<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 JUNE 30, 2000
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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
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(Address of Principal Executive Offices)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year
if Changed Since Last Report)
(410) 277-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 25,501,121 shares outstanding at
August 1, 2000.
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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
June 30, 2000 and 1999 and December 31, 1999 3
Consolidated Statement of Income - Unaudited
Three and six month periods Ended June 30, 2000 and 1999 4
Consolidated Statement of Cash Flows - Unaudited
Six months Ended June 30, 2000 and 1999 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 12
PART II - OTHER INFORMATION 12
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 15
EXHIBIT INDEX 16
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties which could cause actual results to differ materially
from those projected. Such risk and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the SEC from time to time.
2
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subsidiaries
June 30, December 31, June 30,
(DOLLARS IN THOUSANDS) 2000 1999 1999
====================================================================================================================================
<S> <C> <C> <C>
ASSETS
Cash and Due From Banks $ 112,077 $ 90,840 $ 77,137
Short-Term Investments 1,767 1,759 2,628
Mortgage Loans Held for Sale 14,884 30,535 117,158
Securities Available for Sale 1,711,987 1,671,507 1,364,477
Loans:
Consumer 2,418,883 2,204,943 2,348,042
Commercial Business 341,874 363,059 403,783
Real Estate -- Construction 208,885 151,875 129,441
Real Estate -- Mortgage 540,906 464,242 353,760
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 3,510,548 3,184,119 3,235,026
Less: Allowance for Loan Losses 46,714 39,780 38,682
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NET LOANS 3,463,834 3,144,339 3,196,344
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Premises and Equipment, Net 44,338 44,277 40,318
Accrued Interest Receivable 49,306 46,507 42,877
Other Assets 84,683 64,713 58,651
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TOTAL ASSETS $ 5,482,876 $ 5,094,477 $ 4,899,590
====================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 317,883 $ 264,252 $ 266,826
Interest-Bearing 3,602,473 3,544,276 3,302,806
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TOTAL DEPOSITS 3,920,356 3,808,528 3,569,632
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Borrowings 1,184,917 928,441 967,530
Other Liabilities 43,882 43,747 39,763
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TOTAL LIABILITIES 5,149,155 4,780,716 4,576,925
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Corporation-Obligated Mandatorily Redeemable Capital Securities 67,933 39,162 39,250
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STOCKHOLDERS' EQUITY
Preferred Stock (Par Value $.01) Authorized 1,000 Shares, Issued 899 Shares - - -
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 27,524,445, 26,225,752 and 26,114,940 Shares; at June 30,
2000, December 31, 1999 and June 30, 1999, respectively 27,524 26,226 26,115
Capital Surplus 222,806 203,364 202,032
Retained Earnings 94,890 102,587 87,793
Net Accumulated Other Comprehensive Income (47,166) (44,323) (21,323)
Treasury Stock at Cost - 1,983,532, 693,866, and 591,266 Shares at
June 30, 2000, December 31, 1999 and June 30, 1999, respectively (32,266) (13,255) (11,202)
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TOTAL STOCKHOLDERS' EQUITY 265,788 274,599 283,415
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,482,876 $ 5,094,477 $ 4,899,590
====================================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
</TABLE>
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Six Months Ended
June 30, June 30,
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(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 70,619 $ 64,081 $ 138,440 $ 124,734
Interest on Securities 30,643 21,310 60,276 41,401
Tax-Advantaged Interest 519 576 1,033 1,165
Interest on Short-Term Investments 46 21 92 60
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TOTAL INTEREST INCOME 101,827 85,988 199,841 167,360
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INTEREST EXPENSE
Interest on Deposits 42,473 36,197 85,168 70,598
Interest on Borrowings 19,800 13,368 34,700 26,598
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TOTAL INTEREST EXPENSE 62,273 49,565 119,868 97,196
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NET INTEREST INCOME 39,554 36,423 79,973 70,164
Less: Provision for Loan Losses 13,035 2,759 17,335 4,720
