-----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, WA2JbFwQdCq/4taIjFuhPw/JjqjBlAjioUz+Nrpy+ouzSB9Pom5dc/whIlT5SvvA uIGmj8pTSZInEZTPeb/8Hg== 0000950109-99-002871.txt : 19990813 0000950109-99-002871.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950109-99-002871 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MARYLAND BANCORP CENTRAL INDEX KEY: 0000036510 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 520981378 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-50235 FILM NUMBER: 99685843 BUSINESS ADDRESS: STREET 1: FIRST MARYLAND BLDG STREET 2: 25 S CHARLES ST CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4102444000 10-Q 1 FORM 10-Q 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 June 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7273 ------------------------------ First Maryland Bancorp (Exact name of registrant as specified in its charter) Maryland 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 597,763,495 outstanding shares of Common Stock, $1/7 par value, of the registrant are owned by Allied Irish Banks, p.l.c., an Irish banking corporation. FIRST MARYLAND BANCORP AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 INDEX
Page No ------- Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Income.............................................. 3 Consolidated Statements of 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................................................ 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 28 Part II. Other Information Item 1. Legal Proceedings.................................................................. 28 Item 6. Exhibits and reports on Form 8-K................................................... 29 Signatures.................................................................................. 29
2 Item 1. Financial Statements FIRST MARYLAND BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Interest Income Interest and fees on loans and leases ........................... $ 194,722 $ 197,171 $ 388,873 $ 394,143 Interest and dividends on investment securities: Taxable .................................................... 58,028 56,175 120,035 111,005 Tax-exempt ................................................. 5,122 5,351 10,301 10,579 Dividends .................................................. 2,379 3,233 4,110 5,480 Interest on loans held-for-sale ................................. 435 5,429 997 12,698 Other interest income ........................................... 796 2,399 1,382 6,038 --------- --------- --------- --------- Total interest and dividend income .................... 261,482 269,758 525,698 539,943 --------- --------- --------- --------- Interest Expense Interest on deposits ............................................ 88,632 99,396 180,541 198,908 Interest on Federal funds purchased and other short-term borrowings ...................................... 24,837 21,328 51,854 42,804 Interest on long-term debt ...................................... 13,651 12,217 27,313 24,909 --------- --------- --------- --------- Total interest expense ................................ 127,120 132,941 259,708 266,621 --------- --------- --------- --------- Net Interest Income ............................................. 134,362 136,817 265,990 273,322 Provision for credit losses ..................................... 9,349 5,251 20,979 14,122 --------- --------- --------- --------- Net Interest Income After Provision for Credit Losses ................................................... 125,013 131,566 245,011 259,200 --------- --------- --------- --------- Noninterest Income Service charges on deposit accounts ............................. 28,020 27,763 57,137 53,313 Trust and investment advisory income ............................ 19,931 17,940 39,894 34,088 Credit card income .............................................. 7,402 6,102 13,798 11,120 Mortgage banking income ......................................... 2,103 7,173 5,822 21,355 Other income .................................................... 25,996 20,944 45,467 49,104 Securities gains, net ........................................... (292) 9,921 4,991 40,353 Gain on sale of credit card loans ............................... - - - 60,000 --------- --------- --------- --------- Total noninterest income ................................... 83,160 89,843 167,109 269,333 --------- --------- --------- --------- Noninterest Expense Salaries and other personnel costs .............................. 68,311 74,363 137,244 154,433 Equipment costs ................................................. 13,229 10,067 24,534 21,700 Occupancy costs ................................................. 8,741 9,213 18,253 19,424 Other operating expenses ........................................ 45,781 38,593 79,951 77,977 Intangible assets amortization expense .......................... 12,749 13,787 25,514 28,011 --------- --------- --------- --------- Total noninterest expenses ................................. 148,811 146,023 285,496 301,545 --------- --------- --------- --------- Income before income taxes ...................................... 59,362 75,386 126,624 226,988 Income tax expense .............................................. 21,811 27,932 46,655 83,835 --------- --------- --------- --------- Net Income ...................................................... $ 37,551 $ 47,454 $ 79,969 $ 143,153 ========= ========= ========= =========
See accompanying notes to consolidated financial statements 3 FIRST MARYLAND BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
June 30, December 31, 1999 1998 ----------- ------------ (in thousands, except per share amounts) Assets Cash and due from banks ........................................................ $ 982,183 $ 1,206,178 Interest bearing deposits in other banks ....................................... 1,356 1,478 Trading account securities ..................................................... 22,116 42,528 Federal funds sold and securities purchased under resale agreements ............ 10,330 130,916 Investment securities available-for-sale ....................................... 4,285,842 4,815,087 Loans held-for-sale ............................................................ 9,818 84,254 Loans, net of unearned income of $196,797 and $199,471 Commercial ................................................................ 3,514,623 3,452,416 Commercial real estate .................................................... 2,442,834 2,305,639 Residential mortgage ...................................................... 713,687 827,103 Retail .................................................................... 2,867,438 2,739,984 Credit card ............................................................... 14,800 15,234 Commercial leases receivable .............................................. 540,100 540,395 Retail leases receivable .................................................. 335,590 318,582 Foreign ................................................................... 299,642 365,067 ----------- ------------ Total loans, net of unearned income .................................. 10,728,714 10,564,420 Allowance for credit losses .................................................... (157,351) (157,351) ----------- ------------ Loans, net ........................................................... 10,571,363 10,407,069 ----------- ------------ Premises and equipment ......................................................... 205,308 203,903 Due from customers on acceptances .............................................. 5,050 12,253 Intangible assets .............................................................. 867,212 893,584 Other assets ................................................................... 728,470 497,670 ------------ ------------ Total assets ................................................................... $ 17,689,048 $ 18,294,920 ============ ============ Liabilities and Stockholders' Equity Domestic deposits: Noninterest bearing deposits .............................................. $ 2,895,932 $ 3,276,589 Interest bearing deposits ................................................. 8,812,363 8,623,861 Interest bearing deposits in foreign banking office ............................ 248,566 356,601 ------------ ------------ Total deposits ....................................................... 11,956,861 12,257,051 Federal funds purchased and securities sold under repurchase agreements ........ 1,596,855 2,185,794 Other borrowed funds, short-term ............................................... 570,148 377,927 Bank acceptances outstanding ................................................... 5,050 12,253 Accrued taxes and other liabilities ............................................ 735,843 586,137 Long-term debt ................................................................. 896,180 856,320 ------------ ------------ Total liabilities ...................................................... 15,760,937 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 ..... 8,224 8,111 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 .......................................................... 30,000 30,000 Common Stock, $1/7 par value per share; authorized 1,200,000,000 shares, issued 597,763,495 shares ................................................. 85,395 85,395 Capital surplus ................................................................ 701,988 701,988 Retained earnings .............................................................. 1,154,863 1,170,565 Accumulated other comprehensive income ......................................... (52,359) 23,379 ------------ ------------ Total stockholders' equity .............................................. 1,919,887 2,011,327 ------------ ------------ Total liabilities, redeemable preferred stock and stockholders' equity .. $ 17,689,048 $ 18,294,920 ============ ============
