-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, USnpJ8YNd4YXY4PiekMZQfkjYzr5UStTTFFszAsVCE3ragPKe1pxj4Uu2QMhigSK f2uJqT2tbMsLMhtDlVu5Cw== 0000928385-01-000781.txt : 20010312 0000928385-01-000781.hdr.sgml : 20010312 ACCESSION NUMBER: 0000928385-01-000781 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT BANKSHARES CORP CENTRAL INDEX KEY: 0000818969 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521518642 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16421 FILM NUMBER: 1564632 BUSINESS ADDRESS: STREET 1: 114 EAST LEXINGTON ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4102777000 MAIL ADDRESS: STREET 1: 7210 AMBASSADOR RD CITY: BALTIMORE STATE: MD ZIP: 21244-2739 10-K 1 0001.txt PROVIDENT BANKSHARES CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Fiscal Year Ended December 31, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period Commission File Number 0-16421 PROVIDENT BANKSHARES CORPORATION -------------------------------- (Exact Name of Registrant as Specified in its Charter) MARYLAND 52-1518642 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202 ---------------------------------------------------- (Address of Principal Executive Offices) (410) 277-7000 -------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of February 1, 2001 was $617,350,926. For purposes of this calculation, officers and directors of the registrant are considered affiliates. At February 1, 2001, the Registrant had 25,727,958 shares of $1.00 par value common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders (Part III) TABLE OF CONTENTS
Page PART I Item 1. Business 3 Item 2. Properties 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 60 PART III Item 10. Directors and Executive Officers of the Registrant 61 Item 11. Executive Compensation 61 Item 12. Security Ownership of Certain Beneficial Owners and Management 61 Item 13. Certain Relationships and Related Transactions 61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62 Signatures 63
- -------------------------------------------------------------------------------- Statments contained in this Form 10-K which are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risk and uncertainties which could cause actual results to differ materially from those projected. Such risk and uncertainties include potential changes in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation and other risks detailed in documents filed by the Company with the SEC from time to time. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Provident Bankshares Corporation ("the Corporation"), a Maryland corporation, was organized in 1987 by the management of Provident Bank ("the Bank"), and registered as a bank holding company under the Bank Holding Company Act of 1956. Through a reorganization dated December 22, 1987, the Corporation became the sole stockholder of the Bank. The reorganization allowed the Bank to convert from a Maryland chartered mutual savings bank, the form in which it had operated since 1886, to a Maryland chartered stock commercial bank. At December 31, 2000, the Bank was the second largest commercial bank chartered under the laws of the State of Maryland in terms of assets. For the discussion regarding lending and investment activities as well as sources of funds of the Corporation, see pages 13 through 19. Mortgage Banking Activities Provident Mortgage Corp. ("PMC"), a subsidiary of the Bank, was formed in 1992 to offer a broad range of mortgage lending products to consumers and thereby enhance the Corporation's mortgage banking operations. During the fourth quarter of 2000, the Corporation made a decision to reposition its mortgage operations by offering mortgages to its retail customers through an outsourced loan origination process and to no longer seek loan production from realtors and brokers. As a result, the mortgage lending operations of the Bank's subsidiary, Provident Mortgage Corp. are being phased out. Banking Services Activities Provident Investment Center, Inc. ("PIC"), a subsidiary of the Bank, provides consumers a competitive range of banking products, such as purchased annuities and mutual funds. Insurance Activities BankSure Insurance Corporation ("BankSure"), a subsidiary of the Bank, offers insurance products to the Bank's loan customers and thereby enhances the Bank's lending product lines. PIC also offers a variety of life insurance products and services, as agent. Employees At December 31, 2000, the Corporation and its subsidiaries had 1,594 full-time equivalent employees. The Corporation currently maintains what management considers to be a comprehensive, competitive employee benefits program. Employees are not represented by a collective bargaining unit and management considers its relationship with its employees to be good. Competition The Corporation encounters substantial competition in all areas of its business. There are six commercial banks based in Maryland with deposits in excess of $1 billion. Additionally, there are five banks with deposits in excess of $1 billion operating in Maryland which have headquarters in other states. The Bank also faces competition from savings and loan associations, savings banks, mortgage banking companies, credit unions, insurance companies, consumer finance companies, money market and mutual funds and various other financial services firms. Current federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. 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 market may increase, and a consolidation of financial institutions in Maryland may occur. 3 Regulation The Corporation is registered as a bank holding company, under the Bank Holding Company Act of 1956. As such, the Corporation is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports and any additional information that the Federal Reserve Board may require. The Bank Holding Company Act imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank of which it is not already the majority owner; or, with certain exceptions, of any company engaged in 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. Asset growth, deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment of branches, mergers and consolidations, changes in control, electronic funds transfer, management practices and other aspects of operations are subject to regulation by the appropriate federal and state supervisory authorities. The Bank is also subject to various regulatory requirements of the Federal Reserve Board applicable to FDIC insured depository institutions. Recent Legislation The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions to become a "financial holding company" and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through "financial" subsidiaries in certain of the activities permitted for financial holding companies. 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. ITEM 2. PROPERTIES In December 1990, the Bank sold its corporate headquarters located at 114 East Lexington Street, Baltimore, Maryland, and simultaneously leased back these facilities for an initial twelve year lease term. This lease was renegotiated in 2000 and expires in 2012. The majority of the Bank's 98 offices are located in the Baltimore/Washington metropolitan area and southern Pennsylvania. The Bank owns 15 and leases 83 of its offices. Most of these leases provide for the payment of property taxes and other costs by the Bank and include one or more renewal options ranging from five to ten years. Some of the leases also contain a purchase option. In 2000, the Bank renewed a long-term agreement to lease a one-story building large enough to consolidate operations and support functions which expires in 2003. The Bank currently leases all of the building's 80,000 square feet of space. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition or results of operation. Also, refer to Note 12 of Item 8.--"Financial Statements and Supplementary Data" on page 44. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Provident Bankshares Corporation is traded over-the-counter and is quoted in the NASDAQ National Market. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The NASDAQ symbol is PBKS. The trading range of Provident's common stock for the years 2000 and 1999 is shown in Table 6 - Consolidated Quarterly Results of Operations, Market Prices and Dividends contained in Management's Discussion and Analysis (Item 7). At February 1, 2001, there were approximately 3,300 holders of record of the Corporation's common stock. For the year 2000, the Corporation declared and paid dividends of $.674 per share of common stock outstanding. Declarations or payments of dividends are subject to a determination by the Corporation's Board of Directors, which takes into account the Corporation's financial condition, results of operations, economic conditions and other factors, including the regulation restrictions which affect the payment of dividends by the Bank to the Corporation. ITEM 6. SELECTED FINANCIAL DATA Table 1
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except per share data) 2000 1999 1998 1997(1) 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income (tax-equivalent) $ 415,535 $ 353,341 $ 319,240 $ 280,167 $ 248,311 Interest Expense 253,119 204,261 187,509 156,718 137,354 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income (tax-equivalent) 162,416 149,080 131,731 123,449 110,957 Provision for Loan Losses 23,877 11,570 12,027 9,953 10,011 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income after Provision for Loan Losses 138,539 137,510 119,704 113,496 100,946 Non-Interest Income 66,921 61,147 56,143 42,119 44,533 Net Securities Gains 8,499 312 6,749 2,337 5,556 Merger Related Expenses/1/ -- -- -- 10,047 -- Non-Interest Expense 148,368 132,656 123,062 108,263 110,347 - ------------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 65,591 66,313 59,534 39,642 40,688 Income Tax Expense (tax-equivalent) 21,551 22,163 20,504 14,683 14,500 - ------------------------------------------------------------------------------------------------------------------------------------ Income Before Extraordinary Item 44,040 44,150 39,030 24,959 26,188 Extraordinary Item--Gain on Debt Extinguishment, net 770 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net Income $ 44,810 $ 44,150 $ 39,030 $ 24,959 $ 26,188 - ------------------------------------------------------------------------------------------------------------------------------------ Per Share Amounts: Basic--Net Income Before Extraordinary Item $ 1.68 $ 1.65 $ 1.45 $ .95 $ 1.01 --Net Income 1.71 1.65 1.45 .95 1.01 Diluted--Net Income Before Extraordinary Item $ 1.64 $ 1.60 $ 1.40 $ .92 $ .97 --Net Income 1.67 1.60 1.40 .92 .97 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Dividends Paid $ .67 $ .57 $ .47 $ .38 $ .30 - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Adjustment/2/ $ 983 $ 964 $ 1,133 $ 1,055 $ 832 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $5,504,548 $5,094,477 $4,675,897 $3,926,739 $3,485,618 Total Stockholders' Equity 315,411 274,599 296,077 270,182 238,798 Total Common Equity/3/ 326,106 318,922 290,769 265,449 240,171 Return on Average Assets .82% .90% .90% .68% .79% Return on Average Equity 16.17 15.46 13.75 9.90 11.53 Return on Average Common Equity 14.03 14.61 13.99 9.91 11.41 Stockholders' Equity to Assets 5.73 5.39 6.33 6.88 6.85 Average Equity to Average Assets 5.09 5.83 6.52 6.89 6.85 Dividend Payout Ratio 40.41 34.47 32.35 40.04 29.58 - ------------------------------------------------------------------------------------------------------------------------------------
/1/ Merger Related Expenses--Exclusive of after-tax merger-related expenses incurred during 1997, net income would have been $33.6 million. Return on average assets and return on average equity for 1997 would have been .92% and 13.33%, respectively. Basic earnings per share and diluted earnings per share would have been $1.28 and $1.23, respectively. /2/ Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect of 35% in 2000 and 1999, and 39.55% for 1998 through 1996. /3/ Common Equity excludes net accumulated other comprehensive income which is comprised of unrealized gains or losses on available for sale securities. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Review The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries for the three years ended December 31, 2000. This discussion and tabular presentations should be read in conjunction with the accompanying financial statements and notes. Provident Bankshares Corporation ("the Corporation"), through its wholly owned subsidiary, Provident Bank ("the Bank"), offers consumer and commercial banking services. Provident operates in the dynamic Baltimore-Washington corridor through a network of 98 offices in Maryland, Northern Virginia, and southern York County, PA. The Bank offers related financial services through its wholly owned subsidiaries. Mutual funds, annuities and insurance products are offered through Provident Investment Center Inc. (PIC) and leases through Court Square Leasing and Provident Lease Corp. During 1997, the Corporation acquired First Citizens Financial Corporation and the acquisition was accounted for as pooling-of-interests. Accordingly, results for the reporting periods have been restated. During 2000, the Corporation acquired Harbor Federal Bancorp and the acquisition was accounted for as a purchase. Results have been included in operations prospectively. The Corporation recorded net income in 2000 of $44.8 million or $1.67 per share/diluted, a 1.5% increase in net income and 4.4% increase in diluted earnings per share over 1999. Tax equivalent net interest income grew 8.9%, non-interest income grew 22.7% while non-interest expense increased 11.8%. The provision for loan losses more than doubled from 1999 recognizing the deterioration in the health care portfolio. The Corporation also recognized an extraordinary gain from debt extinguishment of $770 thousand, net of taxes. These variances are discussed in more detail beginning on the following pages. Results of Operations Net Interest Income The Corporation's principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and borrowings. Interest income, for purposes of analysis, is presented on a tax-equivalent basis to recognize associated tax benefits. This presentation provides a basis for comparison of yields with taxable earning assets. The discussion on net interest income should be read in conjunction with Table 2--"Analysis of Changes in Net Interest Income" and Table 3--"Consolidated Average Balances, Interest Income and Expense and Yields and Rates." Tax-equivalent net interest income for 2000 increased $13.3 million, or 8.9%, from 1999 as average earning assets grew $536 million over the prior year. Net interest margin decreased to 3.07% from 3.13% in 1999. Provident's tax equivalent interest income increased $62.2 million, or 17.6%, during the year due to the growth in average earning assets along with a 43 basis point increase in yield. The increase in yield was mainly due to a higher interest rate environment during 2000 compared to 1999. Average prime rate in 2000 was 9.23% compared to 8.00% in 1999. The increase in average earning assets resulted from a $130 million increase in the loan portfolios, a $490 million increase in investments and an $85 million decrease in loans held for sale. Residential and commercial mortgage loans increased $135 million and $27 million, respectively. Commercial and residential construction loans also increased by $72 million and $7 million, respectively. Average consumer loans fell $79 million due to the securitization of $324 million of second mortgage loans during the third quarter while the commercial business portfolio declined $31 million. Interest income earned on the loan portfolio increased $28 million reflecting higher loan outstandings. The yield on investments and loans increased 42 basis points and 52 basis points, respectively. Interest lost from non-accruing loans was $2.3 million compared to $735 thousand in 1999. Average non-accrual loans for 2000 were $18.9 million compared to $5.4 million in 1999. This increase was associated with health care credits, a majority of which were charged off or sold during 2000. Interest expense increased $48.9 million from 1999 resulting from a $490 million growth in average interest-bearing liabilities. The overall cost of funds increased 49 basis points as total interest-bearing liabilities increased 53 basis points mainly due to higher rate environment. Excluding the effect of off-balance sheet positions in each year, total costs of interest-bearing liabilities would have increased 51 basis points. The average rate paid on borrowed funds increased 78 basis points during 2000. 6 The increase in average interest-bearing liabilities reflects a $256 million rise in interest-bearing deposits, $132 million of which was associated with brokered deposits. Non-interest bearing demand deposit accounts grew by $37 million or 15%. The Corporation experienced a $233 million increase in borrowed funds. Future growth in net interest income will depend upon consumer and commercial loan demand, growth in deposits and the general level of interest rates. Please refer to the section entitled "Interest Sensitivity Management" on page 22 for further discussion of the impact of current trends on net interest income in 2000. Analysis of Changes in Net Interest Income Table 2
2000/1999 1999/1998 ------------------------------------------------ ------------------------------------------------ Variance Due to Change In Variance Due to Change In --------------------------------- ---------------------------------- (in thousands) Net Increase/ Average Average Average Net Increase/ Average Average Average (tax-equivalent basis) (Decrease) Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume ================================================================================================================================= Interest Income from: Loans: Consumer $ 5,185 $11,732 $ (6,153) $ (394) $ 34,894 $ 962 $ 33,713 $ 219 Commercial Business (1,180) 1,395 (2,462) (113) 3,110 (1,573) 4,971 (288) Real Estate--Construction 8,801 1,265 6,793 743 (272) (949) 736 (59) Real Estate--Mortgage 14,931 1,941 12,181 809 (11,770) (2,260) (10,065) 555 Mortgage Loans Held for Sale (5,701) 1,088 (6,026) (763) 582 61 517 4 Other Short-Term Investments 153 (5) 166 (8) (126) (25) (113) 12 U.S. Treasury and Government Agencies and Corporations 2,708 (23) 2,752 (21) (278) 18 (294) (2) Mortgage-Backed Securities 37,146 5,957 28,897 2,292 751 (3,378) 4,326 (197) Municipal Securities (22) (3) (19) -- 258 (28) 290 (4) Other Debt Securities 173 140 33 -- 6,952 96 6,662 194 - --------------------------------------------------------------------------------------------------------------------------------- Total Interest Income 62,194 20,175 39,749 2,270 34,101 (5,804) 40,644 (739) - --------------------------------------------------------------------------------------------------------------------------------- Interest Expense on: Demand/Money Market Deposits 3,008 1,411 1,452 145 370 (1,697) 2,357 (290) Savings Deposits (819) (680) (146) 7 (4,411) (4,347) (84) 20 Certificates of Deposit 24,793 11,300 12,281 1,212 26,119 412 25,588 119 Individual Retirement Accounts (357) 140 (488) (9) (1,322) (587) (784) 49 Borrowings 22,233 7,462 12,954 1,817 (4,004) (1,564) (2,509) 69 - --------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 48,858 22,859 23,382 2,617 16,752 (6,535) 24,128 (841) - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $13,336 $ (2,684) $16,367 $ (347) $ 17,349 $ 731 $ 16,516 $ 102 =================================================================================================================================
The table above analyzes the reasons for the changes from year-to-year in the principal elements that comprise net interest income. The calculation of rate, volume and rate/volume variances is based upon a procedure established for banks by the Securities and Exchange Commission. Rate, volume and rate/volume variances presented for each component will not total to the variances presented on totals of interest income and interest expense because of shifts from year-to-year in the relative mix of interest-earning assets and interest-bearing liabilities. 7 Consolidated Average Balances, Interest Income and Expense and Yields and Rates Table 3
2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ (tax-equivalent basis) Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-Earning Assets: Loans:/(1)(2)/ Consumer $2,277,961 $188,307 8.27% $2,357,159 $183,122 7.77% Commercial Business 353,437 29,100 8.23 384,708 30,280 7.87 Real Estate--Construction 211,842 20,366 9.61 133,458 11,565 8.67 Real Estate--Mortgage 552,720 44,172 7.99 390,177 29,241 7.49 ---------- -------- ---------- -------- Total Loans 3,395,960 281,945 8.30 3,265,502 254,208 7.78 ---------- -------- ---------- -------- Mortgage Loans Held for Sale 36,352 2,893 7.96 121,663 8,594 7.06 Other Short-Term Investments 6,610 262 3.96 2,617 109 4.17 US Treasury and Government Agencies and Corporations 79,189 5,733 7.24 41,464 3,025 7.30 Mortgage-Backed Securities 1,614,289 112,255 6.95 1,165,777 75,109 6.44 Municipal Securities 26,508 2,033 7.67 26,756 2,055 7.68 Other Debt Securities 137,522 10,414 7.57 137,078 10,241 7.47 Equity Securities -- -- -- -- -- -- ---------- -------- ---------- -------- Total Investment Securities/(2)/ 1,857,508 130,435 7.02 1,371,075 90,430 6.60 ---------- -------- ---------- -------- Total Interest-Earning Assets 5,296,430 415,535 7.85 4,760,857 353,341 7.42 ---------- -------- ---------- -------- Less: Allowance for Loan Losses (41,748) (38,293) Cash and Due From Banks 78,126 68,725 Other Assets 151,196 121,354 ---------- ---------- Total Assets $5,484,004 $4,912,643 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Liabilities: Demand/Money Market Deposits $ 599,030 17,154 2.86 $ 543,257 14,146 2.60 Savings Deposits 608,617 13,581 2.23 614,869 14,400 2.34 Certificates of Deposit 2,227,174 139,323 6.26 2,011,484 114,530 5.69 Individual Retirement Accounts 139,371 7,638 5.48 148,441 7,995 5.39 Borrowings 1,191,608 75,423 6.33 958,239 53,190 5.55 ---------- -------- ---------- -------- Total Interest-Bearing Liabilities 4,765,800 253,119 5.31 4,276,290 204,261 4.78 ---------- -------- ---------- -------- Noninterest-Bearing Demand Deposits 292,360 255,259 Other Liabilities 43,144 39,752 Capital Securities 63,334 39,206 Stockholders' Equity 319,366 302,136 ---------- --------- Total Liabilities and Stockholders' Equity $5,484,004 $4,912,643 ========== ========== Net Interest-Earning Assets $ 530,630 $ 484,567 ========== ========== Net Interest Income (tax-equivalent) 162,416 149,080 Less: Tax-Equivalent Adjustment (983) (964) -------- -------- Net Interest Income $161,433 $148,116 ======== ======== Net Yield on Interest-Earning Assets (tax-equivalent) 3.07% 3.13%
/(1)/ Average loan balances include non-accrual loans. /(2)/ Tax advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect of 35% in 2000 and 1999 and 39.55% for 1998 through 1996. 8
1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------------- $1,920,378 $148,228 7.72% $1,402,359 $113,496 8.09% $1,053,279 $ 85,049 8.07% 325,209 27,170 8.35 292,788 25,607 8.75 268,158 23,807 8.88 125,650 11,837 9.42 125,565 12,968 10.33 124,584 12,574 10.09 517,068 41,011 7.93 624,604 50,227 8.04 577,515 45,813 7.93 ---------- -------- ---------- -------- ---------- -------- 2,888,305 228,246 7.90 2,445,316 202,298 8.27 2,023,536 167,243 8.26 ---------- -------- ---------- -------- ---------- -------- 114,284 8,012 7.01 37,662 2,851 7.57 68,112 4,950 7.27 5,043 235 4.66 6,023 263 4.37 8,949 438 4.89 45,526 3,303 7.26 90,709 6,437 7.10 108,368 7,432 6.86 1,101,684 74,358 6.75 914,196 64,531 7.06 929,786 63,404 6.82 23,036 1,797 7.80 18,875 1,512 8.01 11,917 998 8.37 45,307 3,289 7.26 28,174 2,275 8.07 46,277 3,562 7.70 -- -- -- -- -- -- 2,983 284 9.52 ---------- -------- ---------- -------- ---------- -------- 1,215,553 82,747 6.81 1,051,954 74,755 7.11 1,099,331 75,680 6.88 ---------- -------- ---------- -------- ---------- -------- 4,223,185 319,240 7.56 3,540,955 280,167 7.91 3,199,928 248,311 7.76 ---------- -------- ---------- -------- ---------- -------- (38,831) (33,017) (27,985) 60,562 57,923 55,568 105,659 89,650 92,621 ---------- ---------- ---------- $4,350,575 $3,655,511 $3,320,132 ========== ========== ========== $ 463,874 13,776 2.97 $ 403,128 11,347 2.81 $ 380,913 11,009 2.89 617,643 18,811 3.05 620,267 20,450 3.30 621,995 17,100 2.75 1,559,985 88,411 5.67 1,194,202 67,917 5.69 922,616 53,493 5.80 162,088 9,317 5.75 111,252 6,290 5.65 105,680 6,134 5.80 985,176 57,194 5.81 866,502 50,714 5.85 872,554 49,618 5.69 ---------- -------- ---------- -------- ---------- -------- 3,788,766 187,509 4.95 3,195,351 156,718 4.90 2,903,758 137,354 4.73 ---------- -------- ---------- -------- ---------- -------- 212,339 176,645 158,635 42,608 31,555 28,253 27,873 -- -- 278,989 251,960 229,486 ---------- ---------- ---------- $4,350,575 $3,655,511 $3,320,132 ========== ========== ========== $ 434,419 $ 345,604 $ 296,170 ========== ========== ========== 131,731 123,449 110,957 (1,133) (1,055) (832) -------- -------- -------- $130,598 $122,394 $110,125 ======== ======== ======== 3.12% 3.49% 3.47%