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 26,519 33,664 62,638 65,444
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 10,578 8,408 19,353 15,946
Mortgage Banking Activities 1,020 2,630 1,831 6,634
Commissions and Fees 1,291 1,388 2,679 2,864
Net Securities Gains 7,779 375 7,858 312
Other Non-Interest Income 3,711 2,990 7,027 5,572
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TOTAL NON-INTEREST INCOME 24,379 15,791 38,748 31,328
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 18,139 16,973 35,303 33,198
Occupancy Expense, Net 3,144 2,696 6,334 5,548
Furniture and Equipment Expense 2,491 2,061 4,942 4,218
External Processing Fees 4,268 3,728 8,057 7,429
Capital Securities Expense 1,487 835 2,471 1,671
Other Non-Interest Expense 7,417 6,710 14,868 13,181
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TOTAL NON-INTEREST EXPENSE 36,946 33,003 71,975 65,245
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INCOME BEFORE INCOME TAXES 13,952 16,452 29,411 31,527
Income Tax Expense 4,707 5,462 9,301 10,212
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INCOME BEFORE EXTRAORDINARY ITEM 9,245 10,990 20,110 21,315
Extraordinary Item -- Gain on Debt Extinguishment, Net -- -- 770 --
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NET INCOME $ 9,245 $ 10,990 $ 20,880 $ 21,315
====================================================================================================================================
BASIC EARNINGS PER SHARE
Income Before Extraordinary Item $ 0.35 $ 0.41 $ 0.76 $ 0.80
Net Income 0.35 0.41 0.79 0.80
====================================================================================================================================
DILUTED EARNINGS PER SHARE
Income Before Extraordinary Item $ 0.35 $ 0.40 $ 0.74 $ 0.77
Net Income 0.35 0.40 0.77 0.77
====================================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
</TABLE>
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
(IN THOUSANDS)
Six Months Ended June 30, 2000 1999
=====================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 20,880 $ 21,315
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 11,418 17,796
Provision for Loan Losses 17,335 4,720
Provision for Deferred Income Tax 4,115 3,142
Realized Net Securities Gains (7,858) (312)
Loans Originated or Acquired and Held for Sale (84,433) (444,587)
Proceeds from Sales of Loans 100,623 555,932
Gain on Sales of Loans (539) (3,796)
Other Operating Activities (25,453) (2,987)
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TOTAL ADJUSTMENTS 15,208 129,908
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NET CASH PROVIDED BY OPERATING ACTIVITIES 36,088 151,223
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INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 99,256 118,336
Proceeds on Sales of Securities Available for Sale 26,454 22,820
Purchases of Securities Available for Sale (164,480) (354,691)
Loan Originations and Purchases Less Principal Collections (343,009) (158,481)
Purchases of Premises and Equipment (4,520) (3,662)
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NET CASH USED BY INVESTING ACTIVITIES (386,299) (375,678)
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FINANCING ACTIVITIES
Net Increase in Deposits 111,828 150,075
Net Increase in Short-Term Borrowings 213,068 80,142
Proceeds from Long-Term Debt 260,000 16,000
Payments and Maturities of Long-Term Debt (216,592) (9,214)
Proceeds from Capital Securities 30,000 --
Issuance of Stock 645 1,251
Purchase of Treasury Stock (19,011) (1,425)
Cash Dividends on Common Stock (8,482) (7,172)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 371,456 229,657
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INCREASE IN CASH AND CASH EQUIVALENTS 21,245 5,202
Cash and Cash Equivalents at Beginning of Year 92,599 74,563
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 113,844 $ 79,765
=====================================================================================================================
SUPPLEMENTAL DISCLOSURES
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Interest Paid, Net of Amount Capitalized $ 89,369 $ 63,182
Income Taxes Paid 1,604 7,588
Stock Dividend 20,095 29,846
These financial statements should be read in conjunction with the accompanying notes.
</TABLE>
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
JUNE 30, 2000
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 six month period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. 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, 1999 as
filed with the Securities and Exchange Commission on February 17, 2000.
NOTE B - EXTRAORDINARY ITEM
During the first quarter, the Corporation liquidated $78 million of
Federal Home Loan Bank Advances due in 2001 through 2003. Accordingly, a net
gain of $770 thousand, or $.03 per share, after taxes of $415 thousand was
recognized.
