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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, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period
Commission File Number 0-16421
PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1518642
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
----------------------------------------------------
(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 Name of each exchange on which registered
None 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 and non-voting common equity held by
non-affiliates of the Registrant as of February 1, 2000 was $382,040,591. For
purposes of this calculation, officers and directors of the registrant are
considered affiliates.
At February 1, 2000, the Registrant had 25,524,186 shares of $1.00 par value
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
(Part III)
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 60
PART III
Item 10. Directors and Executive Officers of the Registrant 61
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and Management 61
Item 13. Certain Relationships and Related Transactions 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
Signatures 63
- --------------------------------------------------------------------------------
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
PART I
ITEM 1. BUSINESS
Provident Bankshares Corporation ("the Corporation"), a Maryland
corporation, was organized in 1987 by the management of Provident Bank ("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, 1999, the Bank was the third 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 20.
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. PIC, also offers a variety of life insurance
products and services, as agent.
Employees
At December 31, 1999, the Corporation and its subsidiaries had 1,511 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
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.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that
meets specified conditions to become a "financial holding company" and thereby
engage in a broader array of financial activities than previously permitted.
Such activities can include insurance underwriting and investment banking. The
Gramm-Leach-Bliley Act also authorizes banks to engage through "financial"
subsidiaries in certain of the activities permitted for financial holding
companies.
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, which expires in 2002.
The majority of the Bank's 83 offices are located in the
Baltimore/Washington metropolitan area and southern Pennsylvania. The Bank owns
11 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 11 of Item 8.--"Financial Statements and Supplementary Data"
on page 43.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
4
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 National 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 1999
and 1998 is shown in Table 6--Consolidated Quarterly Results of Operations,
Market Prices and Dividends contained in Management's Discussion and Analysis
(Item 7). At February 1, 2000, there were approximately 3,100 holders of record
of the Corporation's common stock.
For the year 1999, the Corporation declared and paid dividends of $.60 per
share of common stock outstanding. Declarations or payments of dividends are
subject to a determination by the Corporation's Board of Directors, which takes
into account the Corporation's financial condition, results of operations,
economic conditions and other factors, including the regulation restrictions
which affect the payment of dividends by the Bank to the Corporation. See Note
10 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) 1999 1998 1997/(1)/ 1996 1995
============================================================================================================================
Interest Income (tax-equivalent) $ 353,341 $ 319,240 $ 280,167 $ 248,311 $ 224,236
Interest Expense 204,261 187,509 156,718 137,354 122,819
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income (tax-equivalent) 149,080 131,731 123,449 110,957 101,417
Provision for Loan Losses 11,570 12,027 9,953 10,011 1,517
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 137,510 119,704 113,496 100,946 99,900
Non-Interest Income 60,734 55,995 41,672 44,509 34,573
Net Securities Gains (Losses) 312 6,749 2,337 5,556 (2,683)
Merger Related Expenses /(1)/ -- -- 10,047 -- --
Non-Interest Expense 132,243 122,914 107,816 110,323 97,416
Income Before Income Taxes 66,313 59,534 39,642 40,688 34,374
Income Tax Expense (tax-equivalent) 22,163 20,504 14,683 14,500 12,242
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 44,150 $ 39,030 $ 24,959 $ 26,188 $ 22,132
============================================================================================================================
Per Share Amounts:
Net Income--Basic $ 1.73 $ 1.52 $ 1.00 $ 1.07 $ .92
Net Income--Diluted 1.67 1.47 .96 1.02 .88
============================================================================================================================
Cash Dividends Paid $ .60 $ .49 $ .40 $ .31 $ .23
============================================================================================================================
Tax-Equivalent Adjustment/(2)/ $ 964 $ 1,133 $ 1,055 $ 832 $ 754
============================================================================================================================
Total Assets $5,094,477 $4,675,897 $3,926,739 $3,485,618 $3,170,390
Total Stockholders' Equity 274,599 296,077 270,182 238,798 223,048
Return on Average Assets .90% .90% .68% .79% .75%
Return on Average Equity 15.46 13.75 9.90 11.53 11.14
Stockholders' Equity to Assets 5.39 6.33 6.88 6.85 7.04
Average Equity to Average Assets 5.83 6.52 6.89 6.85 6.70
Dividend Payout Ratio 35.93 32.15 40.14 29.49 24.84
- ----------------------------------------------------------------------------------------------------------------------------
/(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 13.33%, respectively. Basic earnings per share and diluted earnings
per share would have been $1.34 and $1.29, 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 35%
in 1999 and 39.55% for 1998 through 1995.
5
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, 1999.
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 ("the Bank"), offers consumer and commercial
banking services. Provident operates in the dynamic Baltimore-Washington
corridor through a network of 83 offices in Maryland and Northern Virginia, as
well as 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 1999 of $44.2 million or $1.67 per
share/diluted, a 13.6% increase over 1998. The growth in net earnings was
attributable to a $17.5 million rise in net interest income offset in part by
lower non-interest income of $1.7 million and higher operating costs of $9.3
million. 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 1999 increased $17.3 million, or
13.2%, from 1998 as average earning assets grew $538 million over the prior
year. Net interest margin increased slightly to 3.13% compared to 3.12% in 1998.
Provident's tax equivalent interest income increased $34.1 million, or
10.7%, during the year primarily due to the growth in average earning assets
offset in part by a 14 basis point decrease in yield. The decrease in yield was
mainly due to a lower interest rate environment during 1999 compared to 1998.
Average prime rate in 1999 was 8.00% compared to 8.35% in 1998. The increase in
average earning assets resulted from a $377 million increase in the loan
portfolios, $153 million in investments and $7 million in loans held for sale.
Consumer loans grew $437 million while the commercial business portfolio also
experienced growth of $60 million. Residential and commercial mortgage loans
declined $97 million and $30 million, respectively, due to sales of residential
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 21 basis points and 12 basis
points, respectively. Interest lost from non-accruing loans was $735 thousand
compared to $850 thousand in 1998.
Interest expense increased $16.8 million from 1998 resulting from a $488
million growth in average interest-bearing liabilities. The overall cost of
funds declined 15 basis points as total interest-bearing liabilities decreased
17 basis points mainly due to lower rate environment for deposit products.
Excluding the effect of off-balance sheet positions in each year, total costs of
interest-bearing liabilities would have decreased 22 basis points. The average
rate paid on borrowed funds decreased 26 basis points during 1999.
6
The increase in average interest-bearing liabilities reflects a $514
million rise in interest-bearing deposits, $408 million of that is associated
with brokered deposits and $39 million with money market certificates of
deposit. Non-interest bearing demand deposit accounts grew by $43 million or
20%. The Corporation experienced a $27 million decrease in borrowed funds.
Future growth in net interest income will depend upon consumer and
commercial loan demand, growth in deposits 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 1999.
Analysis of Changes in Net Interest Income
Table 2
1999/1998 1998/1997
--------------------------------------------- --------------------------------------------------
Variance Due to Change In Variance Due to Change In
------------------------------ -----------------------------------
(in thousands) Net Increase/ Average Average Average Net Increase/ Average Average Average
(tax-equivalent basis) (Decrease) Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume
==============================================================================================================================
Interest Income from:
Loans:
Consumer $ 34,894 $ 962 $ 33,713 $ 219 $ 34,732 $ (5,252) $ 41,924 $(1,940)
Commercial Business 3,110 (1,573) 4,971 (288) 1,563 (1,146) 2,836 (127)
Real Estate--Construction (272) (949) 736 (59) (1,131) (1,139) 9 (1)
Real Estate--Mortgage (11,770) (2,260) (10,065) 555 (9,216) (687) (8,647) 118
Mortgage Loans Held for Sale 582 61 517 4 5,161 (211) 5,801 (429)
Other Short-Term
Investments (126) (25) (113) 12 (28) 18 (43) (3)
U.S. Treasury and
Government Agencies
and Corporations (278) 18 (294) (2) (3,134) 144 (3,206) (72)
Mortgage-Backed Securities 751 (3,378) 4,326 (197) 9,827 (2,827) 13,234 (580)
Municipal Securities 258 (28) 290 (4) 285 (40) 334 (9)
Other Debt Securities 6,952 96 6,662 194 1,014 (230) 1,384 (140)
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 34,101 (5,804) 40,644 (739) 39,073 (12,498) 53,979 (2,408)
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense on:
Demand/Money Market
Deposits 370 (1,697) 2,357 (290) 2,429 625 1,710 94
Savings Deposits (4,411) (4,347) (84) 20 (1,639) (1,559) (87) 7
Certificates of Deposit 26,119 412 25,588 119 20,494 (236) 20,802 (72)
Individual Retirement
Accounts (1,322) (587) (784) 49 3,027 105 2,874 48
Short-Term Borrowings (4,687) (807) (4,068) 188 (11,313) (962) (10,709) 358
Long-Term Debt 683 (1,987) 2,810 (140) 17,793 (470) 18,662 (399)
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 16,752 (6,535) 24,128 (841) 30,791 1,422 29,105 264
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 17,349 $ 731 $ 16,516 $ 102 $ 8,282 $(13,920) $ 24,874 $(2,672)
==============================================================================================================================
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
Consolidated Average Balances, Interest Income and Expense and Yields and Rates
Table 3
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(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 $2,357,159 $ 183,122 7.77% $1,920,378 $148,228 7.72%
Commercial Business 384,708 30,280 7.87 325,209 27,170 8.35
Real Estate--Construction 133,458 11,565 8.67 125,650 11,837 9.42
Real Estate--Mortgage 390,177 29,241 7.49 517,068 41,011 7.93
---------- --------- ---------- --------
Total Loans /(1)/ 3,265,502 254,208 7.78 2,888,305 228,246 7.90
---------- --------- ---------- --------
Mortgage Loans Held for Sale 121,663 8,594 7.06 114,284 8,012 7.01
Other Short-Term Investments 2,617 109 4.17 5,043 235 4.66
US Treasury and Government
Agencies and Corporations 41,464 3,025 7.30 45,526 3,303 7.26
Mortgage-Backed Securities 1,165,777 75,109 6.44 1,101,684 74,358 6.75
Municipal Securities 26,756 2,055 7.68 23,036 1,797 7.80
Other Debt Securities 137,078 10,241 7.47 45,307 3,289 7.26
Equity Securities -- -- -- -- -- --
---------- --------- ---------- --------
Total Investment Securities /(2)/ 1,371,075 90,430 6.60 1,215,553 82,747 6.81
---------- --------- ---------- --------
Total Interest-Earning Assets 4,760,857 353,341 7.42 4,223,185 319,240 7.56
---------- --------- ---------- --------
Less: Allowance for Loan Losses (38,293) (38,831)
Cash and Due From Banks 68,725 60,562
Other Assets 121,354 105,659
---------- ----------
Total Assets $4,912,643 $4,350,575
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 543,257 14,146 2.60 $ 3,874 13,776 2.97
Savings Deposits 614,869 14,400 2.34 617,643 18,811 3.05
Certificates of Deposit 2,011,484 114,530 5.69 1,559,985 88,411 5.67
Individual Retirement Accounts 148,441 7,995 5.39 162,088 9,317 5.75
Short-Term Borrowings 243,300 12,737 5.24 317,424 17,424 5.49
Long-Term Debt 714,939 40,453 5.66 667,752 39,770 5.96
---------- --------- ---------- --------
Total Interest-Bearing Liabilities 4,276,290 204,261 4.78 3,788,766 187,509 4.95
---------- --------- ---------- --------
Noninterest-Bearing Demand Deposits 255,259 212,339
Other Liabilities 39,752 42,608
Capital Securities 39,206 27,873
Stockholders' Equity 302,136 278,989
---------- ----------
Total Liabilities and Stockholders' Equity $4,912,643 $4,350,575
---------- ----------
Net Interest-Earning Assets $ 484,567 $ 434,419
---------- ----------
Net Interest Income (tax-equivalent) 149,080 131,731
Less: Tax-Equivalent Adjustment (964) (1,133)
--------- --------
Net Interest Income $ 148,116 $130,598
--------- --------
Net Yield on Interest-Earning Assets (tax-equivalent) 3.13% 3.12%
/(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 35%
in 1999 and 39.55% for 1998 through 1995.
