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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For Fiscal Year Ended December 31, 2002

or

For the Transition Period

Commission File Number 0-16421

PROVIDENT BANKSHARES CORPORATION
(Exact Name of Registrant as Specified in its Charter)

114 East Lexington Street, Baltimore, Maryland 21202
(Address of Principal Executive Offices)

(410) 277-7000
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None

Name of each exchange on which registered
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        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. ý

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of last sold price or average bid and asked price as of last business day of most recently completed second fiscal quarter was $576,305,403. For purposes of this calculation, officers and directors of the Registrant are considered affiliates.

        At February 24, 2003, the Registrant had 24,387,808 shares of $1.00 par value common stock outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders (Part III).

Current Reports on Form 8-K filed on January 23, 2002 and February 27, 2002 (Part I Item 9)

TABLE OF CONTENTS

         This report, as well as other written communications made from time to time by Provident Bankshares Corporation and subsidiaries (the "Company") (including, without limitation, the Company's 2002 Annual Report to Stockholders) and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend" and "potential." Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including with respect to earnings growth (on both accounting principles generally accepted in the United States of America (GAAP) and cash basis); revenue growth in retail banking, lending and other areas; origination volume in the Company's consumer, commercial and other lending businesses; asset quality and levels of non-performing assets; current and future capital management programs; non-interest income levels, including fees from services and product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

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        The Company cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: prevailing economic conditions; changes in interest rates, loan demand, real estate values and competition, which can materially affect, among other things, retail banking revenues, revenues from sales on non-deposit investment products, origination levels in the Company's lending businesses and the level of defaults, losses and prepayments on loans made by the Company, whether held in portfolio or sold in the secondary markets; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; risks and uncertainties related to acquisitions and related integration and restructuring activities; and other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services. The forward-looking statements are made as of the date of this report, and, except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

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PART I

Item 1. Business

General

        Provident Bankshares Corporation ("the Corporation"), a Maryland corporation, was organized as a bank holding company in 1987, and is the sole stockholder of Provident Bank ("Provident" or "the Bank"), a Maryland chartered stock commercial bank. At December 31, 2002, the Bank was the second largest commercial bank, in asset size, chartered under the laws of the State of Maryland.

        The Bank offers consumer and commercial banking services through a network of 109 retail branch offices and 161 ATMs in the dynamic Baltimore-Washington corridor of Maryland, Northern Virginia, and southern York County, Pennsylvania. At December 31, 2002, the retail branch network consisted of 58 traditional full service branch locations and 51 in-store branches, which include supermarket and national retail superstore locations. Of the 109 branches, 61% are located in the Baltimore metropolitan region and 39% are located in the Washington D.C. metropolitan region.

        The Bank offers related financial services through its wholly owned subsidiaries. Mutual funds, annuities and insurance products are offered through Provident Investment Center ("PIC") and BankSure Insurance Corporation ("BankSure"). Leases are offered through Court Square Leasing Corporation and Provident Lease Corporation. During 2000, the Corporation acquired Harbor Federal Bancorp ("Harbor Federal") and the acquisition was accounted for as a purchase. Results have been included in operations for periods subsequent to the acquisition.

        Provident's business segments are based on management's method of internal reporting which separates its businesses on the basis of products and services. The Corporation's reportable segments are commercial banking, retail banking, and treasury and administration. See Note 20—Business Segment Information in the Notes to Consolidated Financial Statements for further information.

Market Area

        With branches throughout most of Maryland and a growing presence in Northern Virginia, Provident serves one of the most attractive markets in the country. As of June 2002 (the most recent available statewide deposit share data), Provident ranked seventh among commercial banks operating in Maryland with a 4.6% share of statewide deposits. Provident's share of deposits in Virginia grew 250% from .02% in 2001, to .07% in 2002.

