-----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, WrjAgguQwMBlhXe5bzsH2iF+QFVamVos0qXGT+DZvr6ExlkpPR6pAQ8Ma5+0ImCP DNttFCV+91abmQEPrcCZ8Q== 0000950169-00-000127.txt : 20000217 0000950169-00-000127.hdr.sgml : 20000217 ACCESSION NUMBER: 0000950169-00-000127 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000216 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: 546869 BUSINESS ADDRESS: STREET 1: 114 EAST LEXINGTON ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4102817000 MAIL ADDRESS: STREET 1: 7210 AMBASSADOR RD CITY: BALTIMORE STATE: MD ZIP: 21244-2739 10-K 1 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, 1999 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period Commission File Number 0-16421 PROVIDENT BANKSHARES CORPORATION -------------------------------- (Exact Name of Registrant as Specified in its Charter) MARYLAND 52-1518642 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202 ---------------------------------------------------- (Address of Principal Executive Offices) (410) 277-7000 -------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No____ --- The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of February 1, 2000 was $382,040,591. For purposes of this calculation, officers and directors of the registrant are considered affiliates. At February 1, 2000, the Registrant had 25,524,186 shares of $1.00 par value common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders (Part III) TABLE OF CONTENTS
PAGE PART I Item 1. Business 3 Item 2. Properties 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 60 PART III Item 10. Directors and Executive Officers of the Registrant 61 Item 11. Executive Compensation 61 Item 12. Security Ownership of Certain Beneficial Owners and Management 61 Item 13. Certain Relationships and Related Transactions 61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62 Signatures 63
- -------------------------------------------------------------------------------- Statements contained in this Form 10-K which are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risk and uncertainties which could cause actual results to differ materially from those projected. Such risk and uncertainties include potential changes in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation and other risks detailed in documents filed by the Company with the SEC from time to time. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Provident Bankshares Corporation ("the Corporation"), a Maryland corporation, was organized in 1987 by the management of Provident Bank ("the Bank"), and registered as a bank holding company under the Bank Holding Company Act of 1956. Through a reorganization dated December 22, 1987, the Corporation became the sole stockholder of the Bank. The reorganization allowed the Bank to convert from a Maryland chartered mutual savings bank, the form in which it had operated since 1886, to a Maryland chartered stock commercial bank. At December 31, 1999, the Bank was the third largest commercial bank chartered under the laws of the State of Maryland in terms of assets. For the discussion regarding lending and investment activities as well as sources of funds of the Corporation, see pages 13 through 20. Mortgage Banking Activities Provident Mortgage Corp. ("PMC"), a subsidiary of the Bank, was formed in 1992 to offer a broad range of mortgage lending products to consumers and thereby enhance the Corporation's mortgage banking operations. Banking Services Activities Provident Investment Center, Inc. ("PIC"), a subsidiary of the Bank, provides consumers a competitive range of banking products, such as purchased annuities and mutual funds. Insurance Activities BankSure Insurance Corporation ("BankSure"), a subsidiary of the Bank, offers insurance products to the Bank's loan customers and thereby enhances the Bank's lending product lines. PIC, also offers a variety of life insurance products and services, as agent. Employees At December 31, 1999, the Corporation and its subsidiaries had 1,511 full- time equivalent employees. The Corporation currently maintains what management considers to be a comprehensive, competitive employee benefits program. Employees are not represented by a collective bargaining unit and management considers its relationship with its employees to be good. Competition The Corporation encounters substantial competition in all areas of its business. There are six commercial banks based in Maryland with deposits in excess of $1 billion. Additionally, there are five banks with deposits in excess of $1 billion operating in Maryland which have headquarters in other states. The Bank also faces competition from savings and loan associations, savings banks, mortgage banking companies, credit unions, insurance companies, consumer finance companies, money market and mutual funds and various other financial services firms. Current federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. As a consequence of these developments, competition in the Bank's principal market may increase, and a consolidation of financial institutions in Maryland may occur. 3 Regulation The Corporation is registered as a bank holding company, under the Bank Holding Company Act of 1956. As such, the Corporation is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports and any additional information that the Federal Reserve Board may require. The Bank Holding Company Act imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank of which it is not already the majority owner; or, with certain exceptions, of any company engaged in nonbanking activities. The Bank is subject to supervision, regulation and examination by the Bank Commissioner of the State of Maryland and the Federal Deposit Insurance Corporation. Asset growth, deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment of branches, mergers and consolidations, changes in control, electronic funds transfer, management practices and other aspects of operations are subject to regulation by the appropriate federal and state supervisory authorities. The Bank is also subject to various regulatory requirements of the Federal Reserve Board applicable to FDIC insured depository institutions. Recent Legislation The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions to become a "financial holding company" and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through "financial" subsidiaries in certain of the activities permitted for financial holding companies. Monetary Policy The Corporation and the Bank are affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of governmental policies on the earnings of the Corporation and the Bank cannot be predicted. ITEM 2. PROPERTIES In December 1990, the Bank sold its corporate headquarters located at 114 East Lexington Street, Baltimore, Maryland, and simultaneously leased back these facilities for an initial twelve year lease term, which expires in 2002. The majority of the Bank's 83 offices are located in the Baltimore/Washington metropolitan area and southern Pennsylvania. The Bank owns 11 and leases 72 of its offices. Most of these leases provide for the payment of property taxes and other costs by the Bank and include one or more renewal options ranging from five to ten years. Some of the leases also contain a purchase option. In 1993, the Bank renewed a long-term agreement to lease a one-story building large enough to consolidate operations and support functions. The Bank currently leases all of the building's 80,000 square feet of space. ITEM 3. LEGAL PROCEEDINGS Refer to Note 11 of Item 8.--"Financial Statements and Supplementary Data" on page 43. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Provident Bankshares Corporation is traded over-the- counter and is quoted in the NASDAQ National Market. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The NASDAQ symbol is PBKS. The trading range of Provident's common stock for the years 1999 and 1998 is shown in Table 6--Consolidated Quarterly Results of Operations, Market Prices and Dividends contained in Management's Discussion and Analysis (Item 7). At February 1, 2000, there were approximately 3,100 holders of record of the Corporation's common stock. For the year 1999, the Corporation declared and paid dividends of $.60 per share of common stock outstanding. Declarations or payments of dividends are subject to a determination by the Corporation's Board of Directors, which takes into account the Corporation's financial condition, results of operations, economic conditions and other factors, including the regulation restrictions which affect the payment of dividends by the Bank to the Corporation. See Note 10 of Notes to Consolidated Financial Statements of Provident Bankshares Corporation and Subsidiaries for a discussion of the effect of the liquidation account of the Bank on the ability of the Corporation to pay dividends. Certain provisions of Maryland banking law impose limitations on the amount of dividends payable by the Corporation, but none is as restrictive as the liquidation account. ITEM 6. SELECTED FINANCIAL DATA
Table 1 Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 1999 1998 1997/(1)/ 1996 1995 ============================================================================================================================ Interest Income (tax-equivalent) $ 353,341 $ 319,240 $ 280,167 $ 248,311 $ 224,236 Interest Expense 204,261 187,509 156,718 137,354 122,819 - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income (tax-equivalent) 149,080 131,731 123,449 110,957 101,417 Provision for Loan Losses 11,570 12,027 9,953 10,011 1,517 - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 137,510 119,704 113,496 100,946 99,900 Non-Interest Income 60,734 55,995 41,672 44,509 34,573 Net Securities Gains (Losses) 312 6,749 2,337 5,556 (2,683) Merger Related Expenses /(1)/ -- -- 10,047 -- -- Non-Interest Expense 132,243 122,914 107,816 110,323 97,416 Income Before Income Taxes 66,313 59,534 39,642 40,688 34,374 Income Tax Expense (tax-equivalent) 22,163 20,504 14,683 14,500 12,242 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 44,150 $ 39,030 $ 24,959 $ 26,188 $ 22,132 ============================================================================================================================ Per Share Amounts: Net Income--Basic $ 1.73 $ 1.52 $ 1.00 $ 1.07 $ .92 Net Income--Diluted 1.67 1.47 .96 1.02 .88 ============================================================================================================================ Cash Dividends Paid $ .60 $ .49 $ .40 $ .31 $ .23 ============================================================================================================================ Tax-Equivalent Adjustment/(2)/ $ 964 $ 1,133 $ 1,055 $ 832 $ 754 ============================================================================================================================ Total Assets $5,094,477 $4,675,897 $3,926,739 $3,485,618 $3,170,390 Total Stockholders' Equity 274,599 296,077 270,182 238,798 223,048 Return on Average Assets .90% .90% .68% .79% .75% Return on Average Equity 15.46 13.75 9.90 11.53 11.14 Stockholders' Equity to Assets 5.39 6.33 6.88 6.85 7.04 Average Equity to Average Assets 5.83 6.52 6.89 6.85 6.70 Dividend Payout Ratio 35.93 32.15 40.14 29.49 24.84 - ----------------------------------------------------------------------------------------------------------------------------
/(1)/ Merger Related Expenses--Exclusive of after tax merger related expenses incurred during 1997, net income would have been $33.6 million. Return on average assets and return on average equity for 1997 would have been .92% and 13.33%, respectively. Basic earnings per share and diluted earnings per share would have been $1.34 and $1.29, respectively. /(2)/ Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect of 35% in 1999 and 39.55% for 1998 through 1995. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Review The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries for the three years ended December 31, 1999. This discussion and tabular presentations should be read in conjunction with the accompanying financial statements and notes. Provident Bankshares Corporation ("the Corporation"), through its wholly owned subsidiary, Provident Bank ("the Bank"), offers consumer and commercial banking services. Provident operates in the dynamic Baltimore-Washington corridor through a network of 83 offices in Maryland and Northern Virginia, as well as southern York County, PA. The Bank offers related financial services through its wholly owned subsidiaries, including mortgages through Provident Mortgage Corp. (PMC), mutual funds, annuities and insurance products through Provident Investment Center (PIC) and leases through Court Square Leasing and Provident Lease Corp. During 1997, the Corporation acquired First Citizens Financial Corporation and the acquisition was accounted for as a pooling-of- interests. Accordingly, results for the reporting periods have been restated. The Corporation recorded net income in 1999 of $44.2 million or $1.67 per share/diluted, a 13.6% increase over 1998. The growth in net earnings was attributable to a $17.5 million rise in net interest income offset in part by lower non-interest income of $1.7 million and higher operating costs of $9.3 million. These variances are discussed in more detail beginning on the following pages. Results of Operations Net Interest Income The Corporation's principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and borrowings. Interest income, for purposes of analysis, is presented on a tax-equivalent basis to recognize associated tax benefits. This presentation provides a basis for comparison of yields with taxable earning assets. The discussion on net interest income should be read in conjunction with Table 2--"Analysis of Changes in Net Interest Income" and Table 3--"Consolidated Average Balances, Interest Income and Expense and Yields and Rates." Tax-equivalent net interest income for 1999 increased $17.3 million, or 13.2%, from 1998 as average earning assets grew $538 million over the prior year. Net interest margin increased slightly to 3.13% compared to 3.12% in 1998. Provident's tax equivalent interest income increased $34.1 million, or 10.7%, during the year primarily due to the growth in average earning assets offset in part by a 14 basis point decrease in yield. The decrease in yield was mainly due to a lower interest rate environment during 1999 compared to 1998. Average prime rate in 1999 was 8.00% compared to 8.35% in 1998. The increase in average earning assets resulted from a $377 million increase in the loan portfolios, $153 million in investments and $7 million in loans held for sale. Consumer loans grew $437 million while the commercial business portfolio also experienced growth of $60 million. Residential and commercial mortgage loans declined $97 million and $30 million, respectively, due to sales of residential mortgage loans and prepayments of commercial mortgages. Interest income earned on the loan portfolio increased $26 million reflecting higher loan outstandings. The yield on investments and loans decreased 21 basis points and 12 basis points, respectively. Interest lost from non-accruing loans was $735 thousand compared to $850 thousand in 1998. Interest expense increased $16.8 million from 1998 resulting from a $488 million growth in average interest-bearing liabilities. The overall cost of funds declined 15 basis points as total interest-bearing liabilities decreased 17 basis points mainly due to lower rate environment for deposit products. Excluding the effect of off-balance sheet positions in each year, total costs of interest-bearing liabilities would have decreased 22 basis points. The average rate paid on borrowed funds decreased 26 basis points during 1999. 6 The increase in average interest-bearing liabilities reflects a $514 million rise in interest-bearing deposits, $408 million of that is associated with brokered deposits and $39 million with money market certificates of deposit. Non-interest bearing demand deposit accounts grew by $43 million or 20%. The Corporation experienced a $27 million decrease in borrowed funds. Future growth in net interest income will depend upon consumer and commercial loan demand, growth in deposits and the general level of interest rates. Please refer to the section entitled "Interest Sensitivity Management" on page 22 for further discussion of the impact of current trends on net interest income in 1999.
Analysis of Changes in Net Interest Income Table 2 1999/1998 1998/1997 --------------------------------------------- -------------------------------------------------- Variance Due to Change In Variance Due to Change In ------------------------------ ----------------------------------- (in thousands) Net Increase/ Average Average Average Net Increase/ Average Average Average (tax-equivalent basis) (Decrease) Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume ============================================================================================================================== Interest Income from: Loans: Consumer $ 34,894 $ 962 $ 33,713 $ 219 $ 34,732 $ (5,252) $ 41,924 $(1,940) Commercial Business 3,110 (1,573) 4,971 (288) 1,563 (1,146) 2,836 (127) Real Estate--Construction (272) (949) 736 (59) (1,131) (1,139) 9 (1) Real Estate--Mortgage (11,770) (2,260) (10,065) 555 (9,216) (687) (8,647) 118 Mortgage Loans Held for Sale 582 61 517 4 5,161 (211) 5,801 (429) Other Short-Term Investments (126) (25) (113) 12 (28) 18 (43) (3) U.S. Treasury and Government Agencies and Corporations (278) 18 (294) (2) (3,134) 144 (3,206) (72) Mortgage-Backed Securities 751 (3,378) 4,326 (197) 9,827 (2,827) 13,234 (580) Municipal Securities 258 (28) 290 (4) 285 (40) 334 (9) Other Debt Securities 6,952 96 6,662 194 1,014 (230) 1,384 (140) - ------------------------------------------------------------------------------------------------------------------------------ Total Interest Income 34,101 (5,804) 40,644 (739) 39,073 (12,498) 53,979 (2,408) - ------------------------------------------------------------------------------------------------------------------------------ Interest Expense on: Demand/Money Market Deposits 370 (1,697) 2,357 (290) 2,429 625 1,710 94 Savings Deposits (4,411) (4,347) (84) 20 (1,639) (1,559) (87) 7 Certificates of Deposit 26,119 412 25,588 119 20,494 (236) 20,802 (72) Individual Retirement Accounts (1,322) (587) (784) 49 3,027 105 2,874 48 Short-Term Borrowings (4,687) (807) (4,068) 188 (11,313) (962) (10,709) 358 Long-Term Debt 683 (1,987) 2,810 (140) 17,793 (470) 18,662 (399) - ------------------------------------------------------------------------------------------------------------------------------ Total Interest Expense 16,752 (6,535) 24,128 (841) 30,791 1,422 29,105 264 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income $ 17,349 $ 731 $ 16,516 $ 102 $ 8,282 $(13,920) $ 24,874 $(2,672) ==============================================================================================================================
The table above analyzes the reasons for the changes from year-to-year in the principal elements that comprise net interest income. The calculation of rate, volume and rate/volume variances is based upon a procedure established for banks by the Securities and Exchange Commission. Rate, volume and rate/volume variances presented for each component will not total to the variances presented on totals of interest income and interest expense because of shifts from year-to-year in the relative mix of interest-earning assets and interest-bearing liabilities. 7 Consolidated Average Balances, Interest Income and Expense and Yields and Rates Table 3
1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ (tax-equivalent basis) Balance Expense Rate Balance Expense Rate ==================================================================================================================================== ASSETS Interest-Earning Assets: Loans: /(2)/ Consumer $2,357,159 $ 183,122 7.77% $1,920,378 $148,228 7.72% Commercial Business 384,708 30,280 7.87 325,209 27,170 8.35 Real Estate--Construction 133,458 11,565 8.67 125,650 11,837 9.42 Real Estate--Mortgage 390,177 29,241 7.49 517,068 41,011 7.93 ---------- --------- ---------- -------- Total Loans /(1)/ 3,265,502 254,208 7.78 2,888,305 228,246 7.90 ---------- --------- ---------- -------- Mortgage Loans Held for Sale 121,663 8,594 7.06 114,284 8,012 7.01 Other Short-Term Investments 2,617 109 4.17 5,043 235 4.66 US Treasury and Government Agencies and Corporations 41,464 3,025 7.30 45,526 3,303 7.26 Mortgage-Backed Securities 1,165,777 75,109 6.44 1,101,684 74,358 6.75 Municipal Securities 26,756 2,055 7.68 23,036 1,797 7.80 Other Debt Securities 137,078 10,241 7.47 45,307 3,289 7.26 Equity Securities -- -- -- -- -- -- ---------- --------- ---------- -------- Total Investment Securities /(2)/ 1,371,075 90,430 6.60 1,215,553 82,747 6.81 ---------- --------- ---------- -------- Total Interest-Earning Assets 4,760,857 353,341 7.42 4,223,185 319,240 7.56 ---------- --------- ---------- -------- Less: Allowance for Loan Losses (38,293) (38,831) Cash and Due From Banks 68,725 60,562 Other Assets 121,354 105,659 ---------- ---------- Total Assets $4,912,643 $4,350,575 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Liabilities: Demand/Money Market Deposits $ 543,257 14,146 2.60 $ 3,874 13,776 2.97 Savings Deposits 614,869 14,400 2.34 617,643 18,811 3.05 Certificates of Deposit 2,011,484 114,530 5.69 1,559,985 88,411 5.67 Individual Retirement Accounts 148,441 7,995 5.39 162,088 9,317 5.75 Short-Term Borrowings 243,300 12,737 5.24 317,424 17,424 5.49 Long-Term Debt 714,939 40,453 5.66 667,752 39,770 5.96 ---------- --------- ---------- -------- Total Interest-Bearing Liabilities 4,276,290 204,261 4.78 3,788,766 187,509 4.95 ---------- --------- ---------- -------- Noninterest-Bearing Demand Deposits 255,259 212,339 Other Liabilities 39,752 42,608 Capital Securities 39,206 27,873 Stockholders' Equity 302,136 278,989 ---------- ---------- Total Liabilities and Stockholders' Equity $4,912,643 $4,350,575 ---------- ---------- Net Interest-Earning Assets $ 484,567 $ 434,419 ---------- ---------- Net Interest Income (tax-equivalent) 149,080 131,731 Less: Tax-Equivalent Adjustment (964) (1,133) --------- -------- Net Interest Income $ 148,116 $130,598 --------- -------- Net Yield on Interest-Earning Assets (tax-equivalent) 3.13% 3.12%
/(1)/ Average loan balances include non-accrual loans. /(2)/ Tax advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect of 35% in 1999 and 39.55% for 1998 through 1995. 8