8
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
=====================================================================================================================
$1,402,359 $113,496 8.09% $1,053,279 $ 85,049 8.07% $ 678,734 $ 56,566 8.33%
292,788 25,607 8.75 268,158 23,807 8.88 194,094 18,653 9.61
125,565 12,968 10.33 124,584 12,574 10.09 85,277 9,297 10.90
624,604 50,227 8.04 577,515 45,813 7.93 864,852 67,286 7.78
---------- -------- ---------- -------- ---------- --------
2,445,316 202,298 8.27 2,023,536 167,243 8.26 1,822,957 151,802 8.33
---------- -------- ---------- -------- ---------- --------
37,662 2,851 7.57 68,112 4,950 7.27 68,920 5,228 7.59
6,023 263 4.37 8,949 438 4.89 7,496 421 5.62
90,709 6,437 7.10 108,368 7,432 6.86 80,488 5,280 6.56
914,196 64,531 7.06 929,786 63,404 6.82 753,963 52,502 6.96
18,875 1,512 8.01 11,917 998 8.37 8,634 743 8.61
28,174 2,275 8.07 46,277 3,562 7.70 109,308 8,260 7.56
-- -- -- 2,983 284 9.52 -- -- --
---------- -------- ---------- -------- ---------- --------
1,051,954 74,755 7.11 1,099,331 75,680 6.88 952,393 66,785 7.01
---------- -------- ---------- -------- ---------- --------
3,540,955 280,167 7.91 3,199,928 248,311 7.76 2,851,766 224,236 7.86
---------- -------- ---------- -------- ---------- --------
(33,017) (27,985) (27,299)
57,923 55,568 53,379
89,650 92,621 90,322
---------- ---------- ----------
$3,655,511 $3,320,132 $2,968,168
---------- ---------- ----------
$ 403,128 11,347 2.81 $ 380,913 11,009 2.89 $ 323,836 11,118 3.43
620,267 20,450 3.30 621,995 17,100 2.75 636,908 15,442 2.42
1,194,202 67,917 5.69 922,616 53,493 5.80 776,089 45,272 5.83
111,252 6,290 5.65 105,680 6,134 5.80 106,370 6,384 6.00
505,640 28,737 5.68 538,434 29,602 5.50 498,399 29,569 5.93
360,862 21,977 6.09 334,120 20,016 5.99 261,295 15,034 5.75
---------- -------- ---------- -------- ---------- --------
3,195,351 156,718 4.90 2,903,758 137,354 4.73 2,602,897 122,819 4.72
---------- -------- ---------- -------- ---------- --------
176,645 158,635 129,740
31,555 28,253 32,064
-- -- --
251,960 229,486 203,467
---------- ---------- ----------
$3,655,511 $3,320,132 $2,968,168
---------- ---------- ----------
$ 345,604 $ 296,170 $ 248,869
---------- ---------- ----------
123,449 110,957 101,417
(1,055) (832) (754)
-------- -------- --------
$122,394 $110,125 $100,663
-------- -------- --------
3.49% 3.47% 3.56%
9
Provision for Loan Losses
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for estimated losses based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the loan
portfolio, credit concentrating trends in historical loan experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets that the Company classifies in accordance with regulatory
requirements. The provision for loan losses was $11.6 million, down slightly
from $12.0 million in 1998. The Corporation continues to emphasize quality
underwriting as well as aggressive management of prior charge-offs and
potential problem loans.
Net charge-offs were $13.0 million in 1999 compared to $6.1 million in
1998. This increase in charge-offs is related to an adverse decision in a
lawsuit associated with a letter of credit issued in 1989. Net charge-offs as a
percentage of average loans was .40% in 1999 compared to .21% in 1998. Non-
accrual loans ended the year at $28.9 million or .91% of loans outstanding, an
increase of $17.4 million from December 31, 1998. This increase is due to one
health care relationship, the largest portion of which is a shared national
credit.
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 and
mortgage banking activities and gains on investment securities sales. Total
non-interest income decreased 2.7% to $61.0 million. Excluding net securities
gains, non-interest income increased $4.7 million or 8.5%.
Table 4 presents a comparative summary of the major components of non-
interest income.
Non-Interest Income Summary
Table 4
(in thousands) 1999 1998 1997 1996 1995
==================================================================================================================
Service Charges on Deposit Accounts $34,172 $29,260 $24,432 $19,262 $13,685
Mortgage Banking Activities 9,652 11,485 6,845 14,895 9,806
Commissions and Fees 5,280 4,209 3,705 3,229 2,101
Other Loan Fees 3,355 5,104 2,147 1,872 1,208
Interest Income on Tax Refund -- -- -- -- 5,796
Other Non-Interest Income 8,275 5,937 4,543 5,251 1,977
- -------------------------------------------------------------------------------------------------------------------
Subtotal 60,734 55,995 41,672 44,509 34,573
Net Securities Gains (Losses) 312 6,749 2,337 5,556 (2,683)
- -------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $61,046 $62,744 $44,009 $50,065 $31,890
===================================================================================================================
Deposit service charges rose 16.8% over the prior year due mainly to a $4.4
million increase in retail demand deposit service fees. Average interest-bearing
demand/money market deposits grew $79.4 million or 17% over last year while
non-interest bearing deposits increased $42.9 million or 20%. These increases
are the result of continued promotion and sales efforts of retail deposit
products.
Income from mortgage banking activities declined $1.8 million to $9.7
million from $11.5 million in 1998. This decline is from lower production as a
result of higher interest rate environment for residential mortgages. Mortgage
originations during the year decreased $291 million to $764 million.
Commission and fees increased $1.1 million during 1999. This increase is
mainly associated with income from Provident Investment Center (PIC), a wholly
owned subsidiary of the Bank. PIC offers annuities and mutual funds through an
affiliation with a securities broker-dealer as well as property and casualty
insurance products, as agent. For the year 1999, income associated with these
products increased by $895 thousand to $3.2 million. This increase is attributed
to continued sales efforts towards these products. Other non-interest income
increased $2.3 million over 1998, mainly due to higher bankcard income, which
increased $2.1 million.
10
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 $132 million represented a $9 million
increase from 1998 expenses.
Table 5 presents a comparative summary of the major components of non-interest
expense.
Non-Interest Expense Summary
Table 5
(in thousands) 1999 1998 1997 1996 1995
============================================================================================================================
Salaries and Employee Benefits $ 66,071 $ 61,649 $ 54,107 $ 55,406 $50,875
Occupancy Expense, Net 11,376 10,349 10,018 9,317 8,914
Furniture and Equipment 8,927 8,123 7,354 7,036 6,625
External Processing Fees 14,883 14,006 12,374 10,929 7,784
Advertising and Promotion 6,806 7,171 5,678 5,986 5,562
Communication and Postage 5,231 4,376 3,693 3,861 3,050
Printing and Supplies 2,463 2,502 2,277 2,351 2,032
Federal Insurance Fund Recapitalization -- -- -- 3,029 --
Regulatory Fees 1,120 939 1,016 1,699 3,095
Professional Services 2,706 2,413 2,762 3,000 2,621
Merger Related Expenses -- -- 10,047 -- --
Capital Securities Expenses 3,160 2,359 -- -- --
Other Non-Interest Expense 9,500 9,027 8,537 7,709 6,858
- ----------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $132,243 $122,914 $117,863 $110,323 $97,416
============================================================================================================================
Salaries and benefits increased $4.4 million during the year. Compensation
increased $3.6 million while benefits were up $834 thousand. The rise in these
categories is attributable to network expansion as 16 new branches were opened.
Regular salaries rose $5.0 million mainly attributable to merit increases and
increased staffing associated to branch expansion. Full-time equivalent
employees as of December 31, 1999 were 1,511 compared to 1,414 last year.
Occupancy costs rose $1.0 million or 9.9% over last year. This increase is
mainly due to additional rent and leasehold improvements as the branch network
increased to 83 branches in 1999. Total furniture and equipment expense
increased $804 thousand due to upgrading of technology and branch network
expansion.
External processing increased $877 thousand, or 6.3%, associated with 12%
increase in account volume. The year 1999 includes full year of capital
securities expense of $3.2 million associated with the $40 million trust
preferred securities offering during the second quarter of 1998. 1998 capital
securities expense was $2.4 million. All other non-interest expenses were up by
$1.4 million from 1998. This increase is connected to higher communication and
postage expenses of $855 thousand resulting from branch network expansion and
higher net losses of $818,000 associated with retail deposit accounts.
Income Taxes
Provident recorded income tax expense of $21.2 million on pre-tax income of
$65.3 million for an effective tax rate of 32.4%. This compares with a 33.2%
effective tax rate for 1998. This decrease is related to a higher level of state
tax benefits.
Fourth Quarter Results
Provident recorded net income of $11.5 million, or $.44 per share on a
diluted basis, in the fourth quarter of 1999, an increase of $1.4 million, or
14.2%, over the $10.1 million, or $.38 per share on a diluted basis, recorded in
the same period last year. The higher earnings are principally due to an 18.1%
increase in net interest income. Lower non-interest income resulting from net
security gains in 1998 and a rise in operating expenses partially offset the
increase in income.
11
Tax-equivalent net interest income in the fourth quarter rose 17.8% or $6.1
million to $40.4 million as the net interest margin grew to 3.27% from 2.99% and
average earning assets grew $349 million to $4.89 billion. The increase in the
net interest margin primarily reflected a steeper yield curve along with a
higher rate environment as yield on earning assets increased 40 basis points
while the costs of funds increased only 13 basis points benefiting from deposit
growth.
The Corporation recorded a provision for loan losses of $3.6 million during
the quarter to provide for loan growth in the portfolio as well as an increase
in non-performing loans.
Non-interest income declined 19.4% to $14.5 million. Fee income from
deposit accounts increased $1.2 million but were more than offset by lower
security gains of $3.2 million and lower mortgage banking income of $1.45
million. Lower mortgage banking income was associated with higher rate
environment resulting in less production. Mortgage originations were $120
million compared to $361 million in 1998.
Non-interest expense increased $758 thousand to $33.8 million. Compensation
and benefits were flat compared to same period in 1998. While salaries were up
$530 thousand, retirement benefits declined $479 thousand. Occupancy expense was
$316 thousand higher due to network expansion and annual lease increases.
External processing fees increased $104 thousand, which is associated with
increased account volume. Communication and postage expense rose $262 thousand
mainly related to branch network expansion. Net losses increased $425 thousand
related to retail deposit accounts and higher robbery losses.
Table 6 presents quarterly trend data for 1999 and 1998.
Consolidated Quarterly Results of Operations, Market Prices and Dividends
(unaudited)
Table 6
1999 1998
-------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
===========================================================================================================================
Interest Income $95,055 $89,962 $85,988 $81,372 $83,649 $83,478 $77,284 $73,696
Interest Expense 54,894 52,171 49,565 47,631 49,632 50,827 45,094 41,956
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 40,161 37,791 36,423 33,741 34,017 32,651 32,190 31,740
Provision for Loan Losses 3,635 3,215 2,759 1,961 3,783 2,195 3,074 2,975
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 36,526 34,576 33,664 31,780 30,234 30,456 29,116 28,765
Non-Interest Income 14,544 15,309 15,343 15,538 14,810 14,360 15,266 11,559
Net Securities Gains (Losses) -- -- 375 (63) 3,228 1,587 725 1,209
Non-Interest Expense 33,771 33,362 32,930 32,180 33,013 31,619 30,661 27,621
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,299 16,523 16,452 15,075 15,259 14,784 14,446 13,912
Income Tax Expense 5,769 5,218 5,462 4,750 5,159 4,884 4,721 4,607
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $11,530 $11,305 $10,990 $10,325 $10,100 $ 9,900 $ 9,725 $ 9,305
- ---------------------------------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income--Basic $ .45 $ .44 $ .43 $ .40 $ .39 $ .39 $ .38 $ .36
Net Income--Diluted $ .44 $ .43 $ .42 $ .39 $ .38 $ .37 $ .36 $ .35
Market Prices: -High 22.31 24.50 29.88 28.38 26.43 28.46 32.50 32.65
Low 17.31 22.50 21.50 24.69 19.05 21.00 27.50 26.98
Cash Dividends Paid .160 .155 .143 .138 .133 .129 .118 .113
===========================================================================================================================
12
Financial Condition
Source and Use of Funds
Deposits
A major portion of Provident's funding comes from core deposits, which
consist of consumer and commercial transaction accounts and consumer savings and
time deposits. These deposits are generated through the Bank's 83 branch banking
locations. At December 31, 1999, core deposits represented 57% of total deposits
and 45% of total liabilities. Provident's future funding growth is expected to
be generated from deposit growth through strategies outlined below.