See accompanying notes to consolidated financial statements 4 FIRST MARYLAND BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Other Compre- Preferred Common Capital hensive Retained Stock Stock Surplus Income Earnings Total ----- ----- ------- ------ -------- ----- (in thousands) Six Months Ended June 30, 1998 - ------------------------------ Balance, December 31, 1997 $ 30,000 $ 85,395 $ 701,988 $ 33,594 $ 1,021,880 $ 1,872,857 Net income .................................. - - - - 143,153 143,153 Other comprehensive income, net of tax: Minimum pension liability adjustment ... - - - (240) - (240) Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1) ....... - - - (17,996) - (17,996) ----------- Other comprehensive income ......... (18,236) ----------- Comprehensive income ............ - - - - - 124,917 ----------- Accretion of redeemable preferred stock ..... - - - - (104) (104) Dividends declared on common stock .......... - - - - (57,000) (57,000) Dividends declared on preferred stock ...... - - - - (5,910) (5,910) Dividends declared on redeemable preferred stock ....................................... - - - - (203) (203) ----------- ------------ ----------- ----------- ----------- ----------- Balance, June 30, 1998 ...................... $ 30,000 $ 85,395 $ 701,988 $ 15,358 $ 1,101,816 $ 1,934,557 =========== =========== =========== =========== =========== =========== Six Months Ended June 30, 1999 - ------------------------------ Balance, December 31, 1998 .................. $ 30,000 $ 85,395 $ 701,988 $ 23,379 $ 1,170,565 $ 2,011,327 Net income .................................. - - - - 79,969 79,969 Other comprehensive income, net of tax: Minimum pension liability adjustment ... - - - (603) - (603) Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1) ....... - - - (75,135) - (75,135) ------------- Other comprehensive income ......... (75,738) ------------- Comprehensive income ............ - - - - - 4,231 ------------- Accretion of redeemable preferred stock ..... - - - - (113) (113) Dividends declared on common stock .......... - - - - (90,000) (90,000) Dividends declared on preferred stock ....... - - - - (5,355) (5,356) Dividends declared on redeemable preferred stock ....................................... - - - - (203) (202) ----------- ----------- ----------- ----------- ----------- ------------- Balance, June 30, 1999 ...................... $ 30,000 $ 85,395 $ 701,988 $ (52,359) $ 1,154,863 $ 1,919,887 =========== =========== =========== =========== =========== ===========
(1) Disclosure of reclassification amount:
Six Months Ended June 30, -------------------------- 1999 1998 ----------- ----------- Net unrealized holding gains (losses) on investment securities arising during period $ (72,118) $ 7,509 Less: reclassification adjustment for realized gains included in net income 3,017 25,505 ---------- ---------- Change in unrealized gains/losses on investment securities, net of tax $ (75,135) $ (17,996) =========== ===========
See accompanying notes to consolidated financial statements 5 FIRST MARYLAND BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ------------------------------ 1999 1998 ----- ---- (in thousands) Operating Activities Net income ......................................................................... $ 79,969 $ 143,153 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses .................................................... 20,979 14,122 Provision for other real estate losses ......................................... 1,890 337 Depreciation and amortization .................................................. 42,932 41,992 Deferred income tax expense .................................................... 25,603 30,951 Net gain on the sale of assets ................................................. (6,357) (100,504) Net decrease in loans originated for sale ...................................... 74,436 291,523 Net decrease (increase) in trading account securities .......................... 4,789 (8,678) Net (increase) decrease in accrued interest receivable ......................... (63) 5,872 Net increase in accrued interest payable........................................ 6,317 443 Other, net...................................................................... (49,841) (2,462) ---------- ---------- Net cash provided by operating activities 200,654 416,749 ---------- ---------- Investing Activities Proceeds from sales of investment securities available-for-sale ................ 1,334,194 2,387,538 Proceeds from paydowns and maturities of investment securities available-for-sale ......................................................... 492,690 412,804 Purchases of investment securities available-for-sale .......................... (1,434,847) (2,285,978) Net decrease (increase) in short-term investments .............................. 113,088 (37,674) Net disbursements from lending activities of banking subsidiaries............... (208,491) (301,454) Principal collected on loans of nonbank subsidiaries ........................... 6,789 33,219 Loans originated by nonbank subsidiaries ....................................... (5,097) (21,774) Principal payments received under leases ....................................... 2,832 2,702 Purchases of assets to be leased ............................................... (693) (1,440) Proceeds from the sale of other real estate..................................... 22,137 5,269 Net purchases of premises and equipment ........................................ (18,043) (30,806) Proceeds from the sale of credit card loans .................................... - 197,369 Other, net ..................................................................... 8,507 (5,250) ---------- ---------- Net cash provided by investing activities ............................... 313,066 354,525 ---------- ---------- Financing Activities Net decrease in deposits ....................................................... (300,190) (355,054) Net decrease in short-term borrowings........................................... (381,705) (406,911) Proceeds from the issuance of long-term debt.................................... 99,615 - Principal payments on long-term debt............................................ (60,000) (50,000) Cash dividends paid ............................................................ (95,557) (63,113) ---------- ---------- Net cash used for financing activities .................................. (737,837) (875,078) ---------- ---------- Increase in cash and cash equivalents (224,117) (103,804) Cash and cash equivalents at January 1,............................................. 1,207,656 1,079,665 ---------- ---------- Cash and cash equivalents at June 30,............................................... $ 983,539 $ 975,861 ========== ========== Supplemental Disclosures Interest payments .......................................................... $ 253,391 $ 266,178 Income tax payments, net of tax refunds .................................... 19,623 10,054 Noncash Investing And Financing Activities Loan charge-offs ........................................................... 25,102 17,554 Transfers to other real estate and other assets owned ...................... 24,387 4,372
See accompanying notes to consolidated financial statements 6 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of First Maryland Bancorp and Subsidiaries ("The Corporation") 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 six month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Corporation's 1998 Annual Report on Form 10-K. 2. Investment Securities The amortized cost and fair value of available-for-sale securities at June 30, 1999 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (In thousands) U.S. Treasury and U.S. Government agencies.......... $ 206,168 $ 64 $ (3,132) $ 203,100 Mortgage-backed obligations......................... 2,100,903 98 (73,033) 2,027,968 Collateralized mortgage obligations................. 977,799 2,316 (9,946) 970,169 Asset-backed securities............................. 430,081 617 (1,184) 429,514 Obligations of states and political subdivisions.... 417,775 4,596 (5,011) 417,360 Other debt securities............................... 27,830 - - 27,830 Equity securities................................... 207,947 3,192 (1,238) 209,901 ---------- ------- --------- ---------- Total....................................... $4,368,503 $10,883 $(93,544) $4,285,842 ========== ======= ========= ==========
3. Long-term Debt Following is a summary of the long-term debt of the Corporation at June 30, 1999 and December 31, 1998 which is all unsecured:
June 30, December 31, -------- ------------ 1999 1998 ---- ---- (in thousands) 10.375% Subordinated Capital Notes due August 1, 1999........................... $ - $ 59,995 Adjustable rate Federal Home Loan Bank Advance due December 4, 2000............. 200,000 200,000 8.375% Subordinated Notes due May 15, 2002...................................... 99,875 99,853 7.20% Subordinated Notes due July 1, 2007....................................... 199,909 199,903 6.875% Subordinated Notes due June 1, 2009...................................... 99,618 - Floating rate Subordinated Capital Income Securities due January 15, 2027....... 147,834 147,690 Floating rate Subordinated Capital Income Securities due February 1, 2027....... 148,724 148,640 Obligations under capitalized leases............................................ 220 239 -------- --------- Total................................................................... $896,180 $ 856,320 ======== =========
7 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. Long-term Debt (continued) The 6.875% Subordinated Notes mature on June 1, 2009, with interest payable semi-annually and are not redeemable prior to maturity. The Corporation repaid the 10.375% Subordinated Capital Notes on June 2, 1999 using $60 million of the proceeds from the issuance of the 6.875% Subordinated Notes. 4. Line of Business Reporting The Corporation has determined that its major lines of business are those that are based on the Corporation's method of internal reporting, which separates its business on the basis of products and services. The Corporation's reportable business lines are Retail Banking, Corporate Banking, Real Estate Finance, Trust and Investment Advisory Services, and Treasury. Retail Banking provides loans, deposits, mutual fund and annuity products, and credit life insurance to consumers and commercial small business customers. Corporate Banking provides commercial loans, letters of credit, derivative financial instruments, foreign exchange and cash management products and services to domestic and international corporate customers. 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. Treasury is responsible for managing and controlling the liquidity, funding and market risk needs of the Corporation. Other business lines includes smaller business units. The revenues and expenses in other business lines are primarily related to merchant services. Lines of business from which the Corporation has exited are classified under discontinued business lines. Discontinued business lines include 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 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. Other also receives a credit for funds provided and charges for funds used. The Corporation's internal accounting process is based on practices which support the management structure of the Corporation, and the resulting data is not necessarily comparable with similar information from other financial institutions. Net income reflects costs directly associated with each business line plus an appropriate share of corporate overhead expenses. A match funded transfer pricing system is used to allocate interest income and expense, with a business line receiving credit for funds provided and charges for funds used. Loan loss provisions and the allowance for credit losses are allocated based on the credit risk of each business line's loan portfolio and the changes therein. Capital is assigned to each business line based on regulatory risk-based capital guidelines. Interest rate risk is aggregated from all lines and classified under "Treasury". In addition, Treasury includes investment portfolio revenue, wholesale funding expenses and other revenue and expenses associated with the Treasury unit. 8 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Line of Business Reporting (continued) The following tables present operating information about each of the Corporation's business lines for the three months and six months ended June 30, 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. Business Line Results Three Months Ended June 30, 1999
Trust and Real Investment Other Total Retail Corporate Estate Advisory Business Business (in thousands) Banking Banking Finance Services Treasury Lines Lines --------- -------- -------- ---------- -------- ----- ------- Net interest income (FTE) ................. $ 87,411 $ 39,639 $ 9,117 $ 816 $ 7,894 $ 199 $ 145,076 Noninterest income ......................... 18,752 24,583 3,451 22,779 922 10,905 81,392 Securities gains, net ...................... - - - - (292) - (292) --------- --------- --------- --------- --------- --------- --------- Total revenues ......................... 106,163 64,222 12,568 23,595 8,524 11,104 226,176 Total noninterest expenses, excluding intangible asset amortization ............ 59,708 33,770 6,142 12,884 2,191 8,281 122,976 Goodwill and other intangible asset amortization ........................... 226 - - 273 - - 499 Provision for credit losses ............... 3,420 2,661 410 16 - 55 6,562 --------- --------- --------- --------- --------- --------- --------- Income before income taxes ............. 42,809 27,791 6,016 10,422 6,333 2,768 96,139 Income tax expense (FTE) ................... 17,237 11,329 300 4,328 (340) 1,073 33,927 --------- --------- --------- --------- --------- --------- --------- Net income ............................. $ 25,572 $ 16,462 $ 5,716 $ 6,094 $ 6,673 $ 1,695 $ 62,212 ========= ========= ========= ========= ========= ========= ========= (in millions) Average assets ............................. $ 8,618 $ 5,452 $ 1,718 $ 84 $ 4,912 $ 178 $ 20,962 Average loans .............................. 4,098 4,753 1,612 13 - 92 10,568 Average deposits ........................... 8,087 1,437 81 71 2,274 - 11,950 Allocated equity ........................... 411 745 178 11 151 12 1,508 Total Business Consolidated (in thousands) Lines Other Total ------- ------- ------------ Net interest income (FTE) .................. $145,076 $ (6,558) $138,518 Noninterest income ......................... 81,392 2,060 83,452 Securities gains, net ...................... (292) - (292) --------- --------- --------- Total revenues ......................... 226,176 (4,498) 221,678 Total noninterest expenses, excluding intangible asset amortization ........................... 122,976 13,086 136,062 Goodwill and other intangible asset amortization ..................... 499 12,250 12,749 Provision for credit losses ................ 6,562 2,787 9,349 --------- --------- --------- Income before income taxes .............. 96,139 (32,621) 63,518 Income tax expense (FTE) .................. 33,927 (7,960) 25,967 --------- --------- --------- Net income .............................. $ 62,212 $(24,661) $ 37,551 ========= ========= ========= (in millions) Average assets.............................. $ 20,962 $ (3,319) $ 17,643 Average loans............................... 10,568 68 10,636 Average deposits............................ 11,950 86 12,036 Allocated equity............................ 1,508 435 1,943
9 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Line of Business Reporting (continued) Business Line Results Six Months Ended June 30, 1999
Trust and Real Investment Other Total Retail Corporate Estate Advisory Business Business Banking Banking Finance Services Treasury Lines Lines ------- ------- ------- -------- -------- ----- ----- (in thousands) Net interest income (FTE) ..................... $163,633 $ 86,952 $ 18,832 $ 1,274 $ 14,897 $ 484 $286,072 Noninterest income ............................. 37,801 41,467 9,257 44,759 2,775 21,268 157,327 Securities gains, net .......................... -- -- -- -- 4,991 -- 4,991 -------- -------- -------- -------- -------- -------- -------- Total revenues ............................... 201,434 128,419 28,089 46,033 22,663 21,752 448,390 Total noninterest expenses, excluding intangible asset amortization ...... 121,286 64,603 12,261 26,078 4,766 16,072 245,066 Goodwill and other intangible asset amortization ........................... 452 -- -- 547 -- -- 999 Provision for credit losses ................... 6,701 7,300 854 33 -- 110 14,998 -------- -------- -------- -------- -------- -------- -------- Income before income taxes ................. 72,995 56,516 14,974 19,375 17,897 5,570 187,327 Income tax expense (FTE) ....................... 28,693 22,230 2,066 7,756 3,845 2,136 66,726 -------- -------- -------- -------- -------- -------- -------- Net income ................................. $ 44,302 $ 34,286 $ 12,908 $ 11,619 $ 14,052 $ 3,434 $120,601 ======== ======== ======== ======== ======== ======== ======== (in millions) Average assets.................................. $ 8,632 $ 5,327 $ 1,737 $ 72 $ 4,904 $ 180 $ 20,852 Average loans................................... 4,036 4,735 1,632 13 - 94 10,510 Average deposits................................ 8,105 1,503 77 59 2,187 - 11,931 Allocated equity................................ 407 718 177 11 148 12 1,473
Total Business Consolidated Lines Other Total (in thousands) ----- ----- ----- Net interest income (FTE) ...................... $ 286,072 $ (12,569) $ 273,503 Noninterest income ............................. 157,327 4,791 162,118 Securities gains, net .......................... 4,991 -- 4,991 --------- ---------- --------- Total revenues ............................. 448,390 (7,778) 440,612 Total noninterest expenses, excluding intangible asset amortization ...... 245,066 14,916 259,982 Goodwill and other intangible asset amortization ........................... 999 24,515 25,514 Provision for credit losses .................... 14,998 5,981 20,979 --------- ---------- --------- Income before income taxes ................ 187,327 (53,190) 134,137 Income tax expense (FTE) ...................... 66,726 (12,558) 54,168 --------- ---------- --------- Net income ................................ $ 120,601 $ (40,632) $ 79,969 ========= ========== ========= (in millions) Average assets ................................. $ 20,852 $ (3,120) $ 17,732 Average loans .................................. 10,510 76 10,586 Average deposits ............................... 11,931 85 12,016 Allocated equity ............................... 1,473 503 1,976
10 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 4. Line of Business Reporting (continued) The table below presents operating information about each of the Corporation's segments for the three months and six months ended June 30, 1998. Business Line Results Three Months Ended June 30, 1998
Trust and Total Real Investment Other Continuing Retail Corporate Estate Advisory Business Business (in thousands) Banking Banking Finance Services Treasury Lines Lines ------- ------- ------- -------- -------- ----- ----- Net interest income (FTE) ................... $ 82,632 $ 42,837 $ 8,261 $ 1,318 $ 6,868 $ (752) $141,164 Noninterest income .......................... 17,262 17,729 3,043 20,337 635 11,123 70,129 Securities gain, net ........................ - - - - 9,923 - 9,923 -------- -------- -------- -------- -------- -------- ------- Total revenues .......................... 99,894 60,566 11,304 21,655 17,426 10,371 221,216 Total noninterest expenses, excluding intangible amortization ......... 63,142 26,078 4,623 12,007 2,526 6,164 114,540 Goodwill and other intangible assets ........ 226 -- -- 273 -- -- 499 Provision for credit losses ................. 2,058 4,006 598 17 -- 44 6,723 -------- -------- -------- -------- -------- -------- -------- Income before income taxes ............... 34,468 30,482 6,083 9,358 14,900 4,163 99,454 Income tax expense (FTE) .................... 13,644 11,987 878 3,803 4,407 1,582 36,301 -------- -------- -------- -------- -------- -------- -------- Net income ............................... $ 20,824 $ 18,495 $ 5,205 $ 5,555 $ 10,493 $ 2,581 $ 63,153 ======== ======== ======== ======== ======== ======== ======== (in millions) Average assets .............................. $ 8,797 $ 5,079 $ 1,527 $ 237 $ 4,294 $ 81 $ 20,015 Average loans ............................... 3,852 4,514 1,440 13 -- 13 9,832 Average deposits ............................ 8,390 1,491 77 223 1,890 -- 12,071 Allocated equity ............................ 402 651 141 14 126 8 1,342 Total Continuing Discontinued (in thousands) Business Business Consolidated Lines Lines Other Total ----- ----- ----- ----- Net interest income (FTE) ................... $ 141,164 $ 3,582 $ (4,562) $ 140,184 Noninterest income .......................... 70,129 9,242 551 79,922 Securities gain, net ........................ 9,923 -- (2) 9,921 --------- --------- --------- --------- Total revenues .......................... 221,216 12,824 (4,013) 230,027 Total noninterest expenses, excluding intangible asset amortization ............. 114,540 10,378 7,318 132,236 Goodwill and other intangible asset amortization ........................ 499 23 13,265 13,787 Provision for credit losses ................. 6,723 (45) (1,427) 5,251 --------- --------- ---------- --------- Income before income taxes ............... 99,454 2,468 (23,169) 78,753 Income tax expense (FTE) ................... 36,301 1,403 (6,405) 31,299 --------- --------- ---------- --------- Net income ............................... $ 63,153 $ 1,065 $ (16,764) $ 47,454 ========= ========= ========== ========= (in millions) Average assets .............................. $ 20,015 $ 744 $ (3,767) $ 16,992 Average loans ............................... 9,832 488 (209) 10,111 Average deposits ............................ 12,071 (1) 38 12,108 Allocated equity ............................ 1,342 63 544 1,949
11 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Line of Business Reporting (continued) Business Line Results Six Months Ended June 30, 1998
Trust and Total Real Investment Other Continuing Retail Corporate Estate Advisory Business Business Banking Banking Finance Services Treasury Lines Lines (in thousands) ------- ------- ------- -------- -------- ----- ----- Net interest income (FTE) .................... $162,928 $ 86,533 $ 16,119 $ 2,493 $ 15,173 $ (658) $282,588 Noninterest income ........................... 34,900 34,194 7,503 38,409 1,840 18,641 135,487 Securities gain, net ......................... -- -- -- -- 40,359 -- 40,359 -------- -------- -------- -------- -------- -------- ------- Total revenues ........................... 197,828 120,727 23,622 40,902 57,372 17,983 458,434 Total noninterest expenses, excluding intangible asset amortization .... 121,615 51,973 9,881 24,134 5,342 11,949 224,894 Goodwill and other intangible assets ......... 452 -- -- 547 -- 999 Provision for credit losses .................. 4,055 7,250 1,171 35 -- 2,220 14,731 -------- -------- -------- -------- -------- -------- -------- Income before income taxes ................ 71,706 61,504 12,570 16,186 52,030 3,814 217,810 Income tax expense (FTE) ..................... 28,294 24,163 2,789 6,604 16,648 1,483 79,981 -------- -------- -------- -------- -------- -------- -------- Net income ................................ $ 43,412 $ 37,341 $ 9,781 $ 9,582 $ 35,382 $ 2,331 $137,829 ======== ======== ======== ======== ======== ========= ======== (in millions) Average assets ............................... $ 8,752 $ 5,049 $ 1,545 $ 240 $ 4,246 $ 88 $ 19,920 Average loans ................................ 3,776 4,489 1,470 13 -- 21 9,769 Average deposits ............................. 8,345 1,470 76 225 1,932 -- 12,048 Allocated equity ............................. 395 656 141 14 123 9 1,338 Total Continuing Discontinued (in thousands) Business Business Consolidated Lines Lines Other Total --------- --------- --------- --------- Net interest income (FTE) ............... $ 282,588 $ 9,051 $ (11,054) $ 280,585 Noninterest income ...................... 135,487 32,005 1,488 168,980 Securities gain, net .................... 40,359 (6) 40,353 Gain on sale of credit card loans ....... -- 60,000 -- 60,000 --------- --------- --------- --------- Total revenues ...................... 458,434 101,056 (9,572) 549,918 Total noninterest expenses, excluding intangible asset amortization . 224,894 33,078 15,562 273,534 Goodwill and other intangible asset amortization ............................ 999 266 26,746 28,011 Provision for credit losses ............. 14,731 1,051 (1,660) 14,122 --------- --------- --------- --------- Income before income taxes ........... 217,810 66,661 (50,220) 234,251 Income tax expense (FTE) ................ 79,981 26,024 (14,907) 91,098 --------- --------- ---------- --------- Net income ........................... $ 137,829 $ 40,637 $ (35,313) $ 143,153 ========= ========= ========== ========= (in millions) Average assets .......................... $ 19,920 $ 880 $ (3,822) $ 16,978 Average loans ........................... 9,769 514 (204) 10,079 Average deposits ........................ 12,048 -- 66 12,114 Allocated equity ........................ 1,338 80 518 1,936
12 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Subsequent Events On July 13, 1999, the Corporation issued 100,000 Floating Rate Non-Cumulative Subordinated Capital Trust Enhanced Securities ("SKATES") at a price to investors of $98.9 million. Each SKATES pays a non-cumulative quarterly distribution of three month LIBOR plus 1.50%, reset quarterly. Until October 15, 1999 the distribution rate on the SKATES will be 6.81%. These securities will be classified as long-term debt on the Consolidated Statement of Condition. On July 14, 1999, the proceeds from the issuance of the SKATES, as well as other funding sources, were used to redeem the Corporation'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. 6. Stock Options During the second quarter of 1999, the Corporation implemented an employee stock option program called Allfirst Shares. Each full and part-time employee who was eligible for employee benefits and was with the Company as of May 4, 1999 received an option to purchase up to 100 ordinary share American Depository Receipts ("ADRs") of Allied Irish Banks, p.l.c., the Corporation's parent ("AIB"). A total of 602,200 options were granted. The option grant price is $31.67 per ADR, the fair market value of the ADRs at the date of the grant. 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 ADRs 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. The Allfirst Shares program is part of the 1997 Stock Option Plan described below. The Corporation's 1997 Stock Option Plan provides for the grant to key employees of options to acquire AIB ADRs. The options are granted at no less than the fair market value of the stock at the date of the grant. Other options granted on February 9, 1999 and May 4, 1999 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. The Corporation and an independent trustee created a trust which acquired AIB ADRs in the open market with the proceeds of a loan from the Corporation. Proceeds of option exercises and any dividends and other earnings on the trust assets will be used to repay the loan to the trust. Option holders have no preferential rights with respect to the trust assets, and the trust assets are subject to the claims of the Corporation's general creditors in the event of insolvency. The AIB ADRs held by the trust are classified on the Corporation's financial statements as investment securities available-for-sale. At June 30, 1999, investment securities available-for-sale included $72.3 million AIB common ADRs related to the Allfirst Shares Plan and other options granted under the 1997 Stock Option Plan. Any decline in value of the AIB ADRs 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 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 Plan. 13 FIRST MARYLAND BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Stock Options (continued) The summary of the status of the Corporation's stock option plan as of June 30, 1999 and change during the period ending June 30, 1999 is presented below: 1997 Stock Option Plan ---------------------- Weighted- Shares Average (000) Exercise Price ------- -------------- Outstanding at beginning of year (a).......... 2,979.3 $ 22.31 Granted....................................... 737.5 31.94 Exercised..................................... (462.7) (18.67) Forfeited..................................... (180.3) (27.29) ------- ------- Outstanding at June 30, 1999.................. 3,073.8 $ 24.88 ======= ======= (a) Adjusted for 3 for 1 stock split. The following table summarizes information about fixed options outstanding at June 30, 1999:
Options Outstanding Options Exercisable ------------------------------------------- ------------------------------- Number Weighted-Average Number Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Price At 6/30/99 Contractual Life Exercise Price At 6/30/99 Exercise Price -------------- ---------- ---------------- ------------------ ----------- ----------------- $18.67 1,143,850 5.5 years $18.67 1,143,850 $18.67 26.42 1,147,500 9.3 years 26.42 - - 29.29 75,000 9.3 years 29.29 - - 34.04 82,800 9.6 years 34.04 - - 31.67 624,700 9.9 years 31.67 - - --------- --------- ------ --------- ------ Total 3,073,850 8.0 years $24.88 1,143,850 $18.67 ========= ========= ====== ========= ======
For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair values of stock options granted in 1999 of $10.47 and $10.61 per share, respectively, were estimated at the date of the grants using a Black-Scholes option pricing model. The following weighted average assumptions were used in the option pricing model: Stock Options Stock Options Granted on Granted on 2/9/99 5/4/99 ------ ------ Expected future dividend yield................ 3.06% 2.96% Volatility factor............................. .2950 .3036 Risk free interest rate....................... 5.010% 5.380% Expected life of options...................... 10.0 years 5.5 years The pro forma net income of the Corporation that would have been recognized in the consolidated statements of income if the fair value method of accounting for stock options had been used is $78.8 million and $141.2 million, respectively, for the six months ended June 30, 1999 and 1998. 14 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 FINANCIAL CONDITION The Corporation's total assets at June 30, 1999 were $17.7 billion, a $606 million decrease from total assets at December 31, 1998. The primary components of the decrease were cash and due from banks which decreased $224 million, Federal funds sold and securities purchased under resale agreements which decreased $121 million, and investment securities available for sale which decreased $529 million. The decline in cash and due from banks and the decrease in Federal funds sold and securities purchased under resale agreements coincides with a lower level of noninterest bearing demand deposits. These decreases in assets were partially offset by an increase in loans and leases receivable and other assets which increased $164 million and $231 million, respectively, when compared to December 31, 1998. The increase in other assets included a $144 million increase in the fair value of foreign exchange forward and option contracts. At June 30, 1999, investment securities available for sale of $4.3 billion had net unrealized losses of $82.7 million compared to net unrealized gains of $39.3 million at December 31, 1998. The taxable equivalent yield on the entire securities portfolio for the quarter ended June 30, 1999 was 6.11% compared to 6.54% for the second quarter of 1998. Investment securities sold in the first quarter of 1999 totaled $722 million and generated pre-tax gains of $5.3 million. The majority of the securities sold were U.S. Treasury securities and mortgage backed securities which were sold to reduce the duration of the investment securities portfolio. In the first quarter of 1999, the Corporation purchased $976 million of investment securities to replace $283 million of maturities, calls and paydowns of securities and the securities sold. First quarter purchases were primarily U.S. government agency securities, mortgage backed securities and collateralized mortgage obligations. Investment securities sold in the second quarter of 1999 totaled $608 million and generated pre-tax losses of $292 thousand. The securities sold were primarily Federal agency securities and mortgage backed securities. The Federal agency securities were sold to improve the yield of the investment portfolio, while the mortgage backed securities were sold to reduce the duration of the investment portfolio. In the second quarter of 1999, the Corporation purchased $438 million of investment securities to replace $209 million of maturities, calls and paydowns of securities and the some of the securities sold. Second quarter purchases were primarily collateralized mortgage obligations. Loans and leases increased $164 million when compared to December 31, 1998. Growth in commercial loans, retail loans and commercial real estate loans was offset by decreases in other loan portfolios. Commercial loans increased $62 million, with growth primarily in the National/Large Corporate portfolios. Commercial real estate loans increased $137 million. Increased demand for commercial real estate financing was prompted by a decline in commercial real estate vacancies and an increase in commercial real estate rental rates in the Mid-Atlantic region. Retail loans increased $127 million due to growth in home equity loans and indirect auto loans. Residential mortgage loans declined $113 million due to loan maturities and prepayments prompted by the favorable interest rate environment. Foreign loans decreased $65 million due to a decline in foreign maritime loans which resulted from loan charge-offs and loan paydowns. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) Significant fluctuations in liabilities included a $381 million decline in noninterest bearing deposits from December 31, 1998 primarily due to normal seasonal fluctuations in demand deposit balances. Interest bearing deposits increased $80 million primarily due to growth in purchased deposits which increased $686 million from December 31, 1998. Excluding purchased deposits, interest bearing deposits decreased $606 million primarily due to a $381 million decrease in money market deposits, a $235 million decrease in consumer time deposits and a $22 million decrease in interest bearing demand deposits. These decreases were offset by a $33 million increase in savings deposits. The decrease in money market deposits is due to a $202 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 mutual fund companies and broker dealers. The decline in consumer time deposits evidences the consumer trend toward higher yielding non-insured investment vehicles. To the extent that the Corporation must replace noninterest bearing or interest bearing deposits with purchased funds, the Corporation's cost of funds increases. Accrued taxes and other liabilities increased $150 million from December 31, 1998 primarily due to a $102 million increase in the fair value of foreign exchange options and forward contracts. Asset Quality Nonperforming assets were $93.0 million at June 30, 1999, compared to $100.9 million at December 31, 1998, a decrease of $7.9 million. Nonaccrual loans decreased $5.2 million. Additions to nonperforming loans in the first half of 1999 aggregated $28.8 million. These additions were offset by reductions in nonaccrual loans totaling $34.0 million due to paydowns and payoffs of nonaccrual loans totaling $14.0 million, charge-offs of $7.4 million, loans returned to accrual status of $6.2 million and transfers to other real estate and other assets owned of $6.4 million. Other real estate and other assets owned decreased $0.7 million when compared to December 31, 1998. Additions to other real estate owned totaled $4.7 million, including transfers from nonaccrual loans of $3.7 million. Sales and paydowns of other real estate owned totaled $6.0 million. Repossessed assets increased $0.6 million. Other nonperforming assets increased $1.9 million when compared to December 31, 1998. Other nonperforming assets includes $21.1 million in nonperforming maritime loans. The Corporation 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, into 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 also includes a $2.8 million ownership interest in a commercial aircraft resulting from a lessee default on a commercial lease in which the Corporation was a participant. This asset is carried at fair value. The provision for credit losses for the second quarter of 1999 was $9.3 million compared to $5.3 million in the second quarter of 1998. The increase in the provision was primarily due to a $2.8 million increase in retail net charge-offs and a $1.5 million increase in commercial net charge-offs in 1999. The provision for credit losses for the six months ended June 30, 1999 was $21.0 million compared to a provision for credit losses of $14.1 million for the first half of 1998. The increase in provision was primarily due to a $6.3 million increase in foreign loan net charge-offs, a $4.2 million increase in retail net charge-offs and a $1.6 million increase in residential mortgage net charge-offs. These increases were offset by a $3.2 million decrease in credit card net charge-offs due to the sale of substantially all of the Corporation's credit card receivables in the first quarter of 1998 and a $1.6 million decrease in commercial real estate 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 issues causing these overdrafts have been resolved and this trend is not expected to continue. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) 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 June 30, 1999, the Corporation's total international maritime exposure was $274 million, including loans and leases of $222 million, $21 million in other foreign maritime assets, and $31 million in unfunded loan commitments, letters of credit and risk participations. Nonperforming assets at June 30, 1999 included $6.7 million in nonaccrual maritime loans and $21.1 million in other nonperforming maritime assets. The following table details information on the allowance for credit losses and net charge-offs for the six months ended June 30, 1999 and 1998 and risk assets at June 30, 1999 and December 31, 1998. Asset Quality Analysis ALLOWANCE FOR CREDIT LOSSES Six Months Ended June 30, -------------------------- 1999 1998 ----- ---- (in thousands) Beginning balance.................................. $157,351 $168,186 Provision for credit losses........................ 20,979 14,122 Net charge-offs.................................... (20,979) (14,122) Allowance attributable to loans sold............... - (6,850) -------- -------- Ending balance................................ $157,351 $161,336 ======== ======== NET CHARGE-OFFS (RECOVERIES) AS A PERCENTAGE OF AVERAGE LOANS BY CATEGORY Commercial loans........................................ 0.17% 0.24% Commercial real estate loans............................ (0.11) 0.04 Residential mortgages................................... 0.55 0.10 Retail loans............................................ 0.58 0.30 Credit card loans....................................... 0.85 13.01 Commercial leases receivable............................ - - Retail leases receivable................................ 0.43 0.26 Foreign loans........................................... 5.00 0.95 ---- ---- Total.............................................. 0.40% 0.28% 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) RISK ASSETS
June 30, December 31, 1999 1998 ---- ---- (in thousands) Nonaccrual loans: Domestic: Commercial............................................... $15,265 $ 17,356 Commercial real estate................................... 6,885 6,332 Residential mortgage..................................... 22,453 22,366 Foreign....................................................... 9,469 13,227 -------- -------- Total nonaccrual loans.............................. 54,072 59,281 Restructured loans (1)........................................ - 88 Other real estate and assets owned (2)........................ 14,957 15,630 Other (3)..................................................... 23,959 25,903 ------- -------- Total nonperforming assets.......................... $92,988 $100,902 ======= ======== Accruing loans contractually past due 90 days or more as to principal or interest.................................................... $39,764 $40,469 ======= =======
- -------------------- (1) Restructured loans are "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". (2) Other real estate and other assets owned represent collateral on loans to which the Corporation has taken title. This property, which is held for resale, is carried at fair value less estimated costs to sell. (3) Other includes maritime loans discussed in detail under "Nonperforming Assets." Other also includes an interest in a commercial aircraft. ASSET QUALITY RATIOS
June 30, December 31, 1999 1998 ----- ---- Nonperforming assets as a percentage of : Total loans, net of unearned income plus other foreclosed assets owned............................................................. 0.86% 0.95% Total assets....................................................... 0.53 0.55 Allowance for credit losses as a percentage of : Period end loans.................................................. 1.47 1.49 Nonperforming loans............................................... 291.00 265.04
CAPITAL ADEQUACY AND RESOURCES The Corporation's capital strength provides the resources and flexibility to capitalize on business growth and acquisition opportunities. At June 30, 1999, the Corporation's tier 1 risk based capital ratio was 9.41% ($1.4 billion of tier 1 capital) and its total risk based capital ratio was 12.80% ($1.9 billion of total risk based capital). Tier 1 capital consists primarily of common shareholder's equity and non-cumulative preferred instruments 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. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) 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. Substantially the same capital requirements are applied to the Corporation'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 June 30, 1999 the Corporation and its banking subsidiaries were "well capitalized" as defined by regulatory authorities. Capital Adequacy Ratios Regulatory Capital Ratios ------------------------- Tier 1 Total Leverage ------ ----- -------- The Corporation..................... 9.41% 12.80% 8.33% Allfirst Bank....................... 8.35 10.62 7.32 Allfirst Financial Center N.A....... 34.31 35.01 19.54 Regulatory Guidelines: Minimum........................ 4.00 8.00 3.00 Well Capitalized............... 6.00 10.00 5.00 On July 13, 1999, the Corporation issued 100,000 Floating Rate Non-Cumulative Subordinated Capital Trust Enhanced Securities ("SKATES") at a price to investors of $98.9 million. Each SKATES pays a non-cumulative quarterly distribution of three month LIBOR plus 1.50%, reset quarterly. Until October 15, 1999 the distribution rate on the SKATES will be 6.81%. These securities will be classified as long-term debt on the Consolidated Statement of Condition and will qualify as tier 1 capital, with the limitation that the SKATES 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 SKATES, as well as other funding sources, were used to redeem the Corporation'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. The Corporation's tier 1, total, and leverage regulatory capital ratios are 8.78%, 12.69% and 7.72%, respectively, on a pro forma basis after issuance of the SKATES and redemption of the preferred stock. Tier 1 capital on a pro forma basis includes $27 million of the SKATES. The remaining balance of the SKATES is included in tier 2 capital. LIQUIDITY Dividends from subsidiaries are the primary source of funds for the debt service requirements of First Maryland Bancorp. Dividends from subsidiaries totaled $141.2 million in the first half of 1999. Management is confident that the earnings and dividend capacity of its subsidiary banks will be adequate to service interest obligations on long-term debt of the Corporation. On March 30, 1999, the Corporation paid a dividend of $90 million to its sole common shareholder, Allied Irish Banks, p.l.c. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) ANALYSIS OF RESULTS OF OPERATIONS During the second quarter of 1999, the Corporation introduced its new Allfirst brand name and logo. On June 28, 1999, most of the Corporation's subsidiary names were changed to incorporate the new Allfirst brand identity. The name of the Corporation's lead bank changed from FMB Bank to Allfirst Bank on this date. The Corporation expects to change its name to Allfirst Financial Inc. in the near future. The net income of the Corporation for the three months ended June 30, 1999 was $37.6 million, compared to $47.5 million for the three months ended June 30, 1998. Net income for the second quarter of 1999 included $6.1 million in after tax costs ($10.0 million pre-tax) associated with the Allfirst brand introduction. Net income for the second quarter of 1998 included a $6.2 million net after tax gain on the sale of investment securities ($9.9 million pre-tax). Return on average assets and return on average common stockholder's equity were 0.85% and 7.82%, respectively, for the three months ended June 30, 1999 compared to 1.12% and 9.87% for the three months ended June 30, 1998. The net income of the Corporation for the six months ended June 30, 1999 was $80.0 million, compared to $143.2 million for the six months ended June 30, 1998. Net income for the six months ended June 30, 1999 included $6.1 million in after tax costs associated with the Allfirst brand introduction and net after tax securities gains totaling $3.0 million ($5.0 million pre-tax). Net income for the six months ended June 30, 1998 included a $37.4 million after tax gain ($60.0 million pre-tax) on the sale of credit card receivables and $25.5 million in net after tax securities gains ($40.4 million pre-tax). Return on average assets and return on average common stockholder's equity were 0.91% and 8.19%, respectively, for the six months ended June 30, 1999 compared to 1.70% and 15.43% for the six months ended June 30, 1998. Tangible net income, which excludes amortization of goodwill and other intangible assets related to purchase business combinations, was $49.0 million for the three months ended June 30, 1999 compared to $59.6 million for the three months ended June 30, 1998. Excluding the one-time costs associated with the Allfirst brand introduction, tangible net income was $55.1 million and return on average tangible assets and return on average tangible common equity were 1.32% and 22.34%, respectively, for the second quarter of 1999. Tangible net income for the second quarter of 1998, excluding after tax investment securities gains was $53.4 million and return on average tangible assets and return on average tangible equity were 1.33% and 22.46%, respectively. As noted above under "Asset Quality", net income for the second quarter of 1999 was adversely affected by charge-offs and collection expenses associated with the foreign maritime portfolio. Tangible net income for the six months ended June 30, 1999 was $102.8 million compared to $167.7 million for the six months ended June 30, 1998. Excluding the one-time costs associated with the Allfirst brand introduction and net after tax securities gains, tangible net income was $105.9 million and return on average tangible assets and return on average tangible equity were 1.27% and 20.84%, respectively. Tangible net income for the six months ended June 30, 1998, excluding the gain on the sale of credit card receivables and net after tax securities gains was $104.8 million and return on average tangible assets and return on average tangible common equity were 1.32% and 22.70%, respectively. The results for the six months ended June 30, 1999 were adversely affected by charge-offs and collection expenses associated with the foreign maritime portfolio. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) Net Interest Income The largest source of the Corporation's net income is net interest income. For analytical purposes, net interest income is adjusted to a "taxable equivalent" basis to recognize the income tax savings on tax exempt assets. Net interest income on a tax equivalent basis for the second quarter of 1999 was $138.5 million, a decrease of $1.7 million when compared to net interest income for the second quarter of 1998. The decrease in net interest income is primarily due to an eleven basis point decline in the spread between the yield on earning assets and the rate paid on interest bearing liabilities ("net interest spread"). The impact of the decrease in net interest spread was partially offset by a $586 million (4%) increase in interest earning assets when the quarter ended June 30, 1999 is compared to the quarter ended June 30, 1998. The Corporation's net interest margin was 3.64% for the second quarter of 1999 compared to 3.84% for the second quarter of 1998. The decline in net interest margin is primarily due to a lower net interest spread and a nine basis point decrease in the contribution from interest free sources of funds. Net interest income on a tax equivalent basis for the six months ended June 30, 1999 was $273.5 million, a decrease of $7.1 million when compared to net interest income for the six months ended June 30, 1998. The decrease in net interest income is primarily due to a twenty basis point decline in the net interest spread for the six months ended June 30, 1999. The impact of the decrease in net interest spread was partially offset by a $645 million (4.4%) increase in interest earning assets. The Corporation's net interest margin was 3.61% for the six months ended June 30, 1999 compared to 3.86% for the six months ended June 30, 1998. The decline in net interest margin is primarily due to a lower net interest spread and a nine basis point decrease in the contribution from interest free sources of funds. The following tables provide additional information on the Corporation's average balances, interest yields and rates, and net interest margin for the three months ended June 30, 1999 and 1998 and the six months ended June 30, 1999 and 1998. 21 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 ------------------------------------------------------------------- June 30, 1999 June 30, 1998 ------------------------------ ------------------------------ Average Yield/ Average Yield/ Balance Interest (1) Rate (1) Balance Interest (1) Rate (1) ------- ------------ -------- ------- ------------ -------- (dollars in millions) ASSETS Earning assets: Trading account securities................. $ 34.4 $ 0.4 4.94% $ 72.8 $ 1.0 5.56% Money market investments................... 29.9 0.4 5.01 94.4 1.4 5.91 Investment securities: Taxable.................................... 3,923.1 58.0 5.93 3,554.3 56.2 6.34 Tax exempt................................. 397.0 8.2 8.27 421.2 8.0 7.57 Equity investments......................... 196.2 2.5 5.19 148.7 3.1 8.37 --------- ------ ------ --------- ------ ------ Total investment securities........... 4,516.3 68.8 6.11 4,124.3 67.2 6.54 --------- ------ ------ --------- ------ ------ Loans held for sale............................. 29.8 0.4 5.85 257.7 5.4 8.45 Loans (net of unearned income): Commercial................................. 3,454.4 60.8 7.05 3,064.0 59.3 7.76 Commercial real estate..................... 2,406.1 45.9 7.65 2,232.2 46.4 8.33 Residential................................ 733.8 13.6 7.41 874.0 15.9 7.29 Retail..................................... 2,849.9 57.3 8.07 2,697.0 56.2 8.36 Credit card................................ 15.2 0.4 9.66 14.3 0.5 12.62 Commercial leases receivable............... 540.0 7.1 5.26 459.9 5.6 4.91 Retail leases receivable................... 325.3 6.1 7.56 309.7 5.9 7.60 Foreign.................................... 311.3 4.6 5.91 459.8 8.4 7.29 --------- ------ ------ --------- ------ ------ Total loans........................... 10,635.9 195.7 7.38 10,110.8 198.1 7.86 --------- ------ ------ --------- ------ ------ Total earning assets............. 15,246.2 265.6 6.99 14,659.9 273.1 7.47 Allowance for credit losses..................... (157.4) (161.9) Cash and due from banks......................... 833.3 886.4 Other assets.................................... 1,721.1 1,607.1 --------- --------- Total assets............................. $17,643.3 $16,991.5 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits in domestic offices: Interest bearing demand.................... $ 145.7 $ 0.7 1.98% $ 592.2 $ 2.1 1.43% Money market accounts...................... 2,669.1 17.2 2.58 2,146.6 17.4 3.24 Savings.................................... 1,419.9 6.2 1.76 1,565.5 10.3 2.63 Other consumer time........................ 2,923.6 37.7 5.17 3,305.2 43.2 5.25 Large denomination time.................... 1,742.3 22.2 5.11 1,634.1 23.3 5.71 Deposits in foreign banking office.............. 388.8 4.6 4.78 224.7 3.1 5.60 --------- ------ ------ --------- ------ ------ Total interest bearing deposits....... 9,289.4 88.6 3.83 9,468.3 99.4 4.21 --------- ------ ------ --------- ------ ------ Funds purchased................................. 1,648.8 19.2 4.66 1,161.5 15.1 5.20 Other borrowed funds, short-term................ 490.4 5.7 4.65 490.5 6.3 5.13 Long-term debt.................................. 869.6 13.7 6.30 666.5 12.2 7.35 --------- ------ ------ --------- ------ ------ Total interest bearing liabilities.... 12,298.2 127.1 4.15 11,786.7 132.9 4.52 --------- ------ ------ --------- ------ ------ Noninterest bearing deposits.................... 2,746.3 2,639.8 Other liabilities............................... 647.4 607.6 Redeemable preferred stock...................... 8.2 8.0 Stockholders' equity............................ 1,943.1 1,949.4 --------- --------- Total liabilities and stockholders' equity. $17,643.3 $16,991.5 ========= ========= Net interest income, tax equivalent basis....... $138.5 $140.2 ====== ====== Net interest spread............................ 2.84% 2.95% Contribution of interest free sources of funds.. 0.80 0.89 Net interest margin............................. 3.64 3.84
- --------------------------- (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 fully tax-equivalent basis to average earning assets. 22 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)
Six Months Ended ------------------------------------------------------------------- June 30, 1999 June 30, 1998 ------------------------------ ------------------------------ Average Yield/ Average Yield/ Balance Interest (1) Rate (1) Balance Interest (1) Rate (1) ------- ------------ -------- ------- ------------ -------- (dollars in millions) ASSETS Earning assets: Trading account securities................. $ 31.4 $ 0.8 4.86% $ 53.4 $ 1.5 5.70% Money market investments................... 26.1 0.6 4.84 161.0 4.5 5.67 Investment securities: Taxable.................................... 4,026.4 120.0 6.01 3,471.2 111.0 6.45 Tax exempt................................. 403.8 15.8 7.90 415.9 15.8 7.65 Equity investments......................... 178.1 4.4 4.99 143.1 5.7 8.09 --------- ------ ------ --------- ------ ------ Total investment securities........... 4,608.2 140.2 6.14 4,030.2 132.5 6.63 --------- ------ ------ --------- ------ ------ Loans held for sale............................. 32.6 1.0 6.16 316.1 12.7 8.10 Loans (net of unearned income): Commercial................................. 3,428.7 120.3 7.08 3,017.2 116.2 7.77 Commercial real estate..................... 2,373.3 91.7 7.79 2,230.0 93.2 8.43 Residential................................ 764.7 28.5 7.51 919.1 33.4 7.33 Retail..................................... 2,801.7 112.4 8.09 2,635.8 109.9 8.41 Credit card................................ 15.1 0.8 10.09 50.8 3.8 15.16 Commercial leases receivable............... 540.2 14.5 5.41 461.5 11.4 5.00 Retail leases receivable.................. 323.0 12.1 7.58 308.3 11.6 7.60 Foreign.................................... 339.6 10.3 6.10 456.7 16.4 7.22 --------- ------ ------ --------- ------ ------ Total loans........................... 10,586.3 390.6 7.44 10,079.4 396.0 7.92 --------- ------ ------ --------- ------ ------ Total earning assets............. 15,284.6 533.2 7.03 14,640.1 547.2 7.54 Allowance for credit losses..................... (157.4) (163.4) Cash and due from banks......................... 899.3 882.5 Other assets.................................... 1,705.8 1,609.2 --------- --------- Total assets............................. $17,732.4 $16,968.4 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits in domestic offices: Interest bearing demand.................... $ 142.5 $ 1.4 2.10% $ $ 587.4 $ 4.2 1.43% Money market accounts...................... 2,697.6 36.6 2.73 2,100.8 33.3 3.20 Savings.................................... 1,404.2 14.1 2.02 1,571.1 20.5 2.63 Other consumer time........................ 2,984.3 77.2 5.21 3,333.1 86.7 5.24 Large denomination time.................... 1,632.6 41.8 5.17 1,690.9 48.2 5.75 Deposits in foreign banking office.............. 393.8 9.4 4.83 221.0 6.1 5.57 --------- ------ ------ --------- ------ ------ Total interest bearing deposits.... 9,255.1 180.5 3.93 9,504.4 198.9 4.22 --------- ------ ------ --------- ------ ------ Funds purchased................................. 1,769.6 41.0 4.68 1,156.5 30.0 5.22 Other borrowed funds, short-term................ 467.0 10.8 4.68 501.3 12.8 5.17 Long-term debt.................................. 863.0 27.3 6.38 686.1 24.9 7.32 --------- ------ ------ --------- ------ ------ Total interest bearing liabilities. 12,354.7 259.7 4.24 11,848.2 266.6 4.54 --------- ------ ------ --------- ------ ------ Noninterest bearing deposits.................... 2,760.5 2,601.1 Other liabilities............................... 632.6 575.4 Redeemable preferred stock...................... 8.1 7.9 Stockholders' equity............................ 1,976.4 1,936.0 --------- --------- Total liabilities and stockholders' equity. $17,732.4 $16,968.4 ========= ========= Net interest income, tax equivalent basis....... $273.5 $280.6 ====== ====== Net interest spread............................. 2.80% 3.00% Contribution of interest free sources of funds.. 0.81 0.86 Net interest margin............................. 3.61 3.86
- ----------------------------- (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 fully tax-equivalent basis to average earning assets. 23 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 June 30, 1999 and 1998. Noninterest Income
Three Months Ended June 30, Net Change ------------------- ---------- 1999 1998 Dollar Percent ---- ---- ------ ------- (dollars in thousands) Service charges on deposit accounts......... $28,020 $27,763 $ 257 0.9% Trust and investment advisory fees........... 19,931 17,940 1,991 11.1 Credit card income........................... 7,402 6,102 1,300 21.3 Mortgage banking income...................... 2,103 7,173 (5,070) (70.7) Other income................................. 25,996 20,944 5,052 24.1 ------- ------- ------- ------- Total fees and other income... 83,452 79,922 3,530 4.4 Securities gains, net........................ (292) 9,921 (10,213) (102.9) ------- ------- ------- ------- Total noninterest income............. $83,160 $89,843 $(6,683) (7.4)% ======= ======= ======= =======
The Corporation's noninterest income for the second quarter of 1999 was $83.2 million, a $6.7 million (7.4%) decrease from noninterest income for the second quarter of 1998. Noninterest income for the second quarter of 1999 included net investment securities losses of $0.3 million. Noninterest income in 1998 benefited from investment securities gains of $9.9 million. Excluding these items, total fees and other income increased $3.5 million (4.4%) when compared to 1998. Trust and investment advisory fees increased $2.0 million (11.1%) primarily due to a higher level of proprietary funds management fees and personal trust fees in 1999. Credit card income increased $1.3 million (21.3%) primarily due to a higher level of merchant discount income in 1999. Mortgage banking income decreased $5.1 million primarily due to the sale of the residential mortgage origination businesses in the first quarter of 1998. Other income increased $5.1 million when compared to June 30, 1998. Securities sales and fees decreased $2.8 million due to the sale of Hopper Soliday in January 1999. Trading income increased $0.7 million. Other income in 1999 included a $6.3 million increase in lease residual gains and a $0.6 million gain on the sale of a branch. The following table presents the components of noninterest income for the six months ended June 30, 1999 and 1998.
Six Months Ended June 30, Net Change ---------------- ---------- 1999 1998 Dollar Percent ---- ---- ------ ------- (dollars in thousands) Service charges on deposit accounts......... $ 57,137 $ 53,313 3,824 7.2% Trust and investment advisory fees........... 39,894 34,088 5,806 17.0 Credit card income........................... 13,798 11,120 2,678 24.1 Mortgage banking income...................... 5,822 21,355 (15,533) (72.7) Other income................................. 45,467 49,104 (3,637) (7.4) ------- ------- ------- ------- Total fees and other income... 162,118 168,980 (6,862) (4.1) Securities gains, net........................ 4,991 40,353 (35,362) (87.6) Gain on sale of credit card loans............ - 60,000 (60,000) - ------- ------- ------- ------- Total noninterest income............. $167,109 $269,333 $(102,224) (38.0)% ======== ======== ========= =======
24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) The Corporation's noninterest income for the six months ended June 30, 1999 was $167.1 million, a $102.2 million (38.0%) decrease from noninterest income for the six months ended June 30, 1998. Noninterest income for the first half of 1999 included investment securities gains of $5.0 million. Noninterest income for the first half of 1998 benefited from a $60.0 million gain on the sale of credit card loans and gains on the sale of investment securities of $40.4 million. Excluding these items, total fees and other income decreased $6.9 million (4.1%) when compared to 1998. Service charges on deposit accounts increased $3.8 million (7.2%) due to increases in both retail and corporate deposit service charges. Trust and investment advisory fees increased $5.8 million (17.0%) due to a higher level of proprietary funds management fees, personal trust fees and investment advisory fees. Credit card income increased $2.7 million (24.1%) due to an increase in debit card interchange income and merchant discount income in 1999. Mortgage banking income declined $15.5 million (72.7%) due to the sale of the residential mortgage origination businesses in the first quarter of 1998. Income from non-residential mortgage banking activities increased $1.4 million when compared to 1998. Other income decreased $3.6 million (7.4%). Securities sales and fees decreased $7.5 million due to the sale of Hopper Soliday in January 1999. Servicing income decreased $3.8 million due to the absence of servicing income from the Corporation's securitized credit card portfolio which was sold in the first quarter of 1998. Income from lease residual gains increased $6.0 million when compared to 1998, due to some large lease residual gains on railcars in 1999. Other income in 1999 included gains on the sale of other real estate owned totaling $1.5 million and a $0.6 million gain on the sale of a branch. Other income in 1998 included a $1.2 million gain on the payoff of a troubled debt restructuring. Noninterest Expenses The following table presents the components of noninterest expenses for the three months ended June 30, 1999 and 1998.
Noninterest Expenses Three Months Ended June 30, Net Change ------------------- ---------- 1999 1998 Dollar Percent ---- ---- ------ ------- (dollars in thousands) Salaries and other personnel costs........... $ 68,311 $ 74,363 $(6,052) (8.1)% Equipment costs.............................. 13,229 10,067 3,162 31.4 Occupancy costs.............................. 8,741 9,213 (472) (5.1) Other operating expenses: External services....................... 8,063 6,970 1,093 15.7 Postage and communications.............. 4,864 6,165 (1,301) (21.1) Lending and collection.................. 5,541 2,374 3,167 133.4 Professional service fees............... 5,400 3,970 1,430 36.0 Advertising and marketing............... 8,560 4,111 4,449 108.2 Other................................... 13,353 15,003 (1,650) (11.0) ------- ------- ------- ------ Total operating expenses.......... 136,062 132,236 3,826 2.9 Intangible assets amortization expense....... 12,749 13,787 (1,038) (7.5) ------- ------- ------- ------ Total noninterest expenses.... $148,811 $146,023 $2,788 1.9% ======== ======== ====== ======
25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) The Corporation's noninterest expenses for the quarter ended June 30, 1999 were $148.8 million, a $2.8 million (1.9%) increase from noninterest expenses for the quarter ended June 30, 1998. Intangible asset amortization expenses decreased $1.0 million. Total operating expenses increased $3.8 million (2.9%). The quarter ended June 30, 1999 included $10.0 million in expenses associated with the Allfirst brand introduction. Salaries and other personnel costs decreased $6.1 million (8.1%) primarily due a decline in employees resulting from the sale of Hopper Soliday in the first quarter of 1999. External services expense increased $1.1 million (15.7%) due to an increase in network service fees which were the result of a higher volume of debit card and merchant transactions in 1999. Equipment costs increased $3.2 million. Postage and communications expenses decreased $1.3 million (21.1%) due to approximately $0.5 million in postage costs incurred in 1998 related to systems conversions and a decrease in postage and communication expenses resulting from the sale of Hopper Soliday in January 1999. Lending and collection expenses increased $3.2 million primarily due to a $3.7 million increase in lending and collection expenses associated with the Corporation's foreign maritime loan portfolio. Professional service fees increased $1.4 million due an increase in contract programming expenses in 1999. Professional fees in 1998 included $1.6 million in expenses related to system conversions, while professional fees in 1999 included $1.5 million in professional fees associated with the introduction of the new Allfirst brand in 1999. Advertising and marketing expenses increased $4.4 million (108.2%). Advertising expense increased $5.7 million due to the implementation of the new Allfirst brand name in the second quarter of 1999. Other expenses decreased $1.7 million. Office supplies and forms increased $1.2 million due to costs associated with form changes related to the Allfirst name change. In addition, other expenses in the current quarter included a $1.9 million provision for losses on other maritime assets owned and approximately $1.6 million in miscellaneous losses. These increases in other expenses were offset by lower expenses in all other expense categories. The following table presents the components of noninterest expenses for the six months ended June 30, 1999 and 1998. Noninterest Expenses