        The most current data detailing construction activity, office space absorption and home sales strongly suggests that Maryland's economy is performing at or above national levels. In addition, Maryland has experienced employment growth above the national average, has the second highest median income in the country and the sixth highest percentage of households with Internet access. Metropolitan Baltimore is a regional center for the shipping and trucking industries given its deepwater harbor and proximity to Interstate 95. As a consequence, it is also a major provider of warehouse operations for retail distribution and logistics providers. Importantly, this metropolitan area is diversifying from a blue-collar to a white-collar business environment. It is gaining from such major employers as John Hopkins University and Health Systems, Northrop Grumman, Verizon, Baltimore Gas and Electric and the University of Maryland Medical Systems.

        To complement its presence in the attractive Maryland market, Provident is rapidly expanding into Northern Virginia which is the fastest growing area in Virginia and is home to nearly two million people. The area is also the second largest technology sector in the United States. Residential construction continues to highlight Northern Virginia's economic strengths. At more than $90,000, the Northern Virginia region also has one of the highest median incomes in the country.

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        Important to both Maryland and Northern Virginia is the accessibility to other key neighboring markets such as Philadelphia, New York, Richmond and Pittsburgh, as well as the ports in Baltimore and Norfolk. In addition, the entire Baltimore-Washington corridor gains from the presence and employment stability of the federal government and related service industries.

Investment Management

        The following table sets forth information concerning the Bank's investment securities portfolio at December 31.

Investment Securities Summary

        The following table presents the expected cash flows and interest yields of the Bank's investment securities portfolio at December 31, 2002.

Maturities of Investment Securities Portfolio

*

Yields do not give effect to changes in fair value that are reflected as a component of stockholders' equity.

        The Corporation currently allocates $2 billion of its assets to the investment securities portfolio. The portfolio objective is to obtain the maximum sustainable interest margin over match-funded borrowings, subject to liquidity, credit risk, interest rate risk, capital, regulatory and economic considerations. Although securities may be purchased with the intention of holding to maturity, all securities are currently classified as available for sale to maximize management flexibility. There are currently no securities classified as trading securities.

        To achieve its stated objective, the Corporation invests predominantly in U.S. Treasury and Agency securities, corporate bonds, asset-backed securities, and mortgage-backed securities ("MBS"). At December 31, 2002, 90% of the investment portfolio was invested in MBS. The MBS portfolio is well diversified with respect to issuer, both agency and non-agency; structure, including passthroughs and collateralized mortgage obligations ("CMOs"); and re-pricing specifications, which employ fixed rate

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bonds as well as monthly, annual, and 5 year reset Adjustable Rate Mortgages ("ARMs"). The agency MBS portfolio is further diversified by issuer, coupon, vintage, maturity, and average loan size.

        The primary risk in the investment portfolio is duration risk. Duration is a measure of the price volatility of the market value of an investment for a 100 basis point (or 1%) change in interest rates. The higher an investment's duration, the longer the time until its rate is reset to current market rates. The Bank's risk tolerance, as measured by the duration of the investment portfolio, is typically between 2% and 4%. In the current economic environment, the duration is targeted for the lower side of that range due to the potential for higher interest rates in the future. The lower duration has been attained through increasing the allocation of ARMs and 15 year MBS, and reducing the allocation of 30 year MBS. Management performs extensive prepayment modeling to assist in managing the volatile duration risk inherent in MBS.

        Another risk in the investment portfolio is credit risk. The corporate bond portfolio is chiefly invested in securities rated investment grade by Moody's and S&P rating agencies. At December 31, 2002, over 93% of the entire investment portfolio was rated AAA, 6% was investment grade below AAA, and only 1% was rated below investment grade or was not rated.

        Investment strategies and activities are overseen by the Bank's Asset / Liability Committee ("the ALCO"), which also reviews all trades. Investment strategy, trading activity, and the ALCO meeting minutes are reviewed monthly with the Corporation's Board of Directors.