The branch network strategy includes traditional full service branch
locations and in-store branches. In-store branch locations are comprised of
supermarket locations and national retail superstores. Provident Bank as of
December 31, 1999 had 50 traditional branch locations and 33 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 and
Shoppers Food Warehouse in the Washington, D.C. metropolitan area. Provident
will selectively look for additional branch opportunities complementary to
existing locations when the cost of entry is reasonable. The Corporation has ten
additional in-store branches and three new traditional branches planned for
2000. Provident continues to attract increased commercial and retail deposits.
Interest-bearing demand/money market deposit balances at December 31, 1999 were
up $180 million, or 35.0%, compared to year-end 1998. The Bank also operates
eight 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
two new centers planned for 2000.
The table below presents the average deposit balances and rates paid for
the five years ended December 31, 1999.
Average Deposits
Table 7
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 255,259 --% $ 212,339 --% $ 176,645 --% $ 158,635 --% $ 129,740 --%
Money Market/Demand 543,257 2.60 463,874 2.97 403,128 2.81 380,913 2.89 323,836 3.43
Savings 614,869 2.34 617,643 3.05 620,267 3.30 621,995 2.75 636,908 2.42
Time:
Certificates of Deposit 2,011,484 5.69 1,559,985 5.67 1,194,202 5.69 922,616 5.80 776,089 5.83
Individual Retirement
Accounts 148,441 5.39 162,088 5.75 111,252 5.65 105,680 5.80 106,370 6.00
----------- ---------- ---------- ---------- ---------
Total Average Balance
/Rate $ 3,573,310 4.23% $3,015,929 4.32% $2,505,494 4.23% $ 2,189,839 4.01% $1,972,943 3.96%
=========== ========== ========== =========== ==========
Total Year-End Balance $ 3,808,528 $3,419,557 $2,754,515 $ 2,286,144 $2,056,436
=========== ========== ========== =========== ==========
As the table above indicates, Provident has a stable base of consumer
savings deposits. During 1999, average deposits grew $557 million, or 18.5%,
compared to 1998. Average money market/demand deposits and non-interest-bearing
deposits increased $122.3 million or 18.1%. This growth reflects Provident's
emphasis on full banking relationships with its retail and commercial customers.
Average time deposits increased $438 million, or 25%, $408 million of which is
attributable to brokered deposits and $39 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.
13
The table below presents information at December 31, 1999, 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 $68,286 $30,625 $38,540 $42,912 $180,363
Percent of Total 37.8% 17.0% 21.4% 23.8% 100.0%
Credit Risk Management
Much of the fundamental business of Provident is based upon understanding,
measuring and controlling credit risk. Credit risk entails both general risks,
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, 1999,
there were $21.3 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.
14
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 1999 showed a
significant decrease as originations totaled $764 million in 1999 compared to
$1.1 billion in 1998. During 1999, income from the sale of loans was $5.0
million. The mortgage servicing portfolio ended the year at $352 million. The
residential real estate mortgage loan balance at December 31, 1999 was $245
million compared to $238 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) 1999 % 1998 % 1997 % 1996 % 1995 %
===================================================================================================================================
Consumer $2,204,943 69.2% $2,154,557 69.5% $1,667,094 61.7% $1,211,971 54.0% $ 852,605 48.6%
Commercial Business 363,059 11.4 375,930 12.1 288,289 10.7 294,844 13.1 238,667 13.6
Real Estate--Construction:
Residential 89,513 2.8 89,777 2.9 99,926 3.7 112,072 5.0 76,092 4.3
Commercial 62,362 2.0 34,668 1.1 25,154 .9 9,470 .4 19,444 1.1
Real Estate--Mortgage:
Residential 245,401 7.7 238,282 7.7 362,012 13.4 355,566 15.8 332,940 19.1
Commercial 218,841 6.9 206,997 6.7 258,593 9.6 263,950 11.7 233,103 13.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans $3,184,119 100.0% $3,100,211 100.0% $2,701,068 100.0% $2,247,873 100.0% $1,752,851 100.0%
====================================================================================================================================
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 $441 million on average, ending the year at $1.4 billion, and is
predominately comprised of second mortgages.
Consumer loan balances through credits originated by Provident remained
relatively flat during the year, ending the year with a balance of $802 million.
During 1999, the Bank made a decision to cut back on the production of both
indirect auto and residential mortgage loans to concentrate on more profitable
businesses. 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 $262 million. Marine loan
balances ended 1999 with $200 million, and were produced primarily through
correspondent brokers. Home equity lines of credit totaled $173 million at the
end of 1999 while direct second mortgage loans ended the year at $122 million.
15
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 $30
million or 12.9% while average commercial construction loans increased $18.1
million or 72%. Average residential construction loans decreased $10.3 million
or 10.2% 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 $60 million, or 18.3%,
ending the year at $363 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 $56.7 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 $17.4 million, mainly in commercial
business. This increase is due to one health care relationship, the largest
portion of $15 million is part of a shared national credit. The total
relationship is $21 million. The financial condition of the health care industry
has weakened over the past year. Provident has been closely monitoring these and
several other of the bank's health care industry credits where the operators
have had to adjust to changes in Medicare reimbursement policies. The entire
health care portfolio, including the credits added to non-performing loans,
represents 3.5% of Provident's total loans. The increase in past due consumer
loans is a result of a $50 million, or 2.3%, growth in the consumer loan
portfolio, the majority of which is secured by residential real estate. As of
December 31, 1999, non-performing assets and past due loans ended the year at
$31.8 million and $29.2 million, respectively. (See the discussion under Loans
on page 14.) The $5.8 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 increased .54% as 1999 ended at .91% compared to .37% at the end
of 1998. This increase is associated with the health care credit noted above.
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, 1999
===============================================================================
Gross interest income that would have been recorded
had such loans been paid in accordance with original terms $ 2,089
Interest income actually recorded 1,354
16
Non-Performing Assets and Past Due Loans
Table 10
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
===================================================================================================================================
Non-Accrual Loans:
Consumer/(1)/ $ -- $ -- $ -- $ 9,809 $ 4,868
Commercial Business 21,329 3,550 2,917 539 246
Real Estate--Construction:
Residential -- 1,570 -- 37 --
Commercial -- -- -- -- 80
Real Estate--Mortgage:
Residential 7,579 6,397 6,937 4,372 3,785
Commercial -- -- -- 125 1,327
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Accrual Loans 28,908 11,517 9,854 14,882 10,306
- ----------------------------------------------------------------------------------------------------------------------------------
Renegotiated Loans:
Real Estate--Construction:
Residential -- -- -- -- --
Commercial -- -- -- -- 2,575
Real Estate--Mortgage:
Residential -- -- -- -- --
Commercial -- -- -- 3,942 2,900
- ----------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans -- -- -- 3,942 5,475
- ----------------------------------------------------------------------------------------------------------------------------------
Other Non-Performing Assets:
Real Estate--Construction:
Residential 1,538 454 454 132 6,580
Commercial -- -- -- 9,571 7,122
Real Estate--Mortgage:
Residential 1,395 2,554 2,367 903 246
Commercial -- 1,900 -- -- 939
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other Non-Performing Assets 2,933 4,908 2,821 10,606 14,887
==================================================================================================================================
Total Non-Performing Assets $31,841 $16,425 $12,675 $29,430 $30,668
==================================================================================================================================
Past Due Loans:
Consumer/(1)/ $23,369 $19,187 $14,371 $ 237 $ 559
Commercial Business 59 -- 126 -- --
Real Estate--Construction:
Residential -- -- 133 -- --
Commercial -- -- -- -- --
Real Estate--Mortgage:
Residential 5,753 8,806 10,646 7,823 5,072
Commercial -- -- -- -- --
==================================================================================================================================
Total Past Due Loans $29,181 $27,993 $25,276 $ 8,060 $ 5,631
==================================================================================================================================
Ratios:
Total Non-Performing Loans to Year-End
Loans .91% .37% .36% .84% .90%
Total Non-Performing Assets to Year-End
Assets .63 .35 .32 .84 .97
/(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, to
conform to standard industry practice, 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.
17
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.
Management believes that the allowance at December 31, 1999 will be
adequate to absorb losses inherent in the portfolio. Management believes that is
uses the best information available to make such determinations. If
circumstances differ substantially from the assumptions used in making the
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be affected. While the bank believes
it has established its existing allowance for loan losses in accordance with
GAAP, there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. Because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that increases to the
allowance will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above.
The 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) 1999 1998 1997 1996 1995
==========================================================================================================================
Balance at Beginning of Year $ 42,739 $ 36,861 $ 30,361 $ 27,524 $ 27,137
Provision for Loan Losses 11,570 12,027 9,953 10,011 1,517
Allowance Related to Securitized Loans (1,500) -- -- -- --
Loans Charged-off:
Consumer 7,940 4,550 3,641 2,888 1,642
Commercial Business 5,705 1,031 143 5,170 310
Real Estate--Construction:
Residential 500 593 305 37 33
Commercial -- 25 37 8 --
Real Estate--Mortgage:
Residential 412 258 289 360 73
Commercial -- 1,281 798 399 76
- -----------------------------------------------------------------------------------------------------------------
Total Charge-offs 14,557 7,738 5,213 8,862 2,134
- -----------------------------------------------------------------------------------------------------------------
Recoveries:
Consumer 1,236 970 871 826 917
Commercial Business 106 109 882 801 72
Real Estate--Construction:
Residential -- 68 -- -- --
Commercial 24 16 1 16 --
Real Estate--Mortgage:
Residential -- 11 1 45 13
Commercial 162 415 5 -- 2
=================================================================================================================
Total Recoveries 1,528 1,589 1,760 1,688 1,004
=================================================================================================================
Net Loans Charged-off 13,029 6,149 3,453 7,174 1,130
=================================================================================================================
Balance at End of Year $ 39,780 $ 42,739 $ 36,861 $ 30,361 $ 27,524
=================================================================================================================
Balances:
Loans--Year-End $3,184,119 $3,100,211 $2,701,068 $2,247,873 $1,752,851
Loans--Average 3,265,502 2,888,305 2,445,316 2,023,536 1,822,957
Ratios:
Net Loans Charged-off to Average Loans .40% .21% .14% .35% .06%
Allowance for Loan Losses to Year-End Loans 1.25 1.38 1.36 1.35 1.57
- -----------------------------------------------------------------------------------------------------------------
18
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, 1999, and
expected losses have been provided for in the allowance for loan losses. During
1999, the loan loss allowance decreased $3.0 million to $39.8 million at year-
end. This decrease is related to the pay out of an adverse decision in a lawsuit
associated with a letter of credit issued in 1989. This pay out was provided for
in 1998. The allowance as a percentage of total loans was 1.25% at December 31,
1999 compared to 1.38% at December 31, 1998. The allowance for loan losses as a
percentage of non-accrual loans was 138% at December 31, 1999, compared to 371%
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 thousand) 1999 1998 1997 1996 1995
=======================================================================================
Consumer $ 7,100 $ 6,057 $ 3,390 $ 4,572 $ 1,995
Commercial Business 12,672 11,042 8,376 3,120 2,527
Real Estate--Construction:
Residential 1,086 1,638 1,585 1,408 2,697
Commercial 799 439 384 883 545
Real Estate--Mortgage:
Residential 1,289 634 592 998 1,390
Commercial 1,843 1,863 2,486 2,704 3,803
Unallocated 14,991 21,066 20,048 16,676 14,567
- --------------------------------------------------------------------------------------
Total Allowance for Loan Losses $39,780 $42,739 $36,861 $30,361 $27,524
======================================================================================
Investment Securities
Provident's investment activities include management of the $1.7 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
The following table sets forth information concerning the Bank's investment
securities portfolio at December 31.
