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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 SEPTEMBER 30, 2002
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
----------------------------------------------------
(Address of Principal Executive Offices)
Not Applicable
------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year
if Changed Since Last Report)
(410) 277-7000
----------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Common Stock, par value $1.00 per share, 24,511,553 shares outstanding at
October 31, 2002.
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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 - Unaudited
September 30, 2002 and 2001 and December 31, 2001 4
Consolidated Statement of Income - Unaudited
Three month and nine month periods
ended September 30, 2002 and 2001 5
Consolidated Statement of Cash Flows - Unaudited
Nine month periods ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements - Unaudited 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION 24
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 25
Certifications Under Section 302 of the Sarbanes-Oxley Act of 2002 26-27
This report, as well as other written communications made from time to time by
Provident Bankshares Corporation and subsidiaries (the Company) (including,
without limitation, the Company's 2001 Annual Report to Stockholders) and oral
communications made from time to time by authorized officers of the Company, may
contain statements relating to the future results of the Company (including
certain projections and business trends) that are considered "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the PSLRA). Such forward-looking statements may be identified by the use of
such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated," "intend" and "potential." Examples of forward-looking statements
include, but are not limited to, possible or assumed estimates with respect to
the financial condition, expected or anticipated revenue, and results of
operations and business of the Company, including with respect to earnings
growth (on both accounting principles generally accepted in the United
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States of America (GAAP) and cash basis); revenue growth in retail banking,
lending and other areas; origination volume in the Company's consumer,
commercial and other lending businesses; asset quality and levels of
non-performing assets; current and future capital management programs;
non-interest income levels, including fees from services and product sales;
tangible capital generation; market share; expense levels; and other business
operations and strategies. For these statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
PSLRA.
The Company cautions you that a number of important factors could cause actual
results to differ materially from those currently anticipated in any
forward-looking statement. Such factors include, but are not limited to:
prevailing economic conditions; changes in interest rates, loan demand, real
estate values and competition, which can materially affect, among other things,
retail banking revenues, revenues from sales on non-deposit investment products,
origination levels in the Company's mortgage lending businesses and the level of
defaults, losses and prepayments on loans made by the Company, whether held in
portfolio or sold in the secondary markets; changes in accounting principles,
policies, and guidelines; changes in any applicable law, rule, regulation or
practice with respect to tax or legal issues; risks and uncertainties related to
acquisitions and related integration and restructuring activities; and other
economic, competitive, governmental, regulatory and technological factors
affecting the Company's operations, pricing, products and services. The
forward-looking statements are made as of the date of this report, and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
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PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
SEPTEMBER 30, December 31, September 30,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2002 2001 2001
===================================================================================================================================
ASSETS
Cash and Due From Banks $ 158,571 $ 105,986 $ 93,927
Short-Term Investments 1,964 11,798 6,659
Mortgage Loans Held for Sale 7,421 6,932 4,016
Securities Available for Sale 1,916,868 1,804,234 1,837,925
Loans:
Consumer 1,472,617 1,561,717 1,632,137
Commercial Business 373,646 379,616 347,612
Real Estate -- Construction 349,493 308,568 324,424
Real Estate -- Mortgage 439,569 526,992 596,972
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 2,635,325 2,776,893 2,901,145
Less: Allowance for Loan Losses 34,615 34,611 34,704
- -----------------------------------------------------------------------------------------------------------------------------------
NET LOANS 2,600,710 2,742,282 2,866,441
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net 45,494 45,687 45,664
Accrued Interest Receivable 30,520 34,057 36,788
Other Assets 137,624 148,741 135,968
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,899,172 $ 4,899,717 $ 5,027,388
===================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 488,674 $ 384,009 $ 364,610
Interest-Bearing 2,744,741 2,972,038 3,066,964
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 3,233,415 3,356,047 3,431,574
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings 487,485 366,321 380,677
Long-Term Debt 835,141 860,106 872,528
Other Liabilities 31,751 30,961 36,478
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,587,792 4,613,435 4,721,257
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares; Issued 31,717,319,
31,405,793 and 31,386,107 Shares at September 30, 2002, December 31, 2001
and September 30, 2001, respectively 31,717 31,406 31,386
Capital Surplus 289,348 284,457 284,120
Retained Earnings 116,990 97,749 90,405
Net Accumulated Other Comprehensive Income (Loss) 10,438 (6,458) 8,935
Treasury Stock at Cost - 6,983,601, 6,294,201 and
5,741,201 Shares At September 30, 2002, December 31, 2001
and September 30, 2001, respectively (137,113) (120,872) (108,715)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 311,380 286,282 306,131
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,899,172 $ 4,899,717 $ 5,027,388
===================================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
====================================================================================================================================
INTEREST INCOME
Interest and Fees on Loans $ 43,309 $ 55,227 $ 135,407 $ 182,628
Interest on Securities 23,451 29,470 77,723 87,480
Tax-Advantaged Interest 469 556 1,351 1,684
Interest on Short-Term Investments 16 72 81 249
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 67,245 85,325 214,562 272,041
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 19,572 33,633 66,265 113,898
Interest on Borrowings 12,909 17,012 41,011 51,714
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 32,481 50,645 107,276 165,612
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 34,764 34,680 107,286 106,429
Less: Provision for Loan Losses 2,150 2,100 8,400 15,170
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 32,614 32,580 98,886 91,259
- ------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 18,358 15,223 51,890 43,580
Commissions and Fees 1,142 1,290 3,742 3,660
Net Gains 1,997 274 186 8,084
Other Non-Interest Income 2,529 2,621 7,843 7,317
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 24,026 19,408 63,661 62,641
- ------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 18,709 17,222 54,533 53,221
Occupancy Expense, Net 3,722 3,383 10,776 10,060
Furniture and Equipment Expense 2,806 2,511 8,144 7,654
External Processing Fees 5,138 4,417 15,133 12,206
Other Non-Interest Expense 7,096 8,595 23,048 26,500
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 37,471 36,128 111,634 109,641
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 19,169 15,860 50,913 44,259
Income Tax Expense 6,029 5,030 15,893 14,069
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 13,140 10,830 35,020 30,190
Cumulative Effect of Change
in Accounting Principle, Net - - - (1,160)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 13,140 $ 10,830 $ 35,020 $ 29,030
====================================================================================================================================
BASIC EARNINGS PER SHARE
Income before Cumulative Effect of
Change in Accounting Principle $ 0.53 $ 0.42 $ 1.40 $ 1.16
Cumulative Effect of Change
in Accounting Principle, Net - - - (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.53 $ 0.42 $ 1.40 $ 1.12
====================================================================================================================================
DILUTED EARNINGS PER SHARE
Income before Cumulative Effect of
Change in Accounting Principle $ 0.52 $ 0.41 $ 1.36 $ 1.12
Cumulative Effect of Change
in Accounting Principle, Net - - - (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.52 $ 0.41 $ 1.36 $ 1.08
====================================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2002 2001
===========================================================================================================================
OPERATING ACTIVITIES
