Item 1. Business
Allfirst Financial Inc. ("Allfirst") is a bank holding company with its headquarters in Baltimore, Maryland. At December 31, 1999, Allfirst had consolidated total assets of $17.5 billion, total deposits of $12.1 billion, and total stockholders' equity of $1.8 billion. Allfirst provides comprehensive corporate, commercial, correspondent and retail banking services, personal and corporate trust services and related financial products and services to individuals, businesses, governmental units and financial institutions primarily in Maryland and the adjacent states. Allfirst serves customers through a network of 260 full service branch offices and more than 550 automated teller machines.
Allfirst is a wholly owned subsidiary of Allied Irish Banks, p.l.c. ("AIB"), an Irish banking corporation whose securities are traded on the Dublin, London and New York Stock Exchanges. AIB is registered as a bank holding company in the United States and is the largest banking corporation organized under the laws of Ireland, based upon total assets at December 31, 1999. Based upon United States generally accepted accounting principles at December 31, 1999, AIB and its subsidiaries (collectively, "AIB Group") had total assets of approximately $67 billion. AIB Group provides a full range of banking, financial and related services principally in Ireland, the United States, the United Kingdom and in Poland.
On September 15, 1999, First Maryland Bancorp ("First Maryland") was merged into Allfirst, a Delaware corporation, with Allfirst as the surviving corporation. The purposes of the merger were to change the state of incorporation of First Maryland from Maryland to Delaware and to change the name of First Maryland to "Allfirst Financial Inc." First Maryland formed Allfirst solely for the purpose of effecting the Merger. The Merger was structured as an "F" reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. The capital structure, stockholders, assets and business of Allfirst are identical to that of First Maryland. Allfirst Bank, the principal subsidiary, and all other direct and indirect subsidiaries of First Maryland are now direct and indirect subsidiaries of Allfirst. The individuals that served as directors, officers and employees of First Maryland at the time of the merger now hold the same offices and positions with, and perform the same functions for Allfirst. Allfirst became responsible for all of the debts, liabilities, and obligations, of First Maryland existing on the effective date of the merger without limitation or restriction.
During the second quarter of 1999, the new Allfirst brand name and logo were introduced. On June 28, 1999, most of Allfirst's subsidiary names were changed to incorporate the new Allfirst identity and the name of Allfirst's lead bank changed from FMB Bank to Allfirst Bank.
The assets of Allfirst Bank at December 31, 1999 accounted for approximately 93% of Allfirst's consolidated total assets. In addition to domestic banking services, Allfirst Bank conducts international activities at its Baltimore headquarters, through a Cayman Island branch and through correspondent accounts maintained with approximately 25 foreign banks. It offers investment, foreign exchange and securities brokerage services through a brokerage subsidiary and acts as investment advisor to the ARK Funds, a family of proprietary mutual funds.
Allfirst operates various other subsidiaries, including Allfirst Financial Center N.A., a national bank, ("Allfirst Financial Center", and together with Allfirst Bank, the "Banks"), Allfirst Leasing Corporation, a commercial finance company specializing in equipment financing, and Allfirst Mortgage Corporation, a commercial real estate lender.
Allfirst's business segments are based on Allfirst's method of internal reporting, which separates its business on the basis of products and services. Allfirst's reportable segments are Corporate Banking, Real Estate Finance, Retail Banking, Trust and Investment Advisory Services, and Treasury. Additional information on business segments is presented in Note 22 of the Notes To Consolidated Financial Statements.
Competition
The market for banking and bank-related services is highly competitive. Passage of financial modernization legislation in November 1999, which removed barriers to affiliation among banks, broker-dealers and insurance companies, will increase competition in these markets. Allfirst and its subsidiaries compete with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, consumer finance companies, credit unions, money market and other mutual funds, mortgage companies, insurance companies, and a growing list of other local, regional and national institutions that offer financial services. Mergers between financial institutions within Maryland and in neighboring states have added competitive pressure. Allfirst and its subsidiaries compete by offering quality products and convenient services at competitive prices. In order to maintain and enhance its competitive position, Allfirst regularly reviews various acquisition prospects and periodically engages in discussions regarding possible acquisitions.
Supervision and Regulation
The information contained in this section summarizes portions of the applicable laws and regulations relating to the supervision and regulation of Allfirst and its subsidiaries. These summaries do not purport to be complete, and they are qualified in their entirety by reference to the particular statutes and regulations described.
Allfirst is a bank holding company registered under the Bank Holding Company Act, and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the "FRB").
Allfirst Bank, as a state-chartered member bank of the Federal Reserve System, is subject to supervision and regulation by the FRB and the Maryland Banking Commissioner. Allfirst Financial Center, as a national banking association, is subject to supervision and regulation by the Office of the Comptroller of the Currency of the United States ("OCC"). Both Banks, as federally insured institutions, are also subject to regulation by the Federal Deposit Insurance Corporation ("FDIC"). Deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, mergers and consolidations, electronic funds transfers, management practices, and other aspects of the Banks' operations are subject to regulation. The approval of the appropriate bank regulatory authority is required for the establishment of additional branch offices by any of the Banks, subject to applicable state law restrictions.
Federal law regulates transactions among Allfirst and its affiliates, including the amount of banking affiliates' loans to or investments in nonbank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. In addition, various requirements and restrictions under federal and state laws regulate the operations of Allfirst's banking affiliates, requiring the maintenance of reserves against deposits, limiting the nature of loans and interest that may be charged thereon, restricting investments and other activities.
A fundamental principle underlying the FRB's supervision and regulation of bank holding companies is that bank holding companies should act as a source of financial strength to, and commit resources to support, each of its subsidiary banks. Subsidiary banks are in turn to be operated in a manner that protects the overall soundness of the institution and the safety of deposits. Bank regulators can take various remedial measures to deal with banks and bank holding companies that fail to meet legal and regulatory standards.
The 1989 Financial Institution Reform, Recovery and Enforcement Act ("FIRREA") expanded federal regulatory enforcement powers over financial institutions. In addition, FIRREA provides that a depository institution insured by the FDIC can be held liable by the FDIC for any loss incurred or reasonably expected to be incurred in connection with the default of a commonly controlled FDIC insured depository institution. Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA imposes substantial examination, audit and reporting requirements on insured depository institutions. The regulation also requires that risk-based capital standards incorporate interest rate risk, market risk, concentrations of credit risk and risks of nontraditional activities. Allfirst Bank was considered "well
capitalized" under regulatory definitions in effect at December 31, 1999. This is the highest rating presently available.
As a consequence of the extensive regulation of the commercial banking business in the United States, the business of the Banks is particularly susceptible to changes in Federal and state legislation and regulations which may increase the cost of doing business.
Dividends
Allfirst is a legal entity separate and distinct from the Banks and its other subsidiaries, although the principal source of Allfirst's cash revenues is dividends from the Banks. Various Federal and state laws and regulations limit the amount of dividends the Banks can pay to Allfirst without regulatory approval.
The approval of a bank's primary federal regulator is required for any dividend if the total of all dividends declared by such bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years less any required transfers to surplus or a fund for the retirement of any preferred stock. Additionally, Allfirst Bank may pay dividends only out of undivided profits unless State of Maryland bank regulatory approval is obtained, and Allfirst Financial may not declare dividends in excess of net profits on hand, after deducting the amount by which the principal amount of all loans on which interest is past due for a period of six months or more exceeds the reserve for credit losses. Under the first and currently more restrictive of the foregoing dividend limitations, at January 1, 2000, $189.2 million of the retained earnings of Allfirst Bank and none of the retained earnings of Allfirst Financial Center were available to pay dividends to Allfirst.
