Provident Bank Taps Treasury Rescue Funds

The American taxpayer now owns a $151 million slice of Baltimore-based Provident Bank.

Provident Bankshares, the parent company of the bank, said on Monday morning that the Treasury Department had bought both senior preferred shares and warrants to purchase the company's common stock.

The investments through Treasury Secretary Henry M. Paulson, Jr.'s Troubled Asset Relief Program make Provident the 13th U.S. financial institution to take a direct investment of government rescue money, according to Provident.

The investments will help shore up the bank's balance sheet and should allow Provident to increase its lending in the Washington area, said Jeff K. Davis an analyst who follows Provident for Memphis-based Wolf River Capital.

"It is an affirmation that Provident has, shall we say, remained in the good graces of the regulators," Davis said. "My assumption is that Provident will use the capital now for a little bit of incremental lending and a year from now, if the economy firms up . . . it is conceivable that Provident might do an acquisition or two."

While Provident's own loans have held up relatively well during the downturn, the company's bond portfolio has been a major drag on the company's earnings. The company took a $24.6 million write-down on its investment portfolio in the third quarter ended Sept. 30.

That write-down led to a net loss of $5.4 million, or ($0.21 per share) compared with net income of $16.0 million (50 cents), for the same period of the prior year.

The company has taken other steps to raise cash this year.

In April it announced a plan to raise $115 million by selling both debt and equity. In October, Provident bought $42 million worth of deposits located at seven Chevy Chase Bank branches located inside Giant Food stores in the Greater Baltimore area.

The agreement with Paulson announced Monday would give the government 151,500 shares of the company's preferred stock, which will pay out an interest rate of 5 percent for the first years and then jump to nine percent.

Paulson also purchased warrants to buy about 2.4 million worth of common shares at a price of $9.57 per share. Provident's stock price was at $8.71 in mid-day trading on Monday.

Meanwhile, the parent company of Fauquier Bank in Warrenton said it would not apply for funds under the Treasury's program after reviewing the terms. The bank said it did not need the money.

"With our level of capital strength, we can continue to extend credit and execute our growth strategies, including the building of new branch locations," said Randy Ferrell, Fauquier president and chief executive. "While we are seeing some increase in our non-performing loans, it has been commensurate with the current economic conditions and continues to compare favorably with our bank peers. Our conservative principles have kept us away from the sub-prime mortgage and other high-risk lending activities that are making headlines recently."

By Alejandro Lazo  |  November 17, 2008; 12:01 PM ET  | Category:  Economy Watch
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