Back to GetFilings.com
1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Fiscal Year Ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the Transition Period
Commission File Number 0-16421
PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1518642
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
----------------------------------------------------
(Address of Principal Executive Offices)
(410) 277-7000
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of January 28, 1999 was $653,690,817.
At January 28, 1999, the Registrant had 24,289,436 shares of $1.00 par value
common stock outstanding.
2
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 59
PART III
Item 10. Directors and Executive Officers of the Registrant * 60
Item 11. Executive Compensation * 60
Item 12. Security Ownership of Certain Beneficial Owners and Management * 60
Item 13. Certain Relationships and Related Transactions * 60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 61
Signatures 62
* Incorporated by reference from Registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held April 21, 1999, for which a Proxy
Statement will be filed not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
Statements contained in this Form 10-K which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties which could cause actual results to differ materially
from those projected. Such risk and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the SEC from time to time.
- --------------------------------------------------------------------------------
2
3
PART I
ITEM 1. BUSINESS
Provident Bankshares Corporation ("the Corporation"), a Maryland corporation,
was organized in 1987 by the management of Provident Bank of Maryland ("the
Bank"), and registered as a bank holding company under the Bank Holding Company
Act of 1956. Through a reorganization dated December 22, 1987, the Corporation
became the sole stockholder of the Bank. The reorganization allowed the Bank to
convert from a Maryland chartered mutual savings bank, the form in which it had
operated since 1886, to a Maryland chartered stock commercial bank. At December
31, 1998, the Bank was the second largest commercial bank chartered under the
laws of the State of Maryland in terms of assets.
For the discussion regarding lending and investment activities as well as
sources of funds of the Corporation, see pages 13 through 22.
MORTGAGE BANKING ACTIVITIES
Provident Mortgage Corp. ("PMC"), a subsidiary of the Bank, was formed in
1992 to offer a broad range of mortgage lending products to consumers and
thereby enhance the Corporation's mortgage banking operations.
BANKING SERVICES ACTIVITIES
Provident Investment Center, Inc. ("PIC"), a subsidiary of the Bank, provides
consumers a competitive range of banking products, such as purchased annuities
and mutual funds.
INSURANCE ACTIVITIES
BankSure Insurance Corporation ("BankSure"), a subsidiary of the Bank, offers
insurance products to the Bank's loan customers and thereby enhances the Bank's
lending product lines. Provident Investment Center Inc., also a subsidiary of
the Bank, offers a variety of life insurance products and services.
EMPLOYEES
At December 31, 1998, the Corporation and its subsidiaries had 1,414
full-time equivalent employees. The Corporation currently maintains what
management considers to be a comprehensive, competitive employee benefits
program. Employees are not represented by a collective bargaining unit and
management considers its relationship with its employees to be good.
COMPETITION
The Corporation encounters substantial competition in all areas of its
business. There are six commercial banks based in Maryland with deposits in
excess of $1 billion. Additionally, there are five banks with deposits in excess
of $1 billion operating in Maryland which have headquarters in other states. The
Bank also faces competition from savings and loan associations, savings banks,
mortgage banking companies, credit unions, insurance companies, consumer finance
companies, money market and mutual funds and various other financial services
firms.
Current federal law allows the acquisition of banks by bank holding companies
nationwide. Further, federal and Maryland law permit interstate banking. As a
consequence of these developments, competition in the Bank's principal market
may increase, and a consolidation of financial institutions in Maryland may
occur.
3
4
REGULATION
The Corporation is registered as a bank holding company, under the Bank
Holding Company Act of 1956. As such, the Corporation is subject to regulation
and examination by the Federal Reserve Board, and is required to file periodic
reports and any additional information that the Federal Reserve Board may
require. The Bank Holding Company Act imposes certain restrictions upon the
Corporation regarding the acquisition of substantially all of the assets of or
direct or indirect ownership or control of any bank of which it is not already
the majority owner; or, with certain exceptions, of any company engaged in
nonbanking activities.
The Bank is subject to supervision, regulation and examination by the Bank
Commissioner of the State of Maryland and the Federal Deposit Insurance
Corporation. Asset growth, deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and consolidations, changes in control, electronic funds
transfer, management practices and other aspects of operations are subject to
regulation by the appropriate federal and state supervisory authorities. The
Bank is also subject to various regulatory requirements of the Federal Reserve
Board applicable to FDIC insured depository institutions.
MONETARY POLICY
The Corporation and the Bank are affected by fiscal and monetary policies of
the federal government, including those of the Federal Reserve Board, which
regulates the national money supply in order to mitigate recessionary and
inflationary pressures. Among the techniques available to the Federal Reserve
Board are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank
deposits. These techniques are used in varying combinations to influence the
overall growth of bank loans, investments and deposits. Their use may also
affect interest rates charged on loans and paid on deposits. The effect of
governmental policies on the earnings of the Corporation and the Bank cannot be
predicted.
ITEM 2. PROPERTIES
In December 1990, the Bank sold its corporate headquarters located at 114
East Lexington Street, Baltimore, Maryland, and simultaneously leased back these
facilities for an initial twelve year lease term.
The majority of the Bank's 84 offices are located in the Baltimore/Washington
metropolitan area and southern Pennsylvania. The Bank owns 12 and leases 72 of
its offices. Most of these leases provide for the payment of property taxes and
other costs by the Bank and include one or more renewal options ranging from
five to ten years. Some of the leases also contain a purchase option.
In 1993, the Bank renewed a long-term agreement to lease a one-story building
large enough to consolidate operations and support functions. The Bank currently
leases all of the building's 80,000 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 12 of Item 8.--"Financial Statements and Supplementary Data" on
page 44.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
4
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Provident Bankshares Corporation is traded
over-the-counter and is quoted in the NASDAQ Stock Market. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. The NASDAQ
symbol is PBKS. The trading range of Provident's common stock for the years 1998
and 1997 is shown in Table 6--Consolidated Quarterly Results of Operations,
Market Prices and Dividends contained in Management's Discussion and Analysis
(Item 7). At January 28, 1999, there were approximately 3,200 holders of record
of the Corporation's common stock.
For the year 1998, the Corporation declared and paid dividends of $.52 per
share of common stock outstanding. See Note 11 of Notes to Consolidated
Financial Statements of Provident Bankshares Corporation and Subsidiaries for a
discussion of the effect of the liquidation account of the Bank on the ability
of the Corporation to pay dividends. Certain provisions of Maryland banking law
impose limitations on the amount of dividends payable by the Corporation, but
none is as restrictive as the liquidation account.
ITEM 6. SELECTED FINANCIAL DATA
TABLE 1
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997(1) 1996 1995 1994
==================================================================================================================
Interest Income (tax-equivalent) $ 319,240 $ 280,167 $ 248,311 $ 224,236 $ 172,351
Interest Expense 187,509 156,718 137,354 122,819 82,254
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income (tax-equivalent) 131,731 123,449 110,957 101,417 90,097
Provision for Loan Losses 12,027 9,953 10,011 1,517 (678)
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 119,704 113,496 100,946 99,900 90,775
Non-Interest Income 55,995 41,672 44,509 34,573 29,122
Net Securities Gains (Losses) 6,749 2,337 5,556 (2,683) 695
Merger Related Expenses (1) -- 10,047 -- -- --
Non-Interest Expense 122,914 107,816 110,323 97,416 95,164
- ------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 59,534 39,642 40,688 34,374 25,428
Income Tax Expense (tax-equivalent) 20,504 14,683 14,500 12,242 9,263
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 39,030 $ 24,959 $ 26,188 $ 22,132 $ 16,165
==================================================================================================================
Per Share Amounts:
Net Income--Basic $ 1.60 $ 1.05 $ 1.12 $ .97 $ .78
Net Income--Diluted 1.54 1.01 1.07 92 .73
==================================================================================================================
Cash Dividends Paid $ .52 $ .42 $ .33 $ .24 $ .17
==================================================================================================================
Tax-Equivalent Adjustment(2) $ 1,133 $ 1,055 $ 832 $ 754 $ .417
==================================================================================================================
Total Assets $4,675,897 $3,926,739 $3,485,618 $3,170,390 $2,842,050
Total Stockholders' Equity 296,077 270,182 238,798 223,048 184,358
Return on Average Assets .90% .68% .79% .75% .66%
Return on Average Equity 13.99 9.91 11.41 10.88 9.55
Stockholders' Equity to Assets 6.33 6.88 6.85 7.04 6.49
Average Equity to Average Assets 6.41 6.89 6.91 6.85 6.95
Dividend Payout Ratio 33.64 41.51 31.25 26.80 23.38
- ------------------------------------------------------------------------------------------------------------------
(1) Merger Related Expenses--Exclusive of after tax merger related expenses
incurred during 1997, net income would have been $33.6 million. Return on
average assets and return on average equity for 1997 would have been .92% and
13.34%, respectively. Basic earnings per share and diluted earnings per share
would have been $1.41 and $1.36, respectively.
(2) Tax-advantaged income has been adjusted to a tax-equivalent basis using the
combined statutory federal and state income tax rate in effect of 39.55%.
5
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
The principal objective of this Financial Review is to provide an overview of
the financial condition and results of operations of Provident Bankshares
Corporation and its subsidiaries for the three years ended December 31, 1998.
This discussion and tabular presentations should be read in conjunction with the
accompanying financial statements and notes.
Provident Bankshares Corporation ("the Corporation"), through its wholly
owned subsidiary, Provident Bank of Maryland ("the Bank"), offers consumer and
commercial banking services. Provident has offices in seven Maryland counties,
as well as Baltimore City and southern York County, Pa. The Bank offers related
financial services through its wholly owned subsidiaries, including mortgages
through Provident Mortgage Corp. (PMC), mutual funds, annuities and insurance
products through Provident Investment Center (PIC) and leases through Court
Square Leasing and Provident Lease Corp. During 1997, the Corporation acquired
First Citizens Financial Corporation and the acquisition was accounted for as a
pooling-of-interests. Accordingly, results for the reporting periods have been
restated.
The Corporation recorded net income in 1998 of $39.0 million or $1.54 per
share/diluted, a 56% increase over 1997 before adjusting for merger related
costs. Adjusting for merger costs, 1997 would have shown net income of $33.6
million and $1.36 per share/diluted, giving 1998 an increase of $5.4 million in
net income and $.18 per share/diluted over the prior year. The growth in net
earnings was attributable to an $8.2 million rise in net interest income and
$18.7 million higher non-interest income offset in part by higher provision for
loan losses of $2.1 million and a $5.1 million increase in operating costs, net
of merger expenses. These variances are discussed in more detail beginning on
the following pages.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's principal source of revenue is net interest income, the
difference between interest income on earning assets and interest expense on
deposits and borrowings. Interest income, for purposes of analysis, is presented
on a tax-equivalent basis to recognize associated tax benefits. This
presentation provides a basis for comparison of yields with taxable earning
assets. The discussion on net interest income should be read in conjunction with
Table 2--"Analysis of Changes in Net Interest Income" and Table 3--"Consolidated
Average Balances, Interest Income and Expense and Yields and Rates."
Tax-equivalent net interest income for 1998 increased $8.3 million, or 6.7%,
from 1997 as average earning assets grew $682 million over the prior year. Net
interest margin fell by 37 basis points primarily caused by a lower interest
rate environment and leveraging of $40 million of trust preferred securities
issued during the second quarter of 1998. These securities constitute additional
capital for regulatory purposes and provide leveraging opportunities while not
increasing shares outstanding.
Provident's interest income increased $39.1 million, or 13.9%, during the
year primarily due to the growth in average earning assets offset in part by a
35 basis point decrease in yield. The decrease in yield was mainly due to a
lower rate environment and the leveraging of the trust preferred securities
noted above. The increase in average earning assets resulted from a $443 million
increase in the loan portfolios, $164 million in investments and $77 million in
loans held for sale. Consumer loans grew $518 million while the commercial
business portfolio also experienced growth of $32 million. Residential and
commercial mortgage loans declined $80 million and $28 million, respectively,
due to sales of mortgage loans and prepayments of commercial mortgages. Interest
income earned on the loan portfolio increased $26 million reflecting higher loan
outstandings. The yield on investments and loans decreased 30 basis points and
37 basis points, respectively. Interest lost from non-accruing loans was $850
thousand compared to $523 thousand in 1997.
Interest expense increased $30.8 million from 1997 resulting from a $593
million growth in average interest-bearing liabilities. The overall cost of
funds remained relatively flat as total interest-bearing liabilities increased 5
basis points mainly due to the use of brokered CDs to fund asset growth. The
offset was due to the increase in non-interest bearing liabilities. Excluding
the effect of off-balance sheet positions in each year, total costs of
interest-bearing liabilities would have increased 14 basis points. The average
rate paid on borrowed funds decreased 4 basis points during 1998.
6
7
The increase in average interest-bearing liabilities reflects a $475 million
rise in interest-bearing deposits, $396 million of which is associated with
brokered deposits and $33 million with money market certificates of deposit.
Noninterest-bearing demand deposit accounts grew by $36 million or 20%. The
Corporation experienced a $119 million increase in borrowed funds.
Future growth in net interest income will depend upon consumer and commercial
loan demand and the general level of interest rates. Please refer to the section
entitled "Interest Sensitivity Management" on page 22 for further discussion of
the impact of current trends on net interest income in 1998.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
TABLE 2
1998/1997 1997/1996
------------------------------------------------- ------------------------------------------------
(IN THOUSANDS) VARIANCE DUE TO CHANGE IN VARIANCE DUE CHANGE IN
------------------------------- -----------------------------
(TAX-EQUIVALENT BASIS) NET INCREASE/ AVERAGE AVERAGE AVERAGE Net Increase/ Average Average Average
(DECREASE) RATE VOLUME RATE/VOLUME (Decrease) Rate Volume Rate/Volume
===============================================================================================================================
INTEREST INCOME FROM:
Loans:
Consumer $ 34,732 $ (5,252) $ 41,924 $(1,940) $28,447 $ 195 $28,187 $ 65
Commercial Business 1,563 (1,146) 2,836 (127) 1,800 (354) 2,187 (33)
Real Estate--Construction (1,131) (1,139) 9 (1) 394 293 99 2
Real Estate--Mortgage (9,216) (687) (8,647) 118 4,414 627 3,736 51
Mortgage Loans Held for Sale 5,161 (211) 5,801 (429) (2,099) 206 (2,213) (92)
Other Short-Term Investments (28) 18 (43) (3) (175) (47) (143) 15
U.S. Treasury and Government
Agencies and Corporations (3,134) 144 (3,206) (72) (995) 258 (1,211) (42)
Mortgage-Backed Securities 9,827 (2,827) 13,234 (580) 1,127 2,227 (1,063) (37)
Municipal Securities 285 (40) 334 (9) 514 (43) 582 (25)
Other Debt Securities 1,014 (230) 1,384 (140) (1,287) 175 (1,394) (68)
Equity Securities -- -- -- -- (284) -- (284) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 39,073 (12,498) 53,979 (2,408) 31,856 4,873 26,464 519
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON:
Demand/Money Market Deposits 2,429 625 1,710 94 338 (287) 642 (17)
Savings Deposits (1,639) (1,559) (87) 7 3,350 3,407 (48) (9)
Certificates of Deposit 20,494 (236) 20,802 (72) 14,424 (1,022) 15,747 (301)
Individual Retirement Accounts 3,027 105 2,874 48 156 (159) 323 (8)
Short-Term Borrowings (11,289) (943) (10,697) 351 (865) 999 (1,803) (61)
Long-Term Debt 17,769 (498) 18,690 (423) 1,961 332 1,602 27
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 30,791 1,422 29,105 264 19,364 5,063 13,793 508
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 8,282 $(13,920) $ 24,874 $(2,672) $12,492 $ (190) $12,671 $ 11
===============================================================================================================================
The table above analyzes the reasons for the changes from year-to-year in the
principal elements that comprise net interest income. The calculation of rate,
volume and rate/volume variances is based upon a procedure established for banks
by the Securities and Exchange Commission. Rate, volume and rate/volume
variances presented for each component will not total to the variances presented
on totals of interest income and interest expense because of shifts from
year-to-year in the relative mix of interest-earning assets and interest-bearing
liabilities.
7
8
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND YIELDS AND RATES
Provident Bankshares Corporation and Subsidiaries
TABLE 3
1998 1997
- ---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(TAX-EQUIVALENT BASIS) BALANCE EXPENSE RATE Balance Expense Rate
===============================================================================================================
ASSETS
INTEREST-EARNING ASSETS:
Loans: (2)
Consumer $1,920,378 $148,228 7.72% $1,402,359 $113,496 8.09%
Commercial Business 325,209 27,170 8.35 292,788 25,607 8.75
Real Estate--Construction 125,650 11,837 9.42 125,565 12,968 10.33
Real Estate--Mortgage 517,068 41,011 7.93 624,604 50,227 8.04
---------- -------- ---------- -------
Total Loans (1) 2,888,305 228,246 7.90 2,445,316 202,298 8.27
---------- -------- ---------- -------
Mortgage Loans Held for Sale 114,284 8,012 7.01 37,662 2,851 7.57
Federal Funds Sold and Securities
Purchased Under Resale Agreements -- -- -- -- -- --
Other Short-Term Investments 5,043 235 4.66 6,023 263 4.37
US Treasury and Government
Agencies and Corporations 45,526 3,303 7.26 90,709 6,437 7.10
Corporate Securities -- -- -- -- -- --
Mortgage-Backed Securities 1,101,684 74,358 6.75 914,196 64,531 7.06
Municipal Securities 23,036 1,797 7.80 18,875 1,512 8.01
Other Debt Securities 45,307 3,289 7.26 28,174 2,275 8.07
Equity Securities -- -- -- -- -- --
---------- ------- ---------- -------
Total Investment Securities(2) 1,215,553 82,747 6.81 1,051,954 74,755 7.11
---------- ------- ---------- -------
Total Interest-Earning Assets 4,223,185 319,240 7.56 3,540,955 280,167 7.91
---------- ------- ---------- -------
Less: Allowance for Loan Losses (38,831) (33,017)
Cash and Due From Banks 60,562 57,923
Other Assets 105,659 89,650
---------- ----------
Total Assets $4,350,575 $3,655,511
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand/Money Market Deposits $ 463,874 13,776 2.97 $ 403,128 11,347 2.81
Savings Deposits 617,643 18,811 3.05 620,267 20,450 3.30
Certificates of Deposit 1,559,985 88,411 5.67 1,194,202 67,917 5.69
Individual Retirement Accounts 162,088 9,317 5.75 111,252 6,290 5.65
Short-Term Borrowings 317,424 17,448 5.50 505,640 28,737 5.68
Long-Term Debt 667,752 39,746 5.95 360,862 21,977 6.09
---------- ------- ---------- -------
Total Interest-Bearing
Liabilities 3,788,766 187,509 4.95 3,195,351 156,718 4.90
---------- ------- ---------- -------
Noninterest-Bearing Demand Deposits 212,339 176,645
Other Liabilities 42,608 31,555
Capital Securities 27,873 --
Stockholders' Equity 278,989 251,960
---------- ----------
Total Liabilities and Stockholders'
Equity $4,350,575 $3,655,511
========== ==========
Net Interest-Earning Assets $ 434,419 $ 345,604
========== ==========
Net Interest Income (tax-equivalent) 131,731 123,449
Less: Tax-Equivalent Adjustment (1,133) (1,055)
-------- --------
Net Interest Income $130,598 $122,394
======== ========
Net Yield on Interest-Earning
Assets (tax-equivalent) 3.12% 3.49%
(1) Average loan balances include non-accrual loans.
(2) Tax advantaged income has been adjusted to a tax-equivalent basis using the
combined statutory federal and state income tax rate in effect of 39.55%.