9 Provision for Loan Losses Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for estimated losses based on management's evaluation of the collectibility of the loan portfolio, including the nature of the loan portfolio, credit concentration trends in historical loan experience, specific impaired loans and economic conditions. Management also considers the level of problem assets that the Company classifies in accordance with regulatory requirements. The provision for loan losses was $23.9 million, up from $11.6 million in 1999. The Corporation recorded a $13.0 million provision in the second quarter of 2000 to address the deterioration in the health care portfolio. The Corporation continues to emphasize quality underwriting as well as aggressive management of prior charge-offs and potential problem loans. Net charge-offs were $22.5 million in 2000 compared to $13.0 million in 1999. This increase in charge-offs is related to a $7.1 million write down of an existing $15 million non-performing health care credit and a $5.0 million loss on the sale of a second health care loan. Net charge-offs as a percentage of average loans was .66% in 2000 compared to .40% in 1999. Non-accrual loans ended the year at $21.2 million or .63% of loans outstanding, a decrease of $7.7 million from December 31, 1999. This decrease is due to the write down of the above mentioned health care loan. A further discussion of the allowance for loan losses, net charge-offs and non-performing assets appears on pages 16-19. Non-Interest Income Non-interest income is principally derived from fee-based services, mortgage banking activities and gains on investment securities sales. Total non-interest income increased 22.7% to $75.4 million. Excluding net securities gains, non-interest income increased $5.8 million or 9.4%. Table 4 presents a comparative summary of the major components of non-interest income. Non-Interest Income Summary Table 4
(in thousands) 2000 1999 1998 1997 1996 ============================================================================================================================== Service Charges on Deposit Accounts $42,912 $34,172 $29,260 $24,432 $19,262 Mortgage Banking Activities 3,613 9,652 11,485 6,845 14,895 Commissions and Fees 4,737 5,280 4,209 3,705 3,229 Other Loan Fees 2,390 3,355 5,104 2,147 1,872 Other Non-Interest Income 13,269 8,688 6,085 4,990 5,275 - ------------------------------------------------------------------------------------------------------------------------------ Subtotal 66,921 61,147 56,143 42,119 44,533 Net Securities Gains 8,499 312 6,749 2,337 5,556 - ------------------------------------------------------------------------------------------------------------------------------ Total Non-Interest Income $75,420 $61,459 $62,892 $44,456 $50,089 ==============================================================================================================================
Deposit service charges rose 26% over the prior year due mainly to a $6.9 million increase in retail demand deposit service fees. Average interest-bearing demand/money market deposits grew $55.8 million or 10% over last year while non-interest bearing deposits increased $37.1 million or 15%. These increases are the result of network expansion and continued promotion and sales efforts of retail deposit products. Income from mortgage banking activities declined $6.0 million to $3.6 million from $9.7 million in 1999. This decline was from lower production as a result of higher interest rate environment for residential mortgages. As a result, mortgage originations during the year decreased $450 million to $314 million. During the fourth quarter of 2000, the Corporation made a decision to reposition its mortgage operations by offering mortgages to its retail customers through an outsourced loan origination process and to no longer seek loan production from realtors and brokers. As a result, the mortgage lending operations of the Bank's subsidiary, Provident Mortgage Corp. are being phased out. 10 Commissions and fees decreased $543 thousand during 2000. This decrease is mainly associated with lower income from Provident Investment Center (PIC), a wholly owned subsidiary of the Bank. PIC offers annuities and mutual funds through an affiliation with a securities broker-dealer as well as property and casualty insurance products, as agent. For the year 2000, income associated with these products decreased by $435 thousand to $2.8 million. This decrease is attributed to lower sales volume due to an inverted yield curve and a volatile and erratic stock market. Other non-interest income increased $3.6 million over 1999, mainly due to higher bankcard income, which increased $3.0 million and $1.6 million associated with Bank Owned Life Insurance. Non-Interest Expense Non-interest expense is composed primarily of costs associated with employees' salaries and benefits, bank facilities and external data processing. Provident's non-interest expense of $148 million represented a $16 million increase from 1999 expenses. Table 5 presents a comparative summary of the major components of non-interest expense. Non-Interest Expense Summary Table 5
(in thousands) 2000 1999 1998 1997 1996 ================================================================================================================================= Salaries and Employee Benefits $ 71,207 $ 66,394 $ 61,853 $ 54,548 $ 55,416 Occupancy Expense, Net 12,951 11,376 10,349 10,018 9,317 Furniture and Equipment 10,073 8,927 8,123 7,354 7,036 External Processing Fees 16,420 14,883 14,006 12,374 10,929 Advertising and Promotion 7,582 6,806 7,171 5,678 5,986 Communication and Postage 5,673 5,231 4,376 3,693 3,861 Printing and Supplies 2,715 2,463 2,502 2,277 2,351 Federal Insurance Fund Recapitalization -- -- -- -- 3,029 Regulatory Fees 1,217 1,120 939 1,016 1,699 Professional Services 2,731 2,706 2,413 2,762 3,000 Merger Related Expenses -- -- -- 10,047 -- Capital Securities Expenses 5,558 3,160 2,359 -- -- Other Non-Interest Expense 12,241 9,590 8,971 8,543 7,723 - --------------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense $148,368 $132,656 $123,062 $118,310 $110,347 =================================================================================================================================
Salaries and benefits increased $4.8 million during the year. Compensation increased $4.2 million while benefits were up $573 thousand. The rise in these categories is attributable to network expansion as 15 new branches were opened. Regular salaries rose $5.5 million mainly attributable to merit increases and increased staffing associated with branch expansion. Full-time equivalent employees as of December 31, 2000 were 1,594 compared to 1,511 last year. Occupancy costs rose $1.6 million or 14% over last year. This increase is mainly due to additional rent and leasehold improvements as the branch network increased to 98 branches in 2000. Total furniture and equipment expense increased $1.1 million due to upgrading of technology and branch network expansion. External processing increased $1.5 million, or 10%, the majority of which was associated with a 6.5% increase in average account volume. During the first quarter of 2000, the Corporation issued $30 million of trust preferred securities with a maturity of 30 years, callable at the end of the fifth year. The rate on these trust preferred securities is 10.0%. The 2000 capital securities expense was $5.6 million compared to $3.2 million for 1999. All other non-interest expenses were up by $4.2 million from 1999. This increase in other non-interest expenses was due to network expansion as communication, postage, marketing, supplies, personnel costs, net losses and travel and entertainment expenses increased $3.5 million from 1999. Expenses for goodwill and low income housing investments were $565 thousand for 2000 compared to zero in 1999. The Corporation also recognized approximately $800 thousand in one time charges for the restructuring of Provident Mortgage Corp. 11 Income Taxes Provident recorded income tax expense of $20.6 million on pre-tax income of $64.6 million for an effective tax rate of 31.8%. This compares with a 32.4% effective tax rate for 1999. This decrease is mainly related to a higher level of tax-advantaged income and settlement of prior years' exams. Fourth Quarter Results Provident recorded net income of $12.6 million, or $.47 per share on a diluted basis, in the fourth quarter of 2000, an increase of $1.0 million, or 9.1%, over the $11.5 million, or $.42 per share on a diluted basis, recorded in the same period last year. The higher earnings were principally due to a 33% increase in non-interest income or $4.8 million. Net interest income also increased $1.0 million. A rise in operating expenses partially offset the increase in income. Tax-equivalent net interest income in the fourth quarter rose 2.4% or $978 thousand to $41.4 million. This increase was mainly related to a $515 million rise in earning assets offset in part by a 23 basis point drop in net interest margin. The decrease in the net interest margin primarily reflected a flatter yield curve as yield on earning assets increased 18 basis points while the costs of funds increased 41 basis points. The Corporation recorded a provision for loan losses of $3.3 million during the quarter to provide for loan growth in the portfolio as well as an increase in net charge-offs. Non-interest income increased 33% to $19.5 million. Fee income from deposit accounts increased $3.0 million, and other non-interest income increased $2.0 million. Increase in other non-interest income was mainly associated with card holder income and income associated with Bank Owned Life Insurance. During the fourth quarter of 2000, the Corporation made a decision to reposition its mortgage operations by offering mortgages to its retail customers through an outsourced loan origination process and no longer will seek loan production from realtors and brokers. As a result, the mortgage lending operations of the Bank's subsidiary, Provident Mortgage Corp., are being phased out. Net securities gains were $641 million compared to zero in the same period of 1999. Non-interest expense increased $5.2 million to $39.1 million. Compensation and benefits increased $2.2 million compared to the same period in 1999. Compensation was up $1.7 million while benefits increased $460 thousand due to network expansion. Occupancy expense was $411 thousand higher due to network expansion and annual lease increases. External processing fees increased $577 thousand, which was associated with increased account volume. Other expenses included higher minority interest expenses of $835 thousand associated with the capital issuance of trust preferred securities during the first quarter of 2000, higher furniture and equipment expenses of $259 thousand, higher net losses of $276 thousand and goodwill amortization of $195 thousand associated with the purchase of Harbor Federal Bancorp. The Corporation also recognized approximately $800 thousand in one time charges for the restructuring of Provident Mortgage Corp. 12 Table 6 presents quarterly financial data for 2000 and 1999. Consolidated Quarterly Results of Operations, Market Prices and Dividends (unaudited) Table 6
2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First (in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter =================================================================================================================================== Interest Income $107,228 $107,483 $101,827 $98,014 $95,055 $89,962 $85,988 $81,372 Interest Expense 66,100 67,151 62,273 57,595 54,894 52,171 49,565 47,631 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 41,128 40,332 39,554 40,419 40,161 37,791 36,423 33,741 Provision for Loan Losses 3,257 3,285 13,035 4,300 3,635 3,215 2,759 1,961 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 37,871 37,047 26,519 36,119 36,526 34,576 33,664 31,780 Non-Interest Income 18,883 17,148 16,600 14,290 14,680 15,451 15,416 15,600 Net Securities Gains (Losses) 641 -- 7,779 79 -- -- 375 (63) Non-Interest Expense 39,098 37,295 36,946 35,029 33,907 33,504 33,003 32,242 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 18,297 16,900 13,952 15,459 17,299 16,523 16,452 15,075 Income Tax Expense 5,722 5,545 4,707 4,594 5,769 5,218 5,462 4,750 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item $ 12,575 $ 11,355 $ 9,245 $10,865 $11,530 $11,305 $10,990 $10,325 Extraordinary Item -- -- -- 770 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 12,575 $ 11,355 $ 9,245 $11,635 $11,530 $11,305 $10,990 $10,325 - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Amounts: Net Income--Basic* $ .48 $ .44 $ .35 $ .44 $ .43 $ .42 $ .41 $ .39 Net Income--Diluted* $ .47 $ .43 $ .35 $ .43 $ .42 $ .41 $ .40 $ .37 Market Prices: High 21.06 16.88 16.55 16.91 21.25 23.33 27.09 25.74 Low 16.38 13.31 13.19 13.21 16.49 19.23 20.48 22.39 Cash Dividends Paid .180 .175 .162 .157 .152 .148 .136 .132 ===================================================================================================================================
*Income before extraordinary item for first quarter 2000 was $.41 and $.40 for basic and diluted earnings per share respectively. Financial Condition Source and Use 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 98 branch banking locations. At December 31, 2000, core deposits represented 63% of total deposits and 48% of total liabilities. Future funding growth is expected to be generated from deposit growth through strategies outlined below. The branch network strategy includes traditional full service branch locations and in-store branches. In-store branch locations are comprised of supermarket locations and national retail superstores. Provident Bank, as of December 31, 2000, had 56 traditional branch locations and 42 in-store branches. The Bank has an agreement with Supervalu to operate branches in their Metro and Basic supermarkets in the Baltimore metropolitan area and Shoppers Food Warehouse in the Washington, D.C. metropolitan area. Additional branch opportunities complementary to existing locations will be sought when the cost of entry is reasonable. The Bank has nine additional branches planned for 2001. The Bank continues to attract increased commercial and retail deposits. Interest-bearing demand/money market deposit balances at December 31, 2000 were up $83.5 million, or 15%, compared to year-end 1999. The Bank decided to sell its check cashing facilities during the second quarter of 2000 and closed that transaction during the third quarter of 2000. 13 The table below presents the average deposit balances and rates paid for the five years ended December 31, 2000. Average Deposits Table 7
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Average Average Average Average (dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate ==================================================================================================================================== Noninterest-Bearing $ 292,360 --% $ 255,259 --% $ 212,339 --% $ 176,645 --% $ 158,635 --% Money Market/Demand 599,030 2.86 543,257 2.60 463,874 2.97 403,128 2.81 380,913 2.89 Savings 608,617 2.23 614,869 2.34 617,643 3.05 620,267 3.30 621,995 2.75 Time: Certificates of Deposit 2,227,174 6.26 2,011,484 5.69 1,559,985 5.67 1,194,202 5.69 922,616 5.80 Individual Retirement Accounts 139,371 5.48 148,441 5.39 162,088 5.75 111,252 5.65 105,680 5.80 ---------- ---------- ---------- ---------- ---------- Total Average Balance/Rate $3,866,552 4.60% $3,573,310 4.23% $3,015,929 4.32% $2,505,494 4.23% $2,189,839 4.01% ========== ========== ========== ========== ========== Total Year-End Balance $3,954,770 $3,808,528 $3,419,557 $2,754,515 $2,286,144 ========== ========== ========== ========== ==========
As the table above indicates, the Bank has a stable base of consumer savings deposits. During 2000, average deposits grew $293 million, or 8.2%, compared to 1999. Average money market/demand deposits and non-interest-bearing deposits increased $92.9 million or 11.6%. This growth reflects an emphasis on full banking relationships with retail and commercial customers. Average time deposits increased $207 million, or 10%, $132 million of which is attributable to brokered deposits. Brokered deposits, often a cheaper source of funds compared to other available sources of borrowed money, such as Federal Home Loan Bank advances and repurchase agreements, are used to match fund investments and acquired loans. The table below presents information at December 31, 2000, with respect to the maturity of Certificates of Deposit of $100,000 or more. Deposit Maturities Table 8
Maturities -------------------------------------------------------------- Over Three Over Six Three Months Months to Months to Over 12 (dollars in thousands) or Less Six Months 12 Months Months Total ============================================================================================================== Balance $59,883 $28,145 $46,452 $57,754 $192,234 Percent of Total 31.2% 14.6% 24.2% 30.0% 100.0%
Credit Risk Management Much of the fundamental business of Provident is based upon understanding, measuring and controlling credit risk. Credit risk entails both general risks, which 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. For example, loans with generally low credit loss experience include home mortgage and home equity loans. Loans with medium credit loss experience are primarily secured products such as auto and marine loans. The category with high credit loss experience includes unsecured products such as personal revolving credit. In commercial lending, losses as a percentage of outstanding loans can vary widely from period to period and are particularly sensitive to changing economic conditions. The evaluation of specific risk is a basic function of underwriting and loan administration, involving analysis of the borrower's ability to service debt as well as the value of pledged collateral. 14 Policies and procedures have been developed which specify the appropriate credit approval and monitoring for the various types of credit offered. The Bank employs prudent lending practices and adheres to regulatory requirements including loan to value ratios and legal lending limits. These procedures are modified periodically in order to reflect changing conditions and new products. The Bank's lending and loan administration 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. Credit risk analysis assigns a grade to each commercial loan based upon an assessment of the borrower's financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review function tests risk assessments and determines the adequacy of the allowance for loan losses. Financial Accounting Standards require creditors to evaluate the collectibility of contractually due principal and interest on commercial credits to assess the need for providing for losses. The Corporation's credit procedures require monitoring of commercial credits to determine the collectibility of such credits. If a loan is identified as impaired, it will be placed on non-accrual status and recorded according to accounting guidelines. As of December 31, 2000, there were $13.6 million in commercial loans considered to be impaired. Loans The Bank offers a diversified mix of residential and commercial real estate, business and consumer loans. As shown in Table 9, the mix of loans outstanding is heavily consumer oriented. Of the total loans, $2.0 billion, or 60%, are secured by residential real estate including first and second mortgages, and home equity loans. During the fourth quarter of 2000, the Bank made a decision to reposition its mortgage operations by offering mortgages to its retail customers through an outsourced loan origination process and no longer will seek loan production from realtors and brokers. As a result, the mortgage lending operations of its subsidiary, Provident Mortgage Corp., are being phased out. Prior to this decision, residential mortgage lending included the origination, sale and servicing of fixed and variable rate mortgage loans. Loans were originated through the loan production offices of Provident Mortgage Corp. Mortgage origination activity in 2000 was $314 million compared to $764 million in 1999. During 2000, income from the sale of loans was $1.2 million. The mortgage servicing portfolio ended the year at $565 million. The residential real estate mortgage loan balance at December 31, 2000 was $476 million compared to $245 million at the end of the prior year. The following table sets forth information concerning the Bank's loan portfolio by type of loan at December 31. Loan Portfolio Summary Table 9
(dollars in thousands) 2000 % 1999 % 1998 % 1997 % 1996 % - ------------------------------------------------------------------------------------------------------------------------------------ Consumer $2,026,013 60.1% $2,204,943 69.2% $2,154,557 69.5% $1,667,094 61.7% $1,211,971 54.0% Commercial Business 356,041 10.6 363,059 11.4 375,930 12.1 288,289 10.7 294,844 13.1 Real Estate--Construction: Residential 109,046 3.2 89,513 2.8 89,777 2.9 99,926 3.7 112,072 5.0 Commercial 156,872 4.6 62,362 2.0 34,668 1.1 25,154 .9 9,470 .4 Real Estate--Mortgage: Residential 476,030 14.1 245,401 7.7 238,282 7.7 362,012 13.4 355,566 15.8 Commercial 249,769 7.4 218,841 6.9 206,997 6.7 258,593 9.6 263,950 11.7 - ------------------------------------------------------------------------------------------------------------------------------------ Total Loans $3,373,771 100.0% $3,184,119 100.0% $3,100,211 100.0% $2,701,068 100.0% $2,247,873 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
The Bank offers a wide range of loans to consumers including installment loans, home equity loans, and personal lines of credit. In addition, the Bank may purchase portfolios of quality consumer loans from other financial institutions. All purchased portfolios go through a thorough due diligence process prior to a purchase commitment. The portfolio of acquired loans decreased $80 million on average, ending the year at $1.3 billion, and was predominately comprised of second mortgages. The Bank securitized $324 million of acquired second mortgage loans during the third quarter of 2000 and retained the securities in the investment portfolio. 15 Average consumer loan balances through credits originated remained relatively flat during the year, ending the year with a balance of $770 million. During 2000, the Bank made a decision to exit both indirect auto and residential mortgage lending to concentrate on more profitable businesses. Most of the automobile loans were made through a network of auto dealerships in Maryland, Delaware, Pennsylvania and Virginia. Auto loans that were made through this network of dealerships ended the year at $183 million. Marine loan balances ended 2000 with $225 million, and were produced primarily through correspondent brokers. Home equity lines of credit totaled $161 million at the end of 2000 while direct second mortgage loans ended the year at $147 million. The Bank's focus in commercial real estate lending has been on financing commercial and residential construction, as well as on intermediate-term commercial mortgages. Properties securing the loans include office buildings, shopping centers, apartment complexes, warehouses, residential building lots and developments. Average commercial real estate mortgage loans increased $27 million or 13% while average commercial construction loans increased $72 million or 166%. Average residential construction loans increased $6.6 million or 7% to end the year at $109 million. The commercial loan portfolio consists of general business loans, including asset-based loans, primarily to small and medium sized businesses in the Baltimore, Maryland and Washington, D.C. metropolitan areas. The Bank stresses the importance of asset quality as well as the development of new marketing programs. Average commercial loans declined by $31 million, or 8%, ending the year at $356 million. This decline is associated with a decision to reduce the Bank's exposure to national syndicated credits. At December 31, 2000, national syndicated credits represented 3.9% of the total loan portfolio, down from 4.9% at December 31, 1999. The Bank has minimal exposure to highly leveraged transactions ("HLTs"). HLTs are loans to borrowers for the purpose of purchasing or recapitalizing a business in which the loans represent a majority of the borrower's liabilities. HLTs totaled $53.1 million as of year-end, and all are performing in accordance with their contractual terms. Non-Performing Assets and Past Due Loans Non-performing assets include loans on which interest is no longer accrued, renegotiated loans and real estate and other assets that have been acquired through foreclosure or repossession. Past due loans are loans that are 90 days or more past due as of December 31 and still accruing interest because they are well secured and in the process of collection. The Bank does not place consumer loans on non-accrual status as delinquent consumer loans outstandings and any uncollected interest is generally charged-off at the time such loan would be placed on non-accrual status. Information with respect to non-performing assets and past due loans is presented in Table 10 for the years indicated. As shown in the table, total non-accrual loans decreased $7.7 million, mainly in commercial business. This decrease is due to one national shared health care relationship in which part of the largest portion was written-off during the third quarter of 2000. The financial condition of the health care industry remains weak, but the Corporation has been closely monitoring these and several other of the bank's health care industry credits where the operators have had to adjust to changes in Medicare reimbursement policies. The entire health care portfolio represents 3.0% of the Bank's total loans, down from 3.5% at December 31, 1999. The increase in past due consumer loans is related to purchases in the acquired portfolio, the majority of which are secured by residential real estate. Non-performing assets and past due loans ended the year at $24 million and $37 million, respectively. (See the discussion under Loans on page 15.) The ratio of total non-performing loans to year-end loans decreased to .63% compared to .91% at the end of 1999. This decrease is associated with the health care credit noted above. Presented below is interest income that would have been recorded on all non-accrual loans if such loans had been paid in accordance with their original terms and the interest income on such loans that was actually collected for the year.
