1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). 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:
At May 6, 2003, the Registrant had 24,482,754 shares of $1.00 par
value common stock outstanding.
================================================================================
2
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition - Unaudited
March 31, 2003 and 2002 and December 31, 2002 4
Consolidated Statement of Income - Unaudited
Three month periods ended March 31, 2003 and 2002 5
Consolidated Statement of Cash Flows - Unaudited
Three month periods ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements - Unaudited 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
Certifications Under Section 302 of the Sarbanes-Oxley Act of 2002 29
FORWARD-LOOKING STATEMENTS
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 2002 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,
2
3
including with respect to earnings growth (on both accounting principles
generally accepted in the United 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 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, except
as may be required by applicable law or regulation, 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.
3
4
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
MARCH 31, December 31, March 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2003 2002 2002
------------- ------------ ---------------
Assets
Cash and Due From Banks $ 132,005 $ 145,063 $ 92,358
Short-Term Investments 2,250 3,129 23,882
Mortgage Loans Held for Sale 11,892 8,899 4,671
Securities Available for Sale 2,229,246 1,993,229 1,936,021
Loans 2,462,022 2,560,563 2,708,533
Less: Allowance for Loan Losses 32,562 33,425 35,164
------------- ------------ ---------------
Net Loans 2,429,460 2,527,138 2,673,369
------------- ------------ ---------------
Premises and Equipment, Net 47,461 47,031 44,887
Accrued Interest Receivable 27,726 28,101 34,027
Intangible Assets 9,238 9,340 9,645
Other Assets 124,214 128,792 126,585
------------- ------------ ---------------
Total Assets $5,013,492 $ 4,890,722 $ 4,945,445
============= ============ ===============
Liabilities
Deposits:
Noninterest-Bearing $ 560,749 $ 492,661 $ 451,194
Interest-Bearing 2,712,268 2,695,305 2,983,200
------------- ------------ ---------------
Total Deposits 3,273,017 3,187,966 3,434,394
------------- ------------ ---------------
Short-Term Borrowings 287,318 539,758 283,681
Long-Term Debt 1,098,670 814,546 859,942
Other Liabilities 30,499 32,817 85,054
------------- ------------ ---------------
Total Liabilities 4,689,504 4,575,087 4,663,071
------------- ------------ ---------------
Stockholders' Equity
Common Stock (par value $1.00) authorized 100,000,000 shares; issued 31,782,375,
31,737,237 and 31,547,024 shares at
March 31, 2003, December 31, 2002 and March 31, 2002, respectively 31,782 31,737 31,547
Capital Surplus 290,499 289,698 286,427
Retained Earnings 131,163 124,862 104,070
Net Accumulated Other Comprehensive Income (Loss) 16,126 14,920 (15,762)
Treasury Stock at Cost - 7,373,601, 7,373,601 and 6,418,701 shares at
March 31, 2003, December 31, 2002 and March 31, 2002, respectively (145,582) (145,582) (123,908)
------------- ------------ ---------------
Total Stockholders' Equity 323,988 315,635 282,374
------------- ------------ ---------------
Total Liabilities and Stockholders' Equity $ 5,013,492 $ 4,890,722 $ 4,945,445
============= ============ ===============
These financial statements should be read in conjunction with the accompanying notes.
4
5
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended
March 31,
--------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
-------------- -------------
Interest Income
Interest and Fees on Loans $ 36,826 $ 47,041
Interest on Securities 24,014 27,497
Tax-Advantaged Interest 435 450
Interest on Short-Term Investments 8 50
-------------- -------------
Total Interest Income 61,283 75,038
-------------- -------------
Interest Expense
Interest on Deposits 14,373 24,488
Interest on Short-Term Borrowings 1,266 1,331
Interest on Long-Term Borrowings 10,017 12,567
-------------- -------------
Total Interest Expense 25,656 38,386
-------------- -------------
Net Interest Income 35,627 36,652
Less: Provision for Loan Losses 1,760 3,600
-------------- -------------
Net Interest Income after Provision for Loan Losses 33,867 33,052
-------------- -------------
Non-Interest Income
Service Charges on Deposit Accounts 17,321 15,743
Commissions and Fees 1,310 1,334
Net Gains 1,247 431
Other Non-Interest Income 2,713 2,692
-------------- -------------
Total Non-Interest Income 22,591 20,200
-------------- -------------
Non-Interest Expense
Salaries and Employee Benefits 18,984 18,020
Occupancy Expense, Net 4,080 3,501
Furniture and Equipment Expense 2,866 2,634
External Processing Fees 5,092 4,853
Other Non-Interest Expense 8,028 7,375
-------------- -------------
Total Non-Interest Expense 39,050 36,383
-------------- -------------
Income before Income Taxes 17,408 16,869
Income Tax Expense 5,623 5,394
-------------- -------------
Net Income $ 11,785 $ 11,475
============== =============
Net Income Per Share Amounts
Basic $ 0.48 $ 0.46
Diluted 0.47 0.44
These financial statements should be read in conjunction with the accompanying notes.
5
6
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended March 31,
-------------------------------------------
(IN THOUSANDS) 2003 2002
---------------- -----------------
OPERATING ACTIVITIES
Net Income $ 11,785 $ 11,475
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 9,668 7,209
Provision for Loan Losses 1,760 3,600
Provision for Deferred Income Tax 3,967 1,680
Net Gains (1,247) (431)
Loans Originated or Acquired and Held for Sale (26,479) (11,342)
Proceeds from Sales of Loans Held for Sale 23,645 13,720
Net (Increase) Decrease in Accrued Interest
Receivable and Other Assets (150) 15,393
Net Increase (Decrease) in Accrued
Expenses and Other Liabilities (4,409) 676
---------------- -----------------
Total Adjustments 6,755 30,505
---------------- -----------------
Net Cash Provided by Operating Activities 18,540 41,980
---------------- -----------------
INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 204,520 237,831
Proceeds from Sales of Securities Available for Sale 48,296 496
Purchases of Securities Available for Sale (488,996) (334,588)
Loan Principal Collections Less Originations and Purchases 94,406 64,332
Purchases of Premises and Equipment (2,843) (1,385)
---------------- -----------------
Net Cash Used by Investing Activities (144,617) (33,314)
---------------- -----------------
FINANCING ACTIVITIES
Net Increase in Deposits 85,051 78,347
Net Decrease in Short-Term Borrowings (252,440) (82,640)
Proceeds from Long-Term Debt 295,000 10,000
Payments and Maturities of Long-Term Debt (10,833) (9,838)
Issuance of Stock 846 2,111
Purchase of Treasury Stock - (3,036)
Cash Dividends on Common Stock (5,484) (5,154)
---------------- -----------------
Net Cash Provided (Used) by Financing Activities 112,140 (10,210)
---------------- -----------------
Decrease in Cash and Cash Equivalents (13,937) (1,544)
Cash and Cash Equivalents at Beginning of Year 148,192 117,784
---------------- -----------------
Cash and Cash Equivalents at End of Year $ 134,255 $ 116,240
---------------- -----------------
SUPPLEMENTAL DISCLOSURES
Interest Paid, Net of Amount Credited to Deposit Accounts $ 17,487 $ 24,743
Income Taxes Paid 56 2,536
Net Investment Securities Purchased and not Settled - 53,417
Loans Securitized and Converted to Securities Available for Sale - 417
These financial statements should be read in conjunction with the accompanying notes.
6
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2003
NOTE 1 - BASIS OF PRESENTATION
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. The Bank offers consumer and commercial banking services
through a network of branch offices and ATMs in the Baltimore-Washington
corridor of Maryland, Northern Virginia, and southern York County, Pennsylvania.
Related financial services are offered 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.
The accounting and reporting policies of the Corporation conform with
accounting principles generally accepted in the United States of America
("GAAP") 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 and prevailing practices within the banking
industry. The following summary of significant accounting policies of the
Corporation is presented to assist the reader in understanding the financial and
other data presented in this report. Operating results for the three month
period ended March 31, 2003 are not necessarily indicative of the results that
may be expected for any future quarters or for the year ending December 31,
2003. For further information, refer to the consolidated financial statements
and notes thereto included in the Provident Bankshares Corporation's Annual
Report on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on March 7, 2003.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements include the
accounts of the Corporation and its wholly owned subsidiary, Provident Bank and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation. Results of operations from entities purchased,
if any, are included from the date of acquisition. Assets and liabilities of
purchased companies are stated at estimated fair values at the date of
acquisition.
Certain prior years' amounts in the accompanying unaudited Consolidated
Financial Statements have been reclassified to conform to the presentation used
for the current year. These reclassifications have no effect on Stockholders'
Equity or Net Income as previously reported.
USE OF ESTIMATES
In preparation of the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the financial statements and accompanying notes
and the reported amounts of income and expense during the reporting periods.