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ===================================================================================================================== $1,402,359 $113,496 8.09% $1,053,279 $ 85,049 8.07% $ 678,734 $ 56,566 8.33% 292,788 25,607 8.75 268,158 23,807 8.88 194,094 18,653 9.61 125,565 12,968 10.33 124,584 12,574 10.09 85,277 9,297 10.90 624,604 50,227 8.04 577,515 45,813 7.93 864,852 67,286 7.78 ---------- -------- ---------- -------- ---------- -------- 2,445,316 202,298 8.27 2,023,536 167,243 8.26 1,822,957 151,802 8.33 ---------- -------- ---------- -------- ---------- -------- 37,662 2,851 7.57 68,112 4,950 7.27 68,920 5,228 7.59 6,023 263 4.37 8,949 438 4.89 7,496 421 5.62 90,709 6,437 7.10 108,368 7,432 6.86 80,488 5,280 6.56 914,196 64,531 7.06 929,786 63,404 6.82 753,963 52,502 6.96 18,875 1,512 8.01 11,917 998 8.37 8,634 743 8.61 28,174 2,275 8.07 46,277 3,562 7.70 109,308 8,260 7.56 -- -- -- 2,983 284 9.52 -- -- -- ---------- -------- ---------- -------- ---------- -------- 1,051,954 74,755 7.11 1,099,331 75,680 6.88 952,393 66,785 7.01 ---------- -------- ---------- -------- ---------- -------- 3,540,955 280,167 7.91 3,199,928 248,311 7.76 2,851,766 224,236 7.86 ---------- -------- ---------- -------- ---------- -------- (33,017) (27,985) (27,299) 57,923 55,568 53,379 89,650 92,621 90,322 ---------- ---------- ---------- $3,655,511 $3,320,132 $2,968,168 ---------- ---------- ---------- $ 403,128 11,347 2.81 $ 380,913 11,009 2.89 $ 323,836 11,118 3.43 620,267 20,450 3.30 621,995 17,100 2.75 636,908 15,442 2.42 1,194,202 67,917 5.69 922,616 53,493 5.80 776,089 45,272 5.83 111,252 6,290 5.65 105,680 6,134 5.80 106,370 6,384 6.00 505,640 28,737 5.68 538,434 29,602 5.50 498,399 29,569 5.93 360,862 21,977 6.09 334,120 20,016 5.99 261,295 15,034 5.75 ---------- -------- ---------- -------- ---------- -------- 3,195,351 156,718 4.90 2,903,758 137,354 4.73 2,602,897 122,819 4.72 ---------- -------- ---------- -------- ---------- -------- 176,645 158,635 129,740 31,555 28,253 32,064 -- -- -- 251,960 229,486 203,467 ---------- ---------- ---------- $3,655,511 $3,320,132 $2,968,168 ---------- ---------- ---------- $ 345,604 $ 296,170 $ 248,869 ---------- ---------- ---------- 123,449 110,957 101,417 (1,055) (832) (754) -------- -------- -------- $122,394 $110,125 $100,663 -------- -------- -------- 3.49% 3.47% 3.56%
9 Provision for Loan Losses Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for estimated losses based on management's evaluation of the collectibility of the loan portfolio, including the nature of the loan portfolio, credit concentrating trends in historical loan experience, specific impaired loans and economic conditions. Management also considers the level of problem assets that the Company classifies in accordance with regulatory requirements. The provision for loan losses was $11.6 million, down slightly from $12.0 million in 1998. The Corporation continues to emphasize quality underwriting as well as aggressive management of prior charge-offs and potential problem loans. Net charge-offs were $13.0 million in 1999 compared to $6.1 million in 1998. This increase in charge-offs is related to an adverse decision in a lawsuit associated with a letter of credit issued in 1989. Net charge-offs as a percentage of average loans was .40% in 1999 compared to .21% in 1998. Non- accrual loans ended the year at $28.9 million or .91% of loans outstanding, an increase of $17.4 million from December 31, 1998. This increase is due to one health care relationship, the largest portion of which is a shared national credit. A further discussion of the allowance for loan losses, net charge-offs and non-performing assets appears on pages 16 and 19. Non-Interest Income Non-interest income is principally derived from fee-based services and mortgage banking activities and gains on investment securities sales. Total non-interest income decreased 2.7% to $61.0 million. Excluding net securities gains, non-interest income increased $4.7 million or 8.5%. Table 4 presents a comparative summary of the major components of non- interest income. Non-Interest Income Summary Table 4
(in thousands) 1999 1998 1997 1996 1995 ================================================================================================================== Service Charges on Deposit Accounts $34,172 $29,260 $24,432 $19,262 $13,685 Mortgage Banking Activities 9,652 11,485 6,845 14,895 9,806 Commissions and Fees 5,280 4,209 3,705 3,229 2,101 Other Loan Fees 3,355 5,104 2,147 1,872 1,208 Interest Income on Tax Refund -- -- -- -- 5,796 Other Non-Interest Income 8,275 5,937 4,543 5,251 1,977 - ------------------------------------------------------------------------------------------------------------------- Subtotal 60,734 55,995 41,672 44,509 34,573 Net Securities Gains (Losses) 312 6,749 2,337 5,556 (2,683) - ------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income $61,046 $62,744 $44,009 $50,065 $31,890 ===================================================================================================================
Deposit service charges rose 16.8% over the prior year due mainly to a $4.4 million increase in retail demand deposit service fees. Average interest-bearing demand/money market deposits grew $79.4 million or 17% over last year while non-interest bearing deposits increased $42.9 million or 20%. These increases are the result of continued promotion and sales efforts of retail deposit products. Income from mortgage banking activities declined $1.8 million to $9.7 million from $11.5 million in 1998. This decline is from lower production as a result of higher interest rate environment for residential mortgages. Mortgage originations during the year decreased $291 million to $764 million. Commission and fees increased $1.1 million during 1999. This increase is mainly associated with income from Provident Investment Center (PIC), a wholly owned subsidiary of the Bank. PIC offers annuities and mutual funds through an affiliation with a securities broker-dealer as well as property and casualty insurance products, as agent. For the year 1999, income associated with these products increased by $895 thousand to $3.2 million. This increase is attributed to continued sales efforts towards these products. Other non-interest income increased $2.3 million over 1998, mainly due to higher bankcard income, which increased $2.1 million. 10 Non-Interest Expense Non-interest expense is composed primarily of costs associated with employees' salaries and benefits, bank facilities and external data processing. Provident's non-interest expense of $132 million represented a $9 million increase from 1998 expenses. Table 5 presents a comparative summary of the major components of non-interest expense. Non-Interest Expense Summary Table 5
(in thousands) 1999 1998 1997 1996 1995 ============================================================================================================================ Salaries and Employee Benefits $ 66,071 $ 61,649 $ 54,107 $ 55,406 $50,875 Occupancy Expense, Net 11,376 10,349 10,018 9,317 8,914 Furniture and Equipment 8,927 8,123 7,354 7,036 6,625 External Processing Fees 14,883 14,006 12,374 10,929 7,784 Advertising and Promotion 6,806 7,171 5,678 5,986 5,562 Communication and Postage 5,231 4,376 3,693 3,861 3,050 Printing and Supplies 2,463 2,502 2,277 2,351 2,032 Federal Insurance Fund Recapitalization -- -- -- 3,029 -- Regulatory Fees 1,120 939 1,016 1,699 3,095 Professional Services 2,706 2,413 2,762 3,000 2,621 Merger Related Expenses -- -- 10,047 -- -- Capital Securities Expenses 3,160 2,359 -- -- -- Other Non-Interest Expense 9,500 9,027 8,537 7,709 6,858 - ---------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense $132,243 $122,914 $117,863 $110,323 $97,416 ============================================================================================================================
Salaries and benefits increased $4.4 million during the year. Compensation increased $3.6 million while benefits were up $834 thousand. The rise in these categories is attributable to network expansion as 16 new branches were opened. Regular salaries rose $5.0 million mainly attributable to merit increases and increased staffing associated to branch expansion. Full-time equivalent employees as of December 31, 1999 were 1,511 compared to 1,414 last year. Occupancy costs rose $1.0 million or 9.9% over last year. This increase is mainly due to additional rent and leasehold improvements as the branch network increased to 83 branches in 1999. Total furniture and equipment expense increased $804 thousand due to upgrading of technology and branch network expansion. External processing increased $877 thousand, or 6.3%, associated with 12% increase in account volume. The year 1999 includes full year of capital securities expense of $3.2 million associated with the $40 million trust preferred securities offering during the second quarter of 1998. 1998 capital securities expense was $2.4 million. All other non-interest expenses were up by $1.4 million from 1998. This increase is connected to higher communication and postage expenses of $855 thousand resulting from branch network expansion and higher net losses of $818,000 associated with retail deposit accounts. Income Taxes Provident recorded income tax expense of $21.2 million on pre-tax income of $65.3 million for an effective tax rate of 32.4%. This compares with a 33.2% effective tax rate for 1998. This decrease is related to a higher level of state tax benefits. Fourth Quarter Results Provident recorded net income of $11.5 million, or $.44 per share on a diluted basis, in the fourth quarter of 1999, an increase of $1.4 million, or 14.2%, over the $10.1 million, or $.38 per share on a diluted basis, recorded in the same period last year. The higher earnings are principally due to an 18.1% increase in net interest income. Lower non-interest income resulting from net security gains in 1998 and a rise in operating expenses partially offset the increase in income. 11 Tax-equivalent net interest income in the fourth quarter rose 17.8% or $6.1 million to $40.4 million as the net interest margin grew to 3.27% from 2.99% and average earning assets grew $349 million to $4.89 billion. The increase in the net interest margin primarily reflected a steeper yield curve along with a higher rate environment as yield on earning assets increased 40 basis points while the costs of funds increased only 13 basis points benefiting from deposit growth. The Corporation recorded a provision for loan losses of $3.6 million during the quarter to provide for loan growth in the portfolio as well as an increase in non-performing loans. Non-interest income declined 19.4% to $14.5 million. Fee income from deposit accounts increased $1.2 million but were more than offset by lower security gains of $3.2 million and lower mortgage banking income of $1.45 million. Lower mortgage banking income was associated with higher rate environment resulting in less production. Mortgage originations were $120 million compared to $361 million in 1998. Non-interest expense increased $758 thousand to $33.8 million. Compensation and benefits were flat compared to same period in 1998. While salaries were up $530 thousand, retirement benefits declined $479 thousand. Occupancy expense was $316 thousand higher due to network expansion and annual lease increases. External processing fees increased $104 thousand, which is associated with increased account volume. Communication and postage expense rose $262 thousand mainly related to branch network expansion. Net losses increased $425 thousand related to retail deposit accounts and higher robbery losses. Table 6 presents quarterly trend data for 1999 and 1998. Consolidated Quarterly Results of Operations, Market Prices and Dividends (unaudited) Table 6
1999 1998 ------------------------------------------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First (in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter =========================================================================================================================== Interest Income $95,055 $89,962 $85,988 $81,372 $83,649 $83,478 $77,284 $73,696 Interest Expense 54,894 52,171 49,565 47,631 49,632 50,827 45,094 41,956 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income 40,161 37,791 36,423 33,741 34,017 32,651 32,190 31,740 Provision for Loan Losses 3,635 3,215 2,759 1,961 3,783 2,195 3,074 2,975 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 36,526 34,576 33,664 31,780 30,234 30,456 29,116 28,765 Non-Interest Income 14,544 15,309 15,343 15,538 14,810 14,360 15,266 11,559 Net Securities Gains (Losses) -- -- 375 (63) 3,228 1,587 725 1,209 Non-Interest Expense 33,771 33,362 32,930 32,180 33,013 31,619 30,661 27,621 - --------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 17,299 16,523 16,452 15,075 15,259 14,784 14,446 13,912 Income Tax Expense 5,769 5,218 5,462 4,750 5,159 4,884 4,721 4,607 - --------------------------------------------------------------------------------------------------------------------------- Net Income $11,530 $11,305 $10,990 $10,325 $10,100 $ 9,900 $ 9,725 $ 9,305 - --------------------------------------------------------------------------------------------------------------------------- Per Share Amounts: Net Income--Basic $ .45 $ .44 $ .43 $ .40 $ .39 $ .39 $ .38 $ .36 Net Income--Diluted $ .44 $ .43 $ .42 $ .39 $ .38 $ .37 $ .36 $ .35 Market Prices: -High 22.31 24.50 29.88 28.38 26.43 28.46 32.50 32.65 Low 17.31 22.50 21.50 24.69 19.05 21.00 27.50 26.98 Cash Dividends Paid .160 .155 .143 .138 .133 .129 .118 .113 ===========================================================================================================================
12 Financial Condition Source and Use of Funds Deposits A major portion of Provident's funding comes from core deposits, which consist of consumer and commercial transaction accounts and consumer savings and time deposits. These deposits are generated through the Bank's 83 branch banking locations. At December 31, 1999, core deposits represented 57% of total deposits and 45% of total liabilities. Provident's future funding growth is expected to be generated from deposit growth through strategies outlined below. The branch network strategy includes traditional full service branch locations and in-store branches. In-store branch locations are comprised of supermarket locations and national retail superstores. Provident Bank as of December 31, 1999 had 50 traditional branch locations and 33 in-store branches. The Corporation has an agreement with Rich Food Corporation to operate branches in their Metro and Basic supermarkets in the Baltimore metropolitan area and Shoppers Food Warehouse in the Washington, D.C. metropolitan area. Provident will selectively look for additional branch opportunities complementary to existing locations when the cost of entry is reasonable. The Corporation has ten additional in-store branches and three new traditional branches planned for 2000. Provident continues to attract increased commercial and retail deposits. Interest-bearing demand/money market deposit balances at December 31, 1999 were up $180 million, or 35.0%, compared to year-end 1998. The Bank also operates eight Fast'n Friendly Check Cashing centers. The purpose of the check cashing centers is to offer alternative banking services to a segment of our market place that does not utilize traditional banking services. The Corporation has two new centers planned for 2000. The table below presents the average deposit balances and rates paid for the five years ended December 31, 1999. Average Deposits Table 7
1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Average Average Average Average (dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate =================================================================================================================================== Noninterest-Bearing $ 255,259 --% $ 212,339 --% $ 176,645 --% $ 158,635 --% $ 129,740 --% Money Market/Demand 543,257 2.60 463,874 2.97 403,128 2.81 380,913 2.89 323,836 3.43 Savings 614,869 2.34 617,643 3.05 620,267 3.30 621,995 2.75 636,908 2.42 Time: Certificates of Deposit 2,011,484 5.69 1,559,985 5.67 1,194,202 5.69 922,616 5.80 776,089 5.83 Individual Retirement Accounts 148,441 5.39 162,088 5.75 111,252 5.65 105,680 5.80 106,370 6.00 ----------- ---------- ---------- ---------- --------- Total Average Balance /Rate $ 3,573,310 4.23% $3,015,929 4.32% $2,505,494 4.23% $ 2,189,839 4.01% $1,972,943 3.96% =========== ========== ========== =========== ========== Total Year-End Balance $ 3,808,528 $3,419,557 $2,754,515 $ 2,286,144 $2,056,436 =========== ========== ========== =========== ==========
As the table above indicates, Provident has a stable base of consumer savings deposits. During 1999, average deposits grew $557 million, or 18.5%, compared to 1998. Average money market/demand deposits and non-interest-bearing deposits increased $122.3 million or 18.1%. This growth reflects Provident's emphasis on full banking relationships with its retail and commercial customers. Average time deposits increased $438 million, or 25%, $408 million of which is attributable to brokered deposits and $39 million in money market certificates of deposit. Brokered deposits, often a cheaper source of funds compared to other available sources of borrowed money, such as, Federal Home Loan Bank Advances and repurchase agreements are used to match fund investments and acquired loans. 13 The table below presents information at December 31, 1999, with respect to the maturity of Certificates of Deposit of $100,000 or more. Deposit Maturities Table 8
Maturities -------------------------------------------------------- Over Three Over Six Three Months Months to Months to Over 12 (dollars in thousands) or Less Six Months 12 Months Months Total ================================================================================================================================= Balance $68,286 $30,625 $38,540 $42,912 $180,363 Percent of Total 37.8% 17.0% 21.4% 23.8% 100.0%
Credit Risk Management Much of the fundamental business of Provident is based upon understanding, measuring and controlling credit risk. Credit risk entails both general risks, which is inherent in the process of lending, and risk specific to individual borrowers. Each consumer and residential lending product has a generally predictable level of credit loss. For example, loans with generally low credit loss experience include home mortgage and home equity loans. Loans with medium credit loss experience are primarily secured products such as auto and marine loans. The category with high credit loss experience includes unsecured products such as personal revolving credit. In commercial lending, losses as a percentage of outstanding loans can vary widely from period to period and are particularly sensitive to changing economic conditions. The evaluation of specific risk is a basic function of underwriting and loan administration, involving analysis of the borrower's ability to service debt as well as the value of pledged collateral. Policies and procedures have been developed which specify the appropriate credit approval and monitoring for the various types of credit offered. The Bank employs prudent lending practices and adheres to regulatory requirements including loan to value ratios and legal lending limits. These procedures are modified periodically in order to reflect changing conditions and new products. The Bank's lending and loan administration staffs are charged with reviewing the loan portfolio, identifying changes in the economy or in a borrower's circumstances which may affect the ability to repay debt or the value of pledged collateral. In order to assess and monitor the degree of risk in the loan portfolio, credit risk identification and review processes are utilized. Credit risk analysis assigns a grade to each commercial loan based upon an assessment of the borrower's financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review function tests risk assessment and determines the adequacy of the allowance for loan losses. Financial Accounting Standards require creditors to evaluate the collectibility of contractually due principal and interest on commercial credits to assess the need for providing for losses. The Corporation's credit procedures require monitoring of commercial credits to determine the collectibility of such credits. If a loan is identified as impaired, it will be placed on non-accrual status and recorded according to accounting guidelines. As of December 31, 1999, there were $21.3 million in commercial loans considered to be impaired. Loans Provident offers a diversified mix of residential and commercial real estate, business and consumer loans. As shown in Table 9, the mix of loans outstanding has shifted to more consumer orientation over the past five years. Of the total loans, $1.9 billion, or 60%, are secured by residential real estate including first and second mortgages, and home equity loans. 14 Provident's residential mortgage lending includes the origination, sale and servicing of fixed and variable rate mortgage loans. Loans are originated through the loan production offices of Provident Mortgage Corp. Financial Accounting Standards for mortgage banking enterprises that acquire mortgage servicing rights, and sell or securitize those loans with servicing retained, require the allocation of the cost of the mortgage loans to the mortgage servicing rights and the loans. Mortgage origination activity in 1999 showed a significant decrease as originations totaled $764 million in 1999 compared to $1.1 billion in 1998. During 1999, income from the sale of loans was $5.0 million. The mortgage servicing portfolio ended the year at $352 million. The residential real estate mortgage loan balance at December 31, 1999 was $245 million compared to $238 million at the end of the prior year. The following table sets forth information concerning the Bank's loan portfolio by type of loan at December 31. Loan Portfolio Summary Table 9
(dollars in thousands) 1999 % 1998 % 1997 % 1996 % 1995 % =================================================================================================================================== Consumer $2,204,943 69.2% $2,154,557 69.5% $1,667,094 61.7% $1,211,971 54.0% $ 852,605 48.6% Commercial Business 363,059 11.4 375,930 12.1 288,289 10.7 294,844 13.1 238,667 13.6 Real Estate--Construction: Residential 89,513 2.8 89,777 2.9 99,926 3.7 112,072 5.0 76,092 4.3 Commercial 62,362 2.0 34,668 1.1 25,154 .9 9,470 .4 19,444 1.1 Real Estate--Mortgage: Residential 245,401 7.7 238,282 7.7 362,012 13.4 355,566 15.8 332,940 19.1 Commercial 218,841 6.9 206,997 6.7 258,593 9.6 263,950 11.7 233,103 13.3 - ------------------------------------------------------------------------------------------------------------------------------------ Total Loans $3,184,119 100.0% $3,100,211 100.0% $2,701,068 100.0% $2,247,873 100.0% $1,752,851 100.0% ====================================================================================================================================
