I am pleased to report that 2000 was another successful year for Provident Bankshares Corporation. We achieved strong growth in core deposits, non-interest income and commercial loans. We also continued to expand our branch system, increase our customer base and maintain asset quality. Our solid results were driven by the strong performance of our core business operations as we continued to implement our successful financial and network expansion strategies. We launched a number of new initiatives during the year to take advantage of business opportunities in the markets we serve, focus operations on our most profitable business lines and enhance our overall financial performance.

PERFORMANCE SUMMARY

Net income for the year totaled $44.8 million. This is an earnings increase of 1.5% from $44.1 million in 1999. Beneath this relatively flat landscape are two significant events that affected absolute earnings in 2000.

Prompted by continued instability in the health care industry, we took aggressive action in the second quarter regarding two of our health care credits. We made a $13 million addition to the provision for loan losses to address the anticipated write-down of a significant portion of a $15 million non-performing health care credit and the sale of another health credit. The sale of the second credit realized a $5 million loss, which was offset by $7.8 million in gains from securities transactions. The net effect of these second quarter actions decreased earnings for the year by $3 million.

We also continued to use our stock buy-back authority to strategically purchase shares in the open market. During 2000, the Corporation repurchased a total of 3.2 million shares. The resulting deleveraging decreased absolute earnings in 2000 by $2 million, but was very wholesome for earnings per share. Diluted earnings per share for 2000 increased 4.4% to $1.67, up from $1.60 in 1999. Average assets, loans and deposits all showed strong growth in 2000.

Average assets increased 11.6%, with average earning assets up 11.2% for the year. Average loans grew by 4% during 2000, a year in which we also securitized $324 million of consumer loans and moved the assets to the investment portfolio. Average deposits increased 8.2%. Average core deposits were also up 7.1%, with average non-interest bearing demand deposits up 14.5% for the year.

Non-interest income (excluding securities gains) increased 9.4% to $66.9 million, and comprised 29% of our total revenue for the year. Non-interest expense was $148.4 million, an increase of 11.8% in 2000. The expenses associated with expanding our network by 15 branches and the issuance of trust preferred stock drove this increase.

Return on average common equity for the year was 14.03%, down from 14.61% for 1999. Return on average assets was .82% for 2000, down from .90% in 1999, reflecting our second quarter charge-offs. The 2000 net interest margin was 3.07%, down from 3.13% in 1999. The margin for 2000 was reduced four basis points as a result of our investment in a Bank Owned Life Insurance (BOLI) program. While this program will continue to make a positive contribution to earnings, income has been shifted from the margin to non-interest income.

We have active strategies in place to improve all of our key performance ratios, and impressive progress was made during the year. Our financial performance in the last half of 2000 showed that Provident was not only back on track, but steaming ahead with solid earnings momentum for 2001.

SUCCESSFUL STRATEGIES

Expand our valuable network in highly attractive markets. We added 15 new branches in 2000, 10 in-store and five traditional. At year-end 2000, Provident operated 98 branches—42 in-store and 56 traditional—as well as 165 ATMs. Nine of our branches and 21 of our ATMs are in the dynamic Northern Virginia market. In 2001, we plan to open nine new branches.

We also completed our acquisition of Harbor Federal Bancorp, Inc. and integration of its Harbor Federal Savings Bank operations. Harbor added roughly $253 million in total assets and reflects our strategy to expand into attractive, existing and contiguous markets. After consolidation with nearby Provident branches, we will continue to operate five of the nine Harbor offices.

Maintain a strong competitive position in the markets we serve. We opened more than 76,000 new retail checking accounts in 2000, up 20% from 1999, and saw average annual revenue per account reach $188 in 2000. Expansion branches (open less than one year) contributed 32% of the new account volume. At year-end 2000, we had more than 230,000 retail checking accounts.

Retail checking fees continue to be a major component of our non-interest income. Retail checking fees, including the debit card, rose 30% to $41.5 million for the year, driven by both the number of accounts on hand as well as fees generated per account.

It was also a strong year for cash management revenue growth. Cash management assessed fees increased 58% for the year. Commercial non-interest bearing deposits increased 16.8% compared to 1999; non-interest bearing checking accounts were up 25% for the year 2000.

During the year, we continued to attract new commercial business in the Baltimore– Washington corridor. This is in keeping with our strategy to increase in-market loan production while limiting exposure to large syndicated credits.

