<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
COMMISSION FILE NUMBER 0-16421
PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1518642
- --------------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
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(Address of Principal Executive Offices)
Not Applicable
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(Former Name, former Address and Former Fiscal Year if Changed
Since Last Report)
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(410) 277-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 24,338,625 shares outstanding at May 3,
1999.
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PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition
March 31, 1999 and 1998 and December 31, 1998 3
Consolidated Statement of Income - Unaudited
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statement of Cash Flows - Unaudited
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II - OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 14
EXHIBIT INDEX 15
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Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties which could cause actual results to differ materially
from those projected. Such risk and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the SEC from time to time.
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2
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subsidiaries
March 31, December 31, March 31,
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(dollars in thousands) 1999 1998 1998
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<S> <C> <C> <C>
ASSETS
Cash and Due From Banks $ 67,220 $ 74,365 $ 67,057
Short-Term Investments 40,092 198 233
Mortgage Loans Held for Sale 187,168 224,707 118,600
Securities Available for Sale 1,347,176 1,198,511 989,372
Loans:
Consumer 2,269,909 2,154,557 1,786,782
Commercial Business 383,012 375,930 300,673
Real Estate -- Construction 136,329 124,445 117,784
Real Estate -- Mortgage 339,498 445,279 583,135
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Total Loans 3,128,748 3,100,211 2,788,374
Less: Allowance for Loan Losses 37,897 42,739 37,769
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Net Loans 3,090,851 3,057,472 2,750,605
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Premises and Equipment, Net 40,361 40,459 37,465
Accrued Interest Receivable 42,536 40,466 32,623
Other Assets 52,197 39,719 28,939
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Total Assets $ 4,867,601 $ 4,675,897 $ 4,024,894
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LIABILITIES
Deposits:
Noninterest-Bearing $ 264,615 $ 252,024 $ 215,244
Interest-Bearing 3,164,898 3,167,533 2,664,617
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Total Deposits 3,429,513 3,419,557 2,879,861
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Short-Term Borrowings 280,110 145,363 334,307
Long-Term Debt 743,151 735,239 488,297
Other Liabilities 80,925 40,423 42,374
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Total Liabilities 4,533,699 4,340,582 3,744,839
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Corporation-Obligated Mandatorily Redeemable Capital Securities 39,244 39,238 --
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STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 24,838,760, 24,811,256 and 23,537,844 Shares; at March 31,
1999, December 31, 1998 and March 31, 1998, respectively 24,839 24,811 23,538
Capital Surplus 172,614 172,239 135,079
Retained Earnings 110,299 103,496 119,885
Net Accumulated Other Comprehensive Income (3,317) 5,308 4,043
Treasury Stock at Cost - 525,766 Shares at March 31, 1999,
December 31, 1998 and 228,066 at March 31, 1998 (9,777) (9,777) (2,490)
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Total Stockholders' Equity 294,658 296,077 280,055
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Total Liabilities and Stockholders' Equity $ 4,867,601 $ 4,675,897 $ 4,024,894
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</TABLE>
These financial statements should be read in conjunction with the accompanying
notes.
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended
March 31,
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(in thousands, except per share data) 1999 1998
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<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 60,653 $ 56,080
Interest on Securities 20,091 16,679
Tax-Advantaged Interest 589 883
Interest on Short-Term Investments 39 54
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Total Interest Income 81,372 73,696
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INTEREST EXPENSE
Interest on Deposits 34,401 30,047
Interest on Short-Term Borrowings 3,026 4,610
Interest on Long-Term Debt 10,204 7,299
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Total Interest Expense 47,631 41,956
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Net Interest Income 33,741 31,740
Less: Provision for Loan Losses 1,961 2,975
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Net Interest Income after Provision for Loan Losses 31,780 28,765
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 7,538 6,258
Mortgage Banking Activities 4,004 1,584
Commissions and Fees 1,476 1,184
Net Securities Gains (Losses) (63) 1,209
Other Non-Interest Income 2,520 2,533
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Total Non-Interest Income 15,475 12,768
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 16,230 14,357
Occupancy Expense, Net 2,852 2,482
Furniture and Equipment Expense 2,157 1,910
External Processing Fees 3,701 3,258
Capital Securities Expense 836 --
Other Non-Interest Expense 6,404 5,614
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Total Non-Interest Expense 32,180 27,621
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Income Before Income Taxes 15,075 13,912
Income Tax Expense 4,750 4,607
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Net Income $ 10,325 $ 9,305
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Per Share Amounts:
Net Income -- Basic $ 0.43 $ 0.38
Net Income -- Diluted 0.41 0.37
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</TABLE>
These financial statements should be read in conjunction with the accompanying
notes.