Six Months Ended June 30, Net Change ---------------- ---------- 1999 1998 Dollar Percent ---- ---- ------ ------- (dollars in thousands) Salaries and other personnel costs........... $137,244 $154,433 $(17,189) (11.1)% Equipment costs.............................. 24,534 21,700 2,834 13.1 Occupancy costs.............................. 18,253 19,424 (1,171) (6.0) Other operating expenses: External services....................... 15,548 14,957 591 4.0 Postage and communications.............. 10,590 12,322 (1,732) (14.1) Lending and collection.................. 10,709 5,340 5,369 100.5 Professional service fees............... 7,417 8,106 (689) (8.5) Advertising and marketing............... 10,551 8,487 2,064 24.3 Other................................... 25,136 28,765 (3,629) (12.6) ------- ------- ------- ------ Total operating expenses.......... 259,982 273,534 (13,552) (5.0) Intangible assets amortization expense....... 25,514 28,011 (2,497) (8.9) ------- ------- ------- ------ Total noninterest expenses.... $285,496 $301,545 $(16,049) (5.3)% ======== ======== ======== ======
26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued) The Corporation's noninterest expenses for the six months ended June 30, 1999 were $285.5 million, a $16.0 million (5.3%) decrease from noninterest expenses for the six months ended June 30, 1998. Intangible asset amortization expenses decreased $2.5 million. Total operating expenses decreased $13.6 million (5.0%). The six months ended June 30, 1999 included $10.0 million in expenses associated with the Allfirst brand introduction. Salaries and other personnel costs decreased $17.2 million (11.1%) primarily due a decline in employees resulting from the sale of the credit card and residential mortgage origination businesses in the first quarter of 1998 and the sale of Hopper Soliday in the first quarter of 1999. Equipment costs increased $2.8 million. Occupancy costs decreased $1.2 million due to cost savings associated with exited businesses and branch relocation expenses in 1998. External services expense increased $0.6 million (4.0%). External services expenses in 1998 included $1.4 million in expenses associated with discontinued business lines. Excluding these expenses, external services expense increased $2.0 million due to an increase in network service fees prompted by a higher volume of debit card and merchant transactions in 1999. Postage and communications expenses decreased $1.7 million (14.1%) due to approximately $0.5 million in postage costs incurred in 1998 related to systems conversions and a decrease in postage and communication expenses resulting from the sale of businesses in 1998 and the first quarter of 1999. Lending and collection expenses increased $5.4 million due primarily to a $6.7 million increase in lending and collection expenses associated with the Corporation's foreign maritime loan portfolio. Professional service fees decreased $0.7 million. Approximately $2.6 million in contract programming expenses and professional fees were incurred in 1998 for systems conversions and Year 2000 compliance. 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. Advertising and marketing expenses increased $2.1 million (24.3%). Advertising expenses increased $5.7 million due to the implementation of the new Allfirst brand name in the second quarter of 1999. Excluding these expenses, advertising and marketing expenses decreased $3.6 million, primarily due to marketing expenses associated with discontinued businesses in 1998. Other expenses decreased $3.6 million. Office supplies and forms increased $0.9 million due to costs associated with form changes related to the Allfirst name change. In addition, other expenses for the six months ended June 30, 1999 included a $1.9 million provision for losses on other maritime assets owned and a $1.3 million increase in miscellaneous losses. These increases in other expenses were offset by lower expenses in all other expense categories. YEAR 2000 The Corporation has developed an inventory of over 800 products and applications which may be affected by Year 2000 issues. This inventory covers all aspects of the Corporation's business. These applications were assigned a business priority and were organized into projects for replacement, upgrading, renovation and certification testing. The Corporation's primary efforts have been focused on inventoried items which have been identified as mission critical and very important - those applications where any disruption causes critical data to be unreliable, transactions to fail, legal requirements to be missed, or any other potentially serious business issue. As of June 30, 1999, all of the Corporation's mission critical and very important products have been certified as Year 2000 compliant. In addition, all of the critical departments of the Corporation have developed Year 2000 business resumption plans and these plans have been tested. There has been no significant change in the cost of compliance or the schedule for completion of Year 2000 testing in 1999. 27 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 the Corporation's objectives. As a financial institution, the Corporation's primary market risk exposure is interest rate risk. Interest Rate Risk Management Management of 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 June 30, 1999, the interest rate risk position of the Corporation had not changed significantly from the risk position at December 31, 1998 and the Corporation's equity at risk and earnings at risk remained in compliance with the Corporation's policy limits. Fixed Income, Derivative and Foreign Exchange Risk Management The Corporation maintains active securities and derivatives trading positions as well as 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 first six months of 1999. Part II. - Other Information Item 1. Legal Proceedings Various legal actions and proceedings are pending involving First Maryland Bancorp or its subsidiaries. Management believes that the aggregate liability or loss, if any, resulting from such legal actions and proceedings will not be material to the Corporation's financial condition or results of operations. Included among the outstanding litigation is a class action lawsuit instituted by Dauphin Deposit Bank and Trust Company ("Dauphin Deposit ") in the Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994, seeking a declaratory judgment from the Court specifically permitting Dauphin Deposit to discontinue an 18 month variable interest rate deposit product carrying a minimum interest rate of 10% for the 18 month term, which is held in certain individual retirement accounts ("IRAs"). The aggregate balance of the IRAs was approximately $215 million at June 30, 1999. Dauphin Deposit's right to terminate the variable interest rate deposit product is in dispute and is being challenged by the holders of the IRAs in question. Several days after the commencement of trial in April 1996, Dauphin Deposit and representatives of the class reached an agreement in principle to settle the litigation and the trial was continued pending negotiation of a settlement agreement. Dauphin Deposit and representatives of the class filed a settlement agreement with the Court on May 13, 1996 which would permit Dauphin Deposit to terminate the 18 month variable rate product as to all class members on the effective date of the settlement and, in consideration, the balances of those accounts would be automatically deposited in one of three new certificates of deposit established by Dauphin Deposit for purposes of the settlement. All class members were given the opportunity to file objections to the proposed settlement or elect to be excluded from the class and the proposed settlement. Approximately 89 of the 4,315 class members filed formal objections to the settlement with the Court and 12 of the class members elected to opt out of the settlement. A hearing was held before the Court on June 21, 1996 for the purpose of obtaining the Court's approval of the settlement agreement. At the hearing, counsel for Dauphin Deposit and counsel for the representatives of all class members jointly moved for the Court's adoption of the settlement agreement and made argument in favor thereof. The Court, by Order issued July 11, 1996, denied the joint motion of Dauphin Deposit and the representatives of the class for settlement of the class action in accordance with the terms and conditions of the settlement agreement. Dauphin Deposit filed its Notice of Appeal from the trial Court's Order denying the settlement to the Superior Court of Pennsylvania on August 9, 1996. On July 10, 1997, the Superior Court reversed the trial Court's disapproval of the 28 settlement agreement and directed the trial Court to approve the settlement. On July 23, 1997, the class filed an Application for Reargument with the Superior Court which was denied on September 22, 1997. On October 20, 1997, the class filed a Petition for Allowance of Appeal with the Supreme Court of Pennsylvania (the "Petition") which was granted on March 31, 1998. The Supreme Court heard oral argument on November 16, 1998. On March 26, 1999, the Supreme Court affirmed the decision of the Superior Court. The class filed an application for reargument with the Supreme Court on April 9, 1999 which was denied by the Supreme Court on May 13, 1999. On June 18, 1999, the court issued an order approving the settlement and Dauphin Deposit (now Allfirst Bank) is working on resolving implementation issues. Neither management nor counsel can predict when settlement will be implemented with any reasonable degree of certainty. Allfirst Bank has continued to date to pay a 10% interest rate with regard to the 18 month variable interest rate deposit product. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibit is furnished to this Form 10-Q: (27) Financial Data Schedule (b) Reports on Form 8-K A current report on Form 8-K dated May 25, 1999 was filed to provide the following exhibits to a registration Statement filed on Form S-3 (File No. 333-28479). Exhibits: 1.1 Underwriting Agreement, dated May 25, 1999, between First Maryland Bancorp and Salomon Smith Barney Inc., Bear Stearns & Co. Inc. and J.P. Morgan Securities Inc. 12.1 Statement re computation of ratios for the three months ended March 31, 1999, and for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. 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. First Maryland Bancorp August 12, 1999 By /s/ Jerome W. Evans ------------------------- Vice Chairman and Chief Financial Officer August 12, 1999 By /s/ Robert L. Carpenter, Jr. ---------------------------------- Senior Vice President and Controller 29 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST MARYLAND BANCORP JUNE 30, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JUN-30-1999 982,183 1,356 10,330 22,116 4,285,842 0 0 10,728,714 157,351 17,689,048 11,956,861 2,167,003 735,843 896,180 8,224 30,000 85,395 1,804,492 17,689,048 388,873 134,446 2,379 525,698 180,541 259,708 265,990 20,979 4,991 285,496 126,624 79,969 0 0 79,969 0 0 3.61 54,072 39,764 0 61,202 157,351 25,102 4,123 157,351 77,936 20,804 58,611
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