The FRB and the OCC also have issued guidelines that require bank holding companies and national banks to evaluate continuously the level of cash dividends in relation to the organization's net income, capital needs, asset quality and overall financial condition. The OCC also has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any practice or activity which, in the OCC's opinion, constitutes an unsafe or unsound practice. The payment of a dividend by a bank could, depending upon the financial condition of such bank and other factors, be construed by the OCC to be such an unsafe or unsound practice. The OCC has stated that a dividend by a national bank should bear a direct correlation to the level of the bank's current and expected earnings stream, the bank's need to maintain an adequate capital base and the marketplace's perception of the bank and should not be governed by the financing needs of the bank's parent corporation. As a result, notwithstanding the level of dividends which could be declared without regulatory approval by the Banks as set forth in the preceding paragraph, the level of dividends from the Banks to Allfirst in 2000 is not expected to exceed the earnings of the Banks. If the ability to pay dividends to Allfirst were to become restricted, Allfirst would need to rely on alternative means of raising funds to satisfy its requirements. Such alternative means might include, but would not be restricted to, nonbank subsidiary dividends, asset sales or other capital market transactions.
Monetary Policy
Allfirst's subsidiaries, and thus Allfirst, are affected by monetary policies of regulatory authorities, including the FRB, which regulate the national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques of monetary policy available to the FRB are engaging in open market transactions in U.S. Government securities, changing the discount rate on bank borrowing, and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth and distribution of bank loans, investments, and deposits. Their use may also affect interest rates charged on loans or paid on deposits. The effect of governmental monetary policies on the earnings of Allfirst cannot be predicted.
Employees
As of December 31, 1999, Allfirst employed approximately 5,493 full-time equivalent employees. Management of Allfirst considers relations with its employees to be satisfactory.
Item 2.
Item 2. Properties
The following describes the location and general character of the principal offices and other materially important physical properties of Allfirst and its subsidiaries.
Allfirst is a major tenant in a building located at 25 South Charles Street, Baltimore, Maryland, occupying approximately 82% of the 343 thousand square feet of office space available in the building as of December 31, 1999. Allfirst's lease for this space expires in 2006, with a renewal option to the year 2011. During 1999, the annual rental for the space less amounts received on subleases to others was $4.6 million.
Allfirst is the sole tenant at First Center located at 110 South Paca Street, Baltimore, Maryland. The building contains 267 thousand square feet of office space and houses certain staff and operations functions of Allfirst. The current lease term expires on December 31, 2011. During 1999, the annual base rental for the space was $2.6 million. Allfirst is a limited partner with a 0.2% operating interest and a 50% residual interest in the limited partnership which owns the building.
Allfirst Financial Center, located at Mitchell Street, Millsboro, Delaware is owned by Allfirst. The building, acquired in 1981, contains approximately 300 thousand square feet of space, sits on approximately 60 acres of land, and houses certain retail operations functions of Allfirst.
One South Market Square Office Tower located at 213 Market Street, Harrisburg, Pennsylvania is also owned by Allfirst. The building contains approximately 185 thousand square feet of office space and houses, among other things, certain executive offices and commercial operations functions of Allfirst Bank.
In addition to the above office space, Allfirst owns and leases office space in various other office buildings and locations.
Item 3.
Item 3. Legal Proceedings
Allfirst and its subsidiaries are defendants in various matters of litigation generally incidental to their respective businesses. In the opinion of management, based on its review with counsel of the development of these matters to date, disposition of all pending litigation will not materially affect the consolidated financial position or results of operations of Allfirst and its subsidiaries.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Allfirst became a wholly owned subsidiary of AIB on March 21, 1989 and, as a result, Allfirst's common stock is no longer listed or traded on any securities exchanges.
Item 6.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data is derived from the audited financial statements of Allfirst. It should be read in conjunction with the detailed information and financial statements of Allfirst included elsewhere herein.
- -------- (1) Allfirst acquired Dauphin Deposit Corporation ("DDC") on July 8, 1997. Results of operation for the year ended December 31, 1997 are not comparable to the results of operations in other years presented. DDC's results of operations have been included in Allfirst's results since July 1, 1997. (2) Amortization and balances of core deposit intangibles are net of applicable income taxes. Goodwill amortization and balances are not tax effected.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of Allfirst's financial condition and results of operations as of and for the years ended December 31, 1999, 1998 and 1997 should be read in conjunction with the Consolidated Financial Statements of Allfirst and statistical data presented elsewhere herein.
Forward-Looking Statements
Certain information included in this report, other than historical information, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are identified by terminology such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms. Although Allfirst believes that the expectations reflected in such forward looking statements are reasonable, actual results may differ materially from those projected in the forward-looking statements.
Overview
Allfirst's net income to common shareholders for the year ended December 31, 1999 was $172.3 million, compared to $205.9 million for the year ended December 31, 1998, a decrease of $33.6 million (16.3%). In 1999, the full year results included a $6.1 million after-tax charge related to the Allfirst name change and after-tax securities gains of $3.0 million. In 1998, the full year results included a $37.4 million after-tax gain from the sale of the Company's consumer credit card portfolio, after-tax securities gains of $38.3 million and after-tax nonrecurring technology and integration costs totaling $13.7 million. Excluding these items, net income to common shareholders for the year ended December 31, 1999 increased 22% over 1998. Return on average assets and return on average common stockholder's equity were 1.01% and 9.48%, respectively, for the year ended December 31, 1999 compared to 1.28% and 11.36%, respectively, for the year ended December 31, 1998.
Tangible net income, which excludes amortization of goodwill and other intangible assets related to purchase business combinations, was $223.8 million for the year ended December 31, 1999 compared to $266.7 million for the year ended December 31, 1998. Return on average tangible assets and return on average tangible common equity, which exclude intangible assets and amortization related to purchase business combinations, were 1.33% and 22.50%, respectively, for the year ended December 31, 1999 compared to 1.65% and 27.85%, respectively, for the year ended December 31, 1998.
On February 13, 1998, Allfirst sold the residential first mortgage loan origination businesses of its mortgage banking subsidiaries to National City Mortgage Co. These transactions were at book value; therefore, no gain or loss was recognized on the sale. Residential mortgage loans are offered to Allfirst's customers through the retail branch system and Allfirst continues to meet the needs of low and moderate income communities in its market.
On February 25, 1998, Allfirst sold substantially all of its remaining credit card loans, including its interest in the First Omni Bank Credit Card Master Trust, to Bank of America National Association ("BOANA"). Allfirst realized a pretax gain of $60 million on the sale. BOANA and Allfirst have entered into an agreement whereby BOANA provides retail credit card products and services to customers of Allfirst's bank subsidiaries on an agency basis.
On January 19, 1999, Allfirst sold Hopper Soliday & Co., Inc., a full service investment banking and securities brokerage subsidiary. No gain or loss was recognized on this sale.
Net Interest Income
Net interest income, the primary source of Allfirst's earnings, is defined as the difference between the interest and yield-related fee income generated by earning assets and the interest expense incurred on interest bearing liabilities. When net interest income is presented on a fully tax-equivalent basis, interest income from
tax exempt earning assets is increased by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the statutory Federal income tax rate of 35%.
The following table reconciles net interest income as shown in the financial statements to tax-equivalent net interest income.
Net interest income on a fully tax equivalent basis for the year ended December 31, 1999 of $551.4 million decreased $5.3 million (1.0%) when compared to net interest income of $556.7 million for the year ended December 31, 1998. During the third quarter of 1999, Allfirst redeemed its 7.875% preferred stock, replacing it with the proceeds from the issuance of Floating Rate Non-cumulative Subordinated Capital Trust Enhanced Securities and other long-term debt. This transaction, while increasing interest expense and reducing net interest income by $5.0 million, increased the return to common shareholders by $3.4 million by replacing preferred dividends with tax deductible interest expense. In addition, net interest income declined relative to 1998 due to a 14 basis point decrease in the net interest spread. Net interest spread is the difference between the yield on average interest earning assets and the rate paid on average interest bearing liabilities. Customer deposit balances declined in 1999, as customers moved funds into other higher yielding investment products. These deposits were replaced by higher cost purchased deposits and other purchased funds which contributed to the decrease in the net interest spread in 1999. The impact of the preferred stock redemption and the decline in deposits on the net interest spread was partially offset by a $612 million (4.2%) increase in interest earning assets. In addition, Allfirst realized a $1.0 million improvement in long-term funding costs, due to the replacement of $60.0 million in long-term debt with an interest rate of 10.375% with long-term debt with an interest rate of 6.875%.
