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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For Fiscal Year Ended December 31, 2003

or

For the Transition Period From              to              .

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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this Chapter) 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.  ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last sold price or average bid and asked price as of last business day of most recently completed second fiscal quarter was $609,330,930. For purposes of this calculation, officers and directors of the Registrant are considered affiliates.

At February 14, 2004, the Registrant had 24,652,503 shares of $1.00 par value common stock outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

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This report, as well as other written communications made from time to time by Provident Bankshares Corporation and its subsidiaries (the “Corporation”) (including, without limitation, the Corporation’s 2003 Annual Report to Stockholders) and oral communications made from time to time by authorized officers of the Corporation, may contain statements relating to the future results of the Corporation (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 Corporation, including earnings growth determined using accounting principles generally accepted in the United States of America (“GAAP”); revenue growth in retail banking, lending and other areas; origination volume in the Corporation’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 Corporation claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Corporation 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, consumer banking revenues, revenues from sales on non-deposit investment products, origination levels in the Corporation’s lending businesses and the level of defaults, losses and prepayments on loans made by the Corporation, 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 Corporation’s operations, pricing, products and services. The following factors, among others, could cause the actual results of the Southern Financial acquisition to differ materially from the expectations stated in this release, the associated conference call and web cast and prior statements: the ability of the companies to obtain the required shareholder or regulatory approvals of the acquisition; the ability of the companies to consummate the acquisition; the ability of Southern Financial to timely complete its acquisition of Essex Bancorp, Inc.; the ability to successfully integrate the companies following the acquisition; a materially adverse change in the financial condition of either company; the ability to fully realize the expected cost savings and revenues; and the ability to realize the expected cost savings and revenues on a timely basis. Other factors that could cause the actual results of the acquisition to differ materially from current expectations include: a change in economic conditions; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation and regulation; and other economic, competitive, governmental, regulatory, geopolitical, and technological factors affecting the companies’ operations, pricing, and services. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the date of this report, and, except as may be required by applicable law or regulation, the Corporation 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.

In the event that any non-GAAP financial information is described in any written communication, including this press release, or in our teleconference, please refer to the supplemental financial tables included with this release and on our website for the GAAP reconciliation of this information.

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PART I

Item 1. Business

General

Provident Bankshares Corporation (“the Corporation”), a Maryland corporation, is the bank holding company for Provident Bank (“Provident” or “the Bank”), a Maryland chartered stock commercial bank. At December 31, 2003, the Bank was the second largest independent commercial bank, in asset size, headquartered in Maryland.

With $5.2 billion in assets, Provident serves individuals and businesses in Maryland and Virginia through a network of 118 banking offices in Maryland, Virginia, and southern York County, Pennsylvania. Provident also offers related financial services through wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company (“PIC”) and leases through Court Square Leasing and Provident Lease Corporation.

The Corporation’s internet website is www.provbank.com. The Corporation makes available free of charge on or through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”).

Market Area

With banking offices throughout most of Maryland and a growing presence in Virginia, Provident serves one of the most vibrant regions in the country. As of June 2003 (the most recent available statewide deposit share data), Provident ranked eighth among commercial banks operating in Maryland with a 4.16% share of statewide deposits. Provident’s share of deposits in Virginia held steady at 0.07% in 2003.

Maryland’s economy is performing at or above national levels, based on the most current data on unemployment and office space absorption. In addition, Maryland has the highest median income in the country. 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 has expanded into Virginia, particularly 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 nearly $80,000, the northern Virginia region also has one of the highest median incomes in the country.

Important to both Maryland and Virginia is the accessibility to other key neighboring markets such as Philadelphia, New York and Pittsburgh, as well as the ports in Baltimore and Norfolk. In addition, the Baltimore-Washington corridor gains from the presence and employment stability of the federal government and related service industries. The market has benefited from increased federal spending, particularly in the defense and security sectors. In addition, the region stands to expand economically through anticipated growth in health care and educational spending in the near term.

Business Strategy

Provident is well positioned in its region to provide the products and services of its largest competitors, while delivering the level of service provided by the best community banks. Over the past three years the Corporation’s focus has been on the consistent execution of a group of fundamental business strategies: to broaden presence and customer base in the Virginia and metropolitan Washington markets; to grow commercial business in all of its markets; to focus resources in core business lines; and to improve financial fundamentals.