Provident offers a wide range of loans to consumers including installment loans, home equity loans, and personal lines of credit. In addition, the Bank may purchase portfolios of quality consumer loans from other financial institutions. All purchased portfolios go through a thorough due diligence process prior to a purchase commitment. Provident's portfolio of acquired loans increased $441 million on average, ending the year at $1.4 billion, and is predominately comprised of second mortgages. Consumer loan balances through credits originated by Provident remained relatively flat during the year, ending the year with a balance of $802 million. During 1999, the Bank made a decision to cut back on the production of both indirect auto and residential mortgage loans to concentrate on more profitable businesses. Most of the automobile loans are made through a network of auto dealerships in Maryland, Delaware, Pennsylvania and Virginia. Auto loans made through this network of dealerships ended the year at $262 million. Marine loan balances ended 1999 with $200 million, and were produced primarily through correspondent brokers. Home equity lines of credit totaled $173 million at the end of 1999 while direct second mortgage loans ended the year at $122 million. 15 Provident's focus in commercial real estate lending has been on financing commercial and residential construction, as well as on intermediate-term commercial mortgages. Properties securing the loans include office buildings, shopping centers, apartment complexes, warehouses, residential building lots and developments. Average commercial real estate mortgage loans decreased $30 million or 12.9% while average commercial construction loans increased $18.1 million or 72%. Average residential construction loans decreased $10.3 million or 10.2% to end the year at $90 million. Provident's commercial loan portfolio consists of general business loans, including asset-based loans, primarily to small and medium sized businesses in the Baltimore, Maryland and Washington, D.C. metropolitan areas. The Bank stresses the importance of asset quality as well as the development of new marketing programs. Average commercial loans grew by $60 million, or 18.3%, ending the year at $363 million. Provident has minimal exposure to highly leveraged transactions ("HLTs"). HLTs are loans to borrowers for the purpose of purchasing or recapitalizing a business in which the loans represent a majority of the borrower's liabilities. HLTs totaled $56.7 million as of year-end, and all are performing in accordance with their contractual terms. Non-Performing Assets and Past Due Loans Non-performing assets include loans on which interest is no longer accrued, renegotiated loans and real estate and other assets that have been acquired through foreclosure or repossession. Past due loans are loans that are 90 days or more past due as of December 31 and still accruing interest because they are well secured and in the process of collection. The Corporation does not place consumer loans on non-accrual status as delinquent consumer loan outstandings and any uncollected interest are generally charged-off at the time they would be placed on non-accrual status. Information with respect to non-performing assets and past due loans is presented in Table 10 for the years indicated. As shown in the table, total non-accrual loans increased $17.4 million, mainly in commercial business. This increase is due to one health care relationship, the largest portion of $15 million is part of a shared national credit. The total relationship is $21 million. The financial condition of the health care industry has weakened over the past year. Provident has been closely monitoring these and several other of the bank's health care industry credits where the operators have had to adjust to changes in Medicare reimbursement policies. The entire health care portfolio, including the credits added to non-performing loans, represents 3.5% of Provident's total loans. The increase in past due consumer loans is a result of a $50 million, or 2.3%, growth in the consumer loan portfolio, the majority of which is secured by residential real estate. As of December 31, 1999, non-performing assets and past due loans ended the year at $31.8 million and $29.2 million, respectively. (See the discussion under Loans on page 14.) The $5.8 million in past due residential mortgage loans are guaranteed or insured by an agency of the United States government and no significant loss is anticipated. The ratio of total non-performing loans to year-end loans increased .54% as 1999 ended at .91% compared to .37% at the end of 1998. This increase is associated with the health care credit noted above. Presented below is interest income that would have been recorded on all non-accrual loans if such loans had been paid in accordance with their original terms and the interest income on such loans that was actually collected for the year. Year Ended (in thousands) December 31, 1999 =============================================================================== Gross interest income that would have been recorded had such loans been paid in accordance with original terms $ 2,089 Interest income actually recorded 1,354 16 Non-Performing Assets and Past Due Loans Table 10
December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 1997 1996 1995 =================================================================================================================================== Non-Accrual Loans: Consumer/(1)/ $ -- $ -- $ -- $ 9,809 $ 4,868 Commercial Business 21,329 3,550 2,917 539 246 Real Estate--Construction: Residential -- 1,570 -- 37 -- Commercial -- -- -- -- 80 Real Estate--Mortgage: Residential 7,579 6,397 6,937 4,372 3,785 Commercial -- -- -- 125 1,327 - ---------------------------------------------------------------------------------------------------------------------------------- Total Non-Accrual Loans 28,908 11,517 9,854 14,882 10,306 - ---------------------------------------------------------------------------------------------------------------------------------- Renegotiated Loans: Real Estate--Construction: Residential -- -- -- -- -- Commercial -- -- -- -- 2,575 Real Estate--Mortgage: Residential -- -- -- -- -- Commercial -- -- -- 3,942 2,900 - ---------------------------------------------------------------------------------------------------------------------------------- Total Renegotiated Loans -- -- -- 3,942 5,475 - ---------------------------------------------------------------------------------------------------------------------------------- Other Non-Performing Assets: Real Estate--Construction: Residential 1,538 454 454 132 6,580 Commercial -- -- -- 9,571 7,122 Real Estate--Mortgage: Residential 1,395 2,554 2,367 903 246 Commercial -- 1,900 -- -- 939 - ---------------------------------------------------------------------------------------------------------------------------------- Total Other Non-Performing Assets 2,933 4,908 2,821 10,606 14,887 ================================================================================================================================== Total Non-Performing Assets $31,841 $16,425 $12,675 $29,430 $30,668 ================================================================================================================================== Past Due Loans: Consumer/(1)/ $23,369 $19,187 $14,371 $ 237 $ 559 Commercial Business 59 -- 126 -- -- Real Estate--Construction: Residential -- -- 133 -- -- Commercial -- -- -- -- -- Real Estate--Mortgage: Residential 5,753 8,806 10,646 7,823 5,072 Commercial -- -- -- -- -- ================================================================================================================================== Total Past Due Loans $29,181 $27,993 $25,276 $ 8,060 $ 5,631 ================================================================================================================================== Ratios: Total Non-Performing Loans to Year-End Loans .91% .37% .36% .84% .90% Total Non-Performing Assets to Year-End Assets .63 .35 .32 .84 .97
/(1)/ Prior to 1997, consumer loans were generally placed into non-accrual status at 90 days past due and subsequently charged off. Beginning in 1997, to conform to standard industry practice, consumer loans are not placed in non-accrual status but are generally charged-off at 120 days past due for installment loans and 180 days for revolving loans. 17 Allowance for Loan Losses Provident maintains an allowance for loan losses, which is available to absorb potential losses. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. Determination of the adequacy of the allowance, which is performed quarterly, is accomplished by assigning specific reserves to individually identified problem credits and general reserves, based on historic and anticipated loss experience, to all other loans. Management believes that the allowance at December 31, 1999 will be adequate to absorb losses inherent in the portfolio. Management believes that is uses the best information available to make such determinations. If circumstances differ substantially from the assumptions used in making the determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. The following table reflects the allowance for possible loan losses and the activity during each of the respective years. Loan Loss Experience Summary Table 11
(dollars in thousands) 1999 1998 1997 1996 1995 ========================================================================================================================== Balance at Beginning of Year $ 42,739 $ 36,861 $ 30,361 $ 27,524 $ 27,137 Provision for Loan Losses 11,570 12,027 9,953 10,011 1,517 Allowance Related to Securitized Loans (1,500) -- -- -- -- Loans Charged-off: Consumer 7,940 4,550 3,641 2,888 1,642 Commercial Business 5,705 1,031 143 5,170 310 Real Estate--Construction: Residential 500 593 305 37 33 Commercial -- 25 37 8 -- Real Estate--Mortgage: Residential 412 258 289 360 73 Commercial -- 1,281 798 399 76 - ----------------------------------------------------------------------------------------------------------------- Total Charge-offs 14,557 7,738 5,213 8,862 2,134 - ----------------------------------------------------------------------------------------------------------------- Recoveries: Consumer 1,236 970 871 826 917 Commercial Business 106 109 882 801 72 Real Estate--Construction: Residential -- 68 -- -- -- Commercial 24 16 1 16 -- Real Estate--Mortgage: Residential -- 11 1 45 13 Commercial 162 415 5 -- 2 ================================================================================================================= Total Recoveries 1,528 1,589 1,760 1,688 1,004 ================================================================================================================= Net Loans Charged-off 13,029 6,149 3,453 7,174 1,130 ================================================================================================================= Balance at End of Year $ 39,780 $ 42,739 $ 36,861 $ 30,361 $ 27,524 ================================================================================================================= Balances: Loans--Year-End $3,184,119 $3,100,211 $2,701,068 $2,247,873 $1,752,851 Loans--Average 3,265,502 2,888,305 2,445,316 2,023,536 1,822,957 Ratios: Net Loans Charged-off to Average Loans .40% .21% .14% .35% .06% Allowance for Loan Losses to Year-End Loans 1.25 1.38 1.36 1.35 1.57 - -----------------------------------------------------------------------------------------------------------------
18 The continued emphasis on loan quality and close monitoring of potential problem credits has resulted in a strong credit portfolio. Senior managers meet at least monthly to review the credit quality of the loan portfolios and at least quarterly with executive management to review the adequacy of the allowance for loan losses. The allowance is determined by management's evaluation of the composition and risk characteristics of the loan portfolio. Based upon the evaluation of credit risk, loan loss provisions in the form of charges to operations, are made to bring the allowance up to a level management believes is adequate. An analysis of the loan portfolio was performed at December 31, 1999, and expected losses have been provided for in the allowance for loan losses. During 1999, the loan loss allowance decreased $3.0 million to $39.8 million at year- end. This decrease is related to the pay out of an adverse decision in a lawsuit associated with a letter of credit issued in 1989. This pay out was provided for in 1998. The allowance as a percentage of total loans was 1.25% at December 31, 1999 compared to 1.38% at December 31, 1998. The allowance for loan losses as a percentage of non-accrual loans was 138% at December 31, 1999, compared to 371% the prior year. The portion of the allowance, which is allocated to non-accrual loans, is determined by estimating the potential loss on each credit after giving consideration to the value of underlying collateral. Provident maintains a loan classification and review system to identify those loans with a higher than normal risk of uncollectibility. Estimated potential losses from internally criticized loans have been provided for in determining the allowance for loan losses. Table 12 reflects the allocation of the allowance for loan losses to the various loan categories as required by the Securities and Exchange Commission. The entire allowance for loan losses is available to absorb losses from any type of loan. Allocation of Allowance for Loan Losses Table 12
(in thousand) 1999 1998 1997 1996 1995 ======================================================================================= Consumer $ 7,100 $ 6,057 $ 3,390 $ 4,572 $ 1,995 Commercial Business 12,672 11,042 8,376 3,120 2,527 Real Estate--Construction: Residential 1,086 1,638 1,585 1,408 2,697 Commercial 799 439 384 883 545 Real Estate--Mortgage: Residential 1,289 634 592 998 1,390 Commercial 1,843 1,863 2,486 2,704 3,803 Unallocated 14,991 21,066 20,048 16,676 14,567 - -------------------------------------------------------------------------------------- Total Allowance for Loan Losses $39,780 $42,739 $36,861 $30,361 $27,524 ======================================================================================
Investment Securities Provident's investment activities include management of the $1.7 billion investment securities portfolio. The investment securities portfolio includes mortgage-backed securities, U.S. Government securities, municipal securities and other debt securities. In addition to investment securities, the Corporation invests in federal funds sold, reverse repos, mortgage loans held for sale and other short-term investments (referred to in total as the investment portfolio). The strategies employed in the management of these portfolios depend upon the liquidity, interest sensitivity and capital objectives and requirements of the Corporation. The Treasury Division executes these strategies. 19 The following table sets forth information concerning the Bank's investment securities portfolio at December 31. Investment Securities Summary Table 13
(dollars in thousands) 1999 % 1998 % 1997 % 1996 % 1995 % ================================================================================================================================== Securities Available for Sale U.S. Treasury and Government Agencies and Corporations $ 56,447 3.4% $ 42,293 3.5% $ 55,576 5.7% $ 71,882 6.8% $ 67,833 5.8% Mortgage-Backed Securities 1,469,605 87.9 992,089 82.8 885,491 90.0 847,194 80.4 939,382 80.4 Municipal Securities 26,205 1.6 27,732 2.3 19,391 2.0 19,091 1.8 11,981 1.0 Other Debt Securities 119,250 7.1 136,397 11.4 22,783 2.3 29,987 2.8 76,073 6.5 - ---------------------------------------------------------------------------------------------------------------------------------- Total Securities Available for Sale 1,671,507 100.0 1,198,511 100.0 983,241 100.0 968,154 91.8 1,095,269 93.7 - ---------------------------------------------------------------------------------------------------------------------------------- Securities Held to Maturity U.S. Treasury and Government Agencies and Corporations -- -- -- -- -- -- 32,395 3.1 13,397 1.2 Mortgage-Backed Securities -- -- -- -- -- -- 53,842 5.1 60,106 5.1 - ---------------------------------------------------------------------------------------------------------------------------------- Total Securities Held to Maturity -- -- -- -- -- -- 86,237 8.2 73,503 6.3 ================================================================================================================================== Total Investment Securities Portfolio $1,671,507 100.0% $1,198,511 100.0% $983,241 100.0% $1,054,391 100.0% $1,168,772 100.0% ================================================================================================================================== Total Portfolio Yield 7.0% 6.6% 7.0% 6.9% 6.9% ==================================================================================================================================
During 1999, Provident continued to enjoy a strong capital position, a high degree of liquidity, and a substantial level of core deposits. Management's principal objectives for the investment portfolio during 1999 were to maintain an appropriate level of quality, to ensure sufficient liquidity in various interest rate environments while maximizing yield and to increase net income by utilizing excess capital. To successfully achieve these objectives, the Corporation employs off-balance sheet and on balance sheet strategies. Total investment securities increased $473 million during 1999 as a result of securitizing $373 million of purchased consumer loans during the fourth quarter of 1999. The Corporation applies the provisions of Statement of Financial Accounting Standards No. 115 which requires investment securities to be segregated into three categories: 1) held to maturity, 2) trading, and 3) available for sale. All securities in the available for sale category must be measured at fair market value. The resulting gain or loss is excluded from revenue but is reflected as a change in stockholders' equity through accumulated other comprehensive income. Trading securities must be measured at fair value and changes included in income for the period. As of December 31, 1999, the Corporation had no investments classified as trading securities. Securities designated as held to maturity are carried at amortized cost. Subsequent to the acquisition of First Citizens Financial Corporation in 1997, Provident disposed of certain securities classified as held to maturity by First Citizens Financial Corporation. As a result of these transactions, all of the Corporation's investment securities have been classified as available for sale. Additionally, all future purchases of securities will be classified as available for sale in the foreseeable future. At December 31, 1999, the available for sale portfolio included net unrealized losses of approximately $68.2 million, compared to net unrealized gains of $8.8 million at December 31, 1998. In addition to unrealized gains and losses, Provident realized $380 thousand in gains and $68 thousand in losses from the sale of securities from the available for sale portfolio in 1999. These sales were the result of management's continuous monitoring of the investment securities portfolio in terms of both performance and risks. 20 Liquidity and Sensitivity to Interest Rates Liquidity An important component of the Bank's asset/liability structure is the level of liquidity available to meet the needs of customers and creditors. Traditional sources of bank liquidity include deposit growth, loan repayments, investment maturities, asset sales, borrowings and interest received. Provident's Asset/Liability Management Committee has established general guidelines for the maintenance of prudent levels of liquidity. The committee continually monitors the amount and source of available liquidity, the time required to obtain it and its cost. Management believes the Bank has sufficient liquidity to meet funding needs in the foreseeable future. Primary sources of liquidity at December 31, 1999 were loans held for sale, investment securities available for sale, and scheduled loan repayments. Loans held for sale and investment securities available for sale totaled $1.7 billion. This represents 36% of total liabilities compared to 33% at December 31, 1998. Maturities of investment securities, as Table 14 indicates, is expected to generate $203 million in funds in 2000 and $910 million, or 54%, of the portfolio within the next five years. The following table presents the expected cash flows and interest yields of the Bank's investment securities portfolio at December 31, 1999. Maturities of Investment Securities Portfolio Table 14
In One Year After One Year After Five Years Over Unrealized or Less Through Five Years Through Ten Years Ten Years Loss - --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Total Yield ================================================================================================================================= Securities Available for Sale U.S. Treasury and Government Agencies Corporations $ __ __% $ 5,040 5.0% $ -- --% $ 51,595 6.4% $ (188) $ 56,447 6.3% Mortgage-Backed Securities 202,478 7.6 690,058 7.1 363,525 6.8 263,769 6.6 (50,225) 1,469,605 7.0 Municipal Securities 775 7.5 11,523 7.7 12,721 7.7 1,605 7.5 (419) 26,205 7.7 Other Debt Securities 163 3.7 400 6.3 -- -- 136,046 7.6 (17,359) 119,250 7.6 - --------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities Portfolio $ 203,416 7.6% $707,021 7.1% $376,246 6.8% $453,015 6.9% $(68,191) $1,671,507 7.0% =================================================================================================================================
Yields do not give effect to changes in fair value that are reflected as a component of stockholders' equity. 21 Loan repayments are another source of liquidity. Scheduled loan repayments during the year 2000 are $502 million, or 15.8% of loans. Table 15 presents contractual loan maturities and interest rate sensitivity at December 31, 1999. The cash flow from loans is expected to significantly exceed contractual maturities due to refinances and early payoffs.
