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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1996 0-16421
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PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact name of Registrant as specified in its charter)
MARYLAND 52-1518642
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
114 EAST LEXINGTON STREET
BALTIMORE, MARYLAND 21202
(Address of principal executive offices) (zip code)
(410) 281-7000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class
None
Name of each exchange on which registered
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of January 31, 1997 was $332,270,679.
At January 31, 1997, the Registrant had 8,583,575 shares of $1.00 par value
common stock outstanding.
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1
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TABLE OF CONTENTS
PART I. Page
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Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of
Security Holders 4
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 6
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 55
PART III.
Item 10. Directors and Executive Officers of the
Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management 55
Item 13. Certain Relationships and Related
Transactions 55
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 55
Signatures 56
2
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PART I
ITEM 1. BUSINESS
Provident Bankshares Corporation ("the Corporation"), a Maryland corporation,
was organized in 1987 by the management of Provident Bank of Maryland ("the
Bank"), and registered as a bank holding company under the Bank Holding Company
Act of 1956. Through a reorganization dated December 22, 1987, the Corporation
became the sole stockholder of the Bank. The reorganization allowed the Bank to
convert from a Maryland chartered mutual savings bank, the form in which it had
operated since 1886, to a Maryland chartered stock commercial bank. At December
31, 1996, the Bank was the second largest commercial bank chartered under the
laws of the State of Maryland in terms of assets.
For the discussion regarding lending and investment activities as well as
sources of funds of the Corporation, see pages 14 through 21.
MORTGAGE BANKING ACTIVITIES
Provident Mortgage Corp. ("PMC"), a subsidiary of the Bank, was formed in 1992
in conjunction with the acquisition of Consolidated Mortgage Corporation,
("CMC") which occurred during July 1992. The purpose of PMC is to offer a broad
range of mortgage lending products to consumers and thereby enhance the
Corporation's mortgage banking operations.
BANKING SERVICES ACTIVITIES
Provident Investment Center, Inc. ("PIC"), a subsidiary of the Bank, was formed
in 1993 to provide consumers a competitive range of banking products, such as
purchased annuities and mutual funds.
INSURANCE ACTIVITIES
BankSure Insurance Corporation ("BankSure"), a subsidiary of the Bank, was
formed by the Bank in 1985 for the purpose of offering insurance products to its
loan customers and thereby enhancing the Bank's lending product lines.
REAL ESTATE ACTIVITIES
The Bank owns approximately 49,000 square feet of real estate adjacent to the
Corporation's headquarters building. Management plans to utilize this real
estate to meet future space requirements of the Corporation.
EMPLOYEES
At December 31, 1996, the Corporation and its subsidiaries had 966 employees.
The Corporation currently maintains what management considers to be a
comprehensive, competitive employee benefits program. Employees are not
represented by a collective bargaining unit and management considers its
relationship with its employees to be good.
COMPETITION
The Corporation encounters substantial competition in all areas of its business.
There are three commercial banks based in Maryland with assets in excess of $1
billion. The Bank also faces competition from savings and loan associations,
savings banks, mortgage banking companies, credit unions, insurance companies,
consumer finance companies, money market and mutual funds and various other
financial services firms.
Current federal law allows acquisitions of bank holding companies
nationwide. Further, Maryland law in some instances allows acquisitions among
banks in Maryland with banks in other states, provided that the other
jurisdiction has approved reciprocal interstate banking legislation. As a
consequence of these developments, competition in the Bank's principal market
may increase, and a consolidation of financial institutions in Maryland may
occur.
REGULATION
The Corporation is registered as a bank holding company, under the Bank Holding
Company Act of 1956. As such, the Corporation is subject to regulation and
examination by the Federal Reserve Board, and is required to file periodic
reports and any additional information that the Federal Reserve Board may
require. The Bank Holding Company Act imposes certain restrictions upon the
Corporation regarding the acquisition of substantially all of the assets of or
direct or indirect ownership or control of any bank of which it is not already
the majority owner; or, with certain exceptions, of any company engaged in
nonbanking activities.
3
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The Bank is subject to supervision, regulation and examination by the Bank
Commissioner of the State of Maryland and the Federal Deposit Insurance
Corporation. Asset growth, deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and consolidations, changes in control, electronic funds
transfer, management practices and other aspects of operations are subject to
regulation by the appropriate federal and state supervisory authorities. The
Bank is also subject to various regulatory requirements of the Federal Reserve
Board applicable to FDIC insured depository institutions.
MONETARY POLICY
The Corporation and the Bank are affected by fiscal and monetary policies
of the federal government, including those of the Federal Reserve Board, which
regulates the national money supply in order to mitigate recessionary and
inflationary pressures. Among the techniques available to the Federal Reserve
Board are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank
deposits. These techniques are used in varying combinations to influence the
overall growth of bank loans, investments and deposits. Their use may also
affect interest rates charged on loans and paid on deposits. The effect of
governmental policies on the earnings of the Corporation and the Bank cannot be
predicted.
ITEM 2. PROPERTIES
In December 1990, the Bank sold its corporate headquarters located at 114 East
Lexington Street, Baltimore, Maryland, and simultaneously leased back these
facilities for an initial twelve year lease term.
The Bank has 44 offices located throughout the Baltimore metropolitan area.
The Bank owns 6 and leases 38 of its offices. Most of these leases provide for
the payment of property taxes and other costs by the Bank and include one or
more renewal options ranging from five to ten years. Some of the leases also
contain a purchase option.
In 1993, the Bank renewed a long-term agreement to lease a one-story
building large enough to consolidate operations and support functions. The Bank
currently leases all of the building's 80,000 square feet of space.
ITEM 3. LEGAL PROCEEDING
Refer to Note 12 of Item 8--"Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Provident Bankshares Corporation is traded over-the-counter
and is quoted in the NASDAQ Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. The NASDAQ
symbol is PBKS. The trading range of Provident's common stock for the years 1996
and 1995 is shown in the table of Consolidated Quarterly Results of Operations,
Market Prices and Dividends contained on page 13 of Management's Discussion and
Analysis (Item 7). At January 31, 1997, there were approximately 2,709 holders
of record of the Corporation's common stock.
For the year 1996, the Corporation declared and paid dividends of $.72 per
share of common stock outstanding. See Note 10 of Notes to Consolidated
Financial Statements of Provident Bankshares Corporation and Subsidiaries for a
discussion of the effect of the liquidation account of the Bank on the ability
of the Corporation to pay dividends. Certain provisions of Maryland banking law
impose limitations on the amount of dividends payable by the Corporation, but
none is as restrictive as the liquidation account.
4
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Table 1
Year Ended December 31,
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(dollars in thousands, except per share data) 1996 1995 1994 1993 1992
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest Income (tax-equivalent) $ 200,226 $ 180,560 $ 134,639 $ 118,166 $ 116,722
Interest Expense 108,107 96,866 62,027 53,757 62,041
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Net Interest Income (tax-equivalent) 92,119 83,694 72,612 64,409 54,681
Provision for Loan Losses 9,918 1,545 500 1,516 9,150
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Net Interest Income After Provision for Loan Losses 82,201 82,149 72,112 62,893 45,531
Non-Interest Income 39,979 31,976 26,699 24,161 13,876
Net Securities Gains (Losses) 5,507 (2,729) 571 2,951 3,768
Non-Interest Expense 91,781 83,115 79,286 75,751 57,746
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Income Before Taxes and Cumulative Effect of
Change in Accounting Principle 35,906 28,281 20,096 14,254 5,429
Income Tax Expense (tax-equivalent) 12,886 10,256 7,566 5,390 1,210
Cumulative Effect of Change in Accounting
for Purchased Mortgage Servicing Rights -- -- -- 733 --
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Net Income $ 23,020 $ 18,025 $ 12,530 $ 8,131 $ 4,219
====================================================================================================================================
Per Share Amounts:
Net Income Before Cumulative Effect of
Change in Accounting Principle $ 2.62 $ 2.10 $ 1.63 $ 1.21 $ .60
Cumulative Effect of Change in Accounting
for Purchased Mortgage Servicing Rights -- -- -- .10 --
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Net Income -- Primary $ 2.62 $ 2.10 $ 1.63 $ 1.11 $ .60
Net Income -- Fully Diluted 2.60 2.10 1.63 1.11 .59
====================================================================================================================================
Cash Dividends Paid $ .72 $ .54 $ .38 $ .26 $ .18
====================================================================================================================================
Tax-Equivalent Adjustment $ 832 $ 754 $ 417 $ 317 $ 353
====================================================================================================================================
Total Assets $ 2,798,839 $2,562,961 $2,283,762 $1,843,968 $1,633,963
Total Stockholders' Equity 197,181 184,408 150,322 133,945 116,217
Return on Average Assets .86% .75% .66% .48% .27%
Return on Average Equity 12.24 10.77 9.16 6.71 3.71
Stockholders' Equity to Assets 7.05 7.20 6.58 7.26 7.11
Average Equity to Average Assets 7.02 7.00 7.21 7.10 7.25
Dividend Payout Ratio 27.48 25.72 23.37 23.70 30.27
Note: Tax advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax
rate in effect of 39.55% in 1996, 1995 and 1994, 38.62% in 1993 and 34.50% in 1992.
</TABLE>
5
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
The principal objective of this Financial Review is to provide an overview of
the financial condition and results of operations of Provident Bankshares
Corporation and its subsidiaries for the three years ended December 31, 1996.
The outlook for the Corporation based upon current trends and actions taken
during the year is also included. This discussion and tabular presentations
should be read in conjunction with the accompanying financial statements and
notes.
Provident Bankshares Corporation ("the Corporation"), through its
wholly-owned subsidiary, Provident Bank of Maryland ("the Bank"), offers
consumer and commercial banking services throughout central Maryland. The Bank
offers related financial services through its wholly-owned subsidiaries,
including mortgages through Provident Mortgage Corp. (PMC), and mutual funds and
annuities through Provident Investment Center (PIC).
The Corporation recorded significantly improved operating results in 1996,
as earnings totaled $23 million or $2.60 per share on a fully diluted basis, a
28% increase over the $18.0 million or $2.10 (adjusted for 5% stock dividend)
per share earned in 1995. The growth in net earnings was attributable to an
$8.4 million rise in tax-equivalent net interest income and a $16.2 million
increase in non-interest income. These increases were partially offset by an
$8.7 million increase in operating expenses and $8.4 million rise in the
provision for loan losses. These variances are discussed in more detail
beginning on the following pages.
FINANCIAL TRENDS
[The following tables are representative of graphs shown on page 6 of the
Annual Report.]
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<TABLE>
<CAPTION>
RETURN ON AVERAGE ASSETS
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
.27% .48% .66% .75% .86%
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<CAPTION>
RETURN ON AVERAGE EQUITY
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
3.71% 6.71% 9.16% 10.77% 12.24%
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<CAPTION>
AVERAGE ASSETS (in billions)
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$1.57 $1.71 $1.90 $2.39 $2.68
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<CAPTION>
AVERAGE EQUITY (in millions)
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$113.8 $121.2 $136.8 $167.3 $188.0
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<CAPTION>
NET INCOME (in millions)
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$4.219 $8.131 $12.530 $18.025 $23.020
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<CAPTION>
CASH DIVIDENDS PER SHARE (in dollars)
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$ .18 $ .26 $ .38 $ .54 $ .72
Cash Dividends Per Share
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<CAPTION>
EARNINGS PER SHARE (in dollars)
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$ .59 $ 1.11 $ 1.63 $ 2.10 $ 2.60
Fully Diluted Earnings Per Share
</TABLE>
6
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RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's principal source of revenue is net interest income, the
difference between interest income on earning assets and interest expense on
deposits and borrowings. Interest income, for purposes of analysis, is
presented on a tax-equivalent basis to recognize associated tax benefits as this
presentation provides a basis for comparison of yields with taxable earning
assets. The discussion on net interest income should be read in conjunction
with the table 2 -- "Analysis of Changes in Net Interest Income" and table 3
"Consolidated Average Balances -- Interest Income and Expense and Yields and
Rates".
Tax-equivalent net interest income for 1996 increased $8.4 million or 10.1%
from 1995 as average earning assets grew $286 million over the prior year. Net
interest margin dropped by 7 basis points primarily caused by lower yields on
interest earning assets.
Provident's interest income increased $19.7 million or 10.9% during the
year primarily due to the growth in average earning assets offset in part by a
10 basis point decrease in yield. The decrease in yield was mainly due to a
slightly lower interest rate environment. The increase in average earning assets
resulted from a $178 million increase in the loan portfolios and $101 million
increase in the investment portfolio. Consumer loans grew $346 million offset by
a decline of $265 million in the residential mortgage portfolio, the result of a
$282 million securitization at the end of 1995. The commercial business and real
estate construction portfolios also experienced growth. Interest income earned
on the loan portfolio increased $13.8 million reflecting higher loan
outstandings. Average investments increased $101 million during the period
mainly due to the securitization described above. The yield on investments and
loans fell 17 basis points and 7 basis points, respectively. Interest lost from
non-accruing loans was $440 thousand compared to $302 thousand in 1995.
Interest expense increased $11.2 million from 1995 resulting from a $245
million growth in average interest bearing liabilities. The overall cost of
funds remained relatively flat during 1996 as costs on total interest bearing
liabilities declined one basis point. Excluding the effect of off-balance sheet
positions in each year, total costs of interest bearing liabilities would have
declined 14 basis points. The average rate paid on borrowed funds decreased 19
basis points during 1996.
The increase in average interest bearing liabilities reflects a $79.6
million rise in borrowed funds and a $165 million increase in interest bearing
deposits, $105 million of which is associated with matched maturity brokered
deposits. Non-interest bearing demand deposit accounts grew by $22 million or
19%.
Future growth in net interest income will depend upon consumer and
commercial loan demand and the general level of interest rates. Please refer to
the section entitled "Interest Sensitivity Management" on page 23 for further
discussion of the impact of current trends on net interest income in 1996.
7
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<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Table 2
1996/1995 1995/1994
----------------------------------------------- ------------------------------------------------
Variance Due To Change In Variance Due To Change In
-------------------------------- --------------------------------
(in thousands) Net Increase/ Average Average Average Net Increase/ Average Average Average
(tax-equivalent basis) (Decrease) Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME FROM:
Loans:
Consumer $ 27,118 $ (811) $ 28,388 $(459) $13,371 $ 2,138 $10,616 $ 617
Commercial Business 2,432 (1,496) 4,297 (369) 4,360 1,500 2,566 294
Real Estate -- Construction 3,177 (861) 4,594 (556) 1,508 1,324 149 35
Real Estate -- Mortgage (18,948) 1,537 (19,744) (741) 2,446 1,873 546 27
Mortgage Loans Held for Sale 357 (102) 470 (11) (1,044) 542 (1,443) (143)
Federal Funds Sold and Securities
Purchased Under Resale Agreements -- -- -- -- (18) -- (18) --
Other Short-Term Investments 37 (27) 71 (7) 243 1 232 10
U.S. Treasury and Government
Agencies and Corporations (754) (2) (752) -- 217 38 177 2
Corporate Securities -- -- -- -- (1,414) -- (1,414) --
Mortgage-Backed Securities 10,406 (1,095) 11,769 (268) 17,517 1,869 14,748 900
Municipal Securities 255 (20) 283 (8) 475 22 419 34
Other Debt Securities (4,698) 154 (4,763) (89) 8,260 -- 8,260 --
Equity Securities 284 -- 284 -- -- -- -- --
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Total Interest Income 19,666 (2,487) 22,459 (306) 45,921 8,202 35,553 2,166
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INTEREST EXPENSE ON:
Demand/Money Market Deposits 305 (523) 894 (66) 811 597 195 19
Savings Deposits 1,722 1,280 406 36 (3,084) (2,656) (504) 76
Certificates of Deposit 6,221 (770) 7,188 (197) 15,594 5,024 7,553 3,017
Individual Retirement Accounts (250) (210) (41) 1 729 567 147 15
Short-Term Borrowings 447 (1,779) 2,378 (152) 15,078 3,474 9,106 2,498
Long-Term Debt 2,796 458 2,259 79 5,711 1,324 3,716 671
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Total Interest Expense 11,241 (136) 11,393 (16) 34,839 14,347 16,643 3,849
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Net Interest Income $ 8,425 $(2,351) $ 11,066 $(290) $11,082 $ (6,145) $18,910 $(1,683)
===================================================================================================================================
</TABLE>
The table above analyzes the reasons for the changes from year-to-year in the
principal elements that comprise net interest income. The calculation of rate,
volume and rate/volume variances is based upon a procedure established for
banks by the Securities and Exchange Commission. Rate, volume and rate/volume
variances presented for each component will not total to the variances presented
on totals of interest income and interest expense because of shifts from
year-to-year in the relative mix of interest-earning assets and interest-bearing
liabilities.
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<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND YIELDS AND RATES
Provident Bankshares Corporation and Subsidiaries
Table 3
1996 1995
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(dollars in thousands) Average Yield/ Income/ Average Yield/ Income/
(tax-equivalent basis) Balance Rate Expense Balance Rate Expense
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans:(2)
Consumer $ 958,398 8.06% $ 77,263 $ 611,956 8.19% $ 50,145
Commercial Business 227,563 8.73 19,866 182,571 9.55 17,434
Real Estate -- Construction 102,361 10.06 10,299 62,224 11.45 7,122
Real Estate -- Mortgage 272,908 8.07 22,020 526,790 7.78 40,968
---------- -------- ---------- --------
Total Loans(1) 1,561,230 8.29 129,448 1,383,541 8.36 115,669
---------- -------- ---------- --------
Mortgage Loans Held for Sale 64,933 7.36 4,777 58,697 7.53 4,420
Federal Funds Sold and Securities
Purchased Under Resale Agreements -- -- -- -- -- --
Other Short-Term Investments 6,041 4.92 297 4,742 5.48 260
U.S. Treasury and Government
Agencies and Corporations 32,966 6.98 2,300 43,751 6.98 3,054
Corporate Securities -- -- -- -- -- --
Mortgage-Backed Securities 858,513 6.82 58,560 689,907 6.98 48,154
Municipal Securities 11,917 8.37 998 8,634 8.61 743
Other Debt Securities 46,277 7.70 3,562 109,308 7.56 8,260
Equity Securities 2,983 9.52 284 -- -- --
---------- -------- ---------- --------
Total Investment Securities(2) 952,656 6.90 65,704 851,600 7.07 60,211
---------- -------- ---------- --------
Trading Account Securities -- -- -- -- -- --
---------- -------- ---------- --------
Total Interest-Earning Assets 2,584,860 7.75 200,226 2,298,580 7.85 180,560
---------- -------- ---------- --------
Less: Allowance for Loan Losses (22,129) (20,908)
Cash and Due From Banks 45,656 41,120
Other Assets 69,629 70,202
---------- ----------
Total Assets $2,678,016 $2,388,994
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand/Money Market Deposits $ 267,237 2.76 7,370 $ 237,200 2.98 7,065
Savings Deposits 591,339 2.74 16,179 575,196 2.51 14,457
Certificates of Deposit 589,616 5.83 34,394 469,763 6.00 28,173
Individual Retirement Accounts 105,680 5.80 6,134 106,370 6.00 6,384
Short-Term Borrowings 503,878 5.59 28,188 464,094 5.98 27,741
Long-Term Debt 269,852 5.87 15,842 230,022 5.67 13,046
---------- -------- ---------- --------
Total Interest-Bearing Liabilities 2,327,602 4.64 108,107 2,082,645 4.65 96,866
---------- -------- ---------- --------
Noninterest-Bearing Demand Deposits 138,598 116,151
Other Liabilities 23,819 22,866
Stockholders' Equity 187,997 167,332
---------- ----------
Total Liabilities and Stockholders' Equity $2,678,016 $2,388,994
========== ==========
Net Interest-Earning Assets $ 257,258 $ 215,935
========== ==========
Net Interest Income (tax-equivalent) 92,119 83,694
Less: Tax-Equivalent Adjustment (832) (754)
-------- --------
Net Interest Income $ 91,287 $ 82,940
======== ========
Net Yield on Interest-Earning
Assets (tax-equivalent) 3.57% 3.64%
(1) Average loan balances include non-accrual loans.