Lending Activities

Loan Composition

        The Bank offers a diversified mix of residential and commercial real estate, business and consumer loans. Of the total loans, $1.6 billion, or 62%, are secured by residential real estate including first and second mortgages, and home equity lines. The following table sets forth information concerning the Bank's loan portfolio by type of loan at December 31.

Loan Portfolio Summary

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Contractual Loan Principal Repayments

        The following table presents contractual loan maturities and interest rate sensitivity at December 31, 2002. The cash flow from loans is expected to significantly exceed contractual maturities due to refinances and early payoffs.

Loan Maturities and Rate Sensitivity

Consumer Lending

        The Bank offers a wide range of consumer loans including installment loans secured by real estate, boats, or automobiles, home equity lines, and unsecured personal lines of credit. At December 31, 2002, consumer loans represented 56% of the total loan portfolio. 30% of the Bank's consumer loans were originated through the retail branch network or through Provident Direct. Provident Direct is the Bank's direct channel sales center, serving consumers via the Internet and in-bound and out-bound telephone operations. Marine loans, representing 29% of consumer loans, were originated primarily through correspondent brokers, and are underwritten to the Bank's specifications, which include credit and loan to value considerations. The Bank also purchases portfolios of consumer loans from other financial institutions. All purchased portfolios go through a due diligence process prior to a purchase commitment. Reflecting the Bank's decreasing reliance on purchased product, purchases of consumer loans were $106 million in 2002, which was less than half of the level of purchases in 2001. At December 31, 2002, purchased loans represented 38% of consumer loans, a decline from 47% as of December 31, 2001, due to the lower purchase activity which was more than offset by prepayments caused by refinancing activity during 2002.

        During 2000, the Bank exited the indirect auto business to concentrate on more profitable businesses. At December 31, 2002, the remaining balance of the indirect auto portfolio totaled $35.7 million, or 3% of consumer loans.

Commercial Business Lending

        The Bank makes business loans primarily to small and medium sized businesses in the Baltimore, Maryland and Washington, D.C. metropolitan areas. The commercial loan portfolio represents 15% of the Bank's total loans, and consists of term loans, equipment leases and revolving lines of credit for the

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purpose of current asset financing, equipment purchases, owner occupied real estate financing and business expansion. 75% of commercial business loans are originated directly from offices in Baltimore City and Montgomery County, Maryland and in Fairfax County, Virginia, as well as the Bank's retail branches. In 2001, the Bank tapped into the growing small business market by forming a Small Business Center. The Center provides comprehensive business product and sales support to expand existing customer relationships and acquire new clients.

        A small, but growing source of business has been from Court Square Leasing Company, which utilizes a network of correspondents to source small equipment leases, and Provident Lease Corporation, which originates general equipment leases. The leasing businesses represented 18% of the commercial business portfolio at December 31, 2002, an increase of $9.9 million from the prior year.

        At December 31, 2002, the Bank held $65.8 million of syndicated loans originated by other financial institutions, of which $25.9 million were commercial business loans and $39.9 million were commercial real estate loans. The Bank considers $50 million of these loans to be non-core, as these credits were outside of its normal lending area. In an effort to reduce the Bank's exposure to such credits, Provident did not participate in any new syndicated loans outside its lending area in 2002 and participated in only two in-market syndicated loans, totaling $4.0 million, during the year. These strategies helped the Bank achieve a 37% reduction in syndicated loan balances during the year.

        The Bank has minimal exposure to highly leveraged transactions ("HLTs"), which 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 $21.2 million as of year-end, and all are performing in accordance with their contractual terms.

Real Estate Lending

        The Bank's real estate lending focus has been on financing commercial and residential construction, as well as on intermediate-term commercial mortgages. Properties securing these loans include office buildings, shopping centers, apartment complexes, warehouses, and tract developments. These portfolios totaled $589 million at December 31, 2002, or 23% of total loans, compared to $527 million at December 31, 2001, or 19% of total loans at that date.

