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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2006

Commission File Number
0-16421



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PROVIDENT BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Maryland                                                       |  | 52-1518642                             
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)

114 East Lexington Street, Baltimore, Maryland 21202

(Address of Principal Executive Offices)

(410) 277-7000

(Registrants Telephone Number, Including Area Code)



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Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes   x    No ̈

Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filed, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes ̈No  x

At May 1, 2006, the Registrant had 32,954,736 shares of $1.00 par value common stock outstanding.



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TABLE OF CONTENTS



|                                                                                                             |  |     
|------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                             |  | Page
|PART I - FINANCIAL INFORMATION                                                                               |  |     
|                                                                                                             | 
|Item 1. Financial Statements                                                                                 |  |     
|                                                                                                             | 
|Condensed Consolidated Statements of Condition- UnauditedMarch 31, 2006 and 2005 and December 31, 2005       |  | 4   
|                                                                                                             | 
|Condensed Consolidated Statements of Income - UnauditedThree month periods ended March 31, 2006 and 2005     |  | 5   
|                                                                                                             | 
|Condensed Consolidated Statements of Cash Flows - UnauditedThree month periods ended March 31, 2006 and 2005 |  | 6   
|                                                                                                             | 
|Notes to Condensed Consolidated Financial Statements - Unaudited                                             |  | 7   
|                                                                                                             | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 21  
|                                                                                                             | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                           |  | 38  
|                                                                                                             | 
|Item 4. Controls and Procedures                                                                              |  | 38  
|                                                                                                             | 
|PART II - OTHER INFORMATION                                                                                  |  |     
|                                                                                                             | 
|Item 1. Legal Proceedings                                                                                    |  | 39  
|                                                                                                             | 
|Item 1A. Risk Factors                                                                                        |  | 39  
|                                                                                                             | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 39  
|                                                                                                             | 
|Item 3. Defaults upon Senior Securities                                                                      |  | 39  
|                                                                                                             | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                  |  | 39  
|                                                                                                             | 
|Item 5. Other Information                                                                                    |  | 39  
|                                                                                                             | 
|Item 6. Exhibits                                                                                             |  | 40  
|                                                                                                             | 
|SIGNATURES                                                                                                   |  | 41  

Forward-looking Statements

This report, as well as other written communications made from time to time by Provident Bankshares Corporation and its subsidiaries (the Corporation) (including, without limitation, the Corporations
2005 Annual Report to Stockholders) and oral communications made from time to time by authorized officers of the Corporation, may contain statements relating to the future results of the Corporation (including certain projections and business
trends) that are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as
believe, expect, anticipate, should, planned, estimated, intend and potential. Examples of forward-looking statements include, but are not limited to,
possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Corporation, including earnings growth determined using U.S. generally accepted accounting
principles (GAAP); revenue growth in retail banking, lending and other areas; origination volume in the Corporations consumer, commercial and other lending businesses; asset quality and levels of non-performing assets;



2



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current and future capital management programs; non-interest income levels, including fees from services and product sales; tangible capital generation;
market share; expense levels; and other business operations and strategies. For these statements, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Corporation cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking
statement. Such factors include, but are not limited to: the factors identified in the Corporations Form 10-K for the fiscal year ended December 31, 2005 under the headings Forward-Looking Statements and Item 1A. Risk
Factors, prevailing economic conditions, either nationally or locally in some or all areas in which the Corporation conducts business or conditions in the securities markets or the banking industry; changes in interest rates, deposit flows,
loan demand, real estate values and competition, which can materially affect, among other things, consumer banking revenues, revenues from sales on non-deposit investment products, origination levels in the Corporations lending businesses and
the level of defaults, losses and prepayments on loans made by the Corporation, whether held in portfolio or sold in the secondary markets; changes in the quality or composition of the loan or investment portfolios; the Corporations ability to
successfully integrate any assets, liabilities, customers, systems and management personnel the Corporation may acquire into its operations and its ability to realize related revenue synergies and cost savings within expected time frames; the
Corporations timely development of new and competitive products or services in a changing environment, and the acceptance of such products or services by customers; operational issues and/or capital spending necessitated by the potential need
to adapt to industry changes in information technology systems, on which it is highly dependent; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal
issues; risks and uncertainties related to mergers and related integration and restructuring activities; conditions in the securities markets or the banking industry; changes in the quality or composition of the investment portfolio; litigation
liabilities, including costs, expenses, settlements and judgments; or the outcome of other matters before regulatory agencies, whether pending or commencing in the future; and other economic, competitive, governmental, regulatory and technological
factors affecting the Corporations operations, pricing, products and services. Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Companys control. Readers are cautioned not to
place undue reliance on these forward-looking statements which are made as of the date of this report, and, except as may be required by applicable law or regulation, the Corporation assumes no obligation to update the forward-looking statements or
to update the reasons why actual results could differ from those projected in the forward-looking statements.



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PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Condition



|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------- | --------- | - | ---------------- | - | ----------- | ------------- |  | - | --------- | -
|(dollars in thousands, except per share and share amounts)                                                                                                                              |             | March 31,2006 |           |   | December 31,2005 |   |             | March 31,2005 | 
|                                                                                                                                                                                        | (Unaudited) |               |           |   |                  |   | (Unaudited) |              
|Assets:                                                                                                                                                                                 |             |               |           |   |                  |   |             |               |  |   |           |  
|Cash and due from banks                                                                                                                                                                 |             | $             | 138,404   |   |                  | $ | 159,474     |               |  | $ | 155,562   |  
|Short-term investments                                                                                                                                                                  |             |               | 12,059    |   |                  |   | 3,992       |               |  |   | 5,347     |  
|Mortgage loans held for sale                                                                                                                                                            |             |               | 8,007     |   |                  |   | 8,169       |               |  |   | 4,441     |  
|Securities available for sale                                                                                                                                                           |             |               | 1,805,972 |   |                  |   | 1,794,086   |               |  |   | 2,031,290 |  
|Securities held to maturity                                                                                                                                                             |             |               | 110,681   |   |                  |   | 111,269     |               |  |   | 114,091   |  
|Loans                                                                                                                                                                                   |             |               | 3,713,169 |   |                  |   | 3,695,381   |               |  |   | 3,541,175 |  
|Less allowance for loan losses                                                                                                                                                          |             |               | 44,754    |   |                  |   | 45,639      |               |  |   | 45,639    |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Net loans                                                                                                                                                                               |             |               | 3,668,415 |   |                  |   | 3,649,742   |               |  |   | 3,495,536 |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Premises and equipment, net                                                                                                                                                             |             |               | 64,558    |   |                  |   | 65,893      |               |  |   | 63,379    |  
|Accrued interest receivable                                                                                                                                                             |             |               | 32,465    |   |                  |   | 31,766      |               |  |   | 29,627    |  
|Goodwill                                                                                                                                                                                |             |               | 254,855   |   |                  |   | 254,855     |               |  |   | 255,973   |  
|Intangible assets                                                                                                                                                                       |             |               | 10,315    |   |                  |   | 10,765      |               |  |   | 12,167    |  
|Other assets                                                                                                                                                                            |             |               | 266,703   |   |                  |   | 265,915     |               |  |   | 257,269   |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Total assets                                                                                                                                                                            |             | $             | 6,372,434 |   |                  | $ | 6,355,926   |               |  | $ | 6,424,682 |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Liabilities:                                                                                                                                                                            |             |               |           |   |                  |   |             |               |  |   |           |  
|Deposits:                                                                                                                                                                               |             |               |           |   |                  |   |             |               |  |   |           |  
|Noninterest-bearing                                                                                                                                                                     |             | $             | 826,598   |   |                  | $ | 860,023     |               |  | $ | 876,766   |  
|Interest-bearing                                                                                                                                                                        |             |               | 3,335,841 |   |                  |   | 3,264,444   |               |  |   | 3,052,120 |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Total deposits                                                                                                                                                                          |             |               | 4,162,439 |   |                  |   | 4,124,467   |               |  |   | 3,928,886 |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Short-term borrowings                                                                                                                                                                   |             |               | 760,110   |   |                  |   | 647,752     |               |  |   | 719,228   |  
|Long-term debt                                                                                                                                                                          |             |               | 783,702   |   |                  |   | 920,022     |               |  |   | 1,125,465 |  
|Accrued expenses and other liabilities                                                                                                                                                  |             |               | 35,987    |   |                  |   | 33,190      |               |  |   | 39,566    |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Total liabilities                                                                                                                                                                       |             |               | 5,742,238 |   |                  |   | 5,725,431   |               |  |   | 5,813,145 |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Stockholders Equity:                                                                                                                                                                   |             |               |           |   |                  |   |             |               |  |   |           |  
|Common stock (par value $1.00) authorized 100,000,000 shares; issued 41,577,170, 41,386,297 and 40,966,829 shares at March 31,
2006, December 31, 2005 and March 31, 2005, respectively |             |               | 41,577    |   |                  |   | 41,386      |               |  |   | 40,967    |  
|Additional paid-in capital                                                                                                                                                              |             |               | 570,453   |   |                  |   | 565,239     |               |  |   | 554,244   |  
|Retained earnings                                                                                                                                                                       |             |               | 230,155   |   |                  |   | 221,290     |               |  |   | 191,226   |  
|Net accumulated other comprehensive loss                                                                                                                                                |             |               | (26,574   | ) |                  |   | (17,283     | )             |  |   | (12,600   | )
|Treasury stock at cost - 8,602,386, 8,453,179 and 7,904,541 shares at March 31, 2006, December 31, 2005 and March 31,
2005, respectively                                                |             |               | (185,415  | ) |                  |   | (180,137    | )             |  |   | (162,300  | )
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Total stockholders equity                                                                                                                                                              |             |               | 630,196   |   |                  |   | 630,495     |               |  |   | 611,537   |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                              |             | $             | 6,372,434 |   |                  | $ | 6,355,926   |               |  | $ | 6,424,682 |  
|                                                                                                                                                                                        |             |               |           |   |                  |   |             |               |  |   |           |  

The accompanying notes are an integral part of these statements.



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Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Income - Unaudited



|                                                    |  |                             |        |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Three Months EndedMarch 31, |       
|(dollars in thousands, except per share data)       |  | 2006                        |        |   | 2005 |  
|Interest Income:                                    |  |                             |        |   |      |   |        |  
|Loans, including fees                               |  | $                           | 61,147 |   |      | $ | 50,504 |  
|Investment securities                               |  |                             | 23,952 |   |      |   | 24,321 |  
|Tax-advantaged loans and securities                 |  |                             | 806    |   |      |   | 319    |  
|Short-term investments                              |  |                             | 79     |   |      |   | 43     |  
|                                                    |  |                             |        |   |      |   |        |  
|Total interest income                               |  |                             | 85,984 |   |      |   | 75,187 |  
|                                                    |  |                             |        |   |      |   |        |  
|Interest Expense:                                   |  |                             |        |   |      |   |        |  
|Deposits                                            |  |                             | 17,066 |   |      |   | 11,328 |  
|Short-term borrowings                               |  |                             | 8,548  |   |      |   | 4,473  |  
|Long-term debt                                      |  |                             | 9,122  |   |      |   | 10,670 |  
|                                                    |  |                             |        |   |      |   |        |  
|Total interest expense                              |  |                             | 34,736 |   |      |   | 26,471 |  
|                                                    |  |                             |        |   |      |   |        |  
|Net interest income                                 |  |                             | 51,248 |   |      |   | 48,716 |  
|Less provision for loan losses                      |  |                             | 318    |   |      |   | 1,575  |  
|                                                    |  |                             |        |   |      |   |        |  
|Net interest income after provision for loan losses |  |                             | 50,930 |   |      |   | 47,141 |  
|                                                    |  |                             |        |   |      |   |        |  
|Non-Interest Income:                                |  |                             |        |   |      |   |        |  
|Service charges on deposit accounts                 |  |                             | 22,052 |   |      |   | 19,349 |  
|Commissions and fees                                |  |                             | 1,608  |   |      |   | 1,210  |  
|Net gains (losses)                                  |  |                             | 540    |   |      |   | (776   | )
|Derivative losses on swaps                          |  |                             | (603   | ) |      |   | (3,820 | )
|Net cash settlement on swaps                        |  |                             | 290    |   |      |   | 1,579  |  
|Other non-interest income                           |  |                             | 4,338  |   |      |   | 5,502  |  
|                                                    |  |                             |        |   |      |   |        |  
|Total non-interest income                           |  |                             | 28,225 |   |      |   | 23,044 |  
|                                                    |  |                             |        |   |      |   |        |  
|Non-Interest Expense:                               |  |                             |        |   |      |   |        |  
|Salaries and employee benefits                      |  |                             | 27,632 |   |      |   | 22,698 |  
|Occupancy expense, net                              |  |                             | 5,729  |   |      |   | 5,274  |  
|Furniture and equipment expense                     |  |                             | 3,847  |   |      |   | 3,464  |  
|External processing fees                            |  |                             | 4,967  |   |      |   | 5,197  |  
|Other non-interest expense                          |  |                             | 10,616 |   |      |   | 10,841 |  
|                                                    |  |                             |        |   |      |   |        |  
|Total non-interest expense                          |  |                             | 52,791 |   |      |   | 47,474 |  
|                                                    |  |                             |        |   |      |   |        |  
|Income before income taxes                          |  |                             | 26,364 |   |      |   | 22,711 |  
|Income tax expense                                  |  |                             | 8,106  |   |      |   | 6,961  |  
|                                                    |  |                             |        |   |      |   |        |  
|Net income                                          |  | $                           | 18,258 |   |      | $ | 15,750 |  
|                                                    |  |                             |        |   |      |   |        |  
|Net Income Per Share Amounts:                       |  |                             |        |   |      |   |        |  
|Basic                                               |  | $                           | 0.55   |   |      | $ | 0.48   |  
|Diluted                                             |  |                             | 0.55   |   |      |   | 0.47   |  

The accompanying notes are an integral part of these statements.



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Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows 
Unaudited



|                                                                                  |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three Months EndedMarch 31, |         
|(in thousands)                                                                    |  | 2006                        |          |   | 2005 |  
|Operating Activities:                                                             |  |                             |          |   |      |   |          |  
|Net income                                                                        |  | $                           | 18,258   |   |      | $ | 15,750   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                             | 5,604    |   |      |   | 6,569    |  
|Provision for loan losses                                                         |  |                             | 318      |   |      |   | 1,575    |  
|Provision for deferred income tax                                                 |  |                             | 100      |   |      |   | 171      |  
|Net (gains) losses                                                                |  |                             | (540     | ) |      |   | 776      |  
|Net derivative losses                                                             |  |                             | 603      |   |      |   | 3,820    |  
|Originated loans held for sale                                                    |  |                             | (20,188  | ) |      |   | (15,880  | )
|Proceeds from sales of loans held for sale                                        |  |                             | 20,473   |   |      |   | 18,097   |  
|Net decrease in accrued interest receivable and other assets                      |  |                             | 783      |   |      |   | 3,123    |  
|Net increase (decrease) in accrued expenses and other liabilities                 |  |                             | 2,797    |   |      |   | (1,534   | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Total adjustments                                                                 |  |                             | 9,950    |   |      |   | 16,717   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                             | 28,208   |   |      |   | 32,467   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Investing Activities:                                                             |  |                             |          |   |      |   |          |  
|Principal collections and maturities of securities available for sale             |  |                             | 58,999   |   |      |   | 83,480   |  
|Proceeds from sales of securities available for sale                              |  |                             | 11,141   |   |      |   | 129,900  |  
|Purchases of securities available for sale                                        |  |                             | (94,472  | ) |      |   | (87,235  | )
|Loan originations and purchases less principal collections                        |  |                             | (19,824  | ) |      |   | 11,206   |  
|Purchases of premises and equipment                                               |  |                             | (2,151   | ) |      |   | (3,007   | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided (used) by investing activities                                  |  |                             | (46,307  | ) |      |   | 134,344  |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Financing Activities:                                                             |  |                             |          |   |      |   |          |  
|Net increase in deposits                                                          |  |                             | 38,251   |   |      |   | 150,315  |  
|Net increase (decrease) in short-term borrowings                                  |  |                             | 112,358  |   |      |   | (198,665 | )
|Proceeds from long-term debt                                                      |  |                             | 30,000   |   |      |   | 30,000   |  
|Payments and maturities of long-term debt                                         |  |                             | (167,128 | ) |      |   | (110,203 | )
|Proceeds from issuance of stock                                                   |  |                             | 5,405    |   |      |   | 1,669    |  
|Tax benefits associated with share based payments                                 |  |                             | 881      |   |      |   |         |  
|Purchase of treasury stock                                                        |  |                             | (5,278   | ) |      |   | (4,747   | )
|Cash dividends paid on common stock                                               |  |                             | (9,393   | ) |      |   | (8,593   | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided (used) by financing activities                                  |  |                             | 5,096    |   |      |   | (140,224 | )
|                                                                                  |  |                             |          |   |      |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                             | (13,003  | ) |      |   | 26,587   |  
|Cash and cash equivalents at beginning of period                                  |  |                             | 163,466  |   |      |   | 134,322  |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                           | 150,463  |   |      | $ | 160,909  |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Supplemental Disclosures:                                                         |  |                             |          |   |      |   |          |  
|Interest paid, net of amount credited to deposit accounts                         |  | $                           | 28,289   |   |      | $ | 19,882   |  
|Income taxes paid                                                                 |  |                             | 155      |   |      |   | 28       |  

The accompanying notes are an integral part of these statements.



