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Provident Bankshares Corp · S-4/A · On 3/12/04

Filed On 3/12/04 1:05pm ET   ·   SEC File 333-112083   ·   Accession Number 1193125-4-40195

  in   Show  and 
  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 3/12/04  Provident Bankshares Corp         S-4/A                 10:258                                    RR Donnelley/FA

Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction   ·   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Amendment #1 to Form S-4                            HTML  1,736K 
 2: EX-5        Opinion re: Legality                                HTML     16K 
 3: EX-8.1      Opinion re: Tax Matters                             HTML     17K 
 4: EX-23.3     Consent of Experts or Counsel                       HTML      7K 
 5: EX-23.4     Consent of Experts or Counsel                       HTML      8K 
 6: EX-23.5     Consent of Experts or Counsel                       HTML      8K 
 7: EX-23.6     Consent of Experts or Counsel                       HTML      8K 
 8: EX-23.8     Consent of Experts or Counsel                       HTML      7K 
 9: EX-99.3     Miscellaneous Exhibit                               HTML     23K 
10: EX-99.4     Miscellaneous Exhibit                               HTML     14K 


S-4/A   ·   Amendment #1 to Form S-4
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page
"Table of Contents
"Questions and Answers About the Merger
"Summary
"Comparative Per Share Data
"Selected Historical Consolidated Financial Information
"Selected Historical Financial Information for Provident Bankshares
"Selected Historical Financial Information for Southern Financial
"Summary Selected Pro Forma Combined Data
"Market Price and Dividend Information
"Annual Meeting of Provident Bankshares Shareholders
"General
"Purpose of the Meeting
"Record Date for Voting at the Meeting
"Quorum and Shareholder Vote Required
"Voting of Proxies
"How to Revoke a Proxy
"Solicitation of Proxies
"Shares Held by Provident Bankshares Officers and Directors and by Southern Financial
"Participants in Provident Bank s 401(k) Plan
"Recommendation of Provident Bankshares Board of Directors
"Special Meeting of Southern Financial Shareholders
"Shares Held by Southern Financial s Officers and Directors and by Provident Bankshares
"Recommendation of Southern Financial s Board of Directors
"Ownership of Provident Bankshares Common Stock
"Ownership of Southern Financial Common Stock
"The Merger
"About the Parties to the Merger
"Form of the Merger
"Exchange of Southern Financial Stock Certificates
"Provident Bankshares Shareholders Are Not Required to Exchange Stock Certificates
"Treatment of Southern Financial Stock Options
"Material Federal Income Tax Consequences of the Merger
"Background of the Merger
"Recommendation of the Provident Bankshares Board; Provident Bankshares Reasons for the Merger
"Recommendation of the Southern Financial Board and Southern Financial s Reasons for the Merger
"Opinion of Provident Bankshares Financial Advisor
"Opinion of Southern Financial s Financial Advisor
"Dissenters Rights
"Interests of Southern Financial Directors and Executive Officers in the Merger that Differ From the Interests
"Regulatory Approvals Needed to Complete the Merger
"Accounting Treatment of the Merger
"Resale of Provident Bankshares Common Stock
"The Merger Agreement
"Terms of the Merger
"When the Merger Will be Completed
"Conditions to Completing the Merger
"Conduct of Business Before the Merger
"Covenants of Southern Financial and Provident Bankshares in the Merger Agreement
"Representations and Warranties Made by Provident Bankshares and Southern Financial in the Merger Agreement
"Terminating the Merger Agreement
"Termination Fee
"Expenses
"Changing the Terms of the Merger Agreement
"Management and Operations Following the Merger
"Board of Directors
"Management
"Operations
"Pro Forma Financial Information
"A Warning About Forward-Looking Statements
"Description of Provident Bankshares Common Stock
"Common Stock
"Preferred Stock
"Shareholder Protection Rights Agreement
"Comparison of Rights of Shareholders
"Authorized Stock
"Corporate Governance
"Voting Rights
"Required Vote for Authorization of Certain Actions
"Dividends
"Appraisal Rights
"Shareholders Meetings
"Action by Shareholders Without a Meeting
"Limitation of Personal Liability of Directors
"Shareholder Rights Plan
"Amendment of the Bylaws
"Amendment of the Articles of Incorporation
"Selected Provisions in the Articles of Incorporation and Bylaws of Provident Bankshares
"Business Combinations with Interested Shareholders
"Special Meetings of Shareholders
"Advance Notice Provisions for Shareholder Nominations and Proposals
"Code of Business Conduct and Ethics
"Meetings of the Board of Directors
"Committees of the Board of Directors
"Corporate Governance Committee Procedures
"Shareholder Communications
"Directors Compensation
"Independent Directors
"Election of Directors
"Approval of the Provident Bankshares Corporation 2004 Equity Compensation Plan
"Proposed Action Regarding the 2004 Equity Compensation Plan
"Summary Description of the 2004 Equity Compensation Plan
"Federal Income Tax Treatment of Awards Under the 2004 Equity Compensation Plan
"Specific Benefits Under the 2004 Equity Compensation Plan
"Equity Compensation Plan Information
"Ratification of Appointment of Independent Auditors
"Audit Fees
"Report of the Audit Committee
"Executive Compensation
"Summary Compensation Table
"Option Grants in Last Fiscal Year
"Aggregated Option Exercises in Last Fiscal Year and Option Value at Fiscal Year End
"Pension Plans
"Report of the Compensation Committee
"Compensation Committee Interlocks and Insider Participation
"Performance Graph
"Other Information Relating to Directors and Executive Officers of Provident Bankshares
"Section 16(a) Beneficial Ownership Reporting Compliance
"Transactions With Management
"Submission of Future Shareholder Proposals and Nominations
"Provident
"Southern Financial
"Miscellaneous
"Legal Matters
"Experts
"Where You Can Find More Information
"APPENDIX A Agreement and Plan of Reorganization
"Merger
"Articles of Incorporation, Bylaws and Facilities of Continuing Corporation
"Board of Directors and Officers of Continuing Corporation
"Effect of Merger
"Liabilities of Continuing Corporation
"Ratification by Shareholders
"Tax Consequences
"Consideration and Exchange Procedures
"Merger Consideration
"Dissenting Shares
"Exchange of Shares
"Representations and Warranties of Southern Financial
"Organization
"Capitalization
"Approvals; Authority
"Investments
"Financial Statements
"Loan Portfolio
"Certain Loans and Related Matters
"Real Property Owned or Leased
"Personal Property
"Environmental Laws
"Litigation and Other Proceedings
"Taxes
"Contracts and Commitments
"Insurance
"No Conflict With Other Instruments
"Laws and Regulatory Filings
"Absence of Certain Changes
"Employment Relations
"Employee Benefit Plans
"Deferred Compensation Arrangements
"Brokers and Finders
"Accounting Controls
"Securities and Exchange Commission Reporting Obligations
"Outstanding Trust Preferred Securities of Subsidiary Trusts
"Community Reinvestment Act
"Shareholders List
"Fairness Opinion
"Pending Acquisitions
"Southern Financial Information
"Representations and Warranties of Bankshares
"Bankshares Employee Benefit Plans
"Regulatory Approvals; Tax Opinion
"Allowance for Loan Losses
"Environmental Matters
"Ability to Pay Merger Consideration
"Bankshares Information
"Covenants of Southern Financial
"Shareholder Approval and Reasonable Best Efforts
"Activities of Southern Financial Pending Closing
"Access to Properties and Records
"Information for Regulatory Applications and SEC Filings
"Standstill Provision
"Affiliates Letters
"Certain Policies and Actions of Southern Financial
"Completion of the Essex Merger
"Trust Preferred Issues
"Covenants of Bankshares
"Shareholder Approval and Best Efforts
"Activities of Bankshares Pending Closing
"Information for Regulatory Applications and Proxy Solicitation
"Registration Statement
"Applications
"Nasdaq Listing
"Rule 144 Compliance
"Issuance of Bankshares Common Stock
"Indemnification; Insurance
"Assumption of Southern Financial Stock Options
"Supplemental Indentures
"Certain Employee Matters
"Appointment of Directors
"Mutual Covenants of Bankshares and Southern Financial
"Notification; Updated Disclosure Schedules
"Confidentiality
"Publicity
"Closing
"Effective Time
"Termination
"Effect of Termination
"Conditions to Obligations of Bankshares
"Compliance with Representations and Warranties
"Performance of Obligations
"The Essex Merger
"Conditions to Obligations of Southern Financial
"Conditions to Respective Obligations of Bankshares and Southern Financial
"Government Approvals
"Shareholder Approval
"Tax Opinion
"Registration of Bankshares Common Stock
"Listing of Bankshares Common Stock
"Definitions
"Non-Survival of Representations and Warranties
"Amendments
"Notices
"Controlling Law
"Headings
"Modifications or Waiver
"Severability
"Assignment
"Consolidation of Agreements
"Counterparts
"Binding on Successors
"Gender
"Disclosures
"APPENDIX B Fairness Opinion of Keefe, Bruyette & Woods, Inc
"APPENDIX D Article 15 of the Virginia Code on Dissenters Rights
"APPENDIX E Audit Committee Charter of Provident Bankshares Corporation
"APPENDIX F Provident Bankshares Corporation 2004 Equity Compensation Plan

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  AMENDMENT #1 TO FORM S-4  
Table of Contents

As filed with the Securities and Exchange Commission on March 12, 2004.

Registration No. 333-112083


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


AMENDMENT NO. 1

FORM S-4

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933


PROVIDENT BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Maryland   6022   52-1518642

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer
Identification Number)

114 East Lexington Street

Baltimore, Maryland 21202

(410) 281-7000

(Address, including ZIP Code, and telephone number, including area code, of registrant’s principle executive offices)


Robert L. Davis, Esq.

General Counsel

114 East Lexington Street

Baltimore, Maryland 21202

(410) 281-7000

(Name, address, including ZIP Code, and telephone number, including area code, of agent for service)


Copies to:

Paul M. Aguggia, Esq.

Aaron M. Kaslow, Esq.

Muldoon Murphy Faucette & Aguggia LLP

5101 Wisconsin Avenue, N.W.

Washington, D.C. 20016

(202) 362-0840

 

William T. Luedke IV, Esq.

Charlotte M. Rasche, Esq.

Bracewell & Patterson, L.L.P.

South Tower Pennzoil Place

711 Louisiana Street, Suite 2900

Houston, Texas 77002-2781

(713) 223-2900


Approximate date of commencement of proposed sale of the securities to the public:    As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions to the Merger described in

the proxy statement-prospectus.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨


Calculation of Registration Fee


Title of each class of

securities to be registered

  

Amount

to be

registered (1)

  

Proposed maximum

offering price

per unit (2)

  

Proposed maximum

aggregate offering

price (2)

  

Amount of

registration

fee (2)

 

 

Common stock, par value $1.00 per share

   8,800,000    N/A    $ 152,911,349    $ 12,371 (3)

(1) Represents the estimated maximum number of shares of common stock, par value $1.00 per share, issuable by Provident Bankshares Corporation (“Provident Bankshares”) upon the consummation of the merger with Southern Financial Bancorp, Inc. and computed based on the estimated maximum number of such shares (7,781,748) including shares issuable upon the exercise of outstanding stock options, that may be exchanged for the securities being registered. This number also includes 337,349 additional shares available to be issued in the event certain adjustments called for in the merger agreement are required before the effective time of the merger. Pursuant to Rule 416, this registration statement also covers an indeterminate number of shares of common stock as may become issuable as a result of stock splits, stock dividends or similar transactions.
(2) Pursuant to Rule 457(f)(1), the registration fee for the Provident Bankshares common stock is based on the average of the high and low market value of Southern Financial Bancorp, Inc. common stock, par value $.01 per share, on January 20, 2004 ($30.775). Pursuant to Rule 457(f)(3), the maximum cash portion of the merger consideration to be paid by Provident Bankshares in connection with the transaction has been deducted from the value of securities to be received by Provident Bankshares in the transaction.
(3) Previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) or the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.



Table of Contents

The information in this joint proxy-prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This joint proxy statement-prospectus is not an offer to sell these securities, and we are not soliciting to buy these securities, in any state where the offer or sale is not permitted.

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MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

The boards of directors of Provident Bankshares Corporation and Southern Financial Bancorp, Inc. have agreed to a merger of our companies. If the merger is completed, each share of Southern Financial common stock will be converted into 1.0875 shares of Provident Bankshares common stock (plus cash instead of any fractional shares) and $11.125 in cash without interest. Provident Bankshares’ shareholders will continue to own their existing shares. After completion of the merger, we expect that current Provident Bankshares shareholders will own approximately 75% of the combined company and Southern Financial shareholders will own approximately 25% of the combined company. Provident Bankshares common stock is listed on the Nasdaq National Market under the symbol “PBKS.” Based on the closing price of Provident Bankshares common stock on March 10, 2004 of $30.83, Southern Financial shareholders would receive merger consideration with a value of approximately $44.65 for each share of Southern Financial common stock they own.

As a result of Southern Financial shareholders receiving a combination of Provident Bankshares common stock and cash in exchange for Southern Financial common stock, Southern Financial shareholders will recognize gain, but not loss, equal to the lesser of the amount of cash received or the amount of gain realized in the exchange. The merger will be a tax-free transaction for Provident Bankshares shareholders.

We cannot complete the merger unless we obtain the necessary government approvals and unless the shareholders of both companies approve the merger agreement. Each of us is asking our shareholders to consider and vote on this merger proposal at our respective companies’ meetings of shareholders. Whether or not you plan to attend your company’s meeting, please take the time to vote by completing and mailing the enclosed proxy card to the appropriate company. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote “FOR” the merger agreement. If you do not return your proxy card, or if you do not instruct your broker how to vote any shares held for you in “street name,” the effect will be a vote against the merger agreement.

The places, dates and times of the shareholders’ meetings are as follows:

 

For Provident Bankshares shareholders:   For Southern Financial shareholders:

Provident Bankshares

 

Fauquier Springs Country Club

114 East Lexington Street

 

Springs Road

Baltimore, Maryland

 

Warrenton, Virginia

April 21, 2004

 

April 29, 2004

10:00 a.m, local time

 

3:00 p.m., local time

This document contains a more complete description of the shareholders meetings and the terms of the merger. We urge you to review this entire document carefully. You may also obtain information about Provident Bankshares and Southern Financial from documents each company has filed with the Securities and Exchange Commission. We enthusiastically support the merger and recommend that you vote in favor of the merger agreement.

Picture -- LOGO

 

Picture -- LOGO

Gary N. Geisel

Chairman and Chief Executive Officer

 

Georgia S. Derrico

Chairman and Chief Executive Officer

Provident Bankshares Corporation

 

Southern Financial Bancorp, Inc.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this joint proxy statement - prospectus or determined if this joint proxy statement-prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. The securities we are offering through this document are not savings or deposit accounts or other obligations of any bank or non-bank subsidiary of either of our companies, and they are not insured by the Federal Deposit Insurance Corporation, the Savings Association Insurance Fund, the Bank Insurance Fund or any other governmental agency.