Net Income $ 35,020 $ 29,030
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 26,607 28,411
Provision for Loan Losses 8,400 15,170
Provision for Deferred Income Tax (Benefit) (2,736) (4,913)
Realized Net Gains (186) (8,084)
Loans Originated or Acquired and Held for Sale (47,536) (18,520)
Proceeds from Sales of Loans Held for Sale 47,321 23,026
Net (Increase) Decrease in Accrued Interest Receivable,
Accrued Receivables and Other Assets 12,509 (451)
Net Increase (Decrease) in Accrued Interest Payable,
Accrued Expenses and Other Liabilities 790 (9,196)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 45,169 25,443
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,189 54,473
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 549,229 439,302
Proceeds on Sales of Securities Available for Sale 966,669 591,407
Purchases of Securities Available for Sale (1,620,546) (722,266)
Loan Principal Collections Less Originations and Purchases 129,410 161,525
Purchases of Premises and Equipment (6,755) (7,031)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 18,007 462,937
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Decrease in Deposits (122,632) (523,196)
Net Increase (Decrease) in Short-Term Borrowings 121,164 (17,156)
Proceeds from Long-Term Debt 95,000 101,900
Payments and Maturities of Long-Term Debt (122,159) (22,081)
Issuance of Stock 5,202 5,954
Purchase of Treasury Stock (16,241) (44,335)
Cash Dividends on Common Stock (15,779) (14,454)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (55,445) (513,368)
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 42,751 4,042
Cash and Cash Equivalents at Beginning of Year 117,784 96,544
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 160,535 $ 100,586
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES
- ---------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Credited to Deposit Accounts $ 77,488 $ 120,940
Income Taxes Paid 23,283 15,357
Loans Securitized and Converted to Securities Available for Sale - 238,874
Stock Dividend - 28,659
These financial statements should be read in conjunction with the accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United States
of America 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. Certain prior years' amounts in the
Consolidated Financial Statements have been reclassified to conform with the
presentation used for the current year. These reclassifications have no effect
on stockholders' equity or net income as previously reported. Operating results
for the three month and nine month periods ended September 30, 2002 are not
necessarily indicative of the results that may be expected for any future
quarters or for the year ending December 31, 2002. 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, 2001 as filed with the Securities and
Exchange Commission on March 8, 2002.
NOTE B - ADOPTED ACCOUNTING PRINCIPLES
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
provides new guidance on recognition of impairment losses on long-lived assets
to be held and used. The standard broadens the definition of what constitutes a
discontinued operation and how the results of discontinued operations are to be
measured. The provisions of SFAS No. 144 were effective for the Corporation on
January 1, 2002. To date no charges have been required for impairment.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145, among other things, restricts the classification of
gains and losses from extinguishment of debt as extraordinary to only those
transactions that are unusual and infrequent in nature as defined by generally
accepted accounting principles. SFAS No. 145 is effective January 1, 2003,
although earlier adoption is encouraged. The Corporation adopted this statement
for 2002 and earlier periods. Accordingly, any previous extinguishment of debt
recorded as an extraordinary item would be reclassified to pre-tax income before
extraordinary items. Gains and losses on future qualifying debt extinguishment
will likewise be recorded in pre-tax income. During the third and second
quarters of 2002, the Corporation extinguished debt resulting in losses of $1.3
million and $973 thousand, respectively, that are included in net gains on the
Consolidated Statement of Income.
NOTE C - ACCOUNTING FOR DERIVATIVES
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended by SFAS Nos. 137 and 138 (collectively,
"SFAS No. 133"). The statement established the accounting and reporting
standards for derivative instruments embedded in other contracts and for hedging
activities. The adoption of SFAS No. 133 on January 1, 2001 resulted in a
reduction of net earnings of $1.2 million after-tax. This represented the
difference between the derivatives previous carrying amount and the fair value
of the derivatives at January 1, 2001. At adoption of SFAS No. 133, other
comprehensive income ("OCI") reflected a $452 thousand loss, net of tax, to
recognize the net fair value of the derivatives used in the Corporation's cash
flow hedges on that date.
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The Corporation uses derivatives to hedge the interest rate risks inherent
with its funding costs. Fair value hedges which meet the criteria of SFAS No.
133 for effectiveness have changes in the fair value of the derivative and the
designated hedged item recognized in earnings. At and during all periods
presented, the derivatives designated as fair value hedges were proven to be
effective. Accordingly, the designated hedges and the associated hedged items
were marked to fair value by an equal and offsetting amount of $10.3 million and
$3.8 million for the nine months ended September 30, 2002 and 2001,
respectively. Cash flow hedges have the effective portion of changes in the fair
value of the derivative recorded in OCI. At September 30, 2002 and 2001, the
Corporation had unrealized losses in the value of derivatives of $2.5 million
and $1.4 million, respectively, net of taxes, in OCI to reflect the effective
portion of cash flow hedges. Amounts recorded in OCI are recognized into
earnings concurrent with the impact of the hedged item on earnings. For the nine
months ended September 30, 2002 and 2001, the Corporation had no ineffective
portions of hedges.
NOTE D - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Net Income Before Extraordinary Item $ 13,140 $ 10,830 $ 35,020 $ 30,190
Cumulative Effect of Change in Accounting Principle, Net - - - (1,160)
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 13,140 $ 10,830 $ 35,020 $ 29,030
======================================================================================================================
BASIC
Basic EPS Shares 24,840 25,666 25,035 25,898
Net Income Before Extraordinary Item $ 0.53 $ 0.42 $ 1.40 $ 1.16
Cumulative Effect of Change in Accounting Principle, Net - - - (0.04)
- ----------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.53 $ 0.42 $ 1.40 $ 1.12
======================================================================================================================
DILUTED
Dilutive Shares (principally stock options) 653 794 772 930
Diluted EPS Shares 25,493 26,460 25,807 26,828
Net Income Before Extraordinary Item $ 0.52 $ 0.41 $ 1.36 $ 1.12
Cumulative Effect of Change in Accounting Principle, Net - - - (0.04)
- ----------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.52 $ 0.41 $ 1.36 $ 1.08
======================================================================================================================
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NOTE E- INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities portfolio were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 82,155 $ 1,306 $ - $ 83,461
Mortgage-Backed Securities 1,645,790 23,362 1,604 1,667,548
Municipal Securities 20,692 1,710 - 22,402
Other Debt Securities 148,016 455 5,014 143,457
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,896,653 $ 26,833 $ 6,618 $ 1,916,868
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 100,390 $ 1 $ 3,694 $ 96,697
Mortgage-Backed Securities 1,514,396 10,220 5,144 1,519,472
Municipal Securities 22,461 701 1 23,161
Other Debt Securities 175,769 201 11,066 164,904
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,813,016 $ 11,123 $ 19,905 $ 1,804,234
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2001
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 80,926 $ 696 $ - $ 81,622
Mortgage-Backed Securities 1,582,733 23,813 501 1,606,045
Municipal Securities 23,452 1,013 - 24,465
Other Debt Securities 134,652 149 9,008 125,793
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,821,763 $ 25,671 $ 9,509 $ 1,837,925
- ------------------------------------------------------------------------------------------------------------------------
At September 30, 2002 and 2001, net unrealized gains on securities
available for sale of $12.9 million and $10.3 million, respectively, were
reflected as a component of Net Accumulated Other Comprehensive Income, which
are 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. At December 31, 2001, a net unrealized
loss of $5.8 million on the securities portfolio was reflected as a component of
Net Accumulated Other Comprehensive Income in the Consolidated Statement of
Condition. For further details regarding investment securities at December 31,
2001, refer to Notes 1 and 6 of the Consolidated Financial Statements
incorporated by reference from the Corporation's 10-K filed March 8, 2002.