8
9
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
==================================================================================================================
$1,053,279 $ 85,049 8.07% $ 678,734 $ 56,566 8.33% $ 525,796 $ 40,925 7.78%
268,158 23,807 8.88 194,094 18,653 9.61 176,511 15,109 8.56
124,584 12,574 10.09 85,277 9,297 10.90 91,299 8,430 9.23
577,515 45,813 7.93 864,852 67,286 7.78 806,403 60,475 7.50
- ---------- -------- ---------- --------- ---------- ---------
2,023,536 167,243 8.26 1,822,957 151,802 8.33 1,600,009 124,939 7.81
- ---------- -------- ---------- --------- ---------- ---------
68,112 4,950 7.27 68,920 5,228 7.59 93,133 6,489 6.97
-- -- -- -- -- -- 565 18 3.19
8,949 438 4.89 7,496 421 5.62 323 17 5.26
108,368 7,432 6.86 80,488 5,280 6.56 67,555 4,292 6.35
-- -- -- -- -- -- 19,961 1,414 7.08
929,786 63,404 6.82 753,963 52,502 6.96 534,685 34,914 6.53
11,917 998 8.37 8,634 743 8.61 3,371 268 7.95
46,277 3,562 7.70 109,308 8,260 7.56 -- -- --
2,983 284 9.52 -- -- -- -- -- --
- ---------- -------- ---------- --------- ---------- ---------
1,099,331 75,680 6.88 952,393 66,785 7.01 625,572 40,888 6.54
- ---------- -------- ---------- --------- ---------- ---------
3,199,928 248,311 7.76 2,851,766 224,236 7.86 2,319,602 172,351 7.43
- ---------- -------- ---------- --------- ---------- ---------
(27,985) (27,299) (28,753)
55,568 53,379 44,797
92,621 90,322 97,784
- ---------- ---------- ----------
$3,320,132 $2,968,168 $2,433,430
========== ========== ==========
$ 380,913 11,009 2.89 $ 323,836 11,118 3.43 $ 356,642 10,011 2.81
621,995 17,100 2.75 636,908 15,442 2.42 646,063 18,618 2.88
922,616 53,493 5.80 776,089 45,272 5.83 553,399 25,402 4.59
105,680 6,134 5.80 106,370 6,384 6.00 103,671 5,655 5.45
538,434 29,602 5.50 498,399 29,569 5.93 269,968 12,663 4.69
334,120 20,016 5.99 261,295 15,034 5.75 205,795 9,905 4.81
- ---------- -------- ---------- --------- ---------- ---------
2,903,758 137,354 4.73 2,602,897 122,819 4.72 2,135,538 82,254 3.85
- ---------- -------- ---------- --------- ---------- ---------
158,635 129,740 107,112
28,253 32,064 21,549
-- -- --
229,486 203,467 169,231
- ---------- ---------- ----------
$3,320,132 $2,968,168 $2,433,430
========== ========== ==========
$ 296,170 $ 248,869 $ 184,064
========== ========== ==========
110,957 101,417 90,097
(832) (754) (417)
-------- -------- ---------
$110,125 $100,663 $ 89,680
======== ======== =========
3.47% 3.56% 3.88%
9
10
PROVISION FOR LOAN LOSSES
The provision for loan losses, net of the merger related portion, increased
$4.7 million to $12.0 million in 1998. The increase in the provision was mainly
due to loan growth and to more fully provide for an adverse decision in a
lawsuit relating to a letter of credit (see Note 12). The Corporation continues
to emphasize quality underwriting as well as aggressive management of prior
charge-offs and potential problem loans.
Net charge-offs were $6.15 million in 1998 compared to $3.45 million in 1997.
Net charge-offs as a percentage of average loans was .21% in 1998 compared to
.14% in 1997. Non-accrual loans ended the year at $11.5 million or .37% of loans
outstanding, an increase of $1.7 million from December 31, 1997. This rise is
associated with a $428 million increase in period end loan balances.
A further discussion of the allowance for loan losses, net charge-offs and
non-performing assets appears on pages 16 and 19.
NON-INTEREST INCOME
Non-interest income is principally derived from fee-based services, mortgage
banking activities and gains on investment securities sales. Total non-interest
income increased 42.6% to $62.7 million. Excluding net securities gains
(losses), non-interest income increased $14.3 million or 34.4%.
Table 4 presents a comparative summary of the major components of
non-interest income.
NON-INTEREST INCOME SUMMARY
TABLE 4
(IN THOUSANDS) 1998 1997 1996 1995 1994
=======================================================================================================
Service Charges on Deposit Accounts $29,260 $24,432 $19,262 $13,685 $ 8,734
Mortgage Banking Activities 11,485 6,845 14,895 9,806 14,696
Commissions and Fees 4,209 3,705 3,229 2,101 3,223
Other Loan Fees 5,104 2,147 1,872 1,208 1,261
Interest Income on Tax Refund -- -- -- 5,796 --
Other Non-Interest Income 5,937 4,543 5,251 1,977 1,208
- -------------------------------------------------------------------------------------------------------
Subtotal 55,995 41,672 44,509 34,573 29,122
Net Securities Gains (Losses) 6,749 2,337 5,556 (2,683) 695
- -------------------------------------------------------------------------------------------------------
Total Non-Interest Income $62,744 $44,009 $50,065 $31,890 $29,817
=======================================================================================================
Deposit service charges rose 20% over the prior year due to a $4.1 million
increase in retail demand deposit service fees and a $439 thousand increase in
commercial deposit fees. Interest-bearing demand/money market deposits grew $96
million or 23% over last year while noninterest-bearing deposits increased $56
million or 28%. These increases are the result of continued promotion and sales
efforts of retail deposit products.
Income from mortgage banking activities rose $4.6 million, $1.9 million due
to higher gains and $3.0 million from higher origination income offset in part
by $238 thousand in lower servicing income. Mortgage originations during the
year increased $659 million to $1.1 billion.
Provident Investment Center (PIC), a wholly owned subsidiary of the Bank,
offers annuities and mutual funds through an affiliation with a securities
broker-dealer. For the year 1998, income associated with these products
increased by $145 thousand to $2.35 million. This increase is attributed to
continued sales efforts towards these products.
Other non-interest income increased $4.4 million over 1997. This increase is
primarily due to commercial loan fees tied to an increase in loan volumes and
higher prepayment penalties. Cardholder income increased $915 thousand
associated with higher usage and gain on sale of fixed assets increased $471
thousand due to sale of a bank building.
10
11
NON-INTEREST EXPENSE
Non-interest expense is composed primarily of costs associated with
employees' salaries and benefits, bank facilities and external data processing.
Provident's non-interest expense of $123 million represented a $15 million
increase from 1997 expenses adjusted for merger related items.
Table 5 presents a comparative summary of the major components of
non-interest expense.
NON-INTEREST EXPENSE SUMMARY
TABLE 5
(IN THOUSANDS) 1998 1997 1996 1995 1994
======================================================================================================
Salaries and Employee Benefits $ 61,649 $ 54,107 $ 55,406 $50,875 $51,149
Occupancy Expense, Net 10,349 10,018 9,317 8,914 8,305
Furniture and Equipment 8,123 7,354 7,036 6,625 5,486
External Processing Fees 14,006 12,374 10,929 7,784 6,729
Advertising and Promotion 7,171 5,678 5,986 5,562 5,042
Communication and Postage 4,376 3,693 3,861 3,050 2,702
Printing and Supplies 2,502 2,277 2,351 2,032 1,586
Federal Insurance Fund Recapitalization -- -- 3,029 -- --
Regulatory Fees 939 1,016 1,699 3,095 4,357
Professional Services 2,413 2,762 3,000 2,621 2,590
Merger Related Expenses -- 10,047 -- -- --
Capital Securities Expenses 2,359 -- -- -- --
Other Non-Interest Expense 9,027 8,537 7,709 6,858 6,675
- ------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $122,914 $117,863 $110,323 $97,416 $94,621
======================================================================================================
Salaries and benefits increased $7.5 million during the year. Compensation
increased $6.5 million while benefits were up $1.0 million. The rise in these
categories is attributable to higher commissions and incentives of $1.3 million
related mainly to increased mortgage business. Regular salaries rose $5.2
million mainly attributable to merit increases, increased staffing and
recognition of expenses related to lending activities. Full-time equivalent
employees for the year were 1,414 compared to 1,235 last year. Occupancy costs
rose $331 thousand or 3.3% over last year. This increase is mainly due to
additional rent and leasehold improvements as the branch network increased to 68
branches in 1998. Total furniture and equipment expense increased $769 thousand
due to upgrading of technology in the Bank's office automation and branch
platform systems.
External processing increased $1.6 million, or 13.2%, associated with 14.7%
increase in account volume. The year 1998 includes capital securities expense of
$2.4 million associated with the $40 million trust preferred securities offering
during the second quarter of 1998. All other non-interest expenses were up by
$2.5 million from 1997. This increase is connected to higher marketing expenses
of $1.5 million and communication and postage expenses of $684 thousand
resulting from the branch network acquired in the merger of First Citizens
Financial Corporation Savings Bank, and higher employment advertising costs of
$390 thousand.
IMPACT OF THE YEAR 2000 ISSUE
Management initiated the process of preparing computer systems and
applications for the Year 2000 in September 1996. The Year 2000 Issue is the
result of computer programs using two digits rather than four to define the
applicable year. Any of the Corporation's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions.
The Corporation is currently in the testing phase using both internal and
external resources to test the software and hardware for Year 2000 compliance.
The Corporation plans to finish testing by June 30, 1999 and intends to
reprogram, or replace, software and hardware, to the extent necessary. Testing
to date has not led to any adverse events. The Corporation intends to be Year
2000 compliant by June 30, 1999.
11
12
The Corporation relies on M & I Services, a third party processor for the
majority of its data processing requirements. Provident is working with all of
its significant data processing software and hardware suppliers, to make certain
they will be Year 2000 compliant. A due diligence approach is being used to
develop general risk control guidelines to assist in identifying material
customers, evaluating their preparedness, assessing Year 2000 customer risk and
implementing controls to manage the risk.
The total costs associated with becoming Year 2000 compliant are expected to
be less than $1.0 million and are not expected to have a material effect on the
results of operations. As of December 31, 1998, the Corporation had spent
approximately $530 thousand to become Year 2000 compliant. Money to fund Year
2000 compliance will come from normal operating cash flow. Expenses associated
with Year 2000 compliance will directly reduce otherwise reported net income of
the Corporation in the period incurred.
As a precaution, the Corporation has developed a contingency plan in case it
is not completely Year 2000 compliant after December 31, 1999. Management
believes the contingency plan will permit Provident, even if some of its systems
fail, to continue to operate until normal operations can be restored. These
plans include the capability to process off-line and transport the data to our
third party processor by the most effective and efficient means available. These
procedures could require changing schedules and hiring of temporary staff, which
would increase the cost of the operations. The most reasonably likely worst case
Year 2000 scenarios foreseeable at this time would include the Bank temporarily
not being able to process, in some combination, various types of customer
transactions. Despite Provident's efforts to date to remediate affected systems
and develop contingency plans for potential risks, management has not yet
completed all activities associated with resolving Year 2000 issues. Under the
unlikely scenario that required modifications or conversions are not made or are
not completed on a timely basis prior to the Year 2000, normal business
operations could be disrupted. In addition, noncompliance by third parties
(including loan customers) and disruptions to the economy in general resulting
from Year 2000 issues could also have a negative impact of undeterminable
magnitude on the Corporation.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
INCOME TAXES
Provident recorded income tax expense of $19.4 million on pre-tax income of
$58.4 million for an effective tax rate of 33.2%. This compares with a 35.3%
effective tax rate for 1997. This decrease is related to permanent tax
differences associated with the merger of First Citizens Financial Corporation
during 1997.
FOURTH QUARTER RESULTS
Provident recorded net income of $10.1 million, or $.40 per share on a
diluted basis, in the fourth quarter of 1998, an increase of $1.1 million, or
12.1%, over the $9.0 million, or $.35 per share on a diluted basis, recorded in
the same period last year. The higher earnings are principally due to a 10.3%
increase in tax-equivalent net interest income and higher non-interest income. A
higher loan loss provision and a rise in operating expenses partially offset
these increases.
Tax-equivalent net interest income in the fourth quarter rose $3.2 million to
$34.3 million as the net interest margin declined 40 basis points to 2.99% and
average earning assets grew $902 million to $4.55 billion. The decrease in the
net interest margin primarily reflected a flatter yield curve along with a lower
rate environment as yield on earning assets declined more than the drop in the
costs of funds.
The Corporation recorded a provision for loan losses of $3.8 million during
the quarter to provide for loan growth in the portfolio as well as to more fully
provide for an adverse decision in a lawsuit relating to a letter of credit (see
Note 12).
Non-interest income increased 49.1 percent to $18.0 million. The increase is
derived from fee-based services as a result of higher account volumes, increased
mortgage banking business, security gains and increased loan fees. Fee income
from deposit accounts increased $1.6 million and net security gains increased
$1.5 million. Mortgage banking income increased $1.6 million as originations
were $361 million compared to $142 million for the same period in 1997 and loan
fees increased $860 thousand.
12
13
Non-interest expense increased $5.9 million to $33.0 million. Compensation
and benefits increased $3.4 million much of which is associated with increased
mortgage business. Furniture and equipment expense was $393 thousand higher due
to network expansion and upgrading of branch technology. External processing
fees increased $411 thousand which is associated with increased account volume.
Marketing expense and communication and postage expense rose $443 thousand
mainly related to market expansion associated with the merger in 1997. The
issuance of $40 million trust preferred securities during the second quarter of
1998 resulted in $830 thousand of expenses in the fourth quarter of 1998.
Table 6 presents quarterly trend data for 1998 and 1997.
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS, MARKET PRICES AND DIVIDENDS (UNAUDITED)
TABLE 6
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER Quarter Quarter(1) Quarter Quarter
===================================================================================================================================
Interest Income $83,649 $83,478 $77,284 $73,696 $72,043 $71,475 $69,106 $66,488
Interest Expense 49,632 50,827 45,094 41,956 41,250 39,912 38,623 36,933
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 34,017 32,651 32,190 31,740 30,793 31,563 30,483 29,555
Provision for Loan Losses 3,783 2,195 3,074 2,975 2,736 4,330 2,053 834
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 30,234 30,456 29,116 28,765 28,057 27,233 28,430 28,721
Non-Interest Income 14,810 14,360 15,266 11,559 10,328 10,479 10,598 10,267
Net Securities Gains 3,228 1,587 725 1,209 1,769 230 267 71
Merger Related Expenses (1) -- -- -- -- -- 10,047 -- --
Non-Interest Expense 33,013 31,619 30,661 27,621 27,118 26,987 26,909 26,802
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 15,259 14,784 14,446 13,912 13,036 908 12,386 12,257
Income Tax Expense 5,159 4,884 4,721 4,607 4,026 882 4,392 4,328
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $10,100 $ 9,900 $ 9,725 $ 9,305 $ 9,010 $ 26 $ 7,994 $ 7,929
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Amounts: (1)
Net Income--Basic $ .41 $ .40 $ .40 $ .38 $ .38 $ .00 $ .34 $ .33
Net Income--Diluted $ .40 $ .39 $ .38 $ .37 $ .35 $ .00 $ .33 $ .32
Market Prices: High 27.75 29.88 34.13 34.28 30.59 28.39 19.83 19.44
Low 20.00 22.06 28.88 28.33 22.86 19.70 16.19 17.45
Cash Dividends Paid .140 .135 .124 .119 .115 .110 .100 .095
===================================================================================================================================
(1) Merger Related Expenses--Exclusive of $8.6 million after tax-merger related expenses, incurred during the third quarter of
1997, net income would have been $8.7 million. The third quarter basic and diluted earnings per share would have
been $.36.
FINANCIAL CONDITION
SOURCE AND USE OF FUNDS
DEPOSITS
A major portion of Provident's funding comes from core deposits which
consists of consumer and commercial transaction accounts and consumer savings
and time deposits. These deposits are generated through the Bank's 68 branch
banking locations. At December 31, 1998, core deposits represented 63% of total
deposits and 49% of total liabilities. Provident's future funding growth is
expected to be generated from deposit growth through strategies outlined below.
13
14
The branch network strategy includes traditional full service branch
locations supplemented with in-store branches. In-store branch locations are
comprised of supermarket locations and national retail superstores. Provident
Bank of Maryland as of December 31, 1998 had 50 traditional branch locations and
18 in-store branches. The Corporation has an agreement with Rich Food
Corporation to operate branches in their Metro and Basic supermarkets in the
Baltimore metropolitan area. Provident will selectively look for additional
branch opportunities complementary to existing locations when the cost of entry
is reasonable. The Corporation has five additional in-store branches and one new
traditional branch planned for 1999. Provident continues to attract increased
commercial and retail deposits. Interest-bearing demand/money market deposit
balances at December 31, 1998 were up $95.6 million, or 22.8%, compared to
year-end 1997. The Bank also operates seven Fast'n Friendly Check Cashing
centers. The purpose of the check cashing centers is to offer alternative
banking services to a segment of our market place that does not utilize
traditional banking services. The Corporation has one new center planned for
1999.
The table below presents the average deposit balances and rates paid for the
five years ended December 31, 1998.
AVERAGE DEPOSITS
TABLE 7
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE Average Average Average Average Average Average Average Average
(DOLLARS IN THOUSANDS) BALANCE RATE Balance Rate Balance Rate Balance Rate Balance Rate
===============================================================================================================================
Noninterest-Bearing $ 212,339 --% $ 176,645 --% $ 158,635 --% $ 129,740 --% $ 107,112 --%
Money Market/Demand 463,874 2.97 403,128 2.81 380,913 2.89 323,836 3.43 356,642 2.81
Savings 617,643 3.05 620,267 3.30 621,995 2.75 636,908 2.42 646,063 2.88
Time:
Certificates of Deposit 1,559,985 5.67 1,194,202 5.69 922,616 5.80 776,089 5.83 553,399 4.59
Individual Retirement
Accounts 162,088 5.75 111,252 5.65 105,680 5.80 106,370 6.00 103,671 5.45
---------- ---------- ---------- ---------- ----------
Total Average Balance/Rate $3,015,929 4.32% $2,505,494 4.23% $2,189,839 4.01% $1,972,943 3.96% $1,766,887 3.38%
========== ========== ========== ========== ==========
Total Year-End Balance $3,419,557 $2,754,515 $2,286,144 $2,056,436 $1,905,584
========== ========== ========== ========== ==========
As the table above indicates, Provident has a stable base of consumer savings
deposits. During 1998, average deposits grew $510 million, or 20.4%, compared to
1997. Average money market/demand deposits and noninterest-bearing deposits
increased $96.4 million or 16.6%. This growth reflects Provident's emphasis on
full banking relationships with its retail and commercial customers. Average
time deposits increased $417 million, or 32%, $396 million of which is
attributable to brokered deposits and $33 million in money market certificates
of deposit. Brokered deposits, often a cheaper source of funds compared to other
available sources of borrowed money such as Federal Home Loan Bank Advances and
repurchase agreements, are used to match fund investments and acquired loans.
The table below presents information at December 31, 1998, with respect to
the maturity of Certificates of Deposit of $100,000 or more.