Joint Proxy Statement-Prospectus dated March 12, 2004

and first mailed to the shareholders of Provident Bankshares on or about March 17, 2004

and to the shareholders of Southern Financial on or about March 18, 2004

 


Table of Contents

This document incorporates important business and financial information about Provident Bankshares and Southern Financial from documents filed with the Securities and Exchange Commission that have not been included in or delivered with this document. You may read and copy these documents at the SEC’s public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available at the Internet site the SEC maintains at http://www.sec.gov. Reports and other information relating to Provident Bankshares and Southern Financial are also available at the offices of the National Association of Securities Dealers. See “Where You Can Find More Information” on page 111.

 

You also may request copies of these documents from Provident Bankshares and Southern Financial. Provident Bankshares and Southern Financial will provide you with copies of these documents, without charge, upon written or oral request to:

 

Provident Bankshares Corporation

114 East Lexington Street

Baltimore, Maryland 21201

Attention: Robert L. Davis, General Counsel and Corporate Secretary

Telephone: (410) 277-7000

 

Southern Financial Bancorp, Inc.

37 East Main Street

Warrenton, Virginia 20186

Attention: Patricia A. Ferrick, Chief Financial Officer

Telephone: (540) 349-3900

 

If you are a Provident Bankshares shareholder and would like to request documents from Provident Bankshares or Southern Financial, please do so by April 14, 2004 to receive them before the Provident Bankshares annual meeting. If you are a Southern Financial shareholder and would like to request documents from Provident Bankshares or Southern Financial, please do so by April 22, 2004 to receive them before the Southern Financial special meeting.


Table of Contents

Provident Bankshares Corporation

114 East Lexington Street

Baltimore, Maryland 21201

(410) 277-7000

 


 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 


 

The annual meeting of shareholders of Provident Bankshares Corporation will be held on April 21, 2004 at 10 :00 a.m., local time, at the offices of Provident Bankshares, 114 East Lexington Street, Baltimore, Maryland, for the following purposes:

 

  1. To approve and adopt the Agreement and Plan of Reorganization, dated as of November 3, 2003, by and between Provident Bankshares Corporation and Southern Financial Bancorp, Inc., pursuant to which Southern Financial will merge with and into Provident Bankshares, all on and subject to the terms and conditions contained therein;

 

  2. To elect six directors to a three-year term of office;

 

  3. To approve the Provident Bankshares Corporation 2004 Equity Compensation Plan;

 

  4. To ratify the appointment of KPMG LLP as independent auditors of Provident Bankshares for the fiscal year ending December 31, 2004; and

 

  5. To transact any other business as may properly come before the meeting or any adjournment or postponement.

 

Only shareholders of record at the close of business on March 1, 2004 will be entitled to notice of and to vote at the meeting and at any adjournment or postponement of the meeting.

 

By Order of the Board of Directors

Picture -- LOGO

Gary N. Geisel

Chairman and Chief Executive Officer

 

Baltimore, Maryland

March 17, 2004

 

Provident Bankshares’ board of directors unanimously recommends that you vote “FOR” the listed proposals. Whether or not you plan to attend the meeting, please complete, sign, date and return the enclosed proxy in the accompanying pre-addressed postage-paid envelope.


Table of Contents

Southern Financial Bancorp, Inc.

37 East Main Street

Warrenton, Virginia 20186

(540) 349-3900

 


 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 


 

A special meeting of shareholders of Southern Financial Bancorp, Inc. will be held on April 29, 2004 at 3:00 p.m., local time, at the Fauquier Springs Country Club, Springs Road, Warrenton, Virginia, for the following purposes:

 

  1. To approve and adopt the Agreement and Plan of Reorganization, dated as of November 3, 2003, by and between Provident Bankshares Corporation and Southern Financial Bancorp, Inc., pursuant to which Southern Financial will merge with and into Provident Bankshares, all on and subject to the terms and conditions contained therein; and

 

  2. To transact any other business as may properly come before the meeting or any adjournment or postponement.

 

Only shareholders of record at the close of business on March 8, 2004 will be entitled to notice of and to vote at the meeting and at any adjournment or postponement of the meeting.

 

Southern Financial shareholders have the right to dissent from the merger and obtain payment in cash of the fair value of their shares of Southern Financial common stock under applicable provisions of Virginia law. To perfect dissenters’ rights, Southern Financial shareholders must file a written notice of intent to demand payment before the taking of the vote on the merger at the special meeting, must not vote in favor of the merger and must file a written demand with Provident Bankshares for payment for the shares of Southern Financial stock and for an appraisal of the value of those shares. A copy of the applicable Virginia statutory provisions is included as Appendix D to the accompanying joint proxy statement-prospectus and a summary of the provisions can be found under the caption “The Merger—Dissenters’ Rights.”

 

By Order of the Board of Directors

Picture -- LOGO

 

Richard P. Steele

Secretary

 

Warrenton, Virginia

March 18, 2004

 

Southern Financial’s board of directors unanimously recommends that you vote “FOR” the approval and adoption of the merger agreement. Whether or not you plan to attend the meeting, please complete, sign, date and return the enclosed proxy in the accompanying pre-addressed postage-paid envelope.


Table of Contents

 Table of Contents

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

   1

Summary

   4

Comparative Per Share Data

   14

Selected Historical Consolidated Financial Information

   15

Selected Historical Financial Information for Provident Bankshares

   16

Selected Historical Financial Information for Southern Financial

   18

Summary Selected Pro Forma Combined Data

   20

Market Price and Dividend Information

   21

Annual Meeting of Provident Bankshares Shareholders

   22

General

   22

Purpose of the Meeting

   22

Record Date for Voting at the Meeting

   22

Quorum and Shareholder Vote Required

   22

Voting of Proxies

   23

How to Revoke a Proxy

   24

Solicitation of Proxies

   24

Shares Held by Provident Bankshares Officers and Directors and by Southern Financial

   24

Participants in Provident Bank’s 401(k) Plan

   24

Recommendation of Provident Bankshares’ Board of Directors

   24

Special Meeting of Southern Financial Shareholders

   25

General

   25

Purpose of the Meeting

   25

Record Date for Voting at the Meeting

   25

Quorum and Shareholder Vote Required

   25

Voting of Proxies

   25

How to Revoke a Proxy

   26

Solicitation of Proxies

   26

Shares Held by Southern Financial’s Officers and Directors and by Provident Bankshares

   27

Recommendation of Southern Financial’s Board of Directors

   27

Ownership of Provident Bankshares Common Stock

   28

Ownership of Southern Financial Common Stock

   30

The Merger

   32

About the Parties to the Merger

   32

Form of the Merger

   33

Exchange of Southern Financial Stock Certificates

   33

Provident Bankshares Shareholders Are Not Required to Exchange Stock Certificates

   34

Treatment of Southern Financial Stock Options

   34

Material Federal Income Tax Consequences of the Merger

   34

Background of the Merger

   37

Recommendation of the Provident Bankshares Board; Provident Bankshares’ Reasons for the Merger

   38

Recommendation of the Southern Financial Board and Southern Financial’s Reasons for the Merger

   40

Opinion of Provident Bankshares’ Financial Advisor

   41

Opinion of Southern Financial’s Financial Advisor

   46

 

i


Table of Contents

Dissenters’ Rights

   54

Interests of Southern Financial Directors and Executive Officers in the Merger that Differ From the Interests of Southern Financial Shareholders

   56

Regulatory Approvals Needed to Complete the Merger

   58

Accounting Treatment of the Merger

   59

Resale of Provident Bankshares Common Stock

   59

The Merger Agreement

   60

Terms of the Merger

   60

When the Merger Will be Completed

   60

Conditions to Completing the Merger

   60

Conduct of Business Before the Merger

   61

Covenants of Southern Financial and Provident Bankshares in the Merger Agreement

   64

Representations and Warranties Made by Provident Bankshares and Southern Financial in the Merger Agreement

   66

Terminating the Merger Agreement

   66

Termination Fee

   67

Expenses

   67

Changing the Terms of the Merger Agreement

   67

Management and Operations Following the Merger

   68

Board of Directors

   68

Management

   68

Operations

   68

Pro Forma Financial Information

   69

A Warning About Forward-Looking Statements

   76

Description of Provident Bankshares Common Stock

   77

Common Stock

   77

Preferred Stock

   77

Shareholder Protection Rights Agreement

   78

Comparison of Rights of Shareholders

   80

Authorized Stock

   80

Corporate Governance

   80

Voting Rights

   80

Required Vote for Authorization of Certain Actions

   81

Dividends

   81

Appraisal Rights

   81

Shareholders’ Meetings

   82

Action by Shareholders Without a Meeting

   83

Board of Directors

   83

Limitation of Personal Liability of Directors

   84

Shareholder Rights Plan

   85

Amendment of the Bylaws

   85

Amendment of the Articles of Incorporation

   85

Selected Provisions in the Articles of Incorporation and Bylaws of Provident Bankshares

   86

Business Combinations with Interested Shareholders

   86

Board of Directors

   87

Special Meetings of Shareholders

   87

Advance Notice Provisions for Shareholder Nominations and Proposals

   87

Preferred Stock

   87

 

ii


Table of Contents

Corporate Governance of Provident Bankshares

   88

General

   88

Code of Business Conduct and Ethics

   88

Meetings of the Board of Directors

   88

Committees of the Board of Directors

   88

Corporate Governance Committee Procedures

   89

Shareholder Communications

   90

Directors’ Compensation

   91

Independent Directors

   91

Election of Directors

   92

Approval of the Provident Bankshares Corporation 2004 Equity Compensation Plan

   94

Proposed Action Regarding the 2004 Equity Compensation Plan

   94

Summary Description of the 2004 Equity Compensation Plan

   94

Federal Income Tax Treatment of Awards Under the 2004 Equity Compensation Plan

   97

Specific Benefits Under the 2004 Equity Compensation Plan

   97

Equity Compensation Plan Information

   97

Ratification of Appointment of Independent Auditors

   98

Audit Fees

   98

Report of the Audit Committee

   99

Executive Compensation

   101

Summary Compensation Table

   101

Option Grants in Last Fiscal Year

   102

Aggregated Option Exercises in Last Fiscal Year and Option Value at Fiscal Year End

   102

Pension Plans

   103

Report of the Compensation Committee

   104

Compensation Committee Interlocks and Insider Participation

   106

Performance Graph

   107

Other Information Relating to Directors and Executive Officers of Provident Bankshares

   108

Section 16(a) Beneficial Ownership Reporting Compliance

   108

Transactions With Management

   108

Submission of Future Shareholder Proposals and Nominations

   109

Provident

   109

Southern Financial

   109

Miscellaneous

   110

Legal Matters

   110

Experts

   111

Where You Can Find More Information

   111

APPENDIX A   Agreement and Plan of Reorganization

   A-1

APPENDIX B   Fairness Opinion of Keefe, Bruyette & Woods, Inc.

   B-1

APPENDIX C   Fairness Opinion of Sandler O’Neill & Partners, L.P.

   C-1

APPENDIX D   Article 15 of the Virginia Code on Dissenters’ Rights

   D-1

APPENDIX E   Audit Committee Charter of Provident Bankshares Corporation

   E-1

APPENDIX F   Provident Bankshares Corporation 2004 Equity Compensation Plan

   F-1

 

iii


Table of Contents

 QUESTIONS AND ANSWERS ABOUT THE MERGER

 

Q: Why is Southern Financial merging with Provident Bankshares?

 

A: Our companies are proposing to merge because we believe that the merger will benefit our shareholders, customers and employees. We believe the merger will create a stronger financial services company that will be better positioned to compete in the financial services industry in the Washington, D.C. metropolitan area and Virginia through expanded operations and market coverage. In addition, the value of the cash and Provident Bankshares common stock to be issued in the merger in exchange for Southern Financial common stock represents a premium over the market value of Southern Financial common stock. To review the background and reasons for the merger in greater detail, see pages 37 through 40.

 

Q: What am I being asked to vote on and how does my board of directors recommend that I vote?

 

A: Provident Bankshares shareholders are being asked to vote on four matters:

 

  1. the approval and adoption of the merger agreement providing for the merger of Southern Financial with and into Provident Bankshares;

 

  2. the election of six directors to a three-year term;

 

  3. the approval of the Provident Bankshares Corporation 2004 Equity Compensation Plan; and

 

  4. the ratification of KPMG LLP as Provident Bankshares’ independent auditors for the year ending December 31, 2004.

 

Provident Bankshares’ board of directors has determined that the proposed merger is advisable and in the best interests of Provident Bankshares’ shareholders, has approved the merger agreement and recommends that its shareholders vote “FOR” the approval of the merger agreement. Provident Bankshares’ board of directors also recommends that its shareholders vote “FOR” election of each of the nominees for director, “FOR” the approval of the equity compensation plan and “FOR” ratification of the independent auditors.

 

Southern Financial shareholders are being asked to vote on the approval and adoption of the merger agreement providing for the merger of Southern Financial with and into Provident Bankshares. Southern Financial’s board of directors has determined that the proposed merger is advisable and in the best interests of Southern Financial’s shareholders, has approved the merger agreement and recommends that its shareholders vote “FOR” the approval of the merger agreement.

 

Q: What vote is required to approve the merger agreement?

 

A: The approval and adoption of the merger agreement requires the affirmative vote of at least two-thirds of the outstanding shares of Provident Bankshares common stock entitled to vote and the affirmative vote of at least a majority of the outstanding shares of Southern Financial common stock entitled to vote.

 

Q: What will I receive in the merger?

 

A: Under the merger agreement, if you are a shareholder of Southern Financial, you will receive 1.0875 shares of Provident Bankshares common stock and $11.125 in cash, without interest, for each share of Southern Financial common stock you own. Provident Bankshares will not issue fractional shares in the merger. Instead, you will receive a cash payment, without interest, for the value of any fraction of a share of Provident Bankshares common stock that you would otherwise be entitled to receive.

 

If you are a shareholder of Provident Bankshares, each of your shares of Provident Bankshares common stock will remain outstanding and unchanged in the merger. Consequently, you do not need to surrender your stock certificates or exchange them for new ones.

 

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Q: How do I exchange my Southern Financial stock certificates?

 

A: Shortly after the merger, EquiServe, the exchange agent, will send you a letter indicating how and where to surrender your stock certificates in exchange for the merger consideration. In any event, you should not send your Southern Financial stock certificates with your proxy card.

 

Q: What do I do with my Provident Bankshares stock certificates?

 

A: Nothing. Current holders of Provident Bankshares stock will not have to exchange their certificates as a result of the merger.

 

Q: What will my dividends be after the merger?

 

A: You will receive any dividends that are declared and paid after the completion of the merger by Provident Bankshares’ board of directors with respect to Provident Bankshares common stock. Provident Bankshares’ current quarterly dividend rate is $0.245 per share. Although Provident Bankshares has paid quarterly dividends on Provident Bankshares common stock without interruption since 1988, there is no guarantee Provident Bankshares will continue to pay dividends on its common stock. All dividends of Provident Bankshares common stock are declared at the discretion of the Provident Bankshares board of directors.

