GENERAL

Provident Bankshares Corporation (the "Corporation"), a Maryland corporation, is the bank holding company for Provident Bank ("Provident" or "the Bank"), a Maryland chartered stock commercial bank. At March 31, 2009, the Bank is the largest independent commercial bank (based on the FDIC market share report) in asset size headquartered in Maryland, with $6.5 billion in assets. Provident is a regional bank serving Maryland and Virginia, with emphasis on the key urban centers serving the Baltimore, Washington, D.C. and Richmond metropolitan areas.

Provident's principal business is to acquire deposits from individuals and businesses and to use these deposits to fund loans to individuals and businesses. Provident also offers related financial services through wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company and leases through Court Square Leasing.

Agreement and Plan of Merger

For discussion relating to the definitive Agreement and Plan of Merger, refer to Note 19 in the Condensed Consolidated Financial Statements.

Business Strategy

Provident's mission is to exceed customer expectations by delivering superior service, products and banking convenience. Every employee's commitment to serve the Bank's customers in this fashion will assist in establishing Provident as the primary bank of choice of individuals, families, small businesses and middle market businesses throughout its chosen markets. To achieve this mission and to improve financial fundamentals, the strategic priorities of the organization are to:

Maximize Provident's position as the right size bank in the marketplace. Provident's position as the largest bank headquartered in Maryland provides a unique opportunity as the "right size" bank in its market areas, or footprint. The Bank provides the service of a community bank combined with the convenience and wide array of products and services that a major regional bank offers. In addition, the 63 in-store banking offices throughout its footprint reinforce its right size strategy through convenient locations, hours and a full line of products and services. Provident currently has 141 banking offices concentrated in the Baltimore-Washington, D.C. corridor and beyond to Richmond, Virginia. Of the 141 banking offices, 49.6% are located in the Greater Baltimore region and 50.4% are located in the Greater Washington, D.C. and Central Virginia regions, reflecting the successful development of the Bank into a highly competitive regional commercial bank. Provident also offers its customers 24-hour banking services through ATMs, telephone banking and the Internet. The Bank's network of 194 ATMs enhances the banking office network by providing customers increased opportunities to access their funds. In addition, the Bank is a member of the MoneyPass network, which provides free access to more than 12,000 ATMs nationwide for its customers.

Profitably grow and deepen customer relationships in all four key market segments: Commercial, Commercial Real Estate, Consumer and Business Banking. Consumer banking continues to be an important component of the Bank's strategic priorities. Consumer banking services include a broad array of consumer loan, lease, deposit and investment products offered to consumer and commercial customers through Provident's banking office network and ProvidentDirect, the Bank's direct channel sales center. The business banking market segment is supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients. Commercial banking is the other key component to the Corporation's regional presence in its market area. Commercial Banking provides lending services through its commercial business division and its commercial real estate division. The commercial business division provides customized banking solutions to middle market commercial customers while the commercial real estate division provides lending expertise and financing options to real estate customers. The Bank has an experienced team of relationship managers with expertise in business and real estate lending to companies in various industries in the region. It also has a suite of cash management products managed by responsive account teams that deepen customer relationships through competitively priced deposit based services, responsive service and frequent personal contact with each customer.

Consistently execute a higher-performance, customer relationship-focused sales culture. The Corporation's transition to a customer relationship driven sales culture requires deepening relationships through cross-selling and the continuing emphasis on retention of valued customers. The Bank has segmented its customers to better understand and anticipate their financial needs and provide Provident's sales force with a targeted approach to customers and prospects. The successful execution of this strategic priority is centered on the right size bank commitment-providing the service of a community bank combined with the convenience and wide array of products and services that a major regional bank offers. This strategy is measured and monitored by a number of actions such as the utilization of individual performance plans and sales goals.

Sustain a culture that attracts and retains employees who provide the differentiating "Provident Way" customer experience. Provident has always placed a high priority on its employees and has approached employee development and training with renewed emphasis. Employee development is viewed as a critical part of executing Provident's strategic priority as the right size bank and transforming the Corporation's sales culture with a focus on the employee's development and approach with Provident's customers. This strategy is measured and monitored by a number of actions, such as utilization of individual development plans for every employee and tracking individual employee learning activities through our learning management system.

Expand delivery (branch and non-branch) within the market Provident serves. Over the past five years, Provident has expanded its branch network by net 23 in-store or traditional branches.

FINANCIAL REVIEW

The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries year over year, unless otherwise indicated. This discussion and tabular presentations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and Notes.

Overview of Income and Expenses

Income

The Corporation has two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest income-which is the income that the Corporation earns on its loans and investments-and interest expense-which is the interest that is paid on its deposits and borrowings.