(2) Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax
rate in effect of 39.55% in 1996, 1995 and 1994, 38.62% in 1993, and 34.50% in 1992.
9
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND YIELDS AND RATES
Provident Bankshares Corporation and Subsidiaries
Table 3
1994 1993 1992
----------------------------- ---------------------------- ---------------------------
(dollars in thousands) Average Yield/ Income/ Average Yield/ Income/ Average Yield/ Income/
(tax-equivalent basis) Balance Rate Expense Balance Rate Expense Balance Rate Expense
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans:(2)
Consumer $ 474,869 7.74% $ 36,774 $ 395,976 8.02% $ 31,753 $ 265,114 9.65% $ 25,585
Commerical Business 152,624 8.57 13,074 140,903 7.70 10,853 132,771 7.97 10,577
Real Estate -- Construction 60,613 9.26 5,614 65,673 7.16 4,704 81,050 6.73 5,458
Real Estate -- Mortgage 519,423 7.42 38,522 259,037 7.86 20,371 166,846 8.83 14,729
---------- --------- ---------- --------- ---------- ---------
Total Loans(1) 1,207,529 7.78 93,984 861,589 7.86 67,681 645,781 8.73 56,349
---------- --------- ---------- --------- ---------- ---------
Mortgage Loans Held for Sale 79,757 6.85 5,464 103,075 6.74 6,952 35,338 7.30 2,580
Federal Funds Sold and Securities
Purchased Under Resale Agreements 565 3.19 18 367 2.72 10 5,348 3.70 198
Other Short-Term Investments 323 5.26 17 -- -- -- 1,371 4.45 61
U.S. Treasury and Government
Agencies and Corporations 41,182 6.89 2,837 46,514 7.49 3,485 48,130 7.49 3,603
Corporate Securities 19,961 7.08 1,414 123,692 5.36 6,631 148,978 6.73 10,027
Mortgage-Backed Securities 465,719 6.58 30,637 491,656 6.79 33,407 597,150 7.35 43,904
Municipal Securities 3,371 7.95 268 -- -- -- -- -- --
Other Debt Securities -- -- -- -- -- -- -- -- --
Equity Securities -- -- -- -- -- -- -- -- --
---------- --------- ---------- --------- ---------- ---------
Total Investment Securities(2) 530,233 6.63 35,156 661,862 6.58 43,523 794,258 7.24 57,534
---------- --------- ---------- --------- ---------- ---------
Trading Account Securities -- -- -- 14,188 -- -- 30,057 -- --
---------- --------- ---------- --------- ---------- ---------
Total Interest-Earning Assets 1,818,407 7.40 134,639 1,641,081 7.20 118,166 1,512,153 7.72 116,722
---------- --------- ---------- --------- ---------- ---------
Less: Allowance for Loan Losses (20,770) (20,568) (19,171)
Cash and Due From Banks 35,538 28,231 20,170
Other Assets 63,225 57,902 57,565
---------- ---------- ----------
Total Assets $1,896,400 $1,706,646 $1,570,717
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand/Money Market Deposits $ 230,018 2.72 6,254 $ 201,425 2.87 5,779 $ 186,674 3.67 6,850
Savings Deposits 592,213 2.96 17,541 556,526 3.19 17,765 503,223 4.09 20,563
Certificates of Deposit 293,519 4.29 12,579 287,579 4.31 12,390 321,708 5.33 17,152
Individual Retirement Accounts 103,671 5.45 5,655 106,136 5.60 5,948 106,229 6.46 6,858
Short-Term Borrowings 269,968 4.69 12,663 289,237 3.60 10,411 246,813 4.23 10,434
Long-Term Debt 152,666 4.80 7,335 38,500 3.80 1,464 2,513 7.32 184
---------- --------- ---------- --------- ---------- ---------
Total Interest-Bearing Liabilities 1,642,055 3.78 62,027 1,479,403 3.63 53,757 1,367,160 4.54 62,041
---------- --------- ---------- --------- ---------- ---------
Noninterest-Bearing Demand Deposits 100,191 88,340 78,123
Other Liabilities 17,342 17,680 11,619
Stockholders' Equity 136,812 121,223 113,815
---------- ---------- ----------
Total Liabilities and Stockholders'
Equity $1,896,400 $1,706,646 $1,570,717
========== ========== ==========
Net Interest-Earning Assets $ 176,352 $ 161,678 $ 144,993
========== ========== ==========
Net Interest Income (tax-equivalent) 72,612 64,409 54,681
Less: Tax-Equivalent Adjustment (417) (317) (353)
-------- --------- ---------
Net Interest Income $ 72,195 $ 64,092 $ 54,328
======== ========= =========
Net Yield on Interest-Earning 3.99% 3.92% 3.62%
Assets (tax-equivalent)
(1) Average loan balances include non-accrual loans.
(2) Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax
rate in effect of 39.55% in 1996, 1995 and 1994, 38.62% in 1993, and 34.50% in 1992.
</TABLE>
10
<PAGE> 11
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $8.4 million to $9.9 million in 1996.
The increase was the result of overall growth in the loan portfolio of $406
million and a $5 million write-off of a single commercial credit. The
corporation continues to emphasize quality underwriting as well as aggressive
management of prior charge-offs and potential problem loans.
Net charge-offs were $6.6 million in 1996 compared to $976 thousand in
1995. The increase is mainly associated with the single commercial credit noted
above. Net charge-offs as a percentage of average loans were .42% in 1996
compared to .07% in 1995. Absent the commercial credit charge-off, net
charge-offs as a percentage of average loans for 1996 were .08%. Non-accrual
loans ended the year at $13.9 million, an increase of $5.5 million over December
31, 1995, primarily caused by the $322 million growth in consumer loans.
A further discussion of the allowance for loan losses, net charge-offs and
non-performing assets appears on pages 17 and 19.
NON-INTEREST INCOME
Non-interest income is principally derived from fee-based services, mortgage
banking activities and gains on investment securities sales. Total non-interest
income increased 56% to $45.5 million. Excluding net securities gains (losses)
and interest income from a federal income tax refund, non-interest income
increased $13.8 million or 53%.
The table below presents a comparative summary of the major components of non-
interest income.
<TABLE>
<CAPTION>
NON-INTEREST INCOME SUMMARY
Table 4
(in thousands) 1996 1995 1994 1993 1992
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $18,089 $12,590 $ 8,146 $ 5,683 $ 3,738
Mortgage Banking Activities 13,486 9,053 13,926 9,943 5,308
Commissions and Fees 2,928 2,101 2,922 1,446 509
Trading Account Profits -- -- -- 416 1,265
Credit Card Fees -- -- -- 426 939
Other Loan Fees 1,372 732 667 680 648
Interest Income on Tax Refund -- 5,796 -- -- --
Gain on Sale of Credit Card Portfolio -- -- -- 4,389 --
Other Non-Interest Income 4,104 1,704 1,038 1,178 1,469
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 39,979 31,976 26,699 24,161 13,876
Net Securities Gains (Losses) 5,507 (2,729) 571 2,951 3,768
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $45,486 $29,247 $27,270 $27,112 $17,644
=================================================================================================================================
</TABLE>
Loan fees increased $640 thousand from 1995. Retail loan fees increased
$435 thousand while commercial fees were up $205 thousand. These increases are
tied to an increase in loan volume.
Deposit service charges rose 44% over the prior year due to a 51% or $4.7
million increase in retail demand deposit service fees. Interest-bearing demand
deposits grew $18.5 million or 13.4% over last year while noninterest-bearing
deposits increased $23.5 million or 19.6%. These increases are the result of
continued promotion and sales efforts of retail deposit products.
Income from mortgage banking activities increased $4.4 million, $3.9
million due to higher gains on the sale of mortgage loans. Gains from mortgage
servicing rights increased $712 thousand offset in part by lower origination
income of $562 thousand. Mortgage originations during the year declined $29
million to $388 million. This drop in originations reflects the decision to
divest five mortgage origination offices in Pennsylvania and New Jersey.
Provident Investment Center (PIC), a wholly owned subsidiary of the Bank
offers annuities and mutual funds through an affiliation with a securities
broker-dealer. Through concentrated sales efforts, additional licensing and
training of branch sales personnel, income associated with these products
increased by $689 thousand to $1.8 million.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 125/127 -- "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which become
effective for the Corporation in 1997. These Statements provide accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These Statements are not expected to have any
material affect on the results of the Corporation.
11
<PAGE> 12
NON-INTEREST EXPENSE
Non-interest expense is composed primarily of costs associated with employees'
salaries and benefits, bank facilities, external data processing and regulatory
fees. Provident's non-interest expense of $91.8 million represented a 10.4%
increase, compared to a 4.8% increase in 1995. The table below presents a
comparative summary of the major components of non-interest expense.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE SUMMARY
Table 5
(in thousands) 1996 1995 1994 1993 1992
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $47,958 $43,302 $43,638 $43,444 $30,146
Occupancy Expense, Net 8,061 7,685 7,257 6,947 5,784
Furniture and Equipment 6,409 5,334 4,574 4,053 3,298
External Processing Fees 10,143 7,784 6,430 4,877 4,735
Advertising and Promotion 5,433 5,070 4,645 4,317 1,966
Communication and Postage 3,319 2,692 2,337 1,716 1,433
Printing and Supplies 2,098 1,837 1,410 1,390 919
Regulatory Fees 347 1,830 3,038 2,892 2,820
Professional Services 2,349 1,852 1,884 1,712 2,012
Other Non-Interest Expense 5,664 5,729 4,073 4,403 4,633
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $91,781 $83,115 $79,286 $75,751 $57,746
=================================================================================================================================
</TABLE>
Salaries and benefits increased $4.7 million during the year. Compensation
increased $4.0 million while health insurance was up $272 thousand. Pension
expense declined $923 thousand while the 401K match was up $693 thousand. The
rise in compensation is attributable to merit increases, new branches and
staffing our new Fast 'n Friendly Check Cashing centers. Commissions associated
with increased activity within Provident Investment Center, Inc. and maintaining
Saturday hours at most of our branches also contributed to increased
compensation expense. The lower pension cost is due to the change in the pension
plan to a cash balance plan. Health care claims experience led to the increase
in health insurance expense.
Occupancy costs grew $376 thousand or 4.9% over last year mainly due to
additional rent and leasehold improvements in the branch network as well as
additional space requirements at our headquarters and operations buildings.
Total furniture and equipment expense increased $1.1 million as technology in
the bank's office automation and branch platform systems continues to be
upgraded.
During the year, mortgage loan servicing was out-sourced and account volume
grew causing external processing to increase $2.4 million or 30%.
INCOME TAXES
Provident recorded income tax expense of $12.1 million on pre-tax income of
$35.1 million for an effective tax rate of 34.4%. This compares with a 34.5%
effective tax rate for 1995.
FOURTH QUARTER RESULTS
Provident recorded net income of $6.2 million or $.70 per share in the fourth
quarter of 1996, an increase of $1.1 million or 22% over the $5.1 million or
$.59 per share recorded in the same period last year. The higher earnings are
principally due to a 7.8% increase in net interest income, higher non-interest
income and lower tax expense. Higher operating expenses and loan loss provision
partially offset these increases.
Tax-equivalent net interest income in the fourth quarter rose $1.7 million
to $23.9 million as the net interest margin declined 10 basis points to 3.54%
and average earning assets grew $268 million to $2.7 billion. The decrease in
the net interest margin primarily reflected a lower interest rate environment
for earning assets as well as the cost of off balance sheet transactions used in
interest rate risk management.
12
<PAGE> 13
The Corporation recorded a provision for loan losses of $2.3 million during
the quarter to provide for loan growth in the portfolio.
Non-interest income increased 14 percent to $10.4 million. The increase is
derived from fee based services as a result of higher account volumes, security
gains and settlement of litigation. Fee income from retail fees increased $1.3
million and net security gains increased $432 thousand. These increases were
partially offset by lower mortgage banking income mainly associated with lower
sales of mortgage servicing rights and lower volume.
Non-interest expense increased $1.4 million to $23.5 million because of
higher compensation, advertising and promotion, and external processing expense.
External processing costs rose $491 thousand due to increased account volume and
outsourcing of mortgage processing. In addition, furniture and equipment expense
increased $289 thousand associated with upgrading technology. Other non-interest
expense increased $584 thousand mainly related to consulting and legal fees.
The following table presents quarterly trend data for 1996 and 1995.
<TABLE>
<CAPTION>
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS, MARKET PRICES AND DIVIDENDS
Table 6
1996 1995
----------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $52,468 $51,105 $48,825 $46,996 $47,950 $45,802 $44,366 $41,688
Interest Expense 28,820 27,846 26,135 25,306 25,991 25,061 23,894 21,920
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 23,648 23,259 22,690 21,690 21,959 20,741 20,472 19,768
Provision for Loan Losses 2,305 1,838 375 5,400 1,000 300 245 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 21,343 21,421 22,315 16,290 20,959 20,441 20,227 19,768
Non-Interest Income 9,892 11,610 9,705 8,772 9,018 7,680 9,684 5,594
Net Securities Gains (Losses) 460 42 (65) 5,070 28 19 (2,776) --
Non-Interest Expense 23,475 23,522 22,901 21,883 22,050 20,500 20,785 19,780
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 8,220 9,551 9,054 8,249 7,955 7,640 6,350 5,582
Income Tax Expense 2,015 3,646 3,449 2,944 2,855 2,830 1,945 1,872
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,205 $ 5,905 $ 5,605 $ 5,305 $ 5,100 $ 4,810 $ 4,405 $ 3,710
====================================================================================================================================
Per Share Amounts:
Net Income -- Primary $ .70 $ .67 $ .64 $ .61 $ .59 $ .56 $ .52 $ .44
Net Income -- Fully Diluted $ .70 $ .67 $ .64 $ .61 $ .59 $ .56 $ .52 $ .44
Market Prices: High 39.13 35.38 33.75 32.03 32.14 29.88 25.13 22.67
Low 34.75 31.75 30.95 26.31 28.09 25.72 21.31 20.06
Cash Dividends Paid .20 .19 .17 .16 .15 .14 .13 .12
====================================================================================================================================
</TABLE>
13
<PAGE> 14
FINANCIAL CONDITION
SOURCE AND USE OF FUNDS
DEPOSITS
The following table presents information concerning the Bank's average deposits
and rates for the respective years.
<TABLE>
<CAPTION>
AVERAGE DEPOSITS
Table 7
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing $ 138,598 --% $ 116,151 --% $ 100,191 --% $ 88,340 --% $ 78,123 --%
Money Market/Demand 267,237 2.76 237,200 2.98 230,018 2.72 201,425 2.87 186,674 3.67
Savings 591,339 2.74 575,196 2.51 592,213 2.96 556,526 3.19 503,223 4.09
Time:
Certificates of Deposit 589,616 5.83 469,763 6.00 293,519 4.29 287,579 4.31 321,708 5.33
Individual Retirement Accounts 105,680 5.80 106,370 6.00 103,671 5.45 106,136 5.60 106,229 6.46
---------- ---------- ---------- ---------- ----------
Total Average Balance/Rate $1,692,470 3.79% $1,504,680 3.73% $1,319,612 3.18% $1,240,006 3.38% $1,195,957 4.30%
========== ========== ========== ========== ==========
Total Year-End Balance $1,766,225 $1,569,339 $1,448,577 $1,282,921 $1,215,766
========== ========== ========== ========== ==========
</TABLE>
The table below presents information at December 31, 1996, with respect to the
maturity of Certificates of Deposit of $100,000 or more.
<TABLE>
<CAPTION>
DEPOSIT MATURITIES
Table 8
Maturities
-------------------------------------------------------------------------
Three Months Over Three Months Over Six Months Over 12
(dollars in thousands) or Less to Six Months to 12 Months Months Total
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance $16,933 $11,353 $4,135 $12,275 $44,696
Percent of Total 37.9% 25.4% 9.2% 27.5% 100.0%
</TABLE>
14
<PAGE> 15
- -------------------------------------------------------------------------------
DEPOSITS (in billions)
[The following table is representative of the bar graph shown on the top of
page 15 of the Annual Report to Stockholders.]
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$1.22 $1.28 $1.45 $1.57 $1.77
</TABLE>
- -------------------------------------------------------------------------------
The graph above reflects the steady growth in deposits over the respective
years.
A major portion of Provident's funding comes from core deposits which
consists of consumer and commercial transaction accounts and consumer savings
and time deposits. These deposits are generated through the Bank's 44 branch
banking locations. At December 31, 1996, core deposits represented 78% of total
deposits and 53% of total liabilities. Provident's future funding growth is
expected to be generated from deposit growth through strategies outlined below.