Investment Securities Summary
Table 13
(dollars in thousands) 1999 % 1998 % 1997 % 1996 % 1995 %
==================================================================================================================================
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 56,447 3.4% $ 42,293 3.5% $ 55,576 5.7% $ 71,882 6.8% $ 67,833 5.8%
Mortgage-Backed Securities 1,469,605 87.9 992,089 82.8 885,491 90.0 847,194 80.4 939,382 80.4
Municipal Securities 26,205 1.6 27,732 2.3 19,391 2.0 19,091 1.8 11,981 1.0
Other Debt Securities 119,250 7.1 136,397 11.4 22,783 2.3 29,987 2.8 76,073 6.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total Securities
Available for Sale 1,671,507 100.0 1,198,511 100.0 983,241 100.0 968,154 91.8 1,095,269 93.7
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity
U.S. Treasury and Government
Agencies and Corporations -- -- -- -- -- -- 32,395 3.1 13,397 1.2
Mortgage-Backed Securities -- -- -- -- -- -- 53,842 5.1 60,106 5.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to
Maturity -- -- -- -- -- -- 86,237 8.2 73,503 6.3
==================================================================================================================================
Total Investment Securities
Portfolio $1,671,507 100.0% $1,198,511 100.0% $983,241 100.0% $1,054,391 100.0% $1,168,772 100.0%
==================================================================================================================================
Total Portfolio Yield 7.0% 6.6% 7.0% 6.9% 6.9%
==================================================================================================================================
During 1999, 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 1999 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 $473 million during 1999 as a result of
securitizing $373 million of purchased consumer loans during the fourth quarter
of 1999.
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, 1999, the
Corporation had no investments classified as trading securities. Securities
designated as held to maturity are carried at amortized cost. Subsequent to the
acquisition of First Citizens Financial Corporation in 1997, 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, 1999, the available for sale portfolio
included net unrealized losses of approximately $68.2 million, compared to net
unrealized gains of $8.8 million at December 31, 1998.
In addition to unrealized gains and losses, Provident realized $380
thousand in gains and $68 thousand in losses from the sale of securities from
the available for sale portfolio in 1999. These sales were the result of
management's continuous monitoring of the investment securities portfolio in
terms of both performance and risks.
20
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.
Primary sources of liquidity at December 31, 1999 were loans held for sale,
investment securities available for sale, and scheduled loan repayments. Loans
held for sale and investment securities available for sale totaled $1.7 billion.
This represents 36% of total liabilities compared to 33% at December 31, 1998.
Maturities of investment securities, as Table 14 indicates, is expected to
generate $203 million in funds in 2000 and $910 million, or 54%, 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, 1999.
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 Loss
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Total Yield
=================================================================================================================================
Securities Available for
Sale
U.S. Treasury and
Government Agencies
Corporations $ __ __% $ 5,040 5.0% $ -- --% $ 51,595 6.4% $ (188) $ 56,447 6.3%
Mortgage-Backed
Securities 202,478 7.6 690,058 7.1 363,525 6.8 263,769 6.6 (50,225) 1,469,605 7.0
Municipal Securities 775 7.5 11,523 7.7 12,721 7.7 1,605 7.5 (419) 26,205 7.7
Other Debt Securities 163 3.7 400 6.3 -- -- 136,046 7.6 (17,359) 119,250 7.6
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment
Securities Portfolio $ 203,416 7.6% $707,021 7.1% $376,246 6.8% $453,015 6.9% $(68,191) $1,671,507 7.0%
=================================================================================================================================
Yields do not give effect to changes in fair value that are reflected as a
component of stockholders' equity.
21
Loan repayments are another source of liquidity. Scheduled loan repayments
during the year 2000 are $502 million, or 15.8% of loans. Table 15 presents
contractual loan maturities and interest rate sensitivity at December 31, 1999.
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 $380,768 $ 672,236 $1,151,939 $2,204,943 69.2%
Commercial Business 15,894 303,218 43,947 363,059 11.4
Real Estate--Construction:
Residential 63,332 24,827 1,354 89,513 2.8
Commercial 16,329 44,125 1,908 62,362 2.0
Real Estate--Mortgage:
Residential 6,920 12,850 225,631 245,401 7.7
Commercial 18,306 158,771 41,764 218,841 6.9
- -----------------------------------------------------------------------------------------------------------
Total Loans $501,549 $1,216,027 $1,466,543 $3,184,119 100.0%
===========================================================================================================
Rate Sensitivity:
Predetermined Rate $382,058 $ 909,885 $1,066,788 $2,358,731 74.1%
Variable or Adjustable Rate 119,491 306,142 399,755 825,388 25.9
- -----------------------------------------------------------------------------------------------------------
Total Loans $501,549 $1,216,027 $1,466,543 $3,184,119 100.0%
===========================================================================================================
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 45%, of total
liabilities and 43% of total assets.
An important element in liquidity management is the availability of
borrowed funds. At December 31, 1999, short-term borrowings totaled $301
million, or 6.3%, of liabilities in contrast to $145 million, or 3.3%, of
liabilities at December 31, 1998. Another key element in liquidity management is
the use of brokered CDs. Brokered CDs at December 31, 1999 amounted to $1.5
billion, a $372 million increase from the same period last year. The average
maturity of short-term borrowings at the end of the current year was 7 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 $627 million as
of December 31, 1999. 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 that 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
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 twenty four month horizon under a variety
of interest rate scenarios.
As of December 31, 1999, Provident's interest sensitive liabilities
exceeded interest sensitive assets within a one year period by $1.7 billion, or
35% 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 1999, 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 decreased by $536
thousand and interest expense increased by $1.1 million, for a total decrease of
$1.6 million in net interest income for the year ending December 31, 1999.
Included in this net interest income increase was the amortization of closed
positions which reduced interest income by $81 thousand and decreased interest
expense by $1.3 million (a net increase of $1.2 million) for the year. Without
the amortization of closed positions, off-balance sheet positions decreased net
interest income $2.8 million for the year.
As of December 31, 1999, the forward markets indicated that short-term
rates will increase by 95 basis points and long-term rates will increase by 10
basis points over the next twelve months. The Corporation's analysis indicates
that if management does not adjust its December 31, 1999 off-balance sheet
positions and the forward yield curve assumptions occur, off-balance sheet
positions, including amortization of closed positions, would decrease net
interest income by $2.2 million over the next twelve months. However, yields on
associated on-balance sheet hedged assets would improve by a corresponding
amount. This compares to a decrease of $4.2 million should interest rates remain
unchanged. Amortization of closed positions will increase net interest income by
$2.7 million over the next twelve months. Thus, without amortization of closed
positions, net interest income would decrease $2.7 million over the next twelve
months if the forward yield curve assumptions occur and $4.7 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, 1999, see Note 17--Regulatory
Capital. At December 31, 1999, total stockholders' equity was $275 million, a
$21.5 million decrease over the prior year. In addition to the ordinary
adjustments to stockholders' equity of net income and dividends paid, additional
capital of $641 thousand was raised through the dividend reinvestment plan, $2.1
million from the exercise of stock options, while capital decreased by $49.6
million during 1999 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 is 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 1999, the Corporation also repurchased 168,100
shares totaling $3.5 million. In the second quarter of 1999, the Corporation
issued a 5% stock dividend and all earnings per share figures have been adjusted
for this dividend.
23
Provident exceeds all regulatory capital requirements as of December 31,
1999. 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 and
capital securities. 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, 1999, Provident's total
capital ratio was 10.20% 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
9.18%.
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 7.10% at December 31, 1999 was well in excess of this
requirement.
Capital Components and Ratios
Table 16
December 31,
- ---------------------------------------------------------
(dollars in thousands) 1999 1998
================================================================================
Qualifying Capital
Tier 1 Capital $ 358,771 $ 330,461
Total Capital 398,551 368,000
Risk-Weighted Assets 3,907,332 3,586,808
Quarterly Average Assets 5,056,385 4,688,197
Ratios
Leverage Capital 7.10% 7.05%
Tier 1 Capital 9.18 9.21
Total Capital 10.20 10.26
Financial Review 1998/1997
The Corporation recorded net income in 1998 of $39.0 million or $1.47 per
share/diluted; a 53% increase over 1997 before adjusting for merger related
costs. Adjusting for merger costs, 1997 would have shown net income of $33.6
million and $1.29 per share/diluted, giving 1997 an increase of $5.4 million in
net income and $.19 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.
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.
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 $1.5
million compared to $670 thousand in 1997.
24
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.
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. Non-interest bearing demand deposit accounts grew by $36 million or
20%. The Corporation experienced a $119 million increase in borrowed funds.
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. 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.
Total non-interest income increased 42.6% to $62.7 million. Excluding net
securities gains, non-interest income increased $14.3 million or 34.4%. 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. 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. Income associated
with sales of annuities and mutual funds increased by $145 thousand to $2.35
million. Other non-interest income increased $4.4 million over 1997. This
increase was 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.
Provident's non-interest expense of $123 million represented a $15 million
increase from 1997 expenses adjusted for merger related items. 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 was
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 as December 31,
1998 were 1,414 compared to 1,235 in 1997. Occupancy costs rose $331 thousand or
3.3%. This increase was 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 a
14.7% increase in account volume. The year 1998 included 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 was 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 acquisition
of First Citizens Financial Corporation Savings Bank, and higher employment
advertising costs of $390 thousand.
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 compared to a 35.3%
effective tax rate for 1997. This decrease was related to permanent tax
differences associated with the acquisition of First Citizens Financial
Corporation during 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Sensitivity Management" on page 22 and Note 11--Off-Balance
Sheet Risks to the Consolidated Financial Statements herein.
25
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, 1999, 1998 and 1997
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, 1999 and 1998 29
Notes to Consolidated Financial Statements 33-60
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, 1999, 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, 1999. 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, 1999.
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, 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,
1999.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Provident Bankshares Corporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, cash flows, changes
in stockholders' equity and comprehensive income present fairly, in all material
respects, the consolidated financial position of Provident Bankshares
Corporation and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, 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 above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 19, 2000
27
CONSOLIDATED STATEMENT OF INCOME
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
================================================================================
INTEREST INCOME
Interest and Fees on Loans $ 261,837 $ 234,926 $ 203,899
Interest on Securities 88,094 80,184 68,294
Tax-Advantaged Interest 2,337 2,762 6,656
Interest on Short-Term Investments 109 235 263
- -----------------------------------------------------------------------------
Total Interest Income 352,377 318,107 279,112
- -----------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 151,071 130,315 106,004
Interest on Short-Term
Borrowings 12,737 17,424 28,737
Interest on Long-Term Debt 40,453 39,770 21,977
- -----------------------------------------------------------------------------
Total Interest Expense 204,261 187,509 156,718
- -----------------------------------------------------------------------------
Net Interest Income 148,116 130,598 122,394
Less: Provision for Loan Losses 11,570 12,027 9,953
- -----------------------------------------------------------------------------
Net Interest Income
After Provision for Losses 136,546 118,571 112,441
- -----------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit
Accounts 34,172 29,260 24,432
Mortgage Banking Activities 9,652 11,485 6,845
Commissions and Fees 5,280 4,209 3,705
Net Securities Gains 312 6,749 2,337
Other Non-Interest Income 11,630 11,041 6,690
- -----------------------------------------------------------------------------
Total Non-Interest Income 61,046 62,744 44,009
- -----------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee
Benefits 66,071 61,649 54,107
Occupancy Expense, Net 11,376 10,349 10,018
Furniture and Equipment
Expense 8,927 8,123 7,354
External Processing Fees 14,883 14,006 12,374
Merger Related Expenses -- -- 10,047
Capital Securities Expense 3,160 2,359 --
Other Non-Interest Expense 27,826 26,428 23,963
- -----------------------------------------------------------------------------
Total Non-Interest Expense 132,243 122,914 117,863
- -----------------------------------------------------------------------------
Income Before Income Taxes 65,349 58,401 38,587
Income Tax Expense 21,199 19,371 13,628
- -----------------------------------------------------------------------------
Net Income $ 44,150 $ 39,030 $ 24.959
=============================================================================
Per Share Amounts:
Net Income--Basic $ 1.73 $ 1.52 $ 1.00
Net Income--Diluted 1.67 1.47 .96
=============================================================================
The accompanying notes are an integral part of these statements.
