<PAGE>
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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, 1998
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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FIRST MARYLAND BANCORP
(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:
Common Stock, par value $ 1/7 per share
(title of class)
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, 1999, 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 $151,500,000.
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 filed March 24, 1999 are incorporated herein by
reference in response to Part III of this report.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I
<C> <S> <C>
Item 1 -- Business.................................................... 1
Item 2 -- Properties.................................................. 4
Item 3 -- Legal Proceedings........................................... 4
Item 4 -- Submission of Matters to Security Holders................... 4
PART II
Item 5 -- Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 4
Item 6 -- Selected Consolidated Financial Data........................ 5
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 6
Item 7a-- Quantitative and Qualitative Disclosures About Market Risk.. 27
Item 8 -- Financial Statements and Supplementary Data:
First Maryland Bancorp and Subsidiaries:
Consolidated Statements of Income........................... 30
Consolidated Statements of Condition........................ 31
Consolidated Statements of Changes in Stockholders' Equity.. 32
Consolidated Statements of Cash Flows....................... 33
Notes to Consolidated Financial Statements.................. 34
Report of Management........................................ 68
Report of Independent Accountants........................... 69
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 70
PART III
Item 10 -- Directors and Executive Officers of the Registrant(1)....... 70
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............................... 71
Exhibits.................................................... 71
Reports on Form 8-K......................................... 71
Signatures.............................................................. 73
</TABLE>
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(1) Incorporated by reference to portions of the Registrant's Definitive
Information Statement filed March 24, 1999.
<PAGE>
PART I
Item 1. Business
First Maryland Bancorp (the "Corporation") is a bank holding company with
its headquarters in Baltimore, Maryland. At December 31, 1998, the Corporation
had consolidated total assets of $18.3 billion, total deposits of $12.3
billion, and total stockholders' equity of $2.0 billion. The Corporation
provides 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 Corporation
serves customers through a network of 268 full service branch offices and more
than 500 automated teller machines.
In November 1998, Dauphin Deposit Bank and Trust Company ("Dauphin") and The
York Bank and Trust Company ("York Bank"), banking subsidiaries of the
Corporation, were merged into The First National Bank of Maryland ("First
National"), the Corporation's principal subsidiary. The merger will result in
cost savings from standardization of operations and delivery systems,
consolidated financial reporting and reduced regulatory fees. On December 31,
1998, First National converted from a national banking association to a
commercial bank with trust powers chartered under the laws of the state of
Maryland and is now operating under the legal name of FMB Bank. The conversion
did not have a material effect on the business or operations of First National
and FMB Bank continues to operate under various trade names including First
National Bank of Maryland, Bank of Pennsylvania, Dauphin Deposit Bank, Farmers
Bank, Valleybank, and York Bank. The assets of FMB Bank at December 31, 1998
accounted for approximately 93% of the Corporation's consolidated total
assets. In addition to domestic banking services, FMB Bank conducts
international activities at its Baltimore headquarters, a Cayman Island 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 through a brokerage subsidiary and acts as
investment advisor to the ARK Funds, a family of proprietary mutual funds.
The Corporation operates various other subsidiaries, including First Omni
Bank, N.A., ("First Omni", and together with FMB Bank, the "Banks"), a
national bank, First Maryland Leasecorp, a commercial finance company
specializing in equipment financing, and First Maryland Mortgage Corporation,
a commercial real estate lender. On February 25, 1998, the Corporation sold
substantially all of the remaining credit card loans of First Omni, including
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. 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 Company. The Corporation continues 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. On January 19, 1999 the Corporation sold Hopper Soliday & Co.,
Inc. a full service investment banking and securities broker-dealer
subsidiary, to Freedom Securities Corporation.
The Corporation's business segments are based on the Corporation's method of
internal reporting, which separates its business on the basis of products and
services. The Corporation's reportable segments are Corporate Banking,
Corporate Real Estate, Retail Banking, Trust and Investment Advisory Services,
and Treasury. Additional information on business segments is presented in Note
22 of the Notes To Consolidated Financial Statements.
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 registered as a bank
holding company in the United States and is the largest banking corporation
organized under the laws of Ireland, based upon total net income at December
31, 1998. Based upon United States generally accepted accounting principles at
December 31, 1998, AIB and its subsidiaries (collectively, "AIB Group") had
total assets of approximately $63 billion. AIB Group provides a full range of
banking, financial and related
1
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services principally in Ireland, the United States, the United Kingdom and in
Poland through its majority owned subsidiary Wielkopolski Bank Kredytowy S.A.
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, consumer finance companies, 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. 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.
The Corporation is a bank holding company registered under the Bank Holding
Company Act, and is subject to the supervision of, and regulation by, the
Board of Governors of the Federal Reserve System (the "FRB").
FMB Bank, as a state-chartered member bank of the Federal Reserve System, is
subject to supervision and regulation by the FRB and the Maryland Banking
Commissioner. First Omni, as a national banking association, is subject to
supervision and regulation by the Office of the Comptroller of the Currency of
the United States ("OCC"). Both Banks, as federally insured institutions, are
also subject to regulation by the Federal Deposit Insurance Corporation
("FDIC"). Deposits, reserves, investments, loans, consumer law compliance,
issuance of securities, payment of dividends, mergers and consolidations,
electronic funds transfers, management practices, and other aspects of the
Banks' operations are subject to regulation. The approval of the appropriate
bank regulatory authority is required for the establishment of additional
branch offices by any of the Banks, subject to applicable state law
restrictions.
Federal law regulates transactions among the Corporation and its affiliates,
including the amount of banking affiliates' loans to or investments in nonbank
affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. In addition, various requirements and restrictions
under federal and state laws regulate the operations of the Corporation's
banking affiliates, requiring the maintenance of reserves against deposits,
limiting the nature of loans and interest that may be charged thereon,
restricting investments and other activities.
A fundamental principle underlying the FRB's supervision and regulation of
bank holding companies is that bank holding companies should act as a source
of financial strength to, and commit resources to support, each of its
subsidiary banks. Subsidiary banks are in turn to be operated in a manner that
protects the overall soundness of the institution and the safety of deposits.
Bank regulators can take various remedial measures to deal with banks and bank
holding companies that fail to meet legal and regulatory standards.
The 1989 Financial Institution Reform, Recovery and Enforcement Act
("FIRREA") expanded federal regulatory enforcement powers over financial
institutions. In addition, FIRREA provides that a depository institution
insured by the FDIC can be held liable by the FDIC for any loss incurred or
reasonably expected to be incurred in connection with the default of a
commonly controlled FDIC insured depository institution. Under the Federal
Deposit Insurance Corporation Act of 1991 ("FDICIA"), federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet minimum capital
2
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requirements. FDICIA imposes substantial examination, audit and reporting
requirements on insured depository institutions. The regulation also requires
that risk-based capital standards incorporate interest rate risk, market risk,
concentrations of credit risk and risks of nontraditional activities. FMB Bank
was considered "well capitalized" under regulatory definitions in effect at
December 31, 1998. This is the highest rating presently available.
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 state laws and
regulations limit the amount of dividends the Banks can pay to the Corporation
without regulatory approval.
The approval of a bank's primary federal regulator 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 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,
FMB Bank may pay dividends only out of undivided profits unless State of
Maryland bank regulatory approval is obtained, and First Omni 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. Under the
first and currently more restrictive of the foregoing dividend limitations, at
January 1, 1999, $165 million of the retained earnings of FMB Bank and none of
the retained earnings of First Omni were available to pay dividends to the
Corporation.
The FRB and the OCC 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 OCC also has authority under the
Financial Institutions Supervisory Act to prohibit national banks from
engaging in any practice or activity which, in the OCC'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 OCC to be such an unsafe or unsound practice. The OCC 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 1999 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.
Monetary Policy
The Corporation's subsidiaries, and thus the Corporation, are affected by
monetary policies of regulatory authorities, including the FRB, which regulate
the national money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques of monetary policy available to the FRB 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.
3
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Employees
As of December 31, 1998, the Corporation employed approximately 6,055 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 80% of the 343 thousand
square feet of office space available in the building as of December 31, 1998.
The Corporation's lease for this space expires in 2006, with a renewal option
to the year 2011. During 1998, the annual rental for the space, less amounts
received on subleases to others, was $4.2 million.
The Corporation is the sole tenant at First Center located at 110 South Paca
Street, Baltimore, Maryland. The building contains 267 thousand square feet of
office space and houses certain staff and operations functions of the
Corporation. The current lease term expires on December 31, 2011. During 1998,
the annual base rental for the space was $2.3 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 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 FMB Bank.
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 23 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.
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
FMB Bank. As of March 18, 1999, there were 553 registered holders of the
Preferred Stock.
4
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PART II
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,
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1998 1997(1) 1996 1995 1994
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Summary of
Operations:
Interest and dividend
income................ $ 1,076,406 $ 941,498 $ 719,029 $ 707,541 $ 619,746
Interest expense....... 534,178 445,754 315,373 314,548 241,099
----------- ----------- ----------- ---------- ----------
Net interest income.... 542,228 495,744 403,656 392,993 378,647
Provision for credit
losses................ 34,297 32,017 6,500 16,000 22,996
----------- ----------- ----------- ---------- ----------
Net interest income
after provision for
credit losses......... 507,931 463,727 397,156 376,993 355,651
Noninterest income..... 450,105 326,118 216,892 195,910 210,978
Noninterest expenses... 615,446 554,356 406,861 388,724 396,201
----------- ----------- ----------- ---------- ----------
Income before income
taxes................. 342,590 235,489 207,187 184,179 170,428
Income tax expense..... 124,467 84,301 74,850 63,992 59,288
----------- ----------- ----------- ---------- ----------
Net income............. $ 218,123 $ 151,188 $ 132,337 $ 120,187 $ 111,140
=========== =========== =========== ========== ==========
Dividends declared on
preferred stock....... $ 11,820 $ 11,820 $ 11,820 $ 11,820 $ 11,820
Dividends declared on
redeemable preferred
stock................. 405 405 203 -- --
Consolidated Average
Balances:
Total assets........... $17,072,800 $14,132,300 $10,477,100 $9,789,500 $9,411,400
Loans, net of unearned
income................ 10,214,100 8,358,500 6,312,300 5,804,700 5,291,200
Deposits............... 11,961,400 9,569,600 7,073,500 6,744,100 6,635,300
Long-term debt......... 686,400 594,900 481,800 269,500 198,000
Common stockholder's
equity................ 1,812,100 1,438,300 1,062,300 965,000 856,600
Stockholders' equity... 1,957,000 1,583,200 1,207,200 1,109,800 1,001,500
Consolidated Ratios:
Return on average
assets................ 1.28% 1.07% 1.26% 1.23% 1.18%
Return on average
common stockholder's
equity................ 11.36 9.66 11.33 11.23 11.59
Return on average total
stockholders' equity.. 11.15 9.55 10.96 10.83 11.10
Average total
stockholders' equity
to average total
assets................ 11.46 11.20 11.52 11.34 10.64
Capital to risk-
adjusted assets:
Tier 1................. 9.38 8.30 14.12 13.77 14.05
Total.................. 12.65 11.90 17.20 17.05 17.68
Tier 1 leverage ratio.. 8.41 7.26 12.18 10.91 11.05
Net interest margin
(FTE)................. 3.79 4.07 4.30 4.47 4.51
Net charge-offs to
average loans, net of
unearned income....... 0.36 0.48 0.61 0.51 0.56
Allowance for credit
losses to loans, net
of unearned income.... 1.49 1.67 2.28 2.89 3.50
Nonperforming assets to
loans, net of unearned
income plus other
foreclosed assets
owned................. 0.95 0.80 0.87 0.73 1.35
Tax-effected net income
and ratios excluding
goodwill and core
deposit intangible
amortization and
balances:(2)
Net income............. $ 266,696 $ 179,204 $ 136,322 $ 122,812 $ 113,722
Return on average
assets................ 1.65% 1.32% 1.31% 1.26% 1.21%
Return on average
common stockholder's
equity................ 27.85 18.69 12.34 11.87 12.36
Return on average total
stockholders' equity.. 25.19 17.26 11.83 11.37 11.73
</TABLE>
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(1) The Corporation acquired Dauphin Deposit Corporation ("DDC") on July 8,
1997. Results of operation for the year ended December 31, 1997 are not
comparable to the results of operations in 1998. DDC's results of
operations have been included in the Corporation's results since July 1,
1997.
(2) Amortization and balances of core deposit intangibles are net of
applicable income taxes. Goodwill amortization and balances are not tax
effected.
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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, 1998, 1997 and 1996
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 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, 1998 was $218.1
million, compared to $151.2 million for the year ended December 31, 1997, an
increase of $66.9 million (44.3%). Net income in 1998 included a $37.4 million
after tax gain ($60.0 million pretax) on the sale of credit card loans and
$38.3 million of after-tax securities gains ($60.8 million pretax) which were
the result of repositioning the investment portfolio. Net income in 1997
included a $17.4 million after-tax gain ($28.2 million pretax) on the sale of
credit card loans and merger related expenses of $12.5 million after-tax
($20.0 million pretax). Return on average assets and return on average common
stockholder's equity were 1.28% and 11.36%, respectively, for the year ended
December 31, 1998 compared to 1.07% and 9.66%, respectively, for the year
ended December 31, 1997.
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 $266.7
million for the year ended December 31, 1998 compared to $179.2 million for
the year ended December 31, 1997. Return on average tangible assets and return
on average tangible common equity, which exclude intangible assets and
amortization related to purchase business combinations, were 1.65% and 27.85%,
respectively, for the year ended December 31, 1998 compared to 1.32% and
18.69%, respectively, for the year ended December 31, 1997.
The DDC acquisition provided the opportunity for the Corporation to create a
new company, instead of simply combining the two organizations. In connection
with the target environment identification and integration process, the
Corporation recorded pretax 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, 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 did 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 on the sale of $17.4 million ($28.2 million
pretax).
6
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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 pretax 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.
On February 13, 1998, the Corporation sold the residential first mortgage
loan origination businesses of its mortgage banking subsidiaries to National
City Mortgage Co. These transactions were at book value; therefore, no gain or
loss was recognized on the sale. The decline in loans held-for-sale was the
result of exiting these businesses. Residential mortgage loans will be offered
to the Corporation's customers through the retail branch system and the
Corporation will continue to meet the needs of low and moderate income
communities in its market.
In the majority of the Corporation's income and expense categories, the
increases in the amounts reported for the year ended December 31, 1998
compared with the amounts reported for the same periods in 1997 resulted from
the acquisition of DDC in July, 1997. Other significant factors affecting the
Corporation's results of operations are described in the applicable sections
below.
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 interest expense incurred on interest
bearing liabilities. As such, net interest income represents pretax profits
from the Corporation's lending, investing and funding activities. When net
interest income is presented on a fully tax-equivalent basis, interest income
from tax exempt earning assets is increased by an amount equivalent to the
Federal income taxes that would have been paid if this income were taxable at
the statutory Federal income tax rate of 35%. 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,
-----------------------------
1998 1997 1996
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(dollars in millions)
<S> <C> <C> <C>
Net interest income--per financial statements... $ 542.2 $ 495.7 $ 403.7
Tax equivalent adjustment....................... 14.5 10.5 5.1
-------- --------- --------
Net interest income--tax equivalent basis....... $ 556.7 $ 506.2 $ 408.8
======== ========= ========
Average earning assets.......................... 14,694.9 $12,447.8 $9,497.4
Net interest margin (FTE)....................... 3.79% 4.07% 4.30%
</TABLE>
Net interest income on a fully tax equivalent basis for the year ended
December 31, 1998 of $556.7 million increased $50.6 million (10.0%) when
compared to net interest income of $506.2 million for the year ended December
31, 1997. The increase in net interest income is primarily due to an increase
in deposits, excluding purchased deposits, which resulted in approximately
$20.2 million in additional net interest income in 1998. Growth in interest
free funding sources available to fund earning assets or reduce interest
bearing liabilities ("net free funds") resulted in an $8.1 million increase in
net interest income. A decline in credit card receivables resulted in a
decrease in net interest income of $22.1 million. This was offset by an
increase in net interest income on non-credit card loans of $37.4 million in
1998. Net interest income from loans held for sale increased $1.2 million in
1998. The remaining increase in net interest income was due to treasury and
funding activities which provided an additional $5.8 million in net interest
income in 1998.
The net interest margin for the year ended December 31, 1998 was 3.79%,
compared to 4.07% for the year ended December 31, 1997. The decrease in
average credit card loans resulted in a 7 basis point decline in the net
interest margin. Lower margins on non-credit card loans decreased the net
interest margin by 36 basis points. Changes in treasury assets and funding
strategies resulted in a 10 basis point decline in net interest margin. These
decreases were offset by a 16 basis point improvement in the net interest
margin due to an increase in deposits,
7
<PAGE>
excluding purchased deposits and a 6 basis point improvement from an increase
in net free funds. In addition, higher margins on loans held for sale improved
the net interest margin by 3 basis points.
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 below
indicates, net interest income on a tax equivalent basis increased $50.6
million (10.0%) when the year ended December 31, 1998 is compared to the year
ended December 31, 1997. The $84.8 million positive volume variance primarily
resulted from a full year's revenue from the earning assets of DDC in 1998
versus a half year's revenue in 1997. In addition, non-credit card loan growth
in 1998 contributed to the positive volume variance. The $34.2 million
negative rate variance is primarily the result of a decline in loan yields due
to a decrease in credit card loans, lower yields on investment securities
resulting from the portfolio restructuring in 1998 and an increase in the
rates paid on deposits due to higher rates on money market deposits in 1998
and an increase in the volume of purchased deposits.
Net Interest Income Analysis
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
1998 Over 1997 1997 Over 1996
--------------------------------- ---------------------------------
Due to change in (1) Due to change in (1)
Increase ---------------------- Increase ----------------------
(Decrease) Volume Rate (Decrease) Volume Rate
---------- ----------- ---------- ---------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income From
Earning Assets:
Interest and fees on
loans................. $120,326 $ 145,856 $ (25,530) $154,512 $ 166,282 $ (11,770)
Interest and dividends
on investment
securities available-
for-sale.............. 29,539 38,874 (9,335) 58,631 47,055 11,576
Interest and fees on
loans held-for-sale... (2,206) (4,585) 2,379 10,597 10,633 (36)
Interest on trading
account securities.... (1,206) (341) (865) 4,199 4,176 23
Interest on money market
investments............ (7,467) (8,132) 665 (127) (391) 264
-------- ---------- ---------- -------- ---------- ----------
Total................ 138,986 171,672 (32,686) 227,812 227,755 57
-------- ---------- ---------- -------- ---------- ----------
Interest Expense on
Deposits and Borrowed
Funds:
Interest on deposits... 92,636 85,289 7,347 92,475 87,934 4,541
Interest on Federal
funds purchased and
other short-term
borrowings............ (9,464) (5,083) (4,381) 27,294 25,760 1,534
Interest on long-term
debt.................. 5,251 6,648 (1,397) 10,612 8,331 2,281
-------- ---------- ---------- -------- ---------- ----------
Total................ 88,423 86,854 1,569 130,381 122,025 8,356
-------- ---------- ---------- -------- ---------- ----------
Net interest income.. $ 50,563 $ 84,818 $ (34,255) $ 97,431 $ 105,730 $ (8,299)
======== ========== ========== ======== ========== ==========
</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.
8
<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, 1998, 1997 and 1996.
Average Balances, Interest Yields and Rates, and Net Interest Margin
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Trading account
securities........... $ 56.5 $ 3.1 5.48% $ 61.6 $ 4.3 6.98% $ 1.7 $ 0.1 5.85%
Money market
investments.......... 107.9 6.2 5.71 251.0 13.6 5.41 258.2 13.7 5.31
Investment
securities(5) :
Taxable............... 3,539.7 222.6 6.29 3,184.6 209.4 6.58 2,665.1 166.1 6.23
Tax-exempt(1)......... 422.2 31.6 7.49 245.7 19.5 7.95 92.4 9.3 10.09
Equity investments.... 142.3 11.0 7.75 77.0 6.8 8.86 41.5 1.7 4.06
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total investment
securities
available-for-sale... 4,104.3 265.3 6.46 3,507.3 235.7 6.72 2,799.0 177.1 6.33
Loans held-for-sale.... 212.2 17.8 8.38 269.4 20.0 7.42 126.1 9.4 7.45
Loans (net of unearned
income)(1, 2):
Commercial............ 3,139.1 239.0 7.61 2,283.1 178.9 7.84 1,788.3 137.3 7.68
Commercial real
estate............... 2,234.5 186.2 8.33 1,844.7 156.4 8.48 1,320.5 117.7 8.91
Residential........... 866.7 64.5 7.44 937.9 68.6 7.32 725.4 53.1 7.31
Retail................ 2,707.8 225.6 8.33 1,960.6 165.8 8.46 1,244.8 104.5 8.39
Credit card........... 33.0 4.7 14.14 378.6 46.7 12.34 513.4 64.4 12.54
Leases receivable..... 787.5 47.6 6.04 579.3 33.4 5.77 367.2 20.3 5.54
Foreign............... 445.4 31.1 6.99 374.3 28.5 7.62 352.7 26.5 7.50
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total loans........... 10,214.1 798.6 7.82 8,358.5 678.3 8.11 6,312.3 523.8 8.30
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total earning
assets.............. 14,694.9 $1,090.9 7.42% 12,447.8 $951.9 7.65% 9,497.4 $724.1 7.62%
Allowance for credit
losses................ (161.7) (164.6) (168.6)
Cash and due from
banks................. 895.7 732.2 648.2
Other assets........... 1,643.9 1,116.9 500.2
--------- --------- ---------
Total assets.......... $17,072.8 $14,132.3 $10,477.1
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits in domestic
offices:
Interest bearing
demand............... $ 520.2 $ 7.7 1.49% $ 365.0 $ 5.9 1.62% $ 116.6 $ 2.9 2.49%
Money market
accounts............. 2,246.2 72.2 3.22 1,795.0 54.2 3.02 1,593.3 47.9 3.00
Savings................ 1,488.3 37.0 2.49 1,327.0 34.0 2.57 1,048.4 27.2 2.60
Other consumer time... 3,279.2 172.0 5.25 2,610.7 136.4 5.23 1,676.9 88.8 5.30
Large denomination
time................. 1,471.1 84.1 5.72 1,022.8 58.2 5.69 560.6 31.4 5.59
Deposits in foreign
banking office(6)..... 315.5 17.2 5.45 159.3 8.9 5.57 131.1 7.0 5.36
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total interest bearing
deposits............. 9,320.5 390.3 4.19 7,279.8 297.6 4.08 5,126.9 205.2 4.00
--------- -------- ----- --------- ------ ----- --------- ------ -----
Funds purchased........ 1,367.4 69.9 5.11 1,045.9 55.4 5.30 763.5 39.7 5.20
Other borrowed funds,
short-term............ 480.3 24.4 5.07 899.5 48.3 5.37 698.2 36.7 5.26
Long-term debt......... 686.4 49.6 7.23 594.9 44.4 7.46 481.8 33.7 7.01
--------- -------- ----- --------- ------ ----- --------- ------ -----
Total interest bearing
liabilities.......... 11,854.6 534.2 4.51% 9,820.2 445.7 4.54% 7,070.4 315.3 4.46%
--------- -------- ----- --------- ------ ----- --------- ------ -----
Noninterest bearing
deposits.............. 2,640.8 2,289.8 1,946.6
Other liabilities...... 612.4 431.4 249.1
Redeemable preferred
stock................. 8.0 7.8 3.8
Stockholders' equity... 1,957.0 1,583.2 1,207.2
--------- --------- ---------
Total liabilities and
stockholders'equity.. $17,072.8 $14,132.3 $10,477.1
========= ========= =========
Net interest income,
tax equivalent basis.. $ 556.7 $506.2 $408.8
======== ====== ======
Net interest
spread(3)............. 2.92% 3.11% 3.16%
Contribution of
interest free sources
of funds.............. .87 .96 1.14
----- ----- -----
Net interest
margin(4)............. 3.79% 4.07% 4.30%
===== ===== =====
</TABLE>
- --------
(1) Interest on loans to and obligations of public entities is not subject to
Federal income tax. In order to make pretax yields comparable to taxable
loans and investments, a tax equivalent adjustment is used based on a 35%
Federal tax rate.
(2) Nonaccrual loans are included under the appropriate loan categories as
earning assets.
(3) Net interest spread is the difference between the yield on average earning
assets and the rate paid on average interest bearing liabilities.
(4) Net interest margin is the ratio of net interest income on a fully tax-
equivalent basis to average earning assets.
(5) Yields on investment securities available-for-sale are calculated based
upon average amortized cost.
(6) The majority of deposits in foreign banking office were in amounts in
excess of $100 thousand.
9
<PAGE>
Noninterest Income
The following table presents the components of noninterest income for the
years ended December 31, 1998, 1997 and 1996, and a year-to-year comparison
expressed in terms of percent changes.
Noninterest Income
<TABLE>
<CAPTION>
Years ended December 31, Percent change
-------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
-------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit
accounts...................... $107,795 $ 95,903 $ 80,659 12.4% 18.9%
Trust and investment advisory
fees.......................... 71,221 45,867 28,658 55.3 60.0
Mortgage banking income........ 30,736 48,819 29,966 (37.0) 62.9
Security sales and fees........ 24,343 12,553 5,171 93.9 142.8
Credit card income............. 23,446 18,546 9,949 26.4 86.4
Servicing income............... 6,056 26,509 26,126 (77.2) 1.5
Other.......................... 65,749 49,310 36,260 33.3 36.0
-------- -------- -------- ----- -----
Total fees and other income.... 329,346 297,507 216,789 10.7 37.2
Securities gains, net.......... 60,759 456 103 -- 342.7
Gain on sale of credit card
loans......................... 60,000 28,155 -- 113.1 --
-------- -------- -------- ----- -----
Total noninterest income..... $450,105 $326,118 $216,892 38.0% 50.4%
======== ======== ======== ===== =====
</TABLE>
The Corporation's noninterest income for the year ended December 31, 1998
was $450.1 million, a $124.0 million (38.0%) increase over noninterest income
for the year ended December 31, 1997. Noninterest income in 1998 benefited
from a $60.0 million gain on the sale of credit card loans and investment
securities gains of $60.8 million. Noninterest income in 1997 benefited from
$28.2 million in gains on the sale of credit card loans. Total fees and other
income increased $31.8 million (10.7%). Trust and investment advisory fees
increased $25.4 million. Approximately half of the increase was due to an
increase in fee income in 1998 with the remainder due to DDC trust revenue for
a full year in 1998. Mortgage banking income was impacted by the sale of the
Corporation's residential first mortgage loan origination businesses in the
first quarter of 1998. Credit card income declined due to the sale of the
retail credit card portfolio, however, this was offset by the addition of
merchant banking income from DDC. Servicing income decreased $20.5 million
(77.2%) due to an $18.4 million decline in servicing income on credit card
loans resulting from the exit of that business. Trading income, which is
included in other income, increased $7.0 million in 1998. In addition, other
income in 1998 benefited from a $1.2 million gain on the payoff of a troubled
debt restructuring and $4.2 million in miscellaneous income from discontinued
business lines. Other income in 1997 included a $6.1 million gain on the sale
of an investment in an ATM and point of sale network.
Investment securities gains of $60.8 million were realized in 1998 compared
to $0.5 million in 1997. Securities sales are discussed in detail under
"Investment Portfolio".
10
<PAGE>
Noninterest Expenses
The following table presents the components of noninterest expenses for the
years ended December 31, 1998, 1997 and 1996 and a year to year comparison
expressed in terms of percent changes.
Noninterest Expenses
<TABLE>
<CAPTION>
Years ended December 31, Percent change
-------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
-------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and other personnel
costs......................... $311,030 $292,497 $226,633 6.3% 29.1%
Equipment costs................ 42,882 40,757 32,019 5.2 27.3
Occupancy costs................ 37,974 36,976 32,899 2.7 12.4
Other operating expenses:
External services............ 30,658 33,363 26,247 (8.1) 27.1
Postage and communications... 23,841 21,393 17,059 11.4 25.4
Advertising and marketing.... 20,234 16,871 15,940 19.9 5.8
Professional service fees.... 18,628 9,863 10,149 88.9 (2.8)
Lending and collection....... 17,824 10,231 6,657 74.2 53.7
Other........................ 56,772 37,637 30,616 50.8 22.9
-------- -------- -------- ---- -----
Total operating expenses....... 559,843 499,588 398,219 12.1 25.5
Intangible assets amortization
expense....................... 55,603 34,768 8,642 59.9 302.3
Merger related expenses........ -- 20,000 -- -- --
-------- -------- -------- ---- -----
Total noninterest
expenses.................. $615,446 $554,356 $406,861 11.0% 36.3%
======== ======== ======== ==== =====
</TABLE>
The Corporation's noninterest expenses for the year ended December 31, 1998
were $615.4 million, a $61.1 million (11.0%) increase over noninterest
expenses for the year ended December 31, 1997. Noninterest expenses in 1998
included a $20.8 million increase in intangible asset amortization expense
primarily due to the DDC acquisition. The Corporation incurred approximately
$22.6 million in expenses in 1998 related to the installation of an enhanced
technology platform and other issues arising from the integration of the
Corporation's constituent banks. These costs include $10.2 million in salaries
and other personnel costs, $7.3 million in professional fees, $3.4 million in
advertising and marketing expenses and $1.7 million in other expenses. Lending
and collection expenses in 1998 included approximately $9.8 million in
collection costs associated with the maritime loan portfolio. The decline in
external service fees is due to the sale of the credit card loan portfolio.
Quarterly Summary
The following table presents a summary of earnings by quarter for the years
ended December 31, 1998 and 1997:
Summary of Quarterly Earnings
<TABLE>
<CAPTION>
1998 quarters ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Interest and dividend income........ $270,185 $269,758 $267,350 $269,113
Net interest income................. 136,505 136,817 132,594 136,312
Provision for credit losses......... 8,871 5,251 2,808 17,367
Income before income taxes.......... 151,602 75,386 63,497 52,105
Net income.......................... 95,699 47,454 40,053 34,917
</TABLE>
11
<PAGE>
<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
</TABLE>
Investment Portfolio
At December 31, 1998, the investment securities available-for-sale portfolio
was $4.8 billion compared with $4.4 billion at December 31, 1997, a $371
million (8.3%) increase. The taxable equivalent yield on the total portfolio
for the year ended December 31, 1998 was 6.46% compared to 6.72% for the year
ended December 31, 1997. Net unrealized appreciation on the investment
securities portfolio was $39.3 million at December 31, 1998.
During the first quarter of 1998, the investment securities portfolio was
restructured to reduce prepayment risk, primarily related to mortgage backed
securities, and to reduce the aggregate interest rate risk of the Corporation
given the current market environment. A total of $1.7 billion of securities
(primarily mortgage-backed securities) were purchased and sold during the
first quarter. The first quarter sales resulted in a pretax gain of $30.4
million. During the second quarter of 1998, the Corporation sold $462 million
of securities and purchased $558 million of securities to lessen prepayment
risk in a falling interest rate environment. The second quarter sales resulted
in pretax gains of $9.9 million. Third and fourth quarter securities sales
totaled $1.2 billion versus securities purchased of $2.3 billion, resulting in
increased investment portfolio outstandings and improved portfolio yield.
Security sales during the third and fourth quarters resulted in pretax gains
of $20.4 million. Fourth quarter purchases were concentrated in mortgage-
backed securities in order to take advantage of widening mortgage spreads due
to market dislocation and global deleveraging. The restructuring of the
investment portfolio during 1998, coupled with declining market yields,
resulted in a reduction in the aggregate yield on the investment securities
portfolio, but a portfolio more favorably positioned to counter rapid
prepayment risk.
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,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury & U.S. Government agencies..... $ 256,218 $ 862,175 $ 611,061
Mortgage-backed obligations.................. 2,602,572 1,655,235 1,159,649
Collateralized mortgage obligations(1)....... 738,822 976,746 368,656
Asset-backed securities...................... 493,027 309,338 206,422
Obligations of states and political subdivi-
sions....................................... 457,880 435,223 98,889
Other debt securities........................ 84,655 60,768 47,595
Equity securities............................ 181,913 144,622 60,348
---------- ---------- ----------
Total...................................... $4,815,087 $4,444,107 $2,552,620
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1998, 1997 and 1996, $674.7 million, $888.8 million, and
$348.4 million of CMOs, respectively, were issues of the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association.
12
<PAGE>
The following table shows the maturity distribution of the available-for-
sale debt securities of the Corporation at December 31, 1998 based upon
amortized cost.
Maturity of Available-for-Sale Investment Portfolio
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------
Maturing
-----------------------------------------
After After
Within One year Five years
One Through Through After
Year 5 Years 10 years 10 years Totals
-------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S. Gov-
ernment agencies........ $ 22,146 $ 231,582 $ -- $ -- $ 253,728
Mortgage-backed obliga-
tions(1)................ 290,371 839,337 500,843 955,814 2,586,365
Collateralized mortgage
obligations(1).......... 344,205 345,270 27,454 19,866 736,795
Asset-backed securi-
ties(1)................. 106,676 357,340 21,806 3,506 489,328
Obligation of states and
political subdivisions.. 43,736 118,736 75,722 207,160 445,354
Other debt and equity se-
curities(2)............. 81,655 1,250 1,750 179,595 264,250
-------- ---------- -------- ---------- ----------
Total.................. $888,789 $1,893,515 $627,575 $1,365,941 $4,775,820
======== ========== ======== ========== ==========
</TABLE>
- --------
(1) The maturity distribution is based upon long-term cash flow estimates for
each security type and coupon rate.
(2) Equity securities totaling $179.6 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, 1998 based upon amortized cost.
Available-for-Sale Investment Portfolio
(Tax Equivalent Yields)
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------
Maturing
---------------------------------
After After
Within One year 5 years
One Through Through After
Year 5 Years 10 years 10 years Totals
------ -------- -------- -------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S. Government
agencies............................ 5.28% 5.25% -- % -- % 5.25%
Mortgage-backed obligations.......... 6.02 5.95 5.91 6.24 6.06
Collateralized mortgage
obligations(1)...................... 6.52 6.52 6.52 6.52 6.52
Asset-backed securities.............. 6.63 6.63 6.63 6.63 6.63
Obligations of states and political
subdivisions........................ 6.31 7.01 6.35 6.98 6.81
Other debt and equity securities..... 4.58 8.00 7.37 4.61 4.64
---- ---- ---- ---- ----
Total.............................. 6.15% 6.16% 6.02% 6.14% 6.14%
==== ==== ==== ==== ====
</TABLE>
- --------
(1) Computation of weighted average tax equivalent yields includes $184.5
million of floating rate CMOs.
13
<PAGE>
Loan Portfolio
The following table sets forth the composition of the loan portfolio by type
of loan and the percentage of loans by category.
Composition of the Loan Portfolio
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 3,452,416 32.7% $ 2,868,728 28.4% $1,731,031 25.5% $1,798,248 29.3% $1,633,275 29.9%
Commercial real estate.. 2,305,639 21.8 2,256,895 22.4 1,453,244 21.4 1,265,736 20.6 1, 246,847 22.8
Residential............. 827,103 7.8 987,751 9.8 833,045 12.2 650,588 10.6 593,642 10.9
Retail.................. 2,739,984 25.9 2,567,166 25.4 1,380,767 20.3 1,098,955 17.9 984,403 18.0
Credit card............. 15,234 0.2 146,497 1.5 596,474 8.8 654,653 10.7 496,608 9.1
Commercial leases....... 540,395 5.1 469,217 4.7 390,929 5.7 304,239 4.9 232,997 4.3
Retail leases .......... 318,582 3.0 305,004 3.0 47,131 0.7 30,265 0.5 26,636 0.5
Foreign................. 365,067 3.5 482,328 4.8 365,824 5.4 336,140 5.5 244,483 4.5
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of
unearned income........ $10,564,420 100.0% $10,083,586 100.0% $6,798,445 100.0% $6,138,824 100.0% $5,458,891 100.0%
=========== ===== =========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
The following table displays the contractual maturities and interest rate
sensitivities of the loan portfolio of the Corporation at December 31, 1998.
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, 1998
--------------------------------------------
Maturing
--------------------------------
After 1
In one year
Year Through After
Or less(1) 5 years 5 years Total
---------- ---------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Commercial........................ $1,266,096 $1,530,768 $ 655,552 $ 3,452,416
Commercial real estate............ 450,719 835,334 1,019,586 2,305,639
Residential....................... 33,155 115,313 678,635 827,103
Retail............................ 448,886 1,486,342 804,756 2,739,984
Credit card....................... 15,234 -- -- 15,234
Commercial leases receivable...... 47,278 316,478 176,639 540,395
Retail leases receivable.......... 86,926 231,656 -- 318,582
Foreign........................... 48,267 257,887 58,913 365,067
---------- ---------- ---------- -----------
Total........................... $2,396,561 $4,773,778 $3,394,081 $10,564,420
========== ========== ========== ===========
Amount of loans based upon:
Fixed interest rates.............. $ 895,196 $2,472,516 $1,601,080 $ 4,968,792
========== ========== ========== ===========
Variable interest rates(2)........ $1,501,365 $2,301,262 $1,793,001 $ 5,595,628
========== ========== ========== ===========
</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.
14
<PAGE>
Commercial Loans
Commercial loan outstandings of $3.5 billion comprised 32.7% of the
Corporation's total loans and leases at December 31, 1998. Commercial loans
increased $583.7 million or 20.3% during 1998. Specialized lending and mid-
sized corporate customers were major components of portfolio growth in 1998.
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 by
geographic region. 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 81% 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. Key
economic indicators for the Mid-Atlantic region continued to improve during
1998.
Commercial Real Estate
The Corporation's commercial real estate portfolio represents loans secured
primarily by real commercial property. The properties financed include both
owner-occupied and investor real estate. Commercial real estate loans of $2.3
billion comprised 21.8% of the total loan portfolio at December 31, 1998.
Commercial real estate loans increased $48.7 million or 2.2% during 1998.
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, 1998, $1.2
billion or 54% 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 commercial real estate loans to
support its emphasis as a relationship lender for regional companies.
The commercial real estate portfolio continues to be well balanced by
property type and is geographically centered in the Corporation's regional
marketplace, with the majority of the portfolio secured by properties in
Maryland, Pennsylvania, Virginia, and Washington, D.C.
Commercial real estate loans included $434 million in construction loans at
December 31, 1998. These loans are for land acquisition and development, and
building construction. Since December 31, 1997, real estate construction loans
have increased $52 million or 13.6%. Most construction activity continues to
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, 1998 decreased $161 million from
December 31, 1997. The decline is due to loan maturities and loan prepayments
prompted by favorable market conditions. The Corporation has decided to limit
the origination of new loans for its residential mortgage portfolio,
therefore, this loan portfolio is expected to continue to decline in the
future.
The Corporation sold the residential mortgage loan origination businesses of
its mortgage banking subsidiaries, the prime source of new loans for its
residential mortgage portfolio. The Corporation continues to offer a
comprehensive range of first mortgage products through a third party
affiliation. See Part I above.
15
<PAGE>
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 loans are made available to the marketplace on an
indirect basis by means of select third party referral sources. During 1998,
the product of choice in the Corporation's marketplace as well as nationally
was the home equity loan.
As compared to December 31, 1997, retail loans increased $173 million to
$2.7 billion at December 31, 1998. The growth in retail loans is largely
attributable to growth in fixed rate home equity products.
Credit Card
Credit card loans at December 31, 1998 were $15 million compared to $146
million at December 31, 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 ($500 million in securitized
credit card loans), 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.
Commercial Leases Receivable
Commercial leases receivable include small equipment and general equipment
leasing portfolios. Commercial leases receivable increased to $540 million at
December 31, 1997 from $469 million at December 31, 1997. The majority of the
commercial leasing portfolio is general equipment leases 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.
Retail Leases Receivable
Retail leases receivable consist of retail auto leases. Retail leases
receivable increased to $319 million at December 31, 1998 from $305 million at
December 31, 1997. The acquisition of DDC in 1997 significantly increased the
Corporation's retail lease portfolio.
Foreign
Foreign loans totaled $365.1 million at December 31, 1998, a decrease of
$117.3 million when compared to December 31, 1997. Foreign loans by exposure
consist of international maritime, $264.2 million (72.4%); foreign direct
investment, $33.6 million (9.2%) and other, $67.2 million (18.4%). The foreign
maritime loan portfolio has been negatively affected by economic adversity in
certain international markets, particularly in Asia, that have depressed the
dry bulk and tanker shipping industries. Lending and collection expenses in
1998 included approximately $9.8 million in collection costs associated with
the maritime loan portfolio. See "Asset Quality" for additional information.
Asset Quality
Credit Risk Management
Credit approval policies for the Corporation are designed to provide an
effective and timely response to loan requests, while ensuring 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.
16
<PAGE>
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 $34.3 million for the year ended
December 31, 1998, an increase of $2.3 million (7.1%) from the $32.0 million
provision for 1997. Net charge-offs decreased $3.2 million when 1998 is
compared to 1997. The sale of substantially all of the Corporation's credit
card loans in the first quarter of 1998 resulted in a $22.1 million decrease
in net credit card charge-offs in 1998. This decrease was offset by an $18.9
million increase in charge-offs on other loan portfolios in 1998, primarily
due to charge-offs on the foreign maritime portfolio which totaled $19.4
million. The provision for credit losses in 1998 was $2.5 million lower than
charge-offs in 1998 and $8.0 million less than charge-offs in 1997.
Nonperforming Assets
Nonperforming assets were $100.9 million at December 31, 1998, compared to
$81.0 million at December 31, 1997. Additions to nonperforming loans,
including troubled debt restructurings, aggregated $67.6 million in 1998 and
included the transfer to nonaccrual status of $24.3 million of residential
mortgages, $28.5 million of foreign loans, $12.7 million of commercial loans
and $1.4 million of commercial mortgages. These additions were offset by
reductions in nonperforming loans totaling $72.2 million due to paydowns and
payoffs of nonaccrual loans of $31.5 million, charge-offs of $21.5 million,
loans transferred back to accrual status of $15.6 million, and transfers to
other real estate owned of $3.6 million.
Other real estate and other assets owned decreased $1.3 million when
compared to December 31, 1997. Additions to other real estate owned totaled
$7.4 million in 1998, including transfers from nonaccrual loans of $3.6
million. Sales and paydowns of other real estate owned totaled $9.4 million
and other real estate owned writedowns and additions to other real estate
owned valuation reserves totaled $727 thousand in 1998. Other assets owned
increased $1.4 million in 1998.
Other nonperforming assets include $23.1 million in maritime loans. The
Corporation has classified these loans as other nonperforming assets because
the value of the loan collateral is equal to the loan principal. This results
in higher than normal risk for the Corporation. The Corporation has structured
these loans to provide compensation for this increased risk by incorporating
revenue sharing rights and other collateral rights into the loan agreement
which will be triggered by certain events. These loans have been valued based
on the estimated cash flows from the shipping vessel's operations using
current shipping rates, as well as independent valuations. In addition, other
nonperforming assets includes a $2.8 million ownership interest in a
commercial aircraft resulting from a lessee default on a commercial lease in
which the Corporation was a participant. This asset is carried at fair value.
The foreign maritime loan portfolio has been negatively impacted by economic
adversity in certain international markets, particularly in Asia, that have
depressed the dry bulk and tanker shipping industries. It does not appear that
these markets will improve significantly in 1999 and the Corporation may
experience further deterioration in its foreign maritime portfolio in 1999. At
December 31, 1998, outstanding foreign maritime loans were $264 million and
undrawn foreign maritime loan commitments totaled $4.7 million. Nonperforming
assets included $10.4 million in nonaccrual foreign maritime loans and $23.1
million in other nonperforming maritime assets.
17
<PAGE>
The following table sets forth nonperforming assets and accruing loans which
are 90 days or more past due as to principal or interest payments as of the
dates indicated.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Domestic:
Commercial..................... $ 17,356 $21,730 $13,988 $16,587 $13,326
Commercial real estate......... 6,332 9,417 20,347 5,910 30,342
Residential mortgage........... 22,366 24,808 7,545 6,375 5,250
Leases receivable.............. -- -- -- -- 85
Foreign.......................... 13,227 4,340 3,800 4,321 5,300
-------- ------- ------- ------- -------
Total nonaccrual loans....... 59,281 60,295 45,680 33,193 54,303
Restructured loans(1)............ 88 3,692 126 143 4,974
Other real estate and other
assets owned(2)................. 15,630 16,963 13,146 11,501 14,853
Other (3)........................ 25,903 -- -- -- --
-------- ------- ------- ------- -------
Total nonperforming assets... $100,902 $80,950 $58,952 $44,837 $74,130
======== ======= ======= ======= =======
Nonperforming assets as a % of
total loans, net of unearned
income plus other foreclosed
assets owned.................... 0.95% 0.80% 0.87% 0.73% 1.35%
======== ======= ======= ======= =======
Accruing loans contractually past
due 90 days or more as to
principal or interest:
Domestic....................... $ 40,469 $23,717 $23,812 $18,808 $13,338
======== ======= ======= ======= =======
</TABLE>
- --------
(1) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 5, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings."
(2) Other real estate and other assets owned represents 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.
(3) Other includes $23.1 million in maritime loans discussed in detail under
"Nonperforming Assets." Other also includes a $2.8 million ownership
interest in a commercial aircraft.
The following table details the gross interest income that would have been
received during the year ended December 31, 1998 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,
1998
----------------
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........................................................ $4,226 $2,337
Interest income actually recorded............................. 886 608
</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, 1998, the Corporation was monitoring
$82.2 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, 1998 which were classifiable
as nonaccrual, restructured, past due or potential problem assets.
18
<PAGE>
Allowance for Credit Losses
The following table details certain information relating to the Allowance for
Credit Losses ("Allowance") of the Corporation for the five years ended
December 31, 1998. See also Note 5 of the Notes to Consolidated Financial
Statements of the Corporation.
Analysis of the Allowance for Credit Losses
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Transactions
Allowance at beginning of
year....................... $168,186 $154,802 $177,621 $191,024 $200,006
Provision for credit
losses..................... 34,297 32,017 6,500 16,000 22,996
Losses charged-off:
Commercial loans........... 6,836 9,581 2,743 1,848 2,852
Commercial real estate
loans..................... 692 543 6,384 1,270 7,026
Residential mortgages...... 1,300 868 177 110 328
Retail loans............... 11,476 7,998 5,893 2,988 4,798
Credit card loans.......... 3,463 26,962 30,156 30,352 27,180
Commercial leases
receivable................ 1 -- -- -- 144
Retail leases receivable... 1,106 736 125 40 199
Foreign loans.............. 19,364 -- -- 1,840 --
-------- -------- -------- -------- --------
Total losses charged-off... 44,238 46,688 45,478 38,448 42,527
-------- -------- -------- -------- --------
Recoveries of losses
previously charged-off:
Commercial loans........... 1,642 1,083 1,787 1,025 3,908
Commercial real estate
loans..................... 1,928 313 560 452 742
Residential mortgages...... 47 97 8 28 29
Retail loans............... 3,460 2,893 2,143 2,194 2,846
Credit card loans.......... 102 1,507 2,568 5,127 5,203
Commercial leases
receivable................ 7 -- 4 17 136
Retail leases receivable... 255 221 109 202 295
Foreign loans.............. -- 557 -- -- --
-------- -------- -------- -------- --------
Total recoveries........... 7,441 6,671 7,179 9,045 13,159
-------- -------- -------- -------- --------
Net losses charged-off...... 36,797 40,017 38,299 29,403 29,368
Allowance for loans of
acquired banks............. -- 42,884 10,642 -- --
Allowance attributable to
loans sold................. (6,850) (21,500) -- -- (2,610)
Transfer of allowance to
reserve for off-balance
sheet liability............ (1,485) -- (1,662) -- --
-------- -------- -------- -------- --------
Total allowance at end of
year....................... $157,351 $168,186 $154,802 $177,621 $191,024
======== ======== ======== ======== ========
Net Loan Losses (Recoveries)
by Category
Commercial loans........... $ 5,194 $ 8,498 $ 956 $ 823 $ (1,056)
Commercial real estate
loans..................... (1,236) 230 5,824 818 6,284
Residential mortgages...... 1,253 771 169 82 299
Retail loans............... 8,016 5,105 3,750 794 1,952
Credit card loans.......... 3,361 25,455 27,588 25,225 21,977
Commercial leases
receivable................ (6) -- (4) (17) 8
Retail leases receivable... 851 515 16 (162) (96)
Foreign loans.............. 19,364 (557) -- 1,840 --
-------- -------- -------- -------- --------
Total...................... $ 36,797 $ 40,017 $ 38,299 $ 29,403 $ 29,368
======== ======== ======== ======== ========
Net Loan Losses (Recoveries)
to Average Loans by
Category
Commercial loans........... 0.16% 0.37% 0.05% 0.05% (0.06)%
Commercial real estate
loans..................... (0.06) 0.01 0.44 0.06 0.51
Residential mortgages...... 0.14 0.08 0.02 0.01 0.05
Retail loans............... 0.30 0.26 0.30 0.08 0.21
Credit card loans.......... 10.18 6.72 5.37 4.72 4.56
Commercial leases
receivable................ -- -- -- -- --
Retail leases receivable... 0.27 0.30 0.04 (0.58) (0.35)
Foreign loans.............. 4.35 (0.15) -- 0.61 --
-------- -------- -------- -------- --------
Total loans................ 0.36% 0.48% 0.61% 0.51% 0.56%
Total loans--excluding
credit cards.............. 0.33% 0.18% 0.18% 0.08% 0.15%
Allowance as a percentage of
year end loans, net of
unearned income............ 1.49% 1.67% 2.28% 2.89% 3.50%
Allowance as a percentage of
nonperforming loans........ 265.04% 262.84% 337.95% 532.82% 322.26%
</TABLE>
19
<PAGE>
The Corporation evaluates, reports and documents the Allowance in accordance
with all regulatory guidelines including the Interagency Policy Statement on
the Allowance for Loan and Lease Losses. The adequacy of the Allowance is
evaluated at least quarterly, employing a methodology that is sound, based on
reliable information and well documented. The methodology provides consistency
and integrity; however, changes can be incorporated as the risk profiles of
the various loan portfolios change over time.
All outstanding loans, leases, letters of credit and legally binding
commitments to lend are considered in evaluating the adequacy of the
Allowance. Corporate Policy generally requires all accrued but unpaid interest
to be reversed once a loan is placed on nonaccrual status.
All nonaccrual and criticized loans in the commercial portfolios above
certain defined thresholds are analyzed individually to confirm the
appropriate risk rating and accrual status and to determine the need for a
Specific Reserve. Loan types included in the commercial portfolio are
commercial loans, commercial real estate construction loans and mortgages,
foreign loans and commercial leases.
For loans and leases in the commercial portfolios not specifically reserved,
the base factors for the General Reserve allocations are derived from the
blended average of annual historical loss experience by loan type over an
economic cycle. Retail loans and leases are segregated into various pools with
similar risk characteristics. The rolling twelve month historical loss
experience for each pool is updated quarterly to provide the base factors for
the retail General Reserve allocations. In addition, the historical loss
percentage or base factor for each commercial portfolio type and retail pool
are adjusted to reflect current conditions. Among the factors considered are
levels and trends in delinquencies and nonaccruals; trends in volume 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 unallocated reserve is the portion of the Allowance that is not
attributable to any specific components of the loan portfolio. While the
overall analysis of the Allowance is deemed to be conservative with regards to
estimates for inherent credit losses, the unallocated reserve additionally
protects the Corporation from any errors and omissions or subjectivity that
might occur in testing or reviewing the Allowance for adequacy.
The Allowance was $157.4 million for the year ended December 31, 1998, a
decrease of $10.8 million (6.4%) from the $168.2 million allowance on December
31, 1997. The decrease was attributable to the allocation of $6.8 million to
the Bankcard portfolios sold, the net transfer of $1.5 million to other
liabilities as a reserve for Treasury derivative instruments, and charge-offs
exceeding provisions by $2.5 million. Specific reserves decreased by $7.5
million as a common methodology was adopted across the franchise for
identification of nonaccrual loans and assignment of specific reserves.
General reserves increased by $12.9 million primarily due to increased
allocations to the foreign maritime portfolio. The unallocated reserve
decreased by $13.5 million to $50.7 million and represented 32% of the
Allowance as of December 31, 1998 compared to 38% as of December 31, 1997. At
year-end, the Allowance covered 1998 charge-offs four times and represented
1.49% of total loans.
20
<PAGE>
The following table provides an allocation of the Allowance to the
respective loan classifications. The allocation of the Allowance is based on a
consideration of all of the factors discussed above which are used to
determine the Allowance as a whole. Since all of those factors are subject to
change, the allocation of the Allowance detailed below is not necessarily
indicative of future losses or future allocations. The Allowance at December
31, 1998 was available to absorb losses occurring in any category of loans.
Allocation of the Allowance for Credit Losses
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial........................ $ 37,115 $ 35,867 $ 18,139 $ 30,073 $ 28,506
Commercial real estate............ 17,728 21,584 17,671 17,624 32,235
Residential mortgage.............. 4,100 1,719 1,334 1,150 1,022
Retail............................ 12,494 13,041 4,609 3,976 3,696
Credit card....................... -- 6,010 31,801 36,141 30,830
Commericial leases receivable..... 10,113 10,787 12,374 13,407 16,323
Retail leases receivable.......... 1,298 873 160 111 83
Foreign........................... 23,807 14,143 13,540 10,323 12,176
Unallocated....................... 50,696 64,162 55,174 64,816 66,153
-------- -------- -------- -------- --------
Total allowance................. $157,351 $168,186 $154,802 $177,621 $191,024
======== ======== ======== ======== ========
</TABLE>
Deposits
Total deposits at December 31, 1998 were $12.3 billion, a $207 million
decrease when compared to December 31, 1997. Noninterest bearing deposits
increased $319 million from December 31, 1997. Approximately half of the
growth was due to an increase in commercial demand deposit balances, primarily
from financial services customers such as brokerage, credit card and mortgage
companies. The remaining growth was in retail demand deposits due primarily to
higher customer balances at year end.
Interest bearing deposits decreased $526 million due to a $41 million
decline in interest bearing demand deposits, a $183 million drop in savings
deposits, a $283 million decrease in consumer time deposits and a $563 million
decline in purchased time deposits from December 31, 1997. These decreases
were offset by a $544 million increase in money market deposits. The growth in
money market deposits is due to a short-term deposit of approximately $180
million by a financial services customer, a new mortgage escrow deposit from a
corporate customer of approximately $125 million and growth in a retail money
market deposit product priced similarly to money market mutual funds. The
decline in saving deposits is due to the transfer of approximately $175
million of trust savings deposits into non-depository investment products.
Competitive pressures from non-bank financial services companies continue to
be strong, especially from mutual fund companies and broker-dealers. The
decline in consumer time deposits evidences the consumer trend toward higher-
yielding, non-insured investment vehicles.
The following table details the maturity of certificates of deposit of
$100,000 or more on December 31, 1998. There were no non-certificate time
deposits of $100,000 or more at December 31, 1998.
Maturity Distribution of Certificates of Deposit in Amounts of $100,000 or
More
<TABLE>
<CAPTION>
December 31,
1998
-------------
(In millions)
<S> <C>
Within three months............................................... $ 647.6
After three months but within six months.......................... 118.9
After six months but within twelve months......................... 372.1
After twelve months............................................... 544.6
--------
Total........................................................... $1,683.2
========
</TABLE>
21
<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, 1998.
Short-term Borrowings
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Federal funds purchased:
End of year outstandings.................... $1,364,149 $1,092,307 $314,570
Highest month-end balance................... 1,572,750 1,214,465 614,826
Average balance............................. 726,942 553,226 509,466
Average interest rate at year end........... 5.00% 6.50% 6.41%
Weighted average interest rate(1)........... 5.28 5.47 5.28
Repurchase agreements:
End of year outstandings.................... $ 821,645 $ 605,161 $218,977
Highest month-end balance................... 821,645 654,453 350,237
Average balance............................. 640,498 492,638 253,993
Average interest rate at year end........... 4.45% 5.06% 5.00%
Weighted average interest rate(1)........... 4.77 4.95 4.79
Master demand notes of the Corporation:
End of year outstandings.................... $ 319,705 $ 335,116 $320,619
Highest month-end balance................... 325,524 343,907 390,715
Average balance............................. 308,587 338,602 352,615
Average interest rate at year end........... 4.65% 4.90% 4.80%
Weighted average interest rate(1)........... 4.98 4.91 4.86
Other borrowed funds, short-term:
End of year outstandings.................... $ 58,222 $ 151,574 $500,858
Highest month-end balance................... 301,539 675,111 708,906
Average balance............................. 171,747 560,911 345,632
Average interest rate at year end........... 3.68% 5.90% 5.58%
Weighted average interest rate(1)........... 5.06 5.53 5.45
</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.
22
<PAGE>
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%.
The ratio of liquid assets to total assets at December 31, 1998 was 24.3%
compared to 28.7% at December 31, 1997. Liquid assets are defined as vault
cash, balances with the Federal Reserve Banks of Richmond and Philadelphia,
unencumbered investment securities, money market assets, assets available as
collateral for immediate borrowing from the Federal Reserve Banks of Richmond
and Philadelphia and assets securitizable within sixty days. 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, 1998, the ratio of liquid assets to credit
sensitive liabilities was 154.8% compared to 168.8% at December 31, 1997.
Dividends from subsidiaries are the primary source of funds for the debt
service and preferred stock requirements of the Corporation. Dividends from
subsidiaries totaled $155.2 million for the year ended December 31, 1998, and
included $74 million in special dividends from First Omni. In addition, First
Omni returned $22 million of capital to the Corporation through a stock
redemption. 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. On
April 29, 1998, the Corporation paid a dividend of $57 million to its sole
common shareholder, AIB. In January 1999 the Corporation's Board of Directors
declared a $90 million dividend, payable to AIB in March 1999.
Stockholders' Equity and Capital Adequacy
The Corporation's capital strength provides the resources and flexibility to
capitalize on business growth and acquisition opportunities. At December 31,
1998, the Corporation's Tier 1 risk-based capital ratio was 9.38% ($1.4
billion of Tier 1 regulatory capital) and its total risk-based capital ratio
was 12.65% ($1.9 billion of total regulatory capital). Tier 1 capital consists
primarily of common shareholder's equity and noncumulative preferred
instruments less goodwill and certain intangible assets, while total
regulatory capital adds qualifying subordinated debt and the allowance for
credit losses, within permitted limits, to Tier 1 capital. Risk weighted
assets are determined by assigning various levels of risk to different
categories of assets and off-balance sheet activities.
The Federal Reserve Board's regulatory capital guidelines require a minimum
total capital to risk adjusted assets ratio of 8.0%. One-half of the 8.0%
minimum must be Tier 1 capital. The leverage ratio measures Tier 1 capital to
average assets less goodwill and other disallowed intangible assets and must
be maintained in conjunction with the risk-based capital standards. The
regulatory minimum for the leverage ratio is 3.0%; however, this minimum
applies only to top rated banking organizations without any operating,
financial or supervisory deficiencies. Other organizations, (including those
experiencing or anticipating significant growth) are expected to hold an
additional capital cushion of at least 100 to 200 basis points of Tier 1
capital and, in all cases, banking organizations should hold capital
commensurate with the level and nature of all risks, including the volume and
severity of problem loans, to which they are exposed.
23
<PAGE>
The following table details the Corporation's capital components and ratios
at December 31, 1998 and 1997 based upon the requirements of the regulatory
agencies. For additional information on regulatory capital see Note 18 of the
Notes to Consolidated Financial Statements.
Capital Components
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Preferred stockholders' equity...................... $ 144,852 $ 144,852
Common stockholder's equity......................... 1,866,475 1,728,005
Guaranteed preferred beneficial interests in junior
subordinated debentures............................ 296,330 295,873
Disallowed intangibles.............................. (893,584) (956,126)
Net unrealized gains on investment securities
available for sale................................. (24,414) (34,389)
----------- -----------
Tier 1 capital.................................... 1,389,659 1,178,215
----------- -----------
Qualifying subordinated debt........................ 259,815 279,738
Redeemable preferred stock.......................... 4,866 6,319
Allowance for credit losses......................... 155,951 164,386
Off balance sheet reserves.......................... 4,075 --
Mandatory convertible securities.................... 59,995 59,986
----------- -----------
Tier 2 capital.................................... 484,702 510,429
----------- -----------
Total capital....................................... $ 1,874,361 $ 1,688,644
=========== ===========
Risk-adjusted assets................................ $14,816,766 $14,193,737
Average quarterly assets (fourth quarter)........... $17,420,806 $17,174,905
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets............ 9.38% 8.30%
Regulatory minimum.............................. 4.00 4.00
Total capital to risk-adjusted assets............. 12.65 11.90
Regulatory minimum.............................. 8.00 8.00
Leverage ratio...................................... 8.41 7.26
</TABLE>
Year 2000
Many computer systems worldwide do not have the capability to recognize the
Year 2000. This problem exists because computer software was developed with
years designated by their last two digits. Systems developed with this
programming will experience problems when the year advances from "99" to "00".
These computer systems may misread 2000 as 1900 causing any number of errors
and outages. In addition, the Year 2000 is the first leap year ending in "00"
since the year 1900. Not all computer programs will recognize that the Year
2000 includes an extra day.
The Corporation is actively pursuing Year 2000 compliance for all computer
systems. A Year 2000 Executive Steering Committee was established to oversee
the efforts of many internal groups to ensure that affected systems of the
Corporation are able to accurately process date and time sensitive data when
the calendar year changes to 2000. These preparations include accounting for
the Year 2000 as a leap year. The Corporation is also working with vendors,
agencies and customers with whom data is exchanged to monitor their progress
on Year 2000 system issues.
The Corporation began analyzing internal systems and product lines in early
1997. Year 2000 was identified as a high-priority business issue and a formal
project plan was put in motion by mid-year 1997. The Corporation has developed
an inventory of over 800 products and applications which may be affected by
Year 2000 issues. This inventory covers all aspects of the Corporation's
business. These products and applications have been
24
<PAGE>
assigned a business priority and have been organized into projects for
replacement, upgrading, renovation, and certification testing. The
Corporation's primary efforts are focused on inventoried items that have been
identified as mission critical and important--those applications where any
disruption causes critical data to be unreliable, transactions to fail, legal
requirements to be missed, or any other potentially serious business issue.
The assessment includes hardware, software, telecommunications systems, ATMs,
audio response systems, wire transfer systems, automated clearinghouses,
electronic data exchange systems and facilities-related systems with embedded
microchips (vaults, security and alarm systems, elevators, heating and air
conditioning systems).
The Corporation's Year 2000 strategy consists of three approaches; renovate,
upgrade or replace. Approximately 25% of the Corporation's noncompliant
systems will be made Year 2000 compliant through renovation. The renovation of
these systems is substantially complete. The remaining noncompliant systems
will be made Year 2000 compliant through upgrade and replacement. The
Corporation has completed the replacement of major systems in order to upgrade
its technology platforms to its strategic target environment. In the process,
the Corporation replaced a significant portion of its software with Year 2000
compliant products. It is difficult to separate the costs associated with
system replacement and upgrades due to target environment strategies from
those associated with Year 2000 compliance. Direct expenses related to systems
upgrades and Year 2000 compliance total $14.6 million to date and are
anticipated to be approximately $18.4 million through December 31, 1999.
Capital expenditures related to system upgrades are anticipated to be
approximately $39 million.
Direct expenses related to Year 2000 and system conversions were $9.3
million for the year ended December 31, 1998. In addition, funds expended to
date on capital projects associated with systems upgrades and Year 2000
compliance totaled $33.1 million through December 31, 1998. Depreciation
expense on these projects for the year ended December 31, 1998 was $113
thousand.
Project management software is being used to monitor the progress of Year
2000 integration. This software enables the Year 2000 Executive Steering
Committee to monitor company-wide efforts and to track critical Year 2000
milestones. Many of the Corporation's systems are already Year 2000 compliant.
Others are targeted for compliance in the first quarter of 1999. Bankwide
systems will be certified as Year 2000 compliant with testing which will occur
through June 1999. The Corporation's target dates are consistent with Federal
Financial Institution Examination Council guidelines.
Year 2000 compliance by vendors and service providers is critical to the
Corporation's Year 2000 preparedness plan. Questionnaires have been
distributed to vendors and service providers to confirm that these companies
will be Year 2000 compliant. A critical part of the Corporation's strategy is
to maintain close contact with its vendors and to schedule testing periods
with its third party providers where appropriate. In certain circumstances the
Corporation may rely on proxy testing. Proxy testing is compliance testing of
a vendor by a significant customer of the vendor that uses essentially the
same services as the Corporation.
The Corporation is also carefully monitoring its risks in the area of
credit, liquidity and regulatory compliance. A monitoring program is in place
to help relationship managers and credit officers evaluate their corporate
client's Year 2000 efforts and to develop strategies for the management of
credit exposure based on Year 2000 preparedness.
The Corporation's existing contingency procedures will serve as the basis
for managing the Year 2000 transition. Extensive mission critical business
resumption contingency plans are in place and updated as necessary.
Uninterrupted power supply units are installed in key locations to ensure
ongoing operations. The Corporation expects to have specific Year 2000
business resumption contingency plans for mission critical systems in place by
June 30, 1999.
In the opinion of management, the most likely worst case scenario that may
occur as a result of Year 2000 issues is the interruption of business due to
the inability of third party suppliers to provide heat, power, light or
telephone service to the Corporation's retail branch network. This would
result in the temporary closure of
25
<PAGE>
branches. While this scenario is highly unlikely, it is beyond the control of
the Corporation because it is not practical for the Corporation to install
uninterrupted power supplies in each of its branches. However, the business
resumption contingency plans outline manual work-around procedures should a
situation like this occur.
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.
Results of Operations--1997 Compared to 1996
Consolidated net income for 1997 totaled $151.2 million compared with $132.3
million in 1996. Net income in 1997 included a $17.4 million after-tax gain on
($28.2 million pretax) on the sale of credit card loans and merger related
expenses of $12.5 million after-tax ($20 million pretax).
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.
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 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, the credit card gain and
securities gains, 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.
26
<PAGE>
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, merger related expenses, and intangible amortization expense, 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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. The effective management of market risk is essential
to achieving the Corporation's objectives. As a financial institution, the
Corporation's primary market risk exposure is interest rate risk.
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.
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 in 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).
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: (1) the value of a
fixed rate asset or liability will vary with a change in interest rates; and
(2) 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 is 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,
1998, the Corporation's equity at risk was in compliance with a policy limit
of no more than $45 million.
27
<PAGE>
The average, high and low equity at risk exposure for the years ended
December 31, 1998 and 1997 are detailed in the following table:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Average equity at risk......................................... $28,679 $32,259
Highest equity at risk......................................... 36,990 40,000
Lowest equity at risk.......................................... 10,715 16,210
</TABLE>
No material change occurred in equity at risk for the year ended December
31, 1998 compared to the year ended December 31, 1997.
Earnings at Risk
The PML impact on future income is known as earnings at risk. Earnings at
risk is expressed as a percentage of current year budgeted net income before
tax ("NIBT"). The earnings impact of various interest rate scenarios is
measured over multiple time horizons. The results are then compared to current
earnings projections to detect changes due to rising or falling rates. The
income change over a rolling one-year time frame is the earnings impact. The
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, 1998, the
Corporation's earnings at risk was in compliance with the 1998 policy limit of
$33.5 million.
The average, high and low earnings at risk exposure for the years ended
December 31, 1998 and 1997 are detailed in the table below:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Average earnings at risk....................................... $ 6,428 $ 5,186
Highest earnings at risk....................................... 11,128 8,601
Lowest earnings at risk........................................ 1,474 502
</TABLE>
No material change occurred in earnings at risk for the year ended December
31, 1998 compared to the year ended December 31, 1997.
Fixed Income and Derivative Trading 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, 1998
aggregate fixed income and derivative trading VAR was in compliance with a
policy limit of $2.5 million.
28
<PAGE>
The average, high and low fixed income and derivative trading VAR for the
years ended December 31, 1998 and 1997 are detailed in the following table:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Average fixed income and derivative trading value at risk..... $ 253 $ 227
Highest fixed income and derivative trading value at risk..... 897 533
Lowest fixed income and derivative trading value at risk...... 1 1
</TABLE>
No material change occurred in the risk profile of fixed income and
derivative trading for the year ended December 31, 1998 compared to the year
ended December 31, 1997.
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, 1998, the value at
risk of the Corporation's aggregate foreign exchange position was in
compliance with a policy limit of $2.25 million.
The average, high and low value at risk of the Corporation's aggregate
foreign exchange position for the years ended December 1998 and 1997 are
detailed below:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Average aggregate foreign exchange position value at risk..... $ 1,103 $ 1,029
Highest aggregate foreign exchange position value at risk..... 2,111 3,781
Lowest aggregate foreign exchange position value at risk...... 115 84
</TABLE>
No material change occurred in the risk profile of foreign exchange
positions for the year ended December 31, 1998 compared to the year ended
December 31, 1997.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest Income
Interest and fees on loans........................ $ 795,127 $675,450 $521,643
Interest and dividends on investment securities:
Taxable......................................... 222,627 209,393 166,117
Tax-exempt...................................... 21,626 13,058 6,341
Dividends....................................... 9,992 5,684 1,683
Interest on loans held-for-sale................... 17,781 19,987 9,390
Other interest income............................. 9,253 17,926 13,855
--------- -------- --------
Total interest and dividend income............ 1,076,406 941,498 719,029
--------- -------- --------
Interest Expense
Interest on deposits.............................. 390,280 297,644 205,169
Interest on Federal funds purchased and other
short-term borrowings............................ 94,259 103,722 76,428
Interest on long-term debt........................ 49,639 44,388 33,776
--------- -------- --------
Total interest expense........................ 534,178 445,754 315,373
--------- -------- --------
Net interest income............................... 542,228 495,744 403,656
Provision for credit losses (note 5).............. 34,297 32,017 6,500
--------- -------- --------
Net interest income after provision for credit
losses........................................... 507,931 463,727 397,156
--------- -------- --------
Noninterest Income
Service charges on deposit accounts............... 107,795 95,903 80,659
Trust and investment advisory fees................ 71,221 45,867 28,658
Mortgage banking income........................... 30,736 48,819 29,966
Security sales and fees........................... 24,343 12,553 5,171
Credit card income................................ 23,446 18,546 9,949
Servicing income.................................. 6,056 26,509 26,126
Other income...................................... 65,749 49,310 36,260
--------- -------- --------
Total fees and other income................... 329,346 297,507 216,789
Securities gains, net (note 4).................... 60,759 456 103
Gain on sale of credit card loans................. 60,000 28,155 --
--------- -------- --------
Total noninterest income...................... 450,105 326,118 216,892
--------- -------- --------
Noninterest Expenses
Salaries and other personnel costs (notes 13 and
14).............................................. 311,030 292,497 226,633
Equipment costs (note 6).......................... 42,882 40,757 32,019
Occupancy costs (note 6).......................... 37,974 36,976 32,899
Other operating expenses (note 15)................ 167,957 129,358 106,668
--------- -------- --------
Total operating expenses...................... 559,843 499,588 398,219
Intangible assets amortization expense............ 55,603 34,768 8,642
Merger related expenses (note 16)................. -- 20,000 --
--------- -------- --------
Total noninterest expenses.................... 615,446 554,356 406,861
--------- -------- --------
Income before income taxes........................ 342,590 235,489 207,187
Income tax expense (note 17)...................... 124,467 84,301 74,850
--------- -------- --------
Net income........................................ $ 218,123 $151,188 $132,337
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
(in thousands,
except per share amounts)
<S> <C> <C>
Assets
Cash and due from banks............................ $ 1,206,178 $ 1,078,009
Interest bearing deposits in other banks........... 1,478 1,656
Trading account securities......................... 42,528 39,539
Federal funds sold and securities purchased under
resale agreements................................. 130,916 51,130
Investment securities available-for-sale (note 4).. 4,815,087 4,444,107
Loans held-for-sale................................ 84,254 482,153
Loans, net of unearned income of $189,152 in 1998
and $192,569 in 1997:
Commercial....................................... 3,452,416 2,868,728
Commercial real estate........................... 2,305,639 2,256,895
Residential mortgage............................. 827,103 987,751
Retail........................................... 2,739,984 2,567,166
Credit card...................................... 15,234 146,497
Commercial leases receivable..................... 540,395 469,217
Retail leases receivable......................... 318,582 305,004
Foreign.......................................... 365,067 482,328
------------ ------------
Total loans, net of unearned income............ 10,564,420 10,083,586
Allowance for credit losses (note 5)............... (157,351) (168,186)
------------ ------------
Loans, net..................................... 10,407,069 9,915,400
------------ ------------
Premises and equipment (note 6).................... 203,903 170,863
Due from customers on acceptances.................. 12,253 11,810
Intangible assets (note 7)......................... 893,584 967,433
Other assets....................................... 497,670 630,293
------------ ------------
Total assets................................. $ 18,294,920 $ 17,792,393
============ ============
Liabilities and Stockholders' Equity
Domestic deposits:
Noninterest bearing deposits..................... $ 3,276,589 $ 2,957,888
Interest bearing deposits........................ 8,623,861 9,274,034
Interest bearing deposits in foreign banking
office............................................ 356,601 232,234
------------ ------------
Total deposits................................. 12,257,051 12,464,156
Federal funds purchased and securities sold under
repurchase agreements (note 8).................... 2,185,794 1,697,468
Other borrowed funds, short-term (note 9).......... 377,927 486,690
Bank acceptances outstanding....................... 12,253 11,810
Accrued taxes and other liabilities (note 17)...... 586,137 545,672
Long-term debt (note 10)........................... 856,320 705,843
------------ ------------
Total liabilities............................ 16,275,482 15,911,639
------------ ------------
4.50% Cumulative, Redeemable Preferred Stock, $5
par value per share, $100 liquidation preference
per share; authorized and issued 90,000 shares
(note 11)......................................... 8,111 7,897
------------ ------------
Commitments and contingent liabilities (notes 6, 20
and 23)
Stockholders' equity:
7.875% Noncumulative Preferred Stock, Series A,
$5 par value per share, $25 Liquidation
preference per share; authorized 8,910,000
shares; issued 6,000,000 shares (note 11)....... 30,000 30,000
Common stock, $1/7 par value per share;
authorized 1,200,000,000 shares; issued
597,796,495 shares.............................. 85,395 85,395
Capital surplus.................................. 701,988 701,988
Retained earnings................................ 1,170,565 1,021,880
Accumulated other comprehensive income (note
12)............................................. 23,379 33,594
------------ ------------
Total stockholders' equity..................... 2,011,327 1,872,857
------------ ------------
Total liabilities, redeemable preferred stock
and stockholders' equity.................... $ 18,294,920 $ 17,792,393
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
Preferred Common Capital hensive Retained
Stock Stock Surplus Income Earnings Total
--------- ------- -------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance on December 31,
1995................... $30,000 $84,926 $198,176 $ 23,580 $ 846,892 $1,183,574
Net income.............. 132,337 132,337
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment.. -- -- -- (216) -- (216)
Change in unrealized
gains/losses on
investment securities,
net of
reclassification
adjustment
(Note 12)............. -- -- -- (16,082) -- (16,082)
----------
Other comprehensive
income................ (16,298)
----------
Comprehensive income.. -- -- -- -- -- 116,039
----------
Accretion of redeemable
preferred stock........ -- (93) (93)
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)
------- ------- -------- -------- ---------- ----------
Balance on December 31,
1996................... 30,000 84,926 198,176 7,282 927,113 1,247,497
Net income.............. -- -- -- -- 151,188 151,188
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment.. -- -- -- 255 -- 255
Change in unrealized
gains/losses on
investment securities,
net of
reclassification
adjustment (Note 12).. -- -- -- 26,057 -- 26,057
----------
Other comprehensive
income................ -- -- 26,312
----------
Comprehensive income.. -- -- -- -- -- 177,500
----------
Issuance of Common
Stock.................. 469 503,812 -- -- 504,281
Accretion of redeemable
preferred stock........ -- -- -- -- (196) (196)
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)
------- ------- -------- -------- ---------- ----------
Balance on December 31,
1997................... 30,000 85,395 701,988 33,594 1,021,880 1,872,857
Net income.............. -- -- -- -- 218,123 218,123
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment.. -- -- -- (240) -- (240)
Change in unrealized
gains/losses on
investment securities,
net of
reclassification
adjustment (Note 12).. -- -- -- (9,975) -- (9,975)
----------
Other comprehensive
income................ (10,215)
----------
Comprehensive income.. -- -- -- -- 207,908
----------
Accretion of redeemable
preferred stock........ -- -- -- -- (213) (213)
Dividends declared on
common stock........... -- -- -- -- (57,000) (57,000)
Dividends declared on
preferred stock........ -- -- -- -- (11,820) (11,820)
Dividends declared on
redeemable preferred
stock.................. -- -- -- -- (405) (405)
------- ------- -------- -------- ---------- ----------
Balance on December 31,
1998................... $30,000 $85,395 $701,988 $ 23,379 $1,170,565 $2,011,327
======= ======= ======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Net income.............................. $ 218,123 $ 151,188 $ 132,337
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses............ 34,297 32,017 6,500
Provision for other real estate
losses................................ 387 221 77
Amortization of intangibles............ 55,603 34,768 8,642
Depreciation and amortization.......... 29,347 32,416 27,760
Deferred income tax expense............ 67,820 64,585 48,633
Net (gain) loss on the sale of assets.. (121,731) (29,192) 177
Net decrease (increase) in loans
originated for sale................... 342,965 (79,927) (22,358)
Net (increase) decrease in trading
account securities.................... (2,989) (20,180) 326
Net decrease in accrued interest
receivable............................ 4,908 2,683 16,838
Net (decrease) increase in accrued
interest payable...................... (19,864) 16,454 (22,935)
Other, net............................. (94,364) (109,887) (33,961)
----------- ----------- ------------
Net cash provided by operating
activities............................ 514,502 95,146 162,036
----------- ----------- ------------
Investing Activities
Proceeds from sales of investment
securities available-for-sale(1)....... 3,605,263 2,480,951 1,170,054
Proceeds from paydowns and maturities of
investment securities available-for-
sale................................... 865,772 857,890 15,690,565
Purchases of investment securities
available-for-sale..................... (4,554,015) (2,996,164) (16,198,470)
Net (increase) decrease in short-term
investments............................ (79,786) 46,569 269,874
Net disbursements from lending
activities of banking subsidiaries..... (626,440) (427,611) (679,731)
Principal collected on loans of nonbank
subsidiaries........................... 39,427 58,244 40,600
Loans originated by nonbank
subsidiaries........................... (30,071) (68,986) (57,474)
Principal payments received under
leases................................. 4,578 3,889 3,566
Purchases of assets to be leased........ (3,855) (3,192) (17,192)
Proceeds from the sale of other real
estate................................. 10,059 10,207 3,120
Purchases of premises and equipment..... (72,475) (33,083) (24,337)
Proceeds from the sale of premises and
equipment.............................. 6,225 -- --
Proceeds from the sale of credit card
loans.................................. 197,369 366,694 337,716
Acquisitions............................ -- (874,261) (88,289)
Other, net.............................. (1,795) 84,854 1,192
----------- ----------- ------------
Net cash (used for) provided by
investing activities.................. (639,744) (493,999) 451,194
----------- ----------- ------------
Financing Activities
Net (decrease) increase in deposits..... (207,105) 778,741 28,250
Net increase (decrease) in short-term
borrowings............................. 379,563 (411,499) (405,452)
Proceeds from the issuance of long-term
debt................................... 200,000 196,951 --
Principal payments on long-term debt.... -- (20,033) (10,000)
Proceeds from the issuance of medium-
term bank notes........................ -- -- 50,000
Payments on medium-term bank notes...... (50,000) -- (325,000)
Proceeds from the issuance of guaranteed
preferred beneficial interests in
junior subordinated debentures......... -- 148,317 145,801
Cash dividends paid..................... (69,225) (56,225) (52,023)
----------- ----------- ------------
Net cash provided by (used for)
financing activities.................. 253,233 636,252 (568,424)
----------- ----------- ------------
Increase in cash and cash equivalents... 127,991 237,399 44,806
Cash and cash equivalents at January
1,..................................... 1,079,665 842,266 797,460
----------- ----------- ------------
Cash and cash equivalents at December
31,.................................... $ 1,207,656 $ 1,079,665 $ 842,266
=========== =========== ============
Supplemental Disclosures
Interest payments....................... $ 554,041 $ 403,948 $ 329,677
Income tax payments..................... 31,952 38,603 21,142
Noncash Investing And Financing
Activities
Common stock issued to AIB in connection
with purchase acquisition.............. -- 504,281 --
Loan charge-offs........................ 44,238 46,688 45,478
Transfers to other real estate and other
assets owned........................... 30,442 9,936 3,074
</TABLE>
- --------
(1) Includes $213 million in proceeds from 1997 investment securities sales
which did not settle until 1998.
See accompanying notes to consolidated financial statements
33
<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, FMB Bank and First
Omni Bank, N. A. ( 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 1997 and 1996 consolidated financial statements have been reclassified
to conform with the 1998 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.
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 foreign branches, are remeasured into the functional currency (the
U.S. dollar) at relevant exchange rates. Aggregate transaction gains and
losses are included in other income and other expense and are not material to
the financial statements.
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.
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 level yield
method. Realized gains and losses, and declines in value judged to be other-
34
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 loans and interest on other loans are generally
recognized as income on the level yield method (interest method). Commitment
and origination fees greater than $15 thousand are 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. 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.
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 loan charge-offs, and increased by recoveries of loans
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
35
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on a straight-line basis over periods ranging from 15 to 25 years. Core
deposit intangibles are amortized using an accelerated 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
represents 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 writedowns 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.
Other Nonperforming Assets--Other nonperforming assets include maritime
loans where the Corporation is exposed to a higher than normal risk of loss
from a decrease in the value of the loan's collateral due to high loan to
value ratios. These loans are valued based on the estimated cash flows from
the shipping vessel's operations using current shipping rates, as well as
independent valuations. In addition, other nonperforming assets includes an
interest in a commercial aircraft resulting from a lessee default on a
commercial lease in which the Corporation was a participant. This asset is
carried at fair value.
Income Taxes--The Corporation files a consolidated Federal income tax
return. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as income or expense in the period that includes the enactment
date.
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
36
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
designated assets and 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 related to the purchase of
options 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 Flow--For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and interest bearing deposits in other banks.
Stock Based Compensation--Statement of Financial Accounting Standards
("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
equals the market value of the underlying stock on the grant date.
2. Recent Accounting Pronouncements
In March, 1998, the Accounting Standards Executive Committee of the American
Institute of Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 is effective for financial statements for the years
beginning after December 15, 1998. This statement requires the capitalization
of certain costs to develop or obtain software, which result in additional
functionality. Direct costs of materials and services consumed (including
internal payroll and payroll-related costs) during the application development
stage should be capitalized and amortized
37
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
over the software's useful life. Cost of internal and external training and
maintenance should be expensed as incurred. The adoption of SOP 98-1 is not
expected to have a material impact on the Corporation's financial position or
results of operations.
In June 1998, SFAS 133 was issued and is effective for financial statements
for all fiscal quarters of fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative financial instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign currency denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
The impact of the adoption of SFAS 133 has not been determined.
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 ("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 IR 25p ordinary shares 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 United States generally accepted accounting principles ("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.
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 an accelerated method over 10
years.
The Corporation included a $44.0 million restructuring liability as a
component of goodwill. This liability included $16.1 million for change in
control agreements, $10.9 million in severance and bonus accruals associated
with the elimination of approximately 500 full time equivalent positions,
$10.1 million in costs associated with owned and leased facilities that have
been vacated and furniture, equipment, software and leasehold improvements
that have been abandoned or sold as a result of business or process changes,
$5.4 million
38
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for contract terminations, and $1.5 million for other miscellaneous
liabilities. The following table reflects a summary of activity with respect
to the DDC restructuring reserve at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Balance at beginning of year............................... $ 25.0 $ --
Liability established as part of the acquisition cost allo-
cation.................................................... -- 44.0
Cash outlays............................................... (10.1) (19.0)
------ ------
Balance at end of year..................................... $ 14.9 $ 25.0
====== ======
</TABLE>
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
</TABLE>
4. Investment Securities
The amortized cost and fair values of available-for-sale securities at
December 31, 1998 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................. $ 253,728 $ 2,758 $ (268) $ 256,218
Mortgage-backed obligations.... 2,586,365 18,735 (2,528) 2,602,572
Collateralized mortgage obliga-
tions......................... 736,795 3,849 (1,822) 738,822
Asset-backed securities........ 489,328 4,046 (347) 493,027
Obligations of states and po-
litical subdivisions.......... 445,354 12,878 (352) 457,880
Other debt securities.......... 84,655 -- -- 84,655
Equity securities.............. 179,595 3,830 (1,512) 181,913
---------- ------- ------- ----------
Total........................ $4,775,820 $46,096 $(6,829) $4,815,087
========== ======= ======= ==========
</TABLE>
39
<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, 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>
The amortized cost and fair values of available-for-sale debt securities at
December 31, 1998 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, 1998
---------------------
Amortized Fair
Cost Value
---------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less............................... $ 147,537 $ 147,605
Due after one year through five years................. 351,568 358,277
Due after five years through ten years................ 77,472 80,222
Due after ten years................................... 207,160 212,649
Mortgage-backed and asset backed securities(1)........ 3,812,488 3,834,421
---------- ----------
Total............................................... $4,596,225 $4,633,174
========== ==========
</TABLE>
- --------
(1) Includes mortgage-backed obligations, collateralized mortgage obligations
and asset backed securities.
Proceeds from the sale of investment securities available-for-sale were $3.6
billion, $2.5 billion and $1.2 billion during 1998, 1997, and 1996
respectively. Gross gains and losses realized on the sale of investment
securities available-for-sale were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Gross gains.................................... $ 60,973 $ 5,212 $ 3,555
Gross losses................................... (214) (4,756) (3,452)
-------- -------- --------
Total........................................ $ 60,759 $ 456 $ 103
======== ======== ========
</TABLE>
Investment securities with a book value of $2.4 billion at December 31, 1998
and $1.9 billion at December 31, 1997 were pledged to secure public funds,
trust deposits, repurchase agreements and for other purposes required by law.
40
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. 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. Charge-offs on impaired loans are recorded 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, 1998, total nonaccrual loans exceeded total
impaired loans by $25.2 million. Nonaccrual loans that did not meet the
definition of an impaired loan included nonaccrual residential mortgage loans
of $22.4 million and a $2.8 million nonaccrual foreign loan which is
classified as a nonaccrual loan due to regulatory requirements.
At December 31, 1998 and 1997 the recorded investment in loans that were
considered impaired was $34.1 million and $31.7 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 1998 and 1997 amounts were $20.3 million and $15.9
million, respectively, of impaired loans for which the related allowance for
credit losses was $6.7 million and $7.3 million, respectively. At December 31,
1998 and 1997 impaired loans that did not have a valuation allowance amounted
to $13.8 million and $15.8 million, respectively. The average recorded
investment in impaired loans during the years ended December 31, 1998, 1997
and 1996 was approximately $40.2 million, $34.1 million and $27.6 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, 1998, 1997 and 1996, the Corporation recognized interest income
on impaired loans of $988 thousand, $1.7 million and $201 thousand,
respectively.
At December 31, 1998, the majority of the impaired loans were measured using
observable market prices or 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, 1998. A summary of the activity in the allowance for the three
years ended December 31, 1998 follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year................. $168,186 $154,802 $177,621
Provision charged to operating expenses...... 34,297 32,017 6,500
Less charge-offs, net of recoveries of
$7,441, $6,671, and $7,179.................. (36,797) (40,017) (38,299)
Allowance on loans of acquired banks......... -- 42,884 10,642
Allowance attributable to loans sold......... (6,850) (21,500) --
Transfer of allowance to reserve for off-
balance sheet liability..................... (1,485) -- (1,662)
-------- -------- --------
Balance at end of year....................... $157,351 $168,186 $154,802
======== ======== ========
</TABLE>
41
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Premises and Equipment
Components of premises and equipment at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------ ------------------------------
Accumulated Accumulated
Depreciation Depreciation
And And
Cost Amortization Net Cost Amortization Net
-------- ------------ -------- -------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Land.................... $ 22,102 $ -- $ 22,102 $ 20,026 $ -- $ 20,026
Buildings and land
Improvements........... 84,727 21,840 62,887 86,951 23,607 63,344
Leasehold improvements.. 49,598 25,198 24,400 46,121 24,367 21,754
Furniture and
equipment.............. 76,029 47,103 28,926 75,783 46,926 28,857
Computer hardware and
software............... 143,294 77,706 65,588 104,300 67,418 36,882
-------- -------- -------- -------- -------- --------
Total................. $375,750 $171,847 $203,903 $333,181 $162,318 $170,863
======== ======== ======== ======== ======== ========
</TABLE>
Depreciation and amortization on premises and equipment charged to
operations amounted to $27.6 million in 1998, $27.9 million in 1997, and $23.2
million in 1996.
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 $19.8 million in 1998, $20.1 million in 1997,
and $17.2 million in 1996. Rental expense under equipment lease arrangements,
all of which are considered short-term commitments, was $4.5 million in 1998,
$4.3 million in 1997, and $2.4 million in 1996. Aggregate minimum annual
noncancellable long-term lease commitments, net of subleases, total
approximately $21.0 million in 1999, $18.9 million in 2000, $16.7 million in
2001, $14.1 million in 2002, $12.4 million in 2003 and $54.5 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 1998.
7. Intangible Assets
Intangible assets at December 31, 1998 and 1997 included the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Goodwill.................................................. $840,487 $885,411
Core deposit intangible................................... 44,522 60,616
Premium on credit card loans.............................. -- 11,307
Other premiums on deposits................................ 4,904 5,810
Employment contracts...................................... 2,476 3,184
Other..................................................... 1,195 1,105
-------- --------
Total................................................... $893,584 $967,433
======== ========
</TABLE>
42
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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, 1998, Federal
funds sold totaled $121.1 million and Federal funds purchased totaled $1.4
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, 1998, securities purchased under agreements to resell
totaled $9.8 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 $15.0
million during 1998, and the maximum amount outstanding at any month end
during 1998 was $29.9 million.
At December 31, 1998, securities sold under agreements to repurchase totaled
$821.6 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 $640.5 million during 1998, and the
maximum amount outstanding at any month end during 1998 was $821.6 million.
9. 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, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Master demand notes of the Corporation.................... $319,705 $335,116
Federal funds purchased--term............................. -- 70,000
Treasury tax and loan note account........................ 56,020 41,455
Other..................................................... 2,202 40,119
-------- --------
Total................................................... $377,927 $486,690
======== ========
</TABLE>
At December 31, 1998, the Corporation had available lines of credit with
third-party banks aggregating $50 million to support commercial paper
borrowings for which a fee is generally paid in lieu of compensating balances.
43
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Long-term Debt
Following is a summary of the long-term debt of the Corporation at December
31, 1998 and 1997 which is all unsecured:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Floating rate Medium-term Bank Note due April 20, 1998... $ -- $ 50,000
10.375% Subordinated Capital Notes due August 1, 1999.... 59,995 59,986
Adjustable rate Federal Home Loan Bank Advance due
December 4, 2000........................................ 200,000 --
8.375% Subordinated Notes due May 15, 2002............... 99,853 99,809
7.20% Subordinated Notes due July 1, 2007................ 199,903 199,892
Floating rate Subordinated Capital Income Securities due
January 15, 2027........................................ 147,690 147,401
Floating rate Subordinated Capital Income Securities due
February 1, 2027........................................ 148,640 148,472
Obligations under capitalized leases..................... 239 283
-------- --------
Total.................................................. $856,320 $705,843
======== ========
</TABLE>
The combined maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
------- -------- ---- ------- ---- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
$59,995 $200,000 $ -- $99,853 $239 $496,233 $856,320
</TABLE>
There is no provision in any of the notes or related indentures for a
sinking fund. Several of the notes or related indentures also prohibit the
sale, transfer, or disposal of any capital stock of the Corporation.
The 10.375% Subordinated Capital Notes mature August 1, 1999 with interest
payable semiannually and at maturity and will be exchanged for common stock of
the Corporation having a 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 adjustable rate Federal Home Loan Bank Advance matures December 4, 2000,
and is redeemable prior to maturity. The interest rate is equal to one month
LIBOR minus 5 basis points and interest is payable monthly on each reset date.
The advance is secured by investment securities held by the Corporation.
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.
The Floating Rate Subordinated Capital Income Securities ("Capital
Securities") were issued through two wholly owned subsidiaries, First Maryland
Capital I ("Capital I") and First Maryland Capital II ("Capital II"), Delaware
statutory business trusts ("the Trusts"). The Capital Securities represent
undivided preferred ownership interests in the assets of the Trusts. The
Corporation has fully and unconditionally guaranteed all of
44
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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. Cash distributions in each case
are based on the 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.
11. Preferred Stock
The Corporation's Series A Preferred Shares ( the "Preferred Shares") have a
par value of $5.00 per share, and a liquidation preference of $25.00 per
share. The Preferred Shares rank, with respect to dividends, voting,
preferences, qualifications, limitations, restrictions, and the distribution
of assets upon liquidation, senior to the Corporation's common stock. The
Preferred Shares have no preemptive rights and are not subject to any sinking
fund or other obligation of the Corporation to purchase or redeem the
Preferred Shares. The Preferred Shares are not convertible into shares of any
other class or series of capital stock of the Corporation.
The Preferred Shares are redeemable on or after December 14, 1998 at the
Option of the Corporation, in whole or in part, at a redemption price of
$25.00 per share plus accrued and unpaid dividends (whether or not declared)
from the immediately preceding dividend payment date to the redemption date
(but without accumulation of any dividends for prior dividend periods unless
previously declared). At December 31, 1998 there were no dividends in arrears
on the Preferred Shares.
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, 1998, all 90 thousand shares were
outstanding and had a balance of $8.1 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.
45
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Comprehensive Income
The components of other comprehensive income for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------
Tax Expense
Pretax Or (Benefit) After tax
--------- ------------ ---------
(in thousands)
<S> <C> <C> <C>
Unrealized gains/losses on securities:
Unrealized gains arising during
period................................ $ 45,654 $ 17,282 $ 28,372
Less: reclassification adjustment for
gains realized in net income......... 60,759 22,412 38,347
--------- -------- ---------
Net change in unrealized
gains/losses........................ $ (15,105) $ (5,130) (9,975)
Minimum pension liability adjustment.... (240)
---------
Other comprehensive income.......... $ (10,215)
=========
The components of other comprehensive income for the year ended December 31,
1997 are as follows:
<CAPTION>
December 31, 1997
---------------------------------
Tax Expense
Pretax Or (Benefit) After tax
--------- ------------ ---------
(in thousands)
<S> <C> <C> <C>
Unrealized gains/losses on securities:
Unrealized gains arising during
period................................ $ 40,805 $ 14,495 $ 26,310
Less: reclassification adjustment for
gains realized in net income......... 456 203 253
--------- -------- ---------
Net change in unrealized
gains/losses........................ $ 40,349 $ 14,292 26,057
Minimum pension liability adjustment.... 255
---------
Other comprehensive income.......... $ 26,312
=========
The components of other comprehensive income for the year ended December 31,
1996 are as follows:
<CAPTION>
December 31, 1996
---------------------------------
Tax Expense
Pretax Or (Benefit) After tax
--------- ------------ ---------
(in thousands)
<S> <C> <C> <C>
Unrealized gains/losses on securities:
Unrealized losses arising during
period................................ $ (25,503) $ (9,484) $ (16,019)
Less: reclassification adjustment for
gains realized in net income......... 103 40 63
--------- -------- ---------
Net change in unrealized
gains/losses........................ $ (25,606) $ (9,524) (16,082)
Minimum pension liability adjustment.... (216)
---------
Other comprehensive income.......... $ (16,298)
=========
</TABLE>
13. 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; 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.
46
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Corporation sponsors defined benefit post retirement plans
that provide medical and life insurance coverage to eligible retirees and
dependents based on age and length of service. Medical coverage options are
similar to 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 a variety
of health care programs including Health Maintenance Organizations and
insurance companies whose premiums are based on the benefits paid during the
year. Information related to these plans is presented under "Other Benefits"
in the following table.
The following is a reconciliation of the beginning and ending balances of
the benefit obligation, the fair value of plan assets, an analysis of the
funded status of the plans and the amounts recognized in the consolidated
statements of condition for the years ending December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Qualified Plans Nonqualified Plans
Pension Benefits Pension Benefits Other Benefits
------------------ -------------------- ------------------
1998 1997 1998 1997 1998 1997
-------- -------- --------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit
obligation
Benefit obligation at
beginning of year...... $198,693 $129,247 $ 16,412 $ 9,065 $ 36,071 $ 22,300
Service cost............ 7,268 8,174 895 748 1,482 1,220
Interest cost........... 13,568 11,597 1,392 926 2,584 2,003
Amendments.............. (7,635) (1,084) 1,766 126 428 (3,128)
Business combinations... -- 50,016 -- 4,246 -- 14,569
Actuarial loss.......... 17,984 11,286 2,166 1,938 807 1,028
Benefits paid........... (14,115) (10,543) (431) (637) (2,834) (1,921)
-------- -------- --------- --------- -------- --------
Benefit obligation at
end of year............ $215,763 $198,693 $ 22,200 $ 16,412 $ 38,538 $ 36,071
======== ======== ========= ========= ======== ========
Change in plan assets
Fair value of plan
assets at beginning of
year................... $232,160 $127,061
Actual return on plan
assets................. 51,703 31,875
Employer contribution... -- 7,795
Plan participants'
contributions.......... -- --
Benefits paid........... (14,115) (10,543)
Business combinations... -- 75,972
-------- --------
Fair value of plan
assets at end of year.. $269,748 $232,160
======== ========
Funded (unfunded)
status................. $ 53,985 $ 33,467 $ (22,200) $ (16,412) $(38,538) $(36,071)
Unrecognized net loss
(gain)................. 9,505 20,497 3,674 2,133 (2,194) (3,049)
Unrecognized prior
service benefit
(cost)................. (9,278) (2,673) 3,531 2,213 (2,229) (2,874)
Unrecognized transition
(asset) obligation..... (1,236) (2,647) 239 299 13,892 14,885
-------- -------- --------- --------- -------- --------
Net amount
recognized........... $ 52,976 $ 48,644 $ (14,756) $ (11,767) $(29,069) $(27,109)
======== ======== ========= ========= ======== ========
Amounts recognized in
the statement of
financial position
consist of:
Prepaid benefit cost.... $ 52,976 $ 48,644
Accrued benefit
liability.............. -- -- $ (17,772) $ (14,097) $(29,069) $(27,109)
Intangible asset........ -- -- 306 625 -- --
Accumulated other
comprehensive income... -- -- 2,710 1,705 -- --
-------- -------- --------- --------- -------- --------
Net amount
recognized........... $ 52,976 $ 48,644 $ (14,756) $ (11,767) $(29,069) $(27,109)
======== ======== ========= ========= ======== ========
</TABLE>
47
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic benefit costs were based on the following assumptions:
<TABLE>
<CAPTION>
Qualified Plan Nonqualified Plans
Pension Benefits Pension Benefits Other Benefits
------------------ ---------------------- ----------------
1998 1997 1998 1997 1998 1997
-------- -------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Weighted average
assumptions as of
December 31:
Discount rate........... 6.76% 7.34% 5.58%-6.52% 6.05%-7.07% 7.00% 7.50%
Expected return on plan
assets................. 10.00% 9.25% -- -- -- --
Rate of compensation
increase............... 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
</TABLE>
The 1998 health care trend rate is assumed to be 8.5% for non-HMO healthcare
benefits and 5.0% for HMO medical benefits. These rates are assumed to
decrease gradually to 4.5% percent for 2002 and remain at that level
thereafter.
The components of net periodic benefit costs for the Corporation's defined
benefit pension plans for the years ended December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
Qualified Plan Nonqualified Plan
Pension Benefits Pension Benefits
---------------------------- --------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost............... $ 7,268 $ 8,174 $ 7,077 $ 895 $ 748 $ 574
Interest cost.............. 13,568 11,597 8,755 1,392 926 608
Expected return on plan
assets.................... (22,726) (14,718) (10,202) -- -- --
Amortization of
unrecognized transition
(asset) obligation........ (1,411) (1,411) (1,411) 60 100 100
Amortization of prior
service (benefit) cost.... (1,030) (345) (246) 446 316 286
Recognized net actuarial
(gains) losses............ -- 1,277 2,113 626 158 33
Settlement expense......... -- -- -- -- -- 1,705
-------- -------- -------- ------ ------ ------
Net periodic (benefit)
cost.................... $ (4,331) $ 4,574 $ 6,086 $3,419 $2,248 $3,306
======== ======== ======== ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $22.2 million, $17.6 million, and
$0, respectively, as of December 31, 1998, and $16.4 million, $13.9 million,
and $0, respectively as of December 31, 1997.
48
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Corporation's net periodic postretirement benefit
costs for the years ended December 31, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
Other Benefits
----------------------
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost.............. $1,482 $1,220 $1,092
Interest cost............. 2,584 2,003 1,550
Amortization of
unrecognized transition
obligation............... 992 992 992
Amortization of prior
service benefit.......... (216) (254) --
Recognized net actuarial
gains.................... (49) (193) (95)
------ ------ ------
Net periodic benefit
cost................... $4,793 $3,768 $3,539
====== ====== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
(in thousands)
<S> <C> <C>
Effect on total of service cost and interest
cost components............................ $ 181 $ (175)
Effect on post retirement benefit
obligation................................. 2,253 (2,048)
</TABLE>
The Corporation provides all salaried and eligible hourly employees with a
defined contribution plan. Eligible employees can enter the plan on January 1
or July 1 following their date of employment. Employees can contribute varying
percentages of their annual compensation up to a maximum of 16% (highly
compensated maximum of 10% during 1998). The Corporation matches 100% of the
first 3% and 50% of the next 3% of an employee's contribution. Defined
contribution plan expenses totaled $7.4 million, $4.7 million and $3.7 million
in 1998, 1997 and 1996, respectively.
14. 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 AIB ("Common Stock") (or the equivalent
thereof in Common Stock ADSs). 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 130 thousand shares
of Common stock were made during 1998. During 1997 and 1996, awards were made
under the 1989 Plan aggregating the equivalent of 208 thousand and 53 thousand
shares of Common Stock, respectively. In addition, during 1996 awards
aggregating 3 thousand shares of AIB Non-Cumulative Preference Share ADSs
("Preferred Stock") were made. The AIB preferred stock was called in June
1998. Preferred Stock awards were converted to AIB Common Stock or the
Corporation's Preferred Shares, at the election of the plan participants,
based on a conversion price of $25.00 per share. Expenses relative to this
plan totaled $602 thousand, $913 thousand, and $906 thousand, in 1998, 1997,
and 1996, respectively. The awards are subject to a restriction period of at
least three years.
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. Options
granted on October 9, 1998 and October 22, 1998 vest one half in 24 months and
one half in 36 months
49
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from the grant date and must be exercised within 10 years of the grant date or
they will expire. Options granted on December 29, 1997 vested 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 created a trust
which acquired AIB ADSs in the open market 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, 1998 and 1997 investment securities
available-for-sale included $66.3 million and $35.2 million in AIB ADS's,
respectively, 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 other comprehensive
income 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 Stock Option Plans.
The summary of the status of the Corporation's stock option plan as of
December 31, 1998 and 1997, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------
Weighted- Weighted-
Shares Average Shares Average
(000) Exercise Price (000) Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 634.3 $ 56.00 -- $ --
Granted...................... 457.6 79.72 634.3 56.00
Exercised.................... (98.8) (56.00) -- --
Forfeited.................... -- -- -- --
----- ------- ----- ------
Outstanding at end of year... 993.1 $ 66.93 634.3 $56.00
===== ======= ===== ======
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price At 12/31/98 Contractual Life Exercise Price At 12/31/98 Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$56.00 535,500 6 years $56.00 535,500 $56.00
87.87 25,000 10 years 87.87 -- --
79.25 432,600 10 years 79.25 -- --
------- --------- ------ ------- ------
Total 993,100 7.8 years $66.93 535,500 $56.00
======= ========= ====== ======= ======
</TABLE>
For purposes of providing the pro forma disclosures required under SFAS No.
123, the fair values of stock options granted in 1998 and 1997 of $17.66 and
$10.55 per share, respectively, were estimated at the date of the grants using
a Black-Scholes option pricing model.
50
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following weighted average assumptions were used in the option pricing
model:
<TABLE>
<CAPTION>
Stock Options Stock Options Stock Options
Granted on Granted on Granted on
10/22/98 10/09/98 12/29/97
------------- ------------- -------------
<S> <C> <C> <C>
Expected future dividend yield... 4.03% 4.03% 4.53%
Volatility factor................ 0.26 0.26 0.22
Risk free interest rate.......... 4.70% 4.70% 5.77%
Expected life of options......... 10 years 10 years 7 years
</TABLE>
The pro forma net income of the Corporation that would have been recognized
in the consolidated statements of income if the fair value method of
accounting for stock options had been used is $213.7 million and $151.1
million, respectively for the years ended December 31, 1998 and 1997.
15. Other Operating Expenses
The following table summarizes the more significant elements of other
operating expenses for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Other operating expenses:
External services.............................. $ 30,658 $ 33,363 $ 26,247
Postage and communications..................... 23,841 21,393 17,059
Advertising.................................... 20,234 16,871 15,940
Professional service fees...................... 18,628 9,863 10,149
Lending and collection......................... 17,824 10,231 6,657
Other.......................................... 56,772 37,637 30,616
-------- -------- --------
Total........................................ $167,957 $129,358 $106,668
======== ======== ========
</TABLE>
16. 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 non-DDC 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. There is no balance remaining in the severance accrual
at December 31, 1998. The following table reflects a summary of activity with
respect to the restructuring liability at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Balance at beginning of year.................................. $ 11.2 $ --
Provisions charged against income............................. -- 14.6
Cash outlays.................................................. 6.3 3.4
------ ------
Balance at end of year........................................ $ 4.9 $ 11.2
====== ======
</TABLE>
51
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Income Taxes
The Corporation follows an asset and liability approach of accounting for
income taxes. Its objective is to recognize the amount of taxes payable or
refundable in the current year and to defer tax assets and liabilities for
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. The measurement of tax assets and liabilities is based
on enacted tax laws. Deferred tax assets are reduced, if necessary, by the
amount of such benefits that are not expected to be realized based on
available evidence.
The components of income tax expense (benefit) for the three years ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1998 1997 1996
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 47,579 $22,898 $22,678
Foreign(1)....................................... 160 133 330
State............................................ 9,108 (3,315) 3,209
-------- ------- -------
Total current.................................. 56,847 19,716 26,217
-------- ------- -------
Deferred:
Federal.......................................... 64,183 54,138 44,220
State............................................ 3,637 10,447 4,413
-------- ------- -------
Total deferred................................. 67,820 64,585 48,633
-------- ------- -------
Total income tax expense........................... $124,667 $84,301 $74,850
======== ======= =======
</TABLE>
- --------
(1) Foreign income taxes represent taxes on interest received from foreign
borrowers and foreign dividends received.
The reconciliation of the statutory Federal income tax rate to the effective
tax rate for the three years ended December 31, 1998 follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<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.......................... (2.69) (2.45) (1.60)
State income taxes, net of Federal
benefits.................................. 2.42 1.97 2.49
Amortization of intangibles................ 3.84 3.14 0.66
Other, net................................. (2.24) (1.86) (0.43)
-------- -------- --------
Effective tax rate........................... 36.33% 35.80% 36.12%
======== ======== ========
</TABLE>
52
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt............................................... $ 65,176 $ 64,864
Deferred compensation.................................. 14,160 10,653
Income on loans........................................ 5,723 1,812
Other.................................................. 6,809 17,417
-------- --------
Total gross deferred tax assets...................... 91,868 94,746
-------- --------
Deferred tax liabilities:
Leases................................................. 296,194 250,078
Unrealized gains on investment securities available-
for-sale.............................................. 14,853 19,983
Debt and securities sales.............................. -- 815
Pensions............................................... 3,704 500
Depreciation........................................... 5,860 1,095
-------- --------
Total gross deferred tax liabilities................. 320,611 272,471
-------- --------
Net deferred tax liability........................... $228,743 $177,725
======== ========
</TABLE>
18. 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.
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, 1998,
the Corporation and its subsidiary banks met all capital requirements to which
they are subject.
As of December 31, 1998, 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.
53
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Corporation and its subsidiary banks' actual capital amounts and ratios
at December 31, 1998 and 1997 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
---------- ----- ------------ --------------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk
Weighted Assets):
The Corporation......... $1,874,361 12.65% $ 1,185,341 8.00% $ 1,481,677 10.00%
FMB Bank................ 1,570,823 10.98 1,144,085 8.00 1,430,107 10.00
First Omni Bank, N.A.... 7,863 32.75 1,921 8.00 2,401 10.00
Tier 1 Capital (to Risk
Weighted Assets):
The Corporation......... 1,389,659 9.38% $ 592,671 4.00% $ 889,006 6.00%
FMB Bank................ 1,237,112 8.65 572,043 4.00 858,064 6.00
First Omni Bank, N.A.... 7,703 32.08 960 4.00 1,441 6.00
Tier 1 Capital (to
Average Assets):
The Corporation......... 1,389,659 8.41% $ 696,832 4.00% $ 871,040 5.00%
FMB Bank................ 1,237,112 7.22 689,431 4.00 861,778 5.00
First Omni Bank, N.A.... 7,703 15.54 1,983 4.00 2,479 5.00
As of December 31, 1997
Total Capital (to Risk
Weighted Assets):
The Corporation......... $1,688,644 11.90% $ 1,135,499 8.00% $ 1,419,374 10.00%
FMB Bank................ 1,401,806 10.19 1,100,582 8.00 1,375,728 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%
FMB Bank................ 1,056,359 7.68 550,291 4.00 825,437 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%
FMB Bank................ 1,056,359 6.55 645,334 4.00 806,667 5.00
First Omni Bank, N.A.... 81,107 22.15 14,649 4.00 18,311 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 $165 million, plus an
amount equal to their net profits for 1999, 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.
54
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1998 and 1997 were $58.1 million and $58.2 million,
respectively.
19. Fair Value of Financial Instruments
The following is information about the 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.
Trading account assets--Fair values are based on quoted market prices as
recognized in the statements of condition.
Investment securities--Fair values are based on quoted market prices. If a
quoted market price is not available, fair value is estimated using market
values for similar securities.
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.
Deposits--The fair values disclosed for demand deposits (e.g., interest and
noninterest bearing demand, savings and money market savings) are equal to the
amounts payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for certificates of deposit are estimated by discounting
the future cash flows using the current rates at which similar deposits could
be acquired.
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.
55
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Many of the Corporation's assets and liabilities are short-term financial
instruments whose carrying amounts reported in the statements of condition
approximate fair value. These items include cash and due from banks, interest-
bearing deposits in other banks, federal funds sold and securities purchased
under resale agreements, due from customers on acceptances, short-term
borrowed funds, acceptances outstanding, and the financial instruments
included in other assets and liabilities. The estimated fair values of the
Corporation's remaining assets and liabilities as of December 31 are
summarized below.
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Trading account assets... $ 42,528 $ 42,528 $ 39,539 $ 39,539
Investment securities.... 4,815,087 4,815,087 4,444,107 4,444,107
Loans, held for sale..... 84,254 84,310 482,152 484,099
Loans, net of allowance
for credit losses(1).... 9,560,857 9,727,252 9,151,966 9,176,254
Financial Liabilities:
Deposits................. 12,257,051 12,301,824 12,464,156 12,475,513
Long-term debt........... 856,320 914,926 705,843 728,997
</TABLE>
- --------
(1) Leases receivable with carrying values totaling $846.2 million and $763.4
million at December 31, 1998 and 1997, respectively are excluded. The
carrying values are net of the allowance for credit losses and related
unearned income.
Off-Balance Sheet Instruments--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. 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. The fair value of interest rate contracts 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. See notes
20 and 21 for additional information about off-balance sheet financial
instruments.
The estimated fair values of the Corporation's off-balance sheet financial
instruments as of December 31 are summarized below.
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Fair Value Fair Value
---------- ----------
(in thousands)
<S> <C> <C>
Interest rate contracts issued for trading purposes.. $ 6,893 $ 3,018
Interest rate contracts held for purposes other than
trading............................................. 23,356 9,687
Foreign exchange options and forward contracts....... 13,168 30,094
</TABLE>
56
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Off-Balance-Sheet Trading and Lending Activities
Off-Balance-Sheet Financial Instruments--Trading Activities
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 presents the notional amounts, the end-of-period fair
values and the average fair values of the classes of trading instruments at
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
Fair Fair Average Fair Fair Average
Notional Value Value Fair Notional Value Value Fair
Value Gains (Losses) Value Value Gains (Losses) Value
---------- ------- -------- -------- ---------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Dollar interest
rate contracts as
intermediary:
Interest rate swaps.... $2,351,818 $29,926 $(23,235) $ 5,829 $1,568,500 $ 8,284 $(5,311) $ 582
Interest rate caps and
floors written........ 683,709 -- (5,072) (3,186) 658,475 -- (1,765) (1,803)
Interest rate caps and
floors purchased...... 689,637 5,081 -- 3,257 673,566 1,803 -- 1,803
Swaptions written...... 10,000 -- (115) (388) 30,000 -- (371) (265)
Swaptions purchased.... 10,000 120 -- 396 30,000 378 -- 270
Securities trading
activities:
Commitments to purchase
securities, futures
and forward
contracts............. 50,772 -- -- -- 198,908 -- -- --
Commitments to sell
securities, futures
and forward
contracts............. 167,065 188 -- -- 562,212 -- -- --
Foreign exchange trading
activities:
Commitments to purchase
and sell foreign
exchange.............. 600,989 2,262 (1,976) (168) 968,137 4,291 (4,075) 354
Foreign exchange
options written....... 810,108 -- (39,482) (45,040) 522,492 -- (8,608) (30,495)
Foreign exchange
options purchased..... 850,546 53,017 -- 55,546 558,430 38,486 -- 39,157
</TABLE>
The Corporation's credit risk exposure is represented by the instruments
detailed above with a positive fair value. The Corporation would incur a loss
if it was necessary to replace these instruments due to counterparty default.
The Corporation minimizes the credit risk of these instruments through
adherence to credit approvals, risk control limits, and monitoring procedures.
Market risk is the risk of decline in the value of the contract arising from
adverse movements in price, index or rate of the instrument underlying the
contract. Exposure to market risk is managed in accordance with the
Corporation's approved risk limits and by entering into offsetting positions.
In addition, trading systems are in place which measure risks and
profitability associated with trading positions as market movements occur.
Interest Rate Swaps--These transactions generally involve the exchange of
fixed and floating payments without the exchange of the underlying principal
amounts. Payments made or received under swap contracts are accrued based on
contractual terms and are reported as trading income. The related accrued
amounts receivable and payable to customers or counterparties are included in
other assets or liabilities. Revenues from the customer portfolio represent a
small profit margin on intermediated transactions. The difference in the fair
value of the offsetting amounts is not material.
Interest Rate Caps and Floors--These instruments are written by the
Corporation to enable customers to transfer, modify, or reduce their interest
rate risk exposure. In a cap or floor contract, the purchaser pays a
57
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
premium at the initiation of the contract for the right to receive payments if
market interest rates are greater than the strike price of a cap or less than
the strike price of a floor. Payments made or received under cap or floor
contracts are accrued based on contractual terms and are reported as trading
income.
Commitments to Purchase and Sell Securities, Futures and Forward Contracts--
These instruments are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to deliver a specified
instrument at a specified price or yield at a specified date. Commitments to
purchase and sell securities, futures and forward contracts used in securities
trading operations are recognized currently at market value and are reported
as trading account profits (losses).
Commitments to Purchase and Sell Foreign Exchange--Forward commitments
involve the purchase or sale of foreign currency amounts for delivery at a
specified future date. Payments on forward commitments are exchanged on the
delivery date based on the exchange rate in the contract. Forward commitments
to purchase and sell foreign exchange are recognized at market value and are
reported as trading income.
Foreign Exchange Options--These agreements represent rights to purchase or
sell foreign currency at a predetermined price at a future date. The purchaser
pays a premium at the initiation of the contract for the right to exchange a
specified amount at the contracts exchange rate at the maturity of the option.
Revenues from trading activities are shown below.
<TABLE>
<CAPTION>
Years ended December
31,
-----------------------
1998 1997 1996
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Interest rate contracts............................. $ 4,066 $(1,224) $ 309
Foreign exchange contracts.......................... 4,615 3,483 2,913
Securities.......................................... 5,608 5,058 1,719
------- ------- ------
Total............................................. $14,289 $ 7,317 $4,941
======= ======= ======
</TABLE>
Off-Balance Sheet Financial Instruments Issued for Lending Activities
The Corporation issues off-balance sheet financial instruments as part of
its commercial and consumer lending activities. The contract amounts of these
instruments represent potential credit risk at December 31, as shown below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commercial and consumer lending activities:
Unfunded commitments to extend credit............... $6,362,105 $8,290,032
Standby letters of credit........................... 1,165,328 1,165,516
Commercial and similar letters of credit............ 44,064 37,699
Loans sold with recourse............................ 185,091 198,635
Securities lent..................................... 62,730 8,946
</TABLE>
Commitments to extend credit--The Corporation enters into contractual
commitments to extend credit, normally with fixed expiration dates or
termination clauses, at both fixed and variable specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will
be available for working capital purposes, for capital expenditures and to
ensure access to funds at specified terms and conditions. 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 ratios
are the same as those for funded transactions and are established
58
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Standby, Commercial and Similar Letters 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. 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.
Loans sold with recourse--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 Federal National Mortgage Association ("FNMA") 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, 1998 and 1997, the Corporation's credit
risk on loans sold with recourse under the FNMA DUS program totaled $151.3
million and $104.8 million, respectively.
Securities Lent--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.
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
economies of those regions. The loan portfolio is diversified with no single
industry or customer comprising a significant portion of the total portfolio.
Off-Balance Sheet Risk Management Activities
The Corporation uses a variety of off-balance sheet financial instruments as
part of its overall interest rate risk management process. The Corporation's
principal objective of asset/liability management activities is to provide
maximum levels of net interest income while maintaining acceptable levels of
interest rate and liquidity risk and facilitating the Corporation's funding
needs. Accordingly, the Corporation uses a combination of derivative financial
instruments such as interest rate swaps, interest rate caps and floors, and
options with indices that correlate to on-balance sheet instruments to modify
the repricing characteristics of interest earning assets and interest bearing
liabilities.
59
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts disclosed below represent the period end notional values and
fair values of derivative financial instruments held for risk management
purposes. 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.
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
Notional Fair Value Fair Value Notional Fair Value Fair Value
Value Gains (Losses) Value Gains (Losses)
-------- ---------- ---------- -------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Convert fixed rate
liabilities to
floating:
Swaps-receive
fixed/pay floating... $420,000 $21,946 $ -- $465,000 $10,854 $ (3)
Convert floating rate
liabilities to fixed:
Swaps-pay
fixed/receive
floating............. 25,000 49 -- -- -- --
Convert floating assets
to fixed:
Swaps-receive
fixed/pay floating... 325,000 2,781 -- 375,000 691 (1,609)
Convert fixed rate
assets to floating:
Swaps-pay
fixed/receive
floating............. 45,775 -- (1,251) 46,124 122 (893)
Cap floating rate
liabilities at strike
level:
Interest rate caps
purchased............ 35,200 -- -- 106,000 -- --
Convert floating rate
liabilities to a
different index:
Basis swaps........... 30,000 -- (170) 80,000 35 (78)
Call options purchased.. -- -- -- 1,885 568 --
</TABLE>
Deferred losses on the early termination of interest rate swaps designated
to the Corporation's prime based commercial loans were $858 thousand at
December 31, 1997. These losses were amortized into income in 1998. At
December 31, 1997 there was a $57 thousand deferred gain on the early
termination of an interest rate swap designated to the Corporation's Federal
funds purchased. This gain was amortized into income in 1998. At December 31,
1997 there was a $5.2 million deferred gain on the early termination of an
interest rate swap designated to the Corporation's credit card securitization.
This gain was amortized over the life of the securitization as a component of
servicing income until the credit card securitization was sold in 1998 when it
was recognized at a component of the gain on the sale of credit card loans.
22. Line of Business Reporting
The Corporation has determined that its major lines of business are those
that are based on the Corporation's method of internal reporting, which
separates its business on the basis of products and services. The
Corporation's reportable business lines are Retail Banking, Corporate Banking,
Corporate Real Estate, Trust and Investment Advisory Services, and Treasury.
Retail Banking provides loans, deposits, mutual fund and annuity products, and
credit life insurance to consumers and commercial small business customers.
Corporate Banking provides commercial loans, letters of credit, derivative
financial instruments, foreign exchange and cash management products and
services to domestic and international corporate customers. Corporate Real
Estate provides construction and property loans and letters of credit to
domestic corporate customers. It is also involved in mortgage banking
activities related to multi-family housing loan programs and residential
mortgage lending. Trust and Investment Advisory Services provides investment
advisory, investment and fiduciary services to individual, institutional and
corporate clients. Treasury is responsible for managing and controlling the
liquidity, funding and market risk needs of the Corporation. Other business
lines include smaller business units. The revenues and expenses in other
business lines is primarily related to merchant services. Lines of business
that the Corporation has exited are classified under discontinued business
lines. Discontinued business lines includes any gain or loss realized on the
sale of the assets of the business line. As the table indicates, gains on the
sale of
60
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
credit card loans in 1997 and 1998 have been classified under discontinued
business lines. Other includes inter-segment income elimination and
unallocated income and expenses, including goodwill and other intangible asset
amortization of $53.3 million in 1998 and $30.0 million in 1997. Other also
receives a credit for funds provided and charges for funds used.
The Corporation's internal accounting process is based on practices which
support the management structure of the Corporation, and the resulting data is
not necessarily comparable with similar information from other financial
institutions. Net income reflects costs directly associated with each business
line plus an appropriate share of corporate overhead expenses. A match funded
transfer pricing system is used to allocate interest income and expense, with
a business line receiving credit for funds provided and charges for funds
used. Loan loss provisions and the allowance for credit losses are allocated
based on a risk weighting of each business line's loan portfolio and the
changes therein. Capital is assigned to each business line based on regulatory
risk-based capital guidelines. Interest rate risk is aggregated from all lines
and classified under "Treasury". In addition, Treasury includes investment
portfolio revenue, wholesale funding expenses and other revenue and expenses
associated with the Treasury unit.
61
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents operating information about each of the
Corporation's business lines for the year ended December 31, 1998. Net
interest income is presented on a fully tax equivalent ("FTE") basis,
therefore, 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 was taxable at the statutory Federal Income tax rate of 35%. The
offset to this adjustment is made to income tax expense.
<TABLE>
<CAPTION>
Trust and Total
Corporate Investment Other Continuing Discontinued
Retail Corporate Real Advisory Business Business Business Consolidated
Banking Banking Estate Services Treasury Lines Lines Lines Other Total
-------- --------- --------- ---------- -------- -------- ---------- ------------ --------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income (FTE).... $326,429 $178,606 $37,593 $ 3,722 $30,516 $(1,125) $575,741 $ 9,118 $ (28,108) $ 556,751
Noninterest
income.......... 72,430 68,965 16,075 77,026 3,959 38,002 276,457 49,178 3,711 329,346
Securities gains,
net............. -- (6) -- -- 60,765 -- 60,759 -- -- 60,759
Gain on sale of
credit card
loans........... -- -- -- -- -- -- -- 60,000 -- 60,000
-------- -------- ------- ------- ------- ------- -------- -------- --------- ----------
Total revenues.. 398,859 247,565 53,668 80,748 95,240 36,877 912,957 118,296 (24,397) 1,006,856
Total noninterest
expenses,
excluding
intangible asset
amortization.... 247,458 117,391 24,444 50,145 11,111 27,007 477,556 47,041 35,246 559,843
Goodwill and
other intangible
asset
amortization.... 905 -- -- 1,094 -- -- 1,999 306 53,298 55,603
Provision for
credit losses... 9,782 16,608 2,477 70 -- 2,906 31,843 1,143 1,311 34,297
-------- -------- ------- ------- ------- ------- -------- -------- --------- ----------
Income before
income taxes.... 140,714 113,566 26,747 29,439 84,130 6,964 401,559 69,806 (114,252) 357,113
Income tax
expense (FTE)... 55,652 44,915 6,434 11,643 30,178 2,754 151,576 26,269 (38,855) 138,990
-------- -------- ------- ------- ------- ------- -------- -------- --------- ----------
Net income...... $ 85,062 $ 68,651 $20,313 $17,796 $53,951 $ 4,210 $249,983 $ 43,536 $ (75,396) $ 218,123
======== ======== ======= ======= ======= ======= ======== ======== ========= ==========
<CAPTION>
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average assets... $ 8,717 $ 5,145 $ 1,723 $ 151 $ 4,265 $ 98 $ 20,099 $ 425 $ (3,451) $ 17,073
Average loans.... 3,867 4,583 1,641 13 -- 32 10,136 176 (98) 10,214
Average
deposits........ 8,306 1,531 69 148 1,828 -- 11,882 -- 79 11,961
Allocated
equity.......... 400 664 152 2 126 9 1,353 39 565 1,957
</TABLE>
62
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents operating information about each of the
Corporation's business lines for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Trust and Total
Corporate Investment Other Continuing Discontinued
Retail Corporate Real Advisory Business Business Business Consolidated
Banking Banking Estate Services Treasury Lines Lines Lines Other Total
-------- --------- --------- ---------- -------- -------- ---------- ------------ -------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income (FTE).... $270,294 $152,307 $35,547 $ 2,802 $20,923 $(1,682) $480,191 $ 35,909 $ (9,913) $506,187
Noninterest
income.......... 77,341 59,171 8,361 52,894 2,291 19,261 219,319 77,580 608 297,507
Securities gain,
net............. -- 448 -- -- 8 -- 456 -- -- 456
Gain on sale of
credit card
loans........... -- -- -- -- -- -- -- 28,155 -- 28,155
-------- -------- ------- ------- ------- ------- -------- -------- -------- --------
Total revenues.. 347,635 211,926 43,908 55,696 23,222 17,579 699,966 141,644 (9,305) 832,305
Total noninterest
expenses........ 225,304 100,830 17,926 45,226 9,001 9,542 407,829 102,834 8,925 519,588
Goodwill and
other intangible
assets.......... 920 -- -- 1,130 -- -- 2,050 2,708 30,010 34,768
Provision for
credit losses... 5,132 4,028 1,223 65 -- 1,760 12,208 23,943 (4,134) 32,017
-------- -------- ------- ------- ------- ------- -------- -------- -------- --------
Income before
income taxes.... 116,279 107,068 24,759 9,275 14,221 6,277 277,879 12,159 (44,106) 245,932
Income tax
expense (FTE)... 45,950 41,911 7,560 3,389 1,929 2,457 103,196 4,762 (13,214) 94,744
-------- -------- ------- ------- ------- ------- -------- -------- -------- --------
Net income...... $ 70,329 $ 65,157 $17,199 $ 5,886 $12,292 $ 3,820 $174,683 $ 7,397 $(30,892) $151,188
======== ======== ======= ======= ======= ======= ======== ======== ======== ========
<CAPTION>
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average assets... $ 7,071 $ 3,984 $ 1,641 $ 140 $ 3,791 $ 90 $ 16,717 $ 950 $ (3,535) $ 14,132
Average loans.... 2,722 3,478 1,599 15 -- 26 7,840 649 (130) 8,359
Average
deposits........ 6,769 1,325 64 137 1,078 -- 9,373 15 182 9,570
Allocated
equity.......... 289 496 137 2 58 9 991 87 505 1,583
</TABLE>
Significant changes in the reportable business lines of the Corporation
between 1996 and 1997 make it impracticable to disclose comparative data for
the year ended December 31, 1996.
63
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. Litigation
Various legal actions and proceedings are pending involving First Maryland
Bancorp 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 the Corporation's financial condition or results of operations.
Included among the outstanding litigation is a class action lawsuit instituted
by Dauphin Deposit Bank and Trust Company ("Dauphin Deposit ") in the Court of
Common Pleas of Cumberland County, Pennsylvania on February 25, 1994, seeking
a declaratory judgment from the Court specifically permitting Dauphin Deposit
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 ("IRAs"). The aggregate balance of the IRAs was
approximately $227 million at December 31, 1998. Dauphin Deposit's right to
terminate the variable interest rate deposit product is in dispute and is
being challenged by the holders of the IRAs in question. Several days after
the commencement of trial in April 1996, Dauphin Deposit 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
Deposit and representatives of the class filed a settlement agreement with the
Court on May 13, 1996 which would permit Dauphin Deposit 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 of deposit
established by Dauphin Deposit 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 Deposit 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 Deposit and the representatives
of the class for settlement of the class action in accordance with the terms
and conditions of the settlement agreement. Dauphin Deposit 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") which was granted on March 31, 1998. The Supreme Court heard oral
argument on November 16, 1998. Neither management nor counsel can predict the
Supreme Court's decision or the timeframe within which the Supreme Court will
reach its decision with any reasonable degree of certainty. Dauphin Deposit,
which is now FMB Bank, has continued to date to pay a 10% interest rate with
regard to the 18 month variable interest rate deposit product.
64
<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,
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries:
Bank subsidiaries........................ $147,000 $ 76,000 $210,000
Nonbank subsidiaries..................... 8,175 87,447 17,162
Interest income from subsidiaries:
Bank subsidiaries........................ 31,843 27,940 5,982
Nonbank subsidiaries..................... 8,312 9,377 9,756
Other interest and dividend income......... 5,539 12,908 24,057
Other income............................... 4,494 16,748 7,905
-------- -------- --------
Total income........................... 205,363 230,420 274,862
-------- -------- --------
Expenses:
Interest expense, short-term debt.......... 15,780 16,900 17,478
Interest expense, long-term debt........... 48,502 42,113 16,993
Other expenses............................. (14,633) 31,317 3,910
-------- -------- --------
Total expenses......................... 49,649 90,330 38,381
-------- -------- --------
Income before taxes and equity in
undistributed net income of subsidiaries.... 155,714 140,090 236,481
Income tax (benefit) expense................. (758) (10,976) 1,603
-------- -------- --------
Income before equity in undistributed net
income of subsidiaries...................... 156,472 151,066 234,878
Equity in undistributed net income of
subsidiaries(1)............................. 61,651 122 (102,541)
-------- -------- --------
Net income................................... $218,123 $151,188 $132,337
======== ======== ========
</TABLE>
- --------
(1) Amount in brackets represents the excess of dividends paid over net income
of subsidiaries.
65
<PAGE>
FIRST MARYLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CONDITION
First Maryland Bancorp
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Assets
Cash..................................................... $ 1,459 $ 9,494
Interest bearing deposits in other banks................. 161,086 105,296
Securities purchased under agreements to resell.......... 20,000 20,000
Investment securities available-for-sale................. 192,021 78,963
Investment in subsidiaries:
Bank subsidiaries...................................... 1,358,818 2,112,775
Nonbank subsidiaries................................... 79,752 88,234
Loans and advances to subsidiaries:
Bank subsidiaries...................................... 219,000 229,000
Nonbank subsidiaries................................... 152,607 241,075
Loans, net of unearned income............................ 8,775 15,950
Premises and equipment................................... 7,339 7,541
Intangible assets........................................ 791,126 --
Other assets............................................. 62,742 60,598
---------- ----------
Total assets......................................... $3,054,725 $2,968,926
========== ==========
Liabilities and Stockholders' Equity
Short-term debt.......................................... $ 319,964 $ 335,116
Long-term debt........................................... 665,247 664,712
Other liabilities........................................ 50,076 88,343
---------- ----------
Total liabilities.................................... 1,035,287 1,088,171
4.50% Cumulative redeemable preferred stock, Series A, $5
par value per share, $100 liquidation preference per
share; authorized and issued 90,000 shares.............. 8,111 7,898
Stockholders' equity..................................... 2,011,327 1,872,857
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity................................ $3,054,725 $2,968,926
========== ==========
</TABLE>
66
<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,
-------------------------------
1998 1997 1996
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Income before undistributed net income of
subsidiaries................................ $156,472 $151,066 $ 234,878
Adjustments to reconcile net income to net
cash provided by operating activities....... (39,448) 26,710 (2,462)
-------- -------- -----------
Net cash provided by operating
activities.............................. 117,024 177,776 232,416
-------- -------- -----------
Investing Activities
Proceeds from sales of investment
securities.................................. 28,439 18,733 12,030
Proceeds from paydowns and maturities of
investment securities(1).................... 23,045 141,327 15,048,558
Purchases of investment securities(1)........ (164,923) (53,284) (15,041,705)
Net increase in short-term investments....... -- -- (20,000)
Principal collected on loans of parent
company..................................... 9,405 4,415 3,474
Loans originated by the parent company....... (2,230) (3,285) (8,758)
Investment in subsidiaries................... 23,093 (37,539) (42,355)
Net decrease (increase) in loans to
subsidiaries, short-term.................... 78,468 (28,629) (22,254)
Long-term loans to subsidiaries.............. -- (45,000) (113,000)
Principal collected on long-term loans to
subsidiaries................................ 20,000 -- --
Acquisitions................................. -- (874,261) (88,289)
Other, net................................... (189) 1,894 (2,800)
-------- -------- -----------
Net cash provided by (used for) investing
activities.............................. 15,108 (875,629) (275,099)
-------- -------- -----------
Financing Activities
Net (decrease) increase in short-term
borrowings.................................. (15,411) 14,498 (81,871)
Net increase in long-term borrowings from
subsidiaries................................ -- 152,905 151,663
Net increase (decrease) in short-term
borrowings from subsidiaries................ 259 (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.......................... (69,225) (56,225) (52,023)
-------- -------- -----------
Net cash (used by) provided by financing
activities.............................. (84,377) 288,060 7,838
-------- -------- -----------
Increase (decrease) in cash and cash
equivalents(2).............................. 47,755 (409,793) (34,845)
Cash and cash equivalents at January 1,...... 114,790 524,583 559,428
-------- -------- -----------
Cash and cash equivalents at December 31,.... $162,545 $114,790 $ 524,583
======== ======== ===========
</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.
67
<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, 1998. 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, 1998.
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, 1998.
68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
First Maryland Bancorp:
In our opinion, the accompanying consolidated statements of condition and
the related consolidated statements of income, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
First Maryland Bancorp at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 27, 1999
69
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
Item 10. Executive Officers of the Registrant
The following table presents information concerning the executive officers
of the Corporation. Unless otherwise noted, each was elected at the 1998
annual meeting of stockholders to serve until the 1999 annual meeting of
stockholders, and each executive officer has been employed by the Corporation
or one of its subsidiaries for the past five years.
<TABLE>
<CAPTION>
Year
Name Positions Held Age Elected
---- -------------- --- -------
<S> <C> <C> <C>
Jeremiah E. Casey....... Chairman of the Board of the Corporation and 59 1985
each of its subsidiaries
Frank P. Bramble(1)..... Chief Executive Officer of the Corporation and 50 1994
FMB Bank
Harry E. Berry.......... Executive Vice President and Chief Credit 53 1994
Officer of the Corporation and FMB Bank
Robert L. Carpenter, Senior Vice President and Controller of the 45 1995
Jr..................... Corporation and FMB Bank
Bernard M. Cregg(1)..... Executive Vice President of the Corporation and 43 1998
FMB Bank
David M. Cronin......... Executive Vice President and Treasurer of the 49 1989
Corporation; Executive Vice President of FMB
Bank
Nicholas A. DeFelice.... Executive Vice President of the Corporation and 55 1998
FMB Bank
John A. Emens........... Executive Vice President of the Corporation and 54 1997
FMB Bank
Jerome W. Evans(1)...... Vice Chairman and Chief Financial Officer of the 52 1994
Corporation and FMB Bank
Thomas D. Executive Vice President of the Corporation and 42 1998
Fitzsimmons(1)......... FMB Bank
Susan M. Keating(1)..... President and Chief Operating Officer of the 48 1996
Corporation and FMB Bank
Brian L. King........... Executive Vice President and Chief 53 1996
Administrative Officer of the Corporation and
FMB Bank
Paul B. Shannon(1)...... Executive Vice President of the Corporation and 51 1997
FMB Bank
Denise G. Stokes(1)..... Executive Vice President of the Corporation and 45 1998
FMB Bank
</TABLE>
- --------
(1) Prior to joining the Corporation in April 1994, Mr. Bramble was Chairman
of NationsBank of Maryland, N.A. and President and CEO of MNC Financial,
Inc. Prior to joining the Corporation in January, 1997, Mr. Cregg was Head
of Group Human Resources and Strategic Technology of Allied Irish Banks,
p.l.c, director of AIB ltd. and a member of the Bank Council of
Wielkopolski Bank Kredytowy SA. Prior to joining the Corporation in August
1994, Mr. Evans was an Executive Vice President of NationsBank of
70
<PAGE>
Maryland, N.A. and of MNC Financial, Inc. Prior to joining the Corporaton
in August, 1994, Mr. Fitzsimmons was Senior Vice President of NationsBank
of Maryland, N.A. Prior to joining the Corporation in January 1996, Ms.
Keating was President and Senior Bank Executive of NationsBank of Maryland,
N.A. 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. Prior to
joining the Corporation in May, 1996, Ms. Stokes was Regional Sales Manager
for NationsBank's Mid-Atlantic Division.
The information required by Items 10-13 of this report relating to
directors, executive compensation, ownership of the Corporation's securities,
and certain relationships and transactions is incorporated herein by reference
to the sections headed "Election of Directors" and "Compensation of Executive
Officers" contained in the Corporation's definitive Information Statement,
filed March 24, 1999 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>
71
<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, 1998.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
First Maryland Bancorp
/s/ Frank P. Bramble
By __________________________________
(Frank P. Bramble, 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:
<TABLE>
<S> <C> <C>
/s/ Frank P. Bramble Chief Executive Officer March 24, 1999
______________________________________
(Frank P. Bramble)
PRINCIPAL FINANCIAL OFFICER:
/s/ Jerome W. Evans Vice Chairman and Chief March 24, 1999
______________________________________ Financial Officer
(Jerome W. Evans)
PRINCIPAL ACCOUNTING OFFICER:
/s/ Robert L. Carpenter, Jr. Senior Vice President and March 24, 1999
______________________________________ Controller
(Robert L. Carpenter, Jr.)
</TABLE>
MAJORITY OF THE BOARD OF DIRECTORS:
Sherry F. Bellamy, James T. Brady, Frank P. Bramble, Benjamin L. Brown,
Michael D. Buckley, Jeremiah E. Casey, J. Owen Cole, Edward A. Crooke, John F.
Dealy, Mathias J. DeVito, Jerome W. Evans, Jerome W. Geckle, Frank A. Gunther,
Jr., Curran W. Harvey, Jr., Margaret M. Heckler, Lee H. Javitch, Henry J.
Knott, Jr., Andrew Maier, II, Thomas P. Mulcahy, William M. Passano, Jr. and
R. Champlin Sheridan
/s/ Jerome W. Evans Attorney-in-Fact March 24, 1999
By ______________________________
(Jerome E. Evans)
73
<PAGE>
Exhibit 21
FIRST MARYLAND BANCORP
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- -------------
<S> <C>
Beechwood Investments Ltd. British West Indies
Beechwood Investments-Chile Ltda Chile
Forestal San Jose, S.A. (Indirect Ownership) Chile
Compania Caceres Y Virtudes, Grand Cayman British West Indies
Portuaria Coronel, S.A. (Indirect Ownership) Chile
Compania La Proa, Ltd. British West Indies
Bemberg Industrial, S.A. (B.I.S.A.) Argentina
(Indirect Ownership)
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 Foundation, Inc. Maryland
First Maryland Holdings Corporation Maryland
First Manufactured Housing Credit Corporation New York
First Carolina Financial Corporation South Carolina
First Maryland Leasecorp Maryland
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- -------------
<S> <C>
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
EMS Financial, Inc. Pennsylvania
FMB Trust Company, National Association United States
First Maryland Bancorp Fund, L.P (indirect ownership) Delaware
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. (inactive) Maryland
Chesapeake Holdings Riverside, Limited Maryland
Chesapeake Holdings Somerset, L.L.C. (inactive) Maryland
Chesapeake Holdings Sun Marine, Limited (inactive) Maryland
Republic Loan Holding, L.L.C. Maryland
Chesapeake Holdings Winchester, Limited Maryland
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- -------------
<S> <C>
York Wyndham Land, Inc. Pennsylvania
Financial Land Company Pennsylvania
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
Williams, Daniels & Associates, Inc.
f/k/a First Maryland Agency Incorporated Maryland
Zirkin-Cutler Investments, Inc. Maryland
</TABLE>
<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 27, 1999, on our audits of the consolidated financial statements
of First Maryland Bancorp and Subsidiaries as of December 31, 1998 and 1997, and
for the years ended December 31, 1998, 1997 and 1996, which report is included
in First Maryland Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1998.
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 24, 1999
<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, 1998 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.
<TABLE>
<S> <C>
Sherry F. Bellamy Frank A. Gunther, Jr.
- -------------------------- ----------------------------
Sherry F. Bellamy Frank A. Gunther, Jr.
James T. Brady Curran W. Harvey, Jr.
- -------------------------- ----------------------------
James T. Brady Curran W. Harvey, Jr.
Frank P. Bramble Margaret M. Heckler
- -------------------------- ----------------------------
Frank P. Bramble Margaret M. Heckler
Benjamin L. Brown Lee H. Javitch
- -------------------------- ----------------------------
Benjamin L. Brown Lee H. Javitch
Michael D. Buckley Susan C. Keating
- -------------------------- ----------------------------
Michael D. Buckley Susan C. Keating
Jeremiah E. Casey Gary Kennedy
- -------------------------- ----------------------------
Jeremiah E. Casey Gary Kennedy
J. Owen Cole William T. Kirchoff
- -------------------------- ----------------------------
J. Owen Cole William T. Kirchoff
Edward A. Crooke Henry J. Knott, Jr.
- -------------------------- ----------------------------
Edward A. Crooke Henry J. Knott, Jr.
John F. Dealy Andrew Maier, II
- -------------------------- ----------------------------
John F. Dealy Andrew Maier, II
Mathias J. DeVito Thomas P. Mulcahy
- -------------------------- ----------------------------
Mathias J. DeVito Thomas P. Mulcahy
Jerome W. Evans William M. Passano, Jr.
- -------------------------- ----------------------------
Jerome W. Evans William M. Passano, Jr.
Jerome W. Geckle R. Champlin Sheridan
- -------------------------- ----------------------------
Jerome W. Geckle R. Champlin Sheridan
</TABLE>
Dated: January 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
MARYLAND BANCORP DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,206,178
<INT-BEARING-DEPOSITS> 1,478
<FED-FUNDS-SOLD> 130,916
<TRADING-ASSETS> 42,528
<INVESTMENTS-HELD-FOR-SALE> 4,815,087
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,564,420
<ALLOWANCE> 157,351
<TOTAL-ASSETS> 18,294,920
<DEPOSITS> 12,257,051
<SHORT-TERM> 2,563,721
<LIABILITIES-OTHER> 586,137
<LONG-TERM> 856,320
8,111
30,000
<COMMON> 85,395
<OTHER-SE> 1,895,932
<TOTAL-LIABILITIES-AND-EQUITY> 18,294,920
<INTEREST-LOAN> 792,127
<INTEREST-INVEST> 254,245
<INTEREST-OTHER> 27,034
<INTEREST-TOTAL> 1,076,406
<INTEREST-DEPOSIT> 390,280
<INTEREST-EXPENSE> 534,178
<INTEREST-INCOME-NET> 542,228
<LOAN-LOSSES> 34,297
<SECURITIES-GAINS> 60,759
<EXPENSE-OTHER> 615,446
<INCOME-PRETAX> 342,590
<INCOME-PRE-EXTRAORDINARY> 218,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,123
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.79
<LOANS-NON> 59,281
<LOANS-PAST> 40,469
<LOANS-TROUBLED> 88
<LOANS-PROBLEM> 40,469
<ALLOWANCE-OPEN> 168,186
<CHARGE-OFFS> 44,238
<RECOVERIES> 7,441
<ALLOWANCE-CLOSE> 157,351
<ALLOWANCE-DOMESTIC> 82,848
<ALLOWANCE-FOREIGN> 23,807
<ALLOWANCE-UNALLOCATED> 50,696
</TABLE>