DEPOSIT MATURITIES
TABLE 8
Maturities
--------------------------------------------------
Over Three Over Six
Three Months Months to Months to Over 12
(DOLLARS IN THOUSANDS) or Less Six Months 12 Months Months Total
============================================================================================
Balance $82,248 $46,272 $41,377 $29,561 $199,458
Percent of Total 41.2% 23.2% 20.8% 14.8% 100.0%
14
15
CREDIT RISK MANAGEMENT
Much of the fundamental business of Provident is based upon understanding,
measuring and controlling credit risk. Credit risk entails both general risk,
which is inherent in the process of lending, and risk specific to individual
borrowers. Each consumer and residential lending product has a generally
predictable level of credit loss. For example, loans with generally low credit
loss experience include home mortgage and home equity loans. Loans with medium
credit loss experience are primarily secured products such as auto and marine
loans. The category with high credit loss experience includes unsecured products
such as personal revolving credit. In commercial lending, losses as a percentage
of outstanding loans can vary widely from period to period and are particularly
sensitive to changing economic conditions. The evaluation of specific risk is a
basic function of underwriting and loan administration, involving analysis of
the borrower's ability to service debt as well as the value of pledged
collateral.
Policies and procedures have been developed which specify the appropriate
credit approval and monitoring for the various types of credit offered. The Bank
employs prudent lending practices and adheres to regulatory requirements
including loan to value ratios and legal lending limits. These procedures are
modified periodically in order to reflect changing conditions and new products.
The Bank's lending and loan administration staffs are charged with reviewing the
loan portfolio, identifying changes in the economy or in a borrower's
circumstances which may affect the ability to repay debt or the value of pledged
collateral. In order to assess and monitor the degree of risk in the loan
portfolio, credit risk identification and review processes are utilized. Credit
risk analysis assigns a grade to each commercial loan based upon an assessment
of the borrower's financial capacity to service the debt and the presence and
value of collateral for the loan. An independent loan review function tests risk
assessment and determines the adequacy of the allowance for loan losses.
Financial Accounting Standards require creditors to evaluate the
collectibility of contractually due principal and interest on commercial credits
to assess the need for providing for losses. The Corporation's credit procedures
require monitoring of commercial credits to determine the collectibility of such
credits. If a loan is identified as impaired, it will be placed on non-accrual
status and recorded according to accounting guidelines. As of December 31, 1998,
there were $5.1 million in commercial loans considered to be impaired.
LOANS
Provident offers a diversified mix of residential and commercial real estate,
business and consumer loans. As shown in Table 9, the mix of loans outstanding
has shifted to more consumer orientation over the past five years. Of the total
loans, $1.9 billion, or 60%, are secured by residential real estate including
first and second mortgages, and home equity loans.
Provident's residential mortgage lending includes the origination, sale and
servicing of fixed and variable rate mortgage loans. Loans are originated
through the loan production offices of Provident Mortgage Corp. Financial
Accounting Standards for mortgage banking enterprises that acquire mortgage
servicing rights, and sell or securitize those loans with servicing retained,
require the allocation of the cost of the mortgage loans to the mortgage
servicing rights and the loans. Mortgage origination activity in 1998 showed a
significant increase as originations totaled $1.1 billion in 1998 compared to
$376 million in 1997. During 1998, income from the sale of loans was $5.7
million. The mortgage servicing portfolio ended the year at $653 million. The
residential real estate mortgage loan balance at December 31, 1998 was $238
million compared to $362 million at the end of the prior year.
The following table sets forth information concerning the Bank's loan
portfolio by type of loan at December 31.
LOAN PORTFOLIO SUMMARY
TABLE 9
(DOLLARS IN THOUSANDS) 1998 % 1997 % 1996 % 1995 % 1994 %
====================================================================================================================================
Consumer $2,154,557 69.5% $1,667,094 61.7% $1,211,971 54.0% $ 852,605 48.6% $ 540,141 31.6%
Commercial Business 375,930 12.1 288,289 10.7 294,844 13.1 238,667 13.6 199,469 11.7
Real Estate--Construction:
Residential 89,777 2.9 99,926 3.7 112,072 5.0 76,092 4.3 61,104 3.6
Commercial 34,668 1.1 25,154 .9 9,470 .4 19,444 1.1 26,869 1.6
Real Estate--Mortgage:
Residential 238,282 7.7 362,012 13.4 355,566 15.8 332,940 19.1 655,052 38.3
Commercial 206,997 6.7 258,593 9.6 263,950 11.7 233,103 13.3 224,754 13.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans $3,100,211 100.0% $2,701,068 100.0% $2,247,873 100.0% $1,752,851 100.0% $1,707,389 100.0%
====================================================================================================================================
15
16
Provident offers a wide range of loans to consumers including installment
loans, home equity loans, and personal lines of credit. In addition, the Bank
may purchase portfolios of quality consumer loans from other financial
institutions. All purchased portfolios go through a thorough due diligence
process prior to a purchase commitment. Provident's portfolio of acquired loans
increased $522 million on average, ending the year at $1.36 billion, and is
predominately comprised of second mortgages.
Consumer loan balances through credits originated by Provident decreased $4
million on average during 1998, ending the year with a balance of $798 million.
Most of the automobile loans are made through a network of auto dealerships in
Maryland, Delaware, Pennsylvania and Virginia. Auto loans made through this
network of dealerships ended the year at $306 million. Marine loan balances
ended 1998 with $179 million, and were produced primarily through correspondent
brokers. Home equity lines of credit totaled $189 million at the end of 1998
while direct second mortgage loans ended the year at $78 million.
Provident's focus in commercial real estate lending has been on financing
commercial and residential construction, as well as on intermediate-term
commercial mortgages. Properties securing the loans include office buildings,
shopping centers, apartment complexes, warehouses, residential building lots and
developments. Average commercial real estate mortgage loans decreased $28
million or 10.6% while average commercial construction loans increased $10.9
million or 77%. Average residential construction loans decreased $10.9 million
or 9.7% to end the year at $90 million.
Provident's commercial loan portfolio consists of general business loans,
including asset-based loans, primarily to small and medium sized businesses in
the Baltimore, Maryland and Washington, D.C. metropolitan areas. The Bank
stresses the importance of asset quality as well as the development of new
marketing programs. Average commercial loans grew by $32 million, or 11.1%,
ending the year at $376 million. Provident has minimal exposure to highly
leveraged transactions ("HLTs"). HLTs are loans to borrowers for the purpose of
purchasing or recapitalizing a business in which the loans represent a majority
of the borrower's liabilities. HLTs totaled $53.7 million as of year-end, and
all are performing in accordance with their contractual terms.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets include loans on which interest is no longer accrued,
renegotiated loans and real estate and other assets that have been acquired
through foreclosure or repossession. Past due loans are loans that are 90 days
or more past due as of December 31 and still accruing interest because they are
well secured and in the process of collection. The Corporation does not place
consumer loans on non-accrual status as delinquent consumer loan outstandings
and any uncollected interest are generally charged-off at the time they would be
placed on non-accrual status. Information with respect to non-performing assets
and past due loans is presented in Table 10 for the years indicated. As shown in
the table, total non-accrual loans increased $1.7 million, mainly in the
residential construction portfolio. The increase in past due consumer loans is a
result of a $487 million, or 29%, growth in the consumer loan portfolio, the
majority of which is secured by residential real estate. As of December 31,
1998, non-performing assets and past due loans ended the year at $16.4 million
and $28.0 million, respectively. (See the discussion under Loans.) The $8.8
million in past due residential mortgage loans are guaranteed or insured by an
agency of the United States government and no significant loss is anticipated.
The ratio of total non-performing loans to year-end loans remained relatively
flat as 1998 ended at .37% compared to .36% at the end of 1997.
Presented below is interest income that would have been recorded on all
non-accrual loans if such loans had been paid in accordance with their original
terms and the interest income on such loans that was actually collected for the
year.
Year Ended
(IN THOUSANDS) December 31, 1998
=================================================================================
Gross interest income that would have been recorded
had such loans been paid in accordance with original terms $1,158
Interest income actually recorded 308
16
17
NON-PERFORMING ASSETS AND PAST DUE LOANS
TABLE 10
December 31,
- -----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
===============================================================================================
Non-Accrual Loans:
Consumer(1) $ -- $ -- $ 9,809 $ 4,868 $ 1,533
Commercial Business 3,550 2,917 539 246 1,450
Real Estate -- Construction:
Residential 1,570 -- 37 -- --
Commercial -- -- -- 80 9,349
Real Estate -- Mortgage:
Residential 6,397 6,937 4,372 3,785 4,054
Commercial -- -- 125 1,327 --
- -----------------------------------------------------------------------------------------------
Total Non-Accrual Loans 11,517 9,854 14,882 10,306 16,386
- -----------------------------------------------------------------------------------------------
Renegotiated Loans:
Real Estate -- Construction:
Residential -- -- -- -- --
Commercial -- -- -- 2,575 --
Real Estate -- Mortgage:
Residential -- -- -- -- --
Commercial -- -- 3,942 2,900 2,813
- -----------------------------------------------------------------------------------------------
Total Renegotiated Loans -- -- 3,942 5,475 2,813
- -----------------------------------------------------------------------------------------------
Other Non-Performing Assets:
Real Estate -- Construction:
Residential 454 454 132 6,580 11,824
Commercial -- -- 9,571 7,122 4,223
Real Estate -- Mortgage:
Residential 2,554 2,367 903 246 116
Commercial 1,900 -- -- 939 177
- -----------------------------------------------------------------------------------------------
Total Other Non-Performing Assets 4,908 2,821 10,606 14,887 16,340
- -----------------------------------------------------------------------------------------------
Total Non-Performing Assets $16,425 $12,675 $29,430 $30,668 $35,539
===============================================================================================
Past Due Loans:
Consumer(1) $19,187 $14,371 $ 237 $ 559 $ 270
Commercial Business -- 126 -- -- --
Real Estate -- Construction:
Residential -- 133 -- -- --
Commercial -- -- -- -- --
Real Estate -- Mortgage:
Residential 8,806 10,646 7,823 5,072 424
Commercial -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Total Past Due Loans $27,993 $25,276 $ 8,060 $ 5,631 $ 694
===============================================================================================
Ratios:
Total Non-Performing
Loans to Year-End Loans .37% .36% .84% .90% 1.12%
Total Non-Performing Assets
to Year-End Assets .35 .32 .84 .97 1.25
- -----------------------------------------------------------------------------------------------
(1) Prior to 1997, consumer loans were generally placed into non-accrual status
at 90 days past due and subsequently charged off. Beginning in 1997, consumer
loans are not placed in non-accrual status but are generally charged-off at 120
days past due for installment loans and 180 days for revolving loans. This was
done to conform to standard industry practice.
17
18
ALLOWANCE FOR LOAN LOSSES
Provident maintains an allowance for loan losses which is available to absorb
potential losses. The allowance is reduced by actual credit losses and is
increased by the provision for loan losses and recoveries of previous losses.
Determination of the adequacy of the allowance, which is performed quarterly, is
accomplished by assigning specific reserves to individually identified problem
credits and general reserves, based on historic and anticipated loss experience,
to all other loans.
The following table reflects the allowance for possible loan losses and the
activity during each of the respective years.
LOAN LOSS EXPERIENCE SUMMARY
TABLE 11
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 36,861 $ 30,361 $ 27,524 $ 27,137 $ 29,825
Provision for Loan Losses 12,027 9,953 10,011 1,517 (678)
Loans Charged-off:
Consumer 4,550 3,641 2,888 1,642 1,485
Commercial Business 1,031 143 5,170 310 204
Real Estate--Construction:
Residential 593 305 37 33 --
Commercial 25 37 8 -- 1,167
Real Estate--Mortgage:
Residential 258 289 360 73 53
Commercial 1,281 798 399 76 1,088
- ----------------------------------------------------------------------------------------------------------
Total Charge-offs 7,738 5,213 8,862 2,134 3,997
- ----------------------------------------------------------------------------------------------------------
Recoveries:
Consumer 970 871 826 917 1,225
Commercial Business 109 882 801 72 376
Real Estate--Construction:
Residential 68 -- -- -- --
Commercial 16 1 16 -- 385
Real Estate--Mortgage:
Residential 11 1 45 13 1
Commercial 415 5 -- 2 --
- ----------------------------------------------------------------------------------------------------------
Total Recoveries 1,589 1,760 1,688 1,004 1,987
- ----------------------------------------------------------------------------------------------------------
Net Loans Charged-off 6,149 3,453 7,174 1,130 2,010
==========================================================================================================
Balance at End of Year $ 42,739 $ 36,861 $ 30,361 $ 27,524 $ 27,137
==========================================================================================================
Balances:
Loans--Year-End $3,100,211 $2,701,068 $2,247,873 $1,752,851 $1,707,389
Loans--Average 2,888,305 2,445,316 2,023,536 1,822,957 1,600,009
Ratios:
Net Loans Charged-off to Average
Loans .21% .14% .35% .06% .13%
Allowance for Loan Losses to
Year-End Loans 1.38 1.36 1.35 1.57 1.59
- ----------------------------------------------------------------------------------------------------------
18
19
The continued emphasis on loan quality and close monitoring of potential
problem credits has resulted in a strong credit portfolio. Senior managers meet
at least monthly to review the credit quality of the loan portfolios and at
least quarterly with executive management to review the adequacy of the
allowance for loan losses. The allowance is determined by management's
evaluation of the composition and risk characteristics of the loan portfolio.
Based upon the evaluation of credit risk, loan loss provisions in the form of
charges to operations, are made to bring the allowance up to a level management
believes is adequate.
An analysis of the loan portfolio was performed at December 31, 1998, and
expected losses have been provided for in the allowance for loan losses. During
1998, the loan loss allowance increased $5.9 million to $42.7 million at
year-end. The allowance as a percentage of total loans was 1.38% at December 31,
1998 compared to 1.36% at December 31, 1997. In April of 1997, a judgment
stemming from a lawsuit alleging that Provident Bank of Maryland had failed to
fully honor a letter of credit in 1989 was entered against Provident in the
amount of $5.2 million, exclusive of post-judgment interest. This decision
reversed an earlier court holding in favor of Provident. The Bank appealed the
decision. During the fourth quarter of 1998, the appellate court upheld the
lower court decision. Payment was made in January 1999. If this payment had been
made by December 31, 1998, this ratio would have been 1.21%. The allowance for
loan losses as a percentage of non-accrual loans was 371% at December 31, 1998,
compared to 374% the prior year. The portion of the allowance which is allocated
to non-accrual loans is determined by estimating the potential loss on each
credit after giving consideration to the value of underlying collateral.
Provident maintains a loan classification and review system to identify those
loans with a higher than normal risk of uncollectibility. Estimated potential
losses from internally criticized loans have been provided for in determining
the allowance for loan losses.
Table 12 reflects the allocation of the allowance for loan losses to the
various loan categories as required by the Securities and Exchange Commission.
The entire allowance for loan losses is available to absorb losses from any type
of loan.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
TABLE 12
(IN THOUSANDS) 1998 1997 1996 1995 1994
=======================================================================================================
Consumer $ 6,057 $ 3,390 $ 4,572 $ 1,995 $ 708
Commercial Business 11,042 8,376 3,120 2,527 2,579
Real Estate--Construction:
Residential 1,638 1,585 1,408 2,697 2,305
Commercial 439 384 883 545 3,143
Real Estate--Mortgage:
Residential 634 592 998 1,390 1,048
Commercial 1,863 2,486 2,704 3,803 3,054
Unallocated 21,066 20,048 16,676 14,567 14,300
- -------------------------------------------------------------------------------------------------------
Total Allowance for Loan Losses $ 42,739 $ 36,861 $ 30,361 $ 27,524 $27,137
=======================================================================================================
INVESTMENT SECURITIES
Provident's investment activities include management of the $1.2 billion
investment securities portfolio. The investment securities portfolio includes
mortgage-backed securities, U.S. Government securities, municipal securities and
other debt securities. In addition to investment securities, the Corporation
invests in federal funds sold, reverse repos, mortgage loans held for sale and
other short-term investments (referred to in total as the investment portfolio).
The strategies employed in the management of these portfolios depend upon the
liquidity, interest sensitivity and capital objectives and requirements of the
Corporation. The Treasury Division executes these strategies.
19
20
The following table sets forth information concerning the Bank's investment
securities portfolio at December 31.
INVESTMENT SECURITIES SUMMARY
TABLE 13
(DOLLARS IN THOUSANDS) 1998 % 1997 % 1996 % 1995 % 1994 %
====================================================================================================================================
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 42,293 3.5% $ 55,576 5.7% $ 71,882 6.8% $ 67,833 5.8% $ 33,156 3.5%
Mortgage-Backed Securities 992,089 82.8 885,491 90.0 847,194 80.4 939,382 80.4 296,382 31.2
Municipal Securities 27,732 2.3 19,391 2.0 19,091 1.8 11,981 1.0 -- --
Other Debt Securities 136,397 11.4 22,783 2.3 29,987 2.8 76,073 6.5 100,531 10.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities
Available for Sale 1,198,511 100.0 983,241 100.0 968,154 91.8 1,095,269 93.7 430,069 45.3
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
U.S. Treasury and Government
Agencies and Corporations -- -- -- -- 32,395 3.1 13,397 1.2 34,569 3.6
Mortgage-Backed Securities -- -- -- -- 53,842 5.1 60,106 5.1 477,886 50.3
Municipal Securities -- -- -- -- -- -- -- -- 7,186 .8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to
Maturity -- -- -- -- 86,237 8.2 73,503 6.3 519,641 54.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment
Securities Portfolio $1,198,511 100.0% $983,241 100.0% $1,054,391 100.0% $1,168,772 100.0% $949,710 100.0%
====================================================================================================================================
Total Portfolio Yield 6.6% 7.0% 6.9% 6.9% 6.7%
- ------------------------------------------------------------------------------------------------------------------------------------
During 1998, Provident continued to enjoy a strong capital position, a high
degree of liquidity, and a substantial level of core deposits. Management's
principal objectives for the investment portfolio during 1998 were to maintain
an appropriate level of quality, to ensure sufficient liquidity in various
interest rate environments while maximizing yield and to increase net income by
utilizing excess capital. To successfully achieve these objectives, the
Corporation employs off-balance sheet and on balance sheet strategies. Total
investment securities increased $215 million during 1998 as a result of
leveraging $40 million of trust preferred securities issued during the second
quarter of 1998.
The Corporation applies the provisions of Statement of Financial Accounting
Standards No. 115 which requires investment securities to be segregated into
three categories: 1) held to maturity, 2) trading, and 3) available for sale.
All securities in the available for sale category must be measured at fair
market value. The resulting gain or loss is excluded from revenue but is
reflected as a change in stockholders' equity through accumulated other
comprehensive income. Trading securities must be measured at fair value and
changes included in income for the period. As of December 31, 1998, the
Corporation had no investments classified as trading securities. Securities
designated as held to maturity are carried at amortized cost. Subsequent to the
merger of First Citizens Financial Corporation, Provident disposed of certain
securities classified as held to maturity by First Citizens Financial
Corporation. As a result of these transactions, all of the Corporation's
investment securities have been classified as available for sale. Additionally,
all future purchases of securities will be classified as available for sale in
the foreseeable future. At December 31, 1998, the available for sale portfolio
included net unrealized gains of approximately $8.8 million, compared to net
unrealized gains of $7.8 million at December 31, 1997.
In addition to unrealized gains and losses, Provident realized $7.5 million
in gains and $710 thousand in losses from the sale of securities from the
available for sale portfolio in 1998. These sales were the result of
management's continuous monitoring of the investment securities portfolio in
terms of both credit quality and interest sensitivity.
20
21
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
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.
Provident's Asset/Liability Management Committee has established general
guidelines for the maintenance of prudent levels of liquidity. The committee
continually monitors the amount and source of available liquidity, the time
required to obtain it and its cost. Management believes the Bank has sufficient
liquidity to meet funding needs in the foreseeable future.
The primary sources of liquidity at December 31, 1998 were loans held for
sale and investment securities available for sale, which totaled $1.4 billion.