The branch network strategy includes traditional full service branch
locations supplemented with in-store branches. In-store branch locations are
comprised of supermarket locations with plans in 1997 for locations in national
retail superstores. Provident Bank of Maryland as of December 31, 1996 had 34
traditional branch locations and 10 in-store branches. The Corporation has an
agreement with Super Rite Corporation to operate branches in their Metro and
Basic supermarkets in the Baltimore Metropolitan area. Provident will
selectively look for additional branch opportunities complementary to existing
locations when the cost of entry is reasonable. The Corporation has two
traditional branches and six in-store branches planned for 1997. Provident
continues to attract increased commercial and retail deposits. Retail demand
deposit balances at December 31, 1996 were up $35.5 million or 18% compared to
year end 1995. During 1996, the Bank opened four Fast 'n Friendly Check Cashing
centers with the purpose of offering alternative banking services. The
Corporation has two new centers planned for 1997.
Table 7 presents the average deposit balances and rates paid for the five
years ended December 31, 1996. As this table indicates, Provident has a stable
base of consumer savings deposits. During 1996, average deposits grew $188
million or 12.5% compared to 1995. Money market/demand deposits and
noninterest-bearing deposits increased $52.5 million or 14.9%. This growth
reflects Provident's emphasis on full banking relationships with its retail and
commercial customers. Average time deposits increased $119.2 million or 21%,
$105.1 million of which is attributable to matched maturity brokered deposits.
Brokered deposits are utilized as a cheaper source of funds compared to other
available sources of borrowed money whose terms can be matched against the
assets funded. Savings deposits increased $16.1 million as a result of
successful cross sell efforts by our branch personnel.
CREDIT RISK MANAGEMENT
Much of the fundamental business of Provident is based upon understanding,
measuring and controlling credit risk. Credit risk entails both general risk,
which is inherent in the process of lending, and risk specific to individual
borrowers. Each consumer and residential lending product has a generally
predictable level of credit loss. For example, loans with generally low credit
loss experience include home mortgage and home equity loans. Loans with medium
credit loss experience are primarily secured products such as auto and marine
loans. The category with high credit loss experience includes unsecured products
such as personal revolving credit. In commercial lending, losses as a percentage
of outstanding loans can vary widely from period to period and are particularly
sensitive to changing economic conditions. The evaluation of specific risk is a
basic function of underwriting and loan administration, involving analysis of
the borrower's ability to service debt as well as the value of pledged
collateral.
Policies and procedures have been developed which specify the appropriate
credit approval and monitoring for the various types of credit offered. The Bank
employs prudent lending practices and adheres to regulatory requirements
including loan to value ratios and legal lending limits. These procedures are
modified periodically in order to reflect changing conditions and new products.
The Bank's lending and loan administration staffs are charged with reviewing the
loan portfolio, identifying changes in the economy or in a borrower's
circumstances which may affect the ability to repay debt or the value of pledged
collateral. In order to assess and monitor the degree of risk in the loan
portfolio, credit risk identification and review processes are utilized. Credit
risk analysis assigns a grade to each commercial loan based upon an assessment
of the borrower's financial capacity to service the debt and the presence and
value of collateral for the loan. An independent loan review function tests risk
assessment and determines the adequacy of the allowance for loan losses.
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards ("SFAS") No. 114/118 -- "Accounting by Creditors for
Impairment of a Loan" which became effective for the Corporation in 1995. These
Statements require creditors to evaluate the collectibility of contractually due
principal and interest on commercial credits to assess the need for providing
for losses. The Corporation's credit procedures require monitoring of commercial
credits to determine the collectibility of such credits. If a loan is identified
as impaired, it will be placed on non-accrual status and recorded according to
the provisions of the SFAS No. 114/118. As of December 31, 1996, there were no
commercial loans considered to be impaired.
15
<PAGE> 16
LOANS
The following table sets forth information concerning the Bank's loan portfolio
by type of loan at December 31.
<TABLE>
<CAPTION>
LOAN PORTFOLIO SUMMARY
Table 9
(dollars in thousands) 1996 % 1995 % 1994 % 1993 % 1992 %
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer $1,100,702 63.3% $ 778,467 58.4% $ 484,360 38.1% $ 471,846 41.2% $340,846 48.0%
Commercial Business 250,395 14.4 205,876 15.5 178,668 14.0 133,773 11.7 139,181 19.6
Real Estate -- Construction:
Residential 90,003 5.2 65,868 4.9 49,464 3.9 42,001 3.7 26,903 3.8
Commercial 9,470 .5 12,028 .9 7,792 .6 17,318 1.5 44,085 6.2
Real Estate -- Mortgage:
Residential 127,208 7.3 123,037 9.2 417,501 32.8 357,888 31.2 63,854 8.9
Commercial 160,968 9.3 147,512 11.1 134,517 10.6 122,388 10.7 95,687 13.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans $1,738,746 100.0% $1,332,788 100.0% $1,272,302 100.0% $1,145,214 100.0% $710,556 100.0%
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
LOANS (in billions)
[The following table is representative of the bar graph shown in the middle of
page 16 of the Annual Report to Stockholders.]
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$ .71 $1.15 $1.27 $1.33 $1.74
</TABLE>
- -------------------------------------------------------------------------------
Provident offers a diversified mix of residential and commercial real estate,
business and consumer loans. As shown in table 9, the mix of loans outstanding
has shifted to more consumer orientation over the past five years. Growth in
1996 was experienced in all categories.
Provident's residential mortgage lending includes the origination, sale and
servicing of fixed and variable rate mortgage loans. Loans are originated
through the offices of Provident Mortgage Corp. Mortgage origination activity in
1996 showed a slightly lower volume as originations totaled $388 million in 1996
compared to $417 million in 1995. In 1997, originations are projected to exceed
1996's production as more emphasis is being placed on the wholesale segment of
the business. The residential real estate mortgage loan balance at December 31,
1996 was $127 million compared to $123 million at the end of the prior year.
The servicing of residential mortgage loans may be retained or sold. During
1996, $413 million of bulk servicing was sold contributing $3.2 million to the
total mortgage banking revenues. In addition, $227 million of loans sold
servicing released contributed an additional $3.2 million. The mortgage
servicing portfolio ended the year at $441 million. The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 122 --
"Accounting for Mortgage Servicing Rights" -- which became effective for the
Corporation in 1996. This statement requires mortgage banking enterprises that
acquire mortgage servicing rights through either the purchase or origination of
mortgage loans, and sells, or securitizes, those loans with servicing retained,
to allocate the cost of the mortgage loans to the mortgage servicing rights and
the loans.
Provident offers a wide range of loans to consumers including installment
loans, home equity loans, and personal lines of credit. In addition, the Bank
may purchase portfolios of quality consumer loans from other financial
institutions. All purchased portfolios go through a thorough due diligence
process prior to a purchase commitment. Provident's portfolio of acquired loans
increased $123 million on average, ending the year at $422 million, and is
predominately comprised of second mortgages.
16
<PAGE> 17
Consumer credit originated by Provident ended the year with a balance of
$678.6 million, an increase of 37%. The majority of the increase is the result
of automobile loans made through a network of auto dealerships in Maryland,
Delaware, Pennsylvania and Virginia. Auto loans made through this network of
dealerships grew $132 million, ending the year at $279.3 million. Marine loan
balances grew $32 million during 1996, totaling $166.4 million at year-end, and
were produced primarily through correspondent brokers. Home equity lines of
credit increased $6 million during the year and totaled $142.6 million at the
end of 1996.
Provident's focus in commercial real estate lending has been on financing
commercial and residential construction, as well as on intermediate-term
commercial mortgages. Properties securing the loans include office buildings,
shopping centers, apartment complexes, warehouses, residential building lots and
developments. Commercial real estate mortgage loans increased $13.5 million or
9.1% while commercial construction loans decreased $2.6 million or 21.3%.
Residential construction loans increased $24.1 million or 36.6% to end the year
at $90.0 million.
Provident's commercial loan portfolio consists of general business loans,
including asset-based loans, primarily to small and medium sized businesses in
the central Maryland region. The Bank stresses the importance of asset quality
as well as the development of new marketing programs. Outstandings for the
commercial loan portfolio were $250.4 million, an increase of $44.5 million from
December 31, 1995. Provident has minimal exposure to highly leveraged
transactions ("HLTs"). HLTs totaled $20.1 million as of year-end, and all are
performing in accordance with their contractual terms.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets include loans on which interest is no longer accrued and
real estate and other assets that have been acquired through foreclosure or
repossession. Past due loans are loans that are 90 days or more past due as of
December 31 and still accruing interest because they are well secured and in the
process of collection. Information with respect to non-performing assets and
past due loans is presented in table 10 for the years indicated. As shown in the
table, total non-performing assets increased $5.6 million, mainly in the
consumer loan portfolio and past due loans increased $2.4 million, mainly in the
residential mortgage loans. The $4.9 million increase in non-performing consumer
loans is a result of a $322 million or 41% growth in the consumer loan
portfolio. As of December 31, 1996, non-performing assets and past due loans
ended the year at $14.8 million and $8.1 million, respectively. (See the
discussion under Loans) The $7.8 million in past due residential mortgage loans
are guaranteed or insured by an agency of United States government and no
significant loss is anticipated. Non-performing commercial loans remained
relatively unchanged from year to year.
[The following is representative of the bar graph shown in the middle of page
17 of the Annual Report to Stockholders.]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NON-PERFORMING LOANS (as a percentage of period-end loans)
Non-Performing Loans
--------------------------------
<C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
1.86% .57% .51% .64% .80%
Allowance for Loan Losses
-------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
2.82% 1.79% 1.64% 1.61% 1.43%
</TABLE>
- -------------------------------------------------------------------------------
The ratio of total non-performing loans to year-end loans grew to .80% from
.64% at the end of 1995. The increase is mainly attributable to the growth in
consumer loans. Presented below is interest income that would have been recorded
on all non-accrual loans if such loans had been paid in accordance with their
original terms and the interest income on such loans that was actually collected
for the year.
<TABLE>
<CAPTION>
Year Ended
(in thousands) December 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C>
Gross interest income that would have been
recorded had such loans been paid in
accordance with original terms $1,192
Interest income actually recorded 752
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS AND PAST DUE LOANS
Table 10
December 31,
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
========================================================================================================
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans:
Consumer $ 9,809 $4,868 $1,528 $1,284 $1,513
Commercial Business 142 60 1,096 137 2,887
Real Estate -- Construction:
Residential 37 -- -- -- --
Commercial -- 80 -- -- 5,817
Real Estate -- Mortgage:
Residential 3,818 3,470 3,883 2,911 674
Commercial 125 -- -- -- 2,318
- --------------------------------------------------------------------------------------------------------
Total Non-Accrual Loans 13,931 8,478 6,507 4,332 13,209
- --------------------------------------------------------------------------------------------------------
Renegotiated Commercial Mortgage -- -- -- 2,198 --
- --------------------------------------------------------------------------------------------------------
Other Non-Performing Assets:
Consumer -- -- -- -- 33
Commercial Business -- -- -- -- 400
Real Estate -- Construction:
Residential 132 526 -- 542 337
Commercial -- 150 459 -- 340
Real Estate -- Mortgage:
Residential 702 3 116 66 --
Commercial -- -- -- -- 300
- --------------------------------------------------------------------------------------------------------
Total Other Non-Performing Assets 834 679 575 608 1,410
- --------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $14,765 $9,157 $7,082 $7,138 $14,619
========================================================================================================
Past Due Loans:
Consumer $ 237 $ 559 $ 270 $ 121 $ 864
Commercial Business -- -- -- -- --
Real Estate -- Construction:
Residential -- -- -- -- --
Commercial -- -- -- -- --
Real Estate -- Mortgage:
Residential 7,823 5,072 424 368 214
Commercial -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total Past Due Loans $ 8,060 $5,631 $ 694 $ 489 $ 1,078
========================================================================================================
Ratios:
Total Non-Performing Loans
to Year-End Loans .80% .64% .51% .57% 1.86%
Total Non-Performing Assets
to Year-End Assets .53 .36 .31 .39 .89
- --------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
ALLOWANCE FOR LOAN LOSSES
The following table reflects the allowance for possible loan losses and the
activity during each of the respective years.
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE SUMMARY
Table 11
(dollars in thousands) 1996 1995 1994 1993 1992
========================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 21,462 $ 20,893 $ 20,451 $ 20,049 $ 19,449
Provision for Loan Losses 9,918 1,545 500 1,516 9,150
Loans Charged-Off:
Consumer 2,802 1,562 1,410 2,981 4,713
Commercial Business 5,167 312 17 293 4,204
Real Estate -- Construction:
Residential 37 33 -- -- 700
Commercial 8 -- -- -- 959
Real Estate -- Mortgage:
Residential 222 73 53 15 5
Commercial -- -- 565 1,000 321
- --------------------------------------------------------------------------------------------------------
Total Charge-Offs 8,236 1,980 2,045 4,289 10,902
- --------------------------------------------------------------------------------------------------------
Recoveries:
Consumer 822 917 1,225 1,556 1,536
Commercial Business 801 72 376 1,214 670
Real Estate -- Construction:
Residential -- -- -- 96 16
Commercial 16 -- 385 277 125
Real Estate -- Mortgage:
Residential 45 13 1 -- 5
Commercial -- 2 -- 32 --
- --------------------------------------------------------------------------------------------------------
Total Recoveries 1,684 1,004 1,987 3,175 2,352
- --------------------------------------------------------------------------------------------------------
Net Loans Charged-Off 6,552 976 58 1,114 8,550
- --------------------------------------------------------------------------------------------------------
Balance at End of Year $ 24,828 $ 21,462 $ 20,893 $ 20,451 $ 20,049
========================================================================================================
Balances:
Loans -- Year-End $1,738,746 $1,332,788 $1,272,302 $1,145,214 $710,556
Loans -- Average 1,561,230 1,383,541 1,207,529 861,589 645,781
Ratios:
Net Loans Charged-Off to
Average Loans .42% .07% --% .13% 1.32%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Provident maintains an allowance for loan losses which is available to absorb
potential losses. The allowance is reduced by actual credit losses and is
increased by the provision for loan losses and recoveries of previous losses.
Determination of the adequacy of the allowance, which is performed quarterly, is
accomplished by assigning specific reserves to individually identified problem
credits and general reserves, based on historic and anticipated loss experience,
to all other loans.
The continued emphasis on loan quality and close monitoring of potential
problem credits has resulted in a strong credit portfolio. Senior managers meet
at least monthly to review the credit quality of the loan portfolios and at
least quarterly with Executive Management to review the adequacy of the
allowance for loan losses. The allowance is determined by management's
evaluation of the composition and risk characteristics of the loan portfolio.
Based upon the evaluation of credit risk, provisions, in the form of charges to
operations, are made to bring the allowance up to a level management believes is
adequate.
An analysis of the loan portfolio was performed at December 31, 1996, and
expected losses have been provided for in the allowance for loan losses. During
1996 the loan loss allowance increased $3.4 million to $24.8 million at
year-end. The allowance as a percentage of total loans decreased from 1.61% to
1.43%, primarily from the growth in loans during the year. The allowance for
loan losses as a percentage of non-accrual loans was 178% at December 31, 1996,
compared to 253% the prior year. This decrease is attributable to the increase
in non-accrual loans as discussed above. The portion of the allowance which is
allocated to non-accrual loans is determined by estimating the potential loss on
each credit after giving consideration to the value of underlying collateral.
19
<PAGE> 20
Provident maintains a loan classification and review system to identify
those loans with a higher than normal risk of uncollectibility. Estimated
potential losses from internally criticized loans have been provided for in
determining the allowance for loan losses.
The table below reflects the allocation of the allowances for loan losses
to the various loan categories as required by the Securities and Exchange
Commission. The entire allowance for loan losses is available to absorb losses
from any type of loan.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Table 12
December 31,
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
========================================================================================================
<S> <C> <C> <C> <C> <C>
Consumer $ 3,894 $ 1,860 $ 602 $ 1,600 $ 4,119
Commercial Business 2,502 1,913 2,199 2,321 1,716
Real Estate -- Construction:
Residential 1,406 984 790 630 364
Commercial 168 199 1,077 1,204 1,697
Real Estate -- Mortgage:
Residential 260 519 492 557 64
Commercial 1,513 1,420 1,433 1,286 1,007
Unallocated 15,085 14,567 14,300 12,853 11,082
- --------------------------------------------------------------------------------------------------------
Total Allowance for Loan Losses $24,828 $21,462 $20,893 $20,451 $20,049
========================================================================================================
Allowance for Loan Losses to Year-End Loans 1.43% 1.61% 1.64% 1.79% 2.82%
- --------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES
The following table sets forth information concerning the Bank's investment
securities portfolio at December 31.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES SUMMARY
Table 13
(dollars in thousands) 1996 % 1995 % 1994 % 1993 % 1992 %
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 5,020 .5% $ 27,275 2.6% $ 33,156 3.8% $ 39,783 8.5% $ 4,999 .6%
Corporate Notes -- -- -- -- -- -- 54,907 11.7 67,243 8.8
Mortgage-Backed Securities 828,852 90.8 902,368 86.0 285,796 33.2 345,677 73.7 29,750 3.9
Municipal Securities 19,091 2.1 11,981 1.1 -- -- -- -- -- --
Other Debt Securities 29,942 3.3 76,073 7.3 100,531 11.7 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Available
for Sale 882,905 96.7 1,017,697 97.0 419,483 48.7 440,367 93.9 101,992 13.3
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
U.S. Treasury and Government
Agencies and Corporations 14,311 1.6 13,397 1.2 10,613 1.2 8,679 1.8 46,971 6.1
Corporate Notes -- -- -- -- -- -- -- -- 56,929 7.5
Mortgage-Backed Securities 15,891 1.7 18,023 1.8 423,992 49.3 20,279 4.3 558,862 73.1
Municipal Securities -- -- -- -- 7,186 .8 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity 30,202 3.3 31,420 3.0 441,791 51.3 28,958 6.1 662,762 86.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment
Securities Portfolio $913,107 100.0% $1,049,117 100.0% $861,274 100.0% $469,325 100.0% $764,754 100.0%
===================================================================================================================================
Total Portfolio Yield 6.9% 7.0% 6.8% 6.7% 6.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
Provident's investment activities include management of the $913 million
investment securities portfolio. The investment securities portfolio includes
mortgage-backed securities, U.S. Government securities, municipals and corporate
notes. In addition to investment securities, the Corporation invests in federal
funds sold, reverse repos, mortgage loans held for sale and other short-term
investments (referred to in total as the investment portfolio). The strategies
employed in the management of these portfolios depend upon the liquidity,
interest sensitivity and capital objectives and requirements of the Corporation.
The Treasury Division executes these strategies.
