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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, 1997
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
(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
7.875% Noncumulative Preferred registered
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, 1998, 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 $156,750,000.
ALL 597,763,495 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 (to be dated approximately April 3, 1998) are
incorporated herein by reference in response to Part III of this report.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I
<C> <S> <C>
Item 1-- Business..................................................... 1
Item 2-- Properties................................................... 6
Item 3-- Legal Proceedings............................................ 7
Item 4-- Submission of Matters to a Vote of Security Holders.......... 7
PART II
Item 5-- Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 9
Item 6-- Selected Consolidated Financial Data......................... 9
Item 7-- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 8-- Financial Statements and Supplementary Data:
First Maryland Bancorp and Subsidiaries:
Consolidated Statements of Income............................ 32
Consolidated Statements of Condition......................... 33
Consolidated Statements of Changes in Stockholders' Equity... 34
Consolidated Statements of Cash Flows........................ 35
Notes to Consolidated Financial Statements................... 36
Report of Management......................................... 70
Report of Independent Accountants............................ 71
Item 9-- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 72
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................................ 72
Exhibits..................................................... 72
Reports on Form 8-K.......................................... 73
Signatures.............................................................. 74
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(1) Incorporated by reference to portions of the Registrant's definitive
Information Statement (to be dated approximately April 3, 1998) .
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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, 1997, the Corporation had consolidated total assets of $17.8
billion, total deposits of $12.5 billion, and total stockholders' equity of
$1.9 billion. Its principal subsidiaries are The First National Bank of
Maryland ("First National"), Dauphin Deposit Bank and Trust Company
("Dauphin") 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, 1997 accounted for approximately 99% of the
Corporation's consolidated total assets.
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, 1997, First
National had assets of $10.0 billion, net loans of $5.8 billion, and deposits
of $7.1 billion. Its assets at such date comprised approximately 56% of the
consolidated assets of the Corporation. Including its main office, First
National operates 286 banking facilities in Maryland, the District of Columbia
and Virginia, including 151 full service offices. It conducts international
activities at its Baltimore headquarters, a Cayman Islands branch and a
representative office in London, and maintains correspondent accounts with
approximately 50 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.
Dauphin is a Pennsylvania-chartered commercial bank which became a
subsidiary of the Corporation as a result of the Corporation's acquisition of
Dauphin Deposit Corporation ("DDC") in July 1997. At December 31, 1997,
Dauphin had assets of $6.7 billion, net loans of $3.2 billion and deposits of
$4.5 billion. Including its headquarters in Harrisburg, Dauphin operates 108
banking facilities including 98 full service offices.
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, 1997,
York Bank had assets of $1.1 billion, net loans of $708 million, and deposits
of $854 million. York Bank operates 38 banking facilities including 36 full
service offices.
First Omni Bank, N.A. ("First Omni" and, together with First National,
Dauphin and York Bank, the "Banks") is a national banking subsidiary of the
Corporation headquartered in Millsboro, Delaware through which the Corporation
provided retail credit card services. At December 31, 1997, First Omni
serviced credit card loans of $585 million (including $500 million of
securitized credit card loans). In August 1997, First Omni sold its Bell
Atlantic co-branded credit card portfolio to Chase Manhattan Bank Delaware. On
February 25, 1998, First Omni sold substantially all of its remaining assets,
consisting primarily of its interest in the First Omni Bank Credit Card Master
Trust, to Bank of America National Association ("BOANA"). BOANA and the
Corporation have entered into an agreement whereby BOANA will provide retail
credit card products and services to customers of the Corporation's bank
subsidiaries on an agency basis.
The Corporation operates various other subsidiaries, including First
Maryland Leasecorp, a commercial finance company specializing in equipment
financing; First Maryland Mortgage Corporation, a commercial real estate
lender, and Hopper Soliday & Co., Inc., a full service investment banking and
securities broker-dealer that became a subsidiary as a result of the Dauphin
Deposit Corporation acquisition. On February 13, 1998, the Corporation sold
the residential first mortgage loan origination business of First National
Mortgage Corporation and Eastern Mortgage Services, Inc. (a subsidiary of
Dauphin), its mortgage banking subsidiaries, to National City Mortgage Co. The
Corporation will continue to offer residential mortgage and home equity loan
products through its branch network and will continue to meet the credit needs
of low and moderate income communities in its market.
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The Corporation is a wholly owned subsidiary of Allied Irish Banks, p.l.c.
("AIB"), an Irish banking corporation whose securities are traded on the
Dublin, London and New York Stock Exchanges. AIB is a registered bank holding
company under the Bank Holding Company Act and is the largest banking
corporation organized under the laws of Ireland, based upon total assets at
December 31, 1997. Based upon United States generally accepted accounting
principles at December 31, 1997, AIB and its subsidiaries (collectively, "AIB
Group") had total assets of approximately $54 billion. AIB Group provides a
full range of banking, financial and related services principally in Ireland,
the United States, the United Kingdom and in Poland through its 60% subsidiary
Wielkopolski Bank Kredytowy S.A.
ACQUISITION OF DAUPHIN DEPOSIT CORPORATION
On July 8, 1997, the Corporation acquired DDC, which increased total assets
and deposits by approximately $7.0 billion and $4.2 billion, respectively and
gave the Corporation a substantial position in a nine-county region in south-
central Pennsylvania. Rather than simply consolidate the operations of DDC
into the Corporation, management decided to engage in a two step process: (1)
to identify the best products, services, practices and technologies necessary
to create a single, full-service financial institution able to assume and
maintain a dominant position in the Corporation's markets (the "target
environment"); and (2) to implement the target environment. During 1997, the
Corporation began integrating the operations of its banking subsidiaries and
installing new technologies and business processes which are expected to be
substantially complete by the end of 1998. For additional information on DDC
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
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 that 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 banks
were 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. 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 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.
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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. 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 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, as national banking associations, are subject
to supervision, regulation and examination by the Comptroller of the Currency
of the United States (the "Comptroller"). Dauphin and York Bank, as
Pennsylvania state chartered banks, are supervised, regulated and examined by
the Pennsylvania Department of Banking and by the Federal Reserve Board and
the Federal Deposit Insurance Corporation (the "FDIC"), respectively.
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.
First National and Dauphin are members of the Federal Reserve System, and
the deposits of all of 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
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case of Dauphin and York Bank) state laws and regulations limit the amount of
dividends the Banks can pay to the Corporation without regulatory approval.
The approval of the Comptroller for the national banks and the Federal
Reserve Board for state member banks is required for any dividend if the total
of all dividends declared by such bank in any calendar year exceeds the total
of its net profits, as defined by the Comptroller or Federal Reserve Board,
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. Pursuant
to Pennsylvania law, York Bank may pay dividends only out of accumulated net
earnings and may not pay a dividend if any transfer of net earnings to surplus
is required. In addition, 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." At
January 1, 1998, (and after giving effect to a $43 million special dividend
from First Omni paid in February 1998), $22.7 million was available within the
bank subsidiaries to pay dividends without prior regulatory approval.
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 1998 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, 1997, 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, guaranteed preferred beneficial
interest in junior subordinated debentures, 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
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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
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. First
National and First Omni, Dauphin and York Bank are subject to similar risk-
based and leverage capital requirements adopted by the Comptroller, the
Federal Reserve Board (for state member banks) and the FDIC, respectively. On
December 31, 1997, the Corporation had a Tier 1 capital to risk adjusted
assets ratio of 8.30%, a total (Tier 1 plus Tier 2) capital ratio of 11.90%,
and a leverage ratio of 7.26%.
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 summary of certain
provisions of FDICIA.
Pursuant to FDICIA, the Federal Reserve Board, the Comptroller and the FDIC
have adopted regulations 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%, 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%, 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). As of December 31, 1997, 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.
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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, and continuing through the semi-annual
assessment period beginning on January 1, 1998, the Banks' BIF insurance
premium is zero and there is no 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 became 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, 1997, the Corporation employed approximately 7,125 full-
time equivalent employees. Management of the Corporation considers relations
with its employees to be satisfactory.
ITEM 2. PROPERTIES
The following describes the location and general character of the principal
offices and other materially important physical properties of the Corporation
and its subsidiaries.
The Corporation is a major tenant in a building located at 25 South Charles
Street, Baltimore, Maryland, occupying approximately 79.5% of the 343 thousand
square feet of office space available in the building as of December 31, 1997.
The Corporation's lease for this space expires in 2006, with a renewal option
to the year 2011. During 1997, the annual rental for the space, less amounts
received on subleases to others, was $4.0 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
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31, 2011. During 1997, 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.
First Bank Center located at Mitchell Street, Millsboro, Delaware is owned
by the Corporation. The building, acquired in 1981, contains approximately 300
thousand square feet of space, sits on approximately 60 acres of land, and was
the former headquarters for the Corporation's retail credit card operation.
The facility continues to house certain retail operations functions of the
Corporation.
One South Market Square Office Tower located at 213 Market Street,
Harrisburg, Pennsylvania is also owned by the Corporation. The building
contains approximately 185 thousand square feet of office space and houses,
among other things, certain executive offices and commercial operations
functions of Dauphin.
In addition to the above office space, the Corporation owns and leases
office space in various other office buildings and locations.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. For additional
information see Note 22 of the Notes to Consolidated Financial Statements. 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents information concerning the executive officers
of the Corporation. Each was elected at the 1997 Annual Meeting of
Stockholders to serve for a one year term, with the exception of Messrs. Fryer
and Shannon, who were appointed by the Board of Directors to serve until the
1998 Annual Meeting of Stockholders or until a successor is elected and
qualified. Unless otherwise noted, each executive officer has been employed by
the Corporation or one of its subsidiaries for the past five years.
<TABLE>
<CAPTION>
YEAR
FIRST
NAME POSITIONS HELD AGE ELECTED
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<S> <C> <C> <C>
Jeremiah E. Casey............... Chairman of the Board of the 58 1985
Corporation and each of its
subsidiaries
Frank P. Bramble (1)............ President and Chief Executive 49 1994
Officer of the Corporation and
First National
Harry E. Berry.................. Executive Vice President and 52 1994
Chief Credit Officer of the
Corporation and First National
Robert L. Carpenter, Jr. (1).... Senior Vice President and 44 1995
Controller of the Corporation
and First National
David M. Cronin................. Executive Vice President and 48 1989
Treasurer of the Corporation;
Executive Vice President of
First National
Jerome W. Evans (1)............. Executive Vice President and 51 1994
Chief Financial Officer of the
Corporation and First National
Walter R. Fatzinger, Jr. (1).... Executive Vice President of the 55 1994
Corporation and First National
Robert L. Fryer (1)............. Executive Vice President of the 49 1997
Corporation
Susan M. Keating (1)............ Executive Vice President of the 47 1996
Corporation and First National;
President and CEO of Dauphin
Brian L. King................... Executive Vice President and 52 1996
Chief Administrative Officer of
the Corporation and First
National
Jeffrey D. Maddox (1)........... Executive Vice President of the 43 1994
Corporation and First National
Paul B. Shannon (1)............. Executive Vice President of the 50 1997
Corporation and Dauphin
Richard H. White................ Executive Vice President of the 51 1994
Corporation and First National;
President and CEO of First Omni
</TABLE>
- --------
(1) Prior to joining the Corporation in April 1994, Mr. Bramble was Chairman
of NationsBank Maryland and President and CEO of MNC Financial, Inc.
Prior to joining the Corporation in August 1993, Mr. Carpenter was a
Senior Vice President of MNC Financial, Inc. Prior to joining the
Corporation in August 1994, Mr. Evans was an Executive Vice President of
NationsBank Maryland and of MNC Financial, Inc. Prior to joining the
Corporation in August 1994, Mr. Fatzinger was an Executive Vice President
of NationsBank Maryland and of MNC Financial, Inc. Prior to joining the
Corporation in July 1997, Mr. Fryer was President and Chief Operating
Officer of Dauphin Deposit Corporation. Prior to joining the Corporation
is January 1996, Ms. Keating was President and Senior Bank Executive--
Maryland of NationsBank, N.A. in Baltimore, MD and an Executive Vice
President of MNC Financial, Inc. Prior to joining the Corporation in
August 1994, Mr. Maddox was an Executive Vice President of NationsBank
Maryland and an Executive Vice President of MNC Financial, Inc. Prior to
joining the Corporation in July 1997, Mr. Shannon was Vice Chairman and
Chief Credit Policy Officer of Dauphin Deposit Corporation.
8
<PAGE>
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, 1998, there were 664 registered holders of the Preferred Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from the
audited financial statements of the Corporation. It should be read in
conjunction with the detailed information and financial statements of the
Corporation included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS:
Interest and dividend
income................ $ 941,498 $ 719,029 $ 707,541 $ 619,746 $ 617,237
Interest expense....... 445,754 315,373 314,548 241,099 234,038
----------- ----------- ---------- ---------- ----------
Net interest income.... 495,744 403,656 392,993 378,647 383,199
Provision for credit
losses................ 32,017 6,500 16,000 22,996 45,291
----------- ----------- ---------- ---------- ----------
Net interest income af-
ter provision for
credit losses......... 463,727 397,156 376,993 355,651 337,908
Noninterest income..... 326,118 216,892 195,910 210,978 233,445
Noninterest expenses... 554,356 406,861 388,724 396,201 394,653
----------- ----------- ---------- ---------- ----------
Income before income
taxes................. 235,489 207,187 184,179 170,428 176,700
Income tax expense..... 84,301 74,850 63,992 59,288 62,832
----------- ----------- ---------- ---------- ----------
Net income............. $ 151,188 $ 132,337 $ 120,187 $ 111,140 $ 113,868
=========== =========== ========== ========== ==========
Dividends declared on
preferred stock....... $ 11,820 $ 11,820 $ 11,820 $ 11,820 $ 1,575
Dividends declared on
redeemable preferred
stock................. 405 203 -- -- --
CONSOLIDATED AVERAGE
BALANCES:
Total assets........... $14,132,300 $10,477,100 $9,789,500 $9,411,400 $9,395,700
Loans, net of unearned
income................ 8,358,500 6,312,300 5,804,700 5,291,200 5,099,300
Deposits............... 9,569,600 7,073,500 6,744,100 6,635,300 6,651,800
Long term debt......... 313,100 481,000 269,500 198,000 189,500
Common stockholder's
equity................ 1,438,300 1,062,300 965,000 856,600 756,700
Stockholders' equity... 1,583,200 1,207,200 1,109,800 1,001,500 763,900
CONSOLIDATED RATIOS:
Return on average as-
sets.................. 1.07% 1.26% 1.23% 1.18% 1.21%
Return on average com-
mon stockholder's eq-
uity.................. 9.66 11.33 11.23 11.59 14.84
Return on average total
stockholders' equity.. 9.55 10.96 10.83 11.10 14.91
Average total stock-
holders' equity to av-
erage total assets.... 11.20 11.52 11.34 10.64 8.13
Capital to risk adjusted
assets:
Tier 1................ 8.30 14.12 13.77 14.05 12.88
Total................. 11.90 17.20 17.05 17.68 16.62
Tier 1 leverage ratio.. 7.26 12.18 10.91 11.05 9.60
Net interest margin.... 4.07 4.30 4.47 4.51 4.64
Net charge-offs to av-
erage loans, net of
unearned income....... 0.48 0.61 0.51 0.56 0.83
Allowance for credit
losses to loans, net
of unearned income.... 1.67 2.28 2.89 3.50 3.85
Nonperforming assets to
loans, net of unearned
income plus other
foreclosed assets
owned................. 0.80 0.87 0.73 1.35 2.59
TAX-EFFECTED NET INCOME
AND RATIOS EXCLUDING
GOODWILL AND CORE DE-
POSIT INTANGIBLE AMOR-
TIZATION AND BALANCES:
(1)
Net income............. $ 179,204 $ 136,322 $ 122,812 $ 113,722 $ 116,435
Return on average as-
sets.................. 1.32% 1.31% 1.26% 1.21% 1.24%
Return on average com-
mon stockholder's eq-
uity.................. 18.69% 12.34% 11.87% 12.36% 15.91%
Return on average total
stockholders' equity.. 17.26% 11.83% 11.37% 11.73% 15.96%
</TABLE>
- --------
(1) Amortization and balances of core deposit intangibles are net of
applicable income taxes. Goodwill amortization and balances are not tax
effected.
9
<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, 1997, 1996 and 1995
should be read in conjunction with the Consolidated Financial Statements of
the Corporation and statistical data presented elsewhere herein.
FORWARD-LOOKING STATEMENTS
Certain information included in the following section of this report, other
than historical information, may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The forward-
looking statements are identified by terminology such as "may", "will",
"believe", "expect", "estimate", "anticipate", "continue", or similar terms.
Although the Corporation believes that the expectations reflected in such
forward looking statements are reasonable, actual results may differ
materially from those projected in the forward-looking statements.
OVERVIEW
The Corporation's net income for the year ended December 31, 1997 was $151.2
million, compared to $132.3 million for the year ended December 31, 1996, an
increase of $18.9 million (14.2%). Net income in 1997 included a $17.4 million
after-tax gain ($28.2 million pre-tax) on the sale of credit card loans and
merger related expenses of $12.5 million after-tax ($20.0 million pre-tax).
Return on average assets and return on average common stockholder's equity
were 1.07% and 9.66%, respectively, for the year ended December 31, 1997
compared to 1.26% and 11.33%, respectively, for the year ended December 31,
1996. 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 was 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.
On July 8, 1997, the Corporation and its parent, AIB, acquired Dauphin
Deposit Corporation ("DDC"), which was merged into the Corporation. The
acquisition, which was accounted for as a purchase business combination,
resulted in $901.6 million of intangible assets, comprised primarily of
goodwill of $825.1 million, which are amortized against earnings. DDC's
results of operations have been included with the Corporation's results of
operations since July 1, 1997. Tangible net income, which excludes
amortization of goodwill and other intangible assets related to purchase
business combinations, was $179.2 million for the year ended December 31, 1997
compared to $136.3 million for the year ended December 31, 1996. Return on
average tangible assets and return on average tangible common equity, which
exclude intangible assets and amortization related to purchase business
combinations, were 1.32% and 18.69%, respectively, for the year ended December
31, 1997 compared to 1.31% and 12.34%, respectively, for the year ended
December 31, 1996.
The DDC acquisition provided the opportunity for the Corporation to create a
new company, instead of simply combining two existing organizations. In
connection with the target environment identification and integration process,
the Corporation recorded pre-tax merger-related expenses of $20.0 million in
the fourth quarter of 1997 in addition to acquisition costs which are recorded
as a component of the goodwill related to the acquisition. Also, in connection
with identifying the target environment (discussed more fully in Part I,
above), the Corporation decided to exit two business lines, consumer credit
cards and mortgage banking. In each case, management determined that the
investment of resources necessary to operate these businesses at acceptable
levels of return could be applied more effectively elsewhere in the
Corporation. The Corporation will continue to offer residential mortgage
products through retail bank branches and consumer credit card products
through an agency relationship. The sales of these business lines will not
have an adverse effect on the Corporation's financial condition or results of
operations.
On August 8, 1997, the Corporation sold its $355 million Bell Atlantic
cobranded credit card loan portfolio to Chase Manhattan Corporation. The sale
resulted in an after-tax gain of $17.4 million ($28.2 million pre-tax).
10
<PAGE>
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 pre-tax 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 1997, 1996 and 1995. The
following table reconciles net interest income as shown in the financial
statements to tax equivalent net interest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
--------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net interest income--per financial statements... $ 495.7 $ 403.7 $ 393.0
Tax equivalent adjustment....................... 10.5 5.1 7.8
--------- -------- --------
Net interest income--tax equivalent basis....... $ 506.2 $ 408.8 $ 400.8
========= ======== ========
Average earning assets.......................... $12,447.8 $9,497.4 $8,963.9
Net interest margin............................. 4.07% 4.30% 4.47%
</TABLE>
Net interest income on a fully tax equivalent basis for the year ended
December 31, 1997 of $506.2 million increased $97.4 million (23.8%) when
compared to net interest income of $408.8 million for the year ended December
31, 1996. Net interest income in 1997 benefited from $104.2 million in net
interest income from DDC. This was offset by funding costs of $28.3 million
related to the DDC acquisition. Excluding DDC and related funding, net
interest income increased $21.5 million (5.3%) when compared to 1996. The
following items had a significant positive impact on net interest income
excluding DDC in 1997: a $201.0 million increase in interest free funding
sources available to fund earning assets ("net free funds"), $10.7 million; a
$565.1 million increase in average non-credit card loans, $9.7 million; and an
increase in the interest rate spread between earning assets and funding
sources primarily due to changes in the volume and mix of interest earning
assets and interest bearing liabilities, $15.1 million. The following items
had a negative impact on non-DDC net interest income in 1997: the full year
impact of the securitization and sale of $335 million in credit card loans in
April 1996, $10.2 million (the revenue associated with these loans was
reported in noninterest income as servicing income subsequent to the sale and
as net interest income for the first four months of 1996) and a net decrease
in average credit card loans in 1997 primarily due to the sale of $355 million
in credit card loans in the third quarter of 1997, $3.7 million. 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. This increase
was primarily the result of an increase in net free funds and the acquisition
of 1st Washington Bancorp offset by the impact of a net decrease in credit
card loans due to the securitization and sale of $335 million in credit card
loans in April 1996.
The net interest margin for the year ended December 31, 1997 was 4.07%,
compared to 4.30% for the year ended December 31, 1996. The decline in net
interest margin is primarily due to the acquisition of DDC, with funding costs
and the addition of DDC's earning assets and interest bearing liabilities
resulting in a 40 basis point decrease in the Corporation's net interest
margin in 1997. Excluding the impact of DDC, the Corporation's net interest
margin increased 17 basis points. The following significant items had a
positive impact on the net interest margin: the increase in net free funds, 11
basis points, and changes in the volume and mix of interest earning assets and
interest bearing liabilities, 28 basis points. The following items resulted in
a decrease in net interest margin, excluding DDC: the securitization and sale
of $335 million in credit card loans in April 1996, 6 basis points; the
increase in non-credit card loans, 15 basis points; and other net decreases in
credit card loans, 1 basis point. 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 decline in net interest margin was primarily due to the
securitization and sale of credit card loans in 1996 and the effects of a
reduction in market interest rates and competitive factors on the
Corporation's loans and deposit yields offset by the positive impact of an
increase in net free funds.
11
<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
following page indicates, net interest income on a tax equivalent basis
increased $97.4 million (23.8%) when the year ended December 31, 1997 is
compared to the year ended December 31, 1996. The $106.0 million positive
volume variance primarily resulted from the addition of the earning assets of
DDC. The $8.6 million negative rate variance is primarily the result of a
decline in loan yields due to a decrease in credit card loans and an increase
in the rates paid on deposits resulting from a higher volume of purchased
deposits. In addition, the rate paid on long-term debt increased in 1997 due
to a decline in medium term bank notes which are at lower interest rates than
subordinated debt.
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 $27.4 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 $19.5 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 ANALYSIS
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
1997 OVER 1996 1996 OVER 1995
--------------------------------- ----------------------------------
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> <C>
Interest Income From
Earning Assets:
Interest and fees on
loans................. $154,512 $ 166,282 $ (11,770) $10,642 $ 43,259 $ (32,617)
Interest and dividends
on investment securi-
ties available-for-
sale.................. 58,631 47,055 11,576 3,320 5,407 (2,087)
Interest and fees on
loans held for sale... 10,597 10,633 (36) 2,086 2,647 (561)
Interest on money mar-
ket investments....... 4,072 2,965 1,107 (7,234) (5,199) (2,035)
-------- ---------- ---------- ------- ---------- -----------
Total................ 227,812 226,935 877 8,814 46,114 (37,300)
-------- ---------- ---------- ------- ---------- -----------
Interest Expense on Deposits and
Borrowed Funds:
Interest on deposits... 92,475 87,934 4,541 (397) 5,820 (6,217)
Interest on Federal
funds purchased and
other short term
borrowings............ 27,294 25,760 1,534 (10,430) (2,431) (7,999)
Interest on long-term
debt.................. (9,380) (12,747) 3,367 11,597 15,222 (3,625)
Interest on guaranteed
preferred beneficial
interests in junior
subordinated
debentures............ 19,992 19,990 2 55 55 --
-------- ---------- ---------- ------- ---------- -----------
Total................ 130,381 120,937 9,444 825 18,666 (17,841)
-------- ---------- ---------- ------- ---------- -----------
Net interest income.. $ 97,431 $ 105,998 $ ( 8,567) $ 7,989 $ 27,448 $ (19,459)
======== ========== ========== ======= ========== ===========
</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.
12
<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, 1997, 1996 and 1995.
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ -----------------------------
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
Earning assets:
Money market invest-
ments:
Interest bearing
deposits in other
banks................. $ 0.8 $ 0.1 14.56% $ 2.9 $ 0.2 5.46% $ 30.9 $ 1.9 6.17%
Trading account
securities............ 61.6 4.3 6.98 1.7 0.1 5.85 12.9 0.9 6.70
Funds sold............. 250.2 13.5 5.40 255.3 13.5 5.31 310.5 18.3 5.90
Investment securi-
ties(5):
Taxable................ 3,184.6 209.4 6.58 2,665.1 166.1 6.23 2,526.3 153.3 6.07
Tax exempt(1).......... 245.7 19.5 7.95 92.4 9.3 10.09 156.3 19.3 12.35
Equity investments..... 77.0 6.8 8.86 41.5 1.7 4.06 31.3 1.2 3.92
--------- ------ ----- --------- ------ ----- -------- ------- -----
Total investment secu-
rities available-for-
sale.................. 3,507.3 235.7 6.72 2,799.0 177.1 6.33 2,713.9 173.8 6.40
Loans held-for-sale..... 269.4 20.0 7.42 126.1 9.4 7.45 91.0 7.3 8.03
Loans (net of unearned
income)(1, 2):
Commercial............. 2,283.1 178.9 7.84 1,788.3 137.3 7.68 1,740.7 144.4 8.29
Commercial real
estate................ 1,844.7 156.4 8.48 1,320.5 117.7 8.91 1,262.9 111.4 8.82
Residential............ 937.9 68.6 7.32 725.4 53.1 7.31 641.6 46.8 7.29
Retail................. 1,960.6 165.8 8.46 1,244.8 104.5 8.39 1,031.4 89.3 8.66
Credit card............ 378.6 46.7 12.34 513.4 64.4 12.54 534.7 81.6 15.27
Leases receivable...... 579.3 33.4 5.77 367.2 20.3 5.54 293.3 16.8 5.72
Foreign................ 374.3 28.5 7.62 352.7 26.5 7.50 300.1 22.8 7.58
--------- ------ ----- --------- ------ ----- -------- ------- -----
Total loans............ 8,358.5 678.3 8.11 6,312.3 523.8 8.30 5,804.7 513.1 8.84
--------- ------ ----- --------- ------ ----- -------- ------- -----
Total earning assets.. 12,447.8 $951.9 7.65% 9,497.4 $724.1 7.62% 8,963.9 $ 715.3 7.98%
Allowance for credit
losses................. (164.6) (168.6) (185.4)
Cash and due from
banks.................. 732.2 648.2 587.6
Other assets............ 1,116.9 500.2 423.4
--------- --------- --------
Total assets........... $14,132.3 $10,477.1 $9,789.5
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits in domestic of-
fices:
Interest bearing
demand................ $ 365.0 $ 5.9 1.62% $ 116.6 $ 2.9 2.49% $ 523.4 $ 12.2 2.33%
Money market accounts.. 1,795.0 54.2 3.02 1,593.3 47.9 3.00 1,146.5 40.3 3.52
Savings................ 1,327.0 34.0 2.57 1,048.4 27.2 2.60 1,048.1 28.4 2.71
Other consumer time.... 2,610.7 136.4 5.23 1,676.9 88.8 5.30 1,532.0 80.7 5.27
Large denomination
time.................. 1,022.8 58.2 5.69 560.6 31.4 5.59 586.6 35.3 6.01
Deposits in foreign
banking office(6)...... 159.3 8.9 5.57 131.1 7.0 5.36 147.1 8.7 5.88
--------- ------ ----- --------- ------ ----- -------- ------- -----
Total interest bearing
deposits.............. 7,279.8 297.6 4.08 5,126.9 205.2 4.00 4,983.7 205.6 4.12
--------- ------ ----- --------- ------ ----- -------- ------- -----
Funds purchased......... 1,045.9 55.4 5.30 763.5 39.7 5.20 749.0 42.3 5.65
Other borrowed funds,
short-term............. 899.5 48.3 5.37 698.2 36.7 5.26 755.8 44.5 5.90
Long-term debt.......... 313.1 24.4 7.77 481.0 33.7 7.01 269.5 22.1 8.21
Guaranteed preferred
beneficial interests in
junior subordinated
debentures............. 281.8 20.0 7.11 0.8 -- -- -- -- --
--------- ------ ----- --------- ------ ----- -------- ------- -----
Total interest bearing
liabilities.......... 9,820.1 445.7 4.54% 7,070.4 315.3 4.46% 6,758.0 314.5 4.65%
--------- ------ ----- --------- ------ ----- -------- ------- -----
Noninterest bearing de-
posits................. 2,289.8 1,946.6 1,760.4
Other liabilities....... 431.4 249.1 161.3
Redeemable preferred
stock.................. 7.8 3.8 --
Stockholders' equity.... 1,583.2 1,207.2 1,109.8
--------- --------- --------
Total liabilities and
stockholders' equity.. $14,132.3 $10,477.1 $9,789.5
========= ========= ========
Net interest income, tax
equivalent basis....... $506.2 $408.8 $ 400.8
====== ====== =======
Net interest spread(3).. 3.11% 3.16% 3.33%
Contribution of interest
free sources of funds.. .96 1.14 1.14
----- ----- -----
Net interest margin(4).. 4.07% 4.30% 4.47%
===== ===== =====
</TABLE>
- -------
(1) Interest on loans to and obligations of public entities is not subject to
Federal income tax. In order to make pre-tax yields comparable to taxable
loans and investments, a tax equivalent adjustment is used based on a 35%
Federal tax rate.
(2) Nonaccrual loans are included under the appropriate loan categories at
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.
(6) The majority of deposits in foreign banking office were in amounts in
excess of $100 thousand.
13
<PAGE>
NONINTEREST INCOME
The following table presents the components of noninterest income for the
years ended December 31, 1997, 1996 and 1995, and a year-to-year comparison
expressed in terms of percent changes.
NONINTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
----------------------------------- ------------------------------
1997 1997* 1996 1995 1997/1996 1997*/1996 1996/1995
-------- -------- -------- -------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on de-
posit accounts......... $ 95,903 $ 88,665 $ 80,659 $ 71,852 18.9% 9.9% 12.3%
Mortgage banking in-
come................... 48,819 24,977 29,966 16,216 62.9 (16.6) 84.8
Trust and investment ad-
visory fees............ 45,867 35,476 28,658 22,228 60.0 23.8 28.9
Servicing income........ 26,509 26,509 26,126 22,564 1.5 1.5 15.8
Credit card income...... 18,546 11,333 9,949 17,352 86.4 13.9 (42.7)
Other income:
Customer service fees.. 9,148 8,447 8,303 7,716 10.2 1.7 7.6
Security sales and
fees.................. 12,553 6,316 5,171 3,918 142.8 22.1 32.0
Trading income......... 7,317 7,269 4,941 5,061 48.1 47.1 (2.4)
Other.................. 32,845 28,691 23,016 26,867 42.7 24.7 (14.3)
-------- -------- -------- -------- ----- ----- -----
Total other income..... 61,863 50,723 41,431 43,562 49.3 22.4 (4.9)
-------- -------- -------- -------- ----- ----- -----
Total fees and other in-
come................... 297,507 237,683 216,789 193,774 37.2 9.6 11.9
Securities gains, net... 456 457 103 2,136 342.7 343.7 (95.2)
Gain on sale of credit
card loans............. 28,155 28,155 -- -- -- -- --
-------- -------- -------- -------- ----- ----- -----
Total noninterest
income.............. $326,118 $266,295 $216,892 $195,910 50.4% 22.8% 10.7%
======== ======== ======== ======== ===== ===== =====
</TABLE>
- --------
* Excludes noninterest income of DDC subsidiaries acquired as part of the
merger.
The Corporation's noninterest income for the year ended December 31, 1997
was $326.1 million, a $109.2 million increase (50.4%) over noninterest income
for the year ended December 31, 1996. Noninterest income in 1997 benefited
from a gain on the sale of credit card loans ($28.2 million) and DDC
noninterest income of $59.8 million. Excluding DDC, total fees and other
income increased $20.9 million (9.6%) when compared to 1996. Service charges
on deposit accounts increased $8.0 million (9.9%), due to an increase in
corporate deposit service charges ($1.3 million), retail deposit service
charges ($2.3 million) and ATM surcharge revenue ($4.4 million). Trust and
investment advisory fees increased $6.8 million (23.8%). Mortgage banking
income decreased $5.0 million (16.6%). Mortgage banking income in 1996
included $9.4 million in bulk servicing gains resulting from the Corporation's
decision to exit the mortgage servicing business. Servicing income increased
$383 thousand (1.5%). The additional servicing income resulting from an
increase in average securitized credit card loans was offset by an increase in
credit losses on securitized loans. Credit card income increased $1.4 million
(13.9%) due to an increase in merchant credit card income. Securities sales
and fees increased $1.1 million (22.1%) and trading income increased $2.3
million (47.1%). Other income increased $5.7 million (24.7%) primarily due to
the recognition of a $6.1 million gain on the sale of an investment in an ATM
and point of sale network.
Securities gains of $456 thousand were realized in 1997 compared to $103
thousand in 1996 and $2.1 million in 1995. Securities sales are discussed in
detail under "Investment Portfolio".
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 deposit accounts
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.
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 Investments, Inc. 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
14
<PAGE>
in servicing income from securitized credit card loans due to the
securitization and sale of an additional $335 million in credit card loans in
April 1996. Credit card income decreased $7.4 million (42.7%) primarily due to
the securitization and sale of an additional $335 million in credit card loans
which shifted $5.2 million in credit card fee income to servicing income. In
addition, credit card loans related to the Bell Atlantic cobranding increased
$283.7 million. The rewards paid to customers on these cobranded credit card
loans were accounted for as a reduction of the underlying credit card fee
income. 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.
NONINTEREST EXPENSES
The following table presents the components of noninterest expenses for the
years ended December 31, 1997, 1996 and 1995 and a year to year comparison
expressed in terms of percent changes.
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENT CHANGE
----------------------------------- ------------------------------
1997 1997* 1996 1995 1997/1996 1997*/1996 1996/1995
-------- -------- -------- -------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other per-
sonnel costs........... $292,497 $237,002 $226,633 $211,851 29.1% 4.6% 7.0%
Equipment costs......... 40,757 32,724 32,019 30,117 27.3 2.2 6.3
Occupancy costs......... 36,976 31,565 32,899 32,188 12.4 (4.1) 2.2
Other operating ex-
penses:
External services...... 33,363 25,742 26,247 21,205 27.1 (1.9) 23.8
Postage and communica-
tions................. 21,393 16,861 17,059 14,997 25.4 (1.2) 13.7
Advertising............ 16,871 14,220 15,940 16,299 5.8 (10.8) (2.2)
Professional service
fees.................. 9,863 8,515 10,149 8,674 ( 2.8) (16.1) 17.0
Lending and collec-
tion.................. 10,231 6,825 6,657 6,225 53.7 2.5 6.9
Regulatory insurance
and fees.............. 2,862 2,471 3,519 9,031 (18.7) (29.8) (61.0)
Other.................. 34,775 23,444 27,097 31,166 28.3 (13.5) (13.1)
-------- -------- -------- -------- ----- ----- -----
Total operating ex-
penses................. 499,588 399,369 398,219 381,753 25.5 0.3 4.3
Intangible assets amor-
tization expense....... 34,768 9,132 8,642 6,971 302.3 5.7 24.0
Merger related ex-
penses................. 20,000 -- -- -- -- -- --
-------- -------- -------- -------- ----- ----- -----
Total noninterest ex-
penses.............. $554,356 $408,501 $406,861 $388,724 36.3% 0.4% 4.7%
======== ======== ======== ======== ===== ===== =====
</TABLE>
- --------
* Excludes expenses of DDC subsidiaries acquired as part of the merger and
merger related expenses.
The Corporation's noninterest expenses for the year ended December 31, 1997
were $554.4 million, a $147.5 million (36.3%) increase over noninterest
expenses for the year ended December 31, 1996. Noninterest expenses in 1997
included $20.0 million in merger related expenses and an additional $125.9
million of expenses in all categories as a result of the DDC acquisition,
including $25.6 million in intangible asset amortization expense. Excluding
DDC, total operating expenses increased $1.2 million (0.3%) when compared to
1996. Salaries and other personnel costs increased $10.4 million (4.6%)
primarily due to a higher level of incentive compensation in 1997 due to
improved performance. Occupancy costs decreased $1.3 million (4.1%) primarily
due to nonrecurring expenses related to branch closings which were recorded in
1996. Advertising expense decreased $1.7 million (10.8%) due to a reduction in
marketing costs related to the credit card business. Professional service fees
decreased $1.6 million primarily because of lower consulting fees in 1997.
Merger related consulting fees have been included in merger related expenses.
Regulatory insurance and fees decreased $1.0 million due to lower FDIC
assessments in 1997.
The Corporation's noninterest expenses for the year ended December 31, 1996
were $406.9 million, an $18.1 million (4.7%) increase over noninterest
expenses for the year ended December 31, 1995. Salaries and other personnel
costs increased $14.8 million (7.0%). The 1st Washington acquisition resulted
in approximately
15
<PAGE>
$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, and severance expenses increased $1.0 million. Other
personnel costs increased $5.1 million, primarily due to an increase in
pension costs resulting from executive retirements in 1996 and a decrease in
discount rate assumptions. 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
credit card 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.
QUARTERLY SUMMARY
The following table presents a summary of earnings by quarter for the years
ended December 31, 1997 and 1996:
SUMMARY OF QUARTERLY EARNINGS
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest and dividend income........ $184,615 $190,014 $283,273 $283,596
Net interest income................. 104,403 107,984 141,910 141,447
Provision for credit losses......... 9,900 9,300 7,434 5,383
Income before income taxes.......... 53,296 56,156 84,719 41,318
Net income.......................... 34,103 35,824 53,529 27,732
<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 96,621 101,966 105,195
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
</TABLE>
LIQUIDITY RISK MANAGEMENT
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 through the issuance of liabilities at
acceptable costs within an acceptable period of time or through the maturity
or sale of assets.
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%.
16
<PAGE>
The ratio of liquid assets to total assets at December 31, 1997 was 22.9%
compared to 24.3% at December 31, 1996. 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,
1997, the ratio of liquid assets to credit sensitive liabilities was 135.0%
compared to 192.7% at December 31, 1996.
Dividends from subsidiaries are the primary source of funds for the debt
service and preferred stock dividend requirements of the Corporation. At
January 1, 1998, (and after giving effect to a $43 million special dividend
from First Omni paid in February 1998), $22.7 million was available within the
bank subsidiaries to pay dividends without prior regulatory approval, compared
to $2.7 million at January 1, 1997. During 1997, subsidiary banks paid $76
million in dividends to the parent company. The Corporation anticipates an
additional dividend and return of capital of approximately $70 million upon
completion of the sale of substantially all of the assets of its credit card
subsidiary in the first quarter of 1998. Management is confident that the
earnings and dividend capacity of its subsidiary banks will be adequate to
service interest obligations on long-term debt and any preferred stock
dividend requirements of the Corporation. The Corporation also anticipates
that it will declare and pay a dividend to AIB of approximately $60 million
during the second quarter of 1998.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is a process that involves the development and
implementation of strategies to maximize net interest income while minimizing
the earnings risk associated with changing interest rates. ALCO is responsible
for the overall management of the Corporation's asset and liability position,
pursuant to the Corporation's Funds Management Policy. ALCO manages the
Corporation's asset and liability position within the constraints of
maintaining capital adequacy, liquidity and safety.
INTEREST RATE RISK MANAGEMENT
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 enhances 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 interest rate risk management instruments is presented in Note 20 of the
Notes to the Consolidated Financial Statements.
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 Corporation's PML model is commonly known as a Value at Risk
("VAR") model. The essence of the PML or VAR approach is to calculate the
potential financial impact of probability-derived, worst-case, immediate and
sustained changes to interest rates. Measuring risk and establishing the
probable worst-case is a statistical technique. The statistical concept used
to measure risk is volatility as measured by the standard deviation of
interest rate or price movements. The standard deviation is determined by
regression analysis of historical price and rate movements. The greater the
standard deviation, the higher the measured risk. 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 to obtain probable maximum changes in interest rates
providing a 99% degree of certainty that a loss due to market movements would
not exceed the PML amount 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).
17
<PAGE>
Equity at Risk
Equity at risk measures the loss in the value of the current balance sheet
as a result of an immediate, adverse and sustained movement in interest rates.
The fundamental premises of the technique are twofold: the value of a fixed
rate asset or liability will vary with a change in interest rates and the
value of a long-term obligation will vary more than the value of a short-term
obligation for the same change in rates. In the equity at risk simulation, the
present value of all assets and liabilities are determined under both the
current interest rate scenario and the PML scenario. The difference in the
present value of the Corporation under these two scenarios is deemed to be the
Corporation's equity at risk exposure. At December 31, 1997, the Corporation's
equity at risk was $28.0 million, in compliance with the policy limit of no
more than $45 million.
Earnings at Risk
The PML impact on future income is known as earnings at risk. Earnings at
risk are expressed as a percentage of current year budgeted net income before
tax ("NIBT"). The earnings impact of various interest rate scenarios are
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
Corporation's current policy is to limit earnings at risk to 10% of budgeted
current NIBT assuming the same PML interest rate shock methodology employed to
calculate the Corporation's equity at risk exposure. At December 31, 1997, the
Corporation's earnings at risk were $7.0 million which was in compliance with
policy.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange
rates and equity prices.
Fixed Income and Derivative Risk Management
The Corporation maintains active securities and derivative trading positions
resulting from activity generated for corporate customers as well as the
Corporation's own trading account. The Corporation utilizes a variance-
covariance VAR measurement system for the determination of market risk. VAR
provides a single number summary of the largest amount the Corporation is
likely to lose over a specified time period from adverse changes in prices or
rates. Risk is calculated as the PML in fair value over a one-month period
that would arise from a worst-case movement in market rates. The worst-case is
based on a historical observation of price/yield volatility over a period of
years. Market volatilities are raised to 2.33 standard deviations to obtain
probable maximum changes in interest rates providing a 99% degree of certainty
that a loss due to market movements would not exceed the PML amount over a
one-month period. Possible limitations of VAR models are that past movements
in rates may not be indicative of future market conditions regardless of the
historical time period of observation and changes in market rates may not
display a normal distribution which the models assume. At December 31, 1997
aggregate fixed income and derivative trading VAR was $0.3 million which was
in compliance with the policy limit of $2.5 million.
Foreign Exchange Risk Management
The Corporation maintains active foreign exchange trading positions to
service the needs of its corporate and retail customers as well as for its own
trading account. Foreign exchange market risk is the potential loss arising
from an adverse shift in exchange rates and is calculated based on historical
movements and the probability of occurrence. Foreign exchange market risk is
calculated using Monte Carlo simulations with 1,000 iterations. The amount of
risk implied is the tenth worst observation resulting in a 99% confidence that
actual losses will not exceed this amount. At December 31, 1997, the value at
risk of the Corporation's aggregate foreign exchange position was estimated at
$0.9 million which was in compliance with the policy limit of $2.25 million.
18
<PAGE>
INVESTMENT PORTFOLIO
The available for sale ("AFS") investment 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 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. The AFS investment portfolio is primarily comprised of five basic types
of securities: U.S. Treasury and U.S Government agencies, mortgage-backed
obligations ("MBSs"), collateralized mortgage obligations ("CMOs"), asset-
backed securities and obligations of states and political subdivisions
("Municipals"). Other debt and equity securities were 4.6% of the book value
of the total portfolio at December 31, 1997.
At December 31, 1997, the book value ("fair value") of the AFS investment
portfolio was $4.4 billion compared with $2.6 billion at December 31, 1996, a
$1.9 billion (74.1%) increase. The increase in the AFS investment portfolio is
primarily due to the addition of $2.2 billion in investment securities as a
result of the acquisition of Dauphin. The size of the portfolio increased to
25.0% of total assets at December 31, 1997 from 23.7% at December 31, 1996.
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,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury & U.S. Government agencies..... $ 862,175 $ 611,061 $ 900,347
Mortgage-backed obligations.................. 1,655,235 1,159,649 1,245,339
Collateralized mortgage obligations(1)....... 976,746 368,656 412,289
Asset-backed securities...................... 309,338 206,422 12,868
Obligations of states and political subdivi-
sions....................................... 435,223 98,889 104,886
Other debt securities........................ 60,768 47,595 77,906
Equity securities............................ 144,622 60,348 40,388
---------- ---------- ----------
Total...................................... $4,444,107 $2,552,620 $2,794,023
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1997, 1996 and 1995, $888.8 million, $348.4 million and
$382.6 million of CMOs, respectively, were issues of the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association.
19
<PAGE>
The following table shows the maturity distribution of the available-for-
sale debt securities of the Corporation at December 31, 1997 based upon
amortized cost.
MATURITY OF AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
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.... $ 52,144 $ 775,069 $ 26,444 $ -- $ 853,657
Mortgage-backed obliga-
tions(1)............... 183,303 669,506 517,496 260,575 1,630,880
Collateralized mortgage
obligations(1)......... 197,428 438,824 199,369 133,929 969,550
Asset-backed securi-
ties(1)................ 31,462 229,440 42,815 921 304,638
Obligations of states
and political subdivi-
sions.................. 49,839 131,410 91,285 154,404 426,938
Other debt and equity
securities(2).......... 57,768 1,250 1,750 143,304 204,072
-------- ---------- -------- --------- ----------
Total................. $571,944 $2,245,499 $879,159 $ 693,133 $4,389,735
======== ========== ======== ========= ==========
</TABLE>
- --------
(1) The maturity distribution is based upon long-term cash flow estimates for
each security type and coupon rate.
(2) Equity securities totaling $143.3 million have been classified in after 10
years.
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, 1997 based upon amortized cost.
AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO
(TAX EQUIVALENT YIELDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
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. Govern-
ment agencies................ 5.65% 6.04% 6.27% -- % 6.02%
Mortgage backed obliga-
tions(1)..................... 7.02 6.94 6.88 6.87 6.92
Collateralized mortgage obli-
gations(1)................... 6.79 6.80 6.85 6.99 6.83
Asset-backed securities....... 6.99 6.99 6.99 6.99 6.99
Obligations of states and po-
litical subdivisions......... 7.80 7.66 7.05 7.85 7.61
Other debt and equity securi-
ties......................... 5.19 7.90 7.37 5.83 5.68
---- ---- ---- ---- ----
Total....................... 6.70% 6.65% 6.88% 6.90% 6.74%
==== ==== ==== ==== ====
</TABLE>
- --------
(1) Computation of weighted average tax equivalent yields includes $492.8
million of floating rate MBSs and $219.9 million of floating rate CMOs.
Investment Securities Sales
In the AFS portfolio, proceeds from the sale of debt securities during 1997
amounted to $2.5 billion resulting in pretax net gains of $483 thousand. This
compares to realized gains of $18 thousand on $1.2 billion of sales in 1996
and gains of $11 thousand on $867.1 million of security sales in 1995.
Proceeds from the sale of equity securities during 1997 totaled $19.5 million
resulting in pretax net losses of $27 thousand. This
20
<PAGE>
compares to $7.1 million in proceeds in 1996 from the sale of equity
securities which resulted in pretax gains of $85 thousand and $2.7 million in
proceeds from the sale of equity securities in 1995 which resulted in pretax
gains of $2.1 million.
Subsequent Event
The large decline in interest rates during the fourth quarter of 1997 and
the first few weeks of 1998 resulted in a restructuring of the Corporation's
investment portfolio. In January 1998, approximately $1.5 billion in U.S.
Treasury securities and mortgage backed obligations were sold to reduce
corporate wide interest rate and prepayment risk given the current market
environment. The sales resulted in pre-tax net gains of $30.3 million.
Although the Corporation expects interest rates to stabilize during the next
several months, there is a likelihood that interest rates will decline further
during 1998. Therefore, proceeds from the sale will be invested in securities
possessing less prepayment risk but lower returns than the securities sold.
The Corporation anticipates that its interest rate risk position at the end of
the first quarter of 1998 will be similar to the Corporation's risk position
at year end 1997 as discussed under Interest Rate Risk Management. However,
the statement of condition will be subject to less interest rate risk exposure
in a falling interest rate environment due to the investment portfolio
restructuring.
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,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 2,868,728 28.4% $1,731,031 25.5% $1,798,248 29.3% $1,633,275 29.9% $1,626,080 31.3%
Commercial real estate.. 2,256,895 22.4 1,453,244 21.4 1,265,736 20.6 1,246,847 22.8 1,241,576 23.9
Residential............. 987,751 9.8 833,045 12.2 650,588 10.6 593,642 10.9 497,543 9.6
Retail.................. 2,567,166 25.5 1,380,767 20.3 1,098,955 17.9 984,403 18.0 885,117 17.0
Credit card............. 146,497 1.4 596,474 8.8 654,653 10.7 496,608 9.1 527,657 10.1
Leases receivable....... 774,221 7.7 438,060 6.4 334,504 5.4 259,633 4.8 211,821 4.1
Foreign................. 482,328 4.8 365,824 5.4 336,140 5.5 244,483 4.5 207,927 4.0
----------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of
unearned income........ $10,083,586 100.0% $6,798,445 100.0% $6,138,824 100.0% $5,458,891 100.0% $5,197,721 100.0%
=========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
21
<PAGE>
The following table displays the contractual maturities and interest rate
sensitivities of the loan portfolio of the Corporation at December 31, 1997.
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, 1997
------------------------------------------------------------------
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.............. $1,031,363 $ 325,581 $ 604,732 $ 59,323 $ 847,729 $ 2,868,728
Commercial real estate.. 476,075 388,415 827,249 119,004 446,152 2,256,895
Residential............. 177,039 125,474 284,580 128,829 271,829 987,751
Retail.................. 657,215 970,431 295,076 400,386 244,058 2,567,166
Credit card............. 146,497 -- -- -- -- 146,497
Leases receivable....... 107,471 579,628 -- 87,122 -- 774,221
Foreign................. 188,514 9,636 226,019 796 57,363 482,328
---------- ---------- ---------- --------- ---------- -----------
Total............... $2,784,174 $2,399,165 $2,237,656 $ 795,460 $1,867,131 $10,083,586
========== ========== ========== ========= ========== ===========
</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 loan outstandings of $2.9 billion comprised 28.4% of the
Corporation's total loans and leases at December 31, 1997. Commercial loans
increased $1.1 billion or 65.7% during 1997. Approximately $945 million or 83%
of the growth was due to the DDC acquisition. Excluding the impact of the
acquisition, (based on DDC outstandings as of the acquisition date),
commercial loans increased by 11.1%. Specialized lending and mid-sized
corporate customers were major components of portfolio growth in 1997.
Commercial loans include short and medium term loans, revolving credit
arrangements, lines of credit, asset based lending and equipment lending.
The commercial loan portfolio is segregated by market sector as well as
geographic regions. There are two primary market sectors, Corporate Banking
and Business and Priority Banking. Business and Priority Banking is focused on
customers with sales volumes less than $10 million. Corporate Banking services
all other customers and represents approximately 90% of total commercial
outstandings. Within Corporate Banking there are specialized lending functions
including Communications, Healthcare, International, Asset Based Lending,
Transportation, Not for Profit and Financial Institutions. The primary market
for commercial lending is Maryland, Pennsylvania and Washington, D.C.
COMMERCIAL REAL ESTATE
The Corporation's commercial real estate portfolio represents loans secured
primarily by real property. The properties financed include both owner-
occupied and investor real estate.
Commercial real estate loans of $2.3 billion comprised 22.4% of the total
loan portfolio at December 31, 1997. Commercial real estate loans increased
$804 million or 55.3% during 1997. DDC commercial real estate
22
<PAGE>
loans on the acquisition date were $879 million. Excluding the impact of the
acquisition, (based on DDC outstandings as of the acquisition date),
commercial real estate outstandings decreased by 5.2%. Maryland real estate
economic conditions strengthened during the year with increasing rental rates
and falling vacancies. The greater Harrisburg market holds good prospects for
steady future development and Northern Virginia is still considered one of the
top markets across all property sectors. The Corporation continues to focus on
acquisition and refinancing loans for quality projects with strong
sponsorship. As of December 31, 1997, $866 million or 46% of non-construction
commercial real estate outstandings were owner-occupied, being 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.
The commercial real estate portfolio continues to be well-balanced by
property type. The largest property type concentration was office buildings at
28.4% of total commercial real estate outstandings followed by
industrial/warehouse at 18.2% and retail at 15.7%. Property types showing the
most growth in 1997 were retail, office buildings, and industrial/warehouse.
LOANS SECURED BY REAL ESTATE BY PROPERTY TYPE
<TABLE>
<CAPTION>
DECEMBER 31
1997
--------------
(IN THOUSANDS)
<S> <C>
Office buildings................................................. $ 641,417
Industrial/warehouse and other commercial properties............. 411,834
Retail........................................................... 353,448
Hospitals/nursing home medical centers........................... 128,326
Apartments....................................................... 126,062
Special purpose.................................................. 120,934
Hotels/motels.................................................... 102,455
All other........................................................ 372,419
----------
Total.......................................................... $2,256,895
==========
</TABLE>
The commercial real estate portfolio is geographically centered in the
Corporation's regional marketplace, with 93.3% of the portfolio secured by
properties in Maryland, Pennsylvania, Virginia, and Washington, D.C.
LOANS SECURED BY REAL ESTATE BY GEOGRAPHIC REGION
<TABLE>
<CAPTION>
DECEMBER 31
1997
--------------
(IN THOUSANDS)
<S> <C>
Pennsylvania............................................. $1,010,450
Maryland................................................. 946,232
Virginia................................................. 103,861
Washington, D.C.......................................... 46,201
Florida.................................................. 26,972
New Jersey............................................... 80,210
Delaware................................................. 16,489
All other................................................ 26,480
----------
Total.................................................. $2,256,895
==========
</TABLE>
Commercial real estate loans included $382.5 million in construction loans
at December 31, 1997. These loans include land acquisition and development
loans, and building construction loans. Since December 31, 1996, real estate
construction loans have increased $83 million or 27.5%. Excluding the DDC
portfolio as of the acquisition date, construction loans decreased by $53
million in 1997. Most construction activity continues to
23
<PAGE>
occur in Northern Virginia and along the Baltimore/Washington corridor with
development primarily for build-to-suit commercial office space, industrial
and retail projects. The Corporation continues to pursue high quality loan
opportunities.
REAL ESTATE MORTGAGE, RESIDENTIAL
Residential mortgages at December 31, 1997 increased $154.7 million from
December 31, 1996. The DDC acquisition resulted in an additional $241.5
million in residential mortgages on the date of acquisition. Excluding the DDC
impact, residential mortgages declined $86.8 million from December 31, 1996 to
December 31, 1997. On February 13, 1998, the Corporation sold the residential
first mortgage loan origination businesses of its mortgage banking
subsidiaries. See Part I, above.
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
1997, 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 significantly better
than industry averages.
As compared to December 31, 1996, retail loans increased $1.2 billion to
$2.6 billion at December 31, 1997. The growth in retail loans is largely
attributable to the DDC acquisition which resulted in the addition of $904
million in retail loans on the acquisition date. Excluding the impact of the
acquisition, retail outstandings increased $283 million.
CREDIT CARD
Credit card loans at December 31, 1997 were $146.5 million compared to
$596.5 million at December 31, 1996. The DDC acquisition resulted in an
additional $49.7 million in credit card loans on the acquisition date. The
decline in the credit card portfolio in 1997 reflects the sale of the
Corporation's Bell Atlantic co-branded credit card portfolio to Chase
Manhattan Bank Delaware on August 8, 1997.
On February 25, 1998, the Corporation sold substantially all of its
remaining credit card loans, including its interest in the First Omni Bank
Credit Card Master Trust, to Bank of America National Association ("BOANA").
The Corporation realized a pre-tax gain of $60 million on the sale. BOANA and
the Corporation have entered into an agreement whereby BOANA will provide
retail credit card products and services to customers of the Corporation's
bank subsidiaries on an agency basis.
LEASES RECEIVABLE
Leases receivable include retail automobile, small equipment and general
equipment leasing portfolios. Leases receivable increased to $774.2 million at
December 31, 1997 from $438.1 million at December 31, 1996. The increase in
leases receivable is primarily due to the acquisition of DDC which resulted in
the addition of $234 million in leases receivable which were principally
retail automobile leases. The general equipment leasing portfolio represents
approximately 60% 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.
24
<PAGE>
FOREIGN
Foreign loans totaled $482.3 million at December 31, 1997, an increase of
$116.5 million when compared to December 31, 1996. Foreign loans by exposure
consist of maritime (68.3%), foreign direct investment (17.0%) and other
(14.7%). Growth in foreign loans in 1997 was from the maritime portfolio. The
maritime portfolio is widely diversified, both geographically and by asset
type, and is secured by first mortgages/liens.
ASSET QUALITY
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 portfolio. The Corporation manages credit risk through the credit
approval process and written policies which generally specify underwriting
guidelines and standards and in some cases limit credit exposure by industry,
country or product type. All credit policies and credit concentration exposure
limits are reviewed and approved annually by the Executive Committee of the
Board of Directors.
The Credit Review function, which reports independently to the Audit
Committee of the Board of Directors, 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 certify adequacy of the allowance for credit losses, which the
Audit Committee is required to approve quarterly.
Provision for Credit Losses
The provision for credit losses was $32.0 million for the year ended
December 31, 1997, an increase of $25.5 million (392.6%) from the $6.5 million
provision for 1996. The provision for credit losses in 1997 included $3.7
million in provisions related to DDC. Excluding DDC, the provision for credit
losses increased $21.8 million when compared to 1996. The provision for credit
losses was lower than net charge-offs by $8.0 million in 1997 resulting in a
net reduction of the allowance for credit losses. In 1996, the provision for
credit losses was $31.8 million lower than net charge-offs with a
corresponding reduction in the allowance for credit losses. The reduction in
the allowance in both 1996 and 1997 was the result of improvements in credit
quality in the commercial and commercial real estate portfolios. In addition,
the sale of credit card loans in 1997 and the pending sale of credit card
loans in 1998 resulted in a reduction in the allowance needed for estimated
future losses on credit card loans. In 1996, the credit card securitization
resulted in a reduction in the level of credit card loans without a
corresponding reduction in the allocation of allowance 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 credit card loans in 1996 which resulted in a
reduction in the level of credit card loans without a corresponding reduction
in the allowance for credit losses. Approximately $17 million of the allowance
for credit losses was reallocated from the credit card loans sold to the
remaining unsecuritized credit card loan portfolio in light of increasing
delinquency and charge-off trends. In addition, the allowance allocated to the
commercial and commercial real estate portfolios was reduced as a result of
generally improved credit quality.
Nonperforming Assets
Nonperforming assets totaled $81.0 million at December 31, 1997, an increase
of $22.0 million (37.3%) when compared to $59.0 million in nonperforming
assets at December 31, 1996. The acquisition of DDC resulted in an additional
$15.7 million in nonperforming assets on the acquisition date. During 1997
there were additions to nonperforming assets of $62.7 million primarily due to
the transfer of loans to nonaccrual status. These increases were partially
offset by the following decreases in nonperforming assets in 1997: paydowns of
$25.2 million, charge-offs of $9.7 million, other real estate owned paydowns
and sales of $9.6 million and loans reclassified to performing status of $11.9
million.
25
<PAGE>
Nonaccrual residential mortgage loans increased $17.3 million in 1997,
including the addition of $3.1 million in DDC residential mortgages as of the
acquisition date. Losses on residential mortgages are expected to be modest
since all loans with a greater than 80% loan to value ratio are generally
required to maintain mortgage insurance.
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,
---------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Domestic:
Commercial.................... $ 21,730 $13,988 $16,587 $13,326 $ 47,521
Commercial real estate........ 9,417 20,347 5,910 30,342 50,640
Residential mortgage.......... 24,808 7,545 6,375 5,250 5,381
Leases receivable............. -- -- -- 85 863
Foreign......................... 4,340 3,800 4,321 5,300 3,800
-------- ------- ------- ------- --------
Total nonaccrual loans...... 60,295 45,680 33,193 54,303 108,205
Restructured loans(1)........... 3,692 126 143 4,974 4,692
Other real estate and other
assets owned(2)................ 16,963 13,146 11,501 14,853 22,525
-------- ------- ------- ------- --------
Total nonperforming assets.... $ 80,950 $58,952 $44,837 $74,130 $135,422
======== ======= ======= ======= ========
Nonperforming assets as a % of
total loans, net of unearned
income plus other foreclosed
assets owned................... 0.80% 0.87% 0.73% 1.35% 2.59%
======== ======= ======= ======= ========
Accruing loans contractually
past due 90 days or more as to
principal or interest
Domestic....................... $ 23,717 $23,812 $18,808 $13,338 $ 17,172
======== ======= ======= ======= ========
</TABLE>
- --------
(1) 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."
(2) 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 less estimated costs to sell.
The following table details the gross interest income that would have been
received during the year ended December 31, 1997 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, 1997
-------------------
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.................................................... $ 5,073 $ 450
Interest income actually recorded......................... 2,099 356
</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, 1997, the Corporation was monitoring
$47.5 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, 1997 which were classifiable
as nonaccrual, restructured, past due or potential problem assets.
26
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The following table details certain information relating to the Allowance of
the Corporation for the five years ended December 31, 1997. 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,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF TRANSACTIONS
Allowance at beginning of
year....................... $154,802 $177,621 $191,024 $200,006 $201,451
Provision for credit
losses..................... 32,017 6,500 16,000 22,996 45,291
Losses charged-off:
Commercial loans........... 9,581 2,743 1,848 2,852 10,580
Commercial real estate
loans..................... 543 6,384 1,270 7,026 10,802
Residential mortgages...... 868 177 110 328 467
Retail loans............... 7,998 5,893 2,988 4,798 6,005
Credit card loans.......... 26,962 30,156 30,352 27,180 25,360
Leases receivable.......... 736 125 40 343 516
Foreign loans.............. -- -- 1,840 -- 2,561
-------- -------- -------- -------- --------
Total losses charged-off... 46,688 45,478 38,448 42,527 56,291
-------- -------- -------- -------- --------
Recoveries of losses
previously charged-off:
Commercial loans........... 1,083 1,787 1,025 3,908 1,108
Commercial real estate
loans..................... 313 560 452 742 166
Residential mortgages...... 97 8 28 29 16
Retail loans............... 2,893 2,143 2,194 2,846 2,573
Credit card loans.......... 1,507 2,568 5,127 5,203 4,696
Leases receivable.......... 221 113 219 431 331
Foreign loans.............. 557 -- -- -- 4,924
-------- -------- -------- -------- --------
Total recoveries........... 6,671 7,179 9,045 13,159 13,814
-------- -------- -------- -------- --------
Net losses charged-off...... 40,017 38,299 29,403 29,368 42,477
Allowance for loans of
acquired banks............. 42,884 10,642 -- -- --
Allowance for loans sold.... (21,500) -- -- (2,610) (4,259)
Transfer of allowance to
reserve for off-balance
sheet liability............ -- (1,662) -- -- --
-------- -------- -------- -------- --------
Total allowance at end of
year....................... $168,186 $154,802 $177,621 $191,024 $200,006
======== ======== ======== ======== ========
NET LOAN LOSSES (RECOVERIES)
BY CATEGORY
Commercial loans........... $ 8,498 $ 956 $ 823 $ (1,056) $ 9,472
Commercial real estate
loans..................... 230 5,824 818 6,284 10,636
Residential mortgages...... 771 169 82 299 451
Retail loans............... 5,105 3,750 794 1,952 3,432
Credit card loans.......... 25,455 27,588 25,225 21,977 20,664
Leases receivable.......... 515 12 (179) (88) 185
Foreign loans.............. (557) -- 1,840 -- (2,363)
-------- -------- -------- -------- --------
Total...................... $ 40,017 $ 38,299 $ 29,403 $ 29,368 $ 42,477
======== ======== ======== ======== ========
NET LOAN LOSSES (RECOVERIES)
TO AVERAGE LOANS BY
CATEGORY
Commercial loans........... 0.37% 0.05% 0.05% (0.06)% 0.58%
Commercial real estate
loans..................... 0.01 0.44 0.06 0.51 0.88
Residential mortgages...... 0.08 0.02 0.01 0.05 0.11
Retail loans............... 0.26 0.30 0.08 0.21 0.36
Credit card loans.......... 6.72 5.37 4.72 4.56 4.23
Leases receivable.......... 0.09 -- (0.06) (0.04) 0.09
Foreign loans.............. (0.15) -- 0.61 -- (1.22)
-------- -------- -------- -------- --------
Total loans................ 0.48% 0.61% 0.51% 0.56% 0.83%
Total loans--excluding
credit cards.............. 0.18% 0.18% 0.08% 0.15% 0.47%
Allowance as a percentage of
year end loans, net of
unearned income............ 1.67% 2.28% 2.89% 3.50% 3.85%
Allowance as a percentage of
nonperforming loans........ 262.84% 337.95% 532.82% 322.26% 177.16%
</TABLE>
27
<PAGE>
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
Corporate policy requires all accrued but unpaid interest to be reversed once
a loan is placed on nonaccrual status.
All nonaccrual loans and certain substandard loans are analyzed individually
to determine specific reserves. General 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.
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, 1997 was available to absorb losses occurring in any category of loans.
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial......................... $ 24,875 $ 10,337 $ 17,092 $ 19,222 $ 32,453
Commercial real estate............. 20,223 16,703 16,677 31,374 49,221
Residential mortgage............... 1,719 1,334 1,150 1,022 1,087
Retail............................. 12,766 4,151 3,257 3,213 6,266
Credit card........................ 6,010 31,801 36,141 30,830 35,950
Leases receivable.................. 10,787 12,374 13,407 16,323 3,304
Foreign............................ 12,881 12,818 9,970 11,748 9,322
Unallocated........................ 78,925 65,284 79,927 77,292 62,403
-------- -------- -------- -------- --------
Total allowance................ $168,186 $154,802 $177,621 $191,024 $200,006
======== ======== ======== ======== ========
</TABLE>
DEPOSITS
Total deposits at December 31, 1997 were $12.5 billion, a $5.0 billion
increase over total deposits at December 31, 1996. The growth in deposits is
largely attributable to the DDC acquisition which resulted in the addition of
$4.2 billion in deposits on the acquisition date. Excluding the impact of the
acquisition, total deposits increased $779 million. The following table
details the maturity of certificates of deposit of $100 thousand or more on
December 31, 1997. There were no non-certificate time deposits of $100,000 or
more at December 31, 1997.
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT IN AMOUNTS OF $100,000 OR MORE
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Within three months............................................... $ 490.6
After three months but within six months.......................... 141.1
After six months but within twelve months......................... 887.6
After twelve months............................................... 538.3
--------
Total......................................................... $2,057.6
========
</TABLE>
28
<PAGE>
SHORT-TERM BORROWINGS
To the extent that deposits are not adequate to fund customer loan demand in
the Banks, or to the extent that long-term borrowings are inadequate to 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, 1997.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased:
End of year outstandings...................... $1,092,307 $314,570 $300,895
Highest month-end balance..................... 1,214,465 614,826 621,771
Average balance............................... 553,226 509,466 420,093
Average interest rate at year end............. 6.50% 6.41% 5.70%
Weighted average interest rate(1)............. 5.47 5.28 5.67
Repurchase agreements:
End of year outstandings...................... $ 605,161 $218,977 $214,630
Highest month-end balance..................... 654,453 350,237 556,115
Average balance............................... 492,638 253,993 328,874
Average interest rate at year end............. 5.06% 5.00% 5.06%
Weighted average interest rate(1)............. 4.95 4.79 5.62
Master demand notes of the Corporation:
End of year outstandings...................... $ 335,116 $320,619 $402,489
Highest month-end balance..................... 343,907 390,715 408,894
Average balance............................... 338,602 352,615 385,582
Average interest rate at year end............. 4.90% 4.80% 5.20%
Weighted average interest rate(1)............. 4.91 4.86 5.55
Other borrowed funds, short term:
End of year outstandings...................... $ 151,574 $500,858 $506,155
Highest month-end balance..................... 675,111 708,906 618,516
Average balance............................... 560,911 345,632 370,218
Average interest rate at year end............. 5.90% 5.58% 6.04%
Weighted average interest rate(1)............. 5.53 5.45 6.26
</TABLE>
- --------
(1) The weighted average interest rate is calculated by dividing the annual
interest expense by the daily average outstanding principal balance.
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 Corporation's stockholders' equity was $1.9 billion at December 31,
1997, an increase of $625.4 million over stockholders' equity at December 31,
1996. The 50.1% increase in stockholders' equity is primarily due to the
issuance to AIB of $504.3 million in common stock related to the DDC
acquisition in July 1997. In addition, stockholders' equity increased due to
$151.2 million of net income in 1997 and a $26.1 million increase
29
<PAGE>
in the fair value of investment securities available-for-sale, net of income
taxes. Offsetting these increases were $56.2 million in dividends declared in
1997. The primary source of growth in stockholders' equity from 1995 to 1996
was $132.3 million in net income offset by a $16.1 million decline in the fair
value of investment securities available-for-sale, net of income taxes, offset
by dividends declared of $52.0 million in 1996.
Total dividends include common dividends paid to the Corporation's common
shareholder, AIB, of $44.0 million and $40.0 million in 1997 and 1996,
respectively. These dividends represent approximately one third of prior
year's net income.
The following table details the Corporation's capital components and ratios
at December 31, 1997, 1996 and 1995 based upon the capital requirements of the
regulatory agencies discussed in Part I under "Business--Supervision and
Regulation." Tier 1 capital decreased $117.2 million from December 31, 1996
due to the acquisition of DDC which resulted in additional disallowed
intangible assets of $870.0 million at December 31, 1997. The increase in
intangible assets was offset by the issuance of $504.3 million in common stock
to AIB in July 1997 and the issuance of $150.0 million in guaranteed preferred
beneficial interests in junior subordinated debentures in 1997. These
instruments were accorded Tier 1 capital status by the Federal Reserve. In
addition, net income of $151.2 million offset by dividends of $56.2 million
had a positive impact on Tier 1 capital in 1997. Tier 2 capital increased
$227.8 million in 1997 primarily due to a $180 million net increase in
qualifying subordinated debt and the addition of the Dauphin allowance for
credit losses which was $42.9 million at December 31, 1997.
Significant transactions affecting regulatory capital in 1996 included
$132.3 million in net income which was partially offset by $52.0 million in
dividends declared in 1996 and the issuance of $150 million in guaranteed
preferred beneficial interests in junior subordinated debentures in 1996.
CAPITAL COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Preferred stockholders' equity......... $ 144,852 $ 144,852 $ 144,852
Common stockholder's equity............ 1,728,005 1,102,645 1,038,722
Guaranteed preferred beneficial
interests in junior subordinated
debentures............................ 295,873 147,113 --
Disallowed intangibles................. (956,126) (90,861) (37,178)
Net unrealized gains on investment
securities available-for-sale......... ( 34,389) (8,332) (24,414)
----------- ----------- -----------
Tier 1 capital....................... 1,178,215 1,295,417 1,121,982
----------- ----------- -----------
Qualifying long-term debt.............. 279,738 99,765 103,721
Redeemable preferred stock............. 6,319 7,700 --
Allowance for credit losses............ 164,386 115,173 102,754
Mandatory convertible securities....... 59,986 59,977 59,969
----------- ----------- -----------
Tier 2 capital....................... 510,429 282,615 266,444
----------- ----------- -----------
Total capital.......................... $ 1,688,644 $ 1,578,032 $ 1,388,426
=========== =========== ===========
Risk-adjusted assets................... $14,193,737 $ 9,174,168 $ 8,145,412
Average quarterly assets (fourth
quarter).............................. $17,174,905 $10,725,996 $10,316,684
Risk based capital ratios:
Tier 1 capital to risk-adjusted
assets.............................. 8.30% 14.12% 13.77%
Regulatory minimum.................. 4.00 4.00 4.00
Total capital to risk-adjusted
assets.............................. 11.90 17.20 17.05
Regulatory minimum.................. 8.00 8.00 8.00
Leverage ratio......................... 7.26 12.18 10.91
</TABLE>
30
<PAGE>
The Corporation has consistently maintained capital ratios at or above "well
capitalized" standards. For further details on capital ratios see Note 19 of
the Notes to Consolidated Financial Statements of the Corporation.
The tangible common equity to assets ratio of 4.75% at December 31, 1997
compares to a 9.52% level at December 31, 1996. The reduction is due to the
increase in intangible assets resulting from the DDC acquisition.
YEAR 2000
The Corporation initiated the process of preparing its computer systems and
applications for the Year 2000 in 1996. This process involves modifying or
replacing certain hardware and software maintained by the Corporation as well
as communicating with external service providers to ensure that they are
taking the appropriate action to remedy their Year 2000 issues. Management
expects to have substantially all of the system and application changes
completed by the end of 1998, with system verification and certification
throughout 1999 and believes that its level of preparedness is appropriate.
The Corporation is currently in the process of implementing new systems in
order to achieve its DDC merger-related target environment objectives. In the
process, many of the Corporation's systems which were not Year 2000 compliant
are being replaced. It is difficult to separate the costs associated with
system replacements and upgrades due to target environment strategies from
those associated with Year 2000 compliance. Management estimates that the
total cost of target environment system replacements and upgrades and Year
2000 compliance will be approximately $30 million, which includes both
internal and external personnel costs related to implementing and modifying
systems as well as the cost of purchasing or leasing certain hardware and
software. Purchased hardware and software will be capitalized in accordance
with normal policy. Internal personnel and all other costs related to the
project are being expensed as incurred. The costs of the project and the
expected completion dates are based on management's best estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
The impact of recently issued accounting pronouncements is detailed in Note
2 of the Notes to Consolidated Financial Statements of the Corporation.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................... $675,450 $521,643 $510,874
Interest and dividends on investment securities:
Taxable.......................................... 209,393 166,117 153,276
Tax exempt....................................... 13,058 6,341 13,769
Dividends........................................ 5,684 1,683 1,229
Interest on loans held-for-sale.................... 19,987 9,390 7,305
Interest on money market investments............... 17,926 13,855 21,088
-------- -------- --------
Total interest and dividend income............. 941,498 719,029 707,541
-------- -------- --------
INTEREST EXPENSE
Interest on deposits............................... 297,644 205,169 205,566
Interest on Federal funds purchased and other
short-term borrowings............................. 103,722 76,428 86,858
Interest on long-term debt......................... 24,341 33,721 22,124
Interest on guaranteed preferred beneficial inter-
ests in Corporation's junior subordinated deben-
tures............................................. 20,047 55 --
-------- -------- --------
Total interest expense......................... 445,754 315,373 314,548
-------- -------- --------
Net interest income................................ 495,744 403,656 392,993
Provision for credit losses (note 6)............... 32,017 6,500 16,000
-------- -------- --------
Net interest income after provision for credit
losses............................................ 463,727 397,156 376,993
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts................ 95,903 80,659 71,852
Mortgage banking income............................ 48,819 29,966 16,216
Trust and investment advisory fees................. 45,867 28,658 22,228
Servicing income................................... 26,509 26,126 22,564
Gain on sale of credit card loans.................. 28,155 -- --
Credit card income................................. 18,546 9,949 17,352
Securities gains, net (note 5)..................... 456 103 2,136
Other income (note 16)............................. 61,863 41,431 43,562
-------- -------- --------
Total noninterest income....................... 326,118 216,892 195,910
-------- -------- --------
NONINTEREST EXPENSES
Salaries and other personnel costs (notes 14 and
15)............................................... 292,497 226,633 211,851
Equipment costs (notes 7 and 20)................... 40,757 32,019 30,117
Occupancy costs (notes 7 and 20)................... 36,976 32,899 32,188
Intangible assets amortization expense............. 34,768 8,642 6,971
Merger related expenses (note 17).................. 20,000 -- --
Other operating expenses (note 16)................. 129,358 106,668 107,597
-------- -------- --------
Total noninterest expenses..................... 554,356 406,861 388,724
-------- -------- --------
Income before income taxes......................... 235,489 207,187 184,179
Income tax expense (note 18)....................... 84,301 74,850 63,992
-------- -------- --------
Net income......................................... $151,188 $132,337 $120,187
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and due from banks....... $ 1,078,009 $ 842,032
Money market investments (note
4)........................... 92,325 75,260
Investment securities avail-
able-for-sale (note 5)....... 4,444,107 2,552,620
Loans held-for-sale........... 482,153 150,742
Loans, net of unearned income
of $192,569 in 1997 and
$130,026 in 1996:
Commercial.................. 2,868,728 1,731,031
Commercial real estate...... 2,256,895 1,453,244
Residential mortgage........ 987,751 833,045
Retail...................... 2,567,166 1,380,767
Credit card................. 146,497 596,474
Leases receivable........... 774,221 438,060
Foreign..................... 482,328 365,824
------------ ------------
Total loans, net of un-
earned income............ 10,083,586 6,798,445
Allowance for credit losses
(note 6)..................... (168,186) (154,802)
------------ ------------
Loans, net................ 9,915,400 6,643,643
Premises and equipment (note
7)........................... 170,863 106,701
Due from customers on accept-
ances........................ 11,810 8,725
Intangible assets (note 8)....... 967,433 98,847
Other assets.................. 630,293 312,454
------------ ------------
Total assets............ $ 17,792,393 $ 10,791,024
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Domestic deposits:
Noninterest bearing depos-
its........................ $ 2,957,888 $ 2,248,252
Interest bearing deposits... 9,274,034 5,135,616
Interest bearing deposits in
foreign banking office....... 232,234 113,830
------------ ------------
Total deposits............ 12,464,156 7,497,698
Federal funds purchased and
securities sold under
repurchase agreements
(note 9)..................... 1,697,468 533,547
Other borrowed funds, short-
term (note 10)............... 486,690 821,477
Bank acceptances outstanding.. 11,810 8,725
Accrued taxes and other lia-
bilities (note 18)........... 545,672 297,525
Long-term debt (note 11)...... 409,970 229,742
Guaranteed preferred benefi-
cial interests in junior sub-
ordinated debentures
(note 12).................... 295,873 147,113
------------ ------------
Total liabilities....... 15,911,639 9,535,827
------------ ------------
4.50% Cumulative, Redeemable
Preferred Stock, $5 par value
per share, $100 liquidation
preference per share; autho-
rized and issued 90,000
shares (note 13)............. 7,897 7,700
------------ ------------
Commitments and contingent li-
abilities (notes 20 and 22)
Stockholders' equity:
7.875% Noncumulative Pre-
ferred 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
597,763,495 shares......... 85,395 84,926
Capital surplus............. 701,988 198,176
Retained earnings........... 1,021,085 926,063
Net unrealized gains on in-
vestment securities avail-
able-for-sale.............. 34,389 8,332
------------ ------------
Total stockholders' equi-
ty....................... 1,872,857 1,247,497
------------ ------------
Total liabilities,
redeemable preferred
stock and stockholders'
equity................. $ 17,792,393 $ 10,791,024
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
33
<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,
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
Net income.............. 151,188 151,188
Issuance of common
stock.................. 469 503,812 504,281
Dividends declared on
common stock........... (44,000) (44,000)
Dividends declared on
preferred stock........ (11,820) (11,820)
Dividends declared on
redeemable preferred
stock.................. (405) (405)
Change in net cost not
yet recognized as
periodic pension
expense................ 255 255
Accretion of redeemable
preferred stock........ (196) (196)
Change in net unrealized
gains (losses) on
investment securities
available-for-sale..... 26,057 26,057
------- ------- -------- ---------- -------- ----------
BALANCE ON DECEMBER 31,
1997................... $30,000 $85,395 $701,988 $1,021,085 $ 34,389 $1,872,857
======= ======= ======== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
34
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 151,188 $ 132,337 $ 120,187
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses.............. 32,017 6,500 16,000
Provision for other real estate losses... 221 77 264
Amortization of intangibles.............. 34,768 8,642 6,971
Depreciation and amortization............ 32,416 27,760 25,118
Deferred income tax expense.............. 64,585 48,633 32,268
Net (gain) loss on the sale of assets.... (29,192) 177 (3,037)
Net increase in loans originated for
sale.................................... (79,927) (22,358) (40,636)
(Increase) decrease in trading account
securities.............................. (20,180) 326 27,679
Decrease (increase) in accrued interest
receivable.............................. 2,683 16,838 (2,750)
Increase (decrease) in accrued interest
payable................................. 16,454 (22,935) 22,240
Other, net............................... (109,887) (33,961) 65,426
----------- ----------- -----------
Net cash provided by operating
activities.............................. 95,146 162,036 269,730
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from sales of investment securi-
ties..................................... 2,480,951 1,170,054 869,803
Proceeds from paydowns and maturities of
investment securities (1)................... 857,890 15,690,565 29,189,932
Purchases of investment securities (1).... (2,996,164) (16,198,470) (30,373,587)
Net decrease in short-term investments.... 46,569 269,874 (163,207)
Net disbursements from lending activities
of banking subsidiaries.................. (427,611) (679,731) (704,417)
Principal collected on loans of nonbank
subsidiaries............................. 58,244 40,600 31,858
Loans originated by nonbank subsidiaries.. (68,986) (57,474) (40,272)
Principal payments received under leases.. 3,889 3,566 4,652
Purchases of assets to be leased.......... (3,192) (17,192) (7,549)
Proceeds from the sale of other real es-
tate..................................... 10,207 3,120 10,727
Net purchases of premises and equipment... (33,083) (24,337) (25,028)
Purchases of deposits..................... -- -- 6,694
Proceeds from the sale of credit card
loans.................................... 366,694 337,716 --
Acquisitions.............................. (874,261) (88,289) --
Other, net................................ 84,854 1,192 (17,874)
----------- ----------- -----------
Net cash (used for) provided by invest-
ing activities.......................... (493,999) 451,194 (1,218,268)
----------- ----------- -----------
FINANCING ACTIVITIES
Net increase in deposits.................. 778,741 28,250 402,805
Net decrease in short-term borrowings..... (411,499) (405,452) 362,890
Proceeds from the issuance of long-term
debt..................................... 196,951 -- --
Principal payments on long-term debt...... (20,033) (10,000)
Proceeds from the issuance of medium-term
bank notes............................... -- 50,000 325,000
Payments on medium-term bank notes........ -- (325,000) (25,000)
Proceeds from the issuance of guaranteed
preferred beneficial interests in junior
subordinated debentures.................. 148,317 145,801 --
Cash dividends paid....................... (56,225) (52,023) (11,820)
----------- ----------- -----------
Net cash provided by (used for) financ-
ing activities.......................... 636,252 (568,424) 1,053,875
----------- ----------- -----------
Increase in cash and cash equivalents..... 237,399 44,806 105,337
Cash and cash equivalents at January 1,... 842,266 797,460 692,123
----------- ----------- -----------
Cash and cash equivalents at December
31,...................................... $ 1,079,665 $ 842,266 $ 797,460
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Interest payments......................... $ 403,948 $ 329,677 $ 292,308
Income tax payments....................... 38,603 21,142 48,244
NON-CASH INVESTING AND FINANCING ACTIVI-
TIES
Common stock issued to AIB in connection
with purchase acquisition (note 3)...... 504,281 -- --
Loan charge offs......................... 46,688 45,478 38,448
Transfers to other real estate........... 9,936 3,074 6,392
</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 accompanying notes to consolidated financial statements
35
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Maryland Bancorp and subsidiaries (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 Dauphin Deposit Bank and Trust Company 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 is subject to the regulations of
certain Federal agencies and undergoes periodic examinations by those
regulatory agencies.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles. The following is a description of
the more significant of these policies:
Basis of Presentation--The consolidated financial statements include the
accounts of First Maryland Bancorp and all of its subsidiaries. All material
intercompany transactions and balances have been eliminated. Certain amounts
in the 1995 and 1996 consolidated financial statements have been reclassified
to conform with the 1997 presentation.
Use of Estimates--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.
Business Combinations--Business combinations have been accounted for under
the purchase method of accounting and include the results of operations of the
acquired businesses from the date of the acquisition. Net assets of the
companies acquired were recorded at their estimated fair values as of the date
of acquisition.
Foreign Currency Transactions--Foreign currency amounts, including those
related to the foreign branch, 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. 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 and trading
gains and losses are reported in other noninterest income.
36
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are generally treated as
collateralized financing transactions and are recorded at the amount at which
the securities were acquired or sold plus accrued interest. It is the
Corporation's policy to take possession of securities purchased under resale
agreements, which are primarily U.S. Government and Federal agency securities.
The market value of the collateral is monitored and additional collateral is
obtained when deemed appropriate. The Corporation also monitors its exposure
with respect to securities borrowed transactions and requests the return of
excess collateral as required.
Securities--The Corporation's securities portfolio is 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. Commercial, commercial real estate
and residential mortgage 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) there has been significant deterioration in the financial position of the
borrower. Retail loans are generally charged-off prior to payments of
principal or interest becoming more than 150 days delinquent. Credit card
loans are charged-off prior to payments becoming more than 179 days
delinquent, except in the case of bankruptcies and deceased individuals when
charge-offs occur in the month following notification. 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.
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. A loan would not be considered impaired
during a period of "minimum delay" in payment, regardless of the shortfall, if
the ultimate collectibility of all amounts due is expected. The Corporation
defines "minimum delay" as past due less than 90 days.
37
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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, while
improvements which extend the useful life are capitalized and depreciated over
the remaining life. 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 are primarily goodwill, or the excess
of the purchase price over net identifiable tangible and intangible assets
acquired in a purchase business combination. Goodwill is amortized on a
straight-line basis over periods ranging from 15 to 25 years. Core deposit
intangibles are amortized under the interest method over a period of up to 10
years, while other intangible assets are amortized on a straight line basis
over terms of up to 10 years. 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.
Mortgage Servicing Rights--A portion of the total cost of applicable
mortgage loans is allocated 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 Owned--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 owned, 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
38
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
date. Deferred taxes are reduced, if necessary, by the amount of such benefits
that are not expected to be realized based on available evidence.
Derivative Financial Instruments--The Corporation enters into risk
management instruments to adjust the interest rate sensitivity of select
interest earning assets and interest bearing liabilities and to hedge the risk
of future fluctuations in interest rates. The Corporation accounts for these
instruments on an accrual basis when the following conditions are met: (1) the
specific assets or liabilities to be hedged expose the Corporation to interest
rate risk: (2) the financial instruments manage the interest rate risk
exposure; (3) the financial instruments are designated to specific groups of
assets or liabilities; and (4) at inception and throughout the terms of the
financial instruments, there is a high correlation between the indices of the
financial instruments and the indices of the designated assets of liabilities.
Changes in the fair value of risk management instruments are not included in
the financial statements. Interest income (expense) is adjusted on an accrual
basis for the impact of payments to be made or received on these instruments
in the category of the underlying hedged asset (liability). In addition,
premiums and costs related to the purchase of these instruments are deferred
and amortized as an adjustment to interest income or expense as determined by
the nature of the underlying asset (liability). Gains or losses from the early
termination of instruments are deferred and amortized into interest income
(expense) over the shorter of the life of the underlying hedged asset
(liability) or the remaining life of the instrument. Financial instruments that
fail to meet the conditions noted above are considered trading instruments.
The Corporation also enters into derivatives for trading purposes. Trading
instruments are carried at fair value. Fair value is generally determined
based on quoted market rates and pricing models. If these methods cannot be
applied, quoted prices of similar instruments may be used. Fair values and
accrued interest receivable (payable) are included in other assets and
liabilities in the consolidated statements of condition. Gains, both realized
and unrealized, are included in trading income, which is a component of
noninterest income.
Sales and Servicing of Loans--The Corporation periodically securitizes and
sells credit card 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 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.
Cash Flows--For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and interest bearing deposits in other banks
of $1.6 million, $234 thousand and $21.9 million at December 31, 1997, 1996
and 1995, respectively, which are included in money market investments in the
consolidated statements of condition.
Stock Based Compensation--SFAS 123, "Accounting for Stock-Based
Compensation," which became effective January 1, 1996, established financial
accounting and reporting rules for stock based compensation plans. Those plans
include all arrangements by which employees and directors receive shares of
stock or other equity instruments of the Corporation, or the Corporation
incurs liabilities to employees or directors based on the price of the
Corporation's stock. Because the Corporation is a wholly owed subsidiary of
AIB, the provisions of SFAS 123 also apply to compensation plans by which
employees and directors receive shares of stock or other equity instruments of
AIB. SFAS 123 defines a fair value based method of accounting for stock based
compensation. However, SFAS 123 also allows an entity to continue to measure
stock based compensation using the intrinsic value method of Accounting
Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to retain the accounting prescribed in APB 25
must make pro forma disclosures of net income as if the fair value based
method of accounting defined in SFAS 123 had been applied. The Corporation
retained the provisions of APB 25 for expense recognition purposes. Under APB
25, no compensation expense is recognized because the exercise price of the
Corporation's stock options equaled the market value of the underlying stock
on the grant date.
39
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Corporation adopted the required provisions of Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 125") on January 1,
1997. SFAS 125 requires an entity to recognize the financial and servicing
assets it controls and the liabilities it has incurred and to derecognize the
financial assets when control has been surrendered in accordance with criteria
provided in the Statement. The adoption of SFAS 125 did not have a material
impact on the Corporation's financial position or results of operations.
Subsequent to the issuance of SFAS 125, SFAS 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement 125" was issued. SFAS No. 127
defers the effective date of certain provisions of SFAS 125 relating to
repurchase agreements, securities lending, and other similar transactions and
pledged collateral until January 1, 1998. The adoption of SFAS 127 is not
expected to have a material impact on the Corporation's financial position or
results of operations.
In June 1997, SFAS 130, "Reporting Comprehensive Income" was issued and is
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires the disclosure of an
amount that represents total comprehensive income and the components of
comprehensive income in a financial statement.
In June 1997, SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued and is effective for financial statements for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed in both annual and interim financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers.
In February 1998, SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued and is effective for financial statements
for periods beginning after December 15, 1997. SFAS 132 significantly changes
current financial statement disclosure requirements from those that were
required under SFAS 87, "Employers' Accounting for Pensions, FAS 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and SFAS 106, "Employers'
Accounting for Post Retirement Benefits Other Than Pensions". Some of the more
significant changes are that it standardizes the disclosure requirements for
pensions and other postretirement benefits in one footnote; it requires that
additional information be disclosed regarding changes in the benefit
obligation and fair values of plan assets; it eliminates certain disclosures
that are no longer considered useful, including general descriptions of the
plans; and it permits the aggregation of information about certain plans. SFAS
does not change the existing measurement or recognition provisions of SFAS 87,
SFAS 88 or SFAS 106.
3. ACQUISITION OF DAUPHIN DEPOSIT CORPORATION
On July 8, 1997, the Corporation and its parent, AIB, acquired Dauphin
Deposit Corporation ("DDC") which was merged into the Corporation. Under terms
of the Merger Agreement, holders of approximately 86% of the outstanding DDC
common stock received AIB American Depository Shares ("ADSs") at an exchange
ratio of one AIB ADS for each share of DDC common stock. Each AIB ADS
represents six ordinary shares, IR 25p each, of AIB. The remaining DDC
shareholders received $43.00 per share in cash for their DDC common stock. The
AIB ADSs were valued at $43.00 per ADS which is the value of an ADS on the
date the exchange ratio was established in accordance with the terms of the
Agreement and U.S. GAAP. The aggregate value of the consideration paid to DDC
shareholders under U.S. GAAP was $1.366 billion which was funded by cash and
the issuance of $504.3 million in common stock to AIB as reported in the
Consolidated Statements of Changes in Stockholders' Equity.
40
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On the date of acquisition, DDC had total assets of $7.0 billion and total
deposits of $4.2 billion. This acquisition was accounted for as a purchase
business combination and the results of operations have been included with the
Corporation's results of operations since July 1, 1997. The Corporation
recorded $942 thousand in imputed interest on the consideration used to
acquire DDC for the period of July 1, 1997 to July 8, 1997. As a result of the
acquisition, the Corporation recorded $901.6 million in intangible assets
which included $825.1 million in goodwill and a core deposit intangible of
$69.9 million. Goodwill is amortized on a straight line basis over 25 years.
The core deposit intangible is amortized under the interest method over 10
years.
A summary of unaudited pro forma combined financial information for the
years ended December 31, 1997 and 1996 as if the transaction had occurred on
January 1, 1997 and 1996 is presented below. The pro forma financial
information does not purport to be indicative of the results that would have
been obtained if the operations had actually been combined during the periods
presented and is not necessarily indicative of operating results to be
expected in future periods. The effect of anticipated cost savings from the
merger has not been included in the pro forma information.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net interest income....................................... $575,097 $534,940
Noninterest income........................................ 379,679 310,795
Net income................................................ 147,538 129,609
4. MONEY MARKET INVESTMENTS
Money market investments at December 31, 1997 and 1996 include the
following:
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest bearing deposits in other banks.................. $ 1,656 $ 234
Trading account securities................................ 39,539 --
Federal funds sold........................................ 5,275 32,975
Securities purchased under agreements to resell........... 45,855 42,051
-------- --------
Total money market investments.......................... $ 92,325 $ 75,260
======== ========
</TABLE>
5. INVESTMENT SECURITIES
The amortized cost and fair values of available-for-sale securities at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Govern-
ment Agencies................. $ 853,657 $ 8,521 $ (3) $ 862,175
Mortgage backed obligations.... 1,630,880 24,500 (145) 1,655,235
Collateralized mortgage obliga-
tions......................... 969,550 8,093 (897) 976,746
Asset-backed securities........ 304,638 4,743 (43) 309,338
Obligations of states and po-
litical subdivisions.......... 426,938 8,331 (46) 435,223
Other debt securities.......... 60,768 -- -- 60,768
Equity securities.............. 143,304 2,194 (876) 144,622
---------- ------- ------- ----------
Total........................ $4,389,735 $56,382 $(2,010) $4,444,107
========== ======= ======= ==========
</TABLE>
41
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 debt securities at
December 31, 1997 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, 1997
---------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................... $ 159,751 $ 160,014
Due after one year through five years................. 907,730 919,038
Due after five years through ten years................ 119,479 121,807
Due after ten years................................... 154,403 157,307
Mortgage-backed and asset backed securities(1)........ 2,905,068 2,941,319
---------- ----------
Total............................................... $4,246,431 $4,299,485
========== ==========
</TABLE>
- --------
(1) Includes mortgage-backed obligations, collateralized mortgage obligations
and asset backed securities.
Proceeds from the sale of investment securities available-for-sale were $2.5
billion, $1.2 billion and $869.8 million during 1997, 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,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross gains.................................... $ 5,212 $ 3,555 $ 5,910
Gross losses................................... (4,756) (3,452) (3,774)
-------- -------- --------
Total........................................ $ 456 $ 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.
42
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment securities from the consolidated investment portfolio with a book
value of $1.9 billion at December 31, 1997 and $851.9 million at December 31,
1996 were pledged to secure public funds, trust deposits, repurchase
agreements and funds transactions and for other purposes required by law.
6. IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES
Impaired loans include commercial, commercial real estate and foreign loans.
Impaired loans do not include certain groups of smaller, homogenous loans such
as residential mortgages, retail loans and credit card loans that are
evaluated collectively for impairment, or leases and loans measured at fair
value or lower of cost or fair value. Reserves for possible 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, 1997, the difference between total
nonaccrual loans and total impaired loans was $28.6 million which included
nonaccrual residential mortgage loans of $24.8 million 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.
At December 31, 1997 and 1996 the recorded investment in loans that were
considered impaired was $31.7 million and $34.3 million, respectively. All
impaired loans are included in nonperforming assets. Management does not
individually evaluate certain smaller balance homogeneous loans for
impairment. Included in the 1997 and 1996 amounts were $15.9 million and $8.9
million, respectively, of impaired loans for which the related allowance for
credit losses was $7.3 million and $814 thousand, respectively. At December
31, 1997 and 1996 impaired loans that did not have a valuation allowance
amounted to $15.8 million and $25.4 million, respectively. The average
recorded investment in impaired loans during the years ended December 31,
1997, 1996 and 1995 was approximately $34.1 million, $27.6 million and $33.6
million, respectively. Interest payments received on impaired loans are
applied to principal if there is doubt as to the collectibility of the
principal; otherwise, these receipts are recorded as interest income. For the
years ended December 31, 1997, 1996 and 1995, the Corporation recognized
interest income on impaired loans of $1.7 million, $201 thousand and $396
thousand, respectively.
At December 31, 1997, the majority of the impaired loans were measured using
the fair value of the loan's collateral. The valuation allowances for impaired
loans and the activity related to impaired loans is included in the allowance
for credit losses.
The provision for credit losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that all uncollectible amounts have been charged-off and that the
allowance is adequate to cover all losses inherent in the portfolio at
December 31, 1997. A summary of the activity in the allowance for the three
years ended December 31, 1997 follows:
43
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance beginning of year....................... $154,802 $177,621 $191,024
Provision charged to operating expenses......... 32,017 6,500 16,000
Less charge-offs, net of recoveries of $6,671
$7,179, and $9,045............................. (40,017) (38,299) (29,403)
Allowance on loans of acquired banks............ 42,884 10,642 --
Allowance on loans sold......................... (21,500) -- --
Transfer of allowance to reserve for off-balance
sheet liability................................ -- (1,662) --
-------- -------- --------
Balance at end of year.......................... $168,186 $154,802 $177,621
======== ======== ========
</TABLE>
7. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION
AND AND
COST AMORTIZATION NET COST AMORTIZATION NET
-------- ------------ -------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land.................... $ 20,026 $ -- $ 20,026 $ 11,278 $ -- $ 11,278
Buildings and land
improvements........... 86,951 23,607 63,344 48,371 21,591 26,780
Leasehold improvements.. 46,121 24,367 21,754 41,234 23,115 18,119
Furniture and
equipment.............. 75,783 46,926 28,857 56,679 38,066 18,613
Computer hardware and
software............... 104,300 67,418 36,882 90,218 58,307 31,911
-------- -------- -------- -------- -------- --------
Total................. $333,181 $162,318 $170,863 $247,780 $141,079 $106,701
======== ======== ======== ======== ======== ========
</TABLE>
Depreciation and amortization on premises and equipment charged to operations
amounted to $27.9 million in 1997, $23.2 million in 1996, and $22.4 million in
1995.
8. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 included the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................. $885,411 $ 79,454
Core deposit intangible................................... 60,617 --
Premium on credit card loans.............................. 11,307 7,986
Other premiums on deposits................................ 5,809 6,729
Employment contracts...................................... 3,184 3,891
Other..................................................... 1,105 787
-------- --------
Total................................................... $967,433 $ 98,847
======== ========
</TABLE>
44
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. 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, 1997, Federal
funds sold totaled $5.3 million and Federal funds purchased totaled $1.1
billion. 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, 1997, securities purchased under agreements to resell
totaled $45.9 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 $206.3
million during 1997, and the maximum amount outstanding at any month end
during 1997 was $468.1 million.
At December 31, 1997, securities sold under agreements to repurchase totaled
$605.2 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 $492.6 million during 1997, and the
maximum amount outstanding at any month end during 1997 was $654.5 million.
10. 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, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Bank notes................................................ $ -- $400,000
Master demand notes of the Corporation.................... 335,116 320,619
Federal funds purchased-term.............................. 70,000 60,000
Treasury tax and loan note account........................ 41,455 10,965
Other..................................................... 40,119 29,893
-------- --------
Total................................................... $486,690 $821,477
======== ========
</TABLE>
At December 31, 1997, 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.
45
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. LONG-TERM DEBT
Following is a summary of the long-term debt of the Corporation at December
31, 1997 and 1996 which is all unsecured:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Floating Rate Medium-term Bank Note due April 20, 1998... $ 50,000 $ 50,000
10.375% Subordinated Capital Notes due August 1, 1999.... 59,986 59,977
8.68% Notes due January 31, 1997......................... -- 10,000
8.67% Notes due March 20, 1997........................... -- 10,000
8.375% Subordinated Notes due May 15, 2002............... 99,809 99,765
7.20% Subordinated Notes due July 1, 2007................ 199,892 --
Obligations under capitalized leases..................... 283 --
-------- --------
Total.................................................. $409,970 $229,742
======== ========
</TABLE>
The combined maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
---- ------- ---- ---- ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$50,011 $59,986 $-- $-- $99,809 $200,164 $409,970
</TABLE>
The Floating Rate Medium-term Bank Note is 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, 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, 1997 was
5.97%. 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 8.375% Subordinated Notes mature May 15, 2002, with interest payable
semiannually and are not redeemable prior to maturity.
The 7.20% Subordinated Notes mature July 1, 2007, with interest payable
semiannually and are not redeemable prior to maturity. Concurrent with the
issuance of these subordinated notes, the Corporation entered into an interest
rate swap to convert the fixed rate on the subordinated notes to a floating
rate.
12. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED
DEBENTURES
In December 1996 and February 1997, the Corporation issued an aggregate $300
million in Floating Rate Subordinated Capital Income Securities ("Capital
Securities") through two wholly owned subsidiaries, First Maryland Capital I
("Capital I") and First Maryland Capital II ("Capital II"), Delaware statutory
business trusts ("the Trusts"). The Capital Securities represent undivided
preferred ownership interests in the assets of the
46
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Trusts. The Corporation has fully and unconditionally guaranteed all of the
Trusts' obligations under the Capital Securities. The Corporation purchased
9,280 Common Securities of the Trusts ($1,000 liquidation amount per security)
for a purchase price of $9.14 million. The Trusts used the aggregate proceeds
of $304.6 million from the issuance of the Capital Securities and Common
Securities to purchase $309.3 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures ("Junior Subordinated Debentures") issued
by the Corporation which represent the sole assets of the Trusts. At December
31, 1997, the guaranteed preferred beneficial interests in the Corporation's
Junior Subordinated Debentures had a balance of $295.9 million.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions at a variable annual rate equal to LIBOR plus 1.00% for the $150
million issued in December 1996 by Capital I and LIBOR plus 0.85% for the $150
million issued in February 1997 by Capital II, in each case per a liquidation
amount of $1,000 per Capital Security. Interest on the Junior Subordinated
Debentures is calculated at the same rate as the Capital Securities.
The December 1996 Junior Subordinated Debentures mature on January 15, 2027
and are redeemable by the Corporation in whole or in part on or after January
15, 2007. The February 1997 Junior Subordinated Debentures mature on February
1, 2027 and are redeemable by the Corporation in whole or in part on or after
February 1, 2007. The Junior Subordinated Debentures are redeemable by the
Corporation in whole but not in part, upon the occurrence of certain special
events. The Capital Securities will remain outstanding until the Junior
Subordinated Debentures are repaid at maturity, are redeemed prior to maturity
or are distributed in liquidation to the Trusts.
13. 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 in 1996. The redeemable preferred stock was recorded at $7.6
million which was the fair value of the stock at the date of issue. The
carrying amount will be increased to the mandatory redemption amount of $9.0
million by periodic accretions using the interest method with an offset to
retained earnings. At December 31, 1997, all 90 thousand shares were
outstanding and had a balance of $7.9 million. The cumulative dividends are
payable quarterly when, and as declared by, the Corporation's Board of
Directors out of funds legally available for such payments.
The shares are 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.
14. EMPLOYEE BENEFIT PLANS
The Corporation sponsors three defined benefit pension plans. The largest
plan ("the qualified plan") covers substantially all employees of the
Corporation and its subsidiaries with the exception of two small nonbank
subsidiaries; the two smaller plans ("the nonqualified plans") provide
supplemental benefits to certain key employees. Benefits under the plans are
generally based on age, years of service and compensation levels.
Effective December 31, 1997 the DDC pension plan was merged into the pension
plan of the Corporation. Participants in the DDC plan became participants in
the Corporation's plan at that time. The benefits earned through December 31,
1997 are determined based on the plan's provisions prior to the merger. The
liability information presented in the following table is based on the plans
in effect prior to January 1, 1998.
47
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The qualified plan's funding status is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Plan assets at fair value (primarily marketable
securities).......................................... $232,160 $ 127,061
-------- ---------
Accumulated benefit obligation:
Vested.............................................. 149,989 94,647
Non-vested.......................................... 4,539 3,134
-------- ---------
Total............................................. 154,528 97,781
Additional benefits based on future salary levels..... 44,165 31,466
-------- ---------
Projected benefit obligation.......................... 198,693 129,247
-------- ---------
Funded status--plan assets in excess (deficient) of
the projected benefit obligation at December 31,..... $ 33.467 $ ( 2,186)
======== =========
Comprised of:
Unrecognized net transition asset................... $ 2,647 $ 4,059
Unrecognized prior service benefit.................. 2,673 1,933
Unrecognized net loss............................... (20,497) (27,645)
Prepaid pension costs............................... 48,644 19,467
-------- ---------
Total............................................. $ 33,467 $ (2,186)
======== =========
</TABLE>
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation for the qualified plan were
7.34% and 7.26% at December 31, 1997 and 1996, respectively. The rate of
increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation was 4.50% in both 1997 and
1996. The expected long-term rate of return on plan assets used in determining
pension cost was 8.50% to 9.25% in 1997, 9.25% in 1996 and 9.25% in 1995.
Net periodic pension costs for the qualified plan include the following
components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension costs:
Service cost................................ $ 8,174 $ 7,077 $ 5,309
Interest cost............................... 11,597 8,755 7,887
Return on assets............................ ( 27,523) (11,529) (19,488)
Net amortization and deferral............... 12,326 1,783 11,156
--------- -------- --------
Total..................................... $ 4,574 $ 6,086 $ 4,864
========= ======== ========
</TABLE>
The Corporation also maintains nonqualified supplemental pension plans for
certain key employees. All benefits provided under these plans are unfunded
and any payments to plan participants are made by the Corporation.
48
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The nonqualified plans' funding status is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested................................................... $ 12,719 $ 6,654
Non-vested............................................... 1,506 414
-------- -------
Total.................................................. 14,225 7,068
Additional benefits based on future salary levels.......... 2,539 1,997
-------- -------
Projected benefit obligation............................... $ 16,764 $ 9,065
======== =======
Comprised of:
Unrecognized net transition liability.................... $ 298 $ 398
Unrecognized prior service costs......................... 2,213 2,403
Unrecognized net loss.................................... 2,133 522
Accrued pension costs.................................... 12,120 5,742
-------- -------
Unfunded status........................................ $ 16,764 $ 9,065
======== =======
</TABLE>
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation for the nonqualified plan
were 6.05% to 7.07% at December 31, 1997 and 5.48% to 6.59% at December 31,
1996. The rate of increase in future compensation levels used in determining
the actuarial present value of the projected benefit obligation was 4.50% in
both 1997 and 1996.
Net periodic pension costs for the nonqualified plans include the following
components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension costs:
Service cost................................... $ 1,100 $ 574 $ 560
Interest cost.................................. 926 608 702
Net amortization and deferral.................. 574 419 588
Settlement expense............................. -- 1,705 --
-------- -------- --------
Total........................................ $ 2,600 $ 3,306 $ 1,850
======== ======== ========
</TABLE>
For the year ended December 31, 1997, the Corporation had two defined
contribution plans, one covering the employees of the Corporation other than
DDC employees and a plan covering DDC employees. Under the non-DDC Plan
eligible employees could enter the plan on January 1 or July 1 following their
date of employment. Employees could contribute varying percentages of their
annual compensation up to a maximum of 16% (highly compensated maximum of 10%
during 1997). The Corporation matched 50% of the first 6% of an employee's
contribution. In addition, the Corporation made contributions based on
accumulated, unused sick leave accrued at the end of the plan year for non-
officer employees. Under the DDC plan eligible employees could enter the plan
on January 1, April 1, July 1, and October 1 after satisfying the eligibility
requirements which were: one year of service and age twenty-one or older; or
the completion of three years of service. Employees could contribute varying
percentages of their compensation up to 19% (highly compensated maximum of 6%
during 1997). The Corporation matched 25% of the first 10% of an employees
contribution. Defined contribution plan expenses totaled $4.7 million, $3.7
million and $3.2 million in 1997, 1996 and 1995, respectively.
49
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1998, the defined contribution plan covering the
employees of DDC was merged with the non-DDC plan to create one plan. Eligible
employees may contribute varying percentages of their annual compensation up
to a maximum of 16% (highly compensated maximum of 10% for 1998). The
Corporation will match 100% of the first 3% and 50% of the next 3% of an
employee's contribution.
In addition, 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 Health
Maintenance Organizations and through an insurance company whose premiums are
based on the benefits paid during the year.
The following table sets forth the postretirement plan's funded status and
amounts recognized in the Corporation's Consolidated Statements of Condition.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Inactive participants.................................. $ 22,237 $ 13,126
Active employees fully eligible for benefits........... 600 92
Active employees not eligible for benefits............. 13,234 9,082
-------- --------
Accumulated postretirement benefit obligation............ 36,071 22,300
Unrecognized prior service cost.......................... 2,874 --
Unrecognized net gain.................................... 3,049 3,858
Unrecognized transition obligation....................... (14,885) (15,877)
-------- --------
Accrued postretirement benefit costs..................... $ 27,109 $ 10,281
======== ========
</TABLE>
The assumptions used in developing the present value of the postretirement
benefit obligation are as follows:
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
General inflation............................................... 4.50% 4.50%
Weighted average discount rate.................................. 7.50 7.75
Weighted average rate of compensation increase.................. 4.50 4.50
Rate of increase in health care costs-initial................... 9.50 10.20
Rate of increase in health care costs-ultimate.................. 4.50 4.30
</TABLE>
The resulting net periodic postretirement benefit costs consist of the
following components:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............. $1,220 $1,092 $1,056
Interest cost............ 2,003 1,550 1,695
Amortization of
unrecognized transition
obligation.............. 992 992 992
Amortization of prior
service cost............ (254) -- --
Amortization of net
gain.................... (193) (95) (71)
------ ------ ------
Net periodic
postretirement benefit
costs................. $3,768 $3,539 $3,672
====== ====== ======
</TABLE>
50
<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 9.5% for 1997 and is assumed to decrease gradually to
4.5% in the year 2002 and remain at that level thereafter. Increasing or
decreasing the assumed health care cost trend rates by one percentage point in
each future year would have an immaterial impact on post retirement benefit
costs.
15. STOCK OPTIONS AND AWARDS
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 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. Awards
aggregating the equivalent of 208 thousand shares of Common Stock were made
during 1997. 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 $913 thousand, $906
thousand, and $2.0 million in 1997, 1996, and 1995, 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 awards 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. At December 31, 1997 there
was $11.8 million accrued for payouts under this plan. 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. Expenses relative to this plan totaled $5.8 million,
$3.0 million and $3.0 million in 1997, 1996, and 1995, respectively. This plan
has been replaced by the 1997 Stock Option Plan.
The Corporation's 1997 Stock Option Plan provides for the grant to key
employees of options to acquire AIB ADSs. The options are granted at no less
than the fair market value of the stock at the date of the grant. All options
granted to date were granted on December 29, 1997 at an exercise price of
$56.00 per share. These options vest six months from the grant date and must
be exercised within seven years of the grant date or they will expire. The
Corporation and an independent trustee have created a trust which has been
funded with 634,300 AIB ADSs acquired in the open market by the trust with the
proceeds of a loan from the Corporation. Proceeds of option exercises and any
dividends and other earnings on the trust assets will be used to repay the
loan to the trust. Option holders have no preferential rights with respect to
the trust assets, and the trust assets are subject to the claims of the
Corporation's general creditors in the event of insolvency. The AIB ADSs held
by the trust are classified on the Corporation's financial statements as
investment securities available-for-sale. At December 31, 1997 investment
securities available-for-sale included $35.2 million in AIB ADS's related to
the 1997 Stock Option Plan. Any decline in value of the AIB ADSs in the trust
will be reflected as an unrealized loss on investment securities available-
for-sale and reflected in stockholders' equity. AIB will not issue any
securities in connection with the 1997 Stock Option Plan, will not receive any
proceeds from the exercise of the options, and otherwise has no rights or
obligations with respect to the 1997 Stock Option Plan.
51
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes option activity during 1997. None of the options
were exercisable at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OUTSTANDING PRICE
----------- --------
<S> <C> <C>
Outstanding December 31, 1996........................... -- $ --
Granted................................................. 634,300 56.00
------- ------
Outstanding December 31, 1997........................... 634,300 $56.00
======= ======
</TABLE>
For purposes of providing the pro forma disclosures required under SFAS 123,
the fair value of stock options granted in 1997 was $10.55 per share which was
estimated at the date of grant using a Black-Scholes option pricing model.
The following weighted average assumptions were used in the option pricing
model: a risk free interest rate of 5.77%; an expected life of the option of 7
years; an expected future dividend yield of 4.53%; and a volatility factor of
0.22. The weighted average grant date fair value of options granted during
1997 was $6.7 million. There would have been no compensation expense in 1997
using the fair value method to measure compensation expense because the
options were granted on December 29, 1997.
16. OTHER INCOME AND OTHER OPERATING EXPENSES
The following table summarizes the more significant elements of these
accounts for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Other income:
Security sales and fees........................ $ 12,553 $ 5,171 $ 3,918
Other.......................................... 49,310 36,260 39,644
-------- -------- --------
Total........................................ $ 61,863 $ 41,431 $ 43,562
======== ======== ========
Other operating expenses:
External services.............................. $ 33,363 $ 26,247 $ 21,205
Postage and communications..................... 21,393 17,059 14,997
Advertising.................................... 16,871 15,940 16,299
Professional service fees...................... 9,863 10,149 8,674
Other.......................................... 47,868 37,273 46,422
-------- -------- --------
Total........................................ $129,358 $106,668 $107,597
======== ======== ========
</TABLE>
52
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. MERGER RELATED EXPENSES
In the fourth quarter of 1997, the Corporation completed its target
environment and integration plan in connection with the acquisition of DDC. As
a result, the Corporation recorded $20 million in merger related expenses
including professional fees of $5.4 million related to the development of the
target environment and integration plan and a $14.6 million restructuring
charge. These costs were in addition to acquisition costs related to DDC which
were recorded as a component of goodwill. Included in the restructuring charge
were $5.7 million in severance and outplacement costs associated with the
elimination of approximately 101 full-time equivalent employees; $7.7 million
in costs associated with owned and leased facilities that will be vacated, and
furniture, equipment, software and leasehold improvements that will be
abandoned or sold as a result of business or process changes; and $1.2 million
in other costs. The following table reflects a summary of activity with
respect to the restructuring reserve at December 31, 1997.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Balance January 1, 1997........................................ $ --
Provisions charged against income.............................. 14.6
Cash outlays................................................... 3.4
-----
Balance at December 31, 1997................................... $11.2
=====
</TABLE>
18. INCOME TAXES
The components of income tax expense (benefit) for the three years ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................................... $22,898 $ 22,678 $ 28,708
Foreign(1)...................................... 133 330 377
State........................................... (3,315) 3,209 2,639
------- -------- --------
Total current................................. 19,716 26,217 31,724
------- -------- --------
Deferred:
Federal......................................... 54,138 44,220 29,329
State........................................... 10,447 4,413 2,939
------- -------- --------
Total deferred................................ 64,585 48,633 32,268
------- -------- --------
Total income tax expense.......................... $84,301 $ 74,850 $ 63,992
======= ======== ========
</TABLE>
- --------
(1) Foreign income taxes represent taxes on interest received from foreign
borrowers and foreign dividends received.
53
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of the statutory Federal income tax rate to the effective
tax rate for the three years ended December 31, 1997 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<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.......................... (2.45) (1.60) (2.74)
State income taxes, net of Federal
benefits.................................. 1.97 2.49 1.97
Amortization of intangibles................ 3.14 0.66 0.49
Other, net................................. (1.86) (0.43) 0.02
-------- -------- --------
Effective tax rate........................... 35.80% 36.12% 34.74%
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt............................................... $ 64,864 $ 64,349
Deferred compensation.................................. 10,653 13,025
Income on loans........................................ 1,812 6,101
Depreciation........................................... -- 1,194
Other.................................................. 17,415 12,108
-------- --------
Total gross deferred tax assets...................... 94,744 96,777
-------- --------
Deferred tax liabilities:
Leases................................................. 250,078 167,117
Unrealized gains on investment securities available-
for-sale.............................................. 19,981 5,512
Debt and securities sales.............................. 815 5,270
Pensions............................................... 500 2,486
Depreciation........................................... 1,095 --
Other.................................................. -- 6,931
-------- --------
Total gross deferred tax liabilities................. 272,469 187,316
-------- --------
Net deferred tax liability........................... $177,725 $ 90,539
======== ========
</TABLE>
19. REGULATORY MATTERS AND DIVIDEND RESTRICTIONS
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.
54
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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). As of December 31, 1997,
that the Corporation and its subsidiary banks met all capital requirements to
which they are subject.
As of December 31, 1997, 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.
The Corporation and its subsidiary banks' actual capital amounts and ratios
at December 31, 1997 and 1996 are presented in the following table.
<TABLE>
<CAPTION>
MINIMUM TO BE "WELL
CAPITALIZED" UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- --------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ------------ --------------------- ---------
As of December 31, 1997 (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS):
The Corporation......... $1,688,644 11.90% $ 1,135,499 8.00% $ 1,419,374 10.00%
The First National Bank
of Maryland............ 867,544 10.02 692,747 8.00 865,934 10.00
Dauphin Deposit Bank and
Trust Company.......... 440,776 10.39 339,236 8.00 424,046 10.00
The York Bank and Trust
Company................ 90,789 10.62 68,383 8.00 85,478 10.00
First Omni Bank, N.A. .. 91,567 47.39 15,458 8.00 19,323 10.00
TIER 1 CAPITAL (TO RISK
WEIGHTED ASSETS):
The Corporation......... $1,178,215 8.30% $ 567,749 4.00% $ 851,624 6.00%
The First National Bank
of Maryland............ 623,397 7.20 346,374 4.00 519,561 6.00
Dauphin Deposit Bank and
Trust Company.......... 352,892 8.32 169,618 4.00 254,427 6.00
The York Bank and Trust
Company................ 80,070 9.37 34,191 4.00 51,287 6.00
First Omni Bank, N.A. .. 81,107 41.98 7,729 4.00 11,594 6.00
TIER 1 CAPITAL (TO
AVERAGE ASSETS):
The Corporation......... $1,178,215 7.26% $ 648,751 4.00% $ 810,939 5.00%
The First National Bank
of Maryland............ 623,397 6.72 370,761 4.00 463,451 5.00
Dauphin Deposit Bank and
Trust Company.......... 352,892 6.08 231,988 4.00 289,985 5.00
The York Bank and Trust
Company................ 80,070 7.52 42,585 4.00 53,231 5.00
First Omni Bank, N.A. .. 81,107 22.15 14,649 4.00 18,311 5.00
As of December 31, 1996
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS):
The Corporation......... $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
</TABLE>
55
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MINIMUM TO BE "WELL
CAPITALIZED" UNDER
MINIMUM 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>
TIER 1 CAPITAL (TO RISK
WEIGHTED ASSETS):
The Corporation......... $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):
The Corporation......... $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
</TABLE>
Dividends paid by the Corporation's subsidiary banks are subject to various
legal and regulatory restrictions. The subsidiary banks can initiate dividend
payments in 1998, without prior regulatory approval of $22.7 million (after
giving effect to a $43 million special dividend from First Omni in February
1998), plus an amount equal to their net profits for 1998, as defined by
statute, up to the date of any such dividend declaration.
Section 23A of 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 1997 and 1996 were $58.2 million and $20.2 million,
respectively.
20. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT
LIABILITIES
RISK MANAGEMENT INSTRUMENTS
Off-balance sheet financial instruments are utilized to modify the interest
rate characteristics of related assets or liabilities and to provide basis
risk protection. These financial agreements, which are often referred to as
derivative financial instruments ("derivatives"), include interest rate swaps,
interest rate caps and floors, and options. Derivatives are an integral part
of the Corporation's risk management process and allow the Corporation to
modify the repricing or maturity characteristics of assets and liabilities in
a cost-efficient manner. 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. This
flexibility helps the Corporation to achieve liquidity, capital, and interest
rate risk objectives.
Interest rate swaps are also 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
56
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 for 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 indices. 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 indices
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.
57
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the expected maturities and fair values of the
risk management instruments entered into by the Corporation at December 31,
1997 as well as the weighted average maturity and weighted average receive and
pay rates for the instruments at December 31, 1997. The Corporation's credit
risk exposure is represented by the instruments detailed below 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------------
EXPECTED MATURITY WEIGHTED
---------------------------------------------------------------- ESTIMATED AVERAGE
AFTER FAIR MATURITY
1998 1999 2000 2001 2002 2002 TOTAL VALUE (1) IN YEARS
-------- -------- -------- ------- ----- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DESIGNATED TO ASSETS:
INTEREST RATE SWAPS SOLD
Convert floating rate to
fixed rate............. $ (918) 2.03
Notional amount......... $ 50,000 $150,000 $100,000 $75,000 $ -- $ -- $375,000
Weighted average receive
rate................... 5.80% 6.16% 5.76% 5.49% -- % -- % 5.87%
Weighted average pay
rate................... 5.85%
INTEREST RATE SWAPS
PURCHASED
Convert fixed rate to
floating rate.......... $ (771) 2.48
Notional amount......... $ -- $ 15,000 $ 5,674 $24,450 $ -- $ -- $ 46,124
Weighted average pay
rate................... -- % 5.16% 6.03% 7.01% -- % -- % 6.29%
Weighted average receive
rate................... 5.77%
DESIGNATED TO
LIABILITIES:
INTEREST RATE SWAPS SOLD
Convert fixed rate to
floating rate.......... $10,851 4.54
Notional amount......... $240,000 $ -- $ 25,000 $ -- $ -- $200,000 $465,000
Weighted average receive
rate................... 6.19% -- % 6.36% -- % -- % 6.61% 6.38%
Weighted average pay
rate................... 5.84%
INTEREST RATE CAPS
PURCHASED
Cap floating rate at
strike level........... $ -- 1.45
Notional amount......... $ -- $106,000 $ -- $ -- $ -- $ -- $106,000
Strike level (2)........ -- % 13.50% -- % -- % -- % -- % 13.50%
CALL OPTIONS PURCHASED..
Notional amount......... $ 275 $ 1,610 $ -- $ -- $ -- $ -- $ 1,885 $ 568 1.22
BASIS SWAPS
Convert floating rate to
different index........ $ (43) 0.63
Notional amount......... $ 50,000 $ 30,000 $ -- $ -- $ -- $ -- $ 80,000
Weighted average receive
rate................... 5.85%
Weighted average pay
rate................... 5.87%
</TABLE>
- --------
(1) Estimated fair values include carrying amounts which represent accrued
interest receivable (payable) and the following deferred fees: deferred
gains on the early termination of interest rate swaps purchased, $5.2
million, deferred losses on the early termination of interest rate swaps
sold, $858 thousand and deferred premiums on call options purchased, $46
thousand.
(2) Pays interest if interest rates exceed 13.50%.
58
<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 year
ended December 31, 1997.
ACTIVITY OF RISK MANAGEMENT INSTRUMENTS
<TABLE>
<CAPTION>
DESIGNATED TO DESIGNATED TO BASIS
ASSETS LIABILITIES SWAPS TOTAL
------------- ------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of
year..................... $ 763,923 $ 514,536 $80,000 $1,358,459
Additions................. 100,000 340,000 -- 440,000
Maturities/amortizations.. (299) (281,651) -- (281,950)
Terminations.............. (442,500) -- -- (442,500)
--------- --------- ------- ----------
Balance at December 31,
1997..................... $ 421,124 $ 572,885 $80,000 $1,074,009
========= ========= ======= ==========
</TABLE>
Deferred losses on the early termination of interest rate swaps with
notional balances of $200 million designated to the Corporation's prime based
commercial loans were $858 thousand at December 31, 1997 which will be
amortized into income in 1998.
The deferred gain on the early termination of an interest rate swap with a
notional balance of $100 million designated to the Corporation's Federal funds
purchased was $57 thousand at December 31, 1997 which will be amortized into
income in 1998. The deferred gain on the early termination of an interest rate
swap designated to the Corporation's credit card securitization was $5.2
million at December 31, 1997. This gain will be amortized over the life of the
securitization as a component of servicing income until the credit card
securitization is sold in 1998.
The Corporation also utilizes mandatory and optional commitments to deliver
residential securitized mortgages and whole residential mortgage loans to
reduce the interest rate risk inherent in residential mortgage loans held-for-
sale and the commitments made to borrowers for residential mortgage loans
which have not been funded. These 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. These
financial instruments are accounted for in the Corporation's valuation of
residential mortgage loans held-for-sale which are carried at the lower of
cost or fair value.
At December 31, 1997, residential mortgages held-for-sale, residential
mortgage firm and anticipated commitments, and offsetting commitments to
deliver residential mortgages were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Residential mortgages held-for-sale........................... $472,024
Commitments to originate mortgage loans:
Firm commitments............................................ 100,201
Anticipated commitments..................................... 48,335
Mandatory commitments to deliver: (1)
Securitized mortgages....................................... 273,250
Optional commitments to deliver:
Whole mortgage loans........................................ 205,914
Purchased call and put options................................ 15,000
</TABLE>
- --------
(1) Net of offsetting transactions used in pair-offs of $11.5 million.
59
<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 $473.2 million at
December 31, 1997.
For the year ended December 31, 1997, the risk management instruments
entered into by the Corporation had the following impact on the components of
net interest income: gross interest income decreased $3.3 million and gross
interest expense decreased $4.2 million, which resulted in a $874 thousand
increase in net interest income.
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 following table summarizes the Corporation's net trading income by
category of instrument.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ----------------
<S> <C> <C> <C>
Interest rate contracts........................... $ (1,224) $ 309 $ 1,451
Foreign exchange contracts........................ 3,483 2,913 2,708
Securities........................................ 5,058 1,719 902
-------- ------- -------
Total net trading income........................ $ 7,317 $ 4,941 $ 5,061
======== ======= =======
</TABLE>
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, 1997. The Corporation's credit risk exposure is represented by
the instruments detailed below 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.
60
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
FAIR VALUES
NOTIONAL ----------------------
AMOUNTS END-OF-PERIOD AVERAGE
---------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST RATE CONTRACTS:
Interest rate swaps....... $1,568,500
In a receivable
position............... $ 8,284 $ 8,284
In a payable position... (5,311) (7,702)
Interest rate caps and
floors................... 1,332,041
Interest rate caps and
floors held............ 1,803 1,803
Interest rate caps and
floors written......... (1,765) (1,803)
Swaptions................. 60,000
Swaptions held.......... 378 270
Swaptions written....... (371) (265)
Futures................... 360,000
In a favorable
position............... -- --
In an unfavorable
position............... -- --
FOREIGN EXCHANGE
CONTRACTS:
Options................... 1,080,922
Options held............ 38,486 39,157
Options written......... (8,608) (30,495)
Forwards.................. 968,137
In a favorable
position............... 4,291 9,389
In an unfavorable
position............... (4,075) (9,035)
SECURITIES:
Commitments to
purchase............... 198,908 -- --
Commitments to sell..... 202,212 -- --
</TABLE>
OTHER OFF-BALANCE SHEET COMMITMENTS
CREDIT RELATED INSTRUMENTS
Financial instruments whose contractual amounts represent potential credit
risk at December 31, 1997 and 1996 are persented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit.......................... $8,290,032 $8,457,494
Commercial letters of credit.......................... 37,699 47,988
Standby letters of credit............................. 1,165,516 587,820
Securities lent....................................... 8,946 82,495
Loans sold with recourse.............................. 198,635 258,565
</TABLE>
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. The credit risk associated with loan commitments is
essentially the same as that involved in extending loans to customers.
Collateral requirements and loan to value
61
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ratios are the same as those for funded transactions and are established based
on management's assessment of the customer. 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 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 can be either financial or performance based.
Financial standby letters of credit obligate the Corporation to disburse funds
to a third party if the Corporation's customer fails to repay an outstanding
loan or debt instrument under the terms of the agreement with the beneficiary.
Performance standby letters of credit obligate the Corporation to disburse
funds if the customer fails to perform some contractual or non-financial
obligation under the terms of the agreement with the beneficiary. 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 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 are loans 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, 1997 and 1996, the Corporation's credit
risk on loans sold with recourse under the Fannie Mae DUS program totaled
$104.8 million and $89.6 million, respectively.
CONCENTRATIONS OF CREDIT RISK
The majority of the Corporation's loan activity is with customers within the
Baltimore/Washington and greater Harrisburg, Pennsylvania marketplaces which
encompass all of Maryland, Washington, D.C., Northern Virginia and South
Central Pennsylvania. As such, its performance will be influenced by the
economy of those regions. 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 credit card loans with aggregate outstanding balances
totaling $594.5 million and $609.3 million at December 31, 1997 and 1996,
respectively. 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
62
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the sales. At December 31, 1997 and 1996, respectively, $94.5 million and
$109.3 million in manufactured housing loans were serviced by outside parties
for a fixed fee under subservicing agreements. On February 25, 1998, the
Corporation's credit card subsidiary disposed of its interest in the credit
card securitization. The subsidiary will continue to service the securitized
assets for approximately sixty days.
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 $20.1 million in 1997, $17.2 million in 1996,
and $18.0 million in 1995. Rental expense under equipment lease arrangements,
all of which are considered short-term commitments, was $4.3 million in 1997,
$2.4 million in 1996, and $2.6 million in 1995. Aggregate minimum annual
noncancellable long-term lease commitments, net of subleases, total
approximately $20.5 million in 1998, $17.2 million in 1999, $15.4 million in
2000, $13.4 million in 2001, $11.4 million in 2002 and $55.7 million
thereafter.
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 1997.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is information about fair value of 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. Certain financial
instruments and all nonfinancial instruments are excluded from 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.
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 credit card 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.
63
<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 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
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.
64
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks..... $1,078,009 $1,078,009 $ 842,032 $ 842,032
Money market investments.... 92,325 92,325 75,260 75,260
Investment securities
available-for-sale......... 4,444,107 4,444,107 2,552,620 2,552,620
Loans held-for-sale......... 482,152 484,099 150,742 152,989
Loans(a).................... 9,151,966 9,176,254 6,217,957 6,331,693
Interest receivable......... 95,483 95,483 61,641 61,641
LIABILITIES:
Noninterest bearing
deposits................... 2,957,888 2,957,888 2,248,252 2,248,252
Interest bearing deposits... 9,506,268 9,517,625 5,249,446 5,245,825
Funds sold and securities
sold under agreements to
repurchase................. 1,697,468 1,697,468 533,547 533,547
Other borrowed funds, short-
term....................... 486,910 486,910 821,477 821,477
Long-term debt.............. 409,970 432,910 229,742 241,489
Interest payable............ 79,762 79,762 37,956 37,956
OFF-BALANCE SHEET ASSETS
(LIABILITIES):
Interest rate swap
agreements................. (301) 12,092 7,405 5,283
Interest rate caps and
floors..................... 38 38 1 1
Interest rate futures....... -- -- -- 43
Interest rate options....... 615 598 2,620 2,358
Foreign exchange options.... 29,878 29,878 (4,313) (4,313)
Foreign exchange forwards... 216 216 3,685 3,685
</TABLE>
- --------
(a) Leases receivable with carrying values totaling $763.4 million and $425.7
million at December 31, 1997 and 1996, respectively, are excluded. The
carrying values are net of the allowance for loan losses and related
unearned income.
22. LITIGATION
Various legal actions and proceedings are pending involving First Maryland
or its subsidiaries. Management believes that the aggregate liability or loss,
if any, resulting from such legal actions and proceedings will not be material
to First Maryland's financial condition or results of operations. Included
among the outstanding litigation is a class action law suit instituted by
Dauphin Deposit Bank and Trust Company ("Dauphin") in the Court of Common
Pleas of Cumberland County, Pennsylvania on February 25, 1994, seeking a
declaratory judgment from the Court specifically permitting Dauphin to
discontinue an 18 month variable interest rate deposit product carrying a
minimum interest rate of 10% for the 18 month term, which is held in certain
individual retirement accounts (IRA). The aggregate balance of the IRA
accounts was approximately $213 million at December 31, 1997. Dauphin's right
to terminate the variable interest rate deposit product is in dispute and is
being challenged by the holders of the IRA accounts in question. Several days
after the commencement of trial in April 1996, Dauphin and representatives of
the class reached an agreement in principle to settle the litigation and the
trial was continued pending negotiation of a settlement agreement. Dauphin and
representatives of the class filed a settlement agreement with the Court on
May 13, 1996 which would permit Dauphin to terminate the 18 month variable
rate product as to all class members on the effective date of the settlement
and, in consideration, the balances of those accounts would be automatically
deposited in one of three new certificates
65
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of deposit established by Dauphin for purposes of the settlement. All class
members were given the opportunity to file objections to the proposed
settlement or elect to be excluded from the class and the proposed settlement.
Approximately 89 of the 4,315 class members filed formal objections to the
settlement with the Court and 12 of the class members elected to opt out of
the settlement. A hearing was held before the Court on June 21, 1996 for the
purpose of obtaining the Court's approval of the settlement agreement. At the
hearing, counsel for Dauphin and counsel for the representatives of all class
members jointly moved for the Court's adoption of the settlement agreement and
made argument in favor thereof. The Court, by Order issued July 11, 1996,
denied the joint motion of Dauphin and the representatives of the class for
settlement of the class action in accordance with the terms and conditions of
the settlement agreement. Dauphin filed its Notice of Appeal from the trial
Court's Order denying the settlement to the Superior Court of Pennsylvania on
August 9, 1996. On July 10, 1997, the Superior Court reversed the trial
Court's disapproval of the settlement agreement and directed the trial Court
to approve the settlement. On July 23, 1997, the class filed an Application
for Reargument with the Superior Court which was denied on September 22, 1997.
On October 20, 1997, the class filed a Petition for Allowance of Appeal with
the Supreme Court of Pennsylvania (the "Petition"). Dauphin filed a Brief in
Opposition to the Petition on November 3, 1997 and Dauphin is awaiting the
decision of the Supreme Court of Pennsylvania as to whether it will hear the
class' appeal. Neither management nor counsel can predict the outcome of the
class' Petition or the timeframe within which the Supreme Court of
Pennsylvania will act on the Petition with any reasonable degree of certainty.
Dauphin has continued to date to pay a 10% interest rate with regard to the 18
month variable interest rate deposit product.
23. SUBSEQUENT EVENTS
On February 13, 1998, the Corporation sold the residential first mortgage
loan origination business of First National Mortgage Corporation and Eastern
Mortgage Services, Inc., its mortgage banking subsidiaries, to National City
Mortgage Co. This transaction will not materially impact the consolidated
financial position or results of operations of the Corporation. On February
25, 1998, the Corporation sold substantially all of its remaining credit card
loans, including its interest in the First Omni Bank Credit Card Master Trust
to Bank of America National Association ("BOANA"). The Corporation realized a
pre-tax gain of $60 million on the sale. BOANA and the Corporation have
entered into an agreement whereby BOANA will provide retail credit card
products and services to customers of the Corporation's bank subsidiaries on
an agency basis.
In January, 1998, approximately $1.5 billion in U.S. Treasury securities and
mortgage backed obligations were sold to reduce corporate wide interest rate
and prepayment risk given the current market environment. The sales resulted
in pre-tax gains of $30.3 million. The proceeds from the sale will be invested
in securities possessing less prepayment risk but lower returns than the
securities sold.
66
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. 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,
-----------------------------
1997 1996 1995
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries:
Bank subsidiaries........................ $ 76,000 $ 210,000 $ 26,000
Nonbank subsidiaries..................... 87,447 17,162 3,124
Interest income from subsidiaries:
Bank subsidiaries........................ 27,940 5,982 15,153
Nonbank subsidiaries..................... 9,377 9,756 12,159
Other interest and dividend income......... 12,908 24,057 27,665
Other income............................... 16,748 7,905 9,440
-------- --------- --------
Total income........................... 230,420 274,862 93,541
-------- --------- --------
EXPENSES:
Interest expense, short-term debt.......... 16,900 17,478 21,392
Interest expense, long-term debt........... 42,113 16,993 17,475
Other expenses............................. 31,317 3,910 8,371
-------- --------- --------
Total expenses......................... 90,330 38,381 47,238
-------- --------- --------
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES.... 140,090 236,481 46,303
Income tax (benefit) expense................. (10,976) 1,603 5,977
-------- --------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES...................... 151,066 234,878 40,326
Equity in undistributed net income of
subsidiaries(1)............................. 122 (102,541) 79,861
-------- --------- --------
NET INCOME................................... $151,188 $ 132,337 $120,187
======== ========= ========
</TABLE>
- --------
(1) Amount in brackets represents the excess of dividends paid over net income
of subsidiaries.
67
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CONDITION
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash..................................................... $ 9,494 $ 980
Interest bearing deposits in other banks................. 105,296 523,603
Securities purchased under agreements to resell.......... 20,000 20,000
Investment securities available-for-sale................. 78,963 24,518
Investment in subsidiaries:
Bank subsidiaries...................................... 2,112,775 773,517
Nonbank subsidiaries................................... 88,234 248,181
Loans and advances to subsidiaries:
Bank subsidiaries...................................... 229,000 113,000
Nonbank subsidiaries................................... 241,075 172,446
Loans, net of unearned income............................ 15,950 17,079
Premises and equipment................................... 7,541 4,049
Other assets............................................. 60,598 49,464
---------- ----------
Total assets......................................... $2,968,926 $1,946,837
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt.......................................... $ 335,116 $ 320,687
Long-term debt........................................... 664,712 331,406
Other liabilities........................................ 88,343 39,547
---------- ----------
Total liabilities.................................... 1,088,171 691,640
4.50% Cumulative redeemable preferred stock, Series A, $5
par value per share, $100 liquidation Preference per
share; authorized and issued 90,000 shares.............. 7,898 7,700
Stockholders' equity..................................... 1,872,857 1,247,497
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity................................ $2,968,926 $1,946,837
========== ==========
</TABLE>
68
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FIRST MARYLAND BANCORP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before undistributed net income
of subsidiaries....................... $ 151,066 $ 234,878 $ 40,326
Adjustments to reconcile net income to
net cash provided by operating
activities............................ 26,710 (2,462) 118
--------- ------------ ------------
Net cash provided by operating
activities........................ 177,776 232,416 40,444
--------- ------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of investment
securities............................ 18,733 12,030 7,670
Proceeds from paydowns and maturities
of investment securities(1)........... 141,327 15,048,558 28,646,678
Purchases of investment securities(1).. (53,284) (15,041,705) (28,674,933)
Net (increase) decrease in short-term
investments........................... -- (20,000) 37,000
Principal collected on loans of parent
company............................... 4,415 3,474 1,459
Loans originated by the parent
company............................... ( 3,285) (8,758) (11,002)
Investment in subsidiaries............. (37,539) (42,355) (5,022)
Net increase in loans to subsidiaries,
short-term............................ (28,629) (22,254) (48,903)
Long-term loans to subsidiaries........ (45,000) (113,000) (20,000)
Principal collected on long-term loans
to subsidiaries....................... -- -- 20,000
Acquisitions........................... (874,261) (88,289) --
Other, net............................. 1,894 (2,800) 564
--------- ------------ ------------
Net cash used for investing
activities........................ (875,629) (275,099) (46,489)
--------- ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in short-term
borrowings............................ 14,498 (81,871) (50)
Net increase in long-term borrowings
from subsidiaries..................... 152,905 151,663 --
Net (decrease) increase in short-term
borrowings from subsidiaries.......... (69) 69 --
Principal payments on long-term debt... (20,000) (10,000) --
Proceeds from the issuance of long-term
debt.................................. 196,951 -- --
Cash dividends paid.................... (56,225) (52,023) (11,820)
--------- ------------ ------------
Net cash provided by (used by)
financing activities.............. 288,060 7,838 (11,870)
--------- ------------ ------------
Decrease in cash and cash
equivalents(2)........................ (409,793) (34,845) (17,915)
Cash and cash equivalents at January
1,.................................... 524,583 559,428 577,343
--------- ------------ ------------
Cash and cash equivalents at December
31,................................... $ 114,790 $ 524,583 $ 559,428
========= ============ ============
</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.
69
<PAGE>
REPORT OF MANAGEMENT
The management of First Maryland Bancorp is responsible for the preparation,
integrity and fair presentation of its published financial statements and all
other information presented in this Annual Report on Form 10-K. The financial
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts some of which are based on judgments
and estimates of management.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control system can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting
as of December 31, 1997. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control--
Integrated Framework" issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management believes that
the Corporation maintained an effective internal control structure over
financial reporting as of December 31, 1997.
Management is also responsible for compliance with laws and regulations
concerning dividend restrictions and federal laws and regulations concerning
loans to insiders designated by the FDIC as safety and soundness laws and
regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management
believes that the Corporation complied, in all significant respects, with the
designated laws and regulations relating to safety and soundness for the year
ended December 31, 1997.
70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997 and 1996 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First
Maryland Bancorp and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
January 23, 1998, except for note 23, as to which the date is February 25,
1998
71
<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, (to
be dated approximately April 3, 1998) 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>
72
<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**
(10.18) First Maryland Bancorp 1997 Stock Option Plan and Trust
(incorporated herein by reference to Exhibits 99.1 and 99.2 to
registration statement on Form S-8, Registration No. 333-8212)
(21) Subsidiaries of the Registrant
(23) Consent of Coopers & Lybrand L.L.P.
(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, 1997.
73
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
First Maryland Bancorp
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 25, 1998
- ------------------------------------- Executive Officer
(FRANK P. BRAMBLE)
PRINCIPAL FINANCIAL OFFICER:
/s/ Jerome W. Evans Executive Vice March 25, 1998
- ------------------------------------- President and Chief
(JEROME W. EVANS) Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Robert L. Carpenter, Jr. Senior Vice March 25, 1998
- ------------------------------------- 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, Jerome W.
Geckle, Frank A. Gunther, Jr., Curran W. Harvey, Jr., Margaret M. Heckler, Lee
H. Javitch, Gary Kennedy, William T. Kirchhoff, Henry J. Knott, Jr., Andrew
Maier, II, Thomas P. Mulcahy, R. Champlin Sheridan and William M. Passano, Jr.
By /s/ Jerome W. Evans Attorney-in-Fact March 25, 1998
-----------------------------------
(JEROME E. EVANS)
74
<PAGE>
Exhibit 21
FIRST MARYLAND BANCORP
Subsidiaries of Registrant
Jurisdiction of
Name Incorporation
- ---- -------------
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
Dauphin Deposit Bank and Trust Company Pennsylvania
Financial Land Company Pennsylvania
Dauphin Life Company Arizona
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 I Delaware
First Maryland Capital II Delaware
First Maryland Commercial Holdings Corporation Maryland
First Maryland Credit Corporation Maryland
First Maryland Foundation, Inc. Maryland
<PAGE>
First Maryland Holdings Corporation Maryland
First Manufactured Housing Credit Corporation New York
First Carolina Financial Corporation South Carolina
First Maryland Leasecorp Maryland
First Maryland Life Insurance Company Arizona
First Maryland Mortgage Corporation Maryland
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
FMB Trust Company, National Association United States
First Maryland Annuities Agency Corporation Maryland
First Maryland Brokerage Corporation Maryland
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
Cheaspeake Holdings Dorsey Road, L.L.C. (MD) Maryland
Chesapeake Holdings Fort Myers, Limited Corporation Maryland
Chesapeake Holdings Nottoway, Limited Maryland
Chesapeake Holdings Melwood, L.L.C. Maryland
Chesapeake Holdings Presidential, L.L.C. Maryland
Chesapeake Holdings Radio, Limited Maryland
Chesapeake Holdings Rainbow, L.L.C. Maryland
Chesapeake Holdings Riva Road, L.L.C. Maryland
Chesapeake Holdings Riverside, Limited Maryland
Chesapeake Holdings Somerset, L.L.C. Maryland
Chesapeake Holdings Sun Marine, Limited Maryland
Chesapeake Holdings Turnquist, Limited Maryland
Chesapeake Holdings Winchester, Limited Maryland
<PAGE>
FMB Real Estate Loan Holdings, Limited Maryland
First National Mortgage Corporation Maryland
First Omni Bank, National Association United States
Hopper Soliday & Company, Inc. Pennsylvania
Indian River Capital Corporation 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
Williams, Daniels & Associates, Inc.
f/k/a First Maryland Agency Incorporated Maryland
Zirkin-Cutler Investments, Inc. Maryland
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of First Maryland Bancorp on Form S-3, Registration No. 333-28479, of our report
dated January 23, 1998, except for Note 23, as to which the date is February
25, 1998, on our audits of the consolidated financial statements of First
Maryland Bancorp and Subsidiaries as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995, which report is included in First
Maryland Bancorp's Annual Report on Form 10-K for the year ended December 31,
1997.
COOPERS & LYBRAND L.L.P.
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, 1997 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 Curran W. Harvey, Jr.
- ---------------- ---------------------
Frank P. Bramble Curran W. Harvey, Jr.
Benjamin L. Brown Margaret M. Heckler
- ----------------- -------------------
Benjamin L. Brown Margaret M. Heckler
Jeremiah E. Casey Lee H. Javitch
- ----------------- --------------
Jeremiah E. Casey Lee H. Javitch
J. Owen Cole Gary Kennedy
- ------------ ------------
J. Owen Cole Gary Kennedy
Edward A. Crooke William T. Kirchhoff
- ---------------- --------------------
Edward A. Crooke William T. Kirchhoff
John F. Dealy Henry J. Knott, Jr.
- ------------- -------------------
John F. Dealy Henry J. Knott, Jr.
Mathias J. DeVito Andrew Maier, II
- ----------------- ----------------
Mathias J. DeVito Andrew Maier, II
Rhoda M. Dorsey Thomas P. Mulcahy
- --------------- -----------------
Rhoda M. Dorsey Thomas P. Mulcahy
Jerome W. Geckle R. Champlin Sheridan
- ---------------- --------------------
Jerome W. Geckle R. Champlin Sheridan
Frank A. Gunther, Jr. William M. Passano, Jr.
- --------------------- -----------------------
Frank A. Gunther, Jr. William M. Passano, Jr.
Dated: January 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
MARYLAND BANCORP DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,078,009
<INT-BEARING-DEPOSITS> 1,656
<FED-FUNDS-SOLD> 51,130
<TRADING-ASSETS> 39,539
<INVESTMENTS-HELD-FOR-SALE> 4,444,107
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,083,586
<ALLOWANCE> 168,186
<TOTAL-ASSETS> 17,792,393
<DEPOSITS> 12,464,156
<SHORT-TERM> 2,184,158
<LIABILITIES-OTHER> 545,672
<LONG-TERM> 409,970
7,897
30,000
<COMMON> 85,395
<OTHER-SE> 1,757,462
<TOTAL-LIABILITIES-AND-EQUITY> 17,792,393
<INTEREST-LOAN> 675,450
<INTEREST-INVEST> 228,135
<INTEREST-OTHER> 37,913
<INTEREST-TOTAL> 941,498
<INTEREST-DEPOSIT> 297,644
<INTEREST-EXPENSE> 445,754
<INTEREST-INCOME-NET> 495,744
<LOAN-LOSSES> 32,017
<SECURITIES-GAINS> 456
<EXPENSE-OTHER> 554,356
<INCOME-PRETAX> 235,489
<INCOME-PRE-EXTRAORDINARY> 151,188
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,188
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.07
<LOANS-NON> 60,295
<LOANS-PAST> 23,717
<LOANS-TROUBLED> 3,692
<LOANS-PROBLEM> 47,491
<ALLOWANCE-OPEN> 154,802
<CHARGE-OFFS> 46,688
<RECOVERIES> 6,671
<ALLOWANCE-CLOSE> 168,186
<ALLOWANCE-DOMESTIC> 76,380
<ALLOWANCE-FOREIGN> 12,881
<ALLOWANCE-UNALLOCATED> 78,925
</TABLE>