Year Ended (in thousands) December 31, 2000 ============================================================================================== Gross interest income that would have been recorded had such loans been paid in accordance with original terms $2,654 Interest income actually recorded 399
16 Non-Performing Assets and Past Due Loans Table 10
December 31, - ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 1997 1996 =============================================================================================================================== Non-Accrual Loans: Consumer (1) $ -- $ -- $ -- $ -- $ 9,809 Commercial Business 13,601 21,329 3,550 2,917 539 Real Estate--Construction: Residential -- -- 1,570 -- 37 Commercial -- -- -- -- -- Real Estate--Mortgage: Residential 7,619 7,579 6,397 6,937 4,372 Commercial -- -- -- -- 125 - ------------------------------------------------------------------------------------------------------------------------------- Total Non-Accrual Loans 21,220 28,908 11,517 9,854 14,882 - ------------------------------------------------------------------------------------------------------------------------------- Renegotiated Loans: Commercial Business 165 -- -- -- -- Real Estate--Construction: Residential -- -- -- -- -- Commercial -- -- -- -- -- Real Estate--Mortgage: Residential -- -- -- -- -- Commercial -- -- -- -- 3,942 - ------------------------------------------------------------------------------------------------------------------------------- Total Renegotiated Loans 165 -- -- -- 3,942 - ------------------------------------------------------------------------------------------------------------------------------- Other Non-Performing Assets: Real Estate--Construction: Residential 516 1,538 454 454 132 Commercial -- -- -- -- 9,571 Real Estate--Mortgage: Residential 2,060 1,395 2,554 2,367 903 Commercial -- -- 1,900 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total Other Non-Performing Assets 2,576 2,933 4,908 2,821 10,606 - ------------------------------------------------------------------------------------------------------------------------------- Total Non-Performing Assets $23,961 $31,841 $16,425 $12,675 $29,430 =============================================================================================================================== Past Due Loans: Consumer (1) $31,771 $23,369 $19,187 $14,371 $ 237 Commercial Business 131 59 -- 126 -- Real Estate--Construction: Residential -- -- -- 133 -- Commercial -- -- -- -- -- Real Estate--Mortgage: Residential 4,589 5,753 8,806 10,646 7,823 Commercial 919 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total Past Due Loans $37,410 $29,181 $27,993 $25,276 $ 8,060 =============================================================================================================================== Ratios: Total Non-Performing Loans to Year-End Loans .63% .91% .37% .36% .84% Total Non-Performing Assets to Year-End Assets .44 .63 .35 .32 .84 ===============================================================================================================================
(1) Prior to 1997, consumer loans were generally placed into non-accrual status at 90 days past due and subsequently charged off. Beginning in 1997, to conform to standard industry practice, consumer loans are not placed in non-accrual status but are generally charged-off at 120 days past due for installment loans and 180 days for revolving loans. 17 Allowance for Loan Losses The Corporation maintains an allowance for loan losses, which is available to absorb potential losses. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. Determination of the adequacy of the allowance, which is performed quarterly, is accomplished by assigning specific reserves to individually identified problem credits and general reserves, based on historic and anticipated loss experience, to all other loans. Management believes that the allowance at December 31, 2000 will be adequate to absorb losses inherent in the portfolio. Management believes that it uses the best information available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the Corporation believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. The following table reflects the allowance for possible loan losses and the activity during each of the respective years. Loan Loss Experience Summary Table 11
(dollars in thousands) 2000 1999 1998 1997 1996 =============================================================================================================================== Balance at Beginning of Year $ 39,780 $ 42,739 $ 36,861 $ 30,361 $ 27,524 Allowance of Acquired Company 404 -- -- -- -- Provision for Loan Losses 23,877 11,570 12,027 9,953 10,011 Allowance Related to Securitized Loans (950) (1,500) -- -- -- Loans Charged-Off: Consumer 11,040 7,940 4,550 3,641 2,888 Commercial Business 13,000 5,705 1,031 143 5,170 Real Estate--Construction: Residential -- 500 593 305 37 Commercial -- -- 25 37 8 Real Estate--Mortgage: Residential 209 412 258 289 360 Commercial -- -- 1,281 798 399 - ------------------------------------------------------------------------------------------------------------------------------- Total Charge-Offs 24,249 14,557 7,738 5,213 8,862 - ------------------------------------------------------------------------------------------------------------------------------- Recoveries: Consumer 1,414 1,236 970 871 826 Commercial Business 148 106 109 882 801 Real Estate--Construction: Residential -- -- 68 -- -- Commercial -- 24 16 1 16 Real Estate--Mortgage: Residential -- -- 11 1 45 Commercial 236 162 415 5 -- - ------------------------------------------------------------------------------------------------------------------------------- Total Recoveries 1,798 1,528 1,589 1,760 1,688 - ------------------------------------------------------------------------------------------------------------------------------- Net Loans Charged-Off 22,451 13,029 6,149 3,453 7,174 =============================================================================================================================== Balance at End of Year $ 40,660 $ 39,780 $ 42,739 $ 36,861 $ 30,361 =============================================================================================================================== Balances: Loans--Year-End $3,373,771 $3,184,119 $3,100,211 $2,701,068 $2,247,873 Loans--Average 3,395,960 3,265,502 2,888,305 2,445,316 2,023,536 Ratios: Net Loans Charged-Off to Average Loans .66% .40% .21% .14% .35% Allowance for Loan Losses to Year-End Loans 1.21 1.25 1.38 1.36 1.35 - -------------------------------------------------------------------------------------------------------------------------------
18 The continued emphasis on loan quality and close monitoring of potential problem credits has resulted in a strong credit portfolio. Senior managers meet at least monthly to review the credit quality of the loan portfolios and at least quarterly with executive management to review the adequacy of the allowance for loan losses. The allowance is determined by management's evaluation of the composition and risk characteristics of the loan portfolio. Based upon the evaluation of credit risk, loan loss provisions in the form of charges to operations are made to bring the allowance up to a level management believes is adequate. An analysis of the loan portfolio was performed at December 31, 2000, and expected losses have been provided for in the allowance for loan losses. During 2000, the loan loss allowance increased $880 thousand to $40.7 million at year-end. This increase is related to the increase in credit exposure as the total loans increased $190 million, $231 million from the residential mortgage loans. The allowance as a percentage of total loans was 1.21% at December 31, 2000 compared to 1.25% at December 31, 1999. The allowance for loan losses as a percentage of non-accrual loans was 190% at December 31, 2000, compared to 138% the prior year. The portion of the allowance which is allocated to non-accrual loans, is determined by estimating the potential loss on each credit after giving consideration to the value of underlying collateral. The Corporation maintains a loan classification and review system to identify those loans with a higher than normal risk of uncollectibility. Estimated potential losses from internally criticized loans have been provided for in determining the allowance for loan losses. Table 12 reflects the allocation of the allowance for loan losses to the various loan categories as required by the Securities and Exchange Commission. The entire allowance for loan losses is available to absorb losses from any type of loan. Allocation of Allowance for Loan Losses Table 12
(in thousand) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Consumer $ 8,125 $ 7,100 $ 6,057 $ 3,390 $ 4,572 Commercial Business 10,312 12,672 11,042 8,376 3,120 Real Estate--Construction: Residential 1,283 1,086 1,638 1,585 1,408 Commercial 1,980 799 439 384 883 Real Estate--Mortgage: Residential 3,965 1,289 634 592 998 Commercial 2,133 1,843 1,863 2,486 2,704 Unallocated 12,862 14,991 21,066 20,048 16,676 - ------------------------------------------------------------------------------------------------------------------------------- Total Allowance for Loan Losses $40,660 $39,780 $42,739 $36,861 $30,361 - -------------------------------------------------------------------------------------------------------------------------------
Investment Securities The Corporation's investment activities include management of the $1.9 billion investment securities portfolio. The investment securities portfolio includes mortgage-backed securities, U.S. Government securities, municipal securities and other debt securities. In addition to investment securities, the Corporation invests in federal funds sold, reverse repos, mortgage loans held for sale and other short-term investments (referred to in total as the investment portfolio). The strategies employed in the management of these portfolios depend upon the liquidity, interest sensitivity and capital objectives and requirements of the Corporation. The Treasury Division executes these strategies. 19 The following table sets forth information concerning the Bank's investment securities portfolio at December 31. Investment Securities Summary Table 13
(dollars in thousands) 2000 % 1999 % 1998 - ------------------------------------------------------------------------------------------------- Securities Available for Sale U.S. Treasury and Government Agencies and Corporations $ 87,405 4.7% $ 56,447 3.4% $ 42,293 Mortgage-Backed Securities 1,644,202 87.6 1,469,605 87.9 992,089 Municipal Securities 26,080 1.4 26,205 1.6 27,732 Other Debt Securities 118,822 6.3 119,250 7.1 136,397 - ------------------------------------------------------------------------------------------------- Total Securities Available for Sale 1,876,509 100.0 1,671,507 100.0 1,198,511 - ------------------------------------------------------------------------------------------------- Securities Held to Maturity U.S. Treasury and Government Agencies and Corporations -- -- -- -- -- Mortgage-Backed Securities -- -- -- -- -- - ------------------------------------------------------------------------------------------------- Total Securities Held to Maturity -- -- -- -- -- - ------------------------------------------------------------------------------------------------- Total Investment Securities Portfolio $1,876,509 100.0% $1,671,507 100.0% $1,198,511 - ------------------------------------------------------------------------------------------------- Total Portfolio Yield 7.1% 7.0% 6.6% - -------------------------------------------------------------------------------------------------
Investment Securities Summary Table 13
(dollars in thousands) % 1997 % 1996 % - --------------------------------------------------------------------------------------------- Securities Available for Sale U.S. Treasury and Government Agencies and Corporations 3.5% $ 55,576 5.7% $ 71,882 6.8% Mortgage-Backed Securities 82.8 885,491 90.0 847,194 80.4 Municipal Securities 2.3 19,391 2.0 19,091 1.8 Other Debt Securities 11.4 22,783 2.3 29,987 2.8 - --------------------------------------------------------------------------------------------- Total Securities Available for Sale 100.0 983,241 100.0 968,154 91.8 - --------------------------------------------------------------------------------------------- Securities Held to Maturity U.S. Treasury and Government Agencies and Corporations -- -- -- 32,395 3.1 Mortgage-Backed Securities -- -- -- 53,842 5.1 - --------------------------------------------------------------------------------------------- Total Securities Held to Maturity -- -- -- 86,237 8.2 - --------------------------------------------------------------------------------------------- Total Investment Securities Portfolio 100.0% $983,241 100.0% $1,054,391 100.0% - --------------------------------------------------------------------------------------------- Total Portfolio Yield 7.0% 6.9% - ---------------------------------------------------------------------------------------------
During 2000, the Corporation continued to enjoy a strong capital position, a high degree of liquidity, and a substantial level of core deposits. Management's principal objectives for the investment portfolio during 2000 were to maintain an appropriate level of quality, to ensure sufficient liquidity in various interest rate environments while maximizing yield and to increase net income by utilizing excess capital. To successfully achieve these objectives, the Corporation employed off-balance sheet and on balance sheet strategies. Total investment securities increased $205 million during 2000 as a result of securitizing $324 million of purchased consumer loans during the third quarter of 2000. Notional amounts of off-balance sheet positions totaled $540 million at December 31, 2000 compared to $1.6 billion at December 31, 1999. The Corporation segregates its investment securities into three categories: 1) held to maturity, 2) trading, and 3) available for sale. All securities in the available for sale category must be measured at fair market value. The resulting gain or loss is excluded from revenue but is reflected as a change in stockholders' equity through accumulated other comprehensive income. Trading securities must be measured at fair value and changes included in income for the period. As of December 31, 2000, the Corporation had no investments classified as trading securities. Securities designated as held to maturity are carried at amortized cost. At December 31, 2000, the available for sale portfolio included net unrealized losses of approximately $16.5 million, compared to net unrealized losses of $68.2 million at December 31, 1999. In addition to unrealized gains and losses, the Corporation realized $8.8 million in gains and $328 thousand in losses from the sale of securities from the available for sale portfolio in 2000. These sales were the result of management's continuous monitoring of the investment securities portfolio in terms of both performance and risks. 20 Liquidity and Sensitivity to Interest Rates Liquidity An important component of the Bank's asset/liability structure is the level of liquidity available to meet the needs of customers and creditors. Traditional sources of bank liquidity include deposit growth, loan repayments, investment maturities, asset sales, borrowings and interest received. The Bank's Asset/Liability Management Committee has established general guidelines for the maintenance of prudent levels of liquidity. The committee continually monitors the amount and source of available liquidity, the time required to obtain it and its cost. Management believes the Bank has sufficient liquidity to meet funding needs in the foreseeable future. Primary sources of liquidity at December 31, 2000 were investment securities available for sale and scheduled loan repayments. Investment securities available for sale totaled $1.9 billion. This represents 36% of total liabilities at December 31, 2000, the same as December 31, 1999. Maturities of investment securities, as Table 14 indicates, is expected to generate $287 million in funds in 2001 and $1.1 billion, or 58%, of the portfolio within the next five years. The following table presents the expected cash flows and interest yields of the Bank's investment securities portfolio at December 31, 2000. Maturities of Investment Securities Portfolio Table 14
In One Year After One Year After Five Years or Less Through Five Years Through Ten Years - -------------------------------------------------------------------------------------------- (dollars in thousands) Amount Yield Amount Yield Amount Yield - -------------------------------------------------------------------------------------------- Securities Available for Sale U.S. Treasury and Government Agencies and Corporations $ 5,010 5.0% $ -- --% $ -- --% Mortgage-Backed Securities 277,706 7.3 789,431 7.0 345,099 6.9 Municipal Securities 3,785 7.5 11,668 7.7 9,340 7.7 Other Debt Securities 500 9.8 400 6.3 -- -- - -------------------------------------------------------------------------------------------- Total Investment Securities Portfolio $287,001 7.3% $801,499 7.0% $354,439 7.0% - --------------------------------------------------------------------------------------------
Maturities of Investment Securities Portfolio Table 14
Over Unrealized Ten Years Gain (Loss) - -------------------------------------------------------------------------------------------- (dollars in thousands) Amount Yield Amount Total Yield - -------------------------------------------------------------------------------------------- Securities Available for Sale U.S. Treasury and Government Agencies and Corporations $ 78,059 7.3% $ 4,336 $ 87,405 7.2% Mortgage-Backed Securities 233,162 6.5 (1,196) 1,644,202 7.0 Municipal Securities 1,049 7.7 238 26,080 7.7 Other Debt Securities 137,753 7.5 (19,831) 118,822 7.5 - -------------------------------------------------------------------------------------------- Total Investment Securities Portfolio $450,023 7.0% $(16,453) $1,876,509 7.1% - --------------------------------------------------------------------------------------------
Yields do not give effect to changes in fair value that are reflected as a component of stockholders' equity. 21 Loan repayments are another source of liquidity. Scheduled loan repayments during the year 2000 are $450 million, or 13.3% of loans. Table 15 presents contractual loan maturities and interest rate sensitivity at December 31, 2000. The cash flow from loans is expected to significantly exceed contractual maturities due to refinances and early payoffs. Loan Maturities and Rate Sensitivity Table 15
In One Year After One Year After Five (dollars in thousands) or Less Through Five Years Years Total Percentage - ------------------------------------------------------------------------------------------------------------------------------- Loan Maturities: Consumer $283,805 $ 772,365 $ 969,843 $2,026,013 60.1% Commercial Business 23,510 294,640 37,891 356,041 10.6 Real Estate--Construction: Residential 66,349 40,324 2,373 109,046 3.2 Commercial 51,874 101,960 3,038 156,872 4.6 Real Estate--Mortgage: Residential 9,193 31,286 435,551 476,030 14.1 Commercial 15,004 199,100 35,665 249,769 7.4 - ------------------------------------------------------------------------------------------------------------------------------- Total Loans $449,735 $1,439,675 $1,484,361 $3,373,771 100.0% - ------------------------------------------------------------------------------------------------------------------------------- Rate Sensitivity: Predetermined Rate $287,193 $1,058,005 $1,016,872 $2,362,070 70.0% Variable or Adjustable Rate 162,542 381,670 467,489 1,011,701 30.0 - ------------------------------------------------------------------------------------------------------------------------------- Total Loans $449,735 $1,439,675 $1,484,361 $3,373,771 100.0% - -------------------------------------------------------------------------------------------------------------------------------
Core deposits are valuable in assessing liquidity needs because they tend to be stable with little net short or intermediate-term withdrawal demands by customers. At year-end, core deposits represented $2.5 billion, or 48%, of total liabilities and 45% of total assets. An important element in liquidity management is the availability of borrowed funds. At December 31, 2000, short-term borrowings totaled $398 million, or 7.7%, of liabilities in contrast to $301 million, or 6.3%, of liabilities at December 31, 1999. Another key element in liquidity management is the use of brokered CDs. Brokered CDs at December 31, 2000 amounted to $1.3 billion, a $161 million decrease from the same period last year. The average maturity of short-term borrowings at the end of the year was 17 days. These borrowings were fully collateralized by U.S. Government or mortgage-backed securities owned by the Bank. Long-term borrowings consisted of variable and fixed-rate advances from the Federal Home Loan Bank and totaled $725 million as of December 31, 2000. It is anticipated that the Bank will continue to have access to the repurchase market and fed fund lines as well as short and long-term variable and fixed-rate funds from the Federal Home Loan Bank. During the first quarter of 2000, the Corporation issued an additional $30 million of trust preferred securities with a maturity of 30 years, callable at the end of the fifth year. The rate on this issue of trust preferred securities is 10.0%. Total issuance of trust preferred securities now totals $70 million. Interest Sensitivity Management The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, earnings are subject to fluctuations, which arise due to changes in the level and directions of interest rates. Management's objective is to minimize this risk. Measuring and managing interest rate risk is a dynamic process that is performed regularly as an important component of management's analysis of the impact of changes in asset and liability portfolios. Control of the Corporation's interest sensitivity position is accomplished through the structuring of the investment and funding portfolios, securitizing loans for possible sale, the use of variable rate loan products and off-balance sheet derivatives. 