28
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subsidiaries
December 31,
- ------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
==============================================================================
ASSETS
Cash and Due From Banks $ 90,840 $ 74,365
Short-Term Investments 1,759 198
Mortgage Loans Held for Sale 30,535 224,707
Securities Available for Sale 1,671,507 1,198,511
Loans:
Consumer 2,204,943 2,154,557
Commercial Business 363,059 375,930
Real Estate--Construction 151,875 124,445
Real Estate--Mortgage 464,242 445,279
- ------------------------------------------------------------------------------
Total Loans 3,184,119 3,100,211
Less: Allowance for Loan Losses 39,780 42,739
- ------------------------------------------------------------------------------
Net Loans 3,144,339 3,057,472
- ------------------------------------------------------------------------------
Premises and Equipment, Net 44,277 40,459
Accrued Interest Receivable 46,507 40,466
Other Assets 64,713 39,719
- ------------------------------------------------------------------------------
Total Assets $5,094,477 $4,675,897
==============================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 264,252 $ 252,024
Interest-Bearing 3,544,276 3,167,533
- ------------------------------------------------------------------------------
Total Deposits 3,808,528 3,419,557
- ------------------------------------------------------------------------------
Short-Term Borrowings 301,323 145,363
Long-Term Debt 627,118 735,239
Other Liabilities 43,747 40,423
- ------------------------------------------------------------------------------
Total Liabilities 4,780,716 4,340,582
- ------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable
Capital Securities 39,162 39,238
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized
100,000,000 Shares, Issued 26,225,752,
and 24,811,256 Shares; at December 31, 1999 and
December 31, 1998, respectively 26,226 24,811
Capital Surplus 203,364 172,239
Retained Earnings 102,587 103,496
Net Accumulated Other Comprehensive Income (Loss)
Treasury Stock at Cost--693,866 Shares at (44,323) 5,308
December 31, 1999 and 525,766 Shares at
December 31, 1998 (13,255) (9,777)
- ------------------------------------------------------------------------------
Total Stockholders' Equity 274,599 296,077
- ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $5,094,477 $4,675,897
==============================================================================
The accompanying notes are an integral part of these statements.
29
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Provident Bankshares Corporation and Subsidiaries
Accumulated
Other Treasury
Common Capital Retained Comprehensive Stock
(in thousands, except per share data) Stock Surplus Earnings income at Cost
- --------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 $21,687 $109,360 $111,614 $ (1,373) $ (2,490)
Net Income--1997 -- -- 24,959 -- --
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt securities, Net of
Reclassification Adjustment (see Note 15) 6,106
Comprehensive Income
Dividends Paid ($.40 per share) -- -- (8,505) -- --
Exercise of Stock Options (720,638 shares) 720 7,661 -- -- --
Stock Dividend (858,376 shares) 858 13,747 (14,605) -- --
Common Stock Issued under
Dividend Reinvestment Plan (20,312 shares) 20 423 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $23,285 $131,191 $113,463 $ 4,733 $ (2,490)
Net Income--1998 -- -- 39,030 -- --
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net of
Reclassification Adjustment (see Note 15) 575
Comprehensive Income
Dividends Paid ($.49 per share) -- -- (12,648) -- --
Exercise of Stock Options (337,498 shares) 337 5,164 -- -- --
Stock Dividend (1,165,433 shares) 1,165 35,184 (36,349) -- --
Purchase of Treasury Shares (297,700 shares) (7,287)
Common Stock Issued under Dividend
Reinvestment Plan (24,179 shares) 24 700 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $24,811 $172,239 $103,496 $ 5,308 $ (9,777)
Net Income--1999 -- -- 44,150 -- --
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net of
Reclassification Adjustment (see Note 15) (49,631)
Comprehensive Income (Loss)
Dividends Paid ($.60 per share) -- -- (15,232) -- --
Exercise of Stock Options (172,271 shares) 172 1,900 -- -- --
Stock Dividend (1,216,219 shares) 1,216 28,611 (29,827) -- --
Purchase of Treasury Shares (168,100 shares) (3,478)
Common Stock Issued under Dividend
Reinvestment Plan (27,726 shares) 27 614 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 26,226 $ 203,364 $ 102,587 $ (44,323) $(13,255)
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Total
Comprehensive Stockholders'
(in thousands, except per share data) Income (Loss) Equity
- -------------------------------------------------------------------------------------------
Balance at January 1, 1997 $ 238,798
Net Income--1997 $ 24,959 24,959
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt securities, Net of
Reclassification Adjustment (see Note 15) 6,106 6,106
----------
Comprehensive Income $ 31,065
----------
Dividends Paid ($.40 per share) (8,505)
Exercise of Stock Options (720,638 shares) 8,381
Stock Dividend (858,376 shares) --
Common Stock Issued under
Dividend Reinvestment Plan (20,312 shares) 443
- -------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 270,182
Net Income--1998 $ 39,030 39,030
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net of
Reclassification Adjustment (see Note 15) 575 575
----------
Comprehensive Income $ 39,605
----------
Dividends Paid ($.49 per share) (12,648)
Exercise of Stock Options (337,498 shares) 5,501
Stock Dividend (1,165,433 shares) --
Purchase of Treasury Shares (297,700 shares) (7,287)
Common Stock Issued under Dividend
Reinvestment Plan (24,179 shares) 724
- -------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 296,077
Net Income--1999 $ 44,150
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Debt Securities, Net of
Reclassification Adjustment (see Note 15) (49,631) (49,631)
-----------
Comprehensive Income (Loss) $ (5,481)
-----------
Dividends Paid ($.60 per share) (15,232)
Exercise of Stock Options (172,271 shares) 2,072
Stock Dividend (1,216,219 shares) --
Purchase of Treasury Shares (168,100 shares) (3,478)
Common Stock Issued under Dividend
Reinvestment Plan (27,726 shares) 641
- -------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 274,599
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
30
CONSOLIDATED STATEMENT OF CASH FLOWS
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 44,150 $ 39,030 $ 24,959
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 29,230 28,200 8,235
Provision for Loan Losses 11,570 12,027 9,953
Provision for Deferred Income Tax (Benefit) 2,833 (2,941) (5,139)
Realized Net Securities Gains (312) (6,749) (2,337)
Loans Originated or Acquired and Held for Sale (556,072) (993,474) (344,587)
Proceeds from Sales of Loans 755,228 841,538 315,650
Gain on Sales of Loans (4,984) (5,846) (2,632)
Other Operating Activities 286 (23,551) 8,930
- -----------------------------------------------------------------------------------------------------------------------
Total Adjustments 237,779 (150,796) (11,927)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 281,929 (111,766) 13,032
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Principal Collections and Maturities of Securities Available for Sale 197,055 251,725 169,288
Principal Collections and Maturities of Securities Held to Maturity -- -- 13,130
Proceeds on Sales of Securities Available for Sale 22,820 947,030 395,803
Purchases of Securities Held to Maturity -- -- (15,259)
Purchases of Securities Available for Sale (400,702) (1,405,328) (481,343)
Loan Originations and Purchases Less Principal Collections (492,222) (420,763) (454,026)
Purchases of Premises and Equipment (11,657) (10,069) (7,299)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (684,706) (637,405) (379,706)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net Increase in Deposits 388,971 665,042 468,371
Net Increase (Decrease) in Short-Term Borrowings 155,960 (201,928) (255,144)
Proceeds from Long-Term Debt 26,000 475,380 194,000
Payments and Maturities of Long-Term Debt (134,121) (209,218) (53,440)
Proceeds from Capital Securities -- 39,238 --
Issuance of Common Stock 2,713 6,225 8,824
Purchase of Treasury Stock (3,478) (7,287) --
Cash Dividends on Common Stock (15,232) (12,648) (8,505)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 420,813 754,804 354,106
- -----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 18,036 5,633 (12,568)
Cash and Cash Equivalents at Beginning of Year 74,563 68,930 81,498
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 92,599 $ 74,563 $ 68,930
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures
- -----------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 135,681 $ 111,775 $ 71,711
Income Taxes Paid 17,631 18,301 13,114
Stock Dividend 29,827 36,349 14,605
Loans Securitized and Converted to Securities Available for Sale 373,332 -- --
Transfer of Securities Held to Maturity to Securities Available for Sale -- -- 88,318
The accompanying notes are an integral part of these statements.
31
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 44,150 $ 39,030 $ 24,959
Net Other Comprehensive Income:
Net Unrealized Gain (Loss) on Debt Securities (49,428) 4,655 7,519
Less: Reclassification Adjustment for Gains Included in Net Income 203 4,080 1,413
- -----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (49,631) 575 6,106
- -----------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ (5,481) $ 39,605 $ 31,065
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
32
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, 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 83 offices and 159
ATMs located primarily in the greater Baltimore/Washington metropolitan area,
northern Virginia 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.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Provident
Bankshares Corporation and its wholly owned subsidiary, Provident Bank and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Use of Estimates
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 (loss), 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. 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 to conform to
standard industry practice.
33
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, 1999 and 1998 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 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, 1999, 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 Banking Activities
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.
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
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 Statement of 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
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 minimum 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--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 $27.2
million and $23.7 million during the years ended December 31, 1999 and 1998,
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 1999 and 1998,
the Corporation maintained average compensating balances of approximately $11.1
million and $4.5 million, respectively. In addition, the Corporation paid fees
totaling $556 thousand in 1999, $389 thousand in 1998 and $311 thousand in 1997
in lieu of maintaining compensating balances.
NOTE 3--Investment Securities
The aggregate amortized cost and market values of the available for sale
securities portfolio at December 31 were as follows:
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 56,635 $ -- $ 188 $ 56,447 $ 42,267 $ 26 $ -- $ 42,293
Mortgage-Backed Securities 1,519,830 3,638 53,863 1,469,605 986,279 6,270 460 992,089
Municipal Securities 26,624 141 560 26,205 26,787 945 -- 27,732
Other Debt Securities 136,609 -- 17,359 119,250 134,398 2,785 786 136,397
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Available
for Sale $1,739,698 $3,779 $71,970 $1,671,507 $1,189,731 $ 10,026 $ 1,246 $1,198,511
- -----------------------------------------------------------------------------------------------------------------------------------
36
The aggregate amortized cost and market values of the investment securities
portfolio by contractual maturity at December 31, 1999 and 1998, are shown
below. Expected maturities on mortgage-backed securities may differ from the
contractual maturities as borrowers have the right to prepay the obligation
without prepayment penalties.
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
====================================================================================================================================
Securities Available for Sale
In One Year or Less $ 775 $ 776 $ 5,153 $ 5,182
After One Year Through Five Years 16,963 16,854 9,917 10,179
After Five Years Through Ten Years 12,721 12,463 14,120 14,743
Over Ten Years 189,409 171,809 174,262 176,318
Mortgage-Backed Securities 1,519,830 1,469,605 986,279 992,089
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $1,739,698 $1,671,507 $1,189,731 $1,1198,511
====================================================================================================================================
Proceeds from sales of securities available for sale during 1999 were $22.8
million resulting in the realization of gross gains of $380 thousand and gross
losses of $68 thousand on such sales. For 1998, sales of securities yielded
proceeds of $947.0 million which resulted in gross realized gains of $7.4
million and gross losses of $.7 million. Securities sold in 1997 produced
proceeds of $395.8 million resulting in gross gains of $3.4 million and gross
losses of $1.1 million.