6



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Provident Bankshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements -
Unaudited

March 31, 2006

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Provident Bankshares Corporation (the Corporation), a Maryland
corporation, is the bank holding company for Provident Bank (the Bank), a Maryland chartered stock commercial bank. The Bank serves individuals and businesses through a network of banking offices and ATMs in Maryland, Virginia, and
southern York County, Pennsylvania. Related financial services are offered through its wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company and
leases through Court Square Leasing and Provident Lease Corporation.

The accounting and reporting policies of the Corporation conform with U.S. generally
accepted accounting principles (GAAP) and prevailing practices within the banking industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for
complete financial statements and prevailing practices within the banking industry. The following summary of significant accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented
in this report. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2006. For further information,
refer to the Consolidated Financial Statements and notes thereto included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (SEC) on
March 16, 2006.

Principles of Consolidation and Basis of Presentation

The unaudited Condensed Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. Results of operations from purchased companies are included from the date of merger. Assets and liabilities of purchased companies are stated at estimated fair values at the date of merger.

Use of Estimates

The Condensed Consolidated Financial
Statements of the Corporation are prepared in accordance with 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 disclosure 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 and intangible assets associated with mergers, other than temporary impairment of investment securities, pension and
post-retirement benefits, asset prepayment rates, goodwill and intangible assets, stock-based compensation, derivative financial instruments, recourse liabilities, 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. Each estimate and its financial impact, to the extent significant to financial results, is discussed in the audited Consolidated Financial Statements or in the notes to the audited Consolidated Financial Statements as included in the
Corporations 2005 Annual Report on Form 10-K. 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 Corporations unaudited Condensed Consolidated Financial Statements.



7



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Derivative Financial Instruments

The Corporation uses various derivative financial instruments as part of its interest rate risk management strategy to mitigate the exposure to changes in market interest rates. The derivative financial instruments
used separately or in combination are interest rate swaps, caps and floors. Derivative financial instruments are required to be measured at fair value and recognized as either assets or liabilities in the financial statements. Fair value represents
the payment the Corporation would receive or pay if the item were sold or bought in a current transaction. Fair values are generally based on market quotes. The accounting for changes in fair value (gains or losses) of a derivative is dependent on
whether the derivative is designated and qualifies for hedge accounting. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), the Corporation assigns
derivatives to one of these categories at the purchase date: fair value hedge, cash flow hedge or non-designated derivative. SFAS No. 133 requires an assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair
value hedge or cash flow hedge. Derivatives are included in other assets and other liabilities in the Consolidated Statements of Condition.

Fair Value HedgesFor derivatives designated as fair value hedges, the derivative instrument and related hedge item are marked-to-market through the related interest income or expense, as applicable, except for the ineffective
portion which is recorded in non-interest income.

Cash Flow HedgesFor derivatives designated as cash flow hedges,
mark-to-market adjustments are recorded net of income taxes as a component of other comprehensive income (OCI) in stockholders equity, except for the ineffective portion which is recorded in non-interest income. Amounts recorded in
OCI are recognized into earnings concurrent with the hedged items impact on earnings.

Non-Designated DerivativesCertain
economic hedges are not designated as cash flow or as fair value hedges for accounting purposes. As a result, changes in the fair value are recorded in non-interest income in the Consolidated Statements of Income. Interest income or expense related
to non-designated derivatives is also recorded in non-interest income.

All qualifying relationships between hedging instruments and hedged items are fully
documented by the Corporation. Risk management objectives, strategies and the projected effectiveness of the chosen derivatives to hedge specific risks are also documented. At inception of the hedging relationship and periodically as required under
SFAS No. 133, the Corporation evaluates the effectiveness of its hedging instruments. For hedges qualifying for short-cut treatment at inception, the ongoing effectiveness testing includes a review of the hedge and the hedged item
to determine if the hedge continues to qualify for short-cut treatment. An assumption of no hedge ineffectiveness is allowed for derivatives qualifying for short-cut treatment. For all other derivatives qualifying for hedge accounting, a
quantitative assessment of the effectiveness of the hedge is required at each reporting date. The Corporation performs effectiveness testing quarterly for all of its hedges. The Corporation uses benchmark interest rates such as LIBOR to hedge the
interest rate risk associated with interest-earning assets or interest-bearing liabilities. Using benchmark rates and complying with specific criteria set forth in SFAS No.133, the Corporation has concluded that for qualifying hedges, changes in
fair value or cash flows that are attributable to risks being hedged will be highly effective at the hedges inception and on an ongoing basis.

When
it is determined that a derivative is not, or ceases to be effective as a hedge, the Corporation discontinues hedge accounting prospectively. When a fair value hedge is discontinued due to ineffectiveness, the Corporation continues to carry the
derivative on the Consolidated Statements of Condition at its fair value as a non-designated derivative, but discontinues marking-to-market the hedged asset or liability for changes in fair value. Any previous mark-to-market adjustments recorded to
the hedged item are amortized over the remaining life of the asset or liability. All ineffective portions of fair value hedges are reported in and affect net income immediately. When a cash flow hedge is discontinued due to termination of the
derivative, the Corporation continues to carry the previous mark-to-market adjustments in accumulated OCI and recognizes the amount into earnings in the same period or periods during which the hedged item affects earnings. If the cash flow hedge is
discontinued due to ineffectiveness, the derivative is considered a non-designated derivative and continues to be marked-to-market in the Consolidated Statements of Condition as an asset or liability, and mark-to-market through current period
earnings in the Consolidated Statements of Income and not through OCI.



8



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Counter-party credit risk associated with derivatives is controlled by dealing with well-established brokers that are
highly rated by credit rating agencies and by establishing exposure limits for individual counter-parties. Market risk on interest rate swaps is minimized by using these instruments as hedges and by continually monitoring the positions to ensure
ongoing effectiveness. For significant derivative positions, credit risk is controlled by entering into bilateral collateral agreements with brokers, in which the parties pledge collateral to indemnify the counter-party in the case of default. The
Corporations hedging activities and strategies are monitored by the Banks Asset / Liability Committee (ALCO) as part of its oversight of the treasury function.

Share-Based Payment

Prior to January 1, 2006, the Corporation applied the intrinsic value based method of
accounting for its fixed-plan stock options as prescribed by Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB No. 25), and related interpretations, and accordingly, did not
record compensation costs for grants of stock options to employees when the initial exercise price equaled the fair market value on the grant date. However, the Corporation did record compensation costs for restricted share grants over the
respective vesting periods equal to the fair market value of the common shares on the date of each grant.

Effective January 1, 2006, the Corporation
adopted SFAS No.123(R) Share-Based Payment that requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and nonemployees. Under the
provisions of SFAS No. 123(R), the Corporation has applied the modified prospective method of adoption, and therefore, results for prior periods have not been restated.

On December 30, 2005, the Corporation approved the accelerated vesting of all outstanding, unvested stock options of the Corporations common stock granted through 2005. As a result, the stock options, that
otherwise would have vested during 2006 and thereafter became immediately exercisable. The acceleration of vesting was undertaken in an attempt to eliminate compensation expense that the Corporation would otherwise be required to recognize upon
adoption of SFAS No. 123(R). Accordingly, the Corporation will not recognize any compensation cost associated with those stock options in periods subsequent to December 31, 2005.

Compensation cost for stock options granted after January 1, 2006 and restricted share grants will be recognized as non-interest expense in the Condensed
Consolidated Statement of Income on a straight-line basis over the requisite service period of each stock option and restricted share grant. Compensation cost for stock options will include the impact of an estimated forfeiture rate. However, the
impact of forfeitures on the restricted share grants will be recorded as they occur.

At March 31, 2006, no stock options had vesting conditions
linked to the performance of the Corporation. The tax benefits associated with tax deductions in excess of compensation costs are recognized as a financing activity in the Condensed Consolidated Statements of Cash Flows.

Prior to the adoption of SFAS 123(R), the Corporation applied APB 25, to account for its stock-based awards, and the disclosure-only provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, as amended (SFAS 123), to present stock-based compensation disclosure. Under APB 25, because the exercise price of the Corporations stock options equaled the market
price of the underlying stock on the date of grant, the stock options had no intrinsic value and therefore no compensation expense was recognized. The following table details the pro forma effects on net income and earnings per share for the three
months ended March 31, 2005 had compensation expense been recorded based on the fair value method under SFAS 123, utilizing the Black-Scholes option valuation model:



9



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|                                                                                                                         |  |                                  |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | -
|(in thousands, except per share data)                                                                                    |  | Three Months EndedMarch 31, 2005 |       
|Net Income:                                                                                                              |  |                                  |        |  
|Net income as reported                                                                                                   |  | $                                | 15,750 |  
|Addition for total stock-based compensation expense included in reported net income, net of tax                          |  |                                  | 30     |  
|Deduction for total stock-based compensation expense determined under fair value based method for all awards, net of tax |  |                                  | (508   | )
|                                                                                                                         |  |                                  |        |  
|Pro forma net income                                                                                                     |  | $                                | 15,272 |  
|                                                                                                                         |  |                                  |        |  
|Basic Earnings Per Share:                                                                                                |  |                                  |        |  
|As reported                                                                                                              |  | $                                | 0.48   |  
|Pro forma                                                                                                                |  |                                  | 0.46   |  
|                                                                                                                         | 
|Diluted Earnings Per Share:                                                                                              |  |                                  |        |  
|As reported                                                                                                              |  | $                                | 0.47   |  
|Pro forma                                                                                                                |  |                                  | 0.45   |  

Other Changes in Accounting Principles

In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154), which is effective for
accounting changes and corrections of errors made in years beginning after December 15, 2005. SFAS No. 154 provides guidance on the accounting for and reporting accounting changes and error corrections. The adoption of SFAS No. 154
did not have any impact on the results of operations of the Corporation.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments  an amendment of FASB Statements No. 133 and 140 (SFAS No. 155), which is effective for all financial instruments acquired and issued after the beginning of an entitys first fiscal
year that begins after September 15, 2006. The statement eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments will be accounted for on a similar basis regardless of
the form of the financial instrument. It also provides for an election of fair value measurement on an instrument-by-instrument basis in cases where a derivative would otherwise have to be bifurcated. The adoption of SFAS No. 155 is not
expected to have any impact on the results of operations of the Corporation. As of March 31, 2006, the Corporation did not have any hybrid financial instruments.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140 (SFAS No. 156), which is effective for an
entitys first fiscal year that begins after September 15, 2006. The statement establishes the accounting for all separately recognized servicing assets and liabilities which require that they be initially recorded at fair value. The
statement permits, but does not require, subsequent measurement of the separately recognized servicing assets and liabilities at fair value. The adoption of SFAS No. 156 is not expected to have any impact on the results of operations of the
Corporation. Currently, the Corporation does not retain servicing rights for loans sold to third parties.



10



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NOTE 2INVESTMENT SECURITIES

The following table presents the aggregate amortized cost and fair values of the investment securities portfolio as of the dates indicated:



|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|------------------------------------------------------ |  | ------------- | --------- | -------------------- | - | --------------------- |  | ---------- | ------ |  | - | ---------
|(in thousands)                                         |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|March 31, 2006                                         |  |               |           |                      |   |                       |  |            |        |  |   |          
|Securities available for sale:                         |  |               |           |                      |   |                       |  |            |        |  |   |          
|U.S. Treasury and government agencies and corporations |  | $             | 70,832    |                      | $ |                      |  | $          | 2,429  |  | $ | 68,403   
|Mortgage-backed securities                             |  |               | 1,011,815 |                      |   | 644                   |  |            | 39,094 |  |   | 973,365  
|Municipal securities                                   |  |               | 82,266    |                      |   | 97                    |  |            | 835    |  |   | 81,528   
|Other debt securities                                  |  |               | 680,834   |                      |   | 2,687                 |  |            | 845    |  |   | 682,676  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total securities available for sale                    |  |               | 1,845,747 |                      |   | 3,428                 |  |            | 43,203 |  |   | 1,805,972
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Securities held to maturity:                           |  |               |           |                      |   |                       |  |            |        |  |   |          
|Other debt securities                                  |  |               | 110,681   |                      |   | 265                   |  |            | 1,502  |  |   | 109,444  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total securities held to maturity                      |  |               | 110,681   |                      |   | 265                   |  |            | 1,502  |  |   | 109,444  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investment securities                            |  | $             | 1,956,428 |                      | $ | 3,693                 |  | $          | 44,705 |  | $ | 1,915,416
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|December 31, 2005                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|Securities available for sale:                         |  |               |           |                      |   |                       |  |            |        |  |   |          
|U.S. Treasury and government agencies and corporations |  | $             | 78,936    |                      | $ |                      |  | $          | 1,706  |  | $ | 77,230   
|Mortgage-backed securities                             |  |               | 1,061,541 |                      |   | 1,109                 |  |            | 27,873 |  |   | 1,034,777
|Municipal securities                                   |  |               | 58,736    |                      |   | 129                   |  |            | 548    |  |   | 58,317   
|Other debt securities                                  |  |               | 622,701   |                      |   | 2,193                 |  |            | 1,132  |  |   | 623,762  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total securities available for sale                    |  |               | 1,821,914 |                      |   | 3,431                 |  |            | 31,259 |  |   | 1,794,086
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Securities held to maturity:                           |  |               |           |                      |   |                       |  |            |        |  |   |          
|Other debt securities                                  |  |               | 111,269   |                      |   | 307                   |  |            | 1,495  |  |   | 110,081  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total securities held to maturity                      |  |               | 111,269   |                      |   | 307                   |  |            | 1,495  |  |   | 110,081  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investment securities                            |  | $             | 1,933,183 |                      | $ | 3,738                 |  | $          | 32,754 |  | $ | 1,904,167
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|March 31, 2005                                         |  |               |           |                      |   |                       |  |            |        |  |   |          
|Securities available for sale:                         |  |               |           |                      |   |                       |  |            |        |  |   |          
|U.S. Treasury and government agencies and corporations |  | $             | 102,781   |                      | $ |                      |  | $          | 2,754  |  | $ | 100,027  
|Mortgage-backed securities                             |  |               | 1,473,870 |                      |   | 2,910                 |  |            | 23,663 |  |   | 1,453,117
|Municipal securities                                   |  |               | 12,568    |                      |   | 302                   |  |            |       |  |   | 12,870   
|Other debt securities                                  |  |               | 463,857   |                      |   | 1,925                 |  |            | 506    |  |   | 465,276  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total securities available for sale                    |  |               | 2,053,076 |                      |   | 5,137                 |  |            | 26,923 |  |   | 2,031,290
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Securities held to maturity:                           |  |               |           |                      |   |                       |  |            |        |  |   |          
|Other debt securities                                  |  |               | 114,091   |                      |   | 383                   |  |            | 1,421  |  |   | 113,053  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total securities held to maturity                      |  |               | 114,091   |                      |   | 383                   |  |            | 1,421  |  |   | 113,053  
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investment securities                            |  | $             | 2,167,167 |                      | $ | 5,520                 |  | $          | 28,344 |  | $ | 2,144,343
|                                                       |  |               |           |                      |   |                       |  |            |        |  |   |          



11



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At March 31, 2006, a net unrealized after-tax loss of $25.0 million on the securities portfolio was reflected in net
accumulated other comprehensive loss. This compared to net unrealized after-tax losses of $14.2 million and $18.1 million at March 31, 2005 and December 31, 2005, respectively.

Management reviews the investment portfolio on a periodic basis to determine the cause of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to
determine whether the impairment is temporary or other than temporary in nature. Considerations such as recoverability of invested amount over a reasonable period of time, the length of time the security is in a loss position and receipt of amounts
contractually due, for example, are applied in determining other than temporary impairment. At March 31, 2006, the unrealized losses contained within the Corporations investment portfolio were considered temporary because the declines in
fair value were due to changes in market interest rates, not in estimated cash flows of the underlying debt securities.

For further details regarding
investment securities at December 31, 2005, refer to Notes 1 and 4 of the Consolidated Financial Statements in the Corporations Form 10-K for the year ended December 31, 2005.