 

Q: When is the merger expected to be completed?

 

A: We expect to complete the merger as soon as practicable after receiving Provident Bankshares’ and Southern Financial’s shareholder approvals as well as all required regulatory approvals. We currently expect that all shareholder and regulatory approvals will be received during the second calendar quarter of 2004.

 

Q: What are the tax consequences of the merger to me?

 

A: Since, as a Southern Financial shareholder, you will receive a combination of Provident Bankshares common stock and cash, you should recognize capital gain, but not loss, on the exchange to the extent of the lesser of the amount of cash received or the amount of gain realized in the exchange. This tax treatment may not apply to all Southern Financial shareholders. You should consult your own tax advisor for a full understanding of the merger’s tax consequences that are particular to you.

 

If you are a Provident Bankshares shareholder, you will not recognize gain or loss with respect to your shares of Provident Bankshares common stock solely as a result of the merger.

 

Q: What should I do now?

 

A: After you have read this document, please indicate on your proxy card how you want to vote. Sign and mail the proxy card in the enclosed postage prepaid envelope as soon as possible, so that your shares will be represented at the appropriate shareholders’ meeting. Instead of returning a proxy card, Provident Bankshares shareholders may vote their shares by telephone by calling a special toll-free telephone number or via the Internet. Telephone and Internet voting instructions and the toll-free telephone number and Internet address for Provident Bankshares shareholders are set forth on the enclosed proxy card. Southern Financial shareholders may not vote by telephone or via the Internet.

 

Q: If my shares are held in “street name” by my broker, will my broker automatically vote my shares for me?

 

A:

With respect to the merger agreement, your broker will not be able to vote your shares of Provident Bankshares common stock or Southern Financial common stock unless you provide instructions on how to

 

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vote. For Provident Bankshares common shareholders, your broker will not be able to vote your shares of common stock with respect to the approval of the equity compensation plan unless you provide instruction on how to vote. You should instruct your broker how to vote your shares, following the directions your broker provides. If you do not provide instructions to your broker on the proposal to approve the merger agreement, your shares will not be voted, and this will have the effect of voting against adoption of the merger agreement. Please check the voting form used by your broker to see if it offers telephone or Internet voting.

 

With respect to the election of Provident Bankshares’ directors and the ratification of Provident Bankshares’ independent auditors, your broker has the power to vote in its discretion if you do not provide timely voting instructions.

 

Q: Who can help answer my questions?

 

A: If you want additional copies of this document, or if you want to ask any questions about the merger, you should contact:

 

Josie Porterfield                                              or

  

Richard P. Steele

Investor Relations

  

Secretary

Provident Bankshares Corporation

  

Southern Financial Bancorp, Inc.

114 East Lexington Street

  

37 East Main Street

Baltimore, Maryland 21201

  

Warrenton, Virginia 20186

Telephone: (410) 277-7000

  

Telephone: (540) 349-3900

 

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 Summary

 

This brief summary highlights selected information from the joint proxy statement-prospectus. This summary does not contain all of the information that is important to you. You should carefully read this entire document and the other documents that accompany this document or to which this document refers you in order to fully understand the merger. See “Where You Can Find More Information.”

 

THE COMPANIES

Provident Bankshares Corporation

114 East Lexington Street

Baltimore, Maryland

(410) 277-7000

   Provident Bankshares is the bank holding company for Provident Bank of Maryland, a Maryland commercial bank. Provident Bank serves individuals and businesses in the Baltimore-Washington corridor through a full range of financial services and a network of 118 offices in Maryland, Northern Virginia and southern York County, Pennsylvania. At December 31, 2003, Provident Bankshares had total assets of $5.2 billion, deposits of $3.1 billion and stockholders’ equity of $324.8 million.

Southern Financial Bancorp, Inc.

37 East Main Street

Warrenton, Virginia 20186

(540) 349-3900

   Southern Financial is the bank holding company for Southern Financial Bank, a Virginia commercial bank. Southern Financial Bank operates 28 full-service banking offices throughout Northern and Northwest Virginia and the Charlottesville and Richmond, Virginia areas, including one full-service banking office in the District of Columbia. At December 31, 2003, Southern Financial had total assets of $1.1 billion, deposits of $743.7 million and stockholders’ equity of $92.9 million.
     On February 27, 2004, Southern Financial acquired Essex Bancorp, Inc. and its subsidiary Essex Savings Bank, F.S.B. a federally-chartered savings bank. Essex Savings Bank operates four banking offices in southern Virginia and one banking office in North Carolina. At December 31, 2003, Essex Bancorp had total assets of $336.9 million, deposits of $306.9 million and shareholders’ equity of $24.8 million.

 

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THE MERGER

We have attached the merger agreement to this document as Appendix A. We encourage you to read the entire merger agreement. It is the legal document that governs the merger.

Overview of the Transaction (page 33)

   We propose a business combination in which Southern Financial will merge with Provident Bankshares. Provident Bankshares will be the surviving corporation in the merger. Immediately after the merger, Southern Financial Bank and Essex Savings Bank will be merged into Provident Bank, with Provident Bank being the surviving institution.
Currently Outstanding Shares of Provident Bankshares Will Remain Unchanged as a Result of the Merger    As a Provident Bankshares shareholder, each of your shares of Provident Bankshares common stock will remain outstanding and unchanged in the merger. You do not need to surrender your stock certificates or exchange them for new ones.
Each Share of Southern Financial Common Stock Will Be Exchanged for 1.0875 Shares of Provident Bankshares Common Stock and $11.125 in Cash (page 33)    As a Southern Financial shareholder, upon the completion of the merger, each of your shares of Southern Financial common stock will automatically be converted into the right to receive 1.0875 shares of Provident Bankshares common stock and $11.125 in cash.
Comparative Market Prices and Share Information (page 21)    Provident Bankshares common stock is listed on the Nasdaq National Market under the symbol “PBKS.” Southern Financial common stock is listed on the Nasdaq National Market under the symbol “SFFB.”
     The following table shows the closing price per share of Provident Bankshares common stock, the closing price per share of Southern Financial common stock and the equivalent per share price for Southern Financial common stock giving effect to the merger on (1) October 31, 2003, which was the last business day preceding the public announcement of the proposed merger and (2) March 10, 2004. The equivalent per share price of Southern Financial common stock was computed by multiplying the price of Provident Bankshares common stock by 1.0875, the exchange ratio, and adding $11.125, the amount of the per share cash consideration.
         Provident
Bankshares
Common
Stock


  Southern
Financial
Common
Stock


 

Equivalent Price

Per Share of

Southern Financial

Stock


    

October 31, 2003

  $ 31.05   $ 37.27   $ 44.89
    

March 10, 2004

  $ 30.83   $ 44.31   $ 44.65

 

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How to Exchange Your Southern Financial Stock Certificates (page 33)    If you are a shareholder of Southern Financial as of the effective time of the merger, EquiServe, the exchange agent, will mail you a letter of transmittal and instructions for surrender of your Southern Financial stock certificates. When you properly surrender your certificates with the letter of transmittal, EquiServe will deliver to you the merger consideration. You should not send in your stock certificates until you receive the letter of transmittal and instructions.
Tax Consequences of the Merger (page 34)    Provident Bankshares shareholders.    As your shares of Provident Bankshares common stock will remain unchanged, the merger will not cause you to recognize any gain or loss for U.S. federal income tax purposes.
     Southern Financial shareholders.    As a result of receiving a combination of Provident Bankshares common stock and cash in exchange for shares of Southern Financial common stock, you will recognize gain, but not loss, equal to the lesser of (1) the amount of cash received or (2) the amount of gain realized in the transaction. The actual U.S. federal income tax consequences to you will depend on whether your shares of Southern Financial common stock were purchased at different times and at different prices and the character of the gain, if any, as either capital gain or ordinary income. You should consult your own tax advisor for a full understanding of the merger’s tax consequences that are particular to you.
     We will not be obligated to complete the merger unless we each receive a legal opinion from Provident Bankshares’ counsel, dated as of the date of this joint proxy statement-prospectus and updated, if necessary, on the closing date of the merger, that the merger will be treated as a transaction of a type that is tax-free to Provident Bankshares and Southern
     Financial for U.S. federal income tax purposes. This opinion, however, will not bind the Internal Revenue Service or courts, which could take a different view.
We Recommend that Shareholders Approve the Merger (pages 38 and 40)    Provident Bankshares shareholders.    Provident Bankshares’ board of directors believes that the merger is fair to its shareholders and in their best interests, and unanimously recommends that its shareholders vote “FOR” the proposal to approve the merger agreement.
     For a discussion of the circumstances surrounding the merger and the factors considered by Provident Bankshares’ board of directors in approving the merger agreement, see page 37.
     Southern Financial shareholders.    Southern Financial’s board of directors believes that the merger is fair to its

 

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     shareholders and in their best interests and recommends that its shareholders vote “FOR” the proposal to approve the merger agreement.
     For a discussion of the circumstances surrounding the merger and the factors considered by Southern Financial’s board of directors in approving the merger agreement, see page 37.
Our Respective Financial Advisors Believe the Merger Consideration Is Fair to Our Respective Shareholders (pages 41 and 46)    Provident Bankshares shareholders.    Keefe, Bruyette & Woods, Inc. has delivered to Provident Bankshares’ board of directors its opinion that, as of the date of this document, the merger consideration is fair to the holders of Provident Bankshares common stock from a financial point of view. A copy of this opinion is provided as Appendix B to this document. You should read it completely to understand the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review made by Keefe Bruyette in providing this opinion. Provident Bankshares has agreed to pay Keefe Bruyette a fee of $1.5 million for its services in connection with the merger.
     Southern Financial shareholders.    Sandler O’Neill & Partners, L.P. has delivered to Southern Financial’s board of directors its opinion that, as of the date of this document, the merger consideration is fair to the holders of Southern Financial common stock from a financial point of view. A copy of this opinion is provided as Appendix C to this document. You should read it completely to understand the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review made by Sandler O’Neill in providing this opinion. Southern Financial has agreed to pay Sandler O’Neill its expenses plus a fee equal to 1% of the aggregate consideration paid to Southern Financial shareholders for its services in connection with the merger. Based on the March 10, 2004 per share closing price of Provident Bankshares common stock, this fee would be approximately $3.5 million.
Only Southern Financial Shareholders Have Appraisal Rights in the Merger (page 54)    Provident Bankshares shareholders.    Provident Bankshares shareholders will not have appraisal rights as a result of the merger.
     Southern Financial shareholders.    Virginia law provides you, as a shareholder of Southern Financial, with dissenters’ appraisal rights in the merger. This means that if you are not satisfied with the amount you are receiving in the merger and do not vote in favor of the merger agreement, you are legally entitled to have the value of your shares independently determined and to receive payment in cash based on that valuation. To exercise your dissenters’ rights you must (1) deliver to Southern Financial written notice of your intent to demand payment for your shares if the merger is completed

 

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     at or before the special meeting of Southern Financial shareholders (but in any event before the vote is taken at the special meeting); (2) not vote in favor of the merger agreement; and (3) deliver a written demand to Provident Bankshares for payment for your shares of Southern Financial stock and for an appraisal of the value of those shares.
     Written notice to Southern Financial should be addressed to Southern Financial Bancorp, Inc. Attention: Richard P. Steele, Secretary and sent to Southern Financial at 37 East Main Street, Warrenton, Virginia 20186. Your failure to follow exactly the procedures specified under Virginia law will result in the loss of your dissenters’ rights. If you exercise your dissenters’ rights, you could receive less or more than the value of the merger consideration. A copy of the dissenters’ rights provisions of Virginia law is provided as Appendix D to this document.
Interests of Southern Financial Directors and Officers in the Merger Differ From their Interests as Southern Financial Shareholders (page 56)    Some of Southern Financial’s directors and officers have interests in the merger that are different from, or are in addition to, their interests as shareholders in Southern Financial. The members of Provident Bankshares’ and Southern Financial’s boards of directors knew about these additional interests, and considered them when they approved the merger. These include:
       the payout of cash benefits under existing employment agreements and arrangements as a result of completion of the merger;
       the vesting of Southern Financial stock options as a result of completion of the merger;
       provisions in the merger agreement relating to indemnification of directors and officers and insurance for directors and officers of Southern Financial for events occurring before the merger;
       the appointment of two directors of Southern Financial to the board of directors of Provident Bankshares and Provident Bank; and
       the award to each of Georgia S. Derrico and R. Roderick Porter of stock options covering 10,000 shares of Provident Bankshares common stock.
Regulatory Approvals Needed to Complete the Merger (page 58)    We cannot complete the merger unless we receive the approval of the Board of Governors of the Federal Reserve System and the Virginia Corporation Commission. In addition, the mergers of Southern Financial Bank and EssexSavings Bank into Provident Bank are subject to the approval of the Federal Deposit Insurance Corporation and

 

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     the Maryland Division of Financial Regulation. We have made the necessary filings with the Federal Reserve Board, the Virginia Corporation Commission, the Federal Deposit Insurance Corporation and the Maryland Commissioner of Financial Regulation. As of the date of this document, we have received the approval of the Federal Reserve Board. While we do not know of any reason why we would not be able to obtain the other requisite approvals in a timely manner, we cannot be certain when or if we will receive them.
Management and Operations After the Merger (page 68)    The present management of Provident Bankshares will continue to manage the combined company. The board of directors of Provident Bankshares after the merger will be composed of its current members and two current directors of Southern Financial, Georgia S. Derrico and R. Roderick Porter.

 

THE PROVIDENT BANKSHARES ANNUAL SHAREHOLDERS’ MEETING
General (page 22)    Provident Bankshares’ annual meeting will be held at Provident Bankshares’ offices at 114 East Lexington Street, Baltimore, Maryland on April 21, 2004 at 10:00 a.m., local time.

Purpose of the Meeting (page 22)

   At the annual meeting, Provident Bankshares shareholders will be asked to approve the merger agreement with Southern Financial, to elect six directors for three-year terms, to approve the equity compensation plan, to ratify the appointment of KPMG LLP as Provident Bankshares’ independent auditors for the year ending December 31, 2004 and to transact any other business that may properly come before the meeting.

Record Date for Voting (page 22)

   You can vote at the meeting of Provident Bankshares shareholders if you owned Provident Bankshares common stock at the close of business on March 1, 2004. You will be able to cast one vote for each share of Provident Bankshares common stock you owned at that time. As of March 1, 2004, there were 24,703,339 shares of Provident Bankshares common stock issued and outstanding.

Votes Required (page 22)

   To approve the merger agreement, the holders of at least two-thirds of the outstanding shares of Provident Bankshares common stock entitled to vote must vote in its favor. Directors will be elected by a plurality of votes cast. Additionally, the approval of the equity compensation plan and ratification of the auditors require the affirmative vote of at least a majority of the votes cast at the meeting. You can vote your shares by attending the meeting and voting in

 

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     person, by completing and mailing the enclosed proxy card, by telephone or via the Internet. Whether or not you plan to attend the meeting, we urge you to complete, sign and return your proxy card to ensure that your shares are represented.
THE SOUTHERN FINANCIAL SPECIAL SHAREHOLDERS’ MEETING

General (page 25)

   Southern Financial’s special meeting will be held at the Fauquier Springs Country Club, Springs Road, Warrenton, Virginia on April 29, 2004 at 3:00 p.m. local time.