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended
March 31,
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(in thousands) 1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 10,325 $ 9,305
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 9,685 5,237
Provision for Loan Losses 1,961 2,975
Provision for Deferred Income Tax (Benefit) 2,466 (1,214)
Realized Net Securities Gains (Losses) 63 (1,209)
Loans Originated or Acquired and Held for Sale (243,020) (192,134)
Proceeds from Sales of Loans 283,119 141,068
Gain on Sales of Loans (2,560) (609)
Other Operating Activities (11,800) 2,167
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Total Adjustments 39,914 (43,719)
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Net Cash Provided (Used) by Operating Activities 50,239 (34,414)
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Investing Activities:
Principal Collections and Maturities of Securities Available for Sale 58,565 54,366
Proceeds on Sales of Securities Available for Sale 4,272 139,899
Purchases of Securities Available for Sale (184,473) (200,965)
Loan Originations and Purchases Less Principal Collections (43,577) (91,611)
Purchases of Premises and Equipment (1,773) (1,755)
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Net Cash Used by Investing Activities (166,986) (100,066)
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Financing Activities:
Net Increase in Deposits 9,956 125,346
Net Increase (Decrease) in Short-Term Borrowings 134,747 (12,984)
Proceeds from Long-Term Debt 10,000 50,000
Payments and Maturities of Long-Term Debt (2,088) (30,780)
Issuance of Common Stock 403 4,141
Cash Dividends on Common Stock (3,522) (2,883)
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Net Cash Provided by Financing Activities 149,496 132,840
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Increase (Decrease) in Cash and Cash Equivalents 32,749 (1,640)
Cash and Cash Equivalents at Beginning of Year 74,563 68,930
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Cash and Cash Equivalents at End of Period $ 107,312 $ 67,290
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Supplemental Disclosures
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Interest Paid, Net of Amount Capitalized $ 32,729 $ 22,413
Income Taxes Paid 665 37
</TABLE>
These financial statements should be read in conjunction with the accompanying
notes.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and notes thereto included in the Provident Bankshares Corporation's ("the
Corporation") Annual Report on Form 10-K for the year ended December 31, 1998 as
filed with the Securities and Exchange Commission on March 3, 1999.
NOTE B - PER SHARE INFORMATION
The Corporation adopted Statement of Financial Accounting Standards No.
128 - "Earnings Per Share" ("SFAS No. 128") on December 31, 1997. SFAS No. 128
required the Corporation to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128. The following table
presents a summary of per share data and amounts for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1999 1998
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<S> <C> <C>
Qualifying Net Income $ 10,325 $ 9,305
Basic EPS Shares 24,294 24,341
Basic EPS $ 0.43 $ 0.38
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Dilutive Shares (principally stock options) 896 1,151
Diluted EPS Shares 25,190 25,492
Diluted EPS $ 0.41 $ 0.37
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</TABLE>
6
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NOTE C - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment
securities portfolio at March 31, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1999
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 42,766 $ 5 $ -- $ 42,771
Mortgage-Backed Securities 1,145,073 4,499 6,412 1,143,160
Municipal Securities 26,784 762 -- 27,546
Trust Preferred Securities 131,953 238 4,314 127,877
Other Debt Securities 6,087 -- 265 5,822
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Total Securities Available for Sale $ 1,352,663 $ 5,504 $ 10,991 $ 1,347,176
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March 31, 1998
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 38,276 $ 40 $ 9 $ 38,307
Mortgage-Backed Securities 903,920 7,796 1,397 910,319
Municipal Securities 21,039 464 11 21,492
Other Debt Securities 19,448 12 206 19,254
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Total Securities Available for Sale $ 982,683 $ 8,312 $ 1,623 $ 989,372
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</TABLE>
At March 31, 1999 a net unrealized loss of $3.3 million was reflected as
Net Accumulated Other Comprehensive Income which is reflected separately as a
component of Stockholders' Equity in the Consolidated Statement of Condition and
therefore has no effect on the financial results of the Corporation's
operations. This compares to a net unrealized gain of $4.0 million at March 31,
1998. For details regarding investment securities at December 31, 1998, refer to
Notes 1 and 4 of the Consolidated Financial Statements incorporated in the
Corporation's 10-K filed March 3, 1999.