22 Management does not try to anticipate changes in interest rates. Its principal objective is to maintain interest margins in periods of both rising and falling rates. Traditional interest sensitivity gap analyses alone do not adequately measure an institution's exposure to changes in interest rates because gap models are not sensitive to changes in the relationship between interest rates charged or paid and do not incorporate balance sheet trends and management actions. Each of these factors can affect an institution's earnings. Accordingly, in addition to performing gap analysis, management also evaluates the impact of differing interest rates on net interest income using an earnings simulation model. The model incorporates the factors not captured by gap analysis by projecting income over a twenty-four month horizon under a variety of interest rate scenarios. As of December 31, 2000, the Corporation's interest sensitive liabilities exceeded interest sensitive assets within a one year period by $1.7 billion, or 31.5% of assets. The Bank's savings products are structured to give management the ability to reset the rates paid on a monthly basis. This causes the Bank to become more liability sensitive. If interest rates rise, the rate paid on savings deposits may follow, and the Corporation's net interest margin may decline. Management continues to take steps to protect the Bank from possible changes in interest rates. In 2000, these steps included lengthening the maturities on purchased funds and certificates of deposits and shortening asset maturities with interest rate swaps and caps. Management monitors the interest rate environment and employs appropriate off-balance sheet strategies to address potential changes in interest rates. These strategies lower the net interest margin but are designed to maintain an acceptable margin in a changing rate environment. As a result of off-balance sheet transactions undertaken to insulate the Bank from interest rate risks, interest income decreased by $28 thousand and interest expense increased by $2.3 million, for a total decrease of $2.3 million in net interest income for the year ending December 31, 2000. As of January 1, 2001, the Corporation will adopt Financial Accounting Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Upon adoption, this statement requires the Corporation to mark to market all derivative instruments as a transition adjustment. This transition adjustment is estimated to be a $1.2 million after tax loss. The Corporation plans to close the derivative instruments that will not qualify for the shortcut method under SFAS No. 133 which is not expected to result in a material gain or loss. Under the shortcut method, an entity may conclude that the change in the derivative's fair value is equal to the change in the hedged item's fair value attributable to the hedged risk, resulting in no ineffectiveness. Therefore, the adoption of SFAS No. 133 is not expected to adversely impact the earnings from continuing operations of the Corporation in 2001. Stockholders' Equity It is necessary for banks to maintain a sufficient level of capital in order to sustain growth, absorb unforeseen losses and meet regulatory requirements. In addition, the current economic and regulatory climate places an increased emphasis on capital strength. In this environment, the Corporation continues to maintain a strong capital position. The Corporation is well capitalized, exceeding all regulatory requirements as of December 31, 2000, see Note 18--Regulatory Capital. At December 31, 2000, total stockholders' equity was $315 million, a $40.8 million increase over the prior year. In addition to the ordinary adjustments to stockholders' equity of net income and dividends paid, additional capital of $713 thousand was raised through the dividend reinvestment plan, $786 thousand from the exercise of stock options, while capital increased by $33.6 million during 2000 as a result of Statement of Financial Accounting Standards No. 115. This statement requires changes in market value, net of applicable income taxes, of the available for sale investment portfolio to be accounted for through equity. An additional component of regulatory capital is the trust preferred securities issued in 1999 and 2000. These securities are treated as Tier I capital even though they are not included in stockholders' equity in the Consolidated Statement of Condition. During 2000, the Corporation also repurchased 3.2 million shares totaling $51 million and issued 2.1 million shares as part of the Harbor Federal acquisition. In the second quarter of 2000, the Corporation issued a 5% stock dividend and all earnings per share figures have been adjusted for this dividend. On February 16, 2001, the Corporation entered into an agreement to repurchase approximately 1.4 million shares of common stock directly from Mid-Atlantic Investors, a major stockholder. These shares will be repurchased by the Corporation at a fixed price of $23.86 per share. The transaction will be executed in portions, but in its entirety prior to March 31, 2001. Funding will be provided through asset sales and will not affect liquidity requirements in the future. 23 The Corporation exceeds all regulatory capital requirements as of December 31, 2000. The standards used by federal bank regulators to evaluate capital adequacy are the risk-based capital and leverage ratio guidelines. Equity for regulatory purposes does not include market value adjustments as required by SFAS No. 115. Risk-based capital ratios measure core and total stockholders' equity against risk-weighted assets. The Corporation's core capital is equal to common stock, capital surplus and retained earnings less treasury stock. The calculation of the Corporation's total stockholders' equity, for these purposes, is equal to the above plus the allowance for loan losses, subject to certain limitations and capital securities less goodwill. 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, 2000, the Corporation's total capital ratio was 10.48% compared to the minimum regulatory guideline of 8%. In addition, core common stockholders' equity (Tier 1 Capital) must be at least 4% of risk-weighted assets. At year-end, Tier 1 Capital ratio was 9.48%. The leverage ratio represents core capital, as defined above, divided by average total assets. Guidelines for the leverage ratio require the ratio of core stockholders' equity to average total assets to be 100 to 200 basis points above a 3% minimum, depending on risk profiles and other factors. The Bank's leverage ratio of 6.86% at December 31, 2000 was well in excess of this requirement. Capital Components and Ratios Table 16 December 31, - -------------------------------------------------------------------------- (dollars in thousands) 2000 1999 - -------------------------------------------------------------------------- Qualifying Capital Tier 1 Capital $ 385,453 $ 358,771 Total Capital 426,113 398,551 Risk-Weighted Assets 4,067,838 3,907,332 Quarterly Average Assets 5,618,993 5,056,385 Ratios Leverage Capital 6.86% 7.10% Tier 1 Capital 9.48 9.18 Total Capital 10.48 10.20 Financial Review 1999/1998 The Corporation recorded net income in 1999 of $44.2 million or $1.60 per share/diluted, a 14% increase over 1998. The growth in net earnings was attributable to a $17.5 million rise in net interest income offset in part by lower non-interest income of $1.7 million and higher operating costs of $9.3 million. Tax-equivalent net interest income for 1999 increased $17.3 million, or 13.2%, from 1998 as average earning assets grew $538 million over the prior year. Net interest margin increased slightly to 3.13% compared to 3.12% in 1998. Tax equivalent interest income increased $34.1 million, or 10.7%, during the year primarily due to the growth in average earning assets offset in part by a 14 basis point decrease in yield. The decrease in yield was mainly due to a lower interest rate environment during 1999 compared to 1998. Average prime rate in 1999 was 8.00% compared to 8.35% in 1998. The increase in average earning assets resulted from a $377 million increase in the loan portfolios, $153 million in investments and $7 million in loans held for sale. Consumer loans grew $437 million while the commercial business portfolio also experienced growth of $60 million. Residential and commercial mortgage loans declined $97 million and $30 million, respectively, due to sales of residential mortgage loans and prepayments of commercial mortgages. Interest income earned on the loan portfolio increased $26 million reflecting higher loan outstandings. The yield on investments and loans decreased 21 basis points and 12 basis points, respectively. Interest lost from non-accruing loans was $735 thousand compared to $850 thousand in 1998. Interest expense increased $16.8 million from 1999 resulting from a $488 million growth in average interest-bearing liabilities. The overall cost of funds declined 15 basis points as total interest-bearing liabilities decreased 17 basis points mainly due to lower rate environment for deposit products. Excluding the effect of off-balance sheet positions in each year, total costs of interest-bearing liabilities would have decreased 22 basis points. The average rate paid on borrowed funds decreased 26 basis points during 1999. 24 The increase in average interest-bearing liabilities reflected a $514 million rise in interest-bearing deposits, $408 million of that was associated with brokered deposits and $39 million with money market certificates of deposit. Non-interest bearing demand deposit accounts grew by $43 million or 20%. The Corporation experienced a $27 million decrease in borrowed funds. The provision for loan losses was $11.6 million, down slightly from $12.0 million in 1998. Net charge-offs were $13.0 million in 1999 compared to $6.1 million in 1998. This increase in charge-offs was related to an adverse decision in a lawsuit associated with a letter of credit issued in 1989. Net charge-offs as a percentage of average loans was .40% in 1999 compared to .21% in 1998. Non-accrual loans ended the year at $28.9 million or .91% of loans outstanding, an increase of $17.4 million from December 31, 1998. This increase was due to one health care relationship, the largest portion of which is a shared national credit. Non-interest income is principally derived from fee-based services and mortgage banking activities and gains on investment securities sales. Total non-interest income decreased 2.7% to $61.0 million. Excluding net securities gains, non-interest income increased $4.7 million or 8.5%. Deposit service charges rose 16.8% over the prior year due mainly to a $4.4 million increase in retail demand deposit service fees. Average interest-bearing demand/money market deposits grew $79.4 million or 17% over last year while non-interest bearing deposits increased $42.9 million or 20%. These increases were the result of continued promotion and sales efforts of retail deposit products. Income from mortgage banking activities declined $1.8 million to $9.7 million from $11.5 million in 1998. This decline was from lower production as a result of higher interest rate environment for residential mortgages. Mortgage originations during the year decreased $291 million to $764 million. Commissions and fees increased $1.1 million during 1999. This increase was mainly associated with income from Provident Investment Center (PIC), a wholly owned subsidiary of the Bank. PIC offers annuities and mutual funds through an affiliation with a securities broker-dealer as well as property and casualty insurance products, as agent. For the year 1999, income associated with these products increased by $895 thousand to $3.2 million. This increase was attributed to continued sales efforts towards these products. Other non-interest income increased $2.3 million over 1998, mainly due to higher bankcard income, which increased $2.1 million. Non-interest expense is composed primarily of costs associated with employees' salaries and benefits, bank facilities and external data processing. Provident's non-interest expense of $132 million represented a $9 million increase from 1998 expenses. Salaries and benefits increased $4.4 million during the year. Compensation increased $3.6 million while benefits were up $834 thousand. The rise in these categories was attributable to network expansion as 16 new branches were opened. Regular salaries rose $5.0 million mainly attributable to merit increases and increased staffing associated with branch expansion. Full-time equivalent employees as of December 31, 1999 were 1,511 compared to 1,414 last year. Occupancy costs rose $1.0 million or 9.9% over last year. This increase was mainly due to additional rent and leasehold improvements as the branch network increased to 83 branches in 1999. Total furniture and equipment expense increased $804 thousand due to upgrading of technology and branch network expansion. External processing increased $877 thousand, or 6.3%, associated with 12% increase in account volume. The year 1999 includes full year of capital securities expense of $3.2 million associated with the $40 million trust preferred securities offering during the second quarter of 1999. 1999 capital securities expense was $2.4 million. All other non-interest expenses were up by $1.4 million from 1998. This increase was in connection with higher communication and postage expenses of $855 thousand resulting from branch network expansion and higher net losses of $818 thousand associated with retail deposit accounts. Provident recorded income tax expense of $21.2 million on pre-tax income of $65.3 million for an effective tax rate of 32.4%. This compares with a 33.2% effective tax rate for 1998. This decrease was related to a higher level of state tax benefits. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Interest Sensitivity Management" on page 22 and refer to the disclosures on off-balance sheet items in Item 8--Financial Statements and Supplementary Data contained herein. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Provident Bankshares Corporation and Subsidiaries PAGE Report of Independent Accountants 27 For the Three Years Ended December 31, 2000, 1999 and 1998 Consolidated Statement of Income 28 Consolidated Statement of Changes in Stockholders' Equity 30 Consolidated Statement of Cash Flows 31 Consolidated Statement of Comprehensive Income 32 Consolidated Statement of Condition at December 31, 2000 and 1999 29 Notes to Consolidated Financial Statements 33-60 Financial Reporting Responsibility Consolidated Financial Statements Provident Bankshares Corporation (the "Corporation") is responsible for the preparation, integrity and fair presentation of its published consolidated financial statements as of December 31, 2000, and the year then ended. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts, some of which are based on judgments and estimates of management. Internal Control Structure over Financial Reporting Management maintains a system of internal control over financial reporting, including controls over safeguarding of assets against unauthorized acquisition, use or disposition which is designed to provide reasonable assurance to the Corporation's management and board of directors regarding the preparation of reliable published financial statements and such asset safeguarding. The system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. This system encompasses activities that control the preparation of the Corporation's Annual Report on Form 10-K financial statements prepared in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed its internal control structure over financial reporting as of December 31, 2000. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that Provident Bankshares Corporation maintained an effective internal control structure over financial reporting as of December 31, 2000. Compliance with Laws and Regulations Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations. Management assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that Provident Bank, the wholly owned subsidiary of Provident Bankshares Corporation complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2000. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Provident Bankshares Corporation In our opinion, the accompanying consolidated statement of condition and the related consolidated statement of income, changes in stockholders' equity, cash flows, and comprehensive income present fairly, in all material respects, the financial position of Provident Bankshares Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland January 17, 2001 (except with respect to the matters discussed in Note 23, as to which the date is February 21, 2001) 27 CONSOLIDATED STATEMENT OF INCOME Provident Bankshares Corporation and Subsidiaries
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 2000 1999 1998 =================================================================================================================================== INTEREST INCOME Interest and Fees on Loans $283,796 $261,837 $234,926 Interest on Securities 128,402 88,094 80,184 Tax-Advantaged Interest 2,092 2,337 2,762 Interest on Short-Term Investments 262 109 235 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest Income 414,552 352,377 318,107 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits 177,696 151,071 130,315 Interest on Borrowings 75,423 53,190 57,194 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 253,119 204,261 187,509 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 161,433 148,116 130,598 Less: Provision for Loan Losses 23,877 11,570 12,027 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 137,556 136,546 118,571 - ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service Charges on Deposit Accounts 42,912 34,172 29,260 Mortgage Banking Activities 3,613 9,652 11,485 Commissions and Fees 4,737 5,280 4,209 Net Securities Gains 8,499 312 6,749 Other Non-Interest Income 15,659 12,043 11,189 - ----------------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 75,420 61,459 62,892 - ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and Employee Benefits 71,207 66,394 61,853 Occupancy Expense, Net 12,951 11,376 10,349 Furniture and Equipment Expense 10,073 8,927 8,123 External Processing Fees 16,420 14,883 14,006 Capital Securities Expense 5,558 3,160 2,359 Other Non-Interest Expense 32,159 27,916 26,372 - ----------------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 148,368 132,656 123,062 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 64,608 65,349 58,401 Income Tax Expense 20,568 21,199 19,371 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item 44,040 44,150 39,030 Extraordinary Item--Gain on Debt Extinguishment, Net 770 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 44,810 $ 44,150 $ 39,030 =================================================================================================================================== Basic Earnings Per Share Income Before Extraordinary Item $ 1.68 $ 1.65 $ 1.45 Net Income 1.71 1.65 1.45 =================================================================================================================================== Diluted Earnings Per Share Income Before Extraordinary Item $ 1.64 $ 1.60 $ 1.40 Net Income 1.67 1.60 1.40 ===================================================================================================================================
The accompanying notes are an integral part of these statements. 28 CONSOLIDATED STATEMENT OF CONDITION Provident Bankshares Corporation and Subsidiaries
December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 =================================================================================================================================== ASSETS Cash and Due From Banks $ 84,166 $ 90,840 Short-Term Investments 12,378 1,759 Mortgage Loans Held for Sale 8,243 30,535 Securities Available for Sale 1,876,509 1,671,507 Loans: Consumer 2,026,013 2,204,943 Commercial Business 356,041 363,059 Real Estate--Construction 265,918 151,875 Real Estate--Mortgage 725,799 464,242 - ----------------------------------------------------------------------------------------------------------------------------------- Total Loans 3,373,771 3,184,119 Less: Allowance for Loan Losses 40,660 39,780 - ----------------------------------------------------------------------------------------------------------------------------------- Net Loans 3,333,111 3,144,339 - ----------------------------------------------------------------------------------------------------------------------------------- Premises and Equipment, Net 45,805 44,277 Accrued Interest Receivable 48,844 46,507 Other Assets 95,492 64,713 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $5,504,548 $5,094,477 =================================================================================================================================== LIABILITIES Deposits: Noninterest-Bearing $ 327,334 $ 264,252 Interest-Bearing 3,627,436 3,544,276 - ----------------------------------------------------------------------------------------------------------------------------------- Total Deposits 3,954,770 3,808,528 - ----------------------------------------------------------------------------------------------------------------------------------- Borrowings 1,122,806 928,441 Other Liabilities 43,592 43,747 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 5,121,168 4,780,716 - ----------------------------------------------------------------------------------------------------------------------------------- Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities 67,969 39,162 - ----------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock (Par Value $1.00) Authorized 100,000,000 Shares, Issued 29,708,943 and 26,225,752 Shares; at December 31, 2000 and 1999, respectively 29,709 26,226 Capital Surplus 251,184 203,364 Retained Earnings 109,593 102,587 Net Accumulated Other Comprehensive Loss (10,695) (44,323) Treasury Stock at Cost--3,861,969 and 693,866 Shares at December 31, 2000 and 1999, respectively (64,380) (13,255) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 315,411 274,599 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $5,504,548 $5,094,477 ===================================================================================================================================
The accompanying notes are an integral part of these statements. 29 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Provident Bankshares Corporation and Subsidiaries
Accumulated Other Treasury Total Common Capital Retained Comprehensive Stock Comprehensive Stockholders' (in thousands, except per share data) Stock Surplus Earnings Income (Loss) at Cost Income (Loss) Equity =================================================================================================================================== Balance at January 1, 1998 $23,285 $131,191 $113,463 $ 4,733 $ (2,490) $270,182 Net Income--1998 -- -- 39,030 -- -- $ 39,030 39,030 Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt Securities, Net of Reclassification Adjustment (see Note 16) -- -- -- 575 -- 575 575 -------- Comprehensive Income $ 39,605 ======== Dividends Paid ($.47 per share) -- -- (12,648) -- -- (12,648) Exercise of Stock Options (337,498 shares) 337 5,164 -- -- -- 5,501 Stock Dividend (1,165,433 shares) 1,165 35,184 (36,349) -- -- -- Purchase of Treasury Shares (297,700 shares) -- -- -- -- (7,287) (7,287) Common Stock Issued under Dividend Reinvestment Plan (24,179 shares) 24 700 -- -- -- 724 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $24,811 $172,239 $103,496 $ 5,308 $ (9,777) $296,077 Net Income--1999 -- -- 44,150 -- -- $ 44,150 44,150 Other Comprehensive Income, Net of Tax: Unrealized Loss on Debt Securities, Net of Reclassification Adjustment (see Note 16) -- -- -- (49,631) -- (49,631) (49,631) -------- Comprehensive Income (Loss) $ (5,481) ======== Dividends Paid ($.57 per share) -- -- (15,232) -- -- (15,232) Exercise of Stock Options (172,271 shares) 172 1,900 -- -- -- 2,072 Stock Dividend (1,216,219 shares) 1,216 28,611 (29,827) -- -- -- Purchase of Treasury Shares (168,100 shares) -- -- -- -- (3,478) (3,478) Common Stock Issued under Dividend Reinvestment Plan (27,726 shares) 27 614 -- -- -- 641 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $26,226 $203,364 $102,587 $(44,323) $(13,255) $274,599 Net Income--2000 -- -- 44,810 -- -- $ 44,810 44,810 Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt Securities, Net of Reclassification Adjustment (see Note 16) -- -- -- 33,628 -- 33,628 33,628 -------- Comprehensive Income $ 78,438 ======== Dividends Paid ($.67 per share) -- -- (17,716) -- -- (17,716) Exercise of Stock Options (82,220 shares) 82 803 -- -- -- 885 Stock Dividend (1,256,017 shares) 1,256 18,832 (20,088) -- -- -- Purchase of Treasury Shares (3,168,103 shares) -- -- -- -- (51,125) (51,125) Issuance of Stock for Acquisition of Harbor Federal Bancorp (2,098,006 shares) 2,098 27,519 -- -- -- 29,617 Common Stock Issued under Dividend Reinvestment Plan (46,948 shares) 47 666 -- -- -- 713 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $29,709 $251,184 $109,593 $(10,695) $(64,380) $315,411 ===================================================================================================================================