Estimates and assumptions are utilized in the determination of the allowance for
loan losses, non-accrual loans, asset prepayment rates, other real estate owned,
other than temporary impairment of investment securities, intangible assets,
pension and post-retirement benefits, fair value of financial instruments
disclosures, stock-based compensation, derivative positions, recourse
liabilities, litigation and income taxes. Management believes the following
critical accounting policies affect its more significant judgments and estimates
used in preparation of its consolidated financial statements: allowance for loan
losses, other than temporary impairment of investment securities, asset
prepayment rates and income taxes. It is at least reasonably possible that each
of the Corporation's estimates could change in the near term and the affect of
the change could be material to the Corporation's Consolidated Financial
Statements.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("SFAS No. 148"), an
amendment of SFAS No. 123, "Accounting for Stock-Based Compensation"
(collectively, "SFAS No. 123"). The provisions of SFAS No. 123 provide the
Corporation with the option of accruing stock-based employee compensation
expense, or applying the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), which does not require compensation expense
to be recognized. The Corporation has elected to continue to apply APB No. 25 to
account for the Option Plan. Accordingly, no compensation expense has been
recognized.
7
8
The following table illustrates the pro forma effect on net income and earnings per share
if the Corporation had applied the fair value provisions of SFAS No. 123 to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31,
----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
--------------- --------------
NET INCOME
Net Income As Reported $ 11,785 $ 11,475
Deduction for Total Stock-Based Employee Compensation Expense Determined
under Fair Value Based Method for all Awards, Net of Related Tax Effects 239 354
--------------- --------------
Pro Forma Net Income $ 11,546 $ 11,121
=============== ==============
BASIC EARNINGS PER SHARE
As Reported $ 0.48 $ 0.46
Pro Forma 0.47 0.44
DILUTED EARNINGS PER SHARE
As Reported $ 0.47 $ 0.44
Pro Forma 0.46 0.43
The weighted average fair value of all of the options granted during the periods presented have been estimated using the
Black-Scholes option-pricing model with the following assumptions:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------- ------------
Dividend Yield 3.63% 3.72%
Weighted Average Risk-Free Interest Rate 3.14% 3.11%
Weighted Average Expected Volatility 25.31% 25.68%
Weighted Average Expected Life in Years 7.02 6.75
RECENTLY ADOPTED 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 15, 2002. SFAS No. 143
establishes standards for recognition and measurement of liabilities for asset
retirement obligations and retirement cost. SFAS No. 143 did not have a
significant impact on the Corporation's earnings, financial condition or equity.
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. SFAS No. 143 did not
have a significant impact on the Corporation's earnings, financial condition or
equity.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others"
("Interpretation No. 45"), which addresses the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees. Interpretation No. 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees. The liability
is recognized for the non-contingent component of the guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee, or if the guarantee was issued with a premium payment, or as part of
a transaction with multiple elements. The Corporation adopted the recognition
and measurement provisions for all guarantees entered into or modified after
December 31, 2002. The liability associated with these guarantees amounted to
$44 thousand at March 31, 2003, which will be amortized over the period covered
by the guarantees.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("Interpretation No. 46") which explains
identification of variable interest entities and the assessment of whether to
consolidate those entities. Interpretation No. 46 requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among the
involved parties. The provisions of Interpretation No. 46 are effective for all
financial statements issued after January 1, 2003. The Corporation holds no
significant variable interests in any entities which would require
consolidation.
8
9
FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS No. 149"), which is generally effective for contracts
entered into or modified after June 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts, collectively referred to as "derivatives" and hedging
activities under SFAS No. 133. Management does not expect SFAS No. 149 to have a
significant impact on the Corporation.
NOTE 2 - 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
--------------- --------------- -------------- ---------------
MARCH 31, 2003
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 68,310 $ 219 $ 64 $ 68,465
Mortgage-Backed Securities 1,981,418 28,625 354 2,009,689
Municipal Securities 19,245 1,205 - 20,450
Other Debt Securities 126,058 6,515 1,931 130,642
--------------- --------------- -------------- ---------------
Total Securities Available for Sale $ 2,195,031 $ 36,564 $ 2,349 $ 2,229,246
=============== =============== ============== ===============
DECEMBER 31, 2002
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 54,074 $ 199 $ - $ 54,273
Mortgage-Backed Securities 1,767,095 28,258 570 1,794,783
Municipal Securities 19,547 1,580 - 21,127
Other Debt Securities 121,656 3,353 1,963 123,046
--------------- --------------- -------------- ---------------
Total Securities Available for Sale $ 1,962,372 $ 33,390 $ 2,533 $ 1,993,229
=============== =============== ============== ===============
MARCH 31, 2002
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 99,167 $ - $ 4,701 $ 94,466
Mortgage-Backed Securities 1,660,602 6,833 12,262 1,655,173
Municipal Securities 20,891 568 3 21,456
Other Debt Securities 178,764 221 14,059 164,926
--------------- --------------- -------------- ---------------
Total Securities Available for Sale $ 1,959,424 $ 7,622 $ 31,025 $ 1,936,021
=============== =============== ============== ===============
At March 31, 2003, unrealized gains on securities available for sale,
net of taxes, of $22.2 million were reflected as a component of Net Accumulated
Other Comprehensive Income ("OCI") compared to unrealized losses on securities
available for sale, net of taxes, of $15.3 million at March 31, 2002. At
December 31, 2002, a unrealized gain of $19.8 million, net of taxes, on the
securities portfolio was reflected as a component of OCI. For further details
regarding investment securities at December 31, 2002, refer to Notes 1 and 3 of
the Consolidated Financial Statements incorporated by reference from the
Corporation's 10-K filed March 7, 2003.
Net realized gains on investment securities were $1.1 million for the
quarter ended March 31, 2003 as compared to net realized gains of $167 thousand
for the same quarter of 2002. These net gains on investment securities are
included in net gains in the Consolidated Statement of Income.
9
10
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans outstanding is shown in the table below.
(IN THOUSANDS) 03/31/2003 12/31/2002 03/31/2002
--------------- -------------- --------------
Acquired Residential Mortgage $ 500,487 $ 545,323 $ 683,771
Other Consumer 874,705 881,151 845,030
--------------- -------------- --------------
Total Consumer 1,375,192 1,426,474 1,528,801
Commercial Business 364,403 376,065 355,576
Real Estate - Construction - Residential 131,872 119,732 104,915
- Commercial 196,247 238,344 216,017
Real Estate - Mortgage - Residential 140,208 168,869 274,222
- Commercial 254,100 231,079 229,002
--------------- -------------- --------------
Total Loans $ 2,462,022 $ 2,560,563 $ 2,708,533
=============== ============== ==============
The following table reflects the activity in the allowance for loan losses:
Three Months Ended March 31,
--------------------------------
(IN THOUSANDS) 2003 2002
--------------- --------------
Balance at Beginning of Period $ 33,425 $ 34,611
Provision for Loan Losses 1,760 3,600
Transfer to Other Liabilities (262) -
Less: Loans Charged-Off, Net of Recoveries
Acquired Residential Mortgage 1,898 1,903
Other Consumer 390 347
Commercial Business 122 789
Real Estate - Construction - Residential - -
- Commercial - -
Real Estate - Mortgage - Residential (49) 14
- Commercial - (6)
--------------- --------------
Net Charge-Offs 2,361 3,047
--------------- --------------
Balance At End of Period $ 32,562 $ 35,164
=============== ==============
NOTE 4 - INTANGIBLE ASSETS
In September 2000, the Corporation acquired Harbor Federal Bancorp using
the purchase method of accounting and allocated the purchase price to the fair
value of the net assets acquired. This allocation resulted in $8.3 million of
goodwill and $2.6 million of deposit-based intangibles. Effective January 1,
2002, the Corporation adopted Statement of Financial Accounting Standards 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 over seven years. Testing of goodwill
balances was completed at the time of the implementation of SFAS No. 142 and no
impairment of goodwill existed at that date. The Corporation continues to
periodically monitor the balances for any indication of potential impairment in
addition to annual impairment testing of the goodwill balances.
10
11
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 three months ended March 31, 2003.