NOTE D - SERVICING ASSETS
Effective January 1, 1997, the Corporation applies the provisions of
Statement of Financial Accounting Standards No. 125 - "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). Under SFAS No. 125, the Corporation carries any retained interest in a
transferred asset on the Statement of Condition as a servicing asset. The
servicing assets represent the fair value of the servicing contracts associated
with the purchase or origination and subsequent securitization of the mortgage
loans. Servicing assets are amortized in proportion to and over the period of
estimated net servicing income. Servicing assets are evaluated periodically for
impairment based on their fair value and impairment, if any, is recognized
through a valuation allowance and a charge to operations. At March 31, 1999 the
valuation allowance was $10 thousand.
7
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<TABLE>
<CAPTION>
The following is an analysis of the servicing asset balance, net of
accumulated amortization, during the period ended March 31, 1999:
March 31,
(in thousands) 1999
- --------------------------------------------------------------------------------
<S> <C>
Balance at January 1, 1999 $2,608
Additions 5,257
Amortization 38
Sales of Servicing Assets 4,359
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Balance at March 31, 1999 $3,468
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</TABLE>
NOTE E - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") to establish requirements for the disclosure of
comprehensive income in financial statements. Comprehensive income is defined as
net income plus transactions and other occurrences which are the result of
nonowner changes in equity. For financial statements presented for the
Corporation, nonowner equity changes are only comprised of unrealized gains or
losses on available for sale debt securities that will be accumulated with net
income in determining comprehensive income. This statement does not impact the
historical financial results of the Corporation's operations and is effective
for years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Adoption of this standard did not have an impact on the Corporation's results of
operations. Changes in the balance of Net Accumulated Other Comprehensive Income
in the Stockholders' Equity section of the Statement of Condition are the direct
result of changes in the unrealized gains (losses) on available for sale debt
securities.
Presented below is a reconcilement of net income to comprehensive income
indicating the components of other comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- ------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 10,325 $ 9,305
Other Comprehensive Income:
Unrealized Holding Gain (Loss) on Debt Securities (14,331) 66
Less: Reclassification Adjustment for Gains Included in Net Income (63) 1,209
- -------------------------------------------------------------------------------------------------
Other Comprehensive Income, Before Tax (14,268) (1,143)
Income Tax (Benefit) Related to Items of Other Comprehensive Income (5,643) (453)
- -------------------------------------------------------------------------------------------------
Other Comprehensive Income, After Tax (8,625) (690)
- -------------------------------------------------------------------------------------------------
Comprehensive Income $ 1,700 $ 8,615
- ------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
NOTE F - FUTURE ACCOUNTING DISCLOSURE REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement becomes
effective for fiscal years beginning after June 15, 1999 and will not be applied
retroactively. The statement establishes accounting and reporting standards for
derivative instruments and hedging activity. Under the standard, all derivatives
must be measured at fair value and recognized as either assets or liabilities in
the financial statements.
The accounting for changes in fair value (gains and losses) of a
derivative is dependent on the intended use of the derivative and its
designation. Derivatives may be used to: 1) hedge exposure to changes in the
fair value of a recognized asset or liability or a firm commitment, referred to
as a fair value hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as a cash flow hedge, or 3) hedge foreign currency
exposure.
The Corporation only engages in fair value and cash flow hedges. In both
types of hedges, the effective portions of the hedges, if included in earnings,
would not affect corporate net income. Ineffective portions of hedges are
reported in and affect net earnings immediately. Derivatives not designed as a
hedging instrument have the changes in their fair value recognized in earnings
in the period of change. Management is currently assessing the potential impact
of SFAS No. 133 on future corporate operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
EARNINGS SUMMARY
Provident Bankshares Corporation recorded net income for the quarter ended
March 31, 1999 of $10.3 million or $.43 per share basic and $.41 diluted. Net
income for the quarter ended March 31, 1998 was $9.3 million or $.38 per share
basic and $.37 diluted. The higher earnings in 1999 were mainly due to loan
growth and increased fee income. Average total loans outstanding grew $432
million or 15.9% to $3.15 billion. Non-interest income, net of securities gains,
increased 34 percent for the quarter driven by fee-based services, mortgage
banking income and investment service fees. Operating expenses net of capital
securities expenses increased 13.5 percent from the first quarter of 1998. This
increase is associated with continued network expansion, upgrading of branch
technology and increased mortgage banking business. There was a $2.0 million
provision for loan losses during the quarter with net charge-offs of $6.8
million.