The accompanying notes are an integral part of these statements. 30 CONSOLIDATED STATEMENT OF CASH FLOWS Provident Bankshares Corporation and Subsidiaries
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 ================================================================================================================================= Operating Activities Net Income $ 44,810 $ 44,150 $ 39,030 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 20,527 29,230 28,200 Provision for Loan Losses 23,877 11,570 12,027 Provision for Deferred Income Tax (Benefit) 11,775 2,833 (2,941) Realized Net Securities Gains (8,499) (312) (6,749) Loans Originated or Acquired and Held for Sale (155,544) (556,072) (993,474) Proceeds from Sales of Loans Held for Sale 179,009 755,228 841,538 Gain on Sales of Loans Held for Sale (1,173) (4,984) (5,846) Other Operating Activities (436) 286 (23,551) - --------------------------------------------------------------------------------------------------------------------------------- Total Adjustments 69,536 237,779 (150,796) - --------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities 114,346 281,929 (111,766) - --------------------------------------------------------------------------------------------------------------------------------- Investing Activities Principal Collections and Maturities of Securities Available for Sale 246,709 197,055 251,725 Proceeds on Sales of Securities Available for Sale 255,775 22,820 947,030 Purchases of Securities Available for Sale (265,034) (400,702) (1,405,328) Loan Originations and Purchases Less Principal Collections (366,885) (492,222) (420,763) Purchases of Bank Owned Life Insurance (51,620) -- -- Proceeds from Business Acquisition 2,451 -- -- Purchases of Premises and Equipment (8,343) (11,657) (10,069) - --------------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (186,947) (684,706) (637,405) - --------------------------------------------------------------------------------------------------------------------------------- Financing Activities Net Increase (decrease) in Deposits (27,188) 388,971 665,042 Net Increase (decrease) in Short-Term Borrowings 43,080 155,960 (201,928) Proceeds from Long-Term Debt 699,917 26,000 475,380 Payments and Maturities of Long-Term Debt (602,020) (134,121) (209,218) Proceeds from Issuance of Trust Preferred Securities 30,000 -- 39,238 Issuance of Stock 1,598 2,713 6,225 Purchase of Treasury Stock (51,125) (3,478) (7,287) Cash Dividends on Common Stock (17,716) (15,232) (12,648) - --------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 76,546 420,813 754,804 - --------------------------------------------------------------------------------------------------------------------------------- Increase in Cash and Cash Equivalents 3,945 18,036 5,633 Cash and Cash Equivalents at Beginning of Year 92,599 74,563 68,930 - --------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 96,544 $ 92,599 $ 74,563 ================================================================================================================================= Supplemental Disclosures - --------------------------------------------------------------------------------------------------------------------------------- Interest Paid, Net of Amount Capitalized $ 189,037 $ 135,681 $ 111,775 Income Taxes Paid 10,059 17,631 18,301 Stock Dividend 20,088 29,827 36,349 Stock Issued for Acquired Company 29,617 -- -- Loans Securitized and Converted to Securities Available for Sale 309,998 373,332 --
The accompanying notes are an integral part of these statements. 31 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Provident Bankshares Corporation and Subsidiaries
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 ================================================================================================================================= Net Income $44,810 $ 44,150 $39,030 Net Other Comprehensive Income: Net Unrealized Gain (Loss) on Debt Securities 39,152 (49,428) 4,655 Less: Reclassification Adjustment for Gains Included in Net Income 5,524 203 4,080 - --------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) 33,628 (49,631) 575 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income (Loss) $78,438 $ (5,481) $39,605 =================================================================================================================================
The accompanying notes are an integral part of these statements. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Provident Bankshares Corporation and Subsidiaries NOTE 1--Summary of Significant Accounting Policies Provident Bankshares Corporation ("the Corporation") offers a wide range of banking services through its wholly owned subsidiary, Provident Bank, and its subsidiaries ("the Bank"). Product offerings include deposit products, cash management services, commercial and consumer loans and personal investment products. These services are provided through a network of 98 offices and 165 ATMs located primarily in the greater Baltimore/Washington metropolitan area, northern Virginia and southern Pennsylvania. The following summary of significant accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented in this report. The accounting and reporting policies of the Corporation are in accordance with generally accepted accounting principles and conform to general practice within the banking industry. Certain prior years' amounts in the Consolidated Financial Statements have been reclassified to conform with the presentation used for the current year. These reclassifications have no effect on stockholders' equity or net income as previously reported. Principles of Consolidation The Consolidated Financial Statements include the accounts of Provident Bankshares Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Results of operations from entities purchased are included from the date of acquisition. Assets and liabilities of purchased companies are stated at estimated fair values at the date of acquisition. Results of operations from entities acquired using the pooling of interest method are restated for all years presented. Use of Estimates In preparation of the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the financial statements and accompanying notes and the reported amounts of income and expense during the reporting periods. Actual results could differ from these estimates. Investment Securities Investment portfolios are to be divided among three categories: securities available for sale, and if applicable, securities held to maturity and trading account securities. Securities available for sale are securities the Corporation intends to hold for an indefinite period of time, including securities used to manage asset/liability strategy, that may be sold to respond to changes in interest rates, prepayment risks, liquidity needs, manage capital or other similar factors. Available for sale securities are reported at fair value with any unrealized appreciation or depreciation in value reported directly as a separate component of stockholders' equity as net accumulated other comprehensive income (loss), which is reflected net of applicable taxes, and therefore, has no effect on the reported earnings of the Corporation. Gains and losses from sales of securities available for sale are recognized by the specific identification method and are reported in non-interest income. Any securities that the Corporation has the intent and ability to hold to maturity would be included in securities held to maturity and, accordingly, carried at cost adjusted for amortization of premiums and accretion of discounts using the interest method. Loans and Allowance for Loan Losses Interest on loans is accrued at the contractual rate and credited to income based upon the principal amount outstanding. It is the policy of management to place a loan in non-accrual status and discontinue the accrual of interest and reverse previously accrued but unpaid interest when the quality of a commercial credit has deteriorated to the extent that collectibility of all interest and/or principal cannot be reasonably expected or when it is 90 days past due unless the loan is well secured and in the process of collection. Consumer loans are not placed in non-accrual status but are generally charged-off at 120 days past due for installment loans and 180 days for revolving loans to conform to standard industry practice. 33 The Corporation considers a loan impaired when, based on available information, it is probable that the Corporation will be unable to collect principal and interest when due in accordance with the contractual terms of the loan agreement. All non-accrual loans and troubled debt restructurings are considered impaired loans. The measurement of impaired loans may be based on the present value of expected future cash flows discounted at the historical effective interest rate or based on the fair value of the underlying collateral. Impairment criteria are applied to the loan portfolio exclusive of smaller balance homogeneous loans such as residential mortgage and consumer loans which are evaluated collectively for impairment. Restructured loans are considered impaired in the year of restructuring. In subsequent years each restructured loan is evaluated for impairment. The allowance for loan losses includes reserves for these loans. Collections of interest and principal on loans in non- accrual status and considered impaired are generally applied as a reduction to the outstanding principal. Once future collectibility has been established, interest income may be recognized on a cash basis. The Corporation defers and amortizes certain loan fees and costs over the life of the loan using the interest method. Net amortization of these fees and costs are recognized in interest income as a yield adjustment and are, accordingly, reported as Interest and Fees on Loans in the Consolidated Statement of Income. Unearned income on loans at December 31, 2000 and 1999 was not material with respect to the respective financial statements. The Corporation's allowance for loan losses is based upon management's continuing review and evaluation of the loan portfolio and is intended to maintain an allowance adequate to absorb potential losses on loans outstanding. The level of the allowance is based on an evaluation of the risk characteristics of the loan portfolio and considers such factors as past loan loss experience, the financial condition of the borrower, current economic conditions and other relevant factors. Adjustments to the allowance due to changes in measurement of impaired loans are incorporated in the provision for loan losses. Premises and Equipment Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the lives of the related leases, if shorter. Major improvements are capitalized while maintenance and repairs are charged to expense as incurred. Mortgage Banking Activities In the fourth quarter of 2000 the Corporation repositioned its mortgage lending business by eliminating its operation and outsourcing the loan origination process. Prior to January 1, 2001 the Corporation engaged in sales of mortgage loans, which were originated internally or purchased from third parties. Accordingly, at December 31, 2000 mortgage loans held for sale were carried at the aggregate lower of cost or market value. Gains or losses on sales of these mortgage loans were recorded as a component of Non-Interest Income in the Consolidated Statement of Income. The Corporation carries any retained interest in a transferred asset on the Statement of Condition as a servicing asset. The servicing assets represent the fair value of the servicing contracts associated with the purchase or origination and subsequent securitization of the mortgage loans. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. Servicing assets are evaluated periodically for impairment based on their fair value and impairment, if any, is recognized through a valuation allowance and a charge to operations. Income Taxes The Corporation uses the liability method to determine deferred tax amounts and the related income tax expense or benefit. Using this method, deferred taxes are calculated by applying enacted statutory tax rates to temporary differences consisting of items of income and expense that are accounted for in financial reporting periods which differ from income tax reporting periods. The resultant deferred tax assets and liabilities represent future taxes to be recovered or remitted when the related assets and liabilities are recovered or settled. The deferred tax assets are reduced by a valuation allowance for that portion of the tax deferred assets which are unlikely to be realized. 34 Derivative Financial Instruments The Corporation uses a variety of derivative financial instruments as part of its interest rate risk management strategy and the Corporation does not hold or issue derivative financial instruments for trading purposes. The derivative products used are interest rate swaps and caps or floors, used separately or in combination to suit the hedge objective. All are currently classified as hedges. To qualify as a hedge, 1) the asset or liability to be hedged exposes the Corporation to interest rate risk, 2) the derivatives act to move the Corporation to a rate insensitive position should interest rates change, and 3) the derivative is designated and is effective as a hedge of a balance sheet item. Interest rate swaps are agreements between two parties which agree to exchange fixed and floating rates on a notional principal amount without the actual exchange of principal for a specified period of time. The notional amounts are not reflected on the Consolidated Statement of Condition because they are merely a unit of measure to determine the effect of the swap. Income and expense on interest rate swaps associated with designated balance sheet items is recognized using the accrual method over the life of the agreement(s) as an adjustment to the income or expense on the designated balance sheet item. Premiums associated with interest rate floor/cap/corridor arrangements are reflected in the Consolidated Statement of Condition and amortized over their life using the straight-line method and included as an adjustment to interest income/expense associated with the balance sheet item. Payments due to or from counterparties under these agreements are accrued as an adjustment to interest income or expense associated with the designated balance sheet item. The Corporation continually monitors each derivative position to ensure the proper relationship such as risk reduction, correlation or effectiveness between the designated balance sheet item hedged and the derivative position. Any significant divergence between this relationship which results in interest income or expense exceeding projected parameters results in the hedge being marked-to-market with the resultant gain or loss included in earnings. Terminated derivative positions with the designated assets or liabilities retained have the resulting gain or loss deferred and amortized over the estimated remaining life of the hedge into interest income/expense associated with the balance sheet item. Derivatives associated with liquidated hedged assets or liabilities are marked-to-market and have subsequent changes in their fair value reflected in earnings as the derivative is considered speculative in nature. Accounting treatment of derivative positions is consistent with the accounting treatment of the underlying asset or liability. Interest rate swaps used to hedge available for sale debt securities have their fair value included in stockholders' equity which is consistent with the fair value treatment of the available for sale securities. Interest accruals associated with the swap are included as an adjustment to interest income on the associated securities. Derivative products terminated prior to the sale of the related security have the respective gain or loss deferred and amortized into interest income as yield adjustments to the designated asset over the shorter of the remaining life of the agreement or the designated asset. Upon sale of the security, the deferred gain or loss on the derivative is reflected in income at the time of sale. Pension Plan The Corporation has a defined benefit pension plan which covers substantially all employees. The cost of this noncontributory pension plan was computed and accrued using the projected unit credit method. Prior service cost is amortized on a straight-line method over the average remaining service period of employees expected to receive benefits under the plan. Annual contributions are made to the plan in an amount equal to the minimum requirements, but no greater than the maximum allowed by regulatory authorities. Statement of Cash Flows For purposes of reporting cash flows, cash equivalents are composed of cash and due from banks and short-term investments. 35 NOTE 2--Business Combination On August 31, 2000 the Corporation completed its acquisition of Harbor Federal Bancorp, the parent of Harbor Federal Savings Bank, issuing approximately 2.1 million shares of common stock valued at approximately $29.6 million. The purchase method of accounting was used for the acquisition, accordingly, the purchase price was allocated to the fair value of net assets acquired. This allocation resulted in $8.1 million of goodwill and $2.5 million of deposit based intangibles, which are being amortized over twenty and seven years, respectively. The results of operations from the date of acquisition are included in the accompanying consolidated financial statements. NOTE 3--Extraordinary Item During the first quarter of 2000, the Corporation liquidated $78 million of Federal Home Loan Bank Advances due in 2001 through 2003. Accordingly, a net gain of $770 thousand, or $.03 per share, after taxes of $415 thousand was recognized. NOTE 4--Restrictions on Cash and Due From Banks The Federal Reserve requires banks to maintain cash reserves against certain categories of deposit liabilities. Such reserves averaged approximately $30.3 million and $27.2 million during the years ended December 31, 2000 and 1999, respectively. In order to cover the costs of services provided by correspondent banks, the Corporation maintains compensating balance arrangements at these correspondent banks or elects to pay a fee in lieu of such arrangements. During 2000 and 1999, the Corporation maintained average compensating balances of approximately $15.0 million and $11.1 million, respectively. In addition, the Corporation paid fees totaling $533 thousand in 2000, $556 thousand in 1999 and $389 thousand in 1998 in lieu of maintaining compensating balances. NOTE 5--Investment Securities The aggregate amortized cost and market values of the available for sale securities portfolio at December 31 were as follows:
2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------------- Securities Available for Sale U.S. Treasury and Government Agencies and Corporations $ 83,069 $ 4,349 $ 13 $ 87,405 $ 56,635 $ -- $ 188 $ 56,447 Mortgage-Backed Securities 1,645,398 10,585 11,781 1,644,202 1,519,830 3,638 53,863 1,469,605 Municipal Securities 25,842 271 33 26,080 26,624 141 560 26,205 Other Debt Securities 138,653 11 19,842 118,822 136,609 -- 17,359 119,250 - --------------------------------------------------------------------------------------------------------------------------------- Total Securities Available for Sale $1,892,962 $15,216 $31,669 $1,876,509 $1,739,698 $3,779 $71,970 $1,671,507 =================================================================================================================================
36 The aggregate amortized cost and market values of the investment securities portfolio by contractual maturity at December 31, 2000 and 1999, are shown below. Expected maturities on mortgage-backed securities may differ from the contractual maturities as borrowers have the right to prepay the obligation without prepayment penalties.
2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market (in thousands) Cost Value Cost Value ================================================================================================================================= Securities Available for Sale In One Year or Less $ 8,889 $ 8,883 $ 775 $ $ 776 After One Year Through Five Years 11,653 11,757 16,963 16,854 After Five Years Through Ten Years 10,142 10,278 12,721 12,463 Over Ten Years 216,880 201,389 189,409 171,809 Mortgage-Backed Securities 1,645,398 1,644,202 1,519,830 1,469,605 - --------------------------------------------------------------------------------------------------------------------------------- Total Securities Available for Sale $1,892,962 $1,876,509 $1,739,698 $1,671,507 =================================================================================================================================
Proceeds from sales of securities available for sale during 2000 were $255.8 million resulting in the realization of gross gains of $8.8 million and gross losses of $328 thousand on such sales. For 1999, sales of securities yielded proceeds of $22.8 million which resulted in gross realized gains of $380 thousand and gross losses of $68 thousand. Securities sold in 1998 produced proceeds of $947.0 million resulting in gross gains of $7.4 million and gross losses of $709 thousand. At December 31, 2000, a net unrealized loss of $10.7 million on the securities portfolio was reflected as the net accumulated other comprehensive income in the Consolidated Statement of Condition. This compares to a net unrealized loss of $44.3 million at December 31, 1999. Securities with a market value of $1.0 billion and $971.8 million at December 31, 2000 and 1999, respectively, were pledged as collateral for public funds, certain short-term borrowings and for other purposes required by law. NOTE 6--Allowance for Loan Losses A summary of the activity in the allowance for loan losses for the three years ended December 31 is presented below:
(in thousands) 2000 1999 1998 ================================================================================================= Balance at Beginning of the Year $ 39,780 $ 42,739 $ 36,861 Allowance of Acquired Company 404 -- -- Provision for Loan Losses 23,877 11,570 12,027 Allowance Related to Securitized Loans (950) (1,500) -- Loans Charged-Off (24,249) (14,557) (7,738) Less: Recoveries of Loans Previously Charged-Off 1,798 1,528 1,589 ------------------------------------------------------------------------------------------------- Net Loans Charged-Off (22,451) (13,029) (6,149) ------------------------------------------------------------------------------------------------- Balance at End of the Year $ 40,660 $ 39,780 $42,739 =================================================================================================
At December 31, 2000, 1999 and 1998, the recorded investment in loans which are in non-accrual status and therefore considered impaired totaled $13.6 million, $21.3 million and $5.1 million, respectively. There was no additional allowance required for these loans. Had these loans performed in accordance with their original terms, interest income of $2.1 million in 2000, $1.6 million in 1999 and $1.4 million in 1998 would have been recorded. Interest income of $10 thousand was recognized on these loans during 2000. The average recorded investment in impaired loans was approximately $18.9 million in 2000 and $5.4 million in 1999. 37 NOTE 7--Premises and Equipment Real estate and equipment holdings at December 31 are presented in the table below. Real estate owned and used by the Corporation consists of 15 branches and other facilities in the Baltimore/Washington metropolitan area which are used primarily for the operations of the Bank.