        Prior to 2002, residential mortgage lending included the origination, sale and servicing of fixed and variable rate mortgage loans through the loan production offices of Provident Mortgage Corp., a subsidiary of the Bank. In early 2001, the mortgage lending operations of Provident Mortgage Corp. were phased out. Since that time, the Bank has provided mortgages to its retail customers through a third party loan originator, and has not retained any of the mortgages originated from that process. The residential real estate mortgage loan balance at December 31, 2002 declined to $169 million, or 7% of total loans, from $309 million, or 11% of total loans, at the end of the prior year. This decline was primarily due to the refinancings associated with lower interest rates in 2002.

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 are 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 based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience. 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.

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        In evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Corporation for assuming that risk, management may require amounts of collateral support. The type of collateral varies, but may include accounts receivable, inventory, land, buildings, equipment, income-generating commercial properties and residential real estate. The Corporation has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment).

        A commitment is a legally binding agreement to lend funds at a stated interest rate and for a specific purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Corporation will experience may be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Corporation is required to fund the commitment. The Corporation uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Corporation manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity structure of these portfolios; and by applying the same credit standards maintained for all of its related credit activities. The credit risk associated with these commitments is considered in management's evaluation of the allowance for loan losses.

        The liquidity risk of the Corporation arises from its obligation to make payment in the event of a customer's contractual default. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Management of that credit risk is considered in management's evaluation of the allowance for loan losses.

        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. Procedures and risk review are modified periodically in order to reflect changing conditions and new products. The Bank's lending and loan administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower's circumstances which may affect the ability to repay debt or the value of pledged collateral. In order to assess and monitor the degree of risk in the loan portfolio, credit risk identification and review processes are utilized. Lenders assign 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 these risk assessments and evaluates their impact on the allowance for loan losses.

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. Accounting principles generally accepted in the United States of America ("GAAP") require creditors to evaluate the collectibility of contractually due principal and interest on commercial credits to assess the need for providing for inherent 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 is placed on non-accrual status. At December 31, 2002, there were three commercial loans totaling $650 thousand that were considered to be impaired.

        Past due loans are loans that are 90 days or more past due, and are still accruing interest because they are well secured and in the process of collection. Loans secured by residential real estate are

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placed on non-accrual status at 120 days delinquent, unless well secured and in the process of collection. Regardless of collateral value, with isolated exceptions, these loans are placed on non-accrual status at 210 days delinquent. Commercial loans are placed on non-accrual status at 90 days delinquent unless well secured and in the process of collection. Generally, closed-end consumer loans secured by non-residential collateral that are 120 days delinquent are charged-off in full. Unsecured open-end consumer loans are charged-off in full at 180 days past due. Charge-offs of delinquent loans secured by residential real estate are generally recognized when losses are reasonably estimable and probable. Any portion of an outstanding loan balance secured by real estate in excess of the collateral's fair value less costs to sell ("net fair value") is charged-off when it is no more than 180 days delinquent. Occasional exceptions are made based on certain third party guarantees.

Deposits and Other Sources of Funds

Deposits

        A major portion of the Bank'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 branch-banking locations and commercial cash management cross sales and calling efforts. At December 31, 2002, core deposits represented 87% of total deposits and 61% of total liabilities. Future funding growth is expected to be generated from deposit growth through the strategies outlined below.

        The retail branch network includes traditional and in-store full service branch locations. In-store branches are located in supermarkets and national retail superstores. At December 31, 2002, Provident had 58 traditional branches and 51 in-store branches. The Bank's primary agreements are with three store partners: SUPERVALU to operate branches in their Metro and Shoppers Food Warehouse supermarkets in the Baltimore and Washington, D.C. metropolitan areas, BJ Wholesale Club to operate branches in selected Baltimore and Washington, D.C. metropolitan stores, and a new partnership with SuperFresh to operate branches in selected Baltimore-Washington area stores. The Bank also operates ATM Plus Financial Centers ("the Centers") in selected SuperFresh locations. The Centers provide electronic-based transaction services via ATMs and Internet account access. These centers are also staffed for new account openings, loan application and closing assistance and insurance and investment product sales. Additional branch opportunities complementary to existing locations will be sought when the cost of entry is reasonable. The Bank has 12 additional branches planned for 2003.

