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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-7273
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[LOGO OF FIRST MARYLAND BANCORP APPEARS HERE]
(Exact name of registrant as specified in its charter)
MARYLAND 52-0981378
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
FIRST MARYLAND BUILDING 21201
25 SOUTH CHARLES STREET (zip code)
BALTIMORE, MARYLAND
(Address of principal
executive offices)
410-244-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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7.875% Noncumulative Preferred Stock, New York Stock Exchange, Inc.
Series A
Securities registered pursuant to Section 12(g) of the Act: N/A
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value as of March 10, 1997, of voting stock held by
non-affiliates (comprised of 6,000,000 shares of the registrant's 7.875%
Noncumulative Preferred Stock, Series A) was $157,500,000.
ALL 594,480,215 OUTSTANDING SHARES OF COMMON STOCK, $ 1/7 PAR VALUE, OF THE
REGISTRANT ARE OWNED BY ALLIED IRISH BANKS, P.L.C.,
AN IRISH BANKING CORPORATION.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive
Information Statement filed March 26, 1997 are incorporated herein by
reference in response to Part III of this report.
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TABLE OF CONTENTS
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PAGE
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PART I
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Item 1-- Business..................................................... 1
Item 2-- Properties................................................... 8
Item 3-- Legal Proceedings............................................ 8
Item 4-- Submission of Matters to a Vote of Security Holders.......... 8
PART II
Item 5-- Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 9
Item 6-- Selected Consolidated Financial Data......................... 10
Item 7-- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 8-- Financial Statements and Supplementary Data:
First Maryland Bancorp and Subsidiaries:
Consolidated Statements of Income............................ 38
Consolidated Statements of Condition......................... 39
Consolidated Statements of Changes in Stockholders' Equity... 40
Consolidated Statements of Cash Flows........................ 41
Notes to Consolidated Financial Statements................... 42
Management's Report on Responsibility for Financial
Reporting................................................... 79
Independent Auditors' Report................................. 80
Item 9-- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 82
PART III
Item 10-- Directors and Executive Officers of the Registrant(1)
Item 11-- Executive Compensation(1)
Item 12-- Security Ownership of Certain Beneficial Owners and
Management(1)
Item 13-- Certain Relationships and Related Transactions(1)
PART IV
Item 14-- Exhibits, Financial Statement Schedules, and Reports on Form
8-K:
Financial Statement Schedules................................ 82
Exhibits..................................................... 82
Reports on Form 8-K.......................................... 83
Signatures.............................................................. 84
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(1) Incorporated by reference to portions of the Registrant's definitive
Information Statement filed March 26, 1997.
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PART I
ITEM 1. BUSINESS
First Maryland Bancorp (the "Corporation") is a Maryland corporation
incorporated in 1973 and is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act").
At December 31, 1996, the Corporation had consolidated total assets of $10.8
billion, total deposits of $7.5 billion, and total stockholders' equity of
$1.2 billion. Its principal subsidiaries are The First National Bank of
Maryland ("First National"), First Omni Bank, N. A. ("First Omni") and The
York Bank and Trust Company ("York Bank"). These banks provide comprehensive
corporate, commercial, correspondent and retail banking services, personal and
corporate trust services and related financial products and services to
individuals, businesses, governmental units and financial institutions
primarily in Maryland and the adjacent states. The assets of these banks at
December 31, 1996 accounted for approximately 96% of the Corporation's
consolidated total assets and the banks contributed approximately 86%, 89% and
93% to the consolidated net income of the Corporation for each of the three
years ended December 31, 1996, 1995 and 1994, respectively.
First National, the Corporation's largest subsidiary, is a national banking
association chartered under the laws of the United States. It commenced
operations in Baltimore, Maryland on July 10, 1865 and is the successor to a
Maryland banking institution founded in 1806. At December 31, 1996, First
National was the second largest commercial bank headquartered in Maryland in
terms of assets, loans and deposits, with assets of $8.9 billion, net loans of
$5.3 billion, and deposits of $6.8 billion. Its assets at such date comprised
approximately 82% of the consolidated assets of the Corporation. Including its
main office, First National operates 216 banking facilities in Maryland, the
District of Columbia and Virginia, including 159 full service offices, and
loan production offices in Washington, D.C., Easton, Maryland, and York,
Pennsylvania. It conducts international activities at its Baltimore
headquarters, a Cayman Islands branch and a representative office in London,
and maintains correspondent accounts with approximately 55 foreign banks. It
offers investment, foreign exchange and securities brokerage services,
operates a brokerage subsidiary and acts as investment adviser to the ARK
Funds, a family of proprietary mutual funds.
York Bank was acquired by the Corporation on December 31, 1991. It is a
Pennsylvania chartered commercial bank organized in 1960 as the product of a
consolidation of two banks chartered in 1810 and 1890. At December 31, 1996,
York Bank had assets of $1.1 billion, net loans of $698.1 million, deposits of
$844.6 million. York Bank operates 37 banking facilities including 35 full
service offices in south central Pennsylvania and a loan production office in
Lancaster County, Pennsylvania. It is the largest banking institution
headquartered in York County, Pennsylvania, a market contiguous with First
National's principal market.
First Omni is a national banking subsidiary of the Corporation headquartered
in Millsboro, Delaware and conducts retail bankcard services. It offers
MasterCard(R) and VISA(R) bankcards both directly and as agent for other
banks. On April 23, 1996, First Omni securitized and sold an additional $335
million in bankcard loans. At December 31, 1996, First Omni managed bankcard
loans of $1.1 billion (including $500 million of securitized bankcard loans).
The Corporation operates various other subsidiaries, including First
National Mortgage Corporation, a mortgage banking company which originates and
sells residential mortgage loans through its network of 20 offices in
Maryland, Virginia, Delaware, Pennsylvania, North Carolina, Kentucky,
Tennessee, and Mississippi; First Maryland Leasecorp, a commercial finance
company specializing in equipment financing; and First Maryland Mortgage
Corporation, a commercial real estate lender.
Allied Irish Banks, p.l.c. ("AIB") is an Irish banking corporation whose
securities are traded on the Dublin, London and New York Stock Exchanges. In
December 1983, AIB acquired 43% of the outstanding shares of the Corporation.
On March 21, 1989, AIB increased its investment to 100% of the voting stock of
the Corporation, thereby furthering its strategic objective of increasing the
geographic diversification of its investments and operations. AIB is a
registered bank holding company under the Bank Holding Company Act and is the
largest
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banking corporation organized under the laws of Ireland, based upon total
assets at December 31, 1996. Based upon United States generally accepted
accounting principles at December 31, 1996, AIB and its subsidiaries
(collectively, "AIB Group") had total assets of approximately $43.7 billion at
December 31, 1996. AIB Group provides a full range of banking, financial and
related services principally in Ireland, the United States and the United
Kingdom.
ACQUISITION OF DAUPHIN DEPOSIT CORPORATION
General. On January 21, 1997, the Corporation, AIB and Dauphin Deposit
Corporation ("Dauphin") entered into a definitive Agreement and Plan of Merger
(the "Merger Agreement"), pursuant to which Dauphin will merge with and into
the Corporation ("the Merger"). Dauphin shareholders will receive cash and AIB
American Depository Shares ("AIB ADSs") with an aggregate value of
approximately $1.36 billion based upon the market price of AIB ADSs on January
21, 1997. Dauphin and its bank and nonbank subsidiaries provide corporate,
commercial, correspondent and retail banking services, personal and corporate
trust services and related financial products and services to individuals,
businesses, governmental units and financial institutions, primarily in south-
central Pennsylvania. At December 31, 1996, Dauphin had consolidated total
assets of $5.9 billion, total deposits of $4.0 billion, and total
stockholders' equity of $570.4 million.
In connection with the Merger Agreement, Dauphin and AIB entered into a
Stock Option Agreement, dated January 21, 1997, pursuant to which Dauphin
granted to AIB an option to acquire up to 6,112,088 shares of Dauphin Deposit
Corporation ("DDC") Common Stock at an exercise price of $33.1875 per share.
The purpose of the option agreement is to increase the likelihood that the
Merger will be completed as contemplated by the Merger Agreement.
The Merger Agreement. Under the Merger Agreement, (i) Dauphin will merge
with and into First Maryland and (ii) shareholders of Dauphin will receive
either (a) $43.00 per share of DDC Common Stock in cash or (b) that number
(the "Exchange Ratio") of AIB ADSs having a Closing Market Price (as defined
below) of $43.00, at each holder's election, but subject to certain
limitations described below.
If the Closing Market Price of an AIB ADS shortly before the Effective Time
is below $37.00, then the Exchange Ratio will equal 1.1620, and if the Closing
Market Price is more than $43.00, then the Exchange Ratio will be 1.0000. If
the market price of an AIB ADS as measured during a period shortly before
Effective Time is below $32.00, then Dauphin has the right to terminate the
Merger Agreement unless AIB adjusts the Exchange Ratio such that the value of
the AIB ADSs to be received by holders of DDC Common Stock is not less than
$37.19. "Closing Market Price" means that the average closing price of the AIB
ADSs on the New York Stock Exchange for the ten New York Stock Exchange
trading days ending on the fifth business day prior to the closing date of the
Merger.
At least 51% of the outstanding shares of DDC Common Stock must be converted
into AIB ADSs. If an insufficient number of Dauphin shareholders elect to
receive AIB ADSs, then a shareholder who elects to receive all cash may have
some or all of his shares converted into AIB ADSs. A shareholder who makes no
election may receive cash or AIB ADSs, at the discretion of AIB.
Consummation of the Merger is subject to the terms and conditions contained
in the Merger Agreement, including the receipt of approval of the Merger by
the shareholders of Dauphin and of AIB, registration of the AIB ADSs to be
issued in the Merger under the Securities Act of 1933, as amended (the
"Securities Act") and applicable state securities laws, the receipt of certain
U.S. and Irish regulatory approvals, and the receipt of a favorable legal
opinion with respect to the tax consequences of the transactions contemplated
by the Merger. It is anticipated that the Merger will be consummated during
the third quarter of 1997.
During an approximately 18 to 24-month period following consummation of the
Merger, the business of Dauphin and its principal subsidiary, Dauphin Deposit
Bank and Trust Company, will be integrated into the business of First
Maryland.
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Of the total merger consideration of $1.36 billion, $937 million in cash
will be paid by First Maryland to the Dauphin shareholders who elect to
receive cash and to AIB for use of AIB ADSs. These funds will be provided by
liquidation of current assets, dividends from subsidiaries (including
potential dividends from Dauphin), and the issuance of subordinated debt and
capital securities. The remaining $420 million will be funded by AIB.
COMPETITION
The market for banking and bank-related services is highly competitive. The
Corporation and its subsidiaries compete with other providers of financial
services such as other bank holding companies, commercial and savings banks,
savings and loan associations, credit unions, money market and other mutual
funds, mortgage companies, insurance companies, and a growing list of other
local, regional and national institutions which offer financial services.
Mergers between financial institutions within Maryland and in neighboring
states have added competitive pressure. Competition is expected to intensify
as a consequence of interstate banking laws enacted in 1994 or that may be in
effect or enacted in the future. Federal law now provides, among other things,
that: (1) bank holding companies may (subject to certain conditions) acquire
banks and bank holding companies across state lines without regard to whether
such acquisition is prohibited by state law; (2) effective June 1, 1997
(sooner if both states opt-in to interstate branching), banks will be
permitted to merge across state lines provided neither state has opted-out of
interstate branching; and (3) a bank in one state may establish a denovo
branch in another state provided that the other state's laws permit the
establishment of the branch. Maryland, Virginia, the District of Columbia and
Pennsylvania have opted in to interstate acquisitions, mergers and denovo
branching and Delaware has opted into interstate acquisitions and mergers. The
Corporation and its subsidiaries compete by offering quality products and
convenient services at competitive prices. In order to maintain and enhance
its competitive position, the Corporation regularly reviews various
acquisition prospects and periodically engages in discussions regarding such
possible acquisitions.
SUPERVISION AND REGULATION
The information contained in this section summarizes portions of the
applicable laws and regulations relating to the supervision and regulation of
the Corporation and its subsidiaries. These summaries do not purport to be
complete, and they are qualified in their entirety by reference to the
particular statutes and regulations described.
Bank Holding Company Regulation
The Corporation, as a bank holding company registered under the Bank Holding
Company Act, is required to file with the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") an annual report and such
additional information as the Federal Reserve Board may require, and is
subject to regular examinations by the staff of the Federal Reserve Bank of
Richmond.
The Bank Holding Company Act requires that a bank holding company obtain the
prior approval of the Federal Reserve Board before it may acquire
substantially all of the assets of any bank, or ownership or control of any
voting shares of any bank, if after such acquisition, it will own or control,
directly or indirectly, more than 5% of the voting shares of such bank. Under
Federal and state laws in effect through September 28, 1995, the Federal
Reserve Board could not approve the acquisition by the Corporation of any bank
located outside the State of Maryland unless such acquisition was specifically
authorized by the statutory law of the state in which such bank was located.
Effective September 29, 1995, and subject to applicable Federal and state
approval procedures and registration requirements, the Corporation may acquire
banks in any state in the United States and the Federal Reserve Board may
approve the acquisition by the Corporation of any bank located outside of the
State of Maryland without regard to whether such acquisition is prohibited
under the laws of any state.
The Bank Holding Company Act also generally prohibits a bank holding company
from engaging in, or from acquiring direct or indirect control of voting
shares of any company engaged in activities other than banking
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and the management of banking organizations, and any nonbanking activities
which the Federal Reserve Board may find, by order or regulation, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The approval of the Federal Reserve Board is generally
required prior to engaging in permissible nonbanking activities.
The Banks
First National and First Omni (the "National Banks" and together with York
Bank, the "Banks"), as national banking associations, are subject to the
supervision of, and regulation and examination by the Comptroller of the
Currency of the United States (the "Comptroller"). York Bank, a Pennsylvania
state chartered bank, is supervised, regulated and examined by the
Pennsylvania Department of Banking and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, mergers and
consolidations, electronic funds transfers, management practices, and other
aspects of the Banks' operations are subject to regulation. The approval of
the appropriate bank regulatory authority is required for the establishment of
additional branch offices by any of the Banks, subject to applicable state law
restrictions. Commencing June 1, 1997 (or sooner if permitted by applicable
state laws), banks will be permitted to merge across state lines (thereby
creating interstate branch networks), provided that neither the state in which
the surviving bank maintains its main office nor the state in which the
acquired bank maintains its main office opt-out of interstate branching before
June 1, 1997.
All of the National Banks are members of the Federal Reserve System, and the
deposits of all the Banks are insured by the FDIC. Some of the aspects of the
lending and deposit business of the Banks which are subject to regulation by
the Federal Reserve Board or the FDIC include disclosure requirements in
connection with personal and mortgage loans, interest on deposits and reserve
requirements. In addition, the Banks are subject to numerous federal, state
and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to extensions of credit (including to
insiders), credit practices, disclosure of credit terms and discrimination in
credit transactions.
The Banks are subject to restrictions under federal law which limit the
transfer of funds by any of the Banks to the Corporation and its nonbanking
subsidiaries, whether in the form of loans, extensions of credit, investments,
asset purchases or otherwise. Such transfers by any Bank to the Corporation or
any of the Corporation's nonbanking subsidiaries are limited in amount to 10%
of such Bank's capital and surplus and, with respect to the Corporation and
all such nonbanking subsidiaries, to an aggregate of 20% of such Bank's
capital and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specified amounts.
As a result of the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act ("FIRREA") on August 9, 1989, a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989 in connection with
(i) the default of a commonly controlled FDIC-insured depository institution
or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-
insured depository institution in danger of default. "Default" is defined
generally as the appointment of a conservator or receiver and "in danger of
default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance.
As a consequence of the extensive regulation of the commercial banking
business in the United States, the business of the Banks is particularly
susceptible to changes in Federal and state legislation and regulations which
may increase the cost of doing business.
Dividends
The Corporation is a legal entity separate and distinct from the Banks and
its other subsidiaries, although the principal source of the Corporation's
cash revenues is dividends from the Banks. Various Federal (and in the case of
York Bank), state laws and regulations limit the amount of dividends the Banks
can pay to the Corporation without regulatory approval.
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The approval of the Comptroller is required for any dividend by a national
bank if the total of all dividends declared by such bank in any calendar year
would exceed the total of its net profits, as defined by the Comptroller, for
that year combined with its retained net profits for the preceding two years
less any required transfers to surplus or a fund for the retirement of any
preferred stock. Additionally, national bank subsidiaries may not declare
dividends in excess of net profits on hand, after deducting the amount by
which the principal amount of all loans on which interest is past due for a
period of six months or more exceeds the reserve for credit losses. In
addition, the "prompt corrective action" provisions of FDICIA (see discussion
entitled "FDICIA" below) prohibit the payment of dividends by a bank if the
payment would cause the bank to become "undercapitalized." Under the first and
currently more restrictive of the foregoing dividend limitations, at January
1, 1997, none of the retained earnings of the National Banks was available to
pay dividends to the Corporation.
Pursuant to Pennsylvania law, York Bank may pay dividends only out of
accumulated net earnings and may not pay a dividend if any transfer of net
earnings to surplus is required. At January 1, 1997, $2.7 million of the
retained earnings of York Bank was available to pay dividends to the
Corporation.
The Federal Reserve Board and the Comptroller also have issued guidelines
that require bank holding companies and national banks to evaluate
continuously the level of cash dividends in relation to the organization's net
income, capital needs, asset quality and overall financial condition. The
Comptroller also has authority under the Financial Institutions Supervisory
Act to prohibit national banks from engaging in any practice or activity
which, in the Comptroller's opinion, constitutes an unsafe or unsound
practice. The payment of a dividend by a bank could, depending upon the
financial condition of such bank and other factors, be construed by the
Comptroller to be such an unsafe or unsound practice. The Comptroller has
stated that a dividend by a national bank should bear a direct correlation to
the level of the bank's current and expected earnings stream, the bank's need
to maintain an adequate capital base and the marketplace's perception of the
bank and should not be governed by the financing needs of the bank's parent
corporation. As a result, notwithstanding the level of dividends which could
be declared without regulatory approval by the Banks as set forth in the
preceding paragraph, the level of dividends from the Banks to the Corporation
in 1997 is not expected to exceed the earnings of the Banks. If the ability to
pay dividends to the Corporation were to become restricted, the Corporation
would need to rely on alternative means of raising funds to satisfy its
requirements. Such alternative means might include, but would not be
restricted to, nonbank subsidiary dividends, asset sales or other capital
market transactions.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to the Banks and to commit resources to support
the Banks in circumstances where it might not do so absent such policy. In
addition, any capital loans by the Corporation to any of the Banks would also
be subordinate in right of payment to deposits and to certain other
indebtedness of such Bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank at a certain
level will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Capital Requirements
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. As of December 31, 1996, the minimum ratio of total capital
to risk-adjusted assets (including certain off-balance sheet items, such as
standby letters of credit) was 8%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of
perpetual preferred stock, after subtracting goodwill and certain other
adjustments ("Tier 1 capital"). The remainder may consist of perpetual debt,
mandatory convertible debt securities, a limited amount of subordinated debt,
other preferred stock and a limited amount of loan loss reserves ("Tier 2
capital"). The maximum amount of supplementary capital elements that qualify
as Tier 2 capital are limited to 100% of Tier 1 capital net of goodwill. The
Federal Reserve Board also has adopted a minimum leverage ratio (Tier 1
capital to average total assets) of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating.
The rule indicates that the minimum leverage ratio should
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be at least 1.0% to 2.0% higher for holding companies that do not have the
highest rating or that are undertaking major expansion programs. The
Corporation's national and state chartered banking subsidiaries are subject to
similar risk-based and leverage capital requirements adopted by the
Comptroller and the FDIC, respectively. On December 31, 1996, the Corporation
had a Tier 1 capital to risk adjusted assets ratio of 14.12%, a total (Tier 1
plus Tier 2) capital ratio of 17.20%, and a leverage ratio of 12.18%.
Failure to meet the capital guidelines could subject a banking institution
to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC, and
the appointment of a conservator or receiver by the appropriate federal
regulatory authority.
The federal bank regulatory agencies have revised their capital adequacy
guidelines (the "guidelines") to provide for consideration of interest rate
risk in the overall determination of a bank's minimum capital requirement. As
amended, the guidelines explicitly provide that a bank's exposure to declines
in the economic value of its capital due to changes in interest rates is a
factor to be considered in evaluating capital adequacy. In December 1996, the
same agencies issued a joint policy statement that provides guidance to banks
on prudent interest rate risk management and reiterates the agencies' view
that "effective interest rate risk management is an essential component of
safe and sound banking practices."
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA provides
increased funding for the Bank Insurance Fund ("BIF") of the FDIC and provides
for expanded regulation of depository institutions and their affiliates,
including parent holding companies. The following is a brief summary of
certain provisions of FDICIA.
Pursuant to FDICIA, the Federal Reserve Board, the Comptroller and the FDIC
have adopted regulations setting forth a five-tier scheme for measuring the
capital adequacy of the financial institutions they supervise. Under the
regulations (commonly referred to as the "prompt corrective action" rules), an
institution is placed in one of the following capital categories: (i) well
capitalized (a total risk-based capital ratio of at least 10%, a Tier 1 risk-
based capital ratio of at least 6% and a leverage ratio of at least 5%); (ii)
adequately capitalized (a total risk-based capital ratio of at least 8%, a
Tier 1 risk-based capital ratio of at least 4% and a leverage ratio of at
least 4%); (iii) undercapitalized (a total risk-based capital ratio of under
8% or a Tier 1 risk-based ratio under 4% or a leverage ratio under 4%); (iv)
significantly undercapitalized (a total risk-based capital ratio of under 6%
or a Tier 1 risk-based capital ratio under 3% or a leverage ratio under 3%);
and (v) critically undercapitalized (a ratio of tangible equity to total
assets of 2% or less). The regulations permit the appropriate Federal banking
regulator to downgrade an institution to the next lower category if the
regulator determines (i) after notice and opportunity for hearing or response,
that the institution is in an unsafe or unsound condition or (ii) that the
institution has received (and not corrected) a less-than-satisfactory rating
for any of the categories of asset quality, management, earnings or liquidity
in its most recent exam. Supervisory actions by the appropriate Federal
banking regulator depend upon an institution's classification within the five
categories. All institutions are generally prohibited from declaring any
dividends, making any other capital distribution, or paying a management fee
to any controlling person, if such payment would cause the institution to
become undercapitalized. Additional supervisory actions are mandated for an
institution falling into one of the three "undercapitalized" categories, with
the severity of supervisory action increasing at greater levels of capital
deficiency. For example, critically undercapitalized institutions are, among
other things, restricted from making any principal or interest payments on
subordinated debt without prior approval of their appropriate Federal banking
regulator, and are generally subject to the appointment of a conservator or
receiver. The regulations apply only to banks and not to bank holding
companies, such as the Corporation; however, the Federal Reserve Board is
authorized to take appropriate action at the holding company level based on
the undercapitalized status of such holding company's subsidiary banking
institutions. For example, in the case of an undercapitalized banking
institution, the bank holding company is required to guarantee that the
undercapitalized subsidiary complies with a recapitalization plan and may be
liable for civil monetary penalties for failure to fulfill its commitment on
such guarantee. In addition, in the case of a significantly undercapitalized
banking institution,
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the appropriate Federal banking regulator is authorized to prohibit the
holding company from making any capital distribution (including paying
dividends) without the prior approval of the Federal Reserve Board. As of
December 31, 1996, each of the Banks met the requirements of a "well-
capitalized" institution.
The FDIC has promulgated regulations regarding the ability of depository
institutions to accept brokered deposits. Under the rule, (i) an
"undercapitalized" institution is prohibited from accepting, renewing or
rolling over brokered deposits, (ii) an "adequately capitalized" institution
must obtain a waiver from the FDIC before accepting, renewing or rolling over
brokered deposits and (iii) a "well capitalized" institution may accept, renew
or roll over brokered deposits without restriction. In addition, both
"undercapitalized" and "adequately capitalized" institutions are subject to
restrictions on the rates of interest they may pay on any deposits. The
definitions of "well capitalized", "adequately capitalized", and
"undercapitalized" conform to the definitions utilized in the "prompt
corrective action" rules described above.
The FDIC has implemented a system of risk-based insurance premiums. Under
this system, each depository institution is assigned to one of nine risk
classifications based upon certain capital and supervisory measures. From
January 1, 1995 through May 31, 1995, the deposit insurance premiums ranged
from 23 basis points to 31 basis points per $100 of domestic deposits.
Effective June 1, 1995, the FDIC lowered the premiums to a range of 4 basis
points to 31 basis points. Effective January 1, 1996, the Banks' BIF insurance
premium was zero but was subject to a statutory minimum assessment of $2,000
per year. Effective January 1, 1997, the Banks' BIF insurance premium will
again be zero and there will not be a statutory minimum assessment. The FDIC
has the right, upon 45 days' prior notice to the Banks, to increase the
assessment rate by a maximum of 5 basis points in order to maintain the BIF at
the statutorily mandated level. In 1996, First National paid a one time
assessment of 65.7 basis points to the Savings Association Insurance Fund
(SAIF) in respect of certain thrift deposits it acquired from 1991 through
1996. The assessment was required to recapitalize the SAIF to mandated levels.
Commencing January 1, 1997, the Banks will be subject to an annual assessment
equal to approximately 1.3 basis points of their BIF assessable deposits and
an annual assessment of approximately 6.4 basis points of assessable thrift
deposits. The assessments will be used to fund obligations issued by the
Financing Corporation (FICO) to recapitalize the Federal Savings & Loan
Insurance Corporation.
The Federal Deposit Insurance Act provides that, in the liquidation or other
resolution by any receiver of a bank insured by the FDIC, the claims of
depositors have priority over the general claims of other creditors. Hence, in
the event of the liquidation or other resolution of a banking subsidiary of
the Corporation, the general claims of the Corporation as creditor of such
banking subsidiary would be subordinate to the claims of the depositors of
such banking subsidiary, even if the claims of the Corporation were not by
their terms so subordinated. In addition, this statute may, in certain
circumstances, increase the costs to the Banks of obtaining funds through
nondeposit liabilities.
MONETARY POLICY
The Corporation's subsidiaries, and thus the Corporation, are affected by
monetary policies of regulatory authorities, including the Federal Reserve
Board, which regulate the national money supply in order to mitigate
recessionary and inflationary pressures. Among the techniques of monetary
policy available to the Federal Reserve Board are engaging in open market
transactions in U.S. Government securities, changing the discount rate on bank
borrowing, and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth
and distribution of bank loans, investments, and deposits. Their use may also
affect interest rates charged on loans or paid on deposits. The effect of
governmental monetary policies on the earnings of the Corporation cannot be
predicted.
EMPLOYEES
As of December 31, 1996, the Corporation employed approximately 4,824 full-
time equivalent employees. Management of the Corporation considers relations
with its employees to be satisfactory.
7
<PAGE>
ITEM 2. PROPERTIES
The following describes the location and general character of the principal
offices and other materially important physical properties of the Corporation
and its subsidiaries.
The Corporation is a major tenant in a building located at 25 South Charles
Street, Baltimore, Maryland, occupying approximately 74% of the 343 thousand
square feet of office space available in the building as of December 31, 1996.
The Corporation's lease for this space expires in 2006, with a renewal option
to the year 2011. During 1996, the annual rental for the space, less amounts
received on subleases to others, was $3.8 million.
The Corporation is the sole tenant at First Center (formerly the Paca Pratt
Building) located at 110 South Paca Street, Baltimore, Maryland. The building
contains 267 thousand square feet of office space and houses certain lending,
staff, and operations functions of the Corporation. The current lease term
expires on December 31, 2011. During 1996, the annual base rental for the
space was $2.6 million. The Corporation is a limited partner with a 0.2%
operating interest and a 50% residual interest in the limited partnership
which owns the building.
The Corporation also owns First Bank Center located at Mitchell Street,
Millsboro, Delaware. The building, acquired in 1981, contains approximately
300 thousand square feet of space, sits on approximately 60 acres of land, and
houses certain retail operations functions of First National together with the
branch and bankcard functions of First Omni.
In addition to the above office space, the Corporation owns and leases
office space in various other office buildings located in Maryland, New York,
Pennsylvania, Delaware, Kentucky, Mississippi, North Carolina, Tennessee,
Virginia, and the District of Columbia.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. In the opinion
of management, based on its review with counsel of the development of these
matters to date, disposition of all pending litigation will not materially
affect the consolidated financial position or results of operations of the
Corporation and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents information concerning the executive officers
of the Corporation. Each was elected at the 1996 Annual Meeting of
Stockholders to serve for a one year term, with the exception of Mr. King, who
was appointed by the Board of Directors to serve until the 1997 Annual Meeting
of Stockholders and until a successor is elected and qualified.
<TABLE>
<CAPTION>
YEAR FIRST
NAME POSITIONS HELD AGE ELECTED
---- -------------- --- ----------
<S> <C> <C> <C>
Jeremiah E. Casey............ Chairman of the Board of the 57 1985
Corporation and each of its
subsidiaries
Frank P. Bramble............. President and CEO of the 48 1994
Corporation and First National
Harry E. Berry............... Executive Vice President and 51 1994
Chief Credit Officer of the
Corporation and First National
David M. Cronin.............. Executive Vice President and 47 1989
Treasurer of the Corporation;
Executive Vice President of
First National
Jerome W. Evans.............. Executive Vice President, Chief 50 1994
Financial Officer and Chief
Administrative Officer of the
Corporation and First National
Walter R. Fatzinger, Jr. .... Executive Vice President of the 54 1994
Corporation and First National
Susan M. Keating............. Executive Vice President of the 46 1996
Corporation and First National
Brian L. King................ Executive Vice President of the 51 1996
Corporation and First National
Jeffrey D. Maddox............ Executive Vice President of the 42 1994
Corporation and First National
Richard H. White............. Executive Vice President of the 50 1994
Corporation and First National;
President and CEO of First Omni
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation became a wholly owned subsidiary of AIB on March 21, 1989
and, as a result, the Corporation's common stock is no longer listed or traded
on any securities exchanges.
The Corporation's 7.875% Noncumulative Preferred Stock, Series A was issued
on December 13, 1993 and is listed on the New York Stock Exchange. The
transfer agent and registrar for the Preferred Stock is First National. As of
March 10, 1997, there were 773 registered holders of the Preferred Stock.
9
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from the
audited financial statements of the Corporation. It should be read in
conjunction with the detailed information and financial statements of the
Corporation included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS:
Interest and dividend
income................. $ 719,029 $ 707,541 $ 619,746 $ 617,237 $ 648,009
Interest expense........ 315,318 314,548 241,099 234,038 284,657
----------- ---------- ---------- ---------- ----------
Net interest income..... 403,711 392,993 378,647 383,199 363,352
Provision for credit
losses................. 6,500 16,000 22,996 45,291 58,126
----------- ---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses.......... 397,211 376,993 355,651 337,908 305,226
Noninterest income...... 216,892 195,910 210,978 233,445 198,182
Noninterest expenses.... 406,916 388,724 396,201 394,653 361,730
----------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 207,187 184,179 170,428 176,700 141,678
Income tax expense...... 74,850 63,992 59,288 62,832 49,205
----------- ---------- ---------- ---------- ----------
Net income.............. $ 132,337 $ 120,187 $ 111,140 $ 113,868 $ 92,473
=========== ========== ========== ========== ==========
Dividends declared on
preferred stock........ $ 11,820 $ 11,820 $ 11,820 $ 1,575 $ --
Dividends declared on
redeemable preferred
stock.................. 203 -- -- -- --
CONSOLIDATED AVERAGE
BALANCES:
Total assets............ $10,477,100 $9,789,500 $9,411,400 $9,395,700 $9,003,000
Loans, net of unearned
income................. 6,312,300 5,804,700 5,291,200 5,099,300 5,293,900
Deposits................ 7,073,500 6,744,100 6,635,300 6,651,800 6,764,400
Long-term debt.......... 481,000 269,500 198,000 189,500 165,500
Common stockholder's
equity................. 1,062,300 965,000 856,600 756,700 646,700
Stockholders' equity.... 1,207,200 1,109,800 1,001,500 763,900 646,700
CONSOLIDATED RATIOS:
Return on average
assets(1).............. 1.26% 1.23% 1.18% 1.21% 1.03%
Return on average common
stockholder's
equity(2).............. 11.33 11.23 11.59 14.84 14.30
Return on average total
stockholders'
equity(2).............. 10.96 10.83 11.10 14.91 14.30
Average total
stockholders' equity to
average total
assets(2).............. 11.52 11.34 10.64 8.13 7.18
Capital to risk-adjusted
assets(3):
Tier 1................. 14.12 13.77 14.05 12.88 10.02
Total.................. 17.20 17.05 17.68 16.62 14.05
Tier 1 leverage
ratio(3)............... 12.18 10.91 11.05 9.60 7.20
Net interest margin(4).. 4.30 4.47 4.51 4.64 4.58
Net charge-offs to
average loans less
average unearned
income................. 0.61 0.51 0.56 0.83 1.15
Allowance for credit
losses to year end
loans, net of unearned
income................. 2.28 2.89 3.50 3.85 3.88
Year end nonperforming
assets to year end
loans, net of unearned
income plus other
foreclosed assets
owned(5)............... 0.87 0.73 1.35 2.59 3.83
</TABLE>
- --------
(1) Average assets include average unrealized gains (losses) on investment
securities available-for-sale.
(2) Average stockholders' equity includes average net unrealized gains
(losses) on investment securities available-for-sale.
(3) The Federal Reserve Board guidelines for risk-based capital requirements
applicable to all bank holding companies require the minimum ratios of
Tier 1 and total capital to risk-adjusted assets to be 4% and 8%,
respectively. The Federal Reserve Board's minimum leverage guidelines
require all bank holding companies to maintain a ratio of Tier 1 capital
to total average quarterly assets of at least 3%.
(4) Net interest margin is the ratio of net interest income on a fully tax-
equivalent basis to average earning assets.
(5) Nonperforming assets include nonaccrual loans, restructured loans, and
collateral on loans to which the Corporation has taken title.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the Corporation's financial condition and results
of operations as of and for the years ended December 31, 1996, 1995 and 1994
should be read in conjunction with the Consolidated Financial Statements of
the Corporation and statistical data presented elsewhere herein.
EARNINGS SUMMARY
The Corporation's net income for the year ended December 31, 1996 was $132.3
million, compared to $120.2 million for the year ended December 31, 1995, an
increase of $12.1 million (10.1%). This increase is the result of higher net
interest income and noninterest income and a reduction in the provision for
credit losses partially offset by an increase in noninterest expenses.
The Corporation's net income for the year ended December 31, 1995 was $120.2
million, compared to $111.1 million for the year ended December 31, 1994, an
increase of $9.1 million (8.1%). This increase is the result of an increase in
net interest income, a decrease in noninterest expenses and a reduction in the
provision for credit losses partially offset by a decline in noninterest
income.
ACQUISITIONS
On July 16, 1996, the Corporation acquired 1st Washington Bancorp, Inc.
("1st Washington"), a savings and loan holding company headquartered in
Herndon, Virginia, whose principal subsidiary was Washington Federal Savings
Bank. Under terms of the agreement, the shareholders of 1st Washington
received $8.125 in cash per share, for a total purchase price of $83.5
million. On the date of the acquisition, the Corporation acquired total assets
of $866.2 million which included $325.7 million in loans and $426.3 million in
deposits. This acquisition was accounted for as a purchase and the results of
operations of 1st Washington have been included with the Corporation's results
of operations since July 16, 1996.
On July 1, 1996, the Corporation acquired Zirkin-Cutler Investments, Inc.
("Zirkin-Cutler"), a Washington, D.C. investment management company. Under
terms of the agreement, the principals of Zirkin-Cutler received $4.8 million
in cash and 90 thousand shares of redeemable preferred stock with a
liquidation value of $100 per share. On the date of acquisition, Zirkin-Cutler
had $1.1 billion in assets under investment management. This acquisition was
accounted for as a purchase and the results of operations of Zirkin-Cutler
have been included with the Corporation's results of operations since July 1,
1996.
11
<PAGE>
ANALYSIS OF RETURN ON AVERAGE ASSETS
NET INTEREST INCOME
Net interest income, the primary source of the Corporation's earnings, is
defined as the difference between the interest and yield-related fee income
generated by earning assets and the expense associated with funding those
assets. As such, net interest income represents pretax profits from the
Corporation's lending, investing and funding activities. When net interest
income is presented on a fully tax-equivalent basis, interest income from tax
exempt earning assets is increased by an amount equivalent to the Federal
income taxes that would have been paid if this income were taxable at the
statutory Federal income tax rate of 35% for 1996, 1995 and 1994. An analysis
of fully tax-equivalent net interest income, interest rate spreads and net
interest margins is shown in the following two tables.
NET INTEREST INCOME, INTEREST RATE SPREAD AND NET INTEREST MARGIN ON AVERAGE
EARNING ASSETS
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securi-
ties(1)................ $2,799.0 $177.1 6.33% $2,713.9 $173.8 6.40% $2,617.3 $159.7 6.10%
Loans held-for-sale..... 126.1 9.4 7.45 91.0 7.3 8.03 104.8 7.8 7.44
Loans, net of unearned
income................. 6,312.3 523.8 8.30 5,804.7 513.1 8.84 5,291.2 437.4 8.27
Other earning assets.... 260.7 13.8 5.31 354.3 21.1 5.95 603.3 25.0 4.16
-------- ------ -------- ------ -------- ------
Earning assets.......... $9,498.1 724.1 7.62 $8,963.9 715.3 7.98 $8,616.6 629.9 7.31
======== ------ ======== ------ ======== ------
Interest bearing liabil-
ities.................. $7,069.6 315.3 4.46 $6,758.0 314.5 4.65 $6,518.6 241.1 3.70
Net interest spread(2).. 3.16 3.33 3.61
Interest free sources
utilized to fund earn-
ing assets............. 2,428.5 2,205.9 2,098.0
-------- ------ -------- ------ -------- ------
Total sources of funds.. $9,498.1 315.3 3.32 $8,963.9 314.5 3.51 $8,616.6 241.1 2.80
======== ------ ======== ------ ======== ------
Net interest income..... $408.8 $400.8 $388.8
====== ====== ======
Net interest margin(3).. 4.30% 4.47% 4.51%
==== ==== ====
</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.
Net interest income on a fully tax equivalent basis for the year ended
December 31, 1996 of $408.8 million increased $8.0 million (2.0%) when
compared to net interest income of $400.8 million for the year ended December
31, 1995. The following significant items had a positive impact on net
interest income: a $222.6 million increase in net free funds, $11.6 million;
the Corporation's cobranded bankcard program, $9.5 million; the 1st Washington
acquisition, $9.1 million; and other rate/volume changes, $4.5 million. The
following items had a negative impact on net interest income: the
securitization and sale of an additional $335 million in bankcard loans in
April 1996, $20.8 million (the revenues associated with these loans were
reported in noninterest income as servicing income) and the effects of a
reduction in market interest rates and competitive factors on the
Corporation's loan and deposit yields, $5.9 million.
The net interest margin for the year ended December 31, 1996 was 4.30%,
compared to 4.47% for the year ended December 31, 1995. The following
significant items had a negative impact on the net interest margin: the
securitization and sale of an additional $335 million in bankcard loans, 12
basis points; the effects of the reduction in market interest rates and
competitive factors on the Corporation's loan and deposit yields, 7 basis
points; the 1st Washington acquisition, 4 basis points; the Corporation's
cobranded bankcard program, 3 basis points; and other rate/volume changes, 3
basis points. These declines were partially offset by a 12 basis point
positive impact from the increase in net free funds.
12
<PAGE>
Net interest income on a fully tax equivalent basis for the year ended
December 31, 1995 of $400.8 million increased $12.0 million (3.1%) when
compared to net interest income of $388.8 million for the year ended December
31, 1994. The following significant items had a positive impact on net
interest income: a $347.3 million increase in earning assets, $15.7 million
and higher asset yields due to a more favorable earning asset mix, $5.6
million. The following significant items had a negative impact on net interest
income: an increased reliance on wholesale funding sources during 1995, $3.5
million; amortization expense for deferred losses on the early termination of
interest rate swaps sold in December 1994, $3.4 million; and other rate/volume
changes, $2.4 million.
The net interest margin for the year ended December 31, 1995 was 4.47%,
compared to 4.51% for the year ended December 31, 1994. This decline in the
net interest margin is primarily due to a decrease in the interest rate spread
between earning assets and funding costs of 28 basis points. The interest rate
spread declined primarily as a result of the increased reliance on wholesale
funding sources during 1995. This decrease was partially offset by the effects
of a $107.9 million increase in net free funds.
NET INTEREST INCOME ANALYSIS
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
1996 OVER 1995 1995 OVER 1994
-------------------------------- --------------------------------
DUE TO CHANGES IN(1) DUE TO CHANGES IN(1)
INCREASE --------------------- INCREASE ---------------------
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------- --------------------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income From
Earning Assets:
Interest and fees on
loans:
Domestic loans........ $ 6,943 $ 39,086 $ (32,143) $69,025 $ 40,586 $ 28,439
Foreign loans......... 3,698 3,949 (251) 6,715 3,187 3,528
Interest and dividends
on investment
securities............ 3,320 5,407 (2,087) 14,154 7,229 6,925
Interest and fees on
loans held-for-sale... 2,086 2,647 (561) (495) (1,081) 586
Interest on Federal
funds sold and
securities purchased
under resale
agreements............ (4,758) (3,045) (1,713) (4,122) (11,886) 7,764
Interest on deposits in
other banks........... (1,709) (1,511) (198) 1,175 753 422
Interest on trading
account securities.... (766) (668) (98) (1,040) (1,499) 459
-------- --------- ---------- ------- ---------- ---------
Total................ 8,814 41,546 (32,732) 85,412 26,094 59,318
-------- --------- ---------- ------- ---------- ---------
Interest Expense on De-
posits and Borrowed
Funds:
Interest on deposits in
domestic offices...... 1,232 6,388 (5,156) 33,844 1,559 32,285
Interest on deposits in
foreign banking
office................ (1,629) (898) (731) 2,531 1,905 626
Interest on Federal
funds purchased and
other short-term
borrowings............ (10,430) (2,431) (7,999) 32,752 3,608 29,144
Interest on long-term
debt.................. 11,597 15,222 (3,625) 4,322 5,983 (1,661)
-------- --------- ---------- ------- ---------- ---------
Total................ 770 14,185 (13,415) 73,449 9,140 64,309
-------- --------- ---------- ------- ---------- ---------
Net interest income.. $ 8,044 $ 23,338 $ (15,294) $11,963 $ 15,551 $ (3,588)
======== ========= ========== ======= ========== =========
</TABLE>
- --------
(1) The rate/volume change is allocated between volume change and rate change
using the ratio each of the components bears to the absolute value of
their total. Variances are computed on a line-by-line basis and are non-
additive.
13
<PAGE>
Fully tax-equivalent net interest income is affected by changes in the mix
and volume of earning assets and interest bearing liabilities, market interest
rates, the volume of noninterest bearing liabilities available to support
earning assets, and the statutory Federal income tax rate. As the table on the
preceding page indicates, net interest income on a tax equivalent basis
increased $8.0 million (2.0%) when the year ended December 31, 1996 is
compared to the year ended December 31, 1995. The $23.3 million positive
volume variance primarily resulted from a higher volume of earning assets due
to a significant increase in average loans during 1996. This increase was
partially offset by higher funding volumes due to an increase in the issuance
of bank notes during 1996. The $15.3 million negative rate variance resulted
from lower yields on earning assets due to the effects of a reduction in
market interest rates during 1996. This negative rate variance impact was
partially offset by lower funding costs in 1996.
Net interest income on a tax equivalent basis increased $12.0 million (3.1%)
when the year ended December 31, 1995 is compared to the year ended December
31, 1994. The $15.6 million positive volume variance primarily resulted from a
higher volume of earning assets. A more favorable asset mix resulted from a
shift from lower yielding money market investments and investment securities
to higher yielding loans. The $3.6 million negative rate variance resulted
from higher funding costs due to an increased reliance on wholesale funding
sources throughout 1995. This increase in funding costs was partially offset
by an increase in earning asset yields due to the more favorable asset mix
noted above.
14
<PAGE>
The following table provides additional information on the Corporation's
average balances, interest yields and rates, and net interest margin for the
years ended December 31, 1996, 1995 and 1994.
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST(1) RATE(1) BALANCE INTEREST(1) RATE(1) BALANCE INTEREST(1) RATE(1)
--------- ----------- ------- -------- ----------- ------- -------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks.................. $ 647.4 $ -- -- % $ 587.6 $ -- -- % $ 591.0 $ -- -- %
Money market invest-
ments:
Interest bearing
deposits in other
banks................. 3.7 0.2 5.46 30.9 1.9 6.17 17.2 0.7 4.26
Trading account
securities............ 1.7 0.1 5.85 12.9 0.9 6.70 37.1 1.9 5.10
Funds sold............. 255.3 13.5 5.31 310.5 18.3 5.90 549.0 22.4 4.09
Investment securities
available-for-sale(5):
Taxable................ 2,665.1 166.1 6.23 1,144.5 70.4 6.15 914.6 47.7 5.21
Tax exempt(1).......... 92.4 9.3 10.09 156.3 19.3 12.35 196.6 23.4 11.89
Equity investments..... 41.5 1.7 4.06 31.3 1.2 3.92 19.7 1.1 5.79
--------- ------ ----- -------- ------ ----- -------- ------ -----
Total investment
securities available-
for-sale.............. 2,799.0 177.1 6.33 1,332.1 90.9 6.83 1,130.9 72.2 6.39
Investment securities
held-to-maturity:
Taxable................ -- -- -- 1,381.8 82.9 6.00 1,486.4 87.5 5.89
Loans held-for-sale..... 126.1 9.4 7.45 91.0 7.3 8.03 104.8 7.8 7.44
Loans (net of unearned
income)(1, 2):
Commercial............. 1,788.3 137.3 7.68 1,740.7 144.4 8.29 1,632.9 124.6 7.63
Real estate,
construction.......... 291.8 25.6 8.77 279.5 25.7 9.20 263.2 20.1 7.63
Real estate, mortgage:
Residential............ 725.4 53.1 7.31 641.6 46.8 7.29 552.8 37.3 6.74
Commercial............. 1,028.7 92.1 8.96 983.4 85.7 8.72 969.9 78.4 8.08
Retail................. 1,244.8 104.5 8.39 1,031.4 89.3 8.66 909.7 73.5 8.08
Bankcard............... 513.4 64.4 12.54 534.7 81.6 15.27 482.0 74.3 15.40
Leases receivable...... 367.2 20.3 5.54 293.3 16.8 5.72 226.6 13.2 5.82
Foreign................ 352.7 26.5 7.50 300.1 22.8 7.58 254.1 16.0 6.32
--------- ------ ----- -------- ------ ----- -------- ------ -----
Total loans............ 6,312.3 523.8 8.30 5,804.7 513.1 8.84 5,291.2 437.4 8.27
Allowance for credit
losses................. (168.6) -- -- (185.4) -- -- (197.6) -- --
--------- -------- --------
Total loans, net....... 6,143.7 -- -- 5,619.3 -- -- 5,093.6 -- --
Other assets............ 500.2 -- -- 423.4 -- -- 401.4 -- --
--------- ------ -------- ------ -------- ------
Total assets/interest
income................ $10,477.1 $724.1 $9,789.5 $715.3 $9,411.4 $629.9
========= ====== ======== ====== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits in domestic of-
fices:
Noninterest bearing
demand................ $ 1,946.6 $ -- -- % $1,760.4 $ -- -- % $1,730.1 $ -- -- %
--------- -------- --------
Interest bearing
demand................ 116.6 2.9 2.49 523.4 12.2 2.33 548.9 12.7 2.31
Money market accounts.. 1,593.3 47.9 3.00 1,146.5 40.3 3.52 1,312.3 39.2 2.99
Savings................ 1,048.4 27.2 2.60 1,048.1 28.4 2.71 1,144.4 31.2 2.73
Other consumer time.... 1,676.9 88.8 5.30 1,532.0 80.7 5.27 1,410.7 59.2 4.19
Large denomination
time.................. 560.6 31.4 5.59 586.6 35.3 6.01 374.9 20.8 5.55
Deposits in foreign
banking office......... 131.1 7.0 5.36 147.1 8.7 5.88 114.0 6.1 5.37
--------- ------ ----- -------- ------ ----- -------- ------ -----
Total interest bearing
deposits.............. 5,126.9 205.2 4.00 4,983.7 205.6 4.12 4,905.2 169.2 3.45
--------- ------ -------- ------ -------- ------
Total deposits......... 7,073.5 -- -- 6,744.1 -- -- 6,635.3 -- --
Funds purchased......... 763.5 39.7 5.20 749.0 42.3 5.65 643.4 25.1 3.90
Other borrowed funds,
short-term............. 698.2 36.7 5.26 755.8 44.5 5.90 772.0 29.0 3.76
Other liabilities....... 249.1 -- -- 161.3 -- -- 161.2 -- --
Long-term debt.......... 481.0 33.7 7.01 269.5 22.1 8.21 198.0 17.8 8.99
Guaranteed preferred
beneficial interests in
junior subordinated de-
bentures............... 0.8 -- -- -- -- -- -- -- --
Redeemable preferred
stock.................. 3.8 -- -- -- -- -- -- -- --
Stockholders' equity.... 1,207.2 -- -- 1,109.8 -- -- 1,001.5 -- --
--------- ------ -------- ------ -------- ------
Total liabilities,
guaranteed preferred
beneficial interests
in junior
subordinated
debentures,
redeemable preferred
stock and
stockholders'
equity/interest
expense.............. $10,477.1 $315.3 $9,789.5 $314.5 $9,411.4 $241.1
========= ====== ======== ====== ======== ======
Earning assets/interest
income................. $ 9,498.1 $724.1 7.62% $8,963.9 $715.3 7.98% $8,616.6 $629.9 7.31%
Interest bearing
liabilities/interest
expense................ 7,069.6 315.3 4.46 6,758.0 314.5 4.65 6,518.6 241.1 3.70
Earning assets/interest
expense................ 9,498.1 315.3 3.32 8,963.9 314.5 3.51 8,616.6 241.1 2.80
Net interest income, tax
equivalent basis....... 408.8 400.8 388.8
Net interest spread(3).. 3.16% 3.33% 3.61%
===== ===== =====
Net interest margin(4).. 4.30% 4.47% 4.51%
===== ===== =====
</TABLE>
15
<PAGE>
- --------
(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) Nonaccrual loans are included under the appropriate loan categories as
earning assets.
(3) Net interest spread is the difference between the yield on average earning
assets and the rate paid on average interest bearing liabilities.
(4) Net interest margin is the ratio of net interest income on a fully tax-
equivalent basis to average earning assets.
(5) Yields on investment securities available-for-sale are calculated based
upon average amortized cost.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $6.5 million for the year ended December
31, 1996, a decrease of $9.5 million (59.4%) from the $16.0 million provision
for 1995. The primary reason for this decline was the securitization and sale
of an additional $335 million in bankcard loans in 1996 which resulted in a
reduction in the level of bankcard loans without a corresponding reduction in
the allowance for credit losses. Approximately $17 million of the allowance
for credit losses was reallocated from the bankcard loans sold to the
remaining unsecuritized bankcard loan portfolio in light of increasing
delinquency and charge-off trends. In addition, reserves allocated to the
commercial and commercial real estate portfolios were reduced as a result of
improved credit quality.
The provision for credit losses was $16.0 million for the year ended
December 31, 1995, down $7.0 million (30.4%) from the $23.0 million provision
for 1994. Provisions for bankcard loans were increased in 1995 to allow for
portfolio growth that occurred in 1995. This increase was more than offset by
reduced reserves allocated to the commercial and commercial real estate
portfolios prompted by improved credit quality.
NONINTEREST INCOME
The following table presents the components of noninterest income for the
years ended December 31, 1996, 1995 and 1994, and a year-to-year comparison
expressed in terms of percent changes.
NONINTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
-------------------------- -------------------
1996 1995 1994 1996/1995 1995/1994
-------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit ac-
counts........................ $ 80,659 $ 71,852 $ 72,300 12.3% (0.6)%
Mortgage banking income........ 29,966 16,216 16,426 84.8 (1.3)
Trust and investment advisory
fees.......................... 28,658 22,228 19,513 28.9 13.9
Servicing income............... 26,126 22,564 18,750 15.8 20.3
Credit card income............. 9,949 17,352 17,062 (42.7) 1.7
Securities gains, net.......... 103 2,136 15,616 (95.2) (86.3)
Other income:
Customer service fees........ 8,303 7,716 8,577 7.6 (10.0)
Security sales and fees...... 5,171 3,918 4,185 32.0 (6.4)
Trading income............... 4,941 5,061 5,386 (2.4) (6.0)
Other........................ 23,016 26,867 33,163 (14.3) (19.0)
-------- -------- -------- ----- -----
Total other income............. 41,431 43,562 51,311 (4.9) (15.1)
-------- -------- -------- ----- -----
Total noninterest income... $216,892 $195,910 $210,978 10.7% (7.1)%
======== ======== ======== ===== =====
</TABLE>
The Corporation's noninterest income for the year ended December 31, 1996
was $216.9 million, a $21.0 million (10.7%) increase over noninterest income
for the year ended December 31, 1995. Service charges on deposits increased
$8.8 million (12.3%) primarily due to increases in business checking and
retail deposit service charges. Mortgage banking income increased $13.8
million (84.8%) as a result of a $15.1 million increase in gains on the sale
of servicing, including $9.4 million in bulk servicing gains during 1996.
These bulk servicing
16
<PAGE>
gains resulted from the Corporation's decision to exit the mortgage servicing
business which was announced in the first quarter of 1996. The Corporation
entered into a subservicing agreement to service the remainder of its mortgage
servicing portfolio and to provide interim servicing for future loan
originations until the originated mortgage servicing is sold. Origination fees
and document review fees increased $1.8 million due to an increase in the
amount of loans closed in 1996. Other mortgage banking income increased $1.8
million. These increases were partially offset by a $4.9 million decline in
net capitalized mortgage servicing rights income. Trust and investment
advisory fees increased $6.4 million (28.9%) due to increases in custody fees
and investment management and advisory fees. The acquisition of Zirkin-Cutler
resulted in $1.4 million in investment advisory fees in 1996. Servicing income
increased $3.6 million (15.8%) primarily as a result of an increase of $2.8
million in servicing income from securitized bankcard loans primarily due to
the securitization and sale of an additional $335 million in bankcard loans in
April 1996. In addition, favorable loss experience on securitized manufactured
housing loans offset declines in the securitized asset yields resulting in a
net increase in servicing income. Credit card income decreased $7.4 million
(42.7%) primarily due to the securitization and sale of an additional $335
million in bankcard loans which shifted $5.2 million in credit card fee income
to servicing income. In addition, bankcard loans related to the Bell Atlantic
cobranding increased $283.7 million. The rewards paid to customers on these
cobranded bankcard loans were accounted for as a reduction of the underlying
fee income generated on these bankcard loans. Securities gains of $103
thousand were realized in 1996 compared to $2.1 million in 1995. Securities
sales are discussed in detail under "Investment Portfolio". Other income
decreased $3.9 million (14.3%) primarily due to other income recorded in 1995
which included $2.1 million in gains on the payoff of loans which were valued
at a discount when a banking subsidiary was acquired, $1.1 million in
miscellaneous income from an other real estate owned property and $1.1 million
in gains on the sale of other real estate owned.
The Corporation's noninterest income for the year ended December 31, 1995
was $195.9 million, a $15.1 million (7.1%) decrease over noninterest income
for the year ended December 31, 1994. Mortgage banking income decreased $210
thousand (1.3%) in 1995. A $6.6 million decrease in gains on the sale of
servicing was partially offset by $4.9 million in net capitalized originated
mortgage servicing income resulting from the adoption of SFAS No. 122,
"Accounting for Mortgage Servicing Rights" in the second quarter of 1995 and a
$1.3 million increase in mortgage placement fees. Trust and investment
advisory fees increased $2.7 million (13.9%) driven primarily by increases in
fees for custody services and mutual fund management. Servicing income
increased $3.8 million (20.3%). Favorable loss experience on securitized
assets offset declines in securitized asset yields in 1995 resulting in a net
increase in servicing income. Securities gains of $2.1 million were realized
in 1995 compared to $15.6 million in 1994. Securities sales are discussed in
detail under "Investment Portfolio". Customer service fees decreased $861
thousand (10.0%) primarily due to a decline in appraisal fees for first and
second mortgages. Other income decreased $6.3 million (19.0%). Other income in
1995 included $2.1 million in gains on the payoff of loans which were valued
at a discount when a banking subsidiary was acquired and $1.1 million in
miscellaneous income from an OREO property. Other income in 1994 included a
$6.7 million gain on the sale of six branches at a banking subsidiary of the
Corporation and $3.0 million in gains on the payoff of loans which were valued
at a discount when a banking subsidiary was acquired.
17
<PAGE>
NONINTEREST EXPENSES
The following table presents the components of noninterest expenses for the
years ended December 31, 1996, 1995 and 1994 and a year to year comparison
expressed in terms of percent changes.
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
-------------------------- -------------------
1996 1995 1994 1996/1995 1995/1994
-------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and wages.......... $181,842 $172,196 $165,834 5.6% 3.8%
Other personnel costs....... 44,791 39,655 42,594 13.0 (6.9)
Occupancy costs............. 32,899 32,188 32,565 2.2 (1.2)
Equipment costs............. 32,019 30,117 29,586 6.3 1.8
Other operating expenses:
External services......... 26,247 21,205 16,512 23.8 28.4
Postage and
communications........... 17,059 14,997 13,661 13.7 9.8
Advertising............... 15,940 16,299 15,967 (2.2) 2.1
Professional service
fees..................... 10,149 8,674 16,379 17.0 (47.0)
Lending and collection.... 6,657 6,225 9,319 6.9 (33.2)
Regulatory insurance and
fees..................... 3,519 9,031 16,155 (61.0) (44.1)
Other..................... 35,794 38,137 37,629 (6.1) 1.4
-------- -------- -------- ----- -----
Total other operating
expenses................... 115,365 114,568 125,622 0.7 (8.8)
-------- -------- -------- ----- -----
Total noninterest
expenses............... $406,916 $388,724 $396,201 4.7% (1.9)%
======== ======== ======== ===== =====
</TABLE>
The Corporation's noninterest expenses for the year ended December 31, 1996
were $406.9 million, an $18.2 million (4.7%) increase over noninterest
expenses for the year ended December 31, 1995. Salaries and wages increased
$9.6 million (5.6%). The 1st Washington acquisition resulted in approximately
$3.8 million in additional salaries and incentives. In addition, base salaries
and wages increased $3.6 million. Overtime and temporary help expenses
increased $1.2 million due to increased loan volume and retail lending.
Severance expenses increased $1.0 million. Other personnel costs increased
$5.1 million (13.0%). Pension costs increased $3.3 million primarily due to
executive retirements in 1996 which resulted in $2.0 million in pension
settlements. In addition, higher pension costs resulted from a decrease in
discount rate assumptions. Payroll taxes increased $1.0 million and employee
relocation and recruiting expenses increased $788 thousand. Equipment costs
increased $1.9 million (6.3%) due to higher maintenance and depreciation
expenses in 1996 resulting from branch automation and renovations. External
services increased $5.0 million (23.8%) primarily as a result of higher
servicing costs associated with growth in the bankcard loan portfolio and
outsourced processing associated with a government automated tax payment
program. Postage and communications increased $2.1 million (13.7%) primarily
due to higher communications expense in 1996. Professional service fees
increased $1.5 million (17.0%) due to higher consulting fees, contract
programming fees and legal fees. Regulatory insurance and fees decreased $5.5
million (61.0%) as a result of a reduction in the FDIC assessment rate
partially offset by a $1.2 million Savings Association Insurance Fund special
assessment on the Corporation's Oakar deposits.
The Corporation's noninterest expenses for the year ended December 31, 1995
were $388.7 million, a $7.5 million (1.9%) decrease over noninterest expenses
for the year ended December 31, 1994. Salaries and wages increased $6.4
million (3.8%). Base salaries and wages increased $2.8 million (1.9%).
Incentives and commissions increased $11.2 million due to improved overall
financial performance in 1995. Offsetting higher incentives and commissions
was a $7.6 million decrease in severance expense in the current year. Other
personnel costs decreased $2.9 million (6.9%). Pension costs decreased $5.3
million due to executive retirements in 1994 which resulted in $4.4 million in
pension settlements in 1994 and lower pension costs in 1995. Offsetting the
decrease in pension costs was a $2.9 million increase in medical costs.
External services increased $4.7 million (28.4%) primarily due to higher
bankcard processing costs and costs associated with cash management
18
<PAGE>
services. Postage and communication expense increased $1.3 million (9.8%)
primarily due to higher telephone expense. Regulatory fees and insurance
decreased $7.1 million (44.1%) due to reductions in the FDIC assessment rate.
Professional service fees decreased $7.7 million (47.0%) primarily due to
nonrecurring consulting expenses incurred in 1994 related to a corporate
reengineering project. Lower legal fees for collection services, a decline in
appraisal fees and lower loan servicing expense in 1995 resulted in a $3.1
million (33.2%) decrease in lending and collection expenses.
INCOME TAXES
The Corporation's effective tax rate on earnings in 1996 was 36.1%, compared
to 34.7% in 1995 and 34.8% in 1994. Additional information related to income
taxation is presented in Note 18 of the Notes to Consolidated Financial
Statements of the Corporation.
QUARTERLY SUMMARY
The following table presents a summary of earnings by quarter for the years
ended December 31, 1996 and 1995:
SUMMARY OF QUARTERLY EARNINGS
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income........ $182,966 $172,204 $178,489 $185,370
Net interest income................. 99,874 96,621 101,966 105,250
Provision for credit losses......... 4,000 -- 2,000 500
Income before income taxes.......... 46,175 50,515 54,327 56,170
Net income.......................... 30,069 32,534 33,702 36,032
<CAPTION>
1995 QUARTERS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income........ $167,166 $175,889 $177,940 $186,546
Net interest income................. 97,621 97,459 98,074 99,839
Provision for credit losses......... 4,000 3,961 2,373 5,666
Income before income taxes.......... 43,795 44,847 47,595 47,942
Net income.......................... 28,536 29,131 31,032 31,488
</TABLE>
LIQUIDITY
Liquidity is the ability of the Corporation to meet a demand for funds, such
as deposit outflows, new loan requests and other corporate funding
requirements. Liquidity can be obtained either through the maturity or sale of
assets or the issuance of liabilities at acceptable costs within an acceptable
period of time.
The liquidity of the Corporation is enhanced by asset and liability
management policies. The Asset and Liability Committee (ALCO) is responsible
for setting general guidelines regarding the Corporation's sources and uses of
funds and asset and liability sensitivity, pursuant to the Corporation's Funds
Management Policy approved by the Board of Directors. The Committee's goals
foster the stable generation of increased net interest income without
sacrificing credit quality, jeopardizing capital or adversely impacting
liquidity. The Corporation maintains a level of asset and liability liquidity
based on an internal assessment of its ability to meet obligations under both
normal and adverse conditions. The Corporation's current policy sets a minimum
ratio of liquid assets to total assets of 22%.
19
<PAGE>
The ratio of liquid assets to total assets at December 31, 1996 was 24.3%
compared to 26.9% at December 31, 1995. Liquid assets are defined as vault
cash, balances with the Federal Reserve Banks of Richmond and Philadelphia,
unencumbered investment securities, assets available as collateral for
immediate borrowing from the Federal Reserve Banks of Richmond and
Philadelphia and money market assets. Additionally, the Corporation measures
liquidity by calculating the ratio of its liquid assets to credit sensitive
liabilities. Credit sensitive liabilities are defined as wholesale liabilities
where the credit rating of the Corporation would have a significant impact on
the Corporation's ability to roll over maturing liabilities. At December 31,
1996, the ratio of liquid assets to credit sensitive liabilities was 192.7%
compared to 162.9% at December 31, 1995.
The Corporation, on a parent company basis, held liquid assets in excess of
short-term liabilities totaling approximately $375 million at December 31,
1996. It is the intention of management to use these assets as a source of
funding for the acquisition of Dauphin Deposit Corporation. As a result,
dividends from subsidiaries will be the primary source of funds for the debt
service and preferred stock dividend requirements of the Corporation
subsequent to the acquisition. Management is confident that the earnings and
dividend capacity of its subsidiary banks will be adequate to service interest
obligations on existing and new long-term debt and any preferred stock
dividend requirements of the Corporation.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is a process that involves the development
and implementation of strategies to maximize net interest margin while
minimizing the earnings risk associated with changing interest rates. ALCO has
responsibility for the overall management of the Corporation's asset and
liability position, pursuant to the Corporation's Funds Management Policy
approved by the Board of Directors. The Committee manages the Corporation's
asset and liability position within the constraints of maintaining capital
adequacy, liquidity and safety.
Management of the interest rate risk of the Corporation is effected through
adjustments to the size and duration of the available-for-sale investment
portfolio, the duration of purchased funds and other borrowings, and through
the use of off-balance sheet financial instruments such as interest rate
swaps, interest rate caps and floors, financial futures, and options. The use
of off-balance sheet financial instruments augments the Corporation's
management of interest rate risk, liquidity risk, basis risk, and also assists
customers in the management of their exposures. Additional information related
to asset/liability management instruments is presented in Note 22 of the Notes
to Consolidated Financial Statements of the Corporation.
Measurement of the Corporation's sensitivity to changing interest rates is
accomplished primarily through a simulation model. The Corporation identifies
its tolerance for interest rate risk in terms of a probable maximum loss
("PML"). The essence of the PML approach is to calculate the potential
financial impact of probability-derived, worst case interest rate changes.
Measuring risk and establishing the possible worst case is a statistical
technique. The statistical concept used to measure volatility and risk is the
standard deviation of interest rate or price movements. The greater the
standard deviation, the higher the measured risk. The standard deviation is
determined by observing historical price/rate movements. The PML approach
assumes that the pattern of current and future interest rate or price
movements will be similar to those experienced in the past. Market
volatilities are raised to 2.33 standard deviations of risk to obtain probable
maximum changes in interest rates given a 99% degree of certainty over a one
month period. These changes in interest rates for each point on the yield
curve are input into the Corporation's simulation model to determine the PML.
Sensitivity to rate risk is measured from an economic perspective (equity at
risk) and an income perspective (earnings at risk).
Equity At Risk
Equity at risk measures changes in the value of the balance sheet as a
result of an adverse and sustained movement in interest rates. The fundamental
premises of the technique are threefold: that the value of a fixed rate asset
or liability will vary with a change in interest rates; that the value of a
long-term obligation will vary
20
<PAGE>
more than the value of a short-term obligation for the same change in rates;
and that floating rate assets and liabilities do not reprice in tandem or
immediately upon a change in market rates. In the equity at risk simulation,
all interest earning assets and interest bearing liabilities are marked to
market (regardless of accounting treatment), the present value of all balance
sheet items are determined, and a simulated balance sheet is constructed. The
Corporation is currently in compliance with its policy, which authorizes a PML
of equity arising from an adverse shift in rates of no more than $40 million
or approximately 3% of stockholders' equity.
Earnings At Risk
The PML impact on income is known as earnings at risk. Earnings at risk is
expressed in terms of a percentage of budgeted pre-tax profits. The earnings
impact of various interest rate scenarios is measured over multiple time
horizons. The results are then compared to current earnings projections to
detect changes due to rising or falling rates. The income change over a
rolling one year time frame is the earnings impact. The same interest rate
shock methodology used to calculate the change in the value of equity is used
to calculate the PML of earnings in any one given year under the Corporation's
current policy. The Corporation is currently in compliance with its policy,
which authorizes a PML of income arising from an adverse shift in rates of no
more than 10% of budgeted pre-tax income for the current calendar year.
INVESTMENT PORTFOLIO
Investment securities are held in one of two separate portfolios. If and
when the Corporation intends to hold a security for an indefinite time period,
or intends to use a security to manage the interest rate risk or liquidity of
the balance sheet, those securities will be held in the available-for-sale
("AFS") portfolio. The AFS portfolio is marked-to-market on a monthly basis.
Changes in the fair value of the AFS portfolio are excluded from earnings and
reported as a separate component of equity, net of income taxes. Investment
securities purchased for very short time horizons with the intent to benefit
from changes in market rate or price are held in the trading account. This
portfolio is carried at fair value and changes in the fair value of the
trading account are recorded in the income statement. At December 31, 1996,
there were no investment securities held in the trading portfolio.
The securities of no single issuer other than those of the U.S. Government
and related government agencies exceeded 10% of stockholders' equity at
December 31, 1996. All of the obligations of states and political subdivisions
("Municipals") are rated A or higher by Moody's Investors Service, Inc. and
approximately 74% are rated AAA. Investment securities classified as other
securities are generally unrated.
At December 31, 1996, the book value of the investment portfolio was $2.6
billion compared with $2.8 billion at December 31, 1995, a $241.4 million
(8.6%) decrease. The size of the portfolio decreased from 26.7% of total
assets at December 31, 1995 to 23.7% at December 31, 1996. U.S. Treasury and
U.S. Government Agency securities ("U.S. Treasury and Agencies") decreased
$289.3 million (32.1%). Mortgage-backed obligations of federal agencies and
government-sponsored agencies ("MBSs") decreased $85.7 million (6.9%).
Collateralized mortgage obligations ("CMOs") decreased $43.6 million (10.6%).
Municipals decreased $6.0 million (5.7%) and other securities decreased $10.4
million (8.8%). These decreases were partially offset by a $193.6 million
increase in asset-backed securities during 1996.
Available-for-Sale Investment Portfolio
The AFS portfolio is managed from an interest income and a total return
perspective. As such, securities will often be sold out of the AFS portfolio
when management deems that a greater return can be earned in another type of
security (including cash) or that the interest rate risk in the balance sheet
is not appropriate for the prevailing micro and macro-economic climate.
The AFS investment portfolio is primarily comprised of five basic types of
securities: U.S. Treasury and Agencies, MBSs, CMOs, asset-backed securities
and Municipals. The book value of other investment securities accounted for
only 4.2% of the book value of the total portfolio at December 31, 1996.
21
<PAGE>
The following table sets forth the book value (fair value) of the available-
for-sale securities owned by the Corporation.
AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury & U.S. Government Agencies..... $ 611,061 $ 900,347 $ 48,716
Mortgage-backed obligations.................. 1,159,649 1,245,339 723,752
Collateralized mortgage obligations(1)....... 368,656 412,289 15,871
Asset-backed securities...................... 206,422 12,868 --
Obligations of states and political subdivi-
sions....................................... 98,889 104,886 195,791
Other investment securities.................. 107,943 118,294 67,184
---------- ---------- ----------
Total...................................... $2,552,620 $2,794,023 $1,051,314
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1996, 1995 and 1994, $348.4 million, $382.6 million and
$14.5 million of CMOs, respectively, were issues of the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association.
At December 31, 1996, the fair value of the Corporation's AFS investment
portfolio was approximately $14.0 million above the amortized cost of the
portfolio. Gross unrealized gains on AFS debt securities were $21.5 million
and gross unrealized losses were $17.2 million at year end. More specifically,
the net unrealized gain at December 31, 1996 on CMOs was $2.7 million, on
asset-backed securities, $1.8 million and on Municipals, $4.9 million. The net
unrealized loss at December 31, 1996 on U.S. Treasury and Agencies was $3.8
million and on MBSs, $1.7 million. Gross unrealized gains on other debt
securities were $455 thousand. The net unrealized gain on other equity
securities was $9.7 million at December 31, 1996. On December 31, 1995, the
Corporation's AFS portfolio had a fair value of $39.6 million above its
amortized cost.
The following table shows the maturity distribution of the available-for-
sale investment portfolio of the Corporation at December 31, 1996 based upon
amortized cost.
MATURITY OF AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
MATURING
------------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTALS
----------- ---------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S.
Government Agencies.... $ 21,457 $ 522,939 $ 34,165 $ 36,282 $ 614,843
Mortgage-backed obliga-
tions(1)............... 148,203 526,517 351,007 135,642 1,161,369
Collateralized mortgage
obligations(1)......... 157,315 185,544 21,548 1,577 365,984
Asset-backed securi-
ties(1)................ 90,475 113,086 1,096 -- 204,657
Obligations of states
and political
subdivisions........... 9,142 32,510 12,926 39,409 93,987
Other investment securi-
ties................... 92,722 1,000 1,000 3,035 97,757
-------- ---------- -------- -------- ----------
Total................. $519,314 $1,381,596 $421,742 $215,945 $2,538,597
======== ========== ======== ======== ==========
</TABLE>
- --------
(1) The maturity distribution is based upon long-term cash flow estimates for
each security type and coupon rate.
22
<PAGE>
The following table reflects the approximate weighted average tax equivalent
yield (at an assumed Federal tax rate of 35%) of the available-for-sale
investment portfolio at December 31, 1996 based upon amortized cost.
AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
(Tax Equivalent Yields)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
MATURING
----------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTALS
----------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S. Govern-
ment Agencies................ 6.27% 5.70% 6.17% 7.06% 5.83%
Mortgage-backed obliga-
tions(1)..................... 7.06 6.92 6.97 6.99 6.96
Collateralized mortgage obli-
gations(1)................... 6.54 6.53 6.49 6.41 6.53
Asset-backed securities....... 6.84 6.84 6.84 -- 6.84
Obligations of states and po-
litical subdivisions......... 10.47 11.16 10.70 8.11 9.75
Other investment securities... 4.99 10.63 7.35 7.38 5.15
----- ----- ----- ---- ----
Total....................... 6.52% 6.50% 7.00% 7.21% 6.65%
===== ===== ===== ==== ====
</TABLE>
- --------
(1) Computation of weighted average tax equivalent yields includes $289.9
million of floating rate MBSs and $27.2 million of floating rate CMOs.
Held-to-Maturity Investment Portfolio
On December 8, 1995, the Corporation transferred the entire balance of the
HTM portfolio to the AFS portfolio. The following table sets forth the book
value (amortized cost) of the held-to-maturity securities owned by the
Corporation at December 31, 1994.
HELD-TO-MATURITY INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
U.S. Treasury and U.S. Government Agencies....................... $ 793,517
Mortgage-backed obligations...................................... 160,319
Collateralized mortgage obligations(1)........................... 383,426
Other investment securities...................................... 1,005
----------
Total.......................................................... $1,338,267
==========
</TABLE>
- --------
(1) At December 31, 1994, $328.4 million of CMOs were issues of the Federal
Home Loan Mortgage Corporation or the Federal National Mortgage
Association.
Investment Securities Sales
In the AFS portfolio, proceeds from the sale of fixed income investment
securities during 1996 amounted to $1.2 billion resulting in pretax net gains
of $18 thousand. This compares to realized gains of $11 thousand on $867.1
million of sales in 1995 and gains of $11.6 million on $1.3 billion of
security sales in 1994. Proceeds from the sale of equity securities during
1996 totaled $7.1 million resulting in pretax net gains of $85 thousand. This
compares to $2.7 million in proceeds from the sale of equity securities which
resulted in pretax gains of $2.1 million in 1995 and $7.1 million in proceeds
which resulted in pretax gains of $4.0 million in 1994.
In the HTM portfolio, proceeds from the sale of fixed income investment
securities during 1994 amounted to $20.4 million resulting in a pretax net
gain of $28 thousand. The securities were sold as a result of the dissolution
of a nonbanking subsidiary of the Corporation.
23
<PAGE>
CREDIT RISK MANAGEMENT
Credit approval policies for the Corporation are designed to provide an
effective and timely response to loan requests and to ensure the maintenance
of a sound loan portfolio. The Corporation manages credit risk and the credit
approval process by adhering to written policies which generally specify
underwriting standards by industry and in some cases limit credit exposure by
industry, country, or product type. All policies are reviewed and approved
annually by the Board of Directors.
The subsidiary Banks each establish individual loan authorities based upon
the specific responsibilities of their officers. Loan committees approve
credit exposure above individual loan authorities.
The Credit Review function, which reports independently to the Board of
Directors' Loan Portfolio Review Committee, periodically reviews all lending
units throughout the Corporation. It continuously monitors the loan portfolio
to ensure the accuracy of risk ratings, to verify the identification of
problem credits, and to assist the Board of Directors in evaluating the
adequacy of the Allowance for Credit Losses, which the Board of Directors is
required to approve quarterly.
LOAN PORTFOLIO
The following table sets forth the composition of the loan portfolio by type
of loan and the percentage of loans by category.
COMPOSITION OF THE LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $1,731,031 25.5% $1,798,248 29.3% $1,633,275 29.9% $1,626,080 31.3% $1,748,910 33.7%
Real estate, construc-
tion................... 299,925 4.4 290,262 4.7 268,683 4.9 284,008 5.5 327,134 6.3
Real estate, mortgage:
Residential............ 833,045 12.2 650,588 10.6 593,642 10.9 497,543 9.6 382,171 7.4
Commercial............. 1,153,319 17.0 975,474 15.9 978,164 17.9 957,568 18.4 912,085 17.6
Retail.................. 1,380,767 20.3 1,098,955 17.9 984,403 18.0 885,117 17.0 940,728 18.1
Bankcard................ 596,474 8.8 654,653 10.7 496,608 9.1 527,657 10.1 494,851 9.5
Leases receivable....... 438,060 6.4 334,504 5.4 259,633 4.8 211,821 4.1 206,346 4.0
Foreign:
Commercial and
industrial............. 352,924 5.2 323,038 5.3 226,718 4.2 186,492 3.6 151,036 2.9
Banks and financial
institutions.......... -- -- -- -- 120 -- 1,780 -- 30 --
Governments and
official
institutions.......... 12,900 0.2 13,102 0.2 17,645 0.3 19,655 0.4 24,321 0.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of
unearned income........ $6,798,445 100.0% $6,138,824 100.0% $5,458,891 100.0% $5,197,721 100.0% $5,187,612 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
24
<PAGE>
The following table displays the contractual maturities and interest rate
sensitivities of the loans of the Corporation at December 31, 1996. The
Corporation's experience indicates that certain of the loans will be renewed,
rescheduled, or repaid, and that other loans will be charged-off, in each case
prior to scheduled maturity. Accordingly, the table should not be regarded as
a forecast of future cash collections.
CONTRACTUAL LOAN MATURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
MATURING
----------------------------------------------------
AFTER ONE YEAR
THROUGH 5 YEARS AFTER 5 YEARS
--------------------- -------------------
IN ONE FIXED VARIABLE FIXED VARIABLE
YEAR INTEREST INTEREST INTEREST INTEREST
OR LESS(1) RATES RATES(2) RATES RATES(2) TOTAL
---------- ---------- ---------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 684,192 $ 194,226 $ 391,306 $ 25,384 $ 435,923 $1,731,031
Real estate, construc-
tion................... 85,783 42,576 136,650 894 34,022 299,925
Real estate, mortgage:
Residential........... 131,760 97,311 239,795 107,665 256,514 833,045
Commercial............ 191,257 363,503 331,627 87,581 179,351 1,153,319
Retail.................. 286,008 502,311 139,697 232,853 219,898 1,380,767
Bankcard................ 257,845 -- 283,164 -- 55,465 596,474
Leases receivable....... 39,408 327,010 -- 71,642 -- 438,060
Foreign................. 135,145 2,895 188,332 3,800 35,652 365,824
---------- ---------- ---------- -------- ---------- ----------
Total............... $1,811,398 $1,529,832 $1,710,571 $529,819 $1,216,825 $6,798,445
========== ========== ========== ======== ========== ==========
</TABLE>
- --------
(1) Includes demand loans, loans having no stated schedule of repayments or
maturity, and overdrafts.
(2) The variable interest rates generally fluctuate according to a formula
based on various rate indices such as the prime rate and LIBOR.
COMMERCIAL LOANS
Commercial loans comprised 25.5% of the Corporation's total loans and leases
at December 31, 1996, and included short and medium term loans, revolving
credit arrangements, lines of credit, asset based lending and equipment
lending. The commercial loan portfolio is segregated by market sector as well
as geographic regions.
There are three primary market sectors, Corporate Banking, Middle Market and
Small Business. Corporate Banking, which has approximately 50% of total
commercial outstandings, is sub-divided into three primary organizational
components. The National Division calls on large Fortune 500 companies that
usually have a significant presence in the Maryland marketplace. The Regional
Corporate Banking Division services large companies headquartered in Maryland
and contiguous states. In addition to these two major divisions, Corporate
Banking also has several specialized lending functions including
Communications, Healthcare, International, Asset Based Lending, Commercial
Leasing, Transportation and Financial Institutions.
Middle Market lending, which comprises approximately 38% of total commercial
outstandings, serves customers in Maryland and surrounding areas with sales
volumes of $10 to $100 million. Small Business lending, which comprises
approximately 12% of total commercial outstandings, is focused on customers
with sales volumes of less than $10 million. Both the Middle Market and Small
Business lending activities utilize the Corporation's market presence and
branch organization to develop market opportunities.
Commercial lending is primarily done within the Maryland marketplace. The
State of Maryland continued to lag the nation in key economic indicators in
1996. The specialized lending functions, particularly in the Transportation
and Communications sectors, continued to experience strong rates of growth in
1996.
25
<PAGE>
In addition to monitoring exposure based on market segmentation, the
Corporation monitors exposure based on industry classifications and
establishes exposure limits that are reviewed by a committee of the Board of
Directors.
LOAN PORTFOLIO DISTRIBUTION BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
OUTSTANDING UNFUNDED TOTAL NONPERFORMING
BALANCE COMMITMENT EXPOSURE LOANS
----------- ---------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Transportation(1)................. $522,960 $ 43,061 $566,021 $ --
Communications(2)................. 375,758 174,872 550,630 2,309
Healthcare(3)..................... 366,256 100,536 466,792 282
</TABLE>
- --------
(1) Includes loans and leases for vessel, commercial aircraft and railroad
equipment.
(2) Includes exposure to the cable industry, publishing/newspapers, wireless
communications and broadcasting.
(3) Includes exposure to hospitals, nursing care and noninstitutional
borrowers, comprised of both commercial and real estate secured loans.
The Transportation industry exposure is comprised of 46.3% to vessels, 30.2%
to railroad, 15.0% to commercial aircraft and 8.5% to other maritime. Exposure
to the Transportation industry grew 23.4% from December 31, 1995. Loans and
leases in the Transportation portfolio are to borrowers located throughout the
world.
The Healthcare industry exposure is comprised of 52.6% to nursing
homes/assisted living facilities, 27.6% to noninstitutional providers
including private practitioners and 19.8% to hospitals. Exposure to the
Healthcare industry grew 9.5% from December 31, 1995. Consolidation in the
Healthcare industry continues to provide financing opportunities for the
Corporation.
The Communications industry exposure is comprised of 45.1% to the cable
industry, 23.5% to wireless communications, 21.7% to publishing/newspapers and
9.7% to broadcasting. Exposure to the Communications industry grew 14.3% from
December 31, 1995. Loans in the Communications portfolio are to companies and
systems located throughout the United States. Most of the growth in 1996 was
in the cable industry and wireless communications sectors. Lending is
primarily to established companies for the purchase and/or expansion of
existing companies and systems.
COMMERCIAL REAL ESTATE
The Corporation's commercial real estate portfolio represents loans secured
primarily by real property other than 1-4 family residential properties. The
properties financed include both investor and owner-occupied real estate. The
commercial real estate portfolio includes the loan categories presented in the
following table.
COMMERCIAL REAL ESTATE OUTSTANDINGS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate, construction................................ $ 299,925 $ 290,262
Real estate, commercial mortgages........................ 1,153,319 975,474
---------- ----------
Total.................................................. $1,453,244 $1,265,736
========== ==========
</TABLE>
Commercial real estate outstandings of $1.5 billion comprised 21.4% of the
total loan portfolio at December 31, 1996. The 1st Washington acquisition
resulted in an additional $112.9 million in commercial real estate loans
26
<PAGE>
based upon outstandings on the date of acquisition. In addition, there has
been some strengthening of rental rates and property values in the Northern
Virginia market which is still considered one of the top markets across all
property sectors.
The commercial real estate portfolio continues to be well-balanced by
project type. The largest concentration was office buildings at 28.5% of total
commercial real estate outstandings, followed by industrial warehouse at 17.1%
and retail at 16.2%. Property types reflecting the most growth in 1996 were
office, healthcare industry-related properties (including nursing homes),
industrial warehouse, and retail.
LOANS SECURED BY REAL ESTATE AND OTHER ASSETS OWNED BY PROPERTY TYPE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
TOTAL LOANS
-------------------------
OTHER
REAL ESTATE, REAL ESTATE, NONPERFORMING REAL ESTATE
CONSTRUCTION MORTGAGE LOANS OWNED
------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Office buildings.......... $ 87,570 $ 326,572 $ 413 $ --
Industrial warehouse and
other commercial
properties............... 42,121 206,665 5,430 --
Retail.................... 50,934 184,817 2,635 4,103
Hospitals/nursing home
medical centers.......... 17,408 117,535 -- --
Hotels/motels............. -- 58,301 -- --
Commercial land........... 27,984 634 518 4,783
Special purpose........... 6,103 91,352 1,263 --
Apartments................ 30,093 62,563 5,553 --
Mixed use................. -- 47,864 -- --
Residential land.......... 23,991 1,642 -- 1,630
Other land--farm
recreational facilities.. -- 6,968 491 --
Residential properties
held for resale.......... 11,020 1,412 3,496 --
Miscellaneous............. 2,701 46,994 548 --
-------- ---------- ------- -------
Total................... $299,925 $1,153,319 $20,347 $10,516
======== ========== ======= =======
</TABLE>
The commercial real estate portfolio is geographically centered in the
Corporation's regional marketplace, with 68.9% of the portfolio secured by
properties in Maryland, 12.4% in Pennsylvania, 6.6% in Virginia, and 3.9% in
Washington D.C.
LOANS SECURED BY REAL ESTATE AND OTHER ASSETS OWNED BY GEOGRAPHIC REGION
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
TOTAL LOANS
-------------------------
OTHER
REAL ESTATE, REAL ESTATE, NONPERFORMING REAL ESTATE
CONSTRUCTION MORTGAGE LOANS OWNED
------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Maryland.................... $241,992 $ 759,130 $ 7,191 $ 6,177
Pennsylvania................ 12,239 168,197 2,286 1,451
Virginia.................... 24,048 71,927 10,277 2,388
Washington, D.C. ........... 8,188 48,705 593 --
Florida..................... 1,555 32,119 -- 500
New Jersey.................. -- 36,113 -- --
Delaware.................... 4,501 8,967 -- --
All other................... 7,402 28,161 -- --
-------- ---------- ------- -------
Total..................... $299,925 $1,153,319 $20,347 $10,516
======== ========== ======= =======
</TABLE>
27
<PAGE>
REAL ESTATE, CONSTRUCTION
Real estate construction outstandings include land acquisition and
development loans, and building construction loans. Since December 31, 1995,
real estate construction outstandings have increased $9.7 million or 3.3%. All
of the growth resulted from the 1st Washington acquisition which added $32.2
million in construction loans on the date of acquisition. The Corporation
continues to pursue high quality loan opportunities.
REAL ESTATE MORTGAGE, COMMERCIAL
Commercial mortgage outstandings increased $177.8 million or 18.2% since
December 31, 1995. Approximately 46% of the growth resulted from the 1st
Washington acquisition. The improving real estate market and generally low
interest rate environment during the year provided financing opportunities.
The Corporation continues to focus on acquisition and refinancing loans for
quality projects with strong sponsorship.
As of December 31, 1996, $444.0 million or 38.5% of commercial mortgage
outstandings were owner-occupied, which is defined as a property that is 51%
or more physically occupied by the borrower or an affiliate of the borrower.
The Corporation intends to continue to actively solicit this business to
support its emphasis as a relationship lender for regional companies.
REAL ESTATE MORTGAGE, RESIDENTIAL
The Corporation originates residential mortgage loans primarily for sale in
the secondary market. New residential mortgage loan originations are normally
financed through the Corporation's mortgage banking subsidiary, First National
Mortgage Corporation, and are limited to Maryland, Virginia, Delaware,
Pennsylvania, North Carolina, Kentucky, Tennessee, and Mississippi. These
markets have generally shown growth in per capita income, a relatively low
unemployment rate, a diversified and stable economic base and, despite slow
local economic conditions, charge-offs have been negligible. Substantially all
loans originated by the mortgage banking subsidiary are classified as loans
held-for-sale on the consolidated statements of condition of the Corporation.
New originations retained for the Corporation's residential real estate
mortgage portfolio consist primarily of low-income housing and adjustable rate
mortgages. Residential mortgages retained in the portfolio at December 31,
1996 increased $182.5 million from December 31, 1995. The 1st Washington
acquisition resulted in an additional $193.3 million in residential mortgages
on the date of acquisition. Excluding the 1st Washington impact, residential
mortgages declined $10.8 million from December 31, 1995 to December 31, 1996.
RETAIL
The Corporation provides a comprehensive range of retail loan and line of
credit products. These products include home equity, automobile, marine and
unsecured installment loans as well as home equity and unsecured lines of
credit. The principal means by which these products are made available is on a
direct basis through the branch banking system of the Corporation. In
addition, automobile and marine loans are made available to the marketplace on
an indirect basis by means of select third party referral sources. During
1996, the product of choice in the Corporation's marketplace as well as
nationally was the home equity loan. The overall delinquency and net charge-
off rates in the Corporation's retail loan portfolio were better than industry
averages.
As compared to December 31, 1995, retail loans increased $281.8 million to
$1.4 billion at December 31, 1996. The growth in retail loans is primarily
attributable to the following products: home equity loans (64%), indirect
marine (18%), indirect automobile (11%) and home equity lines of credit (5%).
BANKCARD
The Corporation, through its subsidiary, First Omni, offers both VISA(R) and
MasterCard(R) bankcards on a nationwide basis. Outstanding bankcard loans
totaled $596.5 million at December 31, 1996 compared to $654.7 million at
December 31, 1995, a $58.2 million (8.9%) decrease. During 1996, the
Corporation securitized
28
<PAGE>
an additional $335 million in bankcard loans, with total securitized bankcard
loans of $500 million at December 31, 1996. On a managed basis, outstanding
bankcard loans totaled $1.1 billion at December 31, 1996, a $276.8 million
(33.8%) increase from the December 31, 1995 total of $819.7 million.
In July 1995, First Omni entered into a Cobranding Agreement with Bell
Atlantic Network Services, Inc. pursuant to which First Omni issues bankcards
bearing the Bell Atlantic name and trademarks. Bell Atlantic Network Services,
Inc. is a subsidiary of Bell Atlantic Corporation, a regional Bell holding
company serving over 11 million customers in New Jersey, Delaware,
Pennsylvania, Maryland, Virginia, West Virginia and the District of Columbia.
Customers of Bell Atlantic who apply for and are qualified to receive a
cobranded First Omni bankcard receive "rewards", funded by First Omni, based
on the use of the card. The reward check, which carries the customer's name,
address and telephone number, may only be used to pay the cardholder's Bell
Atlantic residential phone bill. At December 31, 1996, bankcard loans related
to the Bell Atlantic cobranding totaled $366.6 million, an increase of $283.7
million from the December 31, 1995 total of $82.9 million. Growth in the Bell
Atlantic cobranding portfolio was the primary source of growth in the total
managed bankcard loan portfolio.
The Corporation's bankcard loan portfolio, like the portfolios of most other
credit card issuers, is experiencing higher charge-off rates as a result of
higher-than-anticipated levels of personal bankruptcies which reached record
levels in 1996, and the general expansion of unsecured consumer credit. First
Omni's charge-off levels are expected to follow industry trends to higher
levels in 1997. Management continues to monitor trends in the portfolio and is
managing credit line usage and underwriting standards in a more aggressive
manner.
LEASES RECEIVABLE
Leases receivable include retail automobile, small equipment and general
equipment leasing portfolios. Leases receivable increased to $438.1 million at
December 31, 1996 from $334.5 million at December 31, 1995. The general
equipment leasing portfolio represents approximately 88% of total lease
receivables with an emphasis on transportation equipment which includes
railcars, tractors, trailers and some commercial aircraft. The primary market
for direct sales efforts with respect to customers and prospects is the Mid-
Atlantic region. Other parts of the country comprise a secondary market for
direct sales calling but with a greater reliance on outside referral sources.
Competition includes other banks, as well as nonbank, independent and captive
finance and leasing companies and income funds.
FOREIGN
Foreign commercial and industrial loans totaled $365.8 million at December
31, 1996, an increase of $29.7 million when compared to December 31, 1995.
Foreign loans consist of maritime industry exposure (75%), foreign direct
investment exposure (12%) and other foreign exposure (13%). Growth in foreign
loans in 1996 primarily resulted from growth in the maritime portfolio. The
maritime portfolio is widely diversified geographically and is secured by
first mortgages/liens on the financed vessels.
ASSET QUALITY
Nonperforming Assets
Nonperforming assets totaled $59.0 million at December 31, 1996, an increase
of $14.2 million (31.5%) when compared to $44.8 million in nonperforming
assets at December 31, 1995. The acquisition of 1st Washington resulted in an
additional $17.5 million in nonperforming assets shortly after the
acquisition. These additions included $16.4 million in nonaccrual real estate
loans and $1.1 million in other real estate owned. Nonperforming assets also
increased $24.2 million primarily due to the transfer of loans to nonaccrual
status. These increases were partially offset by the following decreases in
nonperforming assets in 1996: paydowns of $15.8 million, charge-offs of $7.3
million, other real estate owned sales of $2.8 million and loans reclassified
to accrual status of $1.6 million. The most significant paydowns were on a
variety of commercial and real estate
29
<PAGE>
transactions in which cash payments were received on nonaccrual loans. The
charge-offs were primarily on nonaccrual commercial and construction mortgage
loans and included approximately $5.0 million in charge-offs on loans acquired
from 1st Washington. Loans reclassified to accrual status were primarily
residential mortgages which met the regulatory tests for return to accrual
status.
Loans are placed on nonaccrual status when one of the following conditions
is met: (1) interest or principal has been in default for 90 days or more and
the loan is not both well-secured and in the process of collection;
(2) payment in full of interest or principal is not expected; or (3) due to
deterioration in the financial position of the borrower. A loan remains on
nonaccrual status until it is either current as to payment of principal and
interest with the borrower demonstrating the ability to pay and remain
current, or it meets regulatory guidelines on returning a loan to accrual
status even though the loan has not been brought fully current. Under these
guidelines, two criteria must be met: (1) all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within a reasonable period, and (2) there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms involving payments of cash or cash equivalents.
A loan is impaired when, based upon current information and events, it is
probable that all amounts due according to the contractual terms of the loan
agreement will not be collected. The impairment of a loan is measured at the
present value of expected future cash flows using the loan's effective
interest rate, the fair value of the collateral if the loan is collateral
dependent or the loan's observable market price. Loans to be considered for
evaluation of collectibility include loans classified as doubtful, certain
substandard loans, certain nonaccrual loans and any other loans for which
collection of all principal and interest payments under the contractual terms
is not considered probable. Impaired loans do not include large groups of
smaller balance, homogeneous loans such as residential mortgages, retail loans
and bankcard loans that are evaluated collectively for impairment, or leases
and loans measured at fair value or lower of cost or fair value. A valuation
allowance is recorded if the measured value of the impaired loan is less than
its recorded investment (outstanding principal balance, accrued interest
receivable, net deferred loan fees or costs and unamortized premium or
discount). The valuation allowances for impaired loans are included in the
allowance for credit losses through changes in the provision for credit
losses. See Note 6 of the Notes to Consolidated Financial Statements for
further discussion of the Corporation's impaired loans at December 31, 1996
and 1995.
Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings."
Other real estate and other assets owned represent collateral on loans to
which the Corporation has taken title. This property, which is held for
resale, is carried at fair value minus estimated costs to sell.
30
<PAGE>
The following table sets forth nonperforming assets and accruing loans which
are 90 days or more past due as to principal or interest payments as of the
dates indicated.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Domestic:
Commercial.................... $13,988 $16,587 $13,326 $ 47,521 $ 71,538
Real estate, construction..... 4,014 1,125 2,709 5,787 17,917
Real estate mortgage,
commercial................... 16,333 4,785 27,633 44,853 64,757
Real estate mortgage,
residential.................. 7,545 6,375 5,250 5,381 6,351
Leases receivable............. -- -- 85 863 1,174
Foreign......................... 3,800 4,321 5,300 3,800 10,487
------- ------- ------- -------- --------
Total nonaccrual loans...... 45,680 33,193 54,303 108,205 172,224
Restructured loans.............. 126 143 4,974 4,692 4,515
Other assets owned:
Other real estate............. 12,765 11,546 18,920 26,427 30,993
Valuation reserves............ (324) (295) (4,185) (4,412) (9,195)
Other assets.................. 705 250 118 510 1,210
------- ------- ------- -------- --------
Total other assets owned........ 13,146 11,501 14,853 22,525 23,008
------- ------- ------- -------- --------
Total nonperforming assets...... $58,952 $44,837 $74,130 $135,422 $199,747
======= ======= ======= ======== ========
Nonperforming assets as a % of
total loans, net of unearned
income plus other foreclosed
assets owned................... 0.87% 0.73% 1.35% 2.59% 3.83%
======= ======= ======= ======== ========
Accruing loans contractually
past due 90 days or more as to
principal or interest
Domestic...................... $23,812 $18,808 $13,338 $ 17,172 $ 19,231
======= ======= ======= ======== ========
</TABLE>
The following table details the gross interest income that would have been
received during the year ended December 31, 1996 on nonaccrual loans had such
loans been current in accordance with their original terms throughout the year
and the interest income on such loans actually included in income for the
year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-------------------
DOMESTIC FOREIGN
LOANS LOANS
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross interest income that would have been recorded had
nonaccrual loans been current in accordance with original
terms..................................................... $ 3,854 $ 373
Interest income actually recorded.......................... 522 373
</TABLE>
Potential problem loans consist of loans that are currently performing in
accordance with contractual terms but for which the Corporation has serious
doubts regarding the ability of the borrowers to continue to comply with
present repayment terms. At December 31, 1996, the Corporation was monitoring
$24.0 million of potential problem loans which were not included in the
nonperforming assets table disclosed above. There were no other interest
earning assets, other than loans, at December 31, 1996 which were classifiable
as nonaccrual, restructured, past due or potential problem assets.
31
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The Allowance for Credit Losses (the "Allowance") is created by direct
charges against income in the form of quarterly provisions for credit losses.
The amount of the Allowance equals the cumulative total of the provisions made
from time to time, reduced by credit charge-offs, and increased by recoveries
of credits previously charged-off. The Allowance will also increase by the
allowance for credit losses of loan assets acquired and will be reduced by the
allowance for credit losses associated with loan assets sold (including
securitizations of loan assets).
It is the policy of the Corporation to comply with OCC Banking Circular 201
(Revised) and the supplementary Interagency Policy Statement on the Allowance
for Loan and Lease Losses released on December 21, 1993. The Corporation
maintains an Allowance sufficient to absorb all estimated losses in the loan
and lease portfolio. Generally, a charge to the Allowance is appropriate if it
is determined that it is probable that an asset has been impaired such that
the likelihood of full repayment is doubtful.
All outstanding loans, leases and legally binding commitments to lend are
considered in evaluating the adequacy of the Allowance. The Allowance does not
provide for the estimated losses stemming from uncollectible interest because
Corporation policy requires all accrued but unpaid interest to be reversed
once a loan is placed on nonaccrual status. In 1996, the Corporation
transferred $1.7 million of the Allowance related to off-balance sheet
instruments to other liabilities. This amount represented reserves for
mortgage loans sold with recourse exposure by a nonbanking subsidiary.
All nonaccrual loans and certain substandard loans are analyzed individually
to determine specific reserves. Reserve allocations for all other loans and
leases are based upon actual historical loss experience by portfolio type over
a period of years. In addition, the historical loss percentage for each pool
is adjusted to reflect current conditions. Among the factors considered are
the levels and trends in delinquencies and nonaccruals; trends in volumes and
terms of loans; effects of any changes in lending policies and procedures; the
experience, ability and depth of the lending management and staff; national
and local economic trends and conditions; and concentrations of credit.
32
<PAGE>
The following table details certain information relating to the Allowance of
the Corporation for the five years ended December 31, 1996. See also Note 6 of
the Notes to Consolidated Financial Statements of the Corporation.
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning
of year................ $ 177,621 $ 191,024 $ 200,006 $ 201,451 $ 205,397
Provision for credit
losses................. 6,500 16,000 22,996 45,291 58,126
Losses charged-off:
Commercial loans...... 2,743 1,848 2,852 10,580 14,082
Real estate loans,
construction......... 3,520 635 1,333 1,079 3,692
Real estate loans,
mortgage:
Residential......... 177 110 328 467 150
Commercial.......... 2,864 635 5,693 9,723 8,100
Retail loans.......... 5,893 2,988 4,798 6,005 6,569
Bankcard loans........ 30,156 30,352 27,180 25,360 30,219
Leases receivable..... 125 40 343 516 919
Foreign loans......... -- 1,840 -- 2,561 6,360
---------- ---------- ---------- ---------- ----------
Total losses
charged-off...... 45,478 38,448 42,527 56,291 70,091
---------- ---------- ---------- ---------- ----------
Recoveries of losses
previously charged-off:
Commercial loans...... 1,787 1,025 3,908 1,108 393
Real estate loans,
construction......... 553 114 304 37 35
Real estate loans,
mortgage:
Residential......... 8 28 29 16 56
Commercial.......... 7 338 438 129 348
Retail loans.......... 2,143 2,194 2,846 2,573 2,526
Bankcard loans........ 2,568 5,127 5,203 4,696 4,574
Leases receivable..... 113 219 431 331 367
Foreign loans......... -- -- -- 4,924 1,047
---------- ---------- ---------- ---------- ----------
Total recoveries.. 7,179 9,045 13,159 13,814 9,346
---------- ---------- ---------- ---------- ----------
Net losses charged-off.. 38,299 29,403 29,368 42,477 60,745
Allowance of loans ac-
quired or (sold)....... 10,642 -- (2,610) (4,259) (1,327)
Transfer of allowance to
reserve for off-balance
sheet liability........ (1,662) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total allowance at end
of year................ $ 154,802 $ 177,621 $ 191,024 $ 200,006 $ 201,451
========== ========== ========== ========== ==========
Average loans, net of
average unearned
income................. $6,312,328 $5,804,653 $5,291,240 $5,099,293 $5,293,930
========== ========== ========== ========== ==========
Year end loans, net of
unearned income........ $6,798,445 $6,138,824 $5,458,891 $5,197,721 $5,187,612
========== ========== ========== ========== ==========
Net charge-offs to
average loans, net of
average unearned
income................. 0.61% 0.51% 0.56% 0.83% 1.15%
Allowance as a percent-
age of year end loans,
net of unearned in-
come................... 2.28 2.89 3.50 3.85 3.88
Allowance as a percent-
age of nonperforming
loans.................. 337.95 532.82 322.26 177.16 113.98
</TABLE>
33
<PAGE>
The following table provides an allocation of the Allowance to the
respective loan classifications. The allocation of the Allowance is based on a
consideration of all of the factors discussed above which are used to
determine the Allowance as a whole. Since all of those factors are subject to
change, the allocation of the Allowance detailed below is not necessarily
indicative of future losses or future allocations. The Allowance at December
31, 1996 was available to absorb losses occurring in any category of loans.
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial loans.................. $ 10,337 $ 17,092 $ 19,222 $ 32,453 $ 39,544
Real estate loans, construction... 3,291 5,144 7,556 9,376 19,150
Real estate loans, mortgage:
Residential..................... 1,334 1,150 1,022 1,087 546
Commercial...................... 13,412 11,533 23,818 39,845 41,090
Retail loans...................... 4,151 3,257 3,213 6,266 7,026
Bankcard loans.................... 31,801 36,141 30,830 35,950 37,420
Leases receivable................. 12,374 13,407 16,323 3,304 3,970
Foreign loans..................... 12,818 9,970 11,748 9,322 14,045
Unallocated....................... 65,284 79,927 77,292 62,403 38,660
-------- -------- -------- -------- --------
Total allowance............... $154,802 $177,621 $191,024 $200,006 $201,451
======== ======== ======== ======== ========
</TABLE>
DEPOSITS
The table below provides information on the average balances of and rates
paid on the deposit categories indicated for the years ended December 31,
1996, 1995 and 1994. The aggregate amount of foreign deposits did not exceed
10% of average total deposits. The majority of deposits in the foreign banking
office were in amounts in excess of $100 thousand.
AVERAGE DEPOSITS AND AVERAGE RATES PAID
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES RATES BALANCES RATES BALANCES RATES
-------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Deposits in domestic of-
fices:
Noninterest bearing de-
mand..................... $1,946.6 -- % $1,760.4 -- % $1,730.1 -- %
-------- ---- -------- ---- -------- ----
Interest bearing demand... 116.6 2.49 523.4 2.33 548.9 2.31
Money market accounts..... 1,593.3 3.00 1,146.5 3.52 1,312.3 2.99
Savings................... 1,048.4 2.60 1,048.1 2.71 1,144.4 2.73
Other consumer time....... 1,676.9 5.30 1,532.0 5.27 1,410.7 4.19
Large denomination time... 560.6 5.59 586.6 6.01 374.9 5.55
Deposits in foreign banking
office..................... 131.1 5.36 147.1 5.88 114.0 5.37
-------- ---- -------- ---- -------- ----
Total interest bearing
deposits............... 5,126.9 4.00 4,983.7 4.12 4,905.2 3.45
-------- -------- --------
Total deposits.............. $7,073.5 $6,744.1 $6,635.3
======== ======== ========
Total core deposits(1)...... $6,381.8 $6,010.4 $6,146.4
======== ======== ========
</TABLE>
- --------
(1) Core deposits include all deposits in the preceding table except large
denomination time deposits and deposits in the Corporation's foreign
banking office.
34
<PAGE>
The following table details the maturity of domestic deposits of $100
thousand or more on December 31, 1996.
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN
AMOUNTS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
CERTIFICATES OTHER TIME
OF DEPOSIT, DEPOSITS,
$100,000 $100,000
OR MORE OR MORE TOTAL
------------ ---------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Within three months............................. $178.9 $ -- $178.9
After three months but within six months........ 144.3 8.0 152.3
After six months but within twelve months....... 123.0 2.5 125.5
After twelve months............................. 289.5 -- 289.5
------ ----- ------
Total......................................... $735.7 $10.5 $746.2
====== ===== ======
</TABLE>
SHORT-TERM BORROWINGS
To the extent that deposits are not adequate to fund customer loan demand in
the Banks, or to the extent that long-term borrowings are inadequate to meet
funding requirements of other subsidiaries, the Corporation seeks to meet its
liquidity needs in the short-term funds markets. The Corporation utilizes many
sources to meet these short-term needs. The following table provides
information with respect to each of these sources for the three years ended
December 31, 1996.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased:
End of year outstandings........................ $314,570 $300,895 $205,856
Highest month-end balance....................... 614,826 621,771 331,547
Average balance................................. 509,466 420,093 288,762
Average interest rate at year end............... 6.41% 5.70% 5.55%
Weighted average interest rate(1)............... 5.28 5.67 4.27
Repurchase agreements:
End of year outstandings........................ $218,977 $214,630 $313,916
Highest month-end balance....................... 350,237 556,115 628,028
Average balance................................. 253,993 328,874 354,644
Average interest rate at year end............... 5.00% 5.06% 5.13%
Weighted average interest rate(1)............... 4.79 5.62 3.60
Master demand notes of the Corporation:
End of year outstandings........................ $320,619 $402,489 $402,539
Highest month-end balance....................... 390,715 408,894 454,941
Average balance................................. 352,615 385,582 441,384
Average interest rate at year end............... 4.80% 5.20% 4.95%
Weighted average interest rate(1)............... 4.86 5.55 3.79
Other borrowed funds, short-term:
End of year outstandings........................ $500,858 $506,155 $138,968
Highest month-end balance....................... 708,906 618,516 656,846
Average balance................................. 345,632 370,218 330,616
Average interest rate at year end............... 5.58% 6.04% 3.93%
Weighted average interest rate(1)............... 5.45 6.26 3.71
</TABLE>
- --------
(1) The weighted average interest rate is calculated by dividing the annual
interest expense by the daily average outstanding principal balance.
35
<PAGE>
As indicated, short-term borrowings include master demand notes of the
Corporation. The master demand note ("masternote") is an unsecured obligation
of the Corporation which was developed to meet the investment needs of the
Corporation's cash management customers. Under the masternote program,
available customer balances are invested overnight in masternotes. The
proceeds are used to provide short-term funding to the Corporation's nonbank
subsidiaries, with any excess funds invested in short-term liquid assets.
Outstanding masternote balances are determined by the investable balances of
the Corporation's sweep account customers that elect the masternote investment
option.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The following table shows the changes in the Corporation's stockholders'
equity for the years ended December 31, 1996, 1995 and 1994.
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year................ $1,183,574 $1,024,024 $ 976,794
Net Income................................ 132,337 120,187 111,140
Dividends declared on common stock........ (40,000) -- --
Dividends declared on preferred stock..... (11,820) (11,820) (11,820)
Dividends declared on redeemable preferred
stock.................................... (203) -- --
Change in net cost not yet recognized as
periodic pension expense................. (216) (200) 1,443
Accretion of redeemable preferred stock... (93) -- --
Change in net unrealized gains (losses) on
investment securities available-for-
sale..................................... (16,082) 51,383 (53,582)
Adjustment to preferred stock issuance
costs.................................... -- -- 49
---------- ---------- ----------
Balance, end of year...................... $1,247,497 $1,183,574 $1,024,024
========== ========== ==========
</TABLE>
The Corporation's stockholders' equity was $1.2 billion at December 31,
1996, an increase of $63.9 million over stockholders' equity at December 31,
1995. The $63.9 million (5.4%) increase in stockholders' equity is primarily
due to $132.3 million of net income in 1996. Offsetting this increase were
$40.0 million in common stock dividends and $12.0 million in preferred stock
dividends declared in 1996 and a $16.1 million decline in the fair value of
investment securities available-for-sale, net of income taxes. The primary
source of growth in stockholders' equity from 1994 to 1995 was $120.2 million
in net income and a $51.4 million increase in the fair value of investment
securities available-for-sale, net of income taxes. Partially offsetting these
increases were $11.8 million in preferred stock dividends declared in 1995.
36
<PAGE>
The following table details the Corporation's capital components and ratios
at December 31, 1996, 1995 and 1994 based upon the capital requirements of the
regulatory agencies discussed in Part I under "Business-Supervision and
Regulation." Tier 1 and total capital increased $173.4 million and $189.6
million, respectively, from December 31, 1995 to December 31, 1996 due to
$132.3 million in net income in 1996 coupled with the issuance of $147.1
million in guaranteed preferred beneficial interests in junior subordinated
debentures. These instruments were accorded Tier 1 capital status by the
Federal Reserve. Offsetting these increases were $40 million and $12 million
in dividends declared on common and preferred stock, respectively, in 1996
along with an increase in disallowed goodwill of $52.6 million from the
acquisitions of 1st Washington and Zirkin-Cutler during 1996. Total capital
was positively impacted by the issuance of intermediate preferred stock in
1996 in connection with the Zirkin-Cutler acquisition during 1996. Significant
transactions affecting regulatory capital in 1995 included $120.2 million in
net income which was partially offset by $11.8 million in preferred dividends
declared in 1995.
CAPITAL COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Preferred stockholders' equity.......... $ 144,852 $ 144,852 $ 144,852
Common stockholder's equity............. 1,102,645 1,038,722 879,172
Guaranteed preferred beneficial
interests in junior subordinated
debentures............................. 147,113 -- --
Disallowed intangibles.................. (90,861) (37,178) (40,956)
Net unrealized losses (gains) on
investment securities available-for-
sale................................... (8,332) (24,414) 26,969
----------- ----------- ----------
Tier 1 capital........................ 1,295,417 1,121,982 1,010,037
----------- ----------- ----------
Qualifying long-term debt............... 99,765 103,721 109,676
Intermediate preferred stock............ 7,700 -- --
Allowance for credit losses............. 115,173 102,754 91,105
Mandatory convertible securities........ 59,977 59,969 59,960
----------- ----------- ----------
Tier 2 capital........................ 282,615 266,444 260,741
----------- ----------- ----------
Total capital........................... $ 1,578,032 $ 1,388,426 $1,270,778
=========== =========== ==========
Risk adjusted assets.................... $ 9,174,168 $ 8,145,412 $7,188,442
Average quarterly assets (fourth quar-
ter)................................... $10,725,996 $10,316,684 $9,180,622
Risk based capital ratios:
Tier 1 capital to risk-adjusted as-
sets................................. 14.12% 13.77% 14.05%
Regulatory minimum.................... 4.00 4.00 4.00
Total capital to risk-adjusted as-
sets................................. 17.20 17.05 17.68
Regulatory minimum.................... 8.00 8.00 8.00
Leverage ratio.......................... 12.18 10.91 11.05
</TABLE>
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................... $521,643 $510,874 $435,012
Interest and dividends on investment securities
held-to-maturity:
Taxable.......................................... -- 82,873 87,502
Interest on investment securities available-for-
sale:
Taxable.......................................... 166,117 70,403 47,634
Tax-exempt....................................... 6,341 13,769 15,701
Dividends........................................ 1,683 1,229 1,092
Interest on loans held-for-sale.................... 9,390 7,305 7,732
Interest on money market investments............... 13,855 21,088 25,073
-------- -------- --------
Total interest and dividend income............. 719,029 707,541 619,746
-------- -------- --------
INTEREST EXPENSE
Interest on deposits............................... 205,169 205,566 169,191
Interest on Federal funds purchased and other
short-term borrowings............................. 76,428 86,858 54,106
Interest on long-term debt......................... 33,721 22,124 17,802
-------- -------- --------
Total interest expense......................... 315,318 314,548 241,099
-------- -------- --------
Net interest income................................ 403,711 392,993 378,647
Provision for credit losses (note 6)............... 6,500 16,000 22,996
-------- -------- --------
Net interest income after provision for credit
losses............................................ 397,211 376,993 355,651
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts................ 80,659 71,852 72,300
Mortgage banking income............................ 29,966 16,216 16,426
Trust and investment advisory fees................. 28,658 22,228 19,513
Servicing income................................... 26,126 22,564 18,750
Credit card income................................. 9,949 17,352 17,062
Securities gains, net.............................. 103 2,136 15,616
Other income (note 17)............................. 41,431 43,562 51,311
-------- -------- --------
Total noninterest income....................... 216,892 195,910 210,978
-------- -------- --------
NONINTEREST EXPENSES
Salaries and wages................................. 181,842 172,196 165,834
Other personnel costs (notes 16 and 23)............ 44,791 39,655 42,594
Occupancy costs (notes 7 and 19)................... 32,899 32,188 32,565
Equipment costs (notes 7 and 19)................... 32,019 30,117 29,586
Other operating expenses (note 17)................. 115,365 114,568 125,622
-------- -------- --------
Total noninterest expenses..................... 406,916 388,724 396,201
-------- -------- --------
Income before income taxes......................... 207,187 184,179 170,428
Income tax expense (note 18)....................... 74,850 63,992 59,288
-------- -------- --------
Net income......................................... $132,337 $120,187 $111,140
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
38
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................. $ 841,822 $ 775,582
Money market investments (note 3)................... 75,470 366,355
Investment securities available-for-sale (note 4)... 2,552,620 2,794,023
Loans held-for-sale................................. 150,742 116,002
Loans, net of unearned income of $130,026 in 1996
and $114,813 in 1995:
Commercial........................................ 1,731,031 1,798,248
Real estate, construction......................... 299,925 290,262
Real estate, mortgage:
Residential..................................... 833,045 650,588
Commercial...................................... 1,153,319 975,474
Retail............................................ 1,380,767 1,098,955
Bankcard.......................................... 596,474 654,653
Leases receivable (note 5)........................ 438,060 334,504
Foreign........................................... 365,824 336,140
----------- -----------
Total loans, net of unearned income............. 6,798,445 6,138,824
Allowance for credit losses (note 6)................ (154,802) (177,621)
----------- -----------
Loans, net...................................... 6,643,643 5,961,203
Premises and equipment (note 7)..................... 106,701 104,379
Due from customers on acceptances................... 8,725 14,144
Other assets........................................ 411,301 334,484
----------- -----------
Total assets.................................. $10,791,024 $10,466,172
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Domestic deposits:
Noninterest bearing deposits...................... $ 2,248,252 $ 2,055,129
Interest bearing deposits......................... 5,135,616 4,859,031
Interest bearing deposits in foreign banking of-
fice............................................... 113,830 129,022
----------- -----------
Total deposits.................................. 7,497,698 7,043,182
Federal funds purchased and securities sold under
repurchase agreements (note 11).................... 533,547 515,525
Other borrowed funds, short-term (note 12).......... 821,477 908,644
Bank acceptances outstanding........................ 8,725 14,144
Accrued taxes and other liabilities (note 18)....... 297,525 286,416
Long-term debt (note 13)............................ 229,742 514,687
----------- -----------
Total liabilities............................. 9,388,714 9,282,598
----------- -----------
Guaranteed preferred beneficial interests in junior
subordinated debentures (note 14).................. 147,113 --
----------- -----------
4.50% Cumulative, Redeemable Preferred Stock, $5 par
value per share, $100 liquidation preference per
share; authorized and issued 90,000 shares
(note 15).......................................... 7,700 --
----------- -----------
Commitments and contingent liabilities (notes 19 and
22)
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
Common stock, $1/7 par value per share; authorized
600,000,000 shares;
issued 594,480,215 shares........................ 84,926 84,926
Capital surplus................................... 198,176 198,176
Retained earnings................................. 926,063 846,058
Net unrealized gains on investment securities
available-for-sale............................... 8,332 24,414
----------- -----------
Total stockholders' equity...................... 1,247,497 1,183,574
----------- -----------
Total liabilities, guaranteed preferred
beneficial interests in junior subordinated
debentures, redeemable preferred stock and
stockholders' equity......................... $10,791,024 $10,466,172
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
39
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS
(LOSSES) ON
INVESTMENT
SECURITIES
PREFERRED COMMON CAPITAL RETAINED AVAILABLE-
STOCK STOCK SURPLUS EARNINGS FOR-SALE TOTAL
--------- ------- -------- -------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE ON DECEMBER 31,
1993................... $30,000 $84,926 $198,127 $637,128 $ 26,613 $ 976,794
Net income.............. 111,140 111,140
Dividends declared on
preferred stock........ (11,820) (11,820)
Change in net cost not
yet recognized as
periodic pension
expense................ 1,443 1,443
Change in net unrealized
gains (losses) on
investment securities
available-for-sale..... (53,582) (53,582)
Adjustment to preferred
stock issuance cost.... 49 49
------- ------- -------- -------- -------- ----------
BALANCE ON DECEMBER 31,
1994................... 30,000 84,926 198,176 737,891 (26,969) 1,024,024
Net income.............. 120,187 120,187
Dividends declared on
preferred stock........ (11,820) (11,820)
Change in net cost not
yet recognized as
periodic pension
expense................ (200) (200)
Change in net unrealized
gains (losses) on
investment securities
available-for-sale..... 51,383 51,383
------- ------- -------- -------- -------- ----------
BALANCE ON DECEMBER 31,
1995................... 30,000 84,926 198,176 846,058 24,414 1,183,574
Net income.............. 132,337 132,337
Dividends declared on
common stock........... (40,000) (40,000)
Dividends declared on
preferred stock........ (11,820) (11,820)
Dividends declared on
redeemable preferred
stock.................. (203) (203)
Change in net cost not
yet recognized as
periodic pension
expense................ (216) (216)
Accretion of redeemable
preferred stock........ (93) (93)
Change in net unrealized
gains (losses) on
investment securities
available-for-sale..... (16,082) (16,082)
------- ------- -------- -------- -------- ----------
BALANCE ON DECEMBER 31,
1996................... $30,000 $84,926 $198,176 $926,063 $ 8,332 $1,247,497
======= ======= ======== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................ $ 132,337 $ 120,187 $ 111,140
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses.......... 6,500 16,000 22,996
Provision for other real estate
losses.............................. 77 264 44
Depreciation and amortization........ 36,402 32,089 32,033
Deferred income tax expense.......... 48,633 32,268 18,399
Net loss (gain) on the sale of
assets.............................. 177 (3,037) (25,014)
Net (increase) decrease in loans
originated for sale................. (22,358) (40,636) 181,361
Decrease (increase) in trading
account securities.................. 326 27,679 (3,273)
Decrease (increase) in accrued
interest receivable................. 16,838 (2,750) (5,648)
(Decrease) increase in accrued
interest payable.................... (22,935) 22,240 (1,493)
Other, net........................... (33,961) 65,426 (46,114)
------------ ------------ -----------
Net cash provided by operating
activities.......................... 162,036 269,730 284,431
------------ ------------ -----------
INVESTING ACTIVITIES
Proceeds from sales of investment se-
curities available-for-sale.......... 1,170,054 869,803 1,271,669
Proceeds from sales of investment se-
curities held-to-maturity............ -- -- 20,383
Proceeds from paydowns and maturities
of investment securities available-
for-sale(1).......................... 15,690,565 6,346,840 147,244
Proceeds from paydowns and maturities
of investment securities held-to-ma-
turity(1)............................ -- 22,843,092 360,323
Purchases of investment securities
available-for-sale(1)................ (16,198,470) (7,563,941) (1,198,841)
Purchases of investment securities
held-to-maturity(1).................. -- (22,809,646) (22,832)
Net decrease (increase) in short-term
investments.......................... 269,874 (163,207) (38,114)
Proceeds from sales of loans.......... -- -- 48,420
Purchase of loans..................... -- (19) (255)
Net disbursements from lending activi-
ties of banking subsidiaries......... (679,731) (704,398) (321,126)
Principal collected on loans of non-
bank subsidiaries.................... 40,600 31,858 25,846
Loans originated by nonbank subsidiar-
ies.................................. (57,474) (40,272) (30,250)
Principal payments received under
leases............................... 3,566 4,652 4,916
Purchases of assets to be leased...... (17,192) (7,549) (3,090)
Proceeds from the sale of other real
estate............................... 3,120 10,727 12,189
Proceeds from the sale of premises and
equipment............................ 1,276 798 2,850
Purchases of premises and equipment... (25,613) (25,826) (24,464)
Proceeds from the sale of deposits.... -- -- (193,945)
Purchases of deposits................. -- 6,694 96,600
Securitization and sale of bankcard
loans................................ 337,716 -- --
Purchase of banking subsidiary........ (83,522) -- --
Purchase of investment management com-
pany................................. (4,767) -- --
Purchase of mortgage company.......... -- -- (905)
Other, net............................ 1,192 (17,874) (19,259)
------------ ------------ -----------
Net cash provided by (used for)
investing activities................ 451,194 (1,218,268) 137,359
------------ ------------ -----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits... 28,250 402,805 (43,008)
Net (decrease) increase in short-term
borrowings........................... (405,452) 362,890 (332,356)
Principal payments on long-term debt.. (10,000) -- --
Proceeds from the issuance of medium-
term bank notes...................... 50,000 325,000 25,000
Payments on medium-term bank notes.... (325,000) (25,000) --
Proceeds from the issuance of guaran-
teed preferred beneficial interests
in junior subordinated debentures.... 145,801 -- --
Cash dividends paid................... (52,023) (11,820) (10,440)
------------ ------------ -----------
Net cash (used for) provided by
financing activities................ (568,424) 1,053,875 (360,804)
------------ ------------ -----------
Increase in cash and cash equiva-
lents................................ 44,806 105,337 60,986
Cash and cash equivalents at beginning
of year.............................. 797,460 692,123 631,137
------------ ------------ -----------
Cash and cash equivalents at December
31,.................................. $ 842,266 $ 797,460 $ 692,123
============ ============ ===========
SUPPLEMENTAL DISCLOSURES
Interest payments.................... $ 329,677 $ 292,308 $ 241,465
Income tax payments.................. 21,142 48,244 44,881
NONCASH INVESTING AND FINANCING ACTIV-
ITIES
Loan charge offs..................... 45,478 38,448 42,527
Transfers to other real estate....... 3,074 6,392 2,813
</TABLE>
- --------
(1) Includes purchases and maturities of Federal Agency discount notes which
were utilized by the parent company of the Corporation for liquidity
management purposes. See Note 25 of the Notes to the Consolidated
Financial Statements.
See accompanying notes to consolidated financial statements
41
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Maryland Bancorp and
subsidiaries (the "Corporation") conform to generally accepted accounting
principles. The following is a description of the more significant of these
policies:
Business--The Corporation is a wholly owned subsidiary of Allied Irish
Banks, p.l.c. ("AIB") and provides a full range of banking services through
its banking subsidiaries, The First National Bank of Maryland and First Omni
Bank, N.A. (collectively the "National Banks") and The York Bank and Trust
Company (collectively with the National Banks, the "Banks"). Other
subsidiaries of the Corporation are primarily engaged in consumer banking,
construction lending, equipment, consumer, and commercial financing and
investment advisory services. The Corporation's primary market area is the
Baltimore/Washington marketplace which encompasses all of Maryland,
Washington, D.C., northern Virginia and south central Pennsylvania. The
Corporation is subject to the regulations of certain Federal agencies and
undergoes periodic examinations by those regulatory agencies.
Basis of Presentation--The consolidated financial statements include the
Corporation and its subsidiaries, principally The First National Bank of
Maryland ("First National"), The York Bank and Trust Company ("York Bank") and
First Omni Bank, N.A. ("First Omni"). All significant intercompany
transactions have been eliminated.
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of condition and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for credit
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of the allowances for credit losses and real estate owned, management obtains
independent appraisals for significant properties.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowances may
be necessary based on changes in economic conditions, particularly in the Mid-
Atlantic region of the United States. In addition, as an integral part of
their examination process, various regulatory agencies periodically review the
Corporation's allowance for losses on loans and real estate owned. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Foreign Currency Transactions--Foreign currency amounts, including those
related to foreign branches, are remeasured into the functional currency (the
U.S. dollar) at relevant exchange rates. Aggregate transaction gains and
losses are included in other income and other expense and are not material to
the financial statements.
Money Market Investments--Money market investments are stated at cost, which
approximates fair value except for trading account securities which are
carried at fair value. Adjustments to the fair value of trading account
securities and trading account gains and losses are classified as other income
in the accompanying consolidated statements of income.
Securities--Securities are classified into either the trading portfolio or
the available-for-sale portfolio. At the time of purchase, management
determines the appropriate designation for debt and equity securities.
42
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Trading account securities are purchased principally with the intent to earn
a profit by trading or selling the security. These securities are stated at
fair value. Adjustments to the carrying value of trading account securities
are reported in other noninterest income.
Securities not classified as trading are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with unrealized gains
or losses, net of income taxes, reported as a separate component of
stockholders' equity.
Amortization and accretion of discounts and premiums associated with
securities classified as available-for-sale are computed on the straight-line
basis adjusted for expected prepayment experience, which does not differ
significantly from the level yield method. Realized gains and losses, and
declines in value judged to be other-than-temporary, are included as part of
noninterest income. The cost of securities sold is determined based on the
specific identification method.
Loans Held-For-Sale--Loans held-for-sale are stated at the lower of
aggregate cost or fair value.
Loans--Loans are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for credit losses. The net asset amounts for
leased equipment also reflect related estimated residual values to the extent
such amounts are taken into income as yield adjustments over the lives of the
related leases. Discounts on discounted loans and interest on other loans are
generally recognized as income on the level yield method (interest method).
Commitment and origination fees are generally recognized as income over the
commitment and loan periods, respectively. Loans are placed on nonaccrual
status when one of the following conditions is met: (1) interest or principal
has been in default for 90 days or more and the loan is not both well-secured
and in the process of collection; (2) payment in full of interest or principal
is not expected; or (3) due to the deterioration in the financial position of
the borrower. A loan remains on nonaccrual status until it is either current
as to payment of both principal and interest with the borrower demonstrating
the ability to pay and remain current, or it meets regulatory guidelines on
returning to accrual status even though the loan has not been brought fully
current.
The Corporation adopted the provisions of Statements of Financial Accounting
Standards No. 114 and 118, "Accounting by Creditors for Impairment of a Loan"
on January 1, 1995. A loan is impaired when, based upon current information
and events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. The impairment of a loan is
measured at the present value of expected future cash flows using the loan's
effective interest rate, the fair value of the collateral, if the loan is
collateral dependent, or the loan's observable market price. Loans to be
considered for evaluation of collectibility include loans classified as
doubtful, certain substandard loans, certain nonaccrual loans and any other
loans for which collection of all principal and interest payments under the
contractual terms is not considered probable. A valuation allowance is
recorded if the measured value of the impaired loan is less than its recorded
investment (outstanding principal balance, accrued interest receivable, net
deferred loan fees or costs and unamortized premium or discount). The
valuation allowances for impaired loans are included in the allowance for
credit losses through changes in the provision for credit losses.
Allowance for Credit Losses--The allowance for credit losses ("allowance")
is maintained to absorb all estimated losses in the loan and lease portfolio
by direct charges against income in the form of provisions for credit losses.
The allowance equals the cumulative total of the provisions made from time to
time, reduced by credit charge-offs, and increased by recoveries of credits
previously charged-off. The allowance is also increased by the allowance
attributable to loans acquired and is reduced by the allowance attributable to
loans sold, including securitizations of loans.
43
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Premises and Equipment--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
charged to operating expenses. Depreciation is computed on the straight line
basis over the estimated useful lives of the assets. Leasehold improvements
are amortized over the lesser of the term of the respective leases or the
lives of the assets. Maintenance and repairs are expensed as incurred. Leases
are accounted for as operating leases since none which meet the criteria for
capitalization would have a material effect if capitalized.
Intangible Assets--Intangible assets primarily represent the premium on
purchased deposits and assets and the excess of cost over net assets of
acquired businesses (goodwill). Goodwill is amortized on a straight-line basis
over periods ranging from 15 to 25 years. Premiums on purchased bankcard loans
are amortized using an accelerated method over the estimated lives of the
portfolios, deemed to be 10 years. Other acquired intangible assets such as
premiums on deposits are amortized on a straight-line basis over the expected
periods of benefit. Management evaluates whether events or circumstances have
occurred that would result in impairment of the value or life of goodwill and
identifiable intangible assets. Impairment is measured using estimates of the
future earnings potential of the entity or assets acquired.
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" on January 1, 1996 which requires that long-
lived assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The adoption of SFAS 121 did not have a
material effect on the financial statements of the Corporation.
Mortgage Servicing Rights--The Corporation adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" in
1995 which requires an allocation of a portion of the total cost of applicable
mortgage loans to originated mortgage servicing rights based upon their
relative fair values on the date of mortgage origination. Market quotes are
used to determine the fair value of the mortgage servicing rights at
origination. The capitalized mortgage servicing rights are amortized in
proportion to and over the estimated period of net servicing income. As
related loans pay off during the period of amortization, the related
unamortized mortgage servicing rights are written off. The Corporation
analyzes the capitalized mortgage servicing rights for impairment on a
quarterly basis using a discounted cash flow analysis. Impairment losses are
determined by stratifying the population of mortgage servicing rights based
upon the risk characteristics of loan type and term. A valuation allowance is
recorded if the unamortized mortgage servicing rights exceed the fair value.
Other Real Estate and Assets--Other real estate and other assets owned
represent property acquired through foreclosure or deeded to the Corporation
in lieu of foreclosure on loans on which borrowers have defaulted as to the
payment of principal and interest. Other real estate and assets, at the time
of foreclosure, are recorded at the asset's fair value minus estimated costs
to sell. Any write-downs at the date of acquisition are charged to the
allowance for credit losses. Subsequent write downs to reflect declines in
fair value minus the estimated costs to sell are charged to operating expenses
through the establishment of a valuation allowance. If there is an improvement
in fair value, the valuation allowance is reduced, but not below zero.
Increases and decreases in the valuation allowance are charged or credited to
income. Expenses incurred in maintaining assets are included in other
operating expenses.
Income Taxes--The Corporation files a consolidated federal income tax
return. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as income or expense in the period that includes the enactment
date.
44
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Derivative Financial Instruments
Trading Instruments--The Corporation maintains active trading positions
in interest rate swaps, caps and floors, futures, and options on futures as
well as foreign exchange forward rate agreements, options, and futures.
These positions result from activity generated for corporate customers as
well as for the Corporation's own trading account. Trading instruments are
carried at fair value. The positive and negative fair values are included
in other assets and other liabilities, respectively, in the consolidated
statements of condition. Realized and unrealized gains or losses are
included as a component of other noninterest income.
Risk Management Instruments--The Corporation enters into derivative
financial instruments, primarily interest rate swaps, interest rate caps
and floors, and purchased options for risk management purposes. These risk
management instruments are designated to interest bearing assets and
liabilities of the Corporation and are entered into to modify the
characteristics of the designated assets or liabilities. Interest rate
swaps used for risk management purposes are accounted for on the accrual
basis with net interest income or expense on the swaps recognized as an
adjustment to the interest income or expense of the designated assets or
liabilities. For interest rate caps and floors and purchased options, any
premiums or other cash flows are recorded systematically as a component of
the income or expense of the designated assets or liabilities. Upon early
termination of these derivative financial instruments, any realized gain or
loss is deferred and amortized as an adjustment to the yield of the
designated assets or liabilities over the life of the original hedge, as
long as the designated assets or liabilities remain.
Trust Assets--Property held in fiduciary or agency capacities for First
National's and York Bank's customers is not included in the consolidated
statements of condition since such assets are not assets of the Corporation.
Sales and Servicing of Loans--The Corporation periodically securitizes and
sells bankcard loans and other consumer loans. Servicing income, which
represents the excess of interest and other fees earned on securitized assets
over the interest paid to the investors, estimated credit losses, servicing
fees and other trust expenses, is recorded over the life of the transaction as
earned. Transaction expenses are deferred and amortized over the reinvestment
period of the transaction as a reduction of servicing income.
Statement of Cash Flows--For purposes of reporting cash flows, cash
equivalents include cash and due from banks and interest bearing deposits in
other banks of $444 thousand, $21.9 million and $137.2 million at December 31,
1996, 1995 and 1994, respectively, which are included in money market
investments in the consolidated statements of condition.
Reclassifications--Certain amounts in the 1994 and 1995 consolidated
financial statements have been reclassified to conform with the 1996
presentation.
Prospective Accounting Pronouncements--In June 1996, the Financial
Accounting Standards Board ("FASB") issued SFAS 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards require
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 the criteria provided in the
Statement. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
with the exception of certain provisions relating to repurchase agreements,
securities lending, and other similar transactions and pledged collateral.
These provisions have been delayed until after December 31, 1997 by SFAS 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." The Corporation will apply the new rules prospectively to applicable
transactions in 1997. The adoption of these Statements is not expected to have
a material impact on the financial statements of the Corporation.
45
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
1st Washington Bancorp, Inc.
On July 16, 1996, the Corporation acquired 1st Washington Bancorp, Inc.
("1st Washington"), a savings and loan holding company headquartered in
Herndon, Virginia, whose principal subsidiary was Washington Federal Savings
Bank. Under terms of the agreement, the shareholders of 1st Washington
received $8.125 in cash per share, for a total purchase price of $83.5
million. On the date of the acquisition, the Corporation acquired total assets
of $866.2 million which included $325.7 million in loans and $426.3 million in
deposits. This acquisition was accounted for as a purchase and the results of
operations have been included with the Corporation's results of operations
since July 16, 1996. As a result of the acquisition, the Corporation recorded
$46.5 million in goodwill which is amortized on a straight line basis over a
period of 25 years.
Zirkin-Cutler Investments, Inc.
On July 1, 1996, the Corporation acquired Zirkin-Cutler Investments, Inc.
("Zirkin-Cutler"), a Washington, D.C. investment management company. Under
terms of the agreement, the principals of Zirkin-Cutler received $4.8 million
in cash and 90 thousand shares of redeemable preferred stock. On the date of
acquisition, Zirkin-Cutler had $1.1 billion in assets under investment
management. This acquisition was accounted for as a purchase and the results
of operations have been included with the Corporation's results of operations
since July 1, 1996. As a result of the acquisition, the Corporation recorded
$12.2 million in goodwill and other intangible assets which are amortized on a
straight line basis over periods ranging from 6 to 25 years.
Dauphin Deposit Corporation
On January 21, 1997, the Corporation, AIB and Dauphin Deposit Corporation
("Dauphin") entered into a definitive agreement and plan of merger, pursuant
to which Dauphin will merge with and into the Corporation. Dauphin
shareholders will receive cash and AIB American Depository Shares ("AIB ADSs")
with an aggregate value of approximately $1.36 billion based upon the market
price of AIB ADSs on January 21, 1997. Dauphin and its bank and nonbank
subsidiaries provide corporate, commercial, correspondent and retail banking
services, personal and corporate trust services and related financial products
and services to individuals, businesses, governmental units and financial
institutions, primarily in south-central Pennsylvania. At December 31, 1996,
Dauphin had consolidated total assets of $5.9 billion, total deposits of $4.0
billion, and total stockholders' equity of $570.4 million. The purchase of
Dauphin is subject to both Dauphin and AIB shareholder approval as well as
U.S. and Irish regulatory approvals.
3. MONEY MARKET INVESTMENTS
Money market investments at December 31, 1996 and 1995 include the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest bearing deposits in other banks................... $ 444 $ 21,878
Trading account securities................................. -- 326
Federal funds sold......................................... 32,975 322,275
Securities purchased under agreements to resell............ 42,051 21,876
------- --------
Total money market investments........................... $75,470 $366,355
======= ========
</TABLE>
46
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENT SECURITIES
The amortized cost and fair values of available-for-sale securities at
December 31, 1996 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. Govern-
ment Agencies................. $ 614,843 $ 2,610 $ (6,392) $ 611,061
Mortgage-backed obligations.... 1,161,369 6,921 (8,641) 1,159,649
Collateralized mortgage obliga-
tions......................... 365,984 4,453 (1,781) 368,656
Asset-backed securities........ 204,657 2,028 (263) 206,422
Obligations of states and po-
litical subdivisions.......... 93,987 5,049 (147) 98,889
Other debt securities.......... 47,140 455 -- 47,595
Equity securities.............. 50,617 9,816 (85) 60,348
---------- ------- -------- ----------
Total........................ $2,538,597 $31,332 $(17,309) $2,552,620
========== ======= ======== ==========
</TABLE>
The amortized cost and fair values of available-for-sale securities at
December 31, 1995 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........... $ 891,263 $10,092 $(1,008) $ 900,347
Mortgage-backed obligations.... 1,232,652 13,899 (1,212) 1,245,339
Collateralized mortgage obliga-
tions......................... 408,335 6,010 (2,056) 412,289
Asset-backed securities........ 12,775 93 12,868
Obligations of states and po-
litical subdivisions.......... 98,009 7,040 (163) 104,886
Other debt securities.......... 77,906 -- -- 77,906
Equity securities.............. 33,454 6,934 -- 40,388
---------- ------- ------- ----------
Total........................ $2,754,394 $44,068 $(4,439) $2,794,023
========== ======= ======= ==========
</TABLE>
The amortized cost and fair values of available-for-sale debt securities at
December 31, 1996 by contractual maturity are shown in the following table.
Expected maturities will differ from contractual maturities because many
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................... $ 72,706 $ 72,899
Due after one year through five years................. 556,449 554,908
Due after five years through ten years................ 48,091 48,742
Due after ten years................................... 78,724 80,996
Mortgage-backed securities(1)......................... 1,732,010 1,734,727
---------- ----------
Total............................................... $2,487,980 $2,492,272
========== ==========
</TABLE>
- --------
(1) Includes mortgage-backed securities and collateralized mortgage
obligations.
47
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from the sale of investment securities available-for-sale were $1.2
billion and $869.8 million during 1996 and 1995, respectively. Gross gains and
losses realized on the sale of investment securities available-for-sale were
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Gross gains...................................... $ 3,555 $ 5,910
Gross losses..................................... (3,452) (3,774)
------------ ------------
Total.......................................... $ 103 $ 2,136
============ ============
</TABLE>
On December 8, 1995, consistent with the implementation guidance provided in
the FASB Special Report titled "A Guide to the Implementation of Statement 115
on Accounting for Certain Debt and Equity Securities", the Corporation
reassessed the appropriateness of the classification of securities in the
held-to-maturity portfolio and elected to transfer all securities in the held-
to-maturity portfolio to the available-for-sale portfolio. The investment
securities transferred had an amortized cost of $1.3 billion and net
unrealized gains of $780 thousand on the date of transfer.
Proceeds from the sale of investment securities held-to-maturity were $20.4
million during 1994. These sales occurred as a result of the dissolution of a
nonbanking subsidiary of the Corporation. Gross gains and losses realized on
the sale of investment securities held-to-maturity were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross gains...................................... $ -- $ -- $ 67
Gross losses..................................... -- -- (39)
-------- -------- --------
Total.......................................... $ -- $ -- $ 28
======== ======== ========
</TABLE>
Investment securities from the consolidated investment portfolio with a book
value of $851.9 million at December 31, 1996 and $627.6 million at December
31, 1995 were pledged to secure public funds, trust deposits, repurchase
agreements and funds transactions and for other purposes required by law.
48
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LEASES RECEIVABLE
The Corporation's direct financing portfolio consists of general equipment
leases with an emphasis on transportation equipment in addition to retail
automobile leases. Leveraged leases consist of general and transportation
equipment leasing. The following table details the components of the net
investment in leases at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Direct financing leases:
Lease payments receivable............................ $ 267,469 $ 205,184
Less allowance for credit losses..................... (1,090) (1,079)
--------- ---------
Net lease payments receivable........................ 266,379 204,105
Estimated residual values............................ 47,615 38,308
--------- ---------
313,994 242,413
Less unearned income................................. (67,154) (55,128)
--------- ---------
Net investment in direct financing leases............ $ 246,840 $ 187,285
========= =========
Leveraged leases:
Lease payments receivable............................ $ 94,856 $ 76,071
Estimated residual values............................ 144,912 108,228
--------- ---------
239,768 184,299
Less unearned income................................. (49,638) (38,159)
--------- ---------
Investment in leveraged leases....................... 190,130 146,140
Less related deferred taxes.......................... (134,162) (104,598)
--------- ---------
Net investment in leveraged leases................... $ 55,968 $ 41,542
========= =========
</TABLE>
Minimum lease payments receivable at December 31, 1996 are due as follows:
<TABLE>
<CAPTION>
AFTER
1997 1998 1999 2000 2001 2001 TOTAL
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$44,259 $51,797 $52,252 $62,365 $42,905 $301,274 $554,852
</TABLE>
6. IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Corporation adopted the provisions of Statements of Financial Accounting
Standards (SFAS) No. 114 and 118, "Accounting by Creditors for Impairment of a
Loan" on January 1, 1995. A loan is impaired when, based upon current
information and events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected. The impairment
of a loan is measured at the present value of expected future cash flows using
the loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A valuation allowance is recorded if the measured value
of the impaired loan is less than its recorded investment (outstanding
principal balance, accrued interest receivable, net deferred loan fees or
costs and unamortized premium or discount). The valuation allowances for
impaired loans are included in the allowance for credit losses through charges
against income in the form of provisions for credit losses.
49
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans to be considered for evaluation of collectibility include loans
classified as doubtful, certain substandard loans, certain nonaccrual loans
and any other loans for which collection of all principal and interest
payments under the contractual terms is not considered probable. A loan would
not be considered impaired during a period of "minimum delay" in payment,
regardless of the amount of shortfall, if the ultimate collectibility of all
amounts due is expected. The Corporation defines "minimum delay" as past due
less than 90 days.
Impaired loans include commercial, construction, commercial mortgage and
foreign loans. Impaired loans do not include large groups of smaller balance,
homogeneous loans such as residential mortgages, retail loans and bankcard
loans that are evaluated collectively for impairment, or leases and loans
measured at fair value or lower of cost or fair value. Reserves for probable
future credit losses related to impaired loans are included in the allowance
for credit losses applicable to other than impaired loans. The Corporation's
charge-off policy for impaired loans is consistent with its policy for loan
charge-offs to the allowance. Impaired loans are charged-off when an impaired
loan, or portion thereof, is considered uncollectible. Interest income
received on impaired loans is either applied to principal or recognized on a
cash basis. This policy is consistent with the Corporation's method of
interest recognition on nonaccrual loans.
In certain circumstances, a nonaccrual loan may not meet the definition of
an impaired loan. At December 31, 1996, the difference between total
nonaccrual loans and total impaired loans was $11.3 million which included the
following: nonaccrual residential loans of $7.5 million which were considered
smaller balance homogeneous loans and a $3.8 million nonaccrual foreign loan
which is classified as a nonaccrual loan due to regulatory requirements but
does not meet the definition of an impaired loan.
The following table presents impaired loans by type and any related
valuation allowance at December 31, 1996:
<TABLE>
<CAPTION>
IMPAIRED IMPAIRED
TOTAL LOANS WITH LOANS WITH RELATED
IMPAIRED NO VALUATION A VALUATION VALUATION
LOANS ALLOWANCE ALLOWANCE ALLOWANCE
-------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................... $13,988 $10,358 $3,630 $632
Real estate, construction...... 4,014 4,014 -- --
Real estate mortgage, commer-
cial.......................... 16,333 11,076 5,257 182
------- ------- ------ ----
Total........................ $34,335 $25,448 $8,887 $814
======= ======= ====== ====
The following table presents impaired loans by type and any related
valuation allowance at December 31, 1995:
<CAPTION>
IMPAIRED IMPAIRED
TOTAL LOANS WITH LOANS WITH RELATED
IMPAIRED NO VALUATION A VALUATION VALUATION
LOANS ALLOWANCE ALLOWANCE ALLOWANCE
-------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................... $16,588 $15,370 $1,218 $570
Real estate, construction...... 1,125 1,033 92 35
Real estate mortgage,
commercial.................... 4,785 4,020 765 130
Foreign........................ 521 521 -- --
------- ------- ------ ----
Total........................ $23,019 $20,944 $2,075 $735
======= ======= ====== ====
</TABLE>
50
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Year-to-date average recorded investment in
impaired loans.................................. $ 27,639 $ 33,604
Year-to-date interest income recognized during
impairment...................................... 201 396
Year-to-date interest income recognized on a cash
basis during impairment......................... 201 396
</TABLE>
At December 31, 1996, the majority of the impaired loans were measured using
the fair value of the loan's collateral. The $814 thousand and $735 thousand
valuation allowances for impaired loans at December 31, 1996 and 1995,
respectively and the activity related to impaired loans for the years ended
December 31, 1996 and 1995 is included in the allowance for credit losses
discussed below.
The provision for credit losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that all uncollectible amounts have been charged-off and that the
allowance is adequate to cover all losses inherent in the portfolio at
December 31, 1996. A summary of the activity in the allowance for the three
years ended December 31, 1996 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance beginning of year.................... $177,621 $191,024 $200,006
Provision charged to operating expenses...... 6,500 16,000 22,996
Less charge-offs, net of recoveries of
$7,179, $9,045, and $13,159................. (38,299) (29,403) (29,368)
Allowance on acquired (sold) loans........... 10,642 -- (2,610)
Transfer of allowance to reserve for off-bal-
ance sheet liability........................ (1,662) -- --
-------- -------- --------
Balance at end of year....................... $154,802 $177,621 $191,024
======== ======== ========
</TABLE>
7. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION
AND AND
COST AMORTIZATION NET COST AMORTIZATION NET
-------- ------------ -------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land.................... $ 11,278 $ -- $ 11,278 $ 11,107 $ -- $ 11,107
Buildings and land
improvements........... 48,371 21,591 26,780 46,567 20,238 26,329
Leasehold improvements.. 41,234 23,115 18,119 38,580 21,261 17,319
Furniture and equip-
ment................... 56,679 38,066 18,613 54,178 38,411 15,767
Computer hardware and
software............... 90,218 58,307 31,911 82,114 48,257 33,857
-------- -------- -------- -------- -------- --------
Total................. $247,780 $141,079 $106,701 $232,546 $128,167 $104,379
======== ======== ======== ======== ======== ========
</TABLE>
51
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization on premises and equipment charged to
operations amounted to $23.2 million in 1996, $22.4 million in 1995, and $20.4
thousand in 1994.
8. INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1995 included the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $79,454 $28,693
Premium on bankcard loans................................... 7,986 11,476
Premium on deposits......................................... 6,729 7,787
Employment contracts........................................ 3,891 --
Other....................................................... 787 698
------- -------
Total..................................................... $98,847 $48,654
======= =======
</TABLE>
9. MORTGAGE SERVICING RIGHTS
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 122, "Accounting for Mortgage Servicing Rights" in 1995 which requires an
allocation of a portion of the total cost of applicable mortgage loans to
originated mortgage servicing rights based upon their relative fair values on
the date of mortgage origination.
Mortgage servicing rights activity for the three years ended December 31,
1996 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------
ORIGINATED PURCHASED ORIGINATED PURCHASED PURCHASED
---------- --------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance beginning of
year................... $ 5,033 $1,067 $ -- $1,270 $ 777
Capitalized mortgage
servicing rights....... 732 44 5,610 311 889
Amortization............ (783) (197) (538) (514) (396)
Sale of servicing....... (4,334) (914) -- -- --
Purchased mortgage
servicing rights
acquired............... -- 2,598 -- -- --
Valuation allowance..... -- -- (39) -- --
------- ------ ------ ------ ------
Balance at end of year.. $ 648 $2,598 $5,033 $1,067 $1,270
======= ====== ====== ====== ======
</TABLE>
10. VALUATION ALLOWANCE FOR OTHER REAL ESTATE OWNED
A summary of the activity in the valuation allowance for other real estate
owned is provided below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance beginning of year..................... $ 295 $ 4,185 $ 4,412
Provision for other real estate losses........ 77 264 44
Writedowns.................................... (77) (4,154) (271)
Valuation allowance of acquired other real es-
tate owned................................... 29 -- --
------ --------- --------
Balance at end of year........................ $ 324 $ 295 $ 4,185
====== ========= ========
</TABLE>
52
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FUNDS SOLD AND PURCHASED AND REPURCHASE AGREEMENTS
Federal funds sold and purchased generally represent one-day transactions, a
portion of which arise because of the Corporation's market activity in Federal
funds on behalf of its correspondent banks. At December 31, 1996, federal
funds sold totaled $33.0 million and federal funds purchased totaled $314.5
million. Securities sold or purchased under agreements to resell or repurchase
are secured by U.S. Treasury and U.S. Government agency securities and
generally mature within three months.
At December 31, 1996, securities purchased under agreements to resell
totaled $42.1 million. All securities purchased were delivered either directly
to the Corporation or to an agent for safekeeping. The aggregate fair value of
all securities purchased under agreements to resell did not exceed 10% of
total assets and the amount at risk with any individual counterparty or group
of related counterparties did not exceed 10% of total stockholders' equity.
Securities purchased under agreements to resell averaged approximately $222.0
million during 1996, and the maximum amount outstanding at any month end
during 1996 was $470.3 million.
At December 31, 1996, securities sold under agreements to repurchase totaled
$219.0 million. The aggregate fair value of all securities sold under
agreements to repurchase did not exceed 10% of total assets and the amount at
risk with any individual counterparty or group of related counterparties did
not exceed 10% of total stockholders' equity. Securities sold under agreements
to repurchase averaged approximately $254.0 million during 1996, and the
maximum amount outstanding at any month end during 1996 was $350.2 million.
12. OTHER BORROWED FUNDS, SHORT-TERM
Following is a summary of short-term borrowings exclusive of overnight
Federal funds purchased and securities sold under agreements to repurchase at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Bank notes................................................ $400,000 $400,000
Master demand notes of the Corporation.................... 320,619 402,489
Federal funds purchased-term.............................. 60,000 80,000
Treasury tax and loan note account........................ 10,965 6,000
Other..................................................... 29,893 20,155
-------- --------
Total................................................... $821,477 $908,644
======== ========
</TABLE>
At December 31, 1996, the Corporation had available lines of credit with
third-party banks aggregating $100 million to support commercial paper
borrowings for which a fee is generally paid in lieu of compensating balances.
53
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT
Following is a summary of the long-term debt of the Corporation at December
31, 1996 and 1995 which is all unsecured:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <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 --
10.375% Subordinated Capital Notes due August 1, 1999.... 59,977 59,969
9.15% Notes due June 1, 1996............................. -- 10,000
8.68% Notes due January 31, 1997......................... 10,000 9,998
8.67% Notes due March 20, 1997........................... 10,000 9,998
8.375% Subordinated Notes due May 15, 2002............... 99,765 99,722
-------- --------
Total.................................................. $229,742 $514,687
======== ========
</TABLE>
The combined maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------- ------- ------- ----- ----- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$20,000 $50,000 $59,977 $ -- $ -- $99,765 $229,742
</TABLE>
All of the notes other than the 10.375% Subordinated Capital Notes and the
8.375% Subordinated Notes are senior indebtedness. There is no provision in
any of the Notes or related indentures for a sinking fund. Several of the
notes or related indentures also prohibit the sale, transfer, or disposal of
any capital stock of the Corporation.
The Floating Rate, $50.0 million Medium-term bank note matures April 20,
1998 and bears interest at an effective rate equal to the London inter-bank
offered rate (LIBOR) for 1-month Eurodollar deposits. The rate at December 31,
1996 was 5.64453%. Interest is payable quarterly and the note is not
redeemable prior to maturity.
The 10.375% Subordinated Capital Notes mature August 1, 1999 with interest
payable semiannually and at maturity and will be exchanged for Common Stock of
the Corporation having a fair value equal to the principal amount of the
Notes, except to the extent that the Corporation, at its option, elects to pay
in cash the principal amount of the Notes, in whole or in part, from amounts
representing proceeds of other issuances of securities qualifying as capital,
designated for such purpose.
The 8.68% Notes mature January 31, 1997 with interest payable semiannually
and are not redeemable prior to maturity.
The 8.67% Notes mature March 20, 1997 with interest payable semiannually and
are not redeemable prior to maturity.
The 8.375% Subordinated Notes mature May 15, 2002, with interest payable
semiannually and are not redeemable prior to maturity.
54
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED
DEBENTURES
The Corporation issued $150.0 million in Floating Rate Subordinated Capital
Income Securities ("Capital Securities") in December 1996 through its
subsidiary, First Maryland Capital I, a Delaware statutory business trust
("the Trust"). The Capital Securities represent undivided beneficial ownership
interests in the assets of the Trust. The Corporation purchased 4,640 Common
Securities ($1,000 liquidation amount per security) from the Trust, which
represent all ownership interests in the Trust other than the Capital
Securities for a purchase price of $4.55 million. The Trust was set up for the
sole purpose of issuing the Capital Securities and the Common Securities and
investing the proceeds in Floating Rate Junior Subordinated Debentures
("Junior Subordinated Debentures") issued by the Corporation. The Capital
Securities have a preference in certain circumstances with respect to cash
distributions and amounts on redemption or liquidation over the Common
Securities.
Description of Capital Securities
Each Capital Security has a liquidation amount of $1,000 and 150 thousand
Capital Securities were issued to investors at a price of $980.75 per security
or a total purchase price of $147.1 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 on the liquidation amount of $1,000
per Capital Security. The cash distributions accrue from the date of the
original issuance and are payable quarterly in arrears on the 15th of January,
April, July and October of each year commencing on April 15, 1997. 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 Trust. The Corporation has the right to dissolve the Trust
and distribute the Junior Subordinated Debentures to holders of Capital
Securities in liquidation of the Trust upon the occurrence of certain events
relating to: (i) changes in the tax treatment of the Trust or the Junior
Subordinated Debentures; (ii) changes in the regulatory capital treatment of
the Capital Securities; or (iii) changes in the treatment of the Trust under
the Investment Company Act of 1940. In the absence of such a special event,
the Capital Securities may only be redeemed upon a redemption of the Junior
Subordinated Debentures.
Description of Junior Subordinated Debentures
The Trust used the aggregate proceeds of $151.7 million from the issuance of
the Capital and Common Securities to purchase $154.6 million aggregate
principal amount of Junior Subordinated Debentures from the Corporation.
Interest on the debentures is calculated at the same rate and payable on the
same dates as on the Capital Securities. The Corporation has the right to
defer payment of interest on the Junior Subordinated Debentures by extending
the interest payment period, from time to time, for up to 20 consecutive
quarters. The 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, or at any time, in whole but not in part, upon the occurrence of one of
the special events described above, in either case subject to the necessary
prior approval of the Federal Reserve and the Central Bank of Ireland. If
Junior Subordinated Debentures are redeemed, the Trust must redeem Capital
Securities having an aggregate liquidation amount equal to the aggregate
principal amount of the Junior Subordinated Debentures redeemed.
15. REDEEMABLE PREFERRED STOCK
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 fair value at the
date of issue or $7.6 million. 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 December 31, 1996, all
90 thousand shares were outstanding. The cumulative dividends are payable
quarterly when and as declared by the Corporation's Board
55
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of Directors out of funds legally available for such payments. Other terms of
the redeemable preferred stock are as follows:
Preference
Upon liquidation, $100 per share (an aggregate of $9 million based upon
redeemable preferred shares outstanding at December 31, 1996) plus accrued and
unpaid cumulative dividends through the distribution date before any
distribution to holders of the Corporation's common stock.
Optional Redemption
Redeemable at the Corporation's option or the holders' options (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.
16. EMPLOYEE BENEFIT PLANS
The Corporation sponsors three defined benefit pension plans. The largest
plan covers substantially all employees of the Corporation and its
subsidiaries; the two smaller plans provide supplemental benefits to certain
key employees. Benefits under the plans are generally based on age, years of
service and compensation levels. Net periodic pension costs totaled $9.4
million in 1996, $6.7 million in 1995, and $12.0 million in 1994.
Effective January 1, 1994, the Corporation implemented a change in the
methodology used to determine the amortization of unrecognized actuarial gains
and losses to be included in current period pension costs. Prior to 1994, the
Corporation amortized all actuarial gains and losses over a period of ten
years, the estimated remaining service period of active employees who are
expected to receive benefits under the Corporation's pension plan. In 1994,
the Corporation, in compliance with the provisions of Statement of Financial
Accounting Standards No. 87, elected to amortize these gains and losses only
to the extent that they exceed ten percent of (a) the projected benefit
obligation or (b) the fair market value of plan assets, whichever is greater.
This change in methodology was implemented to reduce the volatility of the
Corporation's pension expense from year to year due to the dramatic swings in
interest rates used to set the annual discount rate. This change in accounting
methodology reduced pension expense by approximately $933 thousand in 1994.
Effective January 1, 1994, the Corporation also changed its actuarial
assumptions regarding the increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
from 5.5% to 4.5%. The 4.5% increase in compensation levels reflects the
Corporation's actual experience from 1994 through 1996.
The following tables set forth the combined financial status of the plans
for 1996 and 1995, and the composition of net periodic pension costs for 1996,
1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested................................................. $101,300 $104,669
Non-vested............................................. 3,548 3,199
-------- --------
Total................................................ $104,848 $107,868
======== ========
Projected benefit obligation............................. $138,312 $149,413
Plan assets at fair value (primarily marketable
securities)............................................. 127,061 112,855
-------- --------
Unfunded status........................................ $ 11,251 $ 36,558
======== ========
</TABLE>
56
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995
---------------------------- ----------------------------
FUNDED UNFUNDED FUNDED UNFUNDED
PLAN PLANS TOTAL PLAN PLANS TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Unrecognized net
transition asset
(liability)............ $ 4,058 $ (398) $ 3,660 $ 5,470 $ (498) $ 4,972
Unrecognized prior
service benefit
(costs)................ 1,934 (2,403) (469) 2,179 (2,503) (324)
Unrecognized net loss... (27,645) (522) (28,167) (47,701) (3,402) (51,103)
Prepaid (accrued)
pension costs.......... 19,467 (5,742) 13,725 17,243 (7,346) 9,897
-------- ------- -------- -------- -------- --------
Unfunded status....... $ (2,186) $(9,065) $(11,251) $(22,809) $(13,749) $(36,558)
======== ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension costs:
Service cost............................... $ 7,651 $ 5,869 $ 6,709
Interest cost.............................. 9,363 8,589 8,519
Return on assets........................... (11,529) (19,488) 3,194
Net amortization and deferral.............. 2,200 11,744 (10,854)
Settlement expense......................... 1,706 -- 4,434
-------- -------- --------
Total.................................... $ 9,391 $ 6,714 $ 12,002
======== ======== ========
</TABLE>
Included in accrued pension costs and netted against retained earnings in
1996, 1995 and 1994 are accruals of $1.1 million, $834 thousand, and $634
thousand, respectively. The adjustments were made to reflect the excess of the
unfunded accumulated benefit obligation (the excess of the accumulated benefit
obligations over the fair value of plan assets) over the existing unrecognized
prior service costs for one of the supplemental plans.
The 1996 weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.80% and 4.50%, respectively. The expected
long-term rate of return on assets was 9.25% in 1996. For 1995, the rates were
6.95%, 4.50% and 9.25%, respectively.
The Corporation sponsors defined benefit postretirement plans that provide
medical and life insurance coverage to eligible retirees and dependents based
on age and length of service. Medical coverage options are the same as those
available to active employees. The cost of plan coverage for retirees and
their qualifying dependents is based upon a credit system that combines age
and years of service. Substantially all employees become eligible for these
benefits when they retire. Benefits are provided through an insurance company
whose premiums are based on the benefits paid during the year.
In 1993, the Corporation adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and elected to amortize the
transition obligation of $19.8 million on a straight-line basis over a period
of twenty years. Postretirement benefit costs totaled $3.5 million , $3.7
million and $3.8 million in 1996, 1995 and 1994, respectively.
57
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's Consolidated Statements of Condition.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
LIFE LIFE
MEDICAL INSURANCE TOTAL MEDICAL INSURANCE TOTAL
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Postretirement Benefit
Obligation:
Retirees.............. $ (8,864) $(1,672) $(10,536) $ (9,867) $(1,649) $(11,516)
Dependents of retirees
eligible for
benefits............. (2,590) -- (2,590) (3,542) -- (3,542)
Active employees fully
eligible for
benefits............. (19) (73) (92) (619) (146) (765)
Active employees not
eligible for
benefits............. (8,198) (884) (9,082) (10,456) (918) (11,374)
-------- ------- -------- -------- ------- --------
Accumulated
postretirement benefit
obligation............. (19,671) (2,629) (22,300) (24,484) (2,713) (27,197)
Plan assets at fair val-
ue..................... -- -- -- -- -- --
-------- ------- -------- -------- ------- --------
Accumulated
postretirement benefit
obligation in excess of
plan assets............ (19,671) (2,629) (22,300) (24,484) (2,713) (27,197)
Unrecognized prior serv-
ice cost............... -- -- -- -- -- --
Unrecognized net (gain)
loss................... (4,041) 183 (3,858) 1,955 289 2,244
Unrecognized transition
obligation............. 14,076 1,801 15,877 14,956 1,914 16,870
-------- ------- -------- -------- ------- --------
Net postretirement bene-
fit liability included
in other liabilities... $ (9,636) $ (645) $(10,281) $ (7,573) $ (510) $ (8,083)
======== ======= ======== ======== ======= ========
</TABLE>
The assumptions used in developing the present value of the postretirement
benefit obligation are as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
General inflation.............................................. 4.50% 4.50%
Weighted average discount rate................................. 7.75 7.25
Weighted average rate of compensation increase................. 4.50 4.50
Rate of increase in health care costs-initial.................. 10.20 12.50
Rate of increase in health care costs-ultimate................. 4.30 5.50
</TABLE>
The resulting net periodic postretirement benefit costs consist of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
LIFE LIFE
MEDICAL INSURANCE TOTAL MEDICAL INSURANCE TOTAL
------- --------- ------ ------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost............. $1,010 $ 82 $1,092 $1,002 $ 54 $1,056
Interest cost............ 1,360 190 1,550 1,517 178 1,695
Amortization of net
gain.................... (95) -- (95) (71) -- (71)
Amortization of
unrecognized transition
obligation.............. 880 112 992 880 112 992
------ ---- ------ ------ ---- ------
Net periodic
postretirement benefit
costs................. $3,155 $384 $3,539 $3,328 $344 $3,672
====== ==== ====== ====== ==== ======
</TABLE>
58
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits is 10.2% for 1996 and is assumed to decrease gradually to
4.3% in the year 2002 and remain at that level thereafter. This health care
cost trend rate assumption has a significant effect on the amounts reported.
To illustrate, increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated post retirement benefit
obligation at December 31, 1996 by $1.1 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit
costs for 1996 by $110 thousand.
The Corporation provides all salaried and eligible hourly employees with a
defined contribution plan, which qualifies under Sec. 401(k) of the Internal
Revenue Code. Eligible employees may enter the plan on January 1 or July 1
following their date of employment. Employees may contribute varying
percentages of their annual base compensation up to a maximum of 16% (highly
compensated maximum of 10% during 1996). The Corporation matches 50% of the
first 6% of an employee's contribution. In addition, the Corporation makes
contributions based on accumulated, unused sick leave accrued at the end of
the plan year for non-officer employees. The defined contribution plan
expenses totaled $3.7 million, $3.2 million and $3.3 million in 1996, 1995 and
1994, respectively.
17. OTHER INCOME AND OTHER OPERATING EXPENSES
The following table summarizes the more significant elements of these
accounts for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Other income:
Customer service fees.......................... $ 8,303 $ 7,716 $ 8,577
Security sales and fees........................ 5,171 3,918 4,185
Trading income................................. 4,941 5,061 5,386
Other.......................................... 23,016 26,867 33,163
-------- -------- --------
Total........................................ $ 41,431 $ 43,562 $ 51,311
======== ======== ========
Other operating expenses:
External services.............................. $ 26,247 $ 21,205 $ 16,512
Postage and communications..................... 17,059 14,997 13,661
Advertising.................................... 15,940 16,299 15,967
Professional service fees...................... 10,149 8,674 16,379
Lending and collection......................... 6,657 6,225 9,319
Regulatory insurance and fees.................. 3,519 9,031 16,155
Other.......................................... 35,794 38,137 37,629
-------- -------- --------
Total........................................ $115,365 $114,568 $125,622
======== ======== ========
</TABLE>
18. INCOME TAXES
The Corporation follows an asset and liability approach of accounting for
income taxes. Its objective is to recognize the amount of taxes payable or
refundable in the current year and to defer tax assets and liabilities for
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. The measurement of tax assets and liabilities is based
on enacted tax laws. Deferred tax assets are reduced, if necessary, by the
amount of such benefits that are not expected to be realized based on
available evidence.
59
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is an analysis of income tax amounts included in the
consolidated statements of condition at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Federal income taxes currently payable..................... $ 3,176 $ 961
State income taxes currently (receivable) payable.......... (643) (446)
Deferred Federal and State income tax liability............ 90,539 54,441
</TABLE>
The components of income tax expense for the three years ended December 31,
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
Federal........................................ $ 22,678 $ 28,708 $ 36,496
Foreign........................................ 330 377 342
State.......................................... 3,209 2,639 4,051
-------- -------- --------
Total taxes currently payable................ 26,217 31,724 40,889
-------- -------- --------
Deferred income taxes:
Federal........................................ 44,220 29,329 15,170
State.......................................... 4,413 2,939 3,229
-------- -------- --------
Total deferred income taxes.................. 48,633 32,268 18,399
-------- -------- --------
Total income tax expense......................... $ 74,850 $ 63,992 $ 59,288
======== ======== ========
</TABLE>
Foreign income taxes represent taxes on interest received from foreign
borrowers and foreign dividends received.
The reconciliation of the statutory Federal income tax rate to the effective
tax rate for the three years ended December 31, 1996 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Percent of pre-tax income:
Statutory Federal income tax rate.......... 35.00% 35.00% 35.00%
Increase (decrease) in tax rate resulting
from:
Tax-exempt income.......................... (1.60) (2.74) (3.85)
State income taxes, net of Federal bene-
fits...................................... 2.49 1.97 2.78
Other, net................................. 0.23 0.51 0.86
-------- -------- --------
Effective tax rate........................... 36.12% 34.74% 34.79%
======== ======== ========
</TABLE>
60
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt........................................... $ 64,349 $ 74,937
Deferred compensation.............................. 13,025 12,635
Income on loans.................................... 6,101 4,937
Depreciation....................................... 1,194 605
Other.............................................. 12,108 6,923
--------- ---------
Total gross deferred tax assets.................. 96,777 100,037
--------- ---------
Deferred tax liabilities:
Leases............................................. (167,117) (130,410)
Unrealized gains on investment securities avail-
able-for-sale..................................... (5,512) (15,225)
Debt and securities sales.......................... (5,270) (2,981)
Pensions........................................... (2,486) (1,705)
Other.............................................. (6,931) (4,157)
--------- ---------
Total gross deferred tax liabilities............. (187,316) (154,478)
--------- ---------
Net deferred tax liability....................... $ (90,539) $ (54,441)
========= =========
</TABLE>
The composition of the 1996 income tax liability and provision between
current and deferred portions is subject to final determination based on the
1996 consolidated Federal income tax return.
19. LEASE COMMITMENTS
The Corporation occupies various office facilities under lease arrangements,
virtually all of which are operating leases. Rental expense under these
leases, net of subleases, was $17.2 million in 1996, $18.0 million in 1995,
and $17.2 million in 1994. Rental expense under equipment lease arrangements,
all of which are considered short-term commitments, was $2.4 million in 1996,
$2.6 million in 1995, and $4.0 million in 1994. The following is a summary of
the annual noncancellable long-term commitments, net of subleases:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997............ $17,720
1998............ 15,839
1999............ 13,789
2000............ 12,425
2001............ 11,100
2002-beyond..... 60,494
</TABLE>
The lease amounts represent minimum rentals not adjusted for property tax
and operating expenses which the Corporation may be obligated to pay. Such
amounts are insignificant in relation to the minimum obligations. It is
expected that in the normal course of business, leases that expire will be
renewed or replaced by leases on other properties; thus, it is anticipated
that future annual minimum lease commitments will not be less than the rental
expense for 1996.
61
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. RESTRICTIONS ON RETAINED EARNINGS
The payment of dividends to the Corporation by the Banks is subject to
various Federal and state laws and regulations. The approval of the
Comptroller of the Currency is required for any dividend by a national bank if
the total of all dividends declared by a national bank in any calendar year
exceeds the total of its net profits for that year combined with its retained
net profits for the preceding two calendar years. Under this formula, none of
the retained earnings of the National Banks was available for dividends
without the prior approval of the Comptroller of the Currency at January 1,
1997. Pursuant to Pennsylvania law, York Bank may pay dividends only out of
accumulated net earnings and may not pay a dividend if any transfer of net
earnings to surplus is required. At January 1, 1997, $2.7 million of the
retained earnings of York Bank was available to pay dividends to the
Corporation.
The Federal Reserve Act limits extensions of credit that can be made from
the Banks to any affiliate (with certain exceptions), including the Parent
Company. Loans to any one affiliate may not exceed 10% of a bank subsidiary's
capital and surplus and loans to all affiliates cannot exceed 20% of such bank
subsidiary's capital and surplus. Additionally, all loans must be
collateralized and must have terms comparable to those with unaffiliated
companies.
The Banks are required to maintain reserves, included in cash and due from
banks, with the Federal Reserve Bank against their deposits. Average reserve
balances maintained during 1996 and 1995 were $20.2 million and $46.4 million,
respectively.
21. REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its subsidiary banks must meet specific capital
guidelines that involve quantitative measures of the Corporation and its
subsidiary banks' assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation and its
subsidiary banks' capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiary banks to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined ), and Tier 1
capital (as defined) to average assets (as defined). Management believes, as
of December 31, 1996, that the Corporation and its subsidiary banks meet all
capital requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Board, the Comptroller of the Currency and the Federal Deposit
Insurance Corporation categorized the Corporation and its subsidiary banks as
well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Corporation and its subsidiary
banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Corporation
or its subsidiary banks' categories.
62
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Corporation and its subsidiary banks' actual capital amounts and ratios
at December 31, 1996 are presented in the following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL
(TO RISK WEIGHTED AS- greater than greater than greater than greater than
SETS) or equal to: or equal to: or equal to: or equal to:
Consolidated............ $1,578,032 17.20% $733,933 8.00% $917,417 10.00%
The First National Bank
of Maryland............ 770,336 10.37 594,441 8.00 743,051 10.00
The York Bank and Trust
Company................ 116,515 14.76 63,168 8.00 78,960 10.00
First Omni Bank, N.A. .. 80,121 12.85 49,864 8.00 62,330 10.00
TIER 1 CAPITAL
(TO RISK WEIGHTED AS-
SETS)
Consolidated............ 1,295,417 14.12% 366,967 4.00% 550,450 6.00%
The First National Bank
of Maryland............ 521,291 7.02 297,220 4.00 445,830 6.00
The York Bank and Trust
Company................ 106,601 13.50 31,584 4.00 47,376 6.00
First Omni Bank, N.A. .. 62,033 9.95 24,932 4.00 37,398 6.00
TIER 1 CAPITAL (TO
AVERAGE ASSETS)
Consolidated............ 1,295,417 12.18% 425,405 4.00% 531,757 5.00%
The First National Bank
of Maryland............ 521,291 6.17 337,828 4.00 422,285 5.00
The York Bank and Trust
Company................ 106,601 10.04 42,452 4.00 53,065 5.00
First Omni Bank, N.A. .. 62,033 11.40 21,757 4.00 27,197 5.00
The Corporation and its subsidiary banks' actual capital amounts and ratios
at December 31, 1995 are presented in the following table.
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL
(TO RISK WEIGHTED AS- greater than greater than greater than greater than
SETS) or equal to: or equal to: or equal to: or equal to:
Consolidated............ $1,388,426 17.05% $651,633 8.00% $814,541 10.00%
The First National Bank
of Maryland............ 683,204 10.51 520,107 8.00 650,133 10.00
The York Bank and Trust
Company................ 130,322 17.48 59,653 8.00 74,566 10.00
First Omni Bank, N.A. .. 89,421 13.37 53,494 8.00 66,868 10.00
TIER 1 CAPITAL
(TO RISK WEIGHTED AS-
SETS)
Consolidated............ 1,121,982 13.77% 325,816 4.00% 488,725 6.00%
The First National Bank
of Maryland............ 552,551 8.50 260,053 4.00 390,080 6.00
The York Bank and Trust
Company................ 120,829 16.20 29,826 4.00 44,740 6.00
First Omni Bank, N.A. .. 70,720 10.58 26,747 4.00 40,121 6.00
TIER 1 CAPITAL (TO
AVERAGE ASSETS)
Consolidated............ 1,121,982 10.91% 411,180 4.00% 513,975 5.00%
The First National Bank
of Maryland............ 552,551 6.99 316,229 4.00 395,287 5.00
The York Bank and Trust
Company................ 120,829 11.44 42,255 4.00 52,819 5.00
First Omni Bank, N.A. .. 70,720 11.24 25,171 4.00 31,464 5.00
</TABLE>
63
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. TRADING AND DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT
LIABILITIES
TRADING INSTRUMENTS
The Corporation maintains active trading positions in a variety of financial
derivatives including foreign exchange and interest rate futures, interest
rate swaps, interest rate caps and floors, forward rate agreements, and
interest rate and foreign exchange options. Many of these positions are a
result of activity generated by corporate customers. The balance of the
positions represent strategic trading decisions of the Corporation's
derivative and foreign exchange traders. The managers and traders involved in
financial derivatives have the technical expertise to trade these products
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.
Net Trading Income
The following table summarizes the Corporation's net trading income by
category of instrument. Net trading income is included in the income statement
as a component of other noninterest income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Interest rate contracts:
Interest rate swaps............................ $ (1,898) $ 4,087
Futures........................................ 1,695 (3,575)
Interest rate caps and floors.................. 17 40
Swaptions...................................... -- 3
Options........................................ 31 6
Miscellaneous.................................. 464 890
------------ ------------
309 1,451
------------ ------------
Foreign exchange contracts:
Spot and forward contracts..................... 6,241 (2,065)
Futures........................................ 20 (101)
Options........................................ (5,608) 2,163
Miscellaneous.................................. 2,260 2,711
------------ ------------
2,913 2,708
------------ ------------
Other:
Securities..................................... 1,719 902
------------ ------------
Total net trading income..................... $ 4,941 $ 5,061
============ ============
</TABLE>
64
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Nature and Terms of Trading Instruments
The following table presents the notional amounts, the end-of-period fair
values and the average fair values of the classes of trading instruments at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
FAIR VALUES
------------------------------------
END-OF-PERIOD
NOTIONAL AMOUNTS DECEMBER 31, AVERAGE
------------------- ----------------- -----------------
1996 1995 1996 1995 1996 1995
---------- -------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate contracts:
Interest rate swaps..... $1,065,738 $770,294
In a receivable posi-
tion................. $ 8,083 $12,257 $ 11,510 $ 6,952
In a payable posi-
tion................. (5,197) (6,043) (6,822) (3,137)
Interest rate caps and
floors................. 1,312,279 308,819
Interest rate caps and
floors held.......... 3,420 191 1,835 1,223
Interest rate caps and
floors written....... (3,419) (191) (1,834) (1,229)
Futures................. 34,000 75,500
In a favorable posi-
tion................. 47 1 -- --
In an unfavorable po-
sition............... (4) (274) -- --
Foreign exchange con-
tracts:
Options................. 2,923,103 707,654
Options held.......... 29,265 7,128 15,886 2,518
Options written....... (33,578) (6,083) (12,378) (2,339)
Forwards................ 499,781 825,137
In a favorable posi-
tion................. 7,333 1,566 2,097 1,224
In an unfavorable po-
sition............... (3,648) (1,365) (1,788) (881)
Securities:
Commitments to pur-
chase................ 17,692 57,545 -- -- -- --
Commitments to sell... 17,702 59,625 -- -- -- --
</TABLE>
The classes of trading instruments disclosed in the preceding table are
identified and described in the following sections, including a discussion of
notional amounts, credit exposure, and market risk.
Notional amounts represent the underlying amounts that the instruments are
based upon and do not represent the amounts exchanged by the parties to the
instruments. In addition, these amounts do not measure the Corporation's
exposure to credit or market risks. Credit risk is the risk of loss in the
event a counterparty to a transaction defaults or fails to perform under the
terms of the contract. The Corporation's credit risk exposure is represented
by the instruments detailed above with a positive fair value. The Corporation
would incur a loss if it was necessary to replace these instruments due to
counterparty default. The Corporation minimizes the credit risk of these
instruments through adherence to credit approvals, risk control limits, and
monitoring procedures. Market risk is the risk of decline in the value of the
contract arising from adverse movements in price, index, or rate of the
instrument underlying the contract. Exposure to market risk is managed in
accordance with the Corporation's approved risk limits and by entering into
offsetting positions. In addition, trading systems are in place which measure
risks and profitability associated with trading positions as market movements
occur.
Interest Rate Contracts
Interest rate swaps--These instruments represent contracts between two
parties to exchange interest payments on a specified principal amount,
referred to as the notional principal, for a specified period. Trading
interest rate swap activity arises when the Corporation takes a fixed or
floating rate position in a swap or when
65
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Corporation acts as an intermediary in arranging interest rate swap
transactions for customers and becomes a principal in the exchange of interest
payments between the parties. Cash settlement on interest rate swaps occurs on
a monthly, quarterly, or semiannual basis as specified in each interest rate
swap contract. The fair value of interest rate swaps in a receivable position
represents credit exposure to the Corporation.
Interest rate caps and floors--These instruments are option-like contracts
that require the writer to pay the purchaser at specified future dates, the
amount, if any by which a specified market interest rate exceeds the fixed cap
rate or falls below the fixed floor rate, applied to a notional principal
amount. The option writer receives a premium for bearing the risk of
unfavorable interest rate changes. Interest rate caps and floors written do
not expose the Corporation to credit risk, since the obligation to perform, if
required, is on the Corporation. The fair value of interest rate caps and
floors held represents credit exposure to the Corporation.
Futures--These instruments are contracts giving the holder the right to
purchase or sell a financial instrument at a future date for a specified
amount. Futures are traded on regulated exchanges. The credit risk of futures
contracts is limited by daily cash settlement of the net change in value of
open contracts with the exchange on which the contracts are traded.
Foreign Exchange Contracts
Options--These instruments are contracts conveying to the purchaser the
right, but not the obligation, to buy or sell an agreed amount of currency at
a specified exchange rate on or before a designated future date. The option
writer receives a premium for bearing the risk of unfavorable exchange rate
changes. Options written do not expose the Corporation to credit risk since
the obligation to perform, if required, is on the Corporation. At December 31,
1996, these contracts were principally denominated in pounds sterling and
deutschemarks. The fair value of options held represents credit exposure to
the Corporation.
Forwards--These instruments are contracts to purchase or sell currencies at
a specified exchange rate on a future date. Forwards are not traded on
regulated exchanges and expose the Corporation to credit risk as daily cash
settlements are not required. The fair value of forwards in a favorable
position represents credit exposure to the Corporation. At December 31, 1996,
these contracts were principally denominated in pounds sterling and
deutschemarks.
Securities
Commitments to purchase--These amounts represent commitments to purchase
when-issued securities as well as purchases of securities for the
Corporation's trading portfolio which have not settled as of the reporting
date. When-issued securities are securities where an announcement has been
made of the forthcoming issue by the U. S. Treasury or some other issuer but
settlement has not yet occurred.
Commitments to sell--These amounts represent commitments to sell when-issued
securities as well as sales of securities in the Corporation's trading
portfolio which have not settled as of the reporting date.
RISK MANAGEMENT INSTRUMENTS
Derivative financial instruments are an integral part of the Corporation's
risk management process. Derivatives allow the Corporation to modify the
repricing or maturity characteristics of assets and liabilities in a cost-
efficient manner. This flexibility helps the Corporation to achieve liquidity,
capital, and interest rate risk objectives.
Derivatives fluctuate in value as interest rates rise or fall just as on-
balance sheet assets and liabilities fluctuate in value. Derivatives are used
to modify the characteristics of assets or liabilities to which they are
66
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 a CD index, treasury
index, or LIBOR. Basis swaps lock in the spread between different indexes
during the life of the swaps. These swaps transfer the basis risk to third
parties willing to assume the risk and allow the Corporation to lock in
interest rate spreads between certain assets and liabilities.
To achieve its asset/liability management objectives, the Corporation uses a
combination of derivatives, particularly interest rate swaps, interest rate
caps and floors, and options. The nature of the instruments and the
significance of notional and credit exposure amounts are the same as described
in the preceding section on Trading Instruments. Credit risk and market risk
factors are also similar. The appropriateness of entering into derivative
instruments for risk management purposes is a function of the current or
desired interest rate sensitivity of the Corporation and is limited by
interest rate risk policies approved by the Corporation's Board of Directors.
67
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the notional and fair value amounts for the risk
management instruments entered into by the Corporation at December 31, 1996 and
1995 as well as the weighted average maturity and weighted average receive and
pay rates for the instruments at December 31, 1996. The unrealized gross gains
for the various classes of instruments represent the credit exposure at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1996
WEIGHTED WEIGHTED ESTIMATED
NOTIONAL AMOUNT AVERAGE AVERAGE RATE FAIR VALUE
----------------- MATURITY ------------ ----------------
1996 1995 IN YEARS RECEIVE PAY 1996 1995
-------- -------- -------- ------- ---- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
DESIGNATED TO ASSETS
INTEREST RATE SWAPS SOLD
Convert floating rate to
fixed rate............. $717,500 $375,000 3.88 6.22% 5.60% $ 1,020 $ 1,665
------- -------
Carrying amount(1)...... 4,444 7,702
Unrealized gross gains.. 4,714 1,685
Unrealized gross
losses................. (8,138) (7,722)
INTEREST RATE SWAPS
PURCHASED
Convert fixed rate to
floating rate.......... 46,423 46,708 3.47 5.55 6.29 (553) (1,795)
------- -------
Carrying amount(1)...... (74) (38)
Unrealized gross gains.. 261 86
Unrealized gross
losses................. (740) (1,843)
DESIGNATED TO
LIABILITIES
INTEREST RATE SWAPS SOLD
Convert fixed rate to
floating rate.......... 337,000 304,000 0.98 6.13 5.58 2,354 6,255
------- -------
Carrying amount(1)...... 305 254
Unrealized gross gains.. 2,105 6,027
Unrealized gross
losses................. (56) (26)
INTEREST RATE SWAPS
PURCHASED
Convert floating rate to
fixed rate............. -- 25,000 -- -- -- -- 53
------- -------
Carrying amount(1)...... (156) (215)
Unrealized gross gains.. 156 268
Unrealized gross
losses................. -- --
INTEREST RATE CAPS
PURCHASED
Convert floating rate to
fixed rate............. 165,000 200,200 2.45 Cap - 13.50%(2) -- --
------- -------
Carrying amount(1)...... -- 47
Unrealized gross gains.. -- --
Unrealized gross
losses................. -- (47)
CALL OPTIONS PURCHASED.. 12,536 12,536 0.71 -- -- 2,358 821
------- -------
Carrying amount(1)...... 2,620 1,490
Unrealized gross gains.. -- --
Unrealized gross
losses................. (262) (669)
BASIS SWAPS
Convert floating rate to
different index........ 80,000 30,000 1.63 5.44 5.51 (424) (695)
------- -------
Carrying amount(1)...... -- (76)
Unrealized gross gains.. 21 --
Unrealized gross
losses................. (445) (619)
</TABLE>
- --------
(1) Carrying amounts for 1996 represent accrued interest receivable (payable)
and the following deferred fees: deferred losses on the early termination
of interest rate swaps sold, $4.3 million; deferred gain on the early
termination of an interest rate swap purchased, ($156) thousand; and
deferred premiums on call options purchased, $262 thousand. Carrying
amounts for 1995 represent accrued interest receivable (payable) and the
following deferred fees: deferred losses on the early termination of
interest rate swaps sold, $7.7 million; deferred fees on the redesignation
of an interest rate swap purchased, ($254) thousand; deferred premiums on
interest rate caps purchased, $47 thousand; and deferred premiums on call
options purchased, $669 thousand.
(2) Pays interest if interest rates exceed 13.50%.
68
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the estimated maturities of the risk
management instruments entered into by the Corporation at December 31, 1996.
<TABLE>
<CAPTION>
1 YEAR 1-5 5-10 TOTAL
OR LESS YEARS YEARS YEARS
-------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Designated to Assets
Notional amounts................... -- $763,923 -- $763,923
Weighted average receive rate...... -- 6.18% -- 6.18%
Estimated fair value............... -- $ 467 -- $ 467
Designated to Liabilities
Notional amounts................... $222,651 $291,885 -- $514,536
Weighted average receive rate...... 5.83% 6.63% -- 6.13%
Estimated fair value............... $ 2,709 $ 2,003 -- $ 4,712
Basis Swaps
Notional amounts................... -- $ 80,000 -- $ 80,000
Weighted average receive rate...... -- 5.44% -- 5.44%
Estimated fair value............... -- $ (424) -- $ (424)
The following table summarizes the estimated maturities of the risk
management instruments entered into by the Corporation at December 31, 1995.
<CAPTION>
1 YEAR 1-5 5-10 TOTAL
OR LESS YEARS YEARS YEARS
-------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Designated to Assets
Notional amounts................... $275,000 $121,258 $25,450 $421,708
Weighted average receive rate...... 5.96% 5.79% 5.94% 5.91%
Estimated fair value............... $ 715 $ 927 $(1,772) $ (130)
Designated to Liabilities
Notional amounts................... $222,200 $319,536 -- $541,736
Weighted average receive rate...... 5.92% 6.89% -- 6.33%
Estimated fair value............... $ 582 $ 6,547 -- $ 7,129
Basis Swaps
Notional amounts................... -- $ 30,000 -- $ 30,000
Weighted average receive rate...... -- 4.83% -- 4.83%
Estimated fair value............... -- $ (695) -- $ (695)
</TABLE>
69
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the activity of the risk management
instruments entered into by the Corporation, by notional amounts, for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DESIGNATED TO DESIGNATED TO BASIS
ASSETS LIABILITIES SWAPS TOTAL
------------- ------------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31,
1994..................... $ 228,107 $ 857,761 $ 30,000 $1,115,868
Additions................. 200,000 305,275 -- 505,275
Maturities/amortizations.. (70) (521,300) -- (521,370)
Terminations.............. (6,329) (100,000) -- (106,329)
--------- --------- --------- ----------
Balance at December 31,
1995..................... 421,708 541,736 30,000 993,444
Additions................. 617,500 195,000 50,000 862,500
Maturities/amortizations.. (275,285) (122,200) (100,000) (497,485)
Redesignations............ -- (100,000) 100,000 --
--------- --------- --------- ----------
Balance at December 31,
1996..................... $ 763,923 $ 514,536 $ 80,000 $1,358,459
========= ========= ========= ==========
</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 $4.3 million at December 31, 1996. In 1997 and
1998, $3.4 million and $858 thousand of these losses, 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 $156 thousand at December 31, 1996. In 1997 and 1998, $98
thousand and $58 thousand of this gain, respectively, will be amortized into
income.
For the year ended December 31, 1996, the risk management instruments
entered into by the Corporation had the following impact on the components of
net interest income: gross interest income decreased $2.9 million and gross
interest expense decreased $3.6 million, which resulted in a $665 thousand
increase in net interest income. For the year ended December 31, 1995, the
risk management instruments entered into by the Corporation had the following
impact on the components of net interest income: gross interest income
decreased $3.5 million and gross interest expense decreased $3.6 million,
which resulted in a $161 thousand increase in net interest income.
Hedges of Anticipated Transactions
The Corporation's mortgage banking subsidiary obtains both mandatory and
optional commitments to deliver securitized mortgages and whole mortgage
loans. These commitments hedge the risk associated with residential mortgages
held-for-sale and firm and anticipated commitments to originate mortgage loans
which are expected to settle within six months. At December 31, 1996 and 1995,
residential mortgages held-for-sale, residential mortgage firm and anticipated
commitments, and offsetting commitments to deliver residential mortgages are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential mortgages held-for-sale....................... $122,887 $113,252
Commitments to originate mortgage loans:
Firm commitments........................................ 16,679 15,656
Anticipated commitments................................. 51,729 41,978
Mandatory commitments to deliver:
Securitized mortgages................................... 73,620 121,200
Optional commitments to deliver:
Whole mortgage loans.................................... 172,970 57,938
</TABLE>
70
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net fair values of the residential mortgages held-for-sale, firm and
anticipated commitments to originate mortgage loans, and the related
commitments to deliver residential mortgage loans were $125.1 million and
$114.5 million, respectively, at December 31, 1996 and 1995.
CREDIT-RELATED INSTRUMENTS
Financial instruments whose contractual amounts represent potential credit
risk at December 31, 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit:
Commercial loans.................................... $2,456,664 $2,307,569
Real estate loans................................... 146,539 115,728
Retail loans........................................ 681,661 602,236
Bankcard loans...................................... 5,092,954 4,071,581
Leases receivable................................... 8,570 13,123
Foreign loans....................................... 71,106 123,199
---------- ----------
Total commitments to extend credit................ $8,457,494 $7,233,436
========== ==========
Letters of credit:
Commercial.......................................... $ 47,988 $ 54,296
Standby-financial................................... 255,208 267,003
Standby-performance................................. 313,653 218,537
Standby-other confirmed............................. 18,959 21,734
---------- ----------
Total letters of credit........................... $ 635,808 $ 561,570
========== ==========
Securities lent....................................... $ 82,495 $ 163,836
Loans sold with recourse.............................. 258,565 90,022
</TABLE>
Commitments to extend credit--The Corporation enters into contractual
commitments to extend credit, normally with fixed expiration dates or
termination clauses, at both fixed and variable specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will
be available for working capital purposes, for capital expenditures and to
ensure access to funds at specified terms and conditions. Substantially all of
the Corporation's commitments to extend credit are contingent upon customers'
meeting and satisfying other conditions at the time of loan funding. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
Commercial letters of credit--Letters of credit are conditional commitments
issued by the Corporation in connection with obligations of customers (account
parties) to other persons (beneficiaries). A draw on a letter of credit by the
beneficiary creates a reimbursement obligation from the account party to the
Corporation. A commercial letter of credit is normally a short-term instrument
used to finance a commercial contract for the shipment of goods from a seller
to a buyer. This type of letter of credit ensures prompt payment to the seller
upon compliance with specific terms of the commercial letter of credit.
Standby letters of credit--A standby letter of credit can be either
financial or performance based. Financial standby letters of credit obligate
the Corporation to disburse funds to a third party if the Corporation's
customer fails to repay an outstanding loan or debt instrument under the terms
of the agreement with the beneficiary. Performance standby letters of credit
obligate the Corporation to disburse funds if the customer fails to perform
71
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
some contractual or non-financial obligation under the terms of the agreement
with the beneficiary. In either case, the beneficiary must also comply with
the terms of the letter of credit. The Corporation's policies generally
require that all standby letter of credit arrangements contain security and
debt covenants similar to those contained in loan agreements. The credit risk
involved in issuing both commercial and standby letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
Securities lent--These instruments represent securities owned by the
Corporation or its customers which are lent to third parties. The contract
amount represents potential credit risk. However, the Corporation obtains
collateral, with a fair value exceeding 100 percent of the contract amount,
for all securities lent which is used to indemnify the Corporation and
customers against possible losses resulting from third party defaults.
Loans sold with recourse--The majority of these loans are sold to a third
party with an agreement that the Corporation will reimburse the purchaser for
losses resulting from the purchased loans. In addition, a nonbanking
subsidiary of the Corporation originates, sells and services loans in
conjunction with the Fannie Mae Delegated Underwriting and Servicing (DUS)
program. Under this program, the Corporation's credit risk associated with
these loans sold with recourse is limited to a maximum loss of 20% of each
loan's original principal balance for the life of the loan. At December 31,
1996 and 1995, the Corporation's credit risk on loans sold with recourse under
the Fannie Mae DUS program totaled $89.6 million and $60.6 million,
respectively.
CONCENTRATIONS OF CREDIT RISK
The majority of the Corporation's loan activity is with customers within the
Baltimore/Washington marketplace which encompasses all of Maryland,
Washington, D.C., northern Virginia, and south central Pennsylvania and as
such its performance will be influenced by the economy of this region. The
loan portfolio is diversified with no single industry or customer comprising a
significant portion of the total portfolio.
SECURITIZED ASSETS
The Corporation's subsidiaries have securitized and sold manufactured
housing loans and bankcard loans with aggregate outstanding balances totaling
$609.3 million and $304.5 million at December 31, 1996 and 1995, respectively.
In April 1996, the Corporation securitized and sold an additional $335 million
in bankcard loans. The Corporation's subsidiaries receive market-rate
servicing fees to service these loans. The excess of interest and other fees
earned on securitized assets over the interest paid to investors, estimated
credit losses, servicing fees and other trust expenses may be paid to the
servicer or may be used in whole or in part to support the credit quality of
the assets for the benefit of investors. No gains or losses were recorded in
connection with the sales. At December 31, 1996 and 1995, respectively, $109.3
million and $139.5 million in manufactured housing loans were serviced by
outside parties for a fixed fee under subservicing agreements.
CONTINGENT LIABILITIES
The Corporation and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. In the opinion
of management, based on its review with counsel of these matters to date,
disposition of all matters will not materially affect the consolidated
financial position or results of operations of the Corporation and its
subsidiaries.
23. RELATED PARTY TRANSACTIONS
The Corporation's 1989 Long-Term Incentive Plan and Trust (the "1989 Plan")
provides for the award to key employees who contribute to the continued
growth, development and financial success of the Corporation of up to 7
million Ordinary shares IR25p each of Allied Irish ("Common Stock") (or the
equivalent thereof in
72
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common Stock ADSs) and 200 thousand Non-Cumulative Preference Share ADSs of
Allied Irish ("Preferred Stock") (together the "Restricted Stock"). An ADS, or
American Depository Share, is a share issued under a deposit agreement
representing the underlying ordinary share which is traded in the issuer's
home market. Awards are made to participants, without payment of consideration
by the participant, in the form of Restricted Stock purchased by the
Corporation in the open market and are held in trust under the 1989 Plan until
the expiration of the relevant restriction period. During 1996, 1994, 1993,
1991 and 1989, awards were made under the 1989 Plan aggregating the equivalent
of 53 thousand, 342 thousand, 2.0 million, 2.0 million and 1.8 million shares
of Common Stock and 3 thousand, 12 thousand, 57 thousand, 70 thousand and 51
thousand shares of Preferred Stock, respectively. Expenses relative to this
plan totaled $906 thousand, $2.0 million and $3.1 million in 1996, 1995 and
1994, respectively. The awards are subject to a restriction period of at least
three years.
Under the Corporation's 1995 Long-Term Incentive Plan (the "1995 Plan"),
incentive opportunities were granted to participants at the commencement of
the plan in January 1995. Awards will be paid to participants at the end of a
three-year performance period ending December 31, 1997. The amount of a
participant's award is based on certain performance targets established at
inception of the 1995 Plan, and will be paid in Common Stock ADSs and cash. If
a participant's employment status changes during the performance period, then
the award may be paid on a pro-rata basis or forfeited, depending on the
nature of the change. The purpose of the 1995 Plan is to attract and retain
key employees who contribute to the continued growth, development and
profitable performance of the Corporation. Expenses relative to this plan
totaled $3.0 million in both 1996 and 1995, respectively.
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating the fair value for its financial instruments as defined by SFAS No.
107.
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
MONEY MARKET INVESTMENTS: The carrying amount approximates fair value.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE: Fair values are based on published
market prices or dealer quotes.
LOANS HELD-FOR-SALE: Market quotes are used to estimate the value of loans
held-for-sale which are primarily residential mortgages unless there is a firm
commitment to sell the loans in which case the commitment price is used.
LOANS: For bankcard and home equity loans/lines of credit with short-term or
variable characteristics, the total loans outstanding approximate fair value.
This amount excludes any value related to the account relationship. The fair
value of other types of loans is estimated by discounting the future cash
flows using the comparable risk-free rate and adjusting for an appropriate
spread to cover credit risk and operating costs.
73
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates
fair value.
NONINTEREST BEARING DEPOSITS: The fair value of these instruments, by the
SFAS No. 107 definition, is the amount payable on demand at the reporting
date.
INTEREST BEARING DEPOSITS: The fair value of interest bearing demand
deposits, savings accounts and money market deposits with no defined maturity,
by SFAS No. 107 definition, is the amount payable on demand at the reporting
date. The fair value of certificates of deposit is estimated by discounting
the future cash flows using the current rates at which similar deposits could
be acquired.
FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, AND
OTHER SHORT-TERM BORROWINGS: The carrying amount approximates fair value.
LONG-TERM DEBT: The fair value is based on dealer quotes, where available,
and on estimates made by discounting the future cash flows using the current
rates at which similar borrowings could be acquired.
COMMITMENTS TO EXTEND CREDIT, STANDBY AND COMMERCIAL LETTERS OF CREDIT: The
fair value of loan commitments and letters of credit, both commercial and
standby, with the exception of residential mortgage loan commitments, is
assumed to equal the carrying value which is immaterial. Extensions of credit
under these commitments, if exercised, would result in loans priced at market
terms. The Corporation does not separately estimate the fair values of
residential mortgage loan commitments. These fair values are included in the
loans held-for-sale valuation.
FOREIGN EXCHANGE CONTRACTS: The fair value of foreign exchange contracts
represents the net asset or liability of the Corporation, since these
contracts are revalued on a monthly basis.
INTEREST RATE CONTRACTS: The fair value of these instruments is the
estimated amount the Corporation would receive or pay to terminate the
contracts or agreements, taking into account current interest rates,
volatility factors and, when appropriate, the credit worthiness of the
counterparties.
74
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Corporation's financial instruments
required to be disclosed under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks..... $ 841,822 $ 841,822 $ 775,582 $ 775,582
Money market investments.... 75,470 75,470 366,355 366,355
Investment securities
available-for-sale......... 2,552,620 2,552,620 2,794,023 2,794,023
Loans held-for-sale......... 150,742 152,989 116,002 117,296
Loans(a).................... 6,217,957 6,331,693 5,640,106 5,820,814
Interest receivable......... 61,641 61,641 64,229 64,229
LIABILITIES:
Noninterest bearing
deposits................... 2,248,252 2,248,252 2,055,129 2,055,129
Interest bearing deposits... 5,249,446 5,245,825 4,988,053 5,006,027
Funds sold and securities
sold under agreements to
repurchase................. 533,547 533,547 515,525 515,525
Other borrowed funds, short-
term....................... 821,477 821,477 908,644 908,644
Long-term debt.............. 229,742 241,489 514,687 537,972
Interest payable............ 37,956 37,956 52,315 52,315
OFF-BALANCE SHEET ASSETS
(LIABILITIES):
Interest rate swap
agreements................. 7,405 5,283 13,841 11,697
Interest rate caps and
floors..................... 1 1 47 --
Interest rate futures....... -- 43 -- (273)
Interest rate options....... 2,620 2,358 1,490 821
Foreign exchange options.... (4,313) (4,313) 1,045 1,045
Foreign exchange forwards... 3,685 3,685 201 201
</TABLE>
- --------
(a) As required by SFAS No. 107, leases receivable with carrying values
totaling $425.7 million and $321.1 million at December 31, 1996 and 1995,
respectively, are excluded. The carrying values are net of the allowance
for loan losses and related unearned income.
75
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of First Maryland Bancorp
(parent company only):
CONDENSED STATEMENTS OF INCOME
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries:
Bank subsidiaries......................... $ 210,000 $ 26,000 $ 51,200
Nonbank subsidiaries...................... 17,162 3,124 11,050
Interest income from subsidiaries:
Bank subsidiaries......................... 5,982 15,153 15,639
Nonbank subsidiaries...................... 9,756 12,159 9,787
Other interest and dividend income........ 24,057 27,665 18,564
Other income................................ 8,313 9,440 7,585
--------- -------- --------
Total income............................ 275,270 93,541 113,825
--------- -------- --------
Expenses:
Interest expense, short-term debt........... 17,478 21,392 16,727
Interest expense, long-term debt............ 16,993 17,475 17,309
Other expenses.............................. 3,910 8,371 5,733
--------- -------- --------
Total expenses.......................... 38,381 47,238 39,769
--------- -------- --------
Income before taxes and equity in
undistributed net income of subsidiaries..... 236,889 46,303 74,056
Income tax expense............................ 2,011 5,977 3,586
--------- -------- --------
Income before equity in undistributed net
income of subsidiaries....................... 234,878 40,326 70,470
Equity in undistributed net income of
subsidiaries(1).............................. (102,541) 79,861 40,670
--------- -------- --------
Net income.................................... $ 132,337 $120,187 $111,140
========= ======== ========
</TABLE>
- --------
(1) Amount in brackets represents the excess of dividends paid over net income
of subsidiaries.
76
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CONDITION
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash.................................................... $ 980 $ 247
Interest bearing deposits in other banks................ 523,603 559,181
Securities purchased under agreements to resell......... 20,000 --
Investment securities available-for-sale................ 24,518 67,921
Investment in subsidiaries:
Bank subsidiaries..................................... 773,517 807,817
Nonbank subsidiaries.................................. 248,181 35,918
Loans and advances to subsidiaries:
Bank subsidiaries..................................... 113,000 76,000
Nonbank subsidiaries.................................. 172,446 205,192
Loans, net of unearned income........................... 17,079 11,795
Premises and equipment.................................. 4,049 4,075
Other assets............................................ 49,464 42,264
---------- ----------
Total assets........................................ $1,946,837 $1,810,410
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt......................................... $ 320,687 $ 402,489
Long-term debt.......................................... 331,406 189,687
Other liabilities....................................... 39,547 34,660
---------- ----------
Total liabilities................................... 691,640 626,836
---------- ----------
4.50% Cumulative redeemable preferred stock, Series A,
$5 par value per share, $100 liquidation preference per
share; authorized and issued 90,000 shares............. 7,700 --
---------- ----------
Stockholders' equity.................................... 1,247,497 1,183,574
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity............................... $1,946,837 $1,810,410
========== ==========
</TABLE>
77
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
CONDENSED STATEMENTS OF CASH FLOWS
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before undistributed net income
of subsidiaries........................ $ 234,878 $ 40,326 $ 70,470
Adjustments to reconcile net income to
net cash provided by operating
activities............................. (2,462) 118 98
------------ ------------ --------
Net cash provided by operating ac-
tivities........................... 232,416 40,444 70,568
------------ ------------ --------
INVESTING ACTIVITIES
Proceeds from sales of investment secu-
rities available-for-sale.............. 12,030 7,670 7,126
Proceeds from paydowns and maturities of
investment securities available-for-
sale(1)................................ 15,048,558 6,042,678 5,866
Proceeds from paydowns and maturities of
investment securities
held-to-maturity(1).................... -- 22,604,000 3,105
Purchases of investment securities
available-for-sale(1).................. (15,041,705) (6,068,789) (10,970)
Purchases of investment securities held-
to-maturity(1)......................... -- (22,606,144) (2,828)
Net (increase) decrease in short-term
investments............................ (20,000) 37,000 (36,942)
Principal collected on loans of parent
company................................ 3,474 1,459 --
Loans originated by the parent company.. (8,758) (11,002) (2,252)
Investment in subsidiaries.............. (125,877) (5,022) (1,850)
Net (increase) decrease in loans to sub-
sidiaries, short-term.................. (22,254) (48,903) 160,159
Long-term loans to subsidiaries......... (113,000) (20,000) --
Principal collected on long-term loans
to subsidiaries........................ -- 20,000 --
Purchase of restricted stock for compen-
sation plan............................ -- -- (1,704)
Purchases of premises and equipment..... -- -- (7)
Proceeds from sales of premises and
equipment.............................. -- -- 383
Purchase of investment management compa-
ny..................................... (4,767) -- --
Other, net.............................. (2,800) 564 4,650
------------ ------------ --------
Net cash provided by (used for) in-
vesting activities................. (275,099) (46,489) 124,736
------------ ------------ --------
FINANCING ACTIVITIES
Net decrease in short-term borrowings... (81,871) (50) (61,143)
Net increase in long-term borrowings
from subsidiaries principal paid on
long-term borrowings................... 151,663 -- --
Net increase in short-term borrowings
from subsidiaries principal paid on
long-term borrowings................... 69 -- --
Principal payments on long-term debt.... (10,000) -- --
Cash dividends paid..................... (52,023) (11,820) (10,440)
------------ ------------ --------
Net cash provided by (used by) fi-
nancing activities................. 7,838 (11,870) (71,583)
------------ ------------ --------
(Decrease) increase in cash and cash
equivalents(2)......................... (34,845) (17,915) 123,721
Cash and cash equivalents at beginning
of year................................ 559,428 577,343 453,622
------------ ------------ --------
Cash and cash equivalents at December
31..................................... $ 524,583 $ 559,428 $577,343
============ ============ ========
</TABLE>
- --------
(1) Includes purchases and maturities of short-term Federal Agency discount
notes which were utilized by the parent company for liquidity management
purposes.
(2) Cash and cash equivalents include those amounts under the captions "Cash"
and "Interest bearing deposits in other banks" on the condensed statements
of condition.
78
<PAGE>
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of First Maryland Bancorp has prepared and is responsible for
the accompanying financial statements, together with the financial data and
other information presented in this Annual Report on Form 10-K. Management
believes that the financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances to
reflect the substance of events and transactions that should be included. The
financial statements include amounts that are based on management's best
estimates and judgments.
Management maintains and depends upon an internal accounting control system
designed to provide reasonable assurance that transactions are executed in
accordance with management's authorization, that financial records are
reliable as the basis for the preparation of all financial statements, and
that the Corporation's assets are safeguarded. The design and implementation
of all systems of internal control are based on judgments required to evaluate
the costs and controls in relation to the expected benefits and to determine
the appropriate balance between these costs and benefits. The Corporation
maintains an internal audit program to monitor compliance with the system of
internal accounting control.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets at least quarterly with the independent public accountants,
management and internal auditors to review accounting, auditing and financial
reporting matters. The independent public accountants and internal auditors
each meet privately with the committee, without management present, to discuss
the results of their audit work and their evaluations of the adequacy of
internal controls and the quality of financial reporting.
The financial statements in this Annual Report on Form 10-K have been
examined by the Corporation's independent public accountants for the purpose
of expressing an opinion as to the fair presentation of the financial
statements. Their independent professional opinion on the Corporation's
financial statements is presented on the following page.
79
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Maryland Bancorp:
We have audited the accompanying consolidated statements of condition of
First Maryland Bancorp and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the two years then ended. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Maryland Bancorp and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and cash flows for the two years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 9, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" effective in 1995.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
January 24, 1997
80
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Maryland Bancorp:
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of First Maryland Bancorp and
Subsidiaries for the year ended December 31, 1994. These consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of First Maryland Bancorp and Subsidiaries for the year ended
December 31, 1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
February 13, 1995
81
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
The information required by Items 10-13 of this report relating to
directors, executive compensation, ownership of the Corporation's securities,
and certain relationships and transactions is incorporated herein by reference
to the sections headed "Election of Directors" and "Compensation of Executive
Officers" contained in the Corporation's definitive Information Statement,
filed March 26, 1997 pursuant to Regulation 14C under the Securities Exchange
Act of 1934; provided that the subsection headed "Report of Management and
Compensation Committee" is not incorporated herein by reference or otherwise.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements: See Item 8.
2. Financial Statement Schedules: None.
3. Exhibits:
<TABLE>
<C> <S>
(3.1) (i) Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3.1 to the Form 8-A/A filed by the
Corporation on November 3, 1995).
(ii) Bylaws**
(4.1) The Corporation agrees to furnish to the Securities and Exchange
Commission upon request a copy of each instrument defining the
rights of holders of long-term debt of the Corporation and its
consolidated subsidiaries.
(10.1) Executive Incentive Pay Plan**
(10.2) First Maryland Bancorp 1989 Long-Term Incentive Plan and Trust,
dated June 20, 1989, and Amendment No. 1 thereto dated as of
January 18, 1991**
(10.3) Amendment No. 2, dated April 1, 1994, to First Maryland Bancorp
1989 Long-Term Incentive Plan and Trust, as amended***
(10.4) First Maryland Bancorp Pension Plan for Executive Employees, as
amended, effective January 1, 1986**
(10.5) Amendment to First Maryland Bancorp Pension Plan for Executive
Employees, effective December 14, 1993***
(10.6) First Maryland Bancorp Deferred Compensation Plan, as amended and
restated, effective January 1, 1990**
(10.7) Amendment No. 1 effective October 1, 1992, Amendment No. 2
effective January 20, 1993 and Amendment No. 3 effective
September 20, 1993, to First Maryland Bancorp Deferred
Compensation Plan***
(10.8) First Maryland Bancorp Deferred Compensation Amended and Restated
Trust Agreement, dated September 23, 1988, Provident National
Bank, trustee**
(10.9) First Maryland Bancorp Deferred Compensation Trust Agreement No.
2, effective July 13, 1990, Provident National Bank, trustee**
(10.10) First Maryland Bancorp Deferred Compensation Trust Agreement No.
3, effective January 25, 1993, Provident National Bank,
trustee***
</TABLE>
82
<PAGE>
<TABLE>
<C> <S>
(10.11) First Maryland Bancorp Deferred Compensation Plan, effective
January 1, 1994***
(10.12) First Maryland Bancorp Deferred Compensation Trust Agreement No.
4, effective January 1, 1994, Provident National Bank, trustee***
(10.13) First Maryland Bancorp Supplemental Retirement Trust Agreement,
dated September 23, 1988, Provident National Bank, trustee**
(10.14) First Maryland Bancorp Executive Post-Retirement Trust Agreement,
dated October 7, 1988, Provident National Bank, trustee**
(10.15) First Maryland Bancorp Executive Life Plan, effective January 1,
1990**
(10.16) First Maryland Bancorp Executive Optional Life Plan, effective
January 1, 1990**
(10.17) First Maryland Bancorp Excess Benefit Plan, effective October 1,
1989**
(21) Subsidiaries of the Registrant
(23.1) Consent of Coopers & Lybrand L.L.P.
(23.2) Consent of KPMG Peat Marwick LLP
(24) Power of Attorney
(27) Financial Data Schedule
</TABLE>
- --------
** Incorporated by reference to the Corporation's Registration Statement on
Form S-1, Registration No. 33-46277, filed with the Commission on March 13,
1992.
*** Incorporated by reference to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995 filed with the Commission on March 22,
1996.
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the quarter ended
December 31, 1996.
83
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
First Maryland Bancorp
By /s/ Frank P. Bramble
----------------------------------
(FRANK P. BRAMBLE, PRESIDENT AND
CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
PRINCIPAL EXECUTIVE OFFICER:
/s/ Frank P. Bramble President and Chief March 26, 1997
- ------------------------------------- Executive Officer
(FRANK P. BRAMBLE)
PRINCIPAL FINANCIAL OFFICER:
/s/ Jerome W. Evans Executive Vice March 26, 1997
- ------------------------------------- President and Chief
(JEROME W. EVANS) Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Robert L. Carpenter, Jr. Senior Vice March 26, 1997
- ------------------------------------- President and
(ROBERT L. CARPENTER, JR.) Controller
MAJORITY OF THE BOARD OF DIRECTORS:
Frank P. Bramble, Benjamin L. Brown, Jeremiah E. Casey, J. Owen Cole, Edward
A. Crooke, John F. Dealy, Mathias J. DeVito, Rhoda M. Dorsey, Frank A.
Gunther, Jr., Curran W. Harvey, Jr., Margaret M. Heckler, Thomas P. Mulcahy
and William M. Passano, Jr.
By /s/ Jerome W. Evans Attorney-in-Fact March 26, 1997
----------------------------------
(JEROME E. EVANS)
84
<PAGE>
Exhibit 21
FIRST MARYLAND BANCORP
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- -------------
<S> <C>
Beechwood Investments Ltd. British West Indies
Beechwood Investments-Chile Ltda Chile
Forestal San Jose, S.A. (Indirect Ownership) Chile
Compania Caceres Y Virtudes, Grand Cayman British West Indies
Portuaria Coronel, S.A. (Indirect Ownership) Chile
Compania La Proa, Ltd. British West Indies
Bemberg Industrial, S.A.(B.I.S.A.)(Indirect Ownership) Argentina
Fariza Ltd. British West Indies
Fariza-Chile Ltda Chile
Forestal San Jose, S.A. (Indirect Ownership) Chile
First Center Corporation Maryland
Pratt-Greene Associates Limited Partnership
(Indirect Ownership) Maryland
First Greene Corporation Maryland
Pratt-Greene Associates Limited Partnership
(Indirect Ownership) Maryland
First Maryland Capital 1 Delaware
First Maryland Commercial Holdings Corporation Maryland
First Maryland Credit Corporation Maryland
First Maryland Foundation, Inc. Maryland
First Maryland Holding Corporation Maryland
First Manufactured Housing Credit Corporation New York
First Carolina Financial Corporation South Carolina
First Maryland Leasecorp Maryland
</TABLE>
<PAGE>
<TABLE>
<S> <C>
First Maryland Life Insurance Company Arizona
First Maryland Mortgage Corporation Maryland
1st Washington Mortgage Service, Inc. District of Columbia
Noteco, Inc. District of Columbia
First Maryland Personnel Services, Inc. Maryland
The First National Bank of Maryland United States
Allied Investment Advisors, Inc. Maryland
ARK Insurance Group, Inc. Maryland
First Washington Insurance, Inc. District of Columbia
First Maryland Annuities Agency Corporation Maryland
First Maryland Brokerage Corporation Maryland
First Maryland International Banking Corporation United States
HIBID, Inc. District of Columbia
Sussex Capital Corporation Delaware
CH Allentown, L.L.C. Maryland
CH Bowie Park, Limited Maryland
CH Burtonsville, L.L.C. Maryland
CH Naples, L.L.C. Maryland
CH Wyemoor Limited L.L.C. Maryland
Chesapeake Holdings 198, L.L.C. Maryland
Chesapeake Holdings Riva Road, L.L.C. Maryland
Chesapeake Holdings Company Maryland
Chesapeake Holdings II, Limited Maryland
Chesapeake Holdings (VA) III, Limited Maryland
Chesapeake Holdings BP Development, Limited Maryland
Chesapeake Holdings BP Property, Limited Maryland
Chesapeake Holdings Belmont, L.L.C. Maryland
Chesapeake Holdings Fort Myers, Limited Corporation Maryland
Chesapeake Holdings Nottoway, Limited Maryland
Chesapeake Holdings Melwood, L.L.C. Maryland
Chesapeake Holdings Radio, Limited Maryland
Chesapeake Holdings Riverside, Limited Maryland
Chesapeake Holdings Turnquist, Limited Maryland
Chesapeake Holdings Winchester, Limited Maryland
First National Mortgage Corporation Maryland
First Omni Bank, National Association United States
FMB Acquisition Corporation Delaware
Indian River Capital Corporation Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Internet, Inc. (Indirect Ownership) Delaware
Juragua Limited British West Indies
Inversiones Industriales SA (Indirect Ownership) Chile
Melquiades Limited British West Indies
Jugos del Sur, S.A. (Indirect Ownership) Argentina
Jugos Alcon (Indirect Ownership) Argentina
Santelices Limited British West Indies
Inversiones Industriales SA (Indirect Ownership) Chile
The York Bank and Trust Company Pennsylvania
York East Manchester Land, Inc.
f/k/a York Elizabethtown Land, Inc. Pennsylvania
York Outlet, Limited Maryland
York Reading Land, Inc. Pennsylvania
York Realty Holding Company, Inc. Maryland
York Wyndham Land, Inc. Pennsylvania
Zirkin-Cutler Investments, Inc. Maryland
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
on Form S-4, Registration No. 333-22871, of First Maryland Bancorp, First
Maryland Capital I and First Maryland Capital II of our report dated January 24,
1997, on our audits of the consolidated statements of condition of First
Maryland Bancorp and Subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended, which reports are included in First
Maryland Bancorp's Annual Report on Form 10-K for the year ended December 31,
1996.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 24, 1997
<PAGE>
Exhibit 23.2
The Board of Directors
First Maryland Bancorp:
We consent to incorporation by reference in the registration statement No.
333-22871 on Form S-4 of First Maryland Bancorp of our report dated February 13,
1995, relating to the consolidated statements of income, changes in
stockholders' equity, and cash flows of First Maryland Bancorp and subsidiaries
for the year ended December 31, 1994, which report appears in the December 31,
1996 annual report on Form 10-K of First Maryland Bancorp.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 24, 1997
<PAGE>
Exhibit 24
FIRST MARYLAND BANCORP
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of First
Maryland Bancorp, a Maryland corporation, constitute and appoint Frank P.
Bramble, Jeremiah E. Casey, and Jerome W. Evans, and any one of them, the true
and lawful agents and attorneys-in-fact of the undersigned with full power and
authority in said agents and attorneys-in-fact, and in any one or more of them,
to sign for the undersigned in their respective names as directors of First
Maryland Bancorp the Annual Report on Form 10-K of First Maryland Bancorp for
the year ended December 31, 1996 to be filed with the Securities and Exchange
Commission under the Securities and Exchange Act of 1934, and any amendments or
supplements to such Form 10-K. We hereby confirm all acts taken by such agents
and attorneys-in-fact, or any one or more of them, as herein authorized. This
Power of Attorney may be executed in one or more counterparts.
Frank P. Bramble Frank A. Gunther, Jr.
- ---------------- ---------------------
Frank P. Bramble Frank A. Gunther, Jr.
Benjamin L. Brown Curran W. Harvey, Jr.
- ----------------- ---------------------
Benjamin L. Brown Curran W. Harvey, Jr.
Jeremiah E. Casey Margaret M. Heckler
- ----------------- -------------------
Jeremiah E. Casey Margaret M. Heckler
J. Owen Cole
- ------------ --------------
J. Owen Cole Kevin J. Kelly
Edward A. Crooke
- ---------------- ------------------
Edward A. Crooke Henry J. Knott, Jr.
John F. Dealy Thomas P. Mulcahy
- ------------- -----------------
John F. Dealy Thomas P. Mulcahy
Mathias J. DeVito William M. Passano, Jr.
- ----------------- -----------------------
Mathias J. DeVito William M. Passano, Jr.
Rhoda M. Dorsey
- ---------------
Rhoda M. Dorsey
- ---------------
Jerome W. Geckle
Dated: January 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
MARYLAND BANCORP DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 841,822
<INT-BEARING-DEPOSITS> 444
<FED-FUNDS-SOLD> 75,026
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,552,620
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,798,445
<ALLOWANCE> 154,802
<TOTAL-ASSETS> 10,791,024
<DEPOSITS> 7,497,698
<SHORT-TERM> 1,355,024
<LIABILITIES-OTHER> 297,525
<LONG-TERM> 229,742
7,700
30,000
<COMMON> 84,926
<OTHER-SE> 1,132,571
<TOTAL-LIABILITIES-AND-EQUITY> 10,791,024
<INTEREST-LOAN> 521,643
<INTEREST-INVEST> 174,141
<INTEREST-OTHER> 23,245
<INTEREST-TOTAL> 719,029
<INTEREST-DEPOSIT> 205,169
<INTEREST-EXPENSE> 315,318
<INTEREST-INCOME-NET> 403,711
<LOAN-LOSSES> 6,500
<SECURITIES-GAINS> 103
<EXPENSE-OTHER> 406,916
<INCOME-PRETAX> 207,187
<INCOME-PRE-EXTRAORDINARY> 132,337
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,337
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.30
<LOANS-NON> 45,680
<LOANS-PAST> 23,812
<LOANS-TROUBLED> 126
<LOANS-PROBLEM> 23,965
<ALLOWANCE-OPEN> 177,621
<CHARGE-OFFS> 45,478
<RECOVERIES> 7,179
<ALLOWANCE-CLOSE> 154,802
<ALLOWANCE-DOMESTIC> 76,700
<ALLOWANCE-FOREIGN> 12,818
<ALLOWANCE-UNALLOCATED> 65,284
</TABLE>