NOTE C - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for
the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Income Before Extraordinary Item $ 9,245 $ 10,990 $ 20,110 $ 21,315
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 770 -
-----------------------------------------------------------------------------------------------------------------------------------
Net Income 9,245 10,990 $ 20,880 $ 21,315
===================================================================================================================================
BASIC
Basic EPS Shares 26,263 26,839 26,409 26,790
Net Income Before Extraordinary Item $ 0.35 $ 0.41 $ 0.76 $ 0.80
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 0.03 -
-----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 0.35 0.41 $ 0.79 $ 0.80
===================================================================================================================================
DILUTED
Dilutive Shares (principally stock options) 525 654 539 904
Diluted EPS Shares 26,788 27,493 26,948 27,694
Net Income Before Extraordinary Item $ 0.35 $ 0.40 $ 0.74 $ 0.77
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 0.03 -
-----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 0.35 0.40 $ 0.77 $ 0.77
===================================================================================================================================
</TABLE>
6
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NOTE D - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities
portfolio at June 30, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 2000
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 83,869 $ 172 $ 132 $ 83,909
Mortgage-Backed Securities 1,537,772 2,633 52,745 1,487,660
Municipal Securities 26,618 127 432 26,313
Other Debt Securities 136,291 -- 22,186 114,105
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Total Securities Available for Sale $ 1,784,550 $ 2,932 $ 75,495 $ 1,711,987
------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 42,654 $ -- $ 41 $ 42,613
Mortgage-Backed Securities 1,194,606 2,060 28,800 1,167,866
Municipal Securities 26,782 297 173 26,906
Other Debt Securities 135,710 67 8,685 127,092
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Total Securities Available for Sale $ 1,399,752 $ 2,424 $ 37,699 $ 1,364,477
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</TABLE>
At June 30, 2000 a net unrealized loss of $47.2 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 loss of $21.3 million at June 30,
1999. For details regarding investment securities at December 31, 1999, refer to
Notes 1 and 3 of the Consolidated Financial Statements incorporated in the
Corporation's 10-K filed February 17, 2000.
7
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NOTE E - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For financial
statements presented for the Corporation, the only nonowner equity change is
comprised of unrealized gains or losses on available for sale debt securities
that will be accumulated with net income from operations. This change does not
have an impact on the Corporation's results of operations.
Presented below is a reconcilement of net income to comprehensive income
indicating the components of other comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Income $ 9,245 $ 10,990 $ 20,880 $ 21,315
Other Comprehensive Income:
Unrealized Holding Gain (Loss) on Debt Securities 3,964 (29,412) 3,486 (43,743)
Less: Reclassification Adjustment for Gains Included in Net Income 7,779 375 7,858 312
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Other Comprehensive Income, Before Tax (3,815) (29,787) (4,372) (44,055)
Income Tax (Benefit) Related to Items of Other Comprehensive Income (1,333) (11,781) (1,529) (17,424)
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Other Comprehensive Income, After Tax (2,482) (18,006) (2,843) (26,631)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 6,763 $ (7,016) $ 18,037 $ (5,316)
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</TABLE>
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"). As amended, the statement
becomes effective for fiscal years beginning after June 15, 2000 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.
NOTE G - PENDING ACQUISITION
On May 4, 2000, the Corporation and Harbor Federal Bancorp, a $244 million
savings bank holding company, entered into a definitive agreement whereby the
Corporation will exchange 1.256 shares of its common stock for each share of
Harbor Federal Bancorp's common stock outstanding. The acquisition will be
accounted for as a purchase and is expected to be completed in the third quarter
of 2000.
8
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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
June 30, 2000 of $9.2 million or $.35 per share basic and diluted. Net income
for the quarter ended June 30, 1999 was $11.0 million or $.41 per share basic
and $.40 diluted. The lower earnings in 2000 were mainly due to the increase in
loan loss provision to address the anticipated write down of a significant
portion of an existing $15 million non-performing health care credit and the
sale of another health care credit. Net interest income increased 8.4% driven by
higher average interest earning assets of $569 million. Non-interest income, net
of securities gains and losses, increased $1.2 million for the quarter driven
mainly by higher service charges on deposit accounts. Operating expenses net of
capital securities expenses increased 10.2% from the second quarter of 1999.
This increase is associated with continued network expansion, as 23 new branches
have been opened since the end of the second quarter of 1999.
NET INTEREST INCOME
Growth in average earning assets raised tax-equivalent net interest income
to $39.8 million for the second quarter of 2000, a $3.1 million increase over
the prior year. The net interest margin for the quarter decreased 9 basis points
from the same quarter last year. The primary factors included the leverage of
capital issued in the first quarter of 2000 and higher non-performing loans
related to health care related credits.
Provident's tax equivalent interest income rose $15.8 million from the
second quarter of 1999, the result of a $569 million expansion in average
earning assets and a 43 basis point increase in yield. Growth in total average
earning assets was provided by increases of $86 million in commercial real
estate loans, $112 million in residential mortgage loans and $48 million in
consumer loans. Mortgage loans held for sale and commercial business loans
declined $106 million and $26 million, respectively. Investments increased $458
million. The yield on earning assets was 7.76% compared to 7.33% for the second
quarter of 2000.
