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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 1-7273
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[LOGO OF FIRST MARYLAND BANCORP APPEARS HERE]
(Exact name of registrant as specified in its charter)
MARYLAND 52-0981378
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
FIRST MARYLAND BUILDING 25 SOUTH
CHARLES STREET BALTIMORE, MARYLAND
21201
(Address of principal executive (zip code)
offices)
410-244-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
7.875% Noncumulative Preferred Stock, registered
Series A New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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 at least the past 90 days.
Yes X No
--- ---
State the aggregate market value of voting stock held by non-affiliates of
the registrant. Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
ALL VOTING STOCK (16,985,149 SHARES OF COMMON STOCK, $5.00 PAR VALUE) IS OWNED
BY ALLIED IRISH BANKS, P.L.C., AN IRISH BANKING CORPORATION.
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TABLE OF CONTENTS
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PART I
Item 1-- Business............................................................ 1
Item 2-- Properties.......................................................... 6
Item 3-- Legal Proceedings................................................... 6
Item 4-- Submission of Matters to a Vote of Security Holders................. 6
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5-- Matters............................................................. 7
Item 6-- Selected Consolidated Financial Data................................ 7
Item 7-- Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
Item 8-- Financial Statements and Supplementary Data:
First Maryland Bancorp and Subsidiaries:
Consolidated Statements of Income................................. 40
Consolidated Statements of Condition.............................. 41
Consolidated Statements of Changes in Stockholders' Equity........ 42
Consolidated Statements of Cash Flows............................. 43
Notes to Consolidated Financial Statements......................... 44
Management's Report on Responsibility for Financial Reporting...... 71
Independent Auditors' Report....................................... 72
Item 9-- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 73
PART III
Item 10-- Directors and Executive Officers of the Registrant(1)
Item 11-- Executive Compensation(1)
Item 12-- Security Ownership of Certain Beneficial Owners and Management(1)
Item 13-- Certain Relationships and Related Transactions(1)
PART IV
Item 14-- Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
Financial Statement Schedules...................................... 73
Reports on Form 8-K................................................ 73
Exhibits:
Agreement to Provide Copies of Long-term Debt
Instruments......................................... Exhibit 4
Power of Attorney................................. Exhibit 25
Remaining Exhibits are incorporated by reference
Signatures.................................................................... 74
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(1) To be filed by amendment.
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PART I
ITEM 1. BUSINESS
First Maryland Bancorp (the "Corporation") is a Maryland corporation
incorporated in 1973 and is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). At
December 31, 1993, the Corporation had consolidated total assets of $9.5
billion, total deposits of $6.8 billion, and total stockholders' equity of
$976.8 million. Its principal subsidiaries are The First National Bank of
Maryland ("First National"), First Omni Bank, N.A. ("First Omni") and The York
Bank and Trust Company ("York Bank"). These banks provide comprehensive
corporate, commercial, correspondent and retail banking services and personal
and corporate trust services which include lending, depository and related
financial services to individuals, businesses, governmental units and financial
institutions primarily in Maryland and the adjacent states. The assets of these
banks at December 31, 1993 accounted for approximately 95% of the Corporation's
consolidated total assets and the banks contributed approximately 91%, 95% and
94% to the consolidated net income of the Corporation for each of the three
years ended December 31, 1993, 1992 and 1991, respectively.
First National, the Corporation's largest subsidiary, is a national banking
association chartered under the laws of the United States. It commenced
operations in Baltimore, Maryland on July 10, 1865 and is the successor to a
Maryland banking institution founded in 1806. At December 31, 1993, First
National was the second largest commercial bank headquartered in Maryland in
terms of assets, loans and deposits, with assets of $7.5 billion, net loans of
$3.7 billion, and deposits of $6.1 billion. Its assets at such date comprised
79% of the consolidated assets of the Corporation. Including its main office,
First National operates 177 banking facilities in Maryland, including 146 full
service offices, and loan production offices in Washington, D.C. and York,
Pennsylvania. It conducts international activities at its Baltimore
headquarters, a Cayman Islands branch and a representative office in London,
and maintains correspondant relationships with more than 75 foreign banks. It
offers investment, foreign exchange and securities brokerage services, operates
a brokerage subsidiary and acts as investment adviser to the ARK Funds, a
family of proprietary mutual funds.
York Bank was acquired by the Corporation on December 31, 1991. It is a
Pennsylvania chartered commercial bank organized in 1960 as the product of a
consolidation of two banks chartered in 1810 and 1890. With assets of $1.1
billion, net loans of $683.4 million, deposits of $894.4 million at December
31, 1993 and 21 offices in south central Pennsylvania, it is the largest
banking institution headquartered in York County, Pennsylvania, a market
contiguous to First National's principal market.
First Omni is a national banking subsidiary of the Corporation headquartered
in Millsboro, Delaware and conducts retail bankcard services for the
Corporation. It offers Mastercard (R) and VISA (R) bankcards both directly and
as agent for other banks. At December 31, 1993 it managed bankcard receivables
of $692.7 million (including $165.0 million of securitized bankcard
receivables).
The Corporation operates various other subsidiaries, including First National
Mortgage Corporation, a mortgage banking company which originates, sells and
services residential mortgage loans through its network of 11 offices in
Maryland, Pennsylvania and Virginia; First National Bank of Maryland, D.C.
("First D.C."), a national bank with its office in the District of Columbia,
First Maryland Leasecorp, a commercial finance company specializing in
equipment financing and First Maryland Mortgage Corporation, a commercial real
estate lender.
Allied Irish Banks, p.l.c. ("AIB") is an Irish banking corporation whose
stock is traded on the Dublin, London and New York Stock Exchanges. In December
1983, AIB acquired 43% of the outstanding shares of the Corporation. On March
21, 1989, AIB increased its investment to 100% of the Corporation, thereby
furthering its strategic objective of increasing the geographic diversification
of its investments and operations. AIB is a registered bank holding company
under the Bank Holding Company Act and AIB is the largest banking corporation
organized under the laws of Ireland, based upon total assets at December 31,
1993. Based upon United States generally accepted accounting principles at
December 31, 1993, AIB and its subsidiaries (collectively, "AIB Group") had
total assets of approximately $29.8 billion. AIB Group provides a diverse range
of banking, financial and related services principally in Ireland, the United
States and the United Kingdom.
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COMPETITION
The market for banking and bank-related services is highly competitive. The
Corporation and its subsidiaries compete with other providers of financial
services such as other bank holding companies, commercial and savings banks,
savings and loan associations, credit unions, money market and other mutual
funds, mortgage companies, insurance companies, and a growing list of other
local, regional and national institutions which offer financial services.
Mergers between financial institutions within Maryland and in neighboring
states have added competitive pressure. Competition is expected to intensify as
a consequence of interstate banking laws now in effect or that may be in effect
in the future. The Corporation and its subsidiaries compete by offering quality
products and convenient services at competitive prices. In order to maintain
and enhance its competitive position, the Corporation regularly reviews various
acquisition prospects and periodically engages in discussions regarding such
possible acquisitions.
SUPERVISION AND REGULATION
The information contained in this section summarizes portions of the
applicable laws and regulations relating to the supervision and regulation of
the Corporation and its subsidiaries. These summaries do not purport to be
complete, and they are qualified in their entirety by reference to the
particular statutes and regulations described.
Bank Holding Company Regulation
The Corporation, as a bank holding company registered under the Bank Holding
Company Act, is required to file with the Federal Reserve Board an annual
report and such additional information as the Federal Reserve Board may
require, and is subject to regular examinations by the staff of the Federal
Reserve Bank of Richmond.
The Bank Holding Company Act requires that a bank holding company obtain the
prior approval of the Federal Reserve Board before it may acquire substantially
all the assets of any bank, or ownership or control of any voting shares of any
bank, if after such acquisition, it will own or control, directly or
indirectly, more than 5% of the voting shares of such bank. Under existing
Federal and state laws, the Federal Reserve Board may not approve the
acquisition by the Corporation of any bank located outside the State of
Maryland unless such an acquisition is specifically authorized by the statutory
law of the state in which such bank is located. Most states have authorized
interstate banking acquisitions by bank holding companies on one or more of the
following bases: a regional reciprocal basis, a national reciprocal basis or an
unrestricted basis. Subject to applicable Federal and state approval procedures
and registration requirements, the Corporation may, consistent with the Bank
Holding Company Act, acquire banks in Maryland, Pennsylvania, Virginia, West
Virginia and the District of Columbia and most of the southeastern states.
In addition to restricting banking acquisitions, the Bank Holding Company Act
generally prohibits a bank holding company from engaging in non-banking
activities or acquiring direct or indirect control of voting shares of any
company engaged in such activities. The Bank Holding Company Act limits the
activities which may be engaged in by the Corporation and its subsidiaries to
those of banking and the management of banking organizations, and to non-
banking activities which the Federal Reserve Board may find, by order or
regulation, to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. The approval of the Federal Reserve
Board is required prior to engaging in non-banking activities.
The Banks
First National, First Omni, and First D.C. (the "National Banks" and together
with York Bank, the "Banks"), as national banking associations, are subject to
the supervision of, and regulation and examination by the Comptroller. York
Bank, a Pennsylvania state chartered bank, is supervised, regulated and
examined by the Pennsylvania Department of Banking and the FDIC. Deposits,
reserves, investments, loans, consumer law compliance, issuance of securities,
payment of dividends, mergers and consolidations, electronic funds transfers,
management practices, and other aspects of the Banks' operations are subject to
regulation. The approval of the appropriate bank regulatory authority is
required for the establishment of additional branch offices by any of the
Banks, subject to applicable state law restrictions.
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All of the National Banks are members of the Federal Reserve System, and the
deposits of all the Banks are insured by the FDIC. Some of the aspects of the
lending and deposit business of the Banks which are subject to regulation by
the Federal Reserve Board or the FDIC include disclosure requirements in
connection with personal and mortgage loans, interest on deposits and reserve
requirements. In addition, the Banks are subject to numerous federal, state and
local laws and regulations which set forth specific restrictions and procedural
requirements with respect to the extension of credit, credit practices, the
disclosure of credit terms and discrimination in credit transactions.
The Banks are subject to restrictions under federal law which limit the
transfer of funds by the Banks to the Corporation and its non-banking
subsidiaries, whether in the form of loans, extensions of credit, investments
or asset purchases. Such transfers by any Bank to the Corporation or any of its
non-banking subsidiaries are limited in amount to 10% of such Bank's capital
and surplus and, with respect to the Corporation and all such non-banking
subsidiaries, to an aggregate of 20% of such Bank's capital and surplus.
Furthermore, such loans and extensions of credit are required to be secured in
specified amounts.
As a result of the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act ("FIRREA") on August 9, 1989, a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989 in connection with
(i) the default of a commonly controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
As a consequence of the extensive regulation of the commercial banking
business in the United States, the business of the Banks is particularly
susceptible to changes in Federal and state legislation and regulations which
may increase the cost of doing business.
Dividends
The Corporation is a legal entity separate and distinct from the Banks and
its other subsidiaries, although the principal source of the Corporation's cash
revenues is dividends from the Banks. Various Federal (and in the case of York
Bank, state) laws and regulations limit the amount of dividends the Banks can
pay to the Corporation without regulatory approval.
The approval of the Comptroller is required for any dividend by a national
bank if the total of all dividends declared by such bank in any calendar year
would exceed the total of its net profits, as defined by the Comptroller, for
that year combined with its retained net profits for the preceding two years
less any required transfers to surplus or a fund for the retirement of any
preferred stock. Additionally, national bank subsidiaries may not declare
dividends in excess of net profits on hand, after deducting the amount by which
the principal amount of all loans on which interest is past due for a period of
six months or more exceeds the reserve for credit losses. In addition, the
"prompt corrective action" provisions of FDICIA prohibit the payment of
dividends by a bank if the payment would cause the bank to become
"undercapitalized." Under the first and currently more restrictive of the
foregoing dividend limitations, at January 1, 1994, approximately $29.2 million
of retained earnings of the National Banks was available to pay dividends to
the Corporation.
Pursuant to Pennsylvania law, York Bank may pay dividends only out of
accumulated net earnings and may not pay a dividend if any transfer of net
earnings to surplus is required. In addition, in December 1991, the Board of
Directors of York Bank adopted resolutions at the direction of the Pennsylvania
Department of Banking and the FDIC which prohibit any payment of dividends that
would reduce York Bank's ratio of tier 1 capital to total assets (leverage
ratio) below 6% and provide for the reduction of the ratio of classified assets
less the allowance for credit losses to tier 1 capital. At December 31, 1993,
York Bank's tier 1 capital ratio as a percent of total assets (leverage ratio)
was 9.4%.
The Federal Reserve Board and the Comptroller also have issued guidelines
that require bank holding companies and national banks to evaluate continuously
the level of cash dividends in relation to the
3
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organization's net income, capital needs, asset quality and overall financial
condition. The Comptroller also has authority under the Financial Institutions
Supervisory Act to prohibit national banks from engaging in what, in the
Comptroller's opinion, constitutes an unsafe or unsound practice. The payment
of a dividend by a bank could, depending upon the financial condition of such
bank and other factors, be construed by the Comptroller to be such an unsafe or
unsound practice. The Comptroller has stated that a dividend by a national bank
should bear a direct correlation to the level of the bank's current and
expected earnings stream, the bank's need to maintain an adequate capital base
and the marketplace's perception of the bank and should not be governed by the
financing needs of the bank's parent corporation. As a result, notwithstanding
the level of dividends which could be declared without regulatory approval by
the Banks as set forth in the preceding paragraph, the level of dividends from
the Banks to the Corporation in 1994 is not expected to exceed the earnings of
the Banks. If the ability to pay dividends to the Corporation were to become
restricted, the Corporation would need to rely on alternative means of raising
funds to satisfy its requirements. Such alternative means might include, but
would not be restricted to, non-bank subsidiary dividends, asset sales or other
capital market transactions.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to the Banks and to commit resources to support
the Banks in circumstances where it might not do so absent such policy. In
addition, any capital loans by the Corporation to any of the Banks would also
be subordinate in right of payment to deposits and to certain other
indebtedness of such Bank. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank at a certain level will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Requirements
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. As of December 31, 1993, the minimum ratio of capital to
risk-adjusted assets (including certain off-balance sheet items, such as
standby letters of credit) was 8%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, after subtracting goodwill and certain other adjustments
("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory
convertible debt securities, a limited amount of subordinated debt, other
preferred stock and a limited amount of loan loss reserves ("Tier 2 capital").
The maximum amount of supplementary capital elements that qualifies as Tier 2
capital is limited to 100% of Tier 1 capital net of goodwill. The Federal
Reserve Board also has adopted a minimum leverage ratio (Tier 1 capital to
average total assets) of 3% for bank holding companies that meet certain
specified criteria, including having the highest regulatory rating. The rule
indicates that the minimum leverage ratio should be at least 1.0% to 2.0%
higher for holding companies that do not have the highest rating or that are
undertaking major expansion programs. The Corporation's national and state
chartered banking subsidiaries are subject to similar risk-based and leverage
capital requirements adopted by the Comptroller and the FDIC, respectively. On
December 31, 1993, the Corporation had a Tier 1 capital to risk adjusted assets
ratio of 12.88%, a total (Tier 1 plus Tier 2) capital ratio of 16.62%, and a
leverage ratio of 9.60%.
Failure to meet the capital guidelines could subject a banking institution to
a variety of enforcement remedies available to federal regulatory authorities,
including the termination of deposit insurance by the FDIC, and the appointment
of a conservator or receiver by the appropriate federal regulatory authority.
In September 1993, the federal bank regulatory agencies issued proposed
revisions to their capital adequacy guidelines which provide for consideration
of interest rate risk in the overall determination of a bank's minimum capital
requirement. The intended effect of the proposal would be to ensure that
banking institutions effectively measure and monitor their interest rate risk
and that they maintain adequate capital for the risk. Under the proposal, an
institution's exposure to interest rate risk would be measured using either a
supervisory model, developed by the federal bank regulatory agencies, or the
bank's own internal model. Measured exposure to interest rate risk that exceeds
more than a prescribed supervisory threshold would require additional capital.
The Corporation does not believe that the proposed revisions, if adopted, would
have an adverse effect on the Corporation.
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FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA provides
increased funding for the Bank Insurance Fund ("BIF") of the FDIC and provides
for expanded regulation of depository institutions and their affiliates,
including parent holding companies. The following is a brief summary of certain
provisions of FDICIA.
Pursuant to FDICIA, the Federal Reserve Board, the Comptroller and the FDIC
have adopted regulations, effective December 19, 1992, setting forth a five-
tier scheme for measuring the capital adequacy of the financial institutions
they supervise. Under the regulations (commonly referred to as the "prompt
corrective action" rules), an institution is placed in one of the following
capital categories: (i) well capitalized (an institution that has a total risk-
based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at
least 6% and a leverage ratio of at least 5%); (ii) adequately capitalized (an
institution that has a total risk-based capital ratio of at least 8%, a Tier 1
risk-based capital ratio of at least 4% and a leverage ratio of at least 4%);
(iii) undercapitalized (an institution that has a total risk-based capital
ratio of under 8% or a Tier 1 risk-based ratio under 4% or a leverage ratio
under 4%); (iv) significantly undercapitalized (an institution that has a total
risk-based capital ratio of under 6% or a Tier 1 risk-based capital ratio under
3% or a leverage ratio under 3%); and (v) critically undercapitalized (an
institution that has a ratio of tangible equity to total assets of 2% or less).
The regulations permit the appropriate Federal banking regulator to downgrade
an institution to the next lower category if the regulator determines (i) after
notice and opportunity for hearing or response, that the institution is in an
unsafe or unsound condition or (ii) that the institution has received (and not
corrected) a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent exam. Supervisory
actions by the appropriate Federal banking regulator depend upon an
institution's classification within the five categories. All institutions are
generally prohibited from declaring any dividends, making any other capital
distribution, or paying a management fee to any controlling person, if such
payment would cause the institution to become undercapitalized. Additional
supervisory actions are mandated for an institution falling into one of the
three "undercapitalized" categories, with the severity of supervisory action
increasing at greater levels of capital deficiency. For example, critically
undercapitalized institutions are, among other things, restricted from making
any principal or interest payments on subordinated debt without prior approval
of their appropriate Federal banking regulator, and are generally subject to
the appointment of a conservator or receiver. The regulations apply only to
banks and not to bank holding companies, such as the Corporation; however, the
Federal Reserve Board is authorized to take appropriate action at the holding
company level based on the undercapitalized status of such holding company's
subsidiary banking institutions. In certain instances relating to an
undercapitalized banking institution, the bank holding company is required to
guarantee the performance of the undercapitalized subsidiary and may be liable
for civil money damages for failure to fulfill its commitments on such
guarantee. As of December 31, 1993, each of the Banks met the requirements of a
"well-capitalized" institution.
The FDIC issued a rule, effective June 16, 1992, regarding the ability of
depository institutions to accept brokered deposits. Under the rule, (i) an
"undercapitalized" institution is prohibited from accepting, renewing or
rolling over brokered deposits, (ii) an "adequately capitalized" institution
must obtain a waiver from the FDIC before accepting, renewing or rolling over
brokered deposits and (iii) a "well capitalized" institution may accept, renew
or roll over brokered deposits without restriction. In addition, both
"undercapitalized" and "adequately capitalized" institutions are subject to
restrictions on the rates of interest they may pay on deposits. The definitions
of "well capitalized", "adequately capitalized", and "undercapitalized" conform
to the definitions utilized in the "prompt corrective action" rules described
above.
The FDIC has also issued regulations implementing, effective for the semi-
annual assessment period commencing January 1, 1993, a system of risk-based
FDIC-insurance premiums. Under this system, each depository institution is
assigned to one of nine risk classifications based upon certain capital and
supervisory measures and, depending upon its classification, will be assessed
premiums ranging from 23 basis points to 31 basis points per $100 of domestic
deposits. To date, implementation of this system has not had a material effect
on the Corporation's income.
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Effective August 10, 1993, the Federal Deposit Insurance Act was amended to
provide that, in the liquidation or other resolution by any receiver of a bank
insured by the FDIC, the claims of depositors have priority over the general
claims of other creditors. Hence, in the event of the liquidation or other
resolution of a banking subsidiary of the Corporation, the general claims of
the Corporation as creditor of such banking subsidiary would be subordinate to
the claims of the depositors of such banking subsidiary, even if the claims of
the Corporation were not by their terms so subordinated. In addition, this
statute may, in certain circumstances, increase the costs to the Banks of
obtaining funds through nondeposit liabilities.
MONETARY POLICY
The Corporation's subsidiaries, and thus the Corporation, are affected by
monetary policies of regulatory authorities, including the Federal Reserve
Board, which regulate the national money supply in order to mitigate
recessionary and inflationary pressures. Among the techniques of monetary
policy available to the Federal Reserve Board are engaging in open market
transactions in U.S. Government securities, changing the discount rate on bank
borrowing, and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth and
distribution of bank loans, investments, and deposits. Their use may also
affect interest rates charged on loans or paid on deposits. The effect of
governmental monetary policies on the earnings of the Corporation cannot be
predicted.
EMPLOYEES
As of December 31, 1993, the Corporation employed approximately 4,585 full-
time equivalent employees. Management of the Corporation considers relations
with its employees to be satisfactory.
ITEM 2. PROPERTIES
The following describes the location and general character of the principal
offices and other materially important physical properties of the Corporation
and its subsidiaries.
The Corporation is a major tenant in a building located at 25 South Charles
Street, Baltimore, Maryland, occupying approximately 66% of the 330,000 square
feet of office space available in the building, and will continue to be the
major tenant of the building under a lease expiring in 1997, with a renewal
option to the year 2002. During 1993, the annual rental for the space, less
amounts received on subleases to others, was $5.1 million.
The Corporation is the sole tenant at First Center (formerly the Paca Pratt
Building) located at 110 South Paca Street, Baltimore, Maryland. The building
contains 267,000 square feet of office space and houses certain lending, staff,
and operations functions of the Corporation. The current lease term expires on
December 31, 2011. During 1993, the annual rental for the space was $2.6
million. The Corporation is a limited partner with a 0.2% operating interest
and a 50% residual interest in the limited partnership which owns the building.
The Corporation also owns First Bank Center located at Mitchell Street,
Millsboro, Delaware. The building, acquired in 1981, contains approximately
300,000 square feet of space, sits on approximately 60 acres of land, and
houses certain retail operations functions of First National together with the
branch and bankcard functions of First Omni.
In addition to the above office space, the Corporation owns and leases office
space in various other office buildings located in Maryland, New York,
Pennsylvania, Virginia and the District of Columbia.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. In the opinion
of Management, based on its review with counsel of the development of these
matters to date, disposition of all pending litigation will not materially
affect the consolidated financial position or results of operations of the
Corporation and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation became a wholly owned subsidiary of Allied Irish on March 21,
1989 and, as a result, the Corporation's common stock is no longer listed or
traded on any securities exchanges.
The Corporation's 7.875% Noncumulative Preferred Stock, Series A was issued
on December 13, 1993 and is listed on the New York Stock Exchange. The transfer
agent and registrar for the Preferred Stock is First National. As of March 23,
1994 there were 970 registered holders of the Preferred Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from the
audited financial statements of the Corporation. It should be read in
conjunction with the detailed information and financial statements of the
Corporation included elsewhere herein. Since the acquisition of York Bank
occurred on December 31, 1991, the Consolidated Summary of Operations and the
Consolidated Average Balances for the year ended December 31, 1991 do not
include amounts for York Bank; however, the capital and loan quality ratios
shown below at December 31, 1991 reflect the acquisition of York Bank.