        In addition to delivering innovative products and responsive service, the Commercial Banking Group offers deposit-based services that support business growth. During 2002, commercial deposit growth was 40%, driven by the Bank's commercial cash management business.

        Provident's small business checking products were revamped in 2001, and now include options similar to the Bank's popular retail product line. The small business DDA customer base grew 25% from year-end 2001 and these accounts are making a positive contribution to commercial deposit growth.

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        The table below presents the average deposit balances and rates paid for the three years ended December 31, 2002.

Average Deposits

Borrowings

        The Bank's wholesale borrowings are managed by the Liquidity Management Department of the Treasury Division. Liquidity Management's objectives are twofold: 1) minimize the cost of borrowings while assuring sufficient funding availability to meet current and future borrowing requirements; and 2) contribute to interest rate risk management goals through match-funding loan or investment activity. Management utilizes a variety of sources to raise borrowed funds at competitive rates, including Fed Funds, Federal Home Loan Bank ("FHLB") borrowings, Securities Sold under Repurchase Agreements ("repos"), and Brokered and Jumbo certificates of deposit ("CDs"). Because they are secured with investments or high quality real estate loans, FHLB borrowings and repos typically are borrowed at rates below the LIBOR rate for the equivalent term. Fed Funds, which are generally overnight borrowings, are typically purchased at the Federal Reserve target rate. Brokered CDs are generally the most expensive source of wholesale funds the Bank employs. As a result of this added cost and the Bank's strong liquidity position, no brokered CDs were issued in 2002.

        In 1998 and 2000, the Corporation formed new wholly owned statutory business trusts, Provident Trust I ("Trust I") and Provident Trust II ("Trust II"), respectively. Trust I issued $40.0 million 8.29% and Trust II issued $30.0 million 10.0% trust preferred securities that were sold to outside third parties. The trust preferred securities are presented net of unamortized issuance costs as Long-Term Debt in the Consolidated Statement of Condition and are includable in Tier 1 capital for regulatory capital purposes. The trust preferred securities pay cash distributions which are payable semiannually for Trust I and quarterly for Trust II, based on their applicable rate and liquidation preference of $1,000 per security. The securities of Trust I mature in 2028 but are redeemable in whole or in part on or after April 15, 2008. Trust II securities mature in 2030 but are redeemable in whole or in part on or after February 28, 2005. Either of the trust preferred securities is redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain events.

Employees

        At December 31, 2002, the Corporation and its subsidiaries had 1,599 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.

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Competition

        The Corporation encounters substantial competition in all areas of its business. There are five commercial banks based in Maryland with deposits in excess of $1 billion. There are seventeen additional commercial 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 loans, savings banks, mortgage banking companies, credit unions, insurance companies, consumer finance companies, money market and mutual fund firms and various other financial services institutions.

        Current federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. Recent legislation has broadened the extent to which financial services companies, such as investment banks and insurance companies, may control commercial banks. As a consequence of these developments, competition in the Bank's principal markets may increase, and a further consolidation of financial institutions in Maryland may occur.

Regulation

        The Corporation is registered as a bank holding company, under the Bank Holding Company Act of 1956 ("HOLA"). 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. HOLA 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 non-banking 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 ("FDIC"). 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.

        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. To date, the Corporation has not elected financial holding company status.

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.