Total interest expense for the second quarter of 2000 was $12.7 million
above a year ago, the combined result of an increase of $500 million in the
average outstanding balance of interest-bearing liabilities and a 59 basis point
increase in rate paid. Included in this increase were $156 million in matched
maturity brokered deposits, $49 million in interest bearing demand/money market
deposits and $38 million in certificates of deposits. Savings deposits and IRA
deposits decreased $11 million and $15 million, respectively. Short term
borrowed money increased $445 million while long term borrowings declined $169
million.
Management monitors the level of earnings at risk due to interest rate
volatility through the simulation of multiple interest rate scenarios. Interest
rate risk products such as interest rate swaps, caps and floors are acquired as
effective protection against the negative effects should certain scenarios that
create earnings volatility occur. These risk avoidance costs decreased interest
income by $1 thousand and increased interest expense by $982 thousand for a
total decrease of $983 thousand in net interest income for the quarter ending
June 30, 2000. Included in this net interest income decrease was the
amortization of closed positions, which decreased interest expense by $176
thousand for the current quarter. Without the amortization of closed positions,
off-balance sheet positions reduced net interest income by $1.2 million.
Management does not speculate on future interest rate movements. At June
30, 2000, the forward markets indicated that short-term interest rates will
increase 30 basis points and long-term rates will remain unchanged over the next
twelve months. The Corporation's analysis indicates that if management does not
adjust its June 30, 2000 off- balance sheet positions and the forward yield
curve assumptions occur, off-balance sheet positions, including amortization of
closed positions, would decrease net interest income by $411 thousand over the
next twelve months. This compares to a decrease of $2.0 million should interest
rates remain unchanged. However, yields and rates on hedged balance sheet assets
and liabilities would improve by a corresponding amount. Amortization of closed
positions will increase net interest income by $595 thousand over the next
twelve months. Thus, without amortization of closed positions, net interest
income would decrease $1.0 million over the next twelve months if the forward
yield curve assumptions occur and $2.6 million if rates remain unchanged.
9
<PAGE> 10
PROVISION FOR LOAN LOSSES
The Corporation recorded a $13 million provision for loan losses, with net
charge-offs of $7.4 million for the second quarter of 2000, compared to a
provision of $2.8 million and net charge-offs of $2.0 million for the same
period of 1999. The increase in the provision for loan losses was made to
address the anticipated write-down of a significant portion of an existing $15
million non-performing health care credit and the sale of another health care
credit not previously classified as non-performing. The Company decided to take
this action after analyzing recently received information regarding the
non-performing credit. Provident also sold the second $15 million health care
loan at the end of the second quarter. The entire health care portfolio now
represents 2.1% of Provident's total loans. 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 June
30, 2000 was $46.7 million, compared to $38.7 million a year ago. At June 30,
2000, the allowance represented 1.33% of total loans and 179% of non-performing
loans. Total non-performing loans were $26.2 million at June 30, 2000, up from
$8.1 million as of June 30, 1999. Non-performing loans as a percent of loans
outstanding as of June 30, 2000 were .75% as compared to .25% as of June 30,
1999.
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $16.6 million
in the second quarter of 2000 compared to $15.4 million for the second quarter
of 1999. This increase was driven by higher service charges on deposit accounts,
which increased $2.2 million offset in part by lower mortgage banking income and
lower commission and fees. The increase in deposit service fees was driven by
higher account volume. Mortgage banking originations totaled $89 million during
the second quarter of 2000 compared to $226 million during the same quarter of
1999. Sales of mortgage loans resulted in $325 thousand in gains for the second
quarter of 2000 as compared to $1.2 million for the same period in 1999. The
lower commissions and fees were attributable mainly to lower investment product
sales.
Sale of securities resulted in a $7.8 million gain for the second quarter
of 2000 compared to $375 thousand for the same period in 1999.
NON-INTEREST EXPENSE
Second quarter non-interest expense was $36.9 million, compared to $33.0
million for the same period last year. Salaries and benefits increased $1.2
million, mainly related to the expansion of the bank's branch network. The
branch network expansion also contributed to increased occupancy costs of $448
thousand, furniture and equipment expense of $430 thousand and $540 thousand in
external processing fees related to increased account volume. During the first
quarter of 2000, $30 million of trust preferred capital securities were issued
resulting in the increase in capital securities expense. All other expenses
increased a total of $707 thousand mainly associated with increases in marketing
expenses; communication expenses and personnel expenses, which also were
associated with, network expansion. Provident has increased its branch network
by 23 branches or 34% since June 30, 1999.