Purpose of the Meeting (page 25)

   At the special meeting, Southern Financial shareholders will be asked to approve the merger agreement with Provident Bankshares and to transact any other business that may properly come before the meeting.

Record Date for Voting (page 25)

   You can vote at the special meeting of Southern Financial shareholders if you owned Southern Financial common stock at the close of business on March 8, 2004. You will be able to cast one vote for each share of Southern Financial common stock you owned at that time. As of March 8, 2004, there were 7,466,449 shares of Southern Financial common stock issued and outstanding.
Vote Required to Approve Merger Agreement (page 25)    To approve the merger agreement, the holders of a majority of the outstanding shares of Southern Financial common stock entitled to vote must vote in its favor. You can vote your shares by attending the special meeting and voting in person or by completing and mailing the enclosed proxy card. Whether or not you plan to attend the meeting, we urge you to complete, sign and return your proxy card to ensure that your shares are represented.
     All of the Southern Financial directors have entered into voting agreements with Provident Bankshares pursuant to which they have agreed to vote all of their shares in favor of the proposal to approve the merger agreement.
     As of March 8, 2004, Southern Financial directors owned approximately 1,059,604 shares of Southern Financial common stock, excluding shares that may be acquired upon the exercise of stock options.

 

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THE MERGER AGREEMENT
Conditions to Completing the Merger (page 60)    The completion of the merger depends on a number of conditions being met. These conditions include:
     1.    approval of the merger agreement by both Provident Bankshares’ shareholders and Southern Financial’s shareholders;
     2.    approval of the merger by regulatory authorities without any restrictions on the operations of Provident Bankshares that are unacceptable to Provident Bankshares;
     3.    the registration statement of which this joint proxy statement-prospectus forms a part being declared effective by the Securities and Exchange Commission with no stop orders or actions initiated to suspend such effectiveness;
    

4.

   receipt of a tax opinion that the merger qualifies as a tax-free reorganization;
    

5.

   the listing on the Nasdaq National Market of sufficient additional shares of Provident Bankshares common stock to be exchanged for Southern Financial stock in the merger and to be issued upon the exercise of Southern Financial stock options following the completion of the merger;
    

6.

   each party’s representations and warranties being true in all material respects;
    

7.

   each party having performed or complied in all material respects with its covenants and obligations; and
    

8.

   Southern Financial having completed or terminated its acquisition of Essex Bancorp.
     Where the law permits, we could decide to complete the merger even though one or more of these conditions has not been met. We cannot be certain when or if the conditions to the merger will be satisfied or waived, or that the merger will be completed.
Terminating the Merger Agreement
(page 66)
   We can agree at any time not to complete the merger, even if the shareholders of both our companies have approved it. Also, the merger agreement may be terminated at any time prior to the merger, as follows:
    

1.

   by either party, if the shareholders of either company do not approve the merger;

 

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2.

   by either party, if a required regulatory approval is denied or a final, non-appealable order or decree preventing consummation of the merger transaction is issued;
    

3.

   by either party, if we do not complete the merger by September 30, 2004 (unless the failure to complete the merger by that date is due to the failure of the party seeking to terminate to fulfill any of its obligations under the merger agreement);
    

4.

   by either party, if the other party fails to perform in all material respects a covenant, any of its representations or warranties are inaccurate in any material respect or the conditions to the other party’s obligation to close have not been fulfilled or waived by such other party;
    

5.

   by Southern Financial during the five-day period after the last required regulatory approval is received, if the average closing price of Provident Bankshares common stock during the 20-day trading period ending on the date the last required regulatory approval is received is less than $24.11 and Provident Bankshares’ common stock underperforms the Nasdaq Bank Index by more than 20% between November 5, 2003 and the end of such 20-day trading period. However, Provident Bankshares may cancel such a termination by electing to increase the exchange ratio or the cash to be paid in the merger so that the per share consideration after the increase is at a level that would not have permitted Southern Financial to terminate the merger agreement;
    

6.

   by Southern Financial, if during the 20-day measurement period referred to above, (1) the average closing price of Provident Bankshares common stock is less than $21.10 (causing the value of the merger consideration to be less than $34.07) and (2) Provident Bankshares common stock underperforms the Nasdaq Bank Index by more than 30% between November 5, 2003 and the end of the measurement period. This right to terminate lasts for three days. Provident Bankshares would not have the right to cancel the termination under this scenario;
          On March 10, 2004, Provident Bankshares common stock closed at $30.83 per share on the Nasdaq National Market. Additionally, the value of the Nasdaq Bank Index was 2,833.84 at November 5, 2003 and as of March 10, 2004 was 2,938.38. If this were the average closing price of Provident Bankshares common stock during the measurement period, and if we were comparing the performance of Provident Bankshares common stock to the performance of the Nasdaq Bank Index as of that date, Southern Financial would not have the right to terminate the merger agreement.

 

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7.

   by Southern Financial, if it receives an alternative acquisition proposal that its board of directors determines in its good faith judgment and in the exercise of its fiduciary duties, based as to legal matters on the written advice of legal counsel and as to financial matters on the written advice of Sandler O’Neill, that the alternative acquisition proposal is a superior proposal and that failure to accept the alternative proposal would be inconsistent with the proper exercise of its fiduciary duties. If Southern Financial terminated the merger agreement for this reason, it would be required to pay Provident Bankshares a $10.0 million termination fee; or
     8.    by Provident Bankshares, if the Southern Financial board of directors (1) resolves to accept an acquisition proposal from a third party, (2) recommends to its shareholders that they tender their shares in a tender or exchange offer commenced by a third party or (3) withdraws or modifies its recommendation of approval of the merger agreement to its shareholders in a manner adverse to Provident Bankshares or recommends approval of an alternative acquisition proposal. If Provident Bankshares terminated the merger agreement for this reason, Southern Financial would be required to pay Provident Bankshares a $10.0 million termination fee.
     In addition, Provident Bankshares will receive a $10.0 million termination fee if either party terminates the merger agreement because the Southern Financial shareholders fail to approve the merger agreement, an alternative acquisition proposal existed at the time of the Southern Financial shareholders’ meeting and within 12 months of the termination Southern Financial enters into an agreement with any third party with respect to any acquisition proposal.
We May Amend the Terms of the Merger and Waive Some Conditions (page 67)    We can agree to amend the merger agreement, and each of us can waive our right to require the other party to adhere to the terms and conditions of the merger agreement, where the law allows. However, after our shareholders approve the merger agreement, any reduction in consideration to be received by Southern Financial shareholders in the merger must be approved by the Southern Financial shareholders.

 

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 Comparative Per Share Data

 

The following table shows information about our income per common share, dividends per share and book value per share, and similar information reflecting the merger (which we refer to as “pro forma” information). In presenting the comparative pro forma information for certain time periods, we assumed that we had been merged throughout those periods, and in presenting comparative pro forma information as of a certain date, we assumed that we had been merged as of that date.

 

The information listed as “equivalent pro forma per share of Southern Financial” was obtained by multiplying the pro forma combined amounts by the exchange ratio of 1.0875. We present this information to reflect the fact that each Southern Financial shareholder will receive shares of Provident Bankshares common stock for each share of Southern Financial common stock exchanged in the merger. We also anticipate that the combined company will derive financial benefits from the merger that include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect these benefits and, accordingly, does not attempt to predict or suggest future results. The pro forma information also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during these periods.

 

The information in the following table is based on, and should be read together with, the historical financial information that we have presented in this document and in our prior filings with the Securities and Exchange Commission (the “SEC”) and with the condensed combined pro forma financial statements presented elsewhere in this document. Provident Bankshares and Southern Financial have incorporated their prior SEC filings into this document by reference. See “Where You Can Find More Information” on page 111.

 

     Provident
Bankshares
Historical


   Southern
Financial
Pro Forma (1)


   Pro Forma
Combined


   

Equivalent

Pro Forma

Per Share of

Southern
Financial (2)


Comparative Per Share Data

                            

Net income for the year ended December 31, 2003:

                            

Basic

   $ 2.10    $ 1.93    $ 1.91 (3)   $ 2.07

Diluted

     2.05      1.87      1.87 (3)     2.03

Cash Dividends Paid:

                            

For the year ended December 31, 2003

     0.93      0.60      0.93 (4)     1.01

Book Value:

                            

At December 31, 2003

     13.22      19.62      17.41       18.93

(1) The pro forma amounts reflected for Southern Financial give effect to the merger with Essex Bancorp, which occurred on February 27, 2004.
(2) Per equivalent Southern Financial share is pro forma combined amount multiplied by 1.0875.
(3) The pro forma net income per share amounts are calculated by totaling the historical net income (adjusted for pro forma adjustment(s) of Provident Bankshares and Southern Financial) and dividing the resulting amount by the average pro forma shares of Provident Bankshares and Southern Financial after giving effect to the merger. The average pro forma shares of Provident Bankshares and Southern Financial reflect historical basic and diluted shares, plus historical basic and diluted average shares of Southern Financial as adjusted for an exchange ratio of 1.0875 shares of Provident Bankshares common stock for each share of Southern Financial common stock. The pro forma net income per share amounts do not take into consideration any operating efficiencies that may be realized as a result of the merger.
(4) Pro forma cash dividends represents Provident Bankshares’ historical amount.

 

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 Selected Historical Consolidated Financial Information

 

The following tables show summarized historical consolidated financial data for Provident Bankshares and Southern Financial. The information in the following tables is based on historical financial information that Provident Bankshares and Southern Financial have presented in their prior filings with the SEC. You should read this summary financial information together with Provident Bankshares’ and Southern Financial’s historical financial information.

 

The audited financial statements of Provident Bankshares are included in Provident Bankshares’ annual report on Form 10-K for the fiscal year ended December 31, 2003 which is incorporated herein by reference. The audited financial statements of Southern Financial are included in Southern Financial’s annual report on Form 10-K for the fiscal year ended December 31, 2003, which is incorporated herein by reference.

 

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Table of Contents

 Selected Historical Financial Information for Provident Bankshares

 

    At or For the Year Ended December 31,

    2003

    2002

  2001

    2000

  1999

    (In thousands, except per share data)

Financial Condition Data:

                                 

Total assets

  $ 5,207,848     $ 4,890,722   $ 4,899,717     $ 5,499,443   $ 5,094,477

Investments

    2,086,510       1,993,229     1,804,234       1,876,509     1,671,507

Total loans

    2,784,546       2,560,563     2,776,893       3,338,194     3,180,784

Deposits

    3,079,549       3,187,966     3,356,047       3,954,770     3,808,528

FHLB advances and other borrowings

    1,781,162       1,354,304     1,226,427       1,190,775     967,603

Stockholders’ equity

    324,765       315,635     286,282       310,306     274,599

Operating Data:

                                 

Interest income (tax-equivalent) (1)

    240,793     $ 277,837   $ 349,035     $ 413,681   $ 353,341

Interest expense

    91,239       135,522     208,933       258,677     207,421
   


 

 


 

 

Net interest income (tax-equivalent) (1)

    149,554       142,315     140,102       155,004     145,920

Provision for loan losses

    9,936       9,825     17,940       29,877     11,570
   


 

 


 

 

Net interest income after provision for loan losses

    139,618       132,490     122,162       125,127     134,350

Non-interest income (excluding net gains (losses))

    92,752       86,394     74,955       64,470     55,445

Net gains (losses)

    (4,379 )     2,786     11,727       10,746     5,459

Non-interest expense

    158,447       150,861     145,478       141,421     128,941
   


 

 


 

 

Income before income taxes
(tax-equivalent) (1)

    69,544       70,809     63,366       58,922     66,313

Income tax expense
(tax-equivalent) (1)

    18,089       22,504     20,741       19,217     22,163
   


 

 


 

 

Income before accounting change

    51,455       48,305     42,625       39,705     44,150

Cumulative effect of accounting change

    —         —       (1,160 )     —       —  
   


 

 


 

 

Net income

  $ 51,455     $ 48,305   $ 41,465     $ 39,705   $ 44,150
   


 

 


 

 

Share Data:

                                 

Basic earnings per share before cumulative effect of accounting change

  $ 2.10     $ 1.94   $ 1.65     $ 1.44   $ 1.58

Cumulative effect of accounting change

    —         —       (0.04 )     —       —  

Basic earnings per share

    2.10       1.94     1.61       1.44     1.58

Diluted earnings per share before cumulative effect of accounting change

    2.05       1.88     1.60       1.41     1.53

Cumulative effect of accounting change

    —         —       (0.04 )     —       —  

Diluted earnings per share

    2.05       1.88     1.56       1.41     1.53

Dividends per share

    0.93       0.85     0.75       0.64     0.54

Weighted average common shares outstanding (in thousands):

                                 

Basic

    24,495       24,896     25,767       27,489     28,010

Diluted

    25,142       25,631     26,662       28,084     28,857

 

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Table of Contents

Selected Historical Financial Information for Provident Bankshares

(Continued)

 

    At or For the Year Ended December 31,

 
    2003

    2002

    2001

    2000

    1999

 
    (In thousands, except per share data)  

Performance Ratios:

                             

Return on average assets (net income divided by average assets) (2)

  1.03 %   1.00 %   0.81 %   0.73 %   0.90 %

Return on average equity (net income divided by average equity) (2)

  16.36     16.14     14.11     14.40     15.46  

Average shareholders’ equity to average assets

  6.26     6.15     5.73     5.07     5.83  

Net interest margin (3)

  3.21     3.14     2.89     2.93     3.07  

Efficiency ratio (4)

  65.39     65.96     67.64     64.44     64.03  

Dividend payout ratio

  45.44     45.10     48.35     45.41     34.26  

Asset Quality Ratios:

                             

Non-performing loans as a percent of loans (5)(6)

  0.92     0.97     1.15     1.09     1.35  

Non-performing assets as a percent of total assets (6)

  0.49     0.51     0.65     0.66     0.84  

Allowance for loan losses as a percent of loans (5)

  1.28     1.31     1.25     1.15     1.15  

Allowance for loan losses as a percent of non-performing loans (6)

  159.25     158.16     120.01     113.67       91.10  

(1) Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal tax rate in effect of 35% in 2003 through 1999.
(2) Exclusive of the cumulative change in accounting principle, return on average assets and return on average equity for 2001 would have been 0.83% and 14.50%, respectively.
(3) The net interest margin represents net interest income as a percentage of average interest-earning assets.
(4) The efficiency ratio represents the ratio of non-interest expenses divided by the sum of net interest income and non-interest income, excluding net gains (losses).
(5) Loans include loans receivable.
(6) Non-performing assets consist of non-performing loans and real estate owned. Non-performing loans consist of loans that have been identified by Provident Bankshares as presenting uncertainty with respect to the collectibility of interest or principal.