NOTE 3LOANS

A summary of
loans outstanding as of the dates indicated is shown in the table below.



|                                             |  |               |           |                  |   |               |  |   |          
|-------------------------------------------- |  | ------------- | --------- | ---------------- | - | ------------- |  | - | ---------
|(in thousands)                               |  | March 31,2006 |           | December 31,2005 |   | March 31,2005
|Residential real estate:                     |  |               |           |                  |   |               |  |   |          
|Originated and acquired residential mortgage |  | $             | 421,122   |                  | $ | 452,853       |  | $ | 626,952  
|Home equity                                  |  |               | 924,311   |                  |   | 900,985       |  |   | 745,996  
|Other consumer:                              |  |               |           |                  |   |               |  |   |          
|Marine                                       |  |               | 398,024   |                  |   | 412,643       |  |   | 431,381  
|Other                                        |  |               | 28,688    |                  |   | 32,793        |  |   | 35,482   
|                                             |  |               |           |                  |   |               |  |   |          
|Total consumer                               |  |               | 1,772,145 |                  |   | 1,799,274     |  |   | 1,839,811
|                                             |  |               |           |                  |   |               |  |   |          
|Commercial real estate:                      |  |               |           |                  |   |               |  |   |          
|Commercial mortgage                          |  |               | 470,364   |                  |   | 485,743       |  |   | 483,256  
|Residential construction                     |  |               | 483,309   |                  |   | 414,803       |  |   | 264,906  
|Commercial construction                      |  |               | 311,036   |                  |   | 312,399       |  |   | 282,092  
|Commercial business                          |  |               | 676,315   |                  |   | 683,162       |  |   | 671,110  
|                                             |  |               |           |                  |   |               |  |   |          
|Total commercial                             |  |               | 1,941,024 |                  |   | 1,896,107     |  |   | 1,701,364
|                                             |  |               |           |                  |   |               |  |   |          
|Total loans                                  |  | $             | 3,713,169 |                  | $ | 3,695,381     |  | $ | 3,541,175
|                                             |  |               |           |                  |   |               |  |   |          



12



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NOTE 4  ALLOWANCE FOR LOAN LOSSES

The following table reflects the activity in the allowance for loan losses for the periods indicated:



|                                             |  |                             |        |      |   |        |  
|-------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | -
|                                             |  | Three Months EndedMarch 31, |       
|(in thousands)                               |  | 2006                        |        | 2005 |  
|Balance at beginning of period               |  | $                           | 45,639 |      | $ | 46,169 |  
|Provision for loan losses                    |  |                             | 318    |      |   | 1,575  |  
|Less loans charged-off, net of recoveries:   |  |                             |        |      |   |        |  
|Originated and acquired residential mortgage |  |                             | 331    |      |   | 641    |  
|Home equity                                  |  |                             | 119    |      |   | (1     | )
|Marine and other consumer                    |  |                             | 271    |      |   | (10    | )
|Commercial business                          |  |                             | 482    |      |   | 1,475  |  
|                                             |  |                             |        |      |   |        |  
|Net charge-offs                              |  |                             | 1,203  |      |   | 2,105  |  
|                                             |  |                             |        |      |   |        |  
|Balance at end of period                     |  | $                           | 44,754 |      | $ | 45,639 |  
|                                             |  |                             |        |      |   |        |  

NOTE 5INTANGIBLE ASSETS

The table below presents an analysis of the goodwill and deposit-based intangible activity for the three months ended March 31, 2006.



|                             |  |                         |         |                         |   |        |             |  |   |         |  
|---------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------ | ----------- |  | - | ------- | -
|(in thousands)               |  | Goodwill                |         | AccumulatedAmortization |   |        | NetGoodwill | 
|Balance at December 31, 2005 |  | $                       | 255,477 |                         | $ | (622   | )           |  | $ | 254,855 |  
|                             |  |                         |         |                         |   |        |             |  |   |         |  
|Balance at March 31, 2006    |  | $                       | 255,477 |                         | $ | (622   | )           |  | $ | 254,855 |  
|                             |  |                         |         |                         |   |        |             |  |   |         |  
|                             |  |                         |        
|(in thousands)               |  | Deposit-basedIntangible |         | AccumulatedAmortization |   |        | Total       | 
|Balance at December 31, 2005 |  | $                       | 15,429  |                         | $ | (4,664 | )           |  | $ | 10,765  |  
|Amortization expense         |  |                         |        |                         |   | (450   | )           |  |   | (450    | )
|                             |  |                         |         |                         |   |        |             |  |   |         |  
|Balance at March 31, 2006    |  | $                       | 15,429  |                         | $ | (5,114 | )           |  | $ | 10,315  |  
|                             |  |                         |         |                         |   |        |             |  |   |         |  



13



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NOTE 6DEPOSITS

The table below presents a summary of deposits as of the dates indicated:



|                                    |  |               |           |                  |   |               |  |   |          
|----------------------------------- |  | ------------- | --------- | ---------------- | - | ------------- |  | - | ---------
|(in thousands)                      |  | March 31,2006 |           | December 31,2005 |   | March 31,2005
|Interest-bearing deposits:          |  |               |           |                  |   |               |  |   |          
|Interest-bearing demand             |  | $             | 648,878   |                  | $ | 618,129       |  | $ | 531,382  
|Money market                        |  |               | 616,039   |                  |   | 597,086       |  |   | 580,038  
|Savings                             |  |               | 692,044   |                  |   | 695,946       |  |   | 760,165  
|Direct time certificates of deposit |  |               | 935,618   |                  |   | 888,510       |  |   | 793,000  
|Brokered certificates of deposit    |  |               | 443,262   |                  |   | 464,773       |  |   | 387,535  
|                                    |  |               |           |                  |   |               |  |   |          
|Total interest-bearing deposits     |  |               | 3,335,841 |                  |   | 3,264,444     |  |   | 3,052,120
|Noninterest-bearing deposits        |  |               | 826,598   |                  |   | 860,023       |  |   | 876,766  
|                                    |  |               |           |                  |   |               |  |   |          
|Total deposits                      |  | $             | 4,162,439 |                  | $ | 4,124,467     |  | $ | 3,928,886
|                                    |  |               |           |                  |   |               |  |   |          

NOTE 7SHORT-TERM BORROWINGS

The table below presents a summary of short-term borrowings as of the dates indicated:



|                                                |  |               |         |                  |   |               |  |   |        
|----------------------------------------------- |  | ------------- | ------- | ---------------- | - | ------------- |  | - | -------
|(in thousands)                                  |  | March 31,2006 |         | December 31,2005 |   | March 31,2005
|Securities sold under repurchase agreements     |  | $             | 324,838 |                  | $ | 370,515       |  | $ | 412,071
|Federal funds purchased                         |  |               | 378,000 |                  |   | 185,000       |  |   | 140,000
|Federal Home Loan Bank advances - variable rate |  |               | 55,000  |                  |   | 90,000        |  |   | 165,000
|Other short-term borrowings                     |  |               | 2,272   |                  |   | 2,237         |  |   | 2,157  
|                                                |  |               |         |                  |   |               |  |   |        
|Total short-term borrowings                     |  | $             | 760,110 |                  | $ | 647,752       |  | $ | 719,228
|                                                |  |               |         |                  |   |               |  |   |        

NOTE 8LONG-TERM DEBT

The table below presents a summary of long-term debt as of the dates indicated:



|                                                |  |               |         |                  |   |               |  |   |          
|----------------------------------------------- |  | ------------- | ------- | ---------------- | - | ------------- |  | - | ---------
|(in thousands)                                  |  | March 31,2006 |         | December 31,2005 |   | March 31,2005
|Federal Home Loan Bank advances - fixed rate    |  | $             | 111,712 |                  | $ | 196,537       |  | $ | 163,228  
|Federal Home Loan Bank advances - variable rate |  |               | 535,000 |                  |   | 585,520       |  |   | 800,000  
|Junior Subordinated Debentures                  |  |               | 136,990 |                  |   | 136,715       |  |   | 142,237  
|Term repurchase agreements                      |  |               |        |                  |   | 1,250         |  |   | 20,000   
|                                                |  |               |         |                  |   |               |  |   |          
|Total long-term debt                            |  | $             | 783,702 |                  | $ | 920,022       |  | $ | 1,125,465
|                                                |  |               |         |                  |   |               |  |   |          

On March 31, 2005, the Corporation redeemed $30.0 million in aggregate principal amount of 10% Junior
Subordinated Debentures issued to Provident Trust II. These Junior Subordinated Debentures had a final stated maturity of March 31, 2030, but were callable at par beginning on March 31, 2005. On July 15, 2005, the Corporation redeemed
$5.0 million in aggregate principal amount of 11% Junior Subordinated Debentures issued to Southern Financial Capital Trust I. These Junior Subordinated Debentures were callable beginning July 15, 2005 and had a final stated maturity date of
July 15, 2030.



14



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NOTE 9STOCKHOLDERS EQUITY

Plan Description and Adoption of SFAS No. 123(R)

The Corporation issues nonqualified stock options and
restricted share grants to certain of its employees and directors pursuant to the 2004 Equity Compensation Plan (the Plan), which has been approved by the shareholders. The Plan allows for a maximum of 12.5 million shares of common stock to be
issued. At March 31, 2006, 4.7 million shares were available to be granted by the Corporation.

Stock Option Plan

Stock options (options) are generally granted with an exercise price equal to the market price of the Corporations shares at the date of the grant. The
stock options granted subsequent to January 1, 2005 vest based on four years of continuous service and have eight year contractual terms.

Stock
options issued in 2004 and prior and in 2005 have contractual terms of ten years and eight years from the date of grant, respectively. As discussed in Note 1, the Corporation accelerated the vesting period for all options granted prior to
December 30, 2005. Accordingly, no compensation expense relating to these options has been recognized in the three months ended March 31, 2006.

All options provide for accelerated vesting upon a change in control (as defined in the Plan). Stock options exercised result in the issuance of new shares.

On the date of each grant, the fair value of each award is estimated using the Black-Scholes option pricing model based on assumptions made by the Corporation as follows:



| |  | Dividend yield is based on the dividend rate of the Corporations stock at the date of the grant
|- |  | ------------------------------------------------------------------------------------------------



| |  | Expected life represents the period of time that granted options are expected to be outstanding based on historical trends
|- |  | --------------------------------------------------------------------------------------------------------------------------



| |  | Risk-free interest rate is based on the U.S. Treasury zero-coupon bond rate with a term equaling the expected life of the granted options
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Expected volatility is based on the historical volatility of the Corporations stock price
|- |  | ------------------------------------------------------------------------------------------

Below is a tabular presentation of the option pricing assumptions and the estimated fair value of the stock options using these assumptions.



|                                               |  |                                  |          |  
|---------------------------------------------- |  | -------------------------------- | -------- | -
|                                               |  | Three Months EndedMarch 31, 2006 |         
|Weighted average dividend yield                |  |                                  | 3.14     | %
|Weighted average risk-free interest rate       |  |                                  | 4.58     | %
|Weighted average expected volatility           |  |                                  | 19.92    | %
|Weighted average expected life                 |  |                                  | 5.25 yrs |  
|Weighted average fair value of options granted |  | $                                | 6.50     |  

The Corporation recognized compensation expense related to stock options of $57 thousand for the three months
ended March 31, 2006. The intrinsic value of options exercised for three months ended March 31, 2006 and 2005 was $2.7 million and $889 thousand, respectively. Unrecognized compensation cost related to non-vested options is $1.8 million at
March 31, 2006 and is expected to be recognized over a weighted average period of 3.9 years.



15



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The following table presents a summarization of the activity related to options for the period indicated:



|                                       |  |              |   |  |                              |       |                                                     |      |                                        |   |       
|-------------------------------------- |  | ------------ | - |  | ---------------------------- | ----- | --------------------------------------------------- | ---- | -------------------------------------- | - | ------
|                                       |  | CommonShares |   |  | WeightedAverageExercisePrice |       | Weighted AverageContractualRemaining Life(in years) |      | AggregateIntrinsicValue (in thousands)
|Options outstanding at January 1, 2006 |  | 2,344,363    |   |  | $                            | 25.64 |                                                     |      |                                        |   |       
|Options granted                        |  | 284,440      |   |  |                              | 36.02 |                                                     |      |                                        |   |       
|Exercised                              |  | (190,959     | ) |  |                              | 21.74 |                                                     |      |                                        |   |       
|Cancelled or expired                   |  |             |   |  |                              |      |                                                     |      |                                        |   |       
|                                       |  |              |   |  |                              |       |                                                     |      |                                        |   |       
|Options outstanding at March 31, 2006  |  | 2,437,844    |   |  |                              | 27.16 |                                                     | 6.16 |                                        | $ | 22,073
|                                       |  |              |   |  |                              |       |                                                     |      |                                        |   |       
|Options exercisable at March 31, 2006  |  | 2,153,416    |   |  | $                            | 25.99 |                                                     | 5.93 |                                        | $ | 22,018

Restricted Stock Awards

The Corporation issues restricted share grants, in the form of new shares, to its directors and certain key employees. The restricted share grants are issued at the fair market value of the common shares on the date
of each grant. The Corporation grants shares of restricted stock to directors of the Corporation as part of director compensation, as such, the restricted share grants vest immediately. The restricted share grants to the directors may only be
exercised six months subsequent to their departure from the board of directors. The restricted share grants to employees vest ratably over four years. The Corporation recorded expense related to these awards of $110 thousand for the three months
ended March 31, 2006.

The following table presents a summarization of the activity related to restricted share grants for the period indicated:



|                            |  |              |   |  |                                |      
|--------------------------- |  | ------------ | - |  | ------------------------------ | -----
|                            |  | CommonShares |   |  | WeightedAverageGrant FairValue
|Unvested at January 1, 2006 |  | 31,764       |   |  | $                              | 33.66
|Awards granted              |  | 58,562       |   |  |                                | 36.00
|Vested                      |  | (7,887       | ) |  |                                | 33.66
|Cancelled                   |  | (225         | ) |  |                                | 33.66
|                            |  |              |   |  |                                |      
|Unvested at March 31, 2006  |  | 82,214       |   |  |                                | 35.33
|                            |  |              |   |  |                                |      

At March 31, 2006, unrecognized compensation cost related to non-vested restricted share grants was $2.8
million and is expected to be recognized over a weighted average period of 3.6 years.

NOTE 10DERIVATIVE FINANCIAL INSTRUMENTS

Fair value hedges that meet the criteria for effectiveness have changes in the fair value of the derivative and the designated hedged item recognized in earnings. At and
during all periods presented, the derivatives designated as fair value hedges were determined to be effective. Accordingly, the designated hedges and the associated hedged items were marked to fair value by an equal and offsetting amount of $909
thousand and $1.2 million for the three months ended March 31, 2006 and 2005, respectively. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other
comprehensive loss. For the three months ended March 31, 2006, the Corporation recorded a decrease in fair value of derivatives of $2.0 million compared to an increase of $1.3 million for the same period in 2005, net of taxes, in net
accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. Amounts recorded in net accumulated other comprehensive loss are recognized earnings concurrent with the impact of the hedged item on earnings. For the three
months ended March 31, 2006, the ineffective portion of a cash flow hedge resulted in a $4 thousand charge to earnings. For the three months ended March 31, 2005, the Corporation had no ineffective hedges.

Non-designated derivatives are marked to market and the gains or losses are recorded in non-interest income at the end of each reporting period. These non-designated
derivatives represent interest rate protection on the Corporations net interest income but do not meet the requirements to receive hedge accounting treatment. For the three months ended March 31, 2006 and 2005, the Corporation recorded a
pre-tax net loss of $603 thousand and $3.8 million, respectively, to reflect the decrease in value of the non-designated interest rate swaps. The net cash settlements on the interest rate swaps are recorded in non-interest income. Net cash
settlements on interest rate swaps were $290 thousand and $1.6 million for the three months ended March 31, 2006 and 2005, respectively.