During 1996, Provident continued to enjoy a strong capital position, a high
degree of liquidity, and a substantial level of core deposits. Management's
principal objectives for the investment portfolio during 1996 were to maintain
an appropriate level of quality, to insure sufficient liquidity in various
interest rate environments while maximizing yield and to increase net income by
utilizing excess capital. To successfully achieve these objectives, the
Corporation employs off balance sheet and on balance sheet strategies. Total
investment securities decreased $136 million during 1996 as a result of shifting
funds into the higher yielding loan portfolios.
The Corporation applies the provisions of Statement of Financial Accounting
Standards No. 115 which requires investment securities to be segregated into
three categories: 1) held to maturity, 2) trading, and 3) available for sale.
Based on the provisions of the standard, all securities in the available for
sale category must be measured at fair market value. The resulting gain or loss
is excluded from revenue but is shown as a change in shareholders' equity.
Trading securities must be measured at fair value and changes included in income
for the period. Securities designated as held to maturity are carried at
amortized cost. As of December 31, 1996, $883 million of the Corporation's $913
million investment securities portfolio was classified as available for sale. At
December 31, 1996, the available for sale portfolio included net unrealized
losses of approximately $2.1 million, compared to net unrealized gains of $11.1
million at December 31, 1995.
In addition to unrealized gains and losses, Provident realized $5.97
million in gains and $467 thousand in losses from the sale of securities from
the available for sale portfolio in 1996. These sales were the result of
management's continuous monitoring of the investment securities portfolio in
terms of both credit quality and interest sensitivity.
As of December 31, 1996, the Corporation had no investments classified as
trading securities.
21
<PAGE> 22
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
The following table presents the contractual maturities and interest yields of
the Bank's investment securities portfolio at December 31, 1996.
<TABLE>
<CAPTION>
MATURITIES OF INVESTMENT SECURITIES PORTFOLIO
Table 14 Unrealized
In One Year After One Year After Five Years Over Gain
or Less Through Five Years Through Ten Years Ten Years (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Total Yield
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 5,006 6.3% $ -- --% $ -- --% $ -- --% $ 14 $ 5,020 6.3%
Mortgage-Backed Securities 114,805 7.0 340,760 7.0 191,050 7.0 184,508 6.9 (2,271) 828,852 7.0
Municipal Securities -- -- 3,543 8.0 11,630 8.0 3,708 8.0 210 19,091 8.0
Other Debt Securities 4,048 7.0 25,977 6.6 -- -- -- -- (83) 29,942 6.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Available
for Sale 123,859 7.0 370,280 7.0 202,680 7.1 188,216 6.9 (2,130) 882,905 7.0
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
U.S. Treasury and Government
Agencies and Corporations -- -- -- -- -- -- 14,311 7.4 -- 14,311 7.4
Mortgage-Backed Securities 1,143 6.1 13,724 6.1 1,024 6.2 -- -- -- 15,891 6.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity 1,143 6.1 13,724 6.1 1,024 6.2 14,311 7.4 -- 30,202 6.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment
Securities Portfolio $125,002 7.0% $384,004 6.9% $203,704 7.0% $202,527 6.9% $(2,130) $913,107 6.9%
====================================================================================================================================
</TABLE>
LIQUIDITY
An important component of the Bank's asset/liability structure is the level of
liquidity available to meet the needs of customers and creditors. Traditional
sources of bank liquidity include deposit growth, loan repayments, maturities of
investment securities and money market investments, asset sales, borrowings and
interest received.
Provident's Asset/Liability Management Committee has established general
guidelines for the maintenance of prudent levels of liquidity. The committee
continually monitors the amount and source of available liquidity, the time
required to obtain it and its cost. Management believes the Bank has sufficient
liquidity to meet funding needs in the foreseeable future.
The primary sources of liquidity at December 31, 1996 were loans held for
sale and investment securities available for sale, which totaled $915 million.
This represents 35% of total liabilities compared to 46% at December 31, 1995.
Maturities of investment securities, as table 14 indicates, is expected to
generate $125 million in funds in 1997 and $509 million, or 56%, of the
portfolio within the next five years. Another source of liquidity is scheduled
loan repayments within one year reflected in table 15, which totaled $245
million or 14% of loans. The liquidity amounts presented are contractual
maturities exclusive of prepayments.
Core deposits are valuable in assessing liquidity needs because they tend
to be stable with little net short or intermediate-term withdrawal demands by
customers. At year-end, core deposits represented $1.4 billion, or 60%, of total
liabilities and 56% of total assets.
An important element in liquidity management is the availability of
borrowed funds. At December 31, 1996, short-term borrowings totaled $554
million, or 21%, of liabilities in contrast to $518 million, or 22%, of
liabilities at December 31, 1995. This increase was used to fund growth in
earning assets. The average maturity of short-term borrowings at the end of the
current year was 50 days. The majority of these borrowings are fully
collateralized by U.S. Government or mortgage-backed securities owned by the
Bank. Long-term borrowings consisted of variable and fixed-rate advances from
the Federal Home Loan Bank and totaled $256 million as of December 31, 1996. It
is anticipated that Provident will continue to have access to the repurchase
market and fed fund lines as well as short and long-term variable and fixed-rate
funds from the Federal Home Loan Bank.
22
<PAGE> 23
The following table presents contractual loan maturities and interest
rate sensitivity at December 31, 1996.
<TABLE>
<CAPTION>
LOAN MATURITIES AND RATE SENSITIVITY
Table 15
In One Year After One Year After Five
(dollars in thousands) or Less Through Five Years Years Total Percent
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Consumer $122,866 $445,747 $532,089 $1,100,702 63.3%
Commercial Business 26,359 184,693 39,343 250,395 14.4
Real Estate -- Construction:
Residential 77,844 12,159 -- 90,003 5.2
Commercial 1,408 8,062 -- 9,470 .5
Real Estate -- Mortgage:
Residential 3,394 11,704 112,110 127,208 7.3
Commercial 13,257 88,806 58,905 160,968 9.3
- ----------------------------------------------------------------------------------------------------------------------
Total Loans $245,128 $751,171 $742,447 $1,738,746 100.0%
======================================================================================================================
Rate Sensitivity:
Fixed Rate $115,856 $441,518 $538,062 $1,095,436 63.0%
Variable or Adjustable Rate 129,272 309,653 204,385 643,310 37.0
- ----------------------------------------------------------------------------------------------------------------------
Total Loans $245,128 $751,171 $742,447 $1,738,746 100.0%
======================================================================================================================
</TABLE>
INTEREST SENSITIVITY MANAGEMENT
The nature of the banking business, which involves paying interest on deposits
at varying rates and terms and charging interest on loans at other rates and
terms, creates interest rate risk. As a result, earnings are subject to
fluctuations which arise due to changes in the level and direction of interest
rates. Management's objective is to minimize this risk.
Measuring and managing interest rate risk is a dynamic process which is
performed regularly as an important component of management's analysis of the
impact of changes in asset and liability portfolios. Control of Provident's
interest sensitivity position is accomplished through the structuring of the
investment and funding portfolios, securitizing loans for possible sale, the use
of variable rate loan products and off-balance sheet derivatives.
Management does not try to anticipate changes in interest rates. Its
principal objective is to maintain interest margins in periods of both rising
and falling rates. Traditional interest sensitivity gap analyses alone do not
adequately measure an institution's exposure to changes in interest rates
because gap models are not sensitive to changes in the relationship between
interest rates charged or paid and do not incorporate balance sheet trends and
management actions. Each of these factors can affect an institution's earnings.
Accordingly, in addition to performing gap analysis, management also evaluates
the impact of differing interest rates on net interest income using an earnings
simulation model. The model incorporates the factors not captured by gap
analysis by projecting income over a twelve month horizon under a variety of
interest rate scenarios.
As of December 31, 1996, Provident's interest sensitive liabilities
exceeded interest sensitive assets within a one year period by $465 million or
16.6% of assets. The Bank's savings products are structured to give management
the ability to reset the rates paid on a monthly basis. This causes the Bank to
become more liability sensitive. If interest rates rise, the rate paid on
savings deposits may follow, and the Corporation's net interest margin may
decline. Management continues to take steps to protect the Bank from possible
increases in interest rates. In 1996 these steps included lengthening the
maturities on purchased funds and certificates of deposits and shortening asset
maturities with straight forward interest rate swaps and caps. Management
monitors the interest rate environment and employs appropriate off-balance sheet
strategies to address potential changes in interest rates. These strategies
lower the net interest margin but are designed to maintain an acceptable margin
in a rising rate environment. As a result of off-balance sheet transactions
undertaken to insulate the bank from interest rate risk, interest income has
been decreased by $2.1 million and interest expense has been decreased by $125
thousand, for a net decrease of $1.97 million for the year ending December 31,
1996. Included in this net interest income decrease were amortization of closed
positions which reduced interest income by $1.0 million and increased interest
expense by $897 thousand (a net decrease of $1.9 million) for the year ending
December 31, 1996. Without the amortization of closed positions, off-balance
sheet positions reduced net interest income $64 thousand for the year ended
December 31, 1996. The forward yield curve indicates that short-term rates will
increase by 65 basis points and long-term will increase 10 basis points over the
next twelve months. The Corporation's analysis indicates that if management does
not adjust its December 31, 1996 off-balance sheet positions and the forward
yield curve assumptions occur, off-balance sheet positions would decrease net
interest income by $1.7 million over the next twelve months. This compares to a
decrease in net interest income of $2.55 million should interest rates remain
unchanged. Amortization of closed positions will reduce net interest income
$3.3 million in 1997 and $2.1 million in 1998.
23
<PAGE> 24
STOCKHOLDERS' EQUITY
It is necessary for banks to maintain a sufficient level of capital in order to
sustain growth, absorb unforeseen losses and meet regulatory requirements. In
addition, the current economic and regulatory climate places an increased
emphasis on capital strength. In this environment, Provident continues to
maintain a strong capital position. At December 31, 1996 total stockholders'
equity was $197 million, a $12.8 million increase over the prior year. In
addition to the ordinary adjustments to stockholders' equity of net income and
dividends paid, additional capital was raised through the dividend reinvestment
plan of $1.5 million and $2.6 million from the exercise of stock options, while
capital decreased by $8.1 million during 1996 as a result of the Statement of
Financial Accounting Standards No. 115. This statement requires changes in
market value, net of applicable income taxes, of the available for sale
investment portfolio to be accounted for through equity. During the second
quarter of 1996, the Corporation issued a 5% stock dividend and all earnings per
share figures have been adjusted for this dividend.
Provident exceeds all regulatory capital requirements as of December 31,
1996. The standards used by federal bank regulators to evaluate capital adequacy
are the risk-based capital and leverage ratio guidelines. Equity for regulatory
purposes does not include market value adjustments as required by SFAS No. 115.
Risk-based capital ratios measure core and total stockholders' equity against
risk-weighted assets. Provident's core capital is equal to its common stock,
capital surplus and retained earnings less treasury stock. The calculation of
Provident's total stockholders' equity, for these purposes, is equal to the
above plus the allowance for loan losses subject to certain limitations. Risk-
weighted assets are determined by applying a weighting to asset categories and
certain off-balance sheet commitments based on the level of credit risk inherent
in the assets. At December 31, 1996, Provident's total capital ratio was 10.42%
compared to the minimum regulatory guideline of 8%. In addition, core common
stockholders' equity (Tier 1 Capital) must be at least 4% of risk-weighted
assets. At year-end, Provident's Tier 1 Capital ratio was 9.26%.
The leverage ratio represents core capital, as defined above, divided by
average total assets. Guidelines for the leverage ratio require the ratio of
core stockholders' equity to average total assets to be 100 to 200 basis points
above a 3% minimum, depending on risk profiles and other factors Provident's
leverage ratio of 7.15% at December 31, 1996 was well in excess of this
requirement.
<TABLE>
<CAPTION>
CAPITAL COMPONENTS AND RATIOS
Table 16
December 31,
- ------------------------------------------------------------------------
(dollars in thousands) 1996 1995
========================================================================
<S> <C> <C>
QUALIFYING CAPITAL
Tier 1 Capital $ 198,374 $ 177,499
Total Capital 223,202 198,961
Risk-Weighted Assets 2,141,810 1,882,559
Quarterly Average Assets 2,774,185 2,505,608
RATIOS
Leverage Capital 7.15% 7.08%
Tier 1 Capital 9.26 9.43
Total Capital 10.42 10.57
</TABLE>
24
<PAGE> 25
FINANCIAL REVIEW 1995/1994
For the year ended December 31, 1995, Provident recorded net income of $18.0
million or $2.10 per share on a fully diluted basis, compared to $12.5 million
or $1.63 per share reported in 1994. The per share amounts have been adjusted
for a 5% stock dividend issued in 1996. This improvement in earnings was
attributable to an $11.1 million rise in tax equivalent net interest income and
a $4.4 million increase in retail service charges. These increases more than
offset a $3.8 million increase in operating expense.
Net interest income on a tax-equivalent basis for 1995 increased $11.1
million or 15.3% from 1994 as average earning assets grew $480 million over the
prior year. The net interest margin dropped by 35 basis points primarily caused
by the leveraging through investment security purchases of additional capital
raised during the fourth quarter of 1994. These margins are lower than is
traditionally earned through the generation of loan balances.
The provision for loan losses increased $1 million to $1.5 million in 1995.
This increase was the result of loan growth in the consumer loan and commercial
loan portfolios as total average loans outstanding grew by $176 million.
Non-interest income increased 7.2% to $29.2 million. Excluding net
securities gains (losses), interest income from a federal income tax refund and
gains for mortgage servicing rights, non-interest income increased $3.6 million
or 18%. Deposit service charges rose 55% over the prior year due to a 63% or
$3.6 million increase in retail demand deposit service fees. Income from
mortgage banking activities fell $4.9 million, $4.1 million due to lower gains
on the sale of mortgage servicing rights. The remaining decline is due to lower
origination fee income as mortgage originations during the year declined $88
million to $417 million. Income from sales of annuities and mutual funds through
an affiliation with a securities broker-dealer decreased $900 thousand to $1.1
million for 1995. This decline was believed to have been associated with
customer preference for certificates of deposit versus annuities as rates for
these products were more attractive in 1995.
Provident's non-interest expense rose 4.8% in 1995 over 1994. Salaries and
benefits declined $336 thousand during 1995. Compensation and payroll taxes
increased $712 thousand while health insurance and pension expense declined
$897 thousand and $267 thousand, respectively. Occupancy costs grew $428
thousand or 5.9% over 1994. Much of this increase was due to additional mortgage
and supermarket branches as well as additional space requirements at our
headquarters and operations buildings. Total furniture and equipment expense
increased $760 thousand due to upgrading of technology in the bank's office
automation and branch platform systems. External processing increased $1.2
million or 19%, as new branch locations were added. Other expenses increased by
$1.7 million mainly associated with settlement of a lawsuit in connection with
termination of an acquisition and write-off of personal computer equipment not
compatible with a newly installed local area network system. In addition,
advertising costs increased $575 thousand or 12% compared to 1994. This increase
was attributable to promotion of retail products.
Provident recorded an income tax expense of $9.5 million in 1995 based on
pre-tax income of $27.5 million, which represented an effective tax rate of
34.5%. This compares with a 36.3% effective tax rate for 1994. The reduction in
the effective tax rate was caused by favorable resolution of state tax issues
and the recognition of deferred tax items at a higher rate as the current
marginal federal rate was higher than when the items were originally deferred.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation and Subsidiaries
===============================================================================
Page
Report of Accountants 26
For the Three Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Income 28
Consolidated Statement of Changes in Stockholders' Equity 30
Consolidated Statement of Cash Flows 31
Consolidated Statement of Condition at December 31, 1996 and 1995 29
Notes to Consolidated Financial Statements 32-54
===============================================================================
REPORT OF COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS
To the Board of Directors
Provident Bankshares Corporation
Baltimore, Maryland
We have audited the accompanying consolidated statement of condition of
Provident Bankshares Corporation and subsidiaries (Corporation) as of December
31, 1996, and 1995, and the related consolidated statement of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Provident
Bankshares Corporation and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
January 15, 1997
26
<PAGE> 27
FINANCIAL REPORTING RESPONSIBILITY
CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation (the "Corporation") is responsible for the
preparation, integrity and fair presentation of its published consolidated
financial statements as of December 31, 1996, and the year then ended. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts, some of
which are based on judgments and estimates of management.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management maintains a system of internal control over financial reporting,
including controls over safeguarding of assets against unauthorized acquisition,
use or disposition which is designed to provide reasonable assurance to the
Corporation's management and board of directors regarding the preparation of
reliable published financial statements and such asset safeguarding. The system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified. This system encompasses activities that
control the preparation of the Corporation's Annual Report/10-K financial
statements prepared in accordance with generally accepted accounting principles.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting
as of December 31, 1996. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control--
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that
Provident Bankshares Corporation maintained an effective internal control
structure over financial reporting as of December 31, 1996.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Provident Bank of Maryland, the wholly owned subsidiary of Provident
Bankshares Corporation complied, in all significant respects, with the
designated laws and regulations related to safety and soundness for the year
ended December 31, 1996.