NET INTEREST INCOME
Growth in average earning assets offset in part by a lower net interest
margin raised tax-equivalent net interest income to $34.0 million for the first
quarter of 1999, a $2.0 million increase over the prior year. The net interest
margin for the quarter declined 43 basis points from the same quarter last year.
The primary factors included declining interest rates and a flattened treasury
yield curve, compressing spreads and increasing prepayments on mortgages. In
addition, a higher mix of lower yielding investments versus loans impacted the
yield-cost spreads as the Corporation leveraged trust preferred capital
securities issued in the second quarter of 1998 in anticipation of future loan
growth.
9
<PAGE> 10
Provident's tax equivalent interest income rose $7.6 million from the
first quarter of 1998, the result of an $814 million expansion in average
earning asset balances. Growth in total average earning assets was provided by
increases of $493 million in consumer loans, $263 million in investment, $69
million in mortgage loans held for sale and $91 million in commercial business
loans. Real estate mortgages decreased $103 million partly due to a $52 million
residential loan sale during the second quarter, 1998. The yield declined 72
basis points to 7.18% versus 7.90% the prior year.
Total interest expense for the first quarter of 1999 was $5.7 million
above a year ago, the combined result of an increase of $734 million in the
average outstanding balance of interest-bearing liabilities offset in part by a
33 basis point drop in rate paid. Included in this increase were $433 million in
matched maturity brokered deposits, $80 million in interest bearing demand/money
market deposits and $51 million in money market certificates of deposits.
Savings and direct certificates of deposit increased $3.5 million and $15.7
million, respectively. Borrowed money increased $160 million.
As a result of off-balance sheet transactions undertaken to insulate the
bank from interest rate risks, interest income decreased by $150 thousand and
interest expense decreased by $641 thousand, for a total increase of $491
thousand in net interest income for the quarter ending March 31, 1999. Included
in this net interest income increase was the amortization of closed positions
which reduced interest income by $54 thousand and increased interest expense by
$545 thousand (a net decrease of $491 thousand) for the current quarter. Without
the amortization of closed positions, off-balance sheet positions had no effect
on net interest income for the current quarter.
Management was assuming for planning purposes as of March 31, 1999, that
short-term rates will increase by 20 basis points and long-term rates will
remained unchanged over the next twelve months. The Corporation's analysis
indicates that if management does not adjust its March 31, 1999 off-balance
sheet positions and the forward yield curve assumptions occur, off-balance sheet
positions, including amortization of closed positions, would increase net
interest income by $102 thousand over the next twelve months. This compares to a
decrease of $1.5 million should interest rates remain unchanged. Amortization of
closed positions will increase net interest income by $502 thousand over the
next twelve months. Thus, without amortization of closed positions, net
interest income would decrease $400 thousand over the next twelve months if the
forward yield curve assumptions occur and $1.0 million if rates remain
unchanged.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $2.0 million provision for loan losses, with
net charge-offs of $6.8 million for the first quarter of 1999, compared to a
provision of $3.0 million and net charge-offs of $2.1 million for the same
period of 1998. The increase in charge-offs was the result of the payment of a
judgment entered in April of 1998 stemming from a lawsuit alleging that
Provident Bank of Maryland had failed to fully honor a letter of credit which
was issued in 1989. The amount of the judgment was $5.2 million, exclusive of
post-judgment interest. The amount of this payment was fully reserved for at
December 31, 1998. The Corporation continues to emphasize loan quality and
closely monitors potential problem credits. Senior managers meet at least
monthly to review the credit quality of the loan portfolios and at least
quarterly with executive management to review the adequacy of the allowance for
loan losses. The allowance for loan losses at March 31, 1999 was $37.9 million,
compared to $37.8 million a year ago. At March 31, 1999, the allowance
represented 1.21% of total loans and 374% of non-performing loans. Total
non-performing loans were $10.1 million at March 31, 1999, down from $14.3
million as of March 31, 1998. Non-performing loans as a percent of loans
outstanding as of March 31, 1999 were .32%.