16



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The table below presents the Corporations open derivative positions as of the dates indicated:



|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|-------------------------------- |  | -------------------------- |  | -------------- | ------- | ----------------- | - | ---------- |  | - | ------ | -
|(in thousands) Derivative Type   |  | Objective                  |  | NotionalAmount |         | Credit RiskAmount |   | MarketRisk | 
|March 31, 2006                   |  |                            |  |                |         |                   |   |            |  |   |        |  
|Designated Derivatives           |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Pay fixed/receive variable       |  | Hedge borrowing cost       |  | $              | 50,000  |                   | $ | 533        |  | $ | 533    |  
|Receive fixed/pay variable       |  | Hedge investment rate risk |  |                | 218,163 |                   |   |           |  |   | (3,397 | )
|Receive fixed/pay variable       |  | Hedge borrowing cost       |  |                | 57,900  |                   |   |           |  |   | (909   | )
|Interest rate caps/corridors     |  | Hedge borrowing cost       |  |                | 165,000 |                   |   | 1,535      |  |   | 1,535  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total designated derivatives     |  |                            |  |                | 491,063 |                   |   | 2,068      |  |   | (2,238 | )
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Non-designated Derivatives       |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  |                            |  |                | 40,000  |                   |   | 3,288      |  |   | 3,288  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total non-designated derivatives |  |                            |  |                | 40,000  |                   |   | 3,288      |  |   | 3,288  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total derivatives                |  |                            |  | $              | 531,063 |                   | $ | 5,356      |  | $ | 1,050  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|December 31, 2005                |  |                            |  |                |         |                   |   |            |  |   |        |  
|Designated Derivatives           |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Receive fixed/pay variable       |  | Hedge borrowing cost       |  | $              | 57,900  |                   | $ |           |  | $ | (657   | )
|Interest rate caps/corridors     |  | Hedge borrowing cost       |  |                | 165,000 |                   |   | 1,155      |  |   | 1,155  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total designated derivatives     |  |                            |  |                | 222,900 |                   |   | 1,155      |  |   | 498    |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Non-designated Derivatives       |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Pay fixed/receive variable       |  |                            |  |                | 70,000  |                   |   | 1,450      |  |   | 1,450  |  
|Receive fixed/pay variable       |  |                            |  |                | 40,000  |                   |   | 3,235      |  |   | 3,235  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total non-designated derivatives |  |                            |  |                | 110,000 |                   |   | 4,685      |  |   | 4,685  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total derivatives                |  |                            |  | $              | 332,900 |                   | $ | 5,840      |  | $ | 5,183  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|March 31, 2005                   |  |                            |  |                |         |                   |   |            |  |   |        |  
|Designated Derivatives           |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Pay fixed/receive variable       |  | Hedge borrowing cost       |  | $              | 95,000  |                   | $ | 1,586      |  | $ | 1,585  |  
|Pay fixed/receive variable       |  | Hedge loan rate risk       |  |                | 55,985  |                   |   | 1,255      |  |   | 1,157  |  
|Interest rate caps/corridors     |  | Hedge borrowing cost       |  |                | 300,000 |                   |   | 3,008      |  |   | 3,008  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total designated derivatives     |  |                            |  |                | 450,985 |                   |   | 5,849      |  |   | 5,750  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Non-designated Derivatives       |  |                            |  |                |         |                   |   |            |  |   |        |  
|Interest rate swaps:             |  |                            |  |                |         |                   |   |            |  |   |        |  
|Pay fixed/receive variable       |  |                            |  |                | 30,000  |                   |   | 738        |  |   | 737    |  
|Receive fixed/pay variable       |  |                            |  |                | 368,500 |                   |   | 5,347      |  |   | (1,313 | )
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total non-designated derivatives |  |                            |  |                | 398,500 |                   |   | 6,085      |  |   | (576   | )
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  
|Total derivatives                |  |                            |  | $              | 849,485 |                   | $ | 11,934     |  | $ | 5,174  |  
|                                 |  |                            |  |                |         |                   |   |            |  |   |        |  



17



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NOTE 11CONTINGENCIES AND OFF BALANCE SHEET RISK

Commitments

Commitments to extend credit in the form of consumer,
commercial real estate and business loans at the date indicated were as follows:



|                                      |  |               |          
|------------------------------------- |  | ------------- | ---------
|(in thousands)                        |  | March 31,2006
|Commercial business and real estate   |  | $             | 915,128  
|Consumer revolving credit             |  |               | 695,032  
|Residential mortgage credit           |  |               | 19,405   
|Performance standby letters of credit |  |               | 116,308  
|Commercial letters of credit          |  |               | 2,182    
|                                      |  |               |          
|Total loan commitments                |  | $             | 1,748,055
|                                      |  |               |          

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do
not necessarily represent future cash requirements.

Litigation

The Corporation is involved in various legal actions that arise in the ordinary course of its business. In April 2005, the Corporation became a party to litigation where a former employee alleges a breach by the Corporation of a
previously executed employment contract. The former employee claims that, under the terms of the contract, he is due a so-called imputed interest payment valued at approximately $2 million. Further, under a theory of damages put forth,
he asserts that he is owed a multiple of the imputed interest payment. The aggregate damage award sought against the Corporation in this action is approximately $6 million. The discovery phase of the litigation process has been completed, however,
no trial date has been set. The Corporation believes it has meritorious defenses against this action and is vigorously and actively contesting the allegations against it.

All other active lawsuits entail amounts which management believes, in the aggregate, are immaterial to the financial condition and the results of operations of the Corporation.

NOTE 12NET GAINS (LOSSES)

Net gains (losses) include the
following components for the periods indicated:



|                    |  |                             |      |   |      |   |      |  
|------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                    |  | Three Months EndedMarch 31, |     
|(in thousands)      |  | 2006                        |      |   | 2005 |  
|Net gains (losses): |  |                             |      |   |      |   |      |  
|Securities sales    |  | $                           | 521  |   |      | $ | (876 | )
|Asset sales         |  |                             | 141  |   |      |   | 151  |  
|Debt extinguishment |  |                             | (122 | ) |      |   | (51  | )
|                    |  |                             |      |   |      |   |      |  
|Net gains (losses)  |  | $                           | 540  |   |      | $ | (776 | )
|                    |  |                             |      |   |      |   |      |  



18



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NOTE 13EARNINGS PER SHARE

The following table presents a summary of per share data and amounts for the periods indicated.



|                                      |  |                             |        |      |   |       
|------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                      |  | Three Months EndedMarch 31,
|(in thousands, except per share data) |  | 2006                        |        | 2005
|Net income                            |  | $                           | 18,258 |      | $ | 15,750
|Basic EPS shares                      |  |                             | 32,948 |      |   | 33,029
|Basic EPS                             |  | $                           | 0.55   |      | $ | 0.48  
|Dilutive shares                       |  |                             | 417    |      |   | 691   
|Diluted EPS shares                    |  |                             | 33,365 |      |   | 33,720
|Diluted EPS                           |  | $                           | 0.55   |      | $ | 0.47  
|Antidilutive shares                   |  |                             | 10     |      |   | 2     

NOTE 14COMPREHENSIVE INCOME

Presented below is a reconciliation of net income to comprehensive income including the components of other comprehensive loss for the periods indicated.



|                                                                           |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                           |  | Three Months EndedMarch 31, |        
|(in thousands)                                                             |  | 2006                        |         |   | 2005 |  
|Net income                                                                 |  | $                           | 18,258  |   |      | $ | 15,750  |  
|Other comprehensive loss:                                                  |  |                             |         |   |      |   |         |  
|Net unrealized gains (losses) on derivatives                               |  |                             | (3,204  | ) |      |   | 1,934   |  
|Net unrealized holding losses on debt securities                           |  |                             | (12,295 | ) |      |   | (19,561 | )
|Less reclassification adjustment for gains (losses) realized in net income |  |                             | 117     |   |      |   | (757    | )
|                                                                           |  |                             |         |   |      |   |         |  
|Other comprehensive loss, before tax                                       |  |                             | (15,616 | ) |      |   | (16,870 | )
|Related income tax benefit                                                 |  |                             | (6,325  | ) |      |   | (5,905  | )
|                                                                           |  |                             |         |   |      |   |         |  
|Other comprehensive loss, after tax                                        |  |                             | (9,291  | ) |      |   | (10,965 | )
|                                                                           |  |                             |         |   |      |   |         |  
|Comprehensive income                                                       |  | $                           | 8,967   |   |      | $ | 4,785   |  
|                                                                           |  |                             |         |   |      |   |         |  

NOTE 15EMPLOYEE BENEFIT PLANS

The actuarially estimated net benefit cost includes the following components for the periods indicated:



|                                                       |  |                             |        |   |                             |   |      |                             |  |   |      |   |  |      |        |      |  |   |     |  |   |    
|------------------------------------------------------ |  | --------------------------- | ------ | - | --------------------------- | - | ---- | --------------------------- |  | - | ---- | - |  | ---- | ------ | ---- |  | - | --- |  | - | ---
|                                                       |  | Qualified Pension Plan      |        |   | Postretirement Benefits     |   |      | Non-qualifiedPension Plan  
|                                                       |  | Three Months EndedMarch 31, |        |   | Three Months EndedMarch 31, |   |      | Three Months EndedMarch 31,
|(in thousands)                                         |  | 2006                        |        |   | 2005                        |   |      | 2006                        |  |   | 2005 |   |  | 2006 |        | 2005
|Service cost - benefits earned during the period       |  | $                           | 842    |   |                             | $ | 304  |                             |  | $ | 72   |   |  | $    | 39     |      |  | $ | 36  |  | $ | 75 
|Interest cost on projected benefit obligation          |  |                             | 908    |   |                             |   | 387  |                             |  |   | 58   |   |  |      | 27     |      |  |   | 153 |  |   | 209
|Expected return on plan assets                         |  |                             | (1,444 | ) |                             |   | (445 | )                           |  |   |     |   |  |      |       |      |  |   |    |  |   |   
|Net amortization and deferral of loss (gain)           |  |                             | 117    |   |                             |   | 50   |                             |  |   | (107 | ) |  |      | 13     |      |  |   | 182 |  |   | 88 
|                                                       |  |                             |        |   |                             |   |      |                             |  |   |      |   |  |      |        |      |  |   |     |  |   |    
|Subtotal                                               |  |                             | 423    |   |                             |   | 296  |                             |  |   | 23   |   |  |      | 79     |      |  |   | 371 |  |   | 372
|Reversal of liability                                  |  |                             |       |   |                             |   |     |                             |  |   |     |   |  |      | (1,641 | )    |  |   |    |  |   |   
|                                                       |  |                             |        |   |                             |   |      |                             |  |   |      |   |  |      |        |      |  |   |     |  |   |    
|Net pension cost included in employee benefits expense |  | $                           | 423    |   |                             | $ | 296  |                             |  | $ | 23   |   |  | $    | (1,562 | )    |  | $ | 371 |  | $ | 372
|                                                       |  |                             |        |   |                             |   |      |                             |  |   |      |   |  |      |        |      |  |   |     |  |   |    



19



---

On March 31, 2005, the Corporation announced that the pension plan would be frozen for new entrants. Employees who
were already participants in the plan were not affected by this change. Also on March 31, 2005, the Corporation communicated to retirees under the age of 65 currently receiving postretirement health care benefits that these benefits would be
eliminated and no longer offered, effective January 1, 2006. Postretirement life insurance benefits continue to be provided to retirees. This action resulted in the reversal of the actuarially determined liability of $1.6 million at
March 31, 2005 associated with health care benefits.

No contributions were made to the qualified pension plan in the three months ended
March 31, 2006 and 2005, respectively. The minimum required contribution in 2006 for the qualified plan is estimated to be zero. The decision to contribute further amounts is dependent on other factors including the actual investment
performance of the plan assets and the requirements of the Internal Revenue Code. Given these uncertainties, the Corporation is not able to reliably estimate the maximum deductible contribution or the amount that will be contributed in 2006 to the
qualified plan. For the unfunded non-qualified pension and postretirement benefit plans, the Corporation will contribute the minimum required amount in 2006, which is equal to the benefits paid under the plans.

NOTE 16BUSINESS SEGMENT INFORMATION

The Corporations
lines of business are structured according to the channels through which its products and services are delivered to its customers. For management purposes the lines are divided into the following segments: Consumer Banking, Commercial Banking, and
Treasury and Administration.

The Corporation offers consumer and commercial banking products and services through its wholly owned subsidiary, Provident
Bank. The Bank offers its services to customers in the key urban areas of Baltimore, Washington and Richmond through 91 traditional and 62 in-store banking offices in Maryland, Virginia and southern York County, Pennsylvania. Additionally, the Bank
offers its customers 24-hour banking services through 252 ATMs, telephone banking and the Internet. Consumer banking services include a broad array of small business and consumer loan, deposit and investment products offered to retail and commercial
customers through the retail branch network and direct channel sales center. Commercial Banking provides an array of commercial financial services including asset-based lending, equipment leasing, real estate financing, cash management and
structured financing to middle market commercial customers. Treasury and Administration is comprised of balance sheet management activities that include managing the investment portfolio, discretionary funding, utilization of derivative financial
instruments and optimizing the Corporations equity position.

The financial performance of each business segment is monitored using an internal
profitability measurement system. This system utilizes policies that ensure the results reflect the economics for each segment compiled on a consistent basis. Line of business information is based on management accounting practices that support the
current management structure and is not necessarily comparable with similar information for other financial institutions. This profitability measurement system uses internal management accounting policies that generally follow the policies described
in Note 1. The Corporations funds transfer pricing system utilizes a matched maturity methodology that assigns a cost of funds to earning assets and a value to the liabilities of each business segment with an offset in the Treasury and
Administration business segment. The provision for loan losses is charged to the consumer and commercial segments based on actual charge-offs with the balance to the Treasury and Administration segment. Operating expense is charged on a fully
absorbed basis. Income tax expense is calculated based on the segments fully taxable equivalent income and the Corporations effective tax rate. Revenues from no individual customer exceeded 10% of consolidated total revenues.



20



---

The table below summarizes results by each business segment for the periods indicated.



|                                                    |  |                   |           |                 |   |                            |  |   |           |   |                   |   |                 |  |   |                            |  |   |           |   |  |   |           |   |  |   |          
|--------------------------------------------------- |  | ----------------- | --------- | --------------- | - | -------------------------- |  | - | --------- | - | ----------------- | - | --------------- |  | - | -------------------------- |  | - | --------- | - |  | - | --------- | - |  | - | ---------
|Three Months Ended March 31,                        |  | 2006              |           | 2005           
|(in thousands)                                      |  | CommercialBanking |           | ConsumerBanking |   | Treasury andAdministration |  |   | Total     |   | CommercialBanking |   | ConsumerBanking |  |   | Treasury andAdministration |  |   | Total    
|Net interest income                                 |  | $                 | 14,873    |                 | $ | 27,379                     |  | $ | 8,996     |   |                   | $ | 51,248          |  | $ | 14,847                     |  | $ | 26,205    |   |  | $ | 7,664     |   |  | $ | 48,716   
|Provision for loan losses                           |  |                   | 351       |                 |   | 521                        |  |   | (554      | ) |                   |   | 318             |  |   | 1,515                      |  |   | (52       | ) |  |   | 112       |   |  |   | 1,575    
|                                                    |  |                   |           |                 |   |                            |  |   |           |   |                   |   |                 |  |   |                            |  |   |           |   |  |   |           |   |  |   |          
|Net interest income after provision for loan losses |  |                   | 14,522    |                 |   | 26,858                     |  |   | 9,550     |   |                   |   | 50,930          |  |   | 13,332                     |  |   | 26,257    |   |  |   | 7,552     |   |  |   | 47,141   
|Non-interest income                                 |  |                   | 4,758     |                 |   | 24,063                     |  |   | (596      | ) |                   |   | 28,225          |  |   | 3,550                      |  |   | 21,227    |   |  |   | (1,733    | ) |  |   | 23,044   
|Non-interest expense                                |  |                   | 6,413     |                 |   | 38,487                     |  |   | 7,891     |   |                   |   | 52,791          |  |   | 5,705                      |  |   | 35,139    |   |  |   | 6,630     |   |  |   | 47,474   
|                                                    |  |                   |           |                 |   |                            |  |   |           |   |                   |   |                 |  |   |                            |  |   |           |   |  |   |           |   |  |   |          
|Income (loss) before income taxes                   |  |                   | 12,867    |                 |   | 12,434                     |  |   | 1,063     |   |                   |   | 26,364          |  |   | 11,177                     |  |   | 12,345    |   |  |   | (811      | ) |  |   | 22,711   
|Income tax expense (benefit)                        |  |                   | 3,956     |                 |   | 3,823                      |  |   | 327       |   |                   |   | 8,106           |  |   | 3,425                      |  |   | 3,784     |   |  |   | (248      | ) |  |   | 6,961    
|                                                    |  |                   |           |                 |   |                            |  |   |           |   |                   |   |                 |  |   |                            |  |   |           |   |  |   |           |   |  |   |          
|Net income (loss)                                   |  | $                 | 8,911     |                 | $ | 8,611                      |  | $ | 736       |   |                   | $ | 18,258          |  | $ | 7,752                      |  | $ | 8,561     |   |  | $ | (563      | ) |  | $ | 15,750   
|                                                    |  |                   |           |                 |   |                            |  |   |           |   |                   |   |                 |  |   |                            |  |   |           |   |  |   |           |   |  |   |          
|Total assets                                        |  | $                 | 1,968,816 |                 | $ | 3,129,567                  |  | $ | 1,274,051 |   |                   | $ | 6,372,434       |  | $ | 1,636,519                  |  | $ | 3,067,711 |   |  | $ | 1,720,452 |   |  | $ | 6,424,682
|                                                    |  |                   |           |                 |   |                            |  |   |           |   |                   |   |                 |  |   |                            |  |   |           |   |  |   |           |   |  |   |          

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Provident Bankshares Corporation (the Corporation), a Maryland corporation, is the holding company for Provident Bank
(Provident or the Bank), a Maryland chartered stock commercial bank. At March 31, 2006, the Bank was the second largest independent commercial bank, in asset size, headquartered in Maryland, with $6.4 billion in assets.
Provident is a regional bank serving Maryland and Virginia, with emphasis on the key urban centers within these states  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 focuses on providing its products and services to three segments of customers  individuals, small businesses and middle market businesses. The Corporation offers consumer and commercial banking products and services through the
Consumer Banking group and the Commercial Banking group. Provident also offers related financial services through wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident
Investment Company (PIC) and leases through Court Square Leasing and Provident Lease Corporation.