The cornerstone of the Bank’s ability to serve its customers is its banking office network, which consists of 59 traditional banking office locations and 59 in-store banking offices at December 31, 2003. In 1993, Provident was the first Maryland bank to offer in-store banking which enables customers to bank where they shop, seven days a week. Ten years later, the network of 59 in-store banking offices is located in a broad range of supermarkets and national retail superstores. The Bank’s primary agreements are with four premier store partners: SUPERVALU to operate banking offices in their Shoppers Food Warehouse supermarkets in Maryland and Virginia, WalMart and BJs Wholesale Club to operate banking offices in selected Baltimore and Washington, D.C. metropolitan stores, and SuperFresh to operate banking offices in selected Maryland stores.

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Of the 118 banking offices at December 31, 2003, 57% are located in the Baltimore metropolitan region and 43% are located in the Virginia/Washington D.C. metropolitan region, reflecting the successful migration of the Bank from a Baltimore-based thrift to a highly competitive regional commercial bank. Provident opened twelve new banking offices in 2003, of which five were in the Baltimore region and seven were in the Virginia/Washington metropolitan region. During the year, three banking offices were consolidated into other existing locations. Additional banking office opportunities complementary to existing locations will be sought when the cost of entry is reasonable. The Bank has nine new banking offices planned for 2004.

Provident also offers its customers 24-hour banking services through ATMs, telephone banking and the Internet. The network of 183 ATMs enhances the banking office network by providing customers increased opportunities to access their funds. In 2003, the ATM network expanded into new markets on Maryland’s Eastern Shore, New Jersey and Pennsylvania.

Provident focuses on providing its products and services to three segments of customers – individuals, small businesses and middle market businesses. The Corporation offers consumer and commercial banking products and services through the Retail Banking group and the Commercial Banking group.

Retail banking services include a broad array of consumer and small business loan, lease, deposit and investment products offered to retail and commercial customers through Provident’s banking office network and ProvidentDirect, the Bank’s direct channel sales center that serves consumers via the Internet and in-bound and out-bound telephone operations. The small business segment is further supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients.

Commercial Banking provides an array of commercial financial services to middle market commercial customers. The Bank has an experienced team of loan officers with expertise in real estate and business lending to companies in various industries in the region. The Bank has a highly regarded suite of cash management products managed by responsive account teams that deepen customer relationships through consistently priced deposit based services.

In late 2003, the Corporation announced a strategic acquisition of Southern Financial Bancorp, Inc. of Warrenton, Virginia (“Southern Financial”). The addition of Southern Financial’s franchise supports the Bank’s strategy to expand in the Virginia and metropolitan Washington markets. The acquisition also complements the Bank’s strategy to enhance its consumer and commercial business lines, as Southern Financial’s commercial banking strength will be combined with Provident’s proven ability to attract consumer loans and low cost deposits. Post-acquisition, the Corporation will have 159 banking offices covering southern Pennsylvania, the District of Columbia, Maryland and Virginia. Provident will be one of four commercial banks and thrift institutions headquartered in Maryland, D.C. or Virginia with more than $5 billion in assets. The transaction is expected to close in the second quarter of 2004.

Lending Activities

Loan Composition

Provident offers a diversified mix of residential and commercial real estate, business and consumer loans and leases. 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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The following table presents contractual loan maturities and interest rate sensitivity at December 31, 2003. The cash flow from loans is expected to significantly exceed contractual maturities due to refinances and early payoffs.

Consumer Lending

A wide range of loans including installment loans secured by real estate, boats, or automobiles, home equity lines, and unsecured personal lines of credit are available to consumers. Of these loans, 70% are secured by residential real estate, 28% by boats or automobiles, and 2% are unsecured. At December 31, 2003, consumer loans represented 61% of the total loan portfolio.

The banking office network and ProvidentDirect are the origination sources for new home equity loans and lines and other direct consumer loans, representing 32% of consumer loans. For the origination of marine loans, representing 27% of consumer loans, the Bank utilizes a network of correspondent brokers as the source of loan applications from key boating areas across the country. Provident individually underwrites each loan, including both credit and loan to value considerations.

