Baltimore-based Provident Bankshares Corp., facing multimillion-dollar losses in a souring credit environment, said yesterday that it is cutting by two-thirds its dividend to shareholders and raising $115 million from investors to strengthen its financial position.
It is the latest in a long line of banks that nationwide have been stung by the rapid deterioration in the housing and financing markets. As home prices fall and foreclosures rise, more financial institutions have needed infusions of cash - and not all have been able to get them. Investment bank Bear Stearns Cos. opted to sell itself rather than face bankruptcy.
What sets Provident apart is that its losses are not primarily from weak loans, but rather bad bets in real estate securities, analysts say. The company, Maryland's largest independent bank, said in January that it was taking nearly $48 million in charges from the falling value of its real estate investment trust securities portfolio. In February, it said it also might have to write off as much as $47.7 million in the first quarter, again thanks to the securities and also because of some of its mortgages.
The 1,800-employee company is raising its capital next week from a collection of investors that includes T. Rowe Price Group Inc. Provident said yesterday that the move is more about preparing for the future in uncertain economic times - and positioning itself for growth - than a reaction to the recent challenges.
"I call it an insurance policy," said Gary N. Geisel, chairman and chief executive. "This allows us to be prepared for whatever economic environment we face over the next 12 to 18 months. It's about strengthening our capital during difficult times. ... We continue to be pleased with the core bank and its performance."
Provident, which paid $1.27 a share in dividends for last year, said it will cut its annual payout to 44 cents per share, the lowest it has been in 14 years. It expects to start the reduction with the dividend due to be paid next month. Savings will add up to about $29 million annually, it said.
Analysts say plans to save money and raise capital will help create a cushion for the future. But they added that the company also needed to deal with the losses.
"If they're taking that sort of write-down, they would need a capital infusion very, very quickly," said Damon DelMonte, an analyst at Keefe, Bruyette & Woods, who doesn't own Provident stock.
Jeff K. Davis, managing director with FTN Midwest Securities, who also doesn't own Provident stock, agreed that yesterday's announcement was a necessary step. "The capital levels, even after the losses, still met the ... 'well-capitalized' requirements that the Fed has, but it was tight," he said.
Still, he noted, some financial institutions are struggling to raise money. Provident "got the deal done," he said.
The company said it will issue $50 million in subordinated debt and $65 million in stock next week. The stock is being sold privately, mostly to institutions. Geisel said the firms are looking for passive investments, not seats on Provident's board of directors.
About 1.4 million shares will be common stock sold at $9.50 apiece - except to Provident executives and directors, who will pay $10.80 a share. The company is also issuing 51,215 shares of a specialized type of preferred stock for $1,000 apiece, which will pay a 10 percent dividend for three years and will then convert to 4.9 million common shares.
That will increase by almost 20 percent the company's outstanding shares. Any more, and a shareholder vote would have been required, noted Chris Fortune, an analyst who covers regional banks for T. Rowe Price.
T. Rowe Price is Provident's third-largest investor, holding nearly 7 percent of the stock as of December. The mutual fund manager is adding to its stake by participating in the company's capital-raising effort, though Fortune said he could not disclose how much T. Rowe is buying.
"It gave us an opportunity to increase our position at what we think is a good price," he said. "It's a tough time for the banks - a lot of investors are fearful of the stocks, and they have reason to be, because the fundamentals are challenged. But these type of opportunities can be very unique."
Collyn Bement Gilbert, an analyst at Stifel Nicolaus who owns no Provident stock, said the company's loans have "held up pretty well" compared with the industry's experience.
Provident is not the only financial institution to slash dividends. IndyMac Bank, which had an annual dividend of $1 a share, announced in February that it would stop paying altogether for the indefinite future. IndyMac wanted to avoid issuing more stock.
DelMonte, the analyst at Keefe, Bruyette & Woods, figures that a fair number of small investors bought Provident stock for its "really attractive dividend," but he said they might take heart at the thought that the reduction could put a floor under the stock price. Shares have fallen more than 60 percent since early August, when the credit environment took a sharp turn for the worse. Shares closed at $10.76 apiece yesterday, up 31 cents.
Provident reported a net loss of $15.5 million in the fourth quarter. It expects to report its first-quarter earnings Thursday. Executives said yesterday that the earnings will be consistent with their expectations in February, when they announced the write-downs.
Geisel, who said he is buying about $50,000 in stock as part of the plan, said Provident should be well-positioned by the move.
"We think we've taken the actions we need to take to weather whatever storms might be on the horizon," he said.