BALTIMORE Fierce proxy fights have marred Provident Bankshares last two annual meetings, but a repeat this year seems unlikely now that the $5.5 billion-asset company has agreed to buy back the shares of its most vocal stockholder.
The $33.6 million repurchase agreement announced this week effectively ended speculation over whether Jerry Shearer, the managing partner of Mid-Atlantic Investors, would advocate another sell-the-bank proposal this year, after trying last year and in 1999. Provident said it would repurchase 1.4 million shares 5.4% of its stock from Mid-Atlantic, which is based in Columbia, S.C., for $23.8568 each, last Fridays average price.
Mr. Shearer had criticized Provident for its sagging stock price and its subpar efficiency. He said Tuesday that he was not free to discuss the agreement.
Peter M. Martin, Providents chairman and chief executive officer, said he was relieved to know he will not face a proxy battle at the annual meeting in April. But he added that the repurchase, which will take place today and next month, is also a good opportunity to acquire a large block of shares at market price and will go a long way toward Providents stated plan of buying back 2.5 million shares.
Like most business deals, it worked for Mid-Atlantic and us, Mr. Martin said.
Provident had already taken a series of steps to boost its lackluster earnings and improve shareholder value. In recent months it has reshuffled management, quit several not-so-profitable businesses, recommitted itself to middle and the low end of the banking market, and continued its expansion in the Baltimore-Washington region through aggressive supermarket branching.
And though the company is still short of its profitability goals, analysts say they are hopeful.
Ive been extremely encouraged by the steps Provident has taken, said David M. West, an analyst at Davenport & Co. LLC in Arlington, Va. Instead of focusing on growing its balance sheet Provident is looking to improve margins and efficiency, which ultimately should boost its weak return on assets, Mr. West said.
To get back to the basics, last year Provident:
Sold its unprofitable Fast n Friendly check-cashing subsidiary in August. The bank had opened its first check cashing store in Baltimore in 1994; it had eight before selling the subsidiary to Dollar Financial Group Inc. of Berwyn, Pa., a payday lender and check casher. As a Provident subsidiary, Fast n Friendly was barred from the lucrative business of selling lottery tickets and could not charge above-market interest rates on loans.
Stopped making indirect auto loans, which it had been doing for five years, in the third quarter. Such lending produced an adjusted return on assets of 0.8%, slightly below the 1% target the company had set.
Closed its Provident Mortgage Co., which had five loan offices, in the fourth quarter, after seven years of operation, citing the cyclical and low-margin nature of the business. Last year the unit took in $1.1 million but cost $1.3 million to run. (Provident continues to offer mortgages but through an outsourcing arrangement with another lender.)
We did Fast n Friendly very well; we did indirect auto lending as well as anyone can do it; we did the mortgage business as well as anyone can do it; and we still couldnt make the kinds of returns we needed, said John F. Novak, Providents head of consumer lending. Were just kidding ourselves to believe that we can do something that all of the big banks that have scale cant do.
Gary N. Geisel, Providents recently appointed president and chief operating officer, said the businesses had once served a purpose but ultimately were not worth keeping. We knew that our core businesses were providing better returns than these businesses were, and as we looked three years out, we didnt see that changing a lot.
The company decided that capital could be used better in its bank franchise, which has 98 branches, 42 of them in stores.
Thanks largely to supermarket branching, the bank opened more than 76,000 new retail checking accounts last year, 20% more than in 1999. Whats more, 46% of Providents new checking accounts and 24% of its consumer loan production came from in-store branches last year. Also, fee income at mature in-store branches averaged $489,000 last year, slightly more than the $478,000 from traditional branches, Mr. Geisel said.
For Provident, going after the low-end customer is cost-effective and made easier through supermarket branches, which break even within 18 months, about half the time for its traditional branches, Mr. Geisel said.
We think thats a market that we can do better than some of the competition, Mr. Geisel said. Its a market that some of the competition has historically ignored.
Provident has partnerships with two supermarket chains, Metro Food Market and Shoppers Food Warehouse, and with Wal-Mart all stores that cater to low- and middle-income consumers. Twenty-thousand customers pass through these stores every week, Mr. Geisel said. Most are young and fitting Providents strategy of modest means, he said.
We sort of see ourselves as the Wal-Mart of banking, Mr. Geisel said. Were not into Saks; were into the typical sort of consumer that would be in the stores were in. Thats why our Wal-Mart partnership works so well. Thats our customer base.
Provident has inverted the hub-and-spoke branching strategy by leading with in-store branches and following with traditional branches. Nearly two-thirds of the 15 branches it opened last year were in supermarkets, and all but one of the 16 branches opened in 1999 were in-store branches. Of the nine being added this year, five will be in-store.
Providents recent initiatives are expected to improve its overall profitability. Optimism for the company may be reflected in its stock price, which has risen 65% in the past year. After falling to a 52-week low of $13.1875 in June, the stock was trading at $21.875 late Thursday.
I think theyve really taken a turn, said Collyn Bement Gilbert, an analyst at the Ferris Baker Watts investment banking firm in Baltimore. She expects to see the company outperform similar-size companies in the region by yearend, as it has been unable to do for several years, she said.
Still, Provident has a ways to go to increase profitability. It earned $44.8 million last year, only 1.5% more than a year earlier, and its return on assets was a weak 0.82%, down from 0.9% in 1999. Its efficiency ratio, which hovers around 63%, also is higher than its peers.
Other recent efforts to improve earnings include last years establishment of a small-business unit and the hiring of a new group of commercial lenders to ramp up loan production for companies with credit needs in the $1 million-to-$5 million range.
In 1998, Mr Martin began to prepare for his successor by grooming three top-level executives who had the potential to be president but needed more seasoning, he said recently.
Last month he tapped Mr. Geisel, 52, to be president and chief operating officer. He was chosen for his superior management skills and a broader perspective, said Mr. Martin, who at 63 plans to retire in a couple years.
I was never particularly enthused about being chairman, president, and CEO, he said. Having someone else be president does make your life easier.