(in thousands) 2000 1999 ================================================================================================= Land $ 1,736 $ 1,014 Buildings and Leasehold Improvements 28,027 23,491 Furniture & Equipment 50,649 50,910 Property Held for Future Expansion 7,184 7,184 ------------------------------------------------------------------------------------------------- Total Premises & Equipment 87,596 82,599 Less: Accumulated Depreciation and Amortization 41,791 38,322 ------------------------------------------------------------------------------------------------- Net Premises and Equipment $45,805 $44,277 =================================================================================================
Property held for future expansion represents real estate adjacent to the Corporation's headquarters building which is currently being used for employee and public parking. Following an assessment of occupancy requirements, management determined that this property would be necessary to meet the Corporation's growing operational requirements. In December 1990, the Corporation entered into a sale and leaseback agreement whereby its headquarters building was sold to an unrelated third party which then leased the building back to the Corporation. During 2000 the lease was renegotiated. At December 31, 2000 the lease has 12 years remaining on the term. The remaining associated deferred gain of $525 thousand from the sale will be recognized in proportion to the gross rental expense incurred over the outstanding term of the lease. The associated lease payments and sublease rental income are included in the table below. The Corporation also maintains non-cancelable operating leases associated with Bank premises. Most of these leases provide for the payment of property taxes and other costs by the Bank and include one or more renewal options ranging up to ten years. Some of the leases also contain purchase options at market value. Annual rental commitments under all long-term non-cancelable operating lease agreements consisted of the following at December 31, 2000.
Real Property Sublease Equipment (in thousands) Leases Income Leases Total ============================================================================================ 2001 $ 8,012 $107 $340 $ 8,245 2002 7,789 42 190 7,937 2003 6,647 5 98 6,740 2004 5,223 -- 9 5,232 2005 3,728 -- -- 3,728 2006 and Thereafter 9,561 -- -- 9,561 -------------------------------------------------------------------------------------------- Total $40,960 $154 $637 $41,443 ============================================================================================
Rental expense for premises and equipment was $8.8 million in 2000, $7.7 million in 1999 and $6.8 million in 1998. 38 Note 8--Mortgage Banking Activities The following is an analysis of mortgage loan servicing asset balance, net of accumulated amortization, during each of the respective years.
(in thousands) 2000 1999 1998 ================================================================================================= Balance at Beginning of Year $ 1,086 $ 2,608 $ 1,984 Additions 1,984 13,573 15,767 Amortization (85) (137) (355) Sales of Servicing Assets (2,652) (14,958) (14,788) ------------------------------------------------------------------------------------------------- Balance at End of Year $ 333 $ 1,086 $ 2,608 =================================================================================================
At December 31, 2000, no valuation allowance was required on the servicing assets. Unpaid principal balances of loans serviced for others not included in the accompanying Consolidated Statement of Condition were $84 million and $79 million at December 31, 2000 and 1999, respectively. Note 9--Borrowings Borrowings consist of short-term and long-term debt. At December 31, short-term borrowings were as follows:
(in thousands) 2000 1999 ================================================================================================= Securities Sold Under Repurchase Agreements and Federal Funds Purchased $315,851 $289,426 Other Short-Term Borrowings 81,982 11,897 ------------------------------------------------------------------------------------------------- Total Short-Term Borrowings $397,833 $301,323 =================================================================================================
The following table sets forth various data on securities sold under repurchase agreements and federal funds purchased.
(dollars in thousands) 2000 1999 1998 ================================================================================================= Balance at December 31 $315,851 $289,426 $143,367 Average Balance During The Year 446,892 232,195 310,504 Maximum Month-End Balance 745,849 337,116 496,506 Weighted Average Rate During the Year 6.20% 5.22% 5.50% Weighted Average Rate At December 31 6.03% 4.97% 4.77% =================================================================================================
39 Securities sold under repurchase agreements at December 31, 2000, are detailed below by due date:
Less than (dollars in thousands) Overnight 30 days 30-90 days Over 90 days Demand Total ============================================================================================================================= Mortgage-Backed Securities: Securities Sold: Carrying Value $176,404 $2,941 $5,131 $-- $-- $ 184,476 Market Value 176,907 2,921 5,249 -- -- 185,077 Repurchase Principal 145,448 2,124 5,079 -- -- 152,651 Average Borrowing Interest Rate 5.74% 5.75% 6.15% --% --% 5.68% =============================================================================================================================
Long-term debt consisted of Federal Home Loan Bank Advances of $654.6 million and $70.4 million of five year term repurchase agreements at December 31, 2000. At December 31, 1999 long-term debt of $627.1 million was composed entirely of Federal Home Loan Bank advances. The principal maturities of the components of long-term debt at December 31, 2000, are presented below. (in thousands) ===================================== 2001 $ 28,458 2002 141,000 2003 151,698 2004 165,000 2005 136,000 After 2005 102,817 ------------------------------------- Total Long-Term Debt $724,973 ===================================== The Federal Home Loan Bank Advances to the Bank mature in varying amounts through 2016. These advances are composed of $335.6 million fixed rate advances with an average interest rate of 6.98% and $320.0 million variable rate advances with an average rate of 6.05%. These advances are collateralized by investment securities and certain real estate loans with carrying values of $615.7 million and $343.1 million, respectively, at December 31, 2000. Note 10--Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities During the second quarter of 1998 and first quarter of 2000, the Corporation formed new wholly owned statutory business trusts, Provident Trust I (the "Trust I") and Provident Trust II ("Trust II"). Trust I issued $40.0 million 8.29% and Trust II issued $30.0 million 10.0% trust preferred securities to outside third parties. The sole purpose of the trusts is to invest the proceeds in an equivalent amount of 8.29% and 10% junior subordinated debentures of the Corporation due in 2028 and 2030, respectively. These subordinated debentures, which are the sole assets of the trusts, are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of the Corporation. The Corporation fully and unconditionally guarantees each trust's securities obligations. For financial reporting purposes, each trust is treated as a subsidiary of the Corporation and consolidated in the corporate financial statements. The trust preferred securities are presented net of issuance costs as a separate line item on the Consolidated Statement of Condition as corporation-obligated mandatorily redeemable trust preferred securities. The trust preferred securities are not included as a component of total stockholders' equity on the Consolidated Statement of Condition. The trust preferred securities are, however, accorded Tier I capital status by the Federal Reserve. The treatment of the trust preferred securities as Tier I capital in addition to the ability to deduct the expense of the subordinated debentures for income tax purposes provides the Corporation with a cost-effective method to raise capital. The proceeds of the trust preferred securities were used for general corporate uses. 40 The trust preferred securities pay cash distributions which are payable semiannually for Trust I and quarterly for Trust II are based on their applicable rate and liquidation preference of $1,000 per security. Distributions to the holders of the trust preferred securities are included in non-interest expense. Under the provisions of the subordinated debt, the Corporation has the right to defer payment of interest on the subordinated debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the trust preferred securities are also deferred. Interest on the subordinated debentures is cumulative. The securities of Trust I are redeemable in whole or in part on or after April 15, 2008. Trust II securities are redeemable in whole or in part on or after February 28, 2005. Either of the securities is redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain events. Note 11--Stockholders' Equity During 2000 and 1999, the Corporation declared a five percent stock dividend for each year to the stockholders of record as of May 1, 2000 and May 3, 1999, respectively. The 2000 stock dividend was paid on May 12, 2000, resulting in the distribution of 1,256,017 common shares with a par value of $1.00 per share. Accordingly, $1.3 million and $18.8 million were transferred from retained earnings to common stock and capital surplus, respectively. The 1999 stock dividend was paid May 14, 1999 with the distribution of 1,216,219 common shares with a $1.00 par value per share. This dividend resulted in the transfer of $1.2 million to common stock and $28.6 million to capital surplus from retained earnings. The cumulative impact of these stock dividends has been reflected in the restatement of earnings and dividends per share and stock option data in the financial statements and accompanying notes. Subsequent to December 31,1997, the Corporation declared a two for one stock split. The split occurred after the dividend payment on February 13, 1998 for stockholders of record at the close of business on February 2, 1998. All earnings per share and common stock related information has been given retroactive effect to this transaction. During 1998, the Corporation approved a stock repurchase program for up to 5% of its outstanding stock. This program was completed in late 2000 with a total of 3.2 million shares repurchased. In December 2000 the Corporation authorized an additional repurchase up to 2.3 million shares. These purchases may occur in the open market from time to time and on an ongoing basis, depending upon market conditions. The Corporation repurchased 3,168,103 and 168,100 shares of common stock at a cost of $51.1 million and $3.5 million during 2000 and 1999, respectively. The Corporation's Stock Option Plan (the "Option Plan") covers a maximum of 5.7 million shares of common stock that has been reserved for issuance under the Option Plan described below. Under the provisions of Statement of Financial Accounting Standards No. 123--"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Corporation had the option of accruing a compensation expense for stock options granted to employees, or applying the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), which does not require compensation expense to be recognized. The Corporation has elected to continue to apply APB No. 25 to account for the Option Plan. Under the Option Plan, stock options are granted at an exercise price not less than the market value of the underlying shares of common stock on the date of the grant. As such, the Option Plan is classified as a fixed stock option plan. Accordingly, no compensation expense has been recognized from 1998 through 2000. The Option Plan provides for the granting of non-qualified stock options to certain key employees and directors of the Corporation and the Bank, as designated by the Corporation's board of directors. All options have a maximum duration of ten years from the date of grant. Vesting in the majority of the options occurred immediately in 50% of the options granted with the remainder vesting in the subsequent year. A minority of options have vesting provisions which may be accelerated on the attainment of specific benchmarks related to the Corporation's performance. Beginning in 1999, options granted have a five year or a three year vesting schedule. Regardless of the vesting schedule all options vest immediately upon a change in control. 41 The following table presents a summarization of the activity related to the options for the periods indicated:
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Common Weighted Avg. Common Weighted Avg. Common Weighted Avg. Shares Exercise Price Shares Exercise Price Shares Exercise Price ==================================================================================================================================== Outstanding, January 1, 2,215,638 $14.46 1,913,844 $12.31 1,971,813 $ 8.14 Granted 622,675 15.34 497,595 20.14 340,838 28.83 Exercised (82,220) 5.67 (180,885) 6.11 (386,135) 5.05 Cancelled or Expired (48,994) 21.04 (14,916) 28.77 (12,672) 29.30 - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding, December 31, 2,707,099 $14.81 2,215,638 $14.46 1,913,844 $12.31 ==================================================================================================================================== Options Exercisable at Year-end 1,462,731 1,280,374 1,358,386 Weighted Average Fair Value of Options Granted During the Year $ .28 $ .63 $ .35 Options Available for Granting under the Option Plan 162,705 732,168 1,217,816 - ------------------------------------------------------------------------------------------------------------------------------------
The table below provides information on the stock options outstandings at December 31, 2000.
Options Outstanding Options Exercisable -------------------------------------------------- ----------------------------------- Weighted Weighted Average Weighted Exercise Price Common Average Remaining Common Average Range Shares Exercise Price Contractual Life Shares Exercise Price ================================================================================================================================= $ .00 - $ 3.03 66,594 $ .84 1.1 66,594 $ .84 3.04 - 6.06 300,025 3.65 2.3 300,025 3.65 6.07 - 9.09 295,296 7.89 3.9 295,296 7.89 9.10 - 12.12 80,803 10.26 5.9 80,803 10.26 12.13 - 15.14 847,924 13.51 7.5 260,641 13.29 15.15 - 18.17 178,277 16.43 6.4 156,435 16.35 18.18 - 21.20 608,326 19.80 9.0 111,326 20.26 21.21 - 24.23 9,417 22.05 7.8 9,417 22.05 24.24 - 27.26 46,426 25.36 7.8 34,064 25.53 27.27 - 30.29 274,011 29.12 7.1 148,130 29.10 - --------------------------------------------------------------------------------------------------------------------------------- 2,707,099 $ 14.81 6.6 1,462,731 $ 12.29 =================================================================================================================================
42 The weighted average fair value of all of the options granted during the period 1998 through 2000 has been estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
2000 1999 1998 ================================================================================================= Dividend Yield 14.24% 14.45% 17.37% Weighted Average Risk-free Interest Rate 4.83 6.39 4.59 Weighted Average Expected Volatility 25.60 24.24 24.68 Weighted Average Expected Life in Years 10 years 7 years 7 years =================================================================================================
The provisions of SFAS No. 123, require pro forma disclosure of compensation expense for the Corporation based on the fair value of the awards at the date of grant. Under those provisions, the Corporation's net income and earnings per share would have been reduced to the following pro forma amounts below:
(in thousands, except per share data) 2000 1999 1998 ================================================================================================ Net Income: As Reported $44,810 $44,150 $39,030 Pro Forma 44,697 43,947 38,959 Basic Earnings Per Share: As Reported $ 1.71 $ 1.65 $ 1.45 Pro Forma $ 1.70 $ 1.64 $ 1.45 Diluted Earnings Per Share: As Reported $ 1.67 $ 1.60 $ 1.40 Pro Forma $ 1.66 $ 1.59 $ 1.40 ================================================================================================
43 Note 12--Off-Balance Sheet Risk CREDIT RISK In the normal course of business, the Bank offers various financial products to its customers to meet their credit and liquidity needs. These instruments involve, to varying degrees, elements of credit and market risk which may exceed any amount recognized in the financial statements. Risks that are inherent in normal banking services also exist in some of these financial instruments. Contract amounts of the instruments indicate the maximum exposure the Bank has in each class of financial instruments discussed in the following paragraphs. These commitments and contingencies are not reflected in the accompanying financial statements. Unless noted otherwise, the Bank does not require collateral or other securities to support financial instruments with credit risk. Subject to its normal credit standards and risk monitoring procedures, the Bank makes contractual commitments to extend credit. Commitments to extend credit in the form of consumer, commercial real estate and commercial business loans amounted to $547.6 million and $488.3 million at December 31, 2000 and 1999, respectively. Commitments typically have fixed expiration dates or other termination clauses. The total of commitments does not necessarily represent future cash requirements as many commitments may expire without being exercised. Collateral and amounts thereof are obtained, if necessary, based upon management's evaluation of each borrower's financial condition. Required collateral may be in the form of cash, accounts receivable, inventory, property, plant and equipment and income generating commercial properties and residential properties. Conditional commitments are issued by the Bank in the form of performance stand-by letters of credit which guarantee the performance of a customer to a third party. These letters of credit are typically included in the amount of funds committed by the Bank to complete associated construction projects. At December 31, commitments under outstanding performance stand-by letters of credit aggregated $34.5 million in 2000 and $34.6 million in 1999. The credit risk of issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. A judgment relating to a 1989 event was entered against Provident Bank of Maryland in April 1997 in the amount of $5.2 million, exclusive of post-judgment interest. This judgment, which Provident appealed, reversed an earlier court holding in favor of Provident. The judgment stemmed from a lawsuit alleging that the Bank had failed to fully honor a letter of credit. During the fourth quarter of 1998, the appellate court upheld the lower court decision. Payment was made in January, 1999. This payment, which was fully reserved, resulted in a charge-off, thereby reducing the allowance for loan losses. Securitizations and Recourse Provision During 2000 and 1999 the Bank securitized $324 million and $383 million of its acquired loan portfolio. These loans were securitized with FNMA and the respective securities were placed into the Bank's investment portfolio. Accordingly, no gain or loss was recorded on these transactions. These assets were sold with full recourse back to the Bank for any credit losses. The maximum potential recourse obligation was $588.3 million and $379.7 million at December 31, 2000 and 1999, respectively. A recourse liability was established on the balance sheet based upon the credit risk inherent in these loans. This recourse liability amounted to $2.1 million and $1.5 million at December 31, 2000 and 1999, respectively. This recourse liability is evaluated periodically for adequacy. To date, no losses have been incurred under these recourse provisions in the investment portfolio. These securities are valued at fair market value along with the remaining securities. 44 Concentrations of Credit Risk Construction and mortgage loan receivables from real estate developers represent $382.4 million and $278.2 million of the total loan portfolio at December 31, 2000 and 1999, respectively. Substantially all loans are collateralized by real property or other assets. These loans are expected to be repaid from the proceeds received by the borrowers from the retail sales or rentals of these properties to third parties. The Corporation's investment portfolio contains mortgage-backed securities amounting to $1.64 billion and $1.47 billion at December 31, 2000 and 1999, respectively. The underlying collateral for these securities is in the form of pools of mortgages on residential properties. The majority of the securities are either directly or indirectly guaranteed by U.S. Government agencies or corporations. Management is of the opinion that credit risk is minimal. Interest Rate Risk The Bank enters into agreements for the delivery of securitized mortgage pools or for the purchases of consumer loan portfolios at a future date at a specified price or yield. Movements in interest rates impose basis and interest rate risk on the Bank between the dates of commitment and the dates of settlement. Forward contracts aggregated $6.3 million and $32.3 million at December 31, 2000 and 1999, respectively. The Bank enters into various derivative financial instruments to manage its interest rate risk exposure which aims to stabilize net interest income through periods of changing interest rates. (see Note 1). The two major types used are interest rate swaps and interest rate floor/cap/ corridor arrangements. These derivative financial instruments use notional amounts to represent a unit of measure but not the amount subject to accounting loss, which is much smaller. Risks in these transactions involve nonperformance by counterparties under the terms of the contract (counterparty credit risk) and, for interest rate swaps, the possibility that interest rate movements or general market volatility could result in losses on open off-balance sheet positions (market risk). The credit risk that results from interest rate swaps, interest rate floors, and interest rate caps is represented by the fair value of contracts that have a positive value at the reporting date. At December 31, 2000 the total amount of credit risk was $4.1 million: however, this amount can increase or decrease if interest rates change. Credit risk is controlled by dealing with well-established brokers which are highly rated by independent sources and by establishing exposure limits for individual counterparties. Market risk on interest rate swaps is minimized by using these instruments as hedges, actively managing interest rate risk and by continually monitoring these positions. Market risk associated with the interest rate floor/cap/corridor arrangements only exist when premiums are amortized into interest expense without receiving any compensation from third parties. The Bank has entered into $15.0 million pay fixed/receive variable and $524.8 million pay variable receive fixed interest rate swaps at December 31, 2000. Variable rates for the swaps are based upon indices of either LIBOR or 10 year treasuries. Unamortized premiums paid and outstanding for floor/cap/corridor arrangements were $1.6 million at December 31, 2000 and $6.1 million at December 31, 1999. 45 Maturities of interest rate swap and interest rate swap/cap/floor arrangements are summarized below with their respective notional value, market value, fees paid and weighted average interest rates at December 31.