Three Months Ended March 31,
-------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
--------------- -----------------
Reported Net Income $ 11,785 $ 11,475
Add Back: Goodwill Amortization - -
--------------- -----------------
Adjusted Net Income $ 11,785 $ 11,475
=============== =================
BASIC EARNINGS PER SHARE
Reported Net Income $ 0.48 $ 0.46
Add Back: Goodwill Amortization - -
--------------- -----------------
Adjusted Net Income $ 0.48 $ 0.46
=============== =================
DILUTED EARNINGS PER SHARE
Reported Net Income $ 0.47 $ 0.44
Add Back: Goodwill Amortization - -
--------------- -----------------
Adjusted Net Income $ 0.47 $ 0.44
=============== =================
Accumulated Deposit-Based Accumulated
(IN THOUSANDS) Goodwill Amortization Intangible Amortization Total
------------ ---------------- ----------------- ----------------- -------------
Balance at December 31, 2002 $ 8,314 $ (622) $ 2,600 $ (952) $ 9,340
Amortization Expense for the Three
Months Ended March 31, 2003 - - - (102) (102)
------------ ---------------- ----------------- ----------------- -------------
Balance at March 31, 2003 $ 8,314 $ (622) $ 2,600 $ (1,054) $ 9,238
============ ================ ================= ================= =============
NOTE 5 - DEPOSITS
The table below presents deposits for the periods indicated.
(IN THOUSANDS) 03/31/2003 03/31/2002
-------------- -----------------
Noninterest-Bearing $ 560,749 $ 451,194
Money Market/Demand 893,179 790,578
Savings 697,492 647,577
Direct Time Certificates of Deposit 743,757 844,553
Broker Certificates of Deposit 377,840 700,492
-------------- -----------------
Total Deposits $ 3,273,017 $ 3,434,394
============== =================
NOTE 6 - SHORT-TERM BORROWINGS
The table below presents short-term borrowings.
(IN THOUSANDS) 03/31/2003 03/31/2002
------------------- ----------------
Securities Sold Under Repurchase Agreements $ 224,725 $ 199,499
Federal Funds Purchased 60,575 82,125
Other Short-Term Borrowings 2,018 2,057
---------------- ---------------
Total Short-Term Borrowings $ 287,318 $ 283,681
================ ===============
11
12
NOTE 7 - LONG-TERM DEBT
Long-term debt was as follows:
(IN THOUSANDS) 03/31/2003 03/31/2002
--------------- ---------------
Federal Home Loan Bank Advances - Fixed Rate $ 288,894 $ 327,838
Federal Home Loan Bank Advances - Variable Rate 646,893 345,230
Trust Preferred Securities 77,883 69,373
Term Repurchase Agreements 85,000 117,500
--------------- ---------------
Total Long-Term Debt $ 1,098,670 $ 859,941
=============== ===============
NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses derivatives to hedge the interest rate risks
inherent with its funding costs. Fair value hedges which meet the criteria 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 $13.4 million and
$3.1 million for the three months ended March 31, 2003 and 2002, respectively.
Cash flow hedges have the effective portion of changes in the fair value of the
derivative recorded in OCI. At March 31, 2003 and 2002, the Corporation had
recorded a cumulative decline in the fair value of derivatives of $3.6 million
and $491 thousand, 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
three months ended March 31, 2003 and 2002, the Corporation had no ineffective
portions of hedges.
The table below presents the Corporation's open derivative positions at March 31:
(IN THOUSANDS)
NOTIONAL CREDIT RISK UNAMORTIZED
DERIVATIVE TYPE HEDGE OBJECTIVE AMOUNT AMOUNT MARKET VALUE PREMIUM
- --------------- --------------------- ------------ ------------ ------------- -----------
2003
INTEREST RATE SWAPS:
PAY FIXED/RECEIVE VARIABLE DEPOSIT/BORROWING COST $320,000 $ -- $ (5,718) $ --
RECEIVE FIXED/PAY VARIABLE BORROWING COST 157,750 13,401 13,401 --
INTEREST RATE CAPS/CORRIDORS BORROWING COST 162,000 13 13 280
---------- ------------ ------------ -----------
$639,750 $ 13,414 $ 7,696 $ 280
========== ============ ============ ===========
2002
Interest Rate Swaps:
Pay Fixed/Receive Variable Deposit/Borrowing Cost $ 45,000 $ 343 $ (832) $ --
Pay Fixed/Receive Variable Asset Values 18,742 25 (379) --
Receive Fixed/Pay Variable Borrowing Cost 70,000 3,078 3,078 --
Interest Rate Caps/Corridors Borrowing Cost 162,000 755 755 833
---------- ------------ ------------ -----------
$295,742 $ 4,201 $ 2,622 $ 833
========== ============ ============ ===========
12
13
NOTE 9 - OTHER COMPREHENSIVE INCOME
Presented below is a reconciliation of net income to comprehensive income indicating the components of other comprehensive income.
Three Months Ended
March 31,
-------------------------------
(IN THOUSANDS) 2003 2002
------------- ------------
Net Income $ 11,875 $ 11,475
Other Comprehensive Income (Loss):
Gain (Loss) on Derivatives Recognized in Other Comprehensive Income (1,829) 194
Unrealized Holding Gain (Loss) on Debt Securities 4,809 (14,342)
Less: Reclassification Adjustment for Gains (Losses) Included in Net Income 1,125 167
------------- ------------
Other Comprehensive Income (Loss), Before Tax 1,855 (14,315)
Income Tax (Benefit) Related to Items of Other Comprehensive Income 649 (5,011)
------------- ------------
Other Comprehensive Income (Loss), After Tax 1,206 (9,304)
------------- ------------
Comprehensive Income $ 13,081 $ 2,171
============= ============
NOTE 10- NET GAINS
Net gains include the following components:
Three Months Ended
March 31,
-----------------------------------------
(IN THOUSANDS) 2003 2002
----------------- ----------------
Net Gains on Securities $ 1,125 $ 167
Asset Sales 122 264
----------------- ----------------
Net Gains $ 1,247 $ 431
================= ================
NOTE 11 - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for the
periods indicated:
Three Months Ended March 31,
-------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
------------ -----------
Qualifying Net Income $11,785 $11,475
Basic EPS Shares 24,384 25,117
Basic EPS $0.48 $0.46
Dilutive Shares 670 850
Diluted EPS Shares 25,054 25,967
Diluted EPS $0.47 $0.44
13
14
NOTE 12 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Commitments to extend credit in the form of consumer, commercial real estate and
business loans at March 31 were as follows:
(IN THOUSANDS)
Commercial Business and Real Estate $ 345,924
Consumer Revolving Credit 259,504
Consumer Residential Mortgage Credit 33,547
Performance Standby Letters of Credit 50,865
Commercial Letters of Credit 404
Forward Loan Purchase Commitment 45,000
-------------
Total Loan Commitments $ 735,244
=============
Historically, many of the commitments expire without being fully drawn;
therefore, the total commitment amounts do not necessarily represent future cash
requirements.
SECURITIZATIONS AND RECOURSE PROVISION
From 1999 through 2001, the Corporation securitized a total of $946
million of its acquired residential mortgage loan portfolio. These loans were
securitized with Fannie Mae and the respective securities were placed into the
Corporation's investment portfolio.
The loans underlying the securities were securitized with full recourse
to the Corporation for any losses. The maximum potential recourse obligation was
$124.2 million and $340.5 million at March 31, 2003 and 2002, respectively. A
recourse liability was established by the Corporation based upon management's
current assessment of the credit risk inherent in the loans. The recourse
liability amounted to $1.9 million and $3.3 million at March 31, 2003 and 2002,
respectively. The recourse liability is evaluated periodically for adequacy. Net
charges to the recourse liability amounted to $1.2 million and and $213 thousand
for the quarters ended March 31, 2003 and 2002, respectively. At March 31, 2003,
$1.8 million of loans with potential recourse were 90 days or more past due.
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL REVIEW
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. The Bank offers consumer and commercial banking services
through a network of 113 banking offices and 169 ATMs in the
Baltimore-Washington corridor of Maryland, Northern Virginia, and southern York
County, Pennsylvania. At March 31, 2003, the branch network consists of 59
traditional full service branch locations, 50 in-store branches and 4 ATM Plus
banking offices. The in-store and ATM Plus offices are located in supermarkets
and national retail superstores. Of the 113 banking offices, 61% are located in
the Baltimore region and 39% 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Discussion and analysis of 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 of America ("GAAP"). The preparation of these financial statements
requires management to make estimates and judgments 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
impairment of investment securities, intangible assets, pension and
post-retirement benefits, stock option plan, derivative positions, recourse
liabilities, litigation 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 judgments 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.
Management believes the following critical accounting policies affect
its more significant judgments and estimates used in preparation of its
consolidated financial statements: allowance for loan losses, other than
temporary impairment of investment securities, asset prepayment rates and income
taxes. Each estimate is discussed below. The financial impact of each estimate,
to the extent significant to financial results, is discussed in the applicable
sections of Management's Discussion and Analysis. It is at least reasonably
possible that each of the Corporation's estimates could change in the near term
and the affect of the change could be material to the Corporation's consolidated
financial statements.
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses ("the
allowance"), 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 to a level considered necessary by
management.
The allowance is based on management's continuing review and evaluation
of the loan portfolio. This process provides an allowance consisting of two
components, allocated and unallocated. To arrive at the allocated component of
the allowance, the Corporation combines estimates of the allowances needed for
loans analyzed individually and on a pooled basis. The allocated component of
the allowance is supplemented by an unallocated component.