The second principal source of pre-tax income is non-interest income-the compensation received from providing products and services. The majority of the non-interest income comes from service charges on deposit accounts. The Corporation also earns income from insurance commissions, mortgage banking fees and other fees and charges.

The Corporation recognizes gains or losses as a result of sales of investment securities or the disposition of loans, foreclosed property or fixed assets. In addition, the Corporation also recognizes gains or losses on its outstanding derivative financial instruments and impairment on investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Corporation's primary source of income.

Expenses

The expenses the Corporation incurs in operating its business consist of salaries and employee benefits expense, occupancy expense, furniture and equipment expense, external processing fees, deposit insurance premiums, advertising expenses, and other miscellaneous expenses.

Salaries and benefits expense consists primarily of the salaries and wages paid to employees, payroll taxes and expenses for health care, retirement and other employee benefits.

Occupancy expense, which are fixed or variable costs associated with building and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and cost of utilities.

Furniture and equipment expenses and depreciation charges relate to office and banking equipment. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of related assets. Estimated lives range from 2 to 15 years for buildings and improvements, and 3 to 10 years for furniture and equipment.

External processing fees are fees paid to third parties for data processing services.

Merger related expenses consist of investment banker fees, legal fees, conversion costs and employees benefit costs agreed to in the Merger Agreement.

Restructuring activities are incremental expenses associated with corporate efficiency and infrastructure initiatives implemented to simplify the Corporation's business model as described in the Notes to the Condensed Consolidated Financial Statements.

Other expenses include expenses for attorneys, accountants and consultants, fees paid to directors, franchise taxes, charitable contributions, insurance, office supplies, postage, telephone and other miscellaneous operating expenses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The unaudited Condensed Consolidated Financial Statements of the Corporation are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis, and believes the following represent its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of fair value associated with other-than-temporary impairment, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, share-based payments, derivative financial instruments, litigation and income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its unaudited Condensed Consolidated Financial Statements: allowance for loan losses, fair value, other-than-temporary-impairment of investment securities, derivative financial instruments, goodwill and intangible assets, and income taxes. Each estimate and its financial impact, to the extent significant to financial results, are discussed in the Notes to the Condensed Consolidated Financial Statements. It is at least reasonably possible that each of the Corporation's estimates could change in the near term or that actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could be material to the Condensed Consolidated Financial Statements.

FINANCIAL CONDITION

Capital growth, liquidity along with maintaining a strong balance sheet in this current economic environment are the top priorities of the Corporation. Over the past twelve months, the Corporation was successful in raising capital and maintaining solid capital ratios well above the minimum regulatory capital levels along with increasing the Corporation's liquidity position. In addition, the financial condition of the Corporation reflects expanded business development and the execution of the Corporation's strategic priorities including growing loans and deposits. Growth in relationship-based loan portfolios (loans other than the Corporation's originated and acquired residential mortgage loans) is a reflection of the Corporation's ability to grow the loan portfolio in the key major markets of Greater Baltimore, Greater Washington, D.C. and Central Virginia through its lending expertise and focus on its premier loan programs - home equity, commercial real estate, and commercial business. The Corporation was also successful in growing customer deposits over the same period a year ago.

Over the past twelve months, the Corporation has increased its liquidity position and reduced its reliance on short-term borrowings by increasing its brokered certificates of deposit balances. Loan credit quality has declined over this time frame and is primarily related to the weakness in the residential construction industry. In addition, values of investment securities have continued to be negatively impacted by the economic down turn and turmoil in the financial markets.

The core banking performance has resulted in an increase in average relationship-based loans of $160.1 million, or 4.1%, and an increase in customer deposits of $236.6 million, or 7.0%, for the quarter ended March 31, 2009, when compared to the same period a year ago. At March 31, 2009, total assets were $6.5 billion, while total loans and deposits were $4.3 billion and $4.8 billion, respectively.

Stockholders' Equity and Capital

Over the past twelve months, long-term capital growth has been a specific focus for the Corporation. To provide capital growth, the Corporation successfully completed a multi-tiered capital plan in April 2008 to strengthen the Corporation's capital base, including the issuance of $64.8 million in equity securities and $50 million in subordinated debt. In addition, beginning with the dividend that was paid in May 2008, the quarterly dividend payment was reduced by approximately 66%.