At December 31, 1999, a net unrealized loss of $44.3 million on the securities
portfolio was reflected as the net accumulated other comprehensive income in the
Consolidated Statement of Condition. This compares to a net unrealized gain of
$5.3 million at December 31, 1998.
The aggregate book and estimated market values of investment securities by
issuer which exceed ten percent of capital at December 31, 1999, 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 $38,879 $38,708
Indy Mac, Inc. 38,701 38,411
====================================================================
Securities with a market value of $971.8 million and $789.7 million at
December 31, 1999 and 1998, respectively, were pledged as collateral for public
funds, certain short-term borrowings and for other purposes required by law.
37
NOTE 4--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) 1999 1998 1997
======================================================================================
Balance at Beginning of the Year $ 42,739 $36,861 $30,361
Provision for Loan Losses 11,570 12,027 9,953
Allowance Related to Securitized Loans (1,500) -- --
Loans Charged-off (14,557) (7,738) (5,213)
Less: Recoveries of Loans
Previously Charged-off 1,528 1,589 1,760
--------------------------------------------------------------------------------------
Net Loans Charged-off (13,029) (6,149) (3,453)
--------------------------------------------------------------------------------------
Balance at End of the Year $ 39,780 $42,739 $36,861
======================================================================================
At December 31, 1999, 1998 and 1997, the recorded investment in loans which
are in non-accrual status and therefore considered impaired totaled $21.3
million, $5.1 million and $2.9 million, respectively. There was no additional
allowance required for these loans. Had these loans performed in accordance with
their original terms, interest income of $1.6 million in 1999, $1.4 million in
1998 and $470 thousand in 1997 would have been recorded. Interest income of $1.0
million was recognized on these loans during 1999. The average recorded
investment in impaired loans was approximately $7.5 million in 1999 and $6.8
million in 1998.
NOTE 5--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 eleven branches
and other facilities in the Baltimore/Washington metropolitan area which are
used primarily for the operations of the Bank.
(in thousands) 1999 1998
=====================================================================
Land $ 1,014 $ 1,014
Buildings and Leasehold Improvements 23,491 22,869
Furniture & Equipment 50,910 42,308
Property Held for Future Expansion 7,184 7,184
---------------------------------------------------------------------
Total Premises & Equipment 82,599 73,375
Less: Accumulated Depreciation and Amortization 38,322 32,916
---------------------------------------------------------------------
Net Premises and Equipment $44,277 $40,459
=====================================================================
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. At December 31, 1999, the
lease has three years remaining on the term. The remaining associated deferred
gain of $778 thousand 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
on the following page.
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, 1999.
38
Real Property Sublease Equipment
(in thousands) Leases Income Leases Total
-------------------------------------------------------------------------------
2000 $ 7,622 $ 79 $428 $ 7,971
2001 6,903 56 278 7,125
2002 6,421 19 164 6,566
2003 3,800 5 106 3,901
2004 2,360 -- 15 2,375
2005 and Thereafter 3,500 -- -- 3,500
-------------------------------------------------------------------------------
Total $30,606 $159 $991 $31,438
===============================================================================
Rental expense for premises and equipment was $7.7 million in 1999, $6.8
million in 1998 and $6.6 million in 1997.
NOTE 6--Mortgage Banking Activities
The following is an analysis of mortgage loan servicing asset balance, net
of accumulated amortization, during each of the respective years.
(in thousands) 1999 1998 1997
--------------------------------------------------------------------------------
Balance at Beginning of the Year $ 2,608 $ 1,984 $ 2,155
Additions 13,573 15,767 1,785
Amortization (137) (355) (359)
Sales of Servicing Assets (14,958) (14,788) (1,597)
--------------------------------------------------------------------------------
Balance at the End of the Year $ 1,086 $ 2,608 $ 1,984
================================================================================
At December 31, 1999, no valuation allowance was required on the servicing
assets. Unpaid principal balances of loans serviced for others not included in
the accompanying Consolidated Statement of Condition were $79 million and $181
million at December 31, 1999 and 1998, respectively.
NOTE 7--Short-Term Borrowings
At December 31, short-term borrowings were as follows:
(in thousands) 1999 1998
-------------------------------------------------------------------------------
Securities Sold Under Repurchase Agreements
and Federal Funds Purchased $289,426 $143,367
Other Short-Term Borrowings 11,897 1,996
-------------------------------------------------------------------------------
Total $301,323 $145,363
===============================================================================
The following table sets forth various data on securities sold under
repurchase agreements and federal funds purchased.
(dollars in thousands) 1999 1998 1997
-------------------------------------------------------------------------------
Balance at December 31 $289,426 $143,367 $345,430
Average Balance During the Year 232,195 310,504 464,662
Maximum Month-End Balance 337,116 496,506 515,937
Weighted Average Rate During the Year 5.22% 5.50% 5.68%
Weighted Average Rate at December 31 4.97% 4.77% 5.72%
-------------------------------------------------------------------------------
39
Securities sold under repurchase agreements at December 31, 1999, 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 $ -- $ -- $ 59,938 $ -- $ -- $59,938
Market Value -- -- 55,973 -- -- 55,973
Repurchase Borrowings -- -- 53,115 -- -- 53,115
Average Borrowing Interest Rate --% --% 5.68% --% --% 5.68%
- ----------------------------------------------------------------------------------------------------------------------------
NOTE 8--Long-Term Debt
Long-term debt consisted of Federal Home Loan Bank Advances of $627.1
million and $735.2 million at December 31, 1999 and 1998, respectively. The
principal maturities of long-term debt at December 31, 1999, are presented
below.
(in thousands)
----------------------------
2000 $221,075
2001 115,000
2002 166,000
2003 51,555
2004 35,000
After 2004 38,488
----------------------------
Total $627,118
============================
The Federal Home Loan Bank Advances to the Bank mature in varying amounts
through 2016. These advances are composed of $232.1 million fixed rate advances
with an average interest rate of 6.37% and $395.0 million variable rate advances
with an average rate of 6.15%. These advances are collateralized by investment
securities and certain real estate loans with carrying values of $593.6 million
and $151.8 million, respectively, at December 31, 1999.
NOTE 9--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 Statement of Condition. 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.
40
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.
NOTE 10--Stockholders' Equity
During 1999 and 1998, the Corporation declared five percent stock dividends
for each year to the stockholders of record as of May 3, 1999 and April 27,
1998, respectively. The 1999 stock dividend was paid on May 14, 1999, resulting
in the distribution of 1,216,219 common shares with a par value of $1.00 per
share. Accordingly, $1.2 million and $28.6 million were transferred from
retained earnings to common stock and capital surplus, respectively. The 1998
stock dividend was paid May 8, 1998 with the distribution of 1,165,433 common
shares with a $1.00 par value per share. This dividend resulted in the transfer
of $1.2 million to common stock and $35.2 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 168,100 and 297,700 shares of common stock at a cost of
$3.5 million and $7.3 million during 1999 and 1998, respectively.
The Corporation's Stock Option Plan (the "Option Plan") covers a maximum of
5.4 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 1999 through 1997.
The Option Plan provides for the granting of non-qualified stock options to
certain key employees and directors of the Corporation 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
or a three year vesting schedule. Regardless of the vesting schedule all options
vest immediately upon a change in control.
41
The following table presents a summarization of the activity related to the
options for the periods indicated:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Common Weighted Avg. Common Weighted Avg. Common Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding, January 1, 1,822,709 $ 12.93 1,877,918 $ 8.55 2,495,634 $ 6.26
Granted 473,900 21.15 324,608 30.27 183,895 17.96
Exercised (172,271) 6.42 (367,748) 5.30 (794,503) 3.43
Canceled or Expired (12,075) 30.22 (12,069) 30.76 (7,108) 15.30
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 2,112,263 $ 15.20 1,822,709 $ 12.93 1,877,918 $ 8.55
==================================================================================================================================
Options Exercisable at Year-end 1,219,404 1,173,425 1,404,012
Weighted Average Fair Value
of Options Granted During the Year $ .66 $ .37 $ 2.57
Options Available for Granting
under the Option Plan 697,303 1,159,825 306,835
- ----------------------------------------------------------------------------------------------------------------------------------
The table below provides information on the stock options outstandings at
December 31, 1999.
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 - $ 3.18 73,476 $ .90 2.1 73,476 $ .90
3.19 - 6.36 318,399 3.79 3.2 318,399 3.79
6.37 - 9.54 306,787 8.30 4.9 306,787 8.30
9.55 - 12.72 80,337 10.77 6.9 80,337 10.77
12.73 - 15.90 386,461 13.71 6.2 136,443 13.76
15.91 - 19.08 173,257 17.24 7.4 142,753 17.09
19.09 - 22.26 443,025 20.97 9.7 17,275 20.29
22.27 - 25.44 8,969 23.15 8.8 6,469 23.14
25.45 - 28.62 47,355 26.60 8.8 29,505 26.88
28.63 - 31.80 274,197 30.58 8.1 107,960 30.54
- ---------------------------------------------------------------------------------------------------------------------------------
2,112,263 $ 15.20 6.6 1,219,404 $ 11.15
=================================================================================================================================
The weighted average fair value of all of the options granted during the
period 1997 through 1999 has been estimated using the Black-Scholes option-
pricing model with the following weighted average assumptions:
1999 1998 1997
-----------------------------------------------------------------------------
Dividend Yield 14.45% 17.37% 38.47%
Weighted Average Risk-free Interest Rate 6.39 4.59 5.72
Weighted Average Expected Volatility 24.24 24.68 22.18
Weighted Average Expected Life 7 years 7 years 7 years
-----------------------------------------------------------------------------
42
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) 1999 1998 1997
------------------------------------------------------------------------
Net Income:
As Reported $44,150 $39,030 $24,959
Pro forma 43,947 38,959 24,473
Basic Earnings Per Share:
As Reported $ 1.73 $ 1.52 $ 1.00
Pro forma $ 1.72 $ 1.52 $ .98
Diluted Earnings Per Share:
As Reported $ 1.67 $ 1.47 $ .96
Pro forma $ 1.67 $ 1.46 $ .94
------------------------------------------------------------------------
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, 1999, the balance of the
liquidation account was $8.9 million.
NOTE 11--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 $488.3 million and $574.0 million at December 31, 1999 and
1998, 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 $379.7
million and $8.6 million at December 31, 1999 and 1998, 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 $34.6 million in
1999 and $24.8 million in 1998. The credit risk of issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
43
A judgment relating to a 1989 event was entered against Provident Bank of
Maryland in April 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 stemmed 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 $278.2 million and $283.0 million of the total loan portfolio at
December 31, 1999 and 1998, 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 $1.47 billion and $992.1 million at December 31, 1999 and 1998,
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 $32.3 million and $276.4 million at
December 31, 1999 and 1998, respectively.
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 $8.1 million at December 31, 1999 and $4.7 million at December 31, 1998.
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, 1999 and 1998.