10
<PAGE> 11
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $15.5 million
in the first quarter of 1999 compared to $11.6 million in 1998. This increase
was driven by a $2.4 million increase in mortgage banking activities, a $1.3
million increase in deposit service fees driven by higher account volume and
commission and fees of $292 thousand. Mortgage banking income was driven by
increased originations which totaled $281 million during the first quarter of
1999 compared to $203 million during the same quarter of 1998. Sales of mortgage
loans resulted in $2.6 million in gains for the first quarter of 1999 as
compared to $551 thousand for the same period in 1998.
Sale of securities resulted in a $63 thousand loss for the quarter
compared to $1.2 million gain for the same quarter in 1998.
NON-INTEREST EXPENSE
First quarter non-interest expense was $32.2 million, compared to $27.6
million for the same period last year. Salaries and benefits increased $1.9
million mainly related to merit increases and incentives associated with
increased mortgage originations. Occupancy costs increased $370 thousand over
last year and furniture and equipment expense increased $247 thousand. These
increases were required by branch network expansion and upgrades of technology.
External processing fees increased $443 thousand due to increased account
volume. During the second quarter of 1998, $40 million of trust preferred
capital securities were issued resulting in $836 thousand in related expenses
for the first quarter of 1999. All other expenses increased a total of $790
thousand mainly associated with a $148 thousand increase in communication
expenses and $360 thousand increase in professional fees.
INCOME TAXES
Provident recorded income tax expense of $4.8 million on income before
taxes of $15.1 million, an effective tax rate of 31.5%. During the first quarter
of 1998, Provident's tax expense was $4.6 million on pre-tax income of $13.9
million, an effective tax rate of 33.1%. The change in effective tax rate is the
result of higher state income tax benefits.
IMPACT OF THE YEAR 2000 ISSUE
Management initiated the process of preparing computer systems and applications
for the Year 2000 in September 1996. The Year 2000 Issue is the result of
computer programs using two digits rather than four to define the applicable
year. Any of the Corporation's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions.
The Corporation is currently in the testing phase using both internal and
external resources to test the software and hardware for Year 2000 compliance.
The Corporation plans to finish testing by June 30, 1999 and intends to
reprogram, or replace, software and hardware, to the extent necessary. Testing
to date has not led to any adverse events. The Corporation intends to be Year
2000 compliant by June 30, 1999.
The Corporation relies on M & I Services, a third party processor for the
majority of its data processing requirements. Provident is working with all of
its significant data processing software and hardware suppliers, to make certain
they will be Year 2000 compliant. A due diligence approach is being used to
develop general risk control guidelines to assist in identifying material
customers, evaluating their preparedness, assessing Year 2000 customer risk and
implementing controls to manage the risk.
11
<PAGE> 12
The total costs associated with becoming Year 2000 compliant are expected
to be less than $1.0 million and are not expected to have a material effect on
the results of operations. As of December 31, 1998, the Corporation had spent
approximately $626 thousand to become Year 2000 compliant. Money to fund Year
2000 compliance will come from normal operating cash flow. Expenses associated
with Year 2000 compliance will directly reduce otherwise reported net income of
the Corporation in the period incurred.
As a precaution, the Corporation has developed a contingency plan in case
it is not completely Year 2000 compliant after December 31, 1999. Management
believes the contingency plan will permit Provident, even if some of its systems
fail, to continue to operate until normal operations can be restored. These
plans include the capability to process off-line and transport the data to our
third party processor by the most effective and efficient means available. These
procedures could require changing schedules and hiring of temporary staff, which
would increase the cost of the operations. The most reasonably likely worst
case Year 2000 scenarios foreseeable at this time would include the Bank
temporarily not being able to process, in some combination, various types of
customer transactions. Despite Provident's efforts to date to remediate affected
systems and develop contingency plans for potential risks, management has not
yet completed all activities associated with resolving Year 2000 issues. Under
the unlikely scenario that required modifications or conversions are not made or
are not completed on a timely basis prior to the Year 2000, normal business
operations could be disrupted. In addition, noncompliance by third parties
(including loan customers) and disruptions to the economy in general resulting
from Year 2000 issues could also have a negative impact of undeterminable
magnitude on the Corporation.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
FINANCIAL CONDITION
Total assets of the Corporation increased $192 million from December 31,
1998 to March 31, 1999 as investments increased $189 million and loan balances
increased $28.5 million offset in part by lower loans held for sale. Consumer
loans were up $115 million and commercial business loans were up $7 million from
December 31, 1998. Real estate construction loans increased $12 million and real
estate mortgage loans declined $106 million. The sale of mortgage loans
contributed to the decline. Total deposits ended the quarter at $3.4 billion, an
increase of $10 million over the December 31, 1998 level. Non-interest bearing
deposits increased $13 million from December 31, 1998 while interest bearing
deposits decreased $3 million. Borrowings increased $143 million from December
31, 1998 ending the quarter at $1.02 billion. In April 1998, the Corporation
issued $40 million of trust preferred capital securities, which were outstanding
as of March 31, 1999. A subsidiary trust of the Corporation issued these capital
securities, and the Corporation received the proceeds by issuing junior
subordinated debentures to the trust. These capital securities are considered
tier 1 capital for regulatory purposes.