INCOME TAXES
Provident recorded income tax expense of $4.7 million on income before
taxes of $14.0 million, an effective tax rate of 33.7%. During the second
quarter of 1999, Provident's tax expense was $5.5 million on pre-tax income of
$16.5 million, an effective tax rate of 33.2%. The change in effective tax rate
is the result of lower state tax benefits for 2000 versus 1999.
10
<PAGE> 11
FINANCIAL REVIEW FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the six months ending June 30, 2000, net income was $20.9 million or
$.79 per share basic and $.77 diluted, compared to $21.3 million or $.80 per
share basic and $.77 per share diluted for the six months ended June 30, 1999.
The lower earnings in 2000 were mainly due to the increase in loan loss
provision to address the anticipated write down of a significant portion of an
existing $15 million non-performing health care credit and the sale of another
health care credit. Tax-equivalent net interest income increased 13.8% driven by
higher average interest earning assets of $509 million. Non-interest income, net
of securities gains and losses, remained relatively flat as higher service
charges on deposit accounts was offset by lower mortgage banking income.
Operating expenses net of capital securities expenses increased 9.3% from 1999.
This increase is associated with continued network expansion, as 23 new branches
have been opened since the end of the second quarter of 1999.
The $9.7 million increase in tax-equivalent net interest income for 2000
was the result of a $509 million increase in average earning assets over the
prior year. Net interest margin increased by 6 basis points caused by an
increase of 52 basis points in yields and a 46 basis point increase in costs of
funds.
The provision for loan losses increased $12.6 million to $17.3 million in
2000. The allowance for loan losses ended the quarter at $46.7 million or 1.33%
of loans outstanding as compared to 1.20% for the same quarter in 1999.
Non-interest income, excluding net securities gains, remained relatively
flat at $30.9 million. Deposit service charges rose $3.4 million over the prior
year to $19.4 million, mortgage banking declined $4.8 million to $1.8 million,
and commissions and fees decreased $185 thousand to $2.7 million. Net securities
gains were $7.9 million in 2000 and $312 thousand in 1999.
Provident's non-interest expense, excluding capital securities expenses,
rose 9.3% in 2000 over 1999. Salaries and employee benefits increased $2.1
million attributable to merit increases and new branches. The branch network
expansion also contributed to increased occupancy costs of $786 thousand,
furniture and equipment expense of $724 thousand and $628 thousand in external
processing fees related to increased account volume.
During the first quarter of 2000, $30 million of trust preferred capital
securities were issued resulting in the increase in capital securities expense.
All other expenses increased a total of $1.7 million mainly associated with
increases in marketing expenses, communication expenses, personnel expense and
net losses associated with deposit accounts. These increases are also associated
with branch network expansion.
Provident recorded an income tax expense of $9.3 million for the six months
ended June 30, 2000 based on pre-tax income of $29.4 million, which represented
an effective tax rate of 31.6%. This compares with a 32.4% effective tax rate
for the same period in 1999.
The Corporation also recognized an extraordinary gain from debt
extinguishment of $770 thousand, net of taxes, during the first quarter of 2000.
YEAR 2000 ISSUES
The Corporation continued to monitor Y2K issues and no material items
occurred that required changes to the Corporation's computer systems.
FINANCIAL CONDITION
Total assets of the Corporation increased $388 million from December 31,
1999 to June 30, 2000 as loan balances increased $326 million. Consumer loans
were up $214 million, real estate construction loans up $57 million and real
estate mortgage loans were up $77 million. Commercial business loans were down
$21 million ending the quarter at $342 million. Total deposits ended the quarter
at $3.92 billion, an increase of $112 million over the December 31, 1999 level.
Core deposits increased $139 million from December 31, 1999 as non-interest
bearing demand increased $54 million and interest bearing demand/money market
increased $48 million. Direct certificates of deposits and savings deposits also
increased $27 million and $17 million, respectively. Borrowings increased $256
million from December 31, 1999 ending the quarter at $1.18 billion. In February
2000, the Corporation issued $30 million of trust preferred capital securities,
which were outstanding as of June 30, 2000. 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. Total trust
preferred capital securities, as of June 30, 2000, was $70 million.