This represents 33% of total liabilities compared to 29% at December 31, 1997.
Maturities of investment securities, as Table 14 indicates, is expected to
generate $228 million in funds in 1998 and $701 million, or 59%, of the
portfolio within the next five years.
The following table presents the expected cash flows and interest yields of
the Bank's investment securities portfolio at December 31, 1998.
MATURITIES OF INVESTMENT SECURITIES PORTFOLIO
TABLE 14
In One Year After One Year After Five Years Over Unrealized
or Less Through Five Years Through Ten Years Ten Years Gain
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Amount Yield Amount Yield Amount Yield Amount Yield Amount Total Yield
====================================================================================================================================
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 5,002 6.2% $ -- --% $ -- --% $ 37,265 7.3% $ 26 $ 42,293 7.2%
Mortgage-Backed Securities 215,037 6.6 463,669 6.6 183,706 6.6 123,867 6.6 5,810 992,089 6.5
Municipal Securities 151 8.6 9,517 7.4 14,121 7.8 2,998 7.5 945 27,732 7.4
Other Debt Securities 7,433 7.7 400 6.3 -- -- 126,565 7.3 1,999 136,397 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities
Portfolio $227,623 6.6% $473,586 6.6% $197,827 6.6% $290,695 7.0% $8,780 $1,198,511 6.6%
====================================================================================================================================
21
22
Another source of liquidity is scheduled loan repayments, which within one
year totaled $626 million, or 20%, of loans. Table 15 presents contractual loan
maturities and interest rate sensitivity at December 31, 1998. The cash flow
from loans is expected to significantly exceed contractual maturities due to
refinances and early payoffs.
LOAN MATURITIES AND RATE SENSITIVITY
TABLE 15
In One Year After One Year After Five
(DOLLARS IN THOUSANDS) or Less Through Five Years Years Total Percentage
==================================================================================================================
Loan Maturities:
Consumer $502,784 $ 986,437 $665,336 $2,154,557 69.5%
Commercial Business 27,205 287,650 61,075 375,930 12.1
Real Estate--Construction:
Residential 71,479 18,298 -- 89,777 2.9
Commercial 6,210 27,714 744 34,668 1.1
Real Estate--Mortgage:
Residential 5,994 21,004 211,284 238,282 7.7
Commercial 12,747 157,613 36,637 206,997 6.7
- ------------------------------------------------------------------------------------------------------------------
Total Loans $626,419 $1,498,716 $975,076 $3,100,211 100.0%
==================================================================================================================
Rate Sensitivity:
Predetermined Rate $479,301 $1,093,865 $644,112 $2,217,278 71.5%
Variable or Adjustable Rate 147,118 404,851 330,964 882,933 28.5
- ------------------------------------------------------------------------------------------------------------------
Total Loans $626,419 $1,498,716 $975,076 $3,100,211 100.0%
==================================================================================================================
Core deposits are valuable in assessing liquidity needs because they tend to
be stable with little net short or intermediate-term withdrawal demands by
customers. At year-end, core deposits represented $2.2 billion, or 49%, of total
liabilities and 46% of total assets.
An important element in liquidity management is the availability of borrowed
funds. At December 31, 1998, short-term borrowings totaled $145 million, or 3%,
of liabilities in contrast to $347 million, or 9.5%, of liabilities at December
31, 1997. This decrease was the result of greater utilization of the broker CD
market and the money market CD product to match fund assets. Brokered CDs at
December 31, 1998 amounted to $1.1 billion, a $469 million increase from the
same period last year. Money market CDs totaled $127 million at December 31,
1998, a $33 million increase from the prior year-end. The average maturity of
short-term borrowings at the end of the current year was 18 days. These
borrowings are fully collateralized by U.S. Government or mortgage-backed
securities owned by the Bank. Long-term borrowings consisted of variable and
fixed-rate advances from the Federal Home Loan Bank and totaled $735 million as
of December 31, 1998. It is anticipated that Provident will continue to have
access to the repurchase market and fed fund lines as well as short and
long-term variable and fixed-rate funds from the Federal Home Loan Bank. During
the second quarter of 1998, the Corporation issued $40 million of trust
preferred securities with a maturity of 30 years, callable at the end of the
tenth year. The rate on the trust preferred securities is 8.29%.
INTEREST SENSITIVITY MANAGEMENT
The nature of the banking business, which involves paying interest on
deposits at varying rates and terms and charging interest on loans at other
rates and terms, creates interest rate risk. As a result, earnings are subject
to fluctuations which arise due to changes in the level and directions of
interest rates. Management's objective is to minimize this risk.
Measuring and managing interest rate risk is a dynamic process which is
performed regularly as an important component of management's analysis of the
impact of changes in asset and liability portfolios. Control of Provident's
interest sensitivity position is accomplished through the structuring of the
investment and funding portfolios, securitizing loans for possible sale, the use
of variable rate loan products and off-balance sheet derivatives.
22
23
Management does not try to anticipate changes in interest rates. Its
principal objective is to maintain interest margins in periods of both rising
and falling rates. Traditional interest sensitivity gap analyses alone do not
adequately measure an institution's exposure to changes in interest rates
because gap models are not sensitive to changes in the relationship between
interest rates charged or paid and do not incorporate balance sheet trends and
management actions. Each of these factors can affect an institution's earnings.
Accordingly, in addition to performing gap analysis, management also evaluates
the impact of differing interest rates on net interest income using an earnings
simulation model. The model incorporates the factors not captured by gap
analysis by projecting income over a twelve month horizon under a variety of
interest rate scenarios.
As of December 31, 1998, Provident's interest sensitive liabilities exceeded
interest sensitive assets within a one year period by $1.45 billion, or 31% of
assets. The Bank's savings products are structured to give management the
ability to reset the rates paid on a monthly basis. This causes the Bank to
become more liability sensitive. If interest rates rise, the rate paid on
savings deposits may follow, and the Corporation's net interest margin may
decline. Management continues to take steps to protect the Bank from possible
increases in interest rates. In 1998, these steps included lengthening the
maturities on purchased funds and certificates of deposits and shortening asset
maturities with interest rate swaps and caps. Management monitors the interest
rate environment and employs appropriate off-balance sheet strategies to address
potential changes in interest rates. These strategies lower the net interest
margin but are designed to maintain an acceptable margin in a changing rate
environment. As a result of off-balance sheet transactions undertaken to
insulate the Bank from interest rate risks, interest income increased by $761
thousand and interest expense decreased by $668 thousand, for a total increase
of $1.4 million in net interest income for the year ending December 31, 1998.
Included in this net interest income increase was the amortization of closed
positions which reduced interest income by $217 thousand and increased interest
expense by $1.5 million (a net decrease of $1.7 million) for the quarter.
Without the amortization of closed positions, off-balance sheet positions
increased net interest income $3.1 million for the year.
Management was assuming for planning purposes as of December 31, 1998, that
short-term rates will decrease by 10 basis points and long-term rates will
increase by 15 basis points over the next twelve months. The Corporation's
analysis indicates that if management does not adjust its December 31, 1998
off-balance sheet positions and the forward yield curve assumptions occur,
off-balance sheet positions, including amortization of closed positions, would
increase net interest income by $1.4 million over the next twelve months. This
compares to an increase of $2.5 million should interest rates remain unchanged.
Amortization of closed positions will increase net interest income by $1.0
million over the next twelve months. Thus, without amortization of closed
positions, net interest income would increase $400 thousand over the next twelve
months if the forward yield curve assumptions occur and $1.5 million if rates
remain unchanged.
STOCKHOLDERS' EQUITY
It is necessary for banks to maintain a sufficient level of capital in order
to sustain growth, absorb unforeseen losses and meet regulatory requirements. In
addition, the current economic and regulatory climate places an increased
emphasis on capital strength. In this environment, Provident continues to
maintain a strong capital position. Provident is well capitalized, exceeding all
regulatory requirements as of December 31, 1998, see Note 18 - Regulatory
Capital. At December 31, 1998, total stockholders' equity was $296 million, a
$26 million increase over the prior year. In addition to the ordinary
adjustments to stockholders' equity of net income and dividends paid, additional
capital of $724 thousand was raised through the dividend reinvestment plan ,
$5.5 million from the exercise of stock options, while capital increased by $575
thousand during 1998 as a result of Statement of Financial Accounting Standards
No. 115. This statement requires changes in market value, net of applicable
income taxes, of the available for sale investment portfolio to be accounted for
through equity. An additional component of regulatory capital are the capital
securities issued in 1998. These securities are treated as Tier I capital even
though they are not included in stockholders' equity in the Consolidated
Statement of Condition. During 1998, the Corporation also repurchased 297,700
shares totaling $7.3 million. In the second quarter of 1998, the Corporation
issued a 5% stock dividend and all earnin gs per share figures have been
adjusted for this dividend and the 2 for 1 stock split in February 1998.
23
24
Provident exceeds all regulatory capital requirements as of December 31,
1998. The standards used by federal bank regulators to evaluate capital adequacy
are the risk-based capital and leverage ratio guidelines. Equity for regulatory
purposes does not include market value adjustments as required by SFAS No. 115.
Risk-based capital ratios measure core and total stockholders' equity against
risk-weighted assets. Provident's core capital is equal to its common stock,
capital surplus and retained earnings less treasury stock. The calculation of
Provident's total stockholders' equity, for these purposes, is equal to the
above plus the allowance for loan losses subject to certain limitations.
Risk-weighted assets are determined by applying a weighting to asset categories
and certain off-balance sheet commitments based on the level of credit risk
inherent in the assets. At December 31, 1998, Provident's total capital ratio
was 10.26% compared to the minimum regulatory guideline of 8%. In addition, core
common stockholders' equity (Tier 1 Capital) must be at least 4% of
risk-weighted assets. At year-end, Provident's Tier 1 Capital ratio was 9.21%.
The leverage ratio represents core capital, as defined above, divided by
average total assets. Guidelines for the leverage ratio require the ratio of
core stockholders' equity to average total assets to be 100 to 200 basis points
above a 3% minimum, depending on risk profiles and other factors. Provident's
leverage ratio of 7.05% at December 31, 1998 was well in excess of this
requirement.
CAPITAL COMPONENTS AND RATIOS
TABLE 16
December 31,
- -------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
===================================================================
QUALIFYING CAPITAL
Tier 1 Capital $ 330,461 $ 265,199
Total Capital 368,000 302,060
Risk-Weighted Assets 3,586,808 2,949,890
Quarterly Average Assets 4,688,197 3,756,348
RATIOS
Leverage Capital 7.05% 7.06%
Tier 1 Capital 9.21 8.99
Total Capital 10.26 10.24
FINANCIAL REVIEW 1997/1996
For the year ended December 31, 1997, Provident recorded net income of $25.0
million or $1.01 per share/diluted (net of merger related costs, net income was
$33.6 million or $1.36 per share/diluted basis), compared to $26.2 million or
$1.07 per share/diluted basis in 1996. The per share amounts have been adjusted
for stock dividends and a 2 for 1 stock split in February 1998. This improvement
in earnings was attributable to a $12.3 million rise in net interest income,
lower provision for loan losses and a $2.5 million decrease in operating costs,
net of merger expenses. These were partially offset by a $6.1 million decrease
in non-interest income.
Tax-equivalent net interest income for 1997 increased $12.5 million, or
11.3%, from 1996 as average earning assets grew $341 million over the prior
year. Net interest margin grew by 2 basis points primarily caused by an $18
million increase in noninterest-bearing liabilities.
The provision for loan losses, net of the merger related portion, decreased
$2.7 million to $7.4 million in 1997. During 1996 the Corporation incurred a $5
million write-off attributed to a single commercial credit. Without this
write-off, the provision in 1996 would have been approximately $5.0 million.
Total loans outstanding grew by $453 million.
24
25
Total non-interest income decreased 12.1% to $44.0 million. Excluding net
securities gains (losses), non-interest income decreased $2.8 million or 6.4%,
primarily due to lower mortgage banking income. Deposit service charges rose 27%
over 1996 due to a $3.3 million increase in retail demand deposit service fees,
$1.1 million increase in ATM fees and a $588 thousand increase in commercial
deposit fees. Interest-bearing demand/money market deposits grew $27 million or
6.8% over 1996 while noninterest-bearing deposits increased $27 million or
15.2%.
Income from mortgage banking activities decreased $8.0 million, $1.5 million
due to lower gains on the sale of mortgage servicing rights, $3.0 million in
lower gains from sale of mortgage loans and $2.0 million from lower origination
income. Mortgage originations during 1997 declined $68 million to $396 million.
The changes resulted primarily from the interruptions of closing sales offices
and shifting to a more indirect origination business.
Income associated with products sold through Provident Investment Center
increased by $384 thousand to $2.2 million. Loan fees increased $275 thousand
from 1996, all associated with retail loan fees. This increase is tied to an
increase in loan volume.
Provident's non-interest expense of $108 million (net of merger expenses)
represented a 2% decrease from 1996. Salaries and benefits decreased $1.3
million during 1997. Compensation decreased $729 thousand while benefits were
down $570 thousand. The decline in these categories is attributable to the
change in the mortgage banking business from predominately retail to wholesale
and savings associated with the merger. Occupancy costs grew $701 thousand, or
7.5%, during 1997. This increase is mainly due to additional rent and leasehold
improvements as the branch network increased to 66 branches in 1997. Total
furniture and equipment expense increased $318 thousand due to upgrading of
technology in the Bank's office automation and branch platform systems.
External processing increased $1.4 million, or 13%, associated with increased
account volume. Regulatory fees declined $3.9 million, mainly associated with a
one-time SAIF special assessment of $3.0 million paid by First Citizens
Financial Corporation in the third quarter of 1996.
Provident recorded income tax expense in 1997 of $13.6 million on pre-tax
income of $38.6 million for an effective tax rate of 35.3%. This compares with a
34.3% effective tax rate for 1996. This increase is related to permanent tax
differences associated with the merger of First Citizens Financial Corporation
offset in part by a lower effective state income tax rate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Sensitivity Management" on page 22 and Note 12 to the
Consolidated Financial Statements herein.
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation and Subsidiaries
Page
Report of Independent Accountants 27
For the Three Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Income 28
Consolidated Statement of Changes in Stockholders' Equity 30
Consolidated Statement of Cash Flows 31
Consolidated Statement of Comprehensive Income 32
Consolidated Statement of Condition at December 31, 1998 and 1997 29
Notes to Consolidated Financial Statements 33-59
FINANCIAL REPORTING RESPONSIBILITY
CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation (the "Corporation") is responsible for the
preparation, integrity and fair presentation of its published consolidated
financial statements as of December 31, 1998, and the year then ended. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts, some of
which are based on judgments and estimates of management.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management maintains a system of internal control over financial reporting,
including controls over safeguarding of assets against unauthorized acquisition,
use or disposition which is designed to provide reasonable assurance to the
Corporation's management and board of directors regarding the preparation of
reliable published financial statements and such asset safeguarding. The system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified. This system encompasses activities that
control the preparation of the Corporation's Annual Report on Form 10-K
financial statements prepared in accordance with generally accepted accounting
principles.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting
as of December 31, 1998. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal
Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that Provident Bankshares Corporation maintained an effective internal
control structure over financial reporting as of December 31, 1998.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Provident Bank of Maryland, the wholly owned subsidiary of Provident
Bankshares Corporation complied, in all significant respects, with the
designated laws and regulations related to safety and soundness for the year
ended December 31, 1998.
26
27
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Provident Bankshares Corporation
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of income, cash flows and
changes in stockholders' equity present fairly, in all material respects, the
consolidated financial position of Provident Bankshares Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of First
Citizens Financial Corporation, acquired during 1997 in a pooling of interests,
as of December 31, 1996 and for the year then ended which statements reflect
total interest income constituting 19% of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for First
Citizens Financial Corporation, is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 1999
ARTHUR ANDERSEN LLP, REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
First Citizens Financial Corporation
Gaithersburg, Maryland
We have audited the consolidated statements of income, stockholders' equity,
and cash flows of First Citizens Financial Corporation (a Delaware Corporation)
and subsidiary for the year ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of First Citizens Financial Corporation and subsidiary for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Washington, D.C.
January 22, 1997
27
28
CONSOLIDATED STATEMENT OF INCOME
Provident Bankshares Corporation and Subidiaries
Year Ended December 31,
- --------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
============================================================================================
INTEREST INCOME
Interest and Fees on Loans $234,926 $203,899 $171,267
Interest on Securities 80,184 68,294 73,186
Tax-Advantaged Interest 2,762 6,656 2,588
Interest on Short-Term Investments 235 263 438
- --------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 318,107 279,112 247,479
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 130,315 106,004 87,736
Interest on Short-Term Borrowings 17,448 28,737 29,602
Interest on Long-Term Debt 39,746 21,977 20,016
- --------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 187,509 156,718 137,354
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME 130,598 122,394 110,125
Less: Provision for Loan Losses 12,027 9,953 10,011
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 118,571 112,441 100,114
- --------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 29,260 24,432 19,262
Mortgage Banking Activities 11,485 6,845 14,895
Commissions and Fees 4,209 3,705 3,229
Net Securities Gains 6,749 2,337 5,556
Other Non-Interest Income 11,041 6,690 7,123
- --------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 62,744 44,009 50,065
- --------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 61,649 54,107 55,406
Occupancy Expense, Net 10,349 10,018 9,317
Furniture and Equipment Expense 8,123 7,354 7,036
External Processing Fees 14,006 12,374 10,929
Merger Related Expenses -- 10,047 --
Federal Deposit Insurance Assessment -- -- 3,029
Capital Securities Expense 2,359 -- --
Other Non-Interest Expense 26,428 23,963 24,606
- --------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 122,914 117,863 110,323
- --------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 58,401 38,587 39,856
Income Tax Expense 19,371 13,628 13,668
- --------------------------------------------------------------------------------------------
NET INCOME $ 39,030 $ 24,959 $ 26,188
============================================================================================
PER SHARE AMOUNTS:
Net Income--Basic $ 1.60 $ 1.05 $ 1.12
Net Income--Diluted 1.54 1.01 1.07
============================================================================================
The accompanying notes are an integral part of these statements.
28
29
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subidiaries
December 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
================================================================================
ASSETS
Cash and Due From Banks $ 74,365 $ 68,580
Short-Term Investments 198 350
Mortgage Loans Held for Sale 224,707 66,925
Securities Available for Sale 1,198,511 983,241
Loans:
Consumer 2,154,557 1,667,094
Commercial Business 375,930 288,289
Real Estate--Construction 124,445 125,080
Real Estate--Mortgage 445,279 620,605
- --------------------------------------------------------------------------------
Total Loans 3,100,211 2,701,068
Less: Allowance for Loan Losses 42,739 36,861
- --------------------------------------------------------------------------------
Net Loans 3,057,472 2,664,207
- --------------------------------------------------------------------------------
Premises and Equipment, Net 40,459 37,402
Accrued Interest Receivable 40,466 31,032
Other Assets 39,719 75,002
- --------------------------------------------------------------------------------
TOTAL ASSETS $4,675,897 $3,926,739
================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 252,024 $ 196,178
Interest-Bearing 3,167,533 2,558,337
- --------------------------------------------------------------------------------
TOTAL DEPOSITS 3,419,557 2,754,515
- --------------------------------------------------------------------------------
Short-Term Borrowings 145,363 347,291
Long-Term Debt 735,239 469,077
Other Liabilities 40,423 85,674
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 4,340,582 3,656,557
- --------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable
Capital Securities 39,238 --
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000
Shares, Issued 24,811,256 and 23,284,896 Shares;
at December 31, 1998 and 1997, respectively 24,811 23,285
Capital Surplus 172,239 131,191
Retained Earnings 103,496 113,463
Net Accumulated Other Comprehensive Income 5,308 4,733
Treasury Stock at Cost--525,766 Shares at
December 31, 1998 and 228,066 Shares at
December 31, 1997 (9,777) (2,490)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 296,077 270,182
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,675,897 $3,926,739
================================================================================
The accompanying notes are an integral part of these statements.