Enhance franchise value while improving profitability. In 2000, we renewed focus on our profitable core business operations. As part of this process, we assessed the short- and long-term profitability of our business lines and made some strategic decisions. We sold our Fast ‘n Friendly check cashing operation, closed our indirect auto lending function and repositioned our mortgage lending business by selling our mortgage office network, eliminating our wholesale operation and focusing specifically on serving the mortgage needs of our retail customers through an outsourced loan origination process. These decisions have allowed us to reallocate our assets—human, intellectual and monetary—and concentrate more fully on our profitable core lines of business.

We also took definitive steps toward becoming a significant player in the small business banking arena. During the year, we created and staffed our new small business unit with high-profile and highly experienced employees from within our organization. We initiated development of the sales and support processes that will become our strategic advantage. We completed the redesign of our small business product set and developed a strategic marketing plan to increase market awareness and sales. We have laid a strong foundation and believe our efforts will begin to pay dividends in early 2001.

Expand our e-commerce capabilities and activities. We believe electronic banking services are an extension of our delivery system—yet another channel for our customers to access our products, receive service and information or communicate with their bankers.

We continued to add over 950 new Internet Banking accounts per month throughout 2000. At year-end, we had more than 17,000 Internet/PC Banking accounts, and they represented almost 9% of our ever-growing checking base. We took more than 425 consumer loan applications via our Web site and opened deposit accounts online for over $1.5 million in balances.

Our debit card program continued to grow as well. Fifty-eight percent of all retail checking account holders now carry our debit card. These 180,000 debit card users generated more than $600,000 per month in fee income during 2000. In March, we launched our business debit card program. By year-end, more than 36% of our business checking accounts had been issued a debit card, and monthly fee income from this product continues to exceed our expectations.

Maintain asset quality. Our asset quality remains strong. We took decisive actions during the second quarter of 2000 to address our troubled health care credits with a significant addition to our loan loss provision. Non-performing assets remained largely unchanged from the third quarter and ended the year at $24.0 million. Our strong, conservative credit culture, coupled with regularly scheduled reviews of our portfolios, will help us maintain a high level of asset quality.

Utilize experienced management. Two years ago, we established the Office of the Chairman to provide a bridge for the continuity of Provident executive management. The concept worked very well, and we are now prepared to take the next step in crossing that bridge. In January 2001, we announced the appointment of Gary Geisel as President and Chief Operating Officer of the Corporation and the Bank. At the same time, Jack Novak, Dick Oppitz and CFO Dennis Starliper were appointed Executive Vice Presidents of the Bank. I will continue as Chairman and CEO.

This executive team, in cooperation with our other senior managers and employees, will continue to refine and execute our successful business strategy.

Build shareholder value. We ended 2000 with a strong quarter, exceeding the consensus EPS estimate for the fourth quarter and for the year. We continued to attract new customers, expand our delivery network, increase deposits, enhance fee income, widen the net interest margin and maintain asset quality. These accomplishments helped drive a 27% increase in our stock price from December 31, 1999 to December 31, 2000. As mentioned earlier, we repurchased 3.2 million shares in 2000 and have remaining authority to repurchase 2.3 million shares.

2001 OUTLOOK

We will continue to focus on our goals to maximize shareholder value by profitably expanding our branch network, increasing our market share and growing our commercial business operations. We expect the successful execution of our business strategies will enable Provident to begin reaching ROA of 1.0%, ROCE between 16% and 18% and EPS growth of 10% by fourth quarter 2001. In addition, management is working diligently to achieve an efficiency ratio of less than 60% by fourth quarter 2001.

I am particularly pleased with the performance of our core business units in 2000. They created performance momentum that positions us well for a successful 2001. As always, these accomplishments would not have been possible without the hard work, initiative, insight and commitment of the managers and employees of Provident Bank. I believe it is our execution—implementing business strategies, exceeding customer service expectations, crafting and presenting commercial banking solutions, providing effective and efficient operations and administrative support—that sets us apart from our bank competitors and peers. The people of Provident make this outstanding performance possible.

Our continued performance improvement reflects Provident’s evolution from a Baltimore thrift to a highly competitive commercial bank serving the entire Baltimore–Washington region. We are well situated for the future and remain committed to our core business strategies. We will continue to deliver outstanding products and services to our individual and business clients, strengthen our financial performance and enhance the value of our company for customers, employees and shareholders.

Sincerely,
Peter M. Martin
Chairman & Chief Executive Officer