Net realized gains on investment securities were $3.1 million for the
quarter ended September 30, 2002. This compares to net realized gains of $167
thousand for the third quarter of 2001. For the nine months ended September 30,
2002 and 2001, the Corporation had net realized gains of $2.1 million and $7.8
million, respectively. These net gains on investment securities are included in
net gains in the Consolidated Statement of Income.
During the second quarter of 2002, debt securities amounting to $10.4
million were determined to be other than temporarily impaired. Included in net
realized losses on investment securities for the prior quarter is a pre-tax
charge of $8.7 million that reduced the basis of the securities to their fair
value. Accrued interest of $189 thousand was reversed from interest income. No
further adjustment was required during the third quarter of 2002.
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NOTE F - 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, nonowner equity changes are comprised
of unrealized gains or losses on available for sale debt securities and recorded
gains or losses on derivatives utilized in cash flow hedges. These nonowner
equity changes are accumulated with net income from operations to determine
comprehensive income. This change does not have an impact on the Corporation's
results of operations.
Presented below is a reconciliation of net income to comprehensive income indicating the components of other
comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 13,140 $ 10,830 $ 35,020 $ 29,030
Other Comprehensive Income (Loss):
Loss on Derivatives Due to SFAS No. 133 Transition - - - (452)
Gain (Loss) on Derivatives Recognized in Other Comprehensive Income (1,562) (1,281) (2,842) (1,630)
Unrealized Holding Gain (Loss) on Debt Securities 21,580 26,344 30,952 40,036
Less: Reclassification Adjustment for Gains (Losses) Included in Net Income 3,062 167 2,118 7,756
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax 16,956 24,896 25,992 30,198
Income Tax (Benefit) Related to Items of Other Comprehensive Income 5,935 8,713 9,097 10,568
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), After Tax 11,021 16,183 16,895 19,630
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 24,161 $ 27,013 $ 51,915 $ 48,660
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE G-SECURITIZATION OF ASSETS
During 2001 and 2000 the Corporation securitized $239 million and $324
million of its acquired loan portfolio. These loans were securitized with FNMA
and the respective securities were placed into the Corporation's investment
portfolio. Accordingly, no gain or loss was recorded on these transactions.
These securities are valued at fair market value along with the Corporation's
investment securities.
The loans underlying the securities were securitized with full recourse to
the Corporation for any credit losses. The maximum potential recourse obligation
was $208.6 million and $532.1 million at September 30, 2002 and 2001,
respectively. A recourse liability was established by the Corporation based upon
management's current assessment of the credit risk inherent in these loans. This
recourse liability amounted to $2.9 million and $3.2 million at September 30,
2002 and 2001, respectively. This recourse liability is evaluated periodically
for adequacy. Net charges to the recourse liability amounted to $648 thousand
and $1.5 million for the nine month periods ended September 30, 2002 and 2001,
respectively. At September 30, 2002, $2.4 million of loans with potential
recourse were 90 days or more past due.
NOTE H - INTANGIBLE ASSETS
In August, 2000, the Corporation acquired Harbor Federal Bancorp using the
purchase method of accounting and accordingly allocated the purchase price to
the fair value of the net assets acquired. This allocation resulted in $9.3
million of goodwill and $2.6 million of deposit based intangibles. Effective
January 1, 2002, the Corporation adopted the Statements of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS No. 141") which requires the
mandatory application of purchase accounting for future business combinations
and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") which
provides guidance on accounting for goodwill. Under the provisions of SFAS No.
142, the Corporation ceased amortization of goodwill, however, the Corporation
continues to amortize the deposit based intangible which is being amortized over
seven years. Testing of goodwill balances for impairment must occur on an annual
basis. This testing was completed at the time of the implementation of SFAS No.
142 and no impairment of goodwill existed at that date.
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Tables are presented below reflecting the impact of the adoption of SFAS No. 142 and an analysis of the goodwill and
deposit based intangible activity for the nine months ended September 30, 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
================================================================================================================
Reported Net Income $ 13,140 $ 10,830 $ 35,020 $ 29,030
Add Back: Goodwill Amortization - 153 - 367
- ----------------------------------------------------------------------------------------------------------------
Adjusted Net Income $ 13,140 $ 10,983 $ 35,020 $ 29,397
================================================================================================================
BASIC EARNINGS PER SHARE
Reported Net Income $ 0.53 $ 0.42 $ 1.40 $ 1.12
Add Back: Goodwill Amortization - 0.01 - 0.02
- ----------------------------------------------------------------------------------------------------------------
Adjusted Net Income $ 0.53 $ 0.43 $ 1.40 $ 1.14
================================================================================================================
DILUTED EARNINGS PER SHARE
Reported Net Income $ 0.52 $ 0.41 $ 1.36 $ 1.08
Add Back: Goodwill Amortization - 0.01 - 0.02
- ----------------------------------------------------------------------------------------------------------------
Adjusted Net Income $ 0.52 $ 0.42 $ 1.36 $ 1.10
================================================================================================================
Accumulated Deposit Based Accumulated
(IN THOUSANDS) Goodwill Amortization Intangible Amortization Total
======================================================================================================================
Balance at January 1, 2002 $ 9,335 $ (622) $ 2,600 $ (544) $ 10,769
Amortization Expense for Nine Months
Ended September 30, 2002 - - - $ (306) $ (306)
Goodwill Acquired during the Year - - - - -
Impairment Losses - - - - -
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 9,335 $ (622) $ 2,600 $ (850) $ 10,463
======================================================================================================================
NOTE I - NET GAINS
Net Gains on the Consolidated Statement of Income include the following components:
Three Months Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
===================================================================================================================================
Securities:
Writedown for Other Than Temporary Impairment $ - $ - $ (8,660) $ -
Sales 3,062 167 10,778 7,756
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities 3,062 167 2,118 7,756
Debt Extinguishment (1,341) - (2,314) -
Asset Sales 276 107 382 328
- -----------------------------------------------------------------------------------------------------------------------------------
Net Gain $ 1,997 $ 274 $ 186 $ 8,084
===================================================================================================================================
11
12
NOTE J - FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 "Accounting for Asset Retirement Obligations" ("SFAS No. 143") effective
for fiscal years beginning after June 30, 2002. SFAS No. 143 establishes
standards for recognition and measurement of liabilities for asset retirement
obligations and retirement cost. Management does not expect SFAS No. 143 to have
a significant impact on the Corporation.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). The requirements of SFAS No. 146 are effective prospectively
for qualifying activities initiated after December 31, 2002. SFAS No. 146
applies to costs associated with an exit activity, including restructuring, or
with a disposal of long-lived assets. Management is unable to determine the
impact of this standard due to its prospective application.