29
30
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Provident Bankshares Corporation and Subidiaries
Accumulated
Other Treasury Total
Common Capital Retained Comprehensive Stock Comprehensive Stockholders'
(IN THOUSANDS, EXCEPT PER SHARE DATA) Stock Surplus Earnings Income at Cost Income Equity
====================================================================================================================================
Balance at January 1, 1996 $20,056 $ 89,341 $109,002 $ 7,139 $(2,490) $223,048
Net Income--1996 -- -- 26,188 -- -- $26,188 26,188
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net
of Reclassification Adjustment (see Note 16) (8,512) (8,512) (8,512)
--------
Comprehensive Income $17,676
========
Dividends Paid ($.35 per share) -- -- (6,281) -- -- (6,281)
Exercise of Stock Options (346,896 shares) 347 2,495 -- -- -- 2,842
Stock Dividend (1,200,432) 1,200 16,095 (17,295) -- -- --
Common Stock Issued under
Dividend Reinvestment Plan (83,496 shares) 84 1,429 -- -- -- 1,513
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $21,687 $109,360 $111,614 $(1,373) $(2,490) $238,798
Net Income--1997 -- -- 24,959 -- -- $24,959 24,959
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net of
Reclassification Adjustment (see Note 16) 6,106 6,106 6,106
-------
Comprehensive Income $31,065
=======
Dividends Paid ($.44 per share) -- -- (8,505) -- -- (8,505)
Exercise of Stock Options (720,638 shares) 720 7,661 -- -- -- 8,381
Stock Dividend (858,376 shares) 858 13,747 (14,605) -- -- --
Common Stock Issued under
Dividend Reinvestment Plan (20,312 shares) 20 423 -- -- -- 443
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $23,285 $131,191 $113,463 $ 4,733 $(2,490) $270,182
Net Income--1998 -- -- 39,030 -- -- $39,030 39,030
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net of
Reclassification Adjustment (see Note 16) 575 575 575
-------
Comprehensive Income $39,605
=======
Dividends Paid ($.518 per share) -- -- (12,648) -- -- (12,648)
Exercise of Stock Options (337,498 shares) 337 5,164 -- -- -- 5,501
Stock Dividend (1,165,433 shares) 1,165 35,184 (36,349) -- -- --
Purchase of Treasury Shares (297,700 shares) (7,287) (7,287)
Common Stock Issued under Dividend
Reinvestment Plan (24,179 shares) 24 700 -- -- -- 724
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $24,811 $172,239 $103,496 $ 5,308 $(9,777) $296,077
====================================================================================================================================
The accompanying notes are an integral part of these statements.
30
31
CONSOLIDATED STATEMENT OF CASH FLOWS
Provident Bankshares Corporation and Subidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
=====================================================================================================
OPERATING ACTIVITIES:
Net Income $ 39,030 $ 24,959 $ 26,188
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 28,200 8,235 6,308
Provision for Loan Losses 12,027 9,953 10,011
Provision for Deferred Income Tax (Benefit) (2,941) (5,139) 750
Realized Net Securities Gains (6,749) (2,337) (5,556)
Loans Originated or Acquired and Held for Sale (993,474) (344,587) (559,717)
Proceeds from Sales of Loans 841,538 315,650 649,363
Gain on Sales of Loans (5,846) (2,632) (5,681)
Other Operating Activities (23,551) 8,930 (6,796)
- -----------------------------------------------------------------------------------------------------
Total Adjustments (150,796) (11,927) 88,682
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (111,766) 13,032 114,870
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal Collections and Maturities of Securities
Available for Sale 251,725 169,288 196,039
Principal Collections and Maturities of Securities
Held to Maturity -- 13,130 13,353
Proceeds on Sales of Securities Available for Sale 947,030 395,803 297,336
Purchases of Securities Held to Maturity -- (15,259) (26,108)
Purchases of Securities Available for Sale (1,405,328) (481,343) (375,667)
Loan Originations and Purchases Less Principal
Collections (420,763) (454,026) (495,697)
Purchases of Premises and Equipment (10,069) (7,299) (6,282)
- -----------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (637,405) (379,706) (397,026)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Increase in Deposits 665,042 468,371 248,686
Net Increase (Decrease) in Short-Term Borrowings (201,928) (255,144) 60,570
Proceeds from Long-Term Debt 475,380 194,000 308,650
Payments and Maturities of Long-Term Debt (209,218) (53,440) (320,638)
Proceeds from Capital Securities 39,238 -- --
Issuance of Common Stock 6,225 8,824 4,355
Purchase of Treasury Stock (7,287) -- --
Cash Dividends on Common Stock (12,648) (8,505) (6,281)
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 754,804 354,106 295,342
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,633 (12,568) 13,186
Cash and Cash Equivalents at Beginning of Year 68,930 81,498 68,312
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 74,563 $ 68,930 $ 81,498
=====================================================================================================
SUPPLEMENTAL DISCLOSURES
- -----------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 111,775 $ 71,711 $ 70,337
Income Taxes Paid 18,301 13,114 15,374
Stock Dividend 36,349 14,605 17,295
Transfer of Securities Held to Maturity to
Securities Available for Sale -- 88,318 --
The accompanying notes are an integral part of these statements.
31
32
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Provident Bankshares Corporation and Subidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
=====================================================================================================
Net Income $39,030 $24,959 $26,188
Net Other Comprehensive Income:
Net Unrealized Gain (Loss) on Debt Securities 4,655 7,519 (5,153)
Less: Reclassification Adjustment for Gains Included
in Net Income 4,080 1,413 3,359
- -----------------------------------------------------------------------------------------------------
Other Comprehensive Income 575 6,106 (8,512)
- -----------------------------------------------------------------------------------------------------
Comprehensive Income $39,605 $31,065 $17,676
=====================================================================================================
The accompanying notes are an integral part of these statements.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation and Subsidiaries
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Provident Bankshares Corporation ("the Corporation") offers a wide range of
banking services through its wholly owned subsidiary, Provident Bank of
Maryland, and its subsidiaries ("the Bank"). Product offerings include deposit
products, cash management services, commercial and consumer loans and personal
investment products. These services are provided through a network of 84 offices
and 113 ATMs located primarily in the greater Baltimore/Washington metropolitan
area and southern Pennsylvania.
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.
The accounting and reporting policies of the Corporation are in accordance
with generally accepted accounting principles and conform to general practice
within the banking industry. Certain prior years' amounts in the Consolidated
Financial Statements have been reclassified to conform with the presentation
used for the current year. These reclassifications have no effect on
stockholders' equity or net income as previously reported.
CONSOLIDATION POLICIES
The Consolidated Financial Statements include the accounts of Provident
Bankshares Corporation and its wholly owned subsidiary, Provident Bank of
Maryland (the "Bank") and its subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Financial statements prior to 1997 have been restated to include the accounts
and results of operations for the acquisition of First Citizens Financial
Corporation which was accounted for using the pooling-of-interest accounting
method--see Note 2.
In preparation of 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.
Actual results could differ from these estimates.
INVESTMENT SECURITIES
Investment portfolios are to be divided among three categories: securities
available for sale, and if applicable, securities held to maturity and trading
account securities. Securities available for sale are securities the Corporation
does not have the intent and ability to hold to maturity nor does it intend to
trade actively as part of any trading account activity. Available for sale
securities are reported at fair value with any unrealized appreciation or
depreciation in value reported directly as a separate component of stockholders'
equity as net accumulated other comprehensive income, which is reflected net of
applicable taxes, and therefore, has no effect on the reported earnings of the
Corporation. Gains and losses from sales of securities available for sale are
recognized by the specific identification method and are reported in
non-interest income. Any securities that the Corporation has the intent and
ability to hold to maturity would be included in securities held to maturity
and, accordingly, carried at cost adjusted for amortization of premiums and
accretion of discounts using the interest method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Interest on loans is accrued at the contractual rate and credited to income
based upon the principal amount outstanding. It is the policy of management to
place a loan in non-accrual status and discontinue the accrual of interest and
reverse previously accrued but unpaid interest when the quality of a commercial
credit has deteriorated to the extent that collectibility of all interest and/or
principal cannot be reasonably expected or when it is 90 days past due unless
the loan is well secured and in the process of collection. Beginning in 1997,
consumer loans are not placed in non-accrual status but are generally charged-
off at 120 days past due for installment loans and 180 days for revolving loans.
This was done to conform to standard industry practice. Prior to 1997, consumer
loans were generally placed into non-accrual status at 90 days past due and
subsequently charged off.
33
34
The Corporation adopted the provisions of Statements of Financial Accounting
Standards No. 114/118 "Accounting by Creditors for Impairment of a Loan" ("SFAS
No. 114/118") on January 1, 1995. Under SFAS No. 114/118, the Corporation
considers a loan impaired when, based on available information, it is probable
that the Corporation will be unable to collect principal and interest when due
in accordance with the contractual terms of the loan agreement. All non-accrual
loans and troubled debt restructurings are considered impaired loans. The
measurement of impaired loans may be based on the present value of expected
future cash flows discounted at the historical effective interest rate or based
on the fair value of the underlying collateral. Impairment criteria are applied
to the loan portfolio exclusive of smaller balance homogeneous loans such as
residential mortgage and consumer loans which are evaluated collectively for
impairment. Restructured loans are considered impaired in the year of
restructuring. In subsequent years each restructured loan is evaluated for
impairment. The allowance for loan losses includes reserves for these loans.
Collections of interest and principal on loans in non-accrual status and
considered impaired are generally applied as a reduction to the outstanding
principal. Once future collectibility has been established, interest income may
be recognized on a cash basis.
The Corporation defers and amortizes certain loan fees and costs over the
life of the loan using the interest method. Net amortization of these fees and
costs are recognized in interest income as a yield adjustment and are,
accordingly, reported as Interest and Fees on Loans in the Consolidated
Statement of Income. Unearned income on loans at December 31, 1998 and 1997 was
not material with respect to the respective financial statements.
The Corporation's allowance for loan losses is based upon management's
continuing review and evaluation of the loan portfolio and is intended to
maintain an allowance adequate to absorb potential losses on loans outstanding.
The level of the allowance is based on an evaluation of the risk characteristics
of the loan portfolio and considers such factors as past and expected future
loan loss experience, the financial condition of the borrower, current economic
conditions and other relevant factors.
Adjustments to the allowance due to changes in measurement of impaired loans
are incorporated in the provision for loan losses. The adoption of SFAS No.
114/118 has not resulted in any additional provision for loan losses for the
years ended December 31, 1998 and 1997, respectively.
PREMISES AND EQUIPMENT
Premises, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the lives of the related leases, if
shorter. Major improvements are capitalized while maintenance and repairs are
charged to expense as incurred.
MORTGAGE SERVICE RIGHTS
The Corporation engages in sales of mortgage loans, which are originated
internally or purchased from third parties. Mortgage loans held for sale are
carried at the aggregate lower of cost or market value. Gains or losses on sales
of these mortgage loans are recorded as a component of Non-Interest Income in
the Consolidated Statement of Income.
Effective January 1, 1997, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 125--"Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). The adoption of SFAS No. 125 had no significant impact on the earnings or
financial condition of the Corporation. The Corporation carries any retained
interest in a transferred asset on the Statement of Condition as a servicing
asset. The servicing assets represent the fair value of the servicing contracts
associated with the purchase or origination and subsequent securitization of the
mortgage loans. Servicing assets are amortized in proportion to and over the
period of estimated net servicing income. Servicing assets are evaluated
periodically for impairment based on their fair value and impairment, if any, is
recognized through a valuation allowance and a charge to operations.
34
35
INCOME TAXES
The Corporation uses the liability method to determine deferred tax amounts
and the related income tax expense or benefit. Using this method, deferred taxes
are calculated by applying enacted statutory tax rates to temporary differences
consisting of items of income and expense that are accounted for in financial
reporting periods which differ from income tax reporting periods. The resultant
deferred tax assets and liabilities represent future taxes to be recovered or
remitted when the related assets and liabilities are recovered or settled. The
deferred tax assets are reduced by a valuation allowance for that portion of the
tax deferred assets which are unlikely to be realized.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses a variety of derivative financial instruments as part of
its interest rate risk management strategy and the Corporation does not hold or
issue derivative financial instruments for trading purposes. The derivative
products used are interest rate swaps and caps or floors, used separately or in
combination to suit the hedge objective. All are currently classified as hedges.
To qualify as a hedge, 1) the asset or liability to be hedged exposes the
Corporation to interest rate risk, 2) the derivatives act to move the
Corporation to a rate insensitive position should interest rates change, and 3)
the derivative is designated and is effective as a hedge of a balance sheet
item.
Interest rate swaps are agreements between two parties which agree to
exchange fixed and floating rates on a notional principal amount without the
actual exchange of principal for a specified period of time. The notional
amounts are not reflected on the Consolidated Statementof Condition because
they are merely a unit of measure to determine the effect of the swap. Income
and expense on interest rate swaps associated with designated balance sheet
items is recognized using the accrual method over the life of the agreement(s)
as an adjustment to the income or expense on the designated balance sheet item.
Premiums associated with interest rate floor/cap/corridor arrangements are
reflected in the Consolidated Statement of Condition and amortized over their
life using the straight-line method and included as an adjustment to interest
income/expense associated with the balance sheet item. Payments due to or from
counterparties under these agreements are accrued as an adjustment to interest
income or expense associated with the designated balance sheet item.
The Corporation continually monitors each derivative position to ensure the
proper relationship such as risk reduction, correlation or effectiveness between
the designated balance sheet item hedged and the derivative position. Any
significant divergence between this relationship which results in interest
income or expense exceeding projected parameters results in the hedge being
marked-to-market with the resultant gain or loss included in earnings.
Terminated derivative positions with the designated assets or liabilities
retained have the resulting gain or loss deferred and amortized over the
estimated remaining life of the hedge into interest income/expense associated
with the balance sheet item. Derivatives associated with liquidated hedged
assets or liabilities are marked-to-market and have subsequent changes in their
fair value reflected in earnings as the derivative is considered speculative in
nature.
Accounting treatment of derivative positions is consistent with the
accounting treatment of the underlying asset or liability. Interest rate swaps
used to hedge available for sale debt securities have their fair value included
in stockholders' equity which is consistent with the fair value treatment of the
available for sale securities. Interest accruals associated with the swap are
included as an adjustment to interest income on the associated securities.
Derivative products terminated prior to the sale of the related security have
the respective gain or loss deferred and amortized into interest income as yield
adjustments to the designated asset over the shorter of the remaining life of
the agreement or the designated asset. Upon sale of the security, the deferred
gain or loss on the derivative is reflected in income at the time of sale.
35
36
PENSION PLAN
The Corporation has a defined benefit pension plan which covers substantially
all employees. The cost of this noncontributory pension plan was computed and
accrued using the projected unit credit method.
Prior service cost is amortized on a straight-line method over the average
remaining service period of employees expected to receive benefits under the
plan. Annual contributions are made to the plan in an amount at least to equal
the maximum requirements and no greater than the maximum allowed by regulatory
authorities.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash equivalents are composed of cash
and due from banks and short-term investments.
NOTE 2--ACQUISITION
On August 22, 1997, the Corporation completed its acquisition of First
Citizens Financial Corporation ("First Citizens"), a savings bank holding
company based in Montgomery County, Maryland. This acquisition was accounted for
as a pooling-of-interest business combination. Historical financial information
for years prior to the acquisition have been restated to reflect the combined
results of Provident Bankshares Corporation and First Citizens for those
periods. Provident issued approximately 4,522,000 shares of common stock to the
former stockholders of First Citizens at an exchange ratio of .7665 of a share
of Provident for each share of First Citizens. At the date of acquisition, First
Citizens had total assets of $674 million.
Exclusive of $8.6 million in post-tax merger related charges incurred by both
entities, net income of the combined entities would have been $33.6 million on a
pre-merger basis for the year ended December 31, 1997. The majority of the
charges incurred included severance pay and benefits for terminated employees,
professional fees which included investment banking, accounting and legal fees,
write-downs of real estate owned properties, write-downs for facilities which
were consolidated and asset write-offs for unusable equipment. These charges
included only identified direct and incremental cost associated with the
acquisition.
Presented below are the combined results of operations based on the audited
consolidated financial statements of Provident and First Citizens for the year
ended December 31, 1996:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
==============================================
Net Interest Income:
Provident $ 91,287
First Citizens 18,838
----------------------------------------------
Combined $110,125
==============================================
Net Income:
Provident $ 23,020
First Citizens 3,168
----------------------------------------------
Combined $ 26,188
==============================================
Diluted Net Income Per Share:
Provident $ 1.19
First Citizens .50
----------------------------------------------
Combined $ 1.07
==============================================
The combined results of operations are not necessarily indicative of the
results that would have occurred had the acquisition been consummated prior to
1997 or that may be achieved in the future.
36
37
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain cash reserves against certain
categories of deposit liabilities. Such reserves averaged approximately $23.7
million and $18.6 million during the years ended December 31, 1998 and 1997,
respectively.
In order to cover the costs of services provided by correspondent banks, the
Corporation maintains compensating balance arrangements at these correspondent
banks or elects to pay a fee in lieu of such arrangements. During 1998 and 1997,
the Corporation maintained average compensating balances of approximately $4.5
million and $2.5 million, respectively. In addition, the Corporation paid fees
totaling $389 thousand in 1998, $311 thousand in 1997 and $397 thousand in 1996
in lieu of maintaining compensating balances.
NOTE 4--INVESTMENT SECURITIES
The aggregate amortized cost and market values of the available for sale
securities portfolio at December 31 were as follows:
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS Gross Gross
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
(IN THOUSANDS) COST GAINS LOSSES VALUE Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 42,267 $ 26 $ -- $ 42,293 $ 55,624 $ 36 $ 84 $ 55,576
Mortgage-Backed Securities 986,279 6,270 460 992,089 877,962 8,870 1,341 885,491
Municipal Securities 26,787 945 -- 27,732 18,868 523 -- 19,391
Other Debt Securities 134,398 2,785 786 136,397 22,958 -- 175 22,783
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $1,189,731 $10,026 $1,246 $1,198,511 $975,412 $9,429 $1,600 $983,241
- -----------------------------------------------------------------------------------------------------------------------------------
The aggregate amortized cost and market values of the investment securities
portfolio by contractual maturity at December 31, 1998 and 1997, are shown
below. Expected maturities on mortgage-backed securities may differ from the
contractual maturities as orrowers have the right to prepay the obligation
without prepayment penalties.
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED MARKET Amortized Market
(IN THOUSANDS) COST VALUE Cost Value
===================================================================================================================================
SECURITIES AVAILABLE FOR SALE
In One Year or Less $ 5,153 $ 5,182 $ 550 $ 514
After One Year Through Five Years 9,917 10,179 16,975 16,737
After Five Years Through Ten Years 14,120 14,743 24,762 25,081
Over Ten Years 174,262 176,318 55,163 55,418
Mortgage-Backed Securities 986,279 992,089 877,962 885,491
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $1,189,731 $1,198,511 $975,412 $983,241
===================================================================================================================================
37
38
Proceeds from sales of securities available for sale during 1998 were $947.0
million resulting in the realization of gross gains of $7.4 million and gross
losses of $.7 million on such sales. For 1997, sales of securities yielded
proceeds of $395.8 million which resulted in gross realized gains of $3.4
million and gross losses of $1.1 million. Securities sold in 1996 produced
proceeds of $297.3 million resulting in gross gains of $6.1 million and gross
losses of $525 thousand.