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Regulatory Capital

        Banks are required to maintain a sufficient level of capital in order to sustain growth, absorb unforeseen losses and meet regulatory requirements. The standards used by federal bank regulators to evaluate capital adequacy are the leverage ratio and risk-based capital guidelines. The Corporation's core (or Tier 1) capital is equal to total stockholders' equity less Net Accumulated Other Comprehensive Income (Loss) plus capital securities less intangible assets. Total regulatory capital consists of core capital plus the allowance for loan losses, subject to certain limitations. The trust preferred securities are considered capital securities, and accordingly, are includable as Tier 1 capital.

        The leverage ratio represents core capital, as defined above, divided by average total assets. Guidelines for the leverage ratio require the ratio to be 100 to 200 basis points above a 3% minimum, depending on risk profiles and other factors.

        Risk-based capital ratios measure core and total regulatory capital against risk-weighted assets. 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, 2002 the Corporation exceeded all regulatory capital requirements.

Item 2. Properties

        The Corporation has 127 offices from which it conducts, or intends to conduct, business which are located in the Baltimore/Washington metropolitan area and southern Pennsylvania. The Bank owns 13 and leases 114 of these 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 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. This lease was renegotiated in 2000 and expires in 2012.

        In 2002, the Bank renewed a long-term lease on a building which houses its operations function. The lease expires in 2013.

Item 3. Legal Proceedings

        The Corporation is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes such routine legal proceedings, in the aggregate, will not have a material adverse affect on the Corporation's financial condition or results of operation.

Item 4. Submission of Matters to a Vote of Security Holders

        None.

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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 2002 and 2001 is shown in Note 23, "Unaudited Consolidated Quarterly Results of Operations, Market Prices and Dividends" contained in the Consolidated Financial Statements and Supplementary Data (Item 8). At February 24, 2003, there were approximately 3,000 holders of record of the Corporation's common stock.

        For the year 2002, the Corporation declared and paid dividends of $.85 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 regulatory restrictions which affect the payment of dividends by the Bank to the Corporation.

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Item 6. Selected Financial Data

(1)

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 2002 through 1999, and 39.55% for 1998.

(2)

Common Equity excludes net accumulated other comprehensive income which is comprised of unrealized gains or losses on available for sale securities, unrealized gains or losses on the effective portion of cash flow hedges and the minimum pension liability adjustment.

(3)

Long-term debt is composed primarily of FHLB Advances and Trust Preferred Securities.

(4)

Exclusive of the Cumulative Change in Accounting Principle, Return on Average Assets and Return on Average Equity for 2001 would have been .83% and 14.50%, respectively.

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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, 2002. This discussion and tabular presentations should be read in conjunction with the accompanying Consolidated Financial Statements and Notes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Corporation, which are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates estimates on an on-going basis; including those related to the allowance for loan losses, non-accrual loans, asset prepayment rates, other real estate owned, other than temporary impairment of investment securities, intangible assets, pension and post-retirement benefits, stock option plan, derivative positions, recourse liabilities, litigation and income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, other than temporary impairment of investment securities, asset prepayment rates and income taxes. Each estimate is discussed below. The financial impact of each estimate, to the extent significant to financial results, is discussed in the applicable sections of Management's Discussion and Analysis. It is at least reasonably possible that each of the Corporation's estimates could change in the near term and the affect of the change could be material to the Corporation's consolidated financial statements.

Allowance for Loan Losses

        The Corporation maintains an allowance for loan losses ("the allowance"), which is intended to be management's best estimate of probable inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charges to earnings to bring the total allowance to a level considered necessary by management.

        The allowance is based on management's continuing review and evaluation of the loan portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Corporation combines estimates of the allowances needed for loans analyzed individually and on a pooled basis. The allocated component of the allowance is supplemented by an unallocated component.

        The portion of the allowance that is allocated to individual internally criticized and non-accrual loans is determined by estimating the inherent loss on each problem credit after giving consideration to the value of underlying collateral. Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. The Corporation's lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower's circumstances which may affect the ability to repay debt or the value of

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pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrower's financial capacity to service the debt and the presence and value of collateral for the loan.