 

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Table of Contents

 Selected Historical Financial Information for Southern Financial

 

    At or For the Year Ended December 31,

    2003

  2002

  2001

  2000

  1999

    (In thousands, except per share data)

Financial Condition Data:

                             

Total assets

  $ 1,094,388   $ 970,630   $ 785,380   $ 610,339   $ 406,222

Total loans receivable, net of deferred fees

    611,616     604,580     418,328     318,912     237,980

Allowance for loan losses

    10,498     10,257     7,354     4,921     3,452

Loans held for sale

    8,651     514     —       220     442

Total investment securities

    377,533     203,563     306,612     233,407     136,919

Total deposits

    743,737     776,083     633,326     515,112     367,188

Other borrowings

    209,755     83,456     55,500     34,000     5,000

Company-obligated mandatorily redeemable securities of subsidiary holding solely parent debentures

    23,000     13,000     13,000     13,000     —  

Total liabilities

    1,001,531     889,327     720,712     570,650     377,358

Total stockholders’ equity

    92,857     81,303     64,668     39,689     28,864

Operating Data:

                             

Interest income

  $ 54,270   $ 51,130   $ 54,179   $ 37,810   $ 29,756

Interest expense

    14,773     17,375     27,147     20,009     14,308
   

 

 

 

 

Net interest income

    39,497     33,755     27,032     17,801     15,448

Provision for loan losses

    4,805     5,050     4,470     1,335     2,130
   

 

 

 

 

Net interest income after provision for loan losses

    34,692     28,705     22,562     16,466     13,318

Noninterest income

    7,731     4,369     6,934     4,553     2,834

Noninterest expense

    22,861     18,401     16,992     13,440     14,589
   

 

 

 

 

Income before income taxes

    19,562     14,673     12,504     7,579     1,563

Income taxes

    6,378     4,661     4,090     2,429     602
   

 

 

 

 

Net income

  $ 13,184   $ 10,012   $ 8,414   $ 5,150   $ 961
   

 

 

 

 

Share Data (1):

                             

Diluted earnings per share

  $ 2.10   $ 1.71   $ 1.84   $ 1.31   $ 0.25

Basic earnings per share

    2.19     1.78     1.90     1.33     0.26

Dividends per share

    0.60     0.38     0.34     0.30     0.21

Weighted average common shares outstanding (in thousands):

                             

Basic

    6,033     5,614     4,429     3,878     3,686

Diluted

    6,269     5,868     4,590     3,947     3,788

 

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Table of Contents

Selected Historical Financial Information for Southern Financial

(Continued)

 

     At or For the Year Ended December 31,

 
     2003

    2002

    2001

    2000

    1999

 
     (In thousands, except per share data)  

Performance Ratios:

                              

Return on average assets (net income divided by average assets)

   1.27 %   1.18 %   1.16 %   1.09 %   0.24 %

Return on average equity (net income divided by average equity)

   15.50     14.14     18.00     15.96     3.12  

Equity to assets

   8.48     8.38     8.23     6.50     7.11  

Allowance for loan losses to non-performing assets

   181.06     451.65     499.25     262.87     661.30  

Efficiency ratio (2)

   46.29     45.53     53.54     60.70     64.04  

Net interest margin (net interest income as a percentage of average interest-earning assets for the period

   4.08     4.25     3.98     4.05     4.07  

Dividend payout ratio

   25.05     21.12     18.42     25.76     90.82  

Noninterest expense to average assets

   2.07     2.16     2.35     2.84     3.61  

Asset Quality Ratios:

                              

Allowance for loan losses to total loans at end of period (3)

   1.72 %   1.70 %   1.76 %   1.54 %   1.45 %

Net chargeoffs (recoveries) to average outstanding loans during the period (3)

   0.71     0.67     0.58     0.17     0.79  

Ratio of non-performing assets to total assets

   0.53     0.23     0.19     0.31     0.75  

(1) Adjusted to reflect a 10% stock dividend effective October 31, 2003.
(2) The efficiency ratio represents the ratio of non-interest expenses, net of amortization of intangibles, divided by the sum of the net interest income and non-interest income, excluding gains and losses on securities and other assets.
(3) Loans include net loans receivable, excluding the allowance for loan losses.

 

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Table of Contents

 Summary Selected Pro Forma Combined Data

 

The following table shows selected financial information on a pro forma combined basis giving effect to the merger as if the merger had become effective at the end of the period presented, in the case of balance sheet information, and at the beginning of the period presented, in the case of income statement information. The pro forma information reflects the purchase method of accounting.

 

We anticipate that the merger will provide the combined company with financial benefits that include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect these benefits and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined as of the date and during the periods presented.

 

You should read this summary pro forma information in conjunction with the information under “Pro Forma Financial Information” beginning on page 69.

 

    

For the

Year Ended
December 31,

2003


     (In thousands,
except share and
per share data)

Pro Forma Combined Income Statement Data:

      

Interest income

   $ 306,351

Interest expense

     113,678
    

Net interest income

     192,673

Provision for loan losses

     15,175
    

Net interest income after provision for loan losses

     177,498

Non-interest income

     98,060

Non-interest expense

     192,346
    

Income before income taxes

     83,212

Income tax expense

     21,716
    

Net income

   $ 61,496
    

Weighted average common shares:

      

Basic

     33,242,054

Diluted

     32,889,470

Pro Forma Per Common Share Data:

      

Basic earnings per share

   $ 1.91

Diluted earnings per share

     1.87

Book value

     17.41
        
    

As of

December 31,
2003


     (In thousands)

Pro Forma Combined Balance Sheet Data:

      

Total assets

   $ 6,766,132

Securities available for sale

     2,504,000

Net loans

     3,520,914

Deposits

     4,133,969

Borrowed funds

     2,016,770

Stockholders’ equity

     562,455

 

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Table of Contents

 Market Price and Dividend Information

 

Provident Bankshares common stock is quoted on the Nasdaq National Market under the symbol “PBKS.” Southern Financial common stock is quoted on the Nasdaq National Market under the symbol “SFFB.”

 

The following table lists the high and low bid information for Provident Bankshares common stock and Southern Financial common stock and the cash dividends declared by Provident Bankshares and Southern Financial for the periods indicated.

 

     Provident Bankshares
Common Stock


   Southern Financial
Common Stock (1)


     High

   Low

   Dividends

   High

   Low

   Dividends

Fiscal 2004

                                         

Quarter ended March 31, 2004

   $ 33.00    $ 29.35    $ —      $ 46.52    $ 42.56    $ 0.17

(through March 10, 2004)

                                         

Fiscal 2003

                                         

Quarter ended December 31, 2003

     31.76      28.41      0.245      48.00      34.87      0.17

Quarter ended September 30, 2003

     30.24      25.57      0.24      36.22      27.28      0.17

Quarter ended June 30, 2003

     26.09      23.15      0.235      29.74      29.15      0.14

Quarter ended March 31, 2003

     24.47      22.50      0.23      27.43      26.97      0.12

Fiscal 2002

                                         

Quarter ended December 31, 2002

     23.75      19.29      0.225      24.11      21.35      0.10

Quarter ended September 30, 2002

     24.16      20.14      0.22      25.56      21.03      0.10

Quarter ended June 30, 2002

     27.65      23.69      0.215      25.61      19.50      0.09

Quarter ended March 31, 2002

     25.06      23.72      0.21      22.14      17.91      0.09

(1) Adjusted to give effect to a 10% stock dividend effective October 31, 2003.

 

You should obtain current market quotations for Provident Bankshares common stock, as the market price of Provident Bankshares common stock will fluctuate between the date of this document and the date on which the merger is completed, and thereafter. You can get these quotations from a newspaper, on the Internet or by calling your broker.

 

As of March 1, 2004, there were approximately 2,939 holders of record of Provident Bankshares common stock. As of March 8, 2004, there were approximately 1,209 holders of record of Southern Financial common stock. These numbers do not reflect the number of persons or entities who may hold their stock in nominee or “street name” through brokerage firms.

 

Following the merger, the declaration of dividends will be at the discretion of Provident Bankshares’ board of directors and will be determined after consideration of various factors, including earnings, cash requirements, the financial condition of Provident Bankshares, applicable state law and government regulations and other factors deemed relevant by Provident Bankshares’ board of directors.

 

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Table of Contents

 Annual Meeting of Provident Bankshares Shareholders

 

 General

 

This joint proxy statement-prospectus is furnished in connection with the solicitation of proxies by the board of directors of Provident Bankshares Corporation for use at the annual meeting of shareholders of Provident Bankshares to be held at Provident Bankshares’ offices at 114 East Lexington Street, Baltimore, Maryland at 10:00 a.m., local time on April 21, 2004, and any adjournments or postponements thereof, for the purposes set forth in this joint proxy statement-prospectus.

 

 Purpose of the Meeting

 

At the annual meeting, shareholders of Provident Bankshares will be asked to consider and vote upon the merger agreement, to elect six directors to three-year terms, to approve the equity compensation plan, to ratify the appointment of KPMG LLP as Provident Bankshares’ independent auditors for the year ending December 31, 2004 and to act on any other matters properly submitted to a vote at the annual meeting.

 

 Record Date for Voting at the Meeting

 

The board of directors has fixed the close of business on March 1, 2004 as the record date for the determination of shareholders entitled to notice of and to vote at the annual meeting and any adjournments or postponements thereof. Only holders of Provident Bankshares common stock at that time will be entitled to notice of and to vote at the annual meeting and any adjournments or postponements thereof. As of the record date, there were 24,703,339 shares of Provident Bankshares common stock issued and outstanding, and each such share is entitled to one vote at the annual meeting.

 

 Quorum and Shareholder Vote Required

 

The presence, in person or by proxy, of holders of at least a majority of the total number of outstanding shares of common stock is necessary to constitute a quorum for transaction of business at the annual meeting. Abstentions and “broker non-votes” will be counted as present for determining the presence or absence of a quorum for the transaction of business at the annual meeting. A “broker non-vote” is a proxy from a broker or other nominee indicating that such person has not received instructions from the beneficial owner or other person entitled to vote the shares on a particular matter with respect to which the broker or other nominee does not have discretionary voting power. Your broker cannot vote your shares of Provident Bankshares common stock on the proposals to approve the merger agreement and the approval of the equity compensation plan without specific instructions from you.

 

Provided a quorum is present, the affirmative vote of the holders of at least two-thirds of the outstanding common stock of Provident Bankshares entitled to vote is necessary to adopt the merger agreement. Thus, abstentions and broker non-votes will have the same effect as a vote against adoption of the merger agreement.

 

In voting on the election of directors, you may vote in favor of all nominees, withhold votes as to all nominees, or withhold votes as to specific nominees. There is no cumulative voting for the election of directors. Directors must be elected by a plurality of the votes cast at the annual meeting. This means that the nominees receiving the greatest number of votes will be elected. Votes that are withheld and broker non-votes will have no effect on the outcome of the election. In voting on the approval of the equity compensation plan and the ratification of the appointment of KPMG LLP as independent auditors, you may vote in favor of the proposal, vote against the proposal or abstain from voting. These matters will be decided by the affirmative vote of a majority of the votes cast at the annual meeting. On these matters, abstentions and broker non-votes will have no effect on the voting.

 

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Table of Contents

 Voting of Proxies

 

Shares represented by proxy will be voted at the annual meeting as specified in the proxy.

 

Proxies Without Voting Instructions. Proxies that are properly signed and dated but that do not contain voting instructions will be voted for approval of the merger agreement, for election of each of the nominees for directors, for approval of the equity compensation plan, for ratification of the appointment of KPMG LLP as independent auditors and at the discretion of the persons named as proxies with respect to any other matters to properly come before the shareholders.

 

Broker Non-Votes. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Your broker cannot vote your shares of Provident Bankshares common stock on the proposal to approve the merger agreement or on the proposal to approve the equity compensation plan without specific instructions from you. Because the affirmative vote of at least two-thirds of the outstanding common stock of Provident Bankshares is required to approve the merger agreement, if you do not instruct your broker how to vote it will have the same effect as a vote against approval of the merger agreement.

 

Other Matters. The proxy card gives authority to the holders of the proxy to vote in their discretion on any other matters that may properly come before the annual meeting or any adjournments or postponements of the annual meeting. Besides the matters contained in the notice to shareholders, Provident Bankshares’ management does not currently know of any other matters to be brought before the annual meeting. As to other matters, if any, that may properly come before the annual meeting, unless otherwise provided in Provident Bankshares’ articles of incorporation, bylaws or by statute, the matter will be approved if a majority of the votes cast are in favor of the matter.

 

The annual meeting may be adjourned or postponed, including by the presiding officer, for the purpose of, among other things, soliciting additional proxies. No proxy voted against the proposal to adopt the merger agreement will be voted in favor of any proposal to adjourn or postpone the annual meeting for the purpose of soliciting additional votes.

 

How to Vote Shares Held Through Brokers. If you hold Provident Bankshares common stock in the name of a broker or other custodian and wish to vote those shares in person at the annual meeting, you must obtain from the nominee holding the Provident Bankshares common stock a properly executed “legal proxy” identifying you as a Provident Bankshares shareholder, authorizing you to act on behalf of the nominee at the annual meeting and identifying the number of shares with respect to which the authorization is granted. Your broker or bank may allow you to deliver your voting instructions via the telephone or the Internet. Please see the instruction form that accompanies this document.

 

Proxy Voting by Internet or Telephone. Instead of voting by mailing a proxy card, shareholders of record can vote their shares of Provident Bankshares common stock by proxy over the Internet, or by calling a specially designated telephone number. The Internet and telephone proxy voting procedures are designed to authenticate shareholders’ identities, allow shareholders to provide their voting instructions and confirm that their instructions have been recorded properly. Specific instructions for shareholders of record who wish to use the Internet or telephone voting procedures are set forth on the enclosed proxy card. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible. The Internet and telephone voting facilities for eligible shareholders of record will close at 11:59 p.m., Eastern time, on April 20, 2004.

 

Because approval of the merger agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Provident Bankshares common stock entitled to vote at the annual meeting, abstentions and broker non-votes will have the same effect as votes against approval of the merger agreement. Accordingly, the Provident Bankshares board of directors urges shareholders to complete, date and sign the accompanying proxy and return it promptly in the enclosed, postage-paid envelope or to vote by telephone or the Internet.

 

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Table of Contents

 How to Revoke a Proxy

 

You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your proxy you must either advise the Secretary of Provident Bankshares in writing before shares have been voted at the annual meeting, deliver proxy instructions with a later date, or attend the meeting and vote your shares in person. Attendance at the annual meeting will not in itself constitute revocation of your proxy.

 

 Solicitation of Proxies

 

This solicitation of proxies for use at the annual meeting is being made by the board of directors of Provident Bankshares. The cost of soliciting proxies will be borne by Provident Bankshares. In addition to solicitation services to be provided by Innisfree M&A Incorporated described below, proxies may be solicited, in person or by telephone, by officers and other employees of Provident Bankshares, who will receive no compensation for their services other than their normal salaries. Brokerage houses, nominees, fiduciaries, and other custodians are requested to forward soliciting material to the beneficial owners of shares held of record by them and will be reimbursed for their expenses in doing so.