Allfirst's net interest margin was 3.60% for the year ended December 31, 1999 compared to 3.79% for the year ended December 31, 1998. The decline in net interest margin is primarily due to lower net interest spreads which were the result of competitive pressures, the loss of customer deposits, and the preferred stock redemption.
Fully tax-equivalent net interest income is affected by changes in the mix and volume of earning assets and interest bearing liabilities, market interest rates, the volume of noninterest bearing liabilities available to support earning assets, and the statutory Federal income tax rate. As the table below indicates, net interest income on a tax equivalent basis decreased $5.3 million when the year ended December 31, 1999 is compared to the year ended December 31, 1998. The $13.2 million positive volume variance was primarily due to loan growth and an increase in investment securities. The $18.6 million negative rate variance was primarily the result of a decline in loan yields and the yield on investments securities which was partially offset by lower rates on interest bearing deposits, purchased funds and long-term debt.
Net Interest Income Analysis (Tax Equivalent Basis)
- -------- (1) The rate/volume change is allocated between volume change and rate change using the ratio each of the components bears to the absolute value of their total.
The following table provides additional information on Allfirst's average balances, interest yields and rates, and net interest margin for the years ended December 31, 1999, 1998 and 1997.
Average Balances, Interest Yields and Rates, and Net Interest Margin (Tax Equivalent Basis)
- -------- (1) Interest on loans to and obligations of public entities is not subject to Federal income tax. In order to make pretax yields comparable to taxable loans and investments, a tax equivalent adjustment is used based on a 35% Federal tax rate. (2) Nonaccrual loans are included under the appropriate loan categories as earning assets. (3) Net interest spread is the difference between the yield on average earning assets and the rate paid on average interest bearing liabilities. (4) Net interest margin is the ratio of net interest income on a fully tax- equivalent basis to average earning assets. (5) Yields on investment securities available-for-sale are calculated based upon average amortized cost. (6) The majority of deposits in foreign banking office were in amounts in excess of $100 thousand.
Noninterest Income
The following table presents the components of noninterest income for the years ended December 31, 1999, 1998 and 1997, and a year-to-year comparison expressed in terms of percent changes. Allfirst has reclassified certain categories of income and expense. Network service fees and VISA(R) royalties, previously shown as noninterest expenses, are now offset against the associated revenue and shown on a net basis as noninterest income. A new category titled electronic banking income captures Automated Teller Machine ("ATM") fees, surcharge revenue and interchange income from VISA(R) debit card transactions. Previously ATM fees were presented with deposit service charges and debit card income was presented with credit card income. All prior periods have been restated to conform to the current year's presentation.
Noninterest Income
Allfirst's noninterest income for the year ended December 31, 1999 was $310.2 million, a $126.3 million (28.9%) decrease from noninterest income for the year ended December 31, 1998. Noninterest income in 1999 benefited from investment securities gains of $5.0 million. Noninterest income in 1998 benefited from a $60.0 million gain on the sale of credit card loans and investment securities gains of $60.8 million. Excluding these items, total fees and other income decreased $10.6 million (3.3%) when compared to 1998. Fees and other income in 1998 included $49.0 million in fees and other income related to discontinued business lines. Excluding revenue from discontinued business lines in 1998, total fees and other income increased $38.4 million (14.4%) in 1999. Service charges on deposit accounts increased $4.1 million (4.6%) due to a higher level of corporate analysis fees in 1999. Trust and investment advisory fees increased $10.9 million (15.3%). Electronic banking income increased $3.7 million (17.8%) primarily due to an increase in Visa(R) debit card interchange income. Mortgage banking income decreased $17.2 million (55.9%) and was affected by the sale of Allfirst's residential first mortgage loan origination businesses in the first quarter of 1998. Excluding revenue from discontinued businesses in 1998, mortgage banking income increased $4.9 million (56.4%). Income from securities sales and fees decreased $12.2 million (50.3%) due to the sale of Hopper Soliday in January 1999. Excluding the revenue from Hopper Soliday in 1998, income from security sales and fees increased $4.1 million (50.7%). Servicing income decreased $4.1 million (67.5%) primarily due to a $3.3 million decline in servicing income on credit card loans resulting from the exit of that business. Other income increased $4.3 million (5.8%). Excluding other income from discontinued businesses totaling $7.2 million in 1998, other income increased $11.5 million. Line of credit fees increased $3.3 million. Income from lease residual gains increased $6.1 million due to some large lease residual gains on railcars in 1999. Gains on the sale of other real estate owned increased $1.3 million in 1999 and other nonrecurring gains totaled $3.0 million in 1999. Other income in 1998 included a $1.2 million gain on the payoff of a troubled debt restructuring and other nonrecurring revenue totaling $0.9 million.
Noninterest Expenses
The following table presents the components of noninterest expenses for the years ended December 31, 1999, 1998 and 1997 and a year to year comparison expressed in terms of percent changes. All prior periods have been restated to conform with the current years presentation. Additional information on the reclassification of prior periods is presented under "noninterest income" on page 10.
Noninterest Expenses
Allfirst's noninterest expenses for the year ended December 31, 1999 were $533.0 million, a $68.9 million (11.4%) decrease from noninterest expenses for the year ended December 31, 1998. Intangible assets amortization expense decreased $4.6 million primarily due to lower deposit premium amortization. Total operating expenses decreased $64.3 million (11.8%). Operating expenses associated with the Allfirst brand introduction totaled $10.0 million in 1999. The year ended December 31, 1998 included $22.7 million in expenses related to the installation of an enhanced technology platform and other issues arising from the integration of Allfirst's constituent banks and $2.0 million in expenses related to the Allfirst brand introduction. In addition, operating expenses in 1998 included $38.3 million in operating expenses related to discontinued businesses. Excluding these expenses, total operating expenses decreased $11.3 million (2.4%) when 1999 is compared to 1998.
Salaries and other personnel costs decreased $35.1 million (11.3%). Salaries and other personnel costs in 1998 included $23.0 million in expenses related to discontinued business lines. In addition, approximately $9.3 million in salaries and other personnel costs were incurred in 1998 related to systems integration and conversion projects. Excluding these items, salaries and other personnel costs decreased $2.8 million (1.0%). Equipment costs increased $3.1 million (7.1%). Occupancy costs decreased $1.4 million (3.7%) with $1.1 million of the decrease due to cost savings associated with exited business lines. External services expense decreased $2.1 million (11.6%). External services expense in 1998 included $1.4 million in expenses associated with discontinued business lines. The remaining decrease is due to cost savings realized from the 1998 integration and conversion projects. Postage and communications expenses decreased $3.6 million (15.2%). Discontinued business lines incurred approximately $2.6 million in postage and communication costs in 1998 and postage costs related to systems integration and conversion projects totaled $0.9 million last year. Excluding these items, postage and communication expense decreased $0.1 million (0.9%) in 1999. Advertising and marketing expenses decreased $6.6 million (32.7%). Advertising expenses increased $6.2 million due to the implementation of the new Allfirst brand name in the second quarter of 1999. Advertising and marketing expenses associated with
discontinued businesses in 1998 totaled $2.3 million and approximately $4.6 million in advertising expenses were incurred in 1998 as a result of integration of the Pennsylvania and Maryland franchises. Excluding these items, advertising and marketing expenses decreased $5.9 million (44.1%). Professional service fees decreased $6.2 million (33.4%). In 1999, approximately $1.5 million in professional fees were incurred in conjunction with the change to the Allfirst brand name in the second quarter of 1999. Approximately $8.3 million in contract programming expenses and professional fees were incurred in 1998 for systems integration and conversion projects. Excluding these items, professional service fees increased $0.6 million (5.7%). Lending and collection expenses decreased $3.8 million (22.5%). Lending and collection expenses related to discontinued business lines totaled $2.5 million in 1998. Excluding these expenses, lending and collection expenses decreased $1.3 million in 1999 due primarily to a $2.4 million decrease in lending and collection expenses associated with Allfirst's foreign maritime loan portfolio.
