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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, 1994
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 (I.R.S. Employer
of incorporation or Identification No.)
organization)
FIRST MARYLAND BUILDING
25 SOUTH CHARLES STREET
BALTIMORE, MARYLAND
(Address of principal 21201
executive offices) (zip code)
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 registered
------------------- -----------------------------------------
7.875% Noncumulative Preferred Stock, New York Stock Exchange, Inc.
Series A
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. [X]
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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PAGE
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PART I
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Item 1-- Business...................................................... 1
Item 2-- Properties.................................................... 7
Item 3-- Legal Proceedings............................................. 7
Item 4-- Submission of Matters to a Vote of Security Holders........... 7
PART II
Item 5-- Market for Registrant's Common Equity and Related Stockholder
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. 74
Independent Auditors' Report.................................. 75
Item 9-- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 76
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................................. 76
Reports on Form 8-K........................................... 76
Exhibits:
Agreement to Provide Copies of Long-term Debt
Instruments........................................Exhibit 4
Power of Attorney.................................. Exhibit 25
Remaining Exhibits are incorporated by reference
Signatures............................................................... 77
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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, 1994, the Corporation had consolidated total assets of $9.1
billion, total deposits of $6.6 billion, and total stockholders' equity of $1.0
billion. 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, 1994 accounted for approximately 96% of the Corporation's
consolidated total assets and the banks contributed approximately 93%, 91% and
95% to the consolidated net income of the Corporation for each of the three
years ended December 31, 1994, 1993 and 1992, 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, 1994, First
National was the second largest commercial bank headquartered in Maryland in
terms of assets, loans and deposits, with assets of $7.3 billion, net loans of
$4.1 billion, and deposits of $6.0 billion. Its assets at such date comprised
80% of the consolidated assets of the Corporation. Including its main office,
First National operates 181 banking facilities in Maryland, including 145 full
service offices, and loan production offices in Washington, D.C., Easton,
Maryland, and York, Pennsylvania. It conducts international activities at its
Baltimore headquarters, a Cayman Islands branch and a representative office in
London, and maintains correspondent relationships with approximately 70 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. At December 31, 1994,
York Bank had assets of $1.1 billion, net loans of $655.3 million, deposits of
$864.7 million and 21 full service offices in south central Pennsylvania and a
loan production office in Lancaster County, 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. It offers
MasterCard (R) and VISA (R) bankcards both directly and as agent for other
banks. At December 31, 1994, it managed bankcard receivables of $661.6 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 28 offices in
Maryland, Delaware, Indiana, Kentucky, Pennsylvania, Tennessee, Virginia, and
West 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
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banking corporation organized under the laws of Ireland, based upon total
assets at December 31, 1994. Based upon United States generally accepted
accounting principles at December 31, 1994, AIB and its subsidiaries
(collectively, "AIB Group") had total assets of approximately $32.4 billion.
AIB Group provides a diverse range of banking, financial and related services
principally in Ireland, the United States and the United Kingdom.
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 enacted in 1994 or that may be in
effect or enacted in the future. Federal law now provides, among other things,
that: (1) effective September 29, 1995, bank holding companies will be
permitted (subject to certain conditions) to acquire banks and bank holding
companies across state lines without regard to whether such acquisition is
prohibited by state law; and (2) effective June 1, 1997 (sooner if both states
opt-in to interstate branching), banks will be permitted to merge across state
lines provided neither state has opted-out of interstate branching. 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 Federal and
state laws in effect through September 28, 1995, the Federal Reserve Board may
not approve the acquisition by the Corporation of any bank located outside the
State of Maryland unless such acquisition is specifically authorized by the
statutory law of the state in which such bank is located. Subject to applicable
Federal and state approval procedures and registration requirements, the
Corporation may: (i) consistent with the provisions of the Bank Holding Company
Act in effect through September 28, 1995, acquire banks in Maryland,
Pennsylvania, Virginia, West Virginia and the District of Columbia and most of
the southeastern states and (ii) consistent with the provisions of the Bank
Holding Company Act which become effective September 29, 1995, acquire banks in
any state in the United States. Commencing on September 29, 1995, the Federal
Reserve Board may approve the acquisition by the Corporation of any bank
located outside the State of Maryland without regard to whether such
acquisition is prohibited under the laws of any state.
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The Bank Holding Company Act also generally prohibits a bank holding company
from engaging in nonbanking 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 nonbanking 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 nonbanking 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. Commencing June 1, 1997
(or sooner if permitted by applicable state laws), banks will be permitted to
merge across state lines provided neither the state in which the surviving bank
maintains its main office nor the state in which the acquired bank maintains
its main office opt-out of interstate branching before June 1, 1997.
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 extensions of credit, credit practices, 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 any of the Banks to the Corporation and its nonbanking
subsidiaries, whether in the form of loans, extensions of credit, investments,
asset purchases or otherwise. Such transfers by any Bank to the Corporation or
any of the Corporation's nonbanking subsidiaries are limited in amount to 10%
of such Bank's capital and surplus and, with respect to the Corporation and all
such nonbanking 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.
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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 (see discussion entitled
"FDICIA" below) 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,
1995, approximately $103.7 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.
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 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 any practice or activity which, 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 1995 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, nonbank 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, 1994, 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,
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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, 1994, the Corporation had a Tier 1 capital to risk adjusted assets
ratio of 14.05%, a total (Tier 1 plus Tier 2) capital ratio of 17.68%, and a
leverage ratio of 11.05%.
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.
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,
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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. For example, in the case of an undercapitalized banking
institution, the bank holding company is required to guarantee that the
undercapitalized subsidiary complies with a recapitalization plan, and may be
liable for civil monetary penalties for failure to fulfill its commitment on
such guarantee. In addition, in the case of a significantly undercapitalized
banking institution, the appropriate Federal banking regulator is authorized to
prohibit the holding company from making any capital distribution (including
paying dividends) without the prior approval of the Federal Reserve Board. As
of December 31, 1994, 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 any 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. On January 31, 1995, the FDIC proposed an
amendment to this regulation to provide for an assessment schedule ranging from
4 basis points to 31 basis points, thus reducing premiums for banks in the
lowest risk classification from 23 basis points to 4 basis points. There is no
assurance that this proposal will be adopted.
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, 1994, the Corporation employed approximately 4,631 full-
time equivalent employees. Management of the Corporation considers relations
with its employees to be satisfactory.
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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 67% 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 1994, 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 1994, 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, Delaware, Indiana, Kentucky, Mississippi, Tennessee, 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.
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 13,
1995, there were 954 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,
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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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1994 1993 1992 1991 1990
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS:
Interest and dividend
income................ $ 619,746 $ 617,237 $ 648,009 $ 675,597 $ 744,643
Interest expense....... 241,099 234,038 284,657 372,518 438,604
---------- ---------- ---------- ---------- ----------
Net interest income.... 378,647 383,199 363,352 303,079 306,039
Provision for credit
losses................ 22,996 45,291 58,126 69,496 97,191
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses......... 355,651 337,908 305,226 233,583 208,848
Noninterest income..... 210,978 233,445 198,182 180,563 123,637
Noninterest expenses... 396,201 394,653 361,730 304,039 274,569
---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 170,428 176,700 141,678 110,107 57,916
Income tax expense..... 59,288 62,832 49,205 35,051 19,579
---------- ---------- ---------- ---------- ----------
Net income............. $ 111,140 $ 113,868 $ 92,473 $ 75,056 $ 38,337
========== ========== ========== ========== ==========
Dividends declared on
preferred stock....... $ 11,820 $ 1,575 $ -- $ -- $ --
CONSOLIDATED AVERAGE
BALANCES:
Total assets........... $9,411,400 $9,395,700 $9,003,000 $7,796,500 $7,440,800
Loans, net............. 5,093,600 4,897,200 5,089,700 4,664,900 5,180,300
Deposits............... 6,635,300 6,651,800 6,764,400 5,788,100 5,228,900
Long-term debt......... 198,000 189,500 165,500 196,200 202,400
Common stockholder's
equity................ 856,600 756,700 646,700 552,600 512,800
Stockholders' equity... 1,001,500 763,900 646,700 552,600 512,800
CONSOLIDATED RATIOS:
Return on average
assets................ 1.18% 1.21% 1.03% 0.96% 0.52%
Return on average
common stockholder's
equity................ 11.59 14.84 14.30 13.58 7.48
Return on average total
stockholders' equity.. 11.10 14.91 14.30 13.58 7.48
Average total
stockholders' equity
to average total
assets................ 10.64 8.13 7.18 7.09 6.89
Capital to risk-
adjusted assets(1):
Tier 1................. 14.05 12.88 10.02 8.06 8.10
Total.................. 17.68 16.62 14.05 11.03 12.34
Tier 1 leverage
ratio(1).............. 11.05 9.60 7.20 7.33 6.70
Net interest margin(2). 4.51 4.64 4.58 4.39 4.61
Net charge-offs to
average loans less
average unearned
income................ 0.56 0.83 1.15 1.10 1.08
Allowance for credit
losses to year end
loans, net of unearned
income................ 3.50 3.85 3.88 3.63 3.10
Year end nonperforming
assets to year end
loans, net of unearned
income plus other
foreclosed assets
owned(3).............. 1.35 2.59 3.83 3.47 2.40
</TABLE>
--------
(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%.
(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.
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, 1994, 1993 and 1992
should be read in conjunction with the Consolidated Financial Statements of
the Corporation and statistical data presented elsewhere herein.
EARNINGS SUMMARY
The Corporation's net income for the year ended December 31, 1994 was $111.1
million, compared to $113.9 million for the year ended December 31, 1993, a
decrease of $2.8 million (2.5%). This decrease is the
8
<PAGE>
result of decreases in net interest income and noninterest income partially
offset by a reduction in the provision for credit losses.
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.
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 1994 and 1993 and 34% for 1992. 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,
--------------------------------------------------------------------------
1994 1993 1992
------------------------ ------------------------ ------------------------
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>
Investment
securities(1).......... $2,607.8 $159.2 6.10% $2,868.9 $191.2 6.66% $2,350.7 $170.4 7.24%
Loans held-for-sale..... 104.8 7.8 7.44 166.6 11.9 7.14 165.9 13.7 8.25
Loans, net of unearned
income................. 5,291.2 437.4 8.27 5,099.3 413.5 8.11 5,293.9 460.8 8.70
Other earning assets.... 612.8 25.5 4.17 358.3 11.4 3.18 377.4 14.4 3.82
-------- ------ -------- ------ -------- ------
Earning assets.......... $8,616.6 629.9 7.31 $8,493.1 628.0 7.39 $8,187.9 659.3 8.05
======== ====== ======== ====== ======== ======
Interest bearing
liabilities............ $6,518.6 241.1 3.70 $6,699.5 234.0 3.49 $6,648.4 284.6 4.28
Net interest spread(2).. 3.61 3.90 3.77
Interest free sources
utilized to fund
earning assets......... 2,098.0 1,793.6 1,539.5
-------- ------ -------- ------ -------- ------
Total sources of funds.. $8,616.6 241.1 2.80 $8,493.1 234.0 2.75 $8,187.9 284.6 3.47
======== ------ ======== ------ ======== ------
Net interest income..... $388.8 $394.0 $374.7
====== ====== ======
Net interest margin(3).. 4.51% 4.64% 4.58%
==== ==== ====
</TABLE>
--------
(1) Yields on investment securities are calculated based upon average amortized
cost.
(2) 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.
(3) 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.
9
<PAGE>
Average earning assets were $8.6 billion for the year ended December 31,
1994, an increase of $123.5 million over average earning assets of $8.5 billion
for the year ended December 31, 1993. This increase is primarily due to an
increase in average loans and funds sold partially offset by a decline in
average investment securities. Average loans increased $191.9 million with the
largest increase in the residential mortgage portfolio.
The net interest margin for the year ended December 31, 1994 was 4.51%
compared to 4.64% for the year ended December 31, 1993. This decline in the net
interest margin is attributable to lower yields on investment securities and
higher funding costs. In addition, increased competition put pressure on the
Corporation's loan yields in 1994. Partially offsetting these negative factors
was a $304.4 million increase in interest free sources of funds primarily due
to the preferred stock issuance in December of 1993. In addition, off-balance
sheet risk management instruments contributed $3.7 million to net interest
income in 1994 compared to $1.7 million in 1993, primarily resulting from an
increase in the notional principal of interest rate swaps during 1994. This
increase resulted in a 4 basis point positive impact on the 1994 net interest
margin compared to a 2 basis point positive impact in 1993.
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.
NET INTEREST INCOME ANALYSIS
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
1994 OVER 1993 1993 OVER 1992
--------------------------------- ---------------------------------
DUE TO CHANGES IN(1) DUE TO CHANGES IN(1)
INCREASE ---------------------- INCREASE ----------------------
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------- ----------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income From
Earning Assets:
Interest and fees on
loans:
Domestic loans......... $ 18,008 $ 10,984 $ 7,024 $(47,590) $ (18,566) $ (29,024)
Foreign loans.......... 5,869 3,517 2,352 282 1,186 (904)
Interest and dividends
on investment
securities
available-for-sale.... 45,494 48,045 (2,551) 26,185 26,185 --
Interest and dividends
on investment
securities
held-to-maturity...... (77,449) (60,977) (16,472) (5,411) 10,142 (15,553)
Interest and fees on
loans held-for-sale... (4,065) (4,578) 513 (1,828) 62 (1,890)
Interest on Federal
funds sold and
securities purchased
under resale
agreement............. 11,802 8,001 3,801 (1,888) 45 (1,933)
Interest on deposits in
other banks........... 596 564 32 (1,086) (910) (176)
Interest on trading
account securities.... 1,603 1,512 91 55 222 (167)
-------- ---------- ---------- -------- ---------- ----------
Total.................. 1,858 9,085 (7,227) (31,281) 23,938 (55,219)
-------- ---------- ---------- -------- ---------- ----------
Interest Expense on
Deposits and Borrowed
Funds:
Interest on deposits in
domestic offices...... (5,373) (609) (4,764) (56,064) (13,209) (42,855)
Interest on deposits in
foreign banking
office................ 3,442 1,957 1,485 (369) (219) (150)
Interest on Federal
funds purchased and
other short-term
borrowing............. 8,503 (6,563) 15,066 4,349 10,260 (5,911)
Interest on long-term
debt.................. 490 759 (269) 1,462 2,223 (761)
-------- ---------- ---------- -------- ---------- ----------
Total.................. 7,062 (6,437) 13,499 (50,622) 2,174 (52,796)
-------- ---------- ---------- -------- ---------- ----------
Net interest income.... $ (5,204) $ 5,681 $ (10,885) $ 19,341 $ 14,102 $ 5,239
======== ========== ========== ======== ========== ==========
</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.
10
<PAGE>
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 decreased $5.2 million
(1.3%) when the year ended December 31, 1994 is compared to the year ended
December 31, 1993. The $5.7 million positive volume variance primarily resulted
from an increase in the volume of earning assets. Volume increases in loans and
funds sold were partially offset by a decline in the volume of investment
securities. The $10.9 million negative rate variance resulted from higher
funding costs as evidenced by the $13.5 million positive rate variance for
interest bearing sources of funds. In addition, the yield on average earning
assets declined 8 basis points, as reflected by the $7.2 million negative rate
variance for average earning assets.
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.
11
<PAGE>
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, 1994, 1993 and 1992.