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YEARS ENDED DECEMBER 31,
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1993 1992 1991 1990 1989
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS:
Interest and dividend
income............... $ 617,237 $ 648,009 $ 675,597 $ 744,643 $ 672,634
Interest expense...... 234,038 284,657 372,518 438,604 398,788
---------- ---------- ---------- ---------- ----------
Net interest income... 383,199 363,352 303,079 306,039 273,846
Provision for credit
losses............... 45,291 58,126 69,496 97,191 36,726
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses........ 337,908 305,226 233,583 208,848 237,120
Noninterest income.... 233,445 198,182 180,563 123,637 116,556
Noninterest expenses.. 394,653 361,730 304,039 274,569 245,950
---------- ---------- ---------- ---------- ----------
Income before income
taxes................ 176,700 141,678 110,107 57,916 107,726
Income tax expense.... 62,832 49,205 35,051 19,579 34,353
---------- ---------- ---------- ---------- ----------
Net income (5)........ 113,868 $ 92,473 $ 75,056 $ 38,337 $ 73,373
========== ========== ========== ========== ==========
Dividends declared on
preferred stock...... $ 1,575 $ -- $ -- $ -- $ --
CONSOLIDATED AVERAGE
BALANCES:
Total assets.......... $9,395,700 $9,003,000 $7,796,500 $7,440,800 $6,533,900
Loans, net............ 4,897,200 5,089,700 4,664,900 5,180,300 4,633,500
Deposits.............. 6,651,800 6,764,400 5,788,100 5,228,900 4,594,700
Long-term debt........ 189,500 165,500 196,200 202,400 196,500
Stockholders' equity
(5).................. 763,900 646,696 552,596 512,796 448,000
CONSOLIDATED RATIOS:
Return on average as-
sets (5)............. 1.21% 1.03% 0.96% 0.52% 1.12%
Return on average com-
mon stockholder's eq-
uity (5)............. 14.84 14.30 13.58 7.48 16.38
Return on average to-
tal stockholders' eq-
uity (5)............. 14.91 14.30 13.58 7.48 16.38
Average stockholders'
equity to average
total assets (5)..... 8.13 7.18 7.09 6.89 6.86
Capital to risk-ad-
justed assets(1):
Tier 1.............. 12.88 10.02 8.06 8.10 --
Total............... 16.62 14.05 11.03 12.34 --
Tier 1 leverage ratio
(1).................. 9.60 7.20 7.33 6.70 --
Net interest margin
(2).................. 4.64 4.58 4.39 4.61 4.79
Net charge-offs to av-
erage loans less av-
erage unearned income
(4).................. 0.83 1.15 1.10 1.08 0.51
Allowance for credit
losses to year end
loans, net of un-
earned income (4).... 3.85 3.88 3.63 3.10 2.31
Year end nonperforming
assets to year end
loans, net of un-
earned income plus
other foreclosed as-
sets owned (3)(4).... 2.59 3.83 3.47 2.40 0.72
</TABLE>
7
<PAGE>
- --------
(1) The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") guidelines for risk-based capital requirements applicable to all
bank holding companies require the minimum ratios of Tier 1 and total
capital to risk-adjusted assets to be 4% and 8%, respectively. The Federal
Reserve Board's minimum leverage guidelines require all bank holding
companies to maintain a ratio of Tier 1 capital to total average quarterly
assets of at least 4%. The Tier 1, total capital, and leverage ratios for
prior periods have been restated to reflect the cumulative effect on prior
years of retroactively applying Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
(2) Net interest margin is the ratio of net interest income on a fully tax
equivalent basis to average earning assets.
(3) Nonperforming assets include nonaccrual loans, restructured loans, and
collateral on loans to which the Corporation has taken title.
(4) Ratios for prior periods have been restated to reflect the reclassification
of certain loans previously classified as in-substance foreclosures,
consistent with a policy change adopted by the federal regulatory agencies.
(5) Restated to reflect the cumulative effect on prior years of retroactively
applying Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" to January 1, 1990.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the Corporation's financial condition and results
of operations as of and for the years ended December 31, 1993, 1992 and 1991
should be read in conjunction with the Consolidated Financial Statements of the
Corporation and statistical data presented elsewhere herein.
The Corporation acquired all of the issued and outstanding capital stock of
York Bank on December 31, 1991. Since the acquisition took place on December
31, 1991, the Consolidated Statement of Income and Consolidated Average
Balances of the Corporation for the year ended December 31, 1991 do not reflect
the results of operations or the average balances of York Bank.
EARNINGS SUMMARY
The Corporation's net income for the year ended December 31, 1993 was $113.9
million, compared to $92.5 million for the year ended December 31, 1992, an
increase of $21.4 million (23.1%). The major factors contributing to the
increase in net income were increases in net interest income and noninterest
income combined with a decrease in the provision for credit losses.
The Corporation's net income for the year ended December 31, 1992 was $92.5
million, compared to $75.1 million for the year ended December 31, 1991. An
increase in net interest income and a decrease in the provision for credit
losses were the primary reasons for the $17.4 million (23.2%) increase in net
income when 1992 is compared to 1991.
8
<PAGE>
Analysis of Return on Average Assets
NET INTEREST INCOME
Net interest income, the largest component of the Corporation's earnings, is
the difference between the interest and yield-related fee income generated by
earning assets and the expense associated with funding those assets. As such,
net interest income represents pretax profits from the Corporation's lending,
investing and funding activities. When net interest income is presented on a
fully tax equivalent basis, interest income from tax exempt earning assets is
increased by an amount equivalent to the Federal income taxes that would have
been paid if this income were taxable at the statutory Federal income tax rate
of 35% for 1993 and 34% for 1992 and 1991. An analysis of fully tax equivalent
net interest income, interest rate spreads and net interest margins is shown in
the following two tables.
Net Interest Income, Interest Rate Spread and Net Interest Margin on Average
Earning Assets
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1992 1991
------------------------ ------------------------ ------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans held-for-sale..... $ 166.6 $ 11.9 7.14% $ 165.9 $ 13.7 8.25% $ 109.9 $ 9.6 8.74%
Loans, net of unearned
income................. 5,099.3 413.5 8.11 5,293.9 460.8 8.70 4,832.9 503.5 10.42
Investment securities... 2,868.9 191.2 6.66 2,350.7 170.4 7.24 1,477.9 129.1 8.74
Other earning assets.... 358.3 11.4 3.18 377.4 14.4 3.82 712.5 43.7 6.13
-------- ------ -------- ------ -------- ------
Earning assets.......... $8,493.1 628.0 7.39 $8,187.9 659.3 8.05 $7,133.2 685.9 9.61
======== ====== ======== ------ ======== ------
Interest bearing
liabilities............ $6,699.5 234.0 3.49 $6,648.4 284.6 4.28 $5,880.9 372.5 6.33
Interest rate spread
(1).................... 3.90 3.77 3.28
Interest free sources
utilized to fund
earning assets......... 1,793.6 1,539.5 1,252.3
-------- ------ -------- ------ -------- ------
Total sources of funds.. $8,493.1 234.0 2.75 $8,187.9 284.6 3.47 $7,133.2 372.5 5.22
======== ------ ======== ------ ======== ------
Net interest income..... $394.0 $374.7 $313.4
====== ====== ======
Net interest margin (2). 4.64% 4.58% 4.39%
==== ==== =====
</TABLE>
- -------
(1) Interest rate spread is the difference between the ratio of interest income
to average earning assets and the ratio of interest expense to average
interest bearing liabilities.
(2) Net interest margin is the difference between the ratio of interest income
to average earning assets and the ratio of interest expense to average
earning assets.
Average earning assets were $8.5 billion for the year ended December 31,
1993, an increase of $305.2 million over average earning assets of $8.2 billion
for the year ended December 31, 1992. This increase is primarily attributable
to an increase in investment securities. Investment securities represented
33.8% of total earning assets for the year ended December 31, 1993 compared to
28.7% for the year ended December 31, 1992.
The net interest margin for the year ended December 31, 1993 was 4.64%
compared to 4.58% for the year ended December 31, 1992. Positively impacting
net interest income and the net interest margin in 1993 was a $254.1 million
increase in interest free sources of funds. This increase was primarily due to
a $209.6 million increase in average noninterest bearing demand deposits. The
net interest margin peaked in the first quarter of 1993 at 4.76%, but declined
to 4.64%, 4.62% and 4.54% in the second, third and fourth quarters of 1993,
respectively, reflecting the compression of the yield curve, the sale of higher
yielding assets and reinvestment in lower yielding assets and the offering of
promotional rates on certain retail products in 1993.
Average earning assets were $8.2 billion for the year ended December 31,
1992, an increase of $1.1 billion over average earning assets of $7.1 billion
for the year ended December 31, 1991. This increase was due to the addition of
the average earning assets of York Bank which were $1.2 billion for the year
ended December 31, 1992. Investment securities represented 28.7% of total
earning assets for the year ended December 31, 1992 compared to 20.7% for the
year ended December 31, 1991.
9
<PAGE>
The interest rate spread and net interest margin both improved in 1992 when
compared to 1991. This improvement can be attributed to the interest rate
environment in 1992. Interest rates declined in 1992 when compared to 1991.
These declines benefited the Corporation because the balance sheet was
structured to take advantage of these market changes. The net result was that
interest expense decreased at a faster rate than interest income resulting in
an improvement in the net interest spread and net interest margin in 1992.
Net Interest Income Analysis (Tax Equivalent Basis)
<TABLE>
<CAPTION>
1993 OVER 1992 1992 OVER 1991
-------------------------------- -----------------------------
DUE TO CHANGES
DUE TO CHANGES IN(1) IN(1)
INCREASE --------------------- INCREASE ------------------
(DECREASE) VOLUME RATES (DECREASE) VOLUME RATES
---------- ---------- --------- ---------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME FROM
EARNING ASSETS:
Interest and fees on
loans:
Domestic loans........ (47,590) (18,566) (29,024) (39,159) 45,929 (85,088)
Foreign loans......... 282 1,186 (904) (3,542) (310) (3,232)
Interest and dividends
on investment
securities............. (5,411) 10,142 (15,553) 41,295 66,153 (24,858)
Interest and dividends
on investment securi-
ties available-for-
sale................... 26,185 26,185 -- -- -- --
Interest and fees on
loans held-for-sale.... (1,828) 62 (1,890) 4,056 4,647 (591)
Interest on Federal
funds sold and securi-
ties purchased under
resale agreement....... (1,888) 45 (1,933) (19,777) (10,096) (9,681)
Interest on deposits in
other banks............ (1,086) (910) (176) (8,064) (5,478) (2,586)
Interest on trading ac-
count securities 55 222 (167) (1,368) (1,025) (343)
-------- ---------- --------- ------- ------- ---------
Total................... (31,281) 23,938 (55,219) (26,559) 93,560 (120,119)
-------- ---------- --------- ------- ------- ---------
INTEREST EXPENSE ON
DEPOSITS AND BORROWED
FUNDS:
Interest on deposits in
domestic offices....... (56,064) (13,209) (42,855) (53,961) 41,487 (95,448)
Interest on deposits in
foreign banking office. (369) (219) (150) (8,036) (4,384) (3,652)
Interest on Federal
funds purchased and
other short-term bor-
rowing................. 4,349 10,260 (5,911) (21,674) 7,381 (29,055)
Interest on long-term
debt................... 1,462 2,223 (761) (4,191) (2,997) (1,194)
-------- ---------- --------- ------- ------- ---------
Total................... (50,622) 2,174 (52,796) (87,862) 44,090 (131,952)
-------- ---------- --------- ------- ------- ---------
Net interest income..... 19,341 14,102 5,239 61,303 47,838 13,465
======== ========== ========= ======= ======= =========
</TABLE>
- --------
(1) The rate/volume change is allocated between volume change and rate change
using the ratio each of the components bears to the absolute value of their
total. Variances are computed on a line-by-line basis and are non-additive.
Fully tax equivalent net interest income is affected by changes in the mix
and volume of earning assets and interest bearing liabilities, market interest
rates, the volume of noninterest bearing liabilities available to support
earning assets, and the statutory Federal income tax rate. As the table above
indicates, net interest income on a tax equivalent basis increased $19.3
million (5.2%) when the year ended December 31, 1993 is compared to the year
ended December 31, 1992. An increase in the volume of earning assets, primarily
due to the purchase of investment securities, resulted in the $14.1 million net
interest income volume variance. The $5.2 million positive rate variance is due
to a six basis point favorable variance in the net interest margin when the
year ended December 31, 1993 is compared to the year ended December 31, 1992.
Average interest bearing deposits decreased $322.2 million when 1993 is
compared to 1992 resulting in the negative volume variance in domestic
deposits. The decrease in deposits included a $210.2 million decrease in large
denomination time deposits resulting from a decision to use other sources of
short-term funding. This is evidenced by the positive volume variance under
Federal funds sold and other short-term borrowings.
10
<PAGE>
Net interest income on a tax equivalent basis increased $61.3 million (19.5%)
when the year ended December 31, 1992 is compared to the year ended December
31, 1991. The positive volume variance was caused by the addition of the
earning assets and interest bearing liabilities of York Bank. The net interest
income of York Bank, adjusted for the funding costs associated with the
acquisition, resulted in approximately $34.5 million (11.0%) of the increase in
tax equivalent net interest income in 1992. The remaining $26.8 million (8.5%)
increase in net interest income was the result of a favorable interest rate
environment in 1992. The net interest margin improved in 1992 when compared to
1991 resulting in a positive rate variance when 1992 is compared to 1991.
The following table provides additional information on the Corporation's
average balances, interest yields and rates, and net interest margin for the
years ended December 31, 1993, 1992 and 1991.
11
<PAGE>
Average Balances, Interest Yields and Rates, and Net Interest Margin
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1993 1992 1991
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) RATE(1) BALANCE INTEREST(1) RATE(1) BALANCE INTEREST(1) RATE(1)
-------- ----------- ------- -------- ----------- ------- -------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks. $ 650.5 $ -- -- % $ 601.1 $ -- -- % $ 496.5 $ -- -- %
Money market invest-
ments:
Interest bearing depos-
its in other banks(7). 3.9 0.1 2.6 28.6 1.2 4.3 136.3 9.3 6.8
Trading account securi-
ties.................. 16.8 0.7 4.2 12.4 0.7 5.8 29.1 2.1 7.2
Funds sold............. 337.6 10.6 3.1 336.4 12.5 3.7 547.1 32.3 5.9
Investment securities:
Taxable................ 2,342.2 146.8 6.3 2,135.8 145.6 6.8 1,258.7 103.8 8.3
Tax-exempt(1).......... 151.6 18.1 11.9 212.7 24.7 11.6 213.6 24.9 11.7
Equity investments..... 2.2 0.1 4.5 2.2 0.1 3.9 5.6 0.4 6.0
-------- ------ ---- -------- ------ -------- ------
Total investment secu-
rities................ 2,496.0 165.0 6.6 2,350.7 170.4 7.2 1,477.9 129.1 8.7
Investment securities
available-for-sale..... 372.9 26.2 7.0 -- -- -- -- -- --
Loans held-for-sale..... 166.6 11.9 7.1 165.9 13.7 8.3 109.9 9.6 8.8
Loans (net of unearned
income)(1,2):
Commercial............. 1,628.9 111.1 6.8 1,743.6 126.7 7.3 1,524.1 140.9 9.3
Real estate, construc-
tion ................. 313.1 21.2 6.8 350.7 23.8 6.8 352.4 31.7 9.0
Real estate, mortgage.. 1,318.7 102.6 7.8 1,347.0 113.6 8.4 1,128.3 110.5 9.8
Retail................. 955.7 79.8 8.3 984.6 91.6 9.3 901.8 96.0 10.7
Bankcard............... 488.4 75.2 15.4 496.1 79.8 16.1 561.1 94.9 16.9
Leases receivable...... 200.2 13.4 6.7 199.4 15.4 7.7 188.5 16.1 8.5
Foreign(7)............. 194.3 10.2 5.2 172.5 9.9 5.7 176.7 13.4 7.6
-------- ------ ---- -------- ------ -------- ------
Total loans............ 5,099.3 413.5 8.1 5,293.9 460.8 8.7 4,832.9 503.5 10.4
Allowance for credit
losses................ (202.1) -- -- (204.2) -- -- (168.0) -- --
-------- -------- --------
Total loans, net....... 4,897.2 -- -- 5,089.7 -- -- 4,664.9 -- --
Other assets(3)......... 454.2 -- -- 418.2 -- -- 334.8 -- --
-------- ------ -------- ------ -------- ------
Total assets/interest
income................ $9,395.7 $628.0 $9,003.0 $659.3 $7,796.5 $685.9
======== ====== ======== ====== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits in domestic of-
fices:
Noninterest bearing de-
mand.................. $1,771.0 $ -- --% $1,561.4 $ -- -- % $1,235.8 $ -- -- %
-------- -------- --------
Interest bearing de-
mand.................. 535.5 13.4 2.5 467.2 15.1 3.2 287.3 14.3 5.0
Money market accounts.. 1,433.1 42.3 3.0 1,529.5 53.9 3.5 1,235.8 68.2 5.5
Savings................ 1,017.0 29.9 2.9 840.1 30.5 3.6 570.2 29.6 5.2
Other consumer time.... 1,480.3 64.2 4.3 1,735.4 91.4 5.3 1,480.0 106.4 7.2
Large denomination
time.................. 342.8 18.6 5.4 553.0 33.5 6.1 818.0 60.0 7.3
Deposits in foreign
banking office (7)..... 72.1 2.7 3.7 77.8 3.1 3.9 161.0 11.1 6.9
-------- ------ ---- -------- ------ -------- ------
Total interest bearing
deposits.............. 4,880.8 171.1 3.5 5,203.0 227.5 4.4 4,552.3 289.6 6.4
-------- ------ -------- ------ -------- ------
Total deposits......... 6,651.8 -- -- 6,764.4 -- -- 5,788.1 -- --
Funds purchased......... 895.4 24.1 2.7 735.6 22.9 3.1 651.4 35.0 5.4
Other borrowed funds,
short-term............. 733.8 21.5 2.9 544.3 18.3 3.4 481.0 27.9 5.8
Other liabilities(8).... 161.3 -- -- 146.5 -- -- 127.2 -- --
Long-term debt(4)....... 189.5 17.3 9.1 165.5 15.9 9.6 196.2 20.0 10.2
Stockholders' equity(8). 763.9 -- -- 646.7 -- -- 552.6 -- --
-------- ------ -------- ------ -------- ------
Total liabilities and
stockholders'
equity/interest ex-
pense................. $9,395.7 $234.0 $9,003.0 $284.6 $7,796.5 $372.5
======== ====== ======== ====== ======== ======
Earning assets/interest
income ................ $8,493.1 $628.0 7.4% $8,187.9 $659.3 8.1% $7,133.2 $685.9 9.6%
Interest bearing
liabilities/interest
expense................ 6,699.5 234.0 3.5 6,648.4 284.6 4.3 5,880.9 372.5 6.3
Earning assets/interest
expense................ 8,493.1 234.0 2.8 8,187.9 284.6 3.5 7,133.2 372.5 5.2
Net interest income, tax
equivalent basis....... 394.0 374.7 313.4
Net interest spread(5).. 3.9% 3.8% 3.3%
==== ==== ====
Net interest margin(6).. 4.6% 4.6% 4.4%
==== ==== ====
Percentage attributable
to foreign activities:
Average foreign assets
to average total as-
sets.................. 2.1% 2.2% 4.0%
Average foreign
liabilities to average
total liabilities..... 0.8 1.4 3.0
</TABLE>
- -------
(1) Interest on loans to and obligations of public entities is not subject to
Federal income tax. In order to make pre-tax yields comparable to taxable
loans and investments a tax equivalent adjustment is used based on a 35%
Federal tax rate for 1993 and a 34% Federal tax rate for 1992 and 1991.
(2) Nonaccrual loans are included under the appropriate loan categories as
earning assets.
(3) Includes overdrafts excluded from average loan balances for yield purposes.
(4) Includes current portion of long-term debt in 1992 and 1991.
(5) Net interest spread is the difference between the ratio of interest income
to average earning assets and the ratio of interest expense to average
interest bearing liabilities.
(6) Net interest margin is the difference between the ratio of interest income
to average earning assets and the ratio of interest expense to average
earning assets.
(7) These categories, coupled with the average balances related to $90 million
in short-term borrowings from Allied Irish in 1992 and 1991 and the average
balances related to $60 million in long-term debt in 1991 comprise foreign
activities. The aggregate of the following categories did not exceed 10% of
average total deposits: foreign banks, foreign governments and official
institutions, other foreign demand deposits and other foreign savings and
time deposits.
(8) Restated to reflect the cumulative effect on prior years of retroactively
applying Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" to January 1, 1990.
12
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $45.3 million in 1993, down $12.8 million
(22.1%) from the $58.1 million provision for 1992. The reduction was primarily
attributable to an $8.9 million decline in bankcard provisions due to more
favorable charge-off experience, and a $3.8 million decrease in York Bank's
provisions due to lower loan volumes and an overall improvement in credit
quality. Partially offsetting these declines was a $5.4 million increase in the
Corporation's manufactured housing subsidiary's provisions resulting from a
deterioration in credit quality.
The 1992 provision for credit losses was $58.1 million which was down $11.4
million (16.4%) from the $69.5 million provision for 1991. Excluding York
Bank's provision of $10.7 million, the provision decreased $22.1 million
(31.8%). The decrease was due to lower levels of problem loans and an
improvement in bankcard charge-off experience in 1992.
NONINTEREST INCOME
The following table presents the components of noninterest income for the
years ended December 31, 1993, 1992 and 1991, and a year to year comparison
expressed in terms of percent changes.
Noninterest Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
----------------------------------- ------------------------------
1993 1992 1992* 1991 1993/1992 1992/1991 1992/1991*
-------- -------- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on
deposit accounts....... $ 72,952 $ 68,475 $ 64,816 $ 59,414 6.5% 15.3% 9.1%
Servicing income from
securitized assets,
net.................... 27,548 28,931 28,931 22,735 (4.8) 27.3 27.3
Trust fees.............. 19,212 18,593 14,239 13,148 3.3 41.4 8.3
Securities gains........ 19,976 6,169 6,186 11,534 223.8 (46.5) (46.4)
Other income:
Mortgage banking in-
come................. 25,745 16,643 16,471 10,908 54.7 52.6 51.0
Bankcard charges and
fees................. 18,770 19,485 19,146 22,914 (3.7) (15.0) (16.4)
Customer service fees. 10,150 8,875 8,230 7,748 14.4 14.5 6.2
Investment banking in-
come................. 8,448 8,847 8,845 7,075 (4.5) 25.0 25.0
Other................. 30,644 22,164 19,281 25,087 38.3 (11.7) (23.1)
-------- -------- -------- -------- ----- ----- -----
Total other income...... 93,757 76,014 71,973 73,732 23.3 3.1 (2.4)
-------- -------- -------- -------- ----- ----- -----
Total noninterest
income............. $233,445 $198,182 $186,145 $180,563 17.8% 9.8% 3.1%
======== ======== ======== ======== ===== ===== =====
</TABLE>
* Amounts excluding York Bank.
The Corporation's noninterest income for the year ended December 31, 1993 was
$233.4 million, a $35.3 million (17.8%) increase over noninterest income for
the year ended December 31, 1992. Service charges on deposit accounts increased
$4.5 million (6.5%) due to a higher level of corporate noninterest bearing
demand deposits and pricing increases. Servicing income on securitized assets
decreased $1.4 million (4.8%) due to a decline in securitized manufactured
housing loans. Trust fees increased $619,000 (3.3%) primarily due to increased
transaction volumes and advisory fees on new mutual fund products. Investment
securities gains increased $13.8 million (223.8%). Investment securities sales
are discussed in detail under "Investment Portfolio". Mortgage banking income
increased $9.1 million (54.7%) due to increased origination volumes and
improvements in the market pricing of mortgage and loan servicing sales
relative to 1992. Bankcard charges and fees decreased $715,000 (3.7%) due to
lower loan volumes in 1993. Customer service fees increased $1.3 million
(14.4%) primarily due to a higher level of mortgage placement fees and
commercial loan forbearance fees. Other noninterest income was $30.6 million in
1993 compared to $22.2 million in 1992. The primary reasons for the $8.5
million (38.3%) increase in other noninterest income were a $2.8 million
increase in leasing residual gains, a $2.4 million recovery of interest on
Argentine loans previously charged off, a $2.3 million increase in foreign
exchange and trading income, a $794,000 increase in gains on the sale of fixed
assets, a $583,000 increase in gains on the sale of other real estate, a
$532,000 casualty loss recovery, and a $461,000 gain on the sale of a branch.
These increases in other noninterest income were offset by a $2.9 million gain
on the sale of $130.2 million in residential mortgages in 1992.