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 establish 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 focus of the organization is to:

Maximize Providents position as the right size bank in the marketplace.Providents position as the second largest bank headquartered in
Maryland provides a unique opportunity as the right size bank in its footprint. The Bank provides the service of a community bank combined with the convenience and wide array of products and services that a strong regional bank offers.
In addition, the 62 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 153 banking offices concentrated in the
Baltimore-Washington, D.C. corridor and beyond to Richmond, Virginia. Of the 153 banking offices, 44% are located in the Greater Baltimore region and 56% 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 network of 252 ATMs enhances the banking office
network by providing customers increased opportunities to access their funds.

Grow and deepen consumer and small business
relationships in Maryland and Virginia. Consumer banking continues to be an important component of the Banks business strategy. Consumer banking services include a broad array of consumer and small business loan, lease, deposit and
investment products offered to consumer and commercial



21



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customers through Providents banking office network and ProvidentDirect, the Banks direct channel sales center. The small business segment is
further supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients.

Grow and deepen commercial and real estate relationships in Maryland and Virginia. Commercial banking is the other key component to the
Corporations regional presence in its market area. The Commercial Banking group provides customized banking solutions to middle market commercial and real estate customers. The Bank has an experienced team of relationship managers with
expertise in real estate and business 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 consistently priced
deposit based services, responsive service and maintenance of frequent personal contact with each customer.

Move from a product
driven organization to a 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 strategy will be 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 strong regional bank offers.

Create a high performance culture that focuses on employee development and retention.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 strategy as the right size bank and transforming the Companys sales culture with a
focus on the employees development and approach with Providents customers.

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 for the periods indicated. This discussion and tabular presentations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and Notes as well as the other information herein.

The 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 disclosure 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 and intangible assets associated with mergers, other than temporary impairment of investment securities, pension and post-retirement benefits, asset prepayment rates,
goodwill and intangible assets, stock-based compensation, derivative financial instruments, recourse liabilities, 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 Condensed Consolidated Financial Statements: allowance for loan losses, other than temporary impairment of investment securities, derivative
financial instruments, goodwill and intangible assets, asset prepayment rates, and income taxes. Each estimate and its financial impact, to the extent significant to financial results, is discussed in the notes to the unaudited 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 unaudited Condensed Consolidated Financial Statements.



22



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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 revenue received from providing products and services. The majority of the
non-interest income comes from service charges on deposit accounts. The Corporation also earns revenue 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. These gains and losses are not a regular part of the
Corporations income. In addition, the Corporation also recognizes gains or losses on its outstanding non-designated derivative financial instruments.

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, fees paid to directors and expenses for 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 and external processing include fees paid to third-party data processing services and
expenses and depreciation charges related 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 are 2 to 40 years for building
and improvements, and 2 to 15 years for furniture and equipment.

Other expenses include expenses for attorneys, accountants and consultants, franchise
taxes, charitable contributions, insurance, office supplies, postage, telephone, merger expense and other miscellaneous operating expenses.

FINANCIAL
CONDITION

The financial condition of the Corporation reflects the continued improvement in financial fundamentals through the consistent execution of
the Banks key strategies and the balance sheet transition towards growing loans and deposits in the Banks core business segments. The expanded market presence experienced over the past few years has been successful in growing and
deepening relationships across the Corporations key major markets of Greater Baltimore, Greater Washington and Central Virginia. The successful efforts have led to growth in average loans of $160.5 million, or 4.5%, and average deposits of
$257.8 million, or 6.9%, over the first quarter of 2005. At March 31, 2006, total assets were $6.4 billion which is essentially flat with the periods ended December 31, 2005 and March 31, 2005. Over the past 12 months, growth in
internally generated loan portfolios has been offset by a decline in non-core or wholesale loans (originated and acquired residential mortgages) and investment securities as the Corporation continues to execute its strategy of transitioning the
balance sheet towards core assets and away from wholesale assets.



23



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Lending

Total
average loan balances increased to $3.7 billion in the first quarter of 2006, an increase of $160.5 million, or 4.5%, from the first quarter 2005 (prior year quarter). The following table summarizes the composition of the Banks
average loans for the periods indicated.



|                                             |  |                              |           |            |   |           |            |   |          |   |  |       |   
|-------------------------------------------- |  | ---------------------------- | --------- | ---------- | - | --------- | ---------- | - | -------- | - |  | ----- | --
|                                             |  | Three Months Ended March 31, |           | $ Variance |   |           | % Variance |  
|(dollars in thousands)                       |  | 2006                         |           | 2005       |   |          
|Residential real estate:                     |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Originated and acquired residential mortgage |  | $                            | 439,513   |            | $ | 639,845   |            | $ | (200,332 | ) |  | (31.3 | )%
|Home equity                                  |  |                              | 914,182   |            |   | 724,721   |            |   | 189,461  |   |  | 26.1  |   
|Other consumer:                              |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Marine                                       |  |                              | 406,786   |            |   | 432,891   |            |   | (26,105  | ) |  | (6.0  | ) 
|Other                                        |  |                              | 30,441    |            |   | 38,250    |            |   | (7,809   | ) |  | (20.4 | ) 
|                                             |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Total consumer                               |  |                              | 1,790,922 |            |   | 1,835,707 |            |   | (44,785  | ) |  | (2.4  | ) 
|                                             |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Commercial real estate:                      |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Commercial mortgage                          |  |                              | 475,354   |            |   | 484,491   |            |   | (9,137   | ) |  | (1.9  | ) 
|Residential construction                     |  |                              | 447,792   |            |   | 259,940   |            |   | 187,852  |   |  | 72.3  |   
|Commercial construction                      |  |                              | 309,123   |            |   | 281,705   |            |   | 27,418   |   |  | 9.7   |   
|Commercial business                          |  |                              | 677,346   |            |   | 678,183   |            |   | (837     | ) |  | (0.1  | ) 
|                                             |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Total commercial                             |  |                              | 1,909,615 |            |   | 1,704,319 |            |   | 205,296  |   |  | 12.0  |   
|                                             |  |                              |           |            |   |           |            |   |          |   |  |       |   
|Total loans                                  |  | $                            | 3,700,537 |            | $ | 3,540,026 |            | $ | 160,511  |   |  | 4.5   |   
|                                             |  |                              |           |            |   |           |            |   |          |   |  |       |   

Strong loan growth in the Corporations core loan portfolios (loans other than the Companys originated
and acquired residential mortgage loans) was offset by continued strategic reductions in non-core or wholesale portfolios (originated and acquired residential mortgages). The average loan balances of loans other than originated and acquired
residential mortgage loans increased in the aggregate, $360.8 million, or 12.4%, over the same quarter in 2005. This increase was a result of the Corporations expanded presence and successful marketing efforts to grow its home equity and
residential and commercial construction loan portfolios. As a result, total average loans increased by 4.5% and was mainly driven by an increase of $189.5 million in average home equity loans and $215.3 million in average residential and commercial
constructions loans. These increases more than offset planned reductions in originated and acquired residential mortgage loans of $200.3 million.

The home
equity loan suite of products has been a key component of the Banks strategy to deepen its consumer relationships. This market strategy resulted in the $189.5 million, or 26.1%, increase in home equity average balances, continuing the growth
of $205.7 million, or 39.6%, that occurred in first quarter 2005. The production of direct consumer loans, primarily home equity loans and lines, are generated by the Banks retail banking offices, phone center and internet units. The strong
growth in home equity lending was partially offset by a decline in marine and other consumer loans. The Corporations marine lending loan growth has been restricted due to low pricing margins in the industry.

Commercial banking is the other key component to the Corporations regional presence in its market area. Average total commercial loans increased $205.3 million, or
12.0%, compared to the 2005 quarter. Commercial and residential construction loans posted increases during the quarter of $187.9 million and $27.4 million, respectively, reflecting strong regional demand for construction loans in the Banks
markets. This growth has occurred within the Corporations market footprint and is a reflection of the lending areas ability to deepen historical lending relationships with seasoned borrowers in familiar markets. These expanded
relationships and associated risks are managed through a strong level of loan administration and credit monitoring by a very experienced lending staff. The result is a well-balanced mix of revenue sources between consumer and commercial loan
products with $1.8 billion, or 48.4%, in consumer loans, and $1.9 billion, or 51.6%, in commercial loans. Geographically, average loan balances of $1.4 billion originated in the Greater Washington and Central Virginia regions represent 37% of total
average loans in first quarter 2006.



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Asset Quality

The
following table presents information with respect to non-performing assets and 90-day delinquencies as of the dates indicated.



|                                                  |  |               |        |   |                  |   |        |  
|------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(dollars in thousands)                            |  | March 31,2006 |        |   | December 31,2005 |  
|Non-Performing Assets:                            |  |               |        |   |                  |   |        |  
|Originated and acquired residential mortgage      |  | $             | 8,648  |   |                  | $ | 7,340  |  
|Home equity                                       |  |               | 310    |   |                  |   | 243    |  
|Other consumer                                    |  |               | 205    |   |                  |   | 315    |  
|Commercial mortgage                               |  |               | 1,437  |   |                  |   | 1,437  |  
|Commercial business                               |  |               | 15,752 |   |                  |   | 16,336 |  
|                                                  |  |               |        |   |                  |   |        |  
|Total non-accrual loans                           |  |               | 26,352 |   |                  |   | 25,671 |  
|Total renegotiated loans                          |  |               |       |   |                  |   |       |  
|                                                  |  |               |        |   |                  |   |        |  
|Total non-performing loans                        |  |               | 26,352 |   |                  |   | 25,671 |  
|Total other assets and real estate owned          |  |               | 1,773  |   |                  |   | 1,787  |  
|                                                  |  |               |        |   |                  |   |        |  
|Total non-performing assets                       |  | $             | 28,125 |   |                  | $ | 27,458 |  
|                                                  |  |               |        |   |                  |   |        |  
|                                                  |  |              
|90-Day Delinquencies:                             |  |               |        |   |                  |   |        |  
|Originated and acquired residential mortgage      |  | $             | 3,578  |   |                  | $ | 5,131  |  
|Home equity                                       |  |               | 263    |   |                  |   | 251    |  
|Other consumer                                    |  |               | 875    |   |                  |   | 1,069  |  
|Residential real estate construction              |  |               |       |   |                  |   | 118    |  
|Commercial business                               |  |               | 290    |   |                  |   | 1,551  |  
|                                                  |  |               |        |   |                  |   |        |  
|Total 90-day delinquencies                        |  | $             | 5,006  |   |                  | $ | 8,120  |  
|                                                  |  |               |        |   |                  |   |        |  
|                                                  |  |              
|Asset Quality Ratios:                             |  |               |        |   |                  |   |        |  
|Non-performing loans to loans                     |  |               | 0.71   | % |                  |   | 0.69   | %
|Non-performing assets to loans                    |  |               | 0.76   | % |                  |   | 0.74   | %
|Allowance for loan losses to loans                |  |               | 1.21   | % |                  |   | 1.24   | %
|Net charge-offs in quarter to average loans       |  |               | 0.13   | % |                  |   | 0.09   | %
|Allowance for loan losses to non-performing loans |  |               | 169.83 | % |                  |   | 177.78 | %

The asset quality within the Corporations loan portfolio continues to remain strong in the first quarter of
2006. Strong asset quality within the Corporations loan portfolio is a reflection of managements credit policies and strategy of shifting the balance sheet to core loan portfolios. In addition, regional credit conditions remained
favorable for the first quarter 2006. Non-performing assets were $28.1 million at March 31, 2006, a 2.4% increase, or $667 thousand, from the level at December 31, 2005. The increase in non-performing assets was due to the $1.3 million
increase in originated and acquired residential mortgages offset by a $584 thousand decline in non-performing commercial business loans during the quarter. Non-performing commercial business loans include $1.3 million of loans that have U.S.
government guarantees.

The level of non-performing assets to total loans was 0.76% at March 31, 2006 compared to 0.74% at December 31, 2005. The
level of 90-day delinquent loans declined during the same period, decreasing $3.1 million, or 38.3%, to $5.0 million from the $8.1 million level at December 31, 2005 and $10.8 million at March 31, 2005. Overall, the asset quality ratios of
the Corporation remain favorable, but no assurances can be given regarding the level of non-performing assets in the future.



25



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Allowance for Loan Losses

The Corporation maintains an allowance for loan losses (the allowance), which is intended to be managements best estimate of probable inherent losses in the outstanding loan portfolio. The allowance is reduced by actual
credit losses and is increased by the provision for loan losses and recoveries of previous loan losses. The provisions for loan losses are charges to earnings to bring the total allowance to a level considered necessary by management.

The allowance is based on managements continuing review and evaluation of the loan portfolio. This process provides an allowance consisting of two components,
allocated and unallocated. To arrive at the allocated component of the allowance, the Corporation combines estimates of the allowances needed for loans analyzed individually and on a pooled basis. The allocated component of the allowance is
supplemented by an unallocated component.

The portion of the allowance that is allocated to individual internally criticized and non-accrual loans is
determined by estimating the inherent loss on each problem credit after giving consideration to the value of underlying collateral. Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and
review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. The Corporations lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the
economy or in a borrowers circumstances that may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of
uncollectibility. Each commercial loan is assigned a risk rating based upon an assessment of the borrowers financial capacity to service the debt and the presence and value of collateral for the loan.

In addition to being used to categorize risk, the Banks internal ten-point risk rating system is used to determine the allocated allowance for the commercial
portfolio. Reserve factors, based on the actual loss history for a 5-year period for criticized loans, are assigned. If the factor, based on loss history for classified credits is lower than the minimum established factor, the higher factor is
applied. For loans with satisfactory risk profiles, the factors are based on the rating profile of the portfolio and the consequent historic losses of bonds with equivalent ratings.

For the consumer portfolios, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. Each quarter, historical rolling loss rates for homogenous pools of loans in these portfolios
provide the basis for the allocated reserve. For any portfolio where the Bank lacks sufficient historic experience, industry loss rates are used. If recent history is not deemed to reflect the inherent losses existing within a portfolio, older
historic loss rates during a period of similar economic or market conditions are used.

The Banks credit administration group adjusts the indicated
loss rates based on qualitative factors. Factors that are considered in adjusting loss rates include risk characteristics, credit concentration trends and general economic conditions, including job growth and unemployment rates. For commercial and
real estate portfolios, additional factors include the level and trend of watched and criticized credits within those portfolios; historic loss rates, commercial real estate vacancy, absorption and rental rates; and the number and volume of
syndicated credits, construction loans, or other portfolio segments deemed to carry higher levels of risk. Upon completion of the qualitative adjustments, the overall allowance is allocated to the components of the portfolio based on the adjusted
loss factors.

The unallocated component of the allowance exists to mitigate the imprecision inherent in managements estimates of expected credit
losses and includes its determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors that may not have been fully considered in the allocated allowance. The relationship of the unallocated component
to the total allowance may fluctuate from period to period. Although management has allocated the majority of the allowance to specific loan categories, the evaluation of the allowance is considered in its entirety.

Lending management meets at least quarterly with executive management to review the credit quality of the loan portfolios and to evaluate the allowance. The Corporation
has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its reviews to executive management and the Audit Committee of the Board of Directors. Such reviews also assist management in
establishing the level of the allowance.

Management believes that it uses the relevant information available to make determinations about the allowance
and that it has established its existing allowance in accordance with GAAP. If circumstances differ substantially from the



26



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assumptions used in making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because events
affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.

The FDIC examines the Bank periodically and, accordingly, as part of this examination, the allowance is reviewed for adequacy utilizing specific guidelines. Based upon
their review, the regulators may from time to time require reserves in addition to those previously provided.