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1994 1993 1992
----------------------------- ----------------------------- -----------------------------
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. $ 591.0 $ -- -- % $ 650.5 $ -- -- % $ 601.1 $ -- -- %
Money market
investments:
Interest bearing
deposits in other
banks(7).............. 17.2 0.7 4.3 3.9 0.1 2.6 28.6 1.2 4.3
Trading account
securities............ 46.6 2.4 5.1 16.8 0.7 4.2 12.4 0.7 5.8
Funds sold............. 549.0 22.4 4.1 337.6 10.6 3.1 336.4 12.5 3.7
Investment securities
available-for-sale(8):
Taxable................ 905.1 47.2 5.2 372.9 26.2 7.0 -- -- --
Tax-exempt(1).......... 196.6 23.4 11.9 -- -- -- -- -- --
Equity investments..... 19.7 1.1 5.8 -- -- -- -- -- --
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total investment
securities
available-for-sale... 1,121.4 71.7 6.4 372.9 26.2 7.0 -- -- --
Investment securities:
Taxable................ 1,486.4 87.5 5.9 2,342.2 146.8 6.3 2,135.8 145.6 6.8
Tax-exempt(1).......... -- -- -- 151.6 18.1 11.9 212.7 24.7 11.6
Equity investments..... -- -- -- 2.2 0.1 4.5 2.2 0.1 3.9
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total investment
securities........... 1,486.4 87.5 5.9 2,496.0 165.0 6.6 2,350.7 170.4 7.2
Loans held-for-sale..... 104.8 7.8 7.4 166.6 11.9 7.1 165.9 13.7 8.3
Loans (net of unearned
income)(1,2):
Commercial............. 1,632.9 124.6 7.6 1,628.9 111.1 6.8 1,743.6 126.7 7.3
Real estate,
construction.......... 263.2 20.1 7.6 313.1 21.2 6.8 350.7 23.8 6.8
Real estate, mortgage:
Residential............ 552.8 37.3 6.7 418.4 31.7 7.6 448.3 39.9 8.9
Commercial............. 969.9 78.4 8.1 900.3 70.9 7.9 898.7 73.7 8.2
Retail................. 909.7 73.5 8.1 955.7 79.8 8.3 984.6 91.6 9.3
Bankcard............... 482.0 74.3 15.4 488.4 75.2 15.4 496.1 79.8 16.1
Leases receivable...... 226.6 13.2 5.8 200.2 13.4 6.7 199.4 15.4 7.7
Foreign(7)............. 254.1 16.0 6.3 194.3 10.2 5.2 172.5 9.9 5.7
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total loans........... 5,291.2 437.4 8.3 5,099.3 413.5 8.1 5,293.9 460.8 8.7
Allowance for credit
losses................. (197.6) -- -- (202.1) -- -- (204.2) -- --
-------- -------- --------
Total loans, net...... 5,093.6 -- -- 4,897.2 -- -- 5,089.7 -- --
Other assets(3)......... 401.4 -- -- 454.2 -- -- 418.2 -- --
-------- ------ -------- ------ -------- ------
Total assets/interest
income............... $9,411.4 $629.9 $9,395.7 $628.0 $9,003.0 $659.3
======== ====== ======== ====== ======== ======
</TABLE>
12
<PAGE>
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN--
(CONTINUED)
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1994 1993 1992
----------------------------- ----------------------------- -----------------------------
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>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits in domestic
offices:
Noninterest bearing
demand................ $1,730.1 $ -- -- % $1,771.0 $ -- -- % $1,561.4 $ -- -- %
-------- -------- --------
Interest bearing
demand................ 548.9 12.7 2.3 535.5 13.4 2.5 467.2 15.1 3.2
Money market accounts.. 1,312.3 39.2 3.0 1,433.1 42.3 3.0 1,529.5 53.9 3.5
Savings................ 1,144.4 31.2 2.7 1,017.0 29.9 2.9 840.1 30.5 3.6
Other consumer time.... 1,410.7 59.2 4.2 1,480.3 64.2 4.3 1,735.4 91.4 5.3
Large denomination
time.................. 374.9 20.8 5.6 342.8 18.6 5.4 553.0 33.5 6.1
Deposits in foreign
banking office(7)...... 114.0 6.1 5.4 72.1 2.7 3.7 77.8 3.1 3.9
-------- ------ --- -------- ------ --- -------- ------ ---
Total interest bearing
deposits............. 4,905.2 169.2 3.5 4,880.8 171.1 3.5 5,203.0 227.5 4.4
-------- ------ --- -------- ------ --- -------- ------ ---
Total deposits........ 6,635.3 -- -- 6,651.8 -- -- 6,764.4 -- --
Funds purchased......... 643.4 25.1 3.9 895.4 24.1 2.7 735.6 22.9 3.1
Other borrowed funds,
short-term............. 772.0 29.0 3.8 733.8 21.5 2.9 544.3 18.3 3.4
Other liabilities....... 161.2 -- -- 161.3 -- -- 146.5 -- --
Long-term debt(4)....... 198.0 17.8 9.0 189.5 17.3 9.1 165.5 15.9 9.6
Stockholders' equity.... 1,001.5 -- -- 763.9 -- -- 646.7 -- --
-------- ------ -------- ------ -------- ------
Total liabilities and
stockholders'
equity/interest
expense.............. $9,411.4 $241.1 $9,395.7 $234.0 $9,003.0 $284.6
======== ====== ======== ====== ======== ======
Earning assets/interest
income................. $8,616.6 $629.9 7.3% $8,493.1 $628.0 7.4% $8,187.9 $659.3 8.1%
Interest bearing
liabilities/interest
expense................ 6,518.6 241.1 3.7 6,699.5 234.0 3.5 6,648.4 284.6 4.3
Earning assets/interest
expense................ 8,616.6 241.1 2.8 8,493.1 234.0 2.8 8,187.9 284.6 3.5
Net interest income, tax
equivalent basis....... 388.8 394.0 374.7
Net interest spread(5).. 3.6% 3.9% 3.8%
=== === ===
Net interest margin(6).. 4.5% 4.6% 4.6%
=== === ===
Percentage attributable
to foreign activities:
Average foreign assets
to average total
assets................ 2.9% 2.1% 2.2%
Average foreign
liabilities to average
total liabilities..... 1.4 0.8 1.4
</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 1994 and 1993 and a 34% Federal tax rate for 1992.
(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.
(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
interest earning assets.
(7) These categories, coupled with the average balance related to $90 million
in short-term borrowings from Allied Irish in 1992 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) Yields on investment securities available-for-sale are calculated based
upon average amortized cost.
13
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $23.0 million in 1994, down $22.3 million
(49.2%) from the $45.3 million provision for 1993. The factors contributing to
this decline include a favorable loss experience, improved loan quality, and a
significant decline in the nonperforming asset portfolio.
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.
NONINTEREST INCOME
The following table presents the components of noninterest income for the
years ended December 31, 1994, 1993 and 1992, and a year to year comparison
expressed in terms of percent changes.
NONINTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
-------------------------- -------------------
1994 1993 1992 1994/1993 1993/1992
-------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit
accounts....................... $ 72,300 $ 72,952 $ 68,475 (0.9)% 6.5%
Trust fees...................... 19,513 19,212 18,593 1.6 3.3
Servicing income from
securitized assets, net........ 18,750 28,620 30,049 (34.5) (4.8)
Bankcard charges and fees....... 17,062 18,770 19,485 (9.1) (3.7)
Securities gains, net........... 15,616 19,976 6,169 (21.8) 223.8
Mortgage banking income......... 15,410 25,745 16,643 (40.1) 54.7
Other income:
Customer service fees......... 9,593 9,923 8,613 (3.3) 15.2
Security sales and fees....... 7,405 8,710 9,038 (15.0) (3.6)
Other......................... 35,329 29,537 21,117 19.6 39.9
-------- -------- -------- ----- -----
Total other income.............. 52,327 48,170 38,768 8.6 24.3
-------- -------- -------- ----- -----
Total noninterest income.... $210,978 $233,445 $198,182 (9.6)% 17.8%
======== ======== ======== ===== =====
</TABLE>
The Corporation's noninterest income for the year ended December 31, 1994 was
$211.0 million, a $22.5 million (9.6%) decrease over noninterest income for the
year ended December 31, 1993. Mortgage banking income decreased $10.3 million
(40.1%) primarily due to lower gains on the sale of servicing and lower
origination fees resulting from a decline in origination volumes in 1994.
Servicing income from securitized assets decreased $9.9 million (34.5%) due to
the outsourcing of the servicing of securitized manufactured housing
receivables in the fourth quarter of 1993, a lower volume of securitized
manufactured housing receivables and a decline in excess servicing income.
Bankcard charges and fees decreased $1.7 million (9.1%) primarily as a result
of increased competition and lower customer card usage. Securities gains of
$15.6 million were realized in 1994 compared to $20.0 million in 1993.
Securities sales are discussed in detail under "Investment Portfolio". Total
other income increased $4.2 million (8.6%) and in 1994 included a $6.7 million
gain on the sale of six branches of a banking subsidiary of the Corporation and
$3.0 million in gains on the payoff of loans which were valued at a discount
when a banking subsidiary was acquired. Offsetting these increases in other
income were a $2.4 million recovery in 1993 of interest on loans previously
charged-off or sold and a $2.2 million decrease in leasing residual gains in
1994.
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. Mortgage banking
14
<PAGE>
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. 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 lower volume of securitized manufactured housing loans.
Securities gains increased $13.8 million (223.8%). Securities sales are
discussed in detail under "Investment Portfolio". Total other noninterest
income increased $9.4 million (24.3%) and in 1993 included a $2.8 million
increase in leasing residual gains, a $2.4 million recovery of interest on
loans previously charged off or sold, and a $2.3 million increase in foreign
exchange and trading income. Offsetting these increases was a $2.9 million gain
on the sale of $130.2 million in residential mortgages in 1992.
NONINTEREST EXPENSE
The following table presents the components of noninterest expense for the
years ended December 31, 1994, 1993 and 1992 and a year to year comparison
expressed in terms of percent changes.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
-------------------------- -------------------
1994 1993 1992 1994/1993 1993/1992
-------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and wages.............. $165,774 $165,239 $154,852 0.3% 6.7%
Other personnel costs........... 42,873 40,415 33,644 6.1 20.1
Net occupancy costs............. 33,549 31,249 29,869 7.4 4.6
Equipment costs................. 29,685 26,979 22,327 10.0 20.8
Other operating expenses:
Professional fees............. 16,742 13,152 8,627 27.3 52.5
Regulatory fees and insurance. 16,155 16,006 16,330 0.9 (2.0)
Advertising and public
relations.................... 15,967 12,302 10,412 29.8 18.2
External processing fees...... 15,418 17,351 17,892 (11.1) (3.0)
Postage and communications.... 13,661 13,238 12,379 3.2 6.9
Lending and collection........ 11,716 13,409 11,208 (12.6) 19.6
Other real estate expense..... 368 6,757 9,349 (94.6) (27.7)
Other......................... 34,293 38,556 34,841 (11.1) 10.7
-------- -------- -------- ----- -----
Total other operating expenses.. 124,320 130,771 121,038 (4.9) 8.0
-------- -------- -------- ----- -----
Total noninterest expense... $396,201 $394,653 $361,730 0.4% 9.1%
======== ======== ======== ===== =====
</TABLE>
The Corporation's noninterest expenses for the year ended December 31, 1994
were $396.2 million, a $1.5 million (0.4%) increase over noninterest expenses
for the year ended December 31, 1993. Salaries and wages increased $535,000
(0.3%). Base salary and wages increased $3.9 million (2.7%). Incentives and
commissions declined $9.8 million primarily due to a decline in short-term
incentive pay in 1994 and lower commissions at the Corporation's mortgage
banking subsidiary due to decreased origination activity in 1994. Offsetting
lower incentives and commissions was a $6.4 million increase in severance
expense in 1994. Severance expenses, which were $8.5 million in 1994 and $2.1
million in 1993, were primarily incurred as a result of a continuing effort to
improve the efficiency of the Corporation and eliminate redundant operations.
Other personnel costs increased $2.5 million (6.1%). The primary reason for
this increase was a $1.8 million increase in pension costs. This increase
included $3.5 million in additional pension costs due to pension settlements
stemming from executive retirements in 1994. Excluding these settlements,
pension expense declined $1.7 million in 1994 primarily due to an accounting
change, the use of a ten percent gain/loss corridor when determining the amount
of amortization of unrecognized actuarial gains and losses to be included in
pension costs and changes in actuarial assumptions regarding increases in
future compensation
15
<PAGE>
levels. An increase in the promotion of retail products in 1994 resulted in a
$3.7 million (29.8%) increase in advertising and public relations expenses.
Professional fees increased $3.6 million (27.3%) primarily due to consulting
related to a corporate reengineering project. Equipment costs increased $2.7
million (10.0%) due to an increase in systems software lease expense and
depreciation expense. Increased property rental expense, higher depreciation on
leasehold improvements and costs incurred to comply with new Federal
regulations such as the Americans with Disabilities Act resulted in a $2.3
million (7.4%) increase in occupancy costs. Lower provisions for other real
estate, $45,000 in 1994 vs. $6.2 million in 1993, resulted in a $6.4 million
(94.6%) decrease in other real estate expense. External processing fees
decreased $1.9 million (11.1%) due to the discontinuation of outsourced data
processing for an acquired banking subsidiary of the Corporation. Lower
repossession expenses and legal fees associated with collections efforts
resulted in a $1.7 million (12.6%) decrease in lending and collection expenses.
Other noninterest expenses decreased $4.3 million (11.1%) primarily due to a
$2.9 million decrease in the amortization of bankcard premiums in 1994.
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%). Base salary and wages increased $5.5 million (4.0%)
primarily due to merit and promotional increases. Incentives and commissions
increased $2.8 million. Salaries and wages in 1993 also 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%). 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. Increased pension
expenses resulting from lower returns on retirement plan assets, lower discount
rates and reduced employee turnover were the primary reasons for the remaining
$4.2 million increase in other personnel costs. Equipment costs increased $4.7
million (20.8%) due to an increase in depreciation expense associated with
computer hardware and software purchases and a $2.1 million increase in
expensed personal property resulting from an increase in capitalization
thresholds. Professional fees increased $4.5 million (52.5%) primarily due to
consulting fees associated with major system conversions. Lending and
collection expenses increased $2.2 million (19.6%) with the most significant
increases in bankcard fraud losses ($692,000) and outside appraisal expenses
($543,000). Advertising and public relations expense increased $1.9 million
(18.2%) due to increased advertising budgets in 1993. Occupancy costs increased
$1.4 million (4.6%) due to property rent expense associated with new facilities
and scheduled rent increases on existing facilities. 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 increased $3.7
million (10.7%) primarily due to a $3.4 million increase in the amortization of
bankcard premiums. Other expenses in 1992 included a $1.8 million write-off of
a subsidiary bank's unamortized goodwill balance.
INCOME TAXES
The Corporation's effective tax rate on earnings in 1994 was 34.8% compared
to 35.6% in 1993 and 34.7% in 1992. The decrease in the effective tax rate in
1994 was due to a decrease in state income taxes, net of Federal benefits and
an increase in certain tax credits. The net effect of these and other lesser
factors and the decrease in pre-tax income accounted for the tax provision
decrease of $3.5 million in 1994. Additional information related to income
taxation is presented in Note 12 of the Notes to Consolidated Financial
Statements of the Corporation.
PROSPECTIVE ACCOUNTING CHANGES
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 for which 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
16
<PAGE>
loan's expected future cash flows discounted at the loan's effective interest
rate. As a practical expedient, impaired loans may be measured at the
observable market price of the loan, or at the fair value of the collateral if
the loan is collateral dependent. 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. Certain provisions
of Statement 114 addressing interest income recognition and disclosures for
impaired loans were amended subsequently by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" issued in October 1994. Statements 114 and 118 are
effective for fiscal years beginning after December 15, 1994. The adoption of
Statements 114 and 118 is not expected to have a material effect on the
financial statements of the Corporation.
QUARTERLY SUMMARY
The following table presents a summary of earnings by quarter for the years
ended December 31, 1994 and 1993:
SUMMARY OF QUARTERLY EARNINGS
<TABLE>
<CAPTION>
1994 QUARTERS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income......... $150,731 $153,794 $153,339 $161,882
Net interest income.................. 92,666 94,574 94,339 97,068
Provision for credit losses.......... 8,999 5,999 5,998 2,000
Income before income taxes........... 39,829 43,798 43,347 43,454
Net income........................... 26,056 28,070 28,527 28,487
<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
</TABLE>
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 Asset and Liability Committee (ALCO) 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 1994. The ratio
of liquid assets to total assets at December 31, 1994 was 24.1%. Liquid assets
are defined as vault cash, balances with the Federal Reserve Banks of Richmond
and Philadelphia, unencumbered investment securities (including held-to-
maturity
17
<PAGE>
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, 1994, the ratio of liquid assets to
credit sensitive liabilities was 228.8%. The Corporation expects the high level
of liquidity to decline slightly in 1995 as loan demand increases.
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. ALCO has
responsibility for the overall management of 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 off-balance sheet financial instruments such as interest rate swaps,
interest rate caps and floors, financial futures, and options. The use of off-
balance sheet financial instruments 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. Additional information related to
asset/liability management instruments is presented in Note 15 of the Notes to
Consolidated Financial Statements of the Corporation.
Management of the Corporation's sensitivity to changing interest rates is
accomplished primarily through an earnings simulation model. From an income
perspective, the maximum risk authorized should not exceed 10% of budgeted pre-
tax income for the current calendar year given an immediate and sustained
increase in interest rates by approximately one percent. As of December 31,
1994, the earnings at risk over the next twelve months was $5.6 million,
representing a liability sensitive position that is well within the
Corporation's maximum risk allowable.
The net interest rate sensitivity of the Corporation at December 31, 1994 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
over a one year time horizon. 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.