Quarterly Summary
The following table presents a summary of earnings by quarter for the years ended December 31, 1999 and 1998:
Summary of Quarterly Earnings
Investment Portfolio
At December 31, 1999, the investment securities available-for-sale portfolio was $4.3 billion compared with $4.8 billion at December 31, 1998, a $528 million (11%) decrease. The taxable equivalent yield on the total portfolio for the year ended December 31, 1999 was 6.14% compared to 6.46% for the year ended December 31, 1998. Net unrealized losses on the investment securities portfolio were $156.5 million at December 31, 1999.
Investment securities sold in 1999 totaled $1.5 billion and generated pretax gains of $5.0 million. The majority of the securities sold were U.S. Treasury securities, Federal agency securities and mortgage backed securities. The U.S. Treasury securities and mortgage backed securities were sold to reduce the duration of the investment securities portfolio. The Federal agency securities were sold to improve the yield of the investment portfolio. In 1999, Allfirst purchased $2.0 billion of investment securities to partially replace $823 million of maturities, calls and paydowns of securities and the $1.5 billion of securities sold. The investment security purchases were primarily U.S. government agency securities, mortgage backed securities and collateralized mortgage obligations.
The following table sets forth the book value ("fair value") of the available-for-sale securities owned by Allfirst.
Available-for-Sale Investment Portfolio
- -------- (1) At December 31, 1999, 1998 and 1997, $1,051.3 million, $738.6 million, and $967.2 million of CMOs, respectively, were issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association or the Government National Mortgage Association.
The following table shows the maturity distribution of the available-for- sale debt securities of Allfirst at December 31, 1999 based upon amortized cost.
Maturity of Available-for-Sale Investment Portfolio
- -------- (1) The maturity distribution is based upon long-term cash flow estimates for each security type and coupon rate. (2) Equity securities totaling $244.4 million have been classified in after 10 years.
The following table reflects the approximate weighted average tax equivalent yield (at an assumed Federal tax rate of 35%) of the available-for-sale investment portfolio at December 31, 1999 based upon amortized cost.
Available-for-Sale Investment Portfolio (Tax Equivalent Yields)
- -------- (1) Computation of weighted average tax equivalent yields includes $129.3 million of floating rate CMOs.
Loan Portfolio
The following table sets forth the composition of the loan portfolio by type of loan and the percentage of loans by category.
Composition of the Loan Portfolio
The following table displays the contractual maturities and interest rate sensitivities of the loan portfolio of Allfirst at December 31, 1999. Allfirst's experience indicates that certain of the loans will be renewed, rescheduled, or repaid, and that other loans will be charged-off, in each case prior to scheduled maturity. Accordingly, the table should not be regarded as a forecast of future cash collections.
Contractual Loan Maturities
- -------- (1) Includes demand loans and loans having no stated schedule of repayments or maturity. (2) The variable interest rates generally fluctuate according to a formula based on various rate indices such as the prime rate and LIBOR.
Commercial Loans
Commercial loan outstandings of $3.5 billion comprised 32.9% of Allfirst's total loans and leases at December 31, 1999. Commercial loans include short and medium term loans, revolving credit arrangements, lines of credit, asset based lending and equipment lending. Commercial loans increased $89.6 million or 2.6% during 1999. The increase in commercial loans in 1999 was primarily due to growth in loans to mid-sized corporate customers.
The commercial loan portfolio is segregated by market sector. There are two primary market sectors, Corporate Banking and Business and Workplace Banking. Business and Workplace Banking is focused on customers with sales volumes less than $10 million. Corporate Banking services all other customers. Within Corporate Banking there are specialized lending functions including Communications, Healthcare, International, Asset Based Lending, Transportation, Not for Profit and Financial Institutions. The primary market for commercial lending is Maryland, Pennsylvania, Virginia and Washington, D.C.
Commercial Real Estate
Allfirst's commercial real estate portfolio represents loans secured primarily by commercial real property. The properties financed include both owner-occupied and investor real estate. Commercial real estate loans of $2.3 billion comprised 21.6% of the total loan portfolio at December 31, 1999. Commercial real estate loans increased $24.2 million or 1.1% during 1999. The commercial real estate portfolio continues to benefit from increasing rental rates and falling vacancies in Allfirst's primary markets. Allfirst continues to focus on acquisition and refinancing loans for quality projects with strong sponsorship for investor real estate financing. In addition, Allfirst intends to continue to actively solicit commercial real estate loans to support its emphasis as a relationship lender for regional companies.
The commercial real estate portfolio continues to be well balanced by property type and is geographically centered in Allfirst's regional marketplace, with the majority of the portfolio secured by properties in Maryland, Pennsylvania, Virginia, and Washington, D.C.
Commercial real estate loans included $476 million in construction loans at December 31, 1999. These loans are for land acquisition and development, and building construction. Since December 31, 1998, real estate construction loans have increased $42 million or 9.6%. Most construction activity continues to occur in Northern Virginia and along the Baltimore/Washington corridor with development primarily for build-to-suit commercial office space, industrial and retail projects. Allfirst continues to pursue high quality loan opportunities.
Residential Mortgage
Residential mortgages at December 31, 1999 of $687 million, decreased $140 million from December 31, 1998. The decline is due to loan maturities and loan prepayments prompted by favorable market conditions. However, the pace of prepayments has slowed due to rising interest rates and receding demand for refinancing. Allfirst has decided to limit the origination of new loans for its residential mortgage portfolio, therefore, this loan portfolio is expected to continue to decline in the future.
Allfirst sold the residential loan origination businesses of its mortgage banking subsidiaries in 1998. Allfirst continues to offer a comprehensive range of first mortgage products through a third party affiliation. See Part I, above.
Retail
Allfirst provides a comprehensive range of retail loan and line of credit products. These products include home equity, automobile, marine and unsecured installment loans as well as home equity and unsecured lines of credit. The principal means by which these products are made available is on a direct basis through the branch and telephone banking system of Allfirst. Loan applications will also be taken over the internet in the year 2000. In addition, automobile loans are made available to the marketplace on an indirect basis by means of select third party referral sources.
As compared to December 31, 1998, retail loans increased $190 million to $2.9 billion at December 31, 1999. The growth in retail loans is largely attributable to a $212 million increase in indirect automobile loans, and modest growth in the direct portfolio and small business loans, offset by a $38 million decline in indirect marine loans.
Commercial Leases Receivable
Commercial leases receivable include small equipment and general equipment leasing portfolios. Commercial leases receivable increased to $616 million at December 31, 1999 from $540 million at December 31, 1998. The majority of the commercial leasing portfolio is general equipment leases with an emphasis on transportation equipment which includes railcars, tractors, trailers and some commercial aircraft. The primary market for direct sales efforts with respect to customers and prospects is the Mid-Atlantic region. Other parts of the country comprise a secondary market for direct sales calling but with a greater reliance on outside referral sources. Competition includes other banks, as well as nonbank, independent and captive finance and leasing companies and income funds.
Retail Leases Receivable
Retail leases receivable consist of retail auto leases. Retail leases receivable increased to $384 million at December 31, 1999 from $319 million at December 31, 1998. Retail leasing experienced record growth in 1999, booking $187 million in gross new business.