 

Provident Bankshares has retained Innisfree M&A Incorporated at a fee estimated not to exceed $15,000, plus reimbursement of reasonable out-of-pocket expenses, to assist in the solicitation of proxies.

 

 Shares Held by Provident Bankshares Officers and Directors and by Southern Financial

 

As of March 1, 2004, directors and executive officers of Provident Bankshares beneficially owned 422,618 shares of Provident Bankshares common stock, not including shares that may be acquired upon the exercise of stock options. This equals 1.7% of the outstanding shares of Provident Bankshares common stock. As of the same date, Southern Financial and its subsidiaries and its directors and executive officers do not beneficially own any shares of Provident Bankshares common stock.

 

 Participants in Provident Bank’s 401(k) Plan

 

If you hold shares of Provident Bankshares common stock through Provident Bank’s 401(k) plan, you will receive voting instructions under separate cover. By following these instructions, you may direct the trustee for the 401(k) plan how to vote the shares of Provident Bankshares common stock credited to your 401(k) plan account. If you do not provide voting instructions to the trustee, the shares credited to your account in the 401(k) plan will not be voted. The deadline for returning your voting instructions to the trustee is April 12, 2004.

 

 Recommendation of Provident Bankshares’ Board of Directors

 

The Provident Bankshares board of directors has approved the merger agreement and the transactions contemplated by that agreement. The Provident Bankshares board of directors believes that the merger agreement is in the best interests of Provident Bankshares and its shareholders and unanimously recommends that the Provident Bankshares shareholders vote “FOR” approval of the merger agreement. See “The Merger—Recommendation of the Provident Bankshares Board; Provident Bankshares’ Reasons for the Merger.” Provident Bankshares’ board of directors also recommends that you vote “FOR” election of each of the nominees for director, “FOR” approval of the equity compensation plan and “FOR” ratification of the independent auditors.

 

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Table of Contents

 Special Meeting of Southern Financial Shareholders

 

 General

 

This joint proxy statement-prospectus is furnished in connection with the solicitation of proxies by the board of directors of Southern Financial Bancorp, Inc. for use at the special meeting of shareholders of Southern Financial to be held at the Fauquier Springs Country Club, Springs Road, Warrenton, Virginia at 3:00 p.m., local time, on April 29, 2004 and any adjournments or postponements thereof, for the purposes set forth in this joint proxy statement-prospectus.

 

 Purpose of the Meeting

 

At the special meeting, shareholders of Southern Financial will be asked to consider and vote upon the merger agreement and to act on any other matters that may be properly submitted to a vote at the special meeting.

 

 Record Date for Voting at the Meeting

 

The board of directors has fixed the close of business on March 8, 2004 as the record date for the determination of shareholders entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. Only holders of Southern Financial common stock at that time will be entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. As of the record date, there were 7,466,449 shares of common stock issued and outstanding, and each such share is entitled to one vote at the special meeting.

 

 Quorum and Shareholder Vote Required

 

The presence, in person or by proxy, of holders of at least a majority of the total number of outstanding shares of common stock is necessary to constitute a quorum for transaction of business at the special meeting. Abstentions and “broker non-votes” will be counted as present for determining the presence or absence of a quorum for the transaction of business at the special meeting. A “broker non-vote” is a proxy from a broker or other nominee indicating that such person has not received instructions from the beneficial owner or other person entitled to vote the shares on a particular matter with respect to which the broker or other nominee does not have discretionary voting power. Your broker cannot vote your shares of Southern Financial common stock on the proposal to approve the merger agreement without specific instructions from you.

 

Provided a quorum is present, the affirmative vote of the holders of at least a majority of the outstanding common stock of Southern Financial is necessary to approve the merger agreement. Thus, abstentions and broker non-votes will have the same effect as a vote against approval of the merger agreement.

 

 Voting of Proxies

 

Shares represented by proxy will be voted at the special meeting as specified in the proxy.

 

Proxies Without Voting Instructions. Proxies that are properly signed and dated but that do not contain voting instructions will be voted for approval of the merger agreement and at the discretion of the persons named as proxies with respect to any other matters to properly come before the shareholders.

 

Broker Non-Votes. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Your broker cannot vote your shares of Southern Financial common stock on the proposal to approve the merger agreement without specific instructions from you. Because the affirmative vote of a majority of the outstanding common stock of Southern Financial is required to approve the merger agreement, if you do not instruct your broker how to vote it will have the same effect as a vote against approval of the merger agreement.

 

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Other Matters. The proxy card gives authority to the holders of the proxy to vote in their discretion on any other matters that may properly come before the special meeting or any adjournments or postponements of the special meeting. Besides the matters contained in the notice to shareholders, Southern Financial’s management does not presently know of any other matters to be brought before the special meeting. As to other matters, if any, that may properly come before the special meeting, unless otherwise provided in Southern Financial’s articles of incorporation or bylaws or by statute, the matter will be approved if a majority of the votes cast are in favor of the matter.

 

The special meeting may be adjourned or postponed, including by the presiding officer, for the purpose of, among other things, soliciting additional proxies. No proxy voted against any of the proposals will be voted in favor of any proposal to adjourn or postpone the special meeting for the purpose of soliciting additional votes.

 

How to Vote Shares Held Through Brokers. If you hold Southern Financial common stock in the name of a broker or other custodian and wish to vote those shares in person at the special meeting, you must obtain from the nominee holding the Southern Financial common stock in the nominee’s name a properly executed “legal proxy” identifying you as a Southern Financial shareholder, authorizing you to act on behalf of the nominee at the special meeting and identifying the number of shares with respect to which the authorization is granted. Your broker or bank may allow you to deliver your voting instructions via the telephone or the Internet. Please see the instruction form that accompanies this document.

 

Dissenters’ Rights. Any Southern Financial shareholder has the right to dissent from approval of the merger agreement and, subject to compliance with certain requirements and procedures set forth in Article 15 of the Virginia Stock Corporation Act, to receive payment of the “fair value,” as defined in the Act, of his or her shares of Southern Financial common stock. See The Merger—Dissenters’ Rights.”

 

Because approval of the merger agreement requires the affirmative vote of the holders of at least a majority of the outstanding shares of Southern Financial common stock entitled to vote at the special meeting, abstentions and broker non-votes will have the same effect as votes against approval of the merger agreement. Accordingly, the Southern Financial board of directors urges shareholders to complete, date and sign the accompanying proxy and return it promptly in the enclosed, postage-paid envelope.

 

 How to Revoke a Proxy

 

You may revoke your proxy at any time before it is exercised by submitting a written notice of revocation or a properly executed proxy having a later date or by attending the special meeting and voting in person. Written notices of revocation should be addressed to Richard P. Steele, Secretary, Southern Financial Bancorp, Inc., 37 East Main Street, Warrenton, Virginia 20186. Attendance at the special meeting will not in itself constitute revocation of your proxy.

 

 Solicitation of Proxies

 

This solicitation of proxies for use at the special meeting is being made by the board of directors of Southern Financial. The cost of soliciting proxies will be borne by Southern Financial. In addition to solicitation services to be provided by MacKenzie Partners, Inc. described below, proxies may be solicited, in person or by telephone, by officers and other employees of Southern Financial, who will receive no compensation for their services other than their normal salaries. Brokerage houses, nominees, fiduciaries, and other custodians are requested to forward soliciting material to the beneficial owners of shares held of record by them and will be reimbursed for their expenses in doing so.

 

Southern Financial has retained MacKenzie Partners, Inc. at a fee estimated not to exceed $4,000, plus reimbursement of reasonable out-of-pocket expenses, to assist in the solicitation of proxies.

 

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 Shares Held by Southern Financial Officers and Directors and by Provident Bankshares

 

As of March 8, 2004, directors and executive officers of Southern Financial owned approximately 1,059,604 shares of Southern Financial common stock, not including shares of stock that may be acquired upon the exercise of stock options. This equals 14.2% of the outstanding shares of Southern Financial common stock. All of the Southern Financial directors have entered into voting agreements with Provident Bankshares pursuant to which they have agreed to vote all of the shares of Southern Financial common stock owned by them on the record date in favor of the proposal to approve the merger agreement. As of March 8, 2004, directors and executive officers of Provident Bankshares do not own any shares of Southern Financial common stock.

 

 Recommendation of Southern Financial’s Board of Directors

 

The Southern Financial board of directors has approved the merger agreement and the transactions contemplated by that agreement. The Southern Financial board of directors believes that the merger agreement is in the best interests of Southern Financial and its shareholders and recommends that the Southern Financial shareholders vote “FOR” approval of the merger agreement. See “The Merger—Recommendation of the Southern Financial Board; Southern Financial’s Reasons for the Merger.”

 

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 Ownership of Provident Bankshares Common Stock

 

The following table provides information as of March 1, 2004, with respect to persons known to Provident Bankshares to be the beneficial owners of more than 5% of Provident Bankshares’ outstanding common stock. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investing power.

 

Name and Address


   Number of Shares
Owned


   

Percent of Common

Stock Outstanding


 

Barclays Global Investors, NA.

Barclays Global Fund Advisors

Barclays Bank, PLC

Barclays Capital Inc.

45 Fremont St., 17th Floor

San Francisco, California 94105

   1,756,882   (1)   7.1 %

T. Rowe Price Associates, Inc.

100 E. Pratt Street

Baltimore, Maryland 21202

   1,434,967   (2)   5.8 %

(1) Based on information filed in Schedule 13G with the U.S. Securities and Exchange Commission on February 17, 2004, and includes shares held by each of Barclays Global Investors, N.A., Barclays Global Fund Advisors, Barclays Bank, PLC and Barclays Capital Inc. The shares reported are reported to be held by the company in trust accounts for the economic benefit of the beneficiaries of those accounts. Barclays Global Investors, NA., Barclays Global Fund Advisors, Barclays Bank, PLC and Barclays Capital Inc. filed a joint Schedule 13G to report such beneficial holdings together with the following entities, each of which reported that it did not individually beneficially own any shares of Provident Bankshares common stock: Barclays Global Investors, Ltd, Barclays Global Investors Japan Trust and Banking Company Limited, Barclays Life Assurance Company Limited, Barclays Capital Securities Limited, Barclays Private Bank & Trust (Isle of Man) Limited, Barclays Bank Trust Company Limited, Barclays Bank (Sussie) SA and Barclays Private Bank Limited.
(2) Based on information filed in a Schedule 13G with the U.S. Securities and Exchange Commission on February 11, 2004. These securities are owned by various individual and institutional investors for which T. Rowe Price Associates, Inc. (“Price Associates”) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities.

 

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The following table provides information as of March 1, 2004 about the shares of common stock of Provident Bankshares that may be considered to be beneficially owned by each director of Provident Bankshares, by those executive officers of Provident Bankshares whose salary and bonus during the 2003 fiscal year exceeded $100,000, and by all directors and executive officers of Provident Bankshares as a group. Unless otherwise indicated, each of the named individuals has sole voting power and sole investment power with respect to the shares shown. None of Provident Bankshares’ directors or named executive officers owns more than 1% of Provident Bankshares’ outstanding shares of common stock. All directors and named executive officers together own 3.9% of the outstanding shares, including shares that may be acquired within 60 days by exercising options.

 

Name


  Number of
Shares Owned
(excluding options)


    Number of
Shares That May Be
Acquired Within 60
Days by Exercising
Options


Directors

         

Melvin A. Bilal

  731      12,213

Thomas S. Bozzuto

  5,932      15,455

Kevin G. Byrnes

  2,430   (1)   16,667

Ward B. Coe, III, Esquire

  764  (2)   16,593

Charles W. Cole, Jr.

  19,263      —  

William J. Crowley, Jr.

  6,000  (3)   2,500

Pierce B. Dunn

  44,653  (4)   20,388

Enos K. Fry

  10,080  (5)   69,929

Gary N. Geisel

  19,059  (6)   145,408

Mark K. Joseph

  13,716      20,388

Bryan J. Logan

  300      2,500

Barbara B. Lucas

  2,969      19,873

Peter M. Martin

  113,262      67,000

Frederick W. Meier, Jr.

  7,353      1,863

Francis G. Riggs

  85,457  (7)   4,863

Sheila K. Riggs

  55,734  (8)   17,574

Donald E. Wilson

  100      5,000

Named Executive Officers who are not also Directors

         

Richard J. Oppitz

  10,472  (9)   74,052

Dennis A. Starliper

  27,067  (10)   43,627

All directors and executive officers as a group (19 persons)

  422,618      553,393

(1) Includes 430 shares held in 401(k) plan.
(2) Includes 700 shares held as trustee for mother’s trust.
(3) Includes 5,500 shares held by spouse.
(4) Includes 135 shares held by spouse, 1,299 shares held as custodian and 29,302 shares held as trustee.
(5) Includes 7,529 shares held in 401(k) plan, 33 shares held by IRA and 1,411 shares held by spouse.
(6) Includes 5,326 shares held in 401(k) plan.
(7) Includes 13,269 shares held as custodian.
(8) Includes 2,424 shares held as custodian.
(9) Includes 9,171 shares held in 401(k) plan.
(10) Includes 24,647 shares held in 401(k) plan.

 

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 Ownership of Southern Financial Common Stock

 

The following table provides information as of March 8, 2004, with respect to persons known to Southern Financial to be the beneficial owners of more than 5% of Southern Financial outstanding common stock. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investing power.

 

Name and Address


   Number of
Shares Owned (1)


  

Percent of

Common Stock
Outstanding (2)


 

Georgia S. Derrico (3)

37 East Main Street

Warrenton, Virginia 20186

   483,223    6.5 %

R. Roderick Porter (3)

37 East Main Street

Warrenton, Virginia 20186

   483,223    6.5 %

(1) Except as otherwise indicated, includes shares held directly, as well as shares held in retirement accounts or by certain family members or corporations over which the named individuals may be deemed to have voting or investment power.
(2) The percentage of common stock outstanding was calculated based on 7,466,449 shares of common stock issued and outstanding as of March 8, 2004.
(3) Georgia S. Derrico and R. Roderick Porter are married to each other and the number and percentage of beneficial ownership of each represents their combined ownership. See the table on the following page for additional information regarding Ms. Derrico’s and Mr. Porter’s beneficial ownership of common stock.

 

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The following table provides information as of March 8, 2004 about the shares of Southern Financial common stock that may be considered to be owned by each director, by those executive officers of Southern Financial whose salary and bonus exceeded $100,000 in fiscal 2003, and by all directors and executive officers of Southern Financial as a group. Unless otherwise indicated, each of the named individuals has sole voting power and sole investment power with respect to the shares shown.