18
<PAGE>
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------------------------------
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
investments............ $ 354.8 $ 20.0 $ -- $ -- $ -- $ -- $ -- $ 374.8
Loans held-for-sale..... 37.7 37.7 -- -- -- -- -- 75.4
Investment securities*.. 92.9 237.0 170.1 258.7 1,114.2 535.2 (47.1) 2,361.0
Loans, net of unearned
income:
Commercial............. 1,045.2 250.3 99.0 34.7 120.0 53.5 30.6 1,633.3
Real estate,
construction.......... 168.1 45.4 17.9 12.7 23.0 0.3 1.3 268.7
Real estate, mortgage:
Residential............ 17.0 31.8 53.8 162.5 113.7 214.1 0.7 593.6
Commercial............. 415.4 53.1 28.4 61.8 300.5 93.4 25.6 978.2
Retail................. 382.7 68.5 55.4 109.9 369.2 4.9 (6.2) 984.4
Bankcard............... 496.6 -- -- -- -- -- -- 496.6
Leases receivable...... 2.9 6.0 8.5 16.0 87.5 141.8 (3.1) 259.6
Foreign................ 81.4 109.7 43.9 1.7 3.9 -- 3.9 244.5
-------- -------- -------- -------- -------- -------- -------- --------
Total loans, net of
unearned income...... 2,609.3 564.8 306.9 399.3 1,017.8 508.0 52.8 5,458.9
Other assets............ 10.0 -- -- -- -- -- 825.5 835.5
-------- -------- -------- -------- -------- -------- -------- --------
Total assets.......... $3,104.7 $ 859.5 $ 477.0 $ 658.0 $2,132.0 $1,043.2 $ 831.2 $9,105.6
======== ======== ======== ======== ======== ======== ======== ========
Cumulative total assets. $3,104.7 $3,964.2 $4,441.2 $5,099.2 $7,231.2 $8,274.4 $9,105.6
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Domestic deposits:
Noninterest bearing
deposits.............. $ 21.2 $ 310.7 $ -- $ -- $ -- $ -- $1,434.8 $1,766.7
Interest bearing
deposits.............. 3,183.0 301.1 319.8 306.1 672.5 4.1 -- 4,786.6
Interest bearing
deposits in foreign
banking office......... 39.0 9.0 25.0 -- 7.3 -- -- 80.3
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits........ 3,243.2 620.8 344.8 306.1 679.8 4.1 1,434.8 6,633.6
Federal funds purchased
and securities sold
under repurchase
agreements............. 474.8 45.0 -- -- -- -- -- 519.8
Other borrowed funds,
short-term............. 536.5 -- -- 5.0 -- -- -- 541.5
Long-term debt.......... -- -- -- 25.0 89.9 99.7 -- 214.6
Interest rate swaps,
caps, floors, and other
derivatives............ (158.5) 96.5 (30.0) 300.6 (234.0) 25.4 -- --
Other liabilities....... -- -- -- -- -- -- 172.1 172.1
Stockholders' equity.... -- -- -- -- -- -- 1,024.0 1,024.0
-------- -------- -------- -------- -------- -------- -------- --------
Total liabilities and
equity............... $4,096.0 $ 762.3 $ 314.8 $ 636.7 $ 535.7 $ 129.2 $2,630.9 $9,105.6
======== ======== ======== ======== ======== ======== ======== ========
Cumulative total
liabilities and equity. $4,096.0 $4,858.3 $5,173.1 $5,809.8 $6,345.5 $6,474.7 $9,105.6
======== ======== ======== ======== ======== ======== ========
Interest sensitivity
gap.................... $ (991) $ 97 $ 162 $ 21 $ 1,596 $ 914 $ (1,800)
Cumulative interest
sensitivity gap........ (991) (894) (732) (711) 886 1,800 --
Ratio of interest-
sensitive assets to
liabilities............ 0.76x 1.13x 1.52x 1.03x 3.98x 8.07x
Ratio of cumulative,
interest-sensitive
assets to liabilities.. 0.76 0.82 0.86 0.88 1.14 1.28
</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, 1994, the book value (amortized cost) of the HTM portfolio was
$1.3 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 or liquidity 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 as a separate component of equity, net of taxes. At
December 31, 1994, the book value (fair value) of the AFS portfolio was $1.0
billion, approximately $43.0 million below 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 fair value which was $56.6 million on
December 31, 1994. Changes in the fair value of the trading account are
recorded in the income statement.
The AFS and HTM investment portfolios are comprised of four basic types of
securities: U.S. Treasury and U.S. Government 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 1.7% of the book value of the total portfolio at
December 31, 1994.
The securities of no single issuer other than the U.S. Government and related
agencies exceeded 10% of stockholders' equity at December 31, 1994.
Substantially all of the Municipals are rated A or higher by Moody's Investors
Service, Inc. and approximately 77% are rated AAA. Investment securities
classified as other securities are generally unrated.
At December 31, 1994, the book value of the total investment portfolio was
$2.4 billion compared with $3.0 billion at December 31, 1993. The portfolio
size decreased from 31.7% of total assets at December 31, 1993 to 25.9% at
December 31, 1994. This decrease in the overall investment portfolio was
prompted by the strong economic growth in 1994 that led to rising interest
rates. Floating rate money market assets and short-term loans offered more
attractive interest rate spreads over rising funding costs than the fixed rate
obligations of the investment portfolio.
Available-for-Sale Investment Portfolio
The AFS portfolio is managed from an interest income and 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 30-year, 15-year, and adjustable rate MBS's;
municipal obligations; and floating rate CMO's are held in the AFS portfolio.
Selected fixed rate CMO's and Treasury notes are occasionally carried in the
AFS portfolio when they exhibit favorable total return characteristics. In
general, the cash flows of the MBS's are deemed too uncertain relative to the
current micro and macro-economic conditions
20
<PAGE>
facing the Corporation for inclusion in the HTM 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 less interest rate
sensitive, 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 book value (fair value) of the available-
for-sale securities owned by the Corporation.
AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury & U.S. Government agencies............. $ 48,716 $ --
Mortgage-backed obligations of Federal agencies...... 723,752 914,215
Collateralized mortgage obligations(1)............... 15,871 138,926
Obligations of states and political subdivisions..... 195,791 220,467
Other investment securities.......................... 38,579 33,291
---------- ----------
Total.............................................. $1,022,709 $1,306,899
========== ==========
</TABLE>
--------
(1) At December 31, 1994 and 1993, $14.5 million and $126.6 million of CMO's,
respectively, were issues of the Federal Home Loan Mortgage Corporation or
the Federal National Mortgage Association.
At December 31, 1994, the fair value of the Corporation's AFS investment
portfolio was approximately $43.0 million below the amortized cost of the
portfolio. Gross unrealized gains on AFS debt securities were $8.4 million and
gross unrealized losses were $55.6 million at year end. More specifically, the
net unrealized loss at December 31, 1994 on MBS's was $49.6 million, on U.S.
Treasury and U.S. Government Agencies, $3.4 million, and the net unrealized
gain on municipals was $5.6 million and on CMO's, $182,000. Gross unrealized
gains on AFS equity securities were $4.2 million at December 31, 1994. On
December 31, 1993, the Corporation's AFS portfolio had a fair value of $43.6
million above its amortized cost.
21
<PAGE>
The following table shows the maturity distribution of the available-for-sale
investment portfolio of the Corporation at December 31, 1994 based upon
amortized cost.
MATURITY OF AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTALS
----------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S.
Government agencies....... $ 2,887 $ 49,197 $ -- $ -- $ 52,084
Mortgage-backed obligations
of Federal agencies(1).... 84,998 313,841 289,790 84,759 773,388
Collateralized mortgage
obligations(1)............ 6,159 8,257 1,176 97 15,689
Obligations of states and
political subdivisions.... 70,526 33,079 42,997 43,542 190,144
Other investment
securities................ 34,397 -- -- -- 34,397
-------- -------- -------- -------- ----------
Total.................... $198,967 $404,374 $333,963 $128,398 $1,065,702
======== ======== ======== ======== ==========
</TABLE>
--------
(1) The maturity distribution is based upon weighted average prepayment rates
of 156 PSA for MBS's and 633 PSA for floating rate CMO's. The Corporation's
assumptions in determining the weighted average prepayment rates were based
upon the composition of these portfolios.
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, 1994 based upon amortized cost.
AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
(Tax Equivalent Yields)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTALS
----------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S. Government
agencies...................... 5.46% 5.96% -- % -- % 5.93%
Mortgage-backed obligations of
Federal agencies(1)........... 5.14 5.37 5.61 5.09 5.40
Collateralized mortgage
obligations(1)................ 4.34 4.34 4.34 4.34 4.34
Obligations of states and
political subdivisions........ 13.45 11.26 11.41 9.28 11.65
Other investment securities.... 4.40 -- -- -- 4.40
----- ----- ----- ---- -----
Total........................ 7.94% 5.90% 6.35% 6.51% 6.50%
===== ===== ===== ==== =====
</TABLE>
--------
(1) Computation of weighted average tax equivalent yields includes $418.6
million of floating rate MBS's and $15.7 million of floating rate CMO's.
Held-to-Maturity Investment Portfolio
Securities that the Corporation has the intent and ability to hold to
maturity are placed in the HTM portfolio. These securities are held to maturity
because they are used to match off against liabilities of comparable duration.
The high levels of liquidity maintained by the Corporation eliminates any need
to sell these securities prior to maturity to fund other obligations.
Securities will not be sold out of the HTM portfolio in response to changes in
loan demand, interest rates, or prepayment speeds. The HTM portfolio is managed
from an interest income perspective.
22
<PAGE>
The following table sets forth the book value (amortized cost) of the held-
to-maturity securities owned by the Corporation.
HELD-TO-MATURITY INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies................................ $ 793,517 $ 970,554 $ 766,888
Mortgage-backed obligations of Federal
agencies................................ 160,319 211,920 1,039,917
Collateralized mortgage obligations(1)... 383,426 520,306 590,207
Obligations of states and political
subdivisions............................ -- -- 207,139
Other investment securities.............. 1,005 6,868 30,217
---------- ---------- ----------
Total.................................. $1,338,267 $1,709,648 $2,634,368
========== ========== ==========
</TABLE>
--------
(1) At December 31, 1994, 1993 and 1992, $328.4 million, $450.4 million, and
$538.6 million of CMO's, respectively, were issues of the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association.
At December 31, 1994, the fair value of the Corporation's HTM investment
portfolio was approximately $67.8 million below the amortized cost of the
portfolio. Gross unrealized gains on HTM debt securities were $260,000 and
gross unrealized losses were $68.0 million at year end. More specifically, the
net unrealized loss at December 31, 1994 on Treasuries was $37.1 million, on
MBS's $10.0 million, and on CMO's $20.7 million.
23
<PAGE>
The following table shows the maturity distribution of the held-to-maturity
securities owned by the Corporation at December 31, 1994.
MATURITY OF HELD-TO-MATURITY INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTALS
----------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies....... $153,446 $639,371 $ 700 $ -- $ 793,517
Mortgage-backed obligations
of Federal agencies(1).... 20,397 97,400 42,522 -- 160,319
Collateralized mortgage
obligations(1)............ 47,976 144,986 106,992 83,472 383,426
Other investment
securities................ 5 -- 1,000 -- 1,005
-------- -------- -------- ------- ----------
Total.................... $221,824 $881,757 $151,214 $83,472 $1,338,267
======== ======== ======== ======= ==========
</TABLE>
--------
(1) The maturity distribution is based upon weighted average prepayment rates
of 245 PSA for 7 year MBS's and 167 PSA for fixed CMO's. The Corporation's
assumptions in determining the weighted average prepayment rates were based
upon the composition of these portfolios.
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, 1994.
HELD-TO-MATURITY INVESTMENT PORTFOLIO
(Tax Equivalent Yields)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTALS
----------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies........... 6.38% 5.59% 6.96% -- % 5.75%
Mortgage-backed obligations of
Federal agencies.............. 6.81 6.87 5.68 -- 6.55
Collateralized mortgage
obligations................... 6.25 6.25 6.25 6.25 6.25
Other investment securities.... 5.50 -- 6.75 -- 6.74
---- ---- ---- ---- ----
Total........................ 6.39% 5.84% 6.10% 6.25% 5.99%
==== ==== ==== ==== ====
</TABLE>
Investment Securities Sales
In the AFS portfolio, proceeds from the sale of fixed income investment
securities during 1994 amounted to $1.3 billion resulting in pretax gains of
$11.6 million. This compares to realized gains of $19.9 million on $711.1
million of sales in 1993 and gains of $6.2 million on $470.0 million of
security sales in 1992. Sale of equity securities resulted in a gain of $4.0
million from the sale of $7.1 million in stock. The sale of AFS fixed income
securities during 1994, the majority of which occurred in the first quarter,
was the result of repositioning the portfolio for higher rates.
In the HTM portfolio, proceeds from the sale of fixed income investment
securities during 1994 amounted to $20.4 million resulting in a pretax gain of
$28,000. The securities were sold as a result of the dissolution of a
nonbanking subsidiary of the Corporation.
24
<PAGE>
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 subsidiary 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 Credit Review function, which reports independently to the Board of
Directors' Loan Portfolio Review Committee, periodically reviews all lending
units throughout the Corporation. It continuously monitors 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, which
the Board of Directors is required to approve quarterly.
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,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $1,633,275 29.9% $1,626,080 31.3% $1,748,910 33.7% $1,848,044 32.7% $1,626,484 32.5%
Real estate,
construction........... 268,683 4.9 284,008 5.5 327,134 6.3 375,776 6.6 365,139 7.3
Real estate, mortgage:
Residential............ 593,642 10.9 497,543 9.6 382,171 7.4 549,334 9.7 522,529 10.4
Commercial............. 978,164 17.9 957,568 18.4 912,085 17.6 901,866 15.9 657,662 13.2
Retail.................. 984,403 18.0 885,117 17.0 940,728 18.1 1,028,742 18.2 930,220 18.6
Bankcard................ 496,608 9.1 527,657 10.1 494,851 9.5 566,712 10.0 507,591 10.2
Leases receivable....... 259,633 4.8 211,821 4.1 206,346 4.0 212,792 3.8 199,447 4.0
Foreign:
Commercial and
industrial............ 226,718 4.2 186,492 3.6 151,036 2.9 128,873 2.3 103,336 2.1
Banks and financial
institutions.......... 120 -- 1,780 -- 30 -- -- -- 8,904 0.2
Governments and official
institutions........... 17,645 0.3 19,655 0.4 24,321 0.5 44,485 0.8 77,346 1.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of
unearned income........ $5,458,891 100.0% $5,197,721 100.0% $5,187,612 100.0% $5,656,624 100.0% $4,998,658 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
25
<PAGE>
The following table displays the contractual maturities and interest rate
sensitivities of the loans of the Corporation at December 31, 1994. 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, 1994
-------------------------------------------------------------
MATURING
--------------------------------------------------
AFTER ONE YEAR
THROUGH 5 YEARS AFTER 5 YEARS
--------------------- -----------------
IN ONE FIXED VARIABLE FIXED VARIABLE
YEAR OR INTEREST INTEREST INTEREST INTEREST
LESS(1) RATES RATES(2) RATES RATES(2) TOTAL
---------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 803,835 $ 122,558 $ 429,099 $ 54,344 $223,439 $1,633,275
Real estate,
construction........... 152,833 23,709 80,260 840 11,041 268,683
Real estate, mortgage:
Residential........... 72,678 120,060 89,459 208,003 103,442 593,642
Commercial............ 227,327 290,901 227,858 93,429 138,649 978,164
Retail.................. 275,493 366,692 150,464 5,479 186,275 984,403
Bankcard................ 230,625 -- 233,852 -- 32,131 496,608
Leases receivable....... 30,595 87,205 -- 141,833 -- 259,633
Foreign................. 99,242 4,147 109,854 -- 31,240 244,483
---------- ---------- ---------- -------- -------- ----------
Total................. $1,892,628 $1,015,272 $1,320,846 $503,928 $726,217 $5,458,891
========== ========== ========== ======== ======== ==========
</TABLE>
--------
(1) Includes demand loans, loans having no stated schedule of repayments or
maturity, and overdrafts.
(2) The variable interest rates generally fluctuate according to a formula
based on various rate indices such as prime rate and LIBOR.
COMMERCIAL LOANS
Commercial loans, 29.9% of the Corporation's total loans and leases at
December 31, 1994 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 (50.2% 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
institutional customers 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 37.7% of
outstandings) are generally those in the Maryland marketplace with sales
volumes of $5 to $100 million, while the Corporation's Small Business customers
(12.1% 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.
26
<PAGE>
Even given the geographic diversification of the Corporation's calling
efforts, the majority of the Corporation's commercial lending is in the
Maryland market, with 65.8% of the Corporation's commercial loans made in the
Maryland marketplace.
The Federal Reserve increased interest rates six times during 1994, motivated
by the desire to control inflation. In the meantime, the U.S. economy grew
beyond many economists' expectations with strong performance particularly
coming from the consumer sector. The industrial sector appeared to be strong
and the job market continued to improve during 1994.
Despite the improvements in the U.S. economy, the performance in the
Corporation's commercial loan portfolio was most impacted by the slow recovery
in the Corporation's region. In addition, rising interest rates and the
anticipation that interest rates will rise further had a dampening effect on
the Corporation's customers' desire to expand, particularly in the Maryland
regional market.
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 a committee of the Board of Directors.
LOAN PORTFOLIO DISTRIBUTION BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------
OUTSTANDING UNFUNDED TOTAL NONPERFORMING
BALANCE COMMITMENT EXPOSURE LOANS
----------- ---------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Communications Industries:
Cable..................... $124,650 $ 74,868 $199,518 $ 2,913
Publishing & Newspapers... 61,482 33,093 94,575 --
Wireless.................. 50,196 16,583 66,779 --
Broadcast................. 18,527 12,535 31,062 --
-------- -------- -------- -------
$254,855 $137,079 $391,934 2,913
======== ======== ======== =======
Healthcare(1)............... $303,575 $ 71,760 $375,335 $10,456
Transportation(2)........... $342,724 $ 11,290 $354,014 $ --
</TABLE>
--------
(1) Includes exposure to hospitals, nursing care and noninstitutional
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 television
represents 48.9% of total Communications Industry outstandings with Publishing
and Newspapers representing 24.1%, Wireless, 19.7% and Broadcasting, 7.3%. 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, 1994, representing 22.8% of total loans, an increase of $5.3
million from December 31, 1993. While the aggregate portfolio outstandings did
not change appreciably, the product mix shifted to a greater concentration in
commercial mortgages. This change is partially attributed to completed
construction properties converting to permanent commercial mortgages as well as
a modest amount of new construction business.
27
<PAGE>
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,
---------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate, construction......................... $ 268,683 $ 284,008
Real estate, commercial mortgages................. 978,164 957,568
---------- ----------
Total........................................... $1,246,847 $1,241,576
========== ==========
</TABLE>
The commercial real estate portfolio continues to be well diversified by
project type and geographic location as illustrated in the following two
tables. At December 31, 1994, office buildings comprised the largest portion of
the commercial real estate portfolio representing 28.6% of total loans
outstanding and other real estate owned. Industrial warehouse and other
commercial properties at 16.8% and retail properties at 14.5% also comprise a
significant portion of the commercial real estate portfolio.
