-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TB1T8DtBipnnPsZx0R3PuOkC7KE3BarhbSeC4zkysy6BE5i/vv3tLsnMaAsNNdqi F/6qFljGKlusbBg/+MAUUw== 0000928385-01-502453.txt : 20020410 0000928385-01-502453.hdr.sgml : 20020410 ACCESSION NUMBER: 0000928385-01-502453 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLFIRST FINANCIAL INC CENTRAL INDEX KEY: 0000036510 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 520981378 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-50235 FILM NUMBER: 1786225 BUSINESS ADDRESS: STREET 1: FIRST MARYLAND BLDG STREET 2: 25 S CHARLES ST CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4102444000 FORMER COMPANY: FORMER CONFORMED NAME: FIRST MARYLAND BANCORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) -- OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7273 ______________________________ Allfirst Financial Inc. (Exact name of registrant as specified in its charter) Delaware 52-0981378 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) The Allfirst Building 25 South Charles Street Baltimore, Maryland 21201 (Address of principal executive offices) (zip code) 410-244-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No - Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: All 597,763 outstanding shares of Common Stock of the registrant are owned by Allied Irish Banks, p.l.c., an Irish banking corporation. ALLFIRST FINANCIAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 INDEX
Page No ------- Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Income............................................ 3 Consolidated Statements of Financial Condition............................... 4 Consolidated Statements of Changes in Stockholders' Equity................... 5 Consolidated Statements of Cash Flows........................................ 6 Notes to Consolidated Financial Statements................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................... 24 Part II. Other Information Item 1. Legal Proceedings............................................................ 24 Item 6. Exhibits and reports on Form 8-K............................................. 24 Signatures............................................................................ 25
2 Item 1. Financial Statements ALLFIRST FINANCIAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ---------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands) Interest Income Interest and fees on loans and leases................ $180,459 $222,060 $574,575 $641,811 Interest and dividends on investment securities: Taxable.......................................... 50,594 55,540 160,897 166,867 Tax-exempt....................................... 5,936 5,838 18,186 16,725 Dividends........................................ 3,739 3,054 10,644 8,356 Interest on loans held for sale...................... 953 377 2,369 1,107 Other interest income................................ 875 1,490 1,645 3,289 -------- -------- -------- -------- Total interest and dividend income............. 242,556 288,359 768,316 838,155 -------- -------- -------- -------- Interest Expense Interest on deposits................................. 77,301 113,515 269,326 305,543 Interest on Federal funds purchased and other short- term borrowings................................... 17,101 29,561 63,433 95,721 Interest on long-term debt........................... 14,280 22,141 46,527 64,127 -------- -------- -------- -------- Total interest expense......................... 108,682 165,217 379,286 465,391 -------- -------- -------- -------- Net Interest Income.................................. 133,874 123,142 389,030 372,764 Provision for loan and lease losses.................. 5,912 6,202 21,421 23,077 -------- -------- -------- -------- Net Interest Income After Provision for Loan and Lease Losses...................................... 127,962 116,940 367,609 349,687 -------- -------- -------- -------- Noninterest Income Service charges on deposit accounts.................. 28,676 25,370 82,476 73,958 Trust and investment advisory income................. 22,397 22,062 65,638 65,889 Electronic banking income............................ 8,788 7,462 24,471 20,803 Mortgage banking income.............................. 4,649 2,828 15,375 8,096 Trading income....................................... 5,111 5,522 16,599 12,775 Consulting income.................................... 10,378 - 15,336 - Other income......................................... 24,505 22,560 68,193 67,832 Securities gains, net................................ 338 (29) 759 146 -------- -------- -------- -------- Total noninterest income....................... 104,842 85,775 288,847 249,499 -------- -------- -------- -------- Noninterest Expense Salaries and other personnel costs................... 86,208 68,850 241,528 204,531 Equipment costs...................................... 12,301 11,222 35,343 34,154 Occupancy costs...................................... 9,629 9,231 28,100 27,781 Postage and communications........................... 5,282 5,063 14,840 15,122 Advertising and public relations..................... 4,204 5,457 11,291 12,415 Other operating expenses............................. 25,280 20,234 68,088 57,998 Intangible assets amortization expense............... 12,787 11,974 35,965 35,810 -------- -------- -------- -------- Total noninterest expenses..................... 155,691 132,031 435,155 387,811 -------- -------- -------- -------- Income before income taxes........................... 77,113 70,684 221,301 211,375 Income tax expense................................... 25,285 23,864 71,848 72,394 -------- -------- -------- -------- Net Income........................................... 51,828 46,820 149,453 138,981 Dividends on preferred stock......................... 101 101 304 304 -------- -------- -------- -------- Net Income to Common Stockholders.................... $ 51,727 $ 46,719 $149,149 $138,677 ======== ======== ======== ========
See accompanying notes to consolidated financial statements 3 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, December 31, 2001 2000 ------------- ------------ (in thousands, except per share amounts) Assets Cash and due from banks.................................................................... $ 812,777 $ 933,969 Interest bearing deposits in other banks................................................... 3,770 1,273 Trading account securities................................................................. 6,968 4,222 Federal funds sold and securities purchased under resale agreements........................ 3,000 44,430 Investment securities available for sale................................................... 4,068,172 4,375,037 Loans held for sale........................................................................ 43,404 57,255 Loans, net of unearned income of $193,352 and $221,128: Commercial............................................................................... 3,932,193 3,828,304 Commercial real estate................................................................... 2,364,027 2,362,564 Residential mortgage..................................................................... 511,966 640,765 Direct retail............................................................................ 2,349,639 2,137,882 Indirect retail.......................................................................... 488,121 718,638 Commercial leases receivable............................................................. 669,755 665,649 Indirect retail leases receivable........................................................ 264,213 353,364 Foreign.................................................................................. 188,915 201,882 ----------- ----------- Total loans, net of unearned income.................................................... 10,768,829 10,909,048 Allowance for credit losses................................................................ (152,539) (152,539) ----------- ----------- Loans, net............................................................................. 10,616,290 10,756,509 ----------- ----------- Premises and equipment..................................................................... 240,320 205,611 Due from customers on acceptances.......................................................... 2,293 3,791 Intangible assets.......................................................................... 803,701 792,782 Other assets............................................................................... 1,112,403 1,233,033 ----------- ----------- Total assets........................................................................... $17,713,098 $18,407,912 =========== =========== Liabilities and Stockholders' Equity Domestic deposits: Noninterest bearing deposits............................................................. $ 2,864,114 $ 2,966,832 Interest bearing deposits (excluding large denomination time deposits)................... 6,957,290 6,848,850 ----------- ----------- Total core deposits........................................................................ 9,821,404 9,815,682 Large denomination time deposits........................................................... 1,460,482 2,553,021 Interest bearing deposits in foreign banking office........................................ 312,063 308,879 ----------- ----------- Total deposits......................................................................... 11,593,949 12,677,582 Federal funds purchased and securities sold under repurchase agreements.................... 1,555,007 1,112,210 Other borrowed funds, short-term........................................................... 504,594 540,386 Bank acceptances outstanding............................................................... 2,293 3,791 Accrued taxes and other liabilities........................................................ 991,538 1,117,127 Long-term debt............................................................................. 1,010,562 996,010 ----------- ----------- Total liabilities...................................................................... 15,657,943 16,447,106 ----------- ----------- 4.50% Cumulative, Redeemable Preferred Stock, $5 par value per share, $100 liquidation preference per share: authorized and issued 90,000 shares.................................. 8,789 8,590 Minority interest.......................................................................... 115 110 Stockholders' equity: Common Stock, no par value; authorized 1,200,000 shares, issued 597,763 shares............. 85,395 85,395 Capital surplus........................................................................... 582,816 582,816 Retained earnings.......................................................................... 1,353,376 1,298,827 Accumulated other comprehensive gain (loss)................................................ 24,664 (14,932) ----------- ----------- Total stockholders' equity............................................................. 2,046,251 1,952,106 ----------- ----------- Total liabilities, redeemable preferred stock and stockholders' equity................. $17,713,098 $18,407,912 =========== ===========
See accompanying notes to consolidated financial statements 4 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Other Common Capital Comprehensive Retained Stock Surplus Income (Loss) Earnings Total ------- -------- ----------------- ----------- ----------- Nine Months Ended September 30, 2000 - ------------------------------------ Balance, December 31, 1999.......................................... $85,395 $582,780 $(97,801) $1,252,646 $1,823,020 Net income.......................................................... - - - 138,981 138,981 Other comprehensive income, net of tax: Minimum pension liability adjustment.............................. - - 963 - 963 Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1)................................. - - 33,872 - 33,872 ---------- Other comprehensive income...................................... 34,835 ---------- Comprehensive income.......................................... 173,816 ---------- Accretion of redeemable preferred stock............................. - - - (185) (185) Dividends declared on common stock.................................. - - - (138,000) (138,000) Dividends declared on redeemable preferred stock.................... - - - (304) (304) ------- -------- -------- ---------- ---------- Balance, September 30, 2000......................................... $85,395 $582,780 $(62,966) $1,253,138 $1,858,347 ======= ======== ======== ========== ========== Nine Months Ended September 30, 2001 - ------------------------------------ Balance, December 31, 2000.......................................... $85,395 $582,816 $(14,932) $1,298,827 $1,952,106 Net income.......................................................... - - - 149,453 149,453 Other comprehensive income, net of tax: Minimum pension liability adjustment.............................. - - (505) - (505) Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1)................................. - - 40,101 - 40,101 ---------- Other comprehensive income..................................... 39,596 ---------- Comprehensive income.......................................... 189,049 ---------- Accretion of redeemable preferred stock............................. - - - (200) (200) Dividends declared on common stock.................................. - - - (94,400) (94,400) Dividends declared on redeemable preferred stock................... - - - (304) (304) ------- -------- -------- ---------- ---------- Balance, September 30, 2001......................................... $85,395 $582,816 $ 24,664 $1,353,376 $2,046,251 ======= ======== ======== ========== ==========
(1) Disclosure of reclassification amount:
Nine Months Ended September 30, ----------------- 2001 2000 ------- ------- Net unrealized holding gains on investment securities arising during period.................. $40,893 $33,960 Less: reclassification adjustment for realized gains included in net income.................. 792 88 ------- ------- Change in unrealized gains on investment securities, net of tax.............................. $40,101 $33,872 ======= =======
See accompanying notes to consolidated financial statements 5 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------- 2001 2000 ----------- --------- (in thousands) Operating Activities Net income........................................................................................ $ 149,453 $ 138,981 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses............................................................. 21,421 23,077 Provision for other real estate owned and other assets owned.................................... 15 1,144 Depreciation and amortization................................................................... 60,965 60,294 Deferred income tax (credit) expense............................................................ (33,604) 11,099 Net change in current taxes payable............................................................. 88,713 23,318 Net gain on the sale of assets.................................................................. (819) (690) Net decrease (increase) in loans originated for sale............................................ 13,851 (6,334) Net increase in trading account securities...................................................... (2,746) (2,815) Net decrease (increase) in accrued interest receivable.......................................... 16,007 (1,098) Net decrease in accrued interest payable........................................................ (27,955) (25,301) Net decrease (increase) in derivative and foreign exchange activity............................. 71,521 (182,175) Net change in other assets and liabilities...................................................... 64,550 (36,341) ----------- --------- Net cash provided by operating activities................................................... 421,372 3,159 ----------- --------- Investing Activities Proceeds from sales of investment securities available for sale................................. 1,114,157 253,592 Proceeds from paydowns and maturities of investment securities available for sale............... 893,057 392,125 Purchases of investment securities available for sale........................................... (1,813,512) (478,349) Net decrease (increase) in short-term investments............................................... 41,430 (70,675) Purchase of commercial loan portfolio........................................................... (161,000) - Net receipts (disbursements) from lending activities of banking subsidiaries.................... 273,710 (237,883) Principal collected on loans of nonbank subsidiaries............................................ 11,376 11,662 Loans originated by nonbank subsidiaries........................................................ (11,402) (10,045) Principal payments received under leases........................................................ 3,450 3,300 Purchases of assets to be leased................................................................ (2,250) (707) Proceeds from the sale of other real estate..................................................... 17,942 8,283 Net purchases of premises and equipment......................................................... (58,559) (17,834) Purchase of bank owned life insurance........................................................... - (179,000) Purchase of non-bank subsidiary................................................................. (43,423) - Net other investing activities.................................................................. (33,711) 13,741 ----------- --------- Net cash provided by (used for) investing activities........................................ 231,265 (311,790) ----------- --------- Financing Activities Net decrease in deposits........................................................................ (1,083,633) 397,034 Net increase in short-term borrowings........................................................... 407,005 95,542 Cash dividends paid............................................................................. (94,704) (138,304) ----------- --------- Net cash (used for) provided by financing activities........................................ (771,332) 354,272 ----------- --------- (Decrease) increase in cash and cash equivalents.................................................. (118,695) 45,641 Cash and cash equivalents at January 1,........................................................... 935,242 799,728 ----------- --------- Cash and cash equivalents at September 30,........................................................ $ 816,547 $ 845,369 =========== ========= Supplemental Disclosures Interest payments........................................................................... $ 407,241 $ 490,692 Income tax payments, net of tax refunds..................................................... 12,157 33,345 Noncash Investing And Financing Activities Loan charge-offs............................................................................ 28,308 30,819 Transfers to other real estate and other assets owned....................................... 4,922 10,965
See accompanying notes to consolidated financial statements 6 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Allfirst Financial Inc. and Subsidiaries ("Allfirst") have been prepared in accordance with generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (which consist of only normal, recurring accruals) necessary for a fair presentation have been included. Certain amounts in prior periods have been reclassified for comparative purposes. Operating results for the nine month period ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in Allfirst's 2000 Annual Report on Form 10-K. 2. Recent Accounting Pronouncements SFAS 141 - Business Combinations SFAS No. 141, "Business Combinations", was issued in July 2001. This Statement addresses financial accounting and reporting for business combinations. While this Statement supercedes APB Opinion No. 16, "Business Combinations", it carries forward without reconsideration the guidance in Opinion 16 and certain of its amendments and interpretations related to the application of the purchase method of accounting. All business combinations included in the scope of this Statement are to be accounted for using the purchase method of accounting. Additionally, this Statement requires that an intangible asset be recognized as an asset apart from goodwill if it arises from contractual or legal rights. If an intangible asset does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is separable; that is, capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged. Also, this Statement requires disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. If goodwill and intangible assets acquired are significant in relation to the purchase price paid, disclosure of other information about those assets is required. The provisions of this Statement are effective for all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. With the exception of the immediate requirement to use the purchase method of accounting for all business combinations completed after June 30, 2001, Allfirst will implement the provisions of SFAS No. 141 on January 1, 2002. The impact of adopting the requirements of this Statement on Allfirst's financial position, results of operations, and cash flow is not expected to be material. SFAS 142 - Goodwill and Other Intangible Assets SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in July 2001. This Statement addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This Statement supercedes APB Opinion No. 17, "Intangible Assets", but carries forward without reconsideration the provisions in Opinion 17 related to internally developed intangible assets. 7 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 2. Recent Accounting Pronouncements (continued) This Statement requires that goodwill be allocated on a reporting unit level. Additionally, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment at the reporting unit level. Intangible assets that have finite lives will continue to be amortized over their useful lives. Also, this Statement requires disclosures about the changes in the carrying amount of goodwill from period to period (in the aggregate and by reportable segment), the carrying amount of intangible assets by major intangible assets class for those assets subject to amortization and for those not subject to amortization, and the estimated intangible asset amortization expense for the next five years. The provisions of this Statement are effective with fiscal years beginning after December 15, 2001. Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of this Statement. Allfirst will implement the provisions of this Statement beginning January 1, 2002. The impact of adopting the requirements of this Statement on Allfirst's financial position, results of operations, and cash flow has not been determined. SFAS 144 - Accounting for the Impairment or Disposal of Long-Lived Assets SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued in October 2001. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", but retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long- lived assets to be disposed of by sale. Additionally, this Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, it retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS 144 applies to both business enterprises and not-for-profit organizations. If a long-lived asset is part of a group that includes other assets and liabilities, the Statement is applied to the group. For the most part, SFAS No. 144 applies to all recorded long-lived assets that are held for use, or that will be disposed of. Long-lived assets include capital lease assets of lessees, assets of lessors subject to operating leases, long-term prepaid assets, and intangible assets that are amortized. A long-lived asset or group to be held and used should be tested for recoverability whenever events or changes in circumstances indicate that it's carrying amount may not be recoverable. An impairment loss should be recognized only if the carrying amount of the asset or group is not recoverable. The impairment loss is measured as the excess of the carrying amount of an asset or group over its fair value. A long-lived asset or group that will be disposed of other than by sale should be classified on the balance sheet as held and used until the disposal transaction occurs. An entity should continue to depreciate the asset or group until disposed of. A long-lived asset or group to be disposed of by sale should be classified on the balance sheet as held for sale if certain criteria are met. The asset or group should be measured at the lower of its carrying amount at the date of reclassification or fair value less cost to sell. Additionally, depreciation of the asset or group should cease when reclassification occurs. 8 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Recent Accounting Pronouncements (continued) The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Allfirst will implement the provisions of this Statement beginning January 1, 2002. The impact of adopting the requirements of this Statement on Allfirst's financial position, results of operations, and cash flow is not expected to be material. 3. Investment Securities The amortized cost and fair value of available for sale securities at September 30, 2001 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- ---------------- --------------- (in thousands) U.S. Treasury and U.S. Government agencies......... $ 183,948 $ 1,536 $ - $ 185,484 Mortgage-backed obligations........................ 1,824,409 49,081 - 1,873,490 Collateralized mortgage obligations................ 804,068 14,114 (177) 818,005 Asset-backed securities............................ 279,339 9,515 (3) 288,851 Obligations of states and political subdivisions... 495,179 18,474 (1,021) 512,632 Other debt securities.............................. 103,675 122 - 103,797 Equity securities.................................. 336,766 76 (50,929) 285,913 ---------- ------- -------- ---------- Total..................................... $4,027,384 $92,918 $(52,130) $4,068,172 ========== ======= ======== ==========
4. Line of Business Reporting Allfirst has determined that its major lines of business are those that 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 Community Banking, Capital Markets, Asset Management, Treasury and Other. Community Banking provides loans, deposits, and investment products to consumers and commercial small business customers. Capital Markets provides commercial loans, construction and property loans, letters of credit, derivative financial instruments, foreign exchange and cash management products and services to middle market and large corporate customers. It is also involved in mortgage banking activities related to multi-family housing loan programs. Asset Management provides investment advisory, investment products, and fiduciary services to individual, institutional and corporate clients. The Asset Management Group also manages the ARK(R) Funds, a family of proprietary mutual funds. Treasury is responsible for managing and controlling the liquidity, funding and market risk needs of Allfirst. Other includes residential mortgage lending which was formerly included in Capital Markets and indirect lending which was formerly included in Community Banking. The activities in both of these businesses were curtailed prior to 2001. Several small business units, inter-segment income elimination and unallocated income and expenses, including goodwill and other intangible asset amortization are included in Other as well. 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 including centrally provided services which are allocated based on estimated usage of those services. Each business unit's assets and liabilities are match funded with interest rate risk centrally managed within Treasury. Loan loss provisions and the allowance for loan and lease losses are allocated based on historical loss experience by product line. 9 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Line of Business Reporting (continued) The following tables present operating information about each of Allfirst's business lines for the three months ended September 30, 2001 and 2000. Business Line Results Three Months Ended September 30, 2001
Community Capital Asset Consolidated (in thousands) Banking Markets Management Treasury Other Total --------- ------- ---------- -------- --------- ----------- Net interest income/1/..................... $ 78,506 $51,644 $ 1,636 $ 8,742 $ (2,528) $138,000 Noninterest income......................... 31,119 31,449 23,039 2,694 16,203 104,504 Securities gains, net...................... - - - 332 6 338 -------- ------- ------- ------- -------- -------- Total revenues........................... 109,625 83,093 24,675 11,768 13,681 242,842 Total noninterest expenses, excluding intangible asset amortization............ 67,896 37,350 15,666 3,220 18,772 142,904 Goodwill and other intangible asset amortization............................. 207 - 274 - 12,306 12,787 Provision for loan and lease losses........ 3,034 6,169 21 - (3,312) 5,912 -------- ------- ------- ------- -------- -------- Income before income taxes................. 38,488 39,574 8,714 8,548 (14,085) 81,239 Income tax expense/1/...................... 14,624 11,907 3,236 2,821 (3,177) 29,411 -------- ------- ------- ------- -------- -------- Net income................................. $ 23,864 $27,667 $ 5,478 $ 5,727 $(10,908) $ 51,828 ======== ======= ======= ======= ======== ======== (in millions) Average identifiable assets................ $ 3,353 $ 6,886 $ 42 $ 4,200 $ 3,067 $ 17,548 Average loans.............................. 3,171 6,090 17 - 1,359 10,637 Average deposits........................... 8,034 1,519 80 1,991 81 11,705
Business Line Results Three Months Ended September 30, 2000
Community Capital Asset Consolidated (in thousands) Banking Markets Management Treasury Other Total --------- ------- ---------- -------- ----- ------------ Net interest income/1/.................. $ 79,071 $50,530 $ 1,324 $(3,060) $ (374) $127,491 Noninterest income...................... 26,247 24,829 22,577 3,621 8,530 85,804 Securities gains, net................... - 17 - (46) - (29) -------- ------- ------- -------- ------- -------- Total revenues..................... 105,318 75,376 23,901 515 8,156 213,266 Total noninterest expenses, excluding intangible asset amortization...... 62,697 33,837 13,057 2,104 8,362 120,057 Goodwill and other intangible asset amortization............................ 226 - 274 - 11,474 11,974 Provision for loan and lease losses..... 2,839 5,872 16 - (2,525) 6,202 -------- ------- ------- ------- ------- -------- Income before income taxes.............. 39,556 35,667 10,554 (1,589) (9,155) 75,033 Income tax expense/1/................... 15,561 12,818 4,011 (1,458) (2,719) 28,213 -------- ------- ------- ------- ------- -------- Net income.............................. $ 23,995 $22,849 $ 6,543 $ (131) $(6,436) $ 46,820 ======== ======= ======= ======= ======= ======== (in millions) Average identifiable assets............ $ 3,125 $ 6,836 $ 36 $ 4,670 $ 3,041 $ 17,708 Average loans.......................... 2,926 6,135 10 - 1,842 10,913 Average deposits....................... 7,786 1,364 58 2,874 94 12,176
(1) Includes tax-equivalent adjustment for tax-exempt interest income 10 ALLFIRST FINANCIAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Line of Business Reporting (continued) The following tables present operating information about each of Allfirst's business lines for the nine months ended September 30, 2001 and 2000. Business Line Results Nine Months Ended September 30, 2001
Community Capital Asset Consolidated Banking Markets Management Treasury Other Total --------- ------- ---------- -------- ----- ------------ (in thousands) Net interest income/1/.................. $236,521 $150,475 $ 4,456 $17,501 $ (7,022) $401,931 Noninterest income...................... 88,235 90,250 67,319 9,134 33,150 288,088 Securities gains, net................... - - - 716 43 759 Total revenues..................... -------- -------- ------- ------- -------- -------- Total noninterest expenses, excluding... 324,756 240,725 71,775 27,351 26,171 690,778 intangible asset amortization...... 196,640 108,281 43,974 7,883 42,412 399,190 Goodwill and other intangible asset amortization............................ 623 - 821 - 34,521 35,965 Provision for loan and lease losses..... 8,854 17,832 55 - (5,320) 21,421 -------- -------- ------- ------- -------- -------- Income before income taxes.............. 118,639 114,612 26,925 19,468 (45,442) 234,202 Income tax expense/1/................... 45,081 35,857 9,991 5,946 (12,126) 84,749 -------- -------- ------- ------- -------- -------- Net income.............................. $ 73,558 $ 78,755 $16,934 $13,522 $(33,316) $149,453 ======== ======== ======= ======= ======== ======== (in millions) Average identifiable assets............ $ 3,262 $ 6,805 $ 38 $ 4,379 $ 3,164 $ 17,648 Average loans.......................... 3,084 6,035 15 - 1,503 10,637 Average deposits....................... 8,004 1,480 70 2,239 81 11,874
Business Line Results Nine Months Ended September 30, 2000
Community Capital Asset Consolidated Banking Markets Management Treasury Other Total --------- ------- ---------- -------- ----- ------------ (in thousands) Net interest income/1/.................. $234,002 $145,136 $ 3,737 $ 2,411 $ (217) $385,069 Noninterest income...................... 75,055 78,070 67,858 6,978 21,392 249,353 Securities gains, net................... - 143 - 3 - 146 -------- -------- ------- ------- -------- -------- Total revenues..................... 309,057 223,349 71,595 9,392 21,175 634,568 Total noninterest expenses, excluding intangible asset amortization...... 181,340 97,971 38,992 6,392 27,306 352,001 Goodwill and other intangible asset amortization............................ 678 - 821 - 34,311 35,810 Provision for loan and lease losses..... 8,461 17,132 48 - (2,564) 23,077 -------- -------- ------- ------- -------- -------- Income before income taxes.............. 118,578 108,246 31,734 3,000 (37,878) 223,680 Income tax expense/1/................... 46,669 39,311 12,067 (1,313) (12,035) 84,699 -------- -------- ------- ------- -------- -------- Net income.............................. $ 71,909 $ 68,935 $19,667 $ 4,313 $(25,843) $138,981 ======== ======== ======= ======= ======== ======== (in millions) Average identifiable assets............ $ 3,125 $ 6,717 $ 36 $ 4,486 $ 3,257 $ 17,621 Average loans.......................... 2,922 6,024 12 - 1,915 10,873 Average deposits....................... 7,784 1,372 56 2,516 96 11,824
(1) Includes tax-equivalent adjustment for tax-exempt interest income 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Certain information included in the following section of this report, other than historical information, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward- looking statements are identified by terminology such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms. Actual results may differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: global, national and regional economic conditions; levels of market interest rates; credit or other risks of lending and investment activities; competitive and regulatory factors; and technological change. ANALYSIS OF RESULTS OF OPERATIONS Performance Overview Net income to common stockholders for the three months ended September 30, 2001 was $51.7 million, an 11% increase when compared to net income to common stockholders of $46.7 million for the three months ended September 30, 2000. Net income to common stockholders represents net income after deducting preferred stock dividends. Return on average assets and return on average common stockholder's equity were 1.17% and 10.03%, respectively, for the three months ended September 30, 2001 compared to 1.05% and 10.21% for the three months ended September 30, 2000. The events of September 11, 2001 did not have a material impact on Allfirst's results for the third quarter. Net income to common stockholders for the nine months ended September 30, 2001 of $149.1 million increased 8% when compared to net income to common stockholders of $138.7 million for the nine months ended September 30, 2000. Return on average assets and return on average common stockholder's equity were 1.13% and 9.97%, respectively, for the nine months ended September 30, 2001 compared to 1.05% and 10.36% for the nine months ended September 30, 2000. Allfirst's results for the nine months ended September 30, 2001 included Community Counselling Service Co., Inc. (CCS) which was acquired in May 2001. CCS is the largest consulting firm to the Not-for-Profit (NFP) sector worldwide. It is engaged in the design and direction of fundraising initiatives for national and international charities, religious organizations and education institutions and supports Allied Irish Banks' United States NFP business headquartered in New York. CCS operates in New York with additional offices in Atlanta, Baltimore, Boston, Chicago, Ft. Lauderdale, San Francisco, Washington, D.C., London and Dublin. As of September 30, 2001, CCS represented 2.4% of Allfirst's year over year revenue growth and 3.6% of year over year expense growth. The net interest margin (on a tax equivalent basis) for the nine month period ended September 30, 2001 was 3.58%, up 22 basis points over the same period last year. Total revenues for the nine month period ended September 30, 2001 grew 9% compared to last year, with a 16% increase in noninterest income and a 4% increase in net interest income. Revenue growth excluding CCS was 6%, led by noninterest income growth of 10% that included an 18% increase in electronic banking fees, a 12% rise in deposit service charges, a 90% increase in mortgage banking income (predominately from Allfirst's commercial mortgage banking operations) and 3% growth in all other noninterest income categories. Noninterest expenses were 12% higher reflecting planned investments in retail / business banking and wealth management. Excluding CCS, noninterest expenses grew 9% compared to last year. Higher pension and healthcare costs represented 3% of the overall growth in noninterest expenses for the first nine months of 2001. The provision for loan and lease losses was $21.4 million compared to $23.1 million last year. The allowance for loan and lease losses was 1.42% of total loans at September 30, 2001. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Tangible net income, which excludes the amortization of goodwill and other intangible assets related to purchase business combinations, was $63.3 million for the three months ended September 30, 2001, compared to $57.8 million for the three months ended September 30, 2000. Return on average tangible assets and return on average tangible common equity, which exclude intangible assets and amortization related to purchase business combinations, were 1.50% and 19.73%, respectively, for the three months ended September 30, 2001 compared to 1.36% and 22.45% for the three months ended September 30, 2000. Tangible net income for the nine months ended September 30, 2001 was $182.3 million compared to $171.7 million for the nine months ended September 30, 2000. Return on average tangible assets and return on average tangible common equity were 1.45% and 19.87%, respectively, for the nine months ended September 30, 2001 compared to 1.37% and 23.39% for the nine months ended September 30, 2000. Nonperforming assets at September 30, 2001 were $87.9 million, or 0.82% of loans, other real estate and other assets owned, a $19.6 million decrease from the December 31, 2000 level of $107.5 million, or 0.98% of loans, other real estate and other assets owned. Asset quality is discussed in more detail on page 21. Net Interest Income Net interest income is the difference between the interest and yield- related fee income generated by earning assets and the interest expense incurred on interest bearing liabilities. The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest bearing liabilities. When net interest income is presented on a tax-equivalent basis, interest income from tax exempt earning assets is increased by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the statutory Federal income tax rate of 35%. Net interest margin represents net interest income on a tax- equivalent basis as a percentage of average earning assets. The net interest income that is presented on pages 14 and 15 is on a tax-equivalent basis. Net interest income as presented in the Consolidated Statements of Income on page 3 is on a non tax-equivalent basis. Net interest income has been favorably impacted by market interest rates in 2001. Net interest income on a tax-equivalent basis for the three months ended September 30, 2001 was $138.0 million, an increase of $10.5 million when compared to net interest income of $127.5 million for the three months ended September 30, 2000. The net interest margin was 3.67% for the third quarter of 2001, up 37 basis points from the same period last year. Net interest income benefited primarily from lower wholesale funding costs and also from higher loan product margins in the third quarter of 2001 compared to the same period last year. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2001 was $401.9 million, an increase of $16.9 million when compared to net interest income of $385.1 million for the nine months ended September 30, 2000. The net interest margin improved by 22 basis points to 3.58% supported primarily by lower wholesale funding costs and also from higher loan product margins. The spread between the yield on earning assets and the rate paid on interest bearing liabilities for the first nine months of 2001 was 2.76%, up 30 basis points compared to the first nine months of 2000. The following tables provide additional information on Allfirst's average balances, interest yields and rates, and net interest margin for the three months and nine months ended September 30, 2001 and 2000. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Average Balances, Interest Yields and Rates and Net Interest Margin (Tax-Equivalent Basis)
Three Months Ended ----------------------------------------------------------------------- September 30, 2001 September 30, 2000 ---------------------------------- ---------------------------------- Average Yield/ Average Yield/ Balance Interest (1) Rate (1) Balance Interest (1) Rate (1) --------- ------------ -------- ---------- ------------ -------- (dollars in millions) ASSETS Earning assets: Trading account securities........................ $ 5.3 $ 0.1 2.96% $ 3.9 $ 0.1 6.55% Money market investments.......................... 96.7 0.8 3.43 85.0 1.3 6.69 Investment securities (2): Taxable........................................... 3,356.4 50.6 5.98 3,628.7 55.5 6.08 Tax exempt........................................ 463.8 9.1 7.82 449.0 9.0 7.96 Equity investments................................ 302.7 3.9 5.10 255.8 3.3 5.10 --------- ------ ---- --------- ------ ---- Total investment securities..................... 4,122.9 63.6 6.12 4,333.5 67.8 6.22 --------- ------ ---- --------- ------ ---- Loans held for sale................................. 61.4 1.0 6.16 19.0 0.4 7.89 Loans (net of unearned income) (3): Commercial........................................ 3,821.5 59.8 6.21 3,749.8 79.1 8.39 Commercial real estate............................. 2,331.9 40.6 6.91 2,361.3 50.3 8.48 Residential mortgage.............................. 529.3 9.9 7.39 672.7 12.8 7.60 Retail............................................ 2,832.1 55.6 7.79 2,892.1 61.5 8.47 Commercial leases receivable...................... 650.2 7.4 4.51 625.3 7.8 4.99 Retail leases receivable.......................... 276.8 5.0 7.19 383.8 7.0 7.21 Foreign........................................... 194.9 2.9 5.95 228.0 4.6 7.97 --------- ------ ---- --------- ------ ---- Total loans..................................... 10,636.7 181.2 6.76 10,913.0 223.1 8.13 --------- ------ ---- --------- ------ ---- Total earning assets.......................... 14,923.0 246.7 6.56 15,354.4 292.7 7.58 Allowance for credit losses......................... (152.6) (157.4) Cash and due from banks............................. 804.7 757.3 Other assets........................................ 1,972.6 1,753.6 --------- --------- Total assets.................................... $17,547.7 $17,707.9 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits in domestic offices: Interest bearing demand........................... $ 92.9 $ 0.2 1.03% $ 121.2 $ 0.6 1.95% Money market accounts............................. 2,888.8 14.7 2.01 2,507.3 19.6 3.11 Savings........................................... 1,151.3 4.0 1.38 1,222.2 5.3 1.72 Other consumer time............................... 2,845.3 38.6 5.38 2,900.7 40.6 5.58 Large denomination time........................... 1,695.8 17.7 4.14 2,450.0 41.9 6.80 Deposits in foreign banking office.................. 219.3 2.1 3.78 340.6 5.5 6.43 --------- ------ ---- --------- ------ ---- Total interest bearing deposits............... 8,893.4 77.3 3.45 9,542.0 113.5 4.73 --------- ------ ---- --------- ------ ---- Funds purchased..................................... 1,568.0 13.4 3.38 1,303.7 20.6 6.28 Other borrowed funds, short-term.................... 442.8 3.7 3.34 574.9 9.0 6.20 Long-term debt...................................... 1,004.3 14.3 5.64 1,195.8 22.1 7.37 --------- ------ ---- --------- ------ ---- Total interest bearing liabilities............ 11,908.5 108.7 3.62 12,616.4 165.2 5.21 --------- ------ ---- --------- ------ ---- Noninterest bearing deposits........................ 2,811.0 2,633.9 Other liabilities................................... 774.3 629.4 Redeemable preferred stock........................... 8.8 8.6 Stockholders' equity................................ 2,045.1 1,819.6 --------- --------- Total liabilities and stockholders' equity........ $17,547.7 $17,707.9 ========= ========= Net interest income, tax-equivalent basis........... $138.0 $127.5 ====== ====== Net interest spread (4)............................. 2.94% 2.37% Contribution of interest free sources of funds...... 0.73 0.93 Net interest margin (5)............................. 3.67 3.30
_____________________________ (1) Interest on loans to and obligations of public entities is not subject to Federal income tax. In order to make pre-tax yields comparable to taxable loans and investments, a tax-equivalent adjustment is used based on a 35% Federal tax rate. (2) Yields on investment securities available for sale are calculated based upon average amortized cost. (3) Nonaccrual loans are included under the appropriate loan categories as earning assets. (4) Net interest spread is the difference between the yield on average earning assets and the rate paid on average interest bearing liabilities. (5) Net interest margin is the ratio of net interest income on a tax equivalent basis to average earning assets. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Average Balances, Interest Yields and Rates and Net Interest Margin (Tax-Equivalent Basis)
Nine Months Ended ----------------------------------------------------------------------- September 30, 2001 September 30, 2000 ---------------------------------- ---------------------------------- Average Yield/ Average Yield/ Balance Interest (1) Rate (1) Balance Interest (1) Rate (1) ---------- ------------ -------- ---------- ------------ -------- (dollars in millions) ASSETS Earning assets: Trading account securities.......................... $ 5.9 $ 0.2 4.52% $ 3.2 $ .2 6.40% Money market investments............................ 49.7 1.4 3.89 65.7 3.1 6.39 Investment securities (2): Taxable............................................. 3,502.6 160.9 6.14 3,666.9 166.9 6.08 Tax exempt........................................... 465.9 28.0 8.03 432.2 25.7 7.95 Equity investments.................................. 292.2 11.1 5.08 247.3 8.8 4.78 --------- ------ ---- --------- ------ ---- Total investment securities....................... 4,260.7 200.0 6.28 4,346.4 201.4 6.19 --------- ------ ---- --------- ------ ---- Loans held for sale................................... 49.7 2.4 6.37 19.7 1.1 7.53 Loans (net of unearned income) (3): Commercial.......................................... 3,752.4 193.7 6.90 3,678.5 222.9 8.09 Commercial real estate.............................. 2,326.8 130.2 7.48 2,354.6 146.0 8.28 Residential mortgage................................ 573.9 32.4 7.56 676.0 38.0 7.51 Retail.............................................. 2,827.9 171.2 8.09 2,912.4 180.9 8.30 Commercial leases receivable........................ 653.7 22.7 4.63 608.1 22.5 4.94 Retail leases receivable............................ 307.2 16.7 7.25 387.8 21.0 7.25 Foreign............................................. 194.9 10.3 7.09 255.3 13.4 7.03 --------- ------ ---- --------- ------ ---- Total loans....................................... 10,636.8 577.2 7.26 10,872.7 644.7 7.92 --------- ------ ---- --------- ------ ---- Total earning assets............................ 15,002.8 781.2 6.96 15,307.7 850.5 7.42 Allowance for credit losses........................... (152.5) (157.4) Cash and due from banks............................... 789.7 760.5 Other assets.......................................... 2,007.8 1,710.0 --------- --------- Total assets........................................ $17,647.8 $17,620.8 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits in domestic offices: Interest bearing demand............................. $ 89.7 $ 0.8 1.27% $ 124.5 $ 1.8 1.90% Money market accounts............................... 2,835.7 52.3 2.47 2,510.0 54.9 2.92 Savings............................................. 1,144.5 12.7 1.48 1,264.6 16.1 1.70 Other consumer time................................. 2,883.9 120.6 5.59 2,859.2 115.4 5.39 Large denomination time............................. 1,953.1 75.5 5.17 2,147.4 104.7 6.51 Deposits in foreign banking office.................... 205.5 7.4 4.80 280.7 12.7 6.03 --------- ------ ---- --------- ------ ---- Total interest bearing deposits................. 9,112.4 269.3 3.95 9,186.4 305.6 4.44 --------- ------ ---- --------- ------ ---- Funds purchased....................................... 1,547.7 50.2 4.33 1,553.8 70.3 6.04 Other borrowed funds, short-term...................... 412.2 13.3 4.30 588.2 25.4 5.78 Long-term debt........................................ 1,007.5 46.5 6.17 1,195.6 64.1 7.16 --------- ------ ---- --------- ------ ---- Total interest bearing liabilities.............. 12,079.8 379.3 4.20 12,524.0 465.4 4.96 --------- ------ ---- --------- ------ ---- Noninterest bearing deposits.......................... 2,761.6 2,637.3 Other liabilities..................................... 798.2 663.6 Redeemable preferred stock............................ 8.8 8.5 Stockholders' equity.................................. 1,999.4 1,787.4 --------- --------- Total liabilities and stockholders' equity.......... $17,647.8 $17,620.8 ========= ========= Net interest income, tax-equivalent basis............. $401.9 $385.1 ====== ====== Net interest spread (4)............................... 2.76% 2.46% Contribution of interest free sources of funds........ 0.82 0.90 Net interest margin (5)............................... 3.58 3.36
_____________________________ (1) Interest on loans to and obligations of public entities is not subject to Federal income tax. In order to make pre-tax yields comparable to taxable loans and investments, a tax-equivalent adjustment is used based on a 35% Federal tax rate. (2) Yields on investment securities available for sale are calculated based upon average amortized cost. (3) Nonaccrual loans are included under the appropriate loan categories as earning assets. (4) Net interest spread is the difference between the yield on average earning assets and the rate paid on average interest bearing liabilities. (5) Net interest margin is the ratio of net interest income on a tax equivalent basis to average earning assets. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Noninterest Income The following table presents the components of noninterest income for the three months ended September 30, 2001 and 2000. Noninterest Income
Three Months Ended September 30, Net Change --------------------------- ----------------------- 2001 2000 Dollar Percent ---- ---- ----- ------- (dollars in thousands) Service charges on deposit accounts............ $ 28,676 $25,370 $ 3,306 13.0% Trust and investment advisory fees............. 22,397 22,062 335 1.5 Electronic banking income...................... 8,788 7,462 1,326 17.8 Mortgage banking income........................ 4,649 2,828 1,821 64.4 Trading income................................. 5,111 5,522 (411) (7.4) Consulting income.............................. 10,378 - 10,378 - Other income................................... 24,505 22,560 1,945 8.6 -------- ------- ------- ---- Total fees and other income............ 104,504 85,804 18,700 21.8 Securities gains, net.......................... 338 (29) 367 - -------- ------- ------- ---- Total noninterest income.................... $104,842 $85,775 $19,067 22.2% ======== ======= ======= ====
Allfirst's noninterest income for the quarter ended September 30, 2001 was $104.8 million, a $19.1 million (22.2%) increase from noninterest income for the quarter ended September 30, 2000. Excluding CCS noninterest income which is included under the caption "consulting income", total noninterest income was $94.5 million, representing a $8.7 million increase (10.1%) over the same period last year. Deposit service charges were $28.7 million, up $3.3 million (13.0%) from the same quarter last year led by 15% growth in retail deposit service charges and 12% growth in corporate deposit service charges. Retail deposit service charge growth was due primarily to higher levels of non-sufficient funds income resulting from improved fee waiver management and a higher number of retail checking accounts while corporate deposit service charge growth reflected new business and cash management pricing modifications. Trust and investment advisory fees of $22.4 million were up $0.3 million compared to the third quarter of 2000 with growth in corporate trust fees and proprietary management fees. Growth in trust and investment advisory fees (1.5%) was achieved despite a decline in the U.S. equity markets during 2001 and the overall market uncertainty that continues to prevail. Electronic banking income captures fee income from automated teller machines and interchange income from VISA debit card transactions and grew by nearly 18% in the third quarter of 2001 compared to the third quarter of 2000. Mortgage banking income for the third quarter of 2001 increased by $1.8 million (64.4%), due to a higher volume of loan origination and mortgage placement fees predominately from Allfirst's commercial mortgage banking operations. Trading income decreased by $0.4 million due to lower proprietary trading. Net of the cost to carry derivative assets (which is included in net interest income), trading income increased $1.3 million. Other income was $24.5 million for the third quarter of 2001 compared to $22.6 million for the third quarter of 2000, an increase of $1.9 million, due primarily to higher standby letter of credit fees of $1.3 million and various increases in other miscellaneous income. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Noninterest Income The following table presents the components of noninterest income for the nine months ended September 30, 2001 and 2000. Noninterest Income
Nine Months Ended September 30, Net Change ---------------------- ---------- 2001 2000 Dollar Percent ---- ---- ------ ------- (dollars in thousands) Service charges on deposit accounts................. $ 82,476 $ 73,958 $ 8,518 11.5% Trust and investment advisory fees.................. 65,638 65,889 (251) (0.4) Electronic banking income........................... 24,471 20,803 3,668 17.6 Mortgage banking income............................. 15,375 8,096 7,279 89.9 Trading income...................................... 16,599 12,775 3,824 29.9 Consulting income................................... 15,336 - 15,336 - Other income........................................ 68,193 67,832 361 0.5 -------- -------- ------- ----- Total fees and other income................ 288,088 249,353 38,735 15.5 Securities gains, net............................... 759 146 613 419.9 -------- -------- ------- ----- Total noninterest income........................ $288,847 $249,499 $39,348 15.8% ======== ======== ======= =====
Allfirst's noninterest income for the nine months ended September 30, 2001 was $288.8 million, a $39.3 million (15.8%) increase from noninterest income for the nine months ended September 30, 2000. Excluding CCS noninterest income which is included under the caption "consulting income", total noninterest income was $273.5 million which represents a $24.0 million increase (9.6%) over the same period last year. Deposit service charges of $82.5 million were up $8.5 million (11.5%) from the prior year. Retail deposit service charges grew $4.8 million due to a 25% increase in retail non-sufficient funds income. Corporate deposit service charges were up $3.7 million (8.1%) due to new business and cash management product pricing modifications in 2001. Trust and investment advisory fees were $65.6 million, a modest decline of 0.4% considering the weakening in the U.S. equity markets that began in 2000 and the overall market uncertainty that continues to prevail. Electronic banking grew by nearly 18% in 2001 to $24.5 million. Mortgage banking income for the first nine months of 2001 increased by $7.3 million (89.9%), due to a higher volume of loan origination and mortgage placement fees predominately from Allfirst's commercial mortgage banking operations. Trading income increased by $3.8 million due to higher proprietary and corporate trading income. Net of the cost to carry derivative assets (which is included in net interest income), trading income was up $3.3 million from the same period in 2000. Other income was $68.2 million for the first nine months of 2001, compared to $67.8 million for the same period last year. Other income included higher bank owned life insurance income of $3.9 million, standby letter of credit fees of $2.1 million, merchant and credit card fees of $1.2 million, and line of credit fees of $1.0 million, offset by lower gains from venture capital activities ($5.2 million) and commercial lease residuals ($2.7 million) that were recognized in the prior year. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Noninterest Expenses The following table presents the components of noninterest expenses for the three months ended September 30, 2001 and 2000. Noninterest Expenses
Three Months Ended September 30, Net Change -------------- ---------- 2001 2000 Dollar Percent ---- ---- ------ ------- (dollars in thousands) Salaries and other personnel costs............... $ 86,208 $ 68,850 $17,358 25.2% Equipment costs.................................. 12,301 11,222 1,079 9.6 Occupancy costs.................................. 9,629 9,231 398 4.3 Other operating expenses: Postage and communications..................... 5,282 5,063 219 4.3 Advertising and public relations............... 4,204 5,457 (1,253) (23.0) Other operating expenses....................... 25,280 20,234 5,046 24.9 -------- -------- ------- ----- Total operating expenses..................... 142,904 120,057 22,847 19.0 Intangible assets amortization expense........... 12,787 11,974 813 6.8 -------- -------- ------- ----- Total noninterest expenses................. $155,691 $132,031 $23,660 17.9% ======== ======== ======= =====
Allfirst's noninterest expenses for the quarter ended September 30, 2001 were $155.7 million, a $23.7 million (17.9%) increase from noninterest expenses for the quarter ended September 30, 2000. Excluding CCS expenses, total noninterest expenses were $145.8 million representing a $13.7 million (10.4%) increase over the same quarter last year. Salaries and other personnel costs were $86.2 million for the third quarter of 2001, up $17.4 million (25.2%) from the same quarter last year due to the acquisition of CCS (representing 10% of the increase), expansions in select business lines and revenue based performance incentives. Included in this increase were other personnel costs that increased $2.6 million primarily due to higher pension costs resulting from the negative impact of the financial markets on plan asset values and higher healthcare costs as a result of higher claims volume and increases in medical costs in 2001. Equipment costs were $1.1 million higher than the prior year due to higher maintenance costs and depreciation. Advertising and public relations decreased $1.3 million over the same quarter last year as 2000 included several major initiatives focusing on customer retention and cross sell opportunities. Occupancy costs and postage and communications had modest increases. Other operating expenses for the third quarter of 2001 were $25.3 million, up $5.0 million (24.9%) from the third quarter of 2000. This increase was due primarily to an increase in deferred compensation expenses of $2.1 million, CCS expenses of $1.6 million, automobile lease residual losses of $1.3 million (including a $0.4 million increase to the automobile lease residual valuation reserve) and external services of $0.6 million, offset by lower provisions for other real estate owned and other assets owned of $1.0 million. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Noninterest Expenses The following table presents the components of noninterest expenses for the nine months ended September 30, 2001 and 2000. Noninterest Expenses
Nine Months Ended September 30, Net Change ---------------------- ----------------------- 2001 2000 Dollar Percent ---- ---- ----- ------- (dollars in thousands) Salaries and other personnel costs.............................. $241,528 $204,531 $36,997 18.1% Equipment costs................................................. 35,343 34,154 1,189 3.5 Occupancy costs................................................. 28,100 27,781 319 1.1 Other operating expenses: Postage and communications.................................... 14,840 15,122 (282) (1.9) Advertising and public relations.............................. 11,291 12,415 (1,124) (9.1) Other operating expenses...................................... 68,088 57,998 10,090 17.4 -------- -------- ------- ---- Total operating expenses.................................... 399,190 352,001 47,189 13.4 Intangible assets amortization expense.......................... 35,965 35,810 155 0.4 -------- -------- ------- ---- Total noninterest expenses................................ $435,155 $387,811 $47,344 12.2% ======== ======== ======= ====
Allfirst's noninterest expenses for the nine months ended September 30, 2001 were $435.2 million, a $47.3 million (12.2%) increase from the same period in 2000. Excluding CCS expenses, total noninterest expenses were $421.2 million representing a $33.4 million (8.6%) increase over the same period last year. Salaries and other personnel costs were $241.5 million for the first nine months of 2001, up $37.0 million (18.1%) from the same period last year due to the acquisition of CCS (representing 5% of the increase), expansions in select business lines and revenue based performance incentives. Included in this increase were other personnel costs that were up $13.2 million with the most significant increases in pension and healthcare costs. Pension costs were $4.0 million higher in 2001 due to the negative impact of the financial markets on plan asset values. Healthcare costs were up $6.9 million due to higher claims volume and medical costs in 2001. Equipment costs were $1.2 million higher than the prior year due to higher maintenance costs and depreciation. Advertising and public relations decreased $1.1 million over same period last year as 2000 included several major initiatives focusing on customer retention and cross sell opportunities. Other operating expenses were $68.1 million, up $10.1 million from the first nine months of 2000. Other expenses included higher automobile lease residual losses of $2.9 million (including a $1.2 million increase to the automobile lease residual valuation reserve), CCS expenses of $2.3 million, higher deferred compensation expenses of $2.0 million, external services costs of $1.7 million, professional fees of $1.0 million and charitable contributions of $0.8 million, offset by modest declines in other miscellaneous expenses. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ANALYSIS OF FINANCIAL CONDITION Allfirst's total assets at September 30, 2001 were $17.7 billion, a $695 million decrease from total assets of $18.4 billion at December 31, 2000. This decrease was primarily due to a reduction in the investment portfolio of $307 million and lower loan balances of $140 million. Short-term investments and loans held for sale were down $50 million and cash balances were down $121 million. Other assets decreased by $120 million primarily due to a decrease in the fair value of derivative and forward contracts held. Investment securities available for sale at September 30, 2001 were $4.1 billion with net unrealized gains of $40.8 million compared to net unrealized losses of $23.1 million at December 31, 2000. The taxable equivalent yield on the entire securities portfolio for the nine months ended September 30, 2001 was 6.28% compared to 6.19% for the first nine months of 2000. Investment securities sold in the first nine months of 2001 totaled $1.1 billion and generated pretax gains of $0.8 million. During the first nine months of 2001, Allfirst purchased $1.6 billion of investment securities partially offsetting $0.9 billion of maturities, calls and paydowns of securities and the $1.1 billion of securities sold. Total loans, net of unearned income, were $10.8 billion at September 30, 2001, a decrease of $140 million from December 31, 2000. This decrease reflects Allfirst's on-going decision to curtail its exposure to residential mortgage, indirect retail lending and indirect retail leasing. Loan balances excluding curtailed businesses increased $308 million compared to December 31, 2000. Retail loans, excluding indirect lending, were up $212 million due to strong growth in Allfirst's home equity product lines. The commercial loan portfolio, excluding commercial overdrafts, grew $178 million due primarily to the purchase of a $161 million commercial loan portfolio in August 2001. Allfirst's commercial real estate portfolio represents loans secured primarily by commercial real estate property. Commercial real estate loans of $2.4 billion were up slightly from year end levels and comprised 22% of the total loan portfolio at September 30, 2001. Allfirst continues to emphasize relationship lending with a focus on quality investor real estate products and owner-occupied properties within Allfirst's geographical market place. As of September 30, 2001, approximately $1.0 billion or 40% of the commercial real estate portfolio was secured by owner-occupied properties, compared to 43% at December 31, 2000. Total deposits as of September 30, 2001 were $11.6 billion compared to $12.7 billion at December 31, 2000. This decrease was due primarily to a $1.1 billion reduction in non-core deposits (large denomination time deposits and interest bearing deposits in foreign banking office) resulting from a decrease in the investment portfolio and a change in the mix of wholesale funding (non- core deposits, federal funds purchased and securities sold under repurchase agreements, other short-term borrowed funds). Core deposits were unchanged from year end levels. Core deposits generated from retail customers were up from year end levels driven by Allfirst's The Money Fund Alternative (TMFA) product. Core deposit balances generated from corporate customers were down from year end levels. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Asset Quality Nonperforming assets were $87.9 million at September 30, 2001, compared to $107.5 million at December 31, 2000, a decrease of $19.6 million. During the first nine months of 2001, nonaccrual loans decreased $6.5 million. Additions to nonaccrual loans in the first nine months of 2001 aggregated $55.8 million. These additions were offset by reductions in nonaccrual loans totaling $62.3 million, comprised of loan sales, paydowns and payoffs of nonaccrual loans totaling $36.6 million, charge-offs of $13.1 million, loans returned to accrual status of $8.4 million and transfers to other real estate and other assets owned of $4.2 million. The decrease in nonaccrual loans included the sale of a $6.6 million loan to a healthcare provider and the $17.4 million reduction of a $20 million syndicated commercial loan to a financial services provider through sale, paydown, and partial charge-off, offset by increases in several other commercial loan relationships. At September 30, 2001, Allfirst's total international maritime exposure was $171.8 million, including loans, leases and letters of credit of $148.1 million, $5.6 million in other foreign maritime assets, and $18.1 million in unfunded loan commitments, letters of credit and risk participations. Total international maritime exposure was $191 million at September 30, 2000. Nonperforming assets at September 30, 2001 included no nonaccrual foreign maritime loans and $5.6 million in other nonperforming maritime assets compared to $0.5 million in nonaccrual foreign maritime loans and $15.5 million in other nonperforming maritime assets at December 31, 2000. The process of establishing and managing the allowance with respect to Allfirst's commercial portfolios begins when a loan officer initially assigns each loan or lease a risk grade, based on a ten-point numerical scale and using established credit criteria. Risk grades are reviewed at least annually and are also validated periodically on a selective basis by the independent Credit Review Department. Management meets quarterly to discuss current conditions that affect various lines of business and that may warrant adjustments to historical loss experience; adjustment factors that are considered include: the levels and trends in past due and nonaccrual loans; trends in loan volume; effects of any changes in lending policies and procedures; changes in underwriting; and the experience and depth of lending management. Historical factors by risk grade are carefully adjusted each quarter based on documentation reflective of management's seasoned judgement. Management also evaluates credit risk concentration, including trends in large dollar exposures to related borrowers, shared national credit exposure and industry concentrations. Experience has demonstrated that concentration risk has the potential to increase loan loss risk when influenced by external industry factors. All nonaccrual and classified loans in the commercial, commercial real estate (construction and mortgages), foreign and commercial lease categories 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. During 2000, management introduced enhancements to support the calculation of the general reserves for loans and leases in the commercial portfolios not specifically reserved. Each risk grade is assigned a graduated risk factor based on the probability of default and loss in the event of default reflective of historical loss rates over a full economic cycle. The cycle currently being used starts with the last recessionary period that began in 1990. Management believes that use of the graduated risk factors allows it to refine further the determination of the allowance for this group of loans. From December 31, 2000 to September 30, 2001, total allocated reserves increased by $20.2 million due primarily to increasing criticized exposure, higher specific reserves in the commercial portfolio and the impact of the slowing regional and national economy. Continuing strong asset quality balanced with some weakening in the regional commercial real estate markets resulted in marginally higher reserves for the commercial real estate portfolio. Additional reserves for the aircraft portfolio contributed to a net increase in allocations to the commercial leasing portfolio. Reserves for the retail portfolios decreased by $0.7 million. Lower reserves for indirect loans and leases reflected lower outstanding balances, offset somewhat by increasing loss rates on these portfolios; Allfirst curtailed its indirect auto leasing and lending business in late 2000. Changes in reserves for other retail portfolios were minimal, reflecting stable and strong asset quality. 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The provision for loan and lease losses for the first nine months of 2001 was $21.4 million, a decrease of $1.7 million from the $23.1 million provision for the first nine months of 2000. The decrease was primarily the result of lower foreign maritime and retail net charge-offs, offset by increases in commercial and commercial real estate net charge-offs. The following table details information on the allowance for credit losses and net charge-offs for the nine months ended September 30, 2001 and 2000 and nonperforming assets at September 30, 2001 and December 31, 2000. Asset Quality Analysis ALLOWANCE FOR CREDIT LOSSES
Nine Months Ended September 30, ---------------------------- 2001 2000 -------- -------- (in thousands) Beginning balance................................................................. $152,539 $157,351 Provision for credit losses....................................................... 21,421 23,077 Net charges-offs.................................................................. (21,421) (23,077) -------- -------- Ending balance................................................................. $152,539 $157,351 ======== ========
NET CHARGE-OFFS (RECOVERIES) AS A PERCENTAGE OF AVERAGE LOANS BY CATEGORY Commercial loans.................................................................. 0.37% 0.34% Commercial real estate loans...................................................... 0.02 - Residential mortgages............................................................. 0.34 0.30 Retail loans...................................................................... 0.37 0.38 Commercial leases receivable...................................................... (0.06) 0.03 Retail leases receivable.......................................................... 0.82 0.60 Foreign loans..................................................................... (0.16) 1.01 ----- ---- Total.......................................................................... 0.27% 0.28%
NONPERFORMING ASSETS
September 30, December 31, 2001 2000 -------- -------- (in thousands) Nonaccrual loans: Domestic: Commercial..................................................................... $45,808 $ 52,231 Commercial real estate......................................................... 4,351 6,728 Residential mortgage........................................................... 14,304 17,432 Commercial lease receivable.................................................... 7,003 1,712 Foreign........................................................................... 2,070 1,928 ------- -------- Total nonaccrual............................................................ 73,536 80,031 Other real estate and assets owned (1)............................................ 8,837 11,993 Other nonperforming maritime assets............................................... 5,573 15,515 ------- -------- Total nonperforming assets.................................................. $87,946 $107,539 ======= ======== Accruing loans contractually past due 90 days or more as to principal or interest........................................................................ $41,473 $ 33,330 ======= ========
____________________ (1) Other real estate and assets owned represent 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. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ASSET QUALITY RATIOS September 30, December 31, 2001 2000 ------ ------ Nonperforming assets as a percentage of : Total loans, net of unearned income plus other foreclosed assets owned........... 0.82% 0.98% Allowance for credit losses as a percentage of : Period end loans................................................................. 1.42 1.40 Nonperforming loans.............................................................. 207.43 190.60
With the exception of an aircraft leveraged lease portfolio representing less than 1% of total loans and leases, Allfirst does not have a material exposure to industries directly effected by the events of September 11, 2001. However, those events are expected to have an adverse effect on what was already a weakening U.S. economy for the rest of 2001 and into 2002. As a result, the credit quality of Allfirst's loan and lease portfolio may decline from September 30 levels. CAPITAL ADEQUACY AND RESOURCES Allfirst's capital strength provides the resources and flexibility to capitalize on business growth and acquisition opportunities. At September 30, 2001, Allfirst's Tier 1 risk based capital ratio was 10.10% ($1.6 billion of Tier 1 capital) and its total risk based capital ratio was 13.01% ($2.0 billion of total risk based capital). Tier 1 capital consists primarily of common stockholders' 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 and the allowance for credit losses, within permitted limits, to Tier 1 capital. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. The Federal Reserve Board's regulatory capital guidelines require a minimum total capital to risk adjusted assets ratio of 8.0%. One-half of the 8.0% minimum must consist of tangible common stockholders' 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. Substantially the same capital requirements are applied to Allfirst's banking subsidiaries under guidelines issued by the Federal Reserve Board and the Office of the Comptroller of the Currency. As illustrated in the following table at September 30, 2001, Allfirst and its principal banking subsidiary were "well capitalized" as defined by regulatory authorities. Capital Adequacy Ratios
Regulatory Capital Ratios ------------------------- Tier 1 Total Leverage ------------- ------------- ------------- Allfirst.............................................................. 10.10% 13.01% 9.64% Allfirst Bank......................................................... 9.59 11.66 8.81 Regulatory Guidelines: Minimum............................................................. 4.00 8.00 3.00 Well Captalized..................................................... 6.00 10.00 5.00
23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY Dividends from subsidiaries are the primary source of funds for the debt service requirements of Allfirst Financial Inc. Dividends from subsidiaries totaled $143.9 million for the nine months ended September 30, 2001. 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. Dividends were paid by Allfirst in the amounts of $46.4 million and $48.0 million as of March 30, 2001 and August 30, 2001, respectively, to its sole common shareholder, Allied Irish Banks, p.l.c. ("AIB"). Item 3. 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 interest rate risk 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. At September 30, 2001, the interest rate risk position of Allfirst had not changed significantly from the risk position at December 31, 2000 and Allfirst's equity at risk and earnings at risk remained in compliance with Allfirst's policy limits. Fixed Income, Derivative and Foreign Exchange Risk Management Allfirst maintains active securities, derivatives trading, and foreign exchange trading positions to service the needs of its customers as well as for its own trading account. There has been no material change in the market risk of these portfolios during the nine months of 2001. Part II. - Other Information Item 1. Legal Proceedings 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. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 2001. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Allfirst Financial Inc. November 14, 2001 By /s/ Maurice J. Crowley -------------------------- Executive Vice President and Chief Financial Officer November 14, 2001 By /s/ Robert L. Carpenter, Jr. -------------------------------- Executive Vice President and Controller 25 -----END PRIVACY-ENHANCED MESSAGE-----