13
<PAGE>
The Corporation's noninterest income for the year ended December 31, 1992
excluding York Bank, was $186.1 million, a $5.6 million (3.1%) increase over
the noninterest income for 1991. Service charges on deposit accounts increased
$5.4 million (9.1%) due to an increased volume of corporate deposits and higher
fees on retail savings accounts. Servicing income from securitized assets
increased $6.2 million (27.3%) reflecting a full year of income on asset
securitizations which took place in the first and third quarter of 1991. The
$1.1 million (8.3%) increase in trust fees for 1992 was primarily due to higher
volumes. Investment security gains decreased $5.3 million (46.4%) in 1992
compared to 1991. Investment securities sales are discussed in detail under
"Investment Portfolio". Mortgage banking income increased $5.6 million (51.0%)
due to increased mortgage origination fees resulting from increased loan
volume. Bankcard charges and fees decreased $3.8 million (16.4%) due to
decreased bankcard demand. Investment banking income increased $1.8 million
(25.0%) primarily due to brokerage and mutual fund fees. Other noninterest
income was $19.3 million in 1992 compared to $25.1 million in 1991. The primary
reason for the $5.8 million (23.1%) decrease in other noninterest income was a
$4.2 million decrease in trading account profits.
14
<PAGE>
NONINTEREST EXPENSE
The following table presents the components of noninterest expense for the
years ended December 31, 1993, 1992 and 1991 and a year to year comparison
expressed in terms of percent changes.
Noninterest Expense
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
----------------------------------- ------------------------------
1993 1992 1992* 1991 1993/1992 1992/1991 1992/1991*
-------- -------- -------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and wages...... $165,239 $154,852 $141,911 $131,420 6.7% 17.8% 8.0%
Other personnel costs... 40,415 33,644 30,275 26,481 20.1 27.0 14.3
Net occupancy costs..... 31,195 29,869 27,591 27,323 4.4 9.3 1.0
Equipment costs......... 28,608 26,572 21,634 21,284 7.7 24.8 1.6
Other operating ex-
penses:
Examinations and
assessments.......... 16,006 16,330 13,614 12,515 (2.0) 30.5 8.8
Lending and collec-
tion................. 13,545 11,318 9,923 10,185 19.7 11.1 (2.6)
Postage and
communications....... 13,238 12,379 11,311 11,607 6.9 6.7 (2.6)
Professional fees..... 13,152 8,627 8,040 6,291 52.5 37.1 27.8
Advertising and public
relations............ 11,266 9,665 9,123 8,035 16.6 20.3 13.5
Other real estate ex-
pense................ 6,757 9,349 8,221 6,505 (27.7) 43.7 26.4
Other................. 55,232 49,125 42,759 42,393 12.4 15.9 .9
-------- -------- -------- -------- ----- ---- ----
Total other operating
expenses............... 129,196 116,793 102,991 97,531 10.6 19.7 5.6
-------- -------- -------- -------- ----- ---- ----
Total noninterest
expense............ $394,653 $361,730 $324,402 $304,039 9.1% 19.0% 6.7%
======== ======== ======== ======== ===== ==== ====
</TABLE>
* Amounts excluding York Bank
The Corporation's noninterest expenses for the year ended December 31, 1993
were $394.7 million, a $32.9 million (9.1%) increase over the noninterest
expenses for the year ended December 31, 1992. Salaries and wages increased
$10.4 million (6.7%) primarily due to merit and promotional increases and
increases in commissions. The increase in salaries and wages included $2.1
million in severance expense resulting from the reengineering of back office
support functions and the discontinuation of the Corporation's manufactured
housing financing subsidiary. Other personnel costs increased $6.8 million
(20.1%) primarily due to increased employee retirement plan expenses resulting
from lower returns on retirement plan assets, lower discount rates and reduced
employee turnover. In addition, the implementation of Statement of Financial
Accounting Standards No. 106, "Employers Accounting For Postretirement Benefits
Other Than Pensions", resulted in a $2.6 million increase in other personnel
costs in 1993. Occupancy costs increased $1.3 million (4.4%) due to property
rent expense associated with new facilities and scheduled rent increases on
existing facilities. Equipment costs increased $2.0 million (7.7%) primarily
due to an increase in depreciation expense associated with computer hardware
and software purchases. Lending and collection expenses increased $2.2 million
(19.7%) with the most significant increases in bankcard fraud losses ($692,000)
and outside appraisal expenses ($543,000). Professional fees increased $4.5
million (52.5%) primarily due to consulting fees associated with major system
conversions. Advertising and public relations expense increased $1.6 million
(16.6%) due to increased advertising budgets in 1993. Other real estate
expenses decreased $2.6 million (27.7%) due to a $335,000 decrease in
provisions for losses on other real estate and a $2.3 million decrease in
expenses associated with other real estate properties. Other noninterest
expenses were $55.2 million in 1993 compared to $49.1 million in 1992. The
primary reasons for the $6.1 million (12.4%) increase in other noninterest
expenses were a $3.4 million increase in the amortization of bankcard premiums,
a $2.1 million increase in personal property expense due to an increase in the
capitalization threshold in 1993 and the
15
<PAGE>
upgrading of computer workstations throughout the Corporation this year, an
$803,000 increase in printing and supplies expenses primarily due to printing
costs incurred for a bankcard solicitation program, and a $600,000 accrual for
discontinued operations at the Corporation's manufactured housing subsidiary.
Offsetting these increases in noninterest expense was a $1.8 million write-off
of a subsidiary bank's unamortized goodwill balance in 1992.
The Corporation's noninterest expenses for the year ended December 31, 1992
excluding York Bank, were $324.4 million, a $20.4 million (6.7%) increase over
the noninterest expense for 1991. Salaries and wages rose $10.5 million (8.0%)
primarily due to incentive compensation increases associated with higher
mortgage banking revenues and merit increases. The $3.8 million (14.3%)
increase in other personnel costs was related to increases in payroll taxes,
health care costs, and deferred benefit expenses. Net occupancy costs and
equipment costs increased $268,000 (1.0%) and $350,000 (1.6%) respectively, for
1992. Other operating expenses increased $5.4 million (5.6%) in 1992 when
compared to 1991. This increase was attributable to a $1.7 million (26.4%)
increase in other real estate expense in 1992. The $1.1 million (8.8%) increase
in examinations and assessments expense was principally the result of a full
year of expense related to the deposit insurance rate increase in July of 1991.
The increase in professional fees of $1.7 million (27.8%) was largely
attributable to increased legal fees and consulting work for systems
conversions. The $1.1 million (13.5%) increase in advertising and public
relations was due to normal increases in advertising budgets. All other
expenses increased $366,000 (0.9%) due primarily to a $1.8 million write-off of
a subsidiary bank's unamortized goodwill balance in September of 1992. In
addition, decreased transaction volume reduced the bankcard processing fees by
$1.2 million (15.3%) for 1992.
INCOME TAXES
The Corporation's effective tax rate on earnings in 1993 was 35.6% compared
to 34.7% in 1992 and 31.8% in 1991. The increase in the effective tax rate in
1993 was due to an increase in the statutory tax rate from 34% to 35% and a
decrease in tax-exempt income as a proportion of income before income taxes.
The net effect of these and other lesser factors and the increase in pre-tax
income accounted for the tax provision increase of $13.6 million in 1993.
Additional information related to income taxation is presented in Note 14 of
the Notes to Consolidated Financial Statements of the Corporation.
PROSPECTIVE ACCOUNTING CHANGES
New and prospective accounting changes relating to accounting for
postemployment benefits and the accounting for loan impairment are discussed
below.
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits"--In November 1992, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits." Statement 112 establishes
accounting standards for employers who provide benefits to former or inactive
employees after employment but before retirement. This Statement is effective
for fiscal years beginning after December 15, 1993. The adoption of Statement
112 is not expected to have a material effect on the financial statements of
the Corporation.
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan"--In May 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan." Statement 114 applies to loans that are
considered impaired, where it is probable that the creditor will not collect
all principal and interest payments according to the loan's contractual terms.
Under Statement 114, impaired loans must be measured at the present value of
the loan's expected future cash flows discounted at the loan's effective
interest rate, observable market price of the loan, or fair value of the
collateral. If the measure of an impaired loan is less than the recorded
investment, a valuation allowance must be established through a corresponding
charge to the provision for credit losses. The Statement is effective for
fiscal years beginning after December 15, 1994. The impact that adoption of
Statement 114 will have on the financial statements is currently under review,
but is not expected to have a material effect on the financial statements of
the Corporation.
16
<PAGE>
QUARTERLY SUMMARY
The following table presents a summary of earnings by quarter for the years
ended December 31, 1993 and 1992:
Summary of Quarterly Earnings
<TABLE>
<CAPTION>
1993 QUARTERS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income......... $154,016 $156,053 $153,835 $153,333
Net interest income.................. 94,511 96,825 95,833 96,030
Provision for credit losses.......... 12,565 11,652 13,119 7,955
Income before income taxes........... 44,756 48,426 41,627 41,891
Net income........................... 28,462 31,020 26,659 27,727
<CAPTION>
1992 QUARTERS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income......... $168,077 $163,321 $159,188 $157,423
Net interest income.................. 85,753 89,978 92,989 94,632
Provision for credit losses(1)....... 15,058 12,437 16,345 14,286
Income before income taxes........... 30,583 37,219 37,583 36,293
Net income........................... 19,987 24,341 24,061 24,084
</TABLE>
- --------
(1) Restated to reflect the reclassification of in-substance foreclosures
provisions, consistent with a policy change adopted by the federal
regulatory agencies.
LIQUIDITY
Liquidity is the ability of the Corporation to meet a demand for funds, such
as deposit outflows, net new loan requests and other corporate funding
requirements. Liquidity can be obtained either through the maturity or sale of
assets or the issuance of liabilities at acceptable costs within an acceptable
period of time.
The liquidity of the Corporation is enhanced by asset and liability
management policies. The Funds Management Policy Committee is responsible for
setting general guidelines regarding the Corporation's sources and uses of
funds, asset and liability sensitivity, and interest margins, pursuant to the
Corporation's Funds Management Policy approved by the Board of Directors. The
Committee's goals foster the stable generation of increased net interest income
without sacrificing credit quality, jeopardizing capital or adversely impacting
liquidity. The Corporation maintains a level of asset and liability liquidity
based on an internal assessment of its ability to meet obligations under both
normal and adverse conditions.
The Corporation experienced high levels of liquidity during 1993. The ratio
of liquid assets to total assets at December 31, 1993 was 26.8%. Liquid assets
are defined as vault cash, balances with the Federal Reserve Banks of Richmond
and Philadelphia, unencumbered investment securities (including held-to-
maturity investment securities), assets available for immediate borrowing from
the Federal Reserve Banks of Richmond and Philadelphia and money market assets.
Additionally, the Corporation measures liquidity by calculating the ratio of
its liquid assets to credit sensitive liabilities. Credit sensitive liabilities
are defined as wholesale liabilities where the credit rating of the Corporation
would have a significant impact on the Corporation's ability to roll over
maturing liabilities. At December 31, 1993, the ratio of liquid assets to
credit sensitive liabilities was 212.2%. The Corporation expects the high level
of liquidity to continue during 1994.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is a process that involves the development and
implementation of strategies to maximize net interest margin while minimizing
the earnings risk associated with changing interest rates. The Funds Management
Policy Committee has responsibility for the overall management of
17
<PAGE>
the Corporation's asset and liability position, pursuant to the Corporation's
Funds Management Policy approved by the Board of Directors. The Committee
manages the Corporation's asset and liability position within the constraints
of maintaining capital adequacy, liquidity and safety.
Management of the interest rate risk of the Corporation is effected through
adjustments to the size and duration of the available-for-sale investment
portfolio, the duration of purchased funds and other borrowings, and through
the use of interest rate derivatives such as interest rate swaps, interest rate
caps and floors and financial futures. The use of derivatives augments the
Corporation's management of interest rate risk, liquidity risk, basis risk, and
also assists customers in the management of their interest rate risk.
Interest rate derivatives are used by the Corporation to lengthen or shorten
the duration of its liabilities, extend the duration of its assets, or reduce
the basis risk between rate resets on sources of funds and rate resets on uses
of funds. Interest rate derivatives allow the Corporation to issue liabilities
based on customers' or market requirements and swap these liabilities to
maturities or indices suitable to the needs of the Corporation.
The Corporation's interest rate derivatives portfolio at December 31, 1993 is
shown in the following table.
Derivatives Portfolio
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED
AMOUNT AVERAGE LIFE
-------------- ------------
<S> <C> <C>
Asset/Liability Management..................... $552,000,000 .95 yrs.
Customer/Trading Uses.......................... 488,124,000 1.80 yrs.
-------------- ---------
Total........................................ $1,040,124,000 1.47 yrs.
============== =========
</TABLE>
The market value of the derivatives portfolio as of December 31, 1993 was
$3,234,000.
Measurement of the Corporation's sensitivity to changing interest rates is
accomplished primarily through an earnings simulation model. Throughout 1993,
the Corporation maintained a balance sheet that would benefit from falling
interest rates. This liability sensitive position remained at December 31,
1993.
As previously mentioned, the Corporation uses simulation techniques to
measure the potential impact of interest rate changes on earnings. The
simulation model associates projected changes in balance sheet activity with
underlying repricing frequency to determine the effects of interest rate
movements on the Corporation's net interest margin. The simulation models are
adjusted and executed monthly. At December 31, 1993, the simulation results
under a ^ 200 basis point change in interest rates reflected projected changes
in the Corporation's net interest margin which were considered acceptable and
within the Corporation's guidelines for managing interest rate risk. The
maximum interest rate risk acceptable to the Corporation would place at risk
10% of stockholders' equity given the immediate and sustained ^ 200 basis point
change in interest rates of which no more than one-third of that risk may be
exposed in any one year.
18
<PAGE>
The net interest rate sensitivity of the Corporation at December 31, 1993 is
illustrated in the following table. This information is presented for six
different time periods reflecting the balances of assets and liabilities with
rates that are subject to change, any rate sensitive off-balance sheet
contracts and data regarding funds which are not sensitive to interest rates.
As indicated in the following table, the Corporation is liability sensitive in
the near term and becomes asset sensitive over the long term. The table shows
the sensitivity of the balance sheet at one point in time and is not
necessarily indicative of the position on other dates.
Interest Rate Sensitivity
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------------------------------------------------------------
REPRICING IN
----------------------------------------------------------
0-30 31-90 91-180 181-365 1-5 OVER 5 RATE
DAYS DAYS DAYS DAYS YEARS YEARS INSENSITIVE TOTAL
-------- -------- -------- -------- -------- -------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Money market invest-
ments.................. $ 196.4 $0.2 $ -- $ -- $ -- $ -- $ -- $ 196.6
Loans held-for-sale..... 132.0 128.4 -- 0.1 1.0 3.6 4.1 269.2
Investment securities*.. 73.9 102.1 161.6 254.2 1,674.0 713.9 36.8 3,016.5
Loans, net of unearned
income:
Commercial............. 976.0 234.6 88.3 65.6 169.0 16.8 75.8 1,626.1
Real estate, construc-
tion.................. 160.9 33.5 7.9 26.7 50.3 -- 4.7 284.0
Real estate, mortgage:
Residential........... 12.0 16.3 43.3 144.3 118.9 160.2 2.5 497.5
Commercial............ 395.9 20.7 31.2 49.3 353.6 66.0 40.9 957.6
Retail................. 420.9 57.8 62.5 99.8 224.3 14.7 5.1 885.1
Bankcard............... 84.8 39.0 52.0 84.9 237.6 29.4 -- 527.7
Leases receivable...... 2.6 5.0 6.8 14.0 67.3 116.1 -- 211.8
Foreign................ 30.5 90.0 49.7 28.2 7.0 -- 2.5 207.9
-------- -------- -------- -------- -------- -------- -------- --------
Total loans, net of
unearned income...... 2,083.6 496.9 341.7 512.8 1,228.0 403.2 131.5 5,197.7
Other assets............ -- 76.1 -- -- -- -- 772.4 848.5
-------- -------- -------- -------- -------- -------- -------- --------
Total assets.......... $2,485.9 $ 803.7 $ 503.3 $ 767.1 $2,903.0 $1,120.7 $ 944.8 $9,528.5
======== ======== ======== ======== ======== ======== ======== ========
Cumulative total as-
sets.................. $2,485.9 $3,289.6 $3,792.9 $4,560.0 $7,463.0 $8,583.7 $9,528.5
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Domestic deposits:
Noninterest bearing de-
posits................ $ -- $ 499.1 $ -- $ -- $ -- $ -- $1,415.4 $1,914.5
Interest bearing depos-
its................... 247.6 2,237.3 298.6 313.2 559.7 4.4 1,087.0 4,747.8
Interest bearing
deposits in foreign
banking office......... 74.0 37.0 -- -- 0.9 -- -- 111.9
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits........ 321.6 2,773.4 298.6 313.2 560.6 4.4 2,502.4 6,774.2
Federal funds purchased
and securities sold un-
der repurchase agree-
ments.................. 685.6 2.4 60.3 -- -- -- -- 748.3
Other borrowed funds,
short-term............. 570.3 25.0 50.0 -- -- -- -- 645.3
Long-term debt.......... -- -- -- -- 189.6 -- -- 189.6
Interest rate swaps,
caps, floors and other
derivatives............ (14.0) (10.5) (14.0) 53.0 (14.5) -- -- --
Other liabilities....... -- -- -- -- -- -- 194.3 194.3
Bankcard asset
securitization......... 165.0 -- -- -- (165.0) -- -- --
Stockholders' equity.... -- -- -- -- -- -- 976.8 976.8
-------- -------- -------- -------- -------- -------- -------- --------
Total liabilities and
equity............... $1,728.5 $2,790.3 $ 394.9 $ 366.2 $ 570.7 $ 4.4 $3,673.5 $9,528.5
======== ======== ======== ======== ======== ======== ======== ========
Cumulative total liabil-
ities and equity....... $1,728.5 $4,518.8 $4,913.7 $5,279.9 $5,850.6 $5,855.0 $9,528.5
======== ======== ======== ======== ======== ======== ========
Interest sensitivity
gap.................... $ 757 $ (1,987) $ 108 $ 401 $ 2,332 $ 1,116 $ (2,729)
Cumulative interest sen-
sitivity gap........... 757 (1,229) (1,121) (720) 1,612 2,729 --
Ratio of interest-
sensitive assets to
liabilities............ 1.44x 0.29x 1.27x 2.09x 5.09x 254.7x 0.26x
Ratio of cumulative,
interest-sensitive
assets to liabilities.. 1.44 0.73 0.77 0.86 1.28 1.47 1.00
</TABLE>
* Includes investment securities available-for-sale.
19
<PAGE>
In developing the classifications used for the preceding table, it was
necessary to make certain assumptions and approximations in assigning assets
and liabilities to the different maturity categories. These assumptions have
been developed by Management over a period of time and reflect its best
assessment of current conditions. These assumptions are continuously reviewed
since they are subject to factors brought about by the development of new
products and changes in consumer behavior patterns.
INVESTMENT PORTFOLIO
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115") on December 31, 1993. Pursuant to the requirements of
FAS 115, investment securities may be held in one of three separate portfolios.
When the Corporation has the intent and ability to hold a security to maturity,
it will be held in the held-to-maturity ("HTM") portfolio. Such securities are
recorded at cost, net of amortization of premium and accretion of discount. At
December 31, 1993, the book value of the HTM portfolio was $1.7 billion. If and
when the Corporation intends to hold a security for an indefinite time period,
or intends to use a security to manage the interest rate risk of the balance
sheet, those securities will be held in the available-for-sale ("AFS")
portfolio. The AFS portfolio is marked-to-market on a monthly basis. Changes in
the fair value of the AFS portfolio are excluded from earnings and reported in
a separate component of equity, net of taxes. At December 31, 1993, the book
value of the AFS portfolio was $1.3 billion, approximately $43.6 million above
the amortized cost of the portfolio. Lastly, investment securities purchased
for very short time horizons with the intent to benefit from changes in market
rate or price are held in the trading account. This portfolio is carried at
market value which was $53.3 million on December 31, 1993. Changes in the
market value of the trading account are recorded in the income statement. Prior
to the adoption of FAS 115, investment securities purchased for a shorter time
horizon or to manage the interest rate risk of the balance sheet were
classified as held-for-possible-sale. This portfolio was carried at the lower
of cost or market value.
The AFS and HTM investment portfolios are comprised of four basic types of
securities: U.S. Treasury and U.S. agency securities ("U.S. Treasury and
Agency"), mortgage-backed obligations of Federal agencies ("MBS's"),
collateralized mortgage obligations ("CMO's"), and obligations of states and
political subdivisions ("Municipals"). The book value of other investment
securities accounted for only 1.3% of the book value of the total portfolio at
December 31, 1993.
The securities of no single issuer other than the U.S. Government and related
agencies exceeded 10% of stockholders' equity at December 31, 1993.
Substantially all of the Municipals are rated A or higher by Moody's Investors
Service, Inc. and approximately 58% are rated AAA. Investment securities
classified as other securities are generally unrated.
At December 31, 1993, the book value of the total investment portfolio (both
AFS and HTM in 1993) was $3.0 billion compared with $2.6 billion at December
31, 1992. The portfolio size increased from 29.8% of total assets at December
31, 1992 to 31.7% at December 31, 1993. This increase in the overall investment
portfolio was prompted by continued lackluster lending activity, by weak macro-
economic growth and excellent investment opportunities precipitated by the
shape of the yield curve.
Available-for-Sale Investment Portfolio
The AFS portfolio is managed from a total return perspective. As such,
securities will often be sold out of the AFS portfolio when management deems
that a greater return can be earned in another type of security (including
cash) or that the interest rate risk in the balance sheet is not appropriate
for the prevailing micro- and macro-economic climate.
All of the Corporation's 15-year MBS's, selected CMO's, municipal
obligations, adjustable rate MBS's and floating rate CMO's are held in the AFS
portfolio. The cash flows of the 15-yr MBS's were deemed too uncertain relative
to the current micro- and macro-economic conditions facing the Corporation.
They were,
20
<PAGE>
therefore, placed in the AFS portfolio. Occasionally, CMO's have been purchased
to manage the interest rate risk of the Corporation. Because these CMO's might
be sold, they have been placed in the AFS portfolio. The floating rate CMO's
and adjustable rate MBS's, though interest rate insensitive, have long average
lives that make it less likely that the Corporation will hold them to maturity.
Municipals are held in the AFS portfolio because they might be sold in response
to a change in the tax position of the Corporation.
The following table sets forth the amortized cost and book value of the
available-for-sale securities owned by the Corporation.
Available-for-Sale Investment Portfolio
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
AMORTIZED BOOK
COST VALUE(1)
---------- ----------
<S> <C> <C>
Mortgage-backed obligations of Federal agencies.......... $ 900,549 $ 914,215
Collateralized mortgage obligations(2)................... 135,083 138,926
Obligations of state and political subdivisions.......... 201,062 220,467
Other investment securities.............................. 26,574 33,291
---------- ----------
Total................................................ $1,263,268 $1,306,899
========== ==========
</TABLE>
- --------
(1) The book value of investment securities classified as available-for-sale is
equal to fair value.
(2) Issues of the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Corporation included in the amortized cost and book
values presented totaled $122.8 million and $126.6 million, respectively.
At December 31, 1993, the book value of the Corporation's AFS investment
portfolio was approximately $43.6 million above the amortized cost of the
portfolio. Gross unrealized gains on AFS debt securities of $39.2 million far
exceeded gross unrealized losses of $2.3 million at year end. More
specifically, the net unrealized gain at December 31, 1993 on MBS's was $13.7
million, on CMO's $3.8 million, and on municipals $19.4 million. Gross
unrealized gains on AFS equity securities were $6.7 million at December 31,
1993. On December 31, 1992, the Corporation's entire investment portfolio
(prior to AFS/HTM split) had a market value of $62.6 million above its book
value.
The following table shows the maturity distribution of the available-for-sale
investment portfolio of the Corporation at December 31, 1993 based upon
amortized cost.
Maturity of Available-for-Sale Investment Portfolio
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTAL
----------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage-backed obligations
of Federal agencies(1).... $203,073 $538,591 $158,585 $ 300 $ 900,549
Collateralized mortgage ob-
ligations(1).............. 37,967 78,088 19,028 -- 135,083
Obligations of state and
political subdivisions.... 6,702 55,640 82,943 55,777 201,062
Other investment securi-
ties...................... 26,574 -- -- -- 26,574
-------- -------- -------- ------- ----------
Total.................. $274,316 $672,319 $260,556 $56,077 $1,263,268
======== ======== ======== ======= ==========
</TABLE>
- --------
(1) The maturity distribution is based upon a constant prepayment rate of 20%
for adjustable rate MBS's and fixed and floating rate CMO's.
21
<PAGE>
The following table reflects the approximate weighted average tax equivalent
yield (at an assumed Federal tax rate of 35%) of the available-for-sale
investment portfolio at December 31, 1993 based upon amortized cost.
Available-for-Sale Investment Portfolio (Tax Equivalent Yields)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTAL
----------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Mortgage-backed obligations of
Federal agencies(1)........... 6.52% 6.60% 6.50% 5.38% 6.56%
Collateralized mortgage
obligations(1)................ 5.76 5.78 5.81 -- 5.78
Obligations of state and
political subdivisions........ 9.57 12.72 11.50 10.99 11.63
Other investment securities.... 3.12 -- -- -- 3.12
---- ----- ----- ----- -----
Total.......................... 6.16% 7.01% 8.04% 10.96% 7.21%
==== ===== ===== ===== =====
</TABLE>
- --------
(1) Computation of weighted average tax equivalent yields includes $97.9
million of floating rate MBS's and $36.4 million of floating rate CMO's.
Held-to-Maturity Investment Portfolio
The HTM portfolio is managed from an interest income perspective. Therefore,
security sales and transfers from the HTM portfolio will be very infrequent.
Occasionally, the Corporation will "clean up" the portfolio by selling its
holdings of MBS's and CMO's that have paid down at least 85% of the purchased
principal and are thus too small to efficiently administer. Also, unanticipated
changes in tax law or regulatory capital standards could precipitate a sale.
Securities could also be sold if there were a deterioration in the financial
condition of the issuer of a security, if the security (after it is held one
year) is within three months of maturity, or if the Corporation is involved in
a major business combination or disposition. Securities will not be sold out of
the HTM portfolio in response to changes in loan demand, interest rates, or
prepayment speeds. Likewise, the Corporation will not use securities in the HTM
portfolio to manage the interest rate risk of the Corporation.
Treasuries have very stable cash flows, minimum credit risk, and utilize no
capital on the margin. They are therefore an excellent offset to the duration
of the Corporation's liabilities. MBS balloon securities have relatively stable
cash flows due to the balloon structure, utilize only a small amount of capital
and also have minimum credit risk. In general, CMO's are bought to offset core
liabilities and capital of the Corporation. These CMO's are held in the HTM
portfolio. Like MBS balloons, the HTM CMO's have only slightly less stable cash
flows than Treasuries with low capital requirements and minimum credit risk.
Coupled with a high interest spread over Treasuries, these short-duration,
stable CMO's were best suited for the HTM portfolio.
22
<PAGE>
The following table sets forth the book value of the held-to-maturity
securities owned by the Corporation.
Held-To-Maturity Investment Portfolio
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies. $ 970,554 $ 766,888 $ 536,746
Mortgage-backed obligations of Federal
agencies.................................. 211,920 1,039,917 418,227
Collateralized mortgage obligations(1)..... 520,306 590,207 362,563
Obligations of state and political subdivi-
sions..................................... -- 207,139 221,060
Other investment securities................ 6,868 30,217 31,869
---------- ---------- ----------
Total.................................. $1,709,648 $2,634,368 $1,570,465
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1993, 1992 and 1991, $450.4 million, $538.6 million and
$250.9 million of CMO's, respectively, were issues of the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Corporation.
The following table shows the maturity distribution of the held-to-maturity
securities owned by the Corporation:
Maturity of Held-to-Maturity Investment Portfolio
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------------------------------------
MATURING
------------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH 10 AFTER
OR LESS 5 YEARS YEARS 10 YEARS TOTAL
----------- ---------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies..... $174,253 $ 795,695 $ 606 $-- $ 970,554
Mortgage-backed
obligations of Federal
agencies(1)............. 89,674 104,405 17,841 -- 211,920
Collateralized mortgage
obligations(1).......... 145,799 301,439 73,068 -- 520,306
Other investment securi-
ties.................... 6,863 5 -- -- 6,868
-------- ---------- ------- ---- ----------
Total................ $416,589 $1,201,544 $91,515 $-- $1,709,648
======== ========== ======= ==== ==========
</TABLE>
- --------
(1) The maturity distribution is based upon constant prepayment rates of 48%
for 7 year MBS's, 20% for 15 year MBS's and 20% for CMO's.
23
<PAGE>
The following table reflects the approximate weighted average tax-equivalent
yield (at an assumed Federal tax rate of 35%) on held-to-maturity investment
securities at December 31,1993.
Held-to-Maturity Investment Portfolio
(Tax Equivalent Yields)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------
MATURING
-------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH 10
OR LESS 5 YEARS YEARS TOTAL
----------- -------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agen-
cies.................................... 6.17% 5.74% 7.17% 5.81%
Mortgage-backed obligations of Federal
agencies................................ 6.83 6.67% 5.81% 6.67
Collateralized mortgage obligations...... 6.36 6.36% 6.37% 6.36
Other investment securities.............. 5.71 5.50% -- 5.71
---- ---- ---- ----
Total................................ 6.37% 5.98% 6.27% 6.09%
==== ==== ==== ====
</TABLE>
At December 31, 1993, the market value of the Corporation's HTM investment
portfolio was approximately $21.8 million above the amortized cost (book value)
of the portfolio. Gross unrealized gains on HTM debt securities of $24.6
million far exceeded gross unrealized losses of $2.8 million at year end. More
specifically, the net unrealized gain at December 31, 1993 on Treasuries was
$18.5 million, on MBS's $2.8 million, and on CMO's $477,000.
Investment Securities Sales
Proceeds from the sale of investment securities during 1993 amounted to
$711.1 million resulting in pretax gains of $19.9 million. This compares to
realized gains of $6.2 million on $470.0 million of sales in 1992 and gains of
$15.4 million on $526.8 million of security sales in 1991.
In March and April of 1993, high coupon MBS's totaling approximately $280.8
million were sold from the held-for-possible-sale portfolio generating gains of
$14.9 million. In May and June of 1993, an additional $408.7 million in
Treasury notes were sold from the held-for-possible-sale portfolio generating
gains of $4.2 million. High coupon MBS's were sold to manage prepayment risk
and Treasuries were sold to manage the duration risk of the portfolio.
The proceeds from the sale of these securities were used to purchase lower
coupon mortgage-backed securities, shorter duration MBS balloons, shorter
duration Treasuries, adjustable-rate mortgage pass-thrus, and short duration,
stable, CMO's with more certain cash flows.
There were no material sales of securities held in the HTM portfolio in 1993.
CREDIT RISK MANAGEMENT
Credit approval policies for the Corporation are designed to provide an
effective and timely response to loan requests and to ensure the maintenance of
a sound loan portfolio. The Corporation manages credit risk and the credit
approval process by adhering to written policies which generally specify
underwriting standards by industry and in some cases limit credit exposure by
industry, country or product type. All such policies are reviewed and approved
annually by the Board of Directors.
The Banks each establish individual loan authority levels based on the
specific job responsibilities of their officers. The Banks also have loan
committees which approve credit exposure above individual loan authorities.
Larger credit exposures are reviewed by executive committees appointed by the
Boards of Directors of the Banks.
The Loan Review function, which reports independently to the Board of
Directors' Audit Committee, annually reviews all lending units in the
Corporation. It also maintains a continuous review of the loan portfolio to
ensure the accuracy of risk ratings, to verify the identification of problem
credits, to provide executive management with an independent and objective
evaluation of the quality of the portfolio, and to assist the Board of
Directors in evaluating the adequacy of the allowance for credit losses. The
internal review function is further enhanced through examinations by
independent auditors and regulators.
24
<PAGE>
LOAN PORTFOLIO
The following table sets forth the composition of the loan portfolio by type
of loan and the percentage of loans by category.
Composition of the Loan Portfolio
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $1,626,080 31.3% $1,748,910 33.7% $1,848,044 32.7% $1,626,484 32.5% $1,581,268 31.1%
Real estate, construc-
tion................... 284,008 5.5 327,134 6.3 375,776 6.6 365,139 7.3 371,746 7.3
Real estate, mortgage:
Residential............ 497,543 9.6 382,171 7.4 549,334 9.7 522,529 10.4 597,407 11.8
Commercial............. 957,568 18.4 912,085 17.6 901,866 15.9 657,662 13.2 585,236 11.5
Retail.................. 885,117 17.0 940,728 18.1 1,028,742 18.2 930,220 18.6 989,750 19.5
Bankcard................ 527,657 10.1 494,851 9.5 566,712 10.0 507,591 10.2 588,616 11.6
Leases receivable....... 211,821 4.1 206,346 4.0 212,792 3.8 199,447 4.0 174,304 3.4
Foreign:
Commercial and indus-
trial................. 186,492 3.6 151,036 2.9 128,873 2.3 103,336 2.1 100,372 1.9
Banks and financial
institutions.......... 1,780 -- 30 -- -- -- 8,904 .2 8,362 .2
Governments and
official institutions. 19,655 0.4 24,321 .5 44,485 .8 77,346 1.5 85,374 1.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of
unearned income........ $5,197,721 100.0% $5,187,612 100.0% $5,656,624 100.0% $4,998,658 100.0% $5,082,435 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
The following table displays the contractual maturities and interest rate
sensitivities of the loans of the Corporation at December 31, 1993. The
Corporation's experience indicates that certain of the loans will be renewed,
rescheduled, or repaid prior to scheduled maturity. Accordingly, the table
should not be regarded as a forecast of future cash collections.
Contractual Loan Maturities
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------------------------------
MATURING
--------------------------------------------------
AFTER ONE YEAR
THROUGH 5 YEARS AFTER 5 YEARS
--------------------- -----------------
IN ONE FIXED VARIABLE FIXED VARIABLE
YEAR INTEREST INTEREST INTEREST INTEREST
OR LESS(1) RATES RATES(2) RATES RATES(2) TOTAL
---------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 814,317 $ 140,685 $ 431,734 $ 20,373 $218,971 $1,626,080
Real estate, construc-
tion................... 180,690 46,370 41,105 4,096 11,747 284,008
Real estate, mortgage:
Residential........... 106,169 90,935 152,346 51,916 96,177 497,543
Commercial............ 249,968 325,589 214,209 64,966 102,836 957,568
Retail.................. 287,304 226,600 161,713 15,460 194,040 885,117
Bankcard................ 250,746 140,487 105,981 17,351 13,092 527,657
Leases receivable....... 28,385 68,353 -- 115,083 -- 211,821
Foreign................. 90,111 4,968 96,490 -- 16,358 207,927
---------- ---------- ---------- -------- -------- ----------
Total loans............. $2,007,690 $1,043,987 $1,203,578 $289,245 $653,221 $5,197,721
========== ========== ========== ======== ======== ==========
</TABLE>
- --------
(1) Includes demand loans, loans having no stated schedule of repayments or
maturity, and overdrafts.
(2) The variable interest rate loans generally fluctuate according to a formula
based on prime rate.
25
<PAGE>
COMMERCIAL LOANS
Commercial loans represent 31.3% of the Corporation's total loans and leases
at December 31, 1993 and include short and medium term loans, revolving credit
arrangements, lines of credit, asset based lending and equipment lending. The
commercial loan portfolio is segregated by market sector as well as geographic
regions. The primary segmentation divides the commercial loan portfolio into
three market sectors, Multinational, Middle Market and Small Business.
The organizational components of the Multinational Group (46.7% of total
outstandings) are, the National Division calling on large Fortune 500 companies
often with a significant presence in the Maryland marketplace, the Maryland
Division which services similar sized companies headquartered in Maryland and
its contiguous states, and the Financial Institutions Division which calls on
financial intermediaries within Maryland and throughout the country. In
addition, the Multinational Group includes several specialized lending
functions, the most significant of which are Healthcare, Communications,
Transportation, Commercial Leasing and Asset Based lending.
The Corporation's Middle Market customers (approximately 40.3% of
outstandings) are generally those in the Maryland marketplace with sales
volumes of $5 to $100 million, while the Corporation's Small Business customers
(13.0% of outstandings) have sales volumes of less than $5 million. Both Middle
Market and Small Business lending activities are directed through the
Corporation's regional structure and utilize the Corporation's market presence
and branch organization to develop market opportunities. Middle Market and
Small Business lending deals with the full range of business organizations and
employs other specialized lending groups within the Corporation as needed.
The majority of the Corporation's commercial lending is in the Maryland
market, with 65.1% of the Corporation's commercial loans made in the Maryland
marketplace.
The Corporation's commercial loan portfolio decreased $122.8 million or 7.0%
from December 31,1992 to December 31,1993. General economic uncertainty plagued
many of the Corporation's market sectors, and business owners remained
cautious. As economic stagnation continued in 1993, the Corporation saw very
little capital expansion planned by customers.
In addition to monitoring exposure based on market segment, the Corporation
monitors exposure based on industry classifications and establishes exposure
limits that are reviewed by the Board of Directors.
Loan Portfolio Distribution by Industry Classification
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------
OUTSTANDING UNFUNDED TOTAL
BALANCE COMMITMENT EXPOSURE
----------- ---------- --------
<S> <C> <C> <C>
Communications Industries:
Cable......................................... $125,207 $39,739 $164,946
Wireless...................................... 89,738 17,986 107,724
Publishing & Newspapers....................... 52,954 49,177 102,131
Broadcast..................................... 17,623 1,963 19,586
-------- -------- --------
$285,522 $108,865 $394,387
-------- -------- --------
Healthcare(1)................................... $220,492 $ 50,900 $271,392
Transportation(2)............................... $273,685 $ 42,949 $316,634
</TABLE>
- --------
(1) Includes exposure to hospitals and nursing care facilities, both commercial
loans and real estate loans
(2) Includes loans and leases for vessel, commercial aircraft and railroad
equipment financing
The loans in the Communications portfolio are to companies and systems
located throughout the United States. The Communications Industry group is
broken down into four distinctly independent industries. Cable
26
<PAGE>
television represents 43.9% of total outstanding with Wireless representing
31.4%, Publishing and Newspapers, 18.5% and Broadcasting, 6.2%. With the
exception of Wireless, these are mature industries with most loans representing
the purchase and/or expansion of existing companies and systems. Wireless is a
rapidly emerging industry with many of the loans representing the establishment
of relatively new systems. Most of the loans to the Communications Industries
are multibank facilities.
COMMERCIAL REAL ESTATE
The Corporation's commercial real estate outstandings were $1.2 billion at
December 31, 1993, representing 23.9% of total loans, an increase of $2.4
million from December 31, 1992. While the absolute levels of the portfolio
outstandings did not change appreciably, the product mix continued to shift to
a greater concentration in commercial mortgages. This change is attributed to
completed construction properties converting to permanent commercial mortgages
as well as the scarcity of viable new construction business.
The Corporation's commercial real estate loan portfolio represents loans
secured primarily by real property, other than loans secured by mortgages on 1-
4 family residential properties. Commercial real estate would include the loan
categories presented in the following table.
Commercial Real Estate Outstandings
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate, construction................................ $ 284,008 $ 327,134
Real estate, commercial mortgages........................ 957,568 912,085
---------- ----------
Total.................................................. $1,241,576 $1,239,219
========== ==========
</TABLE>
The commercial real estate portfolio is well diversified by project type and
geographic location as illustrated in the following two tables. At December 31,
1993, office buildings comprised the largest portion of the commercial real
estate portfolio representing 26.9% of total loans outstanding and other real
estate owned. Industrial warehouse and other commercial properties at 16.2% and
retail properties at 14.3% also comprise a significant portion of the
commercial real estate portfolio.
27
<PAGE>
Loans Secured by Real Estate and Other Assets Owned by Property Type
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
TOTAL LOANS
------------------------- OTHER
REAL ESTATE, REAL ESTATE, NONPERFORMING REAL ESTATE
CONSTRUCTION MORTGAGE LOANS OWNED
------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Office buildings........... $ 99,297 $234,715 $ 3,382 $ 5,071
Industrial warehouse and
other commercial proper-
ties...................... 35,661 169,174 4,950 --
Retail..................... 57,885 122,057 9,935 --
Hospitals/nursing home med-
ical centers.............. 992 99,834 7,343 --
Hotels/motels.............. -- 70,570 10,819 5,000
Commercial land............ 55,901 22 1,600 6,476
Churches, restaurants and
other special purpose
properties................ 7,461 69,857 3,097 117
Apartments................. 1,109 46,600 585 --
Mixed use.................. 99 37,901 437 --
Residential land........... 14,527 216 3,887 2,316
Other land-farm recre-
ational facilities........ -- 10,621 1,522 --
Residential properties held
for resale................ -- 11,055 -- --
Miscellaneous.............. 11,076 84,946 773 41
-------- -------- ------- -------
Total.................. $284,008 $957,568 $48,330 $19,021
======== ======== ======= =======
</TABLE>
As the following table indicates, 64.8% of the aggregate commercial real
estate portfolio at December 31, 1993, was secured by properties in Maryland,
15.3% in Pennsylvania, and 6.5% in Virginia. Consistent with the Corporation's
strategy to lend on real estate in its primary markets, only 7.7% of the
Corporation's commercial real estate was secured by properties outside the Mid-
Atlantic marketplace.
Loans Secured by Real Estate and Other Assets Owned by Geographic Region
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
TOTAL LOANS
------------------------- OTHER
REAL ESTATE, REAL ESTATE, NONPERFORMING REAL ESTATE
CONSTRUCTION MORTGAGE LOANS OWNED
------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Maryland.................... $212,954 $595,421 $26,549 $ 8,266
Pennsylvania................ 13,431 175,987 13,044 3,157
Virginia.................... 33,323 45,987 5,821 2,594
Washington, D.C. ........... -- 34,650 2,899 5,004
Florida..................... 12,159 21,241 -- --
New Jersey.................. 11,931 7,352 -- --
Delaware.................... -- 13,381 17 --
All other................... 210 63,549 -- --
-------- -------- ------- -------
Total................... $284,008 $957,568 $48,330 $19,021
======== ======== ======= =======
</TABLE>
The real estate downturn in the Mid-Atlantic marketplace put severe pressure
on the portfolio during the past 3 1/2 years. It would appear, however, that
market conditions began to improve in the second half of 1993 and that gradual
improvement can be expected going forward in particular property types and sub-
markets.
The Corporation's commercial real estate portfolio quality has exhibited
marked improvement throughout 1993. The commencement of stabilization in the
marketplace along with the workout efforts and restructuring of 1991-1992
helped to produce 1993's positive results. At the same time, new high quality
loans were recorded. Non-accrual loans declined 38.1% to $48.3 million and
owned real estate was reduced by 14.7% to $19.0 million. See Nonperforming
Assets section for further discussion.
28
<PAGE>
REAL ESTATE, CONSTRUCTION
The Corporation's construction lending portfolio decreased $43.1 million in
1993, reflecting the continued unfavorable markets for new development and
portfolio adjustments to move completed projects into permanent financing.
Lenders and developers continue their retrenchment as the unfavorable economic
climate has remained. There is minimal real estate construction growth
forecasted for the near term, although the Corporation continues to solicit the
few high quality loan opportunities available in the marketplace to offset the
expected continuing run-off.
Real estate construction outstandings include land acquisition and
development loans, and building construction loans. The most recent assessment
of real estate construction outstandings indicated that 90% of construction
loan projects were at least "shell complete" (the building is essentially
complete except for tenant specific interior improvements on unleased space)
and approximately 92% of land loan projects were fully developed. As a result,
at December 31, 1993, there was minimal building and land construction risk
associated with the Corporation's real estate construction outstandings.
Leasing risk within the portfolio is also modest as buildings are on average
91% leased or preleased.
REAL ESTATE MORTGAGE, COMMERCIAL
The Corporation's commercial mortgage portfolio increased $45.5 million in
1993, reflecting the transfer of completed projects into permanent financing
and the ability of the Corporation to record selective new loans. Approximately
$394.6 million (41.2%) of the outstandings are owner-occupied, for which
repayment is primarily dependent on the operation of the owners' businesses.
The Corporation intends to continue to actively solicit this business to
support its emphasis as a relationship lender for regional companies. The
remaining $563.0 million are investment property mortgages which are generally
dependent on the operation, sale, or refinancing of the collateral. With new
construction activity diminished, the Corporation will continue to selectively
provide acquisition and refinancing loans.
REAL ESTATE MORTGAGE, RESIDENTIAL
The Corporation originates residential mortgage loans primarily for sale in
the secondary market. New residential mortgage loan originations are primarily
financed through the Corporation's mortgage banking subsidiary, First National
Mortgage Corporation, and are limited to Maryland, Washington, D.C., Virginia,
Delaware, Pennsylvania and West Virginia. This market has generally shown
growth in per capita income, a relatively low unemployment rate, a diversified
and stable economic base and, despite recent local economic weakness, charge-
offs have been negligible. Substantially all loans originated by the mortgage
banking subsidiary are classified as loans held-for-sale on the consolidated
statements of condition of the Corporation. New originations retained for the
Corporation's residential real estate mortgage portfolio consist primarily of
low-income housing, non-convertible Jumbo ARMS and residential construction
loans. Residential mortgages retained in the portfolio at December 31, 1993
increased $115.4 million from December 31, 1992 primarily as a result of the
success of the non-convertible Jumbo ARM product.
RETAIL
The Corporation provides a wide range of retail loan products including
installment and other personal loans, home improvement loans, home equity
loans, automobile and other personal property consumer financings. The recent
economic recession created higher unemployment, which combined with higher
levels of personal debt, put consumers under increasing pressure to meet their
obligations. These pressures have resulted in rising rates of personal
bankruptcies and consumer loan defaults. Despite these negative trends, the
Corporation's delinquency and net charge-off experience with retail loan
products has been generally better than industry averages due to stricter
underwriting standards and collection procedures.
When compared to December 31, 1992, retail loans at December 31, 1993
decreased $55.6 million. This decrease is largely due to the sale of $57.3
million in manufactured housing receivables in the fourth quarter of 1993 and
the Corporation's decision to phase out indirect automobile and boat lending.
Retail loan demand is currently weak and is not expected to improve in the
short term.
29
<PAGE>
BANKCARD
The Corporation through its subsidiary, First Omni, offers both VISA(R) and
MasterCard(R). Outstanding bankcard receivables increased to $527.7 million at
December 31, 1993 from $494.9 million at December 31, 1992 largely due to
direct solicitation efforts in 1993. First Omni will continue to increase the
portfolio by increasing the level of direct solicitation efforts and by
pursuing the purchase of small portfolios as opportunities arise. All
delinquent bankcard accounts are charged off when they reach 180 days past due.
Also, all accounts held by account holders who become deceased or file
bankruptcy are charged off the month that advice of death or bankruptcy is
received.
LEASES RECEIVABLE
Leases receivable include retail automobile, small equipment and general
equipment leasing portfolios. Leases receivable increased to $211.8 million at
December 31, 1993 from $206.3 million at December 31, 1992. The general
equipment leasing portfolio represents approximately 84.3% of total lease
receivables with an emphasis on transportation equipment. The primary market
for direct sales calling efforts on customers and targeted prospects is the
Mid-Atlantic region. Other regions comprise a secondary market for direct sales
calling but with a greater reliance on outside referral sources. Competition
includes banks, as well as non-bank, independent and captive finance and
leasing companies and income funds.
FOREIGN
Loans to foreign banks increased $1.8 million during 1993. This increase was
due to refinancing of Letters of Credit in the Latin American portfolio.
Foreign commercial and industrial loans were $186.5 million at December 31,
1993, an increase of $35.5 million when compared to December 31, 1992.
Commercial and industrial loan exposure consists of maritime industry exposure
(76%), non-maritime Latin American (21%) and European (3%) exposure. The
maritime portfolio is widely diversified, both geographically and by asset type
and is secured by first mortgages/liens. All of the $19.7 million in government
and official institution exposure was in Latin America. Government and official
institutions are central, state, provincial and local governments in foreign
countries and their ministries, departments and agencies.
The economies of virtually all Latin American countries where the Corporation
has exposure continued to evidence a steady trend of improvement in 1993. Lower
inflation, improving trade balances, and healthy reserve positions to fund
trade deficits characterized most of those economies where the Corporation has
exposure. Latin American outstandings continue to represent a higher level of
risk than other foreign obligations and are identified as the only foreign
obligations where balance of payment uncertainties and/or liquidity pressures
might adversely impact the timely repayment of debt.
Most of the Corporation's Latin American exposure lies in Mexico where
economic indicators demonstrated continued improvement. The bulk of the Mexican
exposure is tied to trade facilities extended to key private sector
multinationals. Lower inflation, a stable currency, a balanced federal budget,
the passage of NAFTA, and continued inflow of foreign funds for both direct and
portfolio investment are positive trends mitigated only by the country's
continuing trade deficit. The latter is tied largely to capital and
intermediate goods imports to finance the modernization of the private sector
economy and is believed to be manageable.
ASSET QUALITY
Economic Environment
The economic recession and deteriorating conditions in the commercial real
estate market that were prevalent in most of the United States during the past
several years had an adverse effect on the Corporation's primary markets in the
period 1990 through 1992. These conditions, combined with increased regulatory
scrutiny of financial institutions, created a less stable economic and
regulatory environment for all financial institutions.
30
<PAGE>
More recently, however, generally improving economic and market conditions
have contributed to a reduction in the financial difficulties faced by some of
the Corporation's borrowers. Although further deterioration in the commercial
real estate and real estate construction markets is possible without a more
pronounced pick up in the pace of the economy in Maryland and adjacent states,
the most severe problems appear to be receding. The Corporation anticipates
modest near term improvement in general economic conditions, and expects that
these trends, and their effect on asset quality, will be positive in 1994.
NONPERFORMING ASSETS
Nonperforming assets totaled $135.4 million at December 31, 1993, a decrease
of $64.3 million (32.2%) when compared to $199.7 million in nonperforming
assets at December 31, 1992. The decrease in nonperforming assets was due to a
combination of factors. Among the most significant factors were a slow down in
the number of new nonaccrual loans, pay downs, other real estate owned sales,
loans reclassified to accrual status and charge-offs. The loans reclassified to
accrual status included loans reclassified through the troubled debt
restructuring process as well as through the process discussed in the following
paragraph. At this time, the Corporation does not anticipate significant new
nonaccruals in 1994, and expects that the overall level of nonperforming assets
will continue to decline.
Loans are placed on nonaccrual status when interest or principal has been in
default for 90 days or more, and the loan is not both well secured and in the
process of collection; payment in full of interest or principal is not
expected; or the loan is on a cash basis because of deterioration in the
financial position of the borrower. A loan remains on nonaccrual status until
it is either current as to payment of principal or interest with the borrower
demonstrating the ability to pay and remain current, or it meets revised
regulatory guidance on returning to accrual status even though the loan has not
been brought fully current. Under these circumstances two criteria must be met:
(1) all principal and interest amounts contractually due (including arrearages)
are reasonably assured of repayment within a reasonable period, and (2) there
is a sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms involving
payments of cash or cash equivalents.
Restructured loans are "troubled debt restructurings" as defined in Statement
of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings." Nonaccrual loans would not be included in
troubled debt restructurings.
Other real estate and other assets owned represent collateral on loans to
which the Corporation has taken title. This property, which is held for resale,
is carried at fair market value minus estimated costs to sell.
Consistent with regulatory guidance on the reporting of in-substance
foreclosures and the recently issued (but not yet adopted) Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," the Corporation no longer reports loans as in-substance
foreclosures unless the Corporation has possession of the collateral. For
collateral dependent real estate loans where the Corporation has not taken
title, loss recognition through a charge to the allowance for credit losses is
based on the fair value (as defined in paragraph 13 of FAS 15) of the
collateral if foreclosure is probable with the loan remaining in the loan
category.
31
<PAGE>
The following table sets forth nonperforming assets and accruing loans which
are 90 days or more past due as to principal or interest payments on the dates
indicated.
Nonperforming Assets
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Domestic:
Commercial(1).......... $ 47,521 $ 71,538 $ 71,220 $ 35,108 $16,505
Real estate, construc-
tion.................. 5,787 17,917 25,958 17,036 --
Real estate mortgage,
commercial(2)......... 44,853 64,757 37,803 31,266 17
Real estate mortgage,
residential........... 5,381 6,351 8,409 566 411
Leases receivable...... 863 1,174 282 -- --
Foreign.................. 3,800 10,487 10,174 12,513 17,264
-------- -------- -------- -------- -------
Total nonaccrual
loans............... 108,205 172,224 153,846 96,489 34,197
Restructured loans ...... 4,692 4,515 2,601 -- --
Other assets owned:
Other real estate...... 26,427 30,993 43,610 25,053 648
Valuation reserves..... (4,412) (9,195) (7,713) (4,250) --
Other assets........... 510 1,210 5,644 3,199 1,989
-------- -------- -------- -------- -------
Total other assets
owned............... 22,525 23,008 41,541 24,002 2,637
-------- -------- -------- -------- -------
Total nonperforming as-
sets.................... $135,422 $199,747 $197,988 $120,491 $36,834
======== ======== ======== ======== =======
Nonperforming assets as a
% of total loans, net of
unearned income plus
other foreclosed assets
owned................... 2.59% 3.83% 3.47% 2.40% 0.72%
======== ======== ======== ======== =======
Accruing loans contractu-
ally past due 90 days or
more as to principal or
interest:
Domestic............... $ 17,172 $ 19,231 $ 25,796 $ 26,908 $23,253
Foreign................ -- -- 3,800 -- 1,715
-------- -------- -------- -------- -------
Total................ $ 17,172 $ 19,231 $ 29,596 $ 26,908 $24,968
======== ======== ======== ======== =======
</TABLE>
- --------
(1) Includes $1,793,000 in commercial loans classified as held-for-sale at
December 31, 1993.
(2) Includes $2,308,000 in commercial mortgages classified as held-for-sale at
December 31, 1993.
The following table details the gross interest income that would have been
received during the year ended December 31, 1993 on nonaccrual loans had such
loans been current in accordance with their original terms throughout the year
and the interest income on such loans actually included in income for the year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
------------------------------
DOMESTIC FOREIGN
LOANS LOANS
--------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Gross interest income that would have been re-
corded had loans been current in accordance
with original terms........................... $ 7,948 $ 245
Interest income actually recorded.............. 1,811 219
</TABLE>
At December 31, 1993, the Corporation was monitoring loans totaling $30.9
million not classified as nonaccrual, restructured or past due loans. These
loans demonstrate characteristics which may result in classification as such in
the future. There were no other interest bearing assets, other than loans, at
December 31, 1993 which were classifiable as nonaccrual, restructured, past due
or potential problem assets.
32
<PAGE>
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (the "Allowance") is created by direct
charges against income (provision for credit losses). The amount of the
Allowance equals the cumulative total of the provisions made from time to time,
reduced by credit charge-offs, and increased by recoveries of credits
previously charged off. In addition, the Allowance will increase by the
allowance for credit losses of portfolios acquired and will be reduced by the
allowance for credit losses associated with portfolios sold.
It is the policy of the Corporation to comply fully with OCC Banking Circular
201 (Revised) and the supplementary Interagency Policy Statement on the
Allowance for Loan and Lease Losses released December 21, 1993. The Corporation
maintains an Allowance sufficient to absorb all estimated inherent losses in
the loan and lease portfolio. Inherent losses are losses that meet the criteria
in Statement of Financial Accounting Standards No. 5 for recognition of charges
to income. This requires the determination that it is probable that an asset
has been impaired.
All outstanding loans, leases and legally binding commitments to lend are
considered in evaluating the adequacy of the Allowance. In addition, a
provision for inherent losses arising from off-balance sheet commitments such
as standby letters of credit are included in the Allowance. The Allowance does
not provide for inherent losses stemming from uncollectible interest because
Corporation policy requires all accrued but unpaid interest to be reversed once
a loan is placed on nonaccrual status.
All loans classified doubtful and all nonaccrual loans classified substandard
are analyzed individually to determine specific reserves. All other loans and
leases are segmented into pools based on their risk ratings. Reserve allocation
for these pools is based upon historical loss experience. The methodologies
used for determining historical loss rate factors include actual loss
experience over a period of years, loss migration analysis, or a combination of
the two. In addition, the historical loss percentage for each pool is adjusted
to reflect current conditions. Among the factors considered are the levels and
trends in delinquencies and nonaccruals; trends in volumes and terms of loans;
effects of any changes in lending policies and procedures; the experience,
ability and depth of the lending management and staff; national and local
economic trends and conditions; and concentrations of credit.
The Corporation's Loan Review Group reports independently to the Board of
Directors' Audit Committee. This unit's responsibility is to maintain a
continuous review of the loan portfolio to ensure the accuracy of risk ratings,
to verify the identification of problem credits, to provide executive
management with an independent and objective evaluation of the quality of the
portfolio and to assist the Board of Directors in evaluating the adequacy of
the Allowance. In the retail loan and residential loan areas, this review is
conducted primarily by a retail loan review staff which monitors performance
trends. Formal reviews are supported by management information systems which
are designed to identify accounts which deviate from established lending
policies. In other lending areas, a team of loan review officers systematically
inspects the credit files to identify potential credit problems.
The review process as detailed above is used by the Corporation in forming
its conclusion that the Allowance is adequate at December 31, 1993.
33
<PAGE>
The following table details certain information relating to the Allowance and
credit losses of the Corporation for the five years ended December 31, 1993.
See also Note 7 of the Notes to Consolidated Financial Statements of the
Corporation.
Analysis of the Allowance for Credit Losses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning
of year................ $ 201,451 $ 205,397 $ 155,089 $ 117,222 $ 103,018
Provision for credit
losses................. 45,291 58,126 69,496 97,191 36,726
Losses charged off:
Commercial loans...... 10,580 14,082 4,329 6,921 796
Real estate loans,
construction......... 1,079 3,692 2,968 7,761 --
Real estate loans,
mortgage:
Residential.......... 467 150 54 72 --
Commercial........... 9,723 8,100 2,704 12,463 820
Retail loans.......... 6,005 6,569 6,616 6,492 7,886
Bankcard receivables.. 25,360 30,219 33,169 26,674 23,075
Leases receivable..... 516 919 650 607 695
Foreign loans......... 2,561 6,360 12,359 4,875 4,339
---------- ---------- ---------- ---------- ----------
Total losses charged
off................ 56,291 70,091 62,849 65,865 37,611
---------- ---------- ---------- ---------- ----------
Recoveries of losses
previously charged off:
Commercial loans...... 1,108 393 3,661 2,236 2,636
Real estate loans,
construction......... 37 35 21 -- --
Real estate loans,
mortgage:
Residential.......... 16 56 -- -- 4
Commercial........... 129 348 222 39 219
Retail loans.......... 2,573 2,526 1,322 1,485 2,734
Bankcard receivables.. 4,696 4,574 3,934 4,058 3,838
Leases receivable..... 331 367 196 329 178
Foreign loans......... 4,924 1,047 411 381 3,828
---------- ---------- ---------- ---------- ----------
Total recoveries.... 13,814 9,346 9,767 8,528 13,437
---------- ---------- ---------- ---------- ----------
Net losses charged off.. 42,477 60,745 53,082 57,337 24,174
Allowance of loans ac-
quired or (sold)....... (4,259) (1,327) 33,894 (1,987) 1,652
---------- ---------- ---------- ---------- ----------
Total allowance at end
of year................ $ 200,006 $ 201,451 $ 205,397 $ 155,089 $ 117,222
========== ========== ========== ========== ==========
Average loans, net of
average unearned in-
come................... $5,099,293 $5,293,930 $4,832,877 $5,312,898 $4,742,900
========== ========== ========== ========== ==========
Year end loans, net of
unearned income........ $5,197,721 $5,187,612 $5,656,624 $4,998,658 $5,082,435
========== ========== ========== ========== ==========
Net charge-offs to aver-
age loans, net of aver-
age unearned income.... 0.83% 1.15% 1.10% 1.08% 0.51%
Allowance as a percent-
age of year end loans,
net of unearned income. 3.85 3.88 3.63 3.10 2.31
Allowance as a
percentage of
non-performing loans... 177.16 113.98 131.29 160.73 342.78
</TABLE>
The following table provides an allocation of the Allowance to the respective
loan classifications. The Corporation does not believe that the Allowance can
be fragmented by category with any precision. The allocation of the Allowance
is based on a consideration of all of the factors discussed above which are
used to determine the Allowance as a whole. Since all of those factors are
subject to change, the allocation of the
34
<PAGE>
Allowance detailed below is not necessarily indicative of future losses or
future allocations. The Allowance at December 31, 1993 is available to absorb
losses occurring in any category of loans.
Allocation of the Allowance for Credit Losses
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial loans................... $ 32,453 $ 39,544 $ 60,445 $ 31,862 $ 13,573
Real estate loans, construction.... 9,376 19,150 16,092 11,756 4,320
Real estate loans, mortgage:
Residential ..................... 1,087 546 943 639 597
Commercial....................... 39,845 41,090 23,200 9,155 884
Retail loans....................... 6,266 7,026 11,072 8,618 10,600
Bankcard receivables............... 35,950 37,420 35,004 24,160 21,100
Leases receivable.................. 3,304 3,970 2,290 448 181
Foreign loans...................... 9,322 14,045 24,329 47,726 54,733
Unallocated........................ 62,403 38,660 32,022 20,725 11,234
-------- -------- -------- -------- --------
Total Allowance................ $200,006 $201,451 $205,397 $155,089 $117,222
======== ======== ======== ======== ========
</TABLE>
DEPOSITS
The table below provides information on the average amount of and rates paid
on the deposit categories indicated for the years ended December 31, 1993, 1992
and 1991. The aggregated amount of foreign deposits did not exceed 10% of
average total deposits. The majority of deposits in the foreign banking office
were in amounts in excess of $100,000.
Average Deposits and Average Rates Paid
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1993 1992 1991
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES RATES BALANCES RATES BALANCES RATES
-------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Deposits in domestic of-
fices:
Noninterest bearing de-
mand..................... $1,771.0 -- % $1,561.4 -- % $1,235.8 -- %
-------- -------- --------
Interest bearing demand... 535.5 2.5 467.2 3.2 287.3 5.0
Money market accounts..... 1,433.1 3.0 1,529.5 3.5 1,235.8 5.5
Savings................... 1,017.0 2.9 840.1 3.6 570.2 5.2
Other consumer time....... 1,480.3 4.3 1,735.4 5.3 1,480.0 7.2
Large denomination time... 342.8 5.4 553.0 6.1 818.0 7.3
Deposits in foreign banking
office..................... 72.1 3.7 77.8 3.9 161.0 6.9
-------- --- -------- --- -------- ---
Total interest bearing
deposits............... 4,880.8 3.5 5,203.0 4.4 4,552.3 6.4
-------- -------- --------
Total deposits.............. $6,651.8 $6,764.4 $5,788.1
======== ======== ========
Total core deposits......... $6,236.9 $6,133.6 $4,809.1
======== ======== ========
</TABLE>
35
<PAGE>
The following table details the maturity of domestic deposits of $100,000 or
more on December 31, 1993.
Maturity Distribution of Certificates of Deposit and Other Time Deposits in
Amounts of $100,000 or More
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------
CERTIFICATES OTHER TIME
OF DEPOSIT, DEPOSITS,
$100,000 OR MORE $100,000 OR MORE TOTAL
---------------- ---------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Within three months................... $ 97.1 $ 0.8 $ 97.9
After three months but within six
months............................... 32.6 -- 32.6
After six months but within twelve
months............................... 74.7 -- 74.7
After twelve months................... 145.8 21.2 167.0
------ ----- ------
Total............................. $350.2 $22.0 $372.2
====== ===== ======
</TABLE>
36
<PAGE>
SHORT-TERM BORROWINGS
To the extent that deposits are not adequate to fund customer loan demand in
the Banks, or to the extent that long-term borrowings are inadequate to fund
loan demand of other subsidiaries of the Corporation, liquidity needs can be
met in the short-term funds markets. The Corporation utilizes many sources to
meet these short-term needs. The following table provides information with
respect to each of these sources over the three years ended December 31, 1993.
Short-term Borrowings
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased:
End of year outstandings........................ $345,676 $309,350 $212,429
Highest month-end balance....................... 460,933 472,203 336,838
Average balance................................. 451,042 344,336 308,054
Average rate of interest:
At end of year................................. 3.03% 2.41% 3.73%
During year.................................... 3.05 3.40 5.41
Repurchase agreements:
End of year outstandings........................ 402,590 $270,163 $345,199
Highest month-end balance....................... 720,542 590,725 493,845
Average balance................................. 444,378 391,221 343,389
Average rate of interest:
At end of year................................. 2.35% 2.65% 3.82%
During year.................................... 2.33 2.87 5.35
Master demand notes of the Corporation:
End of year outstandings........................ 463,645 $388,958 $381,588
Highest month-end balance....................... 463,645 408,862 390,310
Average balance................................. 424,181 389,156 363,852
Average rate of interest:
At end of year................................. 2.85% 2.85% 3.75%
During year.................................... 2.86 3.28 5.56
Other borrowed funds, short-term:
End of year outstandings........................ $181,724 $ 12,593 $105,331
Highest month-end balance....................... 439,474 282,348 334,885
Average balance................................. 309,645 155,193 117,114
Average rate of interest:
At end of year................................. 3.37% 4.02% 4.89%
During year.................................... 3.02 3.56 6.54
</TABLE>
Short-term borrowings include master demand notes of the Corporation. This
product is an unsecured obligation of the Corporation which was developed to
meet the overnight investment needs of the Corporation's cash management
customers. Under the masternote program, investable customer balances are swept
daily into demand notes. The proceeds of these notes are used to provide short-
term funding to the Corporation's nonbank subsidiaries with any excess funds
invested in short-term liquid assets. Outstanding master demand note balances
are determined by the investable balances of the Corporation's sweep account
customers.
37
<PAGE>
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The following table shows the changes in the Corporation's stockholders'
equity for the years ended December 31, 1993, 1992 and 1991.
Changes in Stockholders' Equity
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1992 1991
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year as previously
reported.................................... $699,362 $606,779 $525,037
Adjustment for the cumulative effect on prior
years of applying retroactively the new
method of accounting for income taxes....... (5,204) (5,204) (5,204)
-------- -------- --------
Balance, beginning of year as adjusted....... 694,158 601,575 519,833
Net income................................... 113,868 92,473 75,056
Issuance of preferred stock.................. 144,803 -- --
Dividends declared on preferred stock........ (1,575) -- --
Net cost not yet recognized as periodic
pension expense............................. (1,073) 110 240
Adjustment of the valuation allowance on
marketable equity securities................ -- -- 6,446
Unrealized gains on investment securities
available-for-sale, net of tax.............. 26,613 -- --
-------- -------- --------
Balance, end of year......................... $976,794 $694,158 $601,575
======== ======== ========
</TABLE>
The Corporation's stockholders' equity was $976.8 million at December 31,
1993 compared to $694.2 million at December 31, 1992. The $282.6 million
(40.7%) increase in stockholders' equity is primarily due to $113.9 million of
net income in 1993 and the issuance of 6,000,000 shares of noncumulative
preferred stock in December of 1993. Preferred stock was issued to the public
at a price of $150 million with total proceeds to the Corporation of $144.8
million after deducting underwriting discounts and other issuance costs. In
addition, stockholders' equity increased $26.6 million in 1993 due to net
unrealized gains on investment securities available-for-sale resulting from the
implementation of FAS 115 on December 31, 1993. The primary source of growth in
stockholder's equity in 1992 and 1991 was the net income of the Corporation.
Stockholders' equity has been restated for all years presented to reflect the
cumulative effect on prior years of retroactively applying Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Corporation's regulatory capital and regulatory capital ratios presented in the
following table have also been restated to reflect this change.
38
<PAGE>
The following table details the Corporation's capital components and ratios
at December 31, 1993, 1992 and 1991 based upon the capital requirements of
regulatory agencies discussed under "Business--Supervision and Regulation."
Tier 1 and total capital increased $256.3 million and $256.9 million,
respectively, when December 31, 1993 is compared to December 31, 1992 due to
$113.9 million in net income in 1993 and the issuance of preferred stock in
1993. Significant transactions affecting regulatory capital in 1992 included
the issuance of $100 million in qualifying long-term debt in May of 1992 and
the call of $50 million in long-term debt in April of 1992.
Capital Components
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Preferred stockholders' equity............. $144,803 $ -- $ --
Common stockholder's equity................ 831,991 694,158 601,575
Disallowed intangibles..................... (35,657) (35,940) (38,717)
Unrealized gains on investment securities
available-for-sale,
net of tax................................ (26,613) -- --
---------- ---------- ----------
Tier 1 capital............................. 914,524 658,218 562,858
---------- ---------- ----------
Qualifying long-term debt.................. 115,629 121,581 58,157
Allowance for credit losses................ 90,153 83,608 88,709
Mandatory convertible securities........... 59,951 59,942 59,934
---------- ---------- ----------
Tier 2 capital............................. 265,733 265,131 206,800
---------- ---------- ----------
Total capital.............................. $1,180,257 $ 923,349 $ 769,658
========== ========== ==========
Risk-adjusted assets....................... $7,102,379 $6,571,984 $6,981,000
Average quarterly assets (fourth quarter).. $9,557,793 $9,176,494 $7,716,677
Risk based capital ratios:
Tier 1 capital to risk-adjusted as-
sets(1)................................. 12.88% 10.02% 8.06%
Regulatory minimum ...................... 4.00 4.00 4.00
Total capital to risk-adjusted assets(1)
........................................ 16.62 14.05 11.03
Regulatory minimum ...................... 8.00 8.00 8.00
Leverage ratio(1).......................... 9.60 7.20 7.33
</TABLE>
- --------
(1) The Tier 1, total capital and leverage ratios have been restated to reflect
the cumulative effect on prior years of retroactively applying statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans ........................ $411,021 $457,611 $501,144
Interest and dividends on investment securities:
Taxable ......................................... 146,720 145,604 103,835
Tax-exempt ...................................... 12,044 16,865 17,065
Dividends ....................................... 121 63 249
Interest on investment securities available-for-
sale ............................................. 24,208 -- --
Interest on loans held-for-sale ................... 11,580 13,407 9,634
Interest on money market investments............... 11,543 14,459 43,670
-------- -------- --------
Total interest and dividend income ............ 617,237 648,009 675,597
-------- -------- --------
INTEREST EXPENSE
Interest on deposits .............................. 171,122 227,553 289,549
Interest on Federal funds purchased and other
short-term borrowings:
Transactions with Allied Irish................... -- 2,055 12
Other............................................ 45,604 39,199 62,916
Interest on long-term debt:
Transactions with Allied Irish................... -- -- 5,051
Other............................................ 17,312 15,850 14,990
-------- -------- --------
Total interest expense ........................ 234,038 284,657 372,518
-------- -------- --------
NET INTEREST INCOME................................ 383,199 363,352 303,079
Provision for credit losses (note 7)............... 45,291 58,126 69,496
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES............................................ 337,908 305,226 233,583
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts ............... 72,952 68,475 59,414
Servicing income from securitized assets, net...... 27,548 28,931 22,735
Trust fees ........................................ 19,212 18,593 13,148
Securities gains, net.............................. 19,976 6,169 11,534
Other income (note 13)............................. 93,757 76,014 73,732
-------- -------- --------
Total noninterest income ...................... 233,445 198,182 180,563
-------- -------- --------
NONINTEREST EXPENSES
Salaries and wages ................................ 165,239 154,852 131,420
Other personnel costs (notes 12 and 18) ........... 40,415 33,644 26,481
Net occupancy costs (notes 8 and 15)............... 31,195 29,869 27,323
Equipment costs (notes 8 and 15)................... 28,608 26,572 21,284
Other operating expenses (note 13)................. 129,196 116,793 97,531
-------- -------- --------
Total noninterest expenses .................... 394,653 361,730 304,039
-------- -------- --------
INCOME BEFORE INCOME TAXES......................... 176,700 141,678 110,107
Income tax expense (note 14)....................... 62,832 49,205 35,051
-------- -------- --------
NET INCOME ........................................ $113,868 $ 92,473 $ 75,056
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks ............................... $ 630,731 $ 634,427
Money market investments (note 3)...................... 196,573 49,838
Investment securities available-for-sale (note 4)...... 1,306,899 --
Investment securities held-to-maturity (market value of
$1,731,462 and $2,696,997) (note 4)................... 1,709,648 2,634,368
Loans held-for-sale ................................... 269,222 158,108
Loans, net of unearned income of $71,224 in 1993 and
$98,972 in 1992:
Commercial .......................................... 1,626,080 1,748,910
Real estate, construction ........................... 284,008 327,134
Real estate, mortgage:
Residential ........................................ 497,543 382,171
Commercial ......................................... 957,568 912,085
Retail .............................................. 885,117 940,728
Bankcard ............................................ 527,657 494,851
Leases receivable (note 5)........................... 211,821 206,346
Foreign ............................................. 207,927 175,387
---------- ----------
Total loans, net of unearned income ............... 5,197,721 5,187,612
Allowance for credit losses (note 7)................. (200,006) (201,451)
---------- ----------
Loans, net......................................... 4,997,715 4,986,161
Premises and equipment (note 8)........................ 100,726 93,703
Due from customers on acceptances...................... 9,127 8,502
Other assets .......................................... 307,864 284,834
---------- ----------
Total assets .................................... $9,528,505 $8,849,941
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Domestic deposits:
Noninterest bearing deposits......................... $1,914,452 $1,801,942
Interest bearing deposits ........................... 4,747,825 4,898,727
Interest bearing deposits in foreign banking office ... 111,880 118,422
---------- ----------
Total deposits .................................... 6,774,157 6,819,091
Federal funds purchased and securities sold under re-
purchase agreements (note 9).......................... 748,266 579,513
Other borrowed funds, short-term (note 10)............. 645,369 401,551
Bank acceptances outstanding........................... 9,127 8,502
Accrued taxes and other liabilities (note 14).......... 185,215 157,605
Long-term debt (note 11)............................... 189,577 189,521
---------- ----------
Total liabilities ................................. 8,551,711 8,155,783
---------- ----------
Commitments and contingent liabilities (notes 15 and
17)
Stockholders' equity:
7.875% Noncumulative Preferred Stock, Series A, $5
par value per share, $25 liquidation preference per
share; authorized 9,000,000 shares; issued 6,000,000
shares.............................................. 30,000 --
Common stock, $5 par value per share; authorized
41,000,000 shares; issued 16,985,149 shares ........ 84,926 84,926
Capital surplus ..................................... 198,127 83,324
Retained earnings ................................... 637,128 525,908
Unrealized gains on investment securities available-
for-sale (net of taxes of $17,018).................. 26,613 --
---------- ----------
Total stockholders' equity ........................ 976,794 694,158
---------- ----------
Total liabilities and stockholders' equity ...... $9,528,505 $8,849,941
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
41
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
PREFERRED STOCK.................................. $ 30,000 $ -- $ --
COMMON STOCK..................................... 84,926 84,926 84,926
CAPITAL SURPLUS
Balance, beginning of year....................... 83,324 83,324 83,324
Preferred stock proceeds in excess of par value.. 114,803 -- --
-------- -------- --------
Balance, end of year............................. 198,127 83,324 83,324
RETAINED EARNINGS
Balance, beginning of the year, as previously re-
ported.......................................... 531,112 438,529 356,787
Adjustment for the cumulative effect on prior
years of applying retroactively the new method
of accounting for income taxes.................. (5,204) (5,204) (5,204)
-------- -------- --------
Balance at the beginning of the year as adjusted. 525,908 433,325 351,583
Net income....................................... 113,868 92,473 75,056
Dividends declared on preferred stock............ (1,575) -- --
Net cost not yet recognized as periodic pension
expense......................................... (1,073) 110 240
Adjustment of the valuation allowance on market-
able equity securities.......................... -- -- 6,446
-------- -------- --------
Balance, end of the year......................... 637,128 525,908 433,325
UNREALIZED GAINS ON INVESTMENT SECURITIES AVAIL-
ABLE-FOR-SALE, NET OF TAX....................... 26,613 -- --
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY....................... $976,794 $694,158 $601,575
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
42
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................... $ 113,868 $ 92,473 $ 75,056
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses.............. 45,291 58,126 69,496
Provision for other real estate losses... 6,279 6,537 4,350
Depreciation and amortization ........... 35,319 33,234 18,641
Deferred income taxes (benefits)......... (1,977) 16,263 (1,028)
Net gain on the sale of assets........... (22,488) (9,839) (17,996)
Writedown of equity investment securi-
ties.................................... -- -- 3,833
Net increase in loans originated for
sale.................................... (115,511) (21,804) (63,157)
(Increase) decrease in trading account
securities.............................. (45,721) 9,204 46,059
Decrease in accrued interest receivable.. 1,452 11,525 10,350
Decrease in accrued interest payable..... (5,295) (16,376) (23,773)
Other, net............................... 13,635 (11,602) (18,689)
---------- ---------- ----------
Net cash provided by operating activi-
ties.................................. 24,852 167,741 103,142
---------- ---------- ----------
INVESTING ACTIVITIES
Proceeds from sales of investment securi-
ties..................................... 711,058 470,028 526,779
Proceeds from paydowns and maturities of
investment securities.................... 1,487,190 602,897 291,626
Purchases of investment securities........ (2,530,988) (1,782,663) (1,319,816)
Net (increase) decrease in short-term in-
vestments................................ (120,708) 268,262 502,203
Proceeds from sales of loans.............. 57,240 178,065 460,476
Net (disbursements) receipts from lending
activities of banking subsidiaries....... (120,613) 259,311 135,038
Principal collected on loans of nonbank
subsidiaries............................. 27,275 21,475 31,191
Loans originated by nonbank subsidiaries.. (49,511) (64,379) (53,987)
Principal payments received under leases.. 14,241 9,160 12,707
Purchases of assets to be leased.......... (1,311) (1,517) (2,010)
Proceeds from the sale of other real es-
tate..................................... 25,400 32,870 11,208
Proceeds from the sales of premises and
equipment................................ 499 439 1,787
Purchases of premises and equipment....... (21,373) (26,545) (19,653)
Purchase of banking subsidiary............ -- -- (78,227)
(Sales) purchases of deposits............. (8,712) 20,208 194,708
Purchases of bankcard receivables......... (9,637) -- (130,586)
Other, net................................ (29,984) (3,679) 9,651
---------- ---------- ----------
Net cash (used for) provided by invest-
ing activities........................ (569,934) (16,068) 573,095
---------- ---------- ----------
FINANCING ACTIVITIES
Net decrease in deposits ................. (35,682) (188,471) (404,396)
Net increase (decrease) in short-term
borrowings............................... 413,446 (63,533) (345,808)
Proceeds from the issuance of long-term
debt..................................... -- 99,564 --
Principal payments on long-term debt...... (875) (50,825) (60,825)
Proceeds from the issuance of preferred
stock.................................... 144,803 -- --
---------- ---------- ----------
Net cash provided by (used for) financ-
ing activities........................ 521,692 (203,265) (811,029)
---------- ---------- ----------
Decrease in cash and cash equivalents ..... (23,390) (51,592) (134,792)
Cash and cash equivalents at beginning of
year...................................... 654,527 706,119 840,911
---------- ---------- ----------
Cash and cash equivalents at December 31,.. $ 631,137 $ 654,527 $ 706,119
========== ========== ==========
SUPPLEMENTAL DISCLOSURES
Interest payments........................ $ 239,333 $ 301,033 $ 384,408
Income tax payments...................... 50,941 41,476 37,742
NONCASH INVESTING AND FINANCING ACTIVITIES
Loan charge-offs......................... 56,291 67,841 62,849
Transfers to other real estate........... 30,070 17,925 31,679
</TABLE>
See accompanying notes to consolidated financial statements
43
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Maryland Bancorp and
subsidiaries (the "Corporation") conform to generally accepted accounting
principles. The following is a description of the more significant of these
policies:
Business--The Corporation is a wholly owned subsidiary of Allied Irish Banks,
p.l.c. and provides a full range of banking services through its banking
subsidiaries, The First National Bank of Maryland, First Omni Bank, N.A., and
The First National Bank of Maryland, D.C. (collectively the "National Banks")
and The York Bank and Trust Company (collectively with the National Banks, the
"Banks"). Other subsidiaries of the Corporation are primarily engaged in
consumer banking, construction lending, and equipment, consumer, and commercial
financing. The Corporation's primary market area is the Baltimore/Washington
marketplace which encompasses all of Maryland, Washington, D.C., Northern
Virginia and Southern Pennsylvania. The Corporation is subject to the
regulations of certain Federal agencies and undergoes periodic examinations by
those regulatory agencies.
Basis of Presentation--The consolidated financial statements include the
Corporation and its subsidiaries, principally The First National Bank of
Maryland ("First National"), The York Bank and Trust Company ("York Bank") and
First Omni Bank, N.A. ("First Omni"). All significant intercompany transactions
have been eliminated.
In preparing the financial statements, Management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of condition and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for credit losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for credit losses and real estate owned, Management obtains independent
appraisals for significant properties.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While Management uses available information to recognize
losses on loans and real estate owned, future additions to the allowances may
be necessary based on changes in economic conditions, particularly in the Mid-
Atlantic region of the United States. In addition, as an integral part of their
examination process, various regulatory agencies periodically review the
Corporation's allowance for losses on loans and real estate owned. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Foreign Currency Transactions--Foreign currency amounts, including those
related to foreign branches, are remeasured into the functional currency (the
U.S. dollar) generally at relevant exchange rates. Aggregate transaction gains
and losses are included in other income and other expense and are not material
to the financial statements.
Money Market Investments--Money market investments are stated at cost, which
approximates market value except for trading account securities which are
carried at market value. Adjustments to market and trading account gains and
losses are classified as other income in the accompanying consolidated
statements of income.
Securities--At December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires the
classification of securities into one of three categories: trading, available-
for-sale, or held-to-maturity. At the time of purchase, management determines
the appropriate designation for debt securities and reassesses the
classification periodically.
44
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Trading account securities are purchased with the intent to earn a profit by
trading or selling the security. These securities are stated at market value.
Adjustments to the carrying value are reported in other noninterest income.
Securities not classified as held-to-maturity or trading are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with unrealized gains or losses, net of tax, reported as a separate component
of stockholders' equity.
Held-to-maturity securities are purchased with the ability and intent to hold
them to maturity and are, therefore, carried at cost adjusted for amortization
of premium and accretion of discount.
Amortization and accretion of discounts and premiums associated with
securities classified as held-to-maturity or available-for-sale are computed on
the straight-line basis adjusted for expected prepayment experience, which does
not differ significantly from the level yield method. Gains and losses, and
declines in value judged to be other than temporary, are included as part of
noninterest income. The cost of securities sold is determined based on the
specific identification method.
Loans Held-For-Sale--Loans held-for-sale are stated at the lower of aggregate
cost or market.
Financial Interest Rate Instruments--The Corporation enters into financial
interest rate instruments, primarily interest rate swaps, to manage its
interest rate sensitivity and to generate fee income. Transactions designated
as hedges of specific assets or liabilities are recorded as yield adjustments
to the income or expense of the underlying assets or liabilities. Transactions
hedging overall interest rate sensitivity or open positions are recorded using
mark-to-market accounting. Income generated from matched transactions where the
Corporation is acting as a financial intermediary is recorded as noninterest
fee income.
Income on Loans Receivable--Loans are stated at the amount of unpaid
principal, reduced by unearned income and an allowance for credit losses. The
net asset amounts for leased equipment also reflect both related estimated
residual values and unearned investment tax credits to the extent such amounts
are taken into income as yield adjustments over the lives of the related
leases. Discounts on discounted loans and interest on other loans are generally
recognized as income on the level yield method (interest method). Commitment
and origination fees are generally recognized as income over the commitment and
loan periods, respectively. Loans are placed on nonaccrual status when in the
opinion of Management the collection of additional interest is unlikely or a
specific loan meets the criteria for nonaccrual status established by
regulatory authorities. A loan remains on nonaccrual status until the loan is
current as to payment of both principal and interest with the borrower
demonstrating the ability to pay and remain current, or it meets revised
regulatory guidance on returning to accrual status even though the loan has not
been brought fully current.
Premises and Equipment--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
charged to operating expenses. Depreciation generally is computed on the
straight line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the term of the respective leases
or the lives of the assets. Maintenance and repairs are expensed as incurred.
The costs of replacing structural parts of major units are considered
individually and are expensed or capitalized as the facts dictate. Depreciation
and amortization amounts are adjusted, if appropriate, at the time an asset is
retired. Leases are accounted for as operating leases since none which meet the
criteria for capitalization would have a material effect if capitalized.
Income Taxes--Effective January 1, 1993, the Corporation adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" and has restated prior years' retained earnings
to reflect the cumulative effect of the change in the method of accounting for
income taxes. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured
45
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes the
enactment date.
The Corporation files a consolidated federal income tax return. Deferred
income taxes are provided on certain transactions which are reported in the
financial statements in different years than for income tax purposes. The
principal items are the provision for credit losses, income from lease
financing, interest and fee income on loans, securities transactions, deferred
compensation and restricted stock. Accumulated deferred taxes resulting from
these timing differences are included in the aggregate in other assets to the
extent realizable or accrued taxes and other liabilities in the consolidated
statements of condition. Investment tax credits on lease financing transactions
are deferred and taken into income as yield adjustments over the lives of the
related leases.
Other Real Estate and Assets--Other real estate and other assets owned
represent property acquired through foreclosure or deeded to the Corporation in
lieu of foreclosure on loans on which borrowers have defaulted as to the
payment of principal and interest. Other real estate and assets, at the time of
foreclosure, are recorded at the asset's fair value. Any write-downs at the
date of acquisition are charged to the allowance for credit losses. Subsequent
write downs to reflect declines in fair value minus the estimated costs to sell
are charged to operating expenses through the establishment of a valuation
allowance. Any improvement in fair value is reflected by a decrease to the
valuation allowance and a credit to income. Expenses incurred in maintaining
assets are included in other operating expenses.
Trust Assets--Property held in fiduciary or agency capacities for First
National's and York Bank's customers is not included in the consolidated
statements of condition since such assets are not assets of the banks.
Statement of Cash Flows--For purposes of reporting cash flows, cash
equivalents include cash and due from banks and interest bearing deposits in
other banks of $406,000, $20,100,000 and $7,812,000 at December 31, 1993, 1992
and 1991, respectively, which are included in money market investments in the
consolidated statements of condition.
Servicing Income From Securitized Assets--Servicing income from securitized
assets represents the financial spread (between finance charges and other
charges earned on such assets and the pass-through rate due to investors)
retained as seller/servicer reduced by estimated credit losses chargeable
against such spread.
Reclassifications--Certain amounts in the 1991 and 1992 consolidated
financial statements have been reclassified to conform with the 1993
presentation. Consistent with regulatory guidance on the reporting of in-
substance foreclosures and the recently issued (but not yet adopted) Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan," the Corporation no longer reports loans as in-substance
foreclosures unless the Corporation has possession of the collateral. In-
substance foreclosures and the related valuation allowances were reclassified
to the loan portfolio and the allowance for credit losses, respectively, in the
1992 consolidated statement of condition. In addition, provisions for in-
substance foreclosures previously reported as other real estate expense were
reclassified to the provision for credit losses in the 1992 and 1991
consolidated statements of income.
2. ACQUISITION OF THE YORK BANK AND TRUST COMPANY
On December 31, 1991, the Corporation purchased all of the issued and
outstanding common stock of The York Bank and Trust Company, based in York,
Pennsylvania, for a cash price of $129 million. The fair value of the assets
acquired and liabilities assumed totaled $1.4 billion and $1.3 billion,
respectively. The transaction was accounted for as a purchase. Goodwill of
$37.3 million was acquired and is being amortized
46
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over 15 years on a straight-line basis. York Bank is a Pennsylvania chartered
commercial bank with 21 full service offices in south central Pennsylvania. The
results of operations of York Bank are not included in the consolidated
statement of income for the year ended December 31, 1991.
The unaudited pro forma information presented in the following table has been
prepared based on the historical results of the Corporation combined with York
Bank. The information has been combined to present the results of operations as
if the acquisition had occurred at the beginning of 1991. The pro forma results
are not necessarily indicative of the results which would have actually been
obtained if the acquisition had been consummated in the past nor is it
indicative of the results that may be attained in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1991
----------------------------
(IN THOUSANDS)
<S> <C>
Total revenue(1)............................... $521,269
Net income..................................... 66,892
</TABLE>
- --------
(1) Total revenue includes net interest income and noninterest income
3. MONEY MARKET INVESTMENTS
Money market investments at December 31, 1993 and 1992 included the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1993 1992
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Interest bearing deposits in other banks...................... $ 406 $20,100
Trading account securities.................................... 53,337 7,616
Federal funds sold............................................ 121,000 --
Securities purchased under agreements to resell............... 21,830 22,122
-------- -------
Total money market investments............................ $196,573 $49,838
======== =======
</TABLE>
47
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENT SECURITIES
As discussed in Note 1, the Corporation adopted SFAS No. 115 effective
December 31, 1993. Prior to December 31, 1993, the Corporation classified
securities as held-for-possible-sale and investment securities. Held-for-
possible-sale securities were carried at the lower of cost or fair value and
investment securities were carried at amortized cost.
The following is a comparison of the book value and market value of held-to-
maturity securities in the consolidated investment portfolio:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------- ---------------------
BOOK MARKET BOOK MARKET
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies.......................... $ 970,554 $ 989,046 $ 766,888 $ 783,167
Mortgage-backed obligations of Fed-
eral agencies..................... 211,920 214,765 1,039,917 1,058,509
Collateralized mortgage obliga-
tions............................. 520,306 520,783 590,207 594,732
Obligations of states and political
subdivisions...................... -- -- 207,139 227,885
Other investment securities........ 6,868 6,868 30,217 32,704
---------- ---------- ---------- ----------
Total.......................... $1,709,648 $1,731,462 $2,634,368 $2,696,997
========== ========== ========== ==========
</TABLE>
The book and market values of held-to-maturity securities at December 31,
1993 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
BOOK GAINS LOSSES MARKET
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies.......................... $ 970,554 $19,407 $ (915) $ 989,046
Mortgage-backed obligations of Fed-
eral agencies..................... 211,920 3,125 (280) 214,765
Collateralized mortgage obliga-
tions............................. 520,306 2,096 (1,619) 520,783
Obligations of states and political
subdivisions...................... -- -- -- --
Other debt securities.............. 1,242 -- -- 1,242
Nonmarketable equity securities.... 5,626 -- -- 5,626
---------- ------- ------- ----------
Total.......................... $1,709,648 $24,628 $(2,814) $1,731,462
========== ======= ======= ==========
</TABLE>
The book and market values of held-to-maturity securities at December 31,
1992 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
BOOK GAINS LOSSES MARKET
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies.......................... $ 766,888 $16,605 $ (326) $ 783,167
Mortgage-backed obligations of Fed-
eral agencies..................... 1,039,917 21,836 (3,244) 1,058,509
Collateralized mortgage obliga-
tions............................. 590,207 6,248 (1,723) 594,732
Obligations of states and political
subdivisions...................... 207,139 20,789 (43) 227,885
Other debt securities.............. 8,151 -- -- 8,151
Equity securities.................. 22,066 2,487 -- 24,553
---------- ------- ------- ----------
Total.......................... $2,634,368 $67,965 $(5,336) $2,696,997
========== ======= ======= ==========
</TABLE>
48
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The book and market values of held-to-maturity debt securities at December
31, 1993 by contractual maturity are shown in the following table. Expected
maturities will differ from contractual maturities because many issuers have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
BOOK MARKET
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less........................ $ 175,491 $ 177,684
Due after one year through five years.......... 795,700 811,945
Due after five years through ten years......... 606 659
Due after ten years............................ -- --
Mortgage-backed securities..................... 732,225 735,548
---------- ----------
Total...................................... $1,704,022 $1,725,836
========== ==========
</TABLE>
The following is a comparison of the amortized cost and book value of
available-for-sale securities in the consolidated investment portfolio:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
AMORTIZED
COST BOOK(1)
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Mortgage-backed obligations of Federal agencies........ $ 900,549 $ 914,215
Collateralized mortgage obligations.................... 135,083 138,926
Obligations of states and political subdivisions....... 201,062 220,467
Other investment securities............................ 26,574 33,291
---------- ----------
Total.............................................. $1,263,268 $1,306,899
========== ==========
</TABLE>
- --------
(1) The book value of investment securities classified as available-for-sale is
equal to fair value.
The amortized cost and book values of available-for-sale securities at
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES BOOK
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed obligations of Fed-
eral agencies..................... $ 900,549 $14,266 $ (600) $ 914,215
Collateralized mortgage obliga-
tions............................. 135,083 5,403 (1,560) 138,926
Obligations of states and political
subdivisions...................... 201,062 19,528 (123) 220,467
Other debt securities.............. 8,886 -- -- 8,886
Equity securities.................. 17,688 6,717 -- 24,405
---------- ------- ------- ----------
Total.......................... $1,263,268 $45,914 $(2,283) $1,306,899
========== ======= ======= ==========
</TABLE>
The amortized cost and book values of available-for-sale debt securities at
December 31, 1993 by contractual maturity are shown in the following table.
Expected maturities will differ from contractual maturities because many
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------
AMORTIZED
COST BOOK
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less........................ $ 15,588 $ 15,712
Due after one year through five years.......... 55,640 60,751
Due after five years through ten years......... 82,943 92,694
Due after ten years............................ 55,777 60,196
Mortgage-backed securities..................... 1,035,632 1,053,141
---------- ----------
Total...................................... $1,245,580 $1,282,494
========== ==========
</TABLE>
49
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from the sale of investment securities were $711,058,000,
$470,028,000 and $526,779,000 during 1993, 1992 and 1991, respectively. Gross
gains and losses realized on the sale of investment securities were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross gains..................................... $19,894 $ 8,385 $15,385
Gross losses.................................... -- (2,199) (29)
------- ------- -------
Total....................................... $19,894 $ 6,186 $15,356
======= ======= =======
</TABLE>
Investment securities from the consolidated investment portfolio with a book
value of $788,522,000 at December 31, 1993 and $725,836,000 at December 31,
1992 were pledged to secure public funds, trust deposits, repurchase agreements
and funds transactions and for other purposes required by law.
5. LEASES RECEIVABLE
The investment in leases at December 31, 1993 and 1992 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct financing leases:
Lease payments receivable................................. $124,132 $117,971
Estimated residual values................................. 24,472 24,537
Deferred investment tax credits........................... -- (1)
-------- --------
148,604 142,507
Less unearned income...................................... (28,689) (20,343)
-------- --------
Net investment in direct financing leases................. $119,915 $122,164
======== ========
Leveraged leases:
Lease payments receivable................................. $ 57,072 $ 53,144
Estimated residual values................................. 56,642 51,381
Deferred investment tax credits........................... (262) (451)
-------- --------
113,452 104,074
Less unearned income...................................... (21,546) (19,892)
-------- --------
Investment in leveraged leases............................ 91,906 84,182
Less related deferred taxes............................... (71,671) (57,761)
-------- --------
Net investment in leveraged leases........................ $ 20,235 $ 26,421
======== ========
</TABLE>
Minimum lease payments receivable at December 31, 1993 are due as follows:
<TABLE>
<CAPTION>
AFTER
1994 1995 1996 1997 1998 1998 TOTAL
---- ------- ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$29,169 $40,379 $21,497 $16,699 $9,778 $144,534 $262,056
</TABLE>
6. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The majority of the Corporation's loan activity is with customers within the
Maryland marketplace and as such its performance will be influenced by the
economy of this region. The loan portfolio is diversified with no single
industry or customer comprising a significant portion of the total portfolio.
50
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that all uncollectible amounts have been charged off and that the
allowance is adequate to cover possible future charge-offs. A summary of the
activity in the allowance for the three years ended December 31, 1993 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year..................... $201,451 $205,397 $155,089
Provision charged to operating expenses.......... 45,291 58,126 69,496
Allowance of loans acquired or (sold)............ (4,259) (1,327) 33,894
Less charge-offs, net of recoveries of $13,814,
$9,346, and $9,767.............................. (42,477) (60,745) (53,082)
-------- -------- --------
Balance at end of year........................... $200,006 $201,451 $205,397
======== ======== ========
Ratio of allowance to loans, net of unearned in-
come at end of year............................. 3.85% 3.88% 3.63%
======== ======== ========
</TABLE>
8. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1993 and 1992 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------ -----------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION
AND AND
COST AMORTIZATION NET COST AMORTIZATION NET
-------- ------------ -------- -------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land.................... $ 11,462 $ -- $ 11,462 $ 7,342 $ -- $ 7,342
Buildings and land im-
provements............. 48,729 19,926 28,803 47,334 18,419 28,915
Leasehold improvements.. 33,089 16,740 16,349 30,456 14,518 15,938
Furniture and equipment. 68,572 54,914 13,658 65,079 52,782 12,297
Computer hardware and
software............... 78,208 47,754 30,454 67,708 38,497 29,211
-------- -------- -------- -------- -------- -------
Total............... $240,060 $139,334 $100,726 $217,919 $124,216 $93,703
======== ======== ======== ======== ======== =======
</TABLE>
Depreciation and amortization on premises and equipment charged to operations
amounted to $18,020,000 in 1993, $16,555,000 in 1992, and $14,070,000 in 1991.
9. FUNDS SOLD AND PURCHASED AND REPURCHASE AGREEMENTS
Federal funds generally represent one-day transactions, a large portion of
which arise because of the Corporation's market activity in Federal funds for
correspondent banks and other customers. Securities sold or purchased under
agreements to resell or repurchase are secured by U.S. Treasury and U.S.
Government agency securities and mature within three months.
At December 31, 1993, securities purchased under agreements to resell
amounted to $21,829,813. All securities purchased were delivered either
directly to the Corporation or to an agent for safekeeping. The aggregate
market value of all securities purchased under agreements to resell did not
exceed 10% of total assets and the amount at risk with any individual
counterparty or group of related counterparties did not exceed 10% of total
stockholders' equity.
51
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1993, securities sold under agreements to repurchase amounted
to $402,590,381. The aggregate market value of all securities sold under
agreements to repurchase did not exceed 10% of total assets and the amount at
risk with any individual counterparty or group of related counterparties did
not exceed 10% of total stockholders' equity.
10. OTHER BORROWED FUNDS, SHORT-TERM
Following is a summary of short-term borrowings exclusive of Federal funds
purchased and securities sold under agreements to repurchase at December 31,
1993 and 1992:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Master demand notes of the Corporation....................... $463,645 $388,958
Bank notes................................................... 177,000 --
Treasury tax and loan balances............................... 4,688 6,668
Current portion of long-term debt............................ -- 875
Other........................................................ 36 5,050
-------- --------
Total.................................................... $645,369 $401,551
======== ========
</TABLE>
At December 31, 1993, the Corporation had available lines of credit with
third-party banks aggregating $100,000,000 to support commercial paper
borrowings for which a fee is generally paid in lieu of compensating balances.
Investment securities with a book value of $131,363,846 were pledged to
secure the Treasury tax and loan notes at December 31, 1993.
The Banks are required to maintain reserves, included in cash and due from
banks, with the Federal Reserve Bank against their deposits. Average reserve
balances maintained during 1993 and 1992 were $57,563,950 and $60,920,000,
respectively.
11. LONG-TERM DEBT
Following is a summary of the long-term debt of the Corporation at December
31, 1993 and 1992 which is all unsecured:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
10.375% Subordinated Capital Notes due August 1, 1999........ $ 59,951 $ 59,942
9.15% Notes due June 1, 1996................................. 10,000 10,000
8.75% Notes due January 15, 1993............................. -- 875
8.68% Notes due January 31, 1997............................. 9,996 9,994
8.67% Notes due March 20, 1997............................... 9,995 9,994
8.375% Subordinated Notes due May 15, 2002................... 99,635 99,591
-------- --------
189,577 190,396
Less current portion of long-term debt....................... -- 875
-------- --------
Total........................................................ $189,577 $189,521
======== ========
</TABLE>
52
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the notes other than the 10.375% Subordinated Capital Notes and the
8.375% Subordinated Notes are senior indebtedness. There is no provision in any
of the Notes or related indentures for a sinking fund. Several of the notes or
related indentures also prohibit the sale, transfer, or disposal of any capital
stock of the Corporation.
The 10.375% Subordinated Capital Notes mature August 1, 1999 with interest
payable semiannually and at maturity and will be exchanged for Common Stock of
the Corporation having a market value equal to the principal amount of the
Notes, except to the extent that the Corporation, at its option, elects to pay
in cash the principal amount of the Notes, in whole or in part, from amounts
representing proceeds of other issuances of securities qualifying as capital,
designated for such purpose.
The 9.15% Notes mature June 1, 1996 with interest payable semiannually and
are not redeemable except under certain conditions. The notes contain various
financial covenants, including tangible net worth requirements and the
maintenance of indebtedness ratios. The Corporation was in compliance with the
financial covenants at December 31, 1993.
The 8.68% Notes mature January 31, 1997 with interest payable semiannually
and are not redeemable prior to maturity.
The 8.67% Notes mature March 20, 1997 with interest payable semiannually and
are not redeemable prior to maturity.
The 8.375% Subordinated Notes mature May 15, 2002, with interest payable
semiannually and are not redeemable prior to maturity.
12. EMPLOYEE BENEFIT PLANS
The Corporation sponsors three defined benefit pension plans. The largest
plan covers substantially all employees of the Corporation and its
subsidiaries; the two smaller plans provide supplemental benefits to certain
key employees. Benefits under the plans are generally based on age, years of
service and compensation levels. Net periodic pension costs totaled $10,209,000
in 1993, $6,204,000 in 1992, and $4,198,000 in 1991.
The following tables set forth the combined financial status of the plans for
1993 and 1992, and the composition of net periodic pension costs for 1993, 1992
and 1991.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1993 1992
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested....................................................... $ 90,999 $65,728
Non-vested................................................... 3,292 2,430
-------- -------
Total...................................................... $ 94,291 $68,158
======== =======
Projected benefit obligation................................... $136,627 $96,130
Plan assets at fair value (primarily marketable securities).... 88,288 77,302
-------- -------
Unfunded status.............................................. $ 48,339 $18,828
======== =======
</TABLE>
53
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1993 1992
---------------------------- ---------------------------
FUNDED UNFUNDED FUNDED UNFUNDED
PLAN PLANS TOTAL PLAN PLANS TOTAL
-------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Unrecognized net transi-
tion asset (liability)
....................... $ 8,293 $ (697) $ 7,596 $ 9,704 $ (796) $ 8,908
Unrecognized prior serv-
ice costs.............. 2,599 (3,432) (833) (1,604) (21) (1,625)
Unrecognized net loss... (37,966) (9,254) (47,220) (16,446) (5,970) (22,416)
Prepaid (accrued) pen-
sion costs............. 993 (8,875) (7,882) 2,589 (6,284) (3,695)
-------- -------- -------- ------- -------- --------
Unfunded status....... $(26,081) $(22,258) $(48,339) $(5,757) $(13,071) $(18,828)
======== ======== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension costs:
Service cost...................................... $ 6,098 $ 4,878 $ 3,547
Interest cost..................................... 8,151 6,816 5,148
Return on assets.................................. (9,489) (3,812) (10,770)
Net amortization and deferral..................... 5,449 (1,678) 6,273
------- ------- --------
Total........................................... $10,209 $ 6,204 $ 4,198
======= ======= ========
</TABLE>
Included in accrued pension costs and netted against retained earnings in
1993, 1992 and 1991 are accruals of $2,078,000, $1,005,000, and $1,114,000,
respectively. The adjustments were made to reflect the excess of the unfunded
accumulated benefit obligation (the excess of the accumulated benefit
obligations over the fair value of plan assets) over the existing unrecognized
prior service costs for one of the supplemental plans.
The 1993 weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.68% and 5.50%, respectively. The expected
long-term rate of return on assets was 8.00% in 1993. For 1992, the rates were
7.50%, 5.50% and 9.00%, respectively.
The Corporation sponsors defined benefit postretirement plans that provide
medical and life insurance coverage to eligible employees and dependents based
on age and length of service. Medical coverage options are the same as those
available to active employees. The cost of plan coverage for retirees and their
qualifying dependents is based upon a credit system that combines age and years
of service. Substantially all employees become eligible for these benefits when
they retire. Benefits are provided through an insurance company whose premiums
are based on the benefits paid during the year.
In 1993, the Corporation adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and elected to amortize the
transition obligation of $19.8 million on a straight-line basis over a period
of twenty years. Postretirement benefit costs for 1992 and 1991 were recorded
on a cash basis and represented the cost of annual insurance premiums which
were approximately $749,000 in 1992 and $875,000 in 1991. Postretirement
benefit costs increased to $3.7 million in 1993 as a result of the adoption of
SFAS No. 106.
54
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's Consolidated Statement of Condition.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------
LIFE
MEDICAL INSURANCE TOTAL
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees....................................... $ (8,212) $(1,333) $ (9,545)
Dependents of retirees eligible for benefits... (3,156) 0 (3,156)
Active employees fully eligible for benefits... (695) (123) (818)
Active employees not eligible for benefits..... (8,527) (1,144) (9,671)
-------- ------- --------
Accumulated postretirement benefit obligation.... (20,590) (2,600) (23,190)
Plan assets at fair value........................ -- -- --
-------- ------- --------
Accumulated postretirement benefit obligation in
excess of plan assets........................... (20,590) (2,600) (23,190)
Unrecognized prior service cost.................. -- -- --
Unrecognized net loss............................ 1,231 409 1,640
Unrecognized transition obligation............... 16,715 2,139 18,854
-------- ------- --------
Net postretirement benefit liability included in
other liabilities............................... $ (2,644) $ (52) $ (2,696)
======== ======= ========
</TABLE>
The assumptions used in developing the present value of the postretirement
benefit obligation were as follows:
<TABLE>
<S> <C>
Rate of return on plan assets....................................... N/A
General inflation................................................... 4.50%
Weighted average discount rate...................................... 7.75%
Weighted average rate of compensation increase...................... 5.50%
Rate of increase in health care costs--initial...................... 13.50%
Rate of increase in health care costs--ultimate..................... 5.50%
</TABLE>
The resulting net periodic postretirement benefit cost consisted of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------
LIFE
MEDICAL INSURANCE TOTAL
------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................... $1,046 $ 86 $1,132
Interest cost.......................................... 1,410 181 1,591
Amortization of unrecognized transition obligation..... 879 113 992
------ ---- ------
Net periodic postretirement benefit cost............... $3,335 $380 $3,715
====== ==== ======
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits is 13.5% for 1994 and is assumed to decrease gradually to
5.5% in the year 2002 and remain at that level thereafter. This health care
cost trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated post retirement benefit
obligation at December 31, 1993 by $1,315,000, and the aggregate of the service
and interest cost components of net periodic postretirement benefit costs for
1993 by $113,000.
55
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. OTHER INCOME AND OTHER OPERATING EXPENSES
The following table summarizes the more significant elements of these
accounts for the three years ended December 31, 1993:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1992 1991
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Other income:
Mortgage banking income.............................. $ 25,745 $ 16,643 $10,908
Bankcard charges and fees............................ 18,770 19,485 22,914
Customer service fees................................ 10,150 8,875 7,748
Investment banking income............................ 8,448 8,847 7,075
Other ............................................... 30,644 22,164 25,087
-------- -------- -------
Total............................................ $ 93,757 $ 76,014 $73,732
======== ======== =======
Other operating expenses:
Examinations and assessments......................... $ 16,006 $ 16,330 $12,515
Lending and collection............................... 13,545 11,318 10,185
Postage and communications........................... 13,238 12,379 11,607
Professional fees.................................... 13,152 8,627 6,291
Advertising and public relations..................... 11,266 9,665 8,035
Other real estate expense............................ 6,757 9,349 6,505
Other ............................................... 55,232 49,125 42,393
-------- -------- -------
Total............................................ $129,196 $116,793 $97,531
======== ======== =======
</TABLE>
14. INCOME TAXES
As discussed in Note 1, the Corporation adopted SFAS No. 109 retroactive to
January 1, 1990. The cumulative effect of this change was to decrease retained
earnings as of December 31, 1990 by $5.2 million. There was no effect on net
income, effective tax rates or components of income tax expense for any periods
subsequent to December 31, 1990.
SFAS 109 requires an asset and liability approach for accounting for income
taxes. Its objective is to recognize the amount of taxes payable or refundable
in the current year, and deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. The measurement of tax assets and liabilities is based on enacted tax
laws. Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based on available evidence.
The following is an analysis of income tax amounts included in the
consolidated statements of condition at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Federal income taxes currently payable (receivable)........ $ 4,393 $(6,027)
State income taxes currently payable....................... 3,210 925
Deferred Federal and State income tax liability............ 15,474 433
Deferred investment tax credits............................ 262 451
</TABLE>
56
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of income tax expense for the three years ended December 31,
1993 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
Federal....................................... $ 55,041 $ 26,449 $ 30,001
Foreign....................................... 333 553 395
State......................................... 9,435 5,940 5,683
-------- -------- --------
Total taxes currently payable............... 64,809 32,942 36,079
-------- -------- --------
Deferred income taxes:
Federal....................................... (2,648) 13,819 (1,696)
State......................................... 671 2,444 668
-------- -------- --------
Total deferred income taxes................. (1,977) 16,263 (1,028)
-------- -------- --------
Total income tax expense........................ $ 62,832 $49,205 $35,051
======== ======== ========
</TABLE>
Foreign income taxes represent taxes on interest received from foreign
borrowers and foreign dividends received.
The reconciliation of the statutory Federal income tax rate to the effective
tax rate for the three years ended December 31, 1993 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Percent of pre-tax income:
Statutory Federal income tax rate...... 35.00% 34.00% 34.00%
Increase (decrease) in tax rate resulting
from:
Tax-exempt income...................... (4.09) (5.25) (6.09)
State income taxes, net of Federal ben-
efits................................. 3.72 3.90 3.88
Other, net............................. 0.93 2.08 0.04
-------- -------- --------
Effective tax rate....................... 35.56% 34.73% 31.83%
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 and 1992 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt.............................................. $ 75,109 $ 67,294
Deferred compensation................................. 12,962 10,590
Income on loans....................................... 6,327 5,591
Other................................................. 7,522 8,127
-------- --------
Total gross deferred tax assets..................... 101,920 91,602
-------- --------
Deferred tax liabilities:
Leases................................................ (89,981) (83,277)
Depreciation.......................................... (4,659) (4,079)
Unrealized gains on investment securities available-
for-sale............................................. (17,018) --
Other................................................. (5,736) (4,679)
-------- --------
Total gross deferred tax liabilities................ (117,394) (92,035)
-------- --------
Net deferred tax liability.......................... (15,474) (433)
======== ========
</TABLE>
57
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Federal income tax returns have been examined by the Internal Revenue Service
through December 31, 1989 and adequate provision has been made for all
liabilities for Federal and other income taxes as of December 31, 1993. The
composition of the 1993 income tax liability and provision between current and
deferred portions is subject to final determination based on the 1993
consolidated Federal income tax return. The foregoing liability and provision
amounts for 1992 have been reclassified to reflect the final determinations
made with respect to the 1992 federal income tax return.
15. LEASE COMMITMENTS
The Corporation occupies various office facilities under lease arrangements
virtually all of which are operating leases. Rental expense under these leases,
net of subleases, was $16,469,000 in 1993, $17,471,000 in 1992, and $15,906,000
in 1991. Rental expense under equipment lease arrangements, all of which are
considered short-term commitments, was $2,731,000 in 1993, $2,525,000 in 1992,
and $2,366,000 in 1991. The following is a summary of the annual noncancellable
long-term commitments, net of subleases:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1994....................................................... $15,696
1995....................................................... 14,462
1996....................................................... 13,312
1997....................................................... 9,282
1998....................................................... 5,562
1999-2003.................................................. 22,063
2004-and beyond............................................ 26,906
</TABLE>
The lease amounts represent minimum rentals not adjusted for property tax and
operating expenses which the Corporation may be obligated to pay. Such amounts
are insignificant in relation to the minimum obligations. It is expected that
in the normal course of business, leases that expire will be renewed or
replaced by leases on other properties; thus, it is anticipated that future
annual minimum lease commitments will not be less than the rental expense for
1993.
16. REGULATORY REQUIREMENTS AND RESTRICTIONS
Regulations of the Comptroller place a limitation on the amount of dividends
that a national bank may pay to its shareholders without prior approval. Based
on these limitations, the amount available for dividends in 1993 to the
Corporation by the National Banks will be the National Banks' net profits in
1993 plus the total amount available for dividends at January 1, 1994 of
approximately $29.2 million. The Comptroller also has the authority to prohibit
a national bank from paying dividends if the Comptroller deems such payment to
be an unsafe or unsound banking practice.
In December 1991, the Board of Directors of York Bank adopted resolutions at
the direction of the Pennsylvania Department of Banking and the FDIC which
prohibit any payment of dividends that would reduce York Bank's ratio of tier 1
capital to total assets (leverage ratio) below 6% and provide for the reduction
of the ratio of classified assets less the allowance for credit losses to tier
1 capital. At December 31, 1993 York Bank's tier 1 capital ratio as a percent
of total assets (leverage ratio) was 9.4%.
Current Federal Reserve regulations place certain restrictions on "covered
transactions" (which includes loans and purchases of assets) by banks with
their nonbank affiliates. The amount of covered transactions that a bank may
have is limited to 10% with any one nonbank affiliate and to 20% in aggregate
of the bank's capital stock, surplus and undivided profits (net assets) after
adding back the allowance for loan and lease losses. Covered transactions must
be on terms and conditions consistent with safe and sound banking practices,
and banks are precluded from purchasing low quality assets from affiliates,
with very limited
58
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exceptions. Furthermore, certain covered transactions are required to be
secured by collateral having a market value equal to 100% or more of the amount
of the transaction depending on the type of collateral. Based on these
limitations, there was approximately $145.3 million available for covered
transactions between the banks and their nonbank affiliates at December 31,
1993.
17. OFF-BALANCE SHEET ITEMS, COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of customers
and to manage the Corporation's exposure to fluctuations in interest rates.
These financial instruments include unfunded commitments to extend credit,
standby, commercial and similar letters of credit, commitments to sell
securities, foreign exhange contracts, futures, forward and option contracts
and interest rate contracts. When viewed in terms of the maximum exposure,
these instruments involve, in varying degrees, exposure to credit and interest
rate risk in excess of the amount recognized in the consolidated statements of
condition.
The contract or notional amount represents the extent of the Corporation's
involvement in any particular class of instrument. The Corporation's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for unfunded commitments to extend credit and commercial,
standby and other letters of credit is represented by the contractual amounts
of those instruments. The Corporation follows the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. For interest rate caps, floors, and swap transactions, futures and
forward contracts, and options written, the contract and notional amounts do
not represent exposure to credit loss. The Corporation controls the credit risk
of these instruments through adherence to credit approvals, risk control limits
and monitoring procedures.
The Corporation evaluates each customer's credit worthiness on a case by case
basis and requires collateral to support financial instruments when it is
deemed necessary. The amount of collateral obtained upon extension of credit is
based on Management's evaluation of the counterparty. Collateral held varies
but may include deposits held in financial institutions, U.S. Treasury
securities, other marketable securities, income producing commercial
properties, accounts receivable, property, plant and equipment, and inventory.
Financial instruments whose contract amounts represent potential credit risk
at December 31, 1993 and 1992 are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit............................. $4,839,763 $3,636,002
Standby letters of credit ............................... 425,491 400,325
Commercial and similar lines of credit .................. 70,561 46,029
Loans sold with recourse ................................ 51,983 89,359
Securities lent.......................................... 147,153 104,197
</TABLE>
59
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The notional values of financial instruments whose contract or notional
amounts do not represent potential credit risk at December 31, 1993 and 1992
are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest rate swaps ......................................... $629,559 $734,982
Options contracts purchased ................................. 22,000 28,500
Interest rate caps and floors written and swaptions ......... 72,305 203,841
Interest rate caps and floors purchased...................... 238,260 364,591
Commitments to purchase securities, futures and forward con-
tracts ..................................................... 71,678 3,040
Commitments to sell securities, futures and forward contracts
............................................................ 414,306 182,799
Commitments to purchase foreign exchange .................... 175,333 303,127
Commitments to sell foreign exchange ........................ 175,899 302,706
Foreign exchange options written............................. 111,495 --
Foreign exchange options purchased........................... 101,495 --
</TABLE>
Specific discussion of these instruments along with the attendant risks,
credit concentrations and collateral policies is as follows:
Commitments to Extend Credit--These are legally binding contracts to lend to
a customer as long as there is no violation of any condition established in the
contract. Commitments usually have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. At December 31, 1993,
binding commitments to extend credit by category were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Commercial....................................................... $1,778,765
Real estate...................................................... 172,363
Retail........................................................... 531,104
Bankcard......................................................... 2,114,002
Leases receivable................................................ 9,005
Foreign.......................................................... 234,524
----------
Total........................................................ $4,839,763
==========
</TABLE>
Standby, Commercial and Similar Letters of Credit--These instruments are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party. These guarantees are primarily issued to
support the performance of products, services and contractual obligations or to
support public and private borrowing arrangements, including commercial paper
transactions, bond financing and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Risks associated with standby letters
of credit are reduced by participations to third parties. At December 31, 1993
and 1992, $2,500,000 and $1,000,000, respectively, of standby letters of credit
had been participated to others.
Securities Lent--These are the Corporation's securities and customers'
securities held by the Corporation which are lent to third parties. The
Corporation obtains collateral, with a market value exceeding 100 percent of
the contract amount, for all securities lent which is used to indemnify the
Corporation and customers against possible losses resulting from third party
defaults.
Interest Rate Swaps--These transactions generally involve the exchange of
fixed and floating rate payment obligations without the exchange of the
underlying principal amounts. Swaps are used as part of the Corporation's asset
and liability management. In addition, interest rate swap activity may arise
when the
60
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Corporation acts as an intermediary in arranging interest rate swap
transactions for customers. The Corporation typically becomes a principal in
the exchange of interest payments between the parties and, therefore, is
exposed to loss should one party default. The Corporation minimizes credit risk
by performing normal credit reviews on its swap customers and minimizes its
exposure to interest rate risk inherent in interest rate swaps by entering into
offsetting swap positions or other instruments that essentially counterbalance
each other.
Entering into interest rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts but also the interest rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller. These amounts are derived by estimating the cost, on a present value
basis, of replacing at current market rates all those outstanding agreements
for which the Corporation would incur a loss in replacing the contract. At
December 31, 1993 and 1992, the amounts at risk totaled $11,853,000 and
$19,321,000, respectively.
Options--Included in option contracts purchased are optional commitments to
deliver mortgage loans to various investors in the amount of $22,000,000 and
$28,500,000 at December 31, 1993 and 1992, respectively.
Interest Rate Caps and Floors--These instruments are written by the
Corporation to transfer, modify or reduce its customers' or its own interest
rate exposure. Credit risk and interest rate risk are managed through the
oversight procedures applied to other interest rate contracts, as well as
through the purchase of offsetting cap and floor positions. The present value
of caps and floors in a profitable position, which represents the credit risk
on these instruments totaled $99,000 and $632,000 at December 31, 1993 and
1992, respectively. At December 31, 1993 and 1992, the Corporation had
purchased $73,260,000 and $199,591,000 in notional principal amount interest
rate caps and floors as offsetting positions to interest rate caps and floors
written and $165,000,000 notional principal amount interest rate caps to hedge
the interest rate risk associated with bankcard asset securitizations.
Commitments to Purchase and Sell Securities, Futures and Forward Contracts--
These instruments are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to make delivery at a specified
future date of a specified instrument, at a specified price or yield. Risks
arise in these transactions through the possible inability of one of the
counterparties to meet the terms of the contracts and from movements in
interest rates or securities values. Included in forward contracts sold are
mandatory commitments to deliver mortgage loans to various investors in the
amounts of $305,557,000 and $178,512,000 at December 31, 1993 and 1992,
respectively, which are used to hedge the price risk associated with
residential mortgages held-for-sale.
Commitments to Purchase and Sell Foreign Exchange--As with commitments to
sell securities, these future type agreements represent contractual obligations
to purchase and sell foreign exchange at some future price. The potential risks
associated with these obligations arise from fluctuations in foreign exchange
rates, as well as the potential inability of the counterparty to perform under
the contract. These risks are mitigated by offsetting sell positions as well as
standard limiting and monitoring procedures. The exposure to loss on forward
transactions can be estimated by calculating the cost to replace all profitable
contracts outstanding. At December 31, 1993 and 1992, the Corporation's
estimates of its exposure were $4,310,000 and $4,496,000, respectively.
Securitized Assets--At the end of 1990 and during 1991 and 1992, the
Corporation's subsidiaries securitized and sold manufactured housing and credit
card receivables in amounts aggregating $496.0 million. The Corporation's
subsidiaries continue to service the accounts for servicing fees which are
comprised of the financial spread less estimated credit losses. Credit recourse
is generally limited to future servicing income and certain balances maintained
in trust for the benefit of investors. No gains or losses were recorded in
connection with the sales.
61
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Corporation and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. In the opinion
of management, based on its review with counsel of these matters to date,
disposition of all matters will not materially affect the consolidated
financial position or results of operations of the Corporation and its
subsidiaries.
18. RELATED PARTY TRANSACTIONS
The Corporation has granted loans to certain of its executive officers,
directors, principal holders of equity securities, and their associates
(defined generally, as general partners of noncorporate entities, beneficial
owners of at least 10% of equity securities of corporate borrowers, and members
of their immediate families). Such loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of these loans,
exclusive of loans not exceeding $60,000 in the aggregate to any one person,
was $29,893,000 and $41,513,000 at December 31, 1993 and 1992, respectively.
During 1993, $78,096,000 of new loans were made and repayments and other
reductions totaled $89,716,000. At December 31, 1993, none of the loans
outstanding were classified as nonaccrual, restructured or potential problem
loans.
Following the termination of the Corporation's Long Term Incentive Plan on
March 21, 1989, the Corporation adopted its 1989 Long-Term Incentive Plan and
Trust (the "1989 Plan"). The 1989 Plan provides for the award to key employees
who contribute to the continued growth, development and financial success of
the Corporation of up to 7 million Ordinary shares IR25p each of Allied Irish
("Common Stock") (or the equivalent thereof in Common Stock ADRs) and 200,000
Non-Cumulative Preference Share ADRs of Allied Irish ("Preferred Stock")
(together the "Restricted Stock"). Awards are made to participants, without
payment of consideration by the participant, in the form of Restricted Stock
purchased by the Corporation in the open market and held in trust under the
1989 Plan until the expiration of the relevant restriction period. During 1993,
1991 and 1989 awards were made under the 1989 Plan aggregating the equivalent
of 2,035,680, 1,986,954 and 1,834,700 shares of Common Stock and 57,470, 70,361
and 50,704 shares of Preferred Stock, respectively, and expenses relative to
this plan totaled $4,051,000, $2,942,000 and $4,022,000 in 1993, 1992 and 1991,
respectively. The awards are subject to a restriction period of at least three
years.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments ("Statement 107"), requires that the Corporation
disclose estimated fair values for financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Corporation's financial
instruments.
Cash and due from banks
The carrying amounts for cash and due from banks reported on the consolidated
statements of condition approximates fair value due to the short maturity of
these instruments.
Money market investments
Money market investments include interest bearing deposits in other banks,
trading account securities, Federal funds sold, and securities purchased under
agreements to resell. Fair values were determined as follows:
Interest bearing deposits in other banks--The fair value of interest bearing
deposits in other banks was determined by discounting the cash flows associated
with these instruments using an appropriate discount
62
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rate. Current middle market rates for deposits with similar characteristics to
the financial instrument being valued were obtained from offshore eurodollar
dealers and used as discount rates.
Trading account securities--The fair values for the Corporation's trading
account securities are based on quoted market prices and trading account
securities are recognized on the consolidated statements of condition at fair
value.
Federal funds sold--The carrying amount of federal funds sold reported on the
consolidated statement of condition approximates fair value due to the
overnight maturity of these instruments.
Securities purchased under agreements to resell--The fair value of securities
purchased under agreements to resell was determined by discounting the cash
flows associated with these instruments using an appropriate discount rate.
Market rates for financial instruments with similar characteristics to the
financial instrument being valued were used as the discount rate. Market rates
were based on an average of quotes obtained from several securities dealers.
The carrying values and fair values of money market investments consisted of
the following at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
----------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest bearing deposits in other banks.... $ 406 $ 406 $20,100 $20,105
Trading account securities.................. 53,337 53,337 7,616 7,616
Federal funds sold.......................... 121,000 121,000 -- --
Securities purchased under agreements to re-
sell....................................... 21,830 21,824 22,122 22,123
-------- -------- ------- -------
Total money market investments.......... $196,573 $196,567 $49,838 $49,844
======== ======== ======= =======
</TABLE>
Investment securities
The fair value of investment securities is based on bid prices received from
an external pricing service or bid quotations received from external securities
dealers.
The carrying amounts and fair values of investment securities is presented in
Note 4 of the Notes to the Consolidated Financial Statements. The available-
for-sale securities are carried at fair value.
Loans
Loans were segmented into portfolios with similar financial characteristics,
such as commercial, commercial real estate, residential mortgage, retail,
bankcard and foreign loans. Each loan category was further segmented by fixed
and adjustable rate interest terms and by performing and nonperforming
categories. Taxable fixed rate loans were valued separately from tax exempt
loans. Commercial real estate was further segmented between investment and
owner occupied properties.
The fair value of fixed rate performing loans except residential mortgages
was calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan portfolio. The estimated maturity was
based on the Corporation's historical experience with repayments for each loan
classification modified, as required, by an estimate of the effect of current
economic and lending conditions. Adjustable rate loans were considered to be at
fair value if there had not been any significant deterioration in the credit
risk of the borrower. Adjustable
63
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rate loans which had deteriorated in credit quality since their origination
date were further discounted to reflect a reduction in fair value. Residential
mortgages were valued based on quoted market prices for comparable mortgage-
backed securities.
The fair value for significant nonperforming loans was determined by reducing
the book value of nonperforming loans by the specific loan loss reserves
established for these loans. Specific reserves were established by using
appraisals, available market information and specific borrower information.
The fair value estimate for bankcard receivables is based on the value of
existing loans at December 31, 1993 and 1992. This estimate does not include
the value that relates to estimated cash flows from new loans generated from
existing cardholders over the remaining life of the portfolio. Recent portfolio
sales indicate that if this additional value had been considered, the fair
value estimate for bankcard receivables would have increased by approximately
10% of the carrying amount of the receivables.
The fair value of LDC loans was based on market quotes where available and,
where not available, on quoted market prices of LDC debt with similar
characteristics with appropriate adjustments if necessary.
The carrying amounts and fair values of loans receivable consisted of the
following at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................ $1,626,080 $1,618,994 $1,744,410 $1,733,368
Real estate, construction......... 284,008 275,627 326,756 309,500
Real estate, mortgage:
Residential...................... 497,543 504,019 381,696 390,952
Commercial....................... 957,568 929,931 896,965 875,072
Retail............................ 885,117 888,214 940,728 943,891
Bankcard.......................... 527,657 561,470 494,851 520,136
Foreign........................... 207,927 206,145 175,387 172,074
---------- ---------- ---------- ----------
4,985,900 4,984,400 4,960,793 4,944,993
Allowance for credit losses....... (196,702) (196,331)
---------- ---------- ---------- ----------
Total loans................... $4,789,198 $4,984,400 $4,764,462 $4,944,993
========== ========== ========== ==========
</TABLE>
The majority of the loans held-for-sale at December 31, 1993 and 1992 were
residential mortgages. The carrying amount and fair value of loans held-for-
sale at December 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1993 1992
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans held-for-sale......................... $269,222 $272,481 $158,108 $160,189
======== ======== ======== ========
</TABLE>
Accrued interest receivable
The carrying amount of accrued interest receivable approximates its fair
value.
Deposits
Under Statement 107, the fair value of deposits with no stated maturity, such
as noninterest bearing demand deposits, interest bearing demand deposits and
money market and savings accounts, is equal to the
64
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amount payable on demand as of December 31, 1993 and 1992. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate for retail certificates of deposits was estimated
using the rate currently offered for deposits of similar remaining maturities.
The discount rate for large denomination time deposits which includes
commercial, brokered, public funds and negotiable CD's and deposit notes was
determined by using quotations from pricing services or obtaining quotes from
securities dealers depending on the type of deposit being valued.
The carrying amounts and fair values of deposits consisted of the following
at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest bearing deposits........ $1,914,452 $1,914,452 $1,801,942 $1,801,942
Interest bearing demand............. 587,512 587,512 538,279 538,279
Money market accounts............... 1,341,998 1,341,998 1,456,743 1,456,743
Savings............................. 1,120,517 1,120,517 913,124 913,124
Retail time......................... 1,413,774 1,420,992 1,550,579 1,560,020
Large denomination time............. 284,024 290,797 440,002 449,093
Foreign Time........................ 111,880 111,854 118,422 118,418
---------- ---------- ---------- ----------
Total deposits.................. $6,774,157 $6,788,122 $6,819,091 $6,837,619
========== ========== ========== ==========
</TABLE>
Federal funds purchased and securities sold under repurchase agreements
Federal funds purchased--The carrying amount of Federal funds purchased
approximates its fair value due to the overnight maturities of these financial
instruments.
Securities sold under agreements to repurchase--The fair value of securities
sold under agreements to repurchase was determined by discounting the cash
flows associated with these instruments using an appropriate discount rate.
Market rates for financial instruments with similar characteristics to the
financial instrument being valued were used as the discount rate. Market rates
were based on an average of quotes obtained from several securities dealers. In
the case of dollar roll repurchase agreements which are unique instruments with
no quoted market rates, market values were estimated using an equivalent
maturity repurchase agreement market rate.
The carrying amounts and fair values of federal funds purchased and
securities sold under repurchase agreements consisted of the following at
December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal funds purchased.................... $285,676 $285,676 $309,350 $309,350
Securities sold under agreements to repur-
chase..................................... 462,590 462,445 270,163 270,126
-------- -------- -------- --------
$748,266 $748,121 $579,513 $579,476
======== ======== ======== ========
</TABLE>
Other borrowed funds, short term
The master demand notes of the Corporation and the Treasury tax and loan
balances reprice daily. The carrying amount of these financial instruments
approximates fair value. The book value of other short-term borrowings also
approximates its fair value.
65
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt
The fair value of long-term debt was calculated by discounting the cash flows
associated with these instruments using appropriate discount rates. Market
rates for financial instruments with equivalent credit risk characteristics and
equivalent maturities were obtained from investment bankers and used as
discount rates in the valuation model.
The carrying amount and fair values of long-term borrowings consisted of the
following at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term debt.............................. $189,577 $208,792 $190,396 $201,466
======== ======== ======== ========
</TABLE>
Accrued interest payable
The carrying amount of accrued interest payable approximates its market
value.
Interest rate swaps agreements, interest rate caps and floors, foreign exchange
options contracts and swaptions
The fair value of interest rate swaps, interest rate caps and floors, foreign
exchange options contracts and swaptions is obtained from dealer quotes. These
values represent the estimated amount the Corporation would receive or pay to
terminate the contracts or agreements, taking into account current interest
rates and, when appropriate, the credit worthiness of the counterparties.
The notional amount, and estimated fair value for interest rate swaps,
interest rate caps and floors, foreign exchange options contracts and swaptions
at December 31, 1993 and 1992 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
--------------- ----------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate swaps.......................... $629,559 $3,357 $734,982 $ 4,440
Interest rate caps and floors................ 310,565 (123) 553,432 (1,971)
Foreign exchange options contracts........... 212,990 2,742 -- --
Swaptions.................................... -- -- 15,000 (17)
</TABLE>
Commitments to extend credit and standby letters of credit
The Corporation's commercial loan, commercial mortgage and construction
mortgage commitments to extend credit move with market rates, therefore, they
are not subject to interest rate risk. A significant portion of the
Corporation's commercial loan and commercial mortgage commitment fees are
determined retrospectively and are recognized as service fee income on the fee
determination date. It was not considered practicable to develop fair value
disclosures for loan commitments due to the difficulty involved in estimating
future commitment fees when the fee determination date is at the end of the
determination period. Fee income recognized as noninterest income totaled $2.3
million and $1.9 million for the years ended December 31, 1993 and 1992,
respectively. The Corporation had $38,431,000 and $24,569,000 of residential
mortgage commitments outstanding at December 31, 1993 and 1992 with estimated
fair values of $1,245,000 and $620,000, respectively.
66
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Corporation uses a variety of billing methods for its outstanding standby
and commercial letters of credit. Fees may be billed in advance or in arrears
on an annual, quarterly or monthly basis. It was not considered practicable to
perform a fair value calculation on standby and commercial letters of credit
because each customer relationship would have to be separately evaluated. The
majority of the Corporation's standby and commercial letters of credit would
have a positive fair value due to the unbilled and unrecognized fee income
associated with these off-balance sheet commitments. At December 31, 1993 and
1992, deferred commissions on standby and commercial letters of credit totaled
$811,000 and $602,000, respectively. Total fee income on standby and commercial
letters of credit was $4.9 million and $4.4 million for the years ended
December 31, 1993 and 1992.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about financial instruments. These estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Corporation's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on
judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities not considered
financial instruments.
67
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of First Maryland Bancorp
(parent company only):
CONDENSED STATEMENTS OF INCOME FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries:
Bank subsidiaries................................ $ 44,500 $106,968 $38,000
Nonbank subsidiaries............................. 6,554 3,823 18,253
Interest income from subsidiaries:
Bank subsidiaries................................ 8,784 6,641 15,493
Nonbank subsidiaries............................. 11,753 14,379 20,230
Other interest and dividend income............... 9,697 9,203 10,879
Other income....................................... 7,261 4,356 3,781
-------- -------- -------
Total income................................... 88,549 145,370 106,636
-------- -------- -------
Expenses:
Interest expense, short-term debt.................. 12,513 17,164 23,010
Interest expense, long-term debt................... 17,312 15,850 20,041
Other expenses..................................... 7,344 5,513 7,451
-------- -------- -------
Total expenses................................. 37,169 38,527 50,502
-------- -------- -------
Income before taxes and equity in undistributed net
income of subsidiaries............................ 51,380 106,843 56,134
Income tax (credit) expense........................ (222) (1,512) 501
-------- -------- -------
Income before equity in undistributed net income of
subsidiaries...................................... 51,602 108,355 55,633
Equity in undistributed net income of subsidiaries. 62,266 (15,882) 19,423
-------- -------- -------
Net income......................................... $113,868 $ 92,473 $75,056
======== ======== =======
</TABLE>
68
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
CONDENSED STATEMENTS OF CONDITION FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $ 9,845 $ 89
Interest bearing deposits in other banks................. 443,777 271,335
Securities purchased under agreements to resell ......... 58 50
Investment securities available for sale................. 33,291 --
Investment securities ................................... 8,507 31,739
Investment in subsidiaries:
Bank subsidiaries ..................................... 674,873 597,183
Nonbank subsidiaries .................................. 42,754 32,628
Loans and advances to subsidiaries:
Bank subsidiaries ..................................... 76,000 76,000
Nonbank subsidiaries .................................. 316,448 250,038
Premises and equipment................................. 4,120 --
Other assets ............................................ 40,455 34,471
---------- ----------
Total assets ........................................ $1,650,128 $1,293,533
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt.......................................... $463,682 $ 389,874
Long-term debt........................................... 189,577 189,521
Other liabilities ....................................... 20,075 19,980
---------- ----------
Total liabilities ................................... 673,334 599,375
---------- ----------
Stockholders' equity..................................... 976,794 694,158
---------- ----------
Total liabilities and stockholders' equity........... $1,650,128 $1,293,533
========== ==========
</TABLE>
69
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
CONDENSED STATEMENTS OF CASH FLOWS
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1993 1992 1991
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before undistributed net income of
subsidiaries................................ $ 51,602 $108,355 $ 55,633
Adjustments to reconcile net income to net
cash provided by operating activities....... 1,508 7,188 591
-------- --------- ---------
Net cash provided by operating activities.. 53,110 115,543 56,224
-------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sales of investment securities. 2,100 1,556 10,849
Proceeds from paydowns and maturities of in-
vestment securities......................... 3,000 452 6,336
Purchases of investment securities........... (9,572) (12,364) (14,769)
Net decrease (increase) in short-term invest-
ments....................................... (8) -- 210,000
Investment in subsidiaries................... (10,686) (702) (152,084)
Net increase in loans to subsidiaries, short-
term........................................ (67,284) (46,057) (61,471)
Long-term loans to subsidiaries.............. -- (41,000) --
Principal collected on long-term loans to
subsidiaries................................ 875 110,825 825
Purchase of restricted stock for compensation
plan........................................ (4,809) (2,553) --
Purchases of premises and equipment.......... (120) -- --
Proceeds from sales of premises and equip-
ment........................................ 175 -- --
Other, net................................... (3,194) (3,881) (3,434)
-------- --------- ---------
Net cash (used for) provided by investing
activities................................ (89,523) 6,276 (3,748)
-------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) increase in short-
term borrowings............................. 73,808 (143,134) 146,169
Proceeds from the issuance of long-term debt. -- 99,564 --
Principal payment on long-term debt.......... -- (50,825) (60,825)
Proceeds from the issuance of preferred
stock....................................... 144,803 -- --
-------- --------- ---------
Net cash provided by (used for) financing
activities................................ 218,611 (94,395) 85,344
-------- --------- ---------
Increase in cash and cash equivalents(1)....... 182,198 27,424 137,820
Cash and cash equivalents at beginning of year. 271,424 244,000 106,180
-------- --------- ---------
Cash and cash equivalents at end of year....... $453,622 $ 271,424 $ 244,000
======== ========= =========
</TABLE>
- --------
(1) Cash and cash equivalents include those amounts under the captions "Cash
and due from banks" and "Interest bearing deposits in other banks" on the
condensed statements of condition. There were no unconsolidated subsidiaries
or 50% or less owned persons accounted for by the equity method for the three
years ended December 31, 1993.
70
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MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of First Maryland Bancorp has prepared and is responsible for
the accompanying financial statements, together with the financial data and
other information presented in this annual report on Form 10-K. Management
believes that the financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances to
reflect the substance of events and transactions that should be included. The
financial statements include amounts that are based on Management's best
estimates and judgments.
Management maintains and depends upon an internal accounting control system
designed to provide reasonable assurance that transactions are executed in
accordance with Management's authorization, that financial records are reliable
as the basis for the preparation of all financial statements, and that the
Corporation's assets are safeguarded. The design and implementation of all
systems of internal control are based on judgments required to evaluate the
costs and controls in relation to the expected benefits and to determine the
appropriate balance between these costs and benefits. The Corporation maintains
an internal audit program to monitor compliance with the system of internal
accounting control.
The audit committee of the Board of Directors, comprised solely of outside
directors, meets at least quarterly with the independent public accountants,
KPMG Peat Marwick, management and internal auditors to review accounting,
auditing and financial reporting matters. The independent public accountants
and internal auditors each meet privately with the committee, without
management present, to discuss the results of their audit work and their
evaluations of the adequacy of internal controls and the quality of financial
reporting.
The financial statements in this annual report on Form 10-K have been
examined by the Corporation's independent public accountants for the purpose of
expressing an opinion as to the fair presentation of the financial statements.
Their independent professional opinion on the Corporation's financial
statements is presented on the following page.
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders First Maryland Bancorp:
We have audited the accompanying consolidated statements of condition of
First Maryland Bancorp and subsidiaries as of December 31, 1993 and 1992 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1993. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Maryland Bancorp and subsidiaries at December 31, 1993 and 1992 and the results
of their operations and cash flows for each of the years in the three-year
period ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 12, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" effective December 31, 1993;
SFAS No. 109, "Accounting for Income Taxes" retroactive to January 1, 1990; and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions" effective in 1993.
KPMG Peat Marwick
Baltimore, Maryland February 10, 1994
72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Items 10-13 of this Annual Report will be filed by amendment.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: None.
3. Exhibits:
(3.1) Articles of Incorporation and Bylaws. (Incorporated by reference
to Exhibits 3.1 and 3.2 to the Form SE containing Exhibits to the
Corporation's Registration Statement on Form S-1 filed March 13,
1992.)
(3.2) Articles Supplementary creating the 7.875% Noncumulative Preferred
Stock, Series A (Incorporated by reference to Exhibit 3 of the
Corporation's Registration Statement on Form S-3 filed November
16, 1993, File No. 33-51065.)
(4.1) The Corporation agrees to furnish to the Securities and Exchange
Commission upon request a copy of each instrument defining the
rights of holders of long-term debt of the Corporation and its
consolidated subsidiaries.
(4.2) Form of Preferred Stock Certificate (Incorporated by reference to
Exhibit 4 of the Corporation's Registration Statement on Form S-3
filed November 16, 1993, File No. 33-51065.)
(10) Material contracts. (Incorporated by reference to Exhibits 10.1
through 10.19 to the Form SE containing Exhibits to the Corpora-
tion's Registration Statement on Form S-1 filed March 13, 1992.)
(24) Power of Attorney.
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the quarter ended
December 31, 1993.
73
<PAGE>
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.
First Maryland Bancorp
/s/ Charles W. Cole, Jr.
By __________________________________
(CHARLES W. COLE, JR., PRESIDENT
AND CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
PRINCIPAL EXECUTIVE OFFICER:
/s/ Charles W. Cole, Jr. President and Chief March 30, 1994
- ------------------------------------- Executive Officer
(CHARLES W. COLE, JR.)
PRINCIPAL FINANCIAL OFFICER:
/s/ Robert W. Schaefer Executive Vice March 30, 1994
- ------------------------------------- President
(ROBERT W. SCHAEFER)
PRINCIPAL ACCOUNTING OFFICER:
/s/ James A. Smith Senior Vice March 30, 1994
- ------------------------------------- President
(JAMES A. SMITH)
MAJORITY OF THE BOARD OF DIRECTORS:
Benjamin L. Brown, Jeremiah E. Casey, Charles W. Cole, Jr., J. Owen Cole,
Edward A. Crooke, John F. Dealy, Mathias J. DeVito, Rhoda M. Dorsey, Jerome W.
Geckle, Frank A. Gunther, Jr., Curran W. Harvey, Jr., Margaret M. Heckler,
Kevin J. Kelly, Henry J. Knott, Jr., Thomas P. Mulcahy, William M. Passano,
Jr., Robert I. Schattner and Brian V. Wilson.
/s/ Robert W. Schaefer Attorney-in-Fact March 30, 1994
By _________________________________
(ROBERT W. SCHAEFER)
74
<PAGE>
Exhibit 24
FIRST MARYLAND BANCORP
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of First
Maryland Bancorp, a Maryland corporation, constitute and appoint Jeremiah E.
Casey, Charles W. Cole, Jr. and Robert W. Schaefer, and any one of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full
power and authority in said agents and attorneys-in-fact, and in any one or
more of them, to sign for the undersigned in their respective names as
directors of First Maryland Bancorp the Annual Report on Form 10-K of First
Maryland Bancorp for the year ended December 31, 1993 to be filed with the
Securities and Exchange Commission under the Securities and Exchange Act of
1934, and any amendments or supplements to such Form 10-K. We hereby confirm
all acts taken by such agents and attorneys-in-fact, or any one or more of
them, as herein authorized.
<TABLE>
<S> <C>
Benjamin L. Brown Frank A. Gunther, Jr.
- ----------------- ---------------------
Benjamin L. Brown Frank A. Gunther, Jr.
Jeremiah E. Casey Curran W. Harvey, Jr.
- ----------------- ---------------------
Jeremiah E. Casey Curran W. Harvey, Jr.
Charles W. Cole, Jr. Margaret M. Heckler
- -------------------- -------------------
Charles W. Cole, Jr. Margaret M. Heckler
J. Owen Cole Kevin J. Kelly
- ------------ --------------
J. Owen Cole Kevin J. Kelly
Edward A. Cooke Henry J. Knott, Jr.
- --------------- -------------------
Edward A. Cooke Henry J. Knott, Jr.
John F. Dealy Thomas F. Mulcahy
- ------------- -----------------
John F. Dealy Thomas F. Mulcahy
Mathias J. DeVito William M. Passano, Jr.
- ----------------- -----------------------
Mathias J. DeVito William M. Passano, Jr.
Rhoda M. Dorsey Robert I. Schattner
- --------------- -------------------
Rhoda M. Dorsey Robert I. Schattner
Jerome W. Geckle Brian V. Wilson
- ---------------- ---------------
Jerome W. Geckle Brian V. Wilson
Dated: March 15, 1994
</TABLE>