Loan Maturities and Rate Sensitivity Table 15 In One Year After One Year After Five (dollars in thousands) or Less Through Five Years Years Total Percentage - ----------------------------------------------------------------------------------------------------------- Loan Maturities: Consumer $380,768 $ 672,236 $1,151,939 $2,204,943 69.2% Commercial Business 15,894 303,218 43,947 363,059 11.4 Real Estate--Construction: Residential 63,332 24,827 1,354 89,513 2.8 Commercial 16,329 44,125 1,908 62,362 2.0 Real Estate--Mortgage: Residential 6,920 12,850 225,631 245,401 7.7 Commercial 18,306 158,771 41,764 218,841 6.9 - ----------------------------------------------------------------------------------------------------------- Total Loans $501,549 $1,216,027 $1,466,543 $3,184,119 100.0% =========================================================================================================== Rate Sensitivity: Predetermined Rate $382,058 $ 909,885 $1,066,788 $2,358,731 74.1% Variable or Adjustable Rate 119,491 306,142 399,755 825,388 25.9 - ----------------------------------------------------------------------------------------------------------- Total Loans $501,549 $1,216,027 $1,466,543 $3,184,119 100.0% ===========================================================================================================
Core deposits are valuable in assessing liquidity needs because they tend to be stable with little net short or intermediate-term withdrawal demands by customers. At year-end, core deposits represented $2.2 billion, or 45%, of total liabilities and 43% of total assets. An important element in liquidity management is the availability of borrowed funds. At December 31, 1999, short-term borrowings totaled $301 million, or 6.3%, of liabilities in contrast to $145 million, or 3.3%, of liabilities at December 31, 1998. Another key element in liquidity management is the use of brokered CDs. Brokered CDs at December 31, 1999 amounted to $1.5 billion, a $372 million increase from the same period last year. The average maturity of short-term borrowings at the end of the current year was 7 days. These borrowings are fully collateralized by U.S. Government or mortgage-backed securities owned by the Bank. Long-term borrowings consisted of variable and fixed-rate advances from the Federal Home Loan Bank and totaled $627 million as of December 31, 1999. It is anticipated that Provident will continue to have access to the repurchase market and fed fund lines as well as short and long- term variable and fixed-rate funds from the Federal Home Loan Bank. During the second quarter of 1998, the Corporation issued $40 million of trust preferred securities with a maturity of 30 years, callable at the end of the tenth year. The rate on the trust preferred securities is 8.29%. Interest Sensitivity Management The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, earnings are subject to fluctuations, which arise due to changes in the level and directions of interest rates. Management's objective is to minimize this risk. Measuring and managing interest rate risk is a dynamic process that is performed regularly as an important component of management's analysis of the impact of changes in asset and liability portfolios. Control of Provident's interest sensitivity position is accomplished through the structuring of the investment and funding portfolios, securitizing loans for possible sale, the use of variable rate loan products and off-balance sheet derivatives. 22 Management does not try to anticipate changes in interest rates. Its principal objective is to maintain interest margins in periods of both rising and falling rates. Traditional interest sensitivity gap analyses alone do not adequately measure an institution's exposure to changes in interest rates because gap models are not sensitive to changes in the relationship between interest rates charged or paid and do not incorporate balance sheet trends and management actions. Each of these factors can affect an institution's earnings. Accordingly, in addition to performing gap analysis, management also evaluates the impact of differing interest rates on net interest income using an earnings simulation model. The model incorporates the factors not captured by gap analysis by projecting income over a twenty four month horizon under a variety of interest rate scenarios. As of December 31, 1999, Provident's interest sensitive liabilities exceeded interest sensitive assets within a one year period by $1.7 billion, or 35% of assets. The Bank's savings products are structured to give management the ability to reset the rates paid on a monthly basis. This causes the Bank to become more liability sensitive. If interest rates rise, the rate paid on savings deposits may follow, and the Corporation's net interest margin may decline. Management continues to take steps to protect the Bank from possible increases in interest rates. In 1999, these steps included lengthening the maturities on purchased funds and certificates of deposits and shortening asset maturities with interest rate swaps and caps. Management monitors the interest rate environment and employs appropriate off-balance sheet strategies to address potential changes in interest rates. These strategies lower the net interest margin but are designed to maintain an acceptable margin in a changing rate environment. As a result of off-balance sheet transactions undertaken to insulate the Bank from interest rate risks, interest income decreased by $536 thousand and interest expense increased by $1.1 million, for a total decrease of $1.6 million in net interest income for the year ending December 31, 1999. Included in this net interest income increase was the amortization of closed positions which reduced interest income by $81 thousand and decreased interest expense by $1.3 million (a net increase of $1.2 million) for the year. Without the amortization of closed positions, off-balance sheet positions decreased net interest income $2.8 million for the year. As of December 31, 1999, the forward markets indicated that short-term rates will increase by 95 basis points and long-term rates will increase by 10 basis points over the next twelve months. The Corporation's analysis indicates that if management does not adjust its December 31, 1999 off-balance sheet positions and the forward yield curve assumptions occur, off-balance sheet positions, including amortization of closed positions, would decrease net interest income by $2.2 million over the next twelve months. However, yields on associated on-balance sheet hedged assets would improve by a corresponding amount. This compares to a decrease of $4.2 million should interest rates remain unchanged. Amortization of closed positions will increase net interest income by $2.7 million over the next twelve months. Thus, without amortization of closed positions, net interest income would decrease $2.7 million over the next twelve months if the forward yield curve assumptions occur and $4.7 million if rates remain unchanged. Stockholders' Equity It is necessary for banks to maintain a sufficient level of capital in order to sustain growth, absorb unforeseen losses and meet regulatory requirements. In addition, the current economic and regulatory climate places an increased emphasis on capital strength. In this environment, Provident continues to maintain a strong capital position. Provident is well capitalized, exceeding all regulatory requirements as of December 31, 1999, see Note 17--Regulatory Capital. At December 31, 1999, total stockholders' equity was $275 million, a $21.5 million decrease over the prior year. In addition to the ordinary adjustments to stockholders' equity of net income and dividends paid, additional capital of $641 thousand was raised through the dividend reinvestment plan, $2.1 million from the exercise of stock options, while capital decreased by $49.6 million during 1999 as a result of Statement of Financial Accounting Standards No. 115. This statement requires changes in market value, net of applicable income taxes, of the available for sale investment portfolio to be accounted for through equity. An additional component of regulatory capital is the capital securities issued in 1998. These securities are treated as Tier I capital even though they are not included in stockholders' equity in the Consolidated Statement of Condition. During 1999, the Corporation also repurchased 168,100 shares totaling $3.5 million. In the second quarter of 1999, the Corporation issued a 5% stock dividend and all earnings per share figures have been adjusted for this dividend. 23 Provident exceeds all regulatory capital requirements as of December 31, 1999. The standards used by federal bank regulators to evaluate capital adequacy are the risk-based capital and leverage ratio guidelines. Equity for regulatory purposes does not include market value adjustments as required by SFAS No. 115. Risk-based capital ratios measure core and total stockholders' equity against risk-weighted assets. Provident's core capital is equal to its common stock, capital surplus and retained earnings less treasury stock. The calculation of Provident's total stockholders' equity, for these purposes, is equal to the above plus the allowance for loan losses subject to certain limitations and capital securities. Risk-weighted assets are determined by applying a weighting to asset categories and certain off-balance sheet commitments based on the level of credit risk inherent in the assets. At December 31, 1999, Provident's total capital ratio was 10.20% compared to the minimum regulatory guideline of 8%. In addition, core common stockholders' equity (Tier 1 Capital) must be at least 4% of risk-weighted assets. At year-end, Provident's Tier 1 Capital ratio was 9.18%. The leverage ratio represents core capital, as defined above, divided by average total assets. Guidelines for the leverage ratio require the ratio of core stockholders' equity to average total assets to be 100 to 200 basis points above a 3% minimum, depending on risk profiles and other factors. Provident's leverage ratio of 7.10% at December 31, 1999 was well in excess of this requirement. Capital Components and Ratios Table 16
December 31, - --------------------------------------------------------- (dollars in thousands) 1999 1998 ================================================================================ Qualifying Capital Tier 1 Capital $ 358,771 $ 330,461 Total Capital 398,551 368,000 Risk-Weighted Assets 3,907,332 3,586,808 Quarterly Average Assets 5,056,385 4,688,197 Ratios Leverage Capital 7.10% 7.05% Tier 1 Capital 9.18 9.21 Total Capital 10.20 10.26
Financial Review 1998/1997 The Corporation recorded net income in 1998 of $39.0 million or $1.47 per share/diluted; a 53% increase over 1997 before adjusting for merger related costs. Adjusting for merger costs, 1997 would have shown net income of $33.6 million and $1.29 per share/diluted, giving 1997 an increase of $5.4 million in net income and $.19 per share/diluted over the prior year. The growth in net earnings was attributable to an $8.2 million rise in net interest income and $18.7 million higher non-interest income offset in part by higher provision for loan losses of $2.1 million and a $5.1 million increase in operating costs, net of merger expenses. Tax-equivalent net interest income for 1998 increased $8.3 million, or 6.7%, from 1997 as average earning assets grew $682 million over the prior year. Net interest margin fell by 37 basis points primarily caused by a lower interest rate environment and leveraging of $40 million of trust preferred securities issued during the second quarter of 1998. Provident's interest income increased $39.1 million, or 13.9%, during the year primarily due to the growth in average earning assets offset in part by a 35 basis point decrease in yield. The decrease in yield was mainly due to a lower rate environment and the leveraging of the trust preferred securities noted above. The increase in average earning assets resulted from a $443 million increase in the loan portfolios, $164 million in investments and $77 million in loans held for sale. Consumer loans grew $518 million while the commercial business portfolio also experienced growth of $32 million. Residential and commercial mortgage loans declined $80 million and $28 million, respectively, due to sales of mortgage loans and prepayments of commercial mortgages. Interest income earned on the loan portfolio increased $26 million reflecting higher loan outstandings. The yield on investments and loans decreased 30 basis points and 37 basis points, respectively. Interest lost from non-accruing loans was $1.5 million compared to $670 thousand in 1997. 24 Interest expense increased $30.8 million from 1997 resulting from a $593 million growth in average interest-bearing liabilities. The overall cost of funds remained relatively flat as total interest-bearing liabilities increased 5 basis points mainly due to the use of brokered CDs to fund asset growth. The offset was due to the increase in non-interest bearing liabilities. Excluding the effect of off-balance sheet positions in each year, total costs of interest- bearing liabilities would have increased 14 basis points. The average rate paid on borrowed funds decreased 4 basis points during 1998. The increase in average interest-bearing liabilities reflects a $475 million rise in interest-bearing deposits, $396 million of which is associated with brokered deposits and $33 million with money market certificates of deposit. Non-interest bearing demand deposit accounts grew by $36 million or 20%. The Corporation experienced a $119 million increase in borrowed funds. The provision for loan losses, net of the merger related portion, increased $4.7 million to $12.0 million in 1998. The increase in the provision was mainly due to loan growth and to more fully provide for an adverse decision in a lawsuit relating to a letter of credit. Net charge-offs were $6.15 million in 1998 compared to $3.45 million in 1997. Net charge-offs as a percentage of average loans was .21% in 1998 compared to .14% in 1997. Total non-interest income increased 42.6% to $62.7 million. Excluding net securities gains, non-interest income increased $14.3 million or 34.4%. Deposit service charges rose 20% over the prior year due to a $4.1 million increase in retail demand deposit service fees and a $439 thousand increase in commercial deposit fees. Income from mortgage banking activities rose $4.6 million, $1.9 million due to higher gains and $3.0 million from higher origination income offset in part by $238 thousand in lower servicing income. Income associated with sales of annuities and mutual funds increased by $145 thousand to $2.35 million. Other non-interest income increased $4.4 million over 1997. This increase was primarily due to commercial loan fees tied to an increase in loan volumes and higher prepayment penalties. Cardholder income increased $915 thousand associated with higher usage and gain on sale of fixed assets increased $471 thousand due to sale of a bank building. Provident's non-interest expense of $123 million represented a $15 million increase from 1997 expenses adjusted for merger related items. Salaries and benefits increased $7.5 million during the year. Compensation increased $6.5 million while benefits were up $1.0 million. The rise in these categories was attributable to higher commissions and incentives of $1.3 million related mainly to increased mortgage business. Regular salaries rose $5.2 million mainly attributable to merit increases, increased staffing and recognition of expenses related to lending activities. Full-time equivalent employees as December 31, 1998 were 1,414 compared to 1,235 in 1997. Occupancy costs rose $331 thousand or 3.3%. This increase was mainly due to additional rent and leasehold improvements as the branch network increased to 68 branches in 1998. Total furniture and equipment expense increased $769 thousand due to upgrading of technology in the Bank's office automation and branch platform systems. External processing increased $1.6 million, or 13.2%, associated with a 14.7% increase in account volume. The year 1998 included capital securities expense of $2.4 million associated with the $40 million trust preferred securities offering during the second quarter of 1998. All other non-interest expenses were up by $2.5 million from 1997. This increase was connected to higher marketing expenses of $1.5 million and communication and postage expenses of $684 thousand resulting from the branch network acquired in the acquisition of First Citizens Financial Corporation Savings Bank, and higher employment advertising costs of $390 thousand. Provident recorded income tax expense of $19.4 million on pre-tax income of $58.4 million for an effective tax rate of 33.2%. This compared to a 35.3% effective tax rate for 1997. This decrease was related to permanent tax differences associated with the acquisition of First Citizens Financial Corporation during 1997. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Interest Sensitivity Management" on page 22 and Note 11--Off-Balance Sheet Risks to the Consolidated Financial Statements herein. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Provident Bankshares Corporation and Subsidiaries
Page Report of Independent Accountants 27 For the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Statement of Income 28 Consolidated Statement of Changes in Stockholders' Equity 30 Consolidated Statement of Cash Flows 31 Consolidated Statement of Comprehensive Income 32 Consolidated Statement of Condition at December 31, 1999 and 1998 29 Notes to Consolidated Financial Statements 33-60
Financial Reporting Responsibility Consolidated Financial Statements Provident Bankshares Corporation (the "Corporation") is responsible for the preparation, integrity and fair presentation of its published consolidated financial statements as of December 31, 1999, and the year then ended. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts, some of which are based on judgments and estimates of management. Internal Control Structure over Financial Reporting Management maintains a system of internal control over financial reporting, including controls over safeguarding of assets against unauthorized acquisition, use or disposition which is designed to provide reasonable assurance to the Corporation's management and board of directors regarding the preparation of reliable published financial statements and such asset safeguarding. The system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. This system encompasses activities that control the preparation of the Corporation's Annual Report on Form 10-K financial statements prepared in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed its internal control structure over financial reporting as of December 31, 1999. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control-- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that Provident Bankshares Corporation maintained an effective internal control structure over financial reporting as of December 31, 1999. Compliance with Laws and Regulations Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations. Management assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that Provident Bank, the wholly owned subsidiary of Provident Bankshares Corporation complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 1999. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Provident Bankshares Corporation In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, cash flows, changes in stockholders' equity and comprehensive income present fairly, in all material respects, the consolidated financial position of Provident Bankshares Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland January 19, 2000 27 CONSOLIDATED STATEMENT OF INCOME Provident Bankshares Corporation and Subsidiaries
Year Ended December 31, - -------------------------------------------------------------------------------- (in thousands, except per share data) 1999 1998 1997 ================================================================================ INTEREST INCOME Interest and Fees on Loans $ 261,837 $ 234,926 $ 203,899 Interest on Securities 88,094 80,184 68,294 Tax-Advantaged Interest 2,337 2,762 6,656 Interest on Short-Term Investments 109 235 263 - ----------------------------------------------------------------------------- Total Interest Income 352,377 318,107 279,112 - ----------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits 151,071 130,315 106,004 Interest on Short-Term Borrowings 12,737 17,424 28,737 Interest on Long-Term Debt 40,453 39,770 21,977 - ----------------------------------------------------------------------------- Total Interest Expense 204,261 187,509 156,718 - ----------------------------------------------------------------------------- Net Interest Income 148,116 130,598 122,394 Less: Provision for Loan Losses 11,570 12,027 9,953 - ----------------------------------------------------------------------------- Net Interest Income After Provision for Losses 136,546 118,571 112,441 - ----------------------------------------------------------------------------- NON-INTEREST INCOME Service Charges on Deposit Accounts 34,172 29,260 24,432 Mortgage Banking Activities 9,652 11,485 6,845 Commissions and Fees 5,280 4,209 3,705 Net Securities Gains 312 6,749 2,337 Other Non-Interest Income 11,630 11,041 6,690 - ----------------------------------------------------------------------------- Total Non-Interest Income 61,046 62,744 44,009 - ----------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and Employee Benefits 66,071 61,649 54,107 Occupancy Expense, Net 11,376 10,349 10,018 Furniture and Equipment Expense 8,927 8,123 7,354 External Processing Fees 14,883 14,006 12,374 Merger Related Expenses -- -- 10,047 Capital Securities Expense 3,160 2,359 -- Other Non-Interest Expense 27,826 26,428 23,963 - ----------------------------------------------------------------------------- Total Non-Interest Expense 132,243 122,914 117,863 - ----------------------------------------------------------------------------- Income Before Income Taxes 65,349 58,401 38,587 Income Tax Expense 21,199 19,371 13,628 - ----------------------------------------------------------------------------- Net Income $ 44,150 $ 39,030 $ 24.959 ============================================================================= Per Share Amounts: Net Income--Basic $ 1.73 $ 1.52 $ 1.00 Net Income--Diluted 1.67 1.47 .96 =============================================================================
The accompanying notes are an integral part of these statements. 28 CONSOLIDATED STATEMENT OF CONDITION Provident Bankshares Corporation and Subsidiaries December 31, - ------------------------------------------------------------------------------ (dollars in thousands) 1999 1998 ============================================================================== ASSETS Cash and Due From Banks $ 90,840 $ 74,365 Short-Term Investments 1,759 198 Mortgage Loans Held for Sale 30,535 224,707 Securities Available for Sale 1,671,507 1,198,511 Loans: Consumer 2,204,943 2,154,557 Commercial Business 363,059 375,930 Real Estate--Construction 151,875 124,445 Real Estate--Mortgage 464,242 445,279 - ------------------------------------------------------------------------------ Total Loans 3,184,119 3,100,211 Less: Allowance for Loan Losses 39,780 42,739 - ------------------------------------------------------------------------------ Net Loans 3,144,339 3,057,472 - ------------------------------------------------------------------------------ Premises and Equipment, Net 44,277 40,459 Accrued Interest Receivable 46,507 40,466 Other Assets 64,713 39,719 - ------------------------------------------------------------------------------ Total Assets $5,094,477 $4,675,897 ============================================================================== LIABILITIES Deposits: Noninterest-Bearing $ 264,252 $ 252,024 Interest-Bearing 3,544,276 3,167,533 - ------------------------------------------------------------------------------ Total Deposits 3,808,528 3,419,557 - ------------------------------------------------------------------------------ Short-Term Borrowings 301,323 145,363 Long-Term Debt 627,118 735,239 Other Liabilities 43,747 40,423 - ------------------------------------------------------------------------------ Total Liabilities 4,780,716 4,340,582 - ------------------------------------------------------------------------------ Corporation-Obligated Mandatorily Redeemable Capital Securities 39,162 39,238 - ------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common Stock (Par Value $1.00) Authorized 100,000,000 Shares, Issued 26,225,752, and 24,811,256 Shares; at December 31, 1999 and December 31, 1998, respectively 26,226 24,811 Capital Surplus 203,364 172,239 Retained Earnings 102,587 103,496 Net Accumulated Other Comprehensive Income (Loss) Treasury Stock at Cost--693,866 Shares at (44,323) 5,308 December 31, 1999 and 525,766 Shares at December 31, 1998 (13,255) (9,777) - ------------------------------------------------------------------------------ Total Stockholders' Equity 274,599 296,077 - ------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $5,094,477 $4,675,897 ============================================================================== The accompanying notes are an integral part of these statements. 29 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Provident Bankshares Corporation and Subsidiaries