On April 9, 2008, the Corporation entered into a Stock Purchase Agreement (the "Agreement") with certain institutional and individual accredited investors and certain officers of the Corporation and members of the Corporation's Board of Directors in connection with the private placement of $64.8 million of its capital stock. The Agreement provided for the sale of 1,422,110 shares of the Corporation's common stock at a price of $9.50 per share ($10.80 for officers and directors of the Corporation, which was the closing bid price on April 8, 2008, the date prior to the execution of the Agreement), and 51,215 shares of a newly created class of Series A Mandatory Convertible Non-Cumulative Preferred Stock (the "Provident Series A Preferred") at a purchase price and liquidation preference of $1,000 per share. The transaction closed on April 14, 2008. Net proceeds from the equity offering totaled $62.4 million and are included in Tier 1 capital.

On April 24, 2008, the Corporation's wholly owned subsidiary, Provident Bank, completed a private placement of $50.0 million of subordinated unsecured notes that are rated BBB to qualified institutional buyers and accredited investors. The purchase price of the subordinated notes was 97.651% of the principal amount. The notes are callable at the option of the Corporation, five years from the date of issuance. The subordinated notes bear interest at a fixed rate of 9.5% and mature on May 1, 2018, with semi-annual interest payments payable on May 1 and November 1 of each year beginning on November 1, 2008. The subordinated notes are not convertible. The net proceeds from the debt offering totaled $47.7 million and are included in Tier II regulatory capital.

On November 14, 2008, as part of the Troubled Asset Relief Program ("TARP") Capital Purchase Program, the Corporation entered into a Purchase Agreement with the United States Department of the Treasury, pursuant to which Provident sold 151,500 shares of Provident's Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the "Provident Series B Preferred") and a warrant to purchase 2,374,608 shares of the Corporation's common stock, par value $1.00 per share for an aggregate purchase price of $151.5 million in cash. The Provident Series B Preferred is included in Tier 1 capital. The stock warrants were issued with an initial exercise price of $9.57. The warrants have a ten-year term and are exercisable immediately. If the Corporation raises common or perpetual preferred equity equal to or at least 100% of the senior preferred shares issued under TARP by December 31, 2009, the number of warrants will be reduced by 50%.

Total stockholders' equity was $609.1 million at March 31, 2009, a decrease of $62.0 million from December 31, 2008. Stockholders' equity decreased by $67.2 million as a result of the net loss recorded for the three months ended March 31, 2009. Stockholders' equity was further reduced by the payments of common stock dividends of $3.7 million, preferred stock dividends of $3.1 million and a $300 thousand decline related to share based payments and other activities. In addition, stockholders' equity increased by $12.3 million due to the reduction in accumulated other comprehensive loss during the period, primarily due to the write downs in the investment securities portfolio.

The Corporation's tangible common equity ratio decreased from 5.20% at December 31, 2008 to 4.19% at March 31, 2009. The decline is mainly associated with the $67.2 million net loss recorded in the first three months of 2009. The tangible common equity ratio is a non-GAAP measure used by management to evaluate capital adequacy. Tangible common equity is total equity excluding net accumulated other comprehensive loss ("OCI"), less goodwill and deposit-based intangibles and preferred stock. Tangible assets are total assets less goodwill and deposit-based intangibles. The tangible common equity ratio is calculated by removing the impact of OCI, preferred stock and certain intangible assets from total equity and total assets. Management and many stock analysts use the tangible common equity ratio in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method accounting for mergers and acquisitions. Management believes this is an important benchmark for the Corporation and for investors. Neither tangible common equity, tangible assets nor the related measures should be considered in isolation or as a substitute for stockholders' equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and the related measures may differ from that of other companies reporting measures with similar names. The following table is a reconciliation of the Corporation's tangible common equity and tangible assets for the periods ended March 31, 2009, December 31, 2008 and March 31, 2008, respectively.

                                                   March 31,        December 31,        March 31,
(dollars in thousands)                               2009               2008              2008
Total equity capital per consolidated
financial statements                              $   609,093      $      671,073      $   517,549
Accumulated other comprehensive loss                   92,390             104,645           78,881
Goodwill                                             (255,330 )          (255,330 )       (253,906 )
Deposit-based intangible                               (5,020 )            (4,886 )         (5,836 )
Preferred stock                                      (181,608 )          (187,946 )             -

Tangible common equity                            $   259,525      $      327,556      $   336,688


Total assets per consolidated financial
statements                                        $ 6,451,554      $    6,559,848      $ 6,403,916
Goodwill                                             (255,330 )          (255,330 )       (253,906 )
Deposit-based intangible                               (5,020 )            (4,886 )         (5,836 )

Tangible assets                                   $ 6,191,204      $    6,299,632      $ 6,144,174


Tangible common equity ratio                             4.19 %              5.20 %           5.48 %

The Corporation is required to maintain minimum amounts and ratios of core capital to adjusted quarterly average assets ("leverage ratio") and of Tier 1 and total regulatory capital to risk-weighted assets. The actual regulatory capital ratios and required ratios for capital adequacy purposes under FIRREA and the ratios to be categorized as "well capitalized" under prompt corrective action regulations are summarized in the following table.