LOANS SECURED BY REAL ESTATE AND OTHER ASSETS OWNED BY PROPERTY TYPE
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
TOTAL LOANS
------------------------- OTHER
REAL ESTATE, REAL ESTATE, NONPERFORMING REAL ESTATE
CONSTRUCTION MORTGAGE LOANS OWNED
------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Office buildings........... $102,439 $257,649 $ 3,725 $ --
Industrial warehouse and
other commercial proper-
ties...................... 37,195 173,920 4,126 --
Retail..................... 63,214 119,361 8,473 88
Hospitals/nursing home med-
ical centers.............. -- 83,746 -- --
Hotels/motels.............. -- 68,027 -- 5,000
Commercial land............ 48,913 -- 2,563 5,440
Churches, restaurants and
other special purpose
properties................ 2,636 61,388 567 --
Apartments................. 98 62,524 9,680 195
Mixed use.................. 31 44,063 174 --
Residential land........... 9,878 -- 115 1,803
Other land-farm recre-
ational facilities........ -- 10,801 583 --
Residential properties held
for resale................ 2,405 981 -- --
Miscellaneous.............. 1,874 95,704 336 43
-------- -------- ------- -------
Total.................... $268,683 $978,164 $30,342 $12,569
======== ======== ======= =======
</TABLE>
28
<PAGE>
As the following table indicates, 67.0% of the aggregate commercial real
estate portfolio at December 31, 1994, was secured by properties in Maryland,
15.2% in Pennsylvania, and 5.2% in Virginia. Consistent with the Corporation's
strategy to lend on real estate in its primary markets, only 6.3% 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, 1994
---------------------------------------------------
TOTAL LOANS
------------------------- OTHER
REAL ESTATE, REAL ESTATE, NONPERFORMING REAL ESTATE
CONSTRUCTION MORTGAGE LOANS OWNED
------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Maryland.................... $201,654 $634,030 $ 8,602 $ 7,799
Pennsylvania................ 12,848 176,147 11,508 2,174
Virginia.................... 22,270 41,216 837 2,096
Washington, D.C............. 22,161 31,496 -- --
Florida..................... 9,750 28,758 9,388 500
New Jersey.................. -- 17,262 -- --
Delaware.................... -- 9,041 7 --
All other................... -- 40,214 -- --
-------- -------- ------- -------
Total..................... $268,683 $978,164 $30,342 $12,569
======== ======== ======= =======
</TABLE>
The Corporation's commercial real estate portfolio quality has continued to
exhibit improvement throughout 1994. This is a direct result of some
stabilization returning to the market, along with continued positive results
associated with loan workouts and restructurings. The level of nonperforming
loans declined in 1994 by 37.2% to $30.3 million and other real estate owned
was reduced by 33.9% to $12.6 million.
REAL ESTATE, CONSTRUCTION
The Corporation's construction lending portfolio decreased $15.3 million in
1994, reflecting the relatively limited opportunities in the Corporation's
region for new construction financing, as well as continued portfolio
adjustments to move completed projects into permanent financing. There is only
modest real estate construction growth forecasted for the near term, although
the Corporation continues to pursue the few high quality loan opportunities
available in the marketplace to offset the expected continuing run-off. In
particular, attractive opportunities are expected to remain available for
retail projects and the Corporation expects industrial project lending
opportunities to increase as market factors in this sector continue their
favorable trends.
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 77% 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 82% of land loan projects were fully developed. At December
31, 1994, there was minimal building construction and land development risk
associated with the Corporation's real estate construction outstandings.
REAL ESTATE MORTGAGE, COMMERCIAL
The Corporation's commercial mortgage portfolio increased $20.6 million in
1994. Approximately $394.9 million (40.4%) 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 $583.3 million are investment property mortgages which
are generally dependent on the operation, sale, or refinancing of
29
<PAGE>
the collateral. The Corporation will continue to provide acquisition and
refinancing loans for quality projects with strong sponsorship.
REAL ESTATE MORTGAGE, RESIDENTIAL
The Corporation originates residential mortgage loans primarily for sale in
the secondary market. New residential mortgage loan originations are normally
financed through the Corporation's mortgage banking subsidiary, First National
Mortgage Corporation, and are limited to Maryland, Washington, D.C., Virginia,
Delaware, Pennsylvania, West Virginia, Kentucky, Tennessee, Indiana, and
Mississippi. These markets have 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 and non-
convertible adjustable rate mortgages ("ARMS"). Residential mortgages retained
in the portfolio at December 31, 1994 increased $96.1 million from December 31,
1993 primarily as a result of originations of the non-convertible 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, home equity
lines of credit and other revolving credit products. During most of 1994, the
economic recovery created lower unemployment and stronger consumer confidence
which resulted in stronger demand for retail loan products; particularly fixed
interest rate products. The Corporation's delinquency and net charge-off
experience with retail loan products has been generally better than industry
averages.
When compared to December 31, 1993, retail loans increased $99.3 million to
$984.4 million at December 31, 1994. Retail loan demand weakened after the
Federal Reserve raised short-term interest rates for the sixth time in November
1994. As a result, retail loan demand is expected to be somewhat weaker than
what it was during 1994. However, growth in the retail loan portfolio is still
anticipated in 1995.
BANKCARD
The Corporation through its subsidiary, First Omni, offers both VISA (R) and
MasterCard (R). Outstanding bankcard receivables decreased to $496.6 million at
December 31, 1994 from $527.7 million at December 31, 1993. In 1995, First Omni
will continue to pursue marketing efforts that include direct solicitation and
account activation strategies as well as the purchase of small portfolios. All
delinquent bankcard accounts are charged-off at 180 days past due or upon
advice of the account holders who become deceased or file bankruptcy.
LEASES RECEIVABLE
Leases receivable include retail automobile, small equipment and general
equipment leasing portfolios. Leases receivable increased to $259.6 million at
December 31, 1994 from $211.8 million at December 31, 1993. The general
equipment leasing portfolio represents approximately 88.3% 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 nonbank, independent and captive finance and leasing
companies and income funds.
30
<PAGE>
FOREIGN
Loans to foreign banks decreased $1.7 million during 1994. These outstandings
are due to financings associated with letters of credit.
Foreign commercial and industrial loans were $226.7 million at December 31,
1994, an increase of $40.2 million when compared to December 31, 1993.
Commercial and industrial loan exposure consists of maritime industry exposure
(67%), non-maritime trade exposure (21%), foreign direct investment exposure
(11%), and rail exposure (1%). The maritime portfolio is widely diversified,
both geographically and by asset type, and is secured by first mortgages/liens.
Government and official institutions are central, state, provincial, and local
governments in foreign countries and their ministries, departments, and
agencies.
ASSET QUALITY
Economic Environment
The U.S. economy has experienced four years of cyclical expansion, with real
growth in 1994 likely to have peaked at 4% despite vigorous Federal Reserve
tightenings. Maryland's recovery only began in 1993, and its rate of expansion
continues to lag the national pace due to continuing recession in the
construction and defense-related manufacturing sectors.
In the 1991-1993 period, financial institutions strengthened their balance
sheets and performance despite a sluggish recovery in the commercial real
estate market. Although the performance of the Corporation's customers has
improved, competition from nonbank financial institutions continues to depress
both commercial and industrial and consumer loan demand. The quality of the
Corporation's assets in interest-rate sensitive sectors such as housing is
vulnerable to unexpectedly sharp rate increases.
In response to further Federal Reserve tightening forecast for early 1995,
the Corporation anticipates a slowdown in the growth of the national economy to
non-inflationary levels, with a very low probability of recession or high
inflation before 1996. The local economy is likely to continue its growth but
at levels that continue to lag national levels.
NONPERFORMING ASSETS
Nonperforming assets totaled $74.1 million at December 31, 1994, a decrease
of $61.3 million (45.3%) when compared to $135.4 million in nonperforming
assets at December 31, 1993. The most significant changes in nonperforming
assets during 1994 were paydowns of $56.9 million, loans reclassified to
accrual status of $18.5 million, other real estate owned sales of $9.1 million,
and charge-offs of $7.1 million. These decreases were partially offset by $25.5
million in additions to nonperforming assets due to the transfer of loans to
nonaccrual status and $4.8 million in accruing loans transferred to troubled
debt restructuring status. The most significant paydowns were on a variety of
commercial and real estate transactions in which cash payments were received on
nonaccrual loans. Loans reclassified to accrual status included $14.0 million
in commercial and real estate loans which met the regulatory tests for return
to accrual status and $4.5 million in real estate loans which were upgraded
from troubled debt restructuring status and returned to accrual. The most
significant charge-off was a $2.5 million charge-off on a nonaccrual real
estate loan. At this time, the Corporation does not anticipate significant new
nonaccruals in 1995, however it is unlikely that reductions of the magnitude
that occurred over the past several years will continue in 1995.
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
31
<PAGE>
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 value minus estimated costs to sell.
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,
-----------------------------------------------
1994 1993 1992 1991 1990
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Domestic:
Commercial................ $13,326 $ 47,521 $ 71,538 $ 71,220 $ 35,108
Real estate, construction. 2,709 5,787 17,917 25,958 17,036
Real estate mortgage, com-
mercial.................. 27,633 44,853 64,757 37,803 31,266
Real estate mortgage, res-
idential................. 5,250 5,381 6,351 8,409 566
Leases receivable......... 85 863 1,174 282 --
Foreign..................... 5,300 3,800 10,487 10,174 12,513
------- -------- -------- -------- --------
Total nonaccrual loans.. 54,303 108,205 172,224 153,846 96,489
Restructured loans............ 4,974 4,692 4,515 2,601 --
Other assets owned:
Other real estate........... 18,920 26,427 30,993 43,610 25,053
Valuation reserves.......... (4,185) (4,412) (9,195) (7,713) (4,250)
Other assets................ 118 510 1,210 5,644 3,199
------- -------- -------- -------- --------
Total other assets
owned.................. 14,853 22,525 23,008 41,541 24,002
------- -------- -------- -------- --------
Total nonperforming assets.... $74,130 $135,422 $199,747 $197,988 $120,491
======= ======== ======== ======== ========
Nonperforming assets as a % of
total loans, net of unearned
income plus other foreclosed
assets owned................. 1.35% 2.59% 3.83% 3.47% 2.40%
======= ======== ======== ======== ========
Accruing loans contractually
past due 90 days or more as
to principal or interest:
Domestic.................... $13,338 $ 17,172 $ 19,231 $ 25,796 $ 26,908
Foreign..................... -- -- -- 3,800 --
------- -------- -------- -------- --------
Total................... $13,338 $ 17,172 $ 19,231 $ 29,596 $ 26,908
======= ======== ======== ======== ========
</TABLE>
32
<PAGE>
The following table details the gross interest income that would have been
received during the year ended December 31, 1994 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,
1994
----------------
DOMESTIC FOREIGN
LOANS LOANS
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Gross interest income that would have been recorded had
loans been current in accordance with original terms... $3,141 $377
Interest income actually recorded....................... 1,172 339
</TABLE>
At December 31, 1994, the Corporation was monitoring loans totaling $56.9
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, 1994 which were classifiable as nonaccrual, restructured, past due
or potential problem assets.
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 Credit Review Division reports independently to the Board
of Directors' Loan Portfolio Review Committee. This unit's responsibility is to
continuously monitor 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
33
<PAGE>
review is conducted primarily by a retail credit 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 consumer lending areas, a team of credit 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, 1994.
The following table details certain information relating to the Allowance for
credit losses of the Corporation for the five years ended December 31, 1994.
See also Note 5 of the Notes to Consolidated Financial Statements of the
Corporation.
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning
of year................ $ 200,006 $ 201,451 $ 205,397 $ 155,089 $ 117,222
Provision for credit
losses................. 22,996 45,291 58,126 69,496 97,191
Losses charged off:
Commercial loans...... 2,852 10,580 14,082 4,329 6,921
Real estate loans,
construction......... 1,333 1,079 3,692 2,968 7,761
Real estate loans,
mortgage:
Residential......... 328 467 150 54 72
Commercial.......... 5,693 9,723 8,100 2,704 12,463
Retail loans.......... 4,798 6,005 6,569 6,616 6,492
Bankcard receivables.. 27,180 25,360 30,219 33,169 26,674
Leases receivable..... 343 516 919 650 607
Foreign loans......... -- 2,561 6,360 12,359 4,875
---------- ---------- ---------- ---------- ----------
Total losses
charged off...... 42,527 56,291 70,091 62,849 65,865
---------- ---------- ---------- ---------- ----------
Recoveries of losses
previously charged off:
Commercial loans...... 3,908 1,108 393 3,661 2,236
Real estate loans,
construction......... 304 37 35 21 --
Real estate loans,
mortgage:
Residential......... 29 16 56 -- --
Commercial.......... 438 129 348 222 39
Retail loans.......... 2,846 2,573 2,526 1,322 1,485
Bankcard receivables.. 5,203 4,696 4,574 3,934 4,058
Leases receivable..... 431 331 367 196 329
Foreign loans......... -- 4,924 1,047 411 381
---------- ---------- ---------- ---------- ----------
Total recoveries.. 13,159 13,814 9,346 9,767 8,528
---------- ---------- ---------- ---------- ----------
Net losses charged off.. 29,368 42,477 60,745 53,082 57,337
Allowance of loans
acquired or (sold)..... (2,610) (4,259) (1,327) 33,894 (1,987)
---------- ---------- ---------- ---------- ----------
Total allowance at end
of year................ $ 191,024 $ 200,006 $ 201,451 $ 205,397 $ 155,089
========== ========== ========== ========== ==========
Average loans, net of
average unearned
income................. $5,291,240 $5,099,293 $5,293,930 $4,832,877 $5,312,898
========== ========== ========== ========== ==========
Year end loans, net of
unearned income........ $5,458,891 $5,197,721 $5,187,612 $5,656,624 $4,998,658
========== ========== ========== ========== ==========
Net charge-offs to
average loans, net of
average unearned
income................. 0.56% 0.83% 1.15% 1.10% 1.08%
Allowance as a
percentage of year end
loans, net of unearned
income................. 3.50 3.85 3.88 3.63 3.10
Allowance as a
percentage of
nonperforming loans.... 322.26 177.16 113.98 131.29 160.73
</TABLE>
34
<PAGE>
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 Allowance detailed below is not
necessarily indicative of future losses or future allocations. The Allowance at
December 31, 1994 is available to absorb losses occurring in any category of
loans.
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial loans................... $ 19,222 $ 32,453 $ 39,544 $ 60,445 $ 31,862
Real estate loans, construction.... 7,556 9,376 19,150 16,092 11,756
Real estate loans, mortgage:
Residential...................... 1,022 1,087 546 943 639
Commercial....................... 23,818 39,845 41,090 23,200 9,155
Retail loans....................... 3,213 6,266 7,026 11,072 8,618
Bankcard receivables............... 30,830 35,950 37,420 35,004 24,160
Leases receivable.................. 16,323 3,304 3,970 2,290 448
Foreign loans...................... 11,748 9,322 14,045 24,329 47,726
Unallocated........................ 77,292 62,403 38,660 32,022 20,725
-------- -------- -------- -------- --------
Total Allowance................ $191,024 $200,006 $201,451 $205,397 $155,089
======== ======== ======== ======== ========
</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, 1994, 1993
and 1992. 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,
--------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
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..................... $1,730.1 --% $1,771.0 --% $1,561.4 --%
-------- -------- --------
Interest bearing demand... 548.9 2.3 535.5 2.5 467.2 3.2
Money market accounts..... 1,312.3 3.0 1,433.1 3.0 1,529.5 3.5
Savings................... 1,144.4 2.7 1,017.0 2.9 840.1 3.6
Other consumer time....... 1,410.7 4.2 1,480.3 4.3 1,735.4 5.3
Large denomination time... 374.9 5.6 342.8 5.4 553.0 6.1
Deposits in foreign banking
office..................... 114.0 5.4 72.1 3.7 77.8 3.9
-------- --- -------- --- -------- ---
Total interest bearing
deposits............... 4,905.2 3.5 4,880.8 3.5 5,203.0 4.4
-------- -------- --------
Total deposits.............. $6,635.3 $6,651.8 $6,764.4
======== ======== ========
Total core deposits(1)...... $6,146.4 $6,236.9 $6,133.6
======== ======== ========
</TABLE>
--------
(1) Core deposits include all deposits in the preceding table except large
denomination time deposits and deposits in the Corporation's foreign
banking office.
35
<PAGE>
The following table details the maturity of domestic deposits of $100,000 or
more on December 31, 1994.