The primary source of liquidity at March 31, 1999 were loans held for sale
and investments available for sale, which totaled $1.53 billion. This represents
34% of total liabilities compared to 33% at December 31, 1998.
At quarter-end, the leverage ratio was 7.10% and total stockholders'
equity represented 10.29% of risk adjusted assets. These ratios exceed the
minimum requirements of the current leverage capital and risk-based capital
standards established by regulatory agencies.
12
<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 1998, see "Interest
Sensitivity Management" and Note 12 to the Consolidated Financial Statements in
the Corporation's Form 10-K filed with the Commission on March 3, 1999. The
market risk of the Corporation has not experienced any significant changes as of
March 31, 1999 from December 31, 1998. Additionally, refer to "Net Interest
Income" in Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional quantitative and qualitative
discussions about market risk at March 31, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation (1)
(3.2) Second Amended and Restated Bylaws of Provident Bankshares
Corporation (2)
(4.1) Stockholder Protection Rights Plan, as amended (3)
(11) Statement re: Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation during the
quarter ended March 31, 1999.
(1) Incorporated by reference from Provident's Registration Statement on Form
S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Provident's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, filed with the Commission on
November 13, 1998.
(3) Incorporated by reference from Provident's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, filed with the Commission on August
14, 1998.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES CORPORATION
--------------------------------
Registrant
May 14, 1999 /s/ Peter M. Martin
---------------------------------------
Peter M. Martin
President, Chairman and Chief Executive
Officer
May 14, 1999 /s/ R. Wayne Hall
---------------------------------------
R. Wayne Hall
Treasurer
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
- ------- ----------- --------------------------
<S> <C>
(11) Statement re: Computation of Per Share Earnings
(27) Financial Data Schedule
</TABLE>
15
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31
(in thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------------
Basic:
- -----
<S> <C> <C>
Average shares outstanding 24,294 24,341
======== =======
Net Income $ 10,325 $ 9,305
======== =======
Per Share Amount $ 0.43 $ 0.38
======== =======
Diluted:
- -------
Average shares outstanding 24,294 24,341
-------- -------
Net effect of dilutive stock options based
on the treasury stock method using the
average market price or quarter end price,
whichever is greater 896 1,151
-------- -------
Total Shares Outstanding 25,190 25,492
======== =======
Net Income $ 10,325 $ 9,305
======== =======
Per Share Amount $ 0.41 $ 0.37
-------- -------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000818969
<NAME> 1,000
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 67,220
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,347,176
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,128,748
<ALLOWANCE> 37,897
<TOTAL-ASSETS> 4,867,601
<DEPOSITS> 3,429,513
<SHORT-TERM> 280,110
<LIABILITIES-OTHER> 80,925
<LONG-TERM> 743,151
39,244
0
<COMMON> 24,839
<OTHER-SE> 269,819
<TOTAL-LIABILITIES-AND-EQUITY> 4,867,601
<INTEREST-LOAN> 60,653
<INTEREST-INVEST> 20,091
<INTEREST-OTHER> 628
<INTEREST-TOTAL> 81,372
<INTEREST-DEPOSIT> 34,401
<INTEREST-EXPENSE> 47,631
<INTEREST-INCOME-NET> 33,741
<LOAN-LOSSES> 1,961
<SECURITIES-GAINS> (63)
<EXPENSE-OTHER> 16,642
<INCOME-PRETAX> 15,075
<INCOME-PRE-EXTRAORDINARY> 15,075
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,325
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 2.99
<LOANS-NON> 10,132
<LOANS-PAST> 28,343
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 42,739
<CHARGE-OFFS> 7,120
<RECOVERIES> 317
<ALLOWANCE-CLOSE> 37,897
<ALLOWANCE-DOMESTIC> 37,897
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