                                                         March 31,             December 31,
(dollars in thousands)                                     2009                    2008
Total equity capital per consolidated financial
statements                                              $   609,093           $      671,073
Qualifying trust preferred securities                       129,000                  129,000
Accumulated other comprehensive loss                         92,390                  104,645

Adjusted capital                                            830,483                  904,718
Adjustments for tier 1 capital:
Goodwill and disallowed assets                             (372,508 )               (301,088 )


Total tier 1 capital                                        457,975                  603,630

Adjustments for tier 2 capital:
Includable allowance for loan losses                         87,435                   73,098
Subordinated debt                                            50,000                   50,000
Allowance for letter of credit losses                           649                      701


Total tier 2 capital adjustments                            138,084                  123,799

Total regulatory capital                                $   596,059           $      727,429


Risk-weighted assets                                    $ 6,944,051           $    6,295,196
Quarterly regulatory average assets                       6,240,228                6,248,664


                                                                                    Minimum
                                                                                   Regulatory      To be "Well
                                                                                  Requirements     Capitalized"
Ratios:
Tier 1 leverage                                     7.34 %           9.66 %               4.00 %           5.00 %
Tier 1 capital to risk-weighted
assets                                              6.60             9.59                 4.00             6.00
Total regulatory capital to

As of March 31, 2009, the Corporation is considered "adequately capitalized" for regulatory purposes. Refer to page 46 for the impact on total regulatory capital ratios if the Corporation early adopted FSP FAS 115-2 and 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments".

Liquidity

An important component of the Corporation's asset/liability management process is monitoring the level of liquidity available to meet the needs of customers and creditors. Traditional sources of bank liquidity include deposit growth, loan repayments, investment maturities, asset sales, borrowings and interest received. Management believes the Corporation has sufficient liquidity to meet future funding needs.

The Corporation's chief source of liquidity is the assets it possesses, which can either be pledged as collateral for secured borrowings or sold outright. At March 31, 2009, approximately $327.4 million of the Corporation's investment portfolio was immediately saleable at a market value equaling or exceeding its amortized cost basis.

As an alternative to asset sales, the Corporation has the ability to pledge assets to raise secured borrowings. At March 31, 2009, $781.8 million of secured wholesale borrowings were employed, with sufficient collateral available to raise an additional $921.5 million from the FHLB-Atlanta, the Federal Reserve's term auction facility and securities sold under repurchase agreements. Additionally, over $367.3 million of borrowing capacity exists at the Federal Reserve discount window as a contingent funding source. The Corporation also employs unsecured funding sources such as fed funds and brokered certificates of deposit. At March 31, 2009, no fed funds purchased were outstanding, with sufficient funding lines in place to purchase $641.0 million. At March 31, 2009, the Corporation had $1.1 billion of brokered certificates of deposit outstanding. Over the next 12 months, $425.9 million of unsecured funds will mature.

In November 2008, the Corporation issued $151.5 million of preferred equity securities to the U.S. Treasury - the securities commonly known as TARP funding.

A significant use of the Corporation's liquidity is the dividends it pays to shareholders. The Corporation is a one-bank holding company that relies upon the Bank's performance to generate capital growth through Bank earnings. A portion of the Bank's earnings is passed to the Corporation in the form of cash dividends. As a commercial bank under the Maryland Financial

Institution Law, the Bank may declare cash dividends from undivided profits or, with the prior approval of the Commissioner of Financial Regulation, out of paid-in capital in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest and taxes. These dividends paid to the holding company are utilized to pay dividends to stockholders, repurchase shares and pay interest on junior subordinated debentures. The Corporation and the Bank, in declaring and paying dividends, are also limited insofar as minimum capital requirements of regulatory authorities that must be maintained and by certain provisions of the TARP Capital Purchase Program. The Corporation and the Bank comply with such capital requirements. If the Corporation or the Bank were unable to comply with the minimum capital requirements, it could result in regulatory actions that could have a material impact on the Corporation. The Corporation's ability to pay a dividend is also limited by the terms of the merger agreement which requires that the Corporation coordinate with M&T regarding the declaration of any dividends or other distributions with respect to the Corporation's common stock and the related record dates and payment dates, it being intended that, among other things, the holders of the Corporation's common stock will not receive more than one dividend for any single calendar quarter on their shares of Corporation common stock (including any shares of M&T common stock received in exchange therefore in the merger).

Lending
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