Notional Maturity Average Interest Rate/Fee Market
------------------------------------
(dollars in thousands) Amount Date Paid Received Value
- -----------------------------------------------------------------------------------------------
1999
Interest Rate Swaps:
$ 9,000 2000 7.19% 3 month LIBOR (6.00%) $(50)
19,000 2001 6.07% 3 month LIBOR (6.18%) 135
7,600 2001 5.17% 3 month LIBOR (6.17%) 203
26,000 2001 6.32% 3 month LIBOR (6.17%) 121
16,000 2001 5.08% 3 month LIBOR (6.18%) 457
20,000 2001 6.35% 3 month LIBOR (6.07%) 99
20,000 2002 6.46% 3 month LIBOR (6.17%) 87
13,000 2002 6.58% 3 month LIBOR (6.07%) 51
30,000 2002 6.42% 3 month LIBOR (6.12%) 234
44
Notional Maturity Average Interest Rate/Fee Market
------------------------------------------------------
(dollars in thousands) Amount Date Paid Received Value
- -----------------------------------------------------------------------------------------------------------------------------
$10,000 2002 6.29% 10 year Treasury (6.21%) $ 854
18,750 2002 3 month LIBOR (6.97%) 5.69% (402)
36,458 2002 10 year Treasury (7.11%) 5.57% (99)
36,458 2002 10 year Treasury (6.96%) 5.61% (159)
36,458 2002 10 year Treasury (7.11%) 5.75% (1)
36,458 2002 10 year Treasury (7.00%) 5.60% (134)
36,458 2002 10 year Treasury (6.97%) 5.67% (34)
36,458 2002 10 year Treasury (6.91%) 5.59% (89)
36,458 2002 10 year Treasury (6.82%) 5.70% (67)
36,458 2002 10 year Treasury (6.88%) 5.72% (414)
18,750 2002 10 year Treasury (6.93%) 5.79% (20)
18,750 2002 10 year Treasury (7.11%) 5.67% (56)
10,000 2003 6.57% 3 month LIBOR (6.17%) 57
10,000 2003 3 month LIBOR (5.99%) 6.00% (252)
10,000 2003 10 year Treasury (6.01%) 6.00% (113)
17,917 2003 10 year Treasury (6.40%) 5.49% (307)
23,250 2003 10 year Treasury (6.41%) 5.06% (386)
13,600 2003 10 year Treasury (6.80%) 5.75% 91
13,600 2003 10 year Treasury (6.36%) 4.84% (37)
30,000 2004 5.22% 3 month LIBOR (6.21%) 1,788
9,000 2004 6.16% 3 month LIBOR (6.18%) 111
30,000 2004 6.49% 3 month LIBOR (6.10%) 409
10,000 2004 6.46% 3 month LIBOR (6.21%) 159
20,000 2004 5.26% 3 month LIBOR (6.07%) 168
30,000 2004 6.48% 3 month LIBOR (6.12%) 461
30,000 2004 5.19% 10 year Treasury (6.21%) 2,323
15,833 2004 5.81% 10 year Treasury (6.00%) 308
16,333 2004 3 month LIBOR (6.08%) 5.10% (532)
19,667 2004 3 month LIBOR (6.41%) 5.55% (484)
15,000 2004 3 month LIBOR (6.02%) 6.00% (561)
10,000 2004 3 month LIBOR (5.40%) 6.25% (288)
7,639 2004 3 month LIBOR (6.31%) 5.60% (172)
10,000 2004 3 month LIBOR (6.07%) 6.50% (345)
11,667 2004 3 month LIBOR (6.31%) 5.52% (367)
14,250 2004 3 month LIBOR (6.16%) 5.50% (454)
16,625 2004 3 month LIBOR (6.40%) 4.98% (742)
12,000 2004 3 month LIBOR (5.98%) 6.00% (481)
16,333 2004 10 year Treasury (6.40%) 5.00% (77)
15,000 2004 10 year Treasury (6.41%) 4.99% 256
28,050 2004 10 year Treasury (6.24%) 5.15% 103
43,333 2004 10 year Treasury (6.30%) 5.62% (578)
32,465 2004 10 year Treasury (6.14%) 5.61% (925)
10,000 2004 10 year Treasury (6.05%) 5.50% (402)
19,097 2004 10 year Treasury (6.39%) 5.57% (451)
19,444 2004 10 year Treasury (6.15%) 5.56% (456)
45
Notional Maturity Average Interest Rate/Fee Market
--------------------------------------------------------
(dollars in thousands) Amount Date Paid Received Value
- ----------------------------------------------------------------------------------------------------------------------------
$27,222 2004 10 year Treasury (6.11%) 5.58% $ (630)
19,444 2004 10 year Treasury (6.25%) 5.56% (460)
25,000 2004 10 year Treasury (5.95%) 7.00% (179)
28,500 2004 10 year Treasury (6.18%) 5.55% (848)
7,917 2004 10 year Treasury (6.24%) 5.52% (250)
10,000 2004 10 year Treasury (6.08%) 6.00% (240)
12,667 2004 10 year Treasury (6.41%) 5.26% (488)
25,000 2005 6.48% 3 month LIBOR (6.12%) 418
15,000 2005 6.65% 10 year Treasury (6.17%) 767
30,000 2005 6.49% 10 year Treasury (6.12%) 488
45,000 2005 3 month LIBOR (6.19%) 6.41% (357)
15,000 2005 3 month LIBOR (5.39%) 7.00% (100)
12,762 2005 3 month LIBOR (6.39%) 5.58% (405)
45,000 2005 10 year Treasury (6.80%) 5.75% (99)
10,000 2005 10 year Treasury (6.07%) 7.00% (273)
10,692 2005 10 year Treasury (6.43%) 5.53% (347)
10,000 2006 6.60% 3 month LIBOR (6.20%) 187
15,000 2006 3 month LIBOR (5.99%) 7.00% (279)
10,000 2009 6.52% 3 month LIBOR (6.22%) 399
10,000 2009 3 month LIBOR (6.00%) 7.00% (332)
10,000 2009 3 month LIBOR (6.05%) 7.00% (438)
10,000 2009 3 month LIBOR (6.05%) 7.20% (226)
10,000 2009 3 month LIBOR (5.93%) 7.20% (223)
10,000 2009 3 month LIBOR (6.06%) 7.30% (265)
10,000 2009 3 month LIBOR (6.03%) 7.50% (245)
40,000 2028 3 month LIBOR (7.04%) 8.29% (1,053)
Interest Rate Cap Arrangements:
$17,917 2003 $ 18 10 year CMT (7.25%) $ 105
23,250 2003 152 10 year CMT (5.40%) 600
32,465 2004 48 10 year CMT (7.50%) 236
7,639 2004 25 10 year CMT (7.00%) 80
19,097 2004 46 10 year CMT (7.00%) 201
19,444 2004 58 10 year CMT (6.75%) 246
27,222 2004 86 10 year CMT (6.75%) 346
19,444 2004 81 10 year CMT (6.50%) 297
11,667 2004 84 10 year CMT (6.00%) 264
14,250 2004 104 10 year CMT (6.09%) 315
14,250 2004 43 10 year CMT (7.09%) 153
7,917 2004 18 10 year CMT (7.09%) 85
14,250 2004 100 10 year CMT (6.09%) 316
12,667 2004 113 10 year CMT (5.57%) 377
16,625 2004 180 10 year CMT (5.29%) 583
10,688 2005 23 10 year CMT (7.43%) 110
12,762 2005 29 10 year CMT (7.46%) 133
46
Notional Maturity Average Interest Rate/Fee Market
---------------------------------------------------------
(dollars in thousands) Amount Date Paid Received Value
- -----------------------------------------------------------------------------------------------------------------------------
Interest Rate Floor Arrangements:
$21,000 2005 $ 325 10 year Treasury Notes (6.19%), $ 50
Strike Price of 6.69%
45,000 2005 845 10 year Treasury Notes (6.17%), 92
Strike Price of 6.67%
45,000 2006 858 10 year Treasury Notes (6.17%), 101
Strike Price of 6.66%
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
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
47
Notional Maturity Average Interest Rate/Fee Market
------------------------------------------------------
(dollars in thousands) Amount Date Paid Received Value
- ----------------------------------------------------------------------------------------------------------------------------
$ 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 ((.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%
- --------------------------------------------------------------------------------------------------------------------------------
CMS--Constant Maturity Swap
CMT--Constant Maturity Treasury
LIBOR--London Interbank Offered Rate
* - more than
48
For the year ended December 31, 1999, $9.0 million of the interest rate swaps
hedged the exposure of the securities available for sale to declining market
values as a result of increasing interest rates. Additionally, remaining swaps
of $436.4 million, $40.0 million and $1.1 billion were utilized to hedge the
interest rate risk inherent in short-term borrowings, capital securities 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, 1999, 1998 and 1997, respectively.
Notional Amount
--------------------------------------------------
Interest Rate
Interest Rate Floor/Cap/Corridor
(in thousands) Swaps Arrangements
=================================================================================
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
New Contracts 1,310,000 141,000
Expired Contracts (91,818) (291,818)
Terminated Contracts (777,737) --
---------------------------------------------------------------------------------
Balance, December 31, 1999 $1,582,821 $ 392,554
=================================================================================
At December 31, 1999, the Corporation had deferred gains of $3.6 million and
deferred losses of $1.9 million related to terminated contracts. These deferred
gains and losses will be amortized over 4.2 and 3.6 years, respectively. The
Corporation had deferred gains of $2.8 million and deferred losses of $2.3
million related to terminated contracts which were amortized as a yield
adjustment over 1.4 and 2.5 years, respectively, at December 31, 1998.
49
The notional maturities of the interest rate swaps and interest rate floor/cap
arrangements at December 31, 1999, are presented below.
Notional Amount
------------------------------------------
Interest Rate Floor/ Cap
(in thousands) Swaps Arrangements
=======================================================================================
2000 $ 9,000 $ --
2001 88,600 --
2002 420,917 --
2003 98,367 41,167
2004 622,487 216,937
2005 208,450 89,450
2006 25,000 45,000
2007 -- --
2008 -- --
2009 70,000 --
2028 40,000 --
---------------------------------------------------------------------------------------
Total $1,582,821 $392,554
=======================================================================================
NOTE 12--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) 1999 1998 1997
=======================================================================================
Other Non-Interest Income:
Other Loan Fees $ 3,355 $ 5,104 $ 2,147
Other Non-Interest Income 8,275 5,937 4,543
---------------------------------------------------------------------------------------
Total Other Non-Interest Income $11,630 $11,041 $ 6,690
=======================================================================================
Other Non-Interest Expense:
Advertising and Promotion $ 6,806 $ 7,171 $ 5,678
Communication and Postage 5,231 4,376 3,693
Printing and Supplies 2,463 2,502 2,277
Regulatory Fees 1,120 939 1,016
Professional Services 2,706 2,413 2,762
Other Non-Interest Expense 9,500 9,027 8,537
---------------------------------------------------------------------------------------
Total Other Non-Interest Expense $27,826 $26,428 $23,963
=======================================================================================
NOTE 13--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) 1999 1998 1997
=======================================================================================
Current Income Tax Expense (Benefit):
Federal $18,803 $22,422 $19,121
State (437) (110) (354)
-----------------------------------------------------------------------------------------
Total Current 18,366 22,312 18,767
Deferred Income Tax Expense (Benefit) 2,833 (2,941) (5,139)
------------------------------------------------------------------------------------------
Total Income Tax Expense $21,199 $19,371 $13,628
=======================================================================================
Tax expense associated with investment securities gains was $109 thousand in
1999, $2.7 million in 1998 and $927 thousand in 1997.
50
The primary sources of temporary differences that give rise to significant
portions o f the deferred tax asset and liability at December 31, 1999 and 1998,
are presented below.
Deferred Deferred
(in thousands) Assets Liabilities
==========================================================================================
1999:
Loan Loss Reserve Recapture $ -- $ 8,843
Reserve for Loan Loss 13,923 --
Write-down of Property Held for Sale 1,452 --
Employee Benefits 2,656 --
Deferred Gain on Sale/Leaseback 272 --
Deferred State Tax Receivable 5,576 --
Depreciation -- 2,021
Deferred Federal Tax Liability for State Receivable -- 1,952
Deferred Tax Benefit on Unrealized
Losses in Debt Securities 23,867 --
Leasing Activities 536 --
Mortgage Servicing Rights -- 181
Capitalized Real Estate Owned Costs 383 --
REIT Dividend Deferred -- 4,613
All Other 1,145 2,384
------------------------------------------------------------------------------------------
Total $49,810 $19,994
==========================================================================================
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
==========================================================================================
At December 31, 1999 the Corporation had a valuation allowance of $2.1 million
with respect to deferred tax assets. No valuation allowance was required in
1998.
51
The combined federal and state effective income tax rate for each year is
different than the statutory federal income tax rate. The reasons for these
differences are set forth below:
1999 1998 1997
=============================================================================================
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 (.7) (.8) --
Tax Benefit of State Refund Claim (.7) -- --
Tax-Advantaged Income (1.1) (1.2) (1.6)
Disallowed Interest Expense .2 .2 --
Employee Benefits (.2) (.1) (.4)
Non-Deductible Merger Expenses -- -- 2.3
Credit for Community Development
Corporation Contribution -- (.2) --
Other (.1) .3 --
--------------------------------------------------------------------------------------
Total Combined Effective Tax Rate 32.4% 33.2% 35.3%
======================================================================================
NOTE 14--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. Diluted earnings per share 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 dividends issued in 1998 and 1999, and the
2 for 1 stock split in February 1998.