27
<PAGE> 28
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994
====================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $133,297 $118,745 $ 98,464
Interest on Investment Securities 63,212 59,188 34,888
Tax-Advantaged Interest 2,588 1,613 835
Interest on Short-Term Investments 297 260 35
- ----------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 199,394 179,806 134,222
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 64,077 56,079 42,029
Interest on Short-Term Borrowings 28,188 27,741 12,663
Interest on Long-Term Debt 15,842 13,046 7,335
- ----------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 108,107 96,866 62,027
- ----------------------------------------------------------------------------------------------------
NET INTEREST INCOME 91,287 82,940 72,195
Less: Provision for Loan Losses 9,918 1,545 500
- ----------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 81,369 81,395 71,695
- ----------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 18,089 12,590 8,146
Mortgage Banking Activities 13,486 9,053 13,926
Commissions and Fees 2,928 2,101 2,922
Net Securities Gains (Losses) 5,507 (2,729) 571
Other Non-Interest Income 5,476 8,232 1,705
- ----------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 45,486 29,247 27,270
- ----------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 47,958 43,302 43,638
Occupancy Expense, Net 8,061 7,685 7,257
Furniture and Equipment Expense 6,409 5,334 4,574
External Processing Fees 10,143 7,784 6,430
Other Non-Interest Expense 19,210 19,010 17,387
- ----------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 91,781 83,115 79,286
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES 35,074 27,527 19,679
Income Tax Expense 12,054 9,502 7,149
- ----------------------------------------------------------------------------------------------------
NET INCOME $23,020 $18,025 $12,530
====================================================================================================
Per Share Amounts:
Net Income -- Primary $ 2.62 $ 2.10 $ 1.63
Net Income -- Fully Diluted $ 2.60 $ 2.10 $ 1.63
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 29
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subsidiaries
December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
=================================================================================================
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 54,153 $ 49,891
Short-Term Investments 11,003 2,710
Mortgage Loans Held for Sale 32,228 86,326
Securities Available for Sale 882,905 1,017,697
Securities Held to Maturity 30,202 31,420
Loans:
Consumer 1,100,702 778,467
Commercial Business 250,395 205,876
Real Estate -- Construction 99,473 77,896
Real Estate -- Mortgage 288,176 270,549
- -------------------------------------------------------------------------------------------------
Total Loans 1,738,746 1,332,788
Less: Allowance for Loan Losses 24,828 21,462
- -------------------------------------------------------------------------------------------------
Net Loans 1,713,918 1,311,326
- -------------------------------------------------------------------------------------------------
Premises and Equipment, Net 33,031 33,059
Accrued Interest Receivable 19,637 16,778
Other Assets 21,762 13,754
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,798,839 $2,562,961
=================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 150,360 $ 132,479
Interest-Bearing 1,615,865 1,436,860
- -------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,766,225 1,569,339
- -------------------------------------------------------------------------------------------------
Short-Term Borrowings 553,979 517,641
Long-Term Debt 256,217 267,865
Other Liabilities 25,237 23,708
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,601,658 2,378,553
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 30,000,000 Shares,
Issued 1996 - 8,705,395 Shares; 1995 - 8,125,403 Shares 8,705 8,125
Capital Surplus 95,005 78,951
Retained Earnings 97,249 93,031
Net Unrealized Gain (Loss) on Debt Securities (1,288) 6,791
Treasury Stock at Cost (1996 and 1995 - 228,066 Shares) (2,490) (2,490)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 197,181 184,408
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,798,839 $2,562,961
=================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Provident Bankshares Corporation and Subsidiaries
Unrealized Treasury Total
Common Capital Retained Gain (Loss) on Stock Stockholders'
(dollars in thousands, except per share data) Stock Surplus Earnings Debt Securities at Cost Equity
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $6,465 $44,190 $ 77,811 $ 7,969 $(2,490) $133,945
Net Income -- 1994 -- -- 12,530 -- -- 12,530
Dividends Paid ($.38 per share) -- -- (2,764) -- -- (2,764)
Private Offering of Common
Stock (650,000 shares) 650 13,410 -- -- -- 14,060
Exercise of Stock Options (25,018 shares) 25 377 -- -- -- 402
Common Stock Issued under Dividend
Reinvestment Plan (374,290 shares) 374 8,243 -- -- -- 8,617
Unrealized Loss on Debt Securities -- -- -- (16,468) -- (16,468)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 7,514 66,220 87,577 (8,499) (2,490) 150,322
Net Income -- 1995 -- -- 18,025 -- -- 18,025
Dividends Declared ($.54 per share) -- -- (4,293) -- -- (4,293)
Adjustment for Private Offering -- 114 -- -- -- 114
Exercise of Stock Options (114,445 shares) 114 1,576 -- -- -- 1,690
Common Stock Issued under
Dividend Reinvestment Plan (127,074 shares) 127 3,133 -- -- -- 3,260
Unrealized Gain on Debt Securities -- -- -- 15,290 -- 15,290
Stock Dividend (369,977 shares) 370 7,908 (8,278) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 8,125 78,951 93,031 6,791 (2,490) 184,408
NET INCOME -- 1996 -- -- 23,020 -- -- 23,020
DIVIDENDS DECLARED ($.72 PER SHARE) -- -- (6,272) -- -- (6,272)
EXERCISE OF STOCK OPTIONS (134,351 SHARES) 134 2,449 -- -- -- 2,583
COMMON STOCK ISSUED UNDER
DIVIDEND REINVESTMENT PLAN (45,824 SHARES) 46 1,475 -- -- -- 1,521
UNREALIZED LOSS ON DEBT SECURITIES -- -- -- (8,079) -- (8,079)
STOCK DIVIDEND (399,817 SHARES) 400 12,130 (12,530) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $8,705 $95,005 $ 97,249 $(1,288) $(2,490) $197,181
=================================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
=============================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 23,020 $ 18,025 $ 12,530
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
by Operating Activities:
Depreciation and Amortization 6,796 5,410 4,418
Provision for Loan Losses 9,918 1,545 500
Provision for Deferred Income Tax (Benefit) (459) 8,069 2,682
Realized Net Securities (Gains) Losses (5,507) 2,729 (571)
Loans Originated or Acquired and Held for Sale (534,321) (383,657) (411,870)
Proceeds from Sales of Loans 593,357 343,172 523,975
Gains on Sales of Loans (4,938) (295) (655)
Other Operating Activities (5,204) 3,936 (17,311)
- -----------------------------------------------------------------------------------------------------------------------------
Total Adjustments 59,642 (19,091) 101,168
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 82,662 (1,066) 113,698
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal Collections and Maturities of Securities Available for Sale 163,006 99,713 87,067
Principal Collections and Maturities of Securities Held to Maturity 5,192 56,112 4,667
Proceeds on Sales of Securities Available for Sale 273,558 203,026 201,918
Purchases of Securities Held to Maturity (4,047) (22,249) (157,544)
Purchases of Securities Available for Sale (310,391) (221,347) (554,525)
Loan Originations and Purchases Less Principal Collections (411,536) (341,448) (126,451)
Purchases of Premises and Equipment (5,297) (8,103) (6,306)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (289,515) (234,296) (551,174)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Increase in Deposits 196,886 120,762 165,656
Net Increase in Short-Term Borrowings 36,338 38,391 172,671
Proceeds from Long-Term Debt 131,750 95,750 83,700
Payments and Maturities of Long-Term Debt (143,398) (15,085) --
Issuance of Common Stock 4,104 5,064 23,079
Cash Dividends on Common Stock (6,272) (4,293) (2,764)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 219,408 240,589 442,342
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 12,555 5,227 4,866
Cash and Cash Equivalents at Beginning of Year 52,601 47,374 42,508
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 65,156 $ 52,601 $ 47,374
=============================================================================================================================
SUPPLEMENTAL DISCLOSURES
- -----------------------------------------------------------------------------------------------------------------------------
Transfer of Securities Held to Maturity to Securities Available for Sale $ -- $385,221 $ --
Transfer of Securities Available for Sale to Securities Held to Maturity -- -- 268,671
Mortgage Loans Securitized in Investment Portfolio -- 281,246 --
Interest Paid, Net of Amount Capitalized 63,216 55,621 21,796
Income Taxes Paid (Received) 14,554 (2,860) 4,285
Stock Dividend 12,530 8,278 --
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation and Subsidiaries
NOTE 1 -- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The following summary of significant accounting policies of Provident Bankshares
Corporation and its subsidiaries (the "Corporation") is presented to assist the
reader in understanding the financial and other data presented in this report.
The accounting and reporting policies of the Corporation are in accordance
with generally accepted accounting principles and conform to general practice
within the banking industry. Certain prior years' amounts in the Consolidated
Financial Statements have been reclassified to conform with the presentation
used for the current year.
CONSOLIDATION POLICIES
The Consolidated Financial Statements include the accounts of Provident
Bankshares Corporation and its wholly owned subsidiary, Provident Bank of
Maryland (the "Bank") and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES
The Corporation divides the investment portfolio among three categories:
securities held to maturity, securities available for sale and, if applicable,
trading account securities. 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 securities the Corporation does not have the intent and ability to hold to
maturity nor does it intend to trade actively as part of any trading account
activity. Available for sale securities are reported at fair value with any
unrealized appreciation or depreciation in value reported directly as a separate
component of stockholders' equity as unrealized gain (loss) on debt securities
which is reflected net of applicable taxes, and therefore, have had no effect on
the reported earnings of the Corporation.
Gains and losses from sales of securities available for sale are recognized
by the specific identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Interest on loans is accrued at the contractual rate and credited to income
based upon the principal amount outstanding. It is the policy of management to
discontinue the accrual of interest and reverse previously accrued but unpaid
interest when the quality of the credit has deteriorated to the extent that
collectibility of all interest and/or principal cannot be reasonably expected or
when it is 90 days past due unless the loan is well secured and in the process
of collection.
The Corporation adopted the provisions of Statements of Financial
Accounting Standards No. 114/118 "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114/118") on January 1, 1995. Under SFAS No. 114/118, the
Corporation considers a loan impaired when, based on available information, it
is probable that the Corporation will be unable to collect principal and
interest when due in accordance with the contractual terms of the loan
agreement. The measurement of impaired loans may be based on the present value
of expected future cash flows discounted at the historical effective interest
rate or based on the fair value of the underlying collateral. Impairment
criteria are applied to the loan portfolio exclusive of smaller balance
homogeneous loans such as residential mortgage and consumer loans which are
evaluated collectively for impairment. The allowance for loan losses includes
reserves for these loans. Collections of interest and principal on loans in
nonaccrual status and considered impaired are generally applied as a reduction
to the outstanding principal. Once future collectibility has been established,
interest income may be recognized on a cash basis.
The Corporation defers and amortizes loan origination fees and related
costs over the life of the loan using the interest method. Net amortization of
fees and costs are recognized in interest income as a yield adjustment and are,
accordingly, reported as Interest and Fees on Loans in the Consolidated
Statement of Income.
The Corporation's allowance for loan losses is based upon management's
continuing review and evaluation of the loan portfolio and is intended to
maintain an allowance adequate to absorb potential losses on loans outstanding.
The level of the allowance is based on an evaluation of the risk characteristics
of the loan portfolio and considers such factors as past and expected future
loan loss experience, the financial condition of the borrower, current economic
conditions and other relevant factors.
Adjustments to the allowance due to changes in measurement of impaired
loans are incorporated in the provision for loan losses. The adoption of SFAS
No. 114/118 has not resulted in any additional provision for loan losses for the
years ended December 31, 1995 and 1996, respectively.
PREMISES AND EQUIPMENT
Premises, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the lives of the related leases, if
shorter.
32
<PAGE> 33
STOCKHOLDERS' EQUITY
During 1996 and 1995, the Corporation declared five percent stock dividends for
each year to the stockholders of record as of April 29, 1996 and May 1, 1995,
respectively. The 1996 stock dividend was paid on May 10, 1996 resulting in the
distribution of 399,817 common shares with a par value of $1.00 per share.
Accordingly, $400 thousand and $12.1 million was transferred from retained
earnings to common stock and capital surplus, respectively. The 1995 stock
dividend was paid May 12, 1995 with the distribution of 369,977 common shares
with a $1.00 par value per share. This dividend resulted in the transfer of
$370 thousand to common stock and $7.9 million to capital surplus from retained
earnings. The cumulative impact of these stock dividends has been reflected in
the restatement of earnings and dividends per share and stock option data in
the financial statements and accompanying notes.
INCOME TAXES
The Corporation uses the liability method to determine deferred tax amounts and
the related income tax expense or benefit. Using this method, deferred taxes are
calculated by applying enacted statutory tax rates to temporary differences
consisting of items of income and expense that are accounted for in financial
reporting periods which differ from income tax reporting periods. The resultant
deferred tax assets and liabilities represent future taxes to be recovered or
remitted when the related assets and liabilities are recovered or settled. The
deferred tax assets are reduced by a valuation allowance for that portion of the
tax deferred assets which are unlikely to be realized.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses a variety of derivative financial instruments as part of
its interest rate risk management strategy (See Note 12). The Corporation does
not hold or issue derivative financial instruments for trading purposes. The
derivative products used are interest rate swaps and caps or floors, used
separately or in combination to suit the hedge objective and are classified as
hedges. To qualify as a hedge, 1) the asset or liability to be hedged exposes
the Corporation to interest rate risk, 2) the derivatives act to move the
Corporation to a rate insensitive position should interest rates change, and 3)
the derivative is designed and is effective as a hedge of a balance sheet item.
Interest rate swaps are agreements between two parties which
agree to exchange fixed and floating rates on a notional principal amount
without the actual exchange of principal for a specified period of time. The
notional amounts are not reflected on the Consolidated Statement of Condition
because they are merely a unit of measure to determine the effect of the swap.
Income and expense on interest rate swaps associated with designated balance
sheet items is recognized using the accrual method over the life of the
agreement(s) as an adjustment to the income or expense on the designated balance
sheet item. Premiums associated with interest rate floor/cap/corridor
arrangements are reflected in the Consolidated Statement of Condition and
amortized over their life using the straight-line method and included as an
adjustment to interest income/expense associated with the balance sheet item.
Payments due to or from counterparties under these agreements are accrued as an
adjustment to interest income or expense associated with the designated balance
sheet item.
The Corporation continually monitors each derivative position to
ensure the proper relationship between the designated balance sheet item hedged
and the derivative position. Any significant divergence between this
relationship which results in interest income or expense exceeding projected
parameters results in the hedge being marked-to-market with the resultant gain
or loss included in earnings. Terminated derivative positions with the
designated assets or liabilities retained have the resulting gain or loss
deferred and amortized over the estimated remaining life of the hedge.
Interest rate swaps used to hedge available for sale debt securities have
their fair value included in stockholders' equity which is consistent with the
fair value treatment of the available for sale securities. Interest accruals
associated with the swap are included as an adjustment to interest income on the
associated securities. Derivative products terminated prior to the sale of the
related security have the respective gain or loss amortized over the life of the
swap as long as the Corporation retains the security. Upon sale of the security,
the deferred gain or loss on the derivative is reflected in income at the time
of sale.
Derivatives associated with liquidated hedged assets or liabilities are
marked-to-market and have subsequent changes in their fair value reflected in
earnings as the derivative is considered speculative in nature.
PENSION PLAN
The Corporation has a defined benefit pension plan which covers substantially
all employees. The cost of this noncontributory pension plan was computed and
accrued using the projected unit credit method.
Prior service cost is amortized on a straight-line method over the average
remaining service period of employees expected to receive benefits under the
plan.
33
<PAGE> 34
EARNINGS PER SHARE
Primary and fully diluted net income per common share are based upon the
weighted average number of common shares outstanding and common stock
equivalents using the treasury stock method for each year, as applicable and
adjusted for stock dividends.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash equivalents are composed of cash and
due from banks and short-term investments.
NOTE 2 -- RESTRICTIONS ON CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain cash reserves against certain
categories of deposit liabilities. Such reserves averaged approximately $18.5
million and $16.5 million during the years ended December 31, 1996 and 1995,
respectively.
In order to cover the costs of services provided by correspondent banks,
the Corporation maintains compensating balance arrangements at these
correspondent banks or elects to pay a fee in lieu of such arrangements. During
1996 and 1995, the Corporation maintained average compensating balances of
approximately $2.6 million and $2.4 million, respectively. In addition, the
Corporation paid fees totaling $366 thousand in 1996, $317 thousand in 1995 and
$285 thousand in 1994 in lieu of maintaining compensating balances.
<TABLE>
<CAPTION>
NOTE 3 -- INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities portfolio at December 31 were as follows:
1996 1995
------------------------------------------ -------------------------------------------
GROSS GROSS Gross Gross
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
(in thousands) COST GAINS LOSSES VALUE Cost Gains Losses Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 5,006 $ 14 $ -- $ 5,020 $ 27,211 $ 819 $ 755 $ 27,275
Mortgage-Backed Securities 831,123 4,515 6,786 828,852 891,748 13,519 2,899 902,368
Municipal Securities 18,881 327 117 19,091 11,552 433 4 11,981
Other Debt Securities 30,025 36 119 29,942 76,130 1,392 1,449 76,073
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Available
for Sale 885,035 4,892 7,022 882,905 1,006,641 16,163 5,107 1,017,697
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
U.S. Treasury and Government
Agencies and Corporations 14,311 -- -- 14,311 13,397 34 -- 13,431
Mortgage-Backed Securities 15,891 -- 526 15,365 18,023 -- 436 17,587
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity 30,202 -- 526 29,676 31,420 34 436 31,018
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Portfolio $915,237 $4,892 $7,548 $912,581 $1,038,061 $16,197 $5,543 $1,048,715
====================================================================================================================================
</TABLE>
The aggregate amortized cost and market values of the investment securities
portfolio by contractual maturity at December 31, 1996 and 1995, are shown
below. Expected maturities on mortgage-backed securities may differ from the
contractual maturities as borrowers have the right to prepay the obligation
without prepayment penalties.
34
<PAGE> 35
<TABLE>
<CAPTION>
1996 1995
------------------------------ --------------------------------
AMORTIZED MARKET Amortized Market
(in thousands) COST VALUE Cost Value
====================================================================================================================================
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
In One Year or Less $ 5,006 $ 5,020 $ -- $ --
After One Year Through Five Years 3,188 3,250 39,322 39,358
After Five Years Through Ten Years 11,753 11,920 24,651 24,685
Over Ten Years 33,965 33,863 50,920 51,286
Mortgage-Backed Securities 831,123 828,852 891,748 902,368
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale 885,035 882,905 1,006,641 1,017,697
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
In One Year or Less -- -- -- --
After One Year Through Five Years -- -- -- --
After Five Years Through Ten Years -- -- -- --
Over Ten Years 14,311 14,311 13,397 13,431
Mortgage-Backed Securities 15,891 15,365 18,023 17,587
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity 30,202 29,676 31,420 31,018
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Portfolio $915,237 $912,581 $1,038,061 $1,048,715
====================================================================================================================================
</TABLE>
Proceeds from sales of securities available for sale during 1996 were
$273.6 million resulting in the realization of gross gains of $6.0 million and
gross losses of $467 thousand on such sales. For 1995, sales of securities
yielded proceeds of $203.0 million which resulted in gross realized gains of
$800 thousand and gross losses of $3.5 million.
During 1995, the Financial Accounting Standards Board issued a special
report on SFAS No. 115 which provided an opportunity to reclassify from
securities held to maturity to securities available for sale. The permitted
reclassification resulting from this one-time assessment does not call into
question the intent of the Corporation's future investment classifications.
On December 31, 1995, the Corporation transferred $385.2 million of securities
from Securities Held to Maturity to Securities Available for Sale. The transfer
was the result of management's intention to maximize its flexibility to take
advantage of future business opportunities. These securities were transferred
at fair value and the respective holding gains/(losses) were recognized as a
separate component of stockholders' equity.
At December 31, 1996, a net unrealized loss of $1.3 million on the
securities portfolio was reflected as a separate component of stockholders'
equity in the Consolidated Statement of Condition as compared to a net
unrealized gain of $6.8 million at December 31, 1995.