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The primary sources of liquidity at June 30, 2000 were loans held for sale
and investments available for sale, which totaled $1.7 billion. This represents
33% of total liabilities compared to 36% at December 31, 1999.
At June 30, 2000, total stockholders' equity was $265.8 million, an $8.8
million decrease over December 31, 1999. In addition to the ordinary adjustments
to stockholders' equity of net income and dividends paid, additional capital of
$353 thousand was raised through the dividend reinvestment plan, $292 thousand
from the exercise of stock options, while capital decreased by $2.8 million
during the second quarter of 2000 as a result of Statement of Financial
Accounting Standards No. 115. During the second quarter of 2000, the Corporation
also repurchased 806 thousand shares totaling $11.3 million. At quarter-end the
leverage ratio was 7.01% and total stockholders' equity represented 10.30% of
risk adjusted assets. These ratios exceed the minimum requirements of the
current leverage capital and risk-based capital standards established by
regulatory agencies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 1999, see "Interest
Sensitivity Management" and Note 11 to the Consolidated Financial Statements in
the Corporation's Form 10-K filed with the Commission on February 17, 2000. The
market risk of the Corporation has not experienced any material changes as of
June 30, 2000 from December 31, 1999. 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 June 30, 2000.
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
The Annual Meeting of Stockholders of Provident Bankshares Corporation was held
on April 19, 2000.
PROPOSAL I
Election of Directors.
The following persons were elected as directors at the 2000 Annual
Meeting of Stockholders. The corresponding votes for each director and
their terms of office which continue until the 2003 Annual Meeting of
Stockholders is reflected below.
For % Withheld %
--- - -------- -
Dr. Calvin W. Burnett 17,045,145 83.3 3,414,742 16.7
Pierce B. Dunn 17,056,119 83.4 3,403,768 16.6
Mark K. Joseph 16,087,264 78.6 4,372,623 21.4
Peter M. Martin 17,025,879 83.2 3,434,008 16.8
Sheila K. Riggs 17,050,170 83.3 3,409,717 16.7
The following persons continue to serve as directors until the 2001
Annual Meeting of Stockholders: Melvin A. Bilal, Ward B. Coe, III,
Esquire, Frederick W. Meier, Jr. and Sister Rosemarie Nassif.; until
the 2002 Annual Meeting of Stockholders: Thomas S. Bozzuto, Charles W.
Cole, Jr., Barbara B. Lucas, Francis G. Riggs, Carl W. Stearn, Enos K.
Fry and Herbert W. Jorgensen.
PROPOSAL II
The stockholders ratified the selection of PricewaterhouseCoopers LLP
as independent auditors for 2000, with 19,980,597 (97.7%) shares cast
in favor, 274,750 (1.3%) shares cast against and 204,538 (1.0%)
abstaining.
OTHER MATTERS
A non-binding shareholder resolution to achieve a sale, merger or
other acquisition of the Corporation, proposed by Mid-Atlantic
Investors, was defeated with 10,074,635 (56.7%) shares cast against
the Mid-Atlantic proposal, 7,252,114 (40.8%) shares cast in favor and
441,659 (2.5%) abstaining.
Item 5. Other Information
Robert B. Barnhill, Jr. resigned from the Corporation's Board of
Directors effective April 30, 2000.
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Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation (1)
(3.2) Fourth Amended and Restated By-Laws of Provident
Bankshares Corporation (3)
(4.1) Stockholder Protection Rights Plan, as amended (2)
(27) Financial Data Schedule
(b) Reports on Form 8-K were filed with the Securities and Exchange
Commission as follows:
April 21, 2000 - Transcript of April 19, 2000 telephone
conference with financial analysts.
May 4, 2000 - Press release regarding the Company's April
19, 2000 Annual Meeting of Stockholders.
May 10, 2000 - Press Release regarding the pending sale
of the Company's "Fast 'n Friendly check cashing network
to Dollar Financial Group, Inc.
(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 June 30, 1998, filed with the Commission on August 14,
1998.
(3) Incorporated by reference from Provident's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000, filed with the Commission on May 10, 2000.
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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
August 10, 2000 /s/ Peter M. Martin
-------------------
Peter M. Martin
President, Chairman and Chief Executive Officer
August 10, 2000 /s/ R. Wayne Hall
-----------------
R. Wayne Hall
Treasurer
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EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
------- ----------- --------------------------
(27) Financial Data Schedule
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