The portion of the allowance that is allocated to individual internally
criticized and non-accrual loans is determined by estimating the inherent loss
on each problem credit after giving consideration to the value of underlying
collateral. 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 credit 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.
For portfolios such as consumer loans, commercial business loans and
loans secured by real estate, the determination of the allocated allowance is
conducted at an aggregate, or pooled, level. Each quarter, twelve-month rolling
loss rates for homogenous pools of loans in the consumer portfolio provide the
basis for the allocated reserve. Historical loss rates also provide the basis
for reserves allocated to pools within the commercial portfolios. For any
portfolio where the Bank lacks sufficient historic experience, industry loss
rates are used. If recent history is
15
16
not deemed to reflect the inherent losses existing within a portfolio, older
historic loss rates during a period of similar economic or market conditions are
used.
The Bank's credit administration group adjusts the indicated loss rates
based on qualitative factors. Factors that are considered in adjusting loss
rates include risk characteristics, credit concentration trends and general
economic conditions, including job growth and unemployment rates. For commercial
and real estate portfolios, additional factors include the level and trend of
watched and criticized credits within those portfolios; commercial real estate
vacancy, absorption and rental rates; and the number and volume of syndicated
credits, construction loans, speculative construction loans or other portfolio
segments deemed to carry higher levels of risk. Upon completion of the
qualitative adjustments, the overall allowance is allocated to the components of
the portfolio based on the adjusted loss factors.
The unallocated component of the allowance exists to mitigate the
imprecision inherent in management's estimates of expected credit losses and
includes its judgmental determination of the amounts necessary for
concentrations, economic uncertainties and other subjective factors that may not
have been fully considered in the allocated allowance. The relationship of the
unallocated component to the total allowance may fluctuate from period to
period. Although management has allocated the majority of the allowance to
specific loan categories, the evaluation of the allowance is considered in its
entirety.
Lending management meets at least monthly to review the credit quality
of the loan portfolios and at least quarterly with executive management to
evaluate the allowance. The Corporation has an internal risk analysis and review
staff that continuously reviews loan quality and reports the results of its
reviews to executive management, the Audit Committee and the Board of Directors.
Such reviews also assist management in establishing the level of the allowance.
Management believes that it uses the best information available to make
determinations about the allowance and that it has established its existing
allowance in accordance with GAAP. If circumstances differ substantially from
the assumptions used in making determinations, adjustments to the allowance may
be necessary and results of operations could be affected. Because 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 periodically by the FDIC and, accordingly, as part
of this exam, the allowance is reviewed for adequacy utilizing specific
guidelines. Based upon their review, the regulators may from time to time
require reserves in addition to those previously provided.
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. It indicates that the prospects for a near term recovery of value are
not necessarily favorable, or that there is a lack of evidence to support fair
values 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.
ASSET PREPAYMENT RATES
The Corporation purchases amortizing loan pools and investment
securities in which the underlying assets are residential mortgage loans subject
to prepayments. The actual principal reduction on these assets varies from the
expected contractual principal reduction due to principal prepayments resulting
from borrowers elections to refinance the underlying mortgages based on market
and other 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 estimated life is calculated by projecting future
prepayments and the resulting principal cash flows until maturity. Management
makes prepayment rate projections by utilizing actual prepayment speed
experience and 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 cause the
earnings recognized on these assets to vary over the term that the assets are
held, creating volatility in the net interest margin. Prepayment rate
assumptions are monitored and updated monthly to reflect actual activity and the
most recent market projections.
INCOME TAXES
The Corporation accounts for income taxes under the asset/liability
method. Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period indicated by the
enactment date. A valuation
16
17
allowance is established against deferred tax assets when, in the judgment of
management, it is more likely than not that such deferred tax assets will not
become realizable. The judgment about the level of future taxable income is
dependent to a great extent on matters that may, at least in part, be beyond the
Bank's control. It is at least reasonably possible that management's judgment
about the need for a valuation allowance for deferred taxes could change in the
near term.
FINANCIAL CONDITION
At March 31, 2003, total assets were $5.0 billion, up slightly from $4.9
billion at December 31, 2002. The Corporation continued to focus resources on
growth in core business lines, resulting in a higher percentage of core loans
and deposits on the balance sheet, as non-core loan and deposit balances
continued to decline. The Corporation experienced growth in all of its markets,
opening two full service branches in the expansion areas of Northern Virginia
and the Maryland suburbs of Washington D.C., and four ATM Plus banking offices
in Baltimore in-store locations during the quarter. Additionally, during the
quarter the Corporation closed one in-store branch in Baltimore County.
ASSET COMPOSITION
The following table summarizes the composition of the Bank's average earning assets for the periods indicated.
AVERAGE EARNING ASSETS SUMMARY
(DOLLARS IN THOUSANDS)
Three Months Ended Three Months
March 31, Ended
------------------------------------ $ % December 31,
2003 2002 Variance Variance 2002
--------------- --------------- ------------- ----------- --------------------
Investments $ 2,049,951 $ 1,776,733 $ 273,218 15.4% $ 1,893,255
Other earning assets 10,948 14,866 (3,918) (26.4) 11,683
Core loans:
Consumer 845,072 757,026 88,046 11.6 833,790
Commercial business 342,097 322,226 19,871 6.2 316,922
Real estate 561,085 499,927 61,158 12.2 584,369
--------------- --------------- ------------- ---------------
Total core loans 1,748,254 1,579,179 169,075 10.7 1,735,081
--------------- --------------- ------------- ---------------
Non-core loans:
Consumer 701,449 1,084,003 (382,554) (35.3) 798,920
National syndicated loans 49,845 75,509 (25,664) (34.0) 55,405
--------------- --------------- ------------- ---------------
Total non-core loans 751,294 1,159,512 (408,218) (35.2) 854,325
--------------- --------------- ------------- ---------------
Total loans 2,499,548 2,738,691 (239,143) (8.7) 2,589,406
--------------- --------------- ------------- ---------------
Total earning assets $ 4,560,447 $ 4,530,290 $ 30,157 0.7% $ 4,494,344
=============== =============== ============= ===============
Total average earning assets increased by $30 million to $4.6 billion in
the first quarter of 2003 ("the 2003 quarter") compared to the first quarter of
2002 ("the 2002 quarter"). A $273 million increase in average investment
portfolio balances and a $169 million increase in average core loan balances
offset the $408 million decrease in average non-core loan balances. Management
defines core loans as those loans originated by the Bank, as well as purchases
of participations in syndicated loans in the Bank's defined market area.
Non-core loans are defined as purchased loans, participations in syndicated
loans outside the Bank's defined market area, and Bank-originated loans from
discontinued product lines.
The growth in the investment portfolio average balances in the 2003
quarter occurred as the excess cash flow generated by the non-core loan
portfolio payments, net of core loan funding requirements, was reinvested into
the investment portfolio. Most of the purchases were invested in a combination
of 15 and 20 year conventional MBS and 5 year fixed/1 year ARMs. These purchases
shortened the duration of the portfolio and stabilized the prepayment pattern of
the portfolio.
The Corporation's expanded presence in the Baltimore-Washington
metropolitan region helped facilitate the 10.7% growth in average core loans,
which comprise 70% of total average loans at March 31, 2003. Average core
consumer loans, composed primarily of home equity and marine loans, increased
$88 million, or 11.6%, in the 2003 quarter compared to the 2002 quarter. The net
growth occurred despite the longer than anticipated wave of customer refinancing
activity. New production
17
18
from the internet-based home equity product referral network supplemented
lending activity from the Bank's branch and call center network. Average core
commercial business and real estate loans continued to show steady growth,
evidenced by an increase of $81 million, or 9.9%, in the 2003 quarter compared
to the 2002 quarter.
The Corporation's average non-core consumer loan balances continued to
decline at a rapid pace as the low interest rate environment continued in 2003,
decreasing $383 million in the 2003 quarter, or 35.3%, due to increased
prepayments. The largest component of non-core consumer loans is the portfolio
of acquired residential mortgage loans, which declined by $195 million to an
average balance for the quarter of $515 million. The decline was a result of the
increased payoffs, resultant additional amortization of loan purchase premiums
and a lower level of purchases in the 2003 quarter. Management intends to
continue to purchase loans secured by residential real estate, primarily those
in a first lien position, to maintain an average acquired portfolio size between
$500 million and $600 million. The other non-core consumer portfolios, relating
to residential mortgage and indirect auto loan product lines that are no longer
offered by the Bank, declined by $187 million. The non-core syndicated portfolio
average balances declined $25 million, or 34.0%, in the 2003 quarter, which was
consistent with management's objective of reducing the exposure to these
credits.