The aggregate book and estimated market values of investment securities
which exceed ten percent of capital at December 31, 1996, are indicated below.
<TABLE>
<CAPTION>
Estimated
Book Market
(in thousands) Value Value
================================================================================
<S> <C> <C>
Issuer:
ASSET BACKED SECURITIES:
The Money Store, Inc. $30,025 $30,563
================================================================================
</TABLE>
Securities with a market value of $804.1 million and $525.0 million at
December 31, 1996 and 1995, respectively, were pledged as collateral for public
funds, certain short-term borrowings and for other purposes required by law.
35
<PAGE> 36
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the three years
ended December 31 is presented below:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Balance at Beginning of the Year $21,462 $20,893 $20,451
Provision for Loan Losses 9,918 1,545 500
Loans Charged-Off (8,236) (1,980) (2,045)
Less: Recoveries of Loans
Previously Charged-Off 1,684 1,004 1,987
- -------------------------------------------------------------------------------
Net Loans Charged-Off (6,552) (976) (58)
- --------------------------------------------------------------------------------
Balance at End of the Year $24,828 $21,462 $20,893
================================================================================
</TABLE>
At December 31, 1996, 1995 and 1994, the recorded investment in loans
which are in non-accrual status and therefore considered impaired totaled $267
thousand, $140 thousand and $1.1 million, respectively. There was no additional
allowance required for these loans under the provisions of SFAS No. 114/118.
Had these loans performed in accordance with their original terms, interest
income of $130 thousand in 1996, $143 thousand in 1995 and $294 thousand in
1994 would have been recorded. During 1996 and 1995 no interest income was
recognized on these loans, however $35 thousand was recognized in 1994. The
average recorded investment in impaired loans was approximately $624 thousand
in 1996 and $757 thousand in 1995.
NOTE 5 -- PREMISES AND EQUIPMENT
Real estate and equipment holdings at December 31 are presented in the table
below. Real estate owned and used by the Corporation consists of six branches
and other facilities in the metropolitan Baltimore area which are used primarily
for the operations of the Bank.
<TABLE>
<CAPTION>
(in thousands) 1996 1995
================================================================================
<S> <C> <C>
Land $ 202 $ 229
Buildings and Leasehold Improvements 18,142 17,126
Furniture and Equipment 31,027 29,340
Property Held for Future Expansion 7,143 7,107
- --------------------------------------------------------------------------------
Total Premises and Equipment 56,514 53,802
Less: Accumulated Depreciation
and Amortization 23,483 20,743
- --------------------------------------------------------------------------------
Net Premises and Equipment $33,031 $33,059
================================================================================
</TABLE>
Property Held for Future Expansion represents approximately 49,000 square
feet of real estate adjacent to the Corporation's headquarters building which
is currently being used for employee and public parking. Following an assessment
of occupancy requirements, management determined that this property would be
necessary to meet the Corporation's growing office and parking requirements.
In December 1990, the Corporation entered into a sale and leaseback
agreement whereby its headquarters building was sold to an unrelated third party
which then leased the building back to the Corporation. In association with the
sale, the Corporation financed $6.0 million of this arrangement with a market
rate note which has recourse to other assets of the acquiror. The twelve year
lease has two renewal options of five years each and contains an escalation
clause which acts to increase rental payments throughout the lease term up to
specified limits. The associated gain of $2.6 million from the sale has been
deferred and will be recognized in proportion to the gross rental expense
incurred over the term of the lease. The associated lease payments and sublease
rental income are included in the table below.
36
<PAGE> 37
The Corporation also maintains non-cancelable operating leases associated
with Bank premises. Most of these leases provide for the payment of property
taxes and other costs by the Bank and include one or more renewal options
ranging up to ten years. Some of the leases also contain purchase options at
market value. Annual rental commitments under all long-term non-cancelable
operating lease agreements consisted of the following at December 31, 1996.
<TABLE>
<CAPTION>
Real
Property Sublease Equipment
(in thousands) Leases Income Leases Total
================================================================================
<S> <C> <C> <C> <C>
1997 $ 4,996 $ 103 $ 447 $ 5,340
1998 4,692 75 331 4,948
1999 4,245 14 142 4,373
2000 3,672 -- 3 3,675
2001 3,209 -- 2 3,211
2002 and Thereafter 6,093 -- -- 6,093
- -------------------------------------------------------------------------------
Total $26,907 $ 192 $ 925 $27,640
===============================================================================
</TABLE>
Rental expense for premises and equipment was $5.4 million in 1996, $5.0
million in 1995 and $4.8 million in 1994.
NOTE 6 -- MORTGAGE BANKING ACTIVITIES
The Corporation engages in sales of mortgage loans, which are originated
internally or purchased from third parties. Mortgage loans held for sale are
carried at the aggregate lower of cost or market value. Gains or losses on sales
of these mortgage loans are recorded as a component of Non-Interest Income in
the Consolidated Statement of Income.
Unpaid principal balances of loans serviced for others not included in the
accompanying Consolidated Statement of Condition were $282 million and $813
million at December 31, 1996 and 1995, respectively.
Under the provisions of Statement of Financial Accounting Standards No. 122
- -- "Accounting for Mortgage Servicing Rights" ("SFAS No.122"), beginning
January 1, 1996, the Corporation began to recognize a separate asset for the
right to service originated residential mortgage loans for which a definitive
plan existed to sell or securitize the associated mortgage loans based upon the
fair value of the servicing rights. Application of this guidance to originated
servicing rights prior to January 1, 1996 is not permitted. Additionally, any
acquisition costs of acquiring mortgage servicing rights are also capitalized.
Originated and acquired servicing rights are amortized over the estimated period
of and in proportion to estimated net servicing revenue. Servicing rights 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 December 31, 1996, no valuation allowance was required.
The following is an analysis of originated, acquired and excess mortgage
servicing rights for the years ended December 31, 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
Originated Acquired Excess
Mortgage Mortgage Mortgage
(in thousands) Servicing Rights Servicing Rights Servicing Rights
================================================================================================
<S> <C> <C> <C>
Balance, January 1, 1994 $ -- $1,180 $985
Additions -- -- 122
Amortization -- (431) (177)
Sales of Servicing Rights -- -- (243)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1994 -- 749 687
Additions -- -- 93
Amortization -- (189) (108)
Sales of Servicing Rights -- (15) (334)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- 545 338
Additions 3,205 -- 133
Amortization (222) (175) (61)
Sales of Servicing Rights (1,580) (11) (87)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1,403 $ 359 $323
================================================================================================
</TABLE>
37
<PAGE> 38
NOTE 7 -- SHORT-TERM BORROWINGS
At December 31, the detail of short-term borrowings were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Funds Purchased $ 94,065 $ 68,237
Securities Sold Under Repurchase
Agreements 428,571 447,014
Federal Home Loan Bank Advances 30,000 --
Other 1,343 2,390
- ------------------------------------------------------------------------------------------------
Total $553,979 $517,641
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
================================================================================================
<S> <C> <C> <C>
Balance at December 31 $553,979 $517,641 $479,250
Average Balance During
the Year 503,878 464,094 269,968
Maximum Month-End Balance 581,772 524,066 490,145
Weighted Average Rate
During the Year 5.59% 5.98% 4.69%
Weighted Average Rate
at December 31 5.67% 5.75% 6.01%
===============================================================================================
</TABLE>
Securities sold under repurchase agreements at December 31, 1996, are detailed
below by due date:
<TABLE>
<CAPTION>
(dollars in thousands) Overnight Less than 30 days 30-90 days Over 90 days Demand Total
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities:
Securities Sold:
Carrying Value $ -- $167,647 $162,910 $87,124 $ -- $417,681
Market Value -- 165,836 162,989 85,307 -- 414,132
Repurchase Borrowings -- 163,649 155,007 80,828 -- 399,484
Average Borrowing Interest Rate --% 5.60% 5.43% 5.67% --% 5.55%
- ---------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities:
Securities Sold:
Carrying Value $ -- $ 30,022 $ -- $ -- $ -- $ 30,022
Market Value -- 30,562 -- -- -- 30,562
Repurchase Borrowings -- 24,553 -- -- -- 24,553
Average Borrowing Interest Rate --% 5.70% --% --% --% 5.70%
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Securities Sold:
Carrying Value $ -- $ 4,507 $ -- $ -- $ -- $ 4,507
Market Value -- 4,518 -- -- -- 4,518
Repurchase Borrowings -- 4,534 -- -- -- 4,534
Average Borrowing Interest Rate --% 5.45% --% --% --% 5.45%
- --------------------------------------------------------------------------------------------------------------------
Summary Totals:
Securities Sold:
Carrying Value $ -- $202,176 $162,910 $87,124 $ -- $452,210
Market Value -- 200,916 162,989 85,307 -- 449,212
Repurchase Borrowings -- 192,736 155,007 80,828 -- 428,571
Average Borrowing Interest Rate --% 5.61% 5.43% 5.67% --% 5.56%
====================================================================================================================
</TABLE>
38
<PAGE> 39
NOTE 8 -- LONG-TERM DEBT
Long-term debt consisted of Federal Home Loan Bank Advances of $256.2 million
and $267.9 million at December 31, 1996 and 1995, respectively. The principal
maturities of long-term debt at December 31, 1996, are presented below.
<TABLE>
<CAPTION>
(in thousands)
===============================================================================
<S> <C>
1997 $ 37,750
1998 142,000
1999 35,395
2000 20,750
2001 --
After 2001 20,322
- -------------------------------------------------------------------------------
Total $256,217
===============================================================================
</TABLE>
The Federal Home Loan Bank Advances to the Bank mature in varying amounts
through 2016. These advances are composed of $150.5 million fixed rate advances
with an average interest rate of 6.31% and $105.7 million variable rate advances
with an average rate of 5.53%. These advances are collateralized by investment
securities and certain real estate loans with carrying values of $278.4 million
and $131.8 million, respectively, at December 31, 1996.
39
<PAGE> 40
NOTE 9 -- INCOME TAXES
The components of income tax expense and the sources of deferred income taxes
for the three years ended December 31 are presented below.
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
=======================================================================================================
<S> <C> <C> <C>
Current Income Tax Expense (Benefit):
Federal $12,177 $ (59) $4,559
State 334 1,492 (92)
- -------------------------------------------------------------------------------------------------------
Total Current 12,511 1,433 4,467
Deferred Income Tax Expense (Benefit) (457) 8,069 2,682
- -------------------------------------------------------------------------------------------------------
Total Income Tax Expense $12,054 $9,502 $7,149
=======================================================================================================
</TABLE>
Tax expense (benefit) associated with investment securities gains/(losses)
was $2.2 million in 1996, $(1.1) million in 1995 and $223 thousand in 1994.
The primary sources of temporary differences that give rise to significant
portions of the deferred tax asset and liability at December 31, 1996 and 1995,
are presented below.
<TABLE>
<CAPTION>
Deferred Deferred
(in thousands) Assets Liabilities
================================================================================
<S> <C> <C>
1996:
Loan Loss Reserve Recapture $ -- $ 9,797
Reserve for Loan Loss 8,692 --
Write-down of Property Held for Sale 718 --
Employee Benefits 1,974 --
Deferred Gain on Sale/Leaseback 512 --
Deferred State Tax Receivable 1,923 --
Depreciation -- 301
Deferred Federal Tax Liability for
State Receivable -- 673
Deferred Tax Asset on Unrealized
Securities Loss in Debt Securities 842 --
Deferred Tax Liability on
Security Transactions -- 1,933
Mortgage Servicing Rights -- 491
All Other 288 1,500
- --------------------------------------------------------------------------------
Total $14,949 $14,695
- --------------------------------------------------------------------------------
1995:
Loan Loss Reserve Recapture $ -- $ 9,774
Reserve for Loan Loss 7,512 --
Write-down of Property Held for Sale 717 --
Employee Benefits 2,850 --
Deferred Gain on Sale/Leaseback 586 --
Deferred State Tax Receivable 1,673 --
Depreciation -- 545
Deferred Federal Tax Liability for
State Receivable -- 586
Deferred Tax Liability on Unrealized
Gains in Debt Securities -- 4,266
Deferred Tax Liability on
Security Transactions -- 2,318
All Other 394 1,554
- --------------------------------------------------------------------------------
Total $13,732 $19,043
- --------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 41
At December 31, 1996 and 1995, no valuation allowance was required
with respect to deferred tax assets.
The combined federal and state effective tax rate for each year is
different than the statutory federal income tax rate. The reasons for these
differences are set forth below:
<TABLE>
<CAPTION>
1996 1995 1994
================================================================================
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Increases (Decreases) in Tax Rate
Resulting From:
State and Local Income Taxes, Net
of Federal Income Tax Benefit 2.2 3.7 2.8
Tax Benefit of State Refund Claim (1.4) -- --
Tax-Advantaged Income (1.3) (1.7) (1.5)
Resolution of State Tax Issue -- (1.5) --
Federal Benefit Due to Change
in Deferred Tax Rate -- (.9) --
Disallowed Interest Expense .1 .1 .1
Employee Benefits (.1) (.1) (.5)
Other (.1) (.1) .4
- --------------------------------------------------------------------------------
Total Combined Effective Tax Rate 34.4% 34.5% 36.3%
================================================================================
</TABLE>
NOTE 10 -- STOCKHOLDERS' EQUITY
The Corporation's Stock Option Plan (the "Option Plan") covers a maximum of 1.3
million shares of common stock that has been reserved for issuance under the
Option Plan described below. Under the provisions of Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), the Corporation had the option of accruing a compensation expense for
stock options granted to employees, or applying the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") which does not
require compensation expense to be recognized. The Corporation has elected to
continue to apply APB No. 25 in 1996 to account for the Option Plan as had been
applied in 1995 and 1994.
Under the Option Plan, stock options are granted at an exercise price not
less than the market value of the underlying shares of common stock on the date
of the grant, as such, the Option Plan is classified as a fixed stock option
plan. Accordingly, as a fixed stock option plan, no compensation expense has
been recognized in the Consolidated Statement of Income.
The Option Plan provides for the granting of nonqualified stock options to
certain key employees and directors of Bankshares and the Bank, as designated by
the Corporation's board of directors. All options have a maximum duration of ten
years from the date of grant. Vesting in the majority of options usually occurs
immediately in 50% of the options granted with the remainder vesting in the
subsequent year. The vesting provisions on the remaining options may be
accelerated on the attainment of specific benchmarks related to the
Corporation's performance.
The following table presents a summarization of the activity related to the
options for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Common Weighted Avg. Common Weighted Avg. Common Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 627,931 $ 9.35 720,042 $ 8.24 620,285 $ 6.15
Granted 198,600 32.36 32,865 25.41 127,890 18.94
Exercised (138,427) 10.97 (123,874) 7.05 (27,582) 10.54
Cancelled or Expired (2,100) 29.88 (1,102) 18.93 (551) 18.94
- -------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 686,004 $15.62 627,931 $ 9.35 720,042 $ 8.24
===================================================================================================================
Options Exercisable at Year-end 509,264 611,544 656,696
Weighted Average Fair Value of
Options Granted During the Year $ 8.44 $ 6.11 $ 6.10
Options Available for Granting
under the Option Plan 252,308 384,883 30,766
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
The table below provides information on the stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------------
Weighted Weighted Average Weighted
Exercise Price Common Average Remaining Common Average
Range Shares Exercise Price Contractual Life Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.73 - $ 9.62 370,513 $ 5.10 4.1 370,513 $ 5.10
9.63 - 14.90 -- -- -- -- --
14.91 - 20.40 92,741 18.95 7.2 92,741 18.95
20.41 - 26.66 26,250 26.66 8.5 26,250 26.66
26.67 - 31.90 157,500 31.63 9.2 1,260 29.88
31.91 - 37.81 39,000 35.42 9.7 18,500 35.29
- ----------------------------------------------------------------------------------------------------------
686,004 $15.62 6.2 509,264 $ 9.89
==========================================================================================================
</TABLE>
The weighted average fair value of all of the options granted during 1996,
1995 and 1994 has been estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend Yield 14.64% 14.64% 14.64%
Weighted Average Risk-free Interest Rate 6.31 5.47 7.83
Weighted Average Expected Volatility 21.18 21.18 21.18
Weighted Average Expected Life in Years 7 7 7
- ---------------------------------------------------------------------------------
</TABLE>
The provisions of SFAS No. 123 requires pro forma disclosure of
compensation expense for the Corporation based on the fair value of the awards
at the date of grant. Under those provisions, the Corporation's net income and
earnings per share would have been reduced to the following pro forma amounts
below:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1996 1995 1994
=================================================================================
<S> <C> <C> <C>
Net Income:
As Reported $23,020 $18,025 $12,530
Pro forma 22,733 17,969 12,088
Primary Earnings Per Share:
As Reported $ 2.62 $ 2.10 $ 1.63
Pro forma 2.60 2.09 1.57
Fully Diluted Earnings Per Share:
As Reported $ 2.60 $ 2.10 $ 1.63
Pro forma 2.59 2.09 1.57
================================================================================
</TABLE>
At the time of the Corporation's reorganization, a liquidation account was
established by the Bank for the benefit of all eligible deposit account holders
as of December 31, 1986 who maintain their accounts in the Bank subsequent to
the Reorganization. The liquidation account provides these deposit account
holders with an interest in the retained earnings of the Bank prior to any
distribution to stockholders in the sole event of a complete liquidation. The
deposit account holders' interest in the liquidation account decreases as the
related deposit account decreases and will never increase. The liquidation
account does not restrict the use or application of stockholders' equity of the
Bank except that the Bank may not declare or pay a cash dividend on, or
repurchase any of its capital stock if, as the result of such dividend or
repurchase, the Bank's stockholders' equity would be less than the amount then
required for the liquidation account. At December 31, 1996, the balance of the
liquidation account was $12.6 million.
42
<PAGE> 43
NOTE 11 -- EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Corporation's non-contributory defined benefit pension plan covers
substantially all full-time employees with at least one year of service and
provides monthly benefits upon retirement to participants based on average
career earnings and length of service.
During 1996 the Plan was amended effective January 1, 1996 to change the Plan
into a Cash Balance Plan. Accrued benefits were converted to cash balances as
of January 1, 1996 for the Plan participants. This change resulted in a
reduction in the Plan expense during 1996 and the liability at December 31,
1996. The Corporation's policy is to contribute amounts to the plan sufficient
to meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, as amended, plus such additional amounts as the
Corporation deems appropriate. During 1996, the Corporation contributed $1.3
million to the plan assets.