Statement of Financial Accounting Standards No. 147 "Acquisitions of
Certain Financial Institutions" ("SFAS No. 147") was issued in October 2002 and
is effective for acquisitions on or after October 1, 2002. The provisions of
SFAS No. 147 amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions", SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", and FASB Interpretation No. 9. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both SFAS No. 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". In addition, this Statement amends SFAS
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that SFAS No.
144 requires for other long-lived assets that are held and used. Management
believes adoption of this Statement will not have an impact on the Bank's
earnings, financial condition, or equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
GENERAL
Provident Bankshares Corporation ("the Corporation"), a Maryland corporation,
was organized as a bank holding company in 1987, and is the sole stockholder of
Provident Bank ("the Bank"), a Maryland chartered stock commercial bank. At
December 31, 2001, the Bank was the second largest commercial bank chartered
under the laws of the State of Maryland in asset size.
The Bank offers consumer and commercial banking services through a network of
101 branch offices and 163 ATMs in the dynamic Baltimore-Washington corridor of
Maryland, Northern Virginia, and southern York County, Pennsylvania. At
September 30, 2002, the branch network consisted of 57 traditional full service
branch locations and 44 in-store branches, which include supermarket and
national retail superstore locations. Of the 101 branches, 63% are located in
the Baltimore region and 37% are located in the metropolitan Washington D.C.
region. The Bank offers related financial services through its wholly owned
subsidiaries. Mutual funds, annuities and insurance products are offered through
Provident Investment Center and leases through Court Square Leasing Corporation
and Provident Lease Corporation.
FINANCIAL CONDITION
At September 30, 2002, total assets were $4.9 billion, unchanged from December
31, 2001, and a decrease of $128 million from September 30, 2001. This decrease
is the result of the Corporation's continued success in one of its key
strategies to migrate the composition of the balance sheet to include a greater
mix of more profitable "core" loans and deposits. The Corporation continued to
experience steady growth in all of its markets, with the expansion areas of
Northern Virginia and the Maryland suburbs of Washington D.C. continuing to post
strong growth.
12
13
ASSET COMPOSITION
The following table summarizes the composition of the Bank's average earning assets for the periods indicated:
Three Months Ended
September 30, $ %
2002 2001 Variance Variance
----------------------- ------------------------
Investment securities portfolio $ 1,914 $ 1,813 $ 101 5.6%
Loans held for sale and short term investments 9 11 (2) (18.2)%
Core loans:
Consumer 811 687 124 18.1%
Commercial business 308 265 43 16.2%
Real estate 560 538 22 4.1%
----------------------- ------------------------
Total core loans 1,679 1,490 189 12.7%
----------------------- -----------------------
Non-core loans:
Consumer 896 1,372 (476) (34.7)%
National syndicated loans 67 79 (12) (15.2)%
----------------------- -----------------------
Total non-core loans 963 1,451 (488) (33.6)%
----------------------- -----------------------
Total loans 2,642 2,941 (299) (10.2)%
----------------------- -----------------------
Total average earning assets $ 4,565 $ 4,765 $ (200) (4.2)%
======================= =======================
Total average earning assets declined by $200 million to $4.6 billion in the
third quarter of 2002 ("the 2002 quarter") compared to the third quarter of 2001
(" the 2001 quarter"). The decrease was driven by a $488 million decrease in
average non-core loan balances; partially offset by a $101 million increase in
average investment portfolio balances and a $189 million increase in average
core loan balances.
The Corporation's expanded presence in the Baltimore-Washington metropolitan
region facilitated the 12.7% growth in average core loans. The growth in average
core consumer loans, composed primarily of home equity and marine loans, has
continued at a strong pace, increasing $124 million, or 18.1%, in the 2002
quarter compared to the 2001 quarter. In the 2002 quarter, the Bank initiated a
pilot program to market its home equity products through the Internet, which has
resulted in productive lending activity. Average core commercial business and
real estate loans also showed strong growth of $65 million, or 8.1%, in the 2002
quarter compared to the 2001 quarter. The growth in commercial business was
driven largely by increases in the Baltimore-Washington commercial and
industrial loan areas.
The planned shrinkage of the Corporation's non-core consumer loan portfolio,
composed primarily of purchased loans secured by residential real estate, was
accelerated by the declining interest rate environment in 2002. Average non-core
consumer loans decreased $476 million, or 34.7%, in the 2002 quarter compared to
the 2001 quarter, due to increased prepayments and resultant amortization of
$7.1 million in loan purchase premiums. As a result of management's focus on
lending within its market area, the Corporation is no longer participating in
new national syndicated loans, and the existing syndicated portfolio decreased
14.9% in the 2002 quarter.
The $101 million growth in the investment portfolio average balances in the 2002
quarter was primarily due to management's actions to reinvest the excess cash
flow generated by the non-core loan portfolio payments, net of core loan funding
requirements, into the investment portfolio. The investment securities portfolio
is composed of a diversified group of investments, of which 92% is invested in
agency or AAA rated mortgage-backed securities.
13
14
ASSET QUALITY
The asset quality within the Corporation's loan portfolios has continued to
improve in the 2002 quarter as a result of increased response and reaction to
delinquency trends. Non-performing loans were $20.3 million at September 30,
2002, a decrease of $8.5 million, or 29.4%, from the level at September 30,
2001. $20 million of the total non-performing loans are in the consumer and
residential mortgage loan portfolios, and are collateralized by deeds of trust
on 1-4 family residences. At September 30, 2002, non-performing loans as a
percentage of loans outstanding were .77% compared to .99% at September 30,
2001. Management believes that non-performing loans will remain relatively
stable for the balance of the year.
The allowance for loan losses at September 30, 2002 was $34.6 million, which
represents 1.31% of total loans outstanding and 170% of non-performing loans. At
September 30, 2001, the allowance was $34.7 million, representing 1.20% of total
loans outstanding and 120% of non-performing loans. Net charge-offs improved to
$2.3 million for the 2002 quarter from $2.7 million in the 2001 quarter, due
primarily to two recoveries totaling $0.6 million of previously charged off
amounts relating to commercial loans. Net charge-offs to average loans improved
to .34% in the 2002 quarter from .36% in the 2001 quarter. The provision for
loan losses for the nine months of 2002 was $8.4 million, a decrease of $6.8
million from the first nine months of 2001. The decline in the provision was
primarily due to lower charge-off activity related to health care credits and
the acquired loan portfolio and to lower loan balances.