Foreign
Foreign loans totaled $276.8 million at December 31, 1999, a decrease of $88.3 million when compared to December 31, 1998. Foreign loans outstanding at December 31, 1999 included international maritime loans totaling $183 million, foreign direct investment loans totaling $26 million, and other foreign loans of $68 million. The foreign maritime loan portfolio has been negatively affected by economic adversity in certain international markets, particularly in Asia, that have depressed the dry bulk and tanker shipping industries. Lending and collection expenses in 1999 included approximately $7.5 million in collection costs associated with the maritime loan portfolio. See "Asset Quality" for additional information.
Asset Quality
Credit Risk Management
Credit approval policies for Allfirst are designed to provide an effective and timely response to loan requests, while ensuring the maintenance of a sound portfolio. Allfirst manages credit risk through the credit approval process and written policies, which generally specify underwriting guidelines and standards and in some cases limit credit exposure by industry, country or product type. All credit policies and credit concentration exposure limits are reviewed and approved annually by the Executive Committee of the Board of Directors.
The Credit Review function periodically reviews all lending units throughout Allfirst. It continuously monitors the loan portfolio to ensure the accuracy of risk ratings, to verify the identification of problem credits, and to certify adequacy of the allowance for loan and lease losses, which the Audit Committee is required to approve quarterly.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $34.2 million for the year ended December 31, 1999, a decrease of $0.1 million (0.4%) from the $34.3 million provision for 1998. The provision for loan and lease losses in 1998 was $2.5 million lower than net charge-offs. Net charge-offs decreased $2.6 million when 1999 is compared to 1998. The sale of substantially all of Allfirst's credit card loans in the first quarter of 1998 resulted in a $3.2 million decrease in net credit card charge-offs in 1999 versus 1998. Net charge-offs on the foreign maritime portfolio were $8.7 million for the year ended December 31, 1999, a $10.7 million decrease from 1998. These decreases were offset by an $11.3 million increase in charge-offs on other loan portfolios in 1999 due principally to a $5.1 million increase in retail net charge-offs, a $3.1 million increase in commercial charge-offs and a $2.2 million increase in residential mortgage net charge-offs. The increase in retail charge-offs in 1999 is primarily related to charge-offs of retail deposit overdrafts which occurred after system conversions in 1998. The system deficiencies causing these overdrafts have been resolved.
Nonperforming Assets
Nonperforming assets were $80.5 million at December 31, 1999, compared to $100.9 million at December 31, 1998, a decrease of $20.4 million. Nonaccrual loans decreased $7.6 million. Additions to nonperforming loans in 1999 aggregated $55.4 million. These additions were offset by reductions in nonaccrual loans totaling $63.0 million due to paydowns and payoffs of nonaccrual loans totaling $27.8 million, charge-offs of $14.6 million, loans returned to accrual status of $12.8 million and transfers to other real estate and other assets owned of $7.8 million.
Other real estate and other assets owned decreased $2.7 million when compared to December 31, 1998. Additions to other real estate owned totaled $6.7 million, including transfers from nonaccrual loans of $5.6 million. Sales and paydowns of other real estate owned totaled $9.2 million. Repossessed assets decreased $0.2 million.
Other nonperforming assets decreased $10.1 million when compared to December 31, 1998. Other nonperforming assets include $15.8 million and $23.1 million, respectively, in nonperforming maritime loans at December 31, 1999 and 1998. Allfirst has classified these loans as other nonperforming assets because 1) the value of the loan collateral is equal to the loan principal and 2) the structure of these loans provides compensation for increased risk by incorporating revenue sharing rights and other collateral rights, which will be triggered by certain events, in the loan agreement. These loans have been valued based on the estimated cash flows from the shipping vessels' operations as well as independent valuations. In addition, other nonperforming assets at December 31, 1998 included a $2.8 million ownership interest in a commercial aircraft resulting from a lessee default on a commercial lease in which Allfirst was a participant. This asset was sold in the third quarter of 1999.
The foreign maritime loan portfolio has been negatively affected by economic adversity in certain international markets, particularly in Asia, that have depressed the dry bulk and tanker shipping industries. Recently the dry bulk shipping industry has shown signs of improvement; however, the tanker market continues to be weak. At December 31, 1999, Allfirst's total international maritime exposure was $237.4 million, including loans and leases of $195.4 million, $15.8 million in other foreign maritime assets, and $26.2 million in unfunded loan commitments, letters of credit and risk participations. This compares to total foreign maritime exposure of $313.9 million at December 31, 1998. Nonperforming assets at December 31, 1999 included $6.5 million in nonaccrual maritime loans and $15.8 million in other nonperforming maritime assets.
The following table sets forth nonperforming assets and accruing loans which are 90 days or more past due as to principal or interest payments as of the dates indicated.
Nonperforming Assets
- -------- (1) Other real estate and other assets owned represents collateral on loans to which Allfirst has taken title. This property, which is held for resale, is carried at fair value less estimated costs to sell. (2) Other includes maritime loans discussed in detail under "Nonperforming Assets". Other also includes a $2.8 million ownership interest in a commercial aircraft in 1998.
The following table details the gross interest income that would have been received during the year ended December 31, 1999 on nonaccrual loans had such loans been current in accordance with their original terms throughout the year and the interest income on such loans actually included in income for the year.
Potential problem loans consist of loans that are currently performing in accordance with contractual terms but for which Allfirst has serious doubts regarding the ability of the borrowers to continue to comply with present repayment terms. At December 31, 1999, Allfirst was monitoring $80.2 million of potential problem loans which were not included in the nonperforming assets table disclosed above. There were no other interest earning assets, other than loans, at December 31, 1999 which were classifiable as nonaccrual, restructured, past due or potential problem assets.
Allowance for Loan and Lease Losses
The following table details certain information relating to the Allowance for Loan and Lease Losses ("Allowance") of Allfirst for the five years ended December 31, 1999. See also Note 5 of the Notes to Consolidated Financial Statements of Allfirst.
Analysis of the Allowance for Loan and Lease Losses
Allfirst evaluates, reports and documents the Allowance in accordance with all regulatory guidelines including the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The adequacy of the Allowance is evaluated at least quarterly, employing a methodology that is sound, based on reliable information and well documented. The methodology provides consistency and integrity; however, changes can be incorporated as the risk profiles of the various loan portfolios change over time.
All outstanding loans, leases, letters of credit and legally binding commitments to lend are considered in evaluating the adequacy of the Allowance. The Allowance does not provide for the estimated losses stemming from uncollectible interest because Corporate Policy generally requires all accrued but unpaid interest to be reversed once a loan is placed on nonaccrual status.
All nonaccrual and criticized loans in the commercial portfolios above certain defined thresholds are analyzed individually to confirm the appropriate risk rating and accrual status and to determine the need for a Specific Reserve. Loan types included in the commercial portfolio are commercial loans, commercial real estate construction loans and mortgages, foreign loans and commercial leases.
For loans and leases in the commercial portfolios not specifically reserved, the base factors for the General Reserve allocations are derived from the blended average of annual historical loss experience by loan type over an economic cycle. Retail loans and leases are segregated into various pools with similar risk characteristics. The rolling twelve month historical loss experience for each pool is updated quarterly to provide the base factors for the retail General Reserve allocations. In addition, the historical loss percentage or base factor for each commercial portfolio type and retail pool are adjusted to reflect current conditions. Among the factors considered are levels and trends in delinquencies and nonaccruals; trends in volume and terms of loans; effects of any changes in lending policies and procedures; the experience, ability and depth of the lending management and staff; national and local economic trends and conditions; and concentrations of credit.
The Unallocated reserve is the portion of the Allowance that is not attributable to any specific components of the loan portfolio. While the methodology used for general and specific reserves (together the "Allocated Reserves"), is Allfirst's best estimate of inherent losses within a range of credit losses given the current economic climate, the unallocated reserve is available to support losses that are probable within the high end of the loss range. The unallocated reserve additionally protects Allfirst from any errors and omissions or subjectivity that might occur in testing or reviewing the Allowance for adequacy.