The following table sets forth the defined benefit plan's funded status at
January 1:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Actuarial Present Value of Benefit
Obligations:
Accumulated Benefit Obligation,
Including Vested Benefits of
$14,484 - 1997; $13,692 - 1996;
$11,486 - 1995 $(16,840) $(15,783) $(12,733)
================================================================================
Projected Benefit Obligation for
Service Rendered to Date $(16,903) $(17,776) $(14,069)
Plan Assets at Fair Value 20,348 16,789 13,076
- --------------------------------------------------------------------------------
Plan Assets in Excess of (Less than)
Projected Benefit Obligation 3,445 (987) (993)
Unrecognized Net (Gain) Loss from
Past Experience Different from
that Assumed (3,010) (1,194) (147)
Unrecognized Net Asset Arising at
Transition at January 1, 1987 (663) (781) (899)
Unrecognized Prior Service Cost (1,238) (54) (153)
- --------------------------------------------------------------------------------
Accrued Pension Cost Included in
Other Liabilities $ (1,466) $ (3,016) $ (2,192)
================================================================================
</TABLE>
The actuarially estimated net pension cost for the year ended December 31
includes the following components:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Service Cost -- Benefits Earned
During the Year $ 429 $ 974 $ 1,192
Interest Cost on Projected Benefit
Obligation 1,255 1,252 1,175
Actual Return on Plan Assets (3,421) (4,377) 131
Net Amortization and Deferral
of (Gain) Loss 1,515 2,975 (1,434)
- --------------------------------------------------------------------------------
Net Pension Cost (Benefit) Included in
Employee Benefits Expense $ (222) $ 824 $ 1,064
================================================================================
</TABLE>
43
<PAGE> 44
The Corporation revises the rates applied in the determination of the
actuarial present value of the projected benefit obligation to reflect the
anticipated performance of the plan and changes in compensation levels.
<TABLE>
<CAPTION>
1997 1996 1995
================================================================================
<S> <C> <C> <C>
Rates Used in Determining
Actuarial Present Value of Projected
Benefit Obligation:
Weighted Average Discount Rate 8.0% 8.0% 9.0%
Expected Rate of Increase in
Future Compensation Levels 4.0% 4.0% 5.0%
Expected Long Term Rate of Return
on Plan Assets 10.0% 10.0% 10.0%
================================================================================
</TABLE>
Plan assets are primarily comprised of equity securities, and short-term
and long-term debt securities. The unrecognized net asset arising at transition
is being amortized over 15.6 years. The plan held no shares of the Corporation's
common stock at December 31, 1996, 1995 and 1994.
RETIREMENT SAVINGS PLAN
The Retirement Savings Plan is a defined contribution plan which is qualified
under Section 401(a) of the Internal Revenue Code of 1986. The plan generally
allows all employees who complete 500 hours of employment during a six month
period and elect to participate, to receive matching funds from the Corporation
for pre-tax retirement contributions made by the employee. The annual
contribution to this plan is at the discretion of and determined by the Board of
Directors of the Corporation. During 1996, the Corporation raised the maximum
contribution of 50% of an employee's contribution up to 2% of the individual's
salary to 75% and 4.5%, respectively. Contributions to this plan amounted to
$1.1 million, $441 thousand and $403 thousand for the years ended December 31,
1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Corporation provides certain
health care and life insurance benefits to retired employees. Substantially all
employees of the Corporation that reach retirement age may become eligible for
these benefits, generally contingent upon the completion of twenty years of
service. The health care plan is contributory where the retiree is responsible
for all premiums in excess of the Corporation's contribution. The Corporation's
contribution is capped at a growth rate of 4% per year. Under the prospective
transition approach, the transition obligation is amortized over a twenty-year
period. The cost of life insurance benefits provided to the retiree is borne by
the Corporation. At December 31, 1996 and 1995, this plan is unfunded.
44
<PAGE> 45
The following tables set forth the plan's funded status reconciled with
amounts reported in the Corporation's financial statements at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
================================================================================
<S> <C> <C>
Actuarial Present Value of Benefit
Obligations (APBO):
Accumulated Postretirement Benefit Obligation:
Retirees $ (761) $ (680)
Fully Eligible Active Plan Participants (103) (90)
Other Active Plan Participants (338) (309)
- --------------------------------------------------------------------------------
Total (APBO) (1,202) (1,079)
Plan Assets at Fair Value -- --
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (1,202) (1,079)
Unrecognized Net Gain (129) (181)
Less: Unrecognized Transition Obligation 864 919
- --------------------------------------------------------------------------------
Accrued Postretirement Benefit (Liability) $ (467) $ (341)
================================================================================
</TABLE>
The actuarially estimated net postretirement benefit cost for the year
ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
=================================================================================
<S> <C> <C> <C>
Service Cost-Benefits Earned
During Year $ 58 $ 42 $ 48
Interest Cost on Projected Benefit Obligation 88 85 79
Amortization of Transition Obligation 55 53 54
Amortization of Unrecognized Gain -- (8) --
- -------------------------------------------------------------------------------
Net Postretirement Benefit Cost
Included in Employee Benefit Expense $201 $172 $181
- -------------------------------------------------------------------------------
Discount Rate Used in Determining the
Actual Present Value of Accumulated
Postretirement Benefit Obligation 8.0% 8.0% 9.0%
- --------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 46
NOTE 12 -- OFF-BALANCE SHEET RISK
In the normal course of business, the Bank offers various financial products to
its customers to meet their credit and liquidity needs. These instruments
involve, to varying degrees, elements of credit and market risk which may
exceed any amount recognized in the financial statements. Risks that are
inherent in normal banking services also exist in some of these financial
instruments. Contract amounts of the instruments indicate the maximum exposure
the Bank has in each class of financial instruments discussed in the following
paragraphs. These commitments and contingencies are not reflected in the
accompanying financial statements. Unless noted otherwise, the Bank does not
require collateral or other securities to support financial instruments with
credit risk.
Subject to its normal credit standards and risk monitoring procedures, the
Bank makes contractual commitments to extend credit. Commitments to extend
credit in the form of consumer, commercial real estate and commercial business
loans amounted to $323.8 million and $273.3 million at December 31, 1996 and
1995, respectively. Commitments typically have fixed expiration dates or other
termination clauses. The total of commitments does not necessarily represent
future cash requirements as many commitments may expire without being exercised.
Collateral and amounts thereof are obtained, if necessary, based upon
management's evaluation of each borrower's financial condition. Required
collateral may be in the form of cash, accounts receivable, inventory, property,
plant and equipment and income generating commercial properties and residential
properties.
The Bank is obligated under various recourse provisions related to sales of
residential mortgage loans. The maximum potential recourse obligation was $16.4
million and $21.5 million at December 31, 1996 and 1995, respectively. No losses
have been incurred under these recourse provisions.
Conditional commitments are issued by the Bank in the form of performance
stand-by letters of credit which guarantee the performance of a customer to a
third party. These letters of credit are typically included in the amount of
funds committed by the Bank to complete associated construction projects. At
December 31, commitments under outstanding performance stand-by letters of
credit aggregated $30.4 million in 1996 and $18.5 million in 1995. The credit
risk of issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
The Bank enters into agreements for the delivery of securitized mortgage
pools at a future date at a specified price or yield. The inability of
counterparties to meet the terms of these contracts and movements in the value
of securities and interest rates imposes risk on the Bank. Forward contracts
aggregated $46.4 million and $110.1 million at December 31, 1996 and 1995,
respectively. However management does not feel that any significant amounts are
at risk with regard to these contracts.
The Bank enters into various derivative financial instruments to manage its
interest rate risk exposure (see Note 1). The two major types used are interest
rate swaps and interest rate floor/cap/corridor arrangements. These derivative
financial instruments use notional amounts to represent a unit of measure but
not the amount subject to accounting loss, which is much smaller. Risks in these
transactions involve nonperformance by counterparties under the terms of the
contract (counterparty credit risk) and, for interest rate swaps, the
possibility that interest rate movements or general market volatility could
result in losses on open off-balance sheet positions (market risk). Credit risk
is controlled by dealing with well-established brokers which are highly rated by
independent sources. Market risk on interest rate swaps is minimized by using
these instruments as hedges, actively managing interest rate risk and by
continually monitoring these positions. Market risk associated with the interest
rate floor/cap/corridor arrangements only exist when premiums are amortized into
interest expense without receiving any compensation from third parties.
Unamortized premiums paid and outstanding for floor/cap/corridor arrangements
were $ 1.3 million at December 31, 1996, and $1.9 million at December 31, 1995.
46
<PAGE> 47
Notional amounts of interest rate swaps and interest rate
floor/cap/corridor arrangements are detailed below by amounts outstanding,
average interest rates/fees and market values at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Average Interest Rate/Fee
Notional Maturity -------------------------------------------------------------- Market
(dollars in thousands) Amount Date Paid Received Value
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
1996
INTEREST RATE SWAPS:
$ 8,000 1998 5.38% 3 month LIBOR (5.50%) $ 33
8,000 1998 6.47% 3 month LIBOR (5.62%) (93)
15,000 1998 6.96% 3 month LIBOR (5.62%) (216)
20,000 1998 5.29% 3 month LIBOR (5.62%) 96
8,750 1999 6.84% 3 month LIBOR (5.53%) (121)
14,769 1999 6.45% 3 month LIBOR (5.53%) (131)
15,654 1999 6.35% 3 month LIBOR (5.62%) (131)
16,501 1999 5.42% 3 month LIBOR (5.50%) 75
16,501 1999 5.78% 3 month LIBOR (5.94%) 12
16,615 1999 6.21% 3 month LIBOR (5.50%) (79)
16,615 1999 6.31% 3 month LIBOR (5.94%) (96)
17,249 1999 5.34% 3 month LIBOR (5.50%) 95
19,462 1999 6.01% 3 month LIBOR (5.53%) (49)
19,462 1999 6.14% 3 month LIBOR (5.50%) (79)
7,000 2000 5.90% 3 month LIBOR (5.50%) 6
9,000 2000 7.19% 3 month LIBOR (5.62%) (310)
11,000 2000 5.95% 3 month LIBOR (5.62%) 19
15,000 2000 7.08% 3 month LIBOR (5.59%) (408)
15,000 2000 6.45% 3 month LIBOR (5.50%) (138)
15,000 2000 5.83% 3 month LIBOR (5.53%) 20
18,000 2000 6.01% 3 month LIBOR (5.63%) (34)
10,000 2000 6.56% 3 month LIBOR (5.50%) (105)
INTEREST RATE FLOOR/CAP/CORRIDOR ARRANGEMENTS:
CORRIDOR $ 50,000 1997 $850 3 month LIBOR (5.50%)> 4%, capped at 6% $ 129
CORRIDOR 50,000 1997 760 3 month LIBOR (5.59%)> 4%, capped at 6% 192
CORRIDOR 50,000 1998 315 3 month LIBOR (5.63%)> 6.62%, capped at 8.62% 138
CORRIDOR 100,000 1999 768 3 month LIBOR (5.63%)> 6.62%, capped at 8.62% 437
FLOOR 100,000 1997 390 4 year Treasury Notes (6.03%), Strike Price of 6.8% 649
FLOOR 100,000 1999 780 4 year Treasury Notes (6.03%), Strike Price of 6.8% 1,410
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Interest Rate Swaps:
$ 25,000 1996 4.30% 3 month LIBOR (5.94%) $ 183
25,000 1996 4.50% 3 month LIBOR (5.94%) 238
22,000 1997 6.19% 3 month LIBOR (5.88%) (292)
15,000 1998 6.96% 3 month LIBOR (5.69%) (543)
20,000 1998 5.29% 3 month LIBOR (5.63%) (24)
12,250 1999 6.84% 3 month LIBOR (5.94%) (321)
5,000 2000 7.91% 3 month LIBOR (5.81%) (478)
15,000 2000 7.08% 3 month LIBOR (5.69%) (901)
9,000 2000 7.19% 3 month LIBOR (5.95%) (579)
7,000 2000 6.56% 3 month LIBOR (5.87%) (289)
Interest Rate Floor/Cap/Corridor Arrangements:
Corridor $ 50,000 1996 $573 3 month LIBOR (5.81%)> 4%, capped at 6% $ 165
Corridor 40,000 1996 472 3 month LIBOR (5.69%)> 4%, capped at 6% 221
Corridor 50,000 1997 850 3 month LIBOR (5.88%)> 4%, capped at 6% 516
Corridor 50,000 1997 760 3 month LIBOR (5.69%)> 4%, capped at 6% 557
Corridor 50,000 1998 315 3 month LIBOR (5.57%)> 6.62%, capped at 8.62% 141
Corridor 100,000 1999 768 3 month LIBOR (5.57%)> 6.62%, capped at 8.62% 410
Floor 100,000 1997 390 4 year Treasury Notes (5.32%), Strike Price of 6.8% 1,437
Floor 100,000 1999 780 4 year Treasury Notes (5.32%), Strike Price of 6.8% 2,814
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 48
For the year ended December 31, 1996, $39.0 million of the interest rate
swaps hedged the exposure that the securities available for sale had to
declining market values as a result of increasing interest rates. The remaining
$273.6 million in swaps was utilized to hedge the interest rate risk inherent in
short-term borrowings. The interest rate corridors protect the net interest
margin from the impact of increases in savings deposit rates during periods of
rising interest rates. The interest rate floors were purchased to hedge the
impact of loan repricing on net interest income in future years.
The following is an analysis of the activity with regards to interest rate
swaps and interest rate floor/cap/corridor arrangements for the years ended
December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Notional Amount
----------------------------------------
Interest Rate
Interest Rate Floor/Cap/Corridor
(in thousands) Swaps Arrangements
===============================================================================
<S> <C> <C>
Balance, January 1, 1994 $ 166,000 $ 190,000
New Contracts 629,000 390,000
Expired Contracts (126,000) --
Terminated Contracts (485,000) (90,000)
- -------------------------------------------------------------------------------
Balance, December 31, 1994 184,000 490,000
New Contracts 134,500 150,000
Expired Contracts (1,750) (100,000)
Terminated Contracts (161,500) --
- -------------------------------------------------------------------------------
Balance, December 31, 1995 155,250 540,000
NEW CONTRACTS 295,500 --
EXPIRED CONTRACTS (104,172) (90,000)
TERMINATED CONTRACTS (34,000) --
- -------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 312,578 $ 450,000
===============================================================================
</TABLE>
At December 31, 1996, the Corporation had deferred gains of $324 thousand
and deferred losses of $6.0 million related to terminated contracts. These
deferred gains and losses will be amortized over .3 and 1.6 years, respectively.
The Corporation had deferred gains of $3.1 million and deferred losses of $10.7
million related to terminated contracts which were amortized as a yield
adjustment over 1.3 and 2.5 years, respectively, at December 31, 1995.
The notional maturities of the interest rate swaps and interest rate
floor/cap/corridor arrangements at December 31, 1996, are presented below.
<TABLE>
<CAPTION>
Notional Amount
----------------------------------------
Interest Rate
Interest Rate Floor/Cap/Corridor
(in thousands) Swaps Arrangements
===============================================================================
<S> <C> <C>
1997 $ -- $200,000
1998 51,000 50,000
1999 161,578 200,000
2000 90,000 --
2001 10,000 --
- -------------------------------------------------------------------------------
Total $312,578 $450,000
===============================================================================
</TABLE>
In addition to the previously mentioned commitments and contingencies,
there are various legal proceedings against the Bank. Management believes that
the aggregate liabilities, if any, arising from such actions would not have a
material adverse effect on the consolidated financial position of the
Corporation.
48
<PAGE> 49
NOTE 13 -- CONCENTRATIONS OF CREDIT RISK
The Corporation's investment portfolio contains mortgage-backed securities
amounting to $844.7 million and $920.4 million at December 31, 1996 and 1995,
respectively. The underlying collateral for these securities is in the form of
pools of mortgages on residential properties. The majority of the securities are
either directly or indirectly guaranteed by U.S. Government agencies or
corporations. Management is of the opinion that credit risk is minimal.
Construction and mortgage loan receivables from real estate developers
represent $247.6 million and $217.7 million of the total loan portfolio at
December 31, 1996 and 1995, respectively. Substantially all loans are
collateralized by real property or other assets. These loans are expected to be
repaid from the proceeds received by the borrowers from the retail sales or
rentals of these properties to third parties.
NOTE 14 -- OTHER NON-INTEREST INCOME AND EXPENSE
The components of other non-interest income and other non-interest expense for
the three years ended December 31 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
=========================================================================
<S> <C> <C> <C>
Other Non-Interest Income:
Other Loan Fees $ 1,372 $ 732 $ 667
Interest Income on Tax Refund -- 5,796 --
Other Non-Interest Income 4,104 1,704 1,038
- -------------------------------------------------------------------------
Total Other Non-Interest Income $ 5,476 $8,232 $ 1,705
=========================================================================
Other Non-Interest Expense:
Advertising and Promotion $ 5,433 $5,070 $ 4,645
Communication and Postage 3,319 2,692 2,337
Printing and Supplies 2,098 1,837 1,410
Regulatory Fees 347 1,830 3,038
Professional Services 2,349 1,852 1,884
Other Non-Interest Expense 5,664 5,729 4,073
- -------------------------------------------------------------------------
Total Other Non-Interest Expense $19,210 $19,010 $17,387
=========================================================================
</TABLE>
NOTE 15 -- REGULATORY CAPITAL
The Corporation is subject to various capital adequacy guidelines imposed by
federal and state regulatory agencies. Under these guidelines, the Corporation
must meet specific capital adequacy requirements which are quantitative measures
of the Corporation's assets, liabilities and certain off-balance sheet items
calculated under regulatory accounting practices. Additionally, the
Corporation's capital amounts and classifications are subject to qualitative
judgments by these agencies about components, risk weightings and other factors.
The quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain amounts and ratios of total and tier 1
capital to risk-weighted assets and tier 1 capital to average assets, known as
49
<PAGE> 50
the leverage ratio. The Corporation's tier 1 capital is equal to its common
stock, capital surplus and retained earnings less treasury stock. Equity for
regulatory purposes does not include market value adjustments for available for
sale securities. The calculation of the Corporation's total capital is equal to
tier 1 capital plus the allowance for loan losses subject to certain
limitations. Risk-weighted assets are determined by applying weighting to asset
categories and certain off-balance sheet commitments based on the level of
credit risk inherent in the assets. At December 31, 1996, the Corporation
exceeds all regulatory capital requirements. The most recent notification from
the Corporation's primary regulators categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the Corporation's category. If the Corporation is unable to comply
with the minimum capital requirements, it would result in regulatory actions
which could have a material impact on the Corporation.