In conjunction with the acquisition of First Citizens Financial Corporation
in 1997, the Corporation reclassified $88.3 million in held to maturity
securities of the combined entity to the available for sale portfolio. These
securities were transferred by the Corporation to provide additional liquidity
and financial flexibility. All securities were transferred at fair value.
Unrealized gains of $355 thousand were recognized separately in stockholders'
equity as part of net accumulated other comprehensive income. As a result of
the transfer, all securities will be classified as available for sale in the
foreseeable future.
At December 31, 1998, a net unrealized gain of $5.3 million on the securities
portfolio was reflected as a separate component of stockholders' equity as part
of net accumulated other comprehensive income in the Consolidated Statement of
Condition as compared to a net unrealized gain of $4.7 million at December 31,
1997.
The aggregate book and estimated market values of investment securities by
issuer which exceed ten percent of capital at December 31, 1998, are indicated
below. All of these securities represent senior debt securities with AAA bond
ratings.
Estimated
Book Market
(IN THOUSANDS) Value Value
---------------------------------------------------------------
Issuer:
Mortgage-Backed Securities:
Residential Funding Corporation $29,931 $30,441
Indy Mac, Inc. 52,466 52,905
===============================================================
Securities with a market value of $789.7 million and $611.2 million at
December 31, 1998 and 1997, respectively, were pledged as collateral for public
funds, certain short-term borrowings and for other purposes required by law.
NOTE 5--ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the three
years ended December 31 is presented below:
(IN THOUSANDS) 1998 1997 1996
===================================================================================================
Balance at Beginning of the Year $36,861 $30,361 $27,524
Provision for Loan Losses 12,027 9,953 10,011
Loans Charged-off (7,738) (5,213) (8,862)
Less: Recoveries of Loans
Previously Charged-off 1,589 1,760 1,688
---------------------------------------------------------------------------------------------------
Net Loans Charged-off (6,149) (3,453) (7,174)
---------------------------------------------------------------------------------------------------
Balance at End of the Year $42,739 $36,861 $30,361
===================================================================================================
38
39
At December 31, 1998, 1997 and 1996, the recorded investment in loans which
are in non-accrual status and therefore considered impaired totaled $5.1
million, $2.9 million and $4.6 million, respectively. There was no additional
allowance required for these loans under the provisions of SFAS No. 114/118. Had
these loans performed in accordance with their original terms, interest income
of $696 thousand in 1998, $178 thousand in 1997 and $603 thousand in 1996 would
have been recorded. During 1998 and 1997, no interest income was recognized on
these loans. During 1996, interest income of $411 thousand was recognized on
these loans. The average recorded investment in impaired loans was approximately
$6.8 million in 1998 and $2.1 million in 1997.
NOTE 6--PREMISES AND EQUIPMENT
Real estate and equipment holdings at December 31 are presented in the table
below. Real estate owned and used by the Corporation consists of twelve branches
and other facilities in the Baltimore/Washington metropolitan area which are
used primarily for the operations of the Bank.
(IN THOUSANDS) 1998 1997
==========================================================================
Land $ 1,014 $ 851
Buildings and Leasehold Improvements 22,869 23,227
Furniture & Equipment 42,308 37,921
Property Held for Future Expansion 7,184 7,177
--------------------------------------------------------------------------
Total Premises & Equipment 73,375 69,176
Less: Accumulated Depreciation and Amortization 32,916 31,774
--------------------------------------------------------------------------
Net Premises and Equipment $40,459 $37,402
==========================================================================
Property held for future expansion represents real estate adjacent to the
Corporation's headquarters building which is currently being used for employee
and public parking. Following an assessment of occupancy requirements,
management determined that this property would be necessary to meet the
Corporation's growing office and parking requirements.
In December 1990, the Corporation entered into a sale and leaseback agreement
whereby its headquarters building was sold to an unrelated third party which
then leased the building back to the Corporation. The lease has four years
remaining on the term. The remaining associated deferred gain of $1.3 million
from the sale will be recognized in proportion to the gross rental expense
incurred over the outstanding term of the lease. The associated lease payments
and sublease rental income are included in the table below.
The Corporation also maintains non-cancelable operating leases associated
with Bank premises. Most of these leases provide for the payment of property
taxes and other costs by the Bank and include one or more renewal options
ranging up to ten years. Some of the leases also contain purchase options at
market value. Annual rental commitments under all long-term non-cancelable
operating lease agreements consisted of the following at December 31, 1998.
Real Property Sublease Equipment
(IN THOUSANDS) Leases Income Leases Total
=========================================================================
1999 $ 6,388 $ 77 $ 380 $ 6,691
2000 5,627 39 289 5,877
2001 4,737 19 233 4,951
2002 4,260 19 139 4,380
2003 1,985 5 81 2,061
2004 and Thereafter 4,539 -- -- 4,539
------------------------------------------------------------------------
Total $27,536 $159 $1,122 $28,499
========================================================================
Rental expense for premises and equipment was $6.8 million in 1998, $6.6
million in 1997 and $6.3 million in 1996.
39
40
NOTE 7--MORTGAGE BANKING ACTIVITIES
The following is an analysis of mortgage loan servicing asset balance, net of
accumulated amortization, during each of the respective years.
December 31,
------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
========================================================================
Balance at Beginning of the Year $ 1,984 $ 2,155 $ 981
Additions 15,767 1,785 3,338
Amortization (355) (359) (458)
Sales of Servicing Assets (14,788) (1,597) (1,706)
------------------------------------------------------------------------
Balance at the End of the Year $ 2,608 $ 1,984 $ 2,155
========================================================================
At December 31, 1998, a valuation allowance of $19 thousand was required on
the servicing assets. Unpaid principal balances of loans serviced for others not
included in the accompanying Consolidated Statement of Condition were $181
million and $229 million at December 31, 1998 and 1997, respectively.
NOTE 8--SHORT-TERM BORROWINGS
At December 31, short-term borrowings were as follows:
(IN THOUSANDS) 1998 1997
========================================================================
Securities Sold Under Repurchase Agreements
and Federal Funds Purchased $143,367 $345,430
Other Short-Term Borrowings 1,996 1,861
------------------------------------------------------------------------
Total $145,363 $347,291
========================================================================
The following table sets forth various data on securities sold under
repurchase agreements and federal funds purchased.
(DOLLARS IN THOUSANDS) 1998 1997 1996
---------------------------------------------------------------------------
Balance at December 31 $143,367 $345,430 $568,592
Average Balance During the Year 310,504 464,662 496,117
Maximum Month-End Balance 496,506 515,937 583,499
Weighted Average Rate During the Year 5.50% 5.68% 5.59%
Weighted Average Rate at December 31 4.77% 5.72% 5.73%
---------------------------------------------------------------------------
Securities sold under repurchase agreements at December 31, 1998, are
detailed below by due date:
Less than
(DOLLARS IN THOUSANDS) Overnight 30 days 30-90 days Over 90 days Demand Total
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities:
Securities Sold:
Carrying Value $-- $-- $-- $11,687 $-- $11,687
Market Value -- -- -- 11,840 -- 11,840
Repurchase Borrowings -- -- -- 9,680 -- 9,680
Average Borrowing Interest Rate --% --% --% 6.13% --% 6.13%
=================================================================================================================================
40
41
NOTE 9--LONG-TERM DEBT
Long-term debt consisted of Federal Home Loan Bank Advances of $735.2 million
and $469.1 million at December 31, 1998 and 1997, respectively. The principal
maturities of long-term debt at December 31, 1998, are presented below.
(IN THOUSANDS)
------------------------------------
1999 $118,677
2000 223,575
2001 125,000
2002 166,000
2003 54,412
After 2003 47,575
------------------------------------
Total $735,239
====================================
The Federal Home Loan Bank Advances to the Bank mature in varying amounts
through 2016. These advances are composed of $265.2 million fixed rate advances
with an average interest rate of 6.43% and $470.0 million variable rate advances
with an average rate of 5.28%. These advances are collateralized by investment
securities and certain real estate loans with carrying values of $599.7 million
and $159.9 million, respectively, at December 31, 1998.
NOTE 10--CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES
During the second quarter of 1998, the Corporation formed a new wholly owned
statutory business trust, Provident Trust I (the "Trust"), which issued $40.0
million of 8.29% capital securities to outside third parties. The sole purpose
of the Trust is to invest the proceeds in an equivalent amount of junior
subordinated debt securities of the Corporation which bears the same interest
rates as the capital securities. These subordinated debentures, which are the
sole assets of the Trust, are subordinate and junior in right of payment to all
present and future senior and subordinated indebtedness and certain other
financial obligations of Bankshares. The Corporation fully and unconditionally
guarantees the Trust's capital securities obligations. Additionally the Trust
issued $1.5 million in common securities to the Corporation. For financial
reporting purposes, the trust is treated as a subsidiary of the Corporation and
consolidated in the corporate financial statements. The capital securities are
presented net of issuance costs as a separate line item on the Consolidated
Statement of Condition as corporation-obligated mandatorily redeemable capital
securities. The capital securities are not included as a component of total
stockholders' equity on the consolidated balance sheet. The capital securities
are, however, accorded Tier I capital status by the Federal Reserve. The
treatment of the capital securities as Tier I capital in addition to the ability
to deduct the expense of the subordinated debentures for income tax purposes
provides the Corporation with a cost-effective method to raise capital. The
proceeds of the capital securities were used for general corporate growth.
The capital securities pay cash distributions semiannually at a rate of 8.29%
of the liquidation preference. Distributions to the holders of the capital
securities are included in non-interest expense. Under the provisions of the
subordinated debt, the Corporation has the right to defer payment of interest on
the subordinated debentures at any time, or from time to time, for periods not
exceeding five years. If interest payments on the subordinated debentures are
deferred, the distributions on the capital securities are also deferred.
Interest on the subordinated debentures is cumulative.
The securities, the assets of the Trust and the common securities issued by
the Trust are redeemable in whole or in part on or after April 15, 2008, or at
any time in whole but not in part from the date of issuance on the occurrence of
certain events.
41
42
NOTE 11--STOCKHOLDERS' EQUITY
During 1998 and 1997, the Corporation declared five percent stock dividends
for each year to the stockholders of record as of April 27, 1998 and April 28,
1997, respectively. The 1998 stock dividend was paid on May 8, 1998, resulting
in the distribution of 1,165,433 common shares with a par value of $1.00 per
share. Accordingly, $1.2 million and $35.2 million were transferred from
retained earnings to common stock and capital surplus, respectively. The 1997
stock dividend was paid May 9, 1997 with the distribution of 858,376 common
shares with a $1.00 par value per share. This dividend resulted in the transfer
of $858 thousand to common stock and $13.7 million to capital surplus from
retained earnings. The cumulative impact of these stock dividends has been
reflected in the restatement of earnings and dividends per share and stock
option data in the financial statements and accompanying notes.
Subsequent to December 31, 1997, the Corporation declared a two for one stock
split. The split occurred after the dividend payment on February 13, 1998 for
stockholders of record at the close of business on February 2, 1998. All
earnings per share and common stock related information has been given
retroactive effect to this transaction.
During 1998, the Corporation approved a stock repurchase program for up to
5% of its outstanding stock. These purchases may occur in the open market from
time to time and on an ongoing basis, depending upon market conditions. The
Corporation repurchased 297,700 shares of common stock at a cost of $7.3
million during 1998.
The Corporation's Stock Option Plan (the "Option Plan") covers a maximum of
5.2 million shares of common stock that has been reserved for issuance under the
Option Plan described below. Under the provisions of Statement of Financial
Accounting Standards No. 123--"Accounting for Stock-Based Compensation" ("SFAS
No. 123"), the Corporation had the option of accruing a compensation expense
for stock options granted to employees, or applying the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"),
which does not require compensation expense to be recognized. The Corporation
has elected to continue to apply APB No. 25 to account for the Option Plan.
Under the Option Plan, stock options are granted at an exercise price not less
than the market value of the underlying shares of common stock on the date of
the grant. As such, the Option Plan is classified as a fixed stock option plan.
Accordingly, no compensation expense has been recognized from 1998 through 1996.
The Option Plan provides for the granting of non-qualified stock options to
certain key employees and directors of Bankshares and the Bank, as designated by
the Corporation's board of directors. All options have a maximum duration of ten
years from the date of grant. Vesting in the majority of the options occurred
immediately in 50% of the options granted with the remainder vesting in the
subsequent year. A minority of options have vesting provisions which may be
accelerated on the attainment of specific benchmarks related to the
Corporation's performance. Beginning in 1998, options granted have a five-year
vesting schedule. Regardless of the vesting schedule all options vest
immediately upon a change in control.
The following table presents a summarization of the activity related to the
options for the periods indicated:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Common Weighted Avg. Common Weighted Avg. Common Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
==================================================================================================================================
Outstanding, January 1, 1,788,494 $ 8.98 2,376,795 $ 6.57 2,219,866 $ 4.41
Granted 309,150 31.78 175,138 18.86 539,862 14.43
Exercised (350,236) 5.56 (756,670) 3.60 (364,241) 4.89
Canceled or Expired -- -- (6,769) 16.07 (18,692) 8.41
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1,747,408 $ 13.70 1,788,494 $ 8.98 2,376,795 $ 6.57
==================================================================================================================================
Options Exercisable at Year-end 1,129,676 1,337,154 1,314,293
Weighted Average Fair Value
of Options Granted During the Year $ .39 $ 2.70 $ 4.05
Options Available for Granting
under the Option Plan 1,092,467 292,223 1,567,404
- ----------------------------------------------------------------------------------------------------------------------------------
42
43
The table below provides information on the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted Weighted Average Weighted
Exercise Price Common Average Remaining Common Average
Range Shares Exercise Price Contractual Life Shares Exercise Price
================================================================================================================================
$ .00 - $ 6.67 456,936 $ 3.22 3.8 456,935 $ 3.22
6.68 - 10.01 313,070 8.72 5.9 313,070 8.72
10.02 - 16.70 501,510 13.65 7.2 161,259 12.13
16.71 - 20.03 150,362 17.89 8.1 137,132 17.93
20.04 - 26.71 14,280 21.81 8.6 14,280 21.81
20.72 - 33.39 311,250 31.76 9.2 47,000 30.81
- --------------------------------------------------------------------------------------------------------------------------------
1,747,408 $13.70 6.5 1,129,676 $ 9.19
================================================================================================================================
The weighted average fair value of all of the options granted during the
period 1996 through 1998 has been estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
1998 1997 1996
=================================================================================
Dividend Growth Rate 17.37% 38.47% 14.64%
Weighted Average Risk-free Interest Rate 4.59 5.72 6.31
Weighted Average Expected Volatility 24.68 22.18 21.18
Weighted Average Expected Life in Years 7 7 7
---------------------------------------------------------------------------------
The provisions of SFAS No. 123, require pro forma disclosure of compensation
expense for the Corporation based on the fair value of the awards at the date of
grant. Under those provisions, the Corporation's net income and earnings per
share would have been reduced to the following pro forma amounts below:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
==================================================================================
Net Income:
As Reported $39,030 $24,959 $26,188
Pro forma 38,959 24,473 25,361
Basic Earnings Per Share:
As Reported $ 1.60 $ 1.05 $ 1.12
Pro forma $ 1.60 $ 1.03 $ 1.09
Diluted Earnings Per Share:
As Reported $ 1.54 $ 1.01 $ 1.07
Pro forma $ 1.53 $ .99 $ 1.04
==================================================================================
At the time of the Corporation's reorganization, a liquidation account was
established by the Bank for the benefit of all eligible deposit account holders
as of December 31, 1986 who maintain their accounts in the Bank subsequent to
the reorganization. The liquidation account provides these deposit account
holders with an interest in the retained earnings of the Bank prior to any
distribution to stockholders in the sole event of a complete liquidation. The
deposit account holders' interest in the liquidation account decreases as the
related deposit account decreases and will never increase. The liquidation
account does not restrict the use or application of stockholders' equity of the
Bank except that the Bank may not declare or pay a cash dividend on, or
repurchase any of its capital stock if, as the result of such dividend or
repurchase, the Bank's stockholders' equity would be less than the amount then
required for the liquidation account. At December 31, 1998, the balance of the
liquidation account was $10 million.
43
44
NOTE 12--OFF-BALANCE SHEET RISK
CREDIT RISK
In the normal course of business, the Bank offers various financial products
to its customers to meet their credit and liquidity needs. These instruments
involve, to varying degrees, elements of credit and market risk which may exceed
any amount recognized in the financial statements. Risks that are inherent in
normal banking services also exist in some of these financial instruments.
Contract amounts of the instruments indicate the maximum exposure the Bank has
in each class of financial instruments discussed in the following paragraphs.
These commitments and contingencies are not reflected in the accompanying
financial statements. Unless noted otherwise, the Bank does not require
collateral or other securities to support financial instruments with credit
risk.
Subject to its normal credit standards and risk monitoring procedures, the
Bank makes contractual commitments to extend credit. Commitments to extend
credit in the form of consumer, commercial real estate and commercial business
loans amounted to $574.0 million and $467.7 million at December 31, 1998 and
1997, respectively. Commitments typically have fixed expiration dates or other
termination clauses. The total of commitments does not necessarily represent
future cash requirements as many commitments may expire without being exercised.
Collateral and amounts thereof are obtained, if necessary, based upon
management's evaluation of each borrower's financial condition. Required
collateral may be in the form of cash, accounts receivable, inventory, property,
plant and equipment and income generating commercial properties and residential
properties.
The Bank is obligated under various recourse provisions related to sales of
residential mortgage loans. The maximum potential recourse obligation was $8.6
million and $13.3 million at December 31, 1998 and 1997, respectively. No losses
have been incurred under these recourse provisions. Conditional commitments are
issued by the Bank in the form of performance stand-by letters of credit which
guarantee the performance of a customer to a third party. These letters of
credit are typically included in the amount of funds committed by the Bank to
complete associated construction projects. At December 31, commitments under
outstanding performance stand-by letters of credit aggregated $24.8 million in
1998 and $32.9 million in 1997. The credit risk of issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
A judgment relating to a 1989 event was entered against Provident Bank of
Maryland in April of 1997 in the amount of $5.2 million, exclusive of
post-judgment interest. This judgment, which Provident appealed, reversed an
earlier court holding in favor of Provident. The judgment stems from a lawsuit
alleging that the Bank had failed to fully honor a letter of credit. During the
fourth quarter of 1998, the appellate court upheld the lower court decision.
Payment was made in January, 1999. This payment, which was fully reserved,
resulted in a charge-off, thereby reducing the allowance for loan losses.
CONCENTRATIONS OF CREDIT RISK
Construction and mortgage loan receivables from real estate developers
represent $283.0 million and $321.9 million of the total loan portfolio at
December 31, 1998 and 1997, respectively. Substantially all loans are
collateralized by real property or other assets. These loans are expected to be
repaid from the proceeds received by the borrowers from the retail sales or
rentals of these properties to third parties.
The Corporation's investment portfolio contains mortgage-backed securities
amounting to $992.1 million and $885.5 million at December 31, 1998 and 1997,
respectively. The underlying collateral for these securities is in the form of
pools of mortgages on residential properties. The majority of the securities are
either directly or indirectly guaranteed by U.S. Government agencies or
corporations. Management is of the opinion that credit risk is minimal.
INTEREST RATE RISK
The Bank enters into agreements for the delivery of securitized mortgage
pools or for the purchases of consumer loan portfolios at a future date at a
specified price or yield. Movements in interest rates impose basis and interest
rate risk on the Bank between the dates of commitment and the dates of
settlement. Forward contracts aggregated $276.4 million and $89.3 million at
December 31, 1998 and 1997, respectively.
44
45
The Bank enters into various derivative financial instruments to manage its
interest rate risk exposure (see Note 1). The two major types used are interest
rate swaps and interest rate floor/cap/corridor arrangements. These derivative
financial instruments use notional amounts to represent a unit of measure but
not the amount subject to accounting loss, which is much smaller. Risks in these
transactions involve nonperformance by counterparties under the terms of the
contract (counterparty credit risk) and, for interest rate swaps, the
possibility that interest rate movements or general market volatility could
result in losses on open off-balance sheet positions (market risk). Credit risk
is controlled by dealing with well-established brokers which are highly rated
by independent sources. Market risk on interest rate swaps is minimized by
using these instruments as hedges, actively managing interest rate risk and by
continually monitoring these positions. Market risk associated with the interest
rate floor/cap/corridor arrangements only exist when premiums are amortized into
interest expense without receiving any compensation from third parties.
Unamortized premiums paid and outstanding for floor/cap/corridor arrangements
were $4.7 million at December 31, 1998, and $523 thousand at December 31, 1997.
Notional amounts of interest rate swaps and interest rate floor/cap/corridor
arrangements are detailed below by amounts outstanding, average interest rates/
fees and market values at December 31, 1998 and 1997.
Notional Maturity Average Interest Rate/Fee Market
---------------------------------------------------
(DOLLARS IN THOUSANDS) Amount Date Paid Received Value
==================================================================================================================
1998
INTEREST RATE SWAPS:
$10,000 1999 3 MONTH LIBOR (5.52%) 6.00% $ 2
10,000 1999 3 MONTH LIBOR (5.53%) 6.10% 3
10,000 1999 3 MONTH LIBOR (5.51%) 6.00% 14
10,000 1999 3 MONTH LIBOR (5.38%) 6.05% 19
10,000 1999 3 MONTH LIBOR (5.72%) 6.00% 23
15,000 2000 7.08% 3 MONTH LIBOR (5.28%) (372)
9,000 2000 7.19% 3 MONTH LIBOR (5.31%) (283)
15,000 2001 5.73% 3 MONTH LIBOR (5.22%) (212)
16,000 2001 5.08% 3 MONTH LIBOR (5.35%) 60
7,600 2001 5.17% 3 MONTH LIBOR (5.34%) 9
8,000 2002 5.73% 3 MONTH LIBOR (5.22%) (139)
50,000 2002 10 YEAR CMS (5.34%) 5.57% 244
50,000 2002 10 YEAR CMS (5.34%) 5.59% 275
50,000 2002 10 YEAR CMS (5.34%) 5.60% 358
50,000 2002 10 YEAR CMS (5.34%) 5.58% 272
50,000 2002 10 YEAR CMS (5.47%) 5.67% 304
50,000 2002 10 YEAR CMS (5.46%) 5.70% 262
50,000 2002 10 YEAR CMS (5.45%) 5.72% 348
50,000 2002 10 YEAR CMS (5.75%) 5.68% 354
25,000 2002 10 YEAR CMS (5.56%) 5.79% 197
25,000 2002 10 YEAR CMS (5.47%) 5.67% 155
25,000 2002 10 YEAR CMS (5.48%) 5.69% 164
15,000 2003 5.75% 3 MONTH LIBOR (5.22%) (354)
22,917 2003 10 YEAR CMT (4.85%) 5.49% 330
29,450 2003 10 YEAR CMT (4.81%) 5.06% (61)
17,000 2003 10 YEAR CMS (5.51%) 5.75% 164
17,000 2003 10 YEAR CMT (4.55%) 4.84% 62
45
46
Notional Maturity Average Interest Rate/Fee Market
--------------------------------------------------
(DOLLARS IN THOUSANDS) Amount Date Paid Received Value
- --------------------------------------------------------------------------------------------------------------------------------
$19,167 2004 5.81% 3 MONTH LIBOR (5.37%) $(314)
39,549 2004 10 YEAR CMT (4.53%) 5.61% 821
9,306 2004 10 YEAR CMT (4.58%) 5.60% 189
23,264 2004 10 YEAR CMT (4.81%) 5.57% 445
19,167 2004 5.81% 3 MONTH LIBOR (5.22%) (342)
23,611 2004 10 YEAR CMT (4.60%) 5.56% 456
33,056 2004 10 YEAR CMT (4.61%) 5.58% 651
23,611 2004 10 YEAR CMT (4.62%) 5.56% 382
14,167 2004 10 YEAR CMT (4.45%) 5.52% 141
34,500 2004 10 YEAR CMT (4.74%) 5.55% 375
9,583 2004 10 YEAR CMT (4.59%) 5.52% 96
17,250 2004 10 YEAR CMT (4.62%) 5.50% 162
15,333 2004 10 YEAR CMT (4.81%) 5.26% 33
20,124 2004 10 YEAR CMT (4.86%) 4.98% (120)
23,214 2005 5.79% 3 MONTH LIBOR (5.28%) (388)
23,214 2005 5.79% 3 MONTH LIBOR (5.28%) (388)
23,214 2005 5.77% 3 MONTH LIBOR (5.31%) (370)
46,429 2005 5.76% 3 MONTH LIBOR (5.28%) (808)
12,602 2005 10 YEAR CMT (4.67%) 5.53% 255
15,048 2005 10 YEAR CMT (4.70%) 5.58% 334
INTEREST RATE CAP ARRANGEMENTS:
$22,917 2003 $ 22 10 YEAR CMT (7.25%) $ 36
29,450 2003 218 10 YEAR CMT (5.40%) 224
39,549 2004 59 10 YEAR CMT (7.50%) 80
9,306 2004 29 10 YEAR CMT (7.00%) 27
23,264 2004 57 10 YEAR CMT (7.00%) 68
23,611 2004 70 10 YEAR CMT (6.75%) 83
33,056 2004 105 10 YEAR CMT (6.75%) 117
23,611 2004 100 10 YEAR CMT (6.50%) 101
14,167 2004 102 10 YEAR CMT (6.00%) 91
17,250 2004 127 10 YEAR CMT (6.09%) 107
17,250 2004 52 10 YEAR CMT (7.09%) 52
9,583 2004 22 10 YEAR CMT (7.09%) 29
17,250 2004 121 10 YEAR CMT (6.09%) 108
15,333 2004 137 10 YEAR CMT (5.57%) 137
20,125 2004 192 10 YEAR CMT (5.29%) 225
12,602 2005 27 10 YEAR CMT (7.43%) 38
15,048 2005 34 10 YEAR CMT (7.46%) 46
INTEREST RATE CORRIDOR ARRANGEMENTS:
$100,000 1999 $ 31 3 MONTH LIBOR (5.22%)> 6.63%, $ --
CAPPED AT 8.63%
INTEREST RATE FLOOR ARRANGEMENTS:
$100,000 1999 $ -- 4 YEAR TREASURY NOTES (4.70%), $ --
STRIKE PRICE OF 6.8%
- --------------------------------------------------------------------------------------------------------------------------------
46
47
Notional Maturity Average Interest Rate/Fee Market
--------------------------------------------
(DOLLARS IN THOUSANDS) Amount Date Paid Received Value
- --------------------------------------------------------------------------------------------------------------------------------
1997
Interest Rate Swaps:
$20,000 1998 5.29% 3 month LIBOR (5.77%) $ 25
15,000 1998 6.96% 3 month LIBOR (5.91%) (39)
20,000 1998 6.47% 3 month LIBOR (5.75%) 131
12,000 1998 6.49% 3 month LIBOR (5.75%) 87
20,000 1999 6.52% 3 month LIBOR (5.75%) 160
20,000 1999 6.52% 3 month LIBOR (5.75%) 168
9,583 1999 5.34% 3 month LIBOR (5.88%) 36
20,000 1999 6.58% 3 month LIBOR (5.91%) 172
9,167 1999 5.78% 3 month LIBOR (5.91%) 6
5,250 1999 6.84% 3 month LIBOR (5.81%) (46)
20,000 1999 6.60% 3 month LIBOR (5.78%) 221
20,000 1999 6.61% 3 month LIBOR (5.78%) 234
20,000 1999 6.62% 3 month LIBOR (5.72%) 268
12,385 1999 6.01% 3 month LIBOR (5.81%) (20)
20,000 1999 6.65% 3 month LIBOR (5.88%) 262
12,385 1999 6.14% 3 month LIBOR (5.88%) (33)
20,000 1999 6.68% 3 month LIBOR (5.91%) 270
9,962 1999 6.35% 3 month LIBOR (5.78%) (65)
20,000 1999 6.68% 3 month LIBOR (5.78%) 317
9,846 1999 6.45% 3 month LIBOR (5.78%) (65)
11,076 1999 6.21% 3 month LIBOR (5.88%) (40)
11,076 1999 6.31% 3 month LIBOR (5.91%) (52)
20,000 1999 6.70% 3 month LIBOR (5.91%) 302
12,461 2000 6.01% 3 month LIBOR (5.72%) (27)
10,385 2000 5.83% 3 month LIBOR (5.75%) 3
7,615 2000 5.95% 3 month LIBOR (5.91%) (6)
15,000 2000 7.08% 3 month LIBOR (5.91%) (371)
9,000 2000 7.19% 3 month LIBOR (5.91%) (278)
8,461 2000 6.17% 3 month LIBOR (5.72%) (36)
8,000 2002 6.08% 3 month LIBOR (5.91%) (32)
15,000 2002 6.03% 3 month LIBOR (5.91%) (31)
10,000 2002 6.25% 3 month LIBOR (5.90%) (67)
10,000 2002 6.30% 3 month LIBOR (5.90%) (88)
Interest Rate Corridor Arrangements:
$50,000 1998 $ 80 3 month LIBOR (5.81%)> 6.63%, $ 14
capped at 8.63%
100,000 1999 260 3 month LIBOR (5.81%)> 6.63% 95
capped at 8.63%
Interest Rate Floor Arrangements:
$100,000 1999 $ 182 4 year Treasury Notes (5.80%), $1,080
Strike Price of 6.8%
- --------------------------------------------------------------------------------------------------------------------------------
CMS--Constant Maturity Swap
CMT--Constant Maturity Treasury
LIBOR--London Interbank Offered Rate
47
48
For the year ended December 31, 1998, $24.0 million of the interest rate
swaps hedged the exposure that the securities available for sale had to
declining market values as a result of increasing interest rates. Additionally,
remaining swaps of $192.4 million and $926.0 million were utilized to hedge the
interest rate risk inherent in short-term borrowings and brokered certificates
of deposit, respectively. The interest rate corridors protect the net interest
margin from the impact of increases in savings deposit rates during periods of
rising interest rates. The interest rate floors were purchased to hedge the
impact of loan repricing on net interest income in future years.
The following is an analysis of the activity with regards to interest rate
swaps and interest rate floor/cap/corridor arrangements for the years ended
December 31, 1998, 1997 and 1996, respectively.
Notional Amount
----------------------------------------------
Interest Rate
Interest Rate Floor/Cap/Corridor
(IN THOUSANDS) Swaps Arrangements
============================================================================
Balance, January 1, 1996 $ 155,250 $ 540,000
New Contracts 295,500 --
Expired Contracts (104,172) (90,000)
Terminated Contracts (34,000) --
----------------------------------------------------------------------------
Balance, December 31, 1996 312,578 450,000
New Contracts 748,500 --
Expired Contracts (72,759) (200,000)
Terminated Contracts (524,667) --
----------------------------------------------------------------------------
Balance, December 31, 1997 463,652 250,000
NEW CONTRACTS 1,718,800 343,372
EXPIRED CONTRACTS (147,723) (50,000)
TERMINATED CONTRACTS (892,353) --
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $1,142,376 $ 543,372
============================================================================
At December 31, 1998, the Corporation had deferred gains of $2.8 million and
deferred losses of $2.3 million related to terminated contracts. These deferred
gains and losses will be amortized over 1.4 and 2.5 years, respectively. The
Corporation had deferred gains of $1.4 million and deferred losses of $2.8
million related to terminated contracts which were amortized as a yield
adjustment over 3.3 and 1.5 years, respectively, at December 31, 1997.
The notional maturities of the interest rate swaps and interest rate
floor/cap/corridor arrangements at December 31, 1998, are presented below.
Notional Amount
--------------------------------------
Interest Rate
Interest Rate Floor/Cap/Corridor
(IN THOUSANDS) Swaps Arrangements
--------------------------------------------------------------------------
1999 $ 50,000 $200,000
2000 24,000 --
2001 38,600 --
2002 483,000 --
2003 101,367 52,367
2004 301,688 263,355
2005 143,721 27,650
--------------------------------------------------------------------------
Total $1,142,376 $543,372
==========================================================================
48
49
NOTE 13--OTHER NON-INTEREST INCOME AND EXPENSE
The components of other non-interest income and other non-interest expense
for the three years ended December 31 were as follows:
(IN THOUSANDS) 1998 1997 1996
========================================================================================
Other Non-Interest Income:
Other Loan Fees $ 5,104 $ 2,147 $ 1,872
Other Non-Interest Income 5,937 4,543 5,251
----------------------------------------------------------------------------------------
Total Other Non-Interest Income $11,041 $ 6,690 $ 7,123
========================================================================================
Other Non-Interest Expense:
Advertising and Promotion $ 7,171 $ 5,678 $ 5,986
Communication and Postage 4,376 3,693 3,861
Printing and Supplies 2,502 2,277 2,351
Regulatory Fees 939 1,016 1,699
Professional Services 2,413 2,762 3,000
Other Non-Interest Expense 9,027 8,537 7,709
----------------------------------------------------------------------------------------
Total Other Non-Interest Expense $26,428 $23,963 $24,606
========================================================================================
NOTE 14--INCOME TAXES
The components of income tax expense and the sources of deferred income taxes
for the three years ended December 31 are presented below.
(IN THOUSANDS) 1998 1997 1996
==========================================================================================
Current Income Tax Expense (Benefit):
Federal $22,422 $19,121 $12,527
State (110) (354) 391
------------------------------------------------------------------------------------------
Total Current 22,312 18,767 12,918
Deferred Income Tax Expense (Benefit) (2,941) (5,139) 750
------------------------------------------------------------------------------------------
Total Income Tax Expense $19,371 $13,628 $13,668
==========================================================================================
Tax expense associated with investment securities gains was $2.7 million in
1998, $927 thousand in 1997 and $2.2 million in 1996.
49
50
The primary sources of temporary differences that give rise to significant
portions of the deferred tax asset and liability at December 31, 1998 and 1997,
are presented below.
Deferred Deferred
(IN THOUSANDS) Assets Liabilities
=================================================================================================
1998:
LOAN LOSS RESERVE RECAPTURE $ -- $ 9,411
RESERVE FOR LOAN LOSS 14,959 --
WRITE-DOWN OF PROPERTY HELD FOR SALE 1,453 --
EMPLOYEE BENEFITS 2,868 --
DEFERRED GAIN ON SALE/LEASEBACK 359 --
DEFERRED STATE TAX RECEIVABLE 4,800 --
DEPRECIATION -- 837
DEFERRED FEDERAL TAX LIABILITY FOR STATE RECEIVABLE -- 1,680
DEFERRED TAX LIABILITY ON UNREALIZED
GAINS IN DEBT SECURITIES -- 3,448
MORTGAGE SERVICING RIGHTS -- 596
CAPITALIZED REAL ESTATE OWNED COSTS 384 --
DEFERRED LOAN FEES -- 1,434
ALL OTHER 615 2,698
------------------------------------------------------------------------------------------
TOTAL $25,438 $20,104
==========================================================================================
1997:
Loan Loss Reserve Recapture $ -- $ 9,877
Reserve for Loan Loss 12,901 --
Write-down of Property Held for Sale 1,453 --
Employee Benefits 2,289 --
Deferred Gain on Sale/Leaseback 437 --
Deferred State Tax Receivable 2,820 --
Depreciation -- 113
Deferred Federal Tax Liability for State Receivable -- 987
Deferred Tax Liability on Unrealized
Gains in Debt Securities -- 3,096
Deferred Tax Liability on Security Transactions -- 768
Mortgage Servicing Rights -- 549
Capitalized Real Estate Owned Costs 516 --
Deferred Loan Fees -- 1,154
All Other 682 1,807
------------------------------------------------------------------------------------------
Total $21,098 $18,351
==========================================================================================
At December 31, 1998 and 1997, no valuation allowance was required with
respect to deferred tax assets.
50
51
The combined federal and state effective tax rate for each year is different
than the statutory federal income tax rate. The reasons for these differences
are set forth below:
1998 1997 1996
=============================================================================================
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Increases (Decreases) in Tax Rate
Resulting From:
State and Local Income Taxes,
Net of Federal Income Tax Benefit (.8) -- 2.4
Tax Benefit of State Refund Claim -- -- (1.3)
Tax-Advantaged Income (1.2) (1.6) (1.2)
Disallowed Interest Expense .2 -- --
Employee Benefits (.1) (.4) (.1)
Non-Deductible Merger Expenses -- 2.3 --
Credit for Community Development
Corporation Contribution (.2) -- --
Other .3 -- (.5)
---------------------------------------------------------------------------------------------
Total Combined Effective Tax Rate 33.2% 35.3% 34.3%
=============================================================================================
NOTE 15--EARNINGS PER SHARE
The Corporation adopted Statement of Financial Accounting Standards No. 128--
"Earnings Per Share" ("SFAS No. 128") on December 31, 1997. Under the provisions
of the standard, primary earnings per share has been replaced with basic
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Basic earnings per share does not include the effect of any potentially
dilutive transactions or conversions. Additionally, under the standard, diluted
earnings per share replaces fully diluted earnings per share from prior years.
This computation reflects the potential dilution of earnings per share under
the treasury stock method which could occur if contracts to issue common stock
were exercised, such as stock options, and shared in corporate earnings. All
prior period data has also been restated to provide for the effects of the
stock dividend issued in May, 1998, the 2-for-1 stock split in February 1998,
and the acquisition consummated during 1997.
The following table presents a summary of per share data and amounts for the
periods indicated:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
==============================================================================================
Qualifying Net Income $39,030 $24,959 $26,188
Basic EPS Shares 24,389 23,829 23,353
Basic EPS $ 1.60 $ 1.05 $ 1.12
Dilutive Shares 1,016 906 1,140
Diluted EPS Shares 25,405 24,735 24,493
Diluted EPS $ 1.54 $ 1.01 $ 1.07
----------------------------------------------------------------------------------------------
51
52
NOTE 16--OTHER COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes requirements for the disclosure
of comprehensive income in financial statements. Comprehensive income is
defined as net income plus transactions and other occurrences which are the
result of nonowner changes in equity. For financial statements presented for
the Corporation, nonowner equity changes are only comprised of unrealized gains
or losses on available for sale debt securities that will be accumulated with
net income in operations and is effective for years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Adoption of this standard did not have an
impact on the Corporation's results of operations. Changes in the balance of
Net Accumulated Other Comprehensive Income in the Stockholders' Equity section
of the Statement of Condition are the direct result of changes in the unrealized
gains (losses) on available for sale debt securities.