The Allowance was $157.4 million for the year ended December 31, 1999 as provisions of $34.2 million equaled net charge-offs of $34.2 million. Allocated reserves for the Foreign portfolio decreased by $7.7 million due to the improvement in the martime portfolio. The unallocated reserve increased by $12.1 million to $62.5 million. The unallocated reserve represented 40% of the Allowance as of December 31, 1999 compared to 32% as of December 31, 1998. At year end, the Allowance covered 1999 charge-offs more than four times and represented 1.46% of total loans.
The following table provides an allocation of the Allowance to the respective loan classifications. The allocation of the Allowance is based on a consideration of all of the factors discussed above which are used to determine the Allowance as a whole. Since all of those factors are subject to change, the allocation of the Allowance detailed below is not necessarily indicative of future losses or future allocations. The Allowance at December 31, 1999 was available to absorb losses occurring in any category of loans.
Allocation of the Allowance for Loan and Lease Losses
Deposits
Total deposits at December 31, 1999 were $12.1 billion, a $114 million decrease when compared to December 31, 1998. Noninterest bearing deposits decreased $541 million from December 31, 1998. The decrease was due to a $578 million decrease in commercial demand deposit balances offset by a $37 million increase in retail balances.
Interest bearing deposits increased $426 million due to a $1.3 billion increase in purchased time deposits. This increase was offset by an $848 million decrease in interest bearing deposits from Allfirst's retail and corporate customers. The decrease in customer deposits included a $26 million decrease in interest bearing demand deposits, a $430 million decrease in money market deposits, a $69 million decrease in savings deposits and a $323 million decrease in consumer time deposits. The decrease in money market deposits is partially due to a $196 million decline in deposits from a financial services customer and the withdrawal of a $125 million mortgage escrow deposit from a corporate customer. Competitive pressures from non-bank financial services companies continue to be strong, especially from mutual fund companies and broker-dealers. The decline in consumer time deposits, savings, and money market accounts evidences the consumer trend toward higher-yielding, non- insured investment vehicles. Allfirst has participated in this trend with investment sales increasing 77% when the year ended December 31, 1999 is compared to December 31, 1998. To the extent that Allfirst must replace noninterest bearing or interest bearing deposits with purchased funds, Allfirst's cost of funds increases.
The following table details the maturity of certificates of deposit of $100,000 or more on December 31, 1999. There were no non-certificate time deposits of $100,000 or more at December 31, 1999.
Maturity Distribution of Certificates of Deposit in Amounts of $100,000 or More
Short-term Borrowings
To the extent that deposits are not adequate to fund customer loan demand in the Banks, or to the extent that long-term borrowings are inadequate to meet funding requirements of other subsidiaries, Allfirst seeks to meet its liquidity needs in the short-term funds markets. Allfirst utilizes many sources to meet these short-term needs. The following table provides information with respect to each of these sources for the three years ended December 31, 1999.
Short-term Borrowings
- -------- (1) The weighted average interest rate is calculated by dividing the annual interest expense by the daily average outstanding principal balance.
As indicated, short-term borrowings include master demand notes of Allfirst. The master demand note ("masternote") is an unsecured obligation of Allfirst which was developed to meet the investment needs of Allfirst's cash management customers. Under the masternote program, available customer balances are invested overnight in masternotes. The proceeds are used to provide short-term funding to Allfirst's nonbank subsidiaries, with any excess funds invested in short-term liquid assets. Outstanding masternote balances are determined by the investable balances of Allfirst's sweep account customers that elect the masternote investment option.
Long-term Debt
Long-term debt increased $339 million when compared to December 31, 1998. During the second quarter of 1999, Allfirst redeemed its 10.375% subordinated capital notes using the proceeds from the issuance of $100 million of 6.875% subordinated notes. During the third quarter of 1999, Allfirst issued $100 million Floating Rate Non-cumulative Subordinated Capital Trust Enhanced Securities. The proceeds from these securities, as well as other funding sources, were used to redeem Allfirst's preferred stock. A more detailed description of the Subordinated Capital Trust Enhanced Securities is included under "Capital Adequacy and Resources". In addition, long-term advances from the Federal Home Loan Bank increased $200 million from December 31, 1998.
Liquidity Risk Management
Liquidity is the ability of Allfirst to meet a demand for funds, such as deposit outflows, new loan requests and other corporate funding requirements. Liquidity can be obtained through the issuance of liabilities at acceptable costs within an acceptable period of time or through the maturity or sale of assets.
The liquidity of Allfirst is enhanced by asset and liability management policies. The Asset and Liability Committee ("ALCO") is responsible for setting general guidelines regarding Allfirst's sources and uses of funds and asset and liability sensitivity, pursuant to Allfirst's Funds Management Policy approved by the Board of Directors. The Committee's goals foster the stable generation of increased net interest income without sacrificing credit quality, jeopardizing capital or adversely impacting liquidity. Allfirst maintains a level of asset and liability liquidity based on an internal assessment of its ability to meet obligations under both normal and adverse conditions. Allfirst's current policy requires qualifying liquid assets to cover 5% of total retail liabilities plus the higher of 15% of total unsecured wholesale liabilities or sufficient liquidity to cover all wholesale liabilities maturing within 180 days at various required percentages, plus 15% of undrawn credit facilities. Available liquidity at December 31, 1999 was $3.4 billion versus required liquidity per policy of $3.2 billion.
Dividends from subsidiaries are the primary source of funds for the debt service and preferred stock requirements of Allfirst. Dividends from subsidiaries totaled $141.6 million for the year ended December 31, 1999. Management is confident that the earnings and dividend capacity of its subsidiary banks will be adequate to service interest obligations on the long- term debt of Allfirst. On March 30, 1999, Allfirst paid a dividend of $90 million to its sole common shareholder, AIB. In January 2000, Allfirst's Board of Directors declared a $92 million dividend, payable to AIB in March 2000.
Stockholders' Equity and Capital Adequacy
Allfirst's capital strength provides the resources and flexibility to capitalize on business growth and acquisition opportunities. At December 31, 1999, Allfirst's Tier 1 risk based capital ratio was 9.86% ($1.5 billion of Tier 1 capital) and its total risk based capital ratio was 13.24% ($2.0 billion of total risk based capital). Tier 1 capital consists primarily of common shareholder's equity and qualifying amounts of subordinated capital trust preferred securities less goodwill and certain intangible assets, while total risk-based capital adds qualifying subordinated debt, the allowance for loan and lease losses, and other off balance sheet reserves, within permitted limits, to Tier 1 capital. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities.
The Federal Reserve Board's regulatory capital guidelines require a minimum total capital to risk adjusted assets ratio of 8.0%. One-half of the 8.0% minimum must consist of tangible common shareholders' equity (Tier 1 capital). The leverage ratio measures Tier 1 capital to average assets less goodwill and other disallowed intangible assets and must be maintained in conjunction with the risk-based capital standards. The regulatory minimum for the leverage ratio is 3.0%; however, this minimum applies only to top rated banking organizations without any operating, financial or supervisory deficiencies. Other organizations (including those experiencing or anticipating significant growth) are expected to hold an additional capital cushion of at least 100 to 200 basis points of Tier 1 capital and, in all cases, banking organizations should hold capital commensurate with the level and nature of all risks, including the volume and severity of problem loans, to which they are exposed.
On July 13, 1999, Allfirst issued 100,000 Floating Rate Non-cumulative Subordinated Capital Trust Enhanced Securities ("Capital Trust Securities") at a price to investors of $98.9 million. Each Capital Trust Security pays a non- cumulative quarterly distribution based on three month LIBOR plus 1.50%, reset quarterly. These securities are classified as long-term debt on the Consolidated Statement of Condition and qualify as Tier 1 Capital, with the limitation that the Capital Trust Securities and other qualifying capital trust preferred securities cannot exceed 25% of Tier 1 capital. On July 14, 1999, the proceeds from the issuance of the Capital Trust Securities, as well as other funding sources, were used to redeem Allfirst's 7.875% non-cumulative Preferred Stock at a redemption price of $25.00 per share plus $2.4 million of accrued and unpaid dividends.