The following table presents a summary of per share data and amounts for the
periods indicated:
(dollars in thousands, except per share data) 1999 1998 1997
============================================================================
Qualifying Net Income $44,150 $39,030 $24,959
Basic EPS Shares 25,534 25,605 25,046
Basic EPS $ 1.73 $ 1.52 $ 1.00
Dilutive Shares 847 1,016 906
Diluted EPS Shares 26,381 26,621 25,952
Diluted EPS $ 1.67 $ 1.47 $ .96
----------------------------------------------------------------------------
52
NOTE 15--Other Comprehensive Income
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of non-owner changes in equity. For financial
statements presented for the Corporation, the only non-owner equity change is
comprised of unrealized gains or losses on available for sale debt securities
that will be accumulated with net income from operations. This does not have an
impact on the Corporation's results of operations. Below are the components of
Other Comprehensive Income and the related tax effects allocated to each
component:
Year Ended December 31,
------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
================================================================================================
Unrealized Holding Gains (Losses)
Arising During the Year $(76,659) $7,700 $12,411
Tax Expense (Benefit) Attributable to Unrealized
Holding Gains (Losses) Arising During the Year (27,231) 3,045 4,892
------------------------------------------------------------------------------------------------
Net Unrealized Holding Gains (Losses) (49,428) 4,655 7,519
Less: Reclassification Adjustment
Gains Realized in Net Income 312 6,749 2,337
Tax Expense on Realized Gains
Included in Net Income 109 2,669 924
------------------------------------------------------------------------------------------------
Net Reclassification Adjustment 203 4,080 1,413
------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) $(49,631) $ 575 $ 6,106
================================================================================================
NOTE 16--Employee Benefit Plans
Pension Plan
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, 1999 and 1998, this plan is unfunded.
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) 1999 1998 1999 1998
=============================================================================================================================
Actuarial Present Value of Accumulated
Benefit Obligation $23,098 $25,518 $ 1,216 $ 1,363
-----------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at January 1, $26,614 $21,965 $ 1,363 $ 1,060
Service Cost 976 840 114 72
Interest Cost 1,740 1,771 85 88
Benefit Payments (1,323) (1,907) (88) (111)
Actuarial Loss (Gain) (4,373) 3,945 (258) 254
-----------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at December 31, $23,634 $26,614 $ 1,216 $ 1,363
=============================================================================================================================
(in thousands) 1999 1998 1999 1998
=============================================================================================================================
Plan Assets Fair Value at January 1, $30,434 $26,826 $ -- $ --
Employer Contributions -- -- -- --
Benefit Payments (1,323) (1,907) -- --
Actual Return on Plan Assets 1,117 5,515 -- --
-----------------------------------------------------------------------------------------------------------------------------
Plan Assets Fair Market Value at December 31, $30,228 $30,434 $ -- $ --
=============================================================================================================================
(in thousands) 1999 1998 1999 1998
=============================================================================================================================
Plan Assets in Excess of (Less Than)
Projected Benefit Obligation $ 6,594 $ 3,820 $(1,216) $(1,363)
Unrecognized Net Gain from Past
Experience Different from that Assumed (4,914) (2,440) (373) (127)
Unrecognized Prior Service Cost (1,401) (1,596) 76 83
Unrecognized Net Obligation (Asset)
Arising at Transition at January 1, (424) (560) 702 757
-----------------------------------------------------------------------------------------------------------------------------
Accrued Pension Cost Included
in Other Liabilities $ (145) $ (776) $ (811) $ (650)
=============================================================================================================================
The actuarially estimated net benefit cost for the year ended December 31
includes the following components:
(in thousands) 1999 1998 1999 1998
=============================================================================================================================
Service Cost--Benefits Earned During the Year $ 976 $ 840 $ 114 $ 72
Interest Cost on Projected Benefit Obligation 1,740 1,771 85 88
Expected Return on Plan Assets (2,977) (2,599) -- --
Net Amortization and Deferral of Loss (Gain) (370) (331) 50 50
-----------------------------------------------------------------------------------------------------------------------------
Net Pension Cost (Benefit) Included
in Employee Benefit Expense $ (631) $ (319) $ 249 $ 210
=============================================================================================================================
54
The Corporation revises 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
--------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
==============================================================================================================
Rates Used in Determining Actuarial Present
Value of Projected Benefit Obligation:
Weighted Average Discount Rate 8.0% 7.0% 8.0% 7.0%
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 1999 and 1998 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 $ 25 $(21)
Effect on Postretirement Benefit Obligation 103 (88)
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. Under provisions of the plan, the maximum
contribution is 75% of an employee's contribution up to 4.5% of the individual's
salary. Contributions to this plan amounted to $1.3 million, $1.3 million and
$1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 17--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 9), 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, 1999 and 1998, 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 could result in regulatory actions which could have a material
impact on the Corporation.
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) 1999 1998
==================================================================
Qualifying Capital
Tier 1 Capital $ 358,771 $ 330,461
Total Capital 398,551 368,000
Risk-Weighted Assets 3,907,332 3,586,808
Quarterly Average Assets 5,056,385 4,688,197
Ratios
Leverage Capital 7.10% 7.05%
Tier 1 Capital 9.18 9.21
Total Capital 10.20 10.26
NOTE 18--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.
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.
56
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:
1999 1998
- ----------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------
Assets:
Cash and Due From Banks $ 90,840 $ 90,840 $ 74,365 $ 74,365
Short-Term Investments 1,759 1,759 198 198
Mortgage Loans Held for Sale 30,535 30,513 224,707 225,860
Securities Available for Sale 1,671,507 1,671,507 1,198,511 1,198,511
Loans, Net of Allowance 3,144,339 3,089,716 3,057,472 3,147,070
Liabilities:
Deposits $3,808,528 $3,685,790 $3,419,557 $3,434,359
Short-Term Borrowings 301,323 301,430 145,363 145,559
Long-Term Debt 627,118 621,575 735,239 745,435
Recognized Derivative Financial Instruments:
Interest Rate Floors $ 2,028 $ 243 $ -- $ --
Interest Rate Corridors -- -- 31 --
Interest Rate Caps 1,208 4,447 1,474 1,569
Unrecognized Derivative Financial Instruments:
Interest Rate Swaps $ -- $ (6,938) $ -- $ 3,808
Commitments to Extend Credit -- -- -- --
================================================================================================================
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, 1999 and
1998. 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.
57
NOTE 19--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) 1999 1998 1997
====================================================================================================================
Interest Income From Bank Subsidiary $ 34 $ 242 $ 225
Dividend Income From Subsidiaries 20,242 13,951 8,460
--------------------------------------------------------------------------------------------------------------------
Total Income 20,276 14,193 8,685
--------------------------------------------------------------------------------------------------------------------
Operating Expenses 4,105 2,901 2,863
--------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Equity
in Undistributed Income of Subsidiaries 16,171 11,292 5,822
Income Tax Benefit (1,277) (1,038) (43)
--------------------------------------------------------------------------------------------------------------------
17,448 12,330 5,865
Equity in Undistributed Income of Subsidiaries 26,702 26,700 19,094
--------------------------------------------------------------------------------------------------------------------
Net Income $44,150 $39,030 $24,959
====================================================================================================================
Statement of Condition
December 31,
---------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
=========================================================================================================
ASSETS
Interest Bearing Deposit with Bank Subsidiary $ 219 $ 900
Investment in Bank Subsidiary 313,555 336,485
Other Assets 2,000 682
---------------------------------------------------------------------------------------------------------
Total Assets $315,774 $338,067
=========================================================================================================
LIABILITIES
Other Liabilities $ 775 $ 1,514
---------------------------------------------------------------------------------------------------------
Total Liabilities 775 1,514
---------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Capital Securities 40,400 40,476
---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock 26,226 24,811
Capital Surplus 203,364 172,239
Retained Earnings 102,587 103,496
Net Accumulated Other Comprehensive Income of Bank Subsidiary (44,323) 5,308
Treasury Stock at Cost (13,255) (9,777)
---------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 274,599 296,077
---------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $315,774 $338,067
=========================================================================================================
58
Statement of Cash Flows
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
=====================================================================================================================
Operating Activities:
Net Income $ 44,150 $ 39,030 $ 24,959
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Income from Subsidiaries (26,702) (26,700) (19,094)
Other Operating Activities (2,056) 4,688 (3,583)
---------------------------------------------------------------------------------------------------------------------
Total Adjustments (28,758) (22,012) (22,677)
---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,392 17,018 2,282
---------------------------------------------------------------------------------------------------------------------
Investing Activities:
Investment in Bank Subsidiary -- (42,662) (4,500
Investment in Trust Subsidiary -- (1,238) --
---------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities -- (43,900) (4,500)
---------------------------------------------------------------------------------------------------------------------
Financing Activities:
Issuance of Common Stock 2,713 6,225 8,824
Purchase of Treasury Stock (3,478)
Cash Dividends on Common Stock (15,232) (12,648) (8,505)
Other Financing Activities (76) -- --
Issuance of Corporation-Obligated
Mandatorily Redeemable Capital Securities -- 41,238 --
---------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (16,073) 27,528 319
---------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (681) 646 (1,899)
Cash and Cash Equivalents at Beginning of Year 900 254 2,153
---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 219 $ 900 $ 254
Supplemental Disclosures
---------------------------------------------------------------------------------------------------------------------
Income Taxes Paid $ 344 $ 748 $ 187
Stock Dividend 29,827 36,349 14,605
59
NOTE 20--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"). As amended, the statement
becomes effective for fiscal years beginning after June 15, 2000 and will not be
applied retroactively. The statement establishes accounting and reporting
standards for derivative instruments and hedging activity. Under the standard,
all derivatives must be measured at fair value and recognized as either assets
or liabilities in the financial statements.
The accounting for changes in fair value (gains and losses) of a derivative is
dependent on the intended use of the derivative and its designation. Derivatives
may be used to: 1) hedge exposure to 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The text and tables under "Election of Directors" in the Corporation's 2000
Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The text and tables under "Compensation of Officers and Directors" in the
Corporation's 2000 Proxy Statement are 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 2000 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
2000 Proxy Statement is incorporated herein by reference.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The Consolidated Financial Statements of Provident Bankshares
Corporation and Subsidiaries are included in Item 8.
(2) Financial statement schedules--none applicable or required.
(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
(4.1) Amendment No. 1 to Stockholder Protection Rights Agreement.(7)
(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.(6)
(10.5) Form of Change in Control Agreement between Provident Bank of
Maryland and Certain Executive Officers.(6)
(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.
(21) Subsidiaries of Provident Bankshares Corporation.
(23) Consents of Independent Accountants.
(24) Power of Attorney.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Corporation in the last quarter of
1999.
(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 Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, filed with the Commission on
November 13, 1998.
(3) Incorporated by reference from 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 Registrant's definitive 1995 Proxy Statement
for the Annual Meeting of Stockholders held on April 19, 1995.
(6) Incorporated by reference from Registrant's 1995 Form 10-K (File No. 0-
16421) filed with the Commission on March 18, 1996.
(7) Incorporated by reference from Registrant's 1998 Form 10-K (File No. 0-
16421) filed with the Commission on March 3, 1999.
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)
February 16, 2000 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:
February 16, 2000 BY /s/ Peter M. Martin
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Peter M. Martin
Chairman of the Board, President and Chief Executive
Officer
Principal Financial Officer:
February 16, 2000 BY /s/ Dennis A. Starliper
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Dennis A. Starliper
Group Manager and Chief Financial Officer
Principal Accounting Officer:
February 16, 2000 BY /s/ R. Wayne Hall
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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., 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
* Pursuant to the Power of Attorney filed herewith as Exhibit 24.0.
February 16, 2000 BY /s/ R. Wayne Hall
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R. Wayne Hall
Attorney-in-fact
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