        For portfolios such as consumer loans, commercial business loans and loans secured by real estate, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. Each quarter, twelve-month rolling loss rates for homogenous pools of loans in the consumer portfolio provide the basis for the allocated reserve. Historical loss rates also provide the basis for reserves allocated to pools within the commercial portfolios. For any portfolio where the Bank lacks sufficient historic experience, industry loss rates are used. If recent history is not deemed to reflect the inherent losses existing within a portfolio, older historic loss rates during a period of similar economic or market conditions are used.

        The Bank's credit administration group adjusts the indicated loss rates based on qualitative factors. Factors that are considered in adjusting loss rates include risk characteristics, credit concentration trends and general economic conditions, including job growth and unemployment rates. For commercial and real estate portfolios, additional factors include the level and trend of watched and criticized credits within those portfolios; commercial real estate vacancy, absorption and rental rates; and the number and volume of syndicated credits, construction loans, speculative construction loans or other portfolio segments deemed to carry higher levels of risk. Upon completion of the qualitative adjustments, the overall allowance is allocated to the components of the portfolio based on the adjusted loss factors.

        The unallocated component of the allowance exists to mitigate the imprecision inherent in management's estimates of expected credit losses and includes its judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors that may not have been fully considered in the allocated allowance. The relationship of the unallocated component to the total allowance may fluctuate from period to period. Although management has allocated the majority of the allowance to specific loan categories, the evaluation of the allowance is considered in its entirety.

        Lending management meets at least monthly to review the credit quality of the loan portfolios and at least quarterly with executive management to evaluate the allowance. The Corporation has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its reviews to executive management and the Board of Directors. Such reviews also assist management in establishing the level of the allowance.

        Management believes that it uses the best information available to make determinations about the allowance and that it has established its existing allowance in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

        The Bank is examined annually by the FDIC and, accordingly, as part of this exam, the allowance is reviewed for adequacy utilizing specific guidelines. Based upon their review, the regulators may from time to time require reserves in addition to those previously provided.

Other Than Temporary Impairment of Investment Securities

        Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition

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to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Asset Prepayment Rates

        The Corporation purchases amortizing loan pools and investment securities in which the underlying assets are residential mortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments resulting from borrowers elections to refinance the underlying mortgages based on market and other conditions. The purchase premiums and discounts associated with these assets are amortized or accreted to interest income over the estimated life of the related assets. The estimated life is calculated by projecting future prepayments and the resulting principal cash flows until maturity. Management makes prepayment rate projections by utilizing actual prepayment speed experience and available market information on like-kind instruments. The assumed prepayment rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market projections.

Income Taxes

        The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part be beyond the Bank's control. It is at least reasonably possible that management's judgment about the need for a valuation allowance for deferred taxes could change in the near term.

FINANCIAL CONDITION

        At December 31, 2002, total assets were $4.9 billion. Although total assets are unchanged from December 31, 2001, the Corporation has continued to be successful in one of its key strategies to migrate the composition of the balance sheet to include a greater mix of more profitable "core" loans and deposits. The Corporation continued to experience steady growth in all of its markets, with the expansion areas of Northern Virginia and the Maryland suburbs of Washington D.C. continuing to post strong growth.

Asset Composition

        The following table summarizes the composition of the Bank's average earning assets for the periods indicated.

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Average Earning Assets Summary
(dollars in thousands)

        Total average earning assets declined by $308 million to $4.5 billion in 2002 compared to 2001. A decrease of $624 million in average non-core loan balances was partially offset by a $118 million increase in average investment portfolio balances and a $200 million increase in average core loan balances.

        The $118 million growth in the investment portfolio average balances in 2002 was primarily due to management's actions to reinvest the excess cash flow generated by the non-core loan portfolio payments, net of core loan funding requirements, into the investment portfolio. Most of the $118 million was invested in a combination of 30 year conventional MBS and Ginnie Mae 1 year ARMs. Allocation changes were made in 2002 to contain prepayment exposure in the MBS portfolio and reduce credit exposure in the corporate bond portfolio. In the MBS portfolio, short duration CMOs were reduced by $25 million and replaced with a combination of 1 year and 5 year ARMs, which are less prepayment sensitive. $31 million of 1 to 3 year corporate bonds were also replaced with 1 year ARMs. Included in the corporate bond reductions were WorldCom securities due to mature in April 2004, that were sold in November for a modest gain. This followed a second quarter write-down of $8.6 million due to other than temporary impairment. Additionally, $20 million of Trust Preferred Stock securities, primarily single A rated bank debt, were sold to reduce individual credit exposures in that portfolio.

        The Corporation realized $14.4 million in gains and $9.7 million in losses, including the WorldCom write-down, from the sale of $1.1 billion of securities from the available for sale portfolio in 2002. Approximately $3.2 million in gains were taken to offset additional premium amortization on the acquired consumer loan portfolio as a result of increased prepayment activity during 2002. The higher rate mortgage backed securities sold were previously purchased specifically for their potential to generate income in an environment where long-term mortgage rates declined significantly.

        The Corporation's expanded presence in the Baltimore-Washington metropolitan region facilitated the 13.7% growth in average core loans. The growth in average core consumer loans, composed primarily of home equity and marine loans, has continued at a strong pace, increasing $134 million in 2002, or 20.2%, compared to 2001. In 2002, the Bank initiated participation in an internet based home equity product referral network, which resulted in productive lending activity. Average core commercial business and real estate loans also showed strong growth of $65 million in 2002, or 8.3%. Average

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balances in the commercial construction and business portfolios each grew by approximately $37 million, with 41% of the growth coming from the Washington metropolitan region. This growth was partially offset by an $8 million decline in average balances in the commercial mortgage portfolio, reflecting refinancing activity in 2002.

        The planned shrinkage of the Corporation's non-core consumer loan portfolio, composed primarily of purchased loans secured by residential real estate, was accelerated by the declining interest rate environment in 2002. Average non-core consumer loans decreased $606 million in 2002, or 39.3%, due to increased prepayments and resultant additional amortization of $6.5 million in loan purchase premiums. As a result of management's focus on lending within its market area, the Corporation only selectively participates in new national syndicated loans. The existing non-core syndicated portfolio average balances declined 20.4% in 2002, which was consistent with management's objective of reducing the exposure to these credits.

Asset Quality

        The asset quality within the Corporation's loan portfolios continued to improve in 2002 as a result of increased response and reaction to delinquency trends. The trends in credit quality reflect the effectiveness of these credit administration techniques. Information with respect to non-performing assets and past due loans is presented in the following table for the years indicated. As shown in the following table, non-performing assets were $25 million at December 31, 2002, a decrease of $7 million, or 22%, from the level at December 31, 2001. Of the $7 million decrease, $4.2 million is related to the residential mortgage portfolio, which declined due to more active and concerted delinquency management. $20.5 million of the total non-performing loans are in the consumer and residential mortgage loan portfolios, which are collateralized by deeds of trust on 1 to 4 family residences. With the vast majority of non-performing loans already written down to net fair value, management expects little further loss. Commercial and real estate non-performing assets fell to their lowest levels in several years during the first half of 2002 and remained at these historically low levels during the second half of 2002. At December 31, 2002, non-performing loans as a percentage of loans outstanding were .97% compared to 1.15% at December 31, 2001. Although no assurances can be given, management believes that non-performing loans will remain relatively stable in the near term.

        Total past due loans increased $4 million in 2002 due to an increase of $5 million in past due residential mortgages. This increase was caused by the implementation of collection processes primarily aimed at minimizing the migration of residential mortgage loans from past due to non-accrual status. The loans are reflected as past due however, they continue to meet the Bank's criteria to warrant accruing status.

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Non-Performing Assets and Past Due Loans