The Bank also purchases portfolios of loans secured by residential real estate (consisting of first mortgages, home equity loans and lines) from other financial services companies. All acquired portfolios go through a due diligence process prior to a purchase commitment. Over the past several years, for new acquisitions the Bank has increased its credit quality requirements and shifted its lien position focus from predominantly second lien position to entirely first lien position. All of the purchases in 2002 and 2003 were in first lien position and at December 31, 2003, 73% of the $611 million acquired portfolio was in first lien position. Management intends to continue to purchase loans secured by residential real estate to maintain an average acquired portfolio size between $500 million and $600 million.

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. At December 31, 2003, the remaining portfolio of residential real estate mortgage loans declined to $78 million, or 5% of consumer loans, from $169 million, or 11% of consumer loans at December 31, 2002. The decline was accelerated due to prepayments associated with the sustained low interest rate environment in 2003. Beginning in 2002, the Bank has provided mortgages to its retail customers through a third party loan originator, and does not retain any of the mortgages originated from that process.

Commercial Business Lending

Provident makes business loans primarily to small and medium sized businesses in the Baltimore, Maryland and Washington, D.C. metropolitan areas. The Bank is well diversified from an industry perspective with no major concentrations in any industry. Commercial business loans represent 14% of the Bank’s total loans, and consist of term loans, equipment leases and revolving lines of credit for the purpose of current asset financing, equipment purchases, owner occupied real estate financing and business expansion. Commercial business loans are originated directly from offices in Baltimore City and Montgomery County, Maryland, Fairfax County, Virginia, as well as the Bank’s banking office network. Leases originated by Court Square Leasing, which utilizes a network of correspondents to source small equipment leases, and Provident Lease Corporation, which originates general equipment leases, represented 22% of the commercial business portfolio at December 31, 2003, an increase of $14.6 million from 2002.

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Commercial Real Estate Lending

The Bank’s commercial 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 $689 million at December 31, 2003, or 25% of total loans, compared to $589 million at December 31, 2002, or 23% of total loans at that date.

Other Lending

At December 31, 2003, the Bank participated in $54.4 million of loans syndicated by other financial institutions, of which $20.9 million was included in commercial business loans and $33.5 million was included in commercial real estate loans. The Bank considers $22.3 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 2003 and participated in six in-market syndicated loans, totaling $25.3 million, during 2003. These strategies helped the Bank achieve a 17% 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 $10.9 million as of December 31, 2003, and all are performing in accordance with their contractual terms.

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. Unsecured loan products such as personal revolving credit have the highest credit loss experience. Credit risk in commercial lending varies significantly, as losses as a percentage of outstanding loans can shift widely from period to period and are particularly sensitive to changing economic conditions.

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 via a commitment.

A commitment is a legally binding agreement to lend funds at a stated interest rate for a specific purpose. Commitments have fixed expiration dates and generally require a fee. 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 extension of a commitment also gives rise to credit risk. 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. 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 certain commitments are expected to expire without being drawn upon. The credit risk associated with commitments is considered in management’s evaluation of the allowance for loan losses.

Other lending risks include liquidity risk and specific risk. The liquidity risk of the Corporation arises from its obligation to make payment in the event of a customer’s contractual default. 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 by the Bank. 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. Loan officers 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.

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Non-Performing Assets and Delinquent Loans

Non-performing assets include non-accrual loans, 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, 2003, there were five commercial loans totaling $3.2 million that were considered to be impaired.

Delinquencies occur in the normal course of business. The Corporation focuses its efforts on the management of loans that are in various stages of delinquency. These include loans that are 90 days or more delinquent that are still accruing interest because they are well secured and in the process of collection. Closed-end consumer loans secured by non-residential collateral are generally charged-off in full at 120 days delinquent. Unsecured open-end consumer loans are charged-off in full at 180 days delinquent. Loans secured by residential real estate are 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. Charge-offs of delinquent loans secured by 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.

Deposit Activities

The table below presents the average deposit balances and rates paid for the three years ended December 31, 2003.