Accumulated Other Treasury Common Capital Retained Comprehensive Stock (in thousands, except per share data) Stock Surplus Earnings income at Cost - -------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 $21,687 $109,360 $111,614 $ (1,373) $ (2,490) Net Income--1997 -- -- 24,959 -- -- Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt securities, Net of Reclassification Adjustment (see Note 15) 6,106 Comprehensive Income Dividends Paid ($.40 per share) -- -- (8,505) -- -- Exercise of Stock Options (720,638 shares) 720 7,661 -- -- -- Stock Dividend (858,376 shares) 858 13,747 (14,605) -- -- Common Stock Issued under Dividend Reinvestment Plan (20,312 shares) 20 423 -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $23,285 $131,191 $113,463 $ 4,733 $ (2,490) Net Income--1998 -- -- 39,030 -- -- Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt Securities, Net of Reclassification Adjustment (see Note 15) 575 Comprehensive Income Dividends Paid ($.49 per share) -- -- (12,648) -- -- Exercise of Stock Options (337,498 shares) 337 5,164 -- -- -- Stock Dividend (1,165,433 shares) 1,165 35,184 (36,349) -- -- Purchase of Treasury Shares (297,700 shares) (7,287) Common Stock Issued under Dividend Reinvestment Plan (24,179 shares) 24 700 -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $24,811 $172,239 $103,496 $ 5,308 $ (9,777) Net Income--1999 -- -- 44,150 -- -- Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt Securities, Net of Reclassification Adjustment (see Note 15) (49,631) Comprehensive Income (Loss) Dividends Paid ($.60 per share) -- -- (15,232) -- -- Exercise of Stock Options (172,271 shares) 172 1,900 -- -- -- Stock Dividend (1,216,219 shares) 1,216 28,611 (29,827) -- -- Purchase of Treasury Shares (168,100 shares) (3,478) Common Stock Issued under Dividend Reinvestment Plan (27,726 shares) 27 614 -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $ 26,226 $ 203,364 $ 102,587 $ (44,323) $(13,255) - --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Total Comprehensive Stockholders' (in thousands, except per share data) Income (Loss) Equity - ------------------------------------------------------------------------------------------- Balance at January 1, 1997 $ 238,798 Net Income--1997 $ 24,959 24,959 Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt securities, Net of Reclassification Adjustment (see Note 15) 6,106 6,106 ---------- Comprehensive Income $ 31,065 ---------- Dividends Paid ($.40 per share) (8,505) Exercise of Stock Options (720,638 shares) 8,381 Stock Dividend (858,376 shares) -- Common Stock Issued under Dividend Reinvestment Plan (20,312 shares) 443 - ------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 270,182 Net Income--1998 $ 39,030 39,030 Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt Securities, Net of Reclassification Adjustment (see Note 15) 575 575 ---------- Comprehensive Income $ 39,605 ---------- Dividends Paid ($.49 per share) (12,648) Exercise of Stock Options (337,498 shares) 5,501 Stock Dividend (1,165,433 shares) -- Purchase of Treasury Shares (297,700 shares) (7,287) Common Stock Issued under Dividend Reinvestment Plan (24,179 shares) 724 - ------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 296,077 Net Income--1999 $ 44,150 Other Comprehensive Income, Net of Tax: Unrealized Gain on Debt Securities, Net of Reclassification Adjustment (see Note 15) (49,631) (49,631) ----------- Comprehensive Income (Loss) $ (5,481) ----------- Dividends Paid ($.60 per share) (15,232) Exercise of Stock Options (172,271 shares) 2,072 Stock Dividend (1,216,219 shares) -- Purchase of Treasury Shares (168,100 shares) (3,478) Common Stock Issued under Dividend Reinvestment Plan (27,726 shares) 641 - ------------------------------------------------------------------------------------------- Balance at December 31, 1999 $ 274,599 - -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 30 CONSOLIDATED STATEMENT OF CASH FLOWS Provident Bankshares Corporation and Subsidiaries
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Operating Activities: Net Income $ 44,150 $ 39,030 $ 24,959 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 29,230 28,200 8,235 Provision for Loan Losses 11,570 12,027 9,953 Provision for Deferred Income Tax (Benefit) 2,833 (2,941) (5,139) Realized Net Securities Gains (312) (6,749) (2,337) Loans Originated or Acquired and Held for Sale (556,072) (993,474) (344,587) Proceeds from Sales of Loans 755,228 841,538 315,650 Gain on Sales of Loans (4,984) (5,846) (2,632) Other Operating Activities 286 (23,551) 8,930 - ----------------------------------------------------------------------------------------------------------------------- Total Adjustments 237,779 (150,796) (11,927) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities 281,929 (111,766) 13,032 - ----------------------------------------------------------------------------------------------------------------------- Investing Activities: Principal Collections and Maturities of Securities Available for Sale 197,055 251,725 169,288 Principal Collections and Maturities of Securities Held to Maturity -- -- 13,130 Proceeds on Sales of Securities Available for Sale 22,820 947,030 395,803 Purchases of Securities Held to Maturity -- -- (15,259) Purchases of Securities Available for Sale (400,702) (1,405,328) (481,343) Loan Originations and Purchases Less Principal Collections (492,222) (420,763) (454,026) Purchases of Premises and Equipment (11,657) (10,069) (7,299) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (684,706) (637,405) (379,706) - ----------------------------------------------------------------------------------------------------------------------- Financing Activities: Net Increase in Deposits 388,971 665,042 468,371 Net Increase (Decrease) in Short-Term Borrowings 155,960 (201,928) (255,144) Proceeds from Long-Term Debt 26,000 475,380 194,000 Payments and Maturities of Long-Term Debt (134,121) (209,218) (53,440) Proceeds from Capital Securities -- 39,238 -- Issuance of Common Stock 2,713 6,225 8,824 Purchase of Treasury Stock (3,478) (7,287) -- Cash Dividends on Common Stock (15,232) (12,648) (8,505) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 420,813 754,804 354,106 - ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 18,036 5,633 (12,568) Cash and Cash Equivalents at Beginning of Year 74,563 68,930 81,498 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 92,599 $ 74,563 $ 68,930 - ----------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures - ----------------------------------------------------------------------------------------------------------------------- Interest Paid, Net of Amount Capitalized $ 135,681 $ 111,775 $ 71,711 Income Taxes Paid 17,631 18,301 13,114 Stock Dividend 29,827 36,349 14,605 Loans Securitized and Converted to Securities Available for Sale 373,332 -- -- Transfer of Securities Held to Maturity to Securities Available for Sale -- -- 88,318
The accompanying notes are an integral part of these statements. 31 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Provident Bankshares Corporation and Subsidiaries
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Net Income $ 44,150 $ 39,030 $ 24,959 Net Other Comprehensive Income: Net Unrealized Gain (Loss) on Debt Securities (49,428) 4,655 7,519 Less: Reclassification Adjustment for Gains Included in Net Income 203 4,080 1,413 - ----------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) (49,631) 575 6,106 - ----------------------------------------------------------------------------------------------------------------- Comprehensive Income (Loss) $ (5,481) $ 39,605 $ 31,065 - -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Provident Bankshares Corporation and Subsidiaries NOTE 1--Summary of Significant Accounting Policies Provident Bankshares Corporation ("the Corporation") offers a wide range of banking services through its wholly owned subsidiary, Provident Bank, and its subsidiaries ("the Bank"). Product offerings include deposit products, cash management services, commercial and consumer loans and personal investment products. These services are provided through a network of 83 offices and 159 ATMs located primarily in the greater Baltimore/Washington metropolitan area, northern Virginia and southern Pennsylvania. The following summary of significant accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented in this report. The accounting and reporting policies of the Corporation are in accordance with generally accepted accounting principles and conform to general practice within the banking industry. Certain prior years' amounts in the Consolidated Financial Statements have been reclassified to conform with the presentation used for the current year. These reclassifications have no effect on stockholders' equity or net income as previously reported. Principles of Consolidation The Consolidated Financial Statements include the accounts of Provident Bankshares Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates In preparation of financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the financial statements and accompanying notes and the reported amounts of income and expense during the reporting periods. Actual results could differ from these estimates. Investment Securities Investment portfolios are to be divided among three categories: securities available for sale, and if applicable, securities held to maturity and trading account securities. Securities available for sale are securities the Corporation does not have the intent and ability to hold to maturity nor does it intend to trade actively as part of any trading account activity. Available for sale securities are reported at fair value with any unrealized appreciation or depreciation in value reported directly as a separate component of stockholders' equity as net accumulated other comprehensive income (loss), which is reflected net of applicable taxes, and therefore, has no effect on the reported earnings of the Corporation. Gains and losses from sales of securities available for sale are recognized by the specific identification method and are reported in non- interest income. Any securities that the Corporation has the intent and ability to hold to maturity would be included in securities held to maturity and, accordingly, carried at cost adjusted for amortization of premiums and accretion of discounts using the interest method. Loans and Allowance for Loan Losses Interest on loans is accrued at the contractual rate and credited to income based upon the principal amount outstanding. It is the policy of management to place a loan in non-accrual status and discontinue the accrual of interest and reverse previously accrued but unpaid interest when the quality of a commercial credit has deteriorated to the extent that collectibility of all interest and/or principal cannot be reasonably expected or when it is 90 days past due unless the loan is well secured and in the process of collection. Consumer loans are not placed in non-accrual status but are generally charged-off at 120 days past due for installment loans and 180 days for revolving loans to conform to standard industry practice. 33 The Corporation considers a loan impaired when, based on available information, it is probable that the Corporation will be unable to collect principal and interest when due in accordance with the contractual terms of the loan agreement. All non-accrual loans and troubled debt restructurings are considered impaired loans. The measurement of impaired loans may be based on the present value of expected future cash flows discounted at the historical effective interest rate or based on the fair value of the underlying collateral. Impairment criteria are applied to the loan portfolio exclusive of smaller balance homogeneous loans such as residential mortgage and consumer loans which are evaluated collectively for impairment. Restructured loans are considered impaired in the year of restructuring. In subsequent years each restructured loan is evaluated for impairment. The allowance for loan losses includes reserves for these loans. Collections of interest and principal on loans in non- accrual status and considered impaired are generally applied as a reduction to the outstanding principal. Once future collectibility has been established, interest income may be recognized on a cash basis. The Corporation defers and amortizes certain loan fees and costs over the life of the loan using the interest method. Net amortization of these fees and costs are recognized in interest income as a yield adjustment and are, accordingly, reported as Interest and Fees on Loans in the Consolidated Statement of Income. Unearned income on loans at December 31, 1999 and 1998 was not material with respect to the respective financial statements. The Corporation's allowance for loan losses is based upon management's continuing review and evaluation of the loan portfolio and is intended to maintain an allowance adequate to absorb potential losses on loans outstanding. The level of the allowance is based on an evaluation of the risk characteristics of the loan portfolio and considers such factors as past loan loss experience, the financial condition of the borrower, current economic conditions and other relevant factors. Adjustments to the allowance due to changes in measurement of impaired loans are incorporated in the provision for loan losses. The adoption of SFAS No. 114/118 has not resulted in any additional provision for loan losses for the years ended December 31, 1999, 1998 and 1997, respectively. Premises and Equipment Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the lives of the related leases, if shorter. Major improvements are capitalized while maintenance and repairs are charged to expense as incurred. Mortgage Banking Activities The Corporation engages in sales of mortgage loans, which are originated internally or purchased from third parties. Mortgage loans held for sale are carried at the aggregate lower of cost or market value. Gains or losses on sales of these mortgage loans are recorded as a component of Non-Interest Income in the Consolidated Statement of Income. The Corporation carries any retained interest in a transferred asset on the Statement of Condition as a servicing asset. The servicing assets represent the fair value of the servicing contracts associated with the purchase or origination and subsequent securitization of the mortgage loans. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. Servicing assets are evaluated periodically for impairment based on their fair value and impairment, if any, is recognized through a valuation allowance and a charge to operations. 34 Income Taxes The Corporation uses the liability method to determine deferred tax amounts and the related income tax expense or benefit. Using this method, deferred taxes are calculated by applying enacted statutory tax rates to temporary differences consisting of items of income and expense that are accounted for in financial reporting periods which differ from income tax reporting periods. The resultant deferred tax assets and liabilities represent future taxes to be recovered or remitted when the related assets and liabilities are recovered or settled. The deferred tax assets are reduced by a valuation allowance for that portion of the tax deferred assets which are unlikely to be realized. Derivative Financial Instruments The Corporation uses a variety of derivative financial instruments as part of its interest rate risk management strategy and the Corporation does not hold or issue derivative financial instruments for trading purposes. The derivative products used are interest rate swaps and caps or floors, used separately or in combination to suit the hedge objective. All are currently classified as hedges. To qualify as a hedge, 1) the asset or liability to be hedged exposes the Corporation to interest rate risk, 2) the derivatives act to move the Corporation to a rate insensitive position should interest rates change, and 3) the derivative is designated and is effective as a hedge of a balance sheet item. Interest rate swaps are agreements between two parties which agree to exchange fixed and floating rates on a notional principal amount without the actual exchange of principal for a specified period of time. The notional amounts are not reflected on the Consolidated Statement of Condition because they are merely a unit of measure to determine the effect of the swap. Income and expense on interest rate swaps associated with designated balance sheet items is recognized using the accrual method over the life of the agreement(s) as an adjustment to the income or expense on the designated balance sheet item. Premiums associated with interest rate floor/cap/corridor arrangements are reflected in the Consolidated Statement of Condition and amortized over their life using the straight-line method and included as an adjustment to interest income/expense associated with the balance sheet item. Payments due to or from counterparties under these agreements are accrued as an adjustment to interest income or expense associated with the designated balance sheet item. The Corporation continually monitors each derivative position to ensure the proper relationship such as risk reduction, correlation or effectiveness between the designated balance sheet item hedged and the derivative position. Any significant divergence between this relationship which results in interest income or expense exceeding projected parameters results in the hedge being marked-to-market with the resultant gain or loss included in earnings. Terminated derivative positions with the designated assets or liabilities retained have the resulting gain or loss deferred and amortized over the estimated remaining life of the hedge into interest income/expense associated with the balance sheet item. Derivatives associated with liquidated hedged assets or liabilities are marked-to-market and have subsequent changes in their fair value reflected in earnings as the derivative is considered speculative in nature. Accounting treatment of derivative positions is consistent with the accounting treatment of the underlying asset or liability. Interest rate swaps used to hedge available for sale debt securities have their fair value included in stockholders' equity which is consistent with the fair value treatment of the available for sale securities. Interest accruals associated with the swap are included as an adjustment to interest income on the associated securities. Derivative products terminated prior to the sale of the related security have the respective gain or loss deferred and amortized into interest income as yield adjustments to the designated asset over the shorter of the remaining life of the agreement or the designated asset. Upon sale of the security, the deferred gain or loss on the derivative is reflected in income at the time of sale. 35 Pension Plan The Corporation has a defined benefit pension plan which covers substantially all employees. The cost of this noncontributory pension plan was computed and accrued using the projected unit credit method. Prior service cost is amortized on a straight-line method over the average remaining service period of employees expected to receive benefits under the plan. Annual contributions are made to the plan in an amount at least to equal the minimum requirements and no greater than the maximum allowed by regulatory authorities. Statement of Cash Flows For purposes of reporting cash flows, cash equivalents are composed of cash and due from banks and short-term investments. NOTE 2--Restrictions on Cash and Due From Banks The Federal Reserve requires banks to maintain cash reserves against certain categories of deposit liabilities. Such reserves averaged approximately $27.2 million and $23.7 million during the years ended December 31, 1999 and 1998, respectively. In order to cover the costs of services provided by correspondent banks, the Corporation maintains compensating balance arrangements at these correspondent banks or elects to pay a fee in lieu of such arrangements. During 1999 and 1998, the Corporation maintained average compensating balances of approximately $11.1 million and $4.5 million, respectively. In addition, the Corporation paid fees totaling $556 thousand in 1999, $389 thousand in 1998 and $311 thousand in 1997 in lieu of maintaining compensating balances. NOTE 3--Investment Securities The aggregate amortized cost and market values of the available for sale securities portfolio at December 31 were as follows:
1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value Cost Gains Losses Value =================================================================================================================================== Securities Available for Sale U.S. Treasury and Government Agencies and Corporations $ 56,635 $ -- $ 188 $ 56,447 $ 42,267 $ 26 $ -- $ 42,293 Mortgage-Backed Securities 1,519,830 3,638 53,863 1,469,605 986,279 6,270 460 992,089 Municipal Securities 26,624 141 560 26,205 26,787 945 -- 27,732 Other Debt Securities 136,609 -- 17,359 119,250 134,398 2,785 786 136,397 - ----------------------------------------------------------------------------------------------------------------------------------- Total Securities Available for Sale $1,739,698 $3,779 $71,970 $1,671,507 $1,189,731 $ 10,026 $ 1,246 $1,198,511 - -----------------------------------------------------------------------------------------------------------------------------------
36 The aggregate amortized cost and market values of the investment securities portfolio by contractual maturity at December 31, 1999 and 1998, are shown below. Expected maturities on mortgage-backed securities may differ from the contractual maturities as borrowers have the right to prepay the obligation without prepayment penalties.
1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Amortized Market Amortized Market (in thousands) Cost Value Cost Value ==================================================================================================================================== Securities Available for Sale In One Year or Less $ 775 $ 776 $ 5,153 $ 5,182 After One Year Through Five Years 16,963 16,854 9,917 10,179 After Five Years Through Ten Years 12,721 12,463 14,120 14,743 Over Ten Years 189,409 171,809 174,262 176,318 Mortgage-Backed Securities 1,519,830 1,469,605 986,279 992,089 - ------------------------------------------------------------------------------------------------------------------------------------ Total Securities Available for Sale $1,739,698 $1,671,507 $1,189,731 $1,1198,511 ====================================================================================================================================
Proceeds from sales of securities available for sale during 1999 were $22.8 million resulting in the realization of gross gains of $380 thousand and gross losses of $68 thousand on such sales. For 1998, sales of securities yielded proceeds of $947.0 million which resulted in gross realized gains of $7.4 million and gross losses of $.7 million. Securities sold in 1997 produced proceeds of $395.8 million resulting in gross gains of $3.4 million and gross losses of $1.1 million. At December 31, 1999, a net unrealized loss of $44.3 million on the securities portfolio was reflected as the net accumulated other comprehensive income in the Consolidated Statement of Condition. This compares to a net unrealized gain of $5.3 million at December 31, 1998. The aggregate book and estimated market values of investment securities by issuer which exceed ten percent of capital at December 31, 1999, are indicated below. All of these securities represent senior debt securities with AAA bond ratings.
Estimated Book Market (in thousands) Value Value ==================================================================== Issuer: Mortgage-Backed Securities: Residential Funding Corporation $38,879 $38,708 Indy Mac, Inc. 38,701 38,411 ====================================================================
Securities with a market value of $971.8 million and $789.7 million at December 31, 1999 and 1998, respectively, were pledged as collateral for public funds, certain short-term borrowings and for other purposes required by law. 37 NOTE 4--Allowance for Loan Losses A summary of the activity in the allowance for loan losses for the three years ended December 31 is presented below:
(in thousands) 1999 1998 1997 ====================================================================================== Balance at Beginning of the Year $ 42,739 $36,861 $30,361 Provision for Loan Losses 11,570 12,027 9,953 Allowance Related to Securitized Loans (1,500) -- -- Loans Charged-off (14,557) (7,738) (5,213) Less: Recoveries of Loans Previously Charged-off 1,528 1,589 1,760 -------------------------------------------------------------------------------------- Net Loans Charged-off (13,029) (6,149) (3,453) -------------------------------------------------------------------------------------- Balance at End of the Year $ 39,780 $42,739 $36,861 ======================================================================================
At December 31, 1999, 1998 and 1997, the recorded investment in loans which are in non-accrual status and therefore considered impaired totaled $21.3 million, $5.1 million and $2.9 million, respectively. There was no additional allowance required for these loans. Had these loans performed in accordance with their original terms, interest income of $1.6 million in 1999, $1.4 million in 1998 and $470 thousand in 1997 would have been recorded. Interest income of $1.0 million was recognized on these loans during 1999. The average recorded investment in impaired loans was approximately $7.5 million in 1999 and $6.8 million in 1998. NOTE 5--Premises and Equipment Real estate and equipment holdings at December 31 are presented in the table below. Real estate owned and used by the Corporation consists of eleven branches and other facilities in the Baltimore/Washington metropolitan area which are used primarily for the operations of the Bank.
(in thousands) 1999 1998 ===================================================================== Land $ 1,014 $ 1,014 Buildings and Leasehold Improvements 23,491 22,869 Furniture & Equipment 50,910 42,308 Property Held for Future Expansion 7,184 7,184 --------------------------------------------------------------------- Total Premises & Equipment 82,599 73,375 Less: Accumulated Depreciation and Amortization 38,322 32,916 --------------------------------------------------------------------- Net Premises and Equipment $44,277 $40,459 =====================================================================
Property held for future expansion represents real estate adjacent to the Corporation's headquarters building which is currently being used for employee and public parking. Following an assessment of occupancy requirements, management determined that this property would be necessary to meet the Corporation's growing office and parking requirements. In December 1990, the Corporation entered into a sale and leaseback agreement whereby its headquarters building was sold to an unrelated third party which then leased the building back to the Corporation. At December 31, 1999, the lease has three years remaining on the term. The remaining associated deferred gain of $778 thousand from the sale will be recognized in proportion to the gross rental expense incurred over the outstanding term of the lease. The associated lease payments and sublease rental income are included in the table on the following page. The Corporation also maintains non-cancelable operating leases associated with Bank premises. Most of these leases provide for the payment of property taxes and other costs by the Bank and include one or more renewal options ranging up to ten years. Some of the leases also contain purchase options at market value. Annual rental commitments under all long-term non-cancelable operating lease agreements consisted of the following at December 31, 1999. 38
Real Property Sublease Equipment (in thousands) Leases Income Leases Total ------------------------------------------------------------------------------- 2000 $ 7,622 $ 79 $428 $ 7,971 2001 6,903 56 278 7,125 2002 6,421 19 164 6,566 2003 3,800 5 106 3,901 2004 2,360 -- 15 2,375 2005 and Thereafter 3,500 -- -- 3,500 ------------------------------------------------------------------------------- Total $30,606 $159 $991 $31,438 ===============================================================================
Rental expense for premises and equipment was $7.7 million in 1999, $6.8 million in 1998 and $6.6 million in 1997. NOTE 6--Mortgage Banking Activities The following is an analysis of mortgage loan servicing asset balance, net of accumulated amortization, during each of the respective years.