December 31, 2000 2006 and (in thousands) 2001 2002 2003 2004 2005 Thereafter Total ==================================================================================================================================== Interest Rate Swaps Notional Value $ -- $ -- $ 30,000 $ 92,000 $ 50,000 $ 125,000 $ 297,000 Weighted Average Rate Paid -- -- 6.62% 6.57% 6.59% 6.87% 6.70% Weighted Average Rate Received -- -- 6.33% 6.30% 7.03% 7.59% 6.97% Fair Value $ -- $ -- $ (273) $ 315 $ (364) $ 2,250 $ 1,928 Interest Rate Swaps/Caps Notional Value $ -- $226,680 $ 10,200 $ 11,938 $ -- $ -- $ 248,818 Unamortized Fee Paid $ -- $ 1,468 $ 87 $ 20 $ -- $ -- $ 1,575 Weighted Average Rate Paid -- 5.85% 6.01% 5.17% -- -- 5.84% Weighted Average Cap on Rate Paid -- 5.85% 6.01% 7.00% -- -- 5.88% Weighted Average Rate Received -- 5.66% 5.75% 5.60% -- -- 5.66% Fair Value $ -- $ (283) $ (1) $ 45 $ -- $ -- $ (239) Interest Rate Floors Notional Value $ -- $ -- $ -- $ -- $ -- $ -- $ -- Amount Fee Paid $ -- $ -- $ -- $ -- $ -- $ -- $ -- Weighted Average Rate Paid -- -- -- -- -- -- -- Weighted Average Strike Price -- -- -- -- -- -- -- Fair Value $ -- $ -- $ -- $ -- $ -- $ -- $ -- ==================================================================================================================================== December 31, 1999 2005 and (in thousands) 2000 2001 2002 2003 2004 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Swaps Notional Value $9,000 $ 88,600 $ 73,000 $ 30,000 $266,833 $ 230,000 $ 697,433 Weighted Average Rate Paid 7.19% 5.95% 6.44% 6.19% 5.87% 6.36% 6.13% Weighted Average Rate Received 6.00% 6.15% 6.14% 6.06% 6.19% 6.94% 6.42% Fair Value $ (50) $ 1,016 $ 494 $ (308) $ 2,728 $ (1,821) $ 2,059 Interest Rate Swaps/Caps Notional Value $ -- $ -- $347,917 $109,534 $572,592 $ 136,900 $1,166,943 Unamortized Fee Paid $ -- $ -- $ 2,258 $ 442 $ 2,394 $ 969 $ 6,063 Weighted Average Rate Paid -- -- 5.93% 5.71% 5.82% 6.00% 5.88% Weighted Average Cap on Rate Paid -- -- 5.93% 5.93% 6.14% 6.21% 6.05% Weighted Average Rate Received -- -- 5.66% 5.27% 5.43% 5.97% 5.58% Fair Value $ -- $ -- $ (741) $ (405) $ (3,080) $ (324) $ (4,550) Interest Rate Floors Notional Value $ -- $ -- $ -- $ -- $ -- $ 111,000 $ 111,000 Amount Fee Paid $ -- $ -- $ -- $ -- $ -- $ 2,028 $ 2,028 Weighted Average Rate Paid -- -- -- -- -- 6.18% 6.18% Weighted Average Strike Price -- -- -- -- -- 6.67% 6.67% Fair Value $ -- $ -- $ -- $ -- $ -- $ 243 $ 243 ================================================================================================================================
46 For the year ended December 31, 2000, $15.0 million, $40.0 million and $490.8 million were utilized to hedge the interest rate risk inherent in long-term borrowings, capital securities and brokered certificates of deposit, respectively. The interest rate corridors protect the net interest margin from the impact of increases in savings deposit rates during periods of rising interest rates. The interest rate floors were purchased to hedge the impact of loan repricing on net interest income in future years. The following is an analysis of the activity with regards to interest rate swap/floor/cap/corridor arrangements for the years ended December 31, 2000, 1999 and 1998, respectively.
Notional Amount ------------------------------------------------- Interest Rate Interest Rate Floor/Corridor (in thousands) Swaps/Caps Arrangements ============================================================================================ Balance, December 31, 1997 $ 463,652 $ 250,000 New Contracts 2,062,172 -- Expired Contracts (147,723) (50,000) Terminated Contracts (892,353) -- -------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 1,485,748 $ 200,000 New Contracts 1,340,000 111,000 Expired Contracts (183,635) (200,000) Terminated Contracts (777,737) -- -------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ 1,864,376 $ 111,000 New Contracts 380,100 150,000 Expired Contracts (9,000) -- Terminated Contracts (1,689,658) (261,000) -------------------------------------------------------------------------------------------- Balance, December 31, 2000 $ 545,818 $ -- ============================================================================================
At December 31, 2000, the Corporation had deferred gains of $7.1 million and deferred losses of $10.0 million related to terminated contracts. These deferred gains and losses will be amortized over 2.5 and 2.6 years, respectively. The Corporation had deferred gains of $3.6 million and deferred losses of $1.9 million related to terminated contracts which were amortized as a yield adjustment over 4.2 and 3.6 years, respectively, at December 31, 1999. 47 NOTE 13--Other Non-Interest Income and Expense The components of other non-interest income and other non-interest expense for the three years ended December 31 were as follows:
(in thousands) 2000 1999 1998 ================================================================================================= Other Non-Interest Income: Other Loan Fees $ 2,390 $ 3,355 $ 5,104 Other Non-Interest Income 13,269 8,688 6,085 ------------------------------------------------------------------------------------------------- Total Other Non-Interest Income $15,659 $12,043 $11,189 ================================================================================================= Other Non-Interest Expense: Advertising and Promotion $ 7,582 $ 6,806 $ 7,171 Communication and Postage 5,673 5,231 4,376 Printing and Supplies 2,715 2,463 2,502 Regulatory Fees 1,217 1,120 939 Professional Services 2,731 2,706 2,413 Other Non-Interest Expense 12,241 9,590 8,971 ------------------------------------------------------------------------------------------------- Total Other Non-Interest Expense $32,159 $27,916 $26,372 =================================================================================================
NOTE 14--Income Taxes The components of income tax expense and the sources of deferred income taxes for the three years ended December 31 are presented below.
(in thousands) 2000 1999 1998 ================================================================================================= Current Income Tax Expense (Benefit): Federal $ 9,137 $18,803 $22,422 State 71 (437) (110) ------------------------------------------------------------------------------------------------- Total Current 9,208 18,366 22,312 Deferred Income Tax Expense (Benefit) 11,775 2,833 (2,941) ------------------------------------------------------------------------------------------------- Total Income Tax Expense $20,983 $21,199 $19,371 =================================================================================================
Tax expense associated with investment securities gains was $3.0 million in 2000, $109 thousand in 1999 and $2.7 million in 1998. 48 The primary sources of temporary differences that give rise to significant portions of the deferred tax asset and liability at December 31, 2000 and 1999 are presented below.
Deferred Deferred (in thousands) Assets Liabilities ============================================================================================= 2000: Loan Loss Reserve Recapture $ -- $ 9,153 Reserve for Loan Loss 13,893 -- Write-down of Property Held for Sale 700 -- Employee Benefits 2,682 -- Deferred Gain on Sale/Leaseback 184 -- Deferred State Tax Receivable 5,577 -- Depreciation -- 3,850 Deferred Federal Tax Liability for State Receivable -- 1,952 Deferred Tax Asset on Unrealized Gains in Debt Securities 5,759 -- Leasing Activities 1,688 -- Mortgage Servicing Rights -- 70 Capitalized Real Estate Owned Costs 146 -- REIT Dividend Deferral -- 6,404 Deferred Tax Liability on Securities Transaction -- 6,282 Purchase Accounting Adjustments 1,947 -- Harbor Federal Expenses -- 406 All Other 509 1,177 --------------------------------------------------------------------------------------------- Total $33,085 $29,294 ============================================================================================= 1999: Loan Loss Reserve Recapture $ -- $ 8,843 Reserve for Loan Loss 13,923 -- Write-down of Property Held for Sale 1,452 -- Employee Benefits 2,656 -- Deferred Gain on Sale/Leaseback 272 -- Deferred State Tax Receivable 5,576 -- Depreciation -- 2,021 Deferred Federal Tax Liability for State Receivable -- 1,952 Deferred Tax Benefit on Unrealized Losses in Debt Securities 23,867 -- Leasing Activities 536 -- Mortgage Servicing Rights -- 181 Capitalized Real Estate Owned Costs 383 -- REIT Dividend Deferral -- 4,613 All Other 1,145 2,384 --------------------------------------------------------------------------------------------- Total $49,810 $19,994 =============================================================================================
At December 31, 2000 and 1999 the Corporation had valuation allowances with respect to deferred tax assets of $9.2 million and $2.1 million, respectively. 49 The combined federal and state effective income tax rate for each year is different than the statutory federal income tax rate. The reasons for these differences are set forth below:
2000 1999 1998 ============================================================================== Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% Increases (Decreases) in Tax Rate Resulting From: State and Local Income Taxes, Net of Federal Income Tax Benefit .1 (.7) (.8) Tax Benefit of State Refund Claim -- (.7) -- Tax-Advantaged Income (2.0) (1.1) (1.2) Disallowed Interest Expense .2 .2 .2 Employee Benefits (.1) (.2) (.1) Credit for Community Development Corporation Contribution -- -- (.2) Low Income Housing Credit (.2) -- -- Other (1.1) (.1) .3 ------------------------------------------------------------------------------ Total Combined Effective Income Tax Rate 31.9% 32.4% 33.2% ==============================================================================
NOTE 15--Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Basic earnings per share does not include the effect of any potentially dilutive transactions or conversions. Diluted earnings per share reflects the potential dilution of earnings per share under the treasury stock method which could occur if contracts to issue common stock were exercised, such as stock options, and shared in corporate earnings. All prior period data has also been restated to provide for the effects of the stock dividends issued in 1998, 1999 and 2000, and the 2 for 1 stock split in February 1998. The following table presents a summary of per share data and amounts for the periods indicated:
(dollars in thousands, except per share data) 2000 1999 1998 ================================================================================================= Qualifying Net Income $44,810 $44,150 $39,030 Basic EPS Shares 26,270 26,790 26,861 Basic EPS $ 1.71 $ 1.65 $ 1.45 Dilutive Shares 595 847 1,016 Diluted EPS Shares 26,865 27,637 27,877 Diluted EPS $ 1.67 $ 1.60 $ 1.40 -------------------------------------------------------------------------------------------------
50 NOTE 16--Other Comprehensive Income Comprehensive income is defined as net income plus transactions and other occurrences which are the result of non-owner changes in equity. For financial statements presented for the Corporation, the only non-owner equity change is comprised of unrealized gains or losses on available for sale debt securities that will be accumulated with net income from operations. This does not have an impact on the Corporation's results of operations. Below are the components of Other Comprehensive Income and the related tax effects allocated to each component:
Year Ended December 31, --------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 ============================================================================================= Unrealized Holding Gains (Losses) Arising During the Year $60,237 $(76,659) $7,700 Tax Expense (Benefit) Attributable to Unrealized Holding Gains (Losses) Arising During the Year 21,085 (27,231) 3,045 --------------------------------------------------------------------------------------------- Net Unrealized Holding Gains (Losses) 39,152 (49,428) 4,655 Less: Reclassification Adjustment Gains Realized in Net Income 8,499 312 6,749 Tax Expense on Realized Gains Included in Net Income 2,975 109 2,669 --------------------------------------------------------------------------------------------- Net Reclassification Adjustment 5,524 203 4,080 --------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) $33,628 $(49,631) $ 575 ---------------------------------------------------------------------------------------------
NOTE 17--Employee Benefit Plans Pension Plan The Corporation's non-contributory defined benefit pension plan covers substantially all full-time employees with at least one year of service and provides an optional lump sum or monthly benefits upon retirement to participants based on average career earnings and length of service. The Corporation's policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts as the Corporation deems appropriate. Postretirement Benefits In addition to providing pension benefits, the Corporation provides certain health care and life insurance benefits to retired employees. Substantially all employees of the Corporation that reach age 60 may become eligible for these benefits, contingent upon the completion of twenty years of service. The health care plan is contributory where the retiree is responsible for all premiums in excess of the Corporation's contribution. The Corporation's contribution is capped at a growth rate of 4% per year. Under the prospective transition approach, the transition obligation is amortized over a twenty-year period. The cost of life insurance benefits provided to the retiree is borne by the Corporation. At December 31, 2000 and 1999, this plan is unfunded. 51 The following tables set forth the activity for each benefit plan's projected benefit obligation, plan assets and funded status at January 1.
Pension Plan Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 2000 1999 1998 2000 1999 1998 ==================================================================================================================================== Actuarial Present Value of Accumulated Benefit Obligation $23,528 $23,098 $25,518 $ 1,428 $ 1,216 $ 1,363 - ------------------------------------------------------------------------------------------------------------------------------------ Projected Benefit Obligation at January 1, $23,634 $26,614 $21,965 $ 1,216 $ 1,363 $ 1,060 Service Cost 1,284 976 840 114 114 72 Interest Cost 1,970 1,740 1,771 98 85 88 Benefit Payments (2,479) (1,323) (1,907) (162) (88) (111) Actuarial Loss (Gain) 2,532 (4,373) 3,945 162 (258) 254 - ------------------------------------------------------------------------------------------------------------------------------------ Projected Benefit Obligation at December 31, $26,941 $23,634 $26,614 $ 1,428 $ 1,216 $ 1,363 ==================================================================================================================================== (in thousands) 2000 1999 1998 2000 1999 1998 ==================================================================================================================================== Plan Assets Fair Value at January 1, $30,228 $30,434 $26,826 $ -- $ -- $ -- Employer Contributions -- -- -- 162 88 111 Benefit Payments (2,479) (1,323) (1,907) (162) (88) (111) Actual Return on Plan Assets 715 1,117 5,515 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Plan Assets Fair Value at December 31, $28,464 $30,228 $30,434 $ -- $ -- $ -- ==================================================================================================================================== (in thousands) 2000 1999 1998 2000 1999 1998 ==================================================================================================================================== Plan Assets in Excess of (Less Than) Projected Benefit Obligation $ 1,523 $ 6,594 $ 3,820 $(1,428) $(1,216) $(1,363) Unrecognized Net Gain from Past Experience Different from That Assumed (2,202) (4,914) (2,440) (196) (373) (127) Unrecognized Prior Service Cost 867 (1,401) (1,596) 69 76 83 Unrecognized Net Obligation (Asset) Arising at Transition at January 1, (288) (424) (560) 648 702 757 - ------------------------------------------------------------------------------------------------------------------------------------ Accrued Pension Cost Included in Other Liabilities $ (100) $ (145) $ (776) $ (907) $ (811) $ (650) ====================================================================================================================================
The actuarially estimated net benefit cost for the year ended December 31 includes the following components:
(in thousands) 2000 1999 1998 2000 1999 1998 ==================================================================================================================================== Service Cost--Benefits Earned During the Year $ 1,284 $ 976 $ 840 $ 113 $ 114 $ 72 Interest Cost on Projected Benefit Obligation 1,970 1,740 1,771 98 85 88 Expected Return on Plan Assets (2,953) (2,977) (2,599) -- -- -- Net Amortization and Deferral of Loss (Gain) (346) (370) (331) 46 50 50 - ------------------------------------------------------------------------------------------------------------------------------------ Net Pension Cost (Benefit) Included in Employee Benefits Expense $ (45) $ (631) $ (319) $ 257 $ 249 $ 210 ====================================================================================================================================
52 The Corporation revises the rates applied in the determination on the actuarial present value of the projected benefit obligation to reflect the anticipated performance of the plan and changes in compensation levels.
Pension Plan Postretirement Benefits ------------------------------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 ================================================================================================= Rates Used in Determining Actuarial Present Value of Projected Benefit Obligation: Weighted Average Discount Rate 7.75% 8.0% 7.0% 7.75% 8.0% 7.0% Expected Rate of Increase in Future Compensation 4.0 4.0 4.0 Expected Long-Term Rate of Return on Plan Assets 10.0 10.0 10.0 =================================================================================================
The contribution to the Corporation's postretirement benefit plan has been capped at a growth rate of 4% in 2000 and 1999 and is expected to remain at that level in the future. The assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
(In thousands) 1% Increase 1% Decrease ================================================================================================= Effect on Total of Service and Interest Cost Components $ 25 $ (21) Effect on Postretirement Benefit Obligation 126 (107) =================================================================================================
Retirement Savings Plan The Retirement Savings Plan is a defined contribution plan which is qualified under Section 401(a) of the Internal Revenue Code of 1986. The plan generally allows all employees who complete 500 hours of employment during a six month period and elect to participate, to receive matching funds from the Corporation for pre-tax retirement contributions made by the employee. The annual contribution to this plan is at the discretion of and determined by the Board of Directors of the Corporation. Under provisions of the plan, the maximum contribution is 75% of an employee's contribution up to 4.5% of the individual's salary. Contributions to this plan amounted to $1.5 million, $1.3 million and $1.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. NOTE 18--Regulatory Capital The Corporation is subject to various capital adequacy guidelines imposed by federal and state regulatory agencies. Under these guidelines, the Corporation must meet specific capital adequacy requirements which are quantitative measures of the Corporation's assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Additionally, the Corporation's capital amounts and classifications are subject to qualitative judgments by these agencies about components, risk weightings and other factors. The quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain amounts and ratios of total and tier 1 capital to risk-weighted assets and tier 1 capital to average assets, known as the leverage ratio. The Corporation's tier 1 capital is equal to its capital securities (see Note 10), common stock, capital surplus and retained earnings less treasury stock. Equity for regulatory purposes does not include market value adjustments for available for sale securities. The calculation of the Corporation's total capital is equal to tier 1 capital plus the allowance for loan losses subject to certain limitations. Risk-weighted assets are determined by applying weighting to asset categories and certain off-balance sheet commitments based on the level of credit risk inherent in the assets. At December 31, 2000 and 1999, the Corporation exceeded all regulatory capital requirements. The most recent notification from the Corporation's primary regulators categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. If the Corporation is unable to comply with the minimum capital requirements, it could result in regulatory actions which could have a material impact on the Corporation. 53 The minimum regulatory guidelines for total capital and tier 1 capital to risk-weighted assets are 8% and 4%, respectively. Guidelines for the leverage ratio require the ratio of tier 1 capital to average assets to be 100 to 200 basis points above a 3% minimum, depending on risk profiles and other factors. The table below presents the various components used to calculate the capital adequacy ratios.
Provident Bankshares Corporation Provident Bank December 31, December 31, ------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 2000 1999 =========================================================================================== Qualifying Capital Tier 1 Capital $ 385,453 $ 358,771 $ 383,606 $ 356,469 Total Capital 426,113 398,551 424,266 396,249 Risk-Weighted Assets 4,067,838 3,907,332 4,067,636 3,905,896 Quarterly Average Assets 5,618,993 5,056,385 5,616,107 5,054,758 Ratios Leverage Capital 6.86% 7.10% 6.83% 7.05% Tier 1 Capital 9.48 9.18 9.43 9.13 Total Capital 10.48 10.20 10.43 10.14
NOTE 19--Business Segment Information The Corporation's lines of business are structured according to customer group served. For management purposes the lines are divided into the following segments: Retail Banking, Commercial Banking and Treasury and Administration. The Corporation offers consumer and commercial banking products and services through its wholly owned subsidiary, Provident Bank. Provident operates in the Baltimore-Washington corridor, northern Virginia and southern York County, Pennsylvania. The Bank offers its services to customers in our expanding market area through approximately 56 traditional and 42 in-store branches. Additionally, the Bank offers its customers 24-banking services through approximately 165 ATMs, telephone banking and the Internet. Retail services include a broad array of small business and consumer loans, deposit and investment products and a complete range of mortgage lending activities. Commercial Banking provides an array of commercial financial services including asset-based lending, equipment leasing, real estate financing, cash management and structured financing. Treasury and Administration is comprised of balance sheet management activities that include managing the investment portfolio, discretionary funding, utilization of off-balance sheet financial instruments, optimizing the Corporation's equity position and other corporate expenses. The financial performance of each business segment is monitored using an internal profitability measurement system. This system utilizes policies that ensure the results reflect the economics for each segment and that they are compiled on a consistent basis. Line of business information is based on management accounting practices that support the current management structure. This information is not necessarily comparable with similar information for other financial institutions. This profitability measurement system uses internal management accounting policies that generally follow the policies described in Note 1, except for net interest income that is reported on a fully taxable equivalent basis. The Corporation's funds transfer pricing system utilizes a matched maturity methodology that assigns a costs of funds to earning assets and a value to the liabilities of each business segment with an offset in the Treasury and Administration business segment. Provision for loan losses is charged to each segment based on actual charge-offs. Operating expense is charged on a fully absorbed basis. Income tax expense is calculated based on the segments fully taxable equivalent income and the Corporation's effective tax rate. Revenues from no individual customer exceeded 10% of consolidated total revenues. 54 The tables below summarize 2000, 1999 and 1998 results by each business segment.
Commercial Retail Treasury & (in thousands) Banking Banking Administration Total =========================================================================================== 2000: Net Interest Income $ 21,311 $ 116,969 $ 23,153 $ 161,433 Provision for Loan Losses 12,398 10,015 1,464 23,877 ------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 8,913 106,954 21,689 137,556 Non-Interest Income 4,946 62,144 8,330 75,420 Non-Interest Expense 13,340 109,527 25,501 148,368 ------------------------------------------------------------------------------------------- Income before Income Taxes 519 59,571 4,518 64,608 Income Tax Expense 177 20,314 77 20,568 ------------------------------------------------------------------------------------------- Income before Extraordinary Item 342 39,257 4,441 44,040 Extraordinary Item -- -- 770 770 ------------------------------------------------------------------------------------------- Net Income $ 342 $ 39,257 $ 5,211 $ 44,810 ------------------------------------------------------------------------------------------- Average Total Assets $ 779,692 $ 3,134,075 $ 1,570,237 $ 5,484,004 =========================================================================================== Commercial Retail Treasury & (in thousands) Banking Banking Administration Total =========================================================================================== 1999: Net Interest Income $ 20,474 $ 99,395 $ 28,247 $ 148,116 Provision for Loan Losses 5,927 7,009 (1,366) 11,570 ------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 14,547 92,386 29,613 136,546 Non-Interest Income 5,500 56,367 (408) 61,459 Non-Interest Expense 12,268 100,495 19,893 132,656 ------------------------------------------------------------------------------------------- Income before Income Taxes 7,779 48,258 9,312 65,349 Income Tax Expense 2,653 16,456 2,090 21,199 ------------------------------------------------------------------------------------------- Income before Extraordinary Item 5,126 31,802 7,222 44,150 Extraordinary Item -- -- -- -- ------------------------------------------------------------------------------------------- Net Income $ 5,126 $ 31,802 $ 7,222 $ 44,150 ------------------------------------------------------------------------------------------- Average Total Assets $ 722,406 $ 2,679,611 $ 1,510,626 $ 4,912,643 =========================================================================================== Commercial Retail Treasury & (in thousands) Banking Banking Administration Total =========================================================================================== 1998: Net Interest Income $ 21,752 $ 79,166 $ 29,680 $ 130,598 Provision for Loan Losses 2,322 3,822 5,883 12,027 ------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 19,430 75,344 23,797 118,571 Non-Interest Income 4,810 49,894 8,188 62,892 Non-Interest Expense 12,498 91,307 19,257 123,062 ------------------------------------------------------------------------------------------- Income before Income Taxes 11,742 33,931 12,728 58,401 Income Tax Expense 4,004 11,570 3,797 19,371 ------------------------------------------------------------------------------------------- Income before Extraordinary Item 7,738 22,361 8,931 39,030 Extraordinary Item -- -- -- -- ------------------------------------------------------------------------------------------- Net Income $ 7,738 $ 22,361 $ 8,931 $ 39,030 ------------------------------------------------------------------------------------------- Average Total Assets $ 683,256 $ 2,132,771 $ 1,534,548 $ 4,350,575 ===========================================================================================
55 NOTE 20--Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosure about Fair Value of Financial Instruments" ("SFAS No. 107") requires all entities to disclose the fair value of recognized and unrecognized financial instruments on a prospective basis, where practicable, in an effort to provide financial statement users with information in making rational investment and credit decisions. To estimate the fair value of each class of financial instrument the Corporation applied the following methods using the indicated assumptions: Cash and Due from Banks and Short-Term Investments Carrying amount of those investments is used to estimate fair value. Mortgage Loans Held for Sale Fair value for mortgage loans held for trading or sale was determined using forward contract commitment pricing for the majority of these loans. Loans not specifically allocated to a forward commitment have been priced using quoted prices for commitments into which these mortgages would be placed in the future. Securities Available for Sale The fair values of the securities are based on quoted market prices or dealer quotes for those investments. Loans Fair value of loans which have homogeneous characteristics, such as residential mortgages and installment loans, was estimated using discounted cash flows. All other loans were valued using discount rates which reflected credit risks of the borrower, types of collateral and remaining maturities. Deposit Liabilities Fair value of demand deposits, savings accounts and money market deposits was the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings Rates currently available to the Corporation for borrowings and debt with similar terms and remaining maturities are used to estimate fair value of the existing debt. Interest Rate Arrangements The fair value of interest rate swaps and floor/cap arrangements, which the Corporation uses for hedging purposes, is the estimated amount the Corporation would receive or pay to terminate the arrangements at the reporting date, taking into account the current interest rates and the current credit worthiness of the counterparties. Interest rate swaps/caps carrying amounts indicate amounts paid for cap arrangements attached to interest rate swaps. The fair value is the net of the fair value of the swaps and the caps. Commitments to Extend Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the borrowers. Fixed-rate loan commitments also take into account the difference between current levels of interest rates and committed rates. 56 The estimated fair values of the Corporation's financial instruments at December 31 are as follows:
2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value ============================================================================================================================== Assets: Cash and Due From Banks $ 84,166 $ 84,166 $ 90,840 $ 90,840 Short-Term Investments 12,378 12,378 1,759 1,759 Mortgage Loans Held for Sale 8,243 8,257 30,535 30,513 Securities Available for Sale 1,876,509 1,876,509 1,671,507 1,671,507 Loans, Net of Allowance 3,333,111 3,444,379 3,144,339 3,089,716 Liabilities: Deposits $ 3,954,770 $ 3,861,643 $ 3,808,528 $ 3,685,790 Short-Term Borrowings 397,833 398,011 301,323 301,430 Long-Term Debt 724,973 737,348 627,118 621,575 Recognized Derivative Financial Instruments: Interest Rate Floors $ -- $ -- $ 2,028 $ 243 Interest Rate Swaps/Caps 1,575 (239) 6,063 (4,550) Unrecognized Derivative Financial Instruments: Interest Rate Swaps $ -- $ 1,928 $ -- $ 2,059 Commitments to Extend Credit -- -- -- -- ==============================================================================================================================
The calculations represent estimates and do not represent the underlying value of the Corporation. The information presented is based on fair value calculations and market quotes as of December 31, 2000 and 1999. These amounts are based on the relative economic environment at the respective year-ends, therefore, the valuations may have been affected by economic movements since year-end. 57 NOTE 21- Parent Company Financial Information The condensed statements of income, financial condition and cash flows for Provident Bankshares Corporation (parent only) are presented below.
Statement Of Income Year Ended December 31, - ------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 ================================================================================================= Interest Income From Bank Subsidiary $ 86 $ 34 $ 242 Dividend Income From Subsidiaries 76,559 20,242 13,951 - ------------------------------------------------------------------------------------------------- Total Income 76,645 20,276 14,193 - ------------------------------------------------------------------------------------------------- Operating Expenses 6,869 4,105 2,901 - ------------------------------------------------------------------------------------------------- Income Before Income Taxes and Equity in Undistributed Income of Subsidiaries 69,776 16,171 11,292 Income Tax Benefit (2,053) (1,277) (1,038) - ------------------------------------------------------------------------------------------------- 71,829 17,448 12,330 Equity in Undistributed Income (Loss) of Subsidiaries (27,019) 26,702 26,700 - ------------------------------------------------------------------------------------------------- Net Income $ 44,810 $ 44,150 $ 39,030 =================================================================================================
Statement Of Condition December 31, - ------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 ================================================================================================= ASSETS Interest Bearing Deposit with Bank Subsidiary $ 108 $ 219 Investment in Bank Subsidiary 377,541 313,555 Other Assets 8,530 2,000 - ------------------------------------------------------------------------------------------------- Total Assets $ 386,179 $ 315,774 ================================================================================================= LIABILITIES Other Liabilities $ 724 $ 775 - ------------------------------------------------------------------------------------------------- Total Liabilities 724 775 ================================================================================================= Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities 70,135 40,400 - ------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock 29,709 $ 26,226 Capital Surplus 251,085 203,364 Retained Earnings 109,601 102,587 Net Accumulated Other Comprehensive Income of Bank Subsidiary (10,695) (44,323) Treasury Stock at Cost (64,380) (13,255) - ------------------------------------------------------------------------------------------------- Total Stockholders' Equity 315,320 274,599 - ------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 386,179 $ 315,774 =================================================================================================
58 Statement of Cash Flows
Year Ended December 31, ------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 ============================================================================================================= Operating Activities: Net Income $ 44,810 $ 44,150 $ 39,030 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Equity in Undistributed Income from Subsidiaries 27,019 (26,702) (26,700) Other Operating Activities 86 (2,056) 4,688 ------------------------------------------------------------------------------------------------------------- Total Adjustments 27,105 (28,758) (22,012) ------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 71,915 15,392 17,018 ------------------------------------------------------------------------------------------------------------- Investing Activities: Investment in Bank Subsidiary (33,500) -- (42,662) Investment in Trust Subsidiary (928) -- (1,238) ------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (34,428) -- (43,900) ------------------------------------------------------------------------------------------------------------- Financing Activities: Issuance of Common Stock 1,499 2,713 6,225 Purchase of Treasury Stock (51,125) (3,478) (7,287) Cash Dividends on Common Stock (17,707) (15,232) (12,648) Other Financing Activities (1,193) (76) -- Issuance of Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities 30,928 -- 41,238 ------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities (37,598) (16,073) 27,528 ------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (111) (681) 646 Cash and Cash Equivalents at Beginning of Year 219 900 254 ------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 108 $ 219 $ 900 ============================================================================================================= Supplemental Disclosures ------------------------------------------------------------------------------------------------------------- Income Taxes Paid $ 3,419 $ 344 $ 748 Stock Dividend 20,088 29,827 36,349 Stock Issued for Acquired Company 29,617 -- --
59 Note 22--Future Changes in Accounting Principles In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). As amended, the statement becomes effective for fiscal years beginning after June 15, 2000 and will not be applied retroactively. The statement establishes accounting and reporting standards for derivative instruments and hedging activity. Under the standard, all derivatives must be measured at fair value and recognized as either assets or liabilities in the financial statements. The accounting for changes in fair value (gains and losses) of a derivative is dependent on the intended use of the derivative and its designation. Derivatives may be used to: 1) hedge exposure to change the fair value of a recognized asset or liability or a firm commitment, referred to as a fair value hedge, 2) hedge exposure to variable cash flow of forecasted transactions, referred to as a cash flow hedge, or 3) hedge foreign currency exposure. The Corporation only engages in fair value and cash flow hedges for all hedges. Ineffective portions of hedges are reported in and affect net earnings immediately. Derivatives not designed as a hedging instrument have the changes in their fair value recognized in earnings in the period of change. As of January 1, 2001, the Corporation will adopt SFAS No. 133. This statement requires the Corporation to mark to market all derivative instruments as a transition adjustment. This transition adjustment is estimated to be a $1.2 million after tax loss. The Corporation plans to close the derivative instruments that will not qualify for the shortcut method under SFAS No. 133. This is not expected to result in a material gain or loss. Under the shortcut method, an entity may conclude that the change in the derivative's fair value is equal to the change in the hedged item's fair value attributable to the hedged risk, resulting in no ineffectiveness. Therefore, the adoption of SFAS No. 133 is not expected to adversely impact the earnings from continuing operations of the Corporation in 2001. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). This statement becomes effective for applicable transactions occurring after March 31, 2001. Management is currently assessing the potential impact of SFAS No. 140 on future corporate operations. Note 23--Subsequent Event On February 16, 2001, the Corporation entered into an agreement to repurchase approximately 1.4 million shares of common stock directly from Mid-Atlantic Investors, a major stockholder. These shares will be repurchased by the Corporation at a fixed price of $23.86 per share. The transaction will be executed in portions, but in its entirety prior to March 31, 2001. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 60 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The text and tables under "Election of Directors" in the Corporation's 2001 Proxy Statement are incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The text and tables under "Directors' Compensation" and "Executive Compensation" in the Corporation's 2001 Proxy Statement are incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The text and tables under "Stock Ownership" in the Corporation's 2001 Proxy Statement are incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The text under "Compensation Committee Interlocks and Insider Participations" and "Transactions with Management" in the Corporation's 2001 Proxy Statement is incorporated herein by reference. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) The Consolidated Financial Statements of Provident Bankshares Corporation and Subsidiaries are included in Item 8. (2) Financial statement schedules--none applicable or required. (3) Exhibits The following is an index of the exhibits included in this report: (3.1) Articles of Incorporation of Provident Bankshares Corporation.(1) (3.2) Second Amended and Restated By-Laws of Provident Bankshares Corporation.(2) (4.1) Amendment No. 1 to Stockholder Protection Rights Agreement.(7) (10.1) 1994 Supplemental Executive Incentive Plan of Provident Bank of Maryland.(3) (10.2) Supplemental Executive Retirement Income Plan of Provident Bank of Maryland.(4) (10.3) Amended and Restated Stock Option and Appreciation Rights Plan of Provident Bankshares Corporation.(5) (10.4) Form of Change in Control Agreement between Provident Bankshares Corporation and Certain Executive Officers.(6) (10.5) Form of Change in Control Agreement between Provident Bank of Maryland and Certain Executive Officers.(6) (10.6) Deferred Compensation Plan for Outside Directors.(7) (10.7) Provident Bankshares Corporation Non-Employee Directors' Severance Plan.(7) (11) Statement re: Computation of Per Share Earnings. (21) Subsidiaries of Provident Bankshares Corporation. (23) Consents of Independent Accountants. (24) Power of Attorney. (b) Reports on Form 8-K were filed with the Securities and Exchange Commission in the last quarter of 2000 as follows: October 18, 2000--Press Release regarding repositioning of the mortgage lending operation. December 21, 2000--Press Release announcing the Board of Directors approved extending its stock repurchase plan. (1) Incorporated by reference from Registrant's Registration Statement on Form S-3 (File No. 33-73162) filed with the Commission on August 18, 1994. (2) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed with the Commission on November 13, 1998. (3) Incorporated by reference from the Registrant's 1994 Annual Report on Form 10-K (File No. 0-16421) filed with the Commission on February 17, 1995. (4) Incorporated by reference from Registrant's 1993 Form 10-K (File No. 0- 16421) filed with the Commission on March 14, 1994. (5) Incorporated by reference from Registrant's definitive 1995 Proxy Statement for the Annual Meeting of Stockholders held on April 19, 1995. (6) Incorporated by reference from Registrant's 1995 Form 10-K (File No. 0- 16421) filed with the Commission on March 18, 1996. (7) Incorporated by reference from Registrant's 1998 Form 10-K (File No. 0- 16421) filed with the Commission on March 3, 1999. 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROVIDENT BANKSHARES CORPORATION (Registrant) March 9, 2001 BY /s/ Peter M. Martin ------------------- Peter M. Martin Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. Principal Executive Officer: March 9, 2001 BY /s/ Peter M. Martin ------------------ Peter M. Martin Chairman of the Board and Chief Executive Officer Principal Financial Officer: March 9, 2001 BY /s/ Dennis A. Starliper ---------------------- Dennis A. Starliper Group Manager and Chief Financial Officer Principal Accounting Officer: March 9, 2001 BY /s/ R. Wayne Hall ---------------- R. Wayne Hall Treasurer A Majority of the Board of Directors* Melvin A. Bilal, Thomas S. Bozzuto, Dr. Calvin W. Burnett, Ward B. Coe, III, Charles W. Cole, Jr., Pierce B. Dunn, Enos K. Fry, Herbert W. Jorgensen, Mark K. Joseph, Barbara B. Lucas, Peter M. Martin, Frederick W. Meier, Jr., Sister Rosemarie Nassif, Francis G. Riggs, Sheila K. Riggs, Carl W. Stearn * Pursuant to the Power of Attorney filed herewith as Exhibit 24.0. March 9, 2001 BY /s/ R. Wayne Hall ---------------- R. Wayne Hall Attorney-in-fact 63 EX-11 2 0002.txt EXHIBIT 11 EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31 (in thousands, except per share data) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Basic: - ------ Average shares outstanding 26,270 26,790 26,861 ============= ============== ============== Net Income $ 44,810 $ 44,150 $ 39,030 ============= ============== ============== Per Share Amount $ 1.71 $ 1.65 $ 1.45 ============= ============== ============== Diluted: - -------- Average shares outstanding 26,270 26,790 26,861 Net effect of dilutive stock options 595 847 1,016 based on the treasury stock method using the average market price or quarter end price, whichever is greater ------------- -------------- -------------- Total Shares Outstanding 26,865 27,637 27,877 ============= ============== ============== Net Income $ 44,810 $ 44,150 $ 39,030 ============= ============== ============== Per Share Amount $ 1.67 $ 1.60 $ 1.40 ============= ============== ==============
EX-21 3 0003.txt EXHIBIT 21 EXHIBIT 21 -- SUBSIDIARIES OF PROVIDENT BANKSHARES CORPORATION Subsidiaries State of Incorporation - ------------ ---------------------- Provident Bank (1) Maryland Provident Mortgage Corp. (2) Maryland Provident Financial Services, Inc. Maryland Provident Investment Center, Inc. Maryland Banksure Insurance Corporation Maryland PB Investment Corporation Delaware PB REIT, INC. Delaware PB Trust I Delaware PB Trust II Delaware Provident Lease Corp., Inc. Maryland Lexington Properties Management, Inc. Maryland LPM Sub 1, Inc. Maryland LPM Sub 2, Inc. Maryland LPM Sub 3, Inc. Maryland LPM Sub 4, Inc. Maryland LPM Sub 5, Inc. Maryland LPM Sub 6, Inc. Maryland LPM Sub 7, Inc. Maryland LPM Sub 8, Inc. Maryland LPM Sub 9, Inc. Maryland LPM Sub 10, Inc. Maryland Court Square Leasing Corporation Maryland (1) Also doing business as Provident Bank of Maryland and Court Square Financial Services. (2) Also doing business as Court Square Mortgage and Court Square Funding Group. EX-23 4 0004.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements and Prospectuses on Form S-3 (No. 333-30678), Forms S-4 (Nos. 333- 39788 and 333-58959), and Forms S-8 (Nos. 333-45651 and 333-58881) of Provident Bankshares Corporation of our report dated January 17, 2001 relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers PricewaterhouseCoopers Baltimore, Maryland March 5, 2001 EX-24 5 0005.txt EXHIBIT 24 EXHIBIT 24 - POWER OF ATTORNEY PROVIDENT BANKSHARES CORPORATION POWER OF ATTORNEY Each of the undersigned persons, in his or her capacity as an officer or director, or both, of Provident Bankshares Corporation (the "Company"), hereby appoints Peter M. Martin, Dennis A. Starliper, and R. Wayne Hall, and each of them, with full power of substitution and resubstitution and with full power in each to act without the others, his or her attorney-in-fact and agent for the following purposes: 1. To sign for him or her, in his or her name and in his or her capacity as an officer or director, or both, of the Company, an Annual Report on Form 10- K for the Company pursuant to Section 13 of the Securities Exchange Act of 1934, and any amendments, thereto (such report, together with all exhibits and documents therein and all such amendments, the "Form 10-K"). 2. To file or cause to be filed the Form 10-K with the Securities and Exchange Commission; 3. To take all such other action as any such attorney-in-fact, or his substitute, may deem necessary or desirable in connection with Form 10-K. This power of attorney shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Company. /s/ Peter M. Martin December 20, 2000 - --------------------------------- Peter M. Martin /s/ Dennis A. Starliper December 20, 2000 - --------------------------------- Dennis A. Starliper /s/ R. Wayne Hall December 20, 2000 - --------------------------------- R. Wayne Hall /s/ Melvin A. Bilal December 20, 2000 - --------------------------------- Melvin A. Bilal /s/ Thomas S. Bozzuto December 20, 2000 - --------------------------------- Thomas S. Bozzuto /s/ Calvin W. Burnett December 20, 2000 - --------------------------------- Dr. Calvin W. Burnett /s/ Ward B. Coe, III December 20, 2000 - ------------------------------- Ward B. Coe, III /s/ Charles W. Cole December 20, 2000 - ------------------------------- Charles W. Cole /s/ Pierce B. Dunn December 20, 2000 - ------------------------------- Pierce B. Dunn /s/ Enos K. Fry December 20, 2000 - ------------------------------- Enos K. Fry /s/ Herbert W. Jorgensen December 20, 2000 - ------------------------------- Herbert W. Jorgensen /s/ Mark K. Joseph December 20, 2000 - ------------------------------- Mark K. Joseph /s/ Barbara B. Lucas December 20, 2000 - ------------------------------- Barbara B. Lucas /s/ Frederick W. Meier, Jr. December 20, 2000 - ------------------------------- Frederick W. Meier, Jr. /s/ Francis G. Riggs December 20, 2000 - --------------------------- Francis G. Riggs /s/ Sheila K. Riggs December 20, 2000 - --------------------------- Sheila K. Riggs /s/ Carl W. Stearn December 20, 2000 - --------------------------- Carl W. Stearn -----END PRIVACY-ENHANCED MESSAGE-----