Below are the components of Other Comprehensive Income and the related tax
effects allocated to each component:
Year Ended December 31,
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
================================================================================================================
Unrealized Holding Gains (Losses)
Arising During the Year $7,701 $12,411 $(8,362)
Tax Expense (Benefit) Attributable to Unrealized
Holding Gains (Losses) Arising During the Year 3,046 5,381 (3,209)
----------------------------------------------------------------------------------------------------------------
Net Unrealized Holding Gains (Losses) 4,655 7,030 (5,153)
Less: Reclassification Adjustment
Gains Realized in Net Income 6,749 2,337 5,556
Tax Expense on Realized Gains
Included in Net Income 2,669 1,413 2,197
----------------------------------------------------------------------------------------------------------------
Net Reclassification Adjustment 4,080 924 3,359
-----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) $ 575 $ 6,106 $(8,512)
=================================================================================================================
NOTE 17--EMPLOYEE BENEFIT PLANS
PENSION PLAN
Effective December 31, 1997, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 132--"Employers' Disclosures
about Pensions and Other Post Retirement Benefits." The standard revises
employers' disclosure about pension and other postretirement benefits plans and,
accordingly, had no impact on earnings or financial condition of the
Corporation.
The Corporation's non-contributory defined benefit pension plan covers
substantially all full-time employees with at least one year of service and
provides monthly benefits upon retirement to participants based on average
career earnings and length of service. The Corporation's policy is to contribute
amounts to the plan sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, as amended, plus
such additional amounts as the Corporation deems appropriate.
POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Corporation provides certain
health care and life insurance benefits to retired employees. Substantially all
employees of the Corporation that reach retirement age may become eligible for
these benefits, generally contingent upon the completion of twenty years of
service. The health care plan is contributory where the retiree is responsible
for all premiums in excess of the Corporation's contribution. The Corporation's
contribution is capped at a growth rate of 4% per year. Under the prospective
transition approach, the transition obligation is amortized over a twenty-year
period. The cost of life insurance benefits provided to the retiree is borne by
the Corporation. At December 31, 1998 and 1997, this plan is unfunded.
52
53
The following tables set forth the activity for each benefit plan's projected
benefit obligation, plan assets and funded status at January 1.
Pension Plan Postretirement Benefits
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1998 1997
=======================================================================================================================
Actuarial Present Value of Accumulated
Benefit Obligation $25,518 $20,729 $ 1,363 $ 1,060
-----------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at January 1, $21,965 $19,439 $ 1,060 $992
Service Cost 840 839 72 51
Interest Cost 1,771 1,502 88 75
Benefit Payments (1,493) (1,484) (111) (109)
Actuarial Loss 3,531 1,669 254 51
-----------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at December 31, $26,614 $21,965 $ 1,363 $ 1,060
=======================================================================================================================
(IN THOUSANDS) 1998 1997 1998 1997
=======================================================================================================================
Plan Assets Fair Value at January 1, $26,826 $23,492 $ -- $ --
Employer Contributions -- 152 -- --
Benefit Payments (1,493) (1,484) -- --
Actual Return on Plan Assets 1,732 4,666 -- --
-----------------------------------------------------------------------------------------------------------------------
Plan Assets Fair Market Value at December 31, $27,065 $26,826 $ -- $ --
=======================================================================================================================
(IN THOUSANDS) 1998 1997 1998 1997
=======================================================================================================================
Plan Assets in Excess of Projected
Benefit Obligation $ 451 $ 4,861 $(1,363) $(1,060)
Unrecognized Net Loss (Gain) from Past
Experience Different from that Assumed 928 (3,547) (142) (317)
Unrecognized Prior Service Cost (1,596) (1,713) 83 --
Unrecognized Net Assets Arising
at Transition at January 1, (559) (695) 757 811
-----------------------------------------------------------------------------------------------------------------------
Accrued Pension Cost Included
in Other Liabilities $ (776) $(1,094) $ (665) $ (566)
=======================================================================================================================
The actuarially estimated net benefit cost for the year ended December 31
includes the following components:
(IN THOUSANDS) 1998 1997 1998 1997
=======================================================================================================================
Service Cost--Benefits Earned During the Year $ 840 $ 839 $ 72 $ 51
Interest Cost on Projected Benefit Obligation 1,771 1,502 88 75
Expected Return on Plan Assets (2,599) (2,260) -- --
Net Amortization and Deferral of Loss (Gain) (331) (419) 50 37
-----------------------------------------------------------------------------------------------------------------------
Net Pension Cost (Benefit) Included
in Employee Benefit Expense $ (319) $ (338) $ 210 $ 163
=======================================================================================================================
53
54
The Corporation revised the rates applied in the determination on the
actuarial present value of the projected benefit obligation to reflect the
anticipated performance of the plan and changes in compensation levels.
Pension Plan Postretirement Benefits
-----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
=======================================================================================================================
Rates Used in Determining Actuarial Present
Value of Projected Benefit Obligation:
Weighted Average Discount Rate 7.0% 7.5% 7.0% 7.5%
Expected Rate of Increase in Future Compensation 4.0% 4.0%
Expected Long-Term Rate of Return on Plan Assets 10.0% 10.0%
=======================================================================================================================
The contribution to the Corporation's postretirement benefit plan has been
capped at a growth rate of 4% in 1998 and 1997 and is expected to remain at that
level in the future.
The assumed health care cost trend rates could have a significant effect on
the amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
(IN THOUSANDS) 1% Increase 1% Decrease
======================================================================================================================
Effect on Total of Service and Interest Cost Components $ 18 $(15)
Effect on Postretirement Benefit Obligation 113 (96)
RETIREMENT SAVINGS PLAN
The Retirement Savings Plan is a defined contribution plan which is qualified
under Section 401(a) of the Internal Revenue Code of 1986. The plan generally
allows all employees who complete 500 hours of employment during a six-month
period and elect to participate, to receive matching funds from the Corporation
for pre-tax retirement contributions made by the employee. The annual
contribution to this plan is at the discretion of and determined by the Board of
Directors of the Corporation. During 1996, the Corporation raised the maximum
contribution of 50% of an employee's contribution up to 2% of the individual's
salary to 75% and 4.5%, respectively. Contributions to this plan amounted to
$1.3 million, $1.1 million and $1.2 million for the years ended December 31,
1998, 1997 and 1996, respectively.
NOTE 18--REGULATORY CAPITAL
The Corporation is subject to various capital adequacy guidelines imposed by
federal and state regulatory agencies. Under these guidelines, the Corporation
must meet specific capital adequacy requirements which are quantitative measures
of the Corporation's assets, liabilities and certain off-balance sheet items
calculated under regulatory accounting practices. Additionally, the
Corporation's capital amounts and classifications are subject to qualitative
judgments by these agencies about components, risk weightings and other factors.
The quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain amounts and ratios of total and tier 1
capital to risk-weighted assets and tier 1 capital to average assets, known as
the leverage ratio. The Corporation's tier 1 capital is equal to its capital
securities (see Note 10), common stock, capital surplus and retained earnings
less treasury stock. Equity for regulatory purposes does not include market
value adjustments for available for sale securities. The calculation of the
Corporation's total capital is equal to tier 1 capital plus the allowance for
loan losses subject to certain limitations. Risk-weighted assets are determined
by applying weighting to asset categories and certain off-balance sheet
commitments based on the level of credit risk inherent in the assets. At
December 31, 1998 and 1997, the Corporation exceeded all regulatory capital
requirements. The most recent notification from the Corporation's primary
regulators categorized the Corporation as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Corporation's
category. If the Corporation is unable to comply with the minimum capital
requirements, it would result in regulatory actions which could have a material
impact on the Corporation.
54
55
The minimum regulatory guidelines for total capital and tier 1 capital to
risk-weighted assets are 8% and 4%, respectively. Guidelines for the leverage
ratio require the ratio of tier 1 capital to average assets to be 100 to 200
basis points above a 3% minimum, depending on risk profiles and other factors.
The table below presents the various components used to calculate the capital
adequacy ratios.
December 31,
---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
=============================================================================================
QUALIFYING CAPITAL
Tier 1 Capital $ 330,461 $ 265,199
Total Capital 368,000 302,060
Risk-Weighted Assets 3,586,808 2,949,890
Quarterly Average Assets 4,688,197 3,756,348
RATIOS
Leverage Capital 7.05% 7.06%
Tier 1 Capital 9.21 8.99
Total Capital 10.26 10.24
NOTE 19--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair
Value of Financial Instruments" ("SFAS No. 107") requires all entities to
disclose the fair value of recognized and unrecognized financial instruments on
a prospective basis, where practicable, in an effort to provide financial
statement users with information in making rational investment and credit
decisions.
To estimate the fair value of each class of financial instrument the
Corporation applied the following methods using the indicated assumptions:
CASH AND DUE FROM BANKS AND SHORT-TERM INVESTMENTS
Carrying amount of those investments is used to estimate fair value.
MORTGAGE LOANS HELD FOR SALE
Fair value for mortgage loans held for trading or sale was determined using
forward contract commitment pricing for the majority of these loans. Loans not
specifically allocated to a forward commitment have been priced using quoted
prices for commitments into which these mortgages would be placed in the future.
SECURITIES AVAILABLE FOR SALE
The fair values of the securities are based on quoted market prices or dealer
quotes for those investments.
LOANS
Fair value of loans which have homogeneous characteristics, such as
residential mortgages and installment loans, was estimated using discounted cash
flows. All other loans were valued using discount rates which reflected credit
risks of the borrower, types of collateral and remaining maturities.
55
56
DEPOSIT LIABILITIES
Fair value of demand deposits, savings accounts and money market deposits was
the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Rates currently available to the Corporation for borrowings and debt with
similar terms and remaining maturities are used to estimate fair value of the
existing debt.
INTEREST RATE ARRANGEMENTS
The fair value of interest rate swaps and floor/cap/corridor arrangements,
which the Corporation uses for hedging purposes, is the estimated amount the
Corporation would receive or pay to terminate the arrangements at the reporting
date, taking into account the current interest rates and the current credit
worthiness of the counterparties.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the credit worthiness of the borrowers. Fixed-rate loan
commitments also take into account the difference between current levels of
interest rates and committed rates.
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(IN THOUSANDS) Amount Value Amount Value
==============================================================================================================================
Assets:
Cash and Due From Banks $ 74,365 $ 74,365 $ 68,580 $ 68,580
Short-Term Investments 198 198 350 350
Mortgage Loans Held for Sale 224,707 225,860 66,925 67,024
Securities Available for Sale 1,198,511 1,198,511 983,241 983,241
Loans, Net of Allowance 3,057,472 3,147,070 2,664,207 2,764,821
Liabilities:
Deposits $3,419,557 $3,434,359 $2,754,515 $2,761,008
Short-Term Borrowings 145,363 145,559 347,291 347,511
Long-Term Debt 735,239 745,435 469,077 471,406
Recognized Derivative Financial Instruments:
Interest Rate Floors $ -- $ -- $ 182 $ 1,080
Interest Rate Corridors 31 -- 340 109
Interest Rate Caps 1,474 1,569 $ -- $ --
Unrecognized Derivative Financial Instruments:
Interest Rate Swaps $ -- $ 3,808 $ -- $ 1,366
Commitments to Extend Credit -- -- -- 41
==============================================================================================================================
These fair value disclosures are made solely to comply with the requirements
of SFAS No. 107. The calculations represent estimates and do not represent the
underlying value of the Corporation. The information presented is based on fair
value calculations and market quotes as of December 31, 1998 and 1997. These
amounts are based on the relative economic environment at the respective
year-ends, therefore, the valuations may have been affected by economic
movements since year-end.
56
57
NOTE 20--PARENT COMPANY FINANCIAL INFORMATION
The condensed statements of income, financial condition and cash flows for
Provident Bankshares Corporation (parent only) are presented below.
STATEMENT OF INCOME
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
====================================================================================================================
Interest Income From Bank Subsidiary $ 242 $ 225 $ 81
Dividend Income From Subsidiaries 13,951 8,460 6,060
--------------------------------------------------------------------------------------------------------------------
Total Income 14,193 8,685 6,141
--------------------------------------------------------------------------------------------------------------------
Interest Expense 2,412 -- --
Operating Expenses 489 2,863 .505
--------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Equity
in Undistributed Income of Subsidiaries 11,292 5,822 5,636
Income Tax Benefit (1,038) (43) (144)
--------------------------------------------------------------------------------------------------------------------
12,330 5,865 5,780
Equity in Undistributed Income of Subsidiaries 26,700 19,094 20,408
--------------------------------------------------------------------------------------------------------------------
Net Income $39,030 $24,959 $26,188
====================================================================================================================
STATEMENT OF CONDITION
December 31,
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997
====================================================================================================================
ASSETS
Interest Bearing Deposit with Bank Subsidiary $ 900 $ 254
Investment in Bank Subsidiary 336,485 266,071
Other Assets 682 4,325
-----------------------------------------------------------------------------------------------------------
Total Assets $338,067 $270,650
====================================================================================================================
LIABILITIES
Other Liabilities $ 752 $ 468
-----------------------------------------------------------------------------------------------------------
Total Liabilities 752 468
-----------------------------------------------------------------------------------------------------------
Corporate-Obligated Mandatorily Redeemable Capital Securities 41,238 --
-----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock 24,811 23,285
Capital Surplus 172,239 131,191
Retained Earnings 103,496 113,463
Net Accumulated Other Comprehensive Income of Bank Subsidiary 5,308 4,733
Treasury Stock at Cost (9,777) (2,490)
-----------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 296,077 270,182
-----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $338,067 $270,650
====================================================================================================================
57
58
STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
===========================================================================================================
Operating Activities:
Net Income $ 39,030 $ 24,959 $ 26,188
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Equity in Undistributed Income from Subsidiaries (26,700) (19,094) (20,408)
Other Operating Activities 3,926 (3,583) 7
----------------------------------------------------------------------------------------------------------
Total Adjustments (22,774) (22,677) (20,401)
----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 16,256 2,282 5,787
----------------------------------------------------------------------------------------------------------
Investing Activities:
Investment in Bank Subsidiary (41,900) (4,500) (4,000)
Investment in Trust Subsidiary (1,238) -- --
----------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (43,138) (4,500) (4,000)
----------------------------------------------------------------------------------------------------------
Financing Activities:
Issuance of Common Stock 6,225 8,824 4,355
Purchase of Treasury Stock (7,287) -- --
Cash Dividends on Common Stock (12,648) (8,505) (6,281)
Issuance of Corporation-Obligated
Mandatorily Redeemable Capital Securities 41,238 -- --
----------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 27,528 319 (1,926)
----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 646 (1,899) (139)
Cash and Cash Equivalents at Beginning of Year 254 2,153 2,292
----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 900 $ 254 $ 2,153
Supplemental Disclosures
----------------------------------------------------------------------------------------------------------
Income Taxes Paid (Received) $ 748 $ 187 $ (158)
Stock Dividend 36,349 14,605 17,295
58
59
NOTE 21--FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement becomes
effective for fiscal years beginning after June 15, 1999 and will not be applied
retroactively. The statement establishes accounting and reporting standards for
derivative instruments and hedging activity. Under the standard, all derivatives
must be measured at fair value and recognized as either assets or liabilities in
the financial statements.
The accounting for changes in fair value (gains and losses) of a derivative
is dependent on the intended use of the derivative and its designation.
Derivatives may be used to: 1) hedge exposure to change the fair value of a
recognized asset or liability or a firm commitment, referred to as a fair value
hedge, 2) hedge exposure to variable cash flow of forecasted transactions,
referred to as a cash flow hedge, or 3) hedge foreign currency exposure.
The Corporation only engages in fair value and cash flow hedges. In both
types of hedges, the effective portions of the hedges, if included in earnings,
would not affect corporate net income. Ineffective portions of hedges are
reported in and affect net earnings immediately. Derivatives not designed as a
hedging instrument have the changes in their fair value recognized in earnings
in the period of change. Management is currently assessing the potential impact
of SFAS No. 133 on future corporate operations.
The FASB issued Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134")
during October 1998, which becomes effective for all periods beginning after
December 15, 1998. SFAS No. 134 conforms the accounting by mortgage banking
enterprises for mortgage-backed securities subsequent to securitization of
other types of assets by non-mortgage banking enterprises. This statement
should not have a material impact on the Corporation's results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
59
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The text and tables under "Election of Directors" in the Corporation's 1999
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The text and tables under "Compensation of Officers and Directors" in the
Corporation's 1999 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The text and tables under "Voting Securities and Principal Holders Thereof"
and "Election of Directors" in the Corporation's 1999 Proxy Statement are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Certain Transactions with Management" in the Corporation's
1999 Proxy Statement is incorporated herein by reference.
60
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a)(1) The Consolidated Financial Statements of Provident Bankshares Corporation
and Subsidiaries are included in Item 8.
(a)(2) Financial statement schedules--none applicable or required.
(a)(3) Exhibits
The following is an index of the exhibits included in this report:
(3.1) Articles of Incorporation of Provident Bankshares Corporation.(1)
(3.2) Second Amended and Restated By-Laws of Provident Bankshares
Corporation. (6)
(4.1) Amendment No. 1 to Stockholder Protection Rights Agreement.(3)
(10.1) 1994 Supplemental Executive Incentive Plan of Provident Bank of
Maryland.(3)
(10.2) Supplemental Executive Retirement Income Plan of Provident Bank
of Maryland.(4)
(10.3) Amended and restated Stock Option and Appreciation Rights Plan
of Provident Bankshares Corporation.(5)
(10.4) Form of Change in Control Agreement between Provident Bankshares
Corporation and Certain Executive Officers.(2)
(10.5) Form of Change in Control Agreement between Provident Bank of
Maryland and Certain Executive Officers.(2)
(10.6) Deferred Compensation Plan for Outside Directors.(7)
(10.7) Provident Bankshares Corporation Non-Employee Directors'
Severance Plan.(7)
(11) Statement re: Computation of Per Share Earnings.(7)
(21) Subsidiaries of Provident Bankshares Corporation.(7)
(23) Consents of Independent Accountants.(7)
(24) Power of Attorney.(7)
(27) Financial Data Schedule.(7)
(b) No reports on Form 8-K were filed by the Corporation in the last quarter of
1998.
(1) Incorporated by reference from Registrant's Registration Statement on Form
S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Registrant's 1995 Form 10-K (File No.
0-16421) filed with the Commission on March 18, 1996.
(3) Incorporated by reference from the Registrant's 1994 Annual Report on Form
10-K (File No. 0-16421) filed with the Commission on February 17, 1995.
(4) Incorporated by reference from Registrant's 1993 Form 10-K (File No.
0-16421) filed with the Commission on March 14, 1994.
(5) Incorporated by reference from the Registrant's definitive 1995 Proxy
Statement for the Annual Meeting of Stockholders held on April 19, 1995.
(6) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, filed with the Commission on
November 13, 1998.
(7) Filed herewith.
61
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES CORPORATION (Registrant)
January 29, 1999 BY /s/Peter M. Martin
------------------
Peter M. Martin
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the dates indicated.
Principal Executive Officer:
January 29, 1999 BY /s/Peter M. Martin
------------------
Peter M. Martin
Chairman of the Board, President and Chief
Executive Officer
Principal Financial Officer:
January 29, 1999 BY /s/James R. Wallis
------------------
James R. Wallis
Executive Vice President
Principal Accounting Officer:
January 29, 1999 BY /s/R. Wayne Hall
----------------
R. Wayne Hall
Treasurer
A Majority of the Board of Directors*
Robert B. Barnhill, Jr., Melvin A. Bilal,
Thomas S. Bozzuto, Dr. Calvin W. Burnett,
Ward B. Coe, III, Charles W. Cole, Jr.,
M. Jenkins Cromwell, Jr., Pierce B. Dunn,
Enos K. Fry, Herbert W. Jorgensen, Mark K.
Joseph, Barbara B. Lucas, Peter M. Martin,
Frederick W. Meier, Jr., Sister Rosemarie
Nassif, Francis G. Riggs, Sheila K. Riggs,
Carl W. Stearn
January 29, 1999 *BY /s/R. Wayne Hall
----------------
R. Wayne Hall
Attorney-in-fact
62