(in thousands) 1999 1998 1997 -------------------------------------------------------------------------------- Balance at Beginning of the Year $ 2,608 $ 1,984 $ 2,155 Additions 13,573 15,767 1,785 Amortization (137) (355) (359) Sales of Servicing Assets (14,958) (14,788) (1,597) -------------------------------------------------------------------------------- Balance at the End of the Year $ 1,086 $ 2,608 $ 1,984 ================================================================================
At December 31, 1999, no valuation allowance was required on the servicing assets. Unpaid principal balances of loans serviced for others not included in the accompanying Consolidated Statement of Condition were $79 million and $181 million at December 31, 1999 and 1998, respectively. NOTE 7--Short-Term Borrowings At December 31, short-term borrowings were as follows:
(in thousands) 1999 1998 ------------------------------------------------------------------------------- Securities Sold Under Repurchase Agreements and Federal Funds Purchased $289,426 $143,367 Other Short-Term Borrowings 11,897 1,996 ------------------------------------------------------------------------------- Total $301,323 $145,363 ===============================================================================
The following table sets forth various data on securities sold under repurchase agreements and federal funds purchased.
(dollars in thousands) 1999 1998 1997 ------------------------------------------------------------------------------- Balance at December 31 $289,426 $143,367 $345,430 Average Balance During the Year 232,195 310,504 464,662 Maximum Month-End Balance 337,116 496,506 515,937 Weighted Average Rate During the Year 5.22% 5.50% 5.68% Weighted Average Rate at December 31 4.97% 4.77% 5.72% -------------------------------------------------------------------------------
39 Securities sold under repurchase agreements at December 31, 1999, are detailed below by due date:
Less than (dollars in thousands) Overnight 30 days 30-90 days Over 90 days Demand Total - ---------------------------------------------------------------------------------------------------------------------------- Mortgage-Backed Securities: Securities Sold: Carrying Value $ -- $ -- $ 59,938 $ -- $ -- $59,938 Market Value -- -- 55,973 -- -- 55,973 Repurchase Borrowings -- -- 53,115 -- -- 53,115 Average Borrowing Interest Rate --% --% 5.68% --% --% 5.68% - ----------------------------------------------------------------------------------------------------------------------------
NOTE 8--Long-Term Debt Long-term debt consisted of Federal Home Loan Bank Advances of $627.1 million and $735.2 million at December 31, 1999 and 1998, respectively. The principal maturities of long-term debt at December 31, 1999, are presented below.
(in thousands) ---------------------------- 2000 $221,075 2001 115,000 2002 166,000 2003 51,555 2004 35,000 After 2004 38,488 ---------------------------- Total $627,118 ============================
The Federal Home Loan Bank Advances to the Bank mature in varying amounts through 2016. These advances are composed of $232.1 million fixed rate advances with an average interest rate of 6.37% and $395.0 million variable rate advances with an average rate of 6.15%. These advances are collateralized by investment securities and certain real estate loans with carrying values of $593.6 million and $151.8 million, respectively, at December 31, 1999. NOTE 9--Corporation-Obligated Mandatorily Redeemable Capital Securities During the second quarter of 1998, the Corporation formed a new wholly owned statutory business trust, Provident Trust I (the "Trust"), which issued $40.0 million of 8.29% capital securities to outside third parties. The sole purpose of the Trust is to invest the proceeds in an equivalent amount of junior subordinated debt securities of the Corporation which bears the same interest rates as the capital securities. These subordinated debentures, which are the sole assets of the Trust, are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of Bankshares. The Corporation fully and unconditionally guarantees the Trust's capital securities obligations. Additionally the Trust issued $1.5 million in common securities to the Corporation. For financial reporting purposes, the Trust is treated as a subsidiary of the Corporation and consolidated in the corporate financial statements. The capital securities are presented net of issuance costs as a separate line item on the Consolidated Statement of Condition as corporation-obligated mandatorily redeemable capital securities. The capital securities are not included as a component of total stockholders' equity on the Consolidated Statement of Condition. The capital securities are, however, accorded Tier I capital status by the Federal Reserve. The treatment of the capital securities as Tier I capital in addition to the ability to deduct the expense of the subordinated debentures for income tax purposes provides the Corporation with a cost-effective method to raise capital. The proceeds of the capital securities were used for general corporate growth. 40 The capital securities pay cash distributions semiannually at a rate of 8.29% of the liquidation preference. Distributions to the holders of the capital securities are included in non-interest expense. Under the provisions of the subordinated debt, the Corporation has the right to defer payment of interest on the subordinated debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the capital securities are also deferred. Interest on the subordinated debentures is cumulative. The securities, the assets of the Trust and the common securities issued by the Trust are redeemable in whole or in part on or after April 15, 2008, or at any time in whole but not in part from the date of issuance on the occurrence of certain events. NOTE 10--Stockholders' Equity During 1999 and 1998, the Corporation declared five percent stock dividends for each year to the stockholders of record as of May 3, 1999 and April 27, 1998, respectively. The 1999 stock dividend was paid on May 14, 1999, resulting in the distribution of 1,216,219 common shares with a par value of $1.00 per share. Accordingly, $1.2 million and $28.6 million were transferred from retained earnings to common stock and capital surplus, respectively. The 1998 stock dividend was paid May 8, 1998 with the distribution of 1,165,433 common shares with a $1.00 par value per share. This dividend resulted in the transfer of $1.2 million to common stock and $35.2 million to capital surplus from retained earnings. The cumulative impact of these stock dividends has been reflected in the restatement of earnings and dividends per share and stock option data in the financial statements and accompanying notes. Subsequent to December 31, 1997, the Corporation declared a two for one stock split. The split occurred after the dividend payment on February 13, 1998 for stockholders of record at the close of business on February 2, 1998. All earnings per share and common stock related information has been given retroactive effect to this transaction. During 1998, the Corporation approved a stock repurchase program for up to 5% of its outstanding stock. These purchases may occur in the open market from time to time and on an ongoing basis, depending upon market conditions. The Corporation repurchased 168,100 and 297,700 shares of common stock at a cost of $3.5 million and $7.3 million during 1999 and 1998, respectively. The Corporation's Stock Option Plan (the "Option Plan") covers a maximum of 5.4 million shares of common stock that has been reserved for issuance under the Option Plan described below. Under the provisions of Statement of Financial Accounting Standards No. 123--"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Corporation had the option of accruing a compensation expense for stock options granted to employees, or applying the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), which does not require compensation expense to be recognized. The Corporation has elected to continue to apply APB No. 25 to account for the Option Plan. Under the Option Plan, stock options are granted at an exercise price not less than the market value of the underlying shares of common stock on the date of the grant. As such, the Option Plan is classified as a fixed stock option plan. Accordingly, no compensation expense has been recognized from 1999 through 1997. The Option Plan provides for the granting of non-qualified stock options to certain key employees and directors of the Corporation and the Bank, as designated by the Corporation's board of directors. All options have a maximum duration of ten years from the date of grant. Vesting in the majority of the options occurred immediately in 50% of the options granted with the remainder vesting in the subsequent year. A minority of options have vesting provisions which may be accelerated on the attainment of specific benchmarks related to the Corporation's performance. Beginning in 1998, options granted have a five year or a three year vesting schedule. Regardless of the vesting schedule all options vest immediately upon a change in control. 41 The following table presents a summarization of the activity related to the options for the periods indicated:
1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Common Weighted Avg. Common Weighted Avg. Common Weighted Avg. Shares Exercise Price Shares Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding, January 1, 1,822,709 $ 12.93 1,877,918 $ 8.55 2,495,634 $ 6.26 Granted 473,900 21.15 324,608 30.27 183,895 17.96 Exercised (172,271) 6.42 (367,748) 5.30 (794,503) 3.43 Canceled or Expired (12,075) 30.22 (12,069) 30.76 (7,108) 15.30 - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 2,112,263 $ 15.20 1,822,709 $ 12.93 1,877,918 $ 8.55 ================================================================================================================================== Options Exercisable at Year-end 1,219,404 1,173,425 1,404,012 Weighted Average Fair Value of Options Granted During the Year $ .66 $ .37 $ 2.57 Options Available for Granting under the Option Plan 697,303 1,159,825 306,835 - ----------------------------------------------------------------------------------------------------------------------------------
The table below provides information on the stock options outstandings at December 31, 1999.
Options Outstanding Options Exercisable ------------------------------------------------------- ----------------------------------- Weighted Weighted Average Weighted Exercise Price Common Average Remaining Common Average Range Shares Exercise Price Contractual Life Shares Exercise Price - --------------------------------------------------------------------------------------------------------------------------------- $ .00 - $ 3.18 73,476 $ .90 2.1 73,476 $ .90 3.19 - 6.36 318,399 3.79 3.2 318,399 3.79 6.37 - 9.54 306,787 8.30 4.9 306,787 8.30 9.55 - 12.72 80,337 10.77 6.9 80,337 10.77 12.73 - 15.90 386,461 13.71 6.2 136,443 13.76 15.91 - 19.08 173,257 17.24 7.4 142,753 17.09 19.09 - 22.26 443,025 20.97 9.7 17,275 20.29 22.27 - 25.44 8,969 23.15 8.8 6,469 23.14 25.45 - 28.62 47,355 26.60 8.8 29,505 26.88 28.63 - 31.80 274,197 30.58 8.1 107,960 30.54 - --------------------------------------------------------------------------------------------------------------------------------- 2,112,263 $ 15.20 6.6 1,219,404 $ 11.15 =================================================================================================================================
The weighted average fair value of all of the options granted during the period 1997 through 1999 has been estimated using the Black-Scholes option- pricing model with the following weighted average assumptions:
1999 1998 1997 ----------------------------------------------------------------------------- Dividend Yield 14.45% 17.37% 38.47% Weighted Average Risk-free Interest Rate 6.39 4.59 5.72 Weighted Average Expected Volatility 24.24 24.68 22.18 Weighted Average Expected Life 7 years 7 years 7 years -----------------------------------------------------------------------------
42 The provisions of SFAS No. 123, require pro forma disclosure of compensation expense for the Corporation based on the fair value of the awards at the date of grant. Under those provisions, the Corporation's net income and earnings per share would have been reduced to the following pro forma amounts below:
(in thousands, except per share data) 1999 1998 1997 ------------------------------------------------------------------------ Net Income: As Reported $44,150 $39,030 $24,959 Pro forma 43,947 38,959 24,473 Basic Earnings Per Share: As Reported $ 1.73 $ 1.52 $ 1.00 Pro forma $ 1.72 $ 1.52 $ .98 Diluted Earnings Per Share: As Reported $ 1.67 $ 1.47 $ .96 Pro forma $ 1.67 $ 1.46 $ .94 ------------------------------------------------------------------------
At the time of the Corporation's reorganization, a liquidation account was established by the Bank for the benefit of all eligible deposit account holders as of December 31, 1986 who maintain their accounts in the Bank subsequent to the reorganization. The liquidation account provides these deposit account holders with an interest in the retained earnings of the Bank prior to any distribution to stockholders in the sole event of a complete liquidation. The deposit account holders' interest in the liquidation account decreases as the related deposit account decreases and will never increase. The liquidation account does not restrict the use or application of stockholders' equity of the Bank except that the Bank may not declare or pay a cash dividend on, or repurchase any of its capital stock if, as the result of such dividend or repurchase, the Bank's stockholders' equity would be less than the amount then required for the liquidation account. At December 31, 1999, the balance of the liquidation account was $8.9 million. NOTE 11--Off-Balance Sheet Risk Credit Risk In the normal course of business, the Bank offers various financial products to its customers to meet their credit and liquidity needs. These instruments involve, to varying degrees, elements of credit and market risk which may exceed any amount recognized in the financial statements. Risks that are inherent in normal banking services also exist in some of these financial instruments. Contract amounts of the instruments indicate the maximum exposure the Bank has in each class of financial instruments discussed in the following paragraphs. These commitments and contingencies are not reflected in the accompanying financial statements. Unless noted otherwise, the Bank does not require collateral or other securities to support financial instruments with credit risk. Subject to its normal credit standards and risk monitoring procedures, the Bank makes contractual commitments to extend credit. Commitments to extend credit in the form of consumer, commercial real estate and commercial business loans amounted to $488.3 million and $574.0 million at December 31, 1999 and 1998, respectively. Commitments typically have fixed expiration dates or other termination clauses. The total of commitments does not necessarily represent future cash requirements as many commitments may expire without being exercised. Collateral and amounts thereof are obtained, if necessary, based upon management's evaluation of each borrower's financial condition. Required collateral may be in the form of cash, accounts receivable, inventory, property, plant and equipment and income generating commercial properties and residential properties. The Bank is obligated under various recourse provisions related to sales of residential mortgage loans. The maximum potential recourse obligation was $379.7 million and $8.6 million at December 31, 1999 and 1998, respectively. No losses have been incurred under these recourse provisions. Conditional commitments are issued by the Bank in the form of performance stand-by letters of credit which guarantee the performance of a customer to a third party. These letters of credit are typically included in the amount of funds committed by the Bank to complete associated construction projects. At December 31, commitments under outstanding performance stand-by letters of credit aggregated $34.6 million in 1999 and $24.8 million in 1998. The credit risk of issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 43 A judgment relating to a 1989 event was entered against Provident Bank of Maryland in April 1997 in the amount of $5.2 million, exclusive of post-judgment interest. This judgment, which Provident appealed, reversed an earlier court holding in favor of Provident. The judgment stemmed from a lawsuit alleging that the Bank had failed to fully honor a letter of credit. During the fourth quarter of 1998, the appellate court upheld the lower court decision. Payment was made in January, 1999. This payment, which was fully reserved, resulted in a charge- off, thereby reducing the allowance for loan losses. Concentrations of Credit Risk Construction and mortgage loan receivables from real estate developers represent $278.2 million and $283.0 million of the total loan portfolio at December 31, 1999 and 1998, respectively. Substantially all loans are collateralized by real property or other assets. These loans are expected to be repaid from the proceeds received by the borrowers from the retail sales or rentals of these properties to third parties. The Corporation's investment portfolio contains mortgage-backed securities amounting to $1.47 billion and $992.1 million at December 31, 1999 and 1998, respectively. The underlying collateral for these securities is in the form of pools of mortgages on residential properties. The majority of the securities are either directly or indirectly guaranteed by U.S. Government agencies or corporations. Management is of the opinion that credit risk is minimal. Interest Rate Risk The Bank enters into agreements for the delivery of securitized mortgage pools or for the purchases of consumer loan portfolios at a future date at a specified price or yield. Movements in interest rates impose basis and interest rate risk on the Bank between the dates of commitment and the dates of settlement. Forward contracts aggregated $32.3 million and $276.4 million at December 31, 1999 and 1998, respectively. The Bank enters into various derivative financial instruments to manage its interest rate risk exposure (see Note 1). The two major types used are interest rate swaps and interest rate floor/cap/corridor arrangements. These derivative financial instruments use notional amounts to represent a unit of measure but not the amount subject to accounting loss, which is much smaller. Risks in these transactions involve nonperformance by counterparties under the terms of the contract (counterparty credit risk) and, for interest rate swaps, the possibility that interest rate movements or general market volatility could result in losses on open off-balance sheet positions (market risk). Credit risk is controlled by dealing with well-established brokers which are highly rated by independent sources. Market risk on interest rate swaps is minimized by using these instruments as hedges, actively managing interest rate risk and by continually monitoring these positions. Market risk associated with the interest rate floor/cap/corridor arrangements only exist when premiums are amortized into interest expense without receiving any compensation from third parties. Unamortized premiums paid and outstanding for floor/cap/corridor arrangements were $8.1 million at December 31, 1999 and $4.7 million at December 31, 1998. Notional amounts of interest rate swaps and interest rate floor/cap/corridor arrangements are detailed below by amounts outstanding, average interest rates/fees and market values at December 31, 1999 and 1998.