ASSET QUALITY
Non-performing assets were $25.8 million at March 31, 2003, or 1.05% of
loans outstanding, up slightly from $24.9 million at December 31, 2002, but down
from $27.9 million in the 2002 quarter. Of total non-performing loans, $20.7
million are in the consumer and residential mortgage loan portfolios, which are
collateralized by 1 to 4 family residences. With the vast majority of
non-performing loans already written down to net fair value, management expects
little further loss. Commercial and real estate non-performing loans remained at
historically low levels. Total past due loans decreased $2.2 million at March
31, 2003 from the level at December 31, 2002, primarily as loans migrated to the
non-performing category. The loans reflected as past due continue to meet the
Bank's criteria to warrant accruing status.
The overall level of the allowance declined $863 thousand from December
31, 2002 to $32.6 million at March 31, 2003, as a result of the overall decline
in the level of loans. At March 31, 2003, the allowance represents 1.32% of
total loans outstanding and 150% of non-performing loans. Portfolio-wide net
charge-offs represented 0.38% of average loans for the 2003 quarter, continuing
to improve from 0.40% in the December 2002 quarter and 0.45% in the March 2002
quarter.
Although no assurances can be given, management believes that
non-performing assets will remain relatively stable in the near term. Management
believes that the allowance at March 31, 2003 represents its best estimate of
probable losses inherent in the portfolio.
18
19
ASSET QUALITY SUMMARY
(dollars in thousands) 03/31/2003 03/31/2002 12/31/2002
--------------- -------------- ---------------
NON-PERFORMING ASSETS
- ---------------------
Acquired Residential Mortgage $ 17,510 $ 18,680 $ 18,070
Other Consumer 493 469 460
Commercial Business 493 77 514
Real Estate - Construction - Residential - 215 136
- Commercial - - -
Real Estate - Mortgage - Residential 3,141 4,553 1,953
- Commercial - - -
--------------- -------------- ---------------
TOTAL NON-ACCRUAL LOANS 21,637 23,994 21,133
TOTAL RENEGOTIATED LOANS - - -
--------------- -------------- ---------------
TOTAL NON-PERFORMING LOANS 21,637 23,994 21,133
TOTAL OTHER ASSETS AND REAL ESTATE OWNED 4,155 3,938 3,796
--------------- -------------- ---------------
TOTAL NON-PERFORMING ASSETS $ 25,792 $ 27,932 $ 24,929
=============== ============== ===============
PAST DUE LOANS
- --------------
Acquired Residential Mortgage $ 6,229 $ 6,186 $ 5,108
Other Consumer 430 1,419 1,023
Commercial Business 407 221 320
Real Estate - Construction - Residential 136 - -
- Commercial - - -
Real Estate - Mortgage - Residential 5,466 5,755 8,377
- Commercial - - -
--------------- -------------- ---------------
TOTAL PAST DUE LOANS $ 12,668 $ 13,581 $ 14,828
=============== ============== ===============
ASSET QUALITY RATIOS
- --------------------
Non-Performing Loans to Loans 0.88% 0.89% 0.83%
Non-Performing Assets to Loans 1.05% 1.03% 0.97%
Allowance for Loan Losses to Loans 1.32% 1.30% 1.31%
Net Charge-Offs to Average Loans 0.38% 0.45% 0.40%
Allowance for Loan Losses to Non-Performing Loans 150.49% 146.55% 158.16%
Three Months
Ended
Three Months Ended March 31, December 31,
-------------------------------- ---------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES 2003 2002 2002
- ------------------------------------- --------------- -------------- ---------------
Balance at Beginning of Period $ 33,425 $ 34,611 $ 34,615
Provision for Loan Losses 1,760 3,600 1,425
Transfer to Other Liabilities (262) - -
Less: Loans Charged-Off, Net of Recoveries
Acquired Residential Mortgage 1,898 1,903 1,612
Other Consumer 390 347 380
Commercial Business 122 789 517
Real Estate - Construction - Residential - - -
- Commercial - - -
Real Estate - Mortgage - Residential (49) 14 106
- Commercial - (6) -
--------------- -------------- ---------------
Net Charge-Offs 2,361 3,047 2,615
--------------- -------------- ---------------
BALANCE AT END OF PERIOD $ 32,562 $ 35,164 $ 33,425
=============== ============== ===============
19
20
SOURCES OF FUNDS
DEPOSITS AND BORROWINGS
The following table summarizes the composition of the Bank's average deposit and borrowing balances for the periods indicated.
AVERAGE DEPOSITS AND BORROWINGS
Three Months
Three Months Ended Ended
(IN THOUSANDS) March 31, December 31,
----------------------------------- $ % -----------------
2003 2002 Variance Variance 2002
---------------- -------------- ----------- ------------ -----------------
Core Deposits:
Consumer $ 2,342,286 $ 2,309,442 $ 32,844 1.4% $ 2,290,770
Commercial 404,579 291,764 112,815 38.7 447,280
---------------- -------------- ----------- -----------------
Total Core Deposits 2,746,865 2,601,206 145,659 5.6 2,738,050
Non Core Deposits 400,303 727,487 (327,184) (45.0) 439,194
---------------- -------------- ----------- -----------------
Total Average Deposits 3,147,168 3,328,693 (181,525) (5.5) 3,177,244
---------------- -------------- ----------- -----------------
Borrowings:
Fed Funds Purchased 217,564 97,306 120,258 123.6 233,184
FHLB Borrowings 813,836 671,170 142,666 21.3 654,778
Repos and Other 310,317 348,796 (38,479) (11.0) 352,448
Trust Preferred 68,123 68,051 72 0.1 68,105
---------------- -------------- ----------- -----------------
Total Borrowings 1,409,840 1,185,323 224,517 18.9 1,308,515
---------------- -------------- ----------- -----------------
Total Deposits and Borrowings $ 4,557,008 $ 4,514,016 $ 42,992 1.0% $ 4,485,759
================ ============== =========== =================
Total average deposit balances decreased $182 million in the 2003
quarter compared to the 2002 quarter due to the $327 million decrease in average
non-core deposits, composed primarily of brokered CDs that matured but were not
replaced. The Bank's average core deposits, generated from the Bank's consumer
and commercial customer base, continued to grow steadily, replacing $146 million
of the brokered CD runoff. Excluding average retail CDs, which decreased $102
million from the 2002 quarter to the 2003 quarter, average consumer deposit
balances increased $135 million, or 5.8%, from the 2002 quarter to the 2003
quarter. Deposit growth from the commercial sector was particularly strong
during the same period, with a net increase in average balances of $113 million,
or 38.7%, in the 2003 quarter, of which $88 million was in non-interest-bearing
accounts. In the 2003 quarter, average core deposits comprised 87.3% of average
total deposits.
Average borrowings increased $225 million in the first quarter of 2003
compared to the 2002 quarter. Average Fed Funds increased $120 million,
reflecting management's desire to match fund more of the Bank's prime-based loan
portfolio with Fed Funds. In the twelve months ending March 31, 2003, the Bank
extinguished $113 million of term Federal Home Loan Bank ("FHLB") borrowings
with above market rates. The debt was replaced with lower rate FHLB borrowings,
resulting in a favorable impact on interest expense in 2003. Average FHLB
borrowings increased $143 million, net of extinguishments, from the first
quarter of 2002 to the first quarter of 2003, as management utilized this term
funding source to better match the Corporation's asset maturity profile.
LIQUIDITY
An important component of the Bank's asset/liability structure is the
level of liquidity available to meet the needs of customers and creditors.
Traditional sources of bank liquidity include deposit growth, loan repayments,
investment maturities, asset sales, borrowings and interest received. The Bank's
Asset/Liability Management Committee has established general guidelines for
maintaining prudent levels of liquidity. The committee continually monitors the
amount and sources 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.
The Bank's primary source of liquidity is the assets it possesses,
which can be pledged as collateral for secured borrowings or alternatively sold
to raise cash levels. An objective of liquidity management is to optimize the
use of this collateral to minimize funding costs. The Bank's primary sources for
raising secured borrowings are the FHLB and securities broker/dealers. At March
31, 2003, $1.24 billion of secured borrowings were employed, with sufficient
collateral available to immediately raise an additional $708 million. After
covering $128 million of unsecured funds that mature in the next 3 months, the
excess liquidity position of $580 million is well in excess of projected
liquidity requirements for the next 12 months. Additionally, over $500 million
of assets are maintained as collateral with the Federal Reserve as a contingent
source of secured funds.
The Bank also has several unsecured funding sources available. At March
31, 2003, the Bank possessed over $725 million of Fed Funds lines, of which only
$60 million were in use at quarter-end. Brokered CDs, which typically cost 10 -
25 basis points more than secured funds of a similar maturity, remain a viable
funding alternative, however management has not used this source since 2001 in
accordance with its strategy to reduce non-core funding. Existing brokered CD
balances declined by $24 million in the first quarter of 2003. The unsecured
20
21
debt markets are also a potential alternative to raise funds but have not been
employed since 2001 given the Bank's ability to raise funds at lower interest
rates in the secured funds markets.