 

Name


 

Number of
Shares Owned

(excluding options)


    Number of
Shares That May Be
Acquired Within 60
Days by Exercising
Options


  Percent of
Common Stock
Outstanding (1)


 

Directors

               

John C. Belotti

  42,246   (2)   2,783   *  

Fred L. Bollerer

  6,082      2,783   *  

Neil J. Call

  65,958      2,783   *  

David de Give

  120,689  (3)   3,162   1.7 %

Georgia S. Derrico

  483,223  (4)(5)   —     6.5  

Barbara J. Fried

  217,706  (6)   2,783   3.0  

Alfonso G. Finocchiaro

  21,102      2,783   *  

Virginia Jenkins

  3,361      2,783   *  

R. Roderick Porter

  483,223  (4)(7)   —     6.5  

Michael P. Rucker

  33,653  (8)   2,783   *  

Richard E. Smith

  44,716  (9)   2,783   *  

Robert P. Warhurst

   21,261     2,783   *  

Named Executive Officers who are not also Directors

               

Patricia A. Ferrick

  10,631      —     *  

Richard P. Steele

  10,891      7,590   *  

William H. Stevens

  1,458      17,583   *  

All directors and executive officers as a group
(15 persons)

  1,095,190      53,383   15.3 %

 * Indicates ownership of less than 1.0%.
(1) The percentage of common stock outstanding was calculated based on 7,466,449 shares of common stock issued and outstanding, as of March 8, 2004 and assumes the exercise by the shareholder or group of all options for the purchase of common stock held by such shareholder or group and exercisable within 60 days.
(2) Includes 4,387 shares owned by Mr. Belotti’s spouse.
(3) Includes 3,574 shares owned by Mr. de Give’s spouse over which she has sole voting and investment power.
(4) Georgia S. Derrico and R. Roderick Porter are married to each other and the number and percentage of beneficial ownership of each represents their combined ownership.
(5) Includes (i) 43,053 shares owned individually by Ms. Derrico over which she has sole voting and investment power, (ii) 34,360 shares of common stock owned individually by Mr. Porter, (iii) 334,594 shares held jointly with Mr. Porter, (iv) 4,605 shares owned by Marblehead, Inc., which is jointly owned by Ms. Derrico and Mr. Porter and (v) 3,797 shares owned jointly by Mr. Porter and his son. Ms. Derrico disclaims beneficial ownership of the 34,360 shares beneficially owned solely by Mr. Porter and the 3,797 shares beneficially owned directly by Mr. Porter and his son.
(6) Includes 180,899 shares owned individually by Ms. Fried’s spouse over which he has sole voting and investment power.
(7) Includes (i) 34,360 shares of common stock owned individually by Mr. Porter over which he has sole voting and investment power, (ii) 43,053 shares owned individually by Ms. Derrico, (iii) 334,594 shares held jointly with Ms. Derrico, (iv) 4,605 shares owned by Marblehead, Inc., which is jointly owned by Ms. Derrico and Mr. Porter and (v) 3,797 shares owned jointly by Mr. Porter and his son. Mr. Porter disclaims beneficial ownership of the 43,053 shares beneficially owned solely by Ms. Derrico.
(8) Includes 2,783 shares held by the Jack R. Jones, Sr. Trust, of which Mr. Rucker is trustee and 7,649 shares held by the Estate of Henry C. Rucker, of which Mr. Rucker is trustee.
(9) Includes 11,786 shares owned by Reed Insurance Agency, Inc., of which Mr. Smith is President.

 

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 The Merger

 

The following discussion of the merger is qualified by reference to the merger agreement, which is attached to this joint proxy statement-prospectus as Appendix A. You should read the entire merger agreement carefully. It is the legal document that governs the merger.

 

 About the Parties to the Merger

 

Provident Bankshares Corporation. Provident Bankshares is the bank holding company for Provident Bank. As a bank holding company, Provident Bankshares is subject to regulation by the Federal Reserve Board. Since its formation, Provident Bankshares’ principal activity has been to direct and coordinate the business of Provident Bank.

 

Provident Bank is a Maryland chartered commercial bank headquartered in Baltimore, Maryland. Provident Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Maryland Commissioner of Financial Regulation and its deposits are insured by the FDIC up to applicable limits. Provident Bank currently operates through a network of 118 retail branch office and 161 ATMs in the Baltimore-Washington corridor of Maryland, Northern Virginia and southern York County, Pennsylvania.

 

Provident Bankshares’ principal business has been and continues to be attracting retail and business deposits in the areas surrounding its banking offices and investing those deposits, together with funds generated from operations and borrowings, primarily in consumer loans and to a lesser extent, commercial and real estate loans, and mortgage-backed securities. Provident Bankshares also offers related financial services through its wholly-owned subsidiaries, mutual funds, annuities and insurance products through Provident Investment Company and BankSure Insurance Corporation and leases through Court Square Leasing Corporation and Provident Lease Corporation.

 

For financial statements of Provident Bankshares and a discussion of Provident Bankshares’ recent results of operations, see Provident Bankshares’ 2003 annual report on Form 10-K, which is incorporated by reference into this document.

 

Southern Financial Bancorp, Inc. Southern Financial is the bank holding company for Southern Financial Bank. As a bank holding company, Southern Financial is subject to regulation by the Federal Reserve Board. Since its formation, Southern Financial’s principal activity has been to direct and coordinate the business of Southern Financial Bank.

 

Southern Financial Bank is a Virginia chartered commercial bank headquartered in Warrenton, Virginia. Southern Financial Bank is regulated by the FDIC and the Virginia State Corporation Commission and its deposits are insured by the FDIC up to applicable limits. In addition to its main office in Warrenton, Virginia, Southern Financial Bank operates 28 full-service banking offices throughout Northern and Northwest Virginia and the Charlottesville and Richmond, Virginia areas, including one full-service banking office in the District of Columbia.

 

On February 27, 2004, Southern Financial acquired Essex Bancorp, Inc. and its subsidiary Essex Savings Bank, F.S.B., a federally-chartered savings bank. Essex Savings Bank operates four banking offices in southern Virginia and one banking office in North Carolina.

 

Southern Financial’s principal business has been and continues to be attracting retail and business deposits in the areas surrounding its banking offices and investing those deposits, together with funds generated from operations and borrowings, primarily in commercial loans and to a lesser extent, construction and real estate loans, and mortgage-backed securities. Southern Financial also offers web-based banking systems for cash management, addressing the small and medium size business market through its wholly-owned subsidiary

 

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Southern WebTech.com, Inc. The systems are for use by Southern Financial Bank and for license to other banks with a similar market mission in non-competing geographical areas. Additionally, as part of the acquisition of Essex Bancorp, Southern Financial acquired a 24.9% interest in LoanCare Servicing Center, which primarily services mortgage loans owned by Essex Savings Bank, governmental agencies and third-party investors.

 

For financial statements of Southern Financial and a discussion of Southern Financial’s results of operations for the year ended December 31, 2003, see Southern Financial’s annual report on Form 10-K, which is incorporated by reference into this document.

 

 Form of the Merger

 

Our boards of directors each have approved a merger agreement that provides for the merger of Southern Financial with and into Provident Bankshares. Provident Bankshares will survive the merger. Upon completion of the merger, each share of Southern Financial common stock will be converted into the right to receive 1.0875 shares of Provident Bankshares common stock and $11.125 in cash, without interest. The common stock of Provident Bankshares will continue to trade on the Nasdaq National Market under the symbol “PBKS” after completion of the merger.

 

 Exchange of Southern Financial Stock Certificates

 

If you are a shareholder of Southern Financial when the merger is completed, EquiServe, the exchange agent, will mail to you a letter of transmittal and instructions for use in surrendering your Southern Financial stock certificates. When you properly surrender your certificates or provide other satisfactory evidence of ownership, and return the letter of transmittal duly executed and completed in accordance with its instructions, Provident Bankshares will promptly cancel the surrendered stock certificates and deliver to you the number of shares of Provident Bankshares’ common stock and cash to which you are entitled under the merger agreement.

 

You should not send in your stock certificates until you receive the letter of transmittal and instructions.

 

After the effective time of the merger, and until surrendered as described above, each outstanding Southern Financial stock certificate will be deemed for all purposes to represent only the right to receive the merger consideration. With respect to any Southern Financial stock certificate that has been lost or destroyed, Provident Bankshares will pay the merger consideration attributable to such certificate upon receipt of a surety bond or other adequate indemnity, as required in accordance with Provident Bankshares’ standard policy, and evidence reasonably satisfactory to Provident Bankshares of ownership of the shares in question. After the effective time of the merger, Southern Financial’s transfer books will be closed and no transfer of the shares of Southern Financial stock outstanding immediately prior to the effective time will be made on Provident Bankshares’ stock transfer books.

 

To the extent permitted by law, you will be entitled to vote after the effective time of the merger at any meeting of Provident Bankshares’ shareholders the number of whole shares of Provident Bankshares common stock into which your shares of Southern Financial stock are converted, regardless of whether you have exchanged your Southern Financial stock certificates for Provident Bankshares stock certificates. Whenever Provident Bankshares declares a dividend or other distribution on the Provident Bankshares common stock which has a record date after the effective time of the merger, the declaration will include dividends or other distributions on all shares of Provident Bankshares common stock issuable pursuant to the merger agreement. However, no dividend or other distribution payable to the holders of record of Provident Bankshares common stock will be delivered to you until you surrender your Southern Financial stock certificate for exchange as described above. Upon surrender of your Southern Financial stock certificate, the certificate representing the Provident Bankshares common stock into which your shares of Southern Financial stock have been converted, together with the cash portion of the merger consideration, any cash in lieu of any fractional share of Provident

 

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Bankshares common stock to which you would otherwise be entitled and any undelivered dividends, will be delivered and paid to you, without interest.

 

 Provident Bankshares Shareholders Are Not Required to Exchange Stock Certificates

 

Holders of Provident Bankshares common stock will not be required to exchange certificates representing their shares of Provident Bankshares common stock or otherwise take any action as a result of the completion of the merger. There is no need for Provident Bankshares shareholders to submit their Provident Bankshares common stock certificates to Provident Bankshares, EquiServe or any other person in connection with the merger.

 

 Treatment of Southern Financial Stock Options

 

At the effective time of the merger, each option to purchase shares of Southern Financial common stock outstanding and unexercised immediately prior to the effective time will automatically become vested and will be converted into, at the election of the holder, either an option to purchase Provident Bankshares common stock or a cash payment.

 

If the option holder elects to convert his or her option into an option to purchase Provident Bankshares common stock, such option will continue to be governed by the terms of the applicable Southern Financial stock option plan and the stock option agreement evidencing the option. However, from and after the effective time, each stock option granted and outstanding under Southern Financial stock option plans may be exercised solely for shares of Provident Bankshares common stock. The number of shares of Provident Bankshares common stock issuable upon exercise of each former Southern Financial stock option will be equal to the number of shares of Southern Financial common stock subject to the option immediately prior to the merger multiplied by the “option exchange ratio” as defined below. The exercise price per share of Provident Bankshares common stock issuable upon exercise of each former Southern Financial stock option will be equal to the exercise price per share of Southern Financial common stock subject to the option immediately prior to the merger divided by the “option exchange ratio,” rounded to the nearest cent. The “option exchange ratio” will equal the number determined by dividing $11.125 by the closing price per share of Provident Bankshares common stock on the third trading day before the effective time and adding that number to 1.0875.

 

Each stock option which is an “incentive stock option” will be adjusted as required by the Internal Revenue Code to continue as an incentive stock option for federal income tax purposes. Provident Bankshares will take all corporate action necessary to reserve a sufficient additional number of shares of Provident Bankshares common stock for future issuance in satisfaction of its obligations with respect to these options.

 

If the option holder elects to convert his or her option into a cash payment, such option holder will receive an amount of cash calculated by multiplying the difference between (1) the sum of (a) 1.0875 multiplied by the closing price per share of Provident Bankshares common stock on the third trading day prior to the effective time of the merger and (b) $11.125 and (2) the per share exercise price applicable to such option by the number of shares of Southern Financial common stock subject to the option.

 

 Material Federal Income Tax Consequences of the Merger

 

The following discussion addresses the material United States federal income tax consequences of the merger to holders of Southern Financial common stock. This discussion applies only to Southern Financial shareholders who hold their Southern Financial common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code. Further, this discussion does not address all aspects of United States federal income taxation that may be relevant to a particular shareholder in light of his or her personal circumstances or to shareholders subject to special treatment under the United States federal income tax laws including: banks or

 

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trusts; tax-exempt organizations; insurance companies; regulated investment companies or mutual funds; dealers in securities or foreign currency; traders in securities who elect to apply a mark-to-market method of accounting; pass-through entities and investors in such entities; foreign persons; and shareholders who hold Southern Financial common stock as part of a hedge, straddle, constructive sale, conversion transaction or other integrated instrument; and to shareholders of Southern Financial common stock who acquired their shares of Southern Financial common stock upon the exercise of warrants or employee stock options or otherwise as compensation.

 

This discussion is based on the Internal Revenue Code, Treasury regulations, administrative rulings and judicial decisions, all as in effect as of the date of this joint proxy statement-prospectus and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. Tax considerations under state, local and foreign laws are not addressed in this document. The tax consequences of the merger to you may vary depending upon your particular circumstances. Therefore, you should consult your tax advisor to determine the particular tax consequences of the merger to you, including those relating to state and/or local taxes.

 

It is a condition to our obligations to complete the merger that we receive an opinion of Muldoon Murphy Faucette & Aguggia LLP, counsel to Provident Bankshares, stating that the merger will be treated for United States federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. In rendering its opinion, counsel may require and rely upon representations contained in letters and certificates to be received from our officers and others. This opinion neither binds the Internal Revenue Service or the courts or precludes the Internal Revenue Service or the courts from adopting a position contrary to that expressed in the opinion, and no assurance can be given that a contrary position will not be successfully asserted by the Internal Revenue Service nor adopted by the courts if the issues are litigated. Neither Provident Bankshares nor Southern Financial intends to request any ruling from the Internal Revenue Service with respect to the federal income tax consequences of the merger. Although the merger agreement allows both of us to waive the condition that we receive a tax opinion from Muldoon Murphy Faucette & Aguggia LLP, we currently do not anticipate doing so. However, if this condition were waived, Southern Financial would re-solicit the approval of its shareholders prior to completing the merger.

 

In addition, in connection with the filing of the registration statement, Muldoon Murphy Faucette & Aguggia LLP, counsel to Provident Bankshares, has delivered to Provident Bankshares and Southern Financial its opinion, dated the date of this joint proxy statement-prospectus, that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. A copy of this opinion is attached as Exhibit 8.1 to the registration statement of which this joint proxy statement-prospectus forms a part. Such opinion has been rendered on the basis of facts, representations and assumptions set forth or referred to in such opinion and factual representations contained in certificates of officers of Provident Bankshares and Southern Financial, all of which must continue to be true and accurate in all material respects as of the effective time of the merger. Accordingly, the discussions set forth below, subject to the limitations and qualifications set forth therein, constitutes the opinion of Muldoon Murphy Faucette & Aguggia LLP as to the material United States federal income tax consequences of the merger to holders of Southern Financial common stock.