Notional Maturity Average Interest Rate/Fee Market ------------------------------------ (dollars in thousands) Amount Date Paid Received Value - ----------------------------------------------------------------------------------------------- 1999 Interest Rate Swaps: $ 9,000 2000 7.19% 3 month LIBOR (6.00%) $(50) 19,000 2001 6.07% 3 month LIBOR (6.18%) 135 7,600 2001 5.17% 3 month LIBOR (6.17%) 203 26,000 2001 6.32% 3 month LIBOR (6.17%) 121 16,000 2001 5.08% 3 month LIBOR (6.18%) 457 20,000 2001 6.35% 3 month LIBOR (6.07%) 99 20,000 2002 6.46% 3 month LIBOR (6.17%) 87 13,000 2002 6.58% 3 month LIBOR (6.07%) 51 30,000 2002 6.42% 3 month LIBOR (6.12%) 234
44
Notional Maturity Average Interest Rate/Fee Market ------------------------------------------------------ (dollars in thousands) Amount Date Paid Received Value - ----------------------------------------------------------------------------------------------------------------------------- $10,000 2002 6.29% 10 year Treasury (6.21%) $ 854 18,750 2002 3 month LIBOR (6.97%) 5.69% (402) 36,458 2002 10 year Treasury (7.11%) 5.57% (99) 36,458 2002 10 year Treasury (6.96%) 5.61% (159) 36,458 2002 10 year Treasury (7.11%) 5.75% (1) 36,458 2002 10 year Treasury (7.00%) 5.60% (134) 36,458 2002 10 year Treasury (6.97%) 5.67% (34) 36,458 2002 10 year Treasury (6.91%) 5.59% (89) 36,458 2002 10 year Treasury (6.82%) 5.70% (67) 36,458 2002 10 year Treasury (6.88%) 5.72% (414) 18,750 2002 10 year Treasury (6.93%) 5.79% (20) 18,750 2002 10 year Treasury (7.11%) 5.67% (56) 10,000 2003 6.57% 3 month LIBOR (6.17%) 57 10,000 2003 3 month LIBOR (5.99%) 6.00% (252) 10,000 2003 10 year Treasury (6.01%) 6.00% (113) 17,917 2003 10 year Treasury (6.40%) 5.49% (307) 23,250 2003 10 year Treasury (6.41%) 5.06% (386) 13,600 2003 10 year Treasury (6.80%) 5.75% 91 13,600 2003 10 year Treasury (6.36%) 4.84% (37) 30,000 2004 5.22% 3 month LIBOR (6.21%) 1,788 9,000 2004 6.16% 3 month LIBOR (6.18%) 111 30,000 2004 6.49% 3 month LIBOR (6.10%) 409 10,000 2004 6.46% 3 month LIBOR (6.21%) 159 20,000 2004 5.26% 3 month LIBOR (6.07%) 168 30,000 2004 6.48% 3 month LIBOR (6.12%) 461 30,000 2004 5.19% 10 year Treasury (6.21%) 2,323 15,833 2004 5.81% 10 year Treasury (6.00%) 308 16,333 2004 3 month LIBOR (6.08%) 5.10% (532) 19,667 2004 3 month LIBOR (6.41%) 5.55% (484) 15,000 2004 3 month LIBOR (6.02%) 6.00% (561) 10,000 2004 3 month LIBOR (5.40%) 6.25% (288) 7,639 2004 3 month LIBOR (6.31%) 5.60% (172) 10,000 2004 3 month LIBOR (6.07%) 6.50% (345) 11,667 2004 3 month LIBOR (6.31%) 5.52% (367) 14,250 2004 3 month LIBOR (6.16%) 5.50% (454) 16,625 2004 3 month LIBOR (6.40%) 4.98% (742) 12,000 2004 3 month LIBOR (5.98%) 6.00% (481) 16,333 2004 10 year Treasury (6.40%) 5.00% (77) 15,000 2004 10 year Treasury (6.41%) 4.99% 256 28,050 2004 10 year Treasury (6.24%) 5.15% 103 43,333 2004 10 year Treasury (6.30%) 5.62% (578) 32,465 2004 10 year Treasury (6.14%) 5.61% (925) 10,000 2004 10 year Treasury (6.05%) 5.50% (402) 19,097 2004 10 year Treasury (6.39%) 5.57% (451) 19,444 2004 10 year Treasury (6.15%) 5.56% (456)
45
Notional Maturity Average Interest Rate/Fee Market -------------------------------------------------------- (dollars in thousands) Amount Date Paid Received Value - ---------------------------------------------------------------------------------------------------------------------------- $27,222 2004 10 year Treasury (6.11%) 5.58% $ (630) 19,444 2004 10 year Treasury (6.25%) 5.56% (460) 25,000 2004 10 year Treasury (5.95%) 7.00% (179) 28,500 2004 10 year Treasury (6.18%) 5.55% (848) 7,917 2004 10 year Treasury (6.24%) 5.52% (250) 10,000 2004 10 year Treasury (6.08%) 6.00% (240) 12,667 2004 10 year Treasury (6.41%) 5.26% (488) 25,000 2005 6.48% 3 month LIBOR (6.12%) 418 15,000 2005 6.65% 10 year Treasury (6.17%) 767 30,000 2005 6.49% 10 year Treasury (6.12%) 488 45,000 2005 3 month LIBOR (6.19%) 6.41% (357) 15,000 2005 3 month LIBOR (5.39%) 7.00% (100) 12,762 2005 3 month LIBOR (6.39%) 5.58% (405) 45,000 2005 10 year Treasury (6.80%) 5.75% (99) 10,000 2005 10 year Treasury (6.07%) 7.00% (273) 10,692 2005 10 year Treasury (6.43%) 5.53% (347) 10,000 2006 6.60% 3 month LIBOR (6.20%) 187 15,000 2006 3 month LIBOR (5.99%) 7.00% (279) 10,000 2009 6.52% 3 month LIBOR (6.22%) 399 10,000 2009 3 month LIBOR (6.00%) 7.00% (332) 10,000 2009 3 month LIBOR (6.05%) 7.00% (438) 10,000 2009 3 month LIBOR (6.05%) 7.20% (226) 10,000 2009 3 month LIBOR (5.93%) 7.20% (223) 10,000 2009 3 month LIBOR (6.06%) 7.30% (265) 10,000 2009 3 month LIBOR (6.03%) 7.50% (245) 40,000 2028 3 month LIBOR (7.04%) 8.29% (1,053) Interest Rate Cap Arrangements: $17,917 2003 $ 18 10 year CMT (7.25%) $ 105 23,250 2003 152 10 year CMT (5.40%) 600 32,465 2004 48 10 year CMT (7.50%) 236 7,639 2004 25 10 year CMT (7.00%) 80 19,097 2004 46 10 year CMT (7.00%) 201 19,444 2004 58 10 year CMT (6.75%) 246 27,222 2004 86 10 year CMT (6.75%) 346 19,444 2004 81 10 year CMT (6.50%) 297 11,667 2004 84 10 year CMT (6.00%) 264 14,250 2004 104 10 year CMT (6.09%) 315 14,250 2004 43 10 year CMT (7.09%) 153 7,917 2004 18 10 year CMT (7.09%) 85 14,250 2004 100 10 year CMT (6.09%) 316 12,667 2004 113 10 year CMT (5.57%) 377 16,625 2004 180 10 year CMT (5.29%) 583 10,688 2005 23 10 year CMT (7.43%) 110 12,762 2005 29 10 year CMT (7.46%) 133
46
Notional Maturity Average Interest Rate/Fee Market --------------------------------------------------------- (dollars in thousands) Amount Date Paid Received Value - ----------------------------------------------------------------------------------------------------------------------------- Interest Rate Floor Arrangements: $21,000 2005 $ 325 10 year Treasury Notes (6.19%), $ 50 Strike Price of 6.69% 45,000 2005 845 10 year Treasury Notes (6.17%), 92 Strike Price of 6.67% 45,000 2006 858 10 year Treasury Notes (6.17%), 101 Strike Price of 6.66% 1998 Interest Rate Swaps: $10,000 1999 3 month LIBOR (5.52%) 6.00% $ 2 10,000 1999 3 month LIBOR (5.53%) 6.10% 3 10,000 1999 3 month LIBOR (5.51%) 6.00% 14 10,000 1999 3 month LIBOR (5.38%) 6.05% 19 10,000 1999 3 month LIBOR (5.72%) 6.00% 23 15,000 2000 7.08% 3 month LIBOR (5.28%) (372) 9,000 2000 7.19% 3 month LIBOR (5.31%) (283) 15,000 2001 5.73% 3 month LIBOR (5.22%) (212) 16,000 2001 5.08% 3 month LIBOR (5.35%) 60 7,600 2001 5.17% 3 month LIBOR (5.34%) 9 8,000 2002 5.73% 3 month LIBOR (5.22%) (139) 50,000 2002 10 year CMS (5.34%) 5.57% 244 50,000 2002 10 year CMS (5.34%) 5.59% 275 50,000 2002 10 year CMS (5.34%) 5.60% 358 50,000 2002 10 year CMS (5.34%) 5.58% 272 50,000 2002 10 year CMS (5.47%) 5.67% 304 50,000 2002 10 year CMS (5.46%) 5.70% 262 50,000 2002 10 year CMS (5.45%) 5.72% 348 50,000 2002 10 year CMS (5.75%) 5.68% 354 25,000 2002 10 year CMS (5.56%) 5.79% 197 25,000 2002 10 year CMS (5.47%) 5.67% 155 25,000 2002 10 year CMS (5.48%) 5.69% 164 15,000 2003 5.75% 3 month LIBOR (5.22%) (354) 22,917 2003 10 year CMT (4.85%) 5.49% 330 29,450 2003 10 year CMT (4.81%) 5.06% (61) 17,000 2003 10 year CMS (5.51%) 5.75% 164 17,000 2003 10 year CMT (4.55%) 4.84% 62 19,167 2004 5.81% 3 month LIBOR (5.37%) (314) 39,549 2004 10 year CMT (4.53%) 5.61% 821 9,306 2004 10 year CMT (4.58%) 5.60% 189 23,264 2004 10 year CMT (4.81%) 5.57% 445 19,167 2004 5.81% 3 month LIBOR (5.22%) (342) 23,611 2004 10 year CMT (4.60%) 5.56% 456 33,056 2004 10 year CMT (4.61%) 5.58% 651 23,611 2004 10 year CMT (4.62%) 5.56% 382
47
Notional Maturity Average Interest Rate/Fee Market ------------------------------------------------------ (dollars in thousands) Amount Date Paid Received Value - ---------------------------------------------------------------------------------------------------------------------------- $ 14,167 2004 10 year CMT (4.45%) 5.52% $ 141 34,500 2004 10 year CMT (4.74%) 5.55% 375 9,583 2004 10 year CMT (4.59%) 5.52% 96 17,250 2004 10 year CMT (4.62%) 5.50% 162 15,333 2004 10 year CMT (4.81%) 5.26% 33 20,124 2004 10 year CMT (4.86%) 4.98% (120) 23,214 2005 5.79% 3 month LIBOR (5.28%) (388) 23,214 2005 5.79% 3 month LIBOR (5.28%) (388) 23,214 2005 5.77% 3 month LIBOR (5.31%) (370) 46,429 2005 5.76% 3 month LIBOR (5.28%) (808) 12,602 2005 10 year CMT (4.67%) 5.53% 255 15,048 2005 10 year CMT (4.70%) 5.58% 334 Interest Rate Cap Arrangements: $ 22,917 2003 $ 22 10 year CMT (7.25%) $ 36 29,450 2003 218 10 year CMT (5.40%) 224 39,549 2004 59 10 year CMT (7.50%) 80 9,306 2004 29 10 year CMT (7.00%) 27 23,264 2004 57 10 year CMT (7.00%) 68 23,611 2004 70 10 year CMT (6.75%) 83 33,056 2004 105 10 year CMT (6.75%) 117 23,611 2004 100 10 year CMT (6.50%) 101 14,167 2004 102 10 year CMT (6.00%) 91 17,250 2004 127 10 year CMT (6.09%) 107 17,250 2004 52 10 year CMT (7.09%) 52 9,583 2004 22 10 year CMT (7.09%) 29 17,250 2004 121 10 year CMT (6.09%) 108 15,333 2004 137 10 year CMT (5.57%) 137 20,125 2004 192 10 year CMT (5.29%) 225 12,602 2005 27 10 year CMT ((.43%) 38 15,048 2005 34 10 year CMT (7.46%) 46 Interest Rate Corridor Arrangements: $100,000 1999 $ 31 3 month LIBOR (5.22%)*6.63%, $ -- capped at 8.63% Interest Rate Floor Arrangements: $100,000 1999 $ -- 4 year Treasury Notes (4.70%), $ -- Strike Price of 6.8% - --------------------------------------------------------------------------------------------------------------------------------
CMS--Constant Maturity Swap CMT--Constant Maturity Treasury LIBOR--London Interbank Offered Rate * - more than 48 For the year ended December 31, 1999, $9.0 million of the interest rate swaps hedged the exposure of the securities available for sale to declining market values as a result of increasing interest rates. Additionally, remaining swaps of $436.4 million, $40.0 million and $1.1 billion were utilized to hedge the interest rate risk inherent in short-term borrowings, capital securities and brokered certificates of deposit, respectively. The interest rate corridors protect the net interest margin from the impact of increases in savings deposit rates during periods of rising interest rates. The interest rate floors were purchased to hedge the impact of loan repricing on net interest income in future years. The following is an analysis of the activity with regards to interest rate swaps and interest rate floor/cap/corridor arrangements for the years ended December 31, 1999, 1998 and 1997, respectively.
Notional Amount -------------------------------------------------- Interest Rate Interest Rate Floor/Cap/Corridor (in thousands) Swaps Arrangements ================================================================================= Balance, December 31, 1996 $ 312,578 $ 450,000 New Contracts 748,500 -- Expired Contracts (72,759) (200,000) Terminated Contracts (524,667) -- --------------------------------------------------------------------------------- Balance, December 31, 1997 463,652 250,000 New Contracts 1,718,800 343,372 Expired Contracts (147,723) (50,000) Terminated Contracts (892,353) -- --------------------------------------------------------------------------------- Balance, December 31, 1998 1,142,376 543,372 New Contracts 1,310,000 141,000 Expired Contracts (91,818) (291,818) Terminated Contracts (777,737) -- --------------------------------------------------------------------------------- Balance, December 31, 1999 $1,582,821 $ 392,554 =================================================================================
At December 31, 1999, the Corporation had deferred gains of $3.6 million and deferred losses of $1.9 million related to terminated contracts. These deferred gains and losses will be amortized over 4.2 and 3.6 years, respectively. The Corporation had deferred gains of $2.8 million and deferred losses of $2.3 million related to terminated contracts which were amortized as a yield adjustment over 1.4 and 2.5 years, respectively, at December 31, 1998. 49 The notional maturities of the interest rate swaps and interest rate floor/cap arrangements at December 31, 1999, are presented below.
Notional Amount ------------------------------------------ Interest Rate Floor/ Cap (in thousands) Swaps Arrangements ======================================================================================= 2000 $ 9,000 $ -- 2001 88,600 -- 2002 420,917 -- 2003 98,367 41,167 2004 622,487 216,937 2005 208,450 89,450 2006 25,000 45,000 2007 -- -- 2008 -- -- 2009 70,000 -- 2028 40,000 -- --------------------------------------------------------------------------------------- Total $1,582,821 $392,554 =======================================================================================
NOTE 12--Other Non-Interest Income and Expense The components of other non-interest income and other non-interest expense for the three years ended December 31 were as follows:
(in thousands) 1999 1998 1997 ======================================================================================= Other Non-Interest Income: Other Loan Fees $ 3,355 $ 5,104 $ 2,147 Other Non-Interest Income 8,275 5,937 4,543 --------------------------------------------------------------------------------------- Total Other Non-Interest Income $11,630 $11,041 $ 6,690 ======================================================================================= Other Non-Interest Expense: Advertising and Promotion $ 6,806 $ 7,171 $ 5,678 Communication and Postage 5,231 4,376 3,693 Printing and Supplies 2,463 2,502 2,277 Regulatory Fees 1,120 939 1,016 Professional Services 2,706 2,413 2,762 Other Non-Interest Expense 9,500 9,027 8,537 --------------------------------------------------------------------------------------- Total Other Non-Interest Expense $27,826 $26,428 $23,963 =======================================================================================
NOTE 13--Income Taxes The components of income tax expense and the sources of deferred income taxes for the three years ended December 31 are presented below.
(in thousands) 1999 1998 1997 ======================================================================================= Current Income Tax Expense (Benefit): Federal $18,803 $22,422 $19,121 State (437) (110) (354) ----------------------------------------------------------------------------------------- Total Current 18,366 22,312 18,767 Deferred Income Tax Expense (Benefit) 2,833 (2,941) (5,139) ------------------------------------------------------------------------------------------ Total Income Tax Expense $21,199 $19,371 $13,628 =======================================================================================
Tax expense associated with investment securities gains was $109 thousand in 1999, $2.7 million in 1998 and $927 thousand in 1997. 50 The primary sources of temporary differences that give rise to significant portions o f the deferred tax asset and liability at December 31, 1999 and 1998, are presented below.
Deferred Deferred (in thousands) Assets Liabilities ========================================================================================== 1999: Loan Loss Reserve Recapture $ -- $ 8,843 Reserve for Loan Loss 13,923 -- Write-down of Property Held for Sale 1,452 -- Employee Benefits 2,656 -- Deferred Gain on Sale/Leaseback 272 -- Deferred State Tax Receivable 5,576 -- Depreciation -- 2,021 Deferred Federal Tax Liability for State Receivable -- 1,952 Deferred Tax Benefit on Unrealized Losses in Debt Securities 23,867 -- Leasing Activities 536 -- Mortgage Servicing Rights -- 181 Capitalized Real Estate Owned Costs 383 -- REIT Dividend Deferred -- 4,613 All Other 1,145 2,384 ------------------------------------------------------------------------------------------ Total $49,810 $19,994 ========================================================================================== 1998: Loan Loss Reserve Recapture $ -- $ 9,411 Reserve for Loan Loss 14,959 -- Write-down of Property Held for Sale 1,453 -- Employee Benefits 2,868 -- Deferred Gain on Sale/Leaseback 359 -- Deferred State Tax Receivable 4,800 -- Depreciation -- 837 Deferred Federal Tax Liability for State Receivable -- 1,680 Deferred Tax Liability on Unrealized Gains in Debt Securities -- 3,448 Mortgage Servicing Rights -- 596 Capitalized Real Estate Owned Costs 384 -- Deferred Loan Fees -- 1,434 All Other 615 2,698 ------------------------------------------------------------------------------------------ Total $25,438 $20,104 ==========================================================================================
At December 31, 1999 the Corporation had a valuation allowance of $2.1 million with respect to deferred tax assets. No valuation allowance was required in 1998. 51 The combined federal and state effective income tax rate for each year is different than the statutory federal income tax rate. The reasons for these differences are set forth below:
1999 1998 1997 ============================================================================================= Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% Increases (Decreases) in Tax Rate Resulting From: State and Local Income Taxes, Net of Federal Income Tax Benefit (.7) (.8) -- Tax Benefit of State Refund Claim (.7) -- -- Tax-Advantaged Income (1.1) (1.2) (1.6) Disallowed Interest Expense .2 .2 -- Employee Benefits (.2) (.1) (.4) Non-Deductible Merger Expenses -- -- 2.3 Credit for Community Development Corporation Contribution -- (.2) -- Other (.1) .3 -- -------------------------------------------------------------------------------------- Total Combined Effective Tax Rate 32.4% 33.2% 35.3% ======================================================================================
NOTE 14--Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Basic earnings per share does not include the effect of any potentially dilutive transactions or conversions. Diluted earnings per share reflects the potential dilution of earnings per share under the treasury stock method which could occur if contracts to issue common stock were exercised, such as stock options, and shared in corporate earnings. All prior period data has also been restated to provide for the effects of the stock dividends issued in 1998 and 1999, and the 2 for 1 stock split in February 1998. The following table presents a summary of per share data and amounts for the periods indicated:
(dollars in thousands, except per share data) 1999 1998 1997 ============================================================================ Qualifying Net Income $44,150 $39,030 $24,959 Basic EPS Shares 25,534 25,605 25,046 Basic EPS $ 1.73 $ 1.52 $ 1.00 Dilutive Shares 847 1,016 906 Diluted EPS Shares 26,381 26,621 25,952 Diluted EPS $ 1.67 $ 1.47 $ .96 ----------------------------------------------------------------------------
52 NOTE 15--Other Comprehensive Income Comprehensive income is defined as net income plus transactions and other occurrences which are the result of non-owner changes in equity. For financial statements presented for the Corporation, the only non-owner equity change is comprised of unrealized gains or losses on available for sale debt securities that will be accumulated with net income from operations. This does not have an impact on the Corporation's results of operations. Below are the components of Other Comprehensive Income and the related tax effects allocated to each component:
Year Ended December 31, ------------------------------------------------------------------------------------------------ (in thousands) 1999 1998 1997 ================================================================================================ Unrealized Holding Gains (Losses) Arising During the Year $(76,659) $7,700 $12,411 Tax Expense (Benefit) Attributable to Unrealized Holding Gains (Losses) Arising During the Year (27,231) 3,045 4,892 ------------------------------------------------------------------------------------------------ Net Unrealized Holding Gains (Losses) (49,428) 4,655 7,519 Less: Reclassification Adjustment Gains Realized in Net Income 312 6,749 2,337 Tax Expense on Realized Gains Included in Net Income 109 2,669 924 ------------------------------------------------------------------------------------------------ Net Reclassification Adjustment 203 4,080 1,413 ------------------------------------------------------------------------------------------------ Other Comprehensive Income (Loss) $(49,631) $ 575 $ 6,106 ================================================================================================
NOTE 16--Employee Benefit Plans Pension Plan The Corporation's non-contributory defined benefit pension plan covers substantially all full-time employees with at least one year of service and provides monthly benefits upon retirement to participants based on average career earnings and length of service. The Corporation's policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, plus such additional amounts as the Corporation deems appropriate. Postretirement Benefits In addition to providing pension benefits, the Corporation provides certain health care and life insurance benefits to retired employees. Substantially all employees of the Corporation that reach retirement age may become eligible for these benefits, generally contingent upon the completion of twenty years of service. The health care plan is contributory where the retiree is responsible for all premiums in excess of the Corporation's contribution. The Corporation's contribution is capped at a growth rate of 4% per year. Under the prospective transition approach, the transition obligation is amortized over a twenty-year period. The cost of life insurance benefits provided to the retiree is borne by the Corporation. At December 31, 1999 and 1998, this plan is unfunded. 53 The following tables set forth the activity for each benefit plan's projected benefit obligation, plan assets and funded status at January 1.
Pension Plan Postretirement Benefits ----------------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1999 1998 ============================================================================================================================= Actuarial Present Value of Accumulated Benefit Obligation $23,098 $25,518 $ 1,216 $ 1,363 ----------------------------------------------------------------------------------------------------------------------------- Projected Benefit Obligation at January 1, $26,614 $21,965 $ 1,363 $ 1,060 Service Cost 976 840 114 72 Interest Cost 1,740 1,771 85 88 Benefit Payments (1,323) (1,907) (88) (111) Actuarial Loss (Gain) (4,373) 3,945 (258) 254 ----------------------------------------------------------------------------------------------------------------------------- Projected Benefit Obligation at December 31, $23,634 $26,614 $ 1,216 $ 1,363 ============================================================================================================================= (in thousands) 1999 1998 1999 1998 ============================================================================================================================= Plan Assets Fair Value at January 1, $30,434 $26,826 $ -- $ -- Employer Contributions -- -- -- -- Benefit Payments (1,323) (1,907) -- -- Actual Return on Plan Assets 1,117 5,515 -- -- ----------------------------------------------------------------------------------------------------------------------------- Plan Assets Fair Market Value at December 31, $30,228 $30,434 $ -- $ -- ============================================================================================================================= (in thousands) 1999 1998 1999 1998 ============================================================================================================================= Plan Assets in Excess of (Less Than) Projected Benefit Obligation $ 6,594 $ 3,820 $(1,216) $(1,363) Unrecognized Net Gain from Past Experience Different from that Assumed (4,914) (2,440) (373) (127) Unrecognized Prior Service Cost (1,401) (1,596) 76 83 Unrecognized Net Obligation (Asset) Arising at Transition at January 1, (424) (560) 702 757 ----------------------------------------------------------------------------------------------------------------------------- Accrued Pension Cost Included in Other Liabilities $ (145) $ (776) $ (811) $ (650) =============================================================================================================================
The actuarially estimated net benefit cost for the year ended December 31 includes the following components:
(in thousands) 1999 1998 1999 1998 ============================================================================================================================= Service Cost--Benefits Earned During the Year $ 976 $ 840 $ 114 $ 72 Interest Cost on Projected Benefit Obligation 1,740 1,771 85 88 Expected Return on Plan Assets (2,977) (2,599) -- -- Net Amortization and Deferral of Loss (Gain) (370) (331) 50 50 ----------------------------------------------------------------------------------------------------------------------------- Net Pension Cost (Benefit) Included in Employee Benefit Expense $ (631) $ (319) $ 249 $ 210 =============================================================================================================================
54 The Corporation revises the rates applied in the determination on the actuarial present value of the projected benefit obligation to reflect the anticipated performance of the plan and changes in compensation levels.