At March 31, 2006, the allowance was
$44.8 million, or 1.21%, as a percentage of total loans outstanding, compared to an allowance at December 31, 2005 of $45.6 million, or 1.24%, as a percentage of total loans outstanding. The allowance coverage of 169.83% of non-performing loans
at March 31, 2006 compared to 177.78% at December 31, 2005. Portfolio-wide net charge-offs represented 0.13% of average loans in first quarter 2006, compared to 0.24% in first quarter 2005 and 0.09% from the fourth quarter 2005.

Deposits

The following table summarizes the
composition of the Corporations average deposit balances for the periods indicated.



|                         |  |                              |           |            |   |           |            |   |         |   |  |      |  
|------------------------ |  | ---------------------------- | --------- | ---------- | - | --------- | ---------- | - | ------- | - |  | ---- | -
|                         |  | Three Months Ended March 31, |           | $ Variance |   |           | % Variance |  
|(dollars in thousands)   |  | 2006                         |           | 2005       |   |          
|Transaction accounts:    |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Noninterest-bearing      |  | $                            | 791,615   |            | $ | 783,673   |            | $ | 7,942   |   |  | 1.0  | %
|Interest-bearing         |  |                              | 569,191   |            |   | 526,831   |            |   | 42,360  |   |  | 8.0  |  
|Savings/money market:    |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Savings                  |  |                              | 692,013   |            |   | 749,080   |            |   | (57,067 | ) |  | (7.6 | )
|Money market             |  |                              | 614,094   |            |   | 533,176   |            |   | 80,918  |   |  | 15.2 |  
|Certificates of deposit: |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Direct                   |  |                              | 898,518   |            |   | 795,593   |            |   | 102,925 |   |  | 12.9 |  
|Brokered                 |  |                              | 448,418   |            |   | 367,653   |            |   | 80,765  |   |  | 22.0 |  
|                         |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Total deposits           |  | $                            | 4,013,849 |            | $ | 3,756,006 |            | $ | 257,843 |   |  | 6.9  |  
|                         |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Deposits by source:      |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Consumer                 |  | $                            | 2,708,553 |            | $ | 2,660,397 |            | $ | 48,156  |   |  | 1.8  |  
|Commercial               |  |                              | 856,878   |            |   | 727,956   |            |   | 128,922 |   |  | 17.7 |  
|Brokered                 |  |                              | 448,418   |            |   | 367,653   |            |   | 80,765  |   |  | 22.0 |  
|                         |  |                              |           |            |   |           |            |   |         |   |  |      |  
|Total deposits           |  | $                            | 4,013,849 |            | $ | 3,756,006 |            | $ | 257,843 |   |  | 6.9  |  
|                         |  |                              |           |            |   |           |            |   |         |   |  |      |  

Average deposits increased $257.8 million, or 6.9%, in the first quarter 2006 over the same quarter last year.
Consumer deposits grew $48.2 million, or 1.8%, while commercial deposits experienced growth of $128.9 million, or 17.7%. The primary driver in the commercial deposit growth was the increase in certificates of deposit in the Greater Washington and
Central Virginia regions and higher commercial money market balances associated with commercial real estate lending activities in the Greater Baltimore region. In addition, brokered deposits issued also increased as a less expensive alternative to
borrowing.

Geographically, average customer deposits in the Greater Washington and Central Virginia regions represent 39% of total customer deposits. The
Bank currently has 86 retail banking offices in this market or 56% of total banking offices.



27



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Treasury Activities

The Treasury Division manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Managements objective is to achieve the maximum level of stable earnings over the long
term, while controlling the level of interest rate and liquidity risk, and optimizing capital utilization. In managing the investment portfolio to achieve its stated objective, the Corporation invests predominately in U.S. Treasury and Agency
securities, mortgage-backed securities (MBS) and other debt securities, which include corporate bonds and asset-backed securities (ABS).

At March 31, 2006, the investment securities portfolio was $1.9 billion, or 30.1% of total assets. The Banks investment portfolio declined $229 million from March 31, 2005 to March 31, 2006, reflecting managements
strategy to de-emphasize wholesale investments. The reduction in balances occurred in the MBS portfolio, which was reduced from $1.5 billion to $1.0 billion over that time period. Floating rate ABS were increased by $213 million over the same time
period.

At March 31, 2006, 51% of the investment portfolio was invested in MBS. The allocation to floating rate ABS and corporate bonds was increased
to 36%, to take advantage of rising short-term interest rates. The ABS portfolio, representing 34% of the total portfolio, consists predominately of Aaa and single A rated classes of pooled trust preferred securities. The re-allocation of investment
securities out of MBS and into floating rate ABS achieved the objectives of 1) reducing the portfolios market value sensitivity to rising interest rates and 2) increasing the percentage of the portfolio that reprices with one-month or three
month LIBOR in order to increase the Banks asset sensitivity position. Other debt securities primarily include investments in single issuer corporate bonds rated investment-grade by Moodys or S&P, single or double A rated
home equity ABS, and U.S. Treasury, Agency, and municipal securities. Typically, management classifies securities as available for sale to maximize management flexibility, although securities may be purchased with the intention of holding to
maturity.

The primary risk in the investment portfolio is duration risk. Duration measures the expected change in the market value of an investment for a
100 basis point (or 1%) change in interest rates. The higher an investments duration, the longer the time until its rate is reset to current market rates. The Banks risk tolerance, as measured by the duration of the investment portfolio,
is typically between 2% and 3.5%. In the current economic environment, the duration is targeted for the middle of that range. Another risk in the investment portfolio is credit risk. At March 31, 2006, over 65% of the entire investment
portfolio was rated AAA, 34% was investment grade below AAA, and 1% was rated below investment grade or was not rated.

Investment securities are evaluated
periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in
value is other than temporary. If a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. The Corporation had a limited number of securities in a
continuous loss position for 12 months or more at March 31, 2006. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, no other than temporary impairment was recorded at March 31,
2006.

Providents funds management objectives are two-fold: to minimize the cost of borrowings while assuring sufficient funding availability to meet
current and future borrowing requirements, and to contribute to interest rate risk management goals through match-funding loan and investment activity. Management utilizes a variety of sources to raise borrowed funds at competitive rates, including
federal funds purchased (fed funds), Federal Home Loan Bank (FHLB) borrowings, securities sold under repurchase agreements (repos), and brokered and jumbo certificates of deposit (CDs). FHLB borrowings
and repos typically are borrowed at rates approximating the LIBOR rate for the equivalent term because they are secured with investments or high quality real estate loans. Fed funds, which are generally overnight borrowings, are typically purchased
at the Federal Reserve target rate. Brokered CDs are generally added when market conditions permit issuance at rates favorable to other funding sources.

The Corporation formed wholly owned statutory business trusts in 1998, 2000 and 2003. In 2004, the Corporation acquired three wholly owned statutory business trusts from Southern Financial as part of the merger. In all cases, the trusts
issued trust preferred securities that were sold to outside third parties. The junior subordinated debentures issued by



28



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the Corporation to the trusts are presented net of unamortized issuance costs as long-term debt in the Condensed Consolidated Statements of Condition and are
includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations. Any of the junior subordinated debentures are redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain
events. On March 31, 2005, the Corporation redeemed $30 million aggregate value of Junior Subordinated Debentures issued to Provident Trust II at an annual rate of 10%. On July 15, 2005, the Corporation redeemed $5 million aggregate value
of Junior Subordinated Debentures issued to Southern Financial Capital Trust I at an annual rate of 11%. There are no issuances callable in 2006.

Treasury
borrowings rose slightly from December 2005 to March 2006, to fund core loan growth. Comparing monthly average balances, March 2006 borrowings rose $78 million from December 2005, from $1.67 billion to $1.75 billion. Short-term borrowings rose $250
million while long-term borrowings were reduced $150 million, as management took advantage of lagging rates increases in the Fed Funds market by increasing this segment of its borrowing portfolio. In addition, brokered CDs were reduced by $21
million.

Liquidity

An important component of
the Banks asset/liability structure is 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 Bank has sufficient liquidity to meet funding needs for the foreseeable future.

The Banks primary
source of liquidity beyond the traditional sources is the assets it possesses, which can either be pledged as collateral for secured borrowings or sold outright. The Banks primary sources for raising secured borrowings are the FHLB and
securities broker/dealers. At March 31, 2006, $1.0 billion of secured borrowings were employed, with sufficient collateral available to immediately raise an additional $1.1 billion. An excess liquidity position of $672 million remains after
covering $445 million of unsecured funds that mature in the next three months. Additionally, over $300 million of assets are maintained as collateral with the Federal Reserve that is available as a contingent funding source.

The Bank also has several sources of unsecured funding that it uses routinely. At March 31, 2006, the Bank possessed over $900 million of unsecured overnight
borrowing capacity, of which $378 million was in use. The Bank also accesses the brokered CD market when the pricing of CDs is favorable to other secured or unsecured sources. Additionally, the Corporation has access to public and private debt
markets, and most recently issued $71 million of trust preferred securities in December 2003.

As an alternative to raising secured funds, the Bank can
raise liquidity through asset sales. At March 31, 2006, over $500 million of the Banks investment portfolio was immediately saleable at a market value equaling or exceeding its amortized cost basis. Additionally, over a 90-day time frame,
a majority of the Banks $1.8 billion consumer loan portfolio is saleable in an efficient market.

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 must be maintained. 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.

Contractual Obligations, Commitments and Off Balance Sheet Arrangements

The Corporation has various contractual obligations, such as long-term borrowings, that are recorded as liabilities in the Condensed Consolidated Financial Statements. Other items, such as certain minimum lease
payments for the use of



29



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banking and operations offices under operating lease agreements, are not recognized as liabilities in the Condensed Consolidated Financial Statements, but
are required to be disclosed. Each of these arrangements affects the Corporations determination of sufficient liquidity.

The following table
summarizes significant contractual obligations at March 31, 2006 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings.



|                  |  |                                    |         |           |   |          |  |              |        |       |   |         |  |   |        
|----------------- |  | ---------------------------------- | ------- | --------- | - | -------- |  | ------------ | ------ | ----- | - | ------- |  | - | -------
|                  |  | Contractual Payments Due by Period |         |          
|(in thousands)    |  | Less than1 Year                    |         | 1-3 Years |   | 4-5Years |  | After 5Years |        | Total
|Lease obligations |  | $                                  | 13,496  |           | $ | 24,992   |  | $            | 20,512 |       | $ | 34,342  |  | $ | 93,342 
|Long-term debt    |  |                                    | 345,199 |           |   | 263,131  |  |              | 35,518 |       |   | 139,854 |  |   | 783,702
|                  |  |                                    |         |           |   |          |  |              |        |       |   |         |  |   |        
|Total             |  | $                                  | 358,695 |           | $ | 288,123  |  | $            | 56,030 |       | $ | 174,196 |  | $ | 877,044
|                  |  |                                    |         |           |   |          |  |              |        |       |   |         |  |   |        

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of
credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and a risk assessment are considered when determining the amount and
structure of credit arrangements. Commitments to extend credit in the form of consumer, commercial real estate and business loans at March 31, 2006 were as follows:



|                                      |  |               |          
|------------------------------------- |  | ------------- | ---------
|(in thousands)                        |  | March 31,2006
|Commercial business and real estate   |  | $             | 915,128  
|Consumer revolving credit             |  |               | 695,032  
|Residential mortgage credit           |  |               | 19,405   
|Performance standby letters of credit |  |               | 116,308  
|Commercial letters of credit          |  |               | 2,182    
|                                      |  |               |          
|Total loan commitments                |  | $             | 1,748,055
|                                      |  |               |          

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do
not necessarily represent future cash requirements. Obligations also take the form of commitments to purchase loans. At March 31, 2006, the Corporation did not have any firm commitments to purchase loans.

Risk Management

The nature of the banking business, which involves
paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, earnings and the market value of assets and liabilities are subject to fluctuations, which arise
due to changes in the level and directions of interest rates. Managements objective is to minimize the fluctuation in the net interest margin caused by changes in interest rates using cost-effective strategies and tools. The Bank manages
several forms of interest rate risk, including asset/liability mismatch, basis and prepayment risk.

The Corporation purchases amortizing loan pools and
investment securities in which the underlying assets are residential mortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments
resulting from borrowers elections to refinance the underlying mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments.
The prepayment rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating
volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market



30



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projections. Basis risk exists as a result of having much of the Banks earning assets priced using either the Prime rate or the U.S. Treasury yield
curve, while much of the liability portfolio, which finances earning assets, is priced using the CD yield curve or LIBOR yield curve. These different yield curves typically do not move in lock-step with one another.

Measuring and managing interest rate risk is a dynamic process that management performs continually to meet the objective of maintaining a stable net interest margin.
This process relies chiefly on simulation modeling of shocks to the balance sheet under a variety of interest rate scenarios, including parallel and non-parallel rate shifts, such as the forward yield curves for both short and long term interest
rates. The results of these shocks are measured in two forms: first, the impact on the net interest margin and earnings over one and two year time frames; and second, the impact on the market value of equity. In addition to measuring the basis risks
and prepayment risks noted above, simulations also quantify the earnings impact of rate changes and the cost / benefit of hedging strategies.

The
following table shows the anticipated effect on net interest income in parallel shift (up or down) interest rate scenarios. These shifts are assumed to begin on April 1, 2006 for the March 31, 2006 data and on January 1, 2006 for the
December 31, 2005 data and evenly increase or decrease over a 6-month period. The effect on net interest income would be for the next twelve months. Given the interest environment in the periods presented, a 200 basis point drop in rate is
unlikely and has not been shown.

The projected outcomes presented below are based on a balance sheet growth forecast and parallel shifts in interest
rates, i.e. all interest rates moving by the same amount. Management models many non-parallel rate change scenarios as well, including several yield-curve flattening scenarios. The results of each scenario differ; however, the results below are an
accurate indication of the magnitude and direction of the Corporations interest rate risk.



|                       |  |                                                                   |  |                                                                     
|---------------------- |  | ----------------------------------------------------------------- |  | --------------------------------------------------------------------
|Interest Rate Scenario |  | At March 31, 2006ProjectedPercentage Change inNet Interest Income |  | At December 31, 2005ProjectedPercentage Change inNet Interest Income
|-100 basis points      |  | -3.00%                                                            |  | -3.40%                                                              
|No change              |  |                                                                  |  |                                                                    
|+100 basis points      |  | +1.40%                                                            |  | +1.80%                                                              
|+200 basis points      |  | +2.50%                                                            |  | +3.20%                                                              

The percentage changes displayed in the table above relate to the Corporations projected net interest
income. Managements intent is for derivative interest income to mitigate risk to the Corporations net interest income stemming from changes in interest rates. For comparison purposes, these projections include all interest earned on
derivatives in net interest income. The analysis includes the interest income and expense relating to non-designated interest rate swaps that is classified in non-interest income as net cash settlement on swaps.

The isolated modeling environment, assuming no action by management, shows that the Corporations net interest income volatility is less than 3.1% under the assumed
single direction scenarios. The Corporations one-year forward earnings are slightly asset sensitive, which will result in net interest income moving in the same direction as future interest rates. Management pays close attention to the risk of
continued flattening of the yield curve. Short-term interest rates, such as the fed funds rate, have increased approximately 200 basis points over the past year while long-term rates have risen about 60 basis points. Further yield curve flattening
is possible, either through further increases in short-term rates, further decreases in long-term rates, or both. Management routinely models several yield curve flattening scenarios as part of its interest rate risk management function, and this
modeling discloses little risk under most yield curve flattening scenarios.

Management employs the investment, borrowings, and derivatives portfolios in
implementing the Banks interest rate strategy. As noted above, mitigating yield curve flattening risk has been a significant element of interest rate risk management. To protect the Bank from rising short-term interest rates, over $600 million
of the investment portfolio reprices semiannually or more frequently. In the borrowings portfolio, over $270 million of funds reset their rates with long-term interest rates, such as the 10-year constant maturity swap rate, to protect the net
interest margin from falling long-term interest rates. The interest expense associated with these borrowings declines when long-term interest rates decline. Additionally, $366 million of interest rate swaps were in force to reduce interest rate
risk, and $165 million of interest rate caps were employed specifically to protect against rising interest rates in the future.