Average Deposits:

Deposits obtained from individuals and businesses represented 90% of the Bank’s deposit funding in 2003, compared to 71% in 2001. This virtually completes a portion of management’s strategic goals to shift the mix of deposits away from non-core high-cost brokered deposits to core low-cost customer deposits. The customer deposits are generated through the Bank’s increasingly expansive banking office locations and commercial cash management cross sales and calling efforts. In 2003, deposits were evenly balanced between transaction accounts, savings accounts and time deposits. As a result of the banking office expansion efforts, approximately 26% of average customer deposit balances in 2003 were from the Virginia and Washington metropolitan areas. Further, the mix between consumer and commercial deposits continued to improve, with average commercial deposit growth of 28% in 2003 resulting in commercial deposit balances representing 16% of average customer deposits.

Transaction accounts remain a key part of the Bank’s retail deposit-gathering strategy. Transaction accounts not only serve as an important cross-sell tool in terms of deepening customer relationships, but also are an important source of fee income to the Bank. “Totally Free Checking”, a product that Provident introduced to the Baltimore area in 1993, remains the Bank’s most popular checking account product. Management believes this product, combined with the Bank’s other attractive checking accounts and the service options available through both traditional and in-store banking offices, has given Provident a competitive advantage in the customer deposit gathering process.

Treasury Activities

The Treasury Division manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Management’s objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate and liquidity risk, and capital utilization.

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Investments

At December 31, 2003, the investment securities portfolio was $2.1 billion, or 40%, of total assets. The portfolio objective is to obtain the maximum sustainable interest margin over match-funded borrowings, subject to liquidity, credit and interest rate risk; as well as 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.

The following table sets forth information concerning the Bank’s investment securities portfolio at December 31 for the periods indicated.

Available for Sale Securities Summary:

The following table presents the expected cash flows and interest yields of the Bank’s investment securities portfolio at December 31, 2003.

Maturities of Available for Sale Securities Portfolio:

To achieve its stated objective, the Corporation invests predominantly in U.S. Treasury and Agency securities, mortgage-backed securities (“MBS”) and other debt securities, which include corporate bonds and asset-backed securities. At December 31, 2003, 83% 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 bonds as well as monthly, annual, and 5 to 7 year reset Adjustable Rate Mortgages (“ARMs”). Issuer, coupon, vintage, maturity, and average loan size further diversify the agency MBS portfolio. The corporate bond portfolio, representing 7% of the portfolio at December 31, 2003, is chiefly invested in securities rated investment grade by Moody’s and S&P rating agencies.

The primary risk in the investment portfolio is duration risk. Duration is a measure of the market value volatility 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 middle of that range. In 2003, $100 million of quarterly floating asset-backed securities were added to the portfolio to increase asset sensitivity to short-term rate changes. Another risk in the investment portfolio is credit risk. At December 31, 2003, over 93% of the entire investment portfolio was rated AAA, 6% was investment grade below AAA, and 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. ALCO activities are summarized and reviewed monthly with the Corporation’s Board of Directors.

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Borrowings

Provident’s funds management objectives are two-fold: to minimize the cost of borrowings while assuring sufficient funding availability to meet current and future borrowing requirements; and to 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 federal funds purchased (“fed funds”), Federal Home Loan Bank (“FHLB”) borrowings, securities sold under repurchase agreements (“repos”), and brokered and jumbo certificates of deposit (“CDs”). FHLB borrowings and repos typically are borrowed at rates below the LIBOR rate for the equivalent term because they are secured with investments or high quality real estate loans. 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 2003.

In 1998, 2000 and 2003, the Corporation formed wholly owned statutory business trusts, Provident Trust I (“Trust I”), Provident Trust II (“Trust II”) and Provident Trust III (“Trust III”), 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. Trust III issued $71.0 million floating rate capital securities that were sold to third parties at LIBOR plus 2.85%, or 4.02%, at December 31, 2003. The trust preferred securities are presented net of unamortized issuance costs as Long-Term Debt in the Consolidated Statements of Condition and are includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations. The trust preferred securities pay cash distributions which are payable semiannually for Trust I, quarterly for Trust II and Trust III, based on their applicable rate and liquidation preference of $1,000 per security. Trust I securities 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. Trust III securities mature in 2033 but are redeemable in whole or in part on or after December 17, 2008. Any of the trust preferred securities are 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, 2003, the Corporation and its subsidiaries had 1,629 full-time equivalent employees. The Corporation currently maintains what management considers to be a comprehensive, competitive employee benefits program. A collective bargaining unit does not represent employees 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 four commercial banks based in Maryland with deposits in excess of $1 billion. There are sixteen 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. 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 Commissioner of the Division of Financial Regulation 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 banking offices, 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.