Pension Plan Postretirement Benefits -------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 ============================================================================================================== Rates Used in Determining Actuarial Present Value of Projected Benefit Obligation: Weighted Average Discount Rate 8.0% 7.0% 8.0% 7.0% Expected Rate of Increase in Future Compensation 4.0 4.0 Expected Long-Term Rate of Return on Plan Assets 10.0 10.0 ==============================================================================================================
The contribution to the Corporation's postretirement benefit plan has been capped at a growth rate of 4% in 1999 and 1998 and is expected to remain at that level in the future. The assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
(in thousands) 1% Increase 1% Decrease -------------------------------------------------------------------------------------------------------------- Effect on Total of Service and Interest Cost Components $ 25 $(21) Effect on Postretirement Benefit Obligation 103 (88)
Retirement Savings Plan The Retirement Savings Plan is a defined contribution plan which is qualified under Section 401(a) of the Internal Revenue Code of 1986. The plan generally allows all employees who complete 500 hours of employment during a six month period and elect to participate, to receive matching funds from the Corporation for pre-tax retirement contributions made by the employee. The annual contribution to this plan is at the discretion of and determined by the Board of Directors of the Corporation. Under provisions of the plan, the maximum contribution is 75% of an employee's contribution up to 4.5% of the individual's salary. Contributions to this plan amounted to $1.3 million, $1.3 million and $1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE 17--Regulatory Capital The Corporation is subject to various capital adequacy guidelines imposed by federal and state regulatory agencies. Under these guidelines, the Corporation must meet specific capital adequacy requirements which are quantitative measures of the Corporation's assets, liabilities and certain off- balance sheet items calculated under regulatory accounting practices. Additionally, the Corporation's capital amounts and classifications are subject to qualitative judgments by these agencies about components, risk weightings and other factors. The quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain amounts and ratios of total and tier 1 capital to risk-weighted assets and tier 1 capital to average assets, known as the leverage ratio. The Corporation's tier 1 capital is equal to its capital securities (see Note 9), common stock, capital surplus and retained earnings less treasury stock. Equity for regulatory purposes does not include market value adjustments for available for sale securities. The calculation of the Corporation's total capital is equal to tier 1 capital plus the allowance for loan losses subject to certain limitations. Risk-weighted assets are determined by applying weighting to asset categories and certain off-balance sheet commitments based on the level of credit risk inherent in the assets. At December 31, 1999 and 1998, the Corporation exceeded all regulatory capital requirements. The most recent notification from the Corporation's primary regulators categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. If the Corporation is unable to comply with the minimum capital requirements, it could result in regulatory actions which could have a material impact on the Corporation. 55 The minimum regulatory guidelines for total capital and tier 1 capital to risk-weighted assets are 8% and 4%, respectively. Guidelines for the leverage ratio require the ratio of tier 1 capital to average assets to be 100 to 200 basis points above a 3% minimum, depending on risk profiles and other factors. The table below presents the various components used to calculate the capital adequacy ratios. December 31, ------------------------------------------------------------------ (dollars in thousands) 1999 1998 ================================================================== Qualifying Capital Tier 1 Capital $ 358,771 $ 330,461 Total Capital 398,551 368,000 Risk-Weighted Assets 3,907,332 3,586,808 Quarterly Average Assets 5,056,385 4,688,197 Ratios Leverage Capital 7.10% 7.05% Tier 1 Capital 9.18 9.21 Total Capital 10.20 10.26 NOTE 18--Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosure about Fair Value of Financial Instruments" ("SFAS No. 107") requires all entities to disclose the fair value of recognized and unrecognized financial instruments on a prospective basis, where practicable, in an effort to provide financial statement users with information in making rational investment and credit decisions. To estimate the fair value of each class of financial instrument the Corporation applied the following methods using the indicated assumptions: Cash and Due from Banks and Short-Term Investments Carrying amount of those investments is used to estimate fair value. Mortgage Loans Held for Sale Fair value for mortgage loans held for trading or sale was determined using forward contract commitment pricing for the majority of these loans. Loans not specifically allocated to a forward commitment have been priced using quoted prices for commitments into which these mortgages would be placed in the future. Securities Available for Sale The fair values of the securities are based on quoted market prices or dealer quotes for those investments. Loans Fair value of loans which have homogeneous characteristics, such as residential mortgages and installment loans, was estimated using discounted cash flows. All other loans were valued using discount rates which reflected credit risks of the borrower, types of collateral and remaining maturities. Deposit Liabilities Fair value of demand deposits, savings accounts and money market deposits was the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. 56 Short-Term Borrowings and Long-Term Debt Rates currently available to the Corporation for borrowings and debt with similar terms and remaining maturities are used to estimate fair value of the existing debt. Interest Rate Arrangements The fair value of interest rate swaps and floor/cap/corridor arrangements, which the Corporation uses for hedging purposes, is the estimated amount the Corporation would receive or pay to terminate the arrangements at the reporting date, taking into account the current interest rates and the current credit worthiness of the counterparties. Commitments to Extend Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the borrowers. Fixed-rate loan commitments also take into account the difference between current levels of interest rates and committed rates. The estimated fair values of the Corporation's financial instruments at December 31 are as follows:
1999 1998 - ---------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------------------- Assets: Cash and Due From Banks $ 90,840 $ 90,840 $ 74,365 $ 74,365 Short-Term Investments 1,759 1,759 198 198 Mortgage Loans Held for Sale 30,535 30,513 224,707 225,860 Securities Available for Sale 1,671,507 1,671,507 1,198,511 1,198,511 Loans, Net of Allowance 3,144,339 3,089,716 3,057,472 3,147,070 Liabilities: Deposits $3,808,528 $3,685,790 $3,419,557 $3,434,359 Short-Term Borrowings 301,323 301,430 145,363 145,559 Long-Term Debt 627,118 621,575 735,239 745,435 Recognized Derivative Financial Instruments: Interest Rate Floors $ 2,028 $ 243 $ -- $ -- Interest Rate Corridors -- -- 31 -- Interest Rate Caps 1,208 4,447 1,474 1,569 Unrecognized Derivative Financial Instruments: Interest Rate Swaps $ -- $ (6,938) $ -- $ 3,808 Commitments to Extend Credit -- -- -- -- ================================================================================================================
These fair value disclosures are made solely to comply with the requirements of SFAS No. 107. The calculations represent estimates and do not represent the underlying value of the Corporation. The information presented is based on fair value calculations and market quotes as of December 31, 1999 and 1998. These amounts are based on the relative economic environment at the respective year-ends, therefore, the valuations may have been affected by economic movements since year-end. 57 NOTE 19--Parent Company Financial Information The condensed statements of income, financial condition and cash flows for Provident Bankshares Corporation (parent only) are presented below. Statement of Income
Year Ended December 31, -------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 ==================================================================================================================== Interest Income From Bank Subsidiary $ 34 $ 242 $ 225 Dividend Income From Subsidiaries 20,242 13,951 8,460 -------------------------------------------------------------------------------------------------------------------- Total Income 20,276 14,193 8,685 -------------------------------------------------------------------------------------------------------------------- Operating Expenses 4,105 2,901 2,863 -------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes and Equity in Undistributed Income of Subsidiaries 16,171 11,292 5,822 Income Tax Benefit (1,277) (1,038) (43) -------------------------------------------------------------------------------------------------------------------- 17,448 12,330 5,865 Equity in Undistributed Income of Subsidiaries 26,702 26,700 19,094 -------------------------------------------------------------------------------------------------------------------- Net Income $44,150 $39,030 $24,959 ====================================================================================================================
Statement of Condition
December 31, --------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 ========================================================================================================= ASSETS Interest Bearing Deposit with Bank Subsidiary $ 219 $ 900 Investment in Bank Subsidiary 313,555 336,485 Other Assets 2,000 682 --------------------------------------------------------------------------------------------------------- Total Assets $315,774 $338,067 ========================================================================================================= LIABILITIES Other Liabilities $ 775 $ 1,514 --------------------------------------------------------------------------------------------------------- Total Liabilities 775 1,514 --------------------------------------------------------------------------------------------------------- Corporation-Obligated Mandatorily Redeemable Capital Securities 40,400 40,476 --------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock 26,226 24,811 Capital Surplus 203,364 172,239 Retained Earnings 102,587 103,496 Net Accumulated Other Comprehensive Income of Bank Subsidiary (44,323) 5,308 Treasury Stock at Cost (13,255) (9,777) --------------------------------------------------------------------------------------------------------- Total Stockholder's Equity 274,599 296,077 --------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $315,774 $338,067 =========================================================================================================
58 Statement of Cash Flows
Year Ended December 31, --------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 ===================================================================================================================== Operating Activities: Net Income $ 44,150 $ 39,030 $ 24,959 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Income from Subsidiaries (26,702) (26,700) (19,094) Other Operating Activities (2,056) 4,688 (3,583) --------------------------------------------------------------------------------------------------------------------- Total Adjustments (28,758) (22,012) (22,677) --------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 15,392 17,018 2,282 --------------------------------------------------------------------------------------------------------------------- Investing Activities: Investment in Bank Subsidiary -- (42,662) (4,500 Investment in Trust Subsidiary -- (1,238) -- --------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities -- (43,900) (4,500) --------------------------------------------------------------------------------------------------------------------- Financing Activities: Issuance of Common Stock 2,713 6,225 8,824 Purchase of Treasury Stock (3,478) Cash Dividends on Common Stock (15,232) (12,648) (8,505) Other Financing Activities (76) -- -- Issuance of Corporation-Obligated Mandatorily Redeemable Capital Securities -- 41,238 -- --------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities (16,073) 27,528 319 --------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (681) 646 (1,899) Cash and Cash Equivalents at Beginning of Year 900 254 2,153 --------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 219 $ 900 $ 254 Supplemental Disclosures --------------------------------------------------------------------------------------------------------------------- Income Taxes Paid $ 344 $ 748 $ 187 Stock Dividend 29,827 36,349 14,605
59 NOTE 20--Future Changes in Accounting Principles In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). As amended, the statement becomes effective for fiscal years beginning after June 15, 2000 and will not be applied retroactively. The statement establishes accounting and reporting standards for derivative instruments and hedging activity. Under the standard, all derivatives must be measured at fair value and recognized as either assets or liabilities in the financial statements. The accounting for changes in fair value (gains and losses) of a derivative is dependent on the intended use of the derivative and its designation. Derivatives may be used to: 1) hedge exposure to change the fair value of a recognized asset or liability or a firm commitment, referred to as a fair value hedge, 2) hedge exposure to variable cash flow of forecasted transactions, referred to as a cash flow hedge, or 3) hedge foreign currency exposure. The Corporation only engages in fair value and cash flow hedges. In both types of hedges, the effective portions of the hedges, if included in earnings, would not affect corporate net income. Ineffective portions of hedges are reported in and affect net earnings immediately. Derivatives not designed as a hedging instrument have the changes in their fair value recognized in earnings in the period of change. Management is currently assessing the potential impact of SFAS No. 133 on future corporate operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The text and tables under "Election of Directors" in the Corporation's 2000 Proxy Statement are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The text and tables under "Compensation of Officers and Directors" in the Corporation's 2000 Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The text and tables under "Voting Securities and Principal Holders Thereof" and "Election of Directors" in the Corporation's 2000 Proxy Statement are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The text under "Certain Transactions with Management" in the Corporation's 2000 Proxy Statement is incorporated herein by reference. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) The Consolidated Financial Statements of Provident Bankshares Corporation and Subsidiaries are included in Item 8. (2) Financial statement schedules--none applicable or required. (3) Exhibits The following is an index of the exhibits included in this report: (3.1) Articles of Incorporation of Provident Bankshares Corporation.(1) (3.2) Second Amended and Restated By-Laws of Provident Bankshares (4.1) Amendment No. 1 to Stockholder Protection Rights Agreement.(7) (10.1) 1994 Supplemental Executive Incentive Plan of Provident Bank of Maryland.(3) (10.2) Supplemental Executive Retirement Income Plan of Provident Bank of Maryland.(4) (10.3) Amended and Restated Stock Option and Appreciation Rights Plan of Provident Bankshares Corporation.(5) (10.4) Form of Change in Control Agreement between Provident Bankshares Corporation and Certain Executive Officers.(6) (10.5) Form of Change in Control Agreement between Provident Bank of Maryland and Certain Executive Officers.(6) (10.6) Deferred Compensation Plan for Outside Directors.(7) (10.7) Provident Bankshares Corporation Non-Employee Directors' Severance Plan.(7) (11) Statement re: Computation of Per Share Earnings. (21) Subsidiaries of Provident Bankshares Corporation. (23) Consents of Independent Accountants. (24) Power of Attorney. (27) Financial Data Schedule. (b) No reports on Form 8-K were filed by the Corporation in the last quarter of 1999. (1) Incorporated by reference from Registrant's Registration Statement on Form S-3 (File No. 33-73162) filed with the Commission on August 18, 1994. (2) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed with the Commission on November 13, 1998. (3) Incorporated by reference from the Registrant's 1994 Annual Report on Form 10-K (File No. 0-16421) filed with the Commission on February 17, 1995. (4) Incorporated by reference from Registrant's 1993 Form 10-K (File No. 0- 16421) filed with the Commission on March 14, 1994. (5) Incorporated by reference from Registrant's definitive 1995 Proxy Statement for the Annual Meeting of Stockholders held on April 19, 1995. (6) Incorporated by reference from Registrant's 1995 Form 10-K (File No. 0- 16421) filed with the Commission on March 18, 1996. (7) Incorporated by reference from Registrant's 1998 Form 10-K (File No. 0- 16421) filed with the Commission on March 3, 1999. 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROVIDENT BANKSHARES CORPORATION (Registrant) February 16, 2000 BY /s/ Peter M. Martin ------------------ Peter M. Martin Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. Principal Executive Officer: February 16, 2000 BY /s/ Peter M. Martin ------------------- Peter M. Martin Chairman of the Board, President and Chief Executive Officer Principal Financial Officer: February 16, 2000 BY /s/ Dennis A. Starliper ----------------------- Dennis A. Starliper Group Manager and Chief Financial Officer Principal Accounting Officer: February 16, 2000 BY /s/ R. Wayne Hall ----------------- R. Wayne Hall Treasurer A Majority of the Board of Directors* Robert B. Barnhill, Jr., Melvin A. Bilal, Thomas S. Bozzuto, Dr. Calvin W. Burnett, Ward B. Coe, III, Charles W. Cole, Jr., Pierce B. Dunn, Enos K. Fry, Herbert W. Jorgensen, Mark K. Joseph, Barbara B. Lucas, Peter M. Martin, Frederick W. Meier, Jr., Sister Rosemarie Nassif, Francis G. Riggs, Sheila K. Riggs, Carl W. Stearn * Pursuant to the Power of Attorney filed herewith as Exhibit 24.0. February 16, 2000 BY /s/ R. Wayne Hall ----------------- R. Wayne Hall Attorney-in-fact 63 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31 (in thousands, except per share data) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Basic: - ------ Average shares outstanding 25,534 25,605 25,046 ======== ======== ======== Net Income $44,150 $39,030 $24,959 ======== ======== ======== Per Share Amount $ 1.73 $ 1.52 $ 1.00 ======== ======== ======== Diluted: - -------- Average shares outstanding 25,534 25,605 25,046 Net effect of dilutive stock options based on the treasury stock method using the average market price or quarter end price, whichever is greater 847 1,016 906 -------- -------- -------- Total Shares Outstanding 26,381 26,621 25,952 ======== ======== ======== Net Income $44,150 $39,030 $24,959 ======== ======== ======== Per Share Amount $ 1.67 $ 1.47 $ 0.96 ======== ======== ========
EX-21 3 SUBSIDIARIES OF PROVIDENT BANKSHARES CORP. EXHIBIT 21 -- SUBSIDIARIES OF PROVIDENT BANKSHARES CORPORATION [PENDING LEGAL/MMF] 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 Delaware PB Trust I 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, Court Square Financial Services and Fast' n Friendly Check Cashing Services. (2) Also doing business as Court Square Mortgage and Court Square Funding Group. EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 -- CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Provident Bankshares Corporation We hereby consent to the incorporation by reference in the Registration Statements and Prospectuses on Forms S-3 (Nos. 33-73162 and 33-62859) and Forms S-8 (Nos. 33-19352, 33-22552, 33-37502, 33-51462, 333-34409, 333-45651, and 333- 58881) of Provident Bankshares Corporation of our report dated January 19, 2000 relating to the financial statements, which appears in this Form 10-K. /s/PricewaterhouseCoopers LLP Baltimore, Maryland February 16, 2000 EX-24 5 POWER OF ATTORNEY EXHIBIT 24 -- POWER OF ATTORNEY PROVIDENT BANKSHARES CORPORATION POWER OF ATTORNEY [PENDING 1999 UPDATE/LEGAL] 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, James R. Wallis 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 15, 1999 - ----------------------------- Peter M. Martin /s/ Dennis A. Starliper December 15, 1999 - ----------------------------- Dennis A. Starliper /s/ R. Wayne Hall December 15, 1999 - ----------------------------- R. Wayne Hall /s/ Robert B. Barnhill, Jr. December 15, 1999 - ----------------------------- Robert B. Barnhill, Jr. /s/ Melvin A. Bilal December 15, 1999 - ----------------------------- Melvin A. Bilal /s/ Thomas S. Bozzuto December 15, 1999 - ----------------------------- Thomas S. Bozzuto /s/ Dr. Calvin W. Burnett December 15, 1999 - ----------------------------- Dr. Calvin W. Burnett /s/ Ward B. Coe, III December 15, 1999 - ----------------------------- Ward B. Coe, III /s/ Charles W. Cole, Jr. December 15, 1999 - ----------------------------- Charles W. Cole, Jr. /s/ Pierce B. Dunn December 15, 1999 - ----------------------------- Pierce B. Dunn /s/ Enos K. Fry December 15, 1999 - ----------------------------- Enos K. Fry /s/ Herbert W. Jorgensen December 15, 1999 - ----------------------------- Herbert W. Jorgensen /s/ Mark K. Joseph December 15, 1999 - ----------------------------- Mark K. Joseph /s/ Barbara B. Lucas December 15, 1999 - ----------------------------- Barbara B. Lucas /s/ Frederick W. Meier, Jr. December 15, 1999 - ----------------------------- Frederick W. Meier, Jr. /s/ Sister Rosemarie Nassif December 15, 1999 - ----------------------------- Sister Rosemarie Nassif /s/ Francis G. Riggs December 15, 1999 - ----------------------------- Francis G. Riggs /s/ Sheila K. Riggs December 15, 1999 - ----------------------------- Sheila K. Riggs /s/ Carl W. Stearn December 15, 1999 - ----------------------------- Carl W. Stearn EX-27 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000818969 PROVIDENT BANKSHARES CORPORATION 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 90,840 0 0 0 1,671,507 0 0 3,184,119 39,780 5,094,477 3,808,528 301,323 43,747 627,118 39,162 0 26,226 248,373 5,094,477 261,837 88,094 2,446 352,377 151,071 204,261 148,116 11,570 312 71,509 65,349 65,349 0 0 44,150 1.73 1.67 3.13 28,908 29,181 0 0 42,739 14,557 1,528 39,780 39,780 0 0
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