SOURCES OF FUNDS
The following table summarizes the composition of the Bank's average deposit balances for the periods indicated:
(Dollars in millions) Three Months Ended
September 30,
------------------------ $ %
2002 2001 Variance Variance
------------------------ -------------------------
Core deposits:
Retail $ 2,332 $ 2,304 $ 28 1.2%
Commercial 382 263 119 45.2%
------------------------ -------------------------
Total core deposits 2,714 2,567 147 5.7%
Non-core deposits 523 905 (382) (42.2)%
------------------------ -------------------------
Total average deposits $ 3,237 $ 3,472 $ (235) (6.8)%
======================== =========================
Total average deposit balances decreased $235 million in the 2002 quarter
compared to the 2001 quarter, due to the $382 million maturity of average
non-core deposits, which are comprised of brokered certificates of deposit. The
Bank's average core deposits, generated from the Bank's retail and commercial
customer base, continued to grow steadily, replacing $147 million of the
brokered deposits. Excluding average retail certificate of deposit balances,
which decreased $111 million in the 2002 quarter, average retail deposit
balances increased $139 million, or 10.2%, in the 2002 quarter. Deposit growth
from the commercial sector was particularly strong in the 2002 quarter, with a
net increase in average balances of $119 million, or 45.2%, of which 65% was in
non-interest-bearing accounts.
Average borrowings increased $34 million in the 2002 quarter from the 2001
quarter, due to the relative low cost of borrowings when compared to other term
funding sources. During the 2002 quarter, $10 million of FHLB borrowings were
liquidated as part of a strategy that will positively impact the net interest
margin by taking advantage of lower future funding costs.
14
15
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. The Bank'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, and the time and cost required for
obtaining it. Management believes the Bank has sufficient liquidity to meet
funding needs in the foreseeable future.
Primary sources of liquidity at September 30, 2002 were investment securities
available for sale and scheduled loan repayments. Unencumbered securities, those
not pledged as collateral, totaled $663 million at September 30, 2002,
representing 2.3 times the level of unsecured borrowings and brokered deposits
maturing over the next 6 months. Scheduled loan repayments within the next 12
months are approximately $1.4 billion.
At September 30, 2002, the Corporation had $455 million in brokered deposits,
compared to $747 million at December 31, 2001. Brokered deposits maturing within
the next 3 months amount to $46 million or 10% of total brokered deposits, with
$170 million maturing in the following nine months and $239 million in the
twelve months thereafter. An important element of liquidity management is the
availability of borrowed funds. At September 30, 2002, short-term borrowings
totaled $487 million, or 11% of liabilities, in contrast to $366 million at
December 31, 2001. At September 30, 2002, the Bank had the ability to
immediately raise over $613 million in additional funds through pledging
investments and loans as collateral, in lieu of the sales of these assets.
The borrowing requirements of customers include commitments to extend credit and
unused availability of lines of credit, which totaled $712 million at September
30, 2002. Historically, many of the commitments expire without being fully
drawn; therefore, the total commitment amounts do not necessarily represent
future cash requirements.
MARKET RISK AND INTEREST RATE SENSITIVITY
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 and the market value of
assets and liabilities are subject to fluctuations, which arise due to changes
in the level and directions of interest rates. Management's objective is to
minimize this risk.
Measuring and managing interest rate risk is a dynamic process that management
performs regularly. It is an important component of assessing the impact of
changes in asset and liability portfolios on the net interest margin and asset
quality. The Corporation maintains an overall interest rate management strategy
that incorporates structuring of the investment and funding portfolios, the use
of variable rate loan products and derivatives instruments to minimize
significant fluctuations in earnings or market values that are caused by
interest rate volatility (see Note C to unaudited financial statements).
Management monitors the level of earnings at risk due to interest rate
volatility through the simulation of multiple interest rate scenarios. The
isolated modeling environment, assuming no action by management, shows that the
Corporation's earnings volatility is less than 4% under probable scenarios
responding to current market conditions. The Corporation has shortened asset
duration during 2002 by reinvesting investment portfolio cash flows into
variable rate GNMA securities and short term high quality CMOs. These two
portfolios total $713 million, or over 37% of the total investment portfolio.
This and other activities have reduced the effective duration of equity to less
than 1% positive. Management believes that being near neutral is an appropriate
position given the current interest rate environment. The Corporation's one year
forward earnings are slightly asset sensitive, which may contribute to net
interest income moving in the same direction as future interest rates.
15
16
CAPITAL RESOURCES
Total stockholders' equity at September 30, 2002 was $311.4 million,
representing an increase of $25.1 million or 8.8% from December 31, 2001. The
growth in stockholders' equity for the nine months ended September 30, 2002 was
attributable to $35.0 million of earnings of the Corporation and an increase of
$16.9 million in accumulated other comprehensive income, resulting primarily
from an increase in market value of available-for-sale securities. Capital was
reduced by dividends declared on common stock of $15.8 million, and by $16.2
million from the repurchase of 689,400 shares of the Corporation's common stock
at an average price of $23.56. The Corporation is authorized to repurchase an
additional 393,831 shares under its current authorization.
Dividends paid for the first nine months of 2002 were $15.8 million, or $0.63
per share, compared to $14.5 million, or $0.55 per share in 2001.
The Corporation is required to maintain minimum amounts and ratios of core
capital to adjusted tangible capital ("leverage ratio") and of tier 1 and total
regulatory capital to risk-weighted assets. The actual regulatory capital ratios
and required ratios for capital adequacy purposes under FIRREA and the ratios to
be categorized as "well capitalized" under prompt corrective action regulations
are summarized in the following table:
Minimum
September 30, December 31, Regulatory To be "Well
2002 2001 Requirements Capitalized"
------------------------------------------------------------
Tier 1 leverage ratio 7.43% 7.13% 4.00% 5.00%
Tier 1 capital to risk-weighted assets 11.33% 10.09% 4.00% 6.00%
Total regulatory capital to risk-weighted assets 12.42% 11.09% 8.00% 10.00%
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2001
OVERVIEW
Provident Bankshares reported net income of $13.1 million, or $.52 per diluted
share, for the 2002 quarter, compared to $10.8 million, or $.41 per diluted
share, for the 2001 quarter. The Corporation's two key performance measures,
return on average common equity and return on assets, were 17.54% and 1.07%,
respectively, for the 2002 quarter, compared to 14.73% and .85%, respectively,
in the 2001 quarter. The financial results in the 2002 quarter, represented by
an increase of 21% in net income, demonstrate stability and continued growth in
the Corporation's core businesses, as well as strong asset quality. These
increases reflect the Corporation's commitment to produce positive core results
by executing the business strategies of broadening its presence and customer
base in the Washington metropolitan area and growing commercial business in the
Baltimore-Washington corridor.
NET INTEREST INCOME
The discussion on net interest income should be read in conjunction with a
review of the "Analysis of Changes in Net Interest Income" and "Consolidated
Average Balances, Interest Income and Expense and Yields and Rates" tables
presented on the following pages.
Net interest income on a tax-equivalent basis totaled $35.0 million for the 2002
quarter, compared to $34.9 million in the 2001 quarter. During this period, the
net interest margin increased to 3.04% from 2.91% in the 2001 quarter. Although
net interest income was flat, there were substantial differences in the
components of net interest income, as total interest income declined $18.1
million, but was offset by a corresponding decline in total interest expense of
$18.2 million. Generally, the changes were due to the reduction of, and changes
in mix within interest-earning assets and interest-bearing liabilities, as well
as the continued downward movement in interest rates.
16
17
The yield on earning assets for the 2002 quarter was 5.86% compared to 7.12% for
the 2001 quarter, a decline of 126 basis points, reflecting the general decline
in interest rates from the 2001 quarter. Of the $18.2 million decrease in total
interest income, $14.6 million was attributable to rate, with the remaining
difference of $3.5 million attributable to the decreased level of earning
assets. The refinancing boom that accelerated prepayments in the mortgage
portfolios also resulted in the necessity to increase the amortization of
purchase premiums relating to the acquired loan portfolio. In the 2002 quarter,
total premium amortization in this portfolio was $7.1 million, compared to $7.0
million in the 2001 quarter.
The average rate paid on interest-bearing liabilities declined 143 basis points
to 3.14% for the 2002 versus 4.57% for the 2001 quarter. The changes in deposit
mix, from higher rate non-core and retail CDs into lower rate core deposits, had
a favorable impact on interest expense of $11.8 million. Interest expense on
borrowings decreased $4.1 million in the 2002 quarter, reflecting the general
decline in interest rates over the past twelve months.
Although the net interest margin improved to 3.04% for the 2002 quarter compared
to 2.91% in the 2001 quarter, the margin declined 13 basis points from the
second quarter margin of 3.17%. Premium amortization on the acquired loan
portfolio in the third quarter of 2002 was $3.0 million greater than the premium
amortization in the second quarter of 2002, representing 26 basis points of the
decline in margin in the linked quarters.
17
18
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Three Months Ended
September 30, 2002/2001
Variance Due To Change In
---------------------------
(in thousands) Net Increase/ Average Average
(tax-equivalent basis) (Decrease) Rate Volume
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME FROM:
Loans:
Consumer Loans $ (6,652) $ (3,234) $ (3,418)
Commercial Business Loans (414) (958) 544
Real Estate-Construction (1,181) (1,583) 402
Real Estate-Mortgage (3,760) (782) (2,978)
Mortgage Loans Held for Sale 37 (2) 39
Short-Term Investments (56) (20) (36)
Taxable Investment Securities (6,019) (7,651) 1,632
Tax-Advantaged Investment Securities (80) (29) (51)
-------------
Total Interest Income (18,125) (14,653) (3,472)
-------------
INTEREST EXPENSE ON:
Demand/Money Market Deposits (1,598) (2,112) 514
Savings Deposits (649) (847) 198
Certificates of Deposit (11,371) (5,083) (6,288)
Individual Retirement Accounts (443) (369) (74)
Borrowings (4,103) (4,544) 441
-------------
Total Interest Expense (18,164) (14,981) (3,183)
-------------
Net Interest Income $ 39 $ 328 $ (289)
=============
The table above analyzes the reasons for the changes from period-to-period in
the principal elements that comprise net interest income. The calculation of
rate and volume variances is based upon a procedure established for banks by the
Securities and Exchange Commission. Rate and volume variances presented for each
component will not sum 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.
18
19
CONSOLIDATED AVERAGE BALANCES INCOME AND EXPENSE AND YIELDS AND RATES
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 2002 September 30, 2001
--------------------------------- -------------------------------
(dollars in thousands) AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(tax-equivalent basis) BALANCE EXPENSE RATE Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ------
Interest-Earning Assets:
Loans:
Consumer $ 1,479,855 $ 25,342 6.79 % $1,668,498 $ 31,994 7.61 %
Commercial Business 374,650 6,151 6.51 344,471 6,565 7.56
Real Estate-Construction 332,699 3,997 4.77 307,185 5,178 6.69
Real Estate-Mortgage 455,003 8,021 6.99 621,311 11,781 7.52
------------------------- ----------------------
Total Loans 2,642,207 43,511 6.53 2,941,465 55,518 7.49
------------------------- ----------------------
Loans Held for Sale 6,340 107 6.70 4,011 70 6.92
Short-Term Investments 2,332 16 2.72 6,688 72 4.27
Taxable Investment Securities 1,893,581 23,451 4.91 1,789,570 29,470 6.53
Tax-Advantaged Investment Securities 20,724 351 6.72 23,651 431 7.23
------------------------- ----------------------
Total Investment Securities 1,914,305 23,802 4.93 1,813,221 29,901 6.54
------------------------- ----------------------
Total Interest-Earning Assets 4,565,184 67,436 5.86 4,765,385 85,561 7.12
------------------------- ----------------------
Less: Allowance for Loan Losses (34,385) (35,768)
Cash and Due From Banks 97,755 79,812
Other Assets 232,233 258,622
------------- -----------
Total Assets $ 4,860,787 $5,068,051
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 804,225 2,282 1.13 $ 699,643 3,880 2.20
Savings Deposits 657,405 1,772 1.07 604,308 2,421 1.59
Certificates of Deposit 1,203,638 13,971 4.61 1,681,611 25,342 5.98
Individual Retirement Accounts 138,451 1,547 4.43 143,963 1,990 5.48
Borrowings 1,298,340 12,909 3.94 1,264,750 17,012 5.34
------------------------ -----------------------
Total Interest-Bearing Liabilities 4,102,059 32,481 3.14 4,394,275 50,645 4.57
------------------------ -----------------------
Noninterest-Bearing Demand Deposits 433,328 342,241
Other Liabilities 28,120 39,790
Stockholders' Equity 297,280 291,745
------------- -----------
Total Liabilities and Stockholders'
Equity $ 4,860,787 $5,068,051
============= ===========
Net Interest-Earning Assets $ 463,125 $ 371,110
============= ===========
Net Interest Income (tax-equivalent) 34,955 34,916
Less: Tax-Equivalent Adjustment (191) (236)
------------ ---------
Net Interest Income $ 34,764 $ 34,680
============ =========
Net Yield on Interest-Earning Assets
(tax-equivalent) 3.04 % 2.91%
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2002 September 30, 2001
--------------------------------- -------------------------------
(dollars in thousands) AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(tax-equivalent basis) BALANCE EXPENSE RATE Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ------
Interest-Earning Assets:
Loans:
Consumer $ 1,511,390 $ 80,687 7.14 % $1,867,845 $ 107,148 7.67 %
Commercial Business 370,296 18,053 6.52 346,896 20,875 8.05
Real Estate-Construction 317,879 11,407 4.80 284,173 16,375 7.70
Real Estate-Mortgage 482,671 25,918 7.18 666,942 38,950 7.81
------------------------- ----------------------
Total Loans 2,682,236 136,065 6.78 3,165,856 183,348 7.74
------------------------- ----------------------
Loans Held for Sale 5,135 253 6.59 5,429 300 7.39
Short-Term Investments 5,204 81 2.08 10,277 249 3.24
Taxable Investment Securities 1,839,933 77,724 5.65 1,709,873 87,480 6.84
Tax-Advantaged Investment Securities 21,187 1,041 6.57 24,640 1,400 7.60