The minimum regulatory guidelines for total capital and tier 1 capital to
risk-weighted assets are 8% and 4%, respectively. Guidelines for the leverage
ratio require the ratio of tier 1 capital to average assets to be 100 to 200
basis points above a 3% minimum, depending on risk profiles and other factors.
The table below presents the various components used to calculate the capital
adequacy ratios.
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
================================================================================
<S> <C> <C>
QUALIFYING CAPITAL
Tier 1 Capital $ 198,374 $ 177,499
Total Capital 223,202 198,961
Risk-Weighted Assets 2,141,810 1,882,559
Quarterly Average Assets 2,774,185 2,505,608
RATIOS
Leverage Capital 7.15% 7.08%
Tier 1 Capital 9.26 9.43
Total Capital 10.42 10.57
</TABLE>
50
<PAGE> 51
NOTE 16 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair
Value of Financial Instruments" requires all entities to disclose the fair value
of recognized and unrecognized financial instruments on a prospective basis,
where practicable, in an effort to provide financial statement users with
information in making rational investment and credit decisions.
To estimate the fair value of each class of financial instrument, the
Corporation applied the following methods using the indicated assumptions:
CASH AND DUE FROM BANKS AND
SHORT-TERM INVESTMENTS
Carrying amount of those investments is used to estimate fair value.
MORTGAGE LOANS HELD FOR SALE
Fair value for mortgage loans held for trading or sale was determined using
forward contract commitment pricing for the majority of these loans. Loans not
specifically allocated to a forward commitment have been priced using quoted
prices for commitments into which these mortgages would be placed in the future.
SECURITIES AVAILABLE FOR SALE AND
SECURITIES HELD TO MATURITY
The fair values of the securities are based on quoted market prices or dealer
quotes for those investments.
LOANS
Fair value of loans which have homogeneous characteristics, such as residential
mortgages and installment loans, was estimated using discounted cash flows.
All other loans were valued using discount rates which reflected credit risks
of the borrower, types of collateral and remaining maturities.
DEPOSIT LIABILITIES
Fair value of demand deposits, savings accounts and money market deposits is
the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Rates currently available to the Corporation for borrowings and debt with
similar terms and remaining maturities are used to estimate fair value of the
existing debt.
51
<PAGE> 52
INTEREST RATE ARRANGEMENTS
The fair value of interest rate swaps and floor/cap/corridor arrangements, which
the Corporation uses for hedging purposes, is the estimated amount the
Corporation would receive or pay to terminate the arrangements at the reporting
date, taking into account the current interest rates and the current credit
worthiness of the counterparties.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the credit worthiness of the borrowers. Fixed-rate loan
commitments also take into account the difference between current levels of
interest rates and committed rates.
The estimated fair values of the Corporation's financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
===========================================================================================================================
<S> <C> <C> <C> <C>
Assets:
Cash and Due from Banks $ 54,153 $ 54,153 $ 49,891 $ 49,891
Short-Term Investments 11,003 11,003 2,710 2,710
Mortgage Loans Held for Sale 32,228 32,251 86,326 86,267
Securities Available for Sale 882,905 882,905 1,017,697 1,017,697
Securities Held to Maturity 30,202 29,676 31,420 31,018
Loans, Net of Allowance 1,713,918 1,740,345 1,311,326 1,335,702
Liabilities:
Deposits $1,766,225 $1,774,523 $1,569,339 $1,576,254
Short-Term Borrowings 553,979 554,500 517,641 517,807
Long-Term Debt 256,217 258,506 267,865 269,479
Recognized Derivative Financial Instruments:
Interest Rate Floors $ 483 $ 2,059 $ 784 $ 4,251
Interest Rate Corridors 768 896 1,867 2,010
Unrecognized Financial Instruments:
Interest Rate Swaps $ -- $ (1,634) $ -- $ (3,006)
Commitments to Extend Credit -- 7 -- (32)
===========================================================================================================================
</TABLE>
These fair value disclosures are made solely to comply with the
requirements of SFAS No. 107. The calculations represent estimates and do not
represent the underlying value of the Corporation. The information presented is
based on fair value calculations and market quotes as of December 31, 1996 and
1995. These amounts are based on the relative economic environment at the
respective year ends, therefore, the valuations may have been affected by
economic movements since year end.
52
<PAGE> 53
NOTE 17 -- PARENT COMPANY FINANCIAL INFORMATION
The condensed statements of income, financial condition and cash flows for
Provident Bankshares Corporation (parent only) are presented below.
<TABLE>
<CAPTION>
STATEMENT OF INCOME
Year Ended December 31,
- ------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
==========================================================================================
<S> <C> <C> <C>
Interest Income From Bank
Subsidiary $ 42 $ 71 $ 219
Dividend Income From Bank
Subsidiary 6,060 4,410 2,730
- -------------------------------------------------------------------------------------------
Total Income 6,102 4,481 2,949
- -------------------------------------------------------------------------------------------
Operating Expenses 325 527 820
- ------------------------------------------------------------------------------------------
Income Before Income Taxes
and Equity in Undistributed
Income of Bank Subsidiary 5,777 3,954 2,129
Income Tax Benefit (96) (158) (140)
- -------------------------------------------------------------------------------------------
5,873 4,112 2,269
Equity in Undistributed Income
of Bank Subsidiary 17,147 13,913 10,261
- -------------------------------------------------------------------------------------------
Net Income $23,020 $18,025 $12,530
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CONDITION
December 31,
- ------------------------------------------------------------------------------------------
(in thousands) 1996 1995
==========================================================================================
<S> <C> <C>
ASSETS
Interest-Bearing Deposit with Bank Subsidiary $ 852 $ 1,156
Investment in Bank Subsidiary 195,838 182,768
Other Assets 509 489
- ------------------------------------------------------------------------------------------
Total Assets $197,199 $184,413
==========================================================================================
LIABILITIES
Other Liabilities $ 18 $ 5
- ------------------------------------------------------------------------------------------
Total Liabilities 18 5
==========================================================================================
STOCKHOLDERS' EQUITY
Common Stock 8,705 8,125
Capital Surplus 95,005 78,951
Retained Earnings 97,249 93,031
Unrealized Gain (Loss) on Debt Securities
of Bank Subsidiary (1,288) 6,791
Treasury Stock at Cost (2,490) (2,490)
- ------------------------------------------------------------------------------------------
Total Stockholders' Equity 197,181 184,408
- ------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $197,199 $184,413
==========================================================================================
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year Ended December 31,
- ---------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
==============================================================================================
<S> <C> <C> <C>
Operating Activities:
Net Income $ 23,020 $ 18,025 $ 12,530
Adjustments to Reconcile
Net Income to Net Cash
Provided (Used) by
Operating Activities:
Equity in Undistributed
Income from
Bank Subsidiary (17,147) (13,913) (10,261)
Other Operating Activities (9) (667) 131
- ----------------------------------------------------------------------------------------------
Total Adjustments (17,156) (14,580) (10,130)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 5,864 3,445 2,400
- ----------------------------------------------------------------------------------------------
Investing Activities:
Investment in Bank Subsidiary (4,000) (3,800) (22,900)
- ----------------------------------------------------------------------------------------------
Net Cash Used by Investing
Activities (4,000) (3,800) (22,900)
- ----------------------------------------------------------------------------------------------
Financing Activities:
Issuance of Common Stock 4,104 5,064 23,079
Cash Dividends on Common Stock (6,272) (4,293) (2,764)
- ----------------------------------------------------------------------------------------------
Net Cash Provided (Used) by
Financing Activities (2,168) 771 20,315
- ----------------------------------------------------------------------------------------------
Increase (Decrease) in Cash
and Cash Equivalents (304) 416 (185)
Cash and Cash Equivalents
at Beginning of Year 1,156 740 925
- ----------------------------------------------------------------------------------------------
Cash and Cash Equivalents
at End of Year $ 852 $ 1,156 $ 740
==============================================================================================
Supplemental Disclosures
- ----------------------------------------------------------------------------------------------
Income Taxes Paid (Received) $ (158) $ (209) $ 60
Stock Dividend 12,530 8,278 --
</TABLE>
54
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The text and tables under "Election of Directors" in the Corporation's 1997
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The text and tables under "Compensation of Officers and Directors" in the
Corporation's 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The text and tables under "Voting Securities and Principal Holders Thereof"
and "Election of Directors" in the Corporation's 1997 Proxy Statement are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Certain Transactions with Management" in the Corporation's 1997
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The Consolidated Financial Statements of Provident Bankshares
Corporation and Subsidiaries are included in Item 8.
(a) (2) Financial statement schedules--none applicable or required.
(a) (3) Exhibits
The following is an index of the exhibits included in this report:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation.(1)
(3.2) By-Laws of Provident Bankshares Corporation, as amended.(3)
(4.1) Stockholder Protection Right Agreement.(3)
(10.1) 1994 Supplemental Executive Incentive Plan of Provident Bank
of Maryland.(3)
(10.2) Supplemental Executive Retirement Income Plan of Provident
Bank of Maryland.(4)
(10.3) Amended and restated Stock Option and Appreciation Rights
Plan of Provident Bankshares Corporation.(5)
(10.4) Form of Change in Control Agreement between Provident
Bankshares Corporation and Certain Executive Officers.(2)
(10.5) Form of Change in Control Agreement between Provident Bank
of Maryland and Certain Executive Officers.(2)
(11) Statement RE: Computation of Per Share Earnings.(6)
(21) Subsidiaries of Provident Bankshares Corporation.(6)
(23) Consent of Independent Accountants.(6)
(24) Power of Attorney.(6)
(27) Financial Data Schedule.(6)
(b) No reports on Form 8-K were filed by the Corporation in the last
quarter of 1996.
(1) Incorporated by reference from Registrant's Registration Statement on
Form S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Registrant's 1995 Form 10-K (File No.
0-16421) filed with the Commission on March 18, 1996.
(3) Incorporated by reference from the Registrant's 1994 Annual Report on Form
10-K (File No. 0-16421) filed with the Commission on February 17, 1995.
(4) Incorporated by reference from Registrant's 1993 Form 10-K (File No.
0-16421) filed with the Commission on March 14, 1994.
(5) Incorporated by reference from the Registrant's definitive 1995 Proxy
Statement for the Annual Meeting of Stockholders held on April 19, 1995.
(6) Filed herewith.
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES
CORPORATION
(Registrant)
January 31, 1997 BY /s/Carl W. Stearn
-----------------------------------------
Carl W. Stearn
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the dates indicated.
Principal Executive Officer:
January 31, 1997 BY /s/Carl W. Stearn
-----------------------------------------
Carl W. Stearn
Chairman of the Board and
Chief Executive Officer
Principal Financial Officer:
January 31, 1997 BY /s/James R. Wallis
-----------------------------------------
James R. Wallis
Executive Vice President
Principal Accounting Officer:
January 31, 1997 BY /s/R. Wayne Hall
-----------------------------------------
R. Wayne Hall
Treasurer
A Majority of the Board of Directors*
Robert B. Barnhill, Jr., Melvin A. Bilal,
Dr. Calvin W. Burnett, Charles W. Cole, Jr.,
M. Jenkins Cromwell, Jr., Pierce B. Dunn,
Clivie C. Haley, Jr., Mark K. Joseph,
Norman J. Louden, Barbara B. Lucas,
Peter M. Martin, Sister Rosemarie Nassif,
C. William Pacy, Francis G. Riggs,
Sheila K. Riggs, Carl W. Stearn
January 31, 1997 *BY /s/R. Wayne Hall
----------------------------------------
R. Wayne Hall
Attorney-in-fact
56
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- ------------------------------------------------------------------------------------------
Twelve Months Ended
December 31
(in thousands, except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------------
Primary:
- -------
<S> <C> <C> <C>
Actual shares outstanding 8,477 7,897 7,656
Average shares outstanding 8,427 8,204 7,302
Net effect of dilutive stock options
based on the treasury stock method
using the average market price 368 380 396
--------- --------- ---------
Total Shares Outstanding 8,795 8,584 7,698
========= ========= =========
Net Income $ 23,020 $ 18,025 $ 12,530
==========================================
Per Share Amount $ 2.62 $ 2.10 $ 1.63
==========================================
Fully Diluted:
- -------------
Actual shares outstanding 8,477 7,897 7,656
Average shares outstanding 8,427 8,204 7,302
Net effect of dilutive stock options based
on the treasury stock method using the
average market price or quarter end price,
whichever is greater 412 399 396
--------- --------- ---------
Total Shares Outstanding 8,839 8,603 7,698
========= ========= =========
Net Income $ 23,020 $ 18,025 $ 12,530
==========================================
Per Share Amount $ 2.60 $ 2.10 $ 1.63
==========================================
Note: Amounts for 1995 have been restated for the 5% stock dividend paid during
1996. The amounts for 1994 have been restated for the 5% stock dividends paid during
1995 and 1996.
</TABLE>
<PAGE> 1
EXHIBIT 21
__________
Subsidiaries of Provident Bankshares Corporation
________________________________________________
Provident Bank of Maryland
Provident Mortgage Corp.
Provident Financial Services, Inc.
Provident Investment Center, Inc.
Banksure Insurance Corporation
PB Investment Corporation
Provident Lease Corp., Inc.
Lexington Properties Management, Inc.
LPM Sub 1, Inc.
LPM Sub 2, Inc.
LPM Sub 3, Inc.
LPM Sub 4, Inc.
LPM Sub 5, Inc.
LPM Sub 6, Inc.
LPM Sub 7, Inc.
LPM Sub 8, Inc.
LPM Sub 9, Inc.
LPM Sub 10, Inc.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement
Number 33-19352 on Form S-8 dated December 29, 1987, Registration Statement
Number 33-22552 on Form S-8 dated June 15, 1988, Registration Statement Number
33-37502 on Form S-8 dated October 31, 1990, Registration Statement Number
33-51462 on Form S-8 dated August 31, 1992, and Registration Statement Number
33-73162 on Form S-3 dated March 7, 1994 and amended thereto August 18, 1994 and
Registration Statement Number 33-62859 on Form S-3 dated September 22, 1995 of
our report dated January 15, 1997 on our audits of the consolidated financial
statements of Provident Bankshares Corporation as of December 31, 1996 and 1995
and for the years ended December 31, 1996, 1995 and 1994, which report is
included in this Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 7, 1997
<PAGE> 1
PROVIDENT BANKSHARES CORPORATION
Power of Attorney
-----------------
Each of the undersigned persons, in his or her capacity as an
officer or director, or both, of Provident Bankshares Corporation (the
"Company"), hereby appoints Carl W. Stearn, James R. Wallis, and R.
Wayne Hall, and each of them, with full power of substitution and
resubstitution and with full power in each to act without the others,
his or her attorney-in-fact and agent for the following purposes:
1. To sign for him or her, in his or her name and in his or her
capacity as an officer or director, or both, of the Company, an Annual
Report on Form 10-K for the Company pursuant to Section 13 of the
Securities Exchange Act of 1934, and any amendments thereto (such
report, together with all exhibits and documents therein and all such
amendments, the "Form 10-K").
2. To file or cause to be filed the Form 10-K with the
Securities and Exchange Commission;
3. To take all such other action as any such attorney-in-fact,
or his substitute, may deem necessary or desirable in connection with
Form 10-K.
<PAGE> 2
This power of attorney shall continue in full force and effect
until revoked by the undersigned in a writing filed with the Secretary
of the Company.
/s/ Carl W. Stearn December 18, 1996
- ----------------------------
Carl W. Stearn
/s/ Peter M. Martin December 18, 1996
- ----------------------------
Peter M. Martin
December 18, 1996
- ----------------------------
James R. Wallis
- ---------------------------- December 18, 1996
R. Wayne Hall
December 18, 1996
- ----------------------------
Robert B. Barnhill, Jr.
/s/ Melvin A. Bilal December 18, 1996
- ----------------------------
Melvin A. Bilal
/s/ Dr. Calvin W. Burnett December 18, 1996
- ----------------------------
Dr. Calvin W. Burnett
<PAGE> 3
December 18, 1996
- ----------------------------
Charles W. Cole
/s/ M. Jenkins Cromwell, Jr. December 18, 1996
- ----------------------------
M. Jenkins Cromwell, Jr.
December 18, 1996
- ----------------------------
Pierce B. Dunn
/s/ Clivie C. Haley, Jr. December 18, 1996
- ----------------------------
Clivie C. Haley, Jr.
December 18, 1996
- ----------------------------
Mark K. Joseph
/s/ Norman J. Louden December 18, 1996
- ----------------------------
Norman J. Louden
/s/ Barbara B. Lucas December 18, 1996
- ----------------------------
Barbara B. Lucas
/s/ Sister Rosemarie Nassif December 18, 1996
- ----------------------------
Sister Rosemarie Nassif
/s/ C. William Pacy December 18, 1996
- ----------------------------
C. William Pacy
<PAGE> 4
/s/ Francis G. Riggs December 18, 1996
- ----------------------------
Francis G. Riggs
/s/ Shelia K. Riggs December 18, 1996
- ----------------------------
Shelia K. Riggs
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000818969
<NAME> PROVIDENT BANKSHARES CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 54,153
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 882,905
<INVESTMENTS-CARRYING> 30,202
<INVESTMENTS-MARKET> 29,676
<LOANS> 1,738,746
<ALLOWANCE> 24,828
<TOTAL-ASSETS> 2,798,839
<DEPOSITS> 1,766,225
<SHORT-TERM> 553,979
<LIABILITIES-OTHER> 25,237
<LONG-TERM> 256,217
0
0
<COMMON> 8,705
<OTHER-SE> 188,476
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<INTEREST-LOAN> 133,297
<INTEREST-INVEST> 66,097
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 199,394
<INTEREST-DEPOSIT> 64,077
<INTEREST-EXPENSE> 108,107
<INTEREST-INCOME-NET> 91,287
<LOAN-LOSSES> 9,918
<SECURITIES-GAINS> 5,507
<EXPENSE-OTHER> 51,802
<INCOME-PRETAX> 35,074
<INCOME-PRE-EXTRAORDINARY> 35,074
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,020
<EPS-PRIMARY> 2.62
<EPS-DILUTED> 2.60
<YIELD-ACTUAL> 3.57
<LOANS-NON> 14,765
<LOANS-PAST> 8,060
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 21,462
<CHARGE-OFFS> 8,236
<RECOVERIES> 1,684
<ALLOWANCE-CLOSE> 24,828
<ALLOWANCE-DOMESTIC> 24,828
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
