<PAGE>
- --------------------------------------------------------------------------------
---------------
- --------------------------------------------------------------------------------
---------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7273
---------------------------
FIRST MARYLAND BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-0981378
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FIRST MARYLAND BUILDING
25 SOUTH CHARLES STREET
BALTIMORE, MARYLAND 21201
---------------------------------------- ----------
(Address of principal executive offices) (zip code)
410-244-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
All voting stock (597,763,495 outstanding shares of Common Stock, $1/7 par
value) of the registrant is owned by Allied Irish Banks, p.l.c., an Irish
banking corporation.
- --------------------------------------------------------------------------------
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<PAGE>
PAGE 2
FIRST MARYLAND BANCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
----
<S> <C>
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Statements of Condition 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-35
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 36
</TABLE>
<PAGE>
PAGE 3
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................... $200,495 $130,600 $476,305 $384,869
Interest on investment securities available-for-sale:
Taxable......................................... 66,044 40,341 143,530 125,008
Tax-exempt...................................... 5,186 1,572 7,970 4,842
Dividends....................................... 1,388 455 2,761 1,035
Interest on loans held-for-sale...................... 7,554 2,467 11,550 6,571
Interest on money market investments................. 2,606 3,054 15,786 11,334
-------- -------- -------- --------
Total interest and dividend income......... 283,273 178,489 657,902 533,659
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits................................. 96,626 51,736 197,807 152,706
Interest on Federal funds purchased and
other short-term borrowings......................... 31,814 15,330 74,395 54,710
Interest on long-term debt........................... 7,596 9,457 16,668 27,782
Interest on guaranteed preferred beneficial interests
in Company's junior subordinated debentures....... 5,327 - 14,735 -
-------- -------- -------- --------
Total interest expense..................... 141,363 76,523 303,605 235,198
-------- -------- -------- --------
NET INTEREST INCOME.................................. 141,910 101,966 354,297 298,461
Provision for credit losses (note 6)................. 7,434 2,000 26,634 6,000
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES....................................... 134,476 99,966 327,663 292,461
-------- -------- -------- --------
NONINTEREST INCOME
Gain on sale of bankcard loans....................... 28,155 - 28,155
Service charges on deposit accounts.................. 26,437 20,376 69,978 58,791
Mortgage banking income.............................. 18,110 10,904 30,981 22,810
Trust and investment advisory fees................... 14,330 7,470 31,177 20,920
Servicing income..................................... 8,489 7,401 20,515 19,236
Credit card income................................... 7,385 2,056 12,545 8,262
Securities gains (losses), net....................... (230) (126) 278 175
Other income......................................... 16,830 9,303 43,276 29,865
-------- -------- -------- --------
Total noninterest income................... 119,506 57,384 236,905 160,059
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and wages................................... 74,141 47,325 168,005 134,458
Intangible assets amortization expense............... 16,218 2,680 20,722 6,018
Other personnel costs................................ 14,835 9,691 37,553 34,664
Equipment costs...................................... 11,895 8,103 28,949 24,474
Occupancy costs...................................... 10,550 8,511 26,689 23,683
Other operating expenses............................. 41,624 26,713 88,479 78,206
-------- -------- -------- --------
Total noninterest expenses................. 169,263 103,023 370,397 301,503
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES........................... 84,719 54,327 194,171 151,017
Income tax expense................................... 31,190 20,625 70,715 54,712
-------- -------- -------- --------
NET INCOME........................................... $ 53,529 $ 33,702 $123,456 $ 96,305
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PAGE 4
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and due from banks................................................. $ 963,763 $ 842,032 $ 826,779
Money market investments (note 4)....................................... 101,233 75,260 46,896
Investment securities available-for-sale (note 5)....................... 4,320,034 2,552,620 2,801,694
Loans held-for-sale..................................................... 434,438 150,742 159,885
Loans, net of unearned income of $175,408, $130,026 and $121,251:
Commercial............................................................ 2,827,189 1,731,031 1,787,747
Commercial real estate................................................ 2,228,170 1,453,244 1,418,975
Residential mortgage.................................................. 1,045,602 833,045 838,208
Retail................................................................ 2,509,844 1,380,767 1,340,145
Bankcard.............................................................. 142,510 596,474 468,190
Leases receivable..................................................... 730,501 438,060 399,495
Foreign............................................................... 394,473 365,824 362,401
----------- ----------- -----------
Total loans, net of unearned income................................. 9,878,289 6,798,445 6,615,161
Allowance for credit losses (note 6).................................... (175,462) (154,802) (170,529)
----------- ----------- -----------
Loans, net.......................................................... 9,702,827 6,643,643 6,444,632
Premises and equipment.................................................. 195,026 106,701 106,254
Due from customers on acceptances....................................... 10,987 8,725 9,878
Intangible assets....................................................... 966,214 98,847 107,840
Other assets............................................................ 459,991 312,454 338,039
----------- ----------- -----------
Total assets..................................................... $17,154,513 $10,791,024 $10,841,897
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Domestic deposits:
Noninterest bearing deposits.......................................... $ 2,629,276 $ 2,248,252 $ 2,224,720
Interest bearing deposits............................................. 9,028,348 5,135,616 5,130,774
Interest bearing deposits in foreign banking office..................... 194,640 113,830 142,896
----------- ----------- -----------
Total deposits...................................................... 11,852,264 7,497,698 7,498,390
Federal funds purchased and securities sold under repurchase agreements. 1,349,423 533,547 609,980
Other borrowed funds, short-term (note 9)............................... 805,393 821,477 647,236
Bank acceptances outstanding............................................ 10,987 8,725 9,878
Accrued taxes and other liabilities..................................... 585,150 297,525 309,501
Long-term debt (note 10)................................................ 409,971 229,742 554,729
Guaranteed preferred beneficial interests in Company's junior
subordinated debentures (note 11)...................................... 295,758 147,113 -
----------- ----------- -----------
Total liabilities................................................. 15,308,946 9,535,827 9,629,714
----------- ----------- -----------
4.50% Cumulative, Redeemable Preferred Stock, $5 par value per share;
$100 liquidation preference per share; authorized and issued 90,000
shares (note 12)....................................................... 7,847 7,700 9,000
----------- ----------- -----------
Stockholders' equity:
7.875% Noncumulative Preferred Stock, Series A, $5 par value per
share, $25 liquidation preference per share; authorized 8,910,000
shares; issued 6,000,000 shares..................................... 30,000 30,000 30,000
Common stock, $1/7 par value per share; authorized 600,000,000
shares; issued 597,763,495 shares................................... 85,395 84,926 84,926
Capital surplus....................................................... 702,894 198,176 198,176
Retained earnings..................................................... 996,459 926,063 893,181
Net unrealized gains (losses) on investment securities
available-for-sale................................................... 22,972 8,332 (3,100)
----------- ----------- -----------
Total stockholders' equity......................................... 1,837,720 1,247,497 1,203,183
----------- ----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity........................................... $17,154,513 $10,791,024 $10,841,897
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PAGE 5
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS
(LOSSES) ON
INVESTMENT
SECURITIES
PREFERRED COMMON CAPITAL RETAINED AVAILABLE-
STOCK STOCK SURPLUS EARNINGS FOR-SALE TOTAL
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1996
- ------------------------------------
Balance at beginning of year............ $ 30,000 $ 84,926 $ 198,176 $ 846,058 $ 24,414 $1,183,574
Net income.............................. 96,305 96,305
Dividends declared on
common stock........................ (40,000) (40,000)
Dividends declared on
preferred stock..................... (8,865) (8,865)
Dividends declared on redeemable
preferred stock..................... (101) (101)
Change in net cost not yet
recognized as periodic pension
expense............................. (216) (216)
Change in net unrealized gains (losses)
on investment securities available-
for-sale............................ (27,514) (27,514)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1996........... $ 30,000 $ 84,926 $ 198,176 $ 893,181 ($3,100) $1,203,183
========== ========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1997
- ------------------------------------
Balance at beginning of year............ $ 30,000 $ 84,926 $ 198,176 $ 926,063 $ 8,332 $1,247,497
Net income.............................. 123,456 123,456
Issuance of common stock................ 469 504,718 505,187
Dividends declared on
common stock........................ (44,000) (44,000)
Dividends declared on
preferred stock..................... (8,865) (8,865)
Dividends declared on redeemable
preferred stock..................... (304) (304)
Change in net cost not yet
recognized as periodic pension
expense............................. 255 255
Accretion of redeemable preferred
stock............................... (146) (146)
Change in net unrealized gains (losses)
on investment securities available-
for-sale............................ 14,640 14,640
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1997........... $ 30,000 $ 85,395 $ 702,894 $ 996,459 $ 22,972 $1,837,720
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PAGE 6
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................. $ 123,456 $ 96,305
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses......................................... 26,634 6,000
Provision for other real estate losses.............................. - 77
Depreciation and amortization....................................... 41,868 27,291
Deferred income tax expense......................................... 33,166 27,465
Net (gain) loss on the sale of assets............................... (29,001) 335
Net increase in loans originated for sale........................... (32,212) (31,501)
Net increase in trading account securities.......................... (46,216) (2,898)
Net decrease in accrued interest receivable......................... 3,929 9,499
Net increase (decrease) in accrued interest payable................. 11,002 (14,209)
Other, net.......................................................... 23,815 (53,648)
----------- ------------
Net cash provided by operating activities.................... 156,441 64,716
----------- ------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale..... 1,935,819 1,092,474
Proceeds from paydowns and maturities of investment securities
available-for-sale................................................. 619,243 14,398,933
Purchases of investment securities available-for-sale............... (2,106,468) (15,096,517)
Net decrease in short-term investments.............................. 63,329 301,461
Net disbursements from lending activities of banking subsidiaries... (180,458) (487,810)
Principal collected on loans of nonbank subsidiaries................ 38,445 30,492
Loans originated by nonbank subsidiaries............................ (49,122) (41,526)
Principal payments received under leases............................ 2,926 2,785
Purchases of assets to be leased.................................... (2,716) (14,942)
Proceeds from the sale of other real estate owned transactions...... 7,896 2,395
Net purchases of premises and equipment............................. (24,050) (18,124)
Proceeds from the sale of bankcard loans............................ 338,539 -
Securitization and sale of bankcard loans........................... - 337,716
Purchase of banking subsidiary...................................... (1,377,192) (83,522)
Purchase of investment management company........................... - (4,767)
Other, net.......................................................... 193,788 (10,928)
----------- ------------
Net cash (used for) provided by investing activities......... (540,021) 408,120
----------- ------------
FINANCING ACTIVITIES
Net increase in deposits............................................ 171,419 28,942
Net decrease in short-term borrowings............................... (440,841) (503,260)
Proceeds from the issuance of long-term debt........................ 196,951 -
Principal payments on long-term debt................................ (20,000) (10,000)
Proceeds from issuance of medium-term bank notes.................... - 50,000
Proceeds from the issuance of guaranteed preferred beneficial
interests in Company's junior subordinated debentures.............. 146,817 -
Proceeds from the issuance of common stock.......................... 505,187 -
Cash dividends paid................................................. (53,168) (8,966)
----------- ------------
Net cash provided by (used for) financing activities......... 506,365 (443,284)
----------- ------------
Increase in cash and cash equivalents................................... 122,785 29,552
Cash and cash equivalents at beginning of year.......................... 842,266 797,460
----------- ------------
Cash and cash equivalents at September 30,.............................. $ 965,051 $ 827,012
=========== ============
SUPPLEMENTAL DISCLOSURES
Interest payments............................................... $ 282,119 $ 240,831
Income tax payments............................................. 36,779 20,785
NONCASH INVESTING AND FINANCING ACTIVITIES
Loan charge-offs................................................ 32,832 29,393
Transfers to other real estate.................................. 8,144 1,671
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PAGE 7
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accounting and reporting policies of First Maryland Bancorp and
subsidiaries (the "Corporation") conform to generally accepted accounting
principles. The accompanying unaudited interim consolidated financial
statements reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented. These unaudited financial
statements should be read in conjunction with the audited financial statements
and related notes included in the Corporation's 1996 Annual Report on Form 10-K.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
The Corporation adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities ("SFAS 125") on January 1, 1997. SFAS 125 requires an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize the financial assets when control has been
surrendered in accordance with criteria provided in the Statement. The adoption
of SFAS 125 did not have a material impact on the Corporation's financial
position or results of operations.
Subsequent to the issuance of SFAS 125, SFAS 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement 125" was issued. SFAS No. 127
defers the effective date of certain provisions of SFAS 125 relating to
repurchase agreements, securities lending, and other similar transactions and
pledged collateral until January 1, 1998. The adoption of SFAS 127 is not
expected to have a material impact on the Corporation's financial position or
results of operations.
In June 1997, SFAS 130, "Reporting Comprehensive Income" was issued and is
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of general-
purpose financial statements. SFAS 130 requires the disclosure of an amount
that represents total comprehensive income and the components of comprehensive
income in a financial statement. The adoption of SFAS 130 is not expected to
have a material impact on the Corporation's financial position or results of
operations.
In June 1997, SFAS 131, " Disclosures about Segments of an Enterprise and
Related Information" was issued and is effective for financial statements for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed in both annual and interim financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 is not expected
to have a material impact on the Corporation's financial position or results of
operations.
<PAGE>
PAGE 8
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
3. ACQUISITION
On July 8, 1997, Dauphin Deposit Corporation ("Dauphin") merged into the
Corporation, thereby consummating the acquisition of Dauphin by the Corporation
and its parent, Allied Irish Banks, p.l.c. ("AIB"). Under terms of the Merger
Agreement ("Agreement"), holders of approximately 86% of the outstanding
Dauphin common stock received AIB American Depository Shares ("ADSs") at an
exchange ratio of one AIB ADS for each share of Dauphin common stock. Each AIB
ADS represents six ordinary shares, IR 25p each, of AIB. The remaining Dauphin
shareholders received $43.00 per share in cash for their Dauphin common stock.
The AIB ADSs were valued at $43.00 per ADS which is the value of an ADS on the
date the exchange ratio was established in accordance with the terms of the
Agreement and U.S. GAAP. The aggregate value of the consideration paid to
Dauphin shareholders under U.S. GAAP was $1.366 billion which was funded by
cash and the issuance of $505.2 million in common stock to AIB as reported in
the Consolidated Statements of Changes in Stockholders' Equity.
On the date of acquisition, Dauphin had total assets of $7.0 billion and
total deposits of $4.2 billion. This acquisition was accounted for as a
purchase business combination and the results of operations have been included
with the Corporation's results of operations since July 1, 1997. The
Corporation recorded approximately $940 thousand in imputed interest on the
consideration used to acquire Dauphin for the period of July 1, 1997 to July 8,
1997. As a result of the acquisition, the Corporation recorded $885.6 million
in intangible assets which included $815.7 million in goodwill as of September
30, 1997. Goodwill is amortized on a straight line basis over 25 years.
A summary of unaudited pro forma combined financial information on a reported
and tangible basis for the nine months ended September 30, 1997 and 1996 as if
the transaction had occurred on January 1, 1997 and 1996, respectively is
presented below. The pro forma financial information does not purport to be
indicative of the results that would have been obtained if the operations had
actually been combined during the periods presented and is not necessarily
indicative of operating results to be expected in future periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net interest income.............. $433,350 $395,299
Noninterest income............... 290,466 227,679
Net income....................... 119,506 92,558
</TABLE>
4. MONEY MARKET INVESTMENTS
Money market investments at September 30, 1997, December 31, 1996 and
September 30, 1996 included the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest bearing deposits in other banks.. $ 1,288 $ 234 $ 233
Trading account securities................ 65,575 - 3,224
Federal funds sold........................ 11,600 32,975 3,450
Securities purchased under agreements 22,770 42,051 39,989
to resell................................ -------- ------- -------
Total money market $101,233 $75,260 $46,896
investments............... ======== ======= =======
</TABLE>
<PAGE>
PAGE 9
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
5. INVESTMENT SECURITIES
The following is a comparison of the amortized cost and fair values of
available-for-sale securities:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1996
----------------------- ----------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government Agencies........... $ 760,750 $ 764,634 $ 614,843 $ 611,061 $ 827,644 $ 819,629
Mortgage-backed obligations 1,874,590 1,888,860 1, 161,369 1,159,649 1,205,134 1,190,473
Collateralized mortgage
obligations:
Issued by Federal 778,892 783,071 345,357 348,433 328,578 331,355
Agencies...................
Privately issued............ 12,629 12,385 20,627 20,223 22,940 22,467
Obligations of states and
political subdivisions........ 426,102 432,709 93,987 98,889 87,702 92,323
Asset-backed securities........ 291,398 295,803 204,657 206,422 202,007 202,455
Other investment securities 139,616 142,572 97,757 107,943 132,328 142,992
---------- ---------- ----------- ---------- ---------- ----------
Total.............. $4,283,977 $4,320,034 $ 2,538,597 $2,552,620 $2,806,333 $2,801,694
========== ========== =========== ========== ========== ==========
</TABLE>
6. ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing delinquency
of principal and interest payments where pertinent. Management believes that
all uncollectible amounts have been charged-off and that the allowance for
credit losses is adequate to cover all losses inherent in the portfolio at
September 30, 1997. A summary of the activity in the allowance for the nine
months ended September 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance beginning of year............... $154,802 $177,621
Provision for credit losses............. 26,634 6,000
Less: charge-offs, net of recoveries of (28,392) (23,734)
$4,440 and $5,659......................
Allowance for loans of acquired banks... 43,418 10,642
Allowance for bankcard loans sold....... (21,000) -
-------- --------
Balance at September 30................. $175,462 $170,529
======== ========
</TABLE>
<PAGE>
PAGE 10
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets at September 30, 1997, December 31, 1996 and September 30,
1996 included the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill......................... $ 884,374 $ 79,454 $ 82,369
Premium on deposits.............. 71,299 6,729 6,960
Premium on bankcard receivables.. 6,052 7,986 9,336
Employment contracts............. 3,361 3,891 4,068
Other............................ 1,128 787 5,107
------------- ------------- -------------
Total............. $ 966,214 $ 98,847 $ 107,840
============= ============= =============
</TABLE>
As a result of the Dauphin acquisition, the Corporation recorded $815.7
million in goodwill which will be amortized on a straight-line basis over 25
years and a $69.9 million premium on deposits which will be amortized on an
accelerated basis over 10 years.
8. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights at September 30, 1997, December 31, 1996 and
September 30, 1996 totaled:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchased mortgage servicing rights... $ 1,170 $ 2,598 $ 2,669
Originated mortgage servicing rights.. 6,225 648 256
------------- ------------- -------------
Total.................. $ 7,395 $ 3,246 $ 2,925
============= ============= =============
</TABLE>
The Corporation acquired $4.4 million in mortgage servicing rights as a
result of the Dauphin acquisition.
<PAGE>
PAGE 11
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. OTHER BORROWED FUNDS, SHORT-TERM
Other borrowed funds, short-term at September 30, 1997, December 31, 1996 and
September 30, 1996 included the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Master demand notes of the Corporation.. $ 316,403 $ 320,619 $ 295,818
Bank notes.............................. 250,000 400,000 150,000
Federal funds purchased-term............ 165,000 60,000 15,000
Treasury tax and loan note account...... 53,949 10,965 153,484
Other................................... 20,041 29,893 32,934
------------- ------------- -------------
Total.................... $ 805,393 $ 821,477 $ 647,236
============= ============= =============
</TABLE>
10. LONG-TERM DEBT
Following is a summary of the long-term debt of the Corporation at September
30, 1997, December 31, 1996 and September 30, 1996 which is all unsecured:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Floating Rate Medium term bank note due October 2, 1996........ $ - $ - $ 75,000
Floating Rate Medium term bank note due October 23, 1996....... - - 100,000
5.72% Medium term bank note due October 31, 1996............... - - 100,000
Floating Rate Medium term bank note due November 1, 1996....... - - 50,000
Floating Rate Medium term bank note due April 20, 1998......... 50,000 50,000 50,000
10.375% Subordinated Capital Notes due August 1, 1999.......... 59,984 59,977 59,975
8.68% Notes due January 31, 1997............................... - 10,000 10,000
8.67% Notes due March 20, 1997................................. - 10,000 9,999
8.375% Subordinated Notes due May 15, 2002..................... 99,798 99,765 99,755
7.20% Subordinated Notes due July 1, 2007...................... 199,889 - -
Obligations under capitalized lease............................ 300 - -
------------- ------------- -------------
Total........................................... $ 409,971 $ 229,742 $ 554,729
============= ============= =============
</TABLE>
The Corporation issued $200 million in subordinated notes on July 2, 1997.
The 7.20% subordinated notes are unsecured debt obligations of the Corporation
and mature on July 1, 2007. The subordinated notes may not be redeemed prior to
maturity and are not subject to any sinking fund. Interest on the subordinated
notes is payable on January 1 and July 1 of each year, commencing on January 1,
1998. Concurrent with the issuance of the subordinated notes, the Corporation
entered into an interest rate swap agreement to convert the fixed rate on the
subordinated notes to a floating rate.
<PAGE>
PAGE 12
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
11. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
In December 1996 and February 1997, the Corporation issued an aggregate
$300 million in Floating Rate Subordinated Capital Income Securities ("Capital
Securities") through two wholly owned subsidiaries, First Maryland Capital I
("Capital I") and First Maryland Capital II ("Capital II"), Delaware statutory
business trusts ("the Trusts"). The Capital Securities represent undivided
preferred ownership interests in the assets of the Trusts. The Corporation has
fully and unconditionally guaranteed all of the Trusts' obligations under the
Capital Securities. The Corporation purchased 9,280 Common Securities of the
Trusts ($1,000 liquidation amount per security) for a purchase price of $9.14
million. The Trusts used the aggregate proceeds of $304.6 million from the
issuance of the Capital Securities and Common Securities to purchase $309.3
million aggregate principal amount of Floating Rate Junior Subordinated
Debentures ("Junior Subordinated Debentures") issued by the Corporation which
represent the sole assets of the Trusts. At September 30, 1997, the guaranteed
preferred beneficial interests in Company's junior subordinated debentures had a
balance of $295.8 million.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions at a variable annual rate equal to LIBOR plus 100 basis points for
the $150 million issued in December 1996 by Capital I and LIBOR plus 85 basis
points for the $150 million issued in February 1997 by Capital II, in each case
per a liquidation amount of $1,000 per Capital Security. Interest on the Junior
Subordinated Debentures is calculated at the same rate as the Capital
Securities.
The December 1996 Junior Subordinated Debentures mature on January 15, 2027
and are redeemable by the Corporation in whole or in part on or after January
15, 2007. The February 1997 Junior Subordinated Debentures mature on February
1, 2027 and are redeemable by the Corporation in whole or in part on or after
February 1, 2007. The Junior Subordinated Debentures are redeemable by the
Corporation in whole but not in part, upon the occurrence of certain special
events. The Capital Securities will remain outstanding until the Junior
Subordinated Debentures are repaid at maturity, are redeemed prior to maturity
or are distributed in liquidation to the Trusts.
12. REDEEMABLE PREFERRED STOCK
In 1996, the Corporation authorized and issued 90 thousand shares of 4.50%
Cumulative, Redeemable Preferred Stock with a $5 par value and a $100
liquidation preference per share in connection with the Zirkin-Cutler
acquisition. The redeemable preferred stock was recorded at $7.6 million which
was the fair value of the stock at the date of issue. The carrying amount will
be increased to the mandatory redemption amount of $9.0 million by periodic
accretions using the interest method with an offset to retained earnings. At
September 30, 1997, all 90 thousand shares were outstanding and had a balance of
$7.8 million. The cumulative dividends are payable quarterly when and as
declared by the Corporation's Board of Directors out of funds legally available
for such payments.
Upon liquidation, the holders are entitled to $100 per share (an aggregate of
$9 million based upon redeemable preferred shares outstanding at September 30,
1997) plus accrued and unpaid cumulative dividends through the distribution date
before any distribution to holders of the Corporation's common stock.
Redemption can occur at the Corporation's option or the holders' option (on
at least 30 days notice but no more than 60 days notice) during a redemption
period commencing July 1, 2002 and ending June 30, 2003 at $100 per share
(liquidation value) plus accrued and unpaid cumulative dividends through the
redemption date.
<PAGE>
PAGE 13
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
13. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
SUMMARY OF ACCOUNTING POLICIES
TRADING INSTRUMENTS
The Corporation maintains active derivative and securities trading positions
resulting from activity generated for corporate customers as well as for the
Corporation's own trading account. Trading derivative instruments include
interest rate swaps, interest rate caps and floors, futures, options, and
swaptions. Trading foreign exchange derivative instruments include forward rate
agreements, options, spot contracts and futures. Trading securities include U.
S. Treasury and U.S. Government Agencies, obligations of state and political
subdivisions, mortgage-backed obligations and equity securities. Trading
instruments are carried at fair value. Quoted market rates are generally used
in pricing models to determine the fair values of trading instruments. If
pricing models cannot be utilized, fair values are estimated based upon quoted
prices for similar instruments.
Trading securities recorded at fair value are included in money market
investments in the consolidated statements of condition. The positive and
negative fair values and accrued interest receivable and payable for trading
derivatives are included in other assets and other liabilities, respectively, in
the consolidated statements of condition. Interest income generated by trading
securities is included in interest income on money market investments in the
consolidated statements of income. Realized and unrealized gains or losses on
trading instruments are included in trading income.
RISK MANAGEMENT INSTRUMENTS
Risk management instruments are utilized to modify the interest rate
characteristics of related assets or liabilities and to provide basis risk
protection. These instruments include interest rate swaps, interest rate caps,
and call options purchased. The Corporation accounts for these instruments on
an accrual basis when the following conditions are met: (1) the specific assets
or liabilities to be hedged expose the Corporation to interest rate risk; (2)
the financial instruments manage the interest rate risk exposure; (3) the
financial instruments are designated to specific groups of assets or
liabilities; and (4) at inception and throughout the terms of the financial
instruments, there is a high correlation between the indices of the financial
instruments and the indices of the designated assets or liabilities. Changes in
the fair value of risk management instruments are not included in the
consolidated financial statements. Financial instruments that fail to meet the
conditions noted above are recorded at fair value with gains or losses
recognized as trading income.
For the financial instruments which meet the conditions for accrual status,
accrued interest receivable and payable and any deferred premiums paid are
included in other assets and other liabilities in the consolidated statements of
condition. Net interest income or expense on interest rate swaps used for risk
management purposes is recognized as an adjustment to the interest income or
expense of the designated assets or liabilities. The Corporation utilizes an
interest rate swap to manage interest rate risk associated with a securitization
with the related interest income recorded on an accrual basis in servicing
income. Premiums paid on interest rate caps and call options purchased are
capitalized and amortized as an adjustment to the interest income or expense of
the designated asset or liability. Gains or losses from early terminations of
risk management financial instruments are deferred and amortized as yield
adjustments over the shorter of the remaining term of the designated asset or
liability or the remaining term of the financial instrument. Upon disposition
or settlement of a designated asset or liability, the gain or loss is recognized
as a component of the current earnings or loss of the designated asset or
liability.
The Corporation also utilizes mandatory and optional commitments to deliver
residential securitized mortgages and whole residential mortgage loans to reduce
the interest rate risk inherent in residential mortgage loans held-for-sale and
the commitments made to borrowers for residential mortgage loans which have not
been funded. These financial instruments are accounted for in the Corporation's
valuation of residential mortgage loans held-for-sale which are carried at the
lower of cost or fair value.
<PAGE>
PAGE 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain information included in the following section of this report, other
than historical information, may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The forward-
looking statements are identified by terminology such as "may", "will",
"believe", "expect", "estimate", "anticipate", "continue", or similar terms.
Actual results may differ materially from those projected in the
forward-looking statements. Factors that could cause actual results to differ
materially from those in the forward-looking statements include, but are not
limited to: global, national and regional economic conditions; levels of market
interest rates; credit or other risks of lending and investment activities;
competitive and regulatory factors; and technological change.
OVERVIEW
The net income of First Maryland Bancorp ("the Corporation") for the nine
months and quarter ended September 30, 1997 was $123.5 million and $53.5
million, respectively, compared to $96.3 million and $33.7 million for the nine
months and quarter ended September 30, 1996. Return on average assets and
return on average total equity were 1.26% and 11.13%, respectively, for the nine
months ended September 30, 1997 compared to 1.24% and 10.75% for the nine months
ended September 30, 1996.
On July 8, 1997, the Corporation and its parent, AIB merged with Dauphin
Deposit Corporation ("Dauphin") which is now a wholly owned subsidiary of the
Corporation. This acquisition was accounted for as a purchase business
combination which resulted in $885.6 million in intangible assets, primarily
goodwill of $815.7 million which is amortized against earnings. Dauphin's
results of operations have been included with the Corporation's results of
operations since July 1, 1997. Tangible net income which excludes amortization
of intangible assets related to purchase business combinations for the nine
months and quarter ended September 30, 1997 totaled $139.8 million and $67.1
million , respectively, compared to $99.3 million and $35.4 million for the nine
months and quarter ended September 30, 1996. Return on average tangible assets
and return on average tangible total equity which exclude intangible assets and
amortization related to purchase business combinations were 1.47% and 17.01%,
respectively, for the nine months ended September 30, 1997 compared to 1.28% and
11.53% for the nine months ended September 30, 1996.
The Dauphin acquisition provided the opportunity for the Corporation to
create a new company, instead of simply combining two existing organizations. In
order to create the new company, the Corporation embarked on an extensive
review of its operations and businesses with a focus on strategies and tactics
for formulating the products, services and delivery channels, as well as the
optimum organizational structure. Upon completing this review, the Corporation
will implement the recommendations that result in best practices for each
customer segment. The process is also expected to stimulate new initiatives and
innovations as well as result in consolidations or curtailments of certain
business activities. As a result of this process, the Corporation expects to
record a pretax merger-related charge of approximately $15-$20 million in the
fourth quarter of 1997 in addition to those costs which are recorded as a
component of the goodwill related to the acquisition.
On August 8, 1997, the Corporation sold its $360 million Bell Atlantic
bankcard loan portfolio to Chase Manhattan Corporation which resulted in an
after-tax gain on the sale of $17.4 million. Excluding this gain, net income
for the nine months and quarter ended September 30, 1997 was $106.0 million and
$36.1 million, respectively, compared to $96.3 million and $33.7 million for the
nine months and quarter ended September 30, 1996. Excluding this gain, return
on average assets and return on average total equity were 1.08% and 9.56%,
respectively, for the nine months ended September 30, 1997 compared to 1.24% and
10.75% for the nine months ended September 30, 1996.
<PAGE>
PAGE 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TABLE 1
<TABLE>
<CAPTION>
3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER
1997 1997 1997 1996 1996
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF OPERATIONS:
Net interest income (fully tax $ 145,537 $ 109,110 $ 105,531 $ 106,407 $ 103,255
equivalent)...............................
Tax equivalent adjustment.................. 3,627 1,126 1,128 1,212 1,289
----------- ----------- ----------- ----------- -----------
Net interest income........................ 141,910 107,984 104,403 105,195 101,966
Provision for credit losses................ 7,434 9,300 9,900 500 2,000
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
credit losses............................. 134,476 98,684 94,503 104,695 99,966
Noninterest income......................... 119,506 56,141 61,258 56,833 57,384
Noninterest expenses....................... 169,263 98,669 102,465 105,358 103,023
----------- ----------- ----------- ----------- -----------
Income before income taxes................. 84,719 56,156 53,296 56,170 54,327
Income tax expense......................... 31,190 20,332 19,193 20,138 20,625
----------- ----------- ----------- ----------- -----------
Net income................................. $ 53,529 $ 35,824 $ 34,103 $ 36,032 $ 33,702
=========== =========== =========== =========== ===========
Dividends declared on preferred stock...... $ 2,955 $ 2,955 $ 2,955 $ 2,955 $ 2,955
Dividends declared on redeemable
preferred stock........................... 101 102 101 102 101
CONSOLIDATED AVERAGE BALANCES:
Total assets............................... $17,323,000 $10,957,800 $10,912,900 $10,741,800 $10,420,400
Loans, net of unearned income.............. 9,862,700 6,822,100 6,792,700 6,686,500 6,365,900
Deposits................................... 11,765,700 7,238,000 7,258,700 7,233,900 7,208,400
Long-term debt............................. 407,800 209,800 221,700 303,900 554,700
Common stockholder's equity................ 1,733,000 1,135,200 1,124,600 1,083,100 1,044,800
Stockholders' equity....................... 1,877,900 1,280,100 1,269,400 1,227,900 1,189,600
CONSOLIDATED RATIOS:
Return on average assets................... 1.23% 1.31% 1.27% 1.33% 1.29%
Return on average common stockholder's
equity.................................... 11.55 11.58 11.20 12.11 11.67
Return on average total stockholders' 11.31 11.23 10.90 11.67 11.27
equity....................................
Average total stockholders' equity to
average total assets...................... 10.84 11.68 11.63 11.43 11.42
Capital to risk-adjusted assets:
Tier 1................................... 8.49 15.42 15.71 14.12 11.94
Total.................................... 12.29 18.22 18.75 17.20 15.01
Tier 1 leverage ratio...................... 7.09 13.49 13.68 12.18 10.71
Net interest margin........................ 3.86 4.40 4.33 4.35 4.36
Net charge-offs to average loans, net of
average unearned income (annualized)...... 0.29 0.66 0.59 0.87 0.40
Allowance for credit losses to period end
loans, net of unearned income............. 1.78 2.23 2.28 2.28 2.58
Nonperforming assets to period end loans,
net of unearned income plus other
foreclosed assets owned................... 0.91 0.86 0.97 0.87 0.92
</TABLE>
<PAGE>
PAGE 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
NET INTEREST INCOME
Net interest income on a fully tax equivalent basis for the quarter ended
September 30, 1997 of $145.5 million increased $42.3 million (40.9%) when
compared to net interest income of $103.3 million for the quarter ended
September 30, 1996. The net interest margin for the third quarter of 1997 was
3.86% compared to a net interest margin of 4.36% for the third quarter of 1996.
Net interest income on a fully tax equivalent basis for the nine months ended
September 30, 1997 of $360.2 million increased $57.8 million (19.1%) when
compared to net interest income of $302.4 million for the nine months ended
September 30, 1996. The net interest margin for the nine months ended September
30, 1997 was 4.14% compared to a net interest margin of 4.29% for the nine
months ended September 30, 1996.
TABLE 2 NET INTEREST INCOME AND NET INTEREST MARGIN RECONCILIATION
(TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
NET NET
INTEREST INTEREST
INCOME MARGIN
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net interest income/margin at September 30, 1996........................ $ 103.3 $ 4.36%
Acquisition of Dauphin (1).............................................. 48.5 (0.31)
Increase in net free funds.............................................. 2.9 0.08
Other increases in earning assets....................................... 2.6 (0.05)
Acquisition of 1st Washington Bancorp, Inc. ("1st Washington") (1)...... 0.8 (0.01)
Dauphin acquisition funding costs....................................... (12.6) (0.29)
Sale of Bell Atlantic bankcard portfolio................................ (3.3) (0.04)
Other changes........................................................... 3.3 0.12
-------- --------
Net interest income/margin at September 30, 1997........................ $ 145.5 3.86%
======== ========
TABLE 3 NET INTEREST INCOME AND NET INTEREST MARGIN RECONCILIATION
(TAX EQUIVALENT BASIS)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
NET NET
INTEREST INTEREST
INCOME MARGIN
-------- --------
(DOLLARS IN MILLIONS)
Net interest income/margin at September 30, 1996........................ $ 302.4 4.29%
Acquisition of Dauphin (1).............................................. 48.5 (0.06)
Acquisition of 1st Washington (1)....................................... 11.2 (0.06)
Increase in net free funds.............................................. 9.4 0.13
Change in asset yields and funding costs................................ 9.0 0.14
Incremental bankcard loan volume........................................ 8.8 0.03
Dauphin acquisition funding costs....................................... (12.6) (0.29)
Bankcard securitization (2)............................................. (10.2) (0.02)
Decline in bankcard loan product margin................................. (4.4) (0.06)
Sale of Bell Atlantic bankcard portfolio................................ (3.3) (0.01)
Other declines in earning assets........................................ (2.3) 0.03
Other changes........................................................... 3.7 0.02
-------- --------
Net interest income/margin at September 30, 1997........................ $ 360.2 4.14%
======== ========
</TABLE>
- -----------------
(1) The net interest margins of Dauphin and 1st Washington at the dates of
acquisition were significantly lower than the Corporation's net interest
margin.
(2) The bankcard securitization represents the securitization and sale of an
additional $335 million in bankcard loans in April 1996. The revenues
associated with these loans were reported in noninterest income as
servicing income.
<PAGE>
PAGE 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
An analysis of fully tax equivalent net interest income, interest rate
spreads and net interest margins for the three months and nine months ended
September 30, 1997 and 1996 are presented in the following tables.
TABLE 4 NET INTEREST INCOME, INTEREST RATE SPREAD AND NET INTEREST MARGIN ON
AVERAGE EARNING ASSETS
(TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1997 1996
------------------------------------- ------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1).............. $ 4,502.6 $ 75.3 6.64% $ 2,706.9 $ 43.1 6.34%
Loans held-for-sale.................... 427.2 7.6 7.02 127.4 2.5 7.70
Loans, net of unearned income.......... 9,862.7 201.4 8.10 6,365.9 131.1 8.19
Other earning assets................... 178.3 2.6 5.80 226.2 3.1 5.37
--------- --------- --------- ---------
Earning assets......................... $14,970.8 286.9 7.60 $ 9,426.4 179.8 7.59
========= --------- ========= ---------
Interest bearing liabilities........... $12,269.8 141.4 4.57 $ 6,974.6 76.5 4.36
Net interest spread (2)................ 3.03 3.23
Interest free sources utilized to
fund earning assets.................... 2,701.0 2,451.8
--------- --------- --------- ---------
Total sources of funds................. $14,970.8 141.4 3.74 $ 9,426.4 76.5 3.23
========= ========= ========= =========
Net interest income.................... $ 145.5 $ 103.3
========= =========
Net interest margin (3)................ 3.86% 4.36%
========= =========
</TABLE>
TABLE 5 NET INTEREST INCOME, INTEREST RATE SPREAD AND NET INTEREST MARGIN ON
AVERAGE EARNING ASSETS
(TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1997 1996
------------------------------------- ------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1).............. $ 3,186.2 $158.2 6.64% $ 2,826.9 $133.2 6.29%
Loans held-for-sale.................... 213.7 11.6 7.23 117.7 6.6 7.46
Loans, net of unearned income.......... 7,837.1 478.2 8.16 6,186.7 386.5 8.34
Other earning assets................... 381.0 15.8 5.54 285.1 11.3 5.31
--------- --------- --------- ---------
Earning assets......................... $11,618.0 663.8 7.63 $ 9,416.4 537.6 7.63
========= --------- ========= ---------
Interest bearing liabilities........... $ 8,991.6 303.6 4.51 $ 7,011.8 235.2 4.48
Net interest spread (2)................ 3.12 3.15
Interest free sources utilized to
fund earning assets.................... 2,626.4 2,404.6
--------- --------- --------- ---------
Total sources of funds................. $11,618.0 303.6 3.49 $ 9,416.4 235.2 3.34
========= ========= ========= =========
Net interest income.................... $360.2 $ 302.4
========= =========
Net interest margin (3)................ 4.14% 4.29%
========= =========
</TABLE>
- -------------
(1) Yields on investment securities are calculated based upon average amortized
cost.
(2) Net interest spread is the difference between the yield on average earning
assets and the rate paid on average interest bearing liabilities.
(3) Net interest margin is the ratio of net interest income on a fully tax-
equivalent basis to average earning assets.
<PAGE>
PAGE 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
TABLE 6 AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997 THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) RATE(1) BALANCE INTEREST(1) RATE(1)
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.......................... $ 823.9 $ - -% $ 649.4 $ - -%
Money market investments:
Interest bearing deposits in other banks..... 1.2 - 12.32 0.4 - 2.79
Trading account securities................... 96.7 1.5 6.06 1.7 - 5.59
Funds sold................................... 80.4 1.1 5.39 224.1 3.1 5.38
Investment securities
available-for-sale (2):
Taxable...................................... 3,988.3 66.0 6.57 2,568.2 40.3 6.25
Tax-exempt (1)............................... 412.1 7.7 7.41 94.5 2.3 9.84
Equity investments........................... 102.2 1.6 6.12 44.2 0.5 4.08
---------- ----------- ----------- ----------- ----------- -----------
Total investment securities
available-for-sale..................... 4,502.6 75.3 6.64 2,706.9 43.1 6.34
Loans held-for-sale.............................. 427.2 7.6 7.02 127.4 2.5 7.70
Loans (net of unearned income) (1, 3):
Commercial................................... 2,751.1 53.6 7.73 1,740.9 33.8 7.72
Commercial real estate....................... 2,257.4 48.4 8.50 1,352.6 30.4 8.94
Residential mortgage......................... 1,060.9 20.0 7.48 803.8 14.6 7.22
Retail....................................... 2,441.4 52.1 8.47 1,309.0 27.4 8.34
Bankcard..................................... 303.9 9.8 12.74 434.5 13.1 12.02
Leases receivable............................ 690.1 10.4 6.00 379.7 5.3 5.53
Foreign...................................... 357.9 7.1 7.85 345.4 6.5 7.49
---------- ----------- ----------- ----------- ----------- -----------
Total loans.............................. 9,862.7 201.4 8.10 6,365.9 131.1 8.19
Allowance for credit losses...................... (181.9) - - (169.0) - -
---------- -----------
Total loans, net......................... 9,680.8 - - 6,196.9 - -
Other assets..................................... 1,710.2 - - 513.6 - -
---------- ----------- ----------- -----------
Total assets/interest income............. $ 17,323.0 $ 286.9 $ 10,420.4 $ 179.8
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits in domestic offices:
Noninterest bearing demand................... $ 2,560.2 $ - -% $ 1,976.2 $ - -%
---------- -----------
Interest bearing demand...................... 603.1 2.3 1.50 118.8 0.8 2.58
Money market accounts........................ 1,937.9 15.1 3.09 1,621.7 12.0 2.94
Savings...................................... 1,613.5 10.5 2.60 1,071.9 6.7 2.48
Other consumer time.......................... 3,594.2 47.8 5.28 1,753.9 23.1 5.25
Large denomination time...................... 1,250.5 18.0 5.71 540.2 7.5 5.52
Deposits in foreign banking office............... 206.3 2.9 5.60 125.7 1.6 5.27
---------- ----------- ----------- ----------- ----------- -----------
Total interest bearing deposits.......... 9,205.5 96.6 4.16 5,232.2 51.7 3.93
---------- ----------- ----------- ----------- ----------- -----------
Total deposits........................... 11,765.7 - - 7,208.4 - -
Funds purchased.................................. 1,283.8 17.1 5.26 666.8 8.7 5.18
Other borrowed funds, short-term................. 1,077.0 14.8 5.44 520.9 6.6 5.08
Other liabilities................................ 607.3 - - 271.0 - -
Long-term debt................................... 407.8 7.6 7.39 554.7 9.5 6.78
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures....... 295.7 5.3 7.15 - - -
Redeemable preferred stock....................... 7.8 - - 9.0 - -
Stockholders' equity............................. 1,877.9 - - 1,189.6 - -
---------- ----------- ----------- -----------
Total liabilities and stockholders'
equity/interest expense............... $ 17,323.0 $ 141.4 $ 10,420.4 $ 76.5
========== =========== =========== ===========
Earning assets/interest income................... $ 14,970.8 $ 286.9 7.60% $ 9,426.4 $ 179.8 7.59%
Interest bearing liabilities/interest expense.... 12,269.8 141.4 4.57 6,974.6 76.5 4.36
Earning assets/interest expense.................. 14,970.8 141.4 3.74 9,426.4 76.5 3.23
Net interest income, tax equivalent basis........ 145.5 103.3
Net interest spread (4).......................... 3.03% 3.23%
=========== ===========
Net interest margin (5).......................... 3.86% 4.36%
=========== ===========
</TABLE>
<PAGE>
PAGE 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
TABLE 7 AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) RATE(1) BALANCE INTEREST(1) RATE(1)
---------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks....................... $ 701.3 $ - -% $ 655.2 $ - -%
Money market investments:
Interest bearing deposits in other 0.6 - 10.41 4.7 0.2 5.57
banks....................................
Trading account securities................ 65.0 3.0 6.14 1.7 0.1 5.87
Funds sold................................ 315.4 12.8 5.41 278.7 11.0 5.30
Investment securities available-for-sale (2):
Taxable................................... 2,927.0 143.5 6.56 2,694.2 125.0 6.20
Tax-exempt (1)............................ 191.9 11.8 8.20 95.0 7.1 10.01
Equity investments........................ 67.3 2.9 5.86 37.7 1.1 3.66
---------- ----------- ----------- ----------- ----------- -----------
Total investment securities
available-for-sale................... 3,186.2 158.2 6.64 2,826.9 133.2 6.29
Loans held-for-sale........................... 213.7 11.6 7.23 117.7 6.6 7.46
Loans (net of unearned income) (1, 3):
Commercial................................ 2,113.9 123.5 7.81 1,793.0 103.6 7.72
Commercial real estate.................... 1,706.6 108.4 8.49 1,285.3 85.5 8.88
Residential mortgage...................... 909.3 49.8 7.33 687.0 37.9 7.36
Retail.................................... 1,763.1 111.6 8.46 1,205.6 75.6 8.38
Bankcard.................................. 460.8 42.0 12.20 511.7 49.5 12.94
Leases receivable......................... 524.4 22.4 5.71 354.7 14.7 5.55
Foreign................................... 359.0 20.5 7.62 349.4 19.7 7.53
---------- ----------- ----------- ----------- ----------- -----------
Total loans........................... 7,837.1 478.2 8.16 6,186.7 386.5 8.34
Allowance for credit losses................... (162.3) - - (169.9) - -
---------- -----------
Total loans, net...................... 7,674.8 - - 6,016.8 - -
Other assets.................................. 936.4 - - 486.5 - -
---------- ----------- ----------- -----------
Total assets/interest income.......... $ 13,093.4 $ 663.8 $ 10,388.2 $ 537.6
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits in domestic offices:
Noninterest bearing demand................ $ 2,205.7 $ - -% $ 1,944.0 $ - -%
---------- -----------
Interest bearing demand................... 282.9 3.6 1.72 117.1 2.2 2.55
Money market accounts..................... 1,733.7 38.5 2.96 1,586.4 36.0 3.03
Savings................................... 1,238.8 23.4 2.53 1,049.9 20.7 2.63
Other consumer time....................... 2,326.5 90.8 5.22 1,653.5 66.0 5.33
Large denomination time................... 837.0 35.4 5.66 538.7 22.6 5.61
Deposits in foreign banking office............ 146.0 6.1 5.56 130.0 5.2 5.36
---------- ----------- ----------- ----------- ----------- -----------
Total interest bearing deposits....... 6,564.9 197.8 4.02 5,075.6 152.7 4.02
---------- ----------- ----------- ----------- ----------- -----------
Total deposits........................ 8,770.6 - - 7,019.6 - -
Funds purchased............................... 886.4 34.8 5.25 735.3 28.6 5.19
Other borrowed funds, short-term.............. 982.7 39.6 5.38 660.5 26.1 5.29
Other liabilities............................. 405.0 - - 232.2 - -
Long-term debt................................ 280.5 16.7 7.95 540.4 27.8 6.87
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures... 277.1 14.7 7.11 - - -
Redeemable preferred stock.................... 7.7 - - 3.0 - -
Stockholders' equity.......................... 1,483.4 - - 1,197.2 - -
---------- ----------- ----------- -----------
Total liabilities and stockholders'
equity/interest expense............ $ 13,093.4 $ 303.6 $ 10,388.2 $ 235.2
========== =========== =========== ===========
Earning assets/interest income................ $ 11,618.0 $ 663.8 7.63% $ 9,416.4 $ 537.6 7.63%
Interest bearing liabilities/interest 8,991.6 303.6 4.51 7,011.8 235.2 4.48
expense......................................
Earning assets/interest expense............... 11,618.0 303.6 3.49 9,416.4 235.2 3.34
Net interest income, tax equivalent basis..... 360.2 302.4
Net interest spread (4)....................... 3.12% 3.15%
=========== ===========
Net interest margin (5)....................... 4.14% 4.29%
=========== ===========
</TABLE>
<PAGE>
PAGE 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
- -------------------------
(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.
(2) Yields on investment securities available-for-sale are calculated based
upon average amortized cost.
(3) Nonaccrual loans are included under the appropriate loan categories as
earning assets.
(4) Net interest spread is the difference between the yield on average earning
assets and the rate paid on average interest bearing liabilities.
(5) Net interest margin is the ratio of net interest income on a fully tax-
equivalent basis to average earning assets.
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the third quarter of 1997 totaled $7.4
million, an increase of $5.4 million from the $2.0 million provision for credit
losses recorded in the third quarter of 1996. The 1997 provision for credit
losses included a $4.6 million provision for bankcard loans and $2.7 million in
provisions recorded for other loan portfolios. The third quarter 1996 provision
for credit losses included an $11.0 million provision for bankcard loans offset
by $9.1 million in provision recaptures for other loan portfolios.
The provision for credit losses for the nine months ended September 30, 1997
totaled $26.6 million, a $20.6 million increase from the $6.0 million provision
recorded in the nine months ended September 30, 1996. The 1997 provision for
credit losses included a $27.1 million provision for bankcard loans and
approximately $700 thousand in provision recaptures for other loan portfolios.
The 1996 provision for credit losses included an $18.7 million provision for
bankcard loans offset by $12.9 million in provision recaptures for other loan
portfolios.
NONINTEREST INCOME
The following tables present the components of noninterest income for the
three months and nine months ended September 30, 1997 and 1996.
TABLE 8 NONINTEREST INCOME-3RD QUARTER
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
PERCENT CHANGE
-----------------------
1997 1997* 1996 1997/1996 1997*/1996
--------- --------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain on sale of bankcard loans........ $ 28,155 $28,155 $ - 100.0% 100.0%
Service charges on deposit
accounts.......................... 26,437 22,837 20,376 29.7 12.1
Mortgage banking income............... 18,110 6,046 10,904 66.1 (44.6)
Trust and investment advisory
fees.............................. 14,330 9,122 7,470 91.8 22.1
Servicing income...................... 8,489 8,489 7,401 14.7 14.7
Credit card income.................... 7,385 3,795 2,056 259.2 84.6
Securities gains (losses), net........ (230) (229) (126) (82.5) (81.7)
Other income:
Security sales and fees........ 4,702 1,438 1,108 324.4 29.8
Customer service fees.......... 2,260 1,958 2,030 11.3 (3.5)
Trading income................. 2,140 1,926 1,234 73.4 56.1
Other.......................... 7,728 5,766 4,931 56.7 16.9
-------- ------- ------- ------- -------
Total other income.................... 16,830 11,088 9,303 80.9 19.2
-------- ------- ------- ------- -------
Total noninterest income...... $119,506 $89,303 $57,384 108.3% 55.6%
======== ======= ======= ======= =======
Total noninterest income
excluding gain on sale of
bankcard loans............. $ 91,351 $61,148 $57,384 59.2% 6.6%
======== ======= ======= ======= =======
</TABLE>
* Amounts excluding Dauphin
<PAGE>
PAGE 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
The Corporation's noninterest income for the third quarter of 1997 excluding
Dauphin increased $31.9 million (55.6%) when compared to the third quarter of
1996. The sale of the Bell Atlantic bankcard loan portfolio in August 1997
resulted in a $28.2 million gain. Service charges on deposits increased $2.5
million (12.1%) due to an increase in retail deposit and business checking
service charges. Mortgage banking income decreased $4.9 million (44.6%)
primarily due to a $5.8 million gain on the sale of servicing in the third
quarter of 1996 which resulted from the Corporation's decision to exit the
mortgage servicing business. Trust and investment advisory fees increased $1.7
million (22.1%) as a result of increases in investment management and advisory
fees and personal services fees. Servicing income increased $1.1 million
(14.7%) primarily due to an increase in securitized bankcard loan yields which
was partially offset by unfavorable loss experience on the securitized bankcard
loans. Credit card income increased $1.7 million (84.6%) as a result of a
decline in the rewards paid to customers on cobranded bankcard loans due to the
sale of the Bell Atlantic bankcard loan portfolio. Securities losses of $229
thousand were recorded in the third quarter of 1997 compared to securities
losses of $126 thousand in the third quarter of 1996. Securities sales are
discussed in detail under "Changes in Financial Position." Trading income
increased $692 thousand (56.1%) due to increased securities trading income.
Other income increased $835 thousand (16.9%).
TABLE 9 NONINTEREST INCOME-NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
PERCENT CHANGE
-----------------------
1997 1997* 1996 1997/1996 1997*/1996
-------- --------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain on sale of bankcard loans.......... $ 28,155 $ 28,155 $ - 100.0% 100.0%
Service charges on deposit
accounts............................ 69,978 66,378 58,791 19.0 12.9
Mortgage banking income................. 30,981 18,917 22,810 35.8 (17.1)
Trust and investment advisory
fees................................ 31,177 25,969 20,920 49.0 24.1
Servicing income........................ 20,515 20,515 19,236 6.6 6.6
Credit card income...................... 12,545 8,955 8,262 51.8 8.4
Securities gains (losses), net.......... 278 279 175 58.9 59.4
Other income:
Security sales and fees.......... 7,391 4,127 3,804 94.3 8.5
Customer service fees............ 6,574 6,272 6,001 9.5 4.5
Trading income................... 4,773 4,559 3,466 37.7 31.5
Other............................ 24,538 22,576 16,594 47.9 36.0
-------- -------- -------- ------- --------
Total other income...................... 43,276 37,534 29,865 44.9 25.7
-------- -------- -------- ------- --------
Total noninterest income. $236,905 $206,702 $160,059 48.0% 29.1%
======== ======== ======== ======= ========
Total noninterest income
excluding gain on sale of
bankcard loans............... $208,750 $178,547 $160,059 30.4% 11.6%
======== ======== ======== ======= ========
</TABLE>
* Amounts excluding Dauphin
<PAGE>
PAGE 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
The Corporation's noninterest income for the first nine months of 1997
excluding Dauphin increased $46.6 million (29.1%) when compared to the first
nine months of 1996. As noted above, the sale of the Bell Atlantic bankcard
loan portfolio resulted in a gain of $28.2 million. Service charges on deposits
increased $7.6 million (12.9%) due to increases in retail deposit and business
checking service charges. Mortgage banking income decreased $3.9 million
(17.1%) primarily due to $9.4 million in gains on the sale of servicing in 1996
which resulted from the Corporation's decision to exit the mortgage servicing
business which was partially offset by a $5.7 million increase in gains on the
sale of mortgages. Trust and investment advisory fees increased $5.0 million
(24.1%) as a result of increases in investment management and advisory fees,
custody fees and personal services fees. Zirkin-Cutler, acquired in July 1996,
generated $2.4 million in investment advisory fees in the first nine months of
1997. Servicing income increased $1.3 million (6.6%) as a result of a $15.3
million positive impact of the 1996 bankcard securitization offset by
unfavorable loss experience on securitized loans during 1997. Credit card
income increased $693 thousand (8.4%) due a higher level of credit card fee
income during 1997 which was partially offset by the bankcard securitization
which shifted $3.7 million in credit card fee income to servicing income.
Securities gains of $279 thousand were recorded in the first nine months of 1997
compared to securities gains of $175 thousand in the first nine months of 1996.
Securities sales are discussed in detail under "Changes in Financial Position."
Trading income increased $1.1 million (31.5%) due to increased securities
trading income during 1997. Other income increased $6.0 million (36.0%) as
result of a $5.5 million gain on the sale of the Corporation's investment in an
ATM and point-of-sale network system recorded in the first quarter of 1997.
NONINTEREST EXPENSES
The following tables present the components of noninterest expenses for the
three months and nine months ended September 30, 1997 and 1996.
TABLE 10 NONINTEREST EXPENSES-3RD QUARTER
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
PERCENT CHANGE
-----------------------
1997 1997* 1996 1997/1996 1997*/1996
-------- --------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and wages...................... $ 74,141 $ 51,717 $ 47,325 56.7% 9.3%
Intangible assets amortization
expense................................ 16,218 2,359 2,680 505.1 (12.0)
Other personnel costs................... 14,835 10,772 9,691 53.1 11.2
Equipment costs......................... 11,895 8,045 8,103 46.8 (0.7)
Occupancy costs......................... 10,550 7,835 8,511 24.0 (7.9)
Other operating expenses:
External services................ 9,856 6,083 6,884 43.2 (11.6)
Postage and
communications............... 6,342 4,131 4,255 49.0 (2.9)
Advertising...................... 5,541 4,073 4,095 35.3 (0.5)
Professional service fees........ 2,552 1,890 2,091 22.0 (9.6)
Lending and collection........... 3,588 1,955 1,449 147.6 34.9
Regulatory insurance and
fees......................... 857 660 1,122 (23.6) (41.2)
Other............................ 12,888 7,965 6,817 89.1 16.8
-------- -------- -------- ------- --------
Total other operating
expenses............................ 41,624 26,757 26,713 55.8 0.2
-------- -------- -------- ------- --------
Total noninterest expenses.... $169,263 $107,485 $103,023 64.3% 4.3%
======== ======== ======== ======= ========
Total noninterest expenses
excluding intangible assets
amortization expense...... $153,045 $105,126 $100,343 52.5% 4.8%
======== ======== ======== ======= ========
</TABLE>
* Amounts excluding Dauphin
<PAGE>
PAGE 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
The Corporation's noninterest expenses for the third quarter of 1997
excluding Dauphin increased $4.5 million (4.3%) when compared to the third
quarter of 1996. Salaries and wages increased $4.4 million (9.3%) primarily due
to increased employee incentives and commissions. Other personnel costs
increased $1.1 million (11.2%) as a result of an increase in employee retirement
costs resulting from a year-to-date change in actuarial assumptions in the third
quarter of 1996 which was partially offset by executive retirement costs
recorded in the third quarter of 1996. Occupancy costs decreased $676 thousand
(7.9%). External services decreased $801 thousand (11.6%) as a result of lower
servicing costs due to the Bell Atlantic bankcard portfolio sale. Lending and
collection costs increased $506 thousand (34.9%) due to higher legal fees
related to collections and outside repossession expense in 1997.
TABLE 11 NONINTEREST EXPENSES-NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
PERCENT CHANGE
---------------
1997 1997* 1996 1997/1996 1997*/1996
-------- --------- -------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and wages...................... $168,005 $145,581 $134,458 24.9% 8.3%
Intangible assets amortization
expense................................ 20,722 6,863 6,018 244.3 14.0
Other personnel costs................... 37,553 33,490 34,664 8.3 (3.4)
Equipment costs......................... 28,949 25,099 24,474 18.3 2.6
Occupancy costs......................... 26,689 23,974 23,683 12.7 1.2
Other operating expenses:
External services................ 24,718 20,945 18,916 30.7 10.7
Postage and
communications............... 14,972 12,761 12,412 20.6 2.8
Advertising...................... 12,971 11,503 11,486 12.9 0.1
Professional service fees........ 7,471 6,809 6,545 14.1 4.0
Lending and collection........... 6,718 5,085 5,017 33.9 1.4
Regulatory insurance and
fees......................... 2,007 1,810 2,871 (30.1) (37.0)
Other............................ 19,622 14,699 20,959 (6.4) (29.9)
-------- -------- -------- ------- --------
Total other operating
expenses............................ 88,479 73,612 78,206 13.1 (5.9)
-------- -------- -------- ------- --------
Total noninterest
expenses.................. $370,397 $308,619 $301,503 22.9% 2.4%
======== ======== ======== ======= ========
Total noninterest expenses
excluding intangible assets
amortization expense...... $349,675 $301,756 $295,485 18.3% 2.1%
======== ======== ======== ======= ========
</TABLE>
* Amounts excluding Dauphin
The Corporation's noninterest expenses for the first nine months of 1997
excluding Dauphin increased $7.1 million (2.4%) when compared to the first nine
months of 1996. Salaries and wages increased $11.1 million (8.3%) primarily due
to the 1st Washington and Zirkin-Cutler acquisitions in July 1996 and increased
employee incentives and commissions. Other personnel costs decreased $1.2
million (3.4%) as a result of a decline in employee retirement costs due to
executive retirement costs recorded in 1996. This decline was partially offset
by an increase in payroll taxes. Intangible assets amortization expense
increased $845 thousand (14.0%) due to amortization expense related to the 1st
Washington and Zirkin-Cutler acquisitions in the third quarter of 1996.
Equipment costs increased $625 thousand (2.6%) as a result of higher
depreciation expense. External services increased $2.0 million (10.7%) due to
higher servicing costs during 1997 associated with the bankcard loan portfolio
and processing costs associated with a government automated tax payment program.
Regulatory insurance and fees declined $1.1 million (37.0%) due to a $1.2
million Savings Association Insurance Fund special assessment on the
Corporation's OAKAR deposits recorded in 1996.
<PAGE>
PAGE 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
INVESTMENT PORTFOLIO
Investment securities available-for-sale increased $1.8 billion from December
31, 1996 to September 30, 1997. The acquisition of Dauphin resulted in an
additional $2.2 billion in investment securities available-for-sale which
included a fair value adjustment of $12.8 million on the date of acquisition.
Purchases in the first nine months of 1997 totaled $2.1 billion and included the
following: $730.5 million in U.S. Treasury and U.S. Government Agencies
securities; $728.9 million in mortgage-backed obligations ("MBS's"); $476.6
million in collateralized mortgage obligations ("CMO's") and asset-backed
securities; $6.2 million in obligations of state and political subdivisions; and
$164.2 million in other debt and equity securities. These purchases were
partially offset by sales of investment securities. In the first quarter of
1997, the Corporation sold $177.0 million in investment securities which
resulted in net gains of $453 thousand. In the second quarter of 1997, the
Corporation sold $212.0 million in investment securities which resulted in net
gains of $55 thousand. In the third quarter of 1997, the Corporation sold $1.5
billion in investment securities which resulted in net losses of $230 thousand.
Paydowns, maturities and calls in the available-for-sale portfolio in the first
nine months of 1997 totaled $619.2 million. The fair value of the available-
for-sale portfolio at September 30, 1997 was $36.1 million above the amortized
cost compared to a fair value at December 31, 1996 which was $14.0 million above
the amortized cost. This change in the fair value resulted in a $14.6 million
net adjustment to the unrealized gains (losses) on available-for-sale securities
which is included as a component of stockholders' equity. Table 12 provides a
summary of the gross unrealized gains and losses of the available-for-sale
portfolio at September 30, 1997.
TABLE 12
The amortized cost and fair values of available-for-sale securities at
September 30, 1997 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............................... $ 760,750 $ 4,513 $ (629) $ 764,634
Mortgage-backed obligations............. 1,874,590 17,400 (3,130) 1,888,860
Collateralized mortgage obligations.....
Issued by Federal Agencies........... 778,892 5,607 (1,428) 783,071
Privately issued..................... 12,629 - (244) 12,385
Obligations of states and political
subdivisions........................... 426,102 6,640 (33) 432,709
Asset-backed securities................. 291,398 4,405 - 295,803
Other debt securities................... 37,322 - - 37,322
Equity securities....................... 102,294 3,242 (286) 105,250
---------- ---------- ---------- ----------
Total..................... $4,283,977 $ 41,807 $ (5,750) $4,320,034
========== ========== ========== ==========
</TABLE>
<PAGE>
PAGE 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
LOAN PORTFOLIO
Total loans, net of unearned income increased from $6.8 billion at December
31, 1996 to $9.9 billion at September 30, 1997. The $3.1 billion (45.3%)
increase was primarily due to the acquisition of Dauphin on July 8, 1997 which
included $3.3 billion in loan outstandings. Excluding the impact of Dauphin,
total loans decreased $173 million (2.5%) since December 31, 1996.
On August 8, 1997, the sale of the $360 million Bell Atlantic bankcard
portfolio was completed. Excluding the impact of both the bankcard sale and the
Dauphin acquisition, total loans increased $182.2 million (2.7%) since December
31, 1996.
Commercial loans increased $1.1 billion (63.3%) from December 31, 1996 to
September 30, 1997. Approximately $945 million of the growth was due to the
Dauphin acquisition. Month-end balances can reflect some large fluctuations due
to the transactional nature of large corporate customers that borrow for short
periods of time under revolving facilities. Specialized lending sectors such as
Communications and Healthcare offered favorable financing opportunities for the
Corporation.
Commercial real estate loans, which include both construction and commercial
mortgages, increased $774.9 million (53.3%) from December 31, 1996 to September
30, 1997. The Dauphin acquisition resulted in approximately $879 million in
commercial real estate loans. Excluding the impact of Dauphin, commercial real
estate loans declined $103.8 million (7.1%) since December 31, 1996. The
commercial real estate portfolio continues to be well-balanced by property type
and geographically centered in the Corporation's regional marketplace as
reflected in Tables 14 and 15.
Residential mortgages increased $212.6 million (25.5%) from December 31, 1996
to September 30, 1997. Excluding the Dauphin impact of approximately $242
million, residential loans declined $29.0 million (3.5%) since December 31,
1996. The Corporation originates residential mortgages primarily for sale in
the secondary market. New originations retained for the Corporation's permanent
residential mortgage portfolio principally consist of low income housing and
adjustable rate products.
Retail loans increased $1.1 billion (81.8%) from December 31, 1996 to
September 30, 1997, including approximately $904 million from the Dauphin
acquisition. Excluding the impact of the acquisition, retail outstandings
increased $225.5 million (16.3%). Retail loan growth resulted primarily from
major marketing campaigns for home equity credit products and other consumer
loan products.
Bankcard loan outstandings decreased $454.0 million (76.1%) since December
31, 1996. Excluding the impact of the August 1997 bankcard sale of $355.2
million in bankcard loans and the $49.7 million in bankcard loans acquired from
Dauphin, bankcard outstandings decreased $148.4 million (24.9%) since December
31, 1996 primarily due to increased competition and a reduction in the
Corporation's solicitation efforts.
Leases receivable increased $292.4 million (66.8%) since December 31, 1996.
Commercial leases, which represent 60% of total lease outstandings, increased
$45.3 million primarily with borrowers in the transportation industry. The
$247.1 million increase in retail leases primarily resulted from an additional
$234.0 million in retail leases from the Dauphin acquisition.
Foreign loans increased $28.6 million (7.8%) from December 31, 1996 to
September 30, 1997. The growth occurred primarily with customers in the
shipping industry.
The Corporation monitors exposure based on industry classifications and
established limits that are reviewed by the Board of Directors. Significant
exposures by industry classification in the loan portfolio are presented in
Table 13.
<PAGE>
PAGE 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
TABLE 13 LOAN PORTFOLIO DISTRIBUTION BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------------------
OUTSTANDING UNFUNDED TOTAL NONPERFORMING
BALANCE COMMITMENT EXPOSURE LOANS
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Transportation (1).................... $ 600,996 $ 63,906 $ 664,902 $ -
Healthcare (2) (4).................... 550,686 129,580 680,266 1,312
Communications (3).................... 368,615 139,857 508,472 1,309
</TABLE>
- -------------------------
(1) Includes loans and leases for vessel, commercial aircraft and railroad
equipment financing.
(2) Includes exposure to hospitals, nursing care and noninstitutional
borrowers, comprised of both commercial and real estate secured loans.
(3) Includes exposure to cable, publishing/newspapers, wireless communications
and broadcasting.
(4) Dauphin healthcare sector unfunded commitments and nonperforming loans are
not included at September 30, 1997.
TABLE 14 LOANS SECURED BY REAL ESTATE AND OTHER ASSETS OWNED BY PROPERTY TYPE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------
COMMERCIAL OTHER
REAL ESTATE NONPERFORMING REAL ESTATE
LOANS LOANS OWNED
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Office buildings........................ $ 628,972 $ 556 $ -
Industrial warehouse.................... 413,323 6,057 891
Retail.................................. 324,452 1,576 6,621
Hospitals/nursing homes................. 121,150 - -
Special purpose......................... 119,566 1,235 -
Apartments.............................. 115,291 205 -
Hotels/motels........................... 104,884 - -
Residential land........................ 76,656 - -
Mixed use............................... 46,473 110 -
Commercial land......................... 20,397 - 4,073
Other land-farm/recreational............ 6,164 483 -
Residential properties held for resale.. 4,379 - 318
Miscellaneous........................... 246,463 1,747 717
------------- ------------- -------------
Total............................... $ 2,228,170 $ 11,969 $ 12,620
============= ============= =============
</TABLE>
TABLE 15 LOANS SECURED BY REAL ESTATE AND OTHER ASSETS OWNED BY GEOGRAPHIC
REGION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------
COMMERCIAL OTHER
REAL ESTATE NONPERFORMING REAL ESTATE
LOANS LOANS OWNED
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Pennsylvania............................ $ 1,041,960 $ 3,321 $ 2,167
Maryland................................ 932,598 2,494 7,805
Virginia................................ 96,137 4,547 2,148
Washington, D.C......................... 45,419 475 -
New Jersey.............................. 37,368 1,132 -
Florida................................. 27,104 - 500
Delaware................................ 21,433 - -
All other............................... 26,151 - -
------------- ------------- -------------
Total................................ $ 2,228,170 $ 11,969 $ 12,620
============= ============= =============
</TABLE>
<PAGE>
PAGE 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
ASSET QUALITY
NONPERFORMING ASSETS
Nonperforming assets totaled $89.7 million at September 30, 1997, an increase
of $30.8 million (52.2%) when compared to $58.9 million in nonperforming assets
at December 31, 1996. The acquisition of Dauphin resulted in an additional
$15.9 million in nonperforming assets which included $7.7 million in nonaccrual
loans, $4.7 million in restructured loans, $3.5 million in other real estate
owned ("OREO") and other assets owned. In addition to Dauphin, there were $52.0
million in additions to nonperforming assets primarily due to the transfer of
loans to nonaccrual status. These increases were partially offset by the
following declines in nonperforming assets: paydowns of $19.3 million; loans
reclassified to accrual status of $8.9 million; OREO sales and paydowns of $7.0
million; and charge-offs of $1.9 million. The nonaccrual loan paydowns were
cash payments on a variety of commercial and real estate loans. Loans
reclassified to accrual status were commercial and real estate loans which met
the regulatory tests for return to accrual status. The most significant OREO
sales totaled $4.4 million for three commercial real estate properties which
resulted in gains of $242 thousand. The most significant charge-off was a $1.0
million commercial loan charge-off.
The following table presents nonperforming assets and accruing loans which
are 90 days or more past due as to principal or interest payments on the dates
indicated.
TABLE 16 NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans
Domestic:
Commercial............................. $ 28,394 $ 13,988 $ 15,074
Commercial real estate................. 10,837 20,347 21,260
Residential mortgage................... 22,509 7,545 7,992
Foreign....................................... 5,450 3,800 3,800
------------- ------------- -------------
Total nonaccrual loans.......... 67,190 45,680 48,126
------------- ------------- -------------
Restructured loans............................ 4,858 126 131
Other assets owned:
Other real estate...................... 16,604 12,765 12,120
Valuation reserves..................... (324) (324) (324)
Other assets........................... 1,421 705 705
------------- ------------- -------------
Total other assets owned...................... 17,701 13,146 12,501
------------- ------------- -------------
Total nonperforming assets.................... $89,749 $58,952 $60,758
------------- ------------- -------------
Nonperforming assets as a % of total
loans, net of unearned income plus other
foreclosed assets owned...................... 0.91% 0.87% 0.92%
------------- ------------- -------------
Accruing loans contractually past due
90 days or more as to principal or interest:
Domestic............................... $ 27,002 $ 23,812 $ 16,734
============= ============= =============
</TABLE>
Impaired loans at September 30, 1997, December 31, 1996 and September 30,
1996 totaled $40.9 million, $34.3 million and $36.3 million, respectively, which
represented the Corporation's nonaccrual commercial loans, commercial real
estate loans and a $1.6 million foreign loan at September 30, 1997. Impaired
loans with a related valuation allowance at September 30, 1997, December 31,
1996 and September 30, 1996 totaled $24.5 million with an allowance of $10.6
million, $8.9 million with an allowance of $814 thousand and $12.4 million with
an allowance of $3.0 million, respectively.
<PAGE>
PAGE 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
ALLOWANCE FOR CREDIT LOSSES
The following table details certain information relating to the allowance for
credit losses of the Corporation for the nine months ended September 30, 1997
and September 30, 1996, respectively. See also Note 6 of the Notes to
Consolidated Financial Statements of the Corporation.
TABLE 17 ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance at beginning of year............ $ 154,802 $ 177,621
Provision for credit losses............... 26,634 6,000
Losses charged-off:
Commercial loans........................ (1,647) (1,265)
Commercial real estate.................. (303) (1,123)
Residential mortgage.................... (636) (106)
Retail loans............................ (5,422) (4,150)
Bankcard loans.......................... (24,370) (22,676)
Leases receivable....................... (454) (73)
---------- ----------
Total losses charged-off.............. (32,832) (29,393)
---------- ----------
Recoveries of losses previously
charged-off:
Commercial loans........................ 578 1,528
Commercial real estate.................. 319 271
Residential mortgage.................... 74 6
Retail loans............................ 2,127 1,576
Bankcard loans.......................... 1,159 2,196
Leases receivable....................... 183 82
---------- ----------
Total recoveries....................... 4,440 5,659
----------
Net losses charged-off.................... (28,392) (23,734)
Allowance for loans of acquired banks
(1)...................................... 43,418 10,642
Allowance for bankcard loans sold (2)..... (21,000) -
---------- ----------
Total allowance at September 30........... $ 175,462 $ 170,529
========== ==========
Average loans, net of average unearned
income................................... $7,837,053 $6,186,704
========== ==========
Period end loans, net of unearned income.. $9,878,289 $6,615,161
========== ==========
Net charge-offs to average loans, net
of average unearned income............... 0.48% 0.51%
Allowance as a percentage of period end
loans, net of unearned income............ 1.78 2.58
Allowance as a percentage of
nonperforming loans...................... 243.53 353.38
</TABLE>
(1) $43.4 million represents the allowance for loans from the Dauphin
acquisition and the $10.6 million represents the allowance for loans from
the 1st Washington acquisition.
(2) $21 million represents the allowance attributable to the Bell Atlantic
bankcard loan portfolio which was included as a component of the gain on
the sale of bankcard loans.
The Corporation's bankcard loan portfolio, like the portfolios of most other
credit card issuers, has experienced higher charge-off rates as a result of
higher-than-anticipated levels of personal bankruptcies and the general
expansion of unsecured consumer credit. The Corporation's ratio of bankcard
loan net charge-offs to average loans, net of average unearned income
(annualized) for the third quarter of 1997 increased over the second quarter of
1997 and the third quarter of 1996 ratios. The Corporation continues to monitor
trends in the bankcard loan portfolio and is managing credit line usage and
underwriting standards in a more aggressive manner.
<PAGE>
PAGE 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
DEPOSITS
Total deposits increased $4.4 billion from December 31, 1996 to September 30,
1997. This increase included a $3.5 billion increase in core deposits and an
$834.2 million increase in purchased deposits (large denomination time deposits
and foreign time deposits). The Dauphin acquisition resulted in $4.2 billion in
additional deposits on the date of acquisition which included approximately $3.6
billion in core deposits and $630 million in large denomination time deposits.
Dauphin's core deposits consisted of $500 million in noninterest bearing demand
deposits and $3.1 billion in interest bearing deposits. The $3.1 billion in
interest bearing deposits included a $68 million fair value premium adjustment
to Dauphin's certificates of deposit recorded by the Corporation on the date of
acquisition which will be amortized into interest expense over a period ranging
from 7 to 10 years.
Total deposits increased $4.4 billion from September 30, 1996 to September
30, 1997. Core deposits increased $3.5 billion and purchased deposits increased
$818.4 million. As noted above, the Dauphin acquisition resulted in $4.2
billion in additional deposits on the date of acquisition which included $3.6
billion in core deposits and $630 million in purchased deposits.
CAPITAL RESOURCES
The following table details the Corporation's capital components and ratios
at September 30, 1997, December 31, 1996 and September 30, 1996.
TABLE 18 CAPITAL COMPONENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Preferred stockholders' equity............ $ 144,852 $ 144,852 $ 144,852
Common stockholder's equity............... 1,692,868 1,102,645 1,058,331
Guaranteed preferred beneficial
interests in Company's
junior subordinated debentures........... 295,758 147,113 -
Disallowed intangibles.................... (960,162) (90,861) (98,504)
Net unrealized (gains) losses on
investment securities
available-for-sale (1)................... (22,972) (8,332) 3,100
----------- ----------- -----------
Tier 1 capital.......................... 1,150,344 1,295,417 1,107,779
----------- ----------- -----------
Qualifying long-term debt................. 279,727 99,765 99,755
Intermediate preferred stock.............. 6,278 7,700 9,000
Allowance for credit losses (2)........... 169,460 115,173 116,662
Mandatory convertible securities.......... 59,984 59,977 59,975
----------- ----------- -----------
Tier 2 capital.......................... 515,449 282,615 285,392
----------- ----------- -----------
Total capital............................. $ 1,665,793 $ 1,578,032 $ 1,393,171
=========== =========== ===========
Risk-adjusted assets...................... $13,550,777 $ 9,174,168 $ 9,279,066
Average quarterly assets (regulatory
guidelines).............................. $17,190,865 $10,725,996 $10,438,200
Risk based capital ratios:
Tier 1 capital to risk-adjusted assets.. 8.49% 14.12% 11.94%
Regulatory minimum...................... 4.00 4.00 4.00
Total capital to risk-adjusted assets... 12.29 17.20 15.01
Regulatory minimum...................... 8.00 8.00 8.00
Leverage ratio............................ 7.09 12.18 10.71
</TABLE>
<PAGE>
PAGE 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
_________
(1) Not included as Tier 1 capital under current regulatory guidelines.
(2) The amount of the allowance for credit losses which is includable as Tier 2
capital is limited to 1.25% of the risk-adjusted assets less disallowed
intangibles.
Tier 1 capital decreased $145.1 million when September 30, 1997 is compared
to December 31, 1996 and total capital increased $87.8 million during this same
period. Tier 1 and total capital were negatively impacted by an additional
$869.3 million in disallowed goodwill and other intangible assets resulting from
the Dauphin acquisition. The following items had a positive impact on both tier
1 capital and total capital: the issuance of $505.2 million of common stock to
the Corporation's parent, AIB, in July 1997; the issuance of an additional
$148.3 million in guaranteed preferred beneficial interests in Company's junior
subordinated debentures in February 1997 to fund the Dauphin acquisition; and
net income of $123.5 million which was partially offset by $44.0 million and
$9.2 million in dividends declared on common stock and preferred stock,
respectively. In addition, total capital was positively impacted by the issuance
of $200 million in subordinated debt in July 1997 to fund the Dauphin
acquisition which qualifies as Tier 2 capital.
Tier 1 and total capital increased $42.6 million and $272.6 million,
respectively when September 30, 1997 is compared to September 30, 1996. The
following items had a positive impact on both tier 1 and total capital during
this period: additional common stock of $505.2 million; $295.4 million in
guaranteed preferred beneficial interests in Company's junior subordinated
debentures issued in December 1996 and February 1997; and net income of $159.5
million which was partially offset by $56.2 million in dividends declared on
common stock and preferred stock. Tier 1 and total capital were negatively
impacted by an additional $869.3 million in disallowed goodwill and other
intangible assets from the Dauphin acquisition. Tier 2 capital was positively
impacted by the $200 million in subordinated debt. Additional information
regarding the Corporation's capital is presented in the Consolidated Statements
of Changes in Stockholders' Equity.
<PAGE>
PAGE 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
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 effectively. 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.
All trading activity is conducted within the risk limits approved by the
Corporation's Board of Directors. Trading systems are in place which measure
risks and profitability associated with derivative trading positions as market
movements occur. An independent risk control unit monitors the risks. The
results are reported daily and reviewed by the Corporation's Asset/Liability
Committee and the Executive Committee of the Board of Directors on a monthly
basis.
The following table presents the notional amounts and the end-of-period fair
values of the classes of trading instruments at September 30, 1997 as well as
the average fair values for the three months and nine months ended September 30,
1997.
TABLE 19 TRADING INSTRUMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------
FAIR VALUES
----------------------------------------
NOTIONAL AVERAGE AVERAGE
AMOUNTS END-OF-PERIOD THREE MONTHS NINE MONTHS
----------- ------------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest rate contracts:
Interest rate swaps...................................... $1,483,354
In a receivable position................................ $ 7,904 $ 8,249 $ 8,438
In a payable position................................... (9,844) (10,204) (7,876)
Interest rate caps and floors............................ 1,327,744
Interest rate caps and floors held...................... 1,230 1,499 1,866
Interest rate caps and floors written................... (1,243) (1,497) (1,867)
Swaptions................................................ 60,000
Swaptions held.......................................... 294 279 250
Swaptions written....................................... (288) (273) (245)
Futures.................................................. 411,000
In a favorable position................................. 460 - -
In an unfavorable position.............................. (85) - -
Foreign exchange contracts:
Options.................................................. 2,526,932
Options held............................................ 30,301 38,807 42,864
Options written......................................... (29,438) (39,876) (35,192)
Forwards................................................. 768,328
In a favorable position................................. 11,761 13,321 10,662
In an unfavorable position.............................. (13,705) (13,452) (10,209)
Securities:
Commitments to purchase................................. 50,356 - - -
Commitments to sell..................................... 65,103 - - -
</TABLE>
<PAGE>
PAGE 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(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 20 NET TRADING INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996
--------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Interest rate contracts:
Interest rate swaps............ $ (3,675) $(2,339)
Futures........................ 939 1,824
Interest rate caps and floors.. 25 12
Swaptions...................... 3 (1)
Options........................ (11) (5)
Miscellaneous.................. 249 301
-------- -------
(2,470) (208)
-------- -------
Foreign exchange contracts:
Spot and forward contracts..... (37,578) 2,045
Futures........................ - 20
Options........................ 38,388 (1,501)
Miscellaneous.................. 1,824 1,603
-------- -------
2,634 2,167
-------- -------
Other:
Securities..................... 4,609 1,507
-------- -------
Total net trading income.. $ 4,773 $ 3,466
======== =======
</TABLE>
<PAGE>
PAGE 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
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. The Corporation uses a combination
of derivatives, particularly interest rate swaps, interest rate caps and
floors, and options. 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.
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.
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.
The Corporation also utilizes mandatory and optional commitments to deliver
residential securitized mortgages and whole residential mortgage loans to reduce
the interest rate risk inherent in residential mortgage loans held-for-sale and
the commitments made to borrowers for residential mortgage loans which have not
been funded. At September 30, 1997, these commitments totaled $532.3 million.
<PAGE>
PAGE 34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
The following table presents the expected maturities and the fair values of
the risk management instruments entered into by the Corporation at September 30,
1997 as well as the weighted average maturity and weighted average receive and
pay rates of the instruments at September 30, 1997.
TABLE 21 RISK MANAGEMENT INSTRUMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------------------
EXPECTED MATURITY WEIGHTED
------------------------------------------------------------------------------- ESTIMATED AVERAGE
AFTER FAIR MATURITY
1997 1998 1999 2000 2001 2001 TOTAL VALUE(1) IN YEARS
-------- -------- -------- -------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Designated to Assets
- --------------------
Interest rate swaps sold
- ------------------------
Convert floating rate to
fixed rate................ $2,828 2.97
Notional amount............ $ - $ 50,000 $150,000 $100,000 $517,500 $ - $817,500
Weighted average receive
rate...................... -% 5.80% 6.11% 5.76% 6.38% -% 6.22%
Weighted average pay rate.. 5.69%
Interest rate swaps purchased
- -----------------------------
Convert fixed rate to
floating rate............. ($574) 2.73
Notional amount............ $ - $ - $ 15,000 $ 5,751 $ 25,450 $ - $ 46,201
Weighted average pay rate.. -% -% 5.16% 6.03% 7.01% -% 6.29%
Weighted average receive
rate...................... 5.74%
Designated to Liabilities
- -------------------------
Interest rate swaps sold
- ------------------------
Convert fixed rate to
floating rate............. $5,768 4.87
Notional amount............ $32,000 $190,000 $ - $ 25,000 $ - $200,000 $447,000
Weighted average receive
rate...................... 7.48% 6.32% -% 6.36% -% 6.68% 6.56%
Weighted average pay rate.. 5.72%
Interest rate caps purchased
- ----------------------------
Cap floating rate at
strike level.............. $ - 1.70
Notional amount............ $ - $ - $123,700 $ - $ - $ - $123,700
Strike level (2)........... -% -% 13.50% -% -% -% 13.50%
Call options purchased $ 868 0.89
- ----------------------
Notional amount............ $1,415 $ 275 $ 1,610 $ - $ - $ - $ 3,300
Basis swaps
- -----------
Convert floating rate to
different index........... ($284) 0.89
Notional amount............ $ - $50,000 $ 30,000 $ - $ - $ - $ 80,000
Weighted average receive
rate...................... 5.48%
Weighted average pay rate.. 5.61%
</TABLE>
______________
(1) Estimated fair values include carrying amounts which represent accrued
interest receivable (payable) and the following deferred fees: deferred
losses on the early termination of interest rate swaps sold, $1.7 million;
and deferred premiums on call options purchased, $66 thousand.
(2) Pays interest if interest rates exceed 13.50%.
<PAGE>
PAGE 35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-(CONTINUED)
The following table summarizes the activity of the risk management
instruments entered into by the Corporation, by notional amounts, for the nine
months ended September 30, 1997.
TABLE 22 ACTIVITY OF RISK MANAGEMENT INSTRUMENTS
<TABLE>
<CAPTION>
DESIGNATED TO DESIGNATED TO BASIS
ASSETS LIABILITIES SWAPS TOTAL
-------------- -------------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of year... $763,923 $ 514,536 $80,000 $1,358,459
Additions...................... 100,000 290,000 - 390,000
Maturities/amortizations....... (222) (230,536) - (230,758)
-------- --------- ------- ----------
Balance at September 30, 1997.. $863,701 $ 574,000 $80,000 $1,517,701
======== ========= ======= ==========
</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 $1.7 million at September 30, 1997. In the remainder of
1997 and 1998, $858 thousand and $858 thousand, respectively, will be amortized
into income.
The deferred gain on the early termination of an interest rate swap with a
notional balance of $100.0 million designated to the Corporation's federal funds
purchased was $82 thousand at September 30, 1997. In the remainder of 1997 and
1998, $25 thousand and $57 thousand, respectively, will be amortized into
income.
For the nine months ended September 30,1997, the risk management instruments
entered into by the Corporation had the following impact on the components of
net interest income: gross interest income decreased $2.4 million and gross
interest expense decreased $3.2 million, which resulted in a $753 thousand
increase in net interest income.
<PAGE>
PAGE 36
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibit is furnished to this Form 10-Q:
(27) Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K was filed on July 17, 1997 and amended on
August 12, 1997 to discuss the acquisition of Dauphin Deposit
Corporation consummated on July 8, 1997 and to file financial
statements and applicable pro forma financial information pertaining
to the acquisition.
SIGNATURES
Pursuant to the requirements 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
November 13, 1997 By /s/ Jerome W. Evans
-----------------------------------
Jerome W. Evans
Executive Vice President and
Chief Financial Officer
November 13, 1997 By /s/ Robert L. Carpenter, Jr.
-----------------------------------
Robert L. Carpenter, Jr.
Senior Vice President and
Controller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
MARYLAND BANCORP SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 963,763
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<TRADING-ASSETS> 65,575
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<LONG-TERM> 409,971
7,847
30,000
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<INTEREST-DEPOSIT> 197,807
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<SECURITIES-GAINS> 278
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<YIELD-ACTUAL> 4.14
<LOANS-NON> 67,190
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<ALLOWANCE-DOMESTIC> 83,311
<ALLOWANCE-FOREIGN> 11,481
<ALLOWANCE-UNALLOCATED> 80,670
</TABLE>