------------------------- ----------------------
Total Investment Securities 1,861,120 78,765 5.66 1,734,513 88,880 6.85
------------------------- ----------------------
Total Interest-Earning Assets 4,553,695 215,164 6.32 4,916,075 272,777 7.42
------------------------- ----------------------
Less: Allowance for Loan Losses (34,331) (37,012)
Cash and Due From Banks 93,181 80,041
Other Assets 244,581 230,030
------------- -----------
Total Assets $ 4,857,126 $5,189,134
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 777,785 6,956 1.20 $ 675,775 12,735 2.52
Savings Deposits 646,559 5,427 1.12 608,179 7,634 1.68
Certificates of Deposit 1,323,200 49,086 4.96 1,905,451 87,439 6.14
Individual Retirement Accounts 138,515 4,796 4.63 145,466 6,090 5.60
Borrowings 1,229,657 41,011 4.46 1,185,946 51,714 5.83
------------------------- ---------------------
Total Interest-Bearing Liabilities 4,115,716 107,276 3.48 4,520,817 165,612 4.90
------------------------- ---------------------
Noninterest-Bearing Demand Deposits 413,868 332,171
Other Liabilities 29,714 41,033
Stockholders' Equity 297,828 295,113
------------- -----------
Total Liabilities and Stockholders'
Equity $ 4,857,126 $5,189,134
============= ===========
Net Interest-Earning Assets $ 437,979 $ 395,258
============= ===========
Net Interest Income (tax-equivalent) 107,888 107,165
Less: Tax-Equivalent Adjustment (602) (736)
----------- ----------
Net Interest Income $ 107,286 $ 106,429
=========== ==========
Net Yield on Interest-Earning Assets
(tax-equivalent) 3.17 % 2.91 %
19
20
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.2 million for the 2002 quarter compared to
$2.1 million recorded in the 2001 quarter. Net charge-offs improved to $2.3
million for the 2002 quarter from $2.7 million in the 2001 quarter, due
primarily to two recoveries totaling $0.6 million of previously charged off
amounts relating to commercial loans. Net charge-offs to average loans improved
to .34% in the 2002 quarter from .36% in the 2001 quarter. The allowance for
loan losses at September 30, 2002 was $34.6 million, which represents 1.31% of
total loans outstanding and 170% of non-performing loans.
NON-INTEREST INCOME
Non-interest income, excluding net gains (losses), was $22.0 million for the
2002 quarter, compared to $19.1 million for the 2001 quarter, a 15% increase.
Non-interest income represented 39% of total quarterly revenue in the 2002
quarter up from 36% for the 2001 quarter. Improvements in non-interest income
continue to be driven by deposit service charges, which increased $3.1 million,
or 20.6%, from the 2001 quarter. The increase in deposit fees is primarily the
result of the strong retail and commercial checking account growth, notably in
the Washington metropolitan area. Branch banking fee income generated in the
Washington region increased 41% in the 2002 quarter over the 2001 quarter.
Commissions, loan fees and other non-interest income declined slightly,
reflecting decreases in commission and other income.
Net gains (losses) are composed of security gains or losses, losses from the
extinguishment of debt and net gains (losses) on sales of loans, foreclosed
property and fixed assets. The Corporation recorded $2.0 million in net gains in
the 2002 quarter compared to net gains of $0.3 million in the 2001 quarter. The
net gains in the 2002 quarter were primarily composed of $3.1 million in net
gains on the sales of securities, partially offset by a $1.3 million loss on the
early liquidation of FHLB borrowings. As discussed in the "Net Interest Income"
section, the Corporation hedges a portion of the risk of rapid amortization of
premium associated with its purchased loan portfolio. The Corporation does this
by holding securities that appreciate in falling interest rate environments that
trigger increased mortgage refinance activity. The majority of the gains
realized during the current quarter reflect the exercise of this hedging
activity, and substantially offset the increased write-off of premium charged
against net interest income.
NON-INTEREST EXPENSE
Non-interest expense for the 2002 quarter was $37.5 million versus $36.1 million
for the 2001 quarter, a 4% increase, reflecting the Bank's continued focus on
expense containment within the constraints of its branch expansion plans. Total
salaries and benefits increased $1.5 million from the 2001 quarter due primarily
to increases in the cost of employee retirement and health care benefits.
External processing fees increased 16% from the 2001 quarter, due to the
combination of the cost of outsourcing the item processing function in late 2001
and the increase in deposit accounts serviced. Outsourcing had the impact of
lowering salary and benefit expense; however, this decline in salary and benefit
cost was more than offset by the cost associated with the continued expansion of
the branch network in the Washington suburbs. The decrease of $1.3 million in
other non-interest expense in the 2002 quarter compared to the 2001 quarter, was
attributable to decreased advertising and professional fees.
INCOME TAXES
Tax expense of $6.0 million on income before taxes of $19.2 million was recorded
in the 2002 quarter, for an effective tax rate of 31.5%, compared to an
effective tax rate of 31.7% in the 2001 quarter.
FOR NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
The Corporation recorded net income of $35.0 million or $1.36 per diluted share
for the nine months ending September 30, 2002. Net income for the nine months
ended September 30, 2001 was $29.0 million or $1.08 per diluted share, including
a $1.2 million charge for the cumulative effect of change in accounting
principle. The prior year's charge for the change in accounting principle was
the result of the required adoption of SFAS No. 133 (see Note C to unaudited
financial statements).
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Tax-equivalent net interest income for the nine months of 2002 remained
relatively flat compared to 2001, reflecting a $0.7 million increase from period
to period. Interest income declined $57.6 million, but was offset by a decline
in interest expense of $58.3 million. Continued implementation of the
Corporation's strategy to reduce non-core assets and liabilities, such as
purchased loans and brokered deposits, and focus on growth in its core banking
business, resulted in reductions of $362 million in average interest-earning
assets and $405 million average interest-bearing liabilities during the past
year. These reductions, in addition to the general decline in interest rates,
had the effect of maintaining the level of net interest income while improving
the net interest margin to 3.17% in 2002 versus 2.91% in 2001.
The provision for loan losses for the nine months of 2002 was $8.4 million, a
decrease of $6.8 million from the first nine months of 2001. The decline in the
provision was primarily due to lower charge-off activity related to health care
credits and the acquired loan portfolio, and to lower aggregate loan balances.
Non-interest income, excluding net gains, increased 16% to $63.5 million. The
major contributor to this increase was deposit service charges that rose $8.3
million, or 19%, due to the increases in the Bank's retail and commercial
deposit customer base. Commissions, loan fees and other non-interest income rose
6% due primarily to increased fee income on commercial loan products.