 

Exchange for Provident Bankshares Common Stock and Cash. As a result of receiving a combination of Provident Bankshares common stock and cash in exchange for shares of Southern Financial common stock, a Southern Financial shareholder will recognize gain, but not loss, equal to the lesser of (1) the amount of cash received or (2) the amount of gain “realized” in the merger. The amount of gain a Southern Financial shareholder “realizes” will equal the amount by which (a) the cash plus the fair market value at the effective time of the merger of the Provident Bankshares common stock received exceeds (b) the shareholders’ tax basis in the Southern Financial common stock surrendered in the merger. If a shareholder of Southern Financial common stock purchased his or her shares of Southern Financial common stock at different prices, such Southern Financial shareholder will have to compute his or her recognized gain or loss separately for the shares of Southern Financial common stock with different adjusted basis in accordance with rules described in the previous sentences. Any recognized loss disallowed will be included in the adjusted basis of the holders of

 

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Provident Bankshares common stock received in the merger, as discussed below. Any recognized gain would be taxed as a capital gain or a dividend, as described below. The tax basis of the shares of Provident Bankshares common stock received in the merger will be the same as the tax basis of the shares of Southern Financial common stock surrendered in the merger decreased by the amount of cash received in the merger and increased by the (i) gain recognized in the merger, if any and (ii) recognized loss disallowed in the merger, if any. The holding period for shares of Provident Bankshares common stock received by such Southern Financial shareholder will include such shareholder’s holding period for the Southern Financial common stock surrendered in exchange for the Provident Bankshares common stock, provided that such shares of Southern Financial common stock were held as capital assets of the shareholder at the effective time of the merger.

 

Possible Dividend Treatment. In certain circumstances, a Southern Financial shareholder may receive ordinary income, rather than capital gain, treatment on all or a portion of the gain recognized in the merger if the receipt of the cash portion of the merger consideration “has the effect of the distribution of a dividend under the principles of Section 302 of the Internal Revenue Code.” The determination of whether a cash payment has such effect is based on a comparison of the Southern Financial shareholder’s proportionate interest in Provident Bankshares after the merger with the proportionate interest the Southern Financial shareholder would have had if the shareholder had received solely Provident Bankshares common stock in the merger. For purposes of this comparison, the Southern Financial shareholder may constructively own shares of Provident Bankshares common stock held by certain members of the Southern Financial shareholder’s family or certain entities in which the Southern Financial shareholder has an ownership or beneficial interest and certain stock options may be aggregated with the Southern Financial shareholder’s shares of Provident Bankshares common stock. The amount of the cash payment that may be treated as a dividend is limited to the shareholder’s ratable share of the accumulated earnings and profits of Southern Financial at the effective time of the merger. Any gain that is not treated as a dividend will be taxed as a capital gain, provided that the Southern Financial shareholder’s common stock was held as capital assets at the effective time of the merger. Capital gain or loss recognized by a Southern Financial shareholder in the merger will be long-term capital gain or loss if the holding period of the shares of Southern Financial common stock exceeds one year at the completion of the merger. In the case of individuals, the maximum federal income tax rate applicable to long-term capital gains generally is 15%. If a Southern Financial shareholder has to recognize ordinary income, such income for individuals is currently taxed at the maximum rate of 35%. The determination of whether a cash payment will be treated as having the effect of a dividend depends primarily upon the facts and circumstances of each Southern Financial shareholder. Southern Financial shareholders are urged to consult their own tax advisors regarding the tax treatment of the cash received in the merger.

 

Dissenters. A shareholder who receives cash for their shares of Southern Financial common stock because they exercised their dissenter’s rights will be treated for United States federal income tax purposes as if the Provident Bankshares common stock had been received and then redeemed for cash by Provident Bankshares. A Southern Financial shareholder will recognize a capital gain or loss in an amount equal to the difference between the cash received and the tax basis in the Provident Bankshares common stock, unless such payment, under each such shareholder’s particular facts and circumstances, is deemed to have the effect of a dividend distribution and not a redemption treated as an exchange under the principles of Section 302 of the Internal Revenue Code.

 

Cash in Lieu of Fractional Shares. A Southern Financial shareholder who holds Southern Financial common stock as a capital asset and who receives in the merger, in exchange for such stock, cash in lieu of a fractional share interest in Provident Bankshares common stock, will be treated as having received such cash in full payment for such fractional share of stock and as capital gain or loss, notwithstanding the dividend rules discussed above.

 

Backup Withholding. Unless an exemption applies under the backup withholding rules of Section 3406 of the Internal Revenue Code, the exchange agent shall be required to withhold, and will withhold, 28% of any cash payments to which a Southern Financial shareholder is entitled pursuant to the merger, unless the Southern Financial shareholder provides the appropriate form. A Southern Financial shareholder should complete and sign

 

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the substitute Internal Revenue Service Form W-9 enclosed with the letter of transmittal sent by the exchange agent. Unless an applicable exemption exists and is proved in a manner satisfactory to the exchange agent, this completed form provides the information, including the Southern Financial shareholder’s taxpayer identification number, and certification necessary to avoid backup withholding.

 

The foregoing is a summary discussion of material federal income tax consequences of the merger. The discussion is included for general information purposes only and may not apply to a particular Southern Financial shareholders in light of such shareholder’s particular circumstances. Southern Financial shareholder should consult their own tax advisors as to the particular tax consequences to them of the merger, including the application of state, local and foreign tax laws and possible future changes in federal income tax laws and the interception thereof, which can have retroactive effects.

 

 Background of the Merger

 

From time to time, Southern Financial’s board of directors and management have reviewed Southern Financial’s future prospects for earnings and asset growth, and the viability of continued independent operations in accordance with Southern Financial’s business plan, from the perspective of the long-term best interests of Southern Financial and its shareholders. During 2003, several interested parties other than Provident Bankshares contacted Southern Financial to explore the possibility of a business combination. Until the fall of 2003, Southern Financial elected not to pursue these preliminary expressions of interest, believing it to be in the best interests of Southern Financial and its shareholders for Southern Financial to remain an independent entity.

 

On September 8, 2003, Georgia S. Derrico, Chairman of the Board and Chief Executive Officer of Southern Financial, R. Roderick Porter, President and Chief Operating Officer of Southern Financial, and Gary Geisel, Chief Executive Officer of Provident Bankshares, met to discuss the possibility of a business combination between their companies. The discussion was general in nature and addressed non-pricing matters such as financial performance, management and operations. Consistent with their duties to evaluate strategic options for Southern Financial, Ms. Derrico and Mr. Porter contacted Sandler O’Neill & Partners, L.P. to discuss the meeting and to develop a plan to investigate the alternatives available to Southern Financial with respect to a possible business combination. As a result of the process facilitated by Sandler O’Neill, between September 19 and October 2, 2003, Ms. Derrico and Mr. Porter met with representatives of several financial institutions that expressed an interest in Southern Financial, including Provident Bankshares.

 

On October 3, 2003, Provident Bankshares engaged Keefe Bruyette & Woods, Inc. to provide advisory services to Provident Bankshares’ board of directors regarding a possible business combination, including analyzing and assisting management in negotiating the financial aspects of the transaction. Keefe Bruyette was also engaged by Provident Bankshares to provide a fairness opinion with respect to the merger consideration.

 

On October 6, 2003, Southern Financial formally engaged Sandler O’Neill as its financial advisor to provide advisory services to the Southern Financial board of directors in connection with a possible business combination and to provide a fairness opinion with respect to the merger consideration should a transaction be considered by the board of directors. Also, on that date, Southern Financial and Provident Bancshares executed a confidentiality agreement.

 

On October 15, 2003, the Provident Bankshares board of directors held an executive session following the regularly scheduled Provident Bankshares board meeting at which the board was informed of senior management’s discussions with Southern Financial.

 

Southern Financial received preliminary indications of interest on October 15, 2003. During the period of October 16 through October 23, 2003, three financial institutions conducted due diligence with respect to Southern Financial’s business and operations and two of these institutions submitted proposals, including the proposed consideration that each institution proposed to pay in connection with an acquisition of Southern Financial.

 

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Based on a review and consideration of the terms and conditions of the two offers submitted, the Southern Financial board of directors determined that the offer from Provident Bankshares was the best for Southern Financial and its shareholders. At a special meeting of Southern Financial’s board of directors on October 31, 2003, the board discussed the terms of the offers and a representative from Sandler O’Neill reviewed the proposals and information regarding Provident Bankshares and its financial performance. In addition, the board reviewed and discussed a proposed definitive merger agreement with representatives of Bracewell & Patterson, L.L.P., Southern Financial’s legal counsel.

 

Provident Bankshares performed its final due diligence on November 1 and 2, 2003 and the parties and their respective legal counsel engaged in negotiations related to definitive transaction agreements.

 

At a second special meeting of the Southern Financial board of directors held on November 3, 2003, a representative of Sandler O’Neill discussed terms of the offer from Provident Bankshares, including an analysis of comparable transactions and the financial position and valuation of Provident Bankshares. Representatives of Bracewell & Patterson then reviewed the merger agreement and related agreements that had been negotiated with Provident Bankshares. Throughout the presentations, representatives of Sandler O’Neill and Bracewell & Patterson responded to numerous questions and comments from the Southern Financial board.

 

Southern Financial’s board considered the financial performance, stock performance, market position, growth prospects and other matters concerning Provident Bankshares. The board evaluated Provident Bankshares’ offer in relation to the then current market value of Southern Financial’s common stock and management’s estimate of the future value of the common stock of Southern Financial as an independent entity. After thorough discussion, Southern Financial’s board of directors determined that a business combination with Provident Bankshares would be in the best interests of Southern Financial and its shareholders. As a result, Southern Financial’s board of directors unanimously approved the merger agreement and instructed management to execute and deliver the merger agreement on behalf of Southern Financial.

 

On November 3, 2003, at a meeting of the board of directors of Provident Bankshares, Keefe Bruyette reviewed with the board the financial aspects of the proposed transaction and delivered its opinion that the merger consideration was fair to Provident Bankshares from a financial point of view. The board of directors considered this opinion carefully as well as Keefe Bruyette’s experience, qualifications and interest in the transaction. In addition, Provident Bankshares’ board of directors reviewed the merger agreement at length with legal counsel. After extensive review and discussion, Provident Bankshares’ board of directors unanimously approved the transaction and instructed management to execute and deliver the merger agreement.

 

On November 3, 2003, Southern Financial and Provident Bankshares entered into the merger agreement and each financial institution announced the proposed merger.

 

 Recommendation of the Provident Bankshares Board; Provident Bankshares’ Reasons for the Merger

 

Provident Bankshares’ board of directors has unanimously approved the merger agreement and recommends that Provident Bankshares shareholders vote “FOR” the approval of the merger agreement.

 

Provident Bankshares’ board of directors has determined that the merger and the merger agreement are fair to, and in the best interests of, Provident Bankshares and its shareholders. In reaching this determination, the Provident Bankshares board of directors consulted with legal counsel as to its legal duties and the terms of the merger agreement and with its financial advisors with respect to the financial aspects and fairness of the transaction from a financial point of view. In arriving at its determination, the Provident Bankshares board of directors also considered a number of factors, including the following:

 

 

Due Diligence Review. Information concerning the businesses, earnings, operations, financial condition and prospects of Southern Financial and Provident Bankshares, both individually and as combined. The

 

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Provident Bankshares board of directors took into account the results of Provident Bankshares’ due diligence review of Southern Financial.

 

  Keefe Bruyette Opinion. The opinion rendered by Keefe Bruyette, as financial advisor to Provident Bankshares, that the merger consideration is fair, from a financial standpoint, to Provident Bankshares shareholders (see “—Opinion of Provident Bankshares’ Financial Advisor”).

 

  Complementary Markets. The complementary nature of the businesses and market areas of Provident Bankshares and Southern Financial.

 

  Tax Consequences. The terms of the merger agreement and the structure of the merger, including the fact that the merger agreement provides a maximum number of shares of Provident Bankshares common stock to be issued in the merger and that the merger is intended to qualify as a transaction of a type that is generally tax-free for U.S. federal income tax purposes and as a purchase for accounting purposes.

 

  Greater Resources. The size of the combined company, which would permit Provident Bankshares to pursue other acquisitions.

 

  Continuity of Management. The fact that Provident Bankshares’ management team immediately before the merger will remain intact following the merger, and that Provident Bankshares’ board of directors will be increased to accommodate the addition of two current members of the Southern Financial board of directors.

 

  Stock Prices. The historical trading prices for Provident Bankshares and Southern Financial common stock.

 

  Cost Savings. The opportunities for decreasing operating expenses for the combined company.

 

  Current Environment. The current and prospective economic, competitive and regulatory environment facing Provident Bankshares, Southern Financial and the financial services industry.

 

  Termination Fee. The termination fee to which Provident Bankshares would be entitled under certain circumstances.

 

  More Competitive. The board of directors’ assessment that Provident Bankshares would be better able to serve the convenience and needs of its customers and communities by becoming a larger institution better suited for competing against regional financial institutions in its market area.

 

  Accretive to Earnings. That the merger is expected to be accretive to earnings in the first year after the merger and the belief that the business and financial advantages contemplated in connection with the merger will likely be achieved within a reasonable time frame.

 

  Likelihood of Consummation. That Southern Financial had thoroughly reviewed its strategic planning options and the likelihood that the proposed merger would receive the required approvals, and the anticipated impact of the foregoing on the successful consummation of the transaction.

 

  Southern Financial Bank’s CRA Rating. The “Satisfactory” Community Reinvestment Act rating at the most recent examination of Southern Financial Bank.

 

The discussion of the information and factors considered by the Provident Bankshares board of directors is not intended to be exhaustive, but includes all material factors considered by the Provident Bankshares board of directors. In reaching its determination to approve and recommend the merger, the Provident Bankshares board of directors did not assign any specific or relative weights to any of the foregoing factors, and individual directors may have weighed factors differently. The Provident Bankshares board of directors is unanimous in its recommendation that Provident Bankshares Shareholders vote for approval of the merger agreement.

 

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 Recommendation of the Southern Financial Board and Southern Financial’s Reasons for the Merger

 

The Southern Financial board of directors believes that the merger is in the best interests of Southern Financial and its shareholders. Accordingly, the Southern Financial board has unanimously approved the merger agreement and unanimously recommends that Southern Financial shareholders vote FOR approval of the merger agreement.

 

The terms of the merger agreement, including the consideration to be paid to Southern Financial shareholders, were the result of arm’s length negotiations between representatives of Provident Bankshares and Southern Financial. In evaluating whether to affiliate with Provident Bankshares, the Southern Financial board considered a number of factors, including, without limitation, the following:

 

  Information regarding the business, operating results, financial condition, management, earnings and prospects of each of Southern Financial and Provident Bankshares.

 

  The per share merger consideration in the form of 1.0875 shares of Provident Bankshares common stock and $11.125 in cash for each share of Southern Financial common stock outstanding.

 

  The analyses provided by Sandler O’Neill and the opinion rendered by Sandler O ‘Neill, as financial advisor to Southern Financial, that the merger consideration is fair from a financial point of view to Southern Financial’s shareholders.

 

  The compatibility of Provident Bankshares’ management team with that of Southern Financial and the general strategic fit of the entities, including the fact that Southern Financial’s commercial lending and geographic area complements that of Provident Bankshares.

 

  Comparable transactions and valuations on recent transactions.

 

  The Southern Financial board’s review of other strategic alternatives available to Southern Financial and the boa