The following table details Allfirst's capital components and ratios at December 31, 1999 and 1998 based upon the capital requirements of the regulatory agencies. For additional information on regulatory capital see Note 18 of the Notes to Consolidated Financial Statements.
Capital Components
Year 2000
During 1999, management completed the process of preparing for the Year 2000 date change. This process involved identifying and remediating date recognition problems in computer systems, software and other operating equipment, working with third parties to address their Year 2000 issues, and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, Allfirst has successfully managed the transition.
Although considered unlikely, unanticipated problems in Allfirst's core business processes, including problems associated with non-compliant third parties and disruptions to the economy in general, could still occur despite efforts to date to remediate affected systems and develop contingency plans. Management will continue to monitor all business processes, including interaction with Allfirst's customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly.
Allfirst completed the replacement of major systems in 1998 in order to upgrade its technology platforms to its strategic target environment. In the process, Allfirst replaced a significant portion of its software with Year 2000 compliant products. It is difficult to separate the costs associated with system replacements and upgrades due to target environment strategies from those associated with Year 2000 compliance. Direct expenses associated with system replacements and upgrades due to target environment strategies and Year 2000 compliance totaled $18.9 million of which $4.3 million was expensed in the year ended December 31, 1999. In addition, capital expenditures related to system upgrades totaled $38.4 million. Depreciation expense related to these capital expenditures was $5.9 million in 1999 and $0.1 million in 1998.
Recent Accounting Pronouncements
The impact of recently issued accounting pronouncements is detailed in Note 2 of the Notes to Consolidated Financial Statements of Allfirst.
Results of Operations--1998 Compared to 1997
Allfirst's net income for the year ended December 31, 1998 was $218.1 million, compared to $151.2 million for the year ended December 31, 1997, an increase of $66.9 million (44.3%). Net income in 1998 included a $37.4 million after tax gain ($60.0 million pretax) on the sale of credit card loans and $38.3 million of after-tax securities gains ($60.8 million pretax) which were the result of repositioning the investment portfolio. Net income in 1997 included a $17.4 million after-tax gain ($28.2 million pretax) on the sale of credit card loans and merger related expenses of $12.5 million after-tax ($20.0 million pretax). Return on average assets and return on average common stockholder's equity were 1.28% and 11.36%, respectively, for the year ended December 31, 1998 compared to 1.07% and 9.66%, respectively, for the year ended December 31, 1997.
On July 8, 1997, Allfirst and its parent, AIB, acquired Dauphin Deposit Corporation ("DDC"), which was merged into Allfirst. The acquisition, which was accounted for as a purchase business combination, resulted in $901.6 million of intangible assets, (comprised primarily of goodwill of $825.1 million), which are amortized against earnings. DDC's results of operations have been included with Allfirst's results of operations since July 1, 1997.
Tangible net income, which excludes amortization of goodwill and other intangible assets related to purchase business combinations, was $266.7 million for the year ended December 31, 1998 compared to $179.2 million for the year ended December 31, 1997. Return on average tangible assets and return on average tangible common equity, which exclude intangible assets and amortization related to purchase business combinations, were 1.65% and 27.85%, respectively, for the year ended December 31, 1998 compared to 1.32% and 18.69%, respectively, for the year ended December 31, 1997.
The DDC acquisition provided the opportunity for Allfirst to create a new company, instead of simply combining the two organizations. In connection with the target environment identification and integration
process, Allfirst recorded pretax merger-related expenses of $20.0 million in the fourth quarter of 1997 in addition to acquisition costs which are recorded as a component of the goodwill related to the acquisition. Also, in connection with identifying the target environment, Allfirst decided to exit two business lines, consumer credit cards and residential mortgage banking. In each case, management determined that the investment of resources necessary to operate these businesses at acceptable levels of return could be applied more effectively elsewhere in Allfirst. Allfirst continues to offer residential mortgage products through retail bank branches and consumer credit card products through agency relationships. The sales of these business lines did not have an adverse effect on Allfirst's financial condition or results of operations.
In the majority of Allfirst's income and expense categories, the increases in the amounts reported for the year ended December 31, 1998 compared with the amounts reported for the same periods in 1997 resulted from the Merger. Other significant factors affecting Allfirst's results of operations are described below.
Net interest income on a fully tax equivalent basis for the year ended December 31, 1998 of $556.7 million increased $50.6 million (10.0%) when compared to net interest income of $506.2 million for the year ended December 31, 1997. The increase in net interest income is primarily due to an increase in deposits, excluding purchased deposits, which resulted in approximately $20.2 million in additional net interest income in 1998. Growth in interest free funding sources available to fund earning assets or reduce interest bearing liabilities ("net free funds") resulted in an $8.1 million increase in net interest income. A decline in credit card receivables resulted in a decrease in net interest income of $22.1 million. This was offset by an increase in net interest income on non-credit card loans of $37.4 million in 1998. Net interest income from loans held for sale increased $1.2 million in 1998. The remaining increase in net interest income was due to treasury and funding activities which provided an additional $5.8 million in net interest income in 1998.
The net interest margin for the year ended December 31, 1998 was 3.79%, compared to 4.07% for the year ended December 31, 1997. The decrease in average credit card loans resulted in a 7 basis point decline in the net interest margin. Lower margins on non-credit card loans decreased the net interest margin by 36 basis points. Changes in treasury assets and funding strategies resulted in a 10 basis point decline in net interest margin. These decreases were offset by a 16 basis point improvement in the net interest margin due to an increase in deposits, excluding purchased deposits and a 6 basis point improvement from an increase in net free funds. In addition, higher margins on loans held for sale improved the net interest margin by 3 basis points.
Allfirst's noninterest income for the year ended December 31, 1998 was $436.5 million, a $118.7 million (37.3%) increase over noninterest income for the year ended December 31, 1997. Noninterest income in 1998 benefited from a $60.0 million gain on the sale of credit card loans and investment securities gains of $60.8 million. Noninterest income in 1997 benefited from $28.2 million in gains on the sale of credit card loans. Total fees and other income increased $26.5 million (9.2%). Trust and investment advisory fees increased $25.4 million. Approximately half of the increase was due to an increase in fee income in 1998 with the remainder due to DDC trust revenue for a full year in 1998. Mortgage banking income was impacted by the sale of Allfirst's residential first mortgage loan origination businesses in the first quarter of 1998. Servicing income decreased $20.5 million (77.2%) due to an $18.4 million decline in servicing income on credit card loans resulting from the exit of that business. Trading income, which is included in other income, increased $7.0 million in 1998. In addition, other income in 1998 benefited from a $1.2 million gain on the payoff of a troubled debt restructuring and $4.2 million in miscellaneous income from discontinued business lines. Other income in 1997 included a $6.1 million gain on the sale of an investment in an ATM and point of sale network.
Allfirst's noninterest expenses for the year ended December 31, 1998 were $601.9 million, a $55.8 million (10.2%) increase over noninterest expenses for the year ended December 31, 1997. Noninterest expenses in 1998 included a $20.8 million increase in intangible asset amortization expense primarily due to the DDC acquisition. Allfirst incurred approximately $22.6 million in expenses in 1998 related to the installation of an enhanced technology platform and other issues arising from the integration of Allfirst's constituent banks. These costs include $10.2 million in salaries and other personnel costs, $7.3 million in professional fees, $3.4 million in advertising and marketing expenses and $1.7 million in other expenses. Lending and collection expenses in 1998
included approximately $9.8 million in collection costs associated with the maritime loan portfolio. The decline in external service fees is due to the sale of the credit card loan portfolio.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The effective management of market risk is essential to achieving Allfirst's objectives. As a financial institution, Allfirst's primary market risk exposure is interest rate risk.