Net gains were $0.2 million for the nine months ended September 30, 2002,
compared to net gains of $8.1 million for the nine months ended September 30,
2001. Losses from the $8.7 million write-down of WorldCom bonds and $2.3 million
from the extinguishment of debt were offset by net gains on the sales of
investment securities of $10.8 million. The prior year's net gains were composed
primarily of $7.8 million in net security gains.
Non-interest expense of $111.6 million for the nine months ended September 30,
2002 increased only $2.0 million, or 2%, when compared to the same period one
year ago; reflecting the Bank's efforts to contain costs while pursuing its
branch expansion efforts. Salaries and employee benefits increased by $1.3
million, or 2%, due primarily to increased staffing from branch expansion
efforts, offset by decreased staffing from the outsourcing of the item
processing function at the beginning of 2002. External processing fees increased
$2.9 million, or 24%, from both volume increases and item processing. Branch
expansion was also the cause of the growth in both occupancy expense and
furniture and fixture expense that grew by a combined $1.2 million, or 7%. Other
non-interest expense decreased $3.5 million from the prior year as other
non-interest expense in 2001 contained a $1.9 million increase to an existing
recourse reserve related to securitized loans.
The Corporation recorded income tax expense of $15.9 million in the first nine
months of 2002 based on pre-tax income of $50.9 million, which represented an
effective tax rate of 31.2%, compared to an effective tax rate of 31.8% for the
same period of 2001.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Discussion and analysis of the financial condition and results of operations are
based on the consolidated financial statements of the Corporation, which are
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Management evaluates estimates on an on-going basis; including
those related to the allowance for loan losses, non-accrual loans, asset
prepayment rates, other real estate owned, other-than-temporary investment
impairments, intangible assets, pension and post-retirement benefits, stock
option plan, recourse liabilities and income taxes. Management bases its
estimates on historical experience and various other factors and assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgements about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
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Management believes the following critical accounting policies affect its more
significant judgements and estimates used in preparation of its consolidated
financial statements: allowance for loan losses, other-than-temporary investment
security impairment and asset prepayment rates. Each estimate is discussed
below. The financial impact of each estimate, if significant to financial
results, was discussed in the applicable sections of Management's Discussion and
Analysis.
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses, which is intended to be
management's best estimate of probable inherent losses in the outstanding loan
portfolio. The allowance is reduced by actual credit losses and is increased by
the provision for loan losses and recoveries of previous losses. The provisions
for loan losses are charges to earnings to bring the total allowance for loan
losses to the level determined by management.
The allowance for loan losses is based on management's continuing review and
evaluation of the loan portfolio. The level of the allowance is determined by
assigning specific reserves to individually identified problem credits and
general reserves to all other loans. The portion of the allowance that is
allocated to internally criticized and non-accrual loans is determined by
estimating the inherent loss on each credit after giving consideration to the
value of underlying collateral. The general reserves are based on the
composition and risk characteristics of the loan portfolio; including the nature
of the loan portfolio, credit concentration trends, historic and anticipated
delinquency and loss experience, as well as other qualitative factors such as
current economic conditions.
Management emphasizes loan quality and close monitoring of potential problem
credits. Credit risk identification and review processes are utilized in order
to assess and monitor the degree of risk in the loan portfolio. The
Corporation's lending and loan administration staff are charged with reviewing
the loan portfolio and 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. A loan classification and review system exists that identifies those
loans with a higher than normal risk of uncollectibility. Each commercial loan
is assigned a grade 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 group tests risk assessments and evaluates the
reasonableness of the allowance for loan losses. Senior credit managers meet at
least monthly to review the credit quality of the loan portfolios as part of the
credit monitoring process. Using information developed from these meetings,
executive management meets at least quarterly to review the allowance for loan
losses.
Management believes that it uses the best information available to make
determinations about the allowance and that it has established its existing
allowance for loan losses in accordance with GAAP. If circumstances differ
substantially from the assumptions used in making determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be affected. Because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
increases to the allowance will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. The Bank is examined
annually by the FDIC and, accordingly, as part of this exam, loan loss reserves
are reviewed for adequacy utilizing specific guidelines. The regulators may from
time to time require reserves in addition to those previously provided based
upon their review.
OTHER THAN TEMPORARY IMPAIRMENT OF INVESTMENT SECURITIES
Securities are evaluated periodically to determine whether a decline in their
value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The
term "other than temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support
realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other than temporary, the value of
the security is reduced and a corresponding charge to earnings is recognized.
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ASSET PREPAYMENT RATES
The Corporation purchases amortizing loans and investment securities. The actual
principal reduction on these assets exceeds the contractual principal reduction
due to principal prepayments that fluctuate based on market conditions. The
purchase premiums and discounts associated with these assets are amortized or
accreted to interest income over the estimated life of the related assets. The
Corporation funds these assets with matched maturity funds utilizing the
estimated life of the assets. Management makes prepayment rate assumptions by
utilizing available market information on like-kind instruments. The assumed
prepayment rates form the basis for income recognition of premiums or discounts
on the related assets. Changes in prepayment estimates may accordingly cause the
earnings recognized on these assets to vary over the term that the assets are
held. Because the funding costs are fixed, changes in actual prepayments of the
related assets may cause volatility in the net interest margin. These prepayment
rates are monitored and updated monthly to reflect actual activity and the most
recent market projections.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 2001, see
"Interest Sensitivity Management" and Note 13 to the Consolidated Financial
Statements in the Corporation's Form 10-K filed with the Commission on March 8,
2002. The market risk of the Corporation has not experienced any material
changes as of September 30, 2002 from December 31, 2001. 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 September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this quarterly report, and, based on their evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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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) Articles of Amendment to Articles of Incorporation of
Provident Bankshares Corporation (1)
(3.3) Fourth Amended and Restated By-Laws of Provident
Bankshares Corporation (2)
(4.1) Stockholder Protection Rights Plan, as amended (3)
(11.0) Statement Re: Computation of Per Share Earnings (4)
(b) Reports on Form 8-K filed with the Securities and Exchange
Commission - None
(1) Incorporated by reference from Provident's Registration Statement on
Form S-8 (File No. 333-58881) filed with the Commission on July 10,
1998.
(2) 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.
(3) Incorporated by reference from Provident's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, filed with the
Commission on August 14, 1998.
(4) Included in Note D to the Unaudited Consolidated Financial Statements
on Page 8 hereof.
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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
November 13, 2002 /s/ Peter M. Martin
-------------------
Peter M. Martin
Chairman and Chief Executive Officer
November 13, 2002 /s/ Dennis A. Starliper
-----------------------
Dennis A. Starliper
Chief Financial Officer
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CERTIFICATIONS
I, Peter M. Martin, Chairman and Chief Executive Officer of Provident Bankshares
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Provident Bankshares
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Peter M. Martin
----------------------- ------------------------------------
Peter M. Martin
Chairman and Chief Executive Officer
of Provident Bankshares Corporation
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I, Dennis A. Starliper, Chief Financial Officer of Provident Bankshares
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Provident Bankshares
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Dennis A. Starliper
----------------------- ------------------------------------
Dennis A. Starliper
Chief Financial Officer of
Provident Bankshares Corporation