31



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In addition to managing interest rate risk, which applies to both assets and liabilities, the Corporation must understand
and manage risks specific to lending. Much of the fundamental lending business of Provident is based upon understanding, measuring and controlling credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and
risk specific to individual borrowers. Each consumer and residential lending product has a generally predictable level of credit loss based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit
loss experience. Loans with medium credit loss experience are primarily secured products such as auto and marine loans. Unsecured loan products such as personal revolving credit have the highest credit loss experience; therefore the Bank has chosen
not to engage in a significant amount of this type of lending. Credit risk in commercial lending varies significantly, as losses as a percentage of outstanding loans can shift widely from period to period and are particularly sensitive to changing
economic conditions. Generally improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet debt service requirements. However, this improvement in operating cash flow is
often at least partially offset by rising interest rates often seen in an improving economic environment. In addition, changing economic conditions often impact various business segments differently, giving rise to the need to manage industry
concentrations within the loan portfolio. Further discussion relating to asset quality was presented on page 25.

Other lending risks include liquidity
risk and specific risk. The liquidity risk of the Corporation arises from its obligation to make payment in the event of a customers contractual default. The evaluation of specific risk is a basic function of underwriting and loan
administration, involving analysis of the borrowers ability to service debt as well as the value of pledged collateral. In addition to impacting individual lending decisions, this analysis may also determine the aggregate level of commitments
the Corporation is willing to extend to an individual customer or a group of related customers.

Capital Resources

Total stockholders equity was $630.2 million at March 31, 2006, a decrease of $299 thousand from December 31, 2005. The change in stockholders
equity for the period was attributable to $18.3 million in earnings that was partially offset by dividends paid of $9.4 million. Net accumulated other comprehensive loss increased by $9.3 million during the period primarily due to the impact of
rising interest rates on the market value of the debt securities portfolio. Capital was also reduced by $5.4 million associated with stock-based payment and by $5.3 million from the repurchase of 149 thousand shares of the Corporations
common stock at an average price of $35.90. The Corporation is authorized to repurchase an additional 1.1 million shares under its stock repurchase program.

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.



32



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|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|---------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | ----------------------------- |  | ---- | ----------------------- |  | ----- | -
|(dollars in thousands)                                     |  | March 31,2006 |           |   | December 31,2005 |   |           |                               |  |      |                         | 
|Total equity capital per consolidated financial statements |  | $             | 630,196   |   |                  | $ | 630,495   |                               |  |      |                         |  |       |  
|Qualifying trust preferred securities                      |  |               | 129,000   |   |                  |   | 129,000   |                               |  |      |                         |  |       |  
|Minimum pension liability                                  |  |               | (1,196    | ) |                  |   | (1,196    | )                             |  |      |                         |  |       |  
|Accumulated other comprehensive loss                       |  |               | 26,574    |   |                  |   | 17,283    |                               |  |      |                         |  |       |  
|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Adjusted capital                                           |  |               | 784,574   |   |                  |   | 775,582   |                               |  |      |                         |  |       |  
|                                                           |  |               |           |  
|Adjustments for tier 1 capital:                            |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Goodwill and disallowed intangible assets                  |  |               | (265,351  | ) |                  |   | (265,794  | )                             |  |      |                         |  |       |  
|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Total tier 1 capital                                       |  |               | 519,223   |   |                  |   | 509,788   |                               |  |      |                         |  |       |  
|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Adjustments for tier 2 capital:                            |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Allowance for loan losses                                  |  |               | 44,754    |   |                  |   | 45,639    |                               |  |      |                         |  |       |  
|Allowance for letter of credit losses                      |  |               | 511       |   |                  |   | 467       |                               |  |      |                         |  |       |  
|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Total tier 2 capital adjustments                           |  |               | 45,265    |   |                  |   | 46,106    |                               |  |      |                         |  |       |  
|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Total regulatory capital                                   |  | $             | 564,488   |   |                  | $ | 555,894   |                               |  |      |                         |  |       |  
|                                                           |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Risk-weighted assets                                       |  | $             | 4,575,681 |   |                  | $ | 4,645,900 |                               |  |      |                         |  |       |  
|Quarterly regulatory average assets                        |  |               | 6,078,980 |   |                  |   | 6,070,270 |                               |  |      |                         |  |       |  
|                                                           |  |               |           |  
|                                                           |  |               |           |   |                  |   |           | MinimumRegulatoryRequirements |  |      | To be WellCapitalized | 
|Ratios:                                                    |  |               |           |   |                  |   |           |                               |  |      |                         |  |       |  
|Tier 1 leverage                                            |  |               | 8.54      | % |                  |   | 8.40      | %                             |  | 4.00 | %                       |  | 5.00  | %
|Tier 1 capital to risk-weighted assets                     |  |               | 11.35     |   |                  |   | 10.97     |                               |  | 4.00 |                         |  | 6.00  |  
|Total regulatory capital to risk-weighted assets           |  |               | 12.34     |   |                  |   | 11.97     |                               |  | 8.00 |                         |  | 10.00 |  

As of March 31, 2006, the Corporation is considered well
capitalized for regulatory purposes.

RESULTS OF OPERATIONS

For Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Financial
Highlights

Provident reported net income of $18.3 million, or $0.55 per diluted share, in the quarter ended March 31, 2006 compared to $15.8 million
and $0.47 per diluted share in first quarter 2005. The financial results of first quarter 2006 reflect the Companys continued improvement in financial fundamentals through the consistent execution of the Banks key strategies and
transition of the balance sheet. The Corporation showed improvement in its key performance measurements over first quarter 2005, as return on assets, return on common equity and net interest margin were 1.17%, 11.40% and 3.72%, respectively, in the
quarter ended March 31, 2006 compared to 0.99%, 10.32%, and 3.46%, respectively, over the prior year quarter. The financial results in the first quarter of 2006 reflect the Corporations continued commitment to produce positive core results by
executing the basic strategies of broadening its presence and customer base in the Greater Washington and Central Virginia regions, growing commercial business in all markets, and enhancing core business results in all markets.

Solid loan growth of $360.8 million in the Corporations core business segments provided continued improvement in the quantity as well as quality of the
Corporations earnings. This improvement was accomplished on a lower level of average assets and debt and a higher level of capital. Improved earnings included an increase of $2.5 million in net interest income, a $1.3 million decrease in
provision for loan losses, and an increase in non-interest income of $5.2 million, offset by an increase of $5.3 million in non-interest expense and a $1.1 increase in income tax expense, resulting in a $2.5 million increase in net income from first
quarter 2005.

The financial results reflect the continued balance sheet transition toward growing loans and deposits in core business segments. An
overview of the strategies is discussed on pages 21 and 22 of Managements Discussion and Analysis of Financial Condition and Results of Operations. Asset quality continues to remain strong, as non-performing assets to loans were 0.76% and
charge-offs to average loans were 0.13% for the quarter.



33



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Net Interest Income

The Corporations principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and borrowings. Interest income is presented on a tax-equivalent basis to
recognize associated tax benefits in order to provide a basis for comparison of yields with taxable earning assets. The following table presents information regarding the average balance of assets and liabilities, as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods presented. Nonaccrual loans are included in average balances, however, accrued interest income has been excluded from these loans. The tables on the following pages also
analyze the reasons for the changes from year-to-year in the principal elements that comprise net interest income. Rate and volume variances presented for each component will not total the variances presented on totals of interest income and
interest expense because of shifts from year-to-year in the relative mix of interest-earning assets and interest-bearing liabilities.



34



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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income

Three Months Ended March 31, 2006 and 2005



|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|--------------------------------------------- |  | --------------------------------- | --------- | -------------- | --------------------------------- | ---------- |  | ---- | -------------- |  | -------------- | --------- | ---------- | - | ------ |  | ---- | -
|                                              |  | Three Months
Ended March 31, 2006 |           |                | Three Months
Ended March 31, 2005 |           
|(dollars in thousands) (tax-equivalent basis) |  | AverageBalance                    |           | Income/Expense |                                   | Yield/Rate |  |      | AverageBalance |  | Income/Expense |           | Yield/Rate |  
|Assets:                                       |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Interest-earning assets:                      |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Originated and acquired residential           |  | $                                 | 439,513   |                | $                                 | 6,883      |  | 6.35 | %              |  | $              | 639,845   |            | $ | 9,485  |  | 6.01 | %
|Home equity                                   |  |                                   | 914,182   |                |                                   | 14,168     |  | 6.29 |                |  |                | 724,721   |            |   | 9,352  |  | 5.23 |  
|Marine                                        |  |                                   | 406,786   |                |                                   | 5,235      |  | 5.22 |                |  |                | 432,891   |            |   | 5,583  |  | 5.23 |  
|Other consumer                                |  |                                   | 30,441    |                |                                   | 701        |  | 9.34 |                |  |                | 38,250    |            |   | 771    |  | 8.17 |  
|Commercial mortgage                           |  |                                   | 475,354   |                |                                   | 7,917      |  | 6.75 |                |  |                | 484,491   |            |   | 7,172  |  | 6.00 |  
|Residential construction                      |  |                                   | 447,792   |                |                                   | 9,009      |  | 8.16 |                |  |                | 259,940   |            |   | 3,886  |  | 6.06 |  
|Commercial construction                       |  |                                   | 309,123   |                |                                   | 5,461      |  | 7.16 |                |  |                | 281,705   |            |   | 3,914  |  | 5.63 |  
|Commercial business                           |  |                                   | 677,346   |                |                                   | 11,786     |  | 7.06 |                |  |                | 678,183   |            |   | 10,529 |  | 6.30 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total loans                                   |  |                                   | 3,700,537 |                |                                   | 61,160     |  | 6.70 |                |  |                | 3,540,026 |            |   | 50,692 |  | 5.81 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Loans held for sale                           |  |                                   | 7,477     |                |                                   | 126        |  | 6.83 |                |  |                | 6,093     |            |   | 88     |  | 5.86 |  
|Short-term investments                        |  |                                   | 8,475     |                |                                   | 79         |  | 3.78 |                |  |                | 8,671     |            |   | 43     |  | 2.01 |  
|Taxable investment securities                 |  |                                   | 1,849,174 |                |                                   | 23,952     |  | 5.25 |                |  |                | 2,156,984 |            |   | 24,321 |  | 4.57 |  
|Tax-advantaged investment securities          |  |                                   | 72,705    |                |                                   | 1,105      |  | 6.16 |                |  |                | 12,995    |            |   | 231    |  | 7.21 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total investment securities                   |  |                                   | 1,921,879 |                |                                   | 25,057     |  | 5.29 |                |  |                | 2,169,979 |            |   | 24,552 |  | 4.59 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total interest-earning assets                 |  |                                   | 5,638,368 |                |                                   | 86,422     |  | 6.22 |                |  |                | 5,724,769 |            |   | 75,375 |  | 5.34 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Less: allowance for loan losses               |  |                                   | 45,396    |                |                                   |            |  |      |                |  |                | 46,051    |            |   |        |  |      |  
|Cash and due from banks                       |  |                                   | 121,465   |                |                                   |            |  |      |                |  |                | 127,760   |            |   |        |  |      |  
|Other assets                                  |  |                                   | 623,221   |                |                                   |            |  |      |                |  |                | 626,493   |            |   |        |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total assets                                  |  | $                                 | 6,337,658 |                |                                   |            |  |      |                |  | $              | 6,432,971 |            |   |        |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Liabilities and Stockholders Equity:         |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Interest-bearing liabilities:                 |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Interest-bearing demand deposits              |  | $                                 | 569,191   |                |                                   | 669        |  | 0.48 |                |  | $              | 526,831   |            |   | 305    |  | 0.23 |  
|Money market deposits                         |  |                                   | 614,094   |                |                                   | 3,635      |  | 2.40 |                |  |                | 533,176   |            |   | 1,910  |  | 1.45 |  
|Savings deposits                              |  |                                   | 692,013   |                |                                   | 552        |  | 0.32 |                |  |                | 749,080   |            |   | 540    |  | 0.29 |  
|Direct time deposits                          |  |                                   | 898,518   |                |                                   | 7,150      |  | 3.23 |                |  |                | 795,593   |            |   | 4,408  |  | 2.25 |  
|Brokered time deposits                        |  |                                   | 448,418   |                |                                   | 5,060      |  | 4.58 |                |  |                | 367,653   |            |   | 4,165  |  | 4.59 |  
|Short-term borrowings                         |  |                                   | 835,299   |                |                                   | 8,548      |  | 4.15 |                |  |                | 837,946   |            |   | 4,473  |  | 2.16 |  
|Long-term debt                                |  |                                   | 805,654   |                |                                   | 9,122      |  | 4.59 |                |  |                | 1,184,524 |            |   | 10,670 |  | 3.65 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total interest-bearing liabilities            |  |                                   | 4,863,187 |                |                                   | 34,736     |  | 2.90 |                |  |                | 4,994,803 |            |   | 26,471 |  | 2.15 |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Noninterest-bearing demand deposits           |  |                                   | 791,615   |                |                                   |            |  |      |                |  |                | 783,673   |            |   |        |  |      |  
|Other liabilities                             |  |                                   | 33,576    |                |                                   |            |  |      |                |  |                | 35,727    |            |   |        |  |      |  
|Stockholders equity                          |  |                                   | 649,280   |                |                                   |            |  |      |                |  |                | 618,768   |            |   |        |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Total liabilities and stockholders equity    |  | $                                 | 6,337,658 |                |                                   |            |  |      |                |  | $              | 6,432,971 |            |   |        |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net interest-earning assets                   |  | $                                 | 775,181   |                |                                   |            |  |      |                |  | $              | 729,966   |            |   |        |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net interest income (tax-equivalent)          |  |                                   |           |                |                                   | 51,686     |  |      |                |  |                |           |            |   | 48,904 |  |      |  
|Less: tax-equivalent adjustment               |  |                                   |           |                |                                   | 438        |  |      |                |  |                |           |            |   | 188    |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net interest income                           |  |                                   |           |                | $                                 | 51,248     |  |      |                |  |                |           |            | $ | 48,716 |  |      |  
|                                              |  |                                   |           |                |                                   |            |  |      |                |  |                |           |            |   |        |  |      |  
|Net yield on interest-earning assets          |  |                                   |           |                |                                   |            |  | 3.72 | %              |  |                |           |            |   |        |  | 3.46 | %



35



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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income (Continued)

