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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, 1999
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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Allfirst Financial Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-0981378
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
25 South Charles Street 21201
Baltimore, Maryland (zip code)
(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
None registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(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 No [X]
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]
All 597,763 outstanding shares of Common Stock 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 which will be filed on or about March 31, 2000 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.. 28
Item 8 -- Financial Statements and Supplementary Data:
Allfirst Financial Inc. and Subsidiaries:
Consolidated Statements of Income........................... 31
Consolidated Statements of Condition........................ 32
Consolidated Statements of Changes in Stockholders' Equity.. 33
Consolidated Statements of Cash Flows....................... 34
Notes to Consolidated Financial Statements.................. 35
Report of Management........................................ 69
Report of Independent Accountants........................... 70
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 71
PART III
Item 10 -- Directors and Executive Officers of the Registrant(1)....... 71
Item 11 -- Executive Compensation(1)
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management(1)
Item 13 -- Certain Relationships and Related Transactions(1)
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form
8-K:
Financial Statement Schedules............................... 72
Exhibits.................................................... 72
Reports on Form 8-K......................................... 72
Signatures.............................................................. 74
</TABLE>
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(1) Incorporated by reference to portions of the Registrant's Definitive
Information Statement which will be filed on or about March 31, 2000.
<PAGE>
PART I
Item 1. Business
Allfirst Financial Inc. ("Allfirst") is a bank holding company with its
headquarters in Baltimore, Maryland. At December 31, 1999, Allfirst had
consolidated total assets of $17.5 billion, total deposits of $12.1 billion,
and total stockholders' equity of $1.8 billion. Allfirst 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. Allfirst serves
customers through a network of 260 full service branch offices and more than
550 automated teller machines.
Allfirst 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 assets at December 31, 1999. Based upon
United States generally accepted accounting principles at December 31, 1999,
AIB and its subsidiaries (collectively, "AIB Group") had total assets of
approximately $67 billion. AIB Group provides a full range of banking,
financial and related services principally in Ireland, the United States, the
United Kingdom and in Poland.
On September 15, 1999, First Maryland Bancorp ("First Maryland") was merged
into Allfirst, a Delaware corporation, with Allfirst as the surviving
corporation. The purposes of the merger were to change the state of
incorporation of First Maryland from Maryland to Delaware and to change the
name of First Maryland to "Allfirst Financial Inc." First Maryland formed
Allfirst solely for the purpose of effecting the Merger. The Merger was
structured as an "F" reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended. The capital structure, stockholders, assets and
business of Allfirst are identical to that of First Maryland. Allfirst Bank,
the principal subsidiary, and all other direct and indirect subsidiaries of
First Maryland are now direct and indirect subsidiaries of Allfirst. The
individuals that served as directors, officers and employees of First Maryland
at the time of the merger now hold the same offices and positions with, and
perform the same functions for Allfirst. Allfirst became responsible for all
of the debts, liabilities, and obligations, of First Maryland existing on the
effective date of the merger without limitation or restriction.
During the second quarter of 1999, the new Allfirst brand name and logo were
introduced. On June 28, 1999, most of Allfirst's subsidiary names were changed
to incorporate the new Allfirst identity and the name of Allfirst's lead bank
changed from FMB Bank to Allfirst Bank.
The assets of Allfirst Bank at December 31, 1999 accounted for approximately
93% of Allfirst's consolidated total assets. In addition to domestic banking
services, Allfirst Bank conducts international activities at its Baltimore
headquarters, through a Cayman Island branch and through correspondent
accounts maintained with approximately 25 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.
Allfirst operates various other subsidiaries, including Allfirst Financial
Center N.A., a national bank, ("Allfirst Financial Center", and together with
Allfirst Bank, the "Banks"), Allfirst Leasing Corporation, a commercial
finance company specializing in equipment financing, and Allfirst Mortgage
Corporation, a commercial real estate lender.
Allfirst's business segments are based on Allfirst's method of internal
reporting, which separates its business on the basis of products and services.
Allfirst's reportable segments are Corporate Banking, Real Estate Finance,
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.
1
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Competition
The market for banking and bank-related services is highly competitive.
Passage of financial modernization legislation in November 1999, which removed
barriers to affiliation among banks, broker-dealers and insurance companies,
will increase competition in these markets. Allfirst 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. Allfirst and its subsidiaries compete
by offering quality products and convenient services at competitive prices. In
order to maintain and enhance its competitive position, Allfirst 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
Allfirst 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.
Allfirst 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").
Allfirst 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. Allfirst Financial Center, 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 Allfirst 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 Allfirst'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 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. Allfirst Bank was
considered "well
2
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capitalized" under regulatory definitions in effect at December 31, 1999. 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
Allfirst is a legal entity separate and distinct from the Banks and its
other subsidiaries, although the principal source of Allfirst'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 Allfirst 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,
Allfirst Bank may pay dividends only out of undivided profits unless State of
Maryland bank regulatory approval is obtained, and Allfirst Financial 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, 2000, $189.2 million of the retained earnings of Allfirst Bank and
none of the retained earnings of Allfirst Financial Center were available to
pay dividends to Allfirst.
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 Allfirst in 2000
is not expected to exceed the earnings of the Banks. If the ability to pay
dividends to Allfirst were to become restricted, Allfirst 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
Allfirst's subsidiaries, and thus Allfirst, 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 Allfirst
cannot be predicted.
Employees
As of December 31, 1999, Allfirst employed approximately 5,493 full-time
equivalent employees. Management of Allfirst considers relations with its
employees to be satisfactory.
3
<PAGE>
Item 2. Properties
The following describes the location and general character of the principal
offices and other materially important physical properties of Allfirst and its
subsidiaries.
Allfirst is a major tenant in a building located at 25 South Charles Street,
Baltimore, Maryland, occupying approximately 82% of the 343 thousand square
feet of office space available in the building as of December 31, 1999.
Allfirst's lease for this space expires in 2006, with a renewal option to the
year 2011. During 1999, the annual rental for the space less amounts received
on subleases to others was $4.6 million.
Allfirst 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 Allfirst.
The current lease term expires on December 31, 2011. During 1999, the annual
base rental for the space was $2.6 million. Allfirst is a limited partner with
a 0.2% operating interest and a 50% residual interest in the limited
partnership which owns the building.
Allfirst Financial Center, located at Mitchell Street, Millsboro, Delaware
is owned by Allfirst. The building, acquired in 1981, contains approximately
300 thousand square feet of space, sits on approximately 60 acres of land, and
houses certain retail operations functions of Allfirst.
One South Market Square Office Tower located at 213 Market Street,
Harrisburg, Pennsylvania is also owned by Allfirst. The building contains
approximately 185 thousand square feet of office space and houses, among other
things, certain executive offices and commercial operations functions of
Allfirst Bank.
In addition to the above office space, Allfirst owns and leases office space
in various other office buildings and locations.
Item 3. Legal Proceedings
Allfirst and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. In the opinion
of management, based on its review with counsel of the development of these
matters to date, disposition of all pending litigation will not materially
affect the consolidated financial position or results of operations of
Allfirst and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Allfirst became a wholly owned subsidiary of AIB on March 21, 1989 and, as a
result, Allfirst's common stock is no longer listed or traded on any
securities exchanges.
4
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Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data is derived from the
audited financial statements of Allfirst. It should be read in conjunction
with the detailed information and financial statements of Allfirst included
elsewhere herein.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1999 1998 1997(1) 1996 1995
----------- ----------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Summary of
Operations:
Interest and dividend
income................ $ 1,066,589 $ 1,076,406 $ 941,498 $ 719,029 $ 707,541
Interest expense....... 530,139 534,178 445,754 315,373 314,548
----------- ----------- ----------- ----------- ----------
Net interest income.... 536,450 542,228 495,744 403,656 392,993
Provision for loan and
lease losses.......... 34,150 34,297 32,017 6,500 16,000
----------- ----------- ----------- ----------- ----------
Net interest income
after provision for
loan and lease
losses................ 502,300 507,931 463,727 397,156 376,993
Noninterest income..... 310,197 436,537 317,876 212,896 192,217
Noninterest expenses... 533,010 601,878 546,114 402,865 385,031
----------- ----------- ----------- ----------- ----------
Income before income
taxes................. 279,487 342,590 235,489 207,187 184,179
Income tax expense..... 101,410 124,467 84,301 74,850 63,992
----------- ----------- ----------- ----------- ----------
Net income............. 178,077 218,123 151,188 132,337 120,187
Dividends declared on
preferred stock....... 5,765 12,225 12,225 12,023 11,820
----------- ----------- ----------- ----------- ----------
Net income to common
shareholders.......... $ 172,312 $ 205,898 $ 138,963 $ 120,314 $ 108,367
=========== =========== =========== =========== ==========
Consolidated Average
Balances:
Total assets........... $17,663,700 $17,072,800 $14,132,300 $10,477,100 $9,789,500
Loans, net of unearned
income................ 10,656,400 10,214,100 8,358,500 6,312,300 5,804,700
Deposits............... 11,968,900 11,961,400 9,569,600 7,073,500 6,744,100
Long-term debt......... 999,800 686,400 594,900 481,800 269,500
Common stockholder's
equity................ 1,817,700 1,812,100 1,438,300 1,062,300 965,000
Stockholders' equity... 1,894,700 1,957,000 1,583,200 1,207,200 1,109,800
Consolidated Ratios:
Return on average
assets................ 1.01% 1.28% 1.07% 1.26% 1.23%
Return on average
common stockholder's
equity................ 9.48 11.36 9.66 11.33 11.23
Return on average total
stockholders' equity.. 9.40 11.15 9.55 10.96 10.83
Average total
stockholders' equity
to average total
assets................ 10.73 11.46 11.20 11.52 11.34
Capital to risk-
adjusted assets:
Tier 1................. 9.86 9.38 8.30 14.12 13.77
Total.................. 13.24 12.65 11.90 17.20 17.05
Tier 1 leverage ratio.. 8.75 8.41 7.26 12.18 10.91
Net interest margin
(FTE)................. 3.60 3.79 4.07 4.30 4.47
Net charge-offs to
average loans, net of
unearned income....... 0.32 0.36 0.48 0.61 0.51
Allowance for loan and
lease losses to loans,
net of unearned
income................ 1.46 1.49 1.67 2.28 2.89
Nonperforming assets to
loans, net of unearned
income plus other
foreclosed assets
owned................. 0.74 0.95 0.80 0.87 0.73
Tax-effected net income
and ratios excluding
goodwill and core
deposit intangible
amortization and
balances:(2)
Net income............. $ 223,763 $ 266,696 $ 179,204 $ 136,322 $ 122,812
Return on average
assets................ 1.33% 1.65% 1.32% 1.31% 1.26%
Return on average
common stockholder's
equity................ 22.50 27.85 18.69 12.34 11.87
Return on average total
stockholders' equity.. 21.40 25.19 17.26 11.83 11.37
</TABLE>
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(1) Allfirst 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 other years presented. DDC's
results of operations have been included in Allfirst'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.
5
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis of Allfirst's financial condition and results of
operations as of and for the years ended December 31, 1999, 1998 and 1997
should be read in conjunction with the Consolidated Financial Statements of
Allfirst 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
Allfirst 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
Allfirst's net income to common shareholders for the year ended December 31,
1999 was $172.3 million, compared to $205.9 million for the year ended
December 31, 1998, a decrease of $33.6 million (16.3%). In 1999, the full year
results included a $6.1 million after-tax charge related to the Allfirst name
change and after-tax securities gains of $3.0 million. In 1998, the full year
results included a $37.4 million after-tax gain from the sale of the Company's
consumer credit card portfolio, after-tax securities gains of $38.3 million
and after-tax nonrecurring technology and integration costs totaling $13.7
million. Excluding these items, net income to common shareholders for the year
ended December 31, 1999 increased 22% over 1998. Return on average assets and
return on average common stockholder's equity were 1.01% and 9.48%,
respectively, for the year ended December 31, 1999 compared to 1.28% and
11.36%, respectively, for the year ended December 31, 1998.
Tangible net income, which excludes amortization of goodwill and other
intangible assets related to purchase business combinations, was $223.8
million for the year ended December 31, 1999 compared to $266.7 million for
the year ended December 31, 1998. Return on average tangible assets and return
on average tangible common equity, which exclude intangible assets and
amortization related to purchase business combinations, were 1.33% and 22.50%,
respectively, for the year ended December 31, 1999 compared to 1.65% and
27.85%, respectively, for the year ended December 31, 1998.
On February 13, 1998, Allfirst 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. Residential mortgage loans are offered to
Allfirst's customers through the retail branch system and Allfirst continues
to meet the needs of low and moderate income communities in its market.
On February 25, 1998, Allfirst 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"). Allfirst
realized a pretax gain of $60 million on the sale. BOANA and Allfirst have
entered into an agreement whereby BOANA provides retail credit card products
and services to customers of Allfirst's bank subsidiaries on an agency basis.
On January 19, 1999, Allfirst sold Hopper Soliday & Co., Inc., a full
service investment banking and securities brokerage subsidiary. No gain or
loss was recognized on this sale.
Net Interest Income
Net interest income, the primary source of Allfirst'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. When net interest income is presented on a fully tax-equivalent
basis, interest income from
6
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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,
-----------------------------
1999 1998 1997
-------- -------- ---------
(dollars in millions)
<S> <C> <C> <C>
Net interest income--per financial statements... $ 536.5 $ 542.2 $ 495.7
Tax equivalent adjustment....................... 14.9 14.5 10.5
-------- -------- ---------
Net interest income--tax equivalent basis....... $ 551.4 $ 556.7 $ 506.2
======== ======== =========
Average earning assets.......................... 15,307.0 14,694.9 $12,447.8
Net interest margin (FTE)....................... 3.60% 3.79% 4.07%
</TABLE>
Net interest income on a fully tax equivalent basis for the year ended
December 31, 1999 of $551.4 million decreased $5.3 million (1.0%) when
compared to net interest income of $556.7 million for the year ended December
31, 1998. During the third quarter of 1999, Allfirst redeemed its 7.875%
preferred stock, replacing it with the proceeds from the issuance of Floating
Rate Non-cumulative Subordinated Capital Trust Enhanced Securities and other
long-term debt. This transaction, while increasing interest expense and
reducing net interest income by $5.0 million, increased the return to common
shareholders by $3.4 million by replacing preferred dividends with tax
deductible interest expense. In addition, net interest income declined
relative to 1998 due to a 14 basis point decrease in the net interest spread.
Net interest spread is the difference between the yield on average interest
earning assets and the rate paid on average interest bearing liabilities.
Customer deposit balances declined in 1999, as customers moved funds into
other higher yielding investment products. These deposits were replaced by
higher cost purchased deposits and other purchased funds which contributed to
the decrease in the net interest spread in 1999. The impact of the preferred
stock redemption and the decline in deposits on the net interest spread was
partially offset by a $612 million (4.2%) increase in interest earning assets.
In addition, Allfirst realized a $1.0 million improvement in long-term funding
costs, due to the replacement of $60.0 million in long-term debt with an
interest rate of 10.375% with long-term debt with an interest rate of 6.875%.
Allfirst's net interest margin was 3.60% for the year ended December 31,
1999 compared to 3.79% for the year ended December 31, 1998. The decline in
net interest margin is primarily due to lower net interest spreads which were
the result of competitive pressures, the loss of customer deposits, and the
preferred stock redemption.
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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 decreased $5.3
million when the year ended December 31, 1999 is compared to the year ended
December 31, 1998. The $13.2 million positive volume variance was primarily
due to loan growth and an increase in investment securities. The $18.6 million
negative rate variance was primarily the result of a decline in loan yields
and the yield on investments securities which was partially offset by lower
rates on interest bearing deposits, purchased funds and long-term debt.
Net Interest Income Analysis
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
1999 Over 1998 1998 Over 1997
----------------------------- -----------------------------
Due to change Due to change
in(1) 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................. $ (2,051) $ 33,827 $(35,878) $120,326 $145,856 $(25,530)
Interest and dividends
on investment
securities available-
for-sale.............. 14,607 28,282 (13,675) 29,539 38,874 (9,335)
Interest and fees on
loans held-for-sale... (16,185) (12,780) (3,405) (2,206) (4,585) 2,379
Interest on trading
account securities.... (1,638) (1,461) (177) (1,206) (341) (865)
Interest on money market
investments............ (4,103) (3,536) (567) (7,467) (8,132) 665
-------- -------- -------- -------- -------- --------
Total................ (9,370) 44,332 (53,702) 138,986 171,672 (32,686)
-------- -------- -------- -------- -------- --------
Interest Expense on
Deposits and Borrowed
Funds:
Interest on deposits... (27,187) (2,764) (24,423) 92,636 85,289 7,347
Interest on Federal
funds purchased and
other short-term
borrowings............ 8,048 13,129 (5,081) (9,464) (5,083) (4,381)
Interest on long-term
debt.................. 15,101 20,741 (5,640) 5,251 6,648 (1,397)
-------- -------- -------- -------- -------- --------
Total................ (4,038) 31,106 (35,144) 88,423 86,854 1,569
-------- -------- -------- -------- -------- --------
Net interest income.. $ (5,332) $ 13,226 $(18,558) $ 50,563 $ 84,818 $(34,255)
======== ======== ======== ======== ======== ========
</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 Allfirst's average
balances, interest yields and rates, and net interest margin for the years
ended December 31, 1999, 1998 and 1997.
Average Balances, Interest Yields and Rates, and Net Interest Margin
(Tax Equivalent Basis)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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........... $ 28.3 $ 1.5 5.15% $ 56.5 $ 3.1 5.48% $ 61.6 $ 4.3 6.98%
Money market
investments.......... 40.1 2.1 5.13 107.9 6.2 5.71 251.0 13.6 5.41
Investment
securities(5):
Taxable............... 3,942.1 235.6 5.98 3,497.9 221.6 6.33 3,184.6 209.4 6.58
Tax-exempt(1)......... 408.6 32.0 7.84 422.2 32.1 7.61 245.7 19.5 7.95
Equity investments.... 206.7 12.2 5.91 184.1 11.6 6.28 77.0 6.8 8.86
--------- -------- ---- --------- -------- ---- --------- ------ ----
Total investment
securities
available-for-sale... 4,557.3 279.9 6.14 4,104.3 265.3 6.46 3,507.3 235.7 6.72
Loans held-for-sale.... 24.9 1.6 6.41 212.2 17.8 8.38 269.4 20.0 7.42
Loans (net of unearned
income)(1, 2):
Commercial............ 3,474.9 250.1 7.20 3,139.1 239.0 7.61 2,283.1 178.9 7.84
Commercial real
estate............... 2,369.8 185.5 7.83 2,234.5 186.2 8.33 1,844.7 156.4 8.48
Residential........... 732.2 54.2 7.41 866.7 64.5 7.44 937.9 68.6 7.32
Retail................ 2,871.3 232.1 8.08 2,740.8 230.3 8.40 2,339.2 212.5 9.08
Retail leases
receivable........... 342.1 25.8 7.53 312.7 23.7 7.59 172.5 12.6 7.32
Commercial leases
receivable........... 553.4 28.9 5.21 474.8 23.8 5.02 406.8 20.8 5.10
Foreign............... 312.7 20.0 6.39 445.4 31.1 6.99 374.3 28.5 7.62
--------- -------- ---- --------- -------- ---- --------- ------ ----
Total loans........... 10,656.4 796.5 7.47 10,214.1 798.6 7.82 8,358.5 678.3 8.11
--------- -------- ---- --------- -------- ---- --------- ------ ----
Total earning
assets.............. 15,307.0 $1,081.6 7.07% 14,694.9 $1,090.9 7.42% 12,447.8 $951.9 7.65%
Allowance for loan and
lease losses.......... (157.4) (161.7) (164.6)
Cash and due from
banks................. 864.3 895.7 732.2
Other assets........... 1,649.7 1,643.9 1,116.9
--------- --------- ---------
Total assets.......... $17,663.7 $17,072.8 $14,132.3
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits in domestic
offices:
Interest bearing
demand............... $ 139.6 $ 2.8 2.01% $ 520.2 $ 7.7 1.49% $ 365.0 $ 5.9 1.62%
Money market
accounts............. 2,630.2 70.5 2.68 2,246.2 72.2 3.22 1,795.0 54.2 3.02
Savings............... 1,379.7 25.5 1.85 1,488.3 37.0 2.49 1,327.0 34.0 2.57
Other consumer time... 2,903.2 146.6 5.05 3,279.2 172.0 5.25 2,610.7 136.4 5.23
Large denomination
time................. 1,868.7 101.0 5.41 1,471.1 84.1 5.72 1,022.8 58.2 5.69
Deposits in foreign
banking office(6)..... 332.7 16.6 4.98 315.5 17.2 5.45 159.3 8.9 5.57
--------- -------- ---- --------- -------- ---- --------- ------ ----
Total interest bearing
deposits............. 9,254.1 363.1 3.92 9,320.5 390.3 4.19 7,279.8 297.6 4.08
--------- -------- ---- --------- -------- ---- --------- ------ ----
Funds purchased........ 1,598.4 76.9 4.81 1,367.4 69.9 5.11 1,045.9 55.4 5.30
Other borrowed funds,
short-term............ 517.0 25.4 4.91 480.3 24.4 5.07 899.5 48.3 5.37
Long-term debt......... 999.8 64.7 6.48 686.4 49.6 7.23 594.9 44.4 7.46
--------- -------- ---- --------- -------- ---- --------- ------ ----
Total interest bearing
liabilities.......... 12,369.3 530.1 4.29% 11,854.6 534.2 4.51% 9,820.2 445.7 4.54%
--------- -------- ---- --------- -------- ---- --------- ------ ----
Noninterest bearing
deposits.............. 2,714.9 2,640.8 2,289.8
Other liabilities...... 676.6 612.4 431.4
Redeemable preferred
stock................. 8.2 8.0 7.8
Stockholders' equity... 1,894.7 1,957.0 1,583.2
--------- --------- ---------
Total liabilities and
stockholders'
equity............... $17,663.7 $17,072.8 $14,132.3
========= ========= =========
Net interest income,
tax equivalent basis.. $ 551.4 $ 556.7 $506.2
======== ======== ======
Net interest
spread(3)............. 2.78% 2.92% 3.11%
Contribution of
interest free sources
of funds.............. 0.82 0.87 0.96
---- ---- ----
Net interest
margin(4)............. 3.60% 3.79% 4.07%
==== ==== ====
</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, 1999, 1998 and 1997, and a year-to-year comparison
expressed in terms of percent changes. Allfirst has reclassified certain
categories of income and expense. Network service fees and VISA(R) royalties,
previously shown as noninterest expenses, are now offset against the
associated revenue and shown on a net basis as noninterest income. A new
category titled electronic banking income captures Automated Teller Machine
("ATM") fees, surcharge revenue and interchange income from VISA(R) debit card
transactions. Previously ATM fees were presented with deposit service charges
and debit card income was presented with credit card income. All prior periods
have been restated to conform to the current year's presentation.
Noninterest Income
<TABLE>
<CAPTION>
Years ended December 31, Percent change
-------------------------- --------------------
1999 1998 1997 1999/1998 1998/1997
-------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit
accounts..................... $ 93,948 $ 89,808 $ 80,140 4.6% 12.1%
Trust and investment advisory
fees......................... 82,081 71,221 45,867 15.3 55.3
Electronic banking income..... 24,485 20,789 16,230 17.8 28.1
Mortgage banking income....... 13,556 30,736 48,819 (55.9) (37.0)
Security sales and fees....... 12,099 24,343 12,553 (50.3) 93.9
Servicing income.............. 1,968 6,056 26,509 (67.5) (77.2)
Other......................... 77,085 72,825 59,147 5.8 23.1
-------- -------- -------- ------ -----
Total fees and other income... 305,222 315,778 289,265 (3.3) 9.2
Securities gains, net......... 4,975 60,759 456 (91.8) --
Gain on sale of credit card
loans........................ -- 60,000 28,155 (100.0) 113.1
-------- -------- -------- ------ -----
Total noninterest income.... $310,197 $436,537 $317,876 (28.9)% 37.3%
======== ======== ======== ====== =====
</TABLE>
Allfirst's noninterest income for the year ended December 31, 1999 was
$310.2 million, a $126.3 million (28.9%) decrease from noninterest income for
the year ended December 31, 1998. Noninterest income in 1999 benefited from
investment securities gains of $5.0 million. 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. Excluding these items, total
fees and other income decreased $10.6 million (3.3%) when compared to 1998.
Fees and other income in 1998 included $49.0 million in fees and other income
related to discontinued business lines. Excluding revenue from discontinued
business lines in 1998, total fees and other income increased $38.4 million
(14.4%) in 1999. Service charges on deposit accounts increased $4.1 million
(4.6%) due to a higher level of corporate analysis fees in 1999. Trust and
investment advisory fees increased $10.9 million (15.3%). Electronic banking
income increased $3.7 million (17.8%) primarily due to an increase in Visa(R)
debit card interchange income. Mortgage banking income decreased $17.2 million
(55.9%) and was affected by the sale of Allfirst's residential first mortgage
loan origination businesses in the first quarter of 1998. Excluding revenue
from discontinued businesses in 1998, mortgage banking income increased $4.9
million (56.4%). Income from securities sales and fees decreased $12.2 million
(50.3%) due to the sale of Hopper Soliday in January 1999. Excluding the
revenue from Hopper Soliday in 1998, income from security sales and fees
increased $4.1 million (50.7%). Servicing income decreased $4.1 million
(67.5%) primarily due to a $3.3 million decline in servicing income on credit
card loans resulting from the exit of that business. Other income increased
$4.3 million (5.8%). Excluding other income from discontinued businesses
totaling $7.2 million in 1998, other income increased $11.5 million. Line of
credit fees increased $3.3 million. Income from lease residual gains increased
$6.1 million due to some large lease residual gains on railcars in 1999. Gains
on the sale of other real estate owned increased $1.3 million in 1999 and
other nonrecurring gains totaled $3.0 million in 1999. Other income in 1998
included a $1.2 million gain on the payoff of a troubled debt restructuring
and other nonrecurring revenue totaling $0.9 million.
10
<PAGE>
Noninterest Expenses
The following table presents the components of noninterest expenses for the
years ended December 31, 1999, 1998 and 1997 and a year to year comparison
expressed in terms of percent changes. All prior periods have been restated to
conform with the current years presentation. Additional information on the
reclassification of prior periods is presented under "noninterest income" on
page 10.
Noninterest Expenses
<TABLE>
<CAPTION>
Years ended December 31, Percent change
-------------------------- -------------------
1999 1998 1997 1999/1998 1998/1997
-------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and other personnel
costs......................... $275,942 $311,030 $292,497 (11.3)% 6.3%
Equipment costs................ 45,936 42,882 40,757 7.1 5.2
Occupancy costs................ 36,579 37,974 36,976 (3.7) 2.7
Other operating expenses:
External services............ 16,010 18,113 26,574 (11.6) (31.8)
Postage and communications... 20,216 23,841 21,393 (15.2) 11.4
Advertising and marketing.... 13,626 20,234 16,871 (32.7) 19.9
Professional service fees.... 12,407 18,628 9,863 (33.4) 88.9
Lending and collection....... 13,024 16,802 8,778 (22.5) 91.4
Other........................ 48,274 56,772 37,637 (15.0) 50.8
-------- -------- -------- ----- ------
Total operating expenses....... 482,014 546,276 491,346 (11.8) 11.2
Intangible assets amortization
expense....................... 50,996 55,602 34,768 (8.3) 59.9
Merger related expenses........ -- -- 20,000 -- (100.0)
-------- -------- -------- ----- ------
Total noninterest
expenses.................. $533,010 $601,878 $546,114 (11.4)% 10.2%
======== ======== ======== ===== ======
</TABLE>
Allfirst's noninterest expenses for the year ended December 31, 1999 were
$533.0 million, a $68.9 million (11.4%) decrease from noninterest expenses for
the year ended December 31, 1998. Intangible assets amortization expense
decreased $4.6 million primarily due to lower deposit premium amortization.
Total operating expenses decreased $64.3 million (11.8%). Operating expenses
associated with the Allfirst brand introduction totaled $10.0 million in 1999.
The year ended December 31, 1998 included $22.7 million in expenses related to
the installation of an enhanced technology platform and other issues arising
from the integration of Allfirst's constituent banks and $2.0 million in
expenses related to the Allfirst brand introduction. In addition, operating
expenses in 1998 included $38.3 million in operating expenses related to
discontinued businesses. Excluding these expenses, total operating expenses
decreased $11.3 million (2.4%) when 1999 is compared to 1998.
Salaries and other personnel costs decreased $35.1 million (11.3%). Salaries
and other personnel costs in 1998 included $23.0 million in expenses related
to discontinued business lines. In addition, approximately $9.3 million in
salaries and other personnel costs were incurred in 1998 related to systems
integration and conversion projects. Excluding these items, salaries and other
personnel costs decreased $2.8 million (1.0%). Equipment costs increased $3.1
million (7.1%). Occupancy costs decreased $1.4 million (3.7%) with $1.1
million of the decrease due to cost savings associated with exited business
lines. External services expense decreased $2.1 million (11.6%). External
services expense in 1998 included $1.4 million in expenses associated with
discontinued business lines. The remaining decrease is due to cost savings
realized from the 1998 integration and conversion projects. Postage and
communications expenses decreased $3.6 million (15.2%). Discontinued business
lines incurred approximately $2.6 million in postage and communication costs
in 1998 and postage costs related to systems integration and conversion
projects totaled $0.9 million last year. Excluding these items, postage and
communication expense decreased $0.1 million (0.9%) in 1999. Advertising and
marketing expenses decreased $6.6 million (32.7%). Advertising expenses
increased $6.2 million due to the implementation of the new Allfirst brand
name in the second quarter of 1999. Advertising and marketing expenses
associated with
11
<PAGE>
discontinued businesses in 1998 totaled $2.3 million and approximately $4.6
million in advertising expenses were incurred in 1998 as a result of
integration of the Pennsylvania and Maryland franchises. Excluding these
items, advertising and marketing expenses decreased $5.9 million (44.1%).
Professional service fees decreased $6.2 million (33.4%). In 1999,
approximately $1.5 million in professional fees were incurred in conjunction
with the change to the Allfirst brand name in the second quarter of 1999.
Approximately $8.3 million in contract programming expenses and professional
fees were incurred in 1998 for systems integration and conversion projects.
Excluding these items, professional service fees increased $0.6 million
(5.7%). Lending and collection expenses decreased $3.8 million (22.5%).
Lending and collection expenses related to discontinued business lines totaled
$2.5 million in 1998. Excluding these expenses, lending and collection
expenses decreased $1.3 million in 1999 due primarily to a $2.4 million
decrease in lending and collection expenses associated with Allfirst's foreign
maritime loan portfolio.
Quarterly Summary
The following table presents a summary of earnings by quarter for the years
ended December 31, 1999 and 1998:
Summary of Quarterly Earnings
<TABLE>
<CAPTION>
1999 quarters ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Interest and dividend income....... $264,216 $261,482 $266,551 $274,340
Net interest income................ 131,628 134,362 133,426 137,034
Provision for loan and lease
losses............................ 11,630 9,349 6,185 6,986
Income before income taxes......... 67,262 59,362 76,640 76,223
Net income......................... 42,418 37,551 48,106 50,002
<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 loan and lease
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>
Investment Portfolio
At December 31, 1999, the investment securities available-for-sale portfolio
was $4.3 billion compared with $4.8 billion at December 31, 1998, a $528
million (11%) decrease. The taxable equivalent yield on the total portfolio
for the year ended December 31, 1999 was 6.14% compared to 6.46% for the year
ended December 31, 1998. Net unrealized losses on the investment securities
portfolio were $156.5 million at December 31, 1999.
Investment securities sold in 1999 totaled $1.5 billion and generated pretax
gains of $5.0 million. The majority of the securities sold were U.S. Treasury
securities, Federal agency securities and mortgage backed securities. The U.S.
Treasury securities and mortgage backed securities were sold to reduce the
duration of the investment securities portfolio. The Federal agency securities
were sold to improve the yield of the investment portfolio. In 1999, Allfirst
purchased $2.0 billion of investment securities to partially replace $823
million of maturities, calls and paydowns of securities and the $1.5 billion
of securities sold. The investment security purchases were primarily U.S.
government agency securities, mortgage backed securities and collateralized
mortgage obligations.
12
<PAGE>
The following table sets forth the book value ("fair value") of the
available-for-sale securities owned by Allfirst.
Available-for-Sale Investment Portfolio
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury & U.S. Government agencies..... $ 207,895 $ 256,218 $ 862,175
Mortgage-backed obligations.................. 1,896,061 2,602,572 1,655,235
Collateralized mortgage obligations(1)....... 1,051,283 738,822 976,746
Asset-backed securities...................... 392,411 493,027 309,338
Obligations of states and political
subdivisions................................ 436,616 457,880 435,223
Other debt securities........................ 73,804 84,655 60,768
Equity securities............................ 229,273 181,913 144,622
---------- ---------- ----------
Total...................................... $4,287,343 $4,815,087 $4,444,107
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1999, 1998 and 1997, $1,051.3 million, $738.6 million, and
$967.2 million of CMOs, respectively, were issues of the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association or the
Government National Mortgage Association.
The following table shows the maturity distribution of the available-for-
sale debt securities of Allfirst at December 31, 1999 based upon amortized
cost.
Maturity of Available-for-Sale Investment Portfolio
<TABLE>
<CAPTION>
Maturing
---------------------------------------
After After
Within One year Five years
One Through Through 10 After
Year 5 Years years 10 years Totals
-------- ---------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S.
Government Agencies....... $103,464 $ 107,933 $ -- $ -- $ 211,397
Mortgage-backed
obligations(1)............ 201,835 731,566 701,466 365,772 2,000,639
Collateralized mortgage
Obligations(1)............ 155,894 779,092 52,452 80,765 1,068,203
Asset-backed
securities(1)............. 99,154 281,227 14,402 2,853 397,636
Obligations of states and
political Subdivisions.... 43,883 96,915 52,701 254,381 447,880
Other debt and equity
securities(2)............. 70,760 1,250 1,750 244,351 318,111
-------- ---------- -------- -------- ----------
Total.................... $674,990 $1,997,983 $822,771 $948,122 $4,443,866
======== ========== ======== ======== ==========
</TABLE>
- --------
(1) The maturity distribution is based upon long-term cash flow estimates for
each security type and coupon rate.
(2) Equity securities totaling $244.4 million have been classified in after 10
years.
13
<PAGE>
The following table reflects the approximate weighted average tax equivalent
yield (at an assumed Federal tax rate of 35%) of the available-for-sale
investment portfolio at December 31, 1999 based upon amortized cost.
Available-for-Sale Investment Portfolio
(Tax Equivalent Yields)
<TABLE>
<CAPTION>
Maturing
--------------------------------
After
After 5 years
Within One year Through
One Through 10 After
Year 5 Years years 10 years Totals
------ -------- ------- -------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury & U.S. Government
agencies............................. 4.76% 4.84% -- % -- % 4.80%
Mortgage-backed obligations........... 5.92 5.92 5.92 5.95 5.93
Collateralized mortgage
obligations(1)....................... 6.23 6.23 6.23 6.23 6.23
Asset-backed securities............... 6.65 6.65 6.65 6.65 6.65
Obligations of states and political
subdivisions......................... 7.54 7.41 7.09 7.59 7.49
Other debt and equity securities...... 4.65 7.25 7.37 4.39 4.47
---- ---- ---- ---- ----
Total............................... 5.89% 6.16% 6.03% 6.01% 6.06%
==== ==== ==== ==== ====
</TABLE>
- --------
(1) Computation of weighted average tax equivalent yields includes $129.3
million of floating rate CMOs.
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,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
----------- ----- ----------- ----- ----------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 3,542,014 32.9% $ 3,452,416 32.7% $ 2,868,728 28.4% $1,731,031 25.5% $1,798,248 29.3%
Commercial real estate.. 2,329,886 21.6 2,305,639 21.8 2,256,895 22.4 1,453,244 21.4 1,265,736 20.6
Residential mortgage.... 686,780 6.4 827,103 7.8 987,751 9.8 833,045 12.2 650,588 10.6
Retail.................. 2,945,593 27.3 2,755,218 26.1 2,713,663 26.9 1,977,241 29.1 1,753,608 28.6
Commercial leases....... 615,670 5.7 540,395 5.1 469,217 4.7 390,929 5.7 304,239 4.9
Retail leases........... 383,880 3.5 318,582 3.0 305,004 3.0 47,131 0.7 30,265 0.5
Foreign................. 276,807 2.6 365,067 3.5 482,328 4.8 365,824 5.4 336,140 5.5
----------- ----- ----------- ----- ----------- ----- ---------- ----- ---------- -----
Total loans, net of
unearned income........ $10,780,630 100.0% $10,564,420 100.0% $10,083,586 100.0% $6,798,445 100.0% $6,138,824 100.0%
=========== ===== =========== ===== =========== ===== ========== ===== ========== =====
</TABLE>
14
<PAGE>
The following table displays the contractual maturities and interest rate
sensitivities of the loan portfolio of Allfirst at December 31, 1999.
Allfirst'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>
Maturing
--------------------------------
After 1
In one year
Year Through After
Or less 5 years(1) 5 years Total
---------- ---------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Commercial........................ $ 837,957 $2,042,511 $ 661,546 $ 3,542,014
Commercial real estate............ 523,714 1,081,728 724,444 2,329,886
Residential mortgage.............. 30,882 97,889 558,009 686,780
Retail............................ 479,064 1,600,598 865,931 2,945,593
Commercial leases receivable...... 56,554 344,774 214,342 615,670
Retail leases receivable.......... 100,854 278,315 4,711 383,880
Foreign........................... 95,967 171,158 9,682 276,807
---------- ---------- ---------- -----------
Total........................... $2,124,992 $5,616,973 $3,038,665 $10,780,630
========== ========== ========== ===========
Amount of loans based upon:
Fixed interest rates.............. $1,113,035 $3,037,799 $1,575,724 $ 5,726,558
========== ========== ========== ===========
Variable interest rates(2)........ $1,011,957 $2,579,174 $1,462,941 $ 5,054,072
========== ========== ========== ===========
</TABLE>
- --------
(1) Includes demand loans and loans having no stated schedule of repayments or
maturity.
(2) The variable interest rates generally fluctuate according to a formula
based on various rate indices such as the prime rate and LIBOR.
Commercial Loans
Commercial loan outstandings of $3.5 billion comprised 32.9% of Allfirst's
total loans and leases at December 31, 1999. Commercial loans include short
and medium term loans, revolving credit arrangements, lines of credit, asset
based lending and equipment lending. Commercial loans increased $89.6 million
or 2.6% during 1999. The increase in commercial loans in 1999 was primarily
due to growth in loans to mid-sized corporate customers.
The commercial loan portfolio is segregated by market sector. There are two
primary market sectors, Corporate Banking and Business and Workplace Banking.
Business and Workplace Banking is focused on customers with sales volumes less
than $10 million. Corporate Banking services all other customers. 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, Virginia and Washington,
D.C.
Commercial Real Estate
Allfirst's commercial real estate portfolio represents loans secured
primarily by commercial real property. The properties financed include both
owner-occupied and investor real estate. Commercial real estate loans of $2.3
billion comprised 21.6% of the total loan portfolio at December 31, 1999.
Commercial real estate loans increased $24.2 million or 1.1% during 1999. The
commercial real estate portfolio continues to benefit from increasing rental
rates and falling vacancies in Allfirst's primary markets. Allfirst continues
to focus on acquisition and refinancing loans for quality projects with strong
sponsorship for investor real estate financing. In addition, Allfirst intends
to continue to actively solicit commercial real estate loans to support its
emphasis as a relationship lender for regional companies.
15
<PAGE>
The commercial real estate portfolio continues to be well balanced by
property type and is geographically centered in Allfirst'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 $476 million in construction loans at
December 31, 1999. These loans are for land acquisition and development, and
building construction. Since December 31, 1998, real estate construction loans
have increased $42 million or 9.6%. 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. Allfirst continues to pursue high quality loan
opportunities.
Residential Mortgage
Residential mortgages at December 31, 1999 of $687 million, decreased $140
million from December 31, 1998. The decline is due to loan maturities and loan
prepayments prompted by favorable market conditions. However, the pace of
prepayments has slowed due to rising interest rates and receding demand for
refinancing. Allfirst 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.
Allfirst sold the residential loan origination businesses of its mortgage
banking subsidiaries in 1998. Allfirst continues to offer a comprehensive
range of first mortgage products through a third party affiliation. See Part
I, above.
Retail
Allfirst 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 and telephone banking system of Allfirst. Loan
applications will also be taken over the internet in the year 2000. In
addition, automobile loans are made available to the marketplace on an
indirect basis by means of select third party referral sources.
As compared to December 31, 1998, retail loans increased $190 million to
$2.9 billion at December 31, 1999. The growth in retail loans is largely
attributable to a $212 million increase in indirect automobile loans, and
modest growth in the direct portfolio and small business loans, offset by a
$38 million decline in indirect marine loans.
Commercial Leases Receivable
Commercial leases receivable include small equipment and general equipment
leasing portfolios. Commercial leases receivable increased to $616 million at
December 31, 1999 from $540 million at December 31, 1998. 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 $384 million at December 31, 1999 from $319 million at
December 31, 1998. Retail leasing experienced record growth in 1999, booking
$187 million in gross new business.
16
<PAGE>
Foreign
Foreign loans totaled $276.8 million at December 31, 1999, a decrease of
$88.3 million when compared to December 31, 1998. Foreign loans outstanding at
December 31, 1999 included international maritime loans totaling $183 million,
foreign direct investment loans totaling $26 million, and other foreign loans
of $68 million. 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 1999 included approximately $7.5 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 Allfirst are designed to provide an effective
and timely response to loan requests, while ensuring the maintenance of a
sound portfolio. Allfirst manages credit risk through the credit approval
process and written policies, which generally specify underwriting guidelines
and standards and in some cases limit credit exposure by industry, country or
product type. All credit policies and credit concentration exposure limits are
reviewed and approved annually by the Executive Committee of the Board of
Directors.
The Credit Review function periodically reviews all lending units throughout
Allfirst. 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 loan and lease losses, which the Audit
Committee is required to approve quarterly.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $34.2 million for the year ended
December 31, 1999, a decrease of $0.1 million (0.4%) from the $34.3 million
provision for 1998. The provision for loan and lease losses in 1998 was $2.5
million lower than net charge-offs. Net charge-offs decreased $2.6 million
when 1999 is compared to 1998. The sale of substantially all of Allfirst's
credit card loans in the first quarter of 1998 resulted in a $3.2 million
decrease in net credit card charge-offs in 1999 versus 1998. Net charge-offs
on the foreign maritime portfolio were $8.7 million for the year ended
December 31, 1999, a $10.7 million decrease from 1998. These decreases were
offset by an $11.3 million increase in charge-offs on other loan portfolios in
1999 due principally to a $5.1 million increase in retail net charge-offs, a
$3.1 million increase in commercial charge-offs and a $2.2 million increase in
residential mortgage net charge-offs. The increase in retail charge-offs in
1999 is primarily related to charge-offs of retail deposit overdrafts which
occurred after system conversions in 1998. The system deficiencies causing
these overdrafts have been resolved.
Nonperforming Assets
Nonperforming assets were $80.5 million at December 31, 1999, compared to
$100.9 million at December 31, 1998, a decrease of $20.4 million. Nonaccrual
loans decreased $7.6 million. Additions to nonperforming loans in 1999
aggregated $55.4 million. These additions were offset by reductions in
nonaccrual loans totaling $63.0 million due to paydowns and payoffs of
nonaccrual loans totaling $27.8 million, charge-offs of $14.6 million, loans
returned to accrual status of $12.8 million and transfers to other real estate
and other assets owned of $7.8 million.
Other real estate and other assets owned decreased $2.7 million when
compared to December 31, 1998. Additions to other real estate owned totaled
$6.7 million, including transfers from nonaccrual loans of $5.6 million. Sales
and paydowns of other real estate owned totaled $9.2 million. Repossessed
assets decreased $0.2 million.
17
<PAGE>
Other nonperforming assets decreased $10.1 million when compared to December
31, 1998. Other nonperforming assets include $15.8 million and $23.1 million,
respectively, in nonperforming maritime loans at December 31, 1999 and 1998.
Allfirst has classified these loans as other nonperforming assets because 1)
the value of the loan collateral is equal to the loan principal and 2) the
structure of these loans provides compensation for increased risk by
incorporating revenue sharing rights and other collateral rights, which will
be triggered by certain events, in the loan agreement. These loans have been
valued based on the estimated cash flows from the shipping vessels' operations
as well as independent valuations. In addition, other nonperforming assets at
December 31, 1998 included a $2.8 million ownership interest in a commercial
aircraft resulting from a lessee default on a commercial lease in which
Allfirst was a participant. This asset was sold in the third quarter of 1999.
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. Recently the dry bulk
shipping industry has shown signs of improvement; however, the tanker market
continues to be weak. At December 31, 1999, Allfirst's total international
maritime exposure was $237.4 million, including loans and leases of $195.4
million, $15.8 million in other foreign maritime assets, and $26.2 million in
unfunded loan commitments, letters of credit and risk participations. This
compares to total foreign maritime exposure of $313.9 million at December 31,
1998. Nonperforming assets at December 31, 1999 included $6.5 million in
nonaccrual maritime loans and $15.8 million in other nonperforming maritime
assets.
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,
--------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Domestic:
Commercial..................... $13,496 $ 17,356 $21,730 $13,988 $16,587
Commercial real estate......... 8,151 6,332 9,417 20,347 5,910
Residential mortgage........... 20,511 22,366 24,808 7,545 6,375
Commercial leases receivable... 264 -- -- -- --
Foreign.......................... 9,302 13,227 4,340 3,800 4,321
------- -------- ------- ------- -------
Total nonaccrual loans....... 51,724 59,281 60,295 45,680 33,193
Restructured loans............... -- 88 3,692 126 143
Other real estate and other
assets owned(1)................. 12,971 15,630 16,963 13,146 11,501
Other(2)......................... 15,767 25,903 -- -- --
------- -------- ------- ------- -------
Total nonperforming assets... $80,462 $100,902 $80,950 $58,952 $44,837
======= ======== ======= ======= =======
Nonperforming assets as a % of
total loans, net of unearned
income plus other foreclosed
assets owned.................... 0.74% 0.95% 0.80% 0.87% 0.73%
======= ======== ======= ======= =======
Accruing loans contractually past
due 90 days or more as to
principal or interest:
Domestic....................... $31,693 $ 40,469 $23,717 $23,812 $18,808
======= ======== ======= ======= =======
</TABLE>
- --------
(1) Other real estate and other assets owned represents collateral on loans to
which Allfirst has taken title. This property, which is held for resale,
is carried at fair value less estimated costs to sell.
(2) Other includes maritime loans discussed in detail under "Nonperforming
Assets". Other also includes a $2.8 million ownership interest in a
commercial aircraft in 1998.
18
<PAGE>
The following table details the gross interest income that would have been
received during the year ended December 31, 1999 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,
1999
----------------
Domestic Foreign
loans Loans
-------- -------
(in thousands)
<S> <C> <C>
Gross interest income that would have been recorded had
nonaccrual loans been current in accordance with original
terms........................................................ $3,369 $2,216
Interest income actually recorded............................. 1,741 233
</TABLE>
Potential problem loans consist of loans that are currently performing in
accordance with contractual terms but for which Allfirst has serious doubts
regarding the ability of the borrowers to continue to comply with present
repayment terms. At December 31, 1999, Allfirst was monitoring $80.2 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, 1999 which were classifiable as nonaccrual,
restructured, past due or potential problem assets.
19
<PAGE>
Allowance for Loan and Lease Losses
The following table details certain information relating to the Allowance for
Loan and Lease Losses ("Allowance") of Allfirst for the five years ended
December 31, 1999. See also Note 5 of the Notes to Consolidated Financial
Statements of Allfirst.
Analysis of the Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Transactions
Allowance at beginning of
year........................ $157,351 $168,186 $154,802 $177,621 $191,024
Provision for loan and lease
losses...................... 34,150 34,297 32,017 6,500 16,000
Losses charged-off:
Commercial loans............ 9,083 6,836 9,581 2,743 1,848
Commercial real estate
loans...................... 283 692 543 6,384 1,270
Residential mortgages....... 4,447 1,300 868 177 110
Retail loans, excluding
credit card loans.......... 17,622 11,476 7,998 5,893 2,988
Credit card loans........... 187 3,463 26,962 30,156 30,352
Commercial leases
receivable................. -- 1 -- -- --
Retail leases receivable.... 1,860 1,106 736 125 40
Foreign loans............... 8,820 19,364 -- -- 1,840
-------- -------- -------- -------- --------
Total losses charged-off.... 42,302 44,238 46,688 45,478 38,448
-------- -------- -------- -------- --------
Recoveries of losses
previously charged-off:
Commercial loans............ 749 1,642 1,083 1,787 1,025
Commercial real estate
loans...................... 1,322 1,928 313 560 452
Residential mortgages....... 965 47 97 8 28
Retail loans, excluding
credit card loans.......... 4,550 3,460 2,893 2,143 2,194
Credit card loans........... 42 102 1,507 2,568 5,127
Commercial leases
receivable................. 13 7 -- 4 17
Retail leases receivable.... 347 255 221 109 202
Foreign loans............... 164 -- 557 -- --
-------- -------- -------- -------- --------
Total recoveries............ 8,152 7,441 6,671 7,179 9,045
-------- -------- -------- -------- --------
Net losses charged-off....... 34,150 36,797 40,017 38,299 29,403
Allowance for 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) --
-------- -------- -------- -------- --------
Total allowance at end of
year........................ $157,351 $157,351 $168,186 $154,802 $177,621
======== ======== ======== ======== ========
Net Loan Losses (Recoveries)
by Category
Commercial loans............ $ 8,334 $ 5,194 $ 8,498 $ 956 $ 823
Commercial real estate
loans...................... (1,039) (1,236) 230 5,824 818
Residential mortgages....... 3,483 1,253 771 169 82
Retail loans................ 13,072 8,016 5,105 3,750 794
Credit card loans........... 144 3,361 25,455 27,588 25,225
Commercial leases
receivable................. (13) (6) -- (4) (17)
Retail leases receivable.... 1,513 851 515 16 (162)
Foreign loans............... 8,656 19,364 (557) -- 1,840
-------- -------- -------- -------- --------
Total....................... $ 34,150 $ 36,797 $ 40,017 $ 38,299 $ 29,403
======== ======== ======== ======== ========
Net Loan Losses (Recoveries)
to Average Loans by Category
Commercial loans............ 0.24% 0.16% 0.37% 0.05% 0.05%
Commercial real estate
loans...................... (0.04) (0.06) 0.01 0.44 0.06
Residential mortgages....... 0.48 0.14 0.08 0.02 0.01
Retail loans................ 0.46 0.30 0.26 0.30 0.08
Credit card loans........... 0.95 10.18 6.72 5.37 4.72
Commercial leases
receivable................. -- -- -- -- --
Retail leases receivable.... 0.44 0.27 0.30 0.04 (0.58)
Foreign loans............... 2.77 4.35 (0.15) -- 0.61
-------- -------- -------- -------- --------
Total loans................. 0.32% 0.36% 0.48% 0.61% 0.51%
Total loans--excluding
credit cards............... 0.32% 0.33% 0.18% 0.18% 0.08%
Allowance as a percentage of
year end loans, net of
unearned income............. 1.46% 1.49% 1.67% 2.28% 2.89%
Allowance as a percentage of
nonperforming loans......... 304.21% 265.04% 262.84% 337.95% 532.82%
</TABLE>
20
<PAGE>
Allfirst 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. The Allowance does not provide for the estimated losses stemming
from uncollectible interest because 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
methodology used for general and specific reserves (together the "Allocated
Reserves"), is Allfirst's best estimate of inherent losses within a range of
credit losses given the current economic climate, the unallocated reserve is
available to support losses that are probable within the high end of the loss
range. The unallocated reserve additionally protects Allfirst 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, 1999 as
provisions of $34.2 million equaled net charge-offs of $34.2 million.
Allocated reserves for the Foreign portfolio decreased by $7.7 million due to
the improvement in the martime portfolio. The unallocated reserve increased by
$12.1 million to $62.5 million. The unallocated reserve represented 40% of the
Allowance as of December 31, 1999 compared to 32% as of December 31, 1998. At
year end, the Allowance covered 1999 charge-offs more than four times and
represented 1.46% of total loans.
21
<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, 1999 was available to absorb losses occurring in any category of loans.
Allocation of the Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial........................ $ 30,103 $ 37,115 $ 35,867 $ 18,139 $ 30,073
Commercial real estate............ 16,500 18,062 21,584 17,671 17,624
Residential mortgage.............. 4,411 4,100 1,719 1,334 1,150
Retail............................ 15,078 12,494 13,041 4,609 3,976
Credit card....................... -- -- 6,010 31,801 36,141
Commercial leases receivable...... 10,210 10,113 10,787 12,374 13,407
Retail leases receivable.......... 2,484 1,298 873 160 111
Foreign........................... 16,063 23,807 14,143 13,540 10,323
Unallocated....................... 62,502 50,363 64,162 55,174 64,816
-------- -------- -------- -------- --------
Total allowance................. $157,351 $157,351 $168,186 $154,802 $177,621
======== ======== ======== ======== ========
</TABLE>
Deposits
Total deposits at December 31, 1999 were $12.1 billion, a $114 million
decrease when compared to December 31, 1998. Noninterest bearing deposits
decreased $541 million from December 31, 1998. The decrease was due to a $578
million decrease in commercial demand deposit balances offset by a $37 million
increase in retail balances.
Interest bearing deposits increased $426 million due to a $1.3 billion
increase in purchased time deposits. This increase was offset by an $848
million decrease in interest bearing deposits from Allfirst's retail and
corporate customers. The decrease in customer deposits included a $26 million
decrease in interest bearing demand deposits, a $430 million decrease in money
market deposits, a $69 million decrease in savings deposits and a $323 million
decrease in consumer time deposits. The decrease in money market deposits is
partially due to a $196 million decline in deposits from a financial services
customer and the withdrawal of a $125 million mortgage escrow deposit from a
corporate customer. 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, savings, and money
market accounts evidences the consumer trend toward higher-yielding, non-
insured investment vehicles. Allfirst has participated in this trend with
investment sales increasing 77% when the year ended December 31, 1999 is
compared to December 31, 1998. To the extent that Allfirst must replace
noninterest bearing or interest bearing deposits with purchased funds,
Allfirst's cost of funds increases.
22
<PAGE>
The following table details the maturity of certificates of deposit of
$100,000 or more on December 31, 1999. There were no non-certificate time
deposits of $100,000 or more at December 31, 1999.
Maturity Distribution of Certificates of Deposit in Amounts of $100,000 or
More
<TABLE>
<CAPTION>
(In millions)
<S> <C>
Within three months............................................... $1,211.9
After three months but within six months.......................... 577.2
After six months but within twelve months......................... 972.7
After twelve months............................................... 102.8
--------
Total........................................................... $2,864.6
========
</TABLE>
Short-term Borrowings
To the extent that deposits are not adequate to fund customer loan demand in
the Banks, or to the extent that long-term borrowings are inadequate to meet
funding requirements of other subsidiaries, Allfirst seeks to meet its
liquidity needs in the short-term funds markets. Allfirst 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, 1999.
Short-term Borrowings
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Federal funds purchased:
End of year outstandings.................. $ 291,993 $1,364,149 $1,092,307
Highest month-end balance................. 1,223,680 1,572,750 1,214,465
Average balance........................... 818,532 726,942 553,226
Average interest rate at year end......... 5.49% 5.00% 6.50%
Weighted average interest rate(1)......... 4.93 5.28 5.47
Repurchase agreements:
End of year outstandings.................. $ 629,281 $ 821,645 $ 605,161
Highest month-end balance................. 984,940 821,645 654,453
Average balance........................... 779,853 640,498 492,638
Average interest rate at year end......... 4.22% 4.45% 5.06%
Weighted average interest rate(1)......... 4.55 4.77 4.95
Master demand notes of Allfirst:
End of year outstandings.................. $ 334,186 $ 319,705 $ 335,116
Highest month-end balance................. 339,301 325,524 343,907
Average balance........................... 319,734 308,587 338,602
Average interest rate at year end......... 5.15% 4.65% 4.90%
Weighted average interest rate(1)......... 4.78 4.98 4.91
Other borrowed funds, short-term:
End of year outstandings.................. $ 375,576 $ 58,222 $ 151,574
Highest month-end balance................. 375,576 301,539 675,111
Average balance........................... 197,249 171,747 560,911
Average interest rate at year end......... 4.22% 3.68% 5.90%
Weighted average interest rate(1)......... 4.94 5.06 5.53
</TABLE>
- --------
(1) The weighted average interest rate is calculated by dividing the annual
interest expense by the daily average outstanding principal balance.
23
<PAGE>
As indicated, short-term borrowings include master demand notes of Allfirst.
The master demand note ("masternote") is an unsecured obligation of Allfirst
which was developed to meet the investment needs of Allfirst'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 Allfirst's nonbank subsidiaries, with any excess funds invested in
short-term liquid assets. Outstanding masternote balances are determined by
the investable balances of Allfirst's sweep account customers that elect the
masternote investment option.
Long-term Debt
Long-term debt increased $339 million when compared to December 31, 1998.
During the second quarter of 1999, Allfirst redeemed its 10.375% subordinated
capital notes using the proceeds from the issuance of $100 million of 6.875%
subordinated notes. During the third quarter of 1999, Allfirst issued $100
million Floating Rate Non-cumulative Subordinated Capital Trust Enhanced
Securities. The proceeds from these securities, as well as other funding
sources, were used to redeem Allfirst's preferred stock. A more detailed
description of the Subordinated Capital Trust Enhanced Securities is included
under "Capital Adequacy and Resources". In addition, long-term advances from
the Federal Home Loan Bank increased $200 million from December 31, 1998.
Liquidity Risk Management
Liquidity is the ability of Allfirst 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 Allfirst is enhanced by asset and liability management
policies. The Asset and Liability Committee ("ALCO") is responsible for
setting general guidelines regarding Allfirst's sources and uses of funds and
asset and liability sensitivity, pursuant to Allfirst'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. Allfirst
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. Allfirst's current policy requires qualifying liquid assets to
cover 5% of total retail liabilities plus the higher of 15% of total unsecured
wholesale liabilities or sufficient liquidity to cover all wholesale
liabilities maturing within 180 days at various required percentages, plus 15%
of undrawn credit facilities. Available liquidity at December 31, 1999 was
$3.4 billion versus required liquidity per policy of $3.2 billion.
Dividends from subsidiaries are the primary source of funds for the debt
service and preferred stock requirements of Allfirst. Dividends from
subsidiaries totaled $141.6 million for the year ended December 31, 1999.
Management is confident that the earnings and dividend capacity of its
subsidiary banks will be adequate to service interest obligations on the long-
term debt of Allfirst. On March 30, 1999, Allfirst paid a dividend of $90
million to its sole common shareholder, AIB. In January 2000, Allfirst's Board
of Directors declared a $92 million dividend, payable to AIB in March 2000.
Stockholders' Equity and Capital Adequacy
Allfirst's capital strength provides the resources and flexibility to
capitalize on business growth and acquisition opportunities. At December 31,
1999, Allfirst's Tier 1 risk based capital ratio was 9.86% ($1.5 billion of
Tier 1 capital) and its total risk based capital ratio was 13.24% ($2.0
billion of total risk based capital). Tier 1 capital consists primarily of
common shareholder's equity and qualifying amounts of subordinated capital
trust preferred securities less goodwill and certain intangible assets, while
total risk-based capital adds qualifying subordinated debt, the allowance for
loan and lease losses, and other off balance sheet reserves, 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.
24
<PAGE>
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 consist of tangible common shareholders' equity (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.
On July 13, 1999, Allfirst issued 100,000 Floating Rate Non-cumulative
Subordinated Capital Trust Enhanced Securities ("Capital Trust Securities") at
a price to investors of $98.9 million. Each Capital Trust Security pays a non-
cumulative quarterly distribution based on three month LIBOR plus 1.50%, reset
quarterly. These securities are classified as long-term debt on the
Consolidated Statement of Condition and qualify as Tier 1 Capital, with the
limitation that the Capital Trust Securities and other qualifying capital
trust preferred securities cannot exceed 25% of Tier 1 capital. On July 14,
1999, the proceeds from the issuance of the Capital Trust Securities, as well
as other funding sources, were used to redeem Allfirst's 7.875% non-cumulative
Preferred Stock at a redemption price of $25.00 per share plus $2.4 million of
accrued and unpaid dividends.
The following table details Allfirst's capital components and ratios at
December 31, 1999 and 1998 based upon the capital 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,
------------------------
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Preferred stockholders' equity...................... $ -- $ 144,852
Common stockholder's equity......................... 1,823,020 1,866,475
Guaranteed preferred beneficial interests in junior
subordinated debentures............................ 395,744 296,330
Disallowed intangibles.............................. (841,161) (893,584)
Minority interest................................... 120 --
Net unrealized losses (gains) on investment
securities available for sale...................... 96,163 (24,414)
----------- -----------
Tier 1 capital.................................... 1,473,886 1,389,659
----------- -----------
Qualifying subordinated debt........................ 339,510 259,815
Redeemable preferred stock.......................... 5,005 4,866
Allowance for loan and lease losses................. 155,951 155,951
Off balance sheet reserves.......................... 4,209 4,075
Mandatory convertible securities.................... -- 59,995
----------- -----------
Tier 2 capital.................................... 504,675 484,702
----------- -----------
Total capital....................................... $ 1,978,561 $ 1,874,361
=========== ===========
Risk-adjusted assets................................ $14,943,778 $14,816,766
Average quarterly assets (fourth quarter)........... $17,689,521 $17,420,806
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets............ 9.86% 9.38%
Regulatory minimum.............................. 4.00 4.00
Total capital to risk-adjusted assets............. 13.24 12.65
Regulatory minimum.............................. 8.00 8.00
Leverage ratio...................................... 8.75 8.41
</TABLE>
25
<PAGE>
Year 2000
During 1999, management completed the process of preparing for the Year 2000
date change. This process involved identifying and remediating date
recognition problems in computer systems, software and other operating
equipment, working with third parties to address their Year 2000 issues, and
developing contingency plans to address potential risks in the event of Year
2000 failures. To date, Allfirst has successfully managed the transition.
Although considered unlikely, unanticipated problems in Allfirst's core
business processes, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
efforts to date to remediate affected systems and develop contingency plans.
Management will continue to monitor all business processes, including
interaction with Allfirst's customers, vendors and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly.
Allfirst completed the replacement of major systems in 1998 in order to
upgrade its technology platforms to its strategic target environment. In the
process, Allfirst replaced a significant portion of its software with Year
2000 compliant products. It is difficult to separate the costs associated with
system replacements and upgrades due to target environment strategies from
those associated with Year 2000 compliance. Direct expenses associated with
system replacements and upgrades due to target environment strategies and Year
2000 compliance totaled $18.9 million of which $4.3 million was expensed in
the year ended December 31, 1999. In addition, capital expenditures related to
system upgrades totaled $38.4 million. Depreciation expense related to these
capital expenditures was $5.9 million in 1999 and $0.1 million in 1998.
Recent Accounting Pronouncements
The impact of recently issued accounting pronouncements is detailed in Note
2 of the Notes to Consolidated Financial Statements of Allfirst.
Results of Operations--1998 Compared to 1997
Allfirst'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, Allfirst and its parent, AIB, acquired Dauphin Deposit
Corporation ("DDC"), which was merged into Allfirst. 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 Allfirst'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 Allfirst to create a new
company, instead of simply combining the two organizations. In connection with
the target environment identification and integration
26
<PAGE>
process, Allfirst 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, Allfirst decided to exit two business
lines, consumer credit cards and residential 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 Allfirst. Allfirst continues to offer residential
mortgage products through retail bank branches and consumer credit card
products through agency relationships. The sales of these business lines did
not have an adverse effect on Allfirst's financial condition or results of
operations.
In the majority of Allfirst'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 Merger. Other
significant factors affecting Allfirst's results of operations are described
below.
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, 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.
Allfirst's noninterest income for the year ended December 31, 1998 was
$436.5 million, a $118.7 million (37.3%) 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 $26.5 million (9.2%). 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 Allfirst's
residential first mortgage loan origination businesses in the first quarter of
1998. 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.
Allfirst's noninterest expenses for the year ended December 31, 1998 were
$601.9 million, a $55.8 million (10.2%) 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. Allfirst 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 Allfirst'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
27
<PAGE>
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.
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 Allfirst's objectives. As a financial institution, Allfirst's
primary market risk exposure is interest rate risk.
Interest Rate Risk Management
Management of the interest rate risk of Allfirst 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 Allfirst's sensitivity to changing interest rates is
accomplished primarily through a simulation model. Allfirst identifies its
tolerance for interest rate risk in terms of a probable maximum loss ("PML").
Allfirst'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 Allfirst'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 Allfirst under these two scenarios is
deemed to be Allfirst's equity at risk exposure. At December 31, 1999,
Allfirst's equity at risk was in compliance with a policy limit of a
difference of no more than $56.9 million.
28
<PAGE>
The average, high and low equity at risk exposure for the years ended
December 31, 1999 and 1998 are detailed in the following table:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Average equity at risk......................................... $44,941 $28,679
Highest equity at risk......................................... $49,804 36,990
Lowest equity at risk.......................................... $24,449 10,715
</TABLE>
The average equity at risk exposures for the year ended December 31, 1999
increased by $16.3 million when compared to the year ended December 31, 1998.
The increase in equity at risk is due to investment in longer duration
investment securities in 1999 and a decrease in the duration of Allfirst's
funding in 1999 due to the decline in customer deposits.
Earnings at Risk
The PML impact on future income is known as earnings at risk. 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. Allfirst'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 Allfirst's equity at
risk exposure. At December 31, 1999, Allfirst's earnings at risk was in
compliance with the 1999 policy limit of $30.3 million.
The average, high and low earnings at risk exposure for the years ended
December 31, 1999 and 1998 are detailed in the table below:
<TABLE>
<CAPTION>
Years ended
December 31,
--------------
1999 1998
------ -------
(in thousands)
<S> <C> <C>
Average earnings at risk........................................ $3,958 $ 6,428
Highest earnings at risk........................................ 5,901 11,128
Lowest earnings at risk......................................... 610 1,474
</TABLE>
No material change occurred in earnings at risk for the year ended December
31, 1999 compared to the year ended December 31, 1998.
Fixed Income and Derivative Trading Risk Management
Allfirst maintains active securities and derivative trading positions
resulting from activity generated for corporate customers as well as
Allfirst's own trading account. Allfirst utilizes a variance-covariance VAR
measurement system for the determination of market risk. VAR provides a single
number summary of the largest amount Allfirst 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, 1999, aggregate
fixed income and derivative trading VAR was in compliance with a policy limit
of $3.0 million.
29
<PAGE>
The average, high and low fixed income and derivative trading VAR for the
years ended December 31, 1999 and 1998 are detailed in the following table:
<TABLE>
<CAPTION>
Years ended
December
31,
-----------
1999 1998
----- -----
(in
thousands)
<S> <C> <C>
Average fixed income and derivative trading value at risk.......... $ 95 $ 253
Highest fixed income and derivative trading value at risk.......... 498 897
Lowest fixed income and derivative trading value at risk........... -- 1
</TABLE>
No material change occurred in the risk profile of fixed income and
derivative trading for the year ended December 31, 1999 compared to the year
ended December 31, 1998.
Foreign Exchange Risk Management
Allfirst 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, 1999, the value at
risk of Allfirst'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 Allfirst's aggregate foreign
exchange position for the years ended December 1999 and 1998 are detailed
below:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Average aggregate foreign exchange position value at risk........ $1,003 $1,103
Highest aggregate foreign exchange position value at risk........ 2,004 2,111
Lowest aggregate foreign exchange position value at risk......... 152 115
</TABLE>
No material change occurred in the risk profile of foreign exchange
positions for the year ended December 31, 1999 compared to the year ended
December 31, 1998.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998 1997
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Interest Income
Interest and fees on loans..................... $ 793,271 $ 795,127 $675,450
Interest and dividends on investment
securities:
Taxable...................................... 235,647 221,590 209,393
Tax-exempt................................... 20,911 21,626 13,058
Dividends.................................... 11,656 11,029 5,684
Interest on loans held-for-sale................ 1,596 17,781 19,987
Other interest income.......................... 3,508 9,253 17,926
---------- ---------- --------
Total interest and dividend income......... 1,066,589 1,076,406 941,498
---------- ---------- --------
Interest Expense
Interest on deposits........................... 363,093 390,280 297,644
Interest on Federal funds purchased and other
short-term borrowings......................... 102,306 94,259 103,722
Interest on long-term debt..................... 64,740 49,639 44,388
---------- ---------- --------
Total interest expense..................... 530,139 534,178 445,754
---------- ---------- --------
Net interest income............................ 536,450 542,228 495,744
Provision for loan and lease losses (note 5)... 34,150 34,297 32,017
---------- ---------- --------
Net interest income after provision for loan
and lease losses.............................. 502,300 507,931 463,727
---------- ---------- --------
Noninterest Income
Service charges on deposit accounts............ 93,948 89,808 80,140
Trust and investment advisory fees............. 82,081 71,221 45,867
Electronic banking income...................... 24,485 20,789 16,230
Other income (note 15)......................... 104,708 133,960 147,028
---------- ---------- --------
Total fees and other income................ 305,222 315,778 289,265
Securities gains, net (note 4)................. 4,975 60,759 456
Gain on sale of credit card loans.............. -- 60,000 28,155
---------- ---------- --------
Total noninterest income................... 310,197 436,537 317,876
---------- ---------- --------
Noninterest Expenses
Salaries and other personnel costs (notes 13
and 14)....................................... 275,942 311,030 292,497
Equipment costs (note 6)....................... 45,936 42,882 40,757
Occupancy costs (note 6)....................... 36,579 37,974 36,976
Other operating expenses (note 15)............. 123,557 154,390 121,116
---------- ---------- --------
Total operating expenses................... 482,014 546,276 491,346
Intangible assets amortization expense......... 50,996 55,602 34,768
Merger related expenses (note 16).............. -- -- 20,000
---------- ---------- --------
Total noninterest expenses................. 533,010 601,878 546,114
---------- ---------- --------
Income before income taxes..................... 279,487 342,590 235,489
Income tax expense (note 17)................... 101,410 124,467 84,301
---------- ---------- --------
Net income..................................... 178,077 218,123 151,188
Dividends on preferred stock................... 5,765 12,225 12,225
---------- ---------- --------
Net income to common shareholders.............. $ 172,312 $ 205,898 $138,963
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
(in thousands,
except per share amounts)
<S> <C> <C>
Assets
Cash and due from banks............................ $ 798,389 $ 1,206,178
Interest bearing deposits in other banks........... 1,339 1,478
Trading account securities......................... 1,716 42,528
Federal funds sold and securities purchased under
resale agreements................................. 147,225 130,916
Investment securities available-for-sale (note 4).. 4,287,343 4,815,087
Loans held-for-sale................................ 4,808 84,254
Loans, net of unearned income of $217,146 in 1999
and $199,471 in 1998:
Commercial....................................... 3,542,014 3,452,416
Commercial real estate........................... 2,329,886 2,305,639
Residential mortgage............................. 686,780 827,103
Retail........................................... 2,945,593 2,755,218
Credit card......................................
Commercial leases receivable..................... 615,670 540,395
Retail leases receivable......................... 383,880 318,582
Foreign.......................................... 276,807 365,067
------------ ------------
Total loans, net of unearned income............ 10,780,630 10,564,420
Allowance for loan and lease losses (note 5)....... (157,351) (157,351)
------------ ------------
Loans, net..................................... 10,623,279 10,407,069
------------ ------------
Premises and equipment (note 6).................... 203,425 203,903
Due from customers on acceptances.................. 4,601 12,253
Intangible assets (note 7)......................... 841,161 893,584
Other assets....................................... 593,964 497,670
------------ ------------
Total assets................................. $ 17,507,250 $ 18,294,920
============ ============
Liabilities and Stockholders' Equity
Domestic deposits:
Noninterest bearing deposits..................... $ 2,735,959 $ 3,276,589
Interest bearing deposits........................ 9,074,884 8,623,861
Interest bearing deposits in foreign banking
office............................................ 331,744 356,601
------------ ------------
Total deposits................................. 12,142,587 12,257,051
Federal funds purchased and securities sold under
repurchase agreements (note 8).................... 921,274 2,185,794
Other borrowed funds, short-term (note 9).......... 709,762 377,927
Bank acceptances outstanding....................... 4,602 12,253
Accrued taxes and other liabilities (note 17)...... 702,150 586,137
Long-term debt (note 10)........................... 1,195,394 856,320
------------ ------------
Total liabilities............................ 15,675,769 16,275,482
------------ ------------
4.50% Cumulative, Redeemable Preferred Stock, $5
par value per share, $100 liquidation preference
per share; authorized and issued 90,000 shares
(note 11)......................................... 8,341 8,111
Minority interest.................................. 120 --
Commitments and contingent liabilities (notes 6, 20
and 23)
Stockholders' equity:
7.875% Non-cumulative Preferred Stock, Series A,
$5 par value per share, $25 liquidation
preference per share; authorized 8,910,000
shares; issued 6,000,000 shares at December 31,
1998 (note 11).................................. -- 30,000
Common stock, no par value per share; authorized
1,200,000, shares; issued 597,763 shares........ 85,395 85,395
Capital surplus.................................. 582,780 701,988
Retained earnings................................ 1,252,646 1,170,565
Accumulated other comprehensive income (loss)
(note 12)....................................... (97,801) 23,379
------------ ------------
Total stockholders' equity..................... 1,823,020 2,011,327
------------ ------------
Total liabilities, redeemable preferred
stock, minority interest and stockholders'
equity...................................... $ 17,507,250 $ 18,294,920
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
hensive
Preferred Common Capital Income Retained
Stock Stock Surplus (Loss) Earnings Total
--------- ------- -------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
loss.................. ( 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
Net income.............. -- -- -- -- 178,077 178,077
Other comprehensive
income, net of tax:
Minimum pension
liability adjustment.. -- -- -- (603) -- (603)
Change in unrealized
gains/losses on
investment securities,
net of
reclassification
adjustment (Note 12).. -- -- -- (120,577) -- (120,577)
----------
Other comprehensive
loss.................. ( 121,180)
----------
Comprehensive income.. 56,897
----------
Tax benefit--restricted
stock awards........... 792 792
Redemption of preferred
stock.................. (30,000) -- (120,000) (150,000)
Accretion of redeemable
preferred stock........ -- -- -- -- (231) (231)
Dividends declared on
common stock........... -- -- -- -- (90,000) (90,000)
Dividends declared on
preferred stock........ -- -- -- -- (5,356) (5,356)
Dividends declared on
redeemable preferred
stock.................. -- -- -- -- (409) (409)
-------- ------- -------- -------- ---------- ----------
Balance on December 31,
1999................... $ -- $85,395 $582,780 $(97,801) $1,252,646 $1,823,020
======== ======= ======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Net income.............................. $ 178,077 $ 218,123 $ 151,188
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan and lease losses.... 34,150 34,297 32,017
Provision for other real estate
losses................................ 1,890 387 221
Amortization of intangibles............ 50,996 55,602 34,768
Depreciation and amortization.......... 34,639 29,347 32,416
Deferred income tax expense............ 62,561 67,820 64,585
Net gain on the sale of assets......... (7,333) (121,731) (29,192)
Net decrease (increase) in loans
originated for sale................... 79,446 342,965 (79,927)
Net decrease (increase) in trading
account securities.................... 25,189 (2,989) (20,180)
Net decrease in accrued interest
receivable............................ 898 4,908 2,683
Net increase (decrease) in accrued
interest payable...................... 35,011 (19,864) 16,454
Other, net............................. 51,537 (94,363) (109,887)
----------- ----------- -----------
Net cash provided by operating
activities............................ 547,061 514,502 95,146
----------- ----------- -----------
Investing Activities
Proceeds from sales of investment
securities available-for-sale......... 1,490,223 3,605,263 2,480,951
Proceeds from paydowns and maturities
of investment securities available-
for-sale.............................. 823,063 865,772 857,890
Purchases of investment securities
available-for sale.................... (2,024,335) (4,554,015) (2,996,164)
Net (increase) decrease in short-term
investments........................... (23,807) (79,786) 46,569
Net disbursements from lending
activities of banking subsidiaries.... (279,050) (626,440) (427,611)
Principal collected on loans of nonbank
subsidiaries.......................... 13,334 39,427 58,244
Loans originated by nonbank
subsidiaries.......................... (10,997) (30,071) (68,986)
Principal payments received under
leases................................ 5,203 4,578 3,889
Purchases of assets to be leased....... (1,382) (3,855) (3,192)
Proceeds from the sale of other real
estate................................ 35,537 10,059 10,207
Purchases of premises and equipment.... (35,418) (72,475) (33,083)
Proceeds from the sale of premises and
equipment............................. 3,619 6,225 --
Proceeds from the sale of credit card
loans................................. -- 197,369 366,694
Acquisitions........................... -- -- (874,261)
Other, net............................. (11,715) (1,795) 84,854
----------- ----------- -----------
Net cash used for investing
activities............................ (15,725) (639,744) (493,999)
----------- ----------- -----------
Financing Activities
Net (decrease) increase in deposits.... (114,464) (207,105) 778,741
Net (decrease) increase in short-term
borrowings............................ (917,672) 379,563 (411,499)
Proceeds from the issuance of long-term
debt.................................. 299,615 200,000 196,951
Principal payments on long-term debt... (60,000) -- (20,033)
Payments on medium-term bank notes..... -- (50,000) --
Proceeds from the issuance of
guaranteed preferred beneficial
interests in junior subordinated
debentures............................ -- -- 148,317
Proceeds from the issuance of
Subordinated Capital Trust Enhanced
Securities............................ 98,902 -- --
Redemption of Preferred Stock.......... (150,000) -- --
Proceeds from issuance of Preferred
Stock of a subsidiary................. 120 -- --
Cash dividends paid.................... (95,765) (69,225) (56,225)
----------- ----------- -----------
Net cash (used for) provided by
financing activities.................. (939,264) 253,233 636,252
----------- ----------- -----------
(Decrease) increase in cash and cash
equivalents............................ (407,928) 127,991 237,399
Cash and cash equivalents at January
1,..................................... 1,207,656 1,079,665 842,266
----------- ----------- -----------
Cash and cash equivalents at December
31,.................................... $ 799,728 $ 1,207,656 $ 1,079,665
=========== =========== ===========
Supplemental Disclosures
Interest payments...................... $ 495,128 $ 554,041 $ 403,948
Income tax payments.................... 34,251 31,952 38,603
Noncash Investing And Financing
Activities
Common stock issued to AIB in
connection with purchase acquisition.. -- -- 504,281
Loan charge-offs....................... 42,302 44,238 46,688
Transfers to other real estate and
other assets owned.................... 27,532 30,442 9,936
</TABLE>
See accompanying notes to consolidated financial statements
34
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allfirst Financial Inc. and subsidiaries ("Allfirst"), formerly First
Maryland Bancorp, 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, Allfirst Bank and Allfirst Financial Center N.A. (the "Banks").
Other subsidiaries of Allfirst are primarily engaged in consumer banking,
construction lending, equipment, consumer, and commercial financing and
investment advisory services. Allfirst 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 Allfirst 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 Allfirst Financial Inc. and all of its subsidiaries. All material
intercompany transactions and balances have been eliminated. Certain amounts
in the 1998 and 1997 consolidated financial statements have been reclassified
to conform to the 1999 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 and disclosure of contingent 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 loan and lease 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 Allfirst'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. Allfirst also monitors its exposure with respect to
securities borrowed transactions and requests the return of excess collateral
as required.
Securities--Allfirst'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 than temporary, are included as part of noninterest income.
The cost of securities sold is determined based on the specific identification
method.
35
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 loan and lease losses. The net asset
amounts for leased assets reflect related estimated residual values. 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 120 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 loan and lease losses through
changes in the provision for loan and lease 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. Allfirst defines "minimum delay" as past due less than 90 days.
Allowance for Loan and Lease Losses--The allowance for loan and lease 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 level of the allowance is based on management's evaluations
of various factors effecting the loan portfolio including overall growth in
the portfolio, an analysis of significant individual credits and homogenous
pools, adverse situations that could affect a borrower's ability to pay, prior
and current loss experience and economic conditions. 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.
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
36
<PAGE>
ALLFIRST FINANCIAL INC. 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. Allfirst
recognizes mortgage servicing rights related to both retail and commercial
mortgage originations. Market quotes, when available, are used to determine
the fair value of the mortgage servicing rights at origination. When market
quotes are not available, mortgage servicing rights are recorded using a
discounted cash flow analysis. 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. Allfirst
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.
Loans serviced for third party investors at December 31, 1999 and 1998 totaled
$1.2 billion and $862.7 million, respectively. These amounts are not included
in the accompanying consolidated financial statements.
Other Real Estate and Assets Owned--Other real estate and other assets owned
represents property acquired through foreclosure or deeded to Allfirst in lieu
of foreclosure on loans on which borrowers have defaulted as to the payment of
principal and interest. Other real estate and assets owned, at the time of
foreclosure, are recorded at the asset's fair value minus estimated costs to
sell. Any write-downs at the date of acquisition are charged to the allowance
for loan and lease 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 Allfirst 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.
Income Taxes--Allfirst 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--Allfirst 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. Allfirst accounts for these instruments on an
accrual basis when the following conditions are met: (1) the specific assets
or liabilities to be hedged expose Allfirst to interest rate risk; (2) the
financial instruments manage the interest rate risk exposure; (3) the
financial instruments are designated to specific groups of assets or
liabilities; and (4) at inception and throughout the terms of the financial
instruments, there is a high correlation between the indices of the financial
instruments and the indices of the designated assets and liabilities. Changes
in the fair value of risk management instruments are not included in the
financial
37
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Allfirst 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.
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--Allfirst's stock based compensation plans are
accounted for under the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations.
Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for
Stock-Based Compensation", allows a company to recognize stock-based
compensation using a fair-value based method of accounting if it so elects.
The Corporation has elected not to adopt the recognition provisions of SFAS
No. 123.
2. Recent Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of FASB Statement 133", is effective
for financial statements for all fiscal quarters of fiscal years beginning
after June 15, 2000. 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, Allfirst and its parent, AIB, acquired Dauphin Deposit
Corporation ("DDC") which was merged into Allfirst. 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 two EURO 0.32 ordinary shares of AIB after adjusting for the three
for one stock split in May 1999. 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 was 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
38
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Allfirst's results of operations since July 1, 1997. Allfirst 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,
Allfirst 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.
Allfirst 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 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, 1999 and 1998. The remaining balances
are primarily related to facilities closing costs.
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------
1999 1998
------ ------
(in millions)
<S> <C> <C>
Balance at beginning of year................................. $ 14.9 $ 25.0
Cash outlays................................................. (12.1) (10.1)
------ ------
Balance at end of year....................................... $ 2.8 $ 14.9
====== ======
</TABLE>
A summary of unaudited pro forma combined financial information for the year
ended December 31, 1997 as if the transaction had occurred on January 1, 1997
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>
1997
--------------
(in thousands)
<S> <C>
Net interest income........................................... $575,097
Noninterest income............................................ 379,679
Net income.................................................... 147,538
</TABLE>
39
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investment Securities
The amortized cost and fair values of available-for-sale securities at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies.......... $ 211,397 $ 12 $ (3,514) $ 207,895
Mortgage-backed obligations... 2,000,639 -- (104,578) 1,896,061
Collateralized mortgage
obligations.................. 1,068,203 569 (17,489) 1,051,283
Asset-backed securities....... 397,636 -- (5,225) 392,411
Obligations of states and
political subdivisions....... 447,880 2,432 (13,696) 436,616
Other debt securities......... 73,760 44 -- 73,804
Equity securities............. 244,351 5,248 (20,326) 229,273
---------- ------ --------- ----------
Total....................... $4,443,866 $8,305 $(164,828) $4,287,343
========== ====== ========= ==========
</TABLE>
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.
Government agencies........... $ 253,728 $ 2,758 $ (268) $ 256,218
Mortgage-backed obligations.... 2,586,365 18,735 (2,528) 2,602,572
Collateralized mortgage
obligations................... 736,795 3,849 (1,822) 738,822
Asset-backed securities........ 489,328 4,046 (347) 493,027
Obligations of states and
political 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>
The amortized cost and fair values of available-for-sale debt securities at
December 31, 1999 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, 1999
---------------------
Amortized Fair
Cost Value
---------- ----------
(in thousands)
<S> <C> <C>
Due in one year or less............................... $ 218,107 $ 216,782
Due after one year through five years................. 206,098 204,972
Due after five years through ten years................ 54,451 54,118
Due after ten years................................... 254,381 242,442
Mortgage-backed and asset backed securities(1)........ 3,466,478 3,339,756
---------- ----------
Total............................................... $4,199,515 $4,058,070
========== ==========
</TABLE>
- --------
(1) Includes mortgage-backed obligations, collateralized mortgage obligations
and asset backed securities.
40
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proceeds from the sale of investment securities available-for-sale were $1.5
billion, $3.6 billion and $2.5 billion during 1999, 1998, and 1997
respectively. Gross gains and losses realized on the sale of investment
securities available-for-sale were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Gross gains........................................ $5,452 $60,973 $ 5,212
Gross losses....................................... (477) (214) (4,756)
------ ------- -------
Total............................................ $4,975 $60,759 $ 456
====== ======= =======
</TABLE>
Investment securities with a book value of $2.3 billion at December 31, 1999
and $2.4 billion at December 31, 1998 were pledged to secure public funds,
trust deposits, repurchase agreements, Federal Home Loan Bank borrowings, and
for other purposes required by law.
5. Impaired Loans and Allowance for Loan and Lease 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 loan and
lease 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 Allfirst'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, 1999, total nonaccrual loans exceeded total
impaired loans by $23.3 million. Nonaccrual loans that did not meet the
definition of an impaired loan included nonaccrual residential mortgage loans
of $20.5 million and a $2.8 million nonaccrual foreign loan which is
classified as a nonaccrual loan due to regulatory requirements. All impaired
loans are included in nonperforming assets. At December 31, 1999, 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
loan and lease losses.
The following tables present information on impaired loans.
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Recorded investment in impaired loans at the end of the
period.................................................... $28,413 $34,114
Impaired loans for which there is a related allowance for
loan and lease losses..................................... 10,691 20,338
Related allowance for loan and lease losses................ 3,448 6,697
Impaired loans for which there is no related allowance for
loan and lease losses..................................... 17,722 13,776
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Average recorded investment in impaired loans...... $31,482 $40,211 $34,140
Interest income recognized on impaired loans....... 1,398 988 1,742
</TABLE>
41
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the activity in the allowance for loan and
lease losses:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year................. $157,351 $168,186 $154,802
Provision charged to operating expenses...... 34,150 34,297 32,017
Less charge-offs, net of recoveries of
$8,152, $7,441, and $6,671.................. (34,150) (36,797) (40,017)
Allowance on loans of acquired banks......... -- -- 42,884
Allowance attributable to loans sold......... -- (6,850) (21,500)
Transfer of allowance to reserve for off-
balance sheet liability..................... -- (1,485) --
-------- -------- --------
Balance at end of year....................... $157,351 $157,351 $168,186
======== ======== ========
</TABLE>
6. Premises and Equipment
Components of premises and equipment at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
Accumulated Accumulated
Depreciation Depreciation
And And
Cost Amortization Net Cost Amortization Net
-------- ------------ -------- -------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Land.................... $ 20,322 $ -- $ 20,322 $ 22,102 $ -- $ 22,102
Buildings and land
improvements........... 89,367 24,085 65,282 84,727 21,840 62,887
Leasehold improvements.. 50,563 26,157 24,406 49,598 25,198 24,400
Furniture and
equipment.............. 81,558 50,534 31,024 76,029 47,103 28,926
Computer hardware and
software............... 155,881 93,490 62,391 143,294 77,706 65,588
-------- -------- -------- -------- -------- --------
Total................. $397,691 $194,266 $203,425 $375,750 $171,847 $203,903
======== ======== ======== ======== ======== ========
</TABLE>
Depreciation and amortization on premises and equipment charged to
operations amounted to $32.1 million in 1999, $27.6 million in 1998, and $27.9
million in 1997.
Lease Commitments
Allfirst occupies various office facilities under lease arrangements,
virtually all of which are operating leases. Rental expense under these
leases, net of subleases, was $18.6 million in 1999, $19.8 million in 1998,
and $20.1 million in 1997. Rental expense under equipment lease arrangements,
all of which are considered short-term commitments, was $4.7 million in 1999,
$4.5 million in 1998, and $4.3 million in 1997. Aggregate minimum annual
noncancellable long-term lease commitments, net of subleases, total
approximately $20.5 million in 2000, $18.7 million in 2001, $16.3 million in
2002, $14.2 million in 2003, $12.7 million in 2004 and $55.4 million
thereafter.
The lease amounts represent minimum rentals not adjusted for property tax
and operating expenses which Allfirst 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
42
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
properties; thus, it is anticipated that future annual minimum lease
commitments will not be less than the rental expense for 1999.
7. Intangible Assets
Intangible assets at December 31, 1999 and 1998 included the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Goodwill.................................................. $802,499 $840,487
Core deposit intangible................................... 32,588 44,522
Other premiums on deposits................................ 4,000 4,904
Employment contracts...................................... 1,768 2,476
Other..................................................... 306 1,195
-------- --------
Total................................................... $841,161 $893,584
======== ========
</TABLE>
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 Allfirst's market activity in Federal funds
on behalf of its correspondent banks. At December 31, 1999, Federal funds sold
totaled $128.0 million and Federal funds purchased totaled $292.0 million.
Securities sold or purchased under agreements to resell or repurchase are
secured by U.S. Treasury and U.S. Government agency securities and generally
mature within three months. At December 31, 1999, securities purchased under
agreements to resell totaled $19.2 million. All securities purchased were
delivered either directly to Allfirst 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 $4.9 million during 1999, and the maximum amount outstanding at
any month end during 1999 was $19.2 million.
At December 31, 1999, securities sold under agreements to repurchase totaled
$629.3 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 $779.9 million during 1999, and the
maximum amount outstanding at any month end during 1999 was $984.9 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, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Master demand notes of Allfirst........................... $334,186 $319,705
Federal funds purchased--term............................. 100,000 --
Treasury tax and loan note account........................ 275,576 56,020
Other..................................................... -- 2,202
-------- --------
Total................................................... $709,762 $377,927
======== ========
</TABLE>
43
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, Allfirst 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.
10. Long-term Debt
Following is a summary of the long-term debt of Allfirst at December 31,
1999 and 1998. All of the long-term debt of Allfirst is unsecured, except the
Federal Home Loan Bank Advances.
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---------- --------
(in thousands)
<S> <C> <C>
10.375% Subordinated Capital Notes due August 1, 1999.. $ -- $ 59,995
Adjustable rate Federal Home Loan Bank Advances........ 400,000 200,000
8.375% Subordinated Notes due May 15, 2002............. 99,896 99,853
7.20% Subordinated Notes due July 1, 2007.............. 199,915 199,903
6.875% Subordinated Notes due June 1, 2009............. 99,637 --
Floating rate Subordinated Capital Income Securities
due January 15, 2027.................................. 147,979 147,690
Floating rate Subordinated Capital Income Securities
due February 1, 2027.................................. 148,808 148,640
Floating rate Non-cumulative Subordinated Capital Trust
Enhanced Securities due July 15, 2029................. 98,958 --
Obligations under capitalized leases................... 201 239
---------- --------
Total................................................ $1,195,394 $856,320
========== ========
</TABLE>
The combined maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
-------- -------- ------- ---- ---- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
$200,000 $200,000 $99,896 $201 $ -- $695,297 $1,195,394
</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 Allfirst.
Allfirst repaid the 10.375% notes on June 2, 1999, using $60 million of the
proceeds from the issuance of the 6.875% Subordinated Notes.
Adjustable rate Federal Home Loan Bank Advances of $200 million each mature
on December 4, 2000 and August 20, 2001, respectively, and are redeemable
prior to maturity. The interest rates are equal to one month LIBOR minus 5
basis points and one month LIBOR minus 3 basis points, respectively. Interest
is payable monthly on each reset date. Investment securities with a market
value of $421 million were pledged to secure these borrowings at December 31,
1999.
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. Concurrently with the
issuance of these subordinated notes, Allfirst entered into an interest rate
swap to convert the fixed rate on the subordinated notes to a floating rate.
44
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 6.875% Subordinated Notes mature on June 1, 2009, with interest payable
semi-annually and are not redeemable prior to maturity. Concurrently with the
issuance of these subordinated notes, Allfirst 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. Allfirst
has fully and unconditionally guaranteed all of the Trusts' obligations under
the Capital Securities. Allfirst 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 Allfirst 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 Allfirst 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 Allfirst in whole or in part on or after February
1, 2007. The Junior Subordinated Debentures are redeemable by Allfirst 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.
The Floating Rate Non-Cumulative Subordinated Capital Trust Enhanced
Securities ("Capital Trust Securities") were issued through a consolidated
subsidiary, Allfirst Preferred Capital Trust ("Allfirst Capital Trust").
Allfirst Capital Trust is a statutory business trust formed on June 29, 1999
under the laws of the State of Delaware for the exclusive purposes of (i)
issuing the Capital Trust Securities and common securities, (ii) purchasing
Asset Preferred Securities issued by Allfirst Preferred Asset Trust ("Allfirst
Asset Trust") and (iii) engaging in only those other activities necessary or
incidental thereto. Allfirst Asset Trust is a statutory business trust formed
on June 29, 1999 under the laws of the State of Delaware for the exclusive
purposes of (i) issuing its Asset Preferred Securities and common securities,
(ii) investing the gross proceeds of the Asset Preferred Securities in a
junior subordinated debenture of Allfirst Financial Inc. and other permitted
investments and (iii) engaging in only those other activities necessary or
incidental thereto. Allfirst Financial Inc. holds 100% of the common
securities of both trusts.
Distributions on the Capital Trust Securities are non-cumulative. The
distribution rate on the Capital Trust Securities is a rate per annum of three
month LIBOR plus 1.50% of the stated liquidation amount of $1,000 per Capital
Trust Securities, reset quarterly two business days prior to the distribution
dates of October 15, January 15, April 15, and July 15 in each year. The
distributions will be paid if, as and when Allfirst Capital Trust has funds
available for payment. The Capital Trust Securities are subject to mandatory
redemption if the Asset Preferred Securities of Allfirst Asset Trust are
redeemed. Allfirst Asset Trust will redeem the Asset Preferred Securities if
the junior subordinated debenture of Allfirst Financial Inc. held by the
Allfirst Asset Trust is redeemed. Allfirst Financial Inc. may redeem the
junior subordinated debentures, in whole or in part, at any time on or after
July 15, 2009 with the prior consent of the Federal Reserve Board and the
Central Bank of Ireland. Allfirst Asset Trust will redeem the Asset Preferred
Securities at an amount equal to $1,000 plus accrued and
45
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
unpaid distributions for the current quarterly period from the last
distribution date. An equal amount of the Capital Trust Securities will be
redeemed upon any redemption of the Asset Preferred Securities at an amount
per Capital Trust Security equal to $1,000 plus accrued and unpaid
distributions from the last distribution payment date. Allfirst Financial Inc.
has guaranteed, on a subordinated basis, the payment in full of all
distributions and other payments on the Capital Trust Securities and on the
Asset Preferred Securities to the extent that Allfirst Capital Trust and
Allfirst Asset Trust, respectively, have funds legally available.
11. Preferred Stock
On July 14, 1999, the proceeds from the issuance of the Capital Trust
Securities, as well as other funding sources, were used to redeem Allfirst's
7.875% Non-cumulative Preferred Stock at a redemption price of $25.00 per
share plus accrued and unpaid dividends from the immediately preceding
dividend payment date to the redemption date of $2.4 million.
Allfirst 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,
1999, all 90 thousand shares were outstanding and had a balance of $8.3
million. The cumulative dividends are payable quarterly when, and as declared
by, Allfirst's Board of Directors out of funds legally available for such
payments.
The shares are redeemable at Allfirst'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.
12. Comprehensive Income (Loss)
The components of other comprehensive loss for the year ended December 31,
1999 are as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Tax Expense
Or
Pretax (Benefit) After tax
--------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Unrealized gains /losses on securities:
Unrealized losses arising during
period................................. $(190,815) $(73,245) $(117,570)
Less: reclassification adjustment for
gains realized in net income.......... 4,975 1,968 3,007
--------- -------- ---------
Net change in unrealized
gains/losses......................... $(195,790) $(75,213) (120,577)
Minimum pension liability adjustment..... (603)
---------
Other comprehensive loss............. $(121,180)
=========
</TABLE>
46
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of other comprehensive loss for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------
Tax Expense
Or After
Pretax (Benefit) 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 loss............... $(10,215)
========
</TABLE>
The components of other comprehensive income for the year ended December 31,
1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
Tax Expense
Or After
Pretax (Benefit) 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
=======
</TABLE>
13. Employee Benefit Plans
Allfirst sponsors three defined benefit pension plans. The largest plan
("the qualified plan") covers substantially all employees of Allfirst 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.
In addition, Allfirst 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.
47
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the beginning and ending balances of
the benefit obligation, the fair value of plan assets, an analysis of funded
status of the plans and the amounts recognized in the consolidated statements
of condition for the years ending December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Nonqualified
Qualified Plans Plans Pension
Pension Benefits Benefits Other Benefits
------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit
obligation
Benefit obligation at
beginning of year...... $215,763 $198,693 $ 22,200 $ 16,412 $ 38,538 $ 36,071
Service cost............ 8,647 7,268 790 895 1,531 1,482
Interest cost........... 14,286 13,568 1,080 1,392 2,312 2,584
Amendments.............. -- (7,635) -- 1,766 (2,383) 428
Actuarial (gain) loss... (33,890) 17,984 (2,651) 2,166 (4,227) 807
Benefits paid........... (20,637) (14,115) (9,229) (431) (3,402) (2,834)
-------- -------- -------- -------- -------- --------
Benefit obligation at
end of year............ $184,169 $215,763 $ 12,190 $ 22,200 $ 32,369 $ 38,538
======== ======== ======== ======== ======== ========
Change in plan assets
Fair value of plan
assets at beginning of
year................... $269,748 $232,160
Actual return on plan
assets................. 56,583 51,703
Employer contribution... -- --
Plan participants'
contributions.......... -- --
Benefits paid........... (20,637) (14,115)
-------- --------
Fair value of plan
assets at end of year.. $305,694 $269,748
======== ========
Funded (unfunded)
status................. $121,525 $ 53,985 $(12,190) $(22,200) $(32,369) $(38,538)
Unrecognized net (gain)
loss................... (54,524) 9,505 255 3,674 (6,321) (2,194)
Unrecognized prior
service (benefit)
cost................... (8,248) (9,278) 3,085 3,531 (4,226) (2,229)
Unrecognized transition
(asset) obligation..... -- (1,236) 179 239 12,900 13,892
-------- -------- -------- -------- -------- --------
Net amount
recognized........... $ 58,753 $ 52,976 $ (8,671) $(14,756) $(30,016) $(29,069)
======== ======== ======== ======== ======== ========
Amounts recognized in
the statement of
financial position
consist of:
Prepaid benefit cost.... $ 58,753 $ 52,976
Accrued benefit
liability.............. -- -- $(10,030) $(17,772) $(30,016) $(29,069)
Intangible asset........ -- -- 262 306 -- --
Accumulated other
comprehensive income... -- -- 1,097 2,710 -- --
-------- -------- -------- -------- -------- --------
Net amount
recognized........... $ 58,753 $ 52,976 $ (8,671) $(14,756) $(30,016) $(29,069)
======== ======== ======== ======== ======== ========
</TABLE>
48
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic benefit costs were based on the following assumptions:
<TABLE>
<CAPTION>
Qualified
Plans
Pension Nonqualified Plans Other
Benefits Pension Benefits Benefits
------------ ---------------------- ----------
1999 1998 1999 1998 1999 1998
----- ----- ---------- ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions
as of December 31:
Discount rate............... 7.93% 6.76% 7.68%-7.84% 5.58%-6.52% 8.25% 7.00%
Expected return on plan
assets..................... 10.00% 10.00% -- -- -- --
Rate of compensation
increase................... 4.00% 4.50% 4.00% 4.50% -- --
</TABLE>
The 1999 health care trend rate is assumed to be 7.5% for non-HMO healthcare
benefits and 4.5% for HMO medical benefits. These rates are assumed to
decrease gradually to 4.5% in the year 2002 and remain at that level
thereafter, for the non-HMO plans. The HMO plans are currently at their
ultimate rate of 4.5%.
The components of net periodic benefit costs for Allfirst's defined benefit
pension plans for the years ended December 31, 1999, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Qualified Plan Nonqualified Plan
Pension Benefits Pension Benefits
---------------------------- --------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost............... $ 8,647 $ 7,268 $ 8,174 $ 790 $ 895 $ 748
Interest cost.............. 14,286 13,568 11,597 1,080 1,392 926
Expected return on plan
assets.................... (26,444) (22,726) (14,718) -- -- --
Amortization of
unrecognized transition
(asset) obligation........ (1,236) (1,411) (1,411) 60 60 100
Amortization of prior
service (benefit) cost.... (1,030) (1,030) (345) 446 446 316
Recognized net actuarial
losses.................... -- -- 1,277 751 626 158
Settlement expense......... -- -- -- 15 -- --
-------- -------- -------- ------ ------ ------
Net periodic (benefit)
cost.................... $ (5,777) $ (4,331) $ 4,574 $3,142 $3,419 $2,248
======== ======== ======== ====== ====== ======
</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 $12.2 million, $9.3 million, and $0,
respectively, as of December 31, 1999, and $22.2 million, $17.6 million, and
$0, respectively, as of December 31, 1998.
49
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of Allfirst's net periodic postretirement benefit costs for
the years ended December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
Other Benefits
----------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost.............. $1,531 $1,482 $1,220
Interest cost............. 2,312 2,584 2,003
Amortization of
unrecognized transition
obligation............... 992 992 992
Amortization of prior
service benefit.......... (387) (216) (254)
Recognized net actuarial
gains.................... (99) (49) (193)
------ ------ ------
Net periodic benefit
cost................... $4,349 $4,793 $3,768
====== ====== ======
</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............................ $ 156 $ (150)
Effect on post retirement benefit
obligation................................. 1,639 (1,519)
</TABLE>
Allfirst provides all salaried and eligible hourly employees with a defined
contribution plan. Eligible employees can enter the plan on January 1, April
1, July 1, or October 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 1999). Allfirst matches 100% of
the first 3% and 50% of the next 3% of an employee's contribution. Defined
contribution plan expenses totaled $7.3 million, $7.4 million and $4.7 million
in 1999, 1998 and 1997, respectively.
14. Restricted Stock Awards and Stock Options
Allfirst'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 Allfirst of up to 7 million
Ordinary shares of AIB ("Common Stock') EURO 0.32 each (or the equivalent
thereof in Common Stock ADSs). Awards are made to participants, without
payment of consideration by the participant, in the form of Restricted Stock
purchased by Allfirst 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 96 thousand shares of Common Stock were made
during 1999. During 1998 and 1997, awards were made under the 1989 Plan
aggregating the equivalent of 130 thousand and 208 thousand shares of Common
Stock, respectively. Expenses relative to this plan totaled $827 thousand,
$602 thousand, and $913 thousand, in 1999, 1998, and 1997, respectively. The
awards are subject to a restriction period of at least three years.
Allfirst's 1997 and 1999 Stock Option Plans provide 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 in 1998 and 1999, with the exception of the options granted under the
Allfirst Shares Plan and the 1999 stock option plan, vest one half in 24
months and one half in 36 months 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. During 1999,
Allfirst implemented an all employee stock option program called Allfirst
Shares which is part of
50
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the 1997 Stock Option Plan. Each full and part-time employee who was eligible
for employee benefits and was employed by Allfirst as of May 4, 1999 received
an option to purchase up to 100 AIB ADSs. The options may be exercised (i) any
time after May 4, 2002 and before May 4, 2004, as long as the closing price of
AIB ADSs has equaled or exceeded 150% of the exercise price for five
consecutive days at any time after the grant date; or (ii) any time after May
4, 2004, regardless of the price of the ADRs. The options must be exercised
within 10 years or they will expire. Options under the 1999 stock option plan
vest based on certain performance objectives.
Allfirst and an independent Trustee created a trust which acquired AIB ADSs
in the open market with the proceeds of a loan from Allfirst. Proceeds from
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 Allfirst's general creditors in the event of insolvency. The AIB
ADSs held by the trust are classified on Allfirst's financial statements as
investment securities available-for-sale. At December 31, 1999 and 1998
investment securities available-for-sale included $86.1 million and $66.3
million, in AIB ADSs, respectively, related to the 1997 and 1999 Stock Option
Plans. 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 or 1999 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 Allfirst's stock option plans as of December
31, 1999 and 1998, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998(a)
------------------------ ------------------------
Weighted- Weighted-
Shares(b) Average Shares(b) Average
(000) Exercise Price (000) Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,979.3 $22.31 1,902.9 $ 18.67
Granted................. 2,174.3 28.05 1,372.8 26.57
Exercised............... (519.5) 18.67 (296.4) (18.67)
Forfeited............... (352.4) 27.68 -- --
------- ------ ------- -------
Outstanding at end of
year................... 4,281.7 $25.23 2,979.3 $ 22.31
======= ====== ======= =======
</TABLE>
- --------
(a) adjusted for a 3 for 1 stock split in May 1999.
(b) shares represent AIB ADSs.
The following table summarizes information about fixed options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Number
Outstanding Weighted-Average Exercisable
At 12/31/99 Remaining Weighted-Average At 12/31/99 Weighted-Average
(000) Contractual Life Exercise Price (000) Exercise Price
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
1,073.5 5.0 years $18.67 1,073.5 $18.67
1,096.8 8.8 years 26.42 -- --
75.0 8.8 years 29.29 -- --
76.2 9.1 years 34.04 -- --
557.4 9.3 years 31.67 -- --
1,402.8 9.6 years 26.05 -- --
------- --------- ------ ------- ------
Total 4,281.7 8.2 years $25.23 1,073.5 $18.67
======= ========= ====== ======= ======
</TABLE>
51
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of providing the pro forma disclosures required under SFAS No.
123, the fair values of stock options granted were estimated at the date of
the grants using a Black-Scholes option pricing model. The following details
the weighted average assumptions used and the resulting fair values provided
by the option pricing model:
<TABLE>
<CAPTION>
Stock Options
Stock Options Granted on Stock Options Stock Options Stock Options
Granted on 10/9/98 and Granted on Granted on Granted on
12/29/97 10/22/98 2/9/99 5/4/99 8/10/99
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Expected future dividend
yield.................. 4.53% 4.03% 3.06% 2.96% 2.67%
Volatility factor....... 0.22 0.26 0.2950 0.3036 0.3254
Risk free interest
rate................... 5.77% 4.70% 5.01% 5.38% 5.87%
Expected life of
options................ 7 years 10 years 10 years 5.5 years 5.5 years
Fair value per share of
stock options granted.. $ 3.52 $ 5.89 $ 10.47 $ 8.73 $ 8.03
</TABLE>
The pro forma net income of Allfirst 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 $173.9 million, $213.7 million and $151.1
million, respectively for the years ended December 31, 1999, 1998 and 1997.
15. Other Income and Operating Expenses
The following table summarizes the more significant elements of other income
and other operating expenses for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Other income:
Mortgage banking income........................ $ 13,556 $ 30,736 $ 48,819
Security sales and fees........................ 12,099 24,343 12,553
Servicing income............................... 1,968 6,056 26,509
Other.......................................... 77,085 72,825 59,147
-------- -------- --------
Total........................................ $104,708 $133,960 $147,028
======== ======== ========
Other operating expenses:
External services.............................. $ 16,010 $ 18,113 $ 26,574
Postage and communications..................... 20,216 23,841 21,393
Advertising.................................... 13,626 20,234 16,871
Professional service fees...................... 12,407 18,628 9,863
Lending and collection......................... 13,024 16,802 8,778
Other.......................................... 48,274 56,772 37,637
-------- -------- --------
Total........................................ $123,557 $154,390 $121,116
======== ======== ========
</TABLE>
16. Merger Related Expenses
In the fourth quarter of 1997, Allfirst completed its target environment and
integration plan in connection with the acquisition of DDC. As a result,
Allfirst 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
52
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 was 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, 1999 and
1998. The remaining balances are primarily related to facilities closing
costs.
<TABLE>
<CAPTION>
Years
Ended
December
31,
----------
1999 1998
---- -----
(in
millions)
<S> <C> <C>
Balance at beginning of year..................................... $4.9 $11.2
Accrual reversal credited to income.............................. 0.5 --
Cash outlays..................................................... 2.6 6.3
---- -----
Balance at end of year........................................... $1.8 $ 4.9
==== =====
</TABLE>
17. Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998 1997
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal......................................... $ 35,769 $ 47,379 $22,898
Foreign(1)...................................... 219 160 133
State........................................... 2,861 9,108 (3,315)
-------- -------- -------
Total current................................. 38,849 56,647 19,716
-------- -------- -------
Deferred:
Federal......................................... 59,888 64,183 54,138
State........................................... 2,673 3,637 10,447
-------- -------- -------
Total deferred................................ 62,561 67,820 64,585
-------- -------- -------
Total income tax expense.......................... $101,410 $124,467 $84,301
======== ======== =======
</TABLE>
- --------
(1) Foreign income taxes represent taxes on interest received from foreign
borrowers and foreign dividends received.
53
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between actual income tax expense and the amount computed by
applying the statutory federal income tax rate to income before income taxes
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Federal income taxes at statutory rate of
35%......................................... $ 97,821 $119,907 $82,421
Tax exempt income............................ (9,361) (9,215) (5,769)
State income taxes, net of Federal benefits.. 3,597 8,290 4,639
Amortization of intangibles.................. 13,149 13,155 7,394
Other, net................................... (3,796) (7,670) (4,384)
-------- -------- -------
Income tax expense........................... $101,410 $124,467 $84,301
======== ======== =======
Effective tax rate........................... 36.28% 36.33% 35.80%
======== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses.................... $ 56,396 $ 55,925
Deferred compensation.................................. 10,176 9,074
Income on loans........................................ 7,157 6,955
Accrued expenses....................................... 4,821 8,316
Net unrealized losses on investment securities
available for sale.................................... 60,360 --
Other.................................................. 13,611 13,733
-------- --------
Total gross deferred tax assets...................... 152,521 94,003
-------- --------
Deferred tax liabilities:
Leasing................................................ 347,419 296,194
Net unrealized gains on investment securities
available-for-sale.................................... -- 14,853
Pensions............................................... 4,562 800
Depreciation........................................... 12,395 10,899
-------- --------
Total gross deferred tax liabilities................. 364,376 322,746
-------- --------
Net deferred tax liability........................... $211,855 $228,743
======== ========
</TABLE>
18. Regulatory Matters and Dividend Restrictions
Allfirst 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 Allfirst's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Allfirst and its subsidiary banks must meet specific capital guidelines that
involve quantitative measures of Allfirst and its subsidiary banks' assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Allfirst and its subsidiary banks' capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
54
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Qualitative measures established by regulation to ensure capital adequacy
require Allfirst 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, 1999, Allfirst
and its subsidiary banks met all capital requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Board, the Comptroller of the Currency and the Federal Deposit
Insurance Corporation categorized Allfirst and its subsidiary banks as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized", Allfirst 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 Allfirst or its subsidiary
banks' categories.
Allfirst and its subsidiary banks' actual capital amounts and ratios at
December 31, 1999 and 1998 are presented in the following table.
<TABLE>
<CAPTION>
Minimum to Be
"Well
Capitalized"
Under Prompt
Minimum for Corrective
Capital Adequacy Action
Actual Purposes Provisions
---------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk
Weighted Assets):
Allfirst................ $1,978,561 13.24% $1,195,502 8.00% $1,494,378 10.00%
Allfirst Bank........... 1,656,891 11.48 1,154,857 8.00 1,443,572 10.00
Allfirst Financial
Center N.A............. 8,244 35.08 1,880 8.00 2,350 10.00
Tier 1 Capital (to Risk
Weighted Assets):
Allfirst................ $1,473,886 9.86% $ 597,751 4.00% $ 896,626 6.00%
Allfirst Bank........... 1,329,659 9.21 577,429 4.00 866,143 6.00
Allfirst Financial
Center N.A............. 8,084 34.40 940 4.00 1,410 6.00
Tier 1 Capital (to
Average Assets):
Allfirst................ $1,473,886 8.75% $ 673,934 4.00% $ 842,418 5.00%
Allfirst Bank........... 1,329,659 8.08 658,102 4.00 822,627 5.00
Allfirst Financial
Center N.A............. 8,084 21.16 1,528 4.00 1,910 5.00
As of December 31, 1998
Total Capital (to Risk
Weighted Assets):
Allfirst................ $1,874,361 12.65% $1,185,341 8.00% $1,481,677 10.00%
Allfirst Bank........... 1,570,823 10.98 1,144,085 8.00 1,430,107 10.00
Allfirst Financial
Center N.A............. 7,863 32.75 1,921 8.00 2,401 10.00
Tier 1 Capital (to Risk
Weighted Assets):
Allfirst................ $1,389,659 9.38% $ 592,671 4.00% $ 889,006 6.00%
Allfirst Bank........... 1,237,112 8.65 572,043 4.00 858,064 6.00
Allfirst Financial
Center N.A............. 7,703 32.08 960 4.00 1,441 6.00
Tier 1 Capital (to
Average Assets):
Allfirst................ $1,389,659 8.41% $ 696,832 4.00% $ 871,040 5.00%
Allfirst Bank........... 1,237,112 7.22 689,431 4.00 861,778 5.00
Allfirst Financial
Center N.A............. 7,703 15.54 1,983 4.00 2,479 5.00
</TABLE>
55
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends paid by Allfirst's subsidiary banks are subject to various legal
and regulatory restrictions. The subsidiary banks can initiate dividend
payments in 2000, without prior regulatory approval of $189.2 million, plus an
amount equal to their net profits for 2000, as defined by statute, up to the
date of any such dividend declaration.
Section 23A of the Federal Reserve Act limits extensions of credit that can
be made from the Banks to any affiliate (with certain exceptions), including
the Parent Company. Loans to any one affiliate may not exceed 10% of a bank
subsidiary's capital and surplus and loans to all affiliates cannot exceed 20%
of such bank subsidiary's capital and surplus. Additionally, all loans must be
collateralized and must have terms comparable to those with unaffiliated
companies.
The Banks are required to maintain reserves, included in cash and due from
banks, with the Federal Reserve Bank against their deposits. Average reserve
balances maintained during 1999 and 1998 were $30.6 million and $58.1 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 non-financial instruments are excluded
from disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of Allfirst.
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 and commercial 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.
56
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Many of Allfirst'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
Allfirst's remaining assets and liabilities as of December 31 are summarized
below.
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Trading account assets... $ 1,716 $ 1,716 $ 42,528 $ 42,528
Investment securities.... 4,287,343 4,287,343 4,815,087 4,815,087
Loans, held for sale..... 4,808 4,832 84,254 84,310
Loans, net of allowance
for loan and lease
losses(1)............... 9,636,422 9,662,222 9,560,857 9,727,252
Financial Liabilities:
Deposits................. 12,142,587 12,161,623 12,257,051 12,301,824
Long-term debt........... 1,195,394 1,238,732 856,320 914,926
</TABLE>
- --------
(1) Leases receivable with carrying values totaling $986.9 million and $846.2
million at December 31, 1999 and 1998, respectively are excluded. The
carrying values are net of the allowance for lease losses and related
unearned income.
Off-Balance Sheet Instruments--The fair value of loan commitments and
letters of credit, both commercial and standby, 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
fair value of foreign exchange contracts represents the net asset or liability
of Allfirst, since these contracts are revalued on a monthly basis. The fair
value of interest rate contracts is the estimated amount Allfirst 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 Allfirst's off-balance sheet financial
instruments as of December 31 are summarized below.
<TABLE>
<CAPTION>
1999 1998
Estimated Estimated
Fair Value Fair Value
---------- ----------
(in thousands)
<S> <C> <C>
Interest rate contracts issued for trading purposes.. $ 6,511 $ 6,893
Interest rate contracts held for purposes other than
trading............................................. (8,589) 23,356
Foreign exchange options and forward contracts....... (18,684) 13,168
</TABLE>
57
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Off-Balance-Sheet Trading and Lending Activities
Off-Balance-Sheet Financial Instruments--Trading Activities
Allfirst 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 Allfirst'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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -------------------------------------
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.... $2,399,847 $ 39,388 $ (32,786) $ 6,713 $2,351,818 $29,926 $(23,235) $ 5,829
Interest rate caps and
floors written........ 716,905 -- (1,155) (2,011) 683,709 -- (5,072) (3,186)
Interest rate caps and
floors purchased...... 708,088 1,137 -- 1,978 689,637 5,081 -- 3,257
Swaptions written...... 17,200 -- (337) (193) 10,000 -- (115) (388)
Swaptions purchased.... 17,200 338 -- 195 10,000 120 -- 396
Securities trading
activities:
Commitments to purchase
securities, futures
and forward
contracts............. 29,099 -- -- -- 50,772 -- -- --
Commitments to sell
securities, futures
and Forward
contracts............. 47,990 -- -- -- 167,065 188 -- --
Foreign exchange trading
activities:
Commitments to purchase
and sell foreign
exchange.............. 1,128,058 3,806 (3,697) 73 600,989 2,262 (1,976) (168)
Foreign exchange
options written....... 1,267,365 104,092 -- 136,693 810,108 -- (39,482) (45,040)
Foreign exchange
options purchased..... 1,108,630 -- (122,885) (100,440) 850,546 53,017 -- 55,546
</TABLE>
Allfirst's credit risk exposure is represented by the instruments detailed
above with a positive fair value. Allfirst would incur a loss if it was
necessary to replace these instruments due to counterparty default. Allfirst
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 Allfirst'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 Allfirst to
enable customers to transfer, modify, or reduce their interest rate risk
exposure. In a cap or floor contract, the purchaser pays a premium at the
58
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Swaptions--These instruments are written by Allfirst to enable customers to
transfer, modify or reduce their interest rate risk exposure. The purchaser of
a swaption pays a premium up front to the seller for the opportunity to enter
into a swap with specified terms or to cancel or extend an existing swap at a
specified date in the future. Payments made or received under swaption
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,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Interest rate contracts............................ $ 3,445 $ 4,066 $(1,224)
Foreign exchange contracts......................... 6,580 4,615 3,483
Securities......................................... 1,985 5,608 5,058
------- ------- -------
Total............................................ $12,010 $14,289 $ 7,317
======= ======= =======
</TABLE>
Off-Balance Sheet Financial Instruments Issued for Lending Activities
Allfirst 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>
1999 1998
---------- ----------
<S> <C> <C>
Commercial and consumer lending activities:
Unfunded commitments to extend credit............... $6,094,848 $6,362,105
Standby letters of credit........................... 1,237,881 1,165,328
Commercial and similar letters of credit............ 51,528 44,064
Loans sold with recourse............................ 225,283 185,091
Securities lent..................................... -- 62,730
</TABLE>
59
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments to extend credit--Allfirst 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 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 Allfirst to disburse funds to a third party if Allfirst'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 Allfirst 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. Allfirst'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 Allfirst 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 Allfirst. 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 Allfirst will reimburse the purchaser for losses
resulting from the purchased loans. In addition, a nonbanking subsidiary of
Allfirst originates, sells and services loans in conjunction with the Federal
National Mortgage Association ("FNMA") Delegated Underwriting and Servicing
("DUS") program. Under this program, Allfirst'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,
1999 and 1998 Allfirst's credit risk on loans sold with recourse under the
FNMA DUS program totaled $186.6 million and $151.3 million, respectively.
Securities Lent--Securities lent represent securities owned by Allfirst or
its customers which are lent to third parties. The contract amount represents
potential credit risk. However, Allfirst obtains collateral, with a fair value
exceeding 100 percent of the contract amount, for all securities lent which is
used to indemnify Allfirst and customers against possible losses resulting
from third party defaults.
Concentrations of Credit Risk
The majority of Allfirst'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 comprising a significant portion of the total portfolio. Investment
real estate outstandings comprise 13% of total loans, but are geographically
diversified by product type.
21. Off -Balance Sheet Risk Management Activities
Allfirst uses a variety of off-balance sheet financial instruments as part
of its overall interest rate risk management process. Allfirst's principal
objective of asset/liability management activities is to provide maximum
60
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and facilitating Allfirst's funding needs.
Accordingly, Allfirst 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.
The amounts disclosed below represent the period end notional values and
fair values of derivative financial instruments held for risk management
purposes. Allfirst's credit risk exposure is represented by the instruments
detailed below with a positive fair value. Allfirst would incur a loss if it
was necessary to replace these instruments due to counterparty default.
<TABLE>
<CAPTION>
1999 1998
-------------------------------- ------------------------------
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... $1,315,000 $3,106 $(11,365) $420,000 $21,946 $ --
Convert floating rate
liabilities to fixed:
Swaps-pay
fixed/receive
floating............. 534,849 2,652 -- 25,000 49 --
Convert floating assets
to fixed:
Swaps-receive
fixed/pay floating... 275,000 -- (2,750) 325,000 2,781 --
Convert fixed rate
assets to floating:
Swaps-pay
fixed/receive
floating............. 25,450 -- (211) 45,775 -- (1,251)
Cap floating rate
liabilities at strike
level:
Interest rate caps
purchased............ -- -- -- 35,200 -- --
Convert floating rate
liabilities to a
different index:
Basis swaps........... 25,000 -- (21) 30,000 -- (170)
</TABLE>
Deferred losses on the early termination of interest rate swaps designated
to Allfirst'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 Allfirst'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
Allfirst'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
Allfirst's major lines of business are based on Allfirst's method of
internal reporting, which separates its business on the basis of products and
services. Allfirst's reportable business lines are Retail Banking, Corporate
Banking, Real Estate Finance, Trust and Investment Advisory Services, and
Treasury. Retail Banking provides loans, deposits, 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. Real Estate Finance 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,
including mutual fund and annuity products sold through retail branches.
Treasury is responsible for managing and controlling the liquidity, funding
and market risk needs of
61
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allfirst. 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 Allfirst has exited are classified under
discontinued business lines. Discontinued business lines also 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 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 $49.0 million in 1999,
$53.3 million in 1998 and $30.0 million in 1997. Other also receives a credit
for funds provided and charges for funds used.
Allfirst's internal accounting process is based on practices which support
the management structure of Allfirst, 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 loan and lease losses are
allocated based on the credit 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
business 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.
62
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents operating information about each of Allfirst's
business lines for the year ended December 31, 1999. 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
Real Investment Other Total
Retail Corporate Estate Advisory Business Business Consolidated
Banking Banking Finance Services Treasury Lines Lines Other Total
-------- --------- ------- ---------- -------- -------- -------- -------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income
(FTE).................. $330,109 $171,444 $35,821 $ 2,461 $28,152 $ 643 $568,630 $(17,209) $551,421
Noninterest income...... 73,812 79,070 20,028 92,563 4,340 27,416 297,229 7,993 305,222
Securities gains, net... -- -- -- -- 4,975 -- 4,975 -- 4,975
-------- -------- ------- ------- ------- ------- -------- -------- --------
Total revenues......... 403,921 250,514 55,849 95,024 37,467 28,059 870,834 (9,216) 861,618
Total noninterest
expenses, excluding
intangible asset
amortization........... 239,010 118,140 26,473 53,672 9,198 16,190 462,683 19,331 482,014
Goodwill and other
intangible asset
amortization........... 905 -- -- 1,094 -- -- 1,999 48,997 50,996
Provision for loan and
lease losses........... 13,635 18,800 (603) 62 -- 220 32,114 2,036 34,150
-------- -------- ------- ------- ------- ------- -------- -------- --------
Income before income
taxes.................. 150,371 113,574 29,979 40,196 28,269 11,649 374,038 (79,580) 294,458
Income tax expense
(FTE).................. 59,177 44,705 7,655 16,077 8,470 4,553 140,637 (24,256) 116,381
-------- -------- ------- ------- ------- ------- -------- -------- --------
Net income............. $ 91,194 $ 68,869 $22,324 $24,119 $19,799 $ 7,096 $233,401 $(55,324) $178,077
======== ======== ======= ======= ======= ======= ======== ======== ========
<CAPTION>
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average assets.......... $ 8,374 $ 5,364 $ 1,691 $ 69 $ 5,024 $ 175 $ 20,697 $ (3,033) $ 17,664
Average loans........... 4,120 4,774 1,588 13 -- 91 10,586 70 10,656
Average deposits........ 7,967 1,449 80 55 2,338 -- 11,889 80 11,969
</TABLE>
63
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents operating information about each of Allfirst'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
Real Investment Other Continuing Discontinued
Retail Corporate Estate Advisory Business Business Business Consolidated
Banking Banking Finance Services Treasury Lines Lines Lines Other Total
-------- --------- ------- ---------- -------- -------- ---------- ------------ -------- ------------
(in thousands)
<S> <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
loan and lease
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>
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
</TABLE>
64
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents operating information about each of Allfirst's
business lines for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Trust and Total
Real Investment Other Continuing Discontinued
Retail Corporate Estate Advisory Business Business Business Consolidated
Banking Banking Finance Services Treasury Lines Lines LInes Other Total
-------- --------- ------- ---------- -------- -------- ---------- ------------ -------- ------------
(in thousands)
<S> <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
loan and lease
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>
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
</TABLE>
65
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. Litigation
Various legal actions and proceedings are pending involving Allfirst
Financial Inc. 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 Allfirst's financial condition or results of
operations.
24. Condensed Parent Company Financial Information
Following is condensed financial information of Allfirst Financial Inc.
(parent company only):
CONDENSED STATEMENTS OF INCOME
Allfirst Financial Inc.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries:
Bank subsidiaries............................. $140,000 $147,000 $ 76,000
Nonbank subsidiaries.......................... 1,577 8,175 87,447
Interest income from subsidiaries:
Bank subsidiaries............................. 30,831 31,843 27,940
Nonbank subsidiaries.......................... 5,019 8,312 9,377
Other interest and dividend income.............. 6,958 5,539 12,908
Other income.................................... 5,134 4,494 16,748
-------- -------- --------
Total income................................ 189,519 205,363 230,420
-------- -------- --------
Expenses:
Interest expense, short-term debt............... 15,598 15,780 16,900
Interest expense, long-term debt................ 50,779 48,502 42,113
Other expenses................................ 37,837 (14,633) 31,317
-------- -------- --------
Total expenses.............................. 104,214 49,649 90,330
-------- -------- --------
Income before taxes and equity in undistributed
net income of subsidiaries..................... 85,305 155,714 140,090
Income tax (benefit)............................ (7,406) (758) (10,976)
-------- -------- --------
Income before equity in undistributed net income
of subsidiaries................................ 92,711 156,472 151,066
Equity in undistributed net income of
subsidiaries................................... 85,366 61,651 122
-------- -------- --------
Net income...................................... $178,077 $218,123 $151,188
======== ======== ========
</TABLE>
66
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CONDITION
Allfirst Financial Inc.
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Assets
Cash..................................................... $ 741 $ 1,459
Interest bearing deposits in other banks................. 332,208 161,086
Securities purchased under agreements to resell.......... 10,000 20,000
Investment securities available-for-sale................. 187,632 192,021
Investment in subsidiaries:
Bank subsidiaries...................................... 1,326,297 1,358,818
Nonbank subsidiaries................................... 89,558 79,752
Loans and advances to subsidiaries:
Bank subsidiaries...................................... 189,000 219,000
Nonbank subsidiaries................................... 62,917 152,607
Loans, net of unearned income............................ 9,026 8,775
Premises and equipment................................... 8,267 7,339
Intangible assets........................................ 755,199 791,126
Other assets............................................. 63,136 62,742
---------- ----------
Total assets......................................... $3,033,981 $3,054,725
========== ==========
Liabilities and Stockholders' Equity
Short-term debt.......................................... $ 342,186 $ 319,964
Long-term debt........................................... 809,628 665,247
Other liabilities........................................ 50,806 50,076
---------- ----------
Total liabilities.................................... 1,202,620 1,035,287
4.50% Cumulative redeemable preferred stock, Series A, $5
par value per share, $100 liquidation preference per
share; authorized and issued 90,000 shares.............. 8,341 8,111
Stockholders' equity..................................... 1,823,020 2,011,327
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity................................ $3,033,981 $3,054,725
========== ==========
</TABLE>
67
<PAGE>
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
CONDENSED STATEMENTS OF CASH FLOWS
Allfirst Financial Inc.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Income before undistributed net income of
subsidiaries................................ $ 92,711 $ 156,472 $ 151,066
Adjustments to reconcile net income to net
cash provided by operating activities....... 38,303 (39,448) 26,710
--------- --------- ---------
Net cash provided by operating
activities.............................. 131,014 117,024 177,776
--------- --------- ---------
Investing Activities
Proceeds from sales of investment
securities.................................. 206,357 28,439 18,733
Proceeds from paydowns and maturities of
investment securities(1).................... 2,125 23,045 141,327
Purchases of investment securities(1)........ (217,909) (164,923) (53,284)
Net decrease in short-term investments....... 10,000 -- --
Principal collected on loans of parent
company..................................... 782 9,405 4,415
Loans originated by the parent company....... (1,033) (2,230) ( 3,285)
Investment in subsidiaries................... (3,233) 23,093 (37,539)
Net decrease (increase) in loans to
subsidiaries, short-term.................... 59,690 78,468 (28,629)
Long-term loans to subsidiaries.............. -- -- (45,000)
Principal collected on long-term loans to
subsidiaries................................ 60,000 20,000 --
Acquisitions................................. -- -- (874,261)
Other, net................................... 2,384 (189) 1,894
--------- --------- ---------
Net cash provided by (used for) investing
activities.............................. 119,163 15,108 (875,629)
--------- --------- ---------
Financing Activities
Net increase (decrease) in short-term
borrowings.................................. 14,481 (15,411) 14,498
Net increase in long-term borrowings from
subsidiaries................................ 104,155 -- 152,905
Net increase (decrease) in short-term
borrowings from subsidiaries................ 7,741 259 (69)
Principal payments on long-term debt......... (60,000) -- (20,000)
Proceeds from the issuance of long-term
debt........................................ 99,615 -- 196,951
Redemption Preferred Stock................... (150,000) -- --
Cash dividends paid.......................... (95,765) (69,225) (56,225)
--------- --------- ---------
Net cash (used for) provided by financing
activities.............................. (79,773) (84,377) 288,060
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents(2).............................. 170,404 47,755 (409,793)
Cash and cash equivalents at January 1,...... 162,545 114,790 524,583
--------- --------- ---------
Cash and cash equivalents at December 31,.... $ 332,949 $ 162,545 $ 114,790
========= ========= =========
</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.
68
<PAGE>
REPORT OF MANAGEMENT
The management of Allfirst Financial Inc. 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.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets regularly with management, internal auditors and independent
auditors, and reviews audit plans and results as well as management's actions
taken in discharging responsibilities for accounting, financial reporting and
internal controls. PricewaterhouseCoopers LLP, independent auditors, and the
internal auditors have direct and confidential access to the Audit Committee
at all times to discuss the results of their examinations.
Management assessed its internal control structure over financial reporting
as of December 31, 1999. 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
Allfirst maintained an effective internal control structure over financial
reporting as of December 31, 1999.
69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder
Allfirst Financial Inc.:
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, changes in stockholders' equity and
cash flows present fairly, in all material respects, the financial position of
Allfirst Financial Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of
Allfirst'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 auditing standards generally accepted in the
United States, 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
February 3, 2000
70
<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 Allfirst as of December 31, 1999. Unless otherwise noted, each was elected
at the April 1999 meeting of the Board of Directors to serve until the April
2000 meeting of the Board of Directors, and each executive officer has been
employed by Allfirst or one of its subsidiaries for the past five years.
<TABLE>
<CAPTION>
Year
Name Positions Held Age Elected
---- -------------- --- -------
<S> <C> <C> <C>
Frank P. Bramble(1)......... Chairman of the Board of Allfirst and Allfirst 51 1994
Bank
Susan M. Keating(1)......... President and Chief Executive Officer of 49 1996
Allfirst and Allfirst Bank
Harry E. Berry.............. Executive Vice President of Allfirst and 54 1994
Allfirst Bank
Robert L. Carpenter, Jr. ... Executive Vice President and Controller of 46 1995
Allfirst and Allfirst Bank
Bernard M. Cregg(1)......... Executive Vice President of Allfirst and 44 1998
Allfirst Bank
David M. Cronin............. Executive Vice President and Treasurer of 50 1989
Allfirst; Executive Vice President of
Allfirst Bank
Jerome W. Evans............. Vice Chairman and Chief Financial Officer of 53 1994
Allfirst and Allfirst Bank
Taylor Foss(1).............. Executive Vice President of Allfirst and 47 2000
Allfirst Bank
Rick A. Gold(1)............. Executive Vice President of Allfirst and 50 1999
Allfirst Bank
Brian L. King............... Executive Vice President of Allfirst and 54 1996
Allfirst Bank
Dan Ripienski(1)............ Executive Vice President and Chief Credit 49 1999
Officer of Allfirst and Allfirst Bank
Mary Ann Scully............. Executive Vice President of Allfirst and 48 1999
Allfirst Bank
</TABLE>
- --------
(1) Until December 14, 1999, Mr. Bramble was also the Chief Executive Officer
of Allfirst and Allfirst Bank. Prior to joining Allfirst in January, 1997,
Mr. Cregg was Head of Group Human Resources and Strategic Technology of
Allied Irish Banks, p.l.c., director of AIB European Investment Ltd. and a
member of the Bank Council of Wielkopolski Bank Kredytowy SA. Prior to
joining Allfirst in February 2000, Ms. Foss was Senior Vice President,
Human Resources and Development for Fortis Financial Group. She had
previously served as Senior Vice President, Human Resources, for First
Bank System and MNC Financial, Inc. Prior to joining the Corporation in
July 1997, Mr. Gold was an Executive Vice President and head of the Trust
Division of Dauphin Deposit Corporation. On December 14, 1999, Ms. Keating
was appointed to the additional office of Chief Executive Officer of
Allfirst and Allfirst Bank. Prior to joining Allfirst 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. Mr.
Ripienski and Ms. Scully were elected executive officers at the December
1999 meeting of the Board of Directors. Ms. Foss was elected an executive
officer at the January 2000 meeting of the Board of Directors.
71
<PAGE>
The information required by Items 10-13 of this report relating to
directors, executive compensation, ownership of Allfirst'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 Allfirst's definitive Information Statement, to be
filed on or about March 31, 2000 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:
(3.1) (i) Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Current Report on Form 8-K
filed by Allfirst on October 1, 1999).
(ii) Bylaws (Incorporated by reference to Exhibit 3.2 to the
Current Report on Form 8-K filed by Allfirst on October 1,
1999).
(4.1) Allfirst 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 Allfirst and its
consolidated subsidiaries.
(10.1) Executive Incentive Pay Plan**
(10.2) Allfirst Financial Inc. 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 Allfirst Financial
Inc. 1989 Long-Term Incentive Plan and Trust, as amended***
(10.4) Allfirst Financial Inc. Pension Plan for Executive
Employees, as amended, effective January 1, 1986**
(10.5) Amendment to Allfirst Financial Inc. Pension Plan for
Executive Employees, effective December 14, 1993***
(10.6) Allfirst Financial Inc. 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 Allfirst Financial Inc.Deferred
Compensation Plan***
(10.8) Allfirst Financial Inc. Deferred Compensation Amended and
Restated Trust Agreement, dated September 23, 1988,
Provident National Bank, trustee**
(10.9) Allfirst Financial Inc. Deferred Compensation Trust
Agreement No. 2, effective July 13, 1990, Provident National
Bank, trustee**
(10.10) Allfirst Financial Inc. Deferred Compensation Trust
Agreement No. 3, effective January, 25 1993, Provident
National Bank, trustee***
(10.11) Allfirst Financial Inc. Deferred Compensation Plan,
effective January 1, 1994***
(10.12) Allfirst Financial Inc. Deferred Compensation Trust
Agreement No. 4, effective January 1, 1994, Provident
National Bank, trustee***
(10.13) Allfirst Financial Inc. Supplemental Retirement Trust
Agreement, dated September 23, 1988, Provident National
Bank, trustee**
72
<PAGE>
(10.14) Allfirst Financial Inc. Executive Post-Retirement Trust
Agreement, dated October 7, 1988, Provident National Bank,
trustee**
(10.15) Allfirst Financial Inc. Executive Life Plan, effective
January 1, 1990**
(10.16) Allfirst Financial Inc. Executive Optional Life Plan,
effective January 1, 1990**
(10.17) Allfirst Financial Inc. Excess Benefit Plan, effective
October 1, 1989**
(10.18) Allfirst Financial Inc. 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)
(10.19) Allfirst Financial Inc. 1999 Stock Option Plan
(21) Subsidiaries of the Registrant
(23) Consent of PricewaterhouseCoopers LLP
(24) Power of Attorney
(27) Financial Data Schedule
- --------
** Incorporated by reference to Allfirst's Registration Statement on Form
S-1, Registration No. 33-46277, filed with the Commission on March 13,
1992.
*** Incorporated by reference to Allfirst'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
Current Report on Form 8-K filed October 1, 1999.
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Allfirst Financial Inc.
/s/ Susan C. Keating
By___________________________________
(Susan C. Keating,
President and Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
PRINCIPAL EXECUTIVE OFFICER:
<TABLE>
<S> <C> <C>
/s/ Susan C. Keating President and Chief March 16, 2000
______________________________________ Executive Officer
(Susan C. Keating)
PRINCIPAL FINANCIAL OFFICER:
/s/ Jerome W. Evans Vice Chairman and Chief March 16, 2000
______________________________________ Financial Officer
(Jerome W. Evans)
PRINCIPAL ACCOUNTING OFFICER:
/s/ Robert L. Carpenter, Jr. Executive Vice President March 16, 2000
______________________________________ and 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., Margaret M. Heckler, Lee H. Javitch, Susan C. Keating, Gary Kennedy,
William T. Kirchhoff, Henry J. Knott, Jr., Andrew Maier II, Thomas P. Mulcahy,
and R. Champlin Sheridan
<TABLE>
<S> <C> <C>
/s/ Jerome W. Evans Attorney-in-Fact March 16, 2000
______________________________________
(Jerome W. Evans)
</TABLE>
74
<PAGE>
Exhibit 10.19
-------------
ALLFIRST FINANCIAL INC.
AMENDED AND RESTATED 1999 STOCK OPTION PLAN
-------------------------------------------
1. Establishment, Purpose and Types of Awards.
------------------------------------------
First Maryland Bancorp established the First Maryland Bancorp 1999 Stock
Option Plan (the "Original Plan") on July 20, 1999. On September 15, 1999,
First Maryland Bancorp was merged into Allfirst Financial Inc. and Allfirst
Financial Inc. succeeded to all of the rights and duties of First Maryland
Bancorp, including the Original Plan. Allfirst Financial now wishes to amend
and restate the Original Plan in its entirety. All options outstanding under
the Original Plan as of September 15, 1999, shall be subject to this Amended and
Restated 1999 Stock Option Plan (the "Plan").
The purpose of the Plan is to promote the long-term growth and
profitability of Allfirst Financial Inc. (the "Corporation") and Allied Irish
Banks, p.l.c. ("Allied Irish") by providing individuals who serve both as
executive officers of the Corporation and as members of the Board of Directors
of Allied Irish with an incentive to improve shareholder value.
Stock options granted under the Plan will not be qualified under section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Definitions.
-----------
When used in this Plan, the following terms have the meanings indicated:
(a) "ADR" means an American Depository Receipt that evidences an American
Depository Share representing ownership of Ordinary Shares.
(b) "Affiliate" means any entity, whether now or hereafter existing, which
controls, is controlled by, or is under common control with, the Corporation
(including, but not limited to, joint ventures, limited liability companies, and
partnerships). For this purpose, "control" means ownership of 50% or more of
the
<PAGE>
total combined voting power of all classes of stock of the entity.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Change of Control" means the earliest to occur of any of the following
events:
(i) a third party (other than a person that is controlled by or under
common control with Allied Irish, including a "group" as defined in Section
13(d)(3) of the Exchange Act) becomes the beneficial owner of 50% or more of the
outstanding common stock of Allied Irish, or 25% or more of the outstanding
common stock of the Corporation or of Allfirst Bank; or
(ii) as the result of, or in connection with, any cash tender or
exchange offer, merger, consolidation or other business combination, sale or
disposition of all or substantially all of the Corporation's assets, or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of either Allied Irish, the
Corporation or Allfirst Bank immediately before the Transaction shall cease to
constitute a majority of the Board of Directors of such entity or any successor
to such entity or the persons who were stockholders of Allied Irish or the
Corporation, as applicable, immediately before the Transaction shall cease to
own at least 50% of the outstanding voting stock of the applicable entity or any
successor to such entity.
(e) "Committee" means the Management and Compensation Committee of the
Board.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(g) "Fair Market Value" of an ADR means, as of any particular date, the
average of the closing bid and asked prices, regular way, of the ADRs as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange. If
the ADRs are not so listed or admitted to trading, the Committee shall determine
in good faith the manner in which Fair Market Value shall be determined.
2
<PAGE>
(h) "Grant Agreement" means the agreement between the Corporation and a
Optionee setting forth the terms and conditions of an Option granted pursuant to
the Plan.
(i) "Ordinary Shares" means ordinary shares, EO.32 each, of Allied Irish.
(j) "Option" means an option to acquire ADRs granted under this Plan.
(k) "Optionee" means an individual to whom an Option has been granted and
who has executed and delivered a Grant Agreement.
3. Administration and Related Matters.
----------------------------------
(a) Administration. The Plan shall be administered by the Committee.
--------------
(b) Powers of the Committee. (i) The Committee shall have all the powers
-----------------------
vested in it by the terms of the Plan, including the authority to grant Options
under the Plan, to determine the form and the terms and conditions of Grant
Agreements, and to establish programs for granting Options. Notwithstanding any
provision of the Plan to the contrary, all grants of Options are subject to the
approval of the Nomination and Remuneration Committee of the board of directors
of Allied Irish.
(ii) Without limiting the provisions of Section 3(b)(i) hereof, the
Committee shall have full power and authority to take all other actions
necessary to carry out the purpose and intent of the Plan, including the
authority: (A) to determine among the eligible persons to whom, and the time or
times at which Options shall be granted; (B) to determine the number of ADRs to
be covered by each Option; (C) to impose such terms, limitations, restrictions
and conditions upon any such Option as the Committee shall deem appropriate; (D)
to modify, amend, extend or renew outstanding Options, or accept the surrender
of outstanding Options and substitute new Options (provided, however, that any
modification that would materially adversely affect any outstanding Option shall
not be made without the consent of the Optionee); (E) to accelerate or otherwise
change the time in which an Option may be exercised, including without
limitation any restriction or condition with respect to the vesting or
exercisability of an Option following termination of any Optionee's employment;
and (F) to establish objectives and conditions, if any, for the vesting of
Options.
3
<PAGE>
(iii) The Committee shall have full power and authority to administer
and interpret the Plan and to adopt and interpret such rules, regulations,
agreements, guidelines and instruments for the administration of the Plan and
for the conduct of its business as the Committee deems necessary or advisable.
(c) Non-Uniform Determinations. The Committee's determinations under the
--------------------------
Plan (including without limitation all matters covered in Section 3(b) hereof)
need not be uniform and may be made by the Committee selectively among persons
who receive, or are eligible to receive, Options under the Plan, whether or not
such persons are similarly situated.
(d) Limited Liability. To the maximum extent permitted by law, no member
-----------------
of the Committee shall be liable for any action taken or decision made in good
faith relating to the Plan or any Option thereunder.
(e) Indemnification. To the maximum extent permitted by law and by the
---------------
Corporation's charter and by-laws, the Corporation shall indemnify the members
of the Committee in respect of all their activities under the Plan.
(f) Effect of Committee's Decision. All actions taken and decisions and
------------------------------
determinations made by the Committee on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Committee's sole
and absolute discretion and shall be conclusive and binding on all parties
concerned, including the Corporation, its shareholders, any participants in the
Plan and any other employee of the Corporation, and their respective successors
in interest.
(g) Reliance on Reports. Each member of the Committee shall be fully
-------------------
justified in relying or acting in good faith upon any report made by the
independent public accountants of the Corporation and its Affiliates, and upon
any other information furnished by the Corporation, its independent public
accountants or other agents in connection with this Plan. In no event shall any
person who is or shall have been a member of the Committee be liable for any
determination made or other action taken or any omission to act in reliance upon
any such report or information.
4. ADRs Available for the Plan; ADR Trust.
--------------------------------------
(a) Subject to adjustment as provided in Section 7(d) of the Plan, ADRs
representing not more than 3,000,000 Ordinary Shares may be purchased under the
Plan. If any Option or portion
4
<PAGE>
of an Option under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited or otherwise terminated, surrendered or canceled,
then the ADRs subject to such Option or portion thereof shall thereafter be
available for further Options under the Plan.
(b) The Corporation shall create a trust (the "ADR Trust") to acquire on
the open market and hold ADRs for which Options are granted under the Plan,
subject to the claims of the Corporation's creditors in the event of the
Corporation's insolvency. Delivery of ADRs by the ADR Trust upon exercise of an
Option shall fully discharge the Corporation's obligations to the Optionee under
the Plan and the Grant Agreement. The Corporation shall cause all purchases of
ADRs pursuant to the Plan to be reported to the Irish Stock Exchange in
accordance with and to the extent required by the Irish Companies Act of 1990.
(c) Allied Irish shall not issue ADRs or Ordinary Shares in connection with
the exercise of any Options granted under the Plan.
5. Participation.
-------------
Participation in the Plan shall be limited to individuals who serve both as
executive officers of the Corporation and as members of the Board of Directors
of Allied Irish.
6. Options.
-------
The Committee shall establish the terms of all Options. All Options are
subject to the terms and conditions provided in the corresponding Grant
Agreement, which shall incorporate the terms of the Plan. All Options shall
meet the following requirements:
(a) Grant Date. An Option must be granted prior to termination of the Plan
----------
by the Board. An Option is granted on the date that the Committee formally acts
to grant an Option to an Optionee or such other date as the Committee designates
at the time of taking such formal action (the "Grant Date").
(b) Vesting Schedule. Each grant of Options shall become fully or partially
----------------
exercisable to the extent specified hereafter (i.e. vested) upon the occurrence
----
of the following events:
(i)(A) as to 70% of any grant, on the achievement by the Corporation of
performance criteria over a period specified
5
<PAGE>
by the Committee relating to its cost/income ratio, after-tax earnings and/or
return on assets as determined by the Committee, subject to Section 3(b) (and
where peer group comparisons are used, the Corporation's performance must exceed
the peer group averages); and
(B) as to 30% of any grant, on the achievement of growth in tangible
earnings per share, i.e. excluding the amortization of goodwill ("EPS") of
Allied Irish over the first three years from the date of grant at least equal to
the growth in the Consumer Price Index (compiled and published by the Central
Statistics Office of the Government of Ireland and herein, "CPI") during the
same period plus five percent per annum, compounded annually over such three
year period;
(ii) as to 100% of any grant, on the date that is three months prior to
the Expiration Date; or
(iii) as to 100% of any grant, on a Change of Control.
(c) Exercise Price and Term. The exercise price of an Option shall not be
-----------------------
less than 100% of the Fair Market Value of the ADRs on the Grant Date and the
term of the Option shall be ten years. The date that the term of the Option
expires pursuant to this Section 6(c) is the "Expiration Date."
(d) Termination of Employment. Except as otherwise provided by the
-------------------------
Committee in the Grant Agreement, in the event of the Optionee's employment or
service with the Corporation and its Affiliates terminates, then the Option
shall terminate as follows:
(i) If the Optionee terminates employment or service by reason of
"retirement," within the meaning of the Pension Plan and Trust of Allfirst
Financial Inc., as amended from time to time, or "disability" within the meaning
of Code section 22(e)(3), then the Option shall remain exercisable (to the
extent exercisable by the Optionee on the effective date of such termination)
until the Expiration Date but subject to Section 6(d)(ii), below; provided,
--------
however, that no portion of the Option that is not exercisable on the effective
date of such termination shall thereafter become exercisable, and no portion of
the Option may be exercised after the Expiration Date.
(ii) If the Optionee dies, then the Option shall remain exercisable (to
the extent exercisable by the Optionee on the date of death) for a period of one
year; provided, however, that no portion of the Option that is not exercisable
on the date of
6
<PAGE>
death shall thereafter become exercisable, and no portion of the Option may be
exercised after the Expiration Date.
(iii) If the Optionee's employment or service is terminated
involuntarily for "cause," then the Option shall terminate in its entirety on
the date of such termination, regardless of whether the Option is vested at that
time. For purposes of the Plan, "cause" shall mean an Optionee's willful
malfeasance or gross negligence in the performance of his or her duties for the
Corporation or its Affiliates.
(iv) If the Optionee's employment or service is terminated other than
for "cause" and other than by reason of retirement, disability or death as
described in the foregoing subsections (i), (ii) or (iii), then Option shall
remain exercisable (to the extent exercisable by the Optionee on the effective
date of such termination) for a period of thirty days; provided, however, that
--------
no portion of the Option that is not exercisable on the effective date of such
termination shall thereafter become exercisable, and no portion of the Option
may be exercised after the Expiration Date.
(e) Method of Exercise. An Option may be exercised on any business day by
------------------
delivery of a written notice of exercise to the Corporation in accordance with
the instructions in the Grant Agreement. Such notice shall specify the number
of ADRs for which the Option is being exercised and shall be accompanied by (i)
payment to the trustee of the ADR Trust, in cash or by certified or cashier's
check payable to the order of the trustee of the ADR Trust, in an amount equal
to the option price of the ADRs for which the Option is being exercised, and
(ii) payment or provision for payment to the Corporation of all applicable taxes
required to be withheld in respect of the Option. However, payment of the
Option price and the withholding taxes need not accompany the written notice of
exercise if the notice directs that the certificates for the ADRs issued upon
the exercise be delivered to a licensed broker acceptable to the Corporation as
the agent for the individual exercising the Option provided that (x) the broker
tenders to the trustee of the ADR Trust payment of the exercise price in cash or
cash equivalents acceptable to the trustee and the Corporation, (y) the broker
tenders or makes provision for payment in cash or cash equivalents acceptable to
the Corporation equal to the amount of any withholding taxes payable pursuant to
Section 7(a) below, and (z) the Corporation determines that such procedure
satisfies the cashless exercise provisions of the Federal Reserve Board's
Regulation T.
7
<PAGE>
(f) Delivery of ADRs. Promptly after the exercise of an Option and the
----------------
payment in full of the Option price of the ADRs covered thereby and payment or
provision for payment of any applicable withholding taxes, the individual
exercising the Option shall be entitled to the delivery of a certificate or
certificates evidencing such individual's ownership of such ADRs. An individual
holding or exercising an Option shall have none of the rights of a shareholder
until the ADRs covered thereby are fully paid and delivered to such individual
and, except as provided in Section 7(d), no adjustment shall be made for
dividends or other rights for which the record date is prior to the date of such
issuance.
7. Miscellaneous.
-------------
(a) Withholding of Taxes. An Optionee shall pay to the Corporation, or
--------------------
make provision satisfactory to the Committee for payment of, any taxes required
to be withheld in respect of an Option no later than the date of the event
creating the tax liability. The Corporation may, to the extent permitted by
law, deduct any such tax obligations from any payment of any kind otherwise due
to a Optionee.
(b) Transferability. Except as provided below, no Option granted under the
---------------
Plan shall be transferable by a Optionee otherwise than by will or the laws of
descent and distribution, and an Option may be exercised during the lifetime of
the Optionee only by the Optionee or, during the period the Optionee is under a
legal disability, by the Optionee's guardian or legal representative.
Notwithstanding the preceding sentence, the Committee may, in its discretion,
expressly provide that an Option may be transferred to: (i) members of the
Optionee's family; (ii) trusts for the benefit of such family members; or (iii)
partnerships whose only partners are such family members. No consideration may
be paid for any such transfer of Options.
(c) Adjustments; Business Combinations. (i) In the event of changes in the
----------------------------------
Ordinary Shares by reason of any stock dividend, split-up, recapitalization,
merger, consolidation, business combination or exchange of shares and the like,
the Committee shall, in its discretion, make appropriate adjustments to the
maximum number and kind of securities reserved for purchase under the Plan as
provided in Section 4 of the Plan and to the number, kind and price of
securities covered by Options granted, and shall, in its discretion and without
the consent of holders of Options, make any other adjustments in Options,
including but not limited to reducing the number of ADRs subject to Options or
providing or mandating alternative settlement
8
<PAGE>
methods such as settlement of the Options in cash or other securities of the
Corporation or of any other entity, or in any other matters which relate to
Options as the Committee shall determine to be necessary or appropriate.
(ii) Notwithstanding anything in the Plan to the contrary and without
the consent of holders of Options, the Committee, in its sole discretion, may
make any modifications to any Options, including but not limited to
cancellation, forfeiture, surrender or other termination of the Options in whole
or in part regardless of the vested status of the Option, in order to facilitate
any business combination that is authorized by the Board of Directors of Allied
Irish to comply with requirements for treatment as a pooling of interests
transaction for accounting purposes under generally accepted accounting
principles.
(iii) The Committee is authorized to make, without the consent of
holders of Options, adjustments in the terms and conditions of, and the criteria
included in, Options in recognition of unusual or nonrecurring events affecting
Allied Irish or the Corporation, or the financial statements of Allied Irish,
the Corporation or any Affiliate, or of changes in applicable laws, regulations,
or accounting principles, whenever the Committee determines that such
adjustments are appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan.
(d) Substitution of Options in Mergers and Acquisitions. Options may be
---------------------------------------------------
granted under the Plan from time to time in substitution for Options held by
employees or directors of entities who become or are about to become employees
or directors of the Corporation or an Affiliate as the result of a merger or
consolidation of the employing entity with the Corporation or an Affiliate, or
the acquisition by the Corporation or an Affiliate of the assets or stock of the
employing entity. The terms and conditions of any substitute Options so granted
may vary from the terms and conditions set forth herein to the extent that the
Committee deems appropriate at the time of grant to conform the substitute
Options to the provisions of the awards for which they are substituted.
(e) Termination, Amendment and Modification of the Plan. The Board or the
---------------------------------------------------
Committee may terminate, amend or modify the Plan or any portion thereof at any
time; provided, that any Plan amendment that confers a material benefit on an
--------
Optionee, and that is not in response to changes in legislation or to maintain
9
<PAGE>
favorable regulatory or tax treatment of the Plan, must be approved by the
shareholders of Allied Irish.
(f) Non-Guarantee of Employment or Service. Nothing in the Plan or in any
--------------------------------------
Grant Agreement shall confer any right on an individual to continue in the
employment or service of the Corporation or its Affiliates, or shall interfere
in any way with the right of the Corporation and its Affiliates to terminate
such employment or service at any time.
(g) Compliance with Securities Laws; Listing and Registration. ADRs shall
---------------------------------------------------------
not be transferred with respect to an Option granted under the Plan unless the
exercise of such Option and the delivery of certificates for such ADRs pursuant
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933 and the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of the New York Stock
Exchange, and shall be further subject to the approval of counsel for the
Corporation with respect to such compliance to the extent such approval is
sought by the Committee. If the Corporation determines that the listing,
registration or qualification upon any securities exchange or under any law, of
securities subject to any Option is necessary or desirable as a condition of, or
in connection with, the granting of the Option or the purchase of securities
thereunder, no such Option may be exercised in whole or in part and no
restrictions on such Option shall lapse, unless such listing, registration or
qualification is effected free of any conditions not acceptable to the
Corporation.
(h) No Limit on Other Compensation Arrangements. Nothing contained in the
-------------------------------------------
Plan shall prevent the Corporation or its Affiliates from adopting or continuing
in effect other compensation arrangements (whether such arrangements be
generally applicable or applicable only in specific cases) as the Committee in
its discretion determines desirable, including without limitation the granting
of stock options otherwise than under the Plan.
(i) No Trust or Fund Created. Subject to the provisions of Section 4,
------------------------
neither the Plan nor any Option shall create or be construed to create a trust
or separate fund of any kind or a fiduciary relationship between the Corporation
and a Optionee or any other person. To the extent that any Optionee or other
person acquires a right to receive payments from the Corporation pursuant to an
Option, such right shall be no greater than the right of any unsecured general
creditor of the Corporation.
10
<PAGE>
(j) Governing Law. The validity, construction and effect of the Plan, of
-------------
Grant Agreements, and of any rules, regulations, determinations or decisions
made by the Committee relating to the Plan or any Grant Agreements, and the
rights of any and all persons having or claiming to have any interest therein or
thereunder, shall be determined exclusively in accordance with applicable
federal laws and the laws of the State of Maryland, without regard to its
conflict of laws principles.
(k) Fractional Shares. Any fractional ADR with respect to an Option shall
-----------------
be eliminated at the time of payment or removal of restrictions by rounding down
for fractions of less than one-half and rounding up for fractions of equal to or
more than one-half. No cash settlements shall be made with respect to
fractional ADRs eliminated by rounding.
(l) Effective Date; Termination Date. The Plan is effective as of the date
--------------------------------
on which the Plan is approved by the shareholders of Allied Irish, and shall
terminate on such date as the Board shall determine; provided, that no Option
--------
may be granted more than ten years after the date the Plan is approved by the
shareholders of Allied Irish. Subject to other applicable provisions of the
Plan, all Options granted under the Plan prior to such termination of the Plan
shall remain in effect until such Options have been satisfied or terminated in
accordance with the Plan and the terms of such Options.
11
<PAGE>
(m) Benefits not Pensionable. Benefits under the Plan are not pensionable
------------------------
earnings.
ALLFIRST FINANCIAL INC.
By: _________________________
Brian L. King
Executive Vice President
12
<PAGE>
Exhibit 21
ALLFIRST FINANCIAL INC
Subsidiaries of Registrant
Jurisdiction of
Name Incorporation
- ---- -------------
Allfirst Bank Maryland
Allfirst Annuities Agency Corporation Maryland
Allfirst Brokerage Corporation Maryland
Allfirst Insurance Corporation Maryland
Allfirst Trust Company National Association United States
Allfirst Trust Company of Pennsylvania N.A. United States
Allfirst Realty Holding, Inc. Virginia
Allfirst Mortgage Trust Maryland
Allied Investment Advisors, Inc. Maryland
EMS Financial, Inc.(fka Eastern Mortgage Services, Inc.) Pennsylvania
First Maryland Bancorp Fund, L.P (indirect ownership) Delaware
First Maryland International Banking Corporation United States
Sussex Capital Corporation Delaware
WMATA 1998 - 1/st/M-B4 Trust Maryland
CH Allentown, L.L.C. Maryland
CH Bowie Park, Limited Maryland
CH Burtonsville, L.L.C. Maryland
CH Naples, L.L.C. Maryland
CH Residential Properties Maryland
CH Wyemoor Limited L.L.C. Maryland
Cheasapeake Holdings Company Maryland
CH Allentown, L.L.C. 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 Belmont, L.L.C. Maryland
Chesapeake Holdings Dorsey Road, L.L.C. Maryland
Chesapeake Holdings Melwood L.L.C Maryland
Chesapeake Holdings Presidential, L.L.C. Maryland
Chesapeake Holdings Rainbow, L.L.C. (inactive) Maryland
Chesapeake Holdings Riva Road, L.L.C. Maryland
Chesapeake Holdings Somerset, L.L.C. (inactive) Maryland
Chesapeake Holdings II, Limited Maryland
Chesapeake Holdings 198, L.L.C. Maryland
Chesapeake Holdings Belmont, L.L.C. Maryland
Chesapeake Holdings Dorsey Road, L.L.C Maryland
Chesapeake Holdings BP Development, Limited Maryland
Chesapeake Holdings BP Property, Limited Maryland
<PAGE>
Chesapeake Holdings Fort Myers, Limited Corporation Maryland
Chesapeake Holdings Melwood, L.L.C. Maryland
Chesapeake Holdings Nottoway, Limited Maryland
Chesapeake Holdings Presidential , L.L.C. Maryland
Chesapeake Holdings Radio, Limited Maryland
Chesapeake Holdings Rainbow, L.L.C. Maryland
Chesapeake Holdings Riva Road, L.L.C. Maryland
Chesapeake Holdings Riverside, Limited Maryland
Chesapeake Holdings S.C., L.L.C. Maryland
Chesapeake Holdings Somerset, L.L.C. Maryland
Chesapeake Holdings Sun Marine, Limited (inactive) Maryland
Chesapeake Holdings Winchester, Limited Maryland
Financial Land Company (inactive) Pennsylvania
Republic Loan Holdings, L.L.C.
f/k/a FMB Real Estate Loan Holdings, L.L.C. Maryland
York Outlet, Limited Maryland
York Reading Land, Inc. Pennsylvania
York Realty Holding Company, Inc. Maryland
York Wyndham Land, Inc. Pennsylvania
York East Manchester Land, Inc.
f/k/a York Elizabethtown Land, Inc. Pennsylvania
Allfirst Financial Center National Association United States
Allfirst Foundation, Inc. Maryland
Allfirst Leasing Corporation Maryland
Allfirst Life Insurance Corporation Arizona
Allfirst Mortgage Corporation Maryland
Allfirst Preferred Asset Trust Delaware
Allfirst Preferred Capital Trust Delaware
Beechwood Investments Ltd. British West Indies
Beechwood Investments-Chile Ltda Chile
Forestal San Jose, S.A. (Indirect Ownership) Chile
Compania Caceres Y Virtudes, Grand Cayman British West Indies
Portuaria Coronel, S.A. (Indirect Ownership) Chile
Compania La Proa, Ltd. British West Indies
Bemberg Industrial, S.A. (B.I.S.A.) (Indirect Ownership) Argentina
Fariza Ltd. British West Indies
Fariza-Chile Ltda Chile
Forestal San Jose, S.A. (Indirect Ownership) Chile
First Center Corporation Maryland
Pratt-Greene Associates Limited Partnership
(Indirect Ownership) Maryland
First Greene Corporation Maryland
Pratt-Greene Associates Limited Partnership
(Indirect Ownership) Maryland
First Maryland Capital I Delaware
First Maryland Capital II Delaware
First Maryland Commercial Holdings Corporation Maryland
First Maryland Holdings Corporation Maryland
<PAGE>
First Manufactured Housing Credit Corporation New York
First Carolina Financial Corporation South Carolina
First Maryland Personnel Services, Inc. Maryland
First National Mortgage Corporation Maryland
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
<PAGE>
Exhibit 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-28479) of Allfirst Financial Inc. (formerly First
Maryland Bancorp), of our report dated February 3, 2000 relating to the
financial statements, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 16, 2000
<PAGE>
Exhibit 24
----------
ALLFIRST FINANCIAL INC.
Power of Attorney
-----------------
Each of the undersigned persons, in his or her capacity as an officer or
director, or both, of Allfirst Financial Inc. (the "Company"), hereby appoints
Frank P. Bramble, Susan C. Keating, Jerome W. Evans and Robert L. Carpenter,
Jr., and each of them, with full power of substitution and re-substitution and
with full power in each to act without the others, his or her attorney-in-fact
and agent for the following purposes: To sign for him or her, in his or her name
and in his or her capacity as an officer or director, or both, of the Company,
the Annual Report on Form 10-K for the year ended December 31, 1999, and any
amendments or supplements thereto, and to file the same with the Securities and
Exchange Commission.
This power of attorney shall be effective as of the date written opposite
the signature of each of the undersigned and shall continue in full force and
effect until revoked by the undersigned in a writing filed with the Secretary of
the Company.
/s/ Frank P. Bramble January 18, 2000
- ---------------------------------------
Frank P. Bramble
Chairman of the Board and
Director
/s/ Susan C. Keating January 18, 2000
- ---------------------------------------
Susan C. Keating
President, Chief Executive
Officer and Director
/s/ Jerome W. Evans January 18, 2000
- --------------------------------------
Jerome W. Evans
Executive Vice President and
Chief Financial Officer
/s/ Robert L. Carpenter, Jr. January 18, 2000
- ---------------------------------------
Robert L. Carpenter, Jr.
Senior Vice President and
Controller
<PAGE>
/s/ Sherry F. Bellamy January 18, 2000
- ----------------------------------
Sherry F. Bellamy
Director
/s/ James T. Brady January 18, 2000
- ----------------------------------
James T. Brady
Director
/s/ Benjamin L. Brown January 18, 2000
- ----------------------------------
Benjamin L. Brown
Director
/s/ Michael D. Buckley January 18, 2000
- ----------------------------------
Michael D. Buckley
Director
/s/ Jeremiah E. Casey January 18, 2000
- ----------------------------------
Jeremiah E. Casey
Director
/s/ J. Owen Cole January 18, 2000
- ----------------------------------
J. Owen Cole
Director
/s/ Edward A. Crooke January 18, 2000
- ----------------------------------
Edward A. Crooke
Director
/s/ John F. Dealy January 18, 2000
- ----------------------------------
John F. Dealy
Director
/s/ Mathias J. Devito January 18, 2000
- ----------------------------------
Mathias J. DeVito
Director
/s/ Jerome W. Geckle January 18, 2000
- ----------------------------------
Jerome W. Geckle
Director
/s/ Frank A. Gunther, Jr. January 18, 2000
- ----------------------------------
2
<PAGE>
Frank A. Gunther, Jr.
Director
/s/ Margaret M. Heckler January 18, 2000
- ------------------------------------
Margaret M. Heckler
Director
/s/ Lee H. Javitch January 18, 2000
- ----------------------------------
Lee H. Javitch
Director
/s/ Gary Kennedy January 18, 2000
- ------------------------------------
Gary Kennedy
Director
/s/ William T. Kirchhoff January 18, 2000
- ----------------------------------
William T. Kirchhoff
Director
/s/ Henry J. Knott, Jr. January 18, 2000
- ----------------------------------
Henry J. Knott, Jr.
Director
/s/ Andrew Maier II January 18, 2000
- ----------------------------------
Andrew Maier II
Director
/s/ Thomas P. Mulcahy January 18, 2000
- ----------------------------------
Thomas P. Mulcahy
Director
__________________________________ January 18, 2000
Morton I. Rapoport
Director
/s/ R. Champlain Sheridan January 18, 2000
- ----------------------------------
R. Champlin Sheridan
Director
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ALLFIRST
FINANCIAL INC. DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 798,389
<INT-BEARING-DEPOSITS> 1,339
<FED-FUNDS-SOLD> 147,225
<TRADING-ASSETS> 1,716
<INVESTMENTS-HELD-FOR-SALE> 4,287,343
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,780,630
<ALLOWANCE> 157,351
<TOTAL-ASSETS> 17,507,250
<DEPOSITS> 12,142,587
<SHORT-TERM> 1,631,036
<LIABILITIES-OTHER> 702,150
<LONG-TERM> 1,195,394
8,341
0
<COMMON> 85,395
<OTHER-SE> 1,737,625
<TOTAL-LIABILITIES-AND-EQUITY> 17,507,250
<INTEREST-LOAN> 793,271
<INTEREST-INVEST> 268,214
<INTEREST-OTHER> 5,104
<INTEREST-TOTAL> 1,066,589
<INTEREST-DEPOSIT> 363,093
<INTEREST-EXPENSE> 530,139
<INTEREST-INCOME-NET> 536,450
<LOAN-LOSSES> 34,150
<SECURITIES-GAINS> 4,975
<EXPENSE-OTHER> 533,010
<INCOME-PRETAX> 279,487
<INCOME-PRE-EXTRAORDINARY> 279,487
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178,077
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.60
<LOANS-NON> 51,724
<LOANS-PAST> 31,693
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 80,163
<ALLOWANCE-OPEN> 157,351
<CHARGE-OFFS> 42,302
<RECOVERIES> 8,152
<ALLOWANCE-CLOSE> 157,351
<ALLOWANCE-DOMESTIC> 78,786
<ALLOWANCE-FOREIGN> 16,063
<ALLOWANCE-UNALLOCATED> 62,502
</TABLE>