Interest Rate Risk Management
Management of the interest rate risk of Allfirst is effected through adjustments to the size and duration of the available-for-sale investment portfolio, the duration of purchased funds and other borrowings, and through the use of off-balance sheet financial instruments such as interest rate swaps, interest rate caps and floors, financial futures, and options.
Measurement of Allfirst's sensitivity to changing interest rates is accomplished primarily through a simulation model. Allfirst identifies its tolerance for interest rate risk in terms of a probable maximum loss ("PML"). Allfirst's PML model is commonly known as a Value at Risk ("VAR") model. The essence of the PML or VAR approach is to calculate the potential financial impact of probability-derived, worst-case, immediate and sustained changes in interest rates. Measuring risk and establishing the probable worst-case is a statistical technique. The statistical concept used to measure risk is volatility as measured by the standard deviation of interest rate or price movements. The standard deviation is determined by regression analysis of historical price and rate movements. The greater the standard deviation, the higher the measured risk. The PML approach assumes that the pattern of current and future interest rate or price movements will be similar to those experienced in the past. Market volatilities are raised to 2.33 standard deviations to obtain probable maximum changes in interest rates providing a 99% degree of certainty that a loss due to market movements would not exceed the PML amount over a one-month period. These changes in interest rates for each point on the yield curve are input into Allfirst's simulation model to determine the PML. Sensitivity to rate risk is measured from an economic perspective (equity at risk) and an income perspective (earnings at risk).
Equity at Risk
Equity at risk measures the loss in the value of the current balance sheet as a result of an immediate, adverse and sustained movement in interest rates. The fundamental premises of the technique are twofold: (1) the value of a fixed rate asset or liability will vary with a change in interest rates; and (2) the value of a long-term obligation will vary more than the value of a short-term obligation for the same change in rates. In the equity at risk simulation, the present value of all assets and liabilities is determined under both the current interest rate scenario and the PML scenario. The difference in the present value of Allfirst under these two scenarios is deemed to be Allfirst's equity at risk exposure. At December 31, 1999, Allfirst's equity at risk was in compliance with a policy limit of a difference of no more than $56.9 million.
The average, high and low equity at risk exposure for the years ended December 31, 1999 and 1998 are detailed in the following table:
The average equity at risk exposures for the year ended December 31, 1999 increased by $16.3 million when compared to the year ended December 31, 1998. The increase in equity at risk is due to investment in longer duration investment securities in 1999 and a decrease in the duration of Allfirst's funding in 1999 due to the decline in customer deposits.
Earnings at Risk
The PML impact on future income is known as earnings at risk. The earnings impact of various interest rate scenarios is measured over multiple time horizons. The results are then compared to current earnings projections to detect changes due to rising or falling rates. The income change over a rolling one-year time frame is the earnings impact. Allfirst's current policy is to limit earnings at risk to 10% of budgeted current NIBT assuming the same PML interest rate shock methodology employed to calculate Allfirst's equity at risk exposure. At December 31, 1999, Allfirst's earnings at risk was in compliance with the 1999 policy limit of $30.3 million.
The average, high and low earnings at risk exposure for the years ended December 31, 1999 and 1998 are detailed in the table below:
No material change occurred in earnings at risk for the year ended December 31, 1999 compared to the year ended December 31, 1998.
Fixed Income and Derivative Trading Risk Management
Allfirst maintains active securities and derivative trading positions resulting from activity generated for corporate customers as well as Allfirst's own trading account. Allfirst utilizes a variance-covariance VAR measurement system for the determination of market risk. VAR provides a single number summary of the largest amount Allfirst is likely to lose over a specified time period from adverse changes in prices or rates. Risk is calculated as the PML in fair value over a one-month period that would arise from a worst-case movement in market rates. The worst-case is based on a historical observation of price/yield volatility over a period of years. Market volatilities are raised to 2.33 standard deviations to obtain probable maximum changes in interest rates providing a 99% degree of certainty that a loss due to market movements would not exceed the PML amount over a one-month period. Possible limitations of VAR models are that past movements in rates may not be indicative of future market conditions regardless of the historical time period of observation and changes in market rates may not display a normal distribution which the models assume. At December 31, 1999, aggregate fixed income and derivative trading VAR was in compliance with a policy limit of $3.0 million.
The average, high and low fixed income and derivative trading VAR for the years ended December 31, 1999 and 1998 are detailed in the following table:
No material change occurred in the risk profile of fixed income and derivative trading for the year ended December 31, 1999 compared to the year ended December 31, 1998.
Foreign Exchange Risk Management
Allfirst maintains active foreign exchange trading positions to service the needs of its corporate and retail customers as well as for its own trading account. Foreign exchange market risk is the potential loss arising from an adverse shift in exchange rates and is calculated based on historical movements and the probability of occurrence. Foreign exchange market risk is calculated using Monte Carlo simulations with 1,000 iterations. The amount of risk implied is the tenth worst observation resulting in a 99% confidence that actual losses will not exceed this amount. At December 31, 1999, the value at risk of Allfirst's aggregate foreign exchange position was in compliance with a policy limit of $2.25 million.
The average, high and low value at risk of Allfirst's aggregate foreign exchange position for the years ended December 1999 and 1998 are detailed below:
No material change occurred in the risk profile of foreign exchange positions for the year ended December 31, 1999 compared to the year ended December 31, 1998.
Item 8.
Item 8. Financial Statements and Supplementary Data
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
See accompanying notes to consolidated financial statements
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allfirst Financial Inc. and subsidiaries ("Allfirst"), formerly First Maryland Bancorp, is a wholly owned subsidiary of Allied Irish Banks, p.l.c. ("AIB") and provides a full range of banking services through its banking subsidiaries, Allfirst Bank and Allfirst Financial Center N.A. (the "Banks"). Other subsidiaries of Allfirst are primarily engaged in consumer banking, construction lending, equipment, consumer, and commercial financing and investment advisory services. Allfirst is subject to the regulations of certain Federal agencies and undergoes periodic examinations by those regulatory agencies.
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Allfirst conform to generally accepted accounting principles. The following is a description of the more significant of these policies:
Basis of Presentation--The consolidated financial statements include the accounts of Allfirst Financial Inc. and all of its subsidiaries. All material intercompany transactions and balances have been eliminated. Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to the 1999 presentation.
Use of Estimates--In preparing the financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statement of condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses.
Business Combinations--Business combinations have been accounted for under the purchase method of accounting and include the results of operations of the acquired businesses from the date of the acquisition. Net assets of the companies acquired were recorded at their estimated fair values as of the date of acquisition.
Foreign Currency Transactions--Foreign currency amounts, including those related to foreign branches, are remeasured into the functional currency (the U.S. dollar) at relevant exchange rates. Aggregate transaction gains and losses are included in other income and other expense and are not material to the financial statements.
Trading Account Securities--Trading account securities are purchased principally with the intent to earn a profit by trading or selling the security. These securities are stated at fair value. Adjustments to the carrying value of trading account securities and trading gains and losses are reported in other noninterest income.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase--Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally treated as collateralized financing transactions and are recorded at the amount at which the securities were acquired or sold plus accrued interest. It is Allfirst's policy to take possession of securities purchased under resale agreements, which are primarily U.S. Government and Federal agency securities. The market value of the collateral is monitored and additional collateral is obtained when deemed appropriate. Allfirst also monitors its exposure with respect to securities borrowed transactions and requests the return of excess collateral as required.
Securities--Allfirst's securities portfolio is classified as available-for- sale. Available-for-sale securities are stated at fair value, with unrealized gains or losses, net of income taxes, reported as a separate component of stockholders' equity. Amortization and accretion of discounts and premiums associated with securities classified as available-