Three Months Ended March 31, 2006 and 2005



|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------------------------ | -------- | - | ------- | ----- | -- | -------------- | - | ------ | ------- |  | ----- | -------------------------------------------------- |  | - | ------------- | - |  | - | ------ | -
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       | 2006/2005 Income/Expense Variance Due to Change In | 
|                                              |  | 2006 Quarter to 2005 Quarter Increase/(Decrease) |          |  
|(dollars in thousands) (tax-equivalent basis) |  | AverageBalance                                   |          |   | %Change |       |    | Income/Expense |   |        | %Change |  |       | AverageRate                                        |  |   | AverageVolume |  
|Assets:                                       |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Interest-earning assets:                      |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Originated and acquired residential           |  | $                                                | (200,332 | ) |         | (31.3 | )% |                | $ | (2,602 | )       |  | (27.4 | )%                                                 |  | $ | 510           |   |  | $ | (3,112 | )
|Home equity                                   |  |                                                  | 189,461  |   |         | 26.1  |    |                |   | 4,816  |         |  | 51.5  |                                                    |  |   | 2,093         |   |  |   | 2,723  |  
|Marine                                        |  |                                                  | (26,105  | ) |         | (6.0  | )  |                |   | (348   | )       |  | (6.2  | )                                                  |  |   | (12           | ) |  |   | (336   | )
|Other consumer                                |  |                                                  | (7,809   | ) |         | (20.4 | )  |                |   | (70    | )       |  | (9.1  | )                                                  |  |   | 101           |   |  |   | (171   | )
|Commercial mortgage                           |  |                                                  | (9,137   | ) |         | (1.9  | )  |                |   | 745    |         |  | 10.4  |                                                    |  |   | 883           |   |  |   | (138   | )
|Residential construction                      |  |                                                  | 187,852  |   |         | 72.3  |    |                |   | 5,123  |         |  | 131.8 |                                                    |  |   | 1,658         |   |  |   | 3,465  |  
|Commercial construction                       |  |                                                  | 27,418   |   |         | 9.7   |    |                |   | 1,547  |         |  | 39.5  |                                                    |  |   | 1,139         |   |  |   | 408    |  
|Commercial business                           |  |                                                  | (837     | ) |         | (0.1  | )  |                |   | 1,257  |         |  | 11.9  |                                                    |  |   | 1,270         |   |  |   | (13    | )
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Total loans                                   |  |                                                  | 160,511  |   |         | 4.5   |    |                |   | 10,468 |         |  | 20.7  |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Loans held for sale                           |  |                                                  | 1,384    |   |         | 22.7  |    |                |   | 38     |         |  | 43.2  |                                                    |  |   | 16            |   |  |   | 22     |  
|Short-term investments                        |  |                                                  | (196     | ) |         | (2.3  | )  |                |   | 36     |         |  | 83.7  |                                                    |  |   | 37            |   |  |   | (1     | )
|Taxable investment securities                 |  |                                                  | (307,810 | ) |         | (14.3 | )  |                |   | (369   | )       |  | (1.5  | )                                                  |  |   | 3,355         |   |  |   | (3,724 | )
|Tax-advantaged investment securities          |  |                                                  | 59,710   |   |         | 459.5 |    |                |   | 874    |         |  | 378.4 |                                                    |  |   | (38           | ) |  |   | 912    |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Total investment securities                   |  |                                                  | (248,100 | ) |         | (11.4 | )  |                |   | 505    |         |  | 2.1   |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Total interest-earning assets                 |  |                                                  | (86,401  | ) |         | (1.5  | )  |                |   | 11,047 |         |  | 14.7  |                                                    |  |   | 12,200        |   |  |   | (1,153 | )
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Less: allowance for loan losses               |  |                                                  | (655     | ) |         | (1.4  | )  |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Cash and due from banks                       |  |                                                  | (6,295   | ) |         | (4.9  | )  |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Other assets                                  |  |                                                  | (3,272   | ) |         | (0.5  | )  |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Total assets                                  |  | $                                                | (95,313  | ) |         | (1.5  | )  |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Liabilities and Stockholders Equity:         |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Interest-bearing liabilities:                 |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Interest-bearing demand deposits              |  | $                                                | 42,360   |   |         | 8.0   |    |                |   | 364    |         |  | 119.3 |                                                    |  |   | 338           |   |  |   | 26     |  
|Money market deposits                         |  |                                                  | 80,918   |   |         | 15.2  |    |                |   | 1,725  |         |  | 90.3  |                                                    |  |   | 1,399         |   |  |   | 326    |  
|Savings deposits                              |  |                                                  | (57,067  | ) |         | (7.6  | )  |                |   | 12     |         |  | 2.2   |                                                    |  |   | 55            |   |  |   | (43    | )
|Direct time deposits                          |  |                                                  | 102,925  |   |         | 12.9  |    |                |   | 2,742  |         |  | 62.2  |                                                    |  |   | 2,115         |   |  |   | 627    |  
|Brokered time deposits                        |  |                                                  | 80,765   |   |         | 22.0  |    |                |   | 895    |         |  | 21.5  |                                                    |  |   | (16           | ) |  |   | 911    |  
|Short-term borrowings                         |  |                                                  | (2,647   | ) |         | (0.3  | )  |                |   | 4,075  |         |  | 91.1  |                                                    |  |   | 4,089         |   |  |   | (14    | )
|Long-term debt                                |  |                                                  | (378,870 | ) |         | (32.0 | )  |                |   | (1,548 | )       |  | (14.5 | )                                                  |  |   | 2,351         |   |  |   | (3,899 | )
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Total interest-bearing liabilities            |  |                                                  | (131,616 | ) |         | (2.6  | )  |                |   | 8,265  |         |  | 31.2  |                                                    |  |   | 8,980         |   |  |   | (715   | )
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Noninterest-bearing demand deposits           |  |                                                  | 7,942    |   |         | 1.0   |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Other liabilities                             |  |                                                  | (2,151   | ) |         | (6.0  | )  |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Stockholders equity                          |  |                                                  | 30,512   |   |         | 4.9   |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Total liabilities and stockholders equity    |  | $                                                | (95,313  | ) |         | (1.5  | )  |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Net interest-earning assets                   |  | $                                                | 45,215   |   |         | 6.2   |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Net interest income (tax-equivalent)          |  |                                                  |          |   |         |       |    |                |   | 2,782  |         |  | 5.7   |                                                    |  | $ | 3,220         |   |  | $ | (438   | )
|Less: tax-equivalent adjustment               |  |                                                  |          |   |         |       |    |                |   | 250    |         |  | 133.0 |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  
|Net interest income                           |  |                                                  |          |   |         |       |    |                | $ | 2,532  |         |  | 5.2   |                                                    |  |   |               |   |  |   |        |  
|                                              |  |                                                  |          |   |         |       |    |                |   |        |         |  |       |                                                    |  |   |               |   |  |   |        |  



36



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The net interest margin, on a tax-equivalent basis, increased 26 basis points to 3.72% and was driven by the continuation
of the balance sheet transitioning and by the solid growth in core lending activities. Managements strategy to replace lower net interest-earning assets with higher net interest-earning assets has been very successful. The Corporation has seen
solid loan growth in its home equity and residential and commercial construction loan portfolios since the same period a year ago. Growth in these portfolios was offset by planned declines in non-core investment securities and originated and
acquired residential portfolios. Overall, average earning assets decreased $86.4 million to $5.6 billion which was attributable to a $248.1 million reduction in investment securities partially offset by net loan growth of $160.5 million. The yields
on investments and loans grew 70 and 89 basis points, respectively. The yield increase in the portfolio was mainly the result of the rising interest rate environment over the past year and the Corporations greater emphasis on variable rate
securities. Interest-bearing liabilities decreased $131.6 million while the average rate paid increased 75 basis points. The increase in the average rate paid was primarily due to rising interest rates and the mix of interest-bearing liabilities.
Interest expense benefited from a $7.9 million increase in average noninterest-bearing deposit balances during the quarter.

The 6.22% yield on earning
assets correspondingly increased as a result of rising interest rates and its product mix of loans that more than offset the increased funding costs of 2.90%. Net interest income on a tax-equivalent basis was $51.7 million in first quarter 2006,
compared to $48.9 million in first quarter 2005. Total interest income increased $11.0 million and total interest expense increased $8.3 million resulting in the growth in net interest income of $2.8 million on a tax-equivalent basis.

The Corporation has an ongoing risk management strategy of using derivative transactions to maintain a stable net interest margin. As a result of derivative transactions
accounted for as hedges undertaken to mitigate the affect of interest rate risk on the Corporation, interest income increased by $11 thousand and interest expense increased by $95 thousand, for a total decrease of $84 thousand in net interest income
relating to derivative transactions for the quarter ended March 31, 2006.

Future growth in net interest income will depend upon consumer and
commercial loan demand, growth in deposits and the general level of interest rates.

Provision for Loan Losses

The Corporations continued emphasis on quality underwriting as well as aggressive management of charge-offs and potential problem loans resulted in a provision for
loan losses of $318 thousand in first quarter 2006 compared to $1.6 million in first quarter 2005. Net charge-offs were $1.2 million, or 0.13% of average loans, in first quarter 2006 compared to $2.1 million, or 0.24% of average loans, in first
quarter 2005. Originated and acquired residential loan net charge-offs as a percentage of average originated and acquired residential loans continue to decline during the period, from 0.41% in first quarter 2005 to 0.31% in first quarter 2006.

Non-Interest Income

Non-interest income increased
to $28.2 million, or 22.5%, from $23.0 million in first quarter 2005. Deposit fee income increased $2.7 million, or 14.0%, reflecting increases mainly in consumer deposit fees which were a result of implementing a number of fundamental processing
changes in the second quarter 2005 along with the addition of new branches via de-novo expansion. Net cash settlement on swaps, representing interest income and expense on non-designated interest rate swaps, decreased $1.3 million from first quarter
2005, as a result of rising short-term interest rates. Providents non-designated interest rate swaps are receive fixed/pay LIBOR positions. LIBOR rates have increased approximately 190 basis points from first quarter 2005 to first quarter
2006. Other non-interest income benefited from increases in mortgage banking income and income associated with bank owned life insurance.

Net gains were
$540 thousand in first quarter 2006, compared to net losses of $776 thousand in first quarter 2005. First quarter 2006 included investment/borrowing transactions that were focused on reducing fixed rate mortgage-backed securities to reduce interest
rate risk. These transactions generated net gains of $521 thousand. The first quarter of 2006 also included net gains of $123 thousand primarily from the sale of loans. These gains were partially offset by losses of $122 thousand from the
extinguishment of $100 million of FHLB borrowings. Prior years losses were primarily the result of an $876 thousand loss from the sale of securities that was focused on improving future interest yield performance and net losses of $51 thousand
from the extinguishment of $36 million of FHLB borrowings. Derivative losses on swaps



37



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declined $3.2 million, from a net loss of $3.8 million in the 2005 first quarter to a net loss of $603 thousand in the 2006 first quarter. This decline
resulted mainly from the decline in the amount of interest rate swaps the Corporation had on during the first quarter 2006.

Non-Interest Expense

Non-interest expense increased by $5.3 million, or 11.2%. Salaries and employee benefits had the largest change, rising $4.9 million, or 21.7%. This
increase is mainly attributable to increased labor costs of $1.5 million from increased staffing in the branch network and operations support along with additional staffing required to meet regulatory compliance, as well as an increase of $433
thousand in costs associated with incentive and commission programs due to higher levels of production in both consumer and commercial lending. Salaries and employee benefits expense also included an increase in health care costs of $569 thousand,
employment taxes of $262 thousand, Corporations 401k plan of $186 thousand and stock compensation expense of $120 thousand relating to restricted stock and stock options. In addition, the first quarter 2005 included a reduction of $1.6 million
relating to the termination of the Corporations post-retirement benefits plan. Occupancy and furniture and equipment expense increased $838 thousand reflecting the increased branch network, increased lease equipment depreciation expense
associated with the leasing companys operating leases and increased depreciation on furniture and equipment. Non-interest expense also includes $675 thousand reduction in costs related to regulatory compliance obligations.

Income Taxes

The Corporation accounts for income taxes under the
asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as
well as operating loss and tax credit carryforwards. It is at least reasonably possible that managements judgment about the need for a valuation allowance for deferred taxes could change in the near term. The valuation allowance was
approximately $2.4 million at March 31, 2006 versus $1.8 million at March 31, 2005. The valuation allowance relates to additional state operating losses that are unlikely to be realized in the foreseeable future.

The Corporation recorded income tax expense of $8.1 million based on pre-tax income of $26.4 million, representing an effective tax rate of 30.75% in first quarter 2006.
In first quarter 2005, the Corporation recorded a tax expense of $7.0 million on pre-tax income of $22.7 million, an effective tax rate of 30.65%.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding market risk at
December 31, 2005, see Interest Sensitivity Management and Note 15 to the Consolidated Financial Statements in the Corporations Form 10-K filed with the Securities and Exchange Commission on March 16, 2006. The market
risk of the Corporation has not experienced any material changes as of March 31, 2006 from December 31, 2005. Additionally, refer to Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations for additional quantitative and qualitative discussions about market risk at March 31, 2006.

Item 4. Controls and Procedures

The Corporations management, including the Corporations principal executive
officer and principal financial officer, have evaluated the effectiveness of the Corporations disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Corporations disclosure controls and
procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC)
(1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Corporations management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Corporations internal control over financial reporting occurred during the quarter
ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Corporations internal control over financial reporting.



38



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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation is involved in various legal actions that arise in the ordinary course
of its business. In April 2005, the Corporation became a party to litigation where a former employee alleges a breach by the Corporation of a previously executed employment contract. The former employee claims that, under the terms of the contract,
he is due a so-called imputed interest payment valued at approximately $2 million. Further, under a theory of damages put forth, he asserts that he is owed a multiple of the imputed interest payment. The aggregate damage award sought
against the Corporation in this action is approximately $6 million. The discovery phase of the litigation has been completed, however, no trial date has been set. The Corporation believes it has meritorious defenses against this action and is
vigorously and actively contesting the allegations against it.

All other active lawsuits entail amounts which management believes, in the
aggregate, are immaterial to the financial condition and the results of operations of the Corporation.

Item 1A. Risk Factors

For information regarding risk factors at December 31, 2005, see Item 1A. Risk Factors
in the Corporations Form 10-K filed with the Securities and Exchange Commission on March 16, 2006. The risk factors of the Corporation have not changed materially as of March 31, 2006 from December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During 1998, the Corporation initiated a stock
repurchase program for its outstanding stock. Under this plan the Corporation approved the repurchase of specific additional amounts of shares without any specific expiration date. As the Corporation fulfilled each specified repurchase amount,
additional amounts were approved. On June 17, 2005, the Corporation approved an additional stock repurchase of up to 1.3 million shares from time to time subject to market conditions. Currently, the maximum number of shares remaining to be
purchased under this plan is 1,088,658. All shares have been repurchased pursuant to the publicly announced plan. The repurchase plan will continue until it is completed or terminated by the Board of Directors. No plans expired during the three
months ended March 31, 2006. The Corporation currently has no plans to terminate the stock repurchase plan prior to its expiration.

The following
table provides certain information with regard to shares repurchased by the Corporation in the first quarter of 2006.



|                         |  |                                |  |                            |       |                                           |         |                                                            |          
|------------------------ |  | ------------------------------ |  | -------------------------- | ----- | ----------------------------------------- | ------- | ---------------------------------------------------------- | ---------
|Period                   |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |       | Total Number ofShares PurchasedUnder Plan |         | Maximum Numberof Shares Remainingto be PurchasedUnder Plan
|January 1 - January 31   |  | 47,000                         |  | $                          | 36.06 |                                           | 47,000  |                                                            | 1,190,865
|February 1 - February 28 |  | 52,207                         |  |                            | 35.68 |                                           | 52,207  |                                                            | 1,138,658
|March 1 - March 31       |  | 50,000                         |  |                            | 35.99 |                                           | 50,000  |                                                            | 1,088,658
|                         |  |                                |  |                            |       |                                           |         |                                                            |          
|Total                    |  | 149,207                        |  | $                          | 35.90 |                                           | 149,207 |                                                            | 1,088,658
|                         |  |                                |  |                            |       |                                           |         |                                                            |          

Item 3. Defaults Upon Senior Securities  None

Item 4. Submission of Matters to a Vote of Security Holders - None

Item 5. Other Information  None



39



---

Item 6. Exhibits

The exhibits and financial statements filed as a part of this report are as follows:



| |  |        |  |                                                                                                                      
| |  | ------ |  | ---------------------------------------------------------------------------------------------------------------------
| |  | (2.0)  |  | Agreement and Plan of Reorganization between Provident Bankshares Corporation and Southern FinancialBancorp, Inc.
(1)
| |  |       
| |  | (3.1)  |  | Articles of Incorporation of Provident Bankshares Corporation (2)                                                    
| |  |       
| |  | (3.2)  |  | Articles of Amendment to the Articles of Incorporation of Provident Bankshares Corporation (2)                       
| |  |       
| |  | (3.3)  |  | Fifth Amended and Restated By-Laws of Provident Bankshares Corporation (3)                                           
| |  |       
| |  | (10.1) |  | Form of Change in Control Agreement (4)                                                                              
| |  |       
| |  | (10.2) |  | Form of Provident Bank 2006 Executive Incentive Plan (6)                                                             
| |  |       
| |  | (10.3) |  | Form of Provident Bank 2006 Executive Vice President Incentive Plan (6)                                              
| |  |       
| |  | (11.0) |  | Statement re: Computation of Per Share Earnings (5)                                                                  
| |  |       
| |  | (31.1) |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                    
| |  |       
| |  | (31.2) |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                    
| |  |       
| |  | (32.1) |  | Section 1350 Certification of Chief Executive Officer                                                                
| |  |       
| |  | (32.2) |  | Section 1350 Certification of Chief Financial Officer                                                                



---

|(1) | Incorporated by reference from Registrants Form 8-K (File No. 0-16421) filed with the Commission on November 4, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from Registrants Registration Statement on Form S-8 (File No. 33-58881) filed with the Commission on July 10, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from Registrants Annual Report on Form 10-K (File No. 0-16421) for the year ended December 31, 2004, filed with the Commission on March 16,
2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from the Registrants Quarterly Report on Form 10-Q (File No. 0-16421) for the quarter ended March 31, 2005, filed with the Commission on
May 10, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Included in Note 13 to the Unaudited Condensed Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------

|(6) | Incorporated by reference from the Registrants Form 8-K (File No. 0-16421) filed with the Commission on March 16, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------



40



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|             |  |                              |  |                                                                         
|------------ |  | ---------------------------- |  | ------------------------------------------------------------------------
|             |  | Principal Executive Officer:
|             |  |                             
|May 10, 2006 |  | By                           |  | /s/ GARY N. GEISEL                                                      
|             |  |                              |  | Gary N. Geisel Chairman of the Board and Chief Executive
Officer        
|             | 
|             |  | Principal Financial Officer:
|             |  |                             
|May 10, 2006 |  | By                           |  | /s/ DENNIS A. STARLIPER                                                 
|             |  |                              |  | Dennis A. Starliper Executive Vice President and Chief
Financial Officer



41



---

|        |  |                                                                  
|------- |  | -----------------------------------------------------------------
|EXHIBIT |  | DESCRIPTION                                                      
|31.1    |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|        | 
|31.2    |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|        | 
|32.1    |  | Section 1350 Certification of Chief Executive Officer            
|        | 
|32.2    |  | Section 1350 Certification of Chief Financial Officer            



42