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN
AMOUNTS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------
CERTIFICATES OTHER TIME
OF DEPOSIT, DEPOSITS,
$100,000 OR $100,000
MORE OR MORE TOTAL
------------ ---------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Within three months......................... $134.0 $ 0.3 $134.3
After three months but within six months.... 75.9 0.3 76.2
After six months but within twelve months... 81.8 3.1 84.9
After twelve months......................... 280.3 17.5 297.8
------ ----- ------
Total..................................... $572.0 $21.2 $593.2
====== ===== ======
</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 for the three years ended December 31, 1994.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased:
End of year outstandings........................ $205,856 $345,676 $309,350
Highest month-end balance....................... 331,547 460,933 472,203
Average balance................................. 288,762 451,042 344,336
Average rate of interest:
At end of year................................ 5.55% 3.03% 2.41%
During year................................... 4.27 3.05 3.40
Repurchase agreements:
End of year outstandings........................ $313,916 $402,590 $270,163
Highest month-end balance....................... 628,028 720,542 590,725
Average balance................................. 354,644 444,378 391,221
Average rate of interest:
At end of year................................ 5.13% 2.35% 2.65%
During year................................... 3.60 2.33 2.87
Master demand notes of the Corporation:
End of year outstandings........................ $402,539 $463,645 $388,958
Highest month-end balance....................... 454,941 463,645 408,862
Average balance................................. 441,384 424,181 389,156
Average rate of interest:
At end of year................................ 4.95% 2.85% 2.85%
During year................................... 3.79 2.86 3.28
Other borrowed funds, short term:
End of year outstandings........................ $138,968 $181,724 $ 12,593
Highest month-end balance....................... 656,846 439,474 282,348
Average balance................................. 330,616 309,645 155,193
Average rate of interest:
At end of year................................ 3.93% 3.37% 4.02%
During year................................... 3.71 3.02 3.56
</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, 1994, 1993 and 1992.
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1993 1992
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year as previously
reported..................................... $ 976,794 $699,362 $606,779
Adjustment for the cumulative effect on prior
years of applying retroactively the new
method of accounting for income taxes........ -- (5,204) (5,204)
---------- -------- --------
Balance, beginning of year as adjusted........ 976,794 694,158 601,575
Net income.................................... 111,140 113,868 92,473
Issuance of preferred stock................... -- 144,803 --
Dividends declared on preferred stock......... (11,820) (1,575) --
Change in net cost not yet recognized as
periodic pension expense..................... 1,443 (1,073) 110
Change in unrealized gains and losses on
investment securities available-for-sale, net
of income (tax) benefits..................... (53,582) 26,613 --
Adjustment to preferred stock issuance costs.. 49 -- --
---------- -------- --------
Balance, end of year.......................... $1,024,024 $976,794 $694,158
========== ======== ========
</TABLE>
The Corporation's stockholders' equity was $1,024.0 million at December 31,
1994 compared to $976.8 million at December 31, 1993. The $47.2 million (4.8%)
increase in stockholders' equity is primarily due to $111.1 million of net
income in 1994. Partially offsetting this increase is a $53.6 million decline
in the unrealized gains (losses) on investment securities available-for-sale,
net of income (tax) benefits and $11.8 million in preferred stock dividends
declared in 1994. The primary sources of growth in stockholders' equity from
1992 to 1993 were $113.9 million in net income and $144.8 million in proceeds
from the issuance of preferred stock in December of 1993. Stockholders' equity
has been restated for 1993 and 1992 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, 1994, 1993 and 1992 based upon the capital requirements of the
regulatory agencies discussed under "Business--Supervision and Regulation."
Tier 1 and total capital increased $95.5 million and $90.5 million,
respectively, when December 31, 1994 is compared to December 31, 1993 due to
$111.1 million in net income in 1994 which was partially offset by $11.8
million in preferred dividends declared in 1994. Significant transactions
affecting regulatory capital in 1993 included $113.9 million in net income and
$144.8 million in proceeds from the issuance of preferred stock in December of
1993.
CAPITAL COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Preferred stockholders' equity............. $ 144,852 $ 144,803 $ --
Common stockholder's equity................ 879,172 831,991 694,158
Disallowed intangibles..................... (40,956) (35,657) (35,940)
Unrealized losses (gains) on investment se-
curities available-for-sale, net of income
(tax) benefits............................ 26,969 (26,613) --
---------- ---------- ----------
Tier 1 capital........................... 1,010,037 914,524 658,218
---------- ---------- ----------
Qualifying long-term debt.................. 109,676 115,629 121,581
Allowance for credit losses................ 91,105 90,153 83,608
Mandatory convertible securities........... 59,960 59,951 59,942
---------- ---------- ----------
Tier 2 capital........................... 260,741 265,733 265,131
---------- ---------- ----------
Total capital.............................. $1,270,778 $1,180,257 $ 923,349
========== ========== ==========
Risk-adjusted assets....................... $7,188,442 $7,102,379 $6,571,984
Average quarterly assets (fourth quarter).. $9,180,622 $9,557,793 $9,176,494
Risk based capital ratios:
Tier 1 capital to risk-adjusted assets... 14.05% 12.88% 10.02%
Regulatory minimum....................... 4.00 4.00 4.00
Total capital to risk-adjusted assets.... 17.68 16.62 14.05
Regulatory minimum....................... 8.00 8.00 8.00
Leverage ratio............................. 11.05 9.60 7.20
</TABLE>
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................... $435,012 $411,021 $457,611
Interest and dividends on investment securities
held-to-maturity:
Taxable.......................................... 87,502 146,720 145,604
Tax-exempt....................................... -- 12,165 16,865
Dividends........................................ -- -- 63
Interest on investment securities available-for-
sale:
Taxable.......................................... 47,164 20,219 --
Tax-exempt....................................... 15,701 3,966 --
Dividends........................................ 1,092 23 --
Interest on loans held-for-sale.................... 7,732 11,580 13,407
Interest on money market investments............... 25,543 11,543 14,459
-------- -------- --------
Total interest and dividend income............. 619,746 617,237 648,009
-------- -------- --------
INTEREST EXPENSE
Interest on deposits............................... 169,191 171,122 227,553
Interest on Federal funds purchased and other
short-term borrowings:
Transactions with Allied Irish................... -- -- 2,055
Other............................................ 54,106 45,604 39,199
Interest on long-term debt......................... 17,802 17,312 15,850
-------- -------- --------
Total interest expense......................... 241,099 234,038 284,657
-------- -------- --------
NET INTEREST INCOME................................ 378,647 383,199 363,352
Provision for credit losses (note 5)............... 22,996 45,291 58,126
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES............................................ 355,651 337,908 305,226
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts................ 72,300 72,952 68,475
Trust fees......................................... 19,513 19,212 18,593
Servicing income from securitized assets, net...... 18,750 28,620 30,049
Bankcard charges and fees.......................... 17,062 18,770 19,485
Securities gains, net.............................. 15,616 19,976 6,169
Mortgage banking income............................ 15,410 25,745 16,643
Other income (note 11)............................. 52,327 48,170 38,768
-------- -------- --------
Total noninterest income....................... 210,978 233,445 198,182
-------- -------- --------
NONINTEREST EXPENSES
Salaries and wages................................. 165,774 165,239 154,852
Other personnel costs (notes 10 and 16)............ 42,873 40,415 33,644
Net occupancy costs (notes 6 and 13)............... 33,549 31,249 29,869
Equipment costs (notes 6 and 13)................... 29,685 26,979 22,327
Other operating expenses (note 11)................. 124,320 130,771 121,038
-------- -------- --------
Total noninterest expenses..................... 396,201 394,653 361,730
-------- -------- --------
INCOME BEFORE INCOME TAXES......................... 170,428 176,700 141,678
Income tax expense (note 12)....................... 59,288 62,832 49,205
-------- -------- --------
NET INCOME......................................... $111,140 $113,868 $ 92,473
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks................................ $ 554,878 $ 630,731
Money market investments (note 2)...................... 374,799 196,573
Investment securities available-for-sale (note 3)...... 1,022,709 1,306,899
Investment securities held-to-maturity (note 3)........ 1,338,267 1,709,648
Loans held-for-sale.................................... 75,366 269,222
Loans, net of unearned income of $84,809 in 1994 and
$71,224 in 1993:
Commercial........................................... 1,633,275 1,626,080
Real estate, construction............................ 268,683 284,008
Real estate, mortgage:
Residential........................................ 593,642 497,543
Commercial......................................... 978,164 957,568
Retail............................................... 984,403 885,117
Bankcard............................................. 496,608 527,657
Leases receivable (note 4)........................... 259,633 211,821
Foreign.............................................. 244,483 207,927
---------- ----------
Total loans, net of unearned income.............. 5,458,891 5,197,721
Allowance for credit losses (note 5)................... (191,024) (200,006)
---------- ----------
Loans, net....................................... 5,267,867 4,997,715
Premises and equipment (note 6)........................ 102,157 100,726
Due from customers on acceptances...................... 26,059 9,127
Other assets........................................... 343,500 307,864
---------- ----------
Total assets................................... $9,105,602 $9,528,505
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Domestic deposits:
Noninterest bearing deposits......................... $1,766,648 $1,914,452
Interest bearing deposits............................ 4,786,592 4,747,825
Interest bearing deposits in foreign banking office.... 80,306 111,880
---------- ----------
Total deposits................................... 6,633,546 6,774,157
Federal funds purchased and securities sold under
repurchase agreements (note 7)........................ 519,772 748,266
Other borrowed funds, short-term (note 8).............. 541,507 645,369
Bank acceptances outstanding........................... 26,059 9,127
Accrued taxes and other liabilities (note 12).......... 146,062 185,215
Long-term debt (note 9)................................ 214,632 189,577
---------- ----------
Total liabilities.............................. 8,081,578 8,551,711
---------- ----------
Commitments and contingent liabilities (notes 13 and
15)
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 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...................................... 198,176 198,127
Retained earnings.................................... 737,891 637,128
Unrealized (losses) gains on investment securities
available-for-sale (net of income (tax) benefits of
$16,024 and ($17,018)).............................. (26,969) 26,613
---------- ----------
Total stockholders' equity....................... 1,024,024 976,794
---------- ----------
Total liabilities and stockholders' equity..... $9,105,602 $9,528,505
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
41
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON
INVESTMENT
SECURITIES
AVAILABLE-
PREFERRED COMMON CAPITAL RETAINED FOR-SALE
STOCK STOCK SURPLUS EARNINGS NET OF TAX TOTAL
--------- ------- -------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE ON DECEMBER 31,
1991................... $ -- $84,926 $ 83,324 $433,325 $ -- $ 601,575
Net income.............. 92,473 92,473
Change in net cost not
yet recognized as
periodic pension
expense................ 110 110
------- ------- -------- -------- -------- ----------
BALANCE ON DECEMBER 31,
1992................... -- 84,926 83,324 525,908 -- 694,158
Net income.............. 113,868 113,868
Issuance of preferred
stock.................. 30,000 114,803 144,803
Dividends declared on
preferred stock........ (1,575) (1,575)
Change in net cost not
yet recognized as
periodic pension
expense................ (1,073) (1,073)
Unrealized gains on
investment securities
available-for-sale, net
of income tax expense.. 26,613 26,613
------- ------- -------- -------- -------- ----------
BALANCE ON DECEMBER 31,
1993................... 30,000 84,926 198,127 637,128 26,613 976,794
Net income.............. 111,140 111,140
Dividends declared on
preferred stock........ (11,820) (11,820)
Change in net cost not
yet recognized as
periodic pension
expense................ 1,443 1,443
Change in unrealized
gains and losses on
investment securities
available-for-sale, net
of income tax benefits. (53,582) (53,582)
Adjustment to preferred
stock issuance costs... 49 49
------- ------- -------- -------- -------- ----------
BALANCE ON DECEMBER 31,
1994................... $30,000 $84,926 $198,176 $737,891 $(26,969) $1,024,024
======= ======= ======== ======== ======== ==========
</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,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 111,140 $ 113,868 $ 92,473
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses........... 22,996 45,291 58,126
Provision for other real estate
losses............................... 44 6,279 6,537
Depreciation and amortization......... 32,033 35,319 33,234
Deferred income taxes (benefits)...... 18,399 (1,977) 16,263
Net gain on the sale of assets........ (25,014) (22,488) (9,839)
Net decrease (increase) in loans
originated for sale.................. 181,361 (115,511) (21,804)
(Increase) decrease in trading account
securities........................... (3,273) (45,721) 9,204
(Increase) decrease in accrued
interest receivable.................. (5,648) 1,452 11,525
Decrease in accrued interest payable.. (1,493) (5,295) (16,376)
Other, net............................ (46,114) 13,635 (11,602)
----------- ----------- -----------
Net cash provided by operating
activities........................... 284,431 24,852 167,741
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available-for-sale......... 1,271,669 -- --
Proceeds from sales of investment
securities held-to-maturity........... 20,383 711,058 470,028
Proceeds from paydowns and maturities
of investment securities available-
for-sale.............................. 147,244 -- --
Proceeds from paydowns and maturities
of investment securities held-to-
maturity.............................. 360,323 1,487,190 602,897
Purchases of investment securities
available-for-sale.................... (1,198,841) -- --
Purchases of investment securities
held-to-maturity...................... (22,832) (2,530,988) (1,782,663)
Net (increase) decrease in short-term
investments........................... (38,114) (120,708) 268,262
Proceeds from sales of loans........... 48,420 57,240 178,065
Purchase of loans...................... (255) (9,637) --
Net (disbursements) receipts from
lending activities of banking
subsidiaries.......................... (321,126) (120,613) 259,311
Principal collected on loans of nonbank
subsidiaries.......................... 25,846 27,275 21,475
Loans originated by nonbank
subsidiaries.......................... (30,250) (49,511) (64,379)
Principal payments received under
leases................................ 4,916 14,241 9,160
Purchases of assets to be leased....... (3,090) (1,311) (1,517)
Proceeds from the sale of other real
estate................................ 12,189 25,400 32,870
Proceeds from the sales of premises and
equipment............................. 2,850 499 439
Purchases of premises and equipment.... (24,464) (21,373) (26,545)
Sales of deposits...................... (193,945) (8,712) --
Purchases of deposits.................. 96,600 -- 20,208
Purchase of mortgage company........... (905) -- --
Other, net............................. (19,259) (29,984) (3,679)
----------- ----------- -----------
Net cash provided by (used for)
investing activities................. 137,359 (569,934) (16,068)
----------- ----------- -----------
FINANCING ACTIVITIES
Net decrease in deposits............... (43,008) (35,682) (188,471)
Net (decrease) increase in short-term
borrowings............................ (332,356) 413,446 (63,533)
Proceeds from the issuance of long-term
debt.................................. -- -- 99,564
Principal payments on long-term debt... -- (875) (50,825)
Proceeds from the issuance of preferred
stock................................. -- 144,803 --
Proceeds from the issuance of medium-
term bank notes....................... 25,000 -- --
Cash dividends paid.................... (10,440) -- --
----------- ----------- -----------
Net cash (used for) provided by
financing activities................. (360,804) 521,692 (203,265)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents........................... 60,986 (23,390) (51,592)
Cash and cash equivalents at beginning
of year............................... 631,137 654,527 706,119
----------- ----------- -----------
Cash and cash equivalents at December
31,................................... $ 692,123 $ 631,137 $ 654,527
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Interest payments...................... $ 241,465 $ 239,333 $ 301,033
Income tax payments.................... 44,881 50,941 41,476
NONCASH INVESTING AND FINANCING
ACTIVITIES
Loan charge-offs....................... 42,527 56,291 67,841
Transfers to other real estate......... 2,813 30,070 17,925
</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) 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 fair value except for trading account securities which
are carried at fair value. Adjustments to the fair value 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 and equity
securities.
44
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Trading account securities are purchased principally with the intent to
earn a profit by trading or selling the security. These securities are
stated at fair value. Adjustments to the carrying value are reported in
other noninterest income.
Held-to-maturity securities are purchased with the ability and intent to
hold them to maturity and are, therefore, carried at cost adjusted for
premiums and discounts.
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 income tax, reported as a
separate component of stockholders' equity.
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. Realized 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 fair value.
Derivative Financial Instruments
Trading Instruments--The Corporation maintains active trading
positions in interest rate swaps, caps and floors, futures, and options
on futures as well as foreign exchange forward rate agreements,
options, and futures. These positions result from activity generated
for corporate customers as well as for the Corporation's own trading
account. Trading instruments are carried at fair value. The positive
and negative fair values are included in other assets and other
liabilities, respectively, in the consolidated statements of condition.
Realized and unrealized gains or losses are included as a component of
other noninterest income.
Risk Management Instruments--The Corporation enters into derivative
financial instruments, primarily interest rate swaps, interest rate
caps and floors, and purchased options for risk management purposes.
These risk management instruments are designated to interest bearing
assets and liabilities of the Corporation and are entered into to
modify the characteristics of the designated assets or liabilities.
Interest rate swaps used for risk management purposes are accounted for
on the accrual basis with net interest income or expense on the swaps
recognized as an adjustment to the interest income or expense of the
designated assets or liabilities. For interest rate caps and floors and
purchased options, any premiums or other cash flows are recorded
systematically as a component of the income or expense of the
designated assets or liabilities. Upon early termination of these
derivative financial instruments, any realized gain or loss is deferred
and amortized as an adjustment to the yield of the designated assets or
liabilities over the life of the original hedge, as long as the
designated assets or liabilities remain.
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 doubtful 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.
45
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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
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 or expense 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.
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 minus estimated costs to sell. 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
Corporation.
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 $137,245,000, $406,000 and $20,100,000 at December 31,
1994, 1993 and 1992, 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 (the difference between
finance 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 1992 and 1993 consolidated
financial statements have been reclassified to conform with the 1994
presentation.
46
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. MONEY MARKET INVESTMENTS
Money market investments at December 31, 1994 and 1993 include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest bearing deposits in other banks................ $137,245 $ 406
Trading account securities.............................. 56,610 53,337
Federal funds sold...................................... 154,800 121,000
Securities purchased under agreements to resell......... 26,144 21,830
-------- --------
Total money market investments........................ $374,799 $196,573
======== ========
</TABLE>
3. INVESTMENT SECURITIES
The amortized cost and fair values of available-for-sale securities at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies.......................... $ 52,084 $ 1 $ (3,369) $ 48,716
Mortgage-backed obligations of Fed-
eral agencies..................... 773,388 169 (49,805) 723,752
Collateralized mortgage obliga-
tions............................. 15,689 182 -- 15,871
Obligations of states and political
subdivisions...................... 190,144 8,052 (2,405) 195,791
Other debt securities.............. 10,111 -- -- 10,111
Equity securities.................. 24,286 4,216 (34) 28,468
---------- ------- -------- ----------
Total............................ $1,065,702 $12,620 $(55,613) $1,022,709
========== ======= ======== ==========
The amortized cost and fair values of available-for-sale securities at
December 31, 1993 are as follows:
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(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>
47
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and fair values of available-for-sale debt securities at
December 31, 1994 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, 1994
-------------------
AMORTIZED FAIR
COST VALUE
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................... $ 83,524 $ 86,021
Due after one year through five years................. 82,276 80,803
Due after five years through ten years................ 42,997 46,050
Due after ten years................................... 43,542 41,744
Mortgage-backed securities (1)........................ 789,077 739,623
---------- --------
Total............................................... $1,041,416 $994,241
========== ========
</TABLE>
--------
(1) Includes mortgage-backed securities and collateralized mortgage
obligations.
Proceeds from the sale of investment securities available-for-sale were
$1,271,669,000 during 1994. Gross gains and losses realized on the sale of
investment securities available-for-sale were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
(IN THOUSANDS)
<S> <C>
Gross gains................ $22,305
Gross losses............... (6,643)
-------
Total.................... $15,662
=======
</TABLE>
The amortized cost and fair values of held-to-maturity securities at December
31, 1994 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies.......................... $ 793,517 $240 $(37,301) $ 756,456
Mortgage-backed obligations of Fed-
eral agencies..................... 160,319 -- (9,966) 150,353
Collateralized mortgage obliga-
tions............................. 383,426 20 (20,775) 362,671
Other debt securities.............. 1,005 -- -- 1,005
---------- ---- -------- ----------
Total............................ $1,338,267 $260 $(68,042) $1,270,485
========== ==== ======== ==========
</TABLE>
The amortized cost and fair values of held-to-maturity securities at December
31, 1993 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(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
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>
48
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and fair values of held-to-maturity debt securities at
December 31, 1994 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, 1994
---------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................. $ 153,451 $ 153,330
Due after one year through five years............... 639,371 602,462
Due after five years through ten years.............. 1,700 1,669
Mortgage-backed securities (1)...................... 543,745 513,024
---------- ----------
Total............................................. $1,338,267 $1,270,485
========== ==========
</TABLE>
--------
(1) Includes mortgage-backed securities and collateralized mortgage
obligations.
Proceeds from the sale of investment securities held-to-maturity were
$20,383,000 during 1994. These sales occurred as a result of the dissolution of
a nonbanking subsidiary of the Corporation. Proceeds from the sale of
investment securities held-for-possible-sale were $711,058,000 and $470,028,000
during 1993 and 1992. Gross gains and losses realized on the sale of investment
securities held-to-maturity and held-for-possible-sale were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1994 1993(1) 1992(1)
---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross gains....................................... $ 67 $19,894 $ 8,385
Gross losses...................................... (39) -- (2,199)
---- ------- -------
Total........................................... $ 28 $19,894 $ 6,186
==== ======= =======
</TABLE>
--------
(1) Held-for-possible-sale portfolio
Investment securities from the consolidated investment portfolio with a book
value of $818,179,000 at December 31, 1994 and $788,522,000 at December 31,
1993 were pledged to secure public funds, trust deposits, repurchase agreements
and funds transactions and for other purposes required by law.
49
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LEASES RECEIVABLE
The investment in leases at December 31, 1994 and 1993 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct financing leases:
Lease payments receivable............................ $153,324 $124,132
Estimated residual values............................ 33,234 24,472
-------- --------
186,558 148,604
Less unearned income................................. (38,201) (28,689)
-------- --------
Net investment in direct financing leases............ $148,357 $119,915
-------- --------
Leveraged leases:
Lease payments receivable............................ $ 66,336 $ 57,072
Estimated residual values............................ 72,133 56,642
Deferred investment tax credits...................... -- (262)
-------- --------
138,469 113,452
Less unearned income................................. (27,193) (21,546)
-------- --------
Investment in leveraged leases....................... 111,276 91,906
Less related deferred taxes.......................... (85,572) (71,671)
-------- --------
Net investment in leveraged leases................... $ 25,704 $ 20,235
======== ========
</TABLE>
Minimum lease payments receivable at December 31, 1994 are due as follows:
<TABLE>
<CAPTION>
AFTER
1995 1996 1997 1998 1999 1999 TOTAL
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$43,477 $27,889 $31,148 $27,389 $18,556 $176,568 $325,027
</TABLE>
5. 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 all losses inherent in the portfolio at December
31, 1994. A summary of the activity in the allowance for the three years ended
December 31, 1994 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance beginning of year................... $200,006 $201,451 $205,397
Provision charged to operating expenses..... 22,996 45,291 58,126
Allowance of loans acquired or (sold)....... (2,610) (4,259) (1,327)
Less charge-offs, net of recoveries of
$13,159, $13,814, and $9,346............... (29,368) (42,477) (60,745)
-------- -------- --------
Balance at end of year...................... $191,024 $200,006 $201,451
======== ======== ========
</TABLE>
50
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION
AND AND
COST AMORTIZATION NET COST AMORTIZATION NET
-------- ------------ -------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land.................... $ 11,118 $ -- $ 11,118 $ 11,462 $ -- $ 11,462
Buildings and land im-
provements............. 46,679 20,155 26,524 48,729 19,926 28,803
Leasehold improvements.. 33,749 18,438 15,311 33,089 16,740 16,349
Furniture and equipment. 67,430 52,640 14,790 68,572 54,914 13,658
Computer hardware and
software............... 83,538 49,124 34,414 78,208 47,754 30,454
-------- -------- -------- -------- -------- --------
Total................. $242,514 $140,357 $102,157 $240,060 $139,334 $100,726
======== ======== ======== ======== ======== ========
</TABLE>
Depreciation and amortization on premises and equipment charged to operations
amounted to $20,359,000 in 1994, $18,020,000 in 1993, and $16,555,000 in 1992.
7. 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, 1994, securities purchased under agreements to resell
amounted to $26,144,000. All securities purchased were delivered either
directly to the Corporation or to an agent for safekeeping. The aggregate fair
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.
At December 31, 1994, securities sold under agreements to repurchase amounted
to $313,916,000. The aggregate fair 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.
8. 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,
1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Master demand notes of the Corporation.................. $402,539 $463,645
Bank notes.............................................. 130,000 177,000
Other................................................... 8,968 4,724
-------- --------
Total................................................. $541,507 $645,369
======== ========
</TABLE>
51
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994, 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.
9. LONG-TERM DEBT
Following is a summary of the long-term debt of the Corporation at December
31, 1994 and 1993 which is all unsecured:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
5.77% Medium term bank notes due September 1, 1995....... $ 25,000 $ --
10.375% Subordinated Capital Notes due August 1, 1999.... 59,960 59,951
9.15% Notes due June 1, 1996............................. 10,000 10,000
8.68% Notes due January 31, 1997......................... 9,997 9,996
8.67% Notes due March 20, 1997........................... 9,997 9,995
8.375% Subordinated Notes due May 15, 2002............... 99,678 99,635
-------- --------
Total.................................................. $214,632 $189,577
======== ========
</TABLE>
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 5.77% Medium term bank notes mature September 1, 1995 with interest
payable semiannually and are not redeemable prior to maturity.
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 fair 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, 1994.
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.
52
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. 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 $12,002,000
in 1994, $10,209,000 in 1993, and $6,204,000 in 1992.
Effective January 1, 1994, the Corporation implemented a change in the
methodology used to determine the amortization of unrecognized actuarial gains
and losses to be included in current period pension costs. Prior to 1994, the
Corporation amortized all actuarial gains and losses over a period of ten
years, the estimated remaining service period of active employees who are
expected to receive benefits under the Corporation's pension plan. In 1994, the
Corporation, in compliance with the provisions of Statement of Financial
Accounting Standards No. 87, elected to amortize these gains and losses only to
the extent that they exceed ten percent of (a) the projected benefit obligation
or (b) the fair market value of plan assets, whichever is greater. This change
in methodology was implemented to reduce the volatility of the Corporation's
pension expense from year to year due to the dramatic swings in interest rates
used to set the annual discount rate. This change in accounting methodology
reduced pension expense by approximately $933,000 in 1994. Prior year pension
costs have not been restated.
Effective January 1, 1994, the Corporation also changed its actuarial
assumptions regarding the increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
from 5.5% to 4.5%. The 4.5% increase in compensation levels reflects the
Corporation's actual experience during 1994. Future compensation increases are
not expected to exceed 4.5% over the next five years.
The following tables set forth the combined financial status of the plans for
1994 and 1993, and the composition of net periodic pension costs for 1994, 1993
and 1992.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested................................................ $ 75,826 $ 90,999
Non vested............................................ 3,138 3,292
-------- --------
Total............................................... $ 78,964 $ 94,291
======== ========
Projected benefit obligation............................ $107,522 $136,627
Plan assets at fair value (primarily marketable securi-
ties).................................................. 87,372 88,288
-------- --------
Unfunded status..................................... $ 20,150 $ 48,339
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1994 1993
---------------------------- ----------------------------
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). $ 6,881 $ (597) $ 6,284 $ 8,293 $ (697) $ 7,596
Unrecognized prior serv-
ice costs.............. 2,359 (2,696) (337) 2,599 (3,432) (833)
Unrecognized net loss... (25,969) (2,004) (27,973) (37,966) (9,254) (47,220)
Prepaid (accrued) pen-
sion costs............. 7,372 (5,496) 1,876 993 (8,875) (7,882)
-------- -------- -------- -------- -------- --------
Unfunded status....... $ (9,357) $(10,793) $(20,150) $(26,081) $(22,258) $(48,339)
======== ======== ======== ======== ======== ========
</TABLE>
53
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension costs:
Service cost................................. $ 6,709 $ 6,098 $ 4,878
Interest cost................................ 8,519 8,151 6,816
Return on assets............................. 3,194 (9,489) (3,812)
Net amortization and deferral................ (10,854) 5,449 (1,678)
Settlement expense........................... 4,434 -- --
-------- ------- -------
Total...................................... $ 12,002 $10,209 $ 6,204
======== ======= =======
</TABLE>
Included in accrued pension costs and netted against retained earnings in
1994, 1993 and 1992 are accruals of $634,000, $2,078,000, and $1,005,000,
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 1994 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 7.89% and 4.50%, respectively. The expected
long-term rate of return on assets was 9.25% in 1994. For 1993, the rates were
6.68%, 5.50% and 8.00%, 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 totaled $3.8 million in 1994 and
$3.7 million in 1993. Postretirement benefit costs for 1992 were recorded on a
cash basis and represented the cost of annual insurance premiums which were
approximately $749,000.
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 Statements of Condition.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------- ----------------------------
LIFE LIFE
MEDICAL INSURANCE TOTAL MEDICAL INSURANCE TOTAL
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Postretirement Benefit
Obligation:
Retirees.............. $ (8,495) $(1,360) $ (9,855) $ (8,212) $(1,333) $ (9,545)
Dependents of retirees
eligible for bene-
fits................. (3,100) -- (3,100) (3,156) -- (3,156)
Active employees fully
eligible for bene-
fits................. (478) (120) (598) (695) (123) (818)
Active employees not
eligible for bene-
fits................. (8,911) (702) (9,613) (8,527) (1,144) (9,671)
-------- ------- -------- -------- ------- --------
Accumulated
postretirement benefit
obligation............. (20,984) (2,182) (23,166) (20,590) (2,600) (23,190)
Plan assets at fair val-
ue..................... -- -- -- -- -- --
-------- ------- -------- -------- ------- --------
Accumulated
postretirement benefit
obligation in excess of
plan assets............ (20,984) (2,182) (23,166) (20,590) (2,600) (23,190)
Unrecognized prior serv-
ice cost............... -- -- -- -- -- --
Unrecognized net (gain)
loss................... (126) (144) (270) 1,231 409 1,640
Unrecognized transition
obligation............. 15,836 2,026 17,862 16,715 2,139 18,854
-------- ------- -------- -------- ------- --------
Net postretirement bene-
fit liability included
in other liabilities... $ (5,274) $ (300) $ (5,574) $ (2,644) $ (52) $ (2,696)
======== ======= ======== ======== ======= ========
</TABLE>
The assumptions used in developing the present value of the postretirement
benefit obligation are as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Rate of return on plan assets.............................. N/A N/A
General inflation.......................................... 4.50% 4.50%
Weighted average discount rate............................. 8.50% 7.75%
Weighted average rate of compensation increase............. 4.50% 5.50%
Rate of increase in health care costs initial.............. 13.50% 13.50%
Rate of increase in health care costs ultimate............. 5.50% 5.50%
</TABLE>
The resulting net periodic postretirement benefit costs consist of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------ ------------------------
LIFE LIFE
MEDICAL INSURANCE TOTAL MEDICAL INSURANCE TOTAL
------- --------- ------ ------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost.................. $1,031 $ 69 $1,100 $1,046 $ 86 $1,132
Interest cost................. 1,570 175 1,745 1,410 181 1,591
Amortization of unrecognized
transition obligation........ 879 113 992 879 113 992
------ ---- ------ ------ ---- ------
Net periodic postretirement
benefit costs.............. $3,480 $357 $3,837 $3,335 $380 $3,715
====== ==== ====== ====== ==== ======
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits is 13.2% for 1994 and is assumed to decrease gradually to
5.3% in the year 2005 after which the trend increases 0.01% per year. 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
55
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accumulated post retirement benefit obligation at December 31, 1994 by
$1,655,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit costs for 1994 by $133,000.
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" was effective January 1, 1994, however the impact
on the Corporation was not material.
11. OTHER INCOME AND OTHER OPERATING EXPENSES
The following table summarizes the more significant elements of these
accounts for the three years ended December 31, 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Other income:
Customer service fees........................ $ 9,593 $ 9,923 $ 8,613
Security sales and fees...................... 7,405 8,710 9,038
Other........................................ 35,329 29,537 21,117
-------- -------- --------
Total...................................... $ 52,327 $ 48,170 $ 38,768
======== ======== ========
Other operating expenses:
Professional fees............................ $ 16,742 $ 13,152 $ 8,627
Regulatory fees and insurance................ 16,155 16,006 16,330
Advertising and public relations............. 15,967 12,302 10,412
External processing fees..................... 15,418 17,351 17,892
Postage and communications................... 13,661 13,238 12,379
Lending and collection....................... 11,716 13,409 11,208
Other real estate expense.................... 368 6,757 9,349
Other........................................ 34,293 38,556 34,841
-------- -------- --------
Total...................................... $124,320 $130,771 $121,038
======== ======== ========
</TABLE>
12. INCOME TAXES
As discussed in Note 1, the Corporation adopted SFAS No. 109 in 1993
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.
56
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is an analysis of income tax amounts included in the
consolidated statements of condition at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1994 1993
------ -------
(IN THOUSANDS)
<S> <C> <C>
Federal income taxes currently payable.................. $5,102 $ 4,393
State income taxes currently payable.................... 493 3,210
Deferred Federal and State income tax liability......... 229 15,474
</TABLE>
The components of income tax expense for the three years ended December 31,
1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
Federal................... $36,496 $55,041 $26,449
Foreign................... 342 333 553
State..................... 4,051 9,435 5,940
------- ------- -------
Total taxes currently
payable................ 40,889 64,809 32,942
------- ------- -------
Deferred income taxes:
Federal................... 15,170 (2,648) 13,819
State..................... 3,229 671 2,444
------- ------- -------
Total deferred income
taxes.................. 18,399 (1,977) 16,263
------- ------- -------
Total income tax expense.... $59,288 $62,832 $49,205
======= ======= =======
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, 1994 follows:
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Percent of pre-tax income:
Statutory Federal income
tax rate................. 35.00% 35.00% 34.00%
Increase (decrease) in tax
rate resulting from:
Tax-exempt income......... (3.85) (4.09) (5.25)
State income taxes, net of
Federal benefits......... 2.78 3.72 3.90
Other, net................ 0.86 0.93 2.08
------- ------- -------
Effective tax rate.......... 34.79% 35.56% 34.73%
======= ======= =======
</TABLE>
57
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt.......................................... $ 76,171 $ 75,109
Deferred compensation............................. 13,012 12,962
Income on loans................................... 4,140 6,327
Unrealized losses on investment securities
available-for-sale............................... 16,025 --
Other............................................. 7,796 7,522
--------- ---------
Total gross deferred tax assets................. 117,144 101,920
--------- ---------
Deferred tax liabilities:
Leases............................................ (106,738) (89,981)
Depreciation...................................... (1,696) (4,659)
Unrealized gains on investment securities
available-for-sale............................... -- (17,018)
Debt and securities sales......................... (6,925) --
Other............................................. (2,014) (5,736)
--------- ---------
Total gross deferred tax liabilities............ (117,373) (117,394)
--------- ---------
Net deferred tax liability...................... $ (229) $ (15,474)
========= =========
</TABLE>
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, 1994. The
composition of the 1994 income tax liability and provision between current and
deferred portions is subject to final determination based on the 1994
consolidated Federal income tax return.
13. 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 $17,196,000 in 1994, $16,469,000 in 1993, and $17,471,000
in 1992. Rental expense under equipment lease arrangements, all of which are
considered short-term commitments, was $3,978,000 in 1994, $2,731,000 in 1993,
and $2,525,000 in 1992. The following is a summary of the annual noncancellable
long-term commitments, net of subleases:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1995.......................... $16,384
1996.......................... 15,003
1997.......................... 10,609
1998.......................... 6,380
1999.......................... 5,216
2000-2004..................... 21,499
2005-and beyond............... 22,993
</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
58
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
by leases on other properties; thus, it is anticipated that future annual
minimum lease commitments will not be less than the rental expense for 1994.
14. REGULATORY REQUIREMENTS AND RESTRICTIONS
The payment of dividends to the Corporation by subsidiary banks is subject to
various Federal and state regulatory limitations. A national bank must obtain
the approval of the Comptroller of the Currency if the total of all dividends
declared in any calendar year exceeds that bank's net profits for that year
combined with its retained net profits for the preceding two calendar years.
Under this formula, the amount available for dividends without the prior
approval of the Comptroller of the Currency was $103.7 million at January 1,
1995.
The Federal Reserve Act limits extensions of credit that can be made from the
Banks to any affiliate (with certain exceptions), including the Parent Company.
Loans to any one affiliate may not exceed 10% of a bank subsidiary's capital
and surplus and loans to all affiliates cannot exceed 20% of such bank
subsidiary's capital and surplus. Additionally, all loans must be
collateralized and must have terms comparable to those with unaffiliated
companies.
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 1994 and 1993 were $53,755,000 and $57,564,000,
respectively.
15. TRADING AND DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT
LIABILITIES
Trading Instruments
The Corporation maintains active trading positions in a variety of financial
derivatives including foreign exchange and interest rate futures, interest rate
swaps, interest rate caps and floors, forward rate agreements, and interest
rate and foreign exchange options. Many of these positions are a result of
activity generated by corporate customers. The balance of the positions
represent strategic trading decisions of the Corporation's derivative and
foreign exchange traders. The managers and traders involved in financial
derivatives have the technical expertise to trade these products. The active
involvement of the Corporation's traders in these markets allows the
Corporation to offer competitive pricing to customers and the expertise
necessary to advise the Corporation's asset/liability managers on the proper
timing and execution of hedging strategies for the Corporation's balance sheet.
59
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Trading Income
The following table summarizes the Corporation's net trading income by
category of instrument. Net trading income is included in the income statement
as a component of other noninterest income.
<TABLE>
<CAPTION>
1994
--------------
(IN THOUSANDS)
<S> <C>
Interest rate contracts:
Interest rate swaps......... $ 2,382
Futures..................... 504
Interest rate caps and
floors..................... 69
Swaptions................... 13
Options..................... 10
Securities.................. (1,749)
-------
1,229
-------
Foreign exchange contracts:
Spot and forward contracts.. 2,001
Futures..................... 457
Options..................... (1,534)
Miscellaneous............... 13
-------
937
-------
Total net trading income.. $ 2,166
=======
</TABLE>
60
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Nature and Terms of Trading Instruments
The following table presents the notional amounts and fair values of the
classes of trading instruments at December 31, 1994 and 1993 as well as the
average fair values during 1994. The fair value in a receivable position for
interest rate swaps and forwards and the fair value of the interest rate caps
and floors and options held represent the credit exposure at December 31, 1994
and 1993.
<TABLE>
<CAPTION>
FAIR VALUES
-------------------------
NOTIONAL AMOUNTS DECEMBER 31,
----------------- ---------------- 1994
1994 1993 1994 1993 AVERAGE
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate contracts:
Interest rate swaps............. $433,743 $391,059
In a receivable position...... $ 7,053 $ 6,297 $ 3,151
In a payable position......... (4,732) (5,529) (1,917)
Interest rate caps and floors... 364,195 45,565
Interest rate caps and floors
held......................... 2,899 99 689
Interest rate caps and floors
written...................... (2,925) (102) (700)
Forwards and futures............ 62,000 165,178
In a favorable position....... 32 -- --
In an unfavorable position.... (86) (10) --
Foreign exchange contracts:
Options......................... 425,410 212,990
Options held.................. 1,558 1,645 1,544
Options written............... (1,711) (1,097) (1,134)
Forwards and futures............ 346,937 175,333
In a favorable position....... 1,138 43 856
In an unfavorable position.... (846) (200) (106)
Securities:
Commitments to purchase......... 16,148 6,500 -- -- --
Commitments to sell............. 16,343 8,749 -- -- --
</TABLE>
The classes of trading instruments disclosed in the preceding table are
identified and described in the following sections, including a discussion of
notional amounts, credit exposure, and market risk.
Notional amounts represent the underlying amounts that the instruments are
based upon and do not represent the amounts exchanged by the parties to the
instruments. In addition, these amounts do not measure the Corporation's
exposure to credit or market risks. Credit risk is the risk of loss in the
event a counterparty to a transaction defaults or fails to perform under the
terms of the contract. The Corporation's credit risk exposure is represented by
the instruments detailed above with a positive fair value. The Corporation
would incur a loss if it was necessary to replace these instruments due to
counterparty default. The Corporation minimizes the credit risk of these
instruments through adherence to credit approvals, risk control limits, and
monitoring procedures. Market risk is the risk of decline in the value of the
contract arising from adverse movements in price, index, or rate of the
instrument underlying the contract. Exposure to market risk is managed in
accordance with the Corporation's approved risk limits and by entering into
offsetting positions. In addition, trading systems are in place which measure
risks and profitability associated with trading positions as market movements
occur.
61
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Contracts
Interest rate swaps--These instruments represent contracts between two
parties to exchange interest payments on a specified principal amount, referred
to as the notional principal, for a specified period. Trading interest rate
swap activity arises when the Corporation takes a fixed or floating rate
position in a swap or when the Corporation acts as an intermediary in arranging
interest rate swap transactions for customers and becomes a principal in the
exchange of interest payments between the parties. Cash settlement on interest
rate swaps occurs on a monthly, quarterly, or semiannual basis as specified in
each interest rate swap contract.
Interest rate caps and floors--These instruments are option-like contracts
that require the writer to pay the purchaser at specified future dates, the
amount, if any by which a specified market interest rate exceeds the fixed cap
rate or falls below the fixed floor rate, applied to a notional principal
amount. The option writer receives a premium for bearing the risk of
unfavorable interest rate changes. Interest caps and floors written do not
expose the Corporation to credit risk, since the obligation to perform, if
required, is on the Corporation.
Forwards and Futures--These instruments are contracts giving the holder the
right to purchase or sell a financial instrument at a future date for a
specified amount. Futures are traded on regulated exchanges. The credit risk of
futures contracts is limited by daily cash settlement of the net change in
value of open contracts with the exchange on which the contracts are traded.
Forwards are not traded on regulated exchanges and expose the Corporation to
credit risk as daily cash settlements are not required.
Options--These instruments are contracts that grant the purchaser the right
to either purchase from or sell to the writer a specified financial instrument
under agreed terms in exchange for a premium payment. Options written do not
expose the Corporation to credit risk since the obligation to perform, if
required, is on the Corporation.
Foreign Exchange Contracts
Options--These instruments are contracts conveying to the purchaser the
right, but not the obligation, to buy or sell an agreed amount of currency at a
specified exchange rate on or before a designated future date. The option
writer receives a premium for bearing the risk of unfavorable exchange rate
changes. Options written do not expose the Corporation to credit risk since the
obligation to perform, if required, is on the Corporation. At December 31,
1994, these contracts were principally denominated in Japanese yen.
Forwards and Futures--These instruments are contracts to purchase or sell
currencies at a specified exchange rate on a future date. Futures are traded on
regulated exchanges. The credit risk of futures is limited by daily cash
settlement of the net change in value of open contracts with the exchange on
which the contracts are traded. Forwards are not traded on regulated exchanges
and expose the Corporation to credit risk as daily cash settlements are not
required. At December 31, 1994, these contracts were principally denominated in
deutschemarks, Japanese yen, and pounds sterling.
Risk Management Instruments
Derivative financial instruments are an integral part of the Corporation's
risk management process. Derivatives allow the Corporation to modify the
repricing or maturity characteristics of assets and liabilities in a cost-
efficient manner. This flexibility helps the Corporation to achieve liquidity,
capital, and interest rate risk objectives.
Derivatives fluctuate in value as interest rates rise or fall just as on-
balance sheet assets and liabilities fluctuate in value. Derivatives are used
to modify the characteristics of assets or liabilities to which they are
designated as well as to provide basis risk protection.
62
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For example, the Corporation utilizes interest rate swaps to convert fixed
rate assets to floating rate assets or vice versa. When the Corporation uses
swaps to match/fund fixed rate term loans to customers, the Corporation is
converting the fixed rate loans to floating rate loans that better match the
floating rate deposits received from core customers.
Interest rate swaps also are used to convert floating rate liabilities to
fixed rate liabilities or vice versa. Interest rate swaps designated to certain
liabilities are used to extend the period over which the Corporation's short-
term deposits reprice thus locking in fixed rates. This offers protection
against liabilities repricing faster than assets during periods of rising
interest rates. Interest rate swaps sold as liability hedges are used to adjust
fixed rate long-term deposits to floating rate deposits. The Corporation
receives a fixed rate on this type of swap that offsets the fixed rate paid on
the term deposits thus converting the deposits to a floating rate. By issuing
long-term deposits, the Corporation increases its overall liquidity. Customer
demand for long-term deposits is primarily fixed rate. Interest rate swaps
allow the Corporation to swap fixed rate liabilities for floating rate
liabilities when appropriate for interest rate sensitivity purposes.
The Corporation also utilizes interest rate swaps to extend the period over
which floating rate assets (e.g. prime rate loans) reprice thus locking in a
fixed rate. This strategy is used to reduce the asset sensitivity of the
balance sheet or to better match maturities of assets or liabilities. Basis
swaps are sometimes utilized to protect the interest rate spread between assets
and liabilities that are repriced based on different indexes. Prime rate loans
are often funded by liabilities that reset off of a CD index, treasury index,
or LIBOR. Basis swaps lock in the spread between different indexes during the
life of the swaps. These swaps transfer the basis risk to third parties willing
to assume the risk and allow the Corporation to lock in interest rate spreads
between certain assets and liabilities.
To achieve its asset/liability management objectives, the Corporation uses a
combination of derivatives, particularly interest rate swaps, interest rate
caps and floors, and options. The nature of the instruments and the
significance of notional and credit exposure amounts are the same as described
in the preceding section on Trading Instruments. Credit risk and market risk
factors are also similar. The appropriateness of entering into derivative
instruments for risk management purposes is a function of the current or
desired interest rate sensitivity of the Corporation and is limited by interest
rate risk policies approved by the Corporation's Board of Directors.
63
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the notional and fair value amounts for the risk
management instruments entered into by the Corporation at December 31, 1994 and
1993 as well as the weighted average maturity and weighted average receive and
pay rates for the instruments at December 31, 1994. The unrealized gross gains
for the various classes of instruments represent the credit exposure at
December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1994
WEIGHTED WEIGHTED ESTIMATED
NOTIONAL AMOUNT AVERAGE AVERAGE RATE FAIR VALUE
----------------- MATURITY ----------------- ---------------
1994 1993 IN YEARS RECEIVE PAY 1994 1993
-------- -------- -------- --------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
DESIGNATED TO ASSETS
INTEREST RATE SWAPS SOLD
Convert floating rate to
fixed rate............. $175,000 $ -- 1.44 6.11% 6.17% $(3,917) $ --
------- ------
Carrying amount (2)..... 11,155 --
Unrealized gross gains.. -- --
Unrealized gross losses. (15,072) --
INTEREST RATE SWAPS
PURCHASED
Convert fixed rate to
floating rate.......... 40,450 10,500 5.48 5.65 6.32 2,735 (708)
------- ------
Carrying amount (2)..... (195) --
Unrealized gross gains.. 2,930 --
Unrealized gross losses. -- (708)
INTEREST RATE SWAPS
PURCHASED FORWARD
Convert fixed rate to
floating rate.......... 12,657 -- 5.01 -- 5.98(1) 961 --
------- ------
Unrealized gross gains.. 961 --
Unrealized gross losses. -- --
DESIGNATED TO
LIABILITIES
INTEREST RATE SWAPS SOLD
Convert fixed rate to
floating rate.......... 139,000 103,000 2.60 7.66 6.06 (2,149) 5,556
------- ------
Unrealized gross gains.. 746 5,556
Unrealized gross losses. (2,895) --
INTEREST RATE SWAPS
PURCHASED
Convert floating rate to
fixed rate............. 435,500 125,000 0.51 5.78 5.24 3,224 (2,259)
------- ------
Unrealized gross gains.. 3,311 --
Unrealized gross losses. (87) (2,259)
INTEREST RATE CAPS
PURCHASED
Convert floating rate to
fixed rate............. 271,000 215,000 2.48 Cap--13.50%(3) -- --
------- ------
Carrying amount (2)..... 70 --
Unrealized gross gains.. -- --
Unrealized gross losses. (70) --
INTEREST RATE FLOOR SOLD
Convert fixed rate to
floating rate.......... -- 50,000 -- -- -- -- (120)
------- ------
Unrealized gross gains.. -- --
Unrealized gross losses. -- (120)
CALL OPTIONS PURCHASED.. 12,261 -- 2.33 -- -- -- --
------- ------
Carrying amount (2)..... 1,005 --
Unrealized gross gains.. -- --
Unrealized gross losses. (1,005) --
BASIS SWAP
Convert floating rate to
different index........ 30,000 -- 4.19 5.18 6.11 (2,439) --
------- ------
Unrealized gross gains.. -- --
Unrealized gross losses. (2,439) --
</TABLE>
--------
(1) Represents a forward pay rate.
(2) Carrying amounts represent deferred losses on the early termination of
interest rate swaps sold, $11,155,000; deferred fees on the redesignation
of an interest rate swap purchased, ($195,000); deferred premiums on
interest rate caps purchased, $70,000; and deferred premiums on call
options purchased, $1,005,000.
(3) Pays interest if interest rates exceed 13.50%.
64
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the estimated maturities of the risk
management instruments entered into by the Corporation at December 31, 1994.
<TABLE>
<CAPTION>
1 YEAR 1-5 5-10 TOTAL
OR LESS YEARS YEARS YEARS
-------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DESIGNATED TO ASSETS
Notional amounts...................... $ -- $190,000 $38,107 $228,107
Weighted average receive rate......... -- 6.08% 5.63% 6.00%
Estimated fair value.................. -- (2,431) 2,210 (221)
DESIGNATED TO LIABILITIES
Notional amounts...................... 452,669 405,092 -- 857,761
Weighted average receive rate......... 6.08% 6.82% -- 6.43%
Estimated fair value.................. 2,983 (1,908) -- 1,075
BASIS SWAPS
Notional amounts...................... -- 30,000 -- 30,000
Weighted average receive rate......... -- 5.18% -- 5.18%
Estimated fair value.................. -- (2,439) -- (2,439)
</TABLE>
The following table summarizes the activity of the risk management
instruments entered into by the Corporation, by notional amounts, for the year
ended December 31, 1994.
<TABLE>
<CAPTION>
DESIGNATED TO DESIGNATED TO BASIS
ASSETS LIABILITIES SWAPS TOTAL
------------- ------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of
year...................... $ 10,500 $ 493,000 $ -- $ 503,500
Additions.................. 428,107 652,354 30,000 1,110,461
Maturities/amortizations... -- (298,093) -- (298,093)
Terminations............... (200,000) -- -- (200,000)
Redesignations............. (10,500) 10,500 -- --
--------- --------- ------- ----------
Balance at December 31,
1994...................... $ 228,107 $ 857,761 $30,000 $1,115,868
========= ========= ======= ==========
</TABLE>
Deferred losses on the early termination of interest rate swaps with notional
balances of $200.0 million designated to the Corporation's prime based
commercial loans were $11.1 million as of December 31, 1994. These losses are
scheduled to be amortized into income in the following periods: $3.4 million in
1995, $3.4 million in 1996, $3.4 million in 1997, and $858,000 in 1998.
As of December 31, 1994, the risk management instruments entered into by the
Corporation had the following impact on the components of net interest income:
gross interest income increased $2.6 million and gross interest expense
decreased $1.1 million, which resulted in a $3.7 million increase in net
interest income.
Hedges of Anticipated Transactions
The Corporation's mortgage banking subsidiary obtains both mandatory and
optional commitments to deliver securitized mortgages and whole mortgage loans.
These commitments hedge the risk associated with residential mortgages held-
for-sale and firm and anticipated commitments to originate mortgage loans which
are expected to settle within six months. At December 31, 1994 and 1993,
residential mortgages held-for-sale,
65
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
residential mortgage firm and anticipated commitments, and offsetting
commitments to deliver residential mortgages are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential mortgages held-for-sale........................ $75,366 $206,791
Commitments to originate mortgage loans:
Firm commitments......................................... 19,056 38,431
Anticipated commitments.................................. 58,625 93,741
Mandatory commitments to deliver:
Securitized mortgages.................................... 72,150 214,530
Whole mortgage loans..................................... 72,379 75,716
Optional commitments to deliver:
Securitized mortgages.................................... -- 22,000
Whole mortgage loans..................................... -- 16,000
</TABLE>
The net fair values of the residential mortgages held-for-sale, firm and
anticipated commitments to originate mortgage loans, and the related
commitments to deliver residential mortgage loans were $76.1 million and $211.3
million, respectively, at December 31, 1994 and 1993.
Credit-related Instruments
Financial instruments whose contract amounts represent potential credit risk
at December 31, 1994 and 1993 are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit:
Commercial.......................................... $1,923,207 $1,778,765
Real estate......................................... 110,321 172,363
Retail.............................................. 545,879 531,104
Bankcard............................................ 2,809,928 2,114,002
Leases receivable................................... 14,907 9,005
Foreign............................................. 172,388 234,524
---------- ----------
Total commitments to extend credit................ 5,576,630 4,839,763
---------- ----------
Letters of credit:
Commercial.......................................... 52,423 70,561
Standby-financial................................... 188,656 203,220
Standby-performance................................. 247,963 222,271
Standby-other confirmed............................. 26,431 --
---------- ----------
Total letters of credit........................... 515,473 496,052
---------- ----------
Securities lent....................................... 123,603 147,153
Loans sold with recourse.............................. 38,202 51,983
</TABLE>
Commitments to extend credit--The Corporation enters into contractual
commitments to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. Customers
use credit commitments to ensure that funds will be available for working
capital purposes, for
66
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
capital expenditures and to ensure access to funds at specified terms and
conditions. Substantially all of the Corporation's commitments to extend credit
are contingent upon customers' meeting and satisfying other conditions at the
time of loan funding. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Commercial letters of credit--Letters of credit are conditional commitments
issued by the Corporation to guarantee the performance of a customer to a third
party. A commercial letter of credit is normally a short-term instrument used
to finance a commercial contract for the shipment of goods from a seller to a
buyer. This type of letter of credit ensures prompt payment to the seller in
accordance with its terms. Although the commercial letter of credit is
contingent upon the satisfaction of specified conditions, it represents a
current exposure if the customer defaults on the underlying transaction.
Standby letters of credit--A standby letter of credit can be either financial
or performance based. Financial standby letters of credit obligate the
Corporation to disburse funds to a third party if the Corporation's customer
fails to repay an outstanding loan or debt instrument under the terms of the
agreement with the beneficiary. Performance standby letters of credit obligate
the Corporation to disburse funds if the customer fails to perform some
contractual or non-financial obligation under the terms of the agreement with
the beneficiary. The Corporation's policies generally require that all standby
letter of credit arrangements contain security and debt covenants similar to
those contained in loan agreements. The credit risk involved in issuing both
types of letters of credit is essentially the same as that involved in
extending loan facilities to customers.
Securities lent--These instruments represent securities owned by the
Corporation or its customers which are lent to third parties. The contract
amount represents potential credit risk. However, the Corporation obtains
collateral, with a fair 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.
Loans sold with recourse--These loans are sold to a party with an agreement
that the Corporation agrees to reimburse the purchaser for losses resulting
from the purchased loans.
Concentrations of Credit Risk
The majority of the Corporation's loan activity is with customers within the
Baltimore/Washington marketplace which encompasses all of Maryland, Washington,
D.C., Northern Virginia, and Southern Pennsylvania 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 more than 6.3% of
the total portfolio.
Securitized Assets
The Corporation's subsidiaries have securitized and sold manufactured housing
receivables and credit card receivables with outstanding balances totaling
$338.9 million and $382.4 million at December 31, 1994 and 1993, respectively.
The Corporation's subsidiaries continue to receive servicing fees to service
these receivables. These fees 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. At
December 31, 1994 and 1993, respectively, $173.9 million and $217.4 million in
manufactured housing receivables were serviced by outside parties for a fixed
fee under subservicing agreements.
67
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contingent Liabilities
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.
16. RELATED PARTY TRANSACTIONS
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"). An ADR, American depository receipt is a
negotiable certificate issued by a U. S. Bank for shares of stock of a foreign
corporation entitling the shareholder to all dividends and capital gains of the
foreign corporation. 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 1994, 1993, 1991 and
1989, awards were made under the 1989 Plan aggregating the equivalent of
342,156, 2,035,680, 1,986,954 and 1,834,700 shares of Common Stock and 11,886,
57,470, 70,361 and 50,704 shares of Preferred Stock, respectively. Expenses
relative to this plan totaled $3,055,000, $4,051,000 and $2,942,000 in 1994,
1993 and 1992, respectively. The awards are subject to a restriction period of
at least three years.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating the fair value for its financial instruments as defined by SFAS No.
107.
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
MONEY MARKET INVESTMENTS: The carrying amount approximates fair value.
INVESTMENT SECURITIES: Fair values are based on published market prices or
dealer quotes.
LOANS HELD-FOR-SALE: Market quotes are used to estimate the value of loans
held-for-sale which are primarily residential mortgages unless there is a firm
commitment to sell the loans in which case the commitment price is used.
68
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LOANS: For credit card and equity line receivables with short-term or
variable characteristics, the total receivables outstanding approximate fair
value. This amount excludes any value related to the account relationship. The
fair value of other types of loans is estimated by discounting the future cash
flows using the comparable risk-free rate and adjusting for an appropriate
spread to cover credit risk and operating costs.
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates
fair value.
NONINTEREST BEARING DEPOSITS: The fair value of these instruments, by the
SFAS No. 107 definition is the amount payable on demand at the reporting date.
INTEREST BEARING DEPOSITS: The fair value of demand deposits, savings
accounts and money market deposits with no defined maturity, by SFAS No. 107
definition, is the amount payable on demand at the reporting date. The fair
value of certificates of deposit is estimated by discounting the future cash
flows using the current rates at which similar deposits would be made.
FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, AND
OTHER SHORT-TERM BORROWINGS: For these short-term instruments, the carrying
amount approximates fair value.
LONG-TERM DEBT: For these instruments, fair value is based on dealer quotes,
where available, and on estimates made by discounting the future cash flows
using the current rates at which similar borrowings could be made.
COMMITMENTS TO EXTEND CREDIT, STANDBY AND COMMERCIAL LETTERS OF CREDIT: The
fair value of loan commitments and letters of credit, both commercial and
standby, with the exception of residential mortgage loan commitments, is
assumed to equal the carrying value which is immaterial. Extensions of credit
under these commitments, if exercised, would result in loans priced at market
terms. Market quotes are used to estimate the value of residential loan
commitments.
FOREIGN EXCHANGE CONTRACTS: The fair value of foreign exchange contracts
represents the net asset or liability of the Corporation, since these contracts
are revalued on a monthly basis.
INTEREST RATE CONTRACTS: The fair value of these instruments is the estimated
amount the Corporation would receive or pay to terminate the contracts or
agreements, taking into account current interest rates, volatility factors and,
when appropriate, the credit worthiness of the counterparties.
69
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Corporation's financial instruments required
to be disclosed under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks...... $ 554,878 $ 554,878 $ 630,731 $ 630,731
Money market investments..... 374,799 374,799 196,573 196,573
Investment securities........ 2,360,976 2,293,194 3,016,547 3,038,361
Loans held-for-sale.......... 75,366 75,798 269,222 272,481
Loans (a).................... 5,024,557 5,110,119 4,789,198 4,984,400
Interest receivable.......... 61,479 61,479 55,828 55,828
LIABILITIES:
Noninterest bearing deposits. 1,766,648 1,766,648 1,914,452 1,914,452
Interest bearing deposits.... 4,866,898 4,843,674 4,859,705 4,873,670
Funds sold and securities
sold under agreements to
repurchase.................. 519,772 519,772 748,266 748,266
Other borrowed funds, short-
term........................ 541,507 541,507 645,369 645,369
Long-term debt............... 214,632 220,712 189,577 208,792
Interest payable............. 30,075 30,075 30,422 30,422
OFF-BALANCE SHEET ASSETS (LI-
ABILITIES):
Interest rate swap agree-
ments....................... 13,281 736 806 3,357
Interest rate caps and
floors...................... 44 (26) (11) (123)
Interest rate forwards and
futures..................... -- (54) (268) (10)
Interest rate options........ 1,005 -- -- --
Foreign exchange forwards and
futures..................... 287 292 (157) (157)
Foreign exchange options..... -- -- 2,406 548
</TABLE>
--------
(a) As required by SFAS No. 107, leases receivable with a carrying value
totaling $243,310 and $208,517 at December 31, 1994 and 1993, respectively,
are excluded. The carrying values are net of the allowance for loan losses
and related unearned income.
70
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. 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,
---------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries:
Bank subsidiaries............................ $ 51,200 $ 44,500 $106,968
Nonbank subsidiaries......................... 11,050 6,554 3,823
Interest income from subsidiaries:
Bank subsidiaries............................ 15,639 8,784 6,641
Nonbank subsidiaries......................... 9,787 11,753 14,379
Other interest and dividend income........... 18,564 9,697 9,203
Other income................................... 7,585 7,261 4,356
-------- -------- --------
Total income............................... 113,825 88,549 145,370
-------- -------- --------
EXPENSES:
Interest expense, short term debt.............. 16,727 12,513 17,164
Interest expense, long term debt............... 17,309 17,312 15,850
Other expenses................................. 5,733 7,344 5,513
-------- -------- --------
Total expenses............................. 39,769 37,169 38,527
-------- -------- --------
INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES.................... 74,056 51,380 106,843
Income tax expense (credit).................... 3,586 (222) (1,512)
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES........................ 70,470 51,602 108,355
Equity in undistributed net income of subsidi-
aries......................................... 40,670 62,266 (15,882)
-------- -------- --------
NET INCOME..................................... $111,140 $113,868 $ 92,473
======== ======== ========
</TABLE>
71
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CONDITION
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 115 $ 9,845
Interest bearing deposits in other banks.............. 577,228 443,777
Securities purchased under agreements to resell....... 37,000 58
Investment securities available-for-sale.............. 32,767 33,291
Investment securities held-to-maturity................ 8,232 8,507
Investment in subsidiaries:
Bank subsidiaries................................... 676,796 674,873
Nonbank subsidiaries................................ 32,746 42,754
Loans and advances to subsidiaries:
Bank subsidiaries................................... 76,000 76,000
Nonbank subsidiaries................................ 156,289 316,448
Loans, net of unearned income......................... 2,252 --
Premises and equipment................................ 4,101 4,120
Other assets.......................................... 34,736 40,455
---------- ----------
Total assets...................................... $1,638,262 $1,650,128
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt....................................... $ 402,539 $ 463,682
Long-term debt........................................ 189,632 189,577
Other liabilities..................................... 22,067 20,075
---------- ----------
Total liabilities................................. 614,238 673,334
---------- ----------
Stockholders' equity.................................. 1,024,024 976,794
---------- ----------
Total liabilities and stockholders' equity........ $1,638,262 $1,650,128
========== ==========
</TABLE>
72
<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,
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before undistributed net income of sub-
sidiaries.................................... $ 70,470 $ 51,602 $108,355
Adjustments to reconcile net income to net
cash provided by operating activities........ 98 1,508 7,188
-------- -------- --------
Net cash provided by operating activities... 70,568 53,110 115,543
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale........................... 7,126 -- --
Proceeds from sales of investment securities
held-to-maturity............................. -- 2,100 1,556
Proceeds from paydowns and maturities of in-
vestment securities available-for-sale....... 5,866 -- --
Proceeds from paydowns and maturities of in-
vestment securities held-to-maturity......... 3,105 3,000 452
Purchases of investment securities available-
for-sale..................................... (10,970) -- --
Purchases of investment securities held-to-ma-
turity....................................... (2,828) (9,572) (12,364)
Net increase in short-term investments........ (36,942) (8) --
Loans originated by the parent company........ (2,252) -- --
Investment in subsidiaries.................... (1,850) (10,686) (702)
Net decrease (increase) in loans to subsidiar-
ies, short-term.............................. 160,159 (67,284) (46,057)
Long-term loans to subsidiaries............... -- -- (41,000)
Principal collected on long-term loans to sub-
sidiaries.................................... -- 875 110,825
Purchase of restricted stock for compensation
plan......................................... (1,704) (4,809) (2,553)
Purchases of premises and equipment........... (7) (120) --
Proceeds from sales of premises and equipment. 383 175 --
Other, net.................................... 4,650 (3,194) (3,881)
-------- -------- --------
Net cash provided by (used for) investing
activities................................. 124,736 (89,523) 6,276
-------- -------- --------
FINANCING ACTIVITIES
Net (decrease) increase in short-term
borrowings................................... (61,143) 73,808 (143,134)
Proceeds from the issuance of long-term debt.. -- -- 99,564
Principal payment on long-term debt........... -- -- (50,825)
Proceeds from the issuance of preferred stock. -- 144,803 --
Cash dividends paid........................... (10,440) -- --
-------- -------- --------
Net cash (used for) provided by financing
activities................................. (71,583) 218,611 (94,395)
-------- -------- --------
Increase in cash and cash equivalents(1)...... 123,721 182,198 27,424
Cash and cash equivalents at beginning of
year......................................... 453,622 271,424 244,000
-------- -------- --------
Cash and cash equivalents at December 31,..... $577,343 $453,622 $271,424
======== ======== ========
</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, 1994.
73
<PAGE>
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,
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.
74
<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, 1994 and 1993 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, 1994. 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, 1994 and 1993 and the results
of their operations and cash flows for each of the years in the three-year
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 10, 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
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions" effective in 1993.
KPMG Peat Marwick LLP
Baltimore, Maryland
February 13, 1995
75
<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:
<TABLE>
<C> <S>
(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
Corporation's Registration Statement on Form S-1 filed March 13,
1992.)
(24) Power of Attorney.
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 13, 1994 to report the change
in the registrant's independent accountant after the completion of the
current audit for the year ended December 31, 1994.
76
<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/ Frank P. Bramble
By __________________________________
(FRANK P. BRAMBLE, 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/ Frank P. Bramble President and Chief March 27, 1995
------------------------------------- Executive Officer
(FRANK P. BRAMBLE)
PRINCIPAL FINANCIAL OFFICER:
/s/ Robert W. Schaefer Executive Vice March 27, 1995
------------------------------------- President
(ROBERT W. SCHAEFER)
PRINCIPAL ACCOUNTING OFFICER:
/s/ James A. Smith Senior Vice March 27, 1995
------------------------------------- President
(JAMES A. SMITH)
MAJORITY OF THE BOARD OF DIRECTORS:
Frank P. Bramble, Benjamin L. Brown, Jeremiah E. Casey, 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 27, 1995
By __________________________________
(ROBERT W. SCHAEFER)
77
<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 Frank P.
Bramble, Jeremiah E. Casey, 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, 1994 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. This Power of Attorney may be executed in one or more counterparts.
Frank P. Bramble Frank A. Gunther, Jr.
------------------------------------- -------------------------------------
FRANK P. BRAMBLE FRANK A. GUNTHER, JR.
Benjamin L. Brown Curran W. Harvey, Jr.
------------------------------------- -------------------------------------
BENJAMIN L. BROWN CURRAN W. HARVEY, JR.
Jeremiah E. Casey Margaret M. Heckler
------------------------------------- -------------------------------------
JEREMIAH E. CASEY MARGARET M. HECKLER
J. Owen Cole Kevin J. Kelly
------------------------------------- -------------------------------------
J. OWEN COLE KEVIN J. KELLY
Edward A. Crooke Henry J. Knott, Jr.
------------------------------------- -------------------------------------
EDWARD A. CROOKE HENRY J. KNOTT, JR.
John F. Dealy Thomas P. Mulcahy
------------------------------------- -------------------------------------
JOHN F. DEALY THOMAS P. 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: January 17, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST MARYLAND BANCORP DECEMBER 31, 1994 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 554,878
<INT-BEARING-DEPOSITS> 137,245
<FED-FUNDS-SOLD> 180,944
<TRADING-ASSETS> 56,610
<INVESTMENTS-HELD-FOR-SALE> 1,022,709
<INVESTMENTS-CARRYING> 1,338,267
<INVESTMENTS-MARKET> 1,270,485
<LOANS> 5,458,891
<ALLOWANCE> 191,024
<TOTAL-ASSETS> 9,105,602
<DEPOSITS> 6,633,546
<SHORT-TERM> 1,061,279
<LIABILITIES-OTHER> 146,062
<LONG-TERM> 214,632
<COMMON> 84,926
0
30,000
<OTHER-SE> 909,098
<TOTAL-LIABILITIES-AND-EQUITY> 9,105,602
<INTEREST-LOAN> 435,012
<INTEREST-INVEST> 151,459
<INTEREST-OTHER> 33,275
<INTEREST-TOTAL> 619,746
<INTEREST-DEPOSIT> 169,191
<INTEREST-EXPENSE> 241,099
<INTEREST-INCOME-NET> 378,647
<LOAN-LOSSES> 22,996
<SECURITIES-GAINS> 15,616
<EXPENSE-OTHER> 396,201
<INCOME-PRETAX> 170,428
<INCOME-PRE-EXTRAORDINARY> 111,140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,140
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.51
<LOANS-NON> 54,303
<LOANS-PAST> 13,338
<LOANS-TROUBLED> 4,974
<LOANS-PROBLEM> 56,900
<ALLOWANCE-OPEN> 200,006
<CHARGE-OFFS> 42,527
<RECOVERIES> 13,159
<ALLOWANCE-CLOSE> 191,024
<ALLOWANCE-DOMESTIC> 101,984
<ALLOWANCE-FOREIGN> 11,748
<ALLOWANCE-UNALLOCATED> 77,292
</TABLE>