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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 may 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.

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) (“OCI”) 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, subject to certain limitations.

The leverage ratio represents core capital divided by quarterly 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 as prescribed by regulation and certain off-balance sheet commitments based on the level of credit risk inherent in the assets. At December 31, 2003, the Corporation exceeded all regulatory capital requirements.

Item 2. Properties

The Corporation has 128 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 115 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 that 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.

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 2003 and 2002 is shown in a table titled “Unaudited Consolidated Quarterly Summary Results of Operations, Market Prices and Dividends for 2003 and 2002” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 29. At February 14, 2004, there were approximately 3,000 holders of record of the Corporation’s common stock.

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For the year 2003, the Corporation declared and paid dividends of $0.93 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.

On December 17, 2003, the Corporation’s wholly owned subsidiary, Provident Statutory Trust III (“Trust III”), issued $71.0 million in trust preferred securities pursuant to exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Act”), SEC Rule 506 under the Act, SEC Rule 144A under the Act and/or SEC Regulation S under the Act. The placement agents were Keefe, Bruyette & Woods, Inc., FTN Financial Capital Markets, Bear, Stearns & Co. Inc. and Sandler O’Neill & Partners, L.P. The aggregate offering price of the capital securities was $71.0 million. Aggregate commissions paid to the placement agents were approximately $710 thousand. In exchange for the proceeds from the offering of the capital securities and the proceeds from the sale of Trust III’s common securities, the Corporation issued $73.2 million aggregate principal amount of junior subordinated debentures in an offering exempt from registration under Section 4(2) of the Act. The proceeds of the offerings will be used to finance the cash portion of the consideration to be paid to stockholders of Southern Financial in connection with the Southern Financial acquisition.

Item 6. Selected Financial Data

The Corporation has derived the following selected consolidated financial and other data of the Corporation and the Bank in part from the consolidated financial statements and notes appearing elsewhere in this Form 10-K. The data as of and for the years ended December 31, 2003, 2002, 2001, 2000, and 1999 is derived from the audited consolidated financial statements for the Corporation and the Bank.

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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, 2003. This discussion and tabular presentations should be read in conjunction with the accompanying Consolidated Financial Statements and Notes as well as the other information herein.

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 GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates estimates on an on-going basis, including those related to the allowance for loan losses, non-accrual loans, asset prepayment rates, other real estate owned, other than temporary impairment of investment securities, intangible assets, pension and post-retirement benefits, stock-based compensation, 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 effect of the change could be material to the Corporation’s Consolidated Financial Statements.

Allowance for Loan Losses

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

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

The portion of the allowance that is allocated to individual internally criticized and non-accrual loans is determined by estimating the inherent loss on each problem credit after giving consideration to the value of underlying collateral. Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. The Corporation’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan.

For portfolios such as consumer loans, commercial business loans and loans secured by real estate, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. Each quarter, historical rolling loss rates for homogenous pools of loans in these portfolios provide the basis for the allocated reserve. 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

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criticized credits within those portfolios; commercial real estate vacancy, absorption and rental rates; and the number and volume of syndicated credits, 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 periodically by the FDIC and, accordingly, as part of this exam, the allowance is reviewed for adequacy utilizing specific guidelines. Based upon their review, the regulators may from time to time require reserves in addition to those previously provided.

Other Than Temporary Impairment of Investment Securities

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Asset Prepayment Rates

The Corporation purchases amortizing loan pools and investment securities in which the underlying assets are residential mortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments resulting from borrowers elections to refinance the underlying mortgages based on market and other conditions. The purchase premiums and discounts associated with these assets are amortized or accreted to interest income over the estimated life of the related assets. The estimated life is calculated by projecting future prepayments and the resulting principal cash flows until maturity. Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments. The 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.

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FINANCIAL CONDITION

At December 31, 2003, total assets were $5.2 billion, up from $4.9 billion at December 31, 2002. The Corporation continued to evolve the composition of the balance sheet by focusing resources on growth in core business lines, resulting in a higher percentage of core loans and deposits, while non-core loan and deposit balances continued to decline. In 2003, average core loans represent 72% of total average loans and average core deposits represent 90% of total average deposits, evidencing the substantial progress made in the transition to a core-based balance sheet.