As an alternative to raising secured funds, the Bank can raise liquidity
through asset sales. At March 31, 2003, over $500 million of the Bank's
investment portfolio is not pledged as collateral for borrowings, and is
immediately saleable at a market value equaling or exceeding its amortized cost
basis. Additionally, over a 90-day time frame, much of the Bank's $1.5 billion
consumer loan portfolio of residential mortgage loans, automobile loans, and
marine loans is saleable in an efficient market.
Commitments to lend funds to customers affect the Bank's determination
of sufficient liquidity. The borrowing requirements of customers include
commitments to extend credit and unused availability of lines of credit, which
totaled $735 million at March 31, 2003 (see Note 12 to the unaudited
consolidated financial statements). Historically, many of the commitments expire
without being fully drawn; therefore, the total commitment amounts do not
necessarily represent future cash requirements.
The Corporation is a one-bank holding company which relies upon the
Bank's performance to generate capital growth through Bank earnings. A portion
of the Bank's earnings are passed to the Corporation in the form of cash
dividends. These dividends are utilized to pay dividends to stockholders,
repurchase shares and pay interest on trust preferred securities.
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 the fluctuation in the net interest margin caused by
changes in interest rates using cost-effective strategies and tools.
The Bank manages several forms of interest rate risk. The simplest
involves the mismatch of maturities between fixed rate assets and liabilities. A
second risk, basis risk, exists as a result of having much of the Bank's earning
assets priced using either the Prime rate or the U.S. Treasury yield curve,
while much of the liability portfolio is priced using the CD yield curve or
LIBOR yield curve. These different yield curves typically do not move in
lock-step with one another. A third risk, options risk, exists in the form of
prepayment volatility in residential mortgage loans and other consumer loans.
Prepayment risk increases when long-term interest rates, such as the 10 year
Treasury Note rate or the 30 year mortgage rate, decline substantially.
Prepayment volatility complicates funding strategies in which the goal is to
maintain a stable spread between asset yields and borrowing rates.
Measuring and managing interest rate risk is a dynamic process that
management performs continually to meet the objective of maintaining a stable
net interest margin. This process relies chiefly on simulation modeling of
shocks to the balance sheet under a variety of interest rate scenarios,
including parallel and non-parallel rate shifts, such as the forward yield
curves for U.S. Treasuries and Interest Rate Swaps. The results of these shocks
are measured in two forms: first, the impact on net interest margin and earnings
over one and two year time frames; and second, the impact on the market value of
equity. There are several advantages of simulation analysis over traditional gap
analysis. In addition to measuring the basis risks and prepayment risks noted
above, simulations also quantify the earnings impact of rate changes and the
cost/benefit of hedging strategies.
The following table shows the anticipated effect on net interest income
in parallel shift (up or down) interest rate scenarios. These shifts are assumed
to begin on April 1, 2003 and evenly ramp-up or down over a six-month period.
The effect on net interest income would be for the next 12 months. Given the
interest environment at March 31, 2003, a 200 basis point drop in rate is
unlikely and has not been shown.
ANNUALIZED PROJECTED PERCENTAGE
INTEREST RATE SCENARIO PRIME RATE CHANGE IN NET INTEREST INCOME
---------------------- ---------- -----------------------------
-100 basis points 3.25% -3.1%
No Change 4.25% --
+100 basis points 5.25% +2.0%
+200 basis points 6.25% +1.8%
The isolated modeling environment, assuming no action by management,
shows that the Corporation's net interest income volatility is less than 4%
under probable scenarios. The Corporation's one year forward earnings are
slightly asset sensitive, which will result in net interest income moving in the
same direction as future interest rates.
The Corporation maintains an overall interest rate management strategy
that incorporates structuring of investments, purchased funds, variable rate
loan products, and derivatives in order to minimize significant fluctuations in
earnings or market values (see Note 8 to unaudited financial statements). The
Bank continues to employ hedges to mitigate interest rate risk. Borrowings
totaling over $500 million have been employed which reset their rates monthly or
quarterly based on the level of long-term interest rates - specifically, the
10-year constant maturity swap rate - rather than short-term rates, to offset
the effect of mortgage prepayments on asset yields. Both the 10-year swap rate
and the 30-year mortgage rate fell by 24 basis points from Jan. 2, 2003 to March
31, 2003. Additionally, $478 million notional in interest rate swaps were in
force to reduce maturity mismatches, and $162 million of interest rate caps were
employed to protect the interest margin from rising interest rates in the
future.
21
22
CAPITAL RESOURCES
Total stockholder's equity was $324 million at March 31, 2003, an
increase of $8.3 million, or 2.6%, from December 31, 2002. The growth in
stockholder's equity for the three months ended March 31, 2003 was attributable
to $11.8 million in earnings and an increase of $1.3 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 of
$5.5 million. The Corporation approved an extension of its repurchase program in
early 2003 to authorize repurchases of an additional 1.0 million shares, but did
not repurchase any shares during the 2003 quarter.
The Corporation is required to maintain minimum amounts and ratios of
core capital to adjusted quarterly average assets ("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
MARCH 31, MARCH 31, REGULATORY TO BE "WELL
2003 2002 REQUIREMENTS CAPITALIZED"
------------- ------------- --------------- ----------------
Tier 1 leverage ratio 7.51% 7.40% 4.00% 5.00%
Tier 1 capital to risk-weighted assets 12.15% 10.67% 4.00% 6.00%
Total regulatory capital to risk-weighted assets 13.23% 11.72% 8.00% 10.00%
RESULTS OF OPERATIONS
OVERVIEW
The Corporation recorded net income for the quarter ended March 31, 2003
of $11.8 million or $.47 per diluted share. The Corporation's two key
performance measures, return on average common equity and return on assets, were
15.81% and 0.98%, respectively, compared to 15.76% and 0.96%, respectively, for
the 2002 quarter. The financial results for the 2003 quarter, represented by
increases of 2.7% in net income and 6.8% in diluted earnings per share.
Net income increased $300 thousand from the prior year's first quarter.
Increases of $2.4 million in non-interest income and $800 thousand in net
interest income after provision for loan losses offset a $2.7 million increase
in non-interest expense. These variances are discussed in more detail, as
follows.
NET INTEREST INCOME
The Corporation's principal source of revenue is net interest income,
the difference between interest income on earning assets and interest expense on
deposits and borrowings. Interest income, for purposes of analysis, is presented
on a tax-equivalent basis to recognize associated tax benefits. This
presentation provides a basis for comparison of yields with taxable earning
assets. The discussion of net interest income should be read in conjunction with
the table on the following pages. The table analyzes the reasons for the changes
from period-to-period in the principal elements that comprise net interest
income. Rate and volume variances presented for each component will not total to
the variances presented on totals of interest income and interest expense
because of shifts from period-to-period in the relative mix of interest-earning
assets and interest-bearing liabilities.
22
23
PROVIDENT BANKSHARES CORPORATION
COMPARATIVE ANALYSIS OF AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND INTEREST YIELDS AND RATES
--------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
--------------------------------------------------------------
(dollars in thousands) AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(tax-equivalent basis) BALANCE EXPENSE RATE Balance Expense Rate
---------- ---------- ------- ---------- --------- --------
ASSETS
- ------
Interest-Earning Assets:
Home Equity--Direct $ 374,534 $ 5,009 5.42 % $ 355,451 $ 5,534 6.31 %
Marine 428,833 6,264 5.92 353,901 6,094 6.98
Acquired Residential Mortgage 515,256 8,578 6.75 711,113 14,268 8.14
Other Direct Consumer 41,703 842 8.19 47,676 941 8.00
Other Indirect Consumer 32,424 614 7.68 82,596 1,527 7.50
Residential Mortgage 153,770 2,803 7.39 290,292 5,672 7.92
----------- --------- ---------- --------
Total Consumer Loans 1,546,520 24,110 6.32 1,841,029 34,036 7.50
Commercial Business 368,650 5,398 5.94 364,369 5,923 6.59
Real Estate-Construction 337,356 3,647 4.38 311,172 3,694 4.81
Commercial Mortgage 247,022 3,785 6.21 222,121 3,628 6.62
----------- --------- ---------- --------
Total Loans 2,499,548 36,940 5.99 2,738,691 47,281 7.00
----------- --------- ---------- --------
Loans Held for Sale 8,651 121 5.67 4,145 65 6.36
Short-Term Investments 2,297 8 1.41 10,721 50 1.89
Taxable Investment Securities 2,030,410 24,049 4.80 1,754,774 27,497 6.35
Tax-Advantaged Investment Securities 19,541 339 7.04 21,959 356 6.57
----------- --------- ---------- --------
Total Investment Securities 2,049,951 24,388 4.82 1,776,733 27,853 6.36
----------- --------- ---------- --------
Total Interest-Earning Assets 4,560,447 61,457 5.47 4,530,290 75,249 6.74
----------- --------- ---------- --------
Less: Allowance for Loan Losses (32,766) (33,891)
Cash and Due From Banks 103,084 84,165
Other Assets 253,062 259,673
----------- ----------
Total Assets $4,883,827 $4,840,237
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 844,448 1,723 0.83 $ 742,828 2,291 1.25
Savings Deposits 677,776 1,090 0.65 623,342 1,777 1.16
Direct Time Deposits 757,250 5,558 2.98 856,762 8,736 4.14
Brokered Time Deposits 398,018 6,002 6.12 723,120 11,684 6.55
Short-Term Borrowings 439,184 1,266 1.17 324,975 1,331 1.66
Long-Term Debt 970,656 10,017 4.19 860,348 12,567 5.92
----------- --------- ---------- --------
Total Interest-Bearing Liabilities 4,087,332 25,656 2.55 4,131,375 38,386 3.77
----------- --------- ---------- --------
Noninterest-Bearing Demand Deposits 469,676 382,641
Other Liabilities 24,439 30,919
Stockholders' Equity 302,380 295,302
----------- ----------
Total Liabilities and Stockholder $4,883,827 $4,840,237
=========== ==========
Net Interest-Earning Assets $ 473,115 $ 398,915
=========== ==========
Net Interest Income (tax-equivalent) 35,801 36,863
Less: Tax-Equivalent Adjustment (174) (211)
--------- --------
Net Interest Income $ 35,627 $ 36,652
========= ========
Net Yield on Interest-Earning Assets 3.18 % 3.30 %
-------------------------
2003/2002
------------------------------------------- INCOME/EXPENSE VARIANCE
2003/2002 INCREASE/(DECREASE) DUE TO CHANGE IN
------------------------------------------- -------------------------
(dollars in thousands) AVERAGE % INCOME/ % AVERAGE AVERAGE
(tax-equivalent basis) BALANCE CHANGE EXPENSE CHANGE RATE VOLUME
------------ -------- --------- --------- ---------- ------------
ASSETS
- ------
Interest-Earning Assets:
Home Equity--Direct $ 19,083 5.4 % $ (525) (9.5)% $ (811) $ 286
Marine 74,932 21.2 170 2.8 (1,006) 1,176
Acquired Residential Mortgage (195,857) (27.5) (5,690) (39.9) (2,174) (3,516)
Other Direct Consumer (5,973) (12.5) (99) (10.5) 21 (120)
Other Indirect Consumer (50,172) (60.7) (913) (59.8) 36 (949)
Residential Mortgage (136,522) (47.0) (2,869) (50.6) (358) (2,511)
----------- ---------
Total Consumer Loans (294,509) (16.0) (9,926) (29.2)
Commercial Business 4,281 1.2 (525) (8.9) (594) 69
Real Estate-Construction 26,184 8.4 (47) (1.3) (344) 297
Commercial Mortgage 24,901 11.2 157 4.3 (234) 391
----------- ---------
Total Loans (239,143) (8.7) (10,341) (21.9)
----------- ---------
Loans Held for Sale 4,506 108.7 56 86.2 (8) 64
Short-Term Investments (8,424) (78.6) (42) (84.0) (10) (32)
Taxable Investment Securities 275,636 15.7 (3,448) (12.5) (7,354) 3,906
Tax-Advantaged Investment Securities (2,418) (11.0) (17) (4.8) 24 (41)
----------- ---------
Total Investment Securities 273,218 15.4 (3,465) (12.4)
----------- ---------
Total Interest-Earning Assets 30,157 0.7 (13,792) (18.3) (14,290) 498
----------- ---------
Less: Allowance for Loan Losses 1,125 (3.3)
Cash and Due From Banks 18,919 22.5
Other Assets (6,611) (2.5)
-----------
Total Assets $ 43,590 0.9
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 101,620 13.7 (568) (24.8) (851) 283
Savings Deposits 54,434 8.7 (687) (38.7) (831) 144
Direct Time Deposits (99,512) (11.6) (3,178) (36.4) (2,247) (931)
Brokered Time Deposits (325,102) (45.0) (5,682) (48.6) (734) (4,948)
Short-Term Borrowings 114,209 35.1 (65) (4.9) (458) 393
Long-Term Debt 110,308 12.8 (2,550) (20.3) (4,018) 1,468
----------- ---------
Total Interest-Bearing Liabilities (44,043) (1.1) (12,730) (33.2) (12,325) (405)
----------- ---------
Noninterest-Bearing Demand Deposits 87,035 22.7
Other Liabilities (6,480) (21.0)
Stockholders' Equity 7,078 2.4
-----------
Total Liabilities and Stockholder $ 43,590 0.9
===========
Net Interest-Earning Assets $ 74,200 18.6 %
===========
Net Interest Income (tax-equivalent) (1,062) (2.9) $ (1,965) $ 903
Less: Tax-Equivalent Adjustment 37 (17.5)
---------
Net Interest Income $ (1,025) (2.8)%
=========
Net Yield on Interest-Earning Assets
23
24
Net interest income on a tax-equivalent basis totaled $35.8 million in
the 2003 quarter, compared to $36.9 million in the 2002 quarter. The net
interest margin decreased to 3.18% from 3.30% for the prior year. Total interest
income declined $13.8 million, partially offset by a corresponding decline in
total interest expense of $12.7 million. Generally, favorable changes in the mix
of interest-bearing liabilities were offset by less than favorable changes in
the mix of interest-earning assets resulting from higher levels of investment
portfolio balances at lower rates.
The yield on earning assets was 5.47% in the 2003 quarter, compared to
6.74% in the 2002 quarter, a decline of 127 basis points, reflecting the general
decline in interest rates during the period. The $13.8 million decrease in total
interest income was attributable to the net decrease of $239 million in average
loan balances with higher yields being replaced by a $273 million increase in
average investment security balances at lower yields. The refinancing boom that
accelerated prepayments in the mortgage portfolios also resulted in the need to
increase the amortization of premiums relating to purchased loans which reside
in the investment and loan portfolios. In the 2003 quarter, total premium
amortization in these portfolios was $4.3 million, compared to $3.0 million in
the 2002 quarter, an 11 basis point component in the decrease in yield. As part
of the Bank's strategy, gains were taken on securities held specifically to
offset the additional premium amortization.
The average rate paid on interest-bearing liabilities declined 122 basis
points to 2.55% in the 2003 quarter, versus 3.77% in the 2002 quarter. The
favorable changes in deposit mix, from higher rate non-core and consumer CDs
into lower rate demand and savings deposits, had a positive impact on interest
expense of $10.1 million. Interest expense on borrowings decreased $2.6 million
in the 2003 quarter from the prior year quarter, primarily reflecting the
aforementioned debt extinguishment strategy in 2002.
As a result of derivative transactions undertaken to mitigate the effect
of interest rate risk on the Bank, interest income decreased by $80 thousand and
interest expense decreased by $696 thousand, for a total increase of $616
thousand in net interest income for the 2003 quarter. This compared to a total
increase in net interest income of $197 thousand relating to derivative
transactions for the 2002 quarter.
Future growth in net interest income will depend upon consumer and
commercial loan demand, growth in deposits and the general level of interest
rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.8 million for the 2003 quarter,
down from $3.6 million in the 2002 quarter. The decrease in the provision
resulted from lower charge-offs and a decline in loan balances of $247 million.
This was partially offset by the impact of an overall increase in the allowance
of two basis points to 1.32% as compared to total loans. Net charge-offs were
$2.4 million in the 2003 quarter compared to $3.0 million in the 2002 quarter.
Net charge-offs declined as a result of lower charge-offs on commercial business
loans for the current quarter versus the prior year quarter that related to an
individual credit. On an overall basis, net charge-offs as a percentage of
average loans were 0.38% in the 2003 quarter compared to 0.45% in the 2002
quarter.
NON-INTEREST INCOME
Total non-interest income increased $2.4 million to $22.6 million in the
2003 quarter compared to the 2002 quarter. Comparing the 2003 quarter to the
2002 quarter, total non-interest income, excluding net gains, was $21.3 million
and $19.8 million, respectively, which represents an 8% increase from period to
period. Exclusive of these gains, non-interest income, as a percentage of
combined net interest margin and non-interest income, was 37% and 35% for the
2003 quarter versus the 2002 quarter, respectively. The improvement in
non-interest income continued to be driven by deposit service charges, which
increased $1.6 million, or 10%, to $17.3 million from the 2002 quarter to the
2003 quarter. The increase in deposit fees was primarily the result of strong
consumer and commercial deposit account growth, notably in the Washington
metropolitan area.
Commissions and fees and other non-interest income were level with the
amounts in the prior year quarter. Commissions and fees were primarily generated
from Provident Investment Center, Inc., which offers annuities and mutual funds
through an affiliation with a securities broker-dealer, as well as property and
casualty insurance products as an agent. Other non-interest income is composed
primarily of prepayment fees generated on early loan payoffs, cash surrender
value income associated with bank-owned life insurance and operating lease
income.
Net gains are composed of security gains and losses, losses from the
extinguishment of debt and gains and losses on sales of loans, foreclosed
property and fixed assets. The Corporation recorded $1.2 million in net gains
for the 2003 quarter, compared to net gains of $431 thousand in the same period
in 2002. The net gains in 2003 were primarily composed of $1.1 million in net
gains on securities. The Corporation realized $622 thousand in gains from the
sale of $48 million of securities from the available for sale portfolio in the
2003 quarter. The gains were taken to offset additional premium amortization on
the acquired loan portfolio as a result of continued high prepayment activity
during the 2003 quarter. The higher rate mortgage-backed securities sold were
previously purchased specifically for their potential to generate income in an
environment where long-term mortgage rates declined significantly. Included in
net gains on securities is $502 thousand in gains recognized on securities
received resulting from the de-mutualization of an insurance company.
Additionally, the Bank
24
25
realized $122 thousand in net gains in the first quarter of 2003 relating to the
favorable disposition of certain loans, fixed assets and foreclosed property.
A settlement was announced in April 2003 and is in process relating to
litigation between merchants and VISA and MasterCard regarding debit card
interchange reimbursement fees. This settlement is likely to have a negative
impact on this portion of the Bank's fee income, which represents approximately
15% of non-interest income. There is currently insufficient information
available to calculate the amount of the impact, and management is actively
pursuing possible remedies.
NON-INTEREST EXPENSE
Non-interest expense increased $2.7 million, or 7.3%, in the 2003
quarter compared to the comparable 2002 quarter. Approximately 50% of the
increase was directly attributable to the opening of 15 new branches during the
last twelve months, impacting salaries and employee benefits, occupancy and
furniture and fixture expense. The growth in non-interest expense, other than
that which was impacted by branch expansion, was contained to an annual growth
rate of less than 4%. External processing fees increased $239 thousand, or 4.9%,
due to increases in the volume of processing. Other non-interest expense
increased $653 thousand in the 2003 quarter compared to the 2002 quarter, due
primarily to a $324 thousand charge to increase the recourse reserve related to
securitized loans.
INCOME TAXES
Provident recorded income tax expense of $5.6 million on pre-tax income
of $17.4 million, for a 32.3% effective tax rate in the 2003 quarter. The
Corporation recorded $5.4 million of income tax expense on pre-tax income of
$16.9 million in the 2002 quarter, resulting in an effective tax rate of 32%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 2002, see
"Interest Sensitivity Management" and Note 11 to the Consolidated Financial
Statements in the Corporation's Form 10-K filed with the Securities and Exchange
Commission on March 7, 2003. The market risk of the Corporation has not
experienced any material changes as of March 31, 2003 from December 31, 2002.
Additionally, refer to "Net Interest Income" in Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations for additional
quantitative and qualitative discussions about market risk at March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
The Corporation maintains controls and procedures designed to ensure
that information required to be disclosed in the reports that the Corporation
files or submits under the Securities and Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Under the supervision
and with the participation of the Corporation's management, including the
Corporation's Chief Executive Officer and Chief Financial Officer, the
Corporation 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.
(b) Changes in Internal Controls
----------------------------
The Corporation made no significant changes in its internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
25
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is involved in various legal actions arising in
the ordinary course of business. All such actions, in the
aggregate, involve amounts that are believed by management to be
immaterial to the financial condition and results of operations
of the Corporation.
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
(a) The Company held its Annual Meeting of Shareholders on April
16, 2003. Proxies were solicited with respect to such meeting
under regulation 14A of the Securities and Exchange Act of 1934,
as amended, pursuant to proxy materials dated March 10, 2003. Of
the shares eligible to vote at the annual meeting, 21,541,917
were represented in person or by proxy.
(b) There was no solicitation in opposition to the Board nominees
for directors and all of such nominees were elected as follows:
No. of Votes No. of Votes Broker
Director For % Withheld % Non-Votes %
-------- --- - -------- - --------- -
Kevin G. Byrnes 21,308,000 98.9 233,917 1.1 0 0.0
Pierce B. Dunn 21,246,959 98.6 294,958 1.4 0 0.0
Mark K. Joseph 21,248,461 98.6 293,456 1.4 0 0.0
Peter M. Martin 21,298,085 98.9 243,832 1.1 0 0.0
Sheila K. Riggs 21,315,697 98.9 226,220 1.1 0 0.0
Donand E. Wilson 21,295,335 98.9 246,582 1.1 0 0.0
The following directors are serving terms of office that continue
through 2004 and 2005, as noted:
Director Year Term Expires
-------- -----------------
Melvin A. Bilal 2004
Ward B.Coe, III 2004
Gary N. Geisel 2004
Frederick W. Meier, Jr. 2004
Thomas S. Bozzuto 2005
Charles W. Cole, Jr. 2005
Enos K. Fry 2005
Barbara B. Lucas 2005
Francis G. Riggs 2005
(c) Two additional proposals were submitted for a vote,
with the following results:
Broker
No. of Votes No. of Votes No.of Votes Non-
Proposal For % Against % Abstaining % Votes %
-------- --- - ------- - ---------- - ----- -
Amendment of the
Provident Bankshares
Corporation Amended and
Related Stock Option Plan 17,591,307 81.6 3,809,773 17.7 140,834 0.7 3 0.0
Ratification of the
appointment of KPMG LLP
as independent auditors
for the fiscal year
ending December 31, 2003 21,115,781 98.1 332,667 1.5 93,032 0.4 437 0.0
Item 5. Other Information - None
26
27
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 Agreement, as amended (3)
(4.2) Indenture of Provident Trust I, relating to the Junior
Subordinated Debentures (4)
(4.3) Amended and Restated Trust Agreement of Provident
Trust I (4)
(4.4) Form of Exchange Capital Security Certificate for
Provident Trust I (4)
(4.5) Form of Exchange Guarantee Agreement of Provident Trust
I, relating to the Exchange of Capital Securities (4)
(4.6) Form of Indenture of Provident Bankshares Corporation of
Provident Trust II, relating to the Junior Subordinated
Debentures (5)
(4.7) Form of Amended and Restated Trust Agreement of Provident
Trust II (5)
(4.8) Form of Guarantee Agreement of Provident Trust II (5)
(11.0) Statement Re: Computation of Per Share Earnings (6)
(99.1) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(99.2) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K filed with the Securities and Exchange
Commission
On April 16, 2003, the Company filed a Form 8-K to file a press
release announcing its financial results for the quarter ended March
31, 2003.
On April 17, 2003, the Company filed a Form 8-K/A to file
financial tables inadvertently excluded from the Company's earnings
release for the quarter ended March 31, 2003, and to file additional
financial tables as posted on the Company's website on April 17, 2003,
in connection with the Company's April 17, 2003 earnings conference
call.
(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 (File No. 0-16421) for the quarter ended March 31, 2000, filed
with the Commission on May 10, 2000.
(3) Incorporated by reference from Provident's 1998 Annual Report on
Form 10-K (File No. 0-16421) filed with the Commission on
March 3, 1999.
(4) Incorporated by reference from Provident's Registration Statement on
Form S-4 (File No. 333-58959) filed with the Commission on
July 13, 1998.
(5) Incorporated by reference from Provident's Registration Statement on
Form S-3 (File No. 333-30678) filed with the Commission on
February 18, 2000.
(6) Included in Note 11 to the Unaudited Consolidated Financial
Statements on Page 13 hereof.
27
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES CORPORATION
--------------------------------
Registrant
May 14, 2003 /s/ Gary N. Geisel
------------------
Gary N. Geisel
Chairman and Chief Executive Officer
May 14, 2003 /s/ Dennis A. Starliper
-----------------------
Dennis A. Starliper
Chief Financial Officer
28
29
CERTIFICATION
- -------------
I, Gary N. Geisel, Chief Executive Officer and Chairman of the Board, 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 the
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 officer 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 the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
-----------------------
/s/ GARY N. GEISEL
---------------------------------
Gary N. Geisel
Chief Executive Officer and
Chairman of the Board
29
30
CERTIFICATION
- -------------
I, Dennis A. Starliper, Chief Financial Officer, 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 the
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 officer 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 the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
-----------------------
/s/ DENNIS A. STARLIPER
----------------------------------
Dennis A. Starliper
Chief Financial Officer
30