On November 3, 2003, the Corporation announced the acquisition of Southern Financial Bancorp, Inc. of Warrenton, Virginia. The addition of Southern Financial’s franchise supports the Bank’s strategy to expand in the Virginia and metropolitan Washington markets. The acquisition is also expected to complement the Bank’s strategy to enhance its consumer and commercial business lines, as Southern Financial’s commercial banking strength will be combined with Provident’s proven ability to attract consumer loans and low cost deposits. Transition and integration activities are in process and on schedule, as are the necessary filings and notices with the Securities and Exchange Commission and various regulatory bodies. The transaction is expected to close in the second quarter of 2004.

Asset Composition

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

Average Earning Assets:

Total average earning assets increased by $121 million, or 3%, to $4.7 billion in 2003. While total average loan balances were flat at $2.6 billion, the mix changed favorably as the Corporation was able to shift cash flows from non-core loans into core loans. A $277 million decrease in average non-core loan balances was partially offset by a $214 million increase in average core loan balances. Average investment portfolio balances increased by $182 million utilizing the excess non-core cash flows. Investments and core loans represent 84% of total average earning assets in 2003, a 6% improvement from 2002.

The Corporation’s expanded presence in the Baltimore-Washington metropolitan regions helped achieve a 13% growth in average core loans. The average core loan growth of $214 million was evenly split between consumer and commercial loans. Average core consumer loans, comprised of direct consumer and marine loans, increased $110 million, or 14%, in 2003. Production of direct consumer loans, primarily home equity loans and lines generated by the Bank’s retail banking offices, phone center and Internet unit, totaled $383 million in 2003, and was 77% greater than 2002 production. The strong production in the current year resulted in a $55 million net increase in average home equity loan and line balances to $421 million. Average core consumer loan balances from the Washington market grew 30% in 2003, reflecting the Bank’s continued expansion into that market. Marine loans, which are originated indirectly through brokers but underwritten individually by the Bank, also had strong performance, with average marine loan balances up 16% to $446 million in 2003. Average core commercial business, real estate construction and commercial mortgage loans also continued to show steady growth, evidenced by an increase of $104 million, or 12%, in 2003. The 2003 growth in average core commercial loans was evenly balanced by region, with growth of 13% in the Washington market and 12% in the Baltimore market.

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Consistent with the execution of its key strategies, the Corporation’s average non-core loan balances continued to decline significantly, decreasing $277 million, or 27%, in 2003. The largest component of non-core consumer loans is the portfolio of acquired residential mortgage loans (consisting of first mortgages, home equity loans and lines), that declined by $81 million to an average balance of $555 million for the year. In 2003, the Corporation purchased $251 million in loans secured by residential real estate, all of which were in first lien position, including $24 million in loans to borrowers residing in the Bank’s footprint. Provident will service the loans within its footprint in order to cultivate additional relationships with the borrowers. The purchases offset payoffs of $239 million that occurred in the portfolio during the year. Additionally, in November 2003, the Corporation desecuritized $54 million in remaining Fannie Mae security balances and transferred the underlying loans back to the acquired portfolio. Management intends to continue to purchase residential loans to maintain an average acquired portfolio size between $500 million and $600 million.

The other non-core consumer portfolios, consisting of residential mortgage and indirect auto loan product lines that are no longer offered by the Bank, declined $164 million in 2003. Non-core syndicated portfolio average balances declined $31 million, or 47%, in 2003. The remaining $36 million average balances of non-core syndicated loans represent a diversified portfolio of loans which are performing as agreed and amortizing according to their terms and conditions. As a result of management’s focus on lending within its market area, the Corporation only selectively participates in new syndicated loans.

The growth in the investment portfolio average balances of $182 million in 2003 primarily occurred as excess cash flow generated by non-core loan portfolio payments, net of core loan funding requirements, was reinvested into the investment portfolio. Cash flows were predominately invested in a combination of 15-year conventional MBS and 7/1 hybrid ARMs, as well as floating rate asset-backed securities, reducing duration risk.

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Asset Quality

The following table presents information with respect to non-performing assets and 90-day delinquencies for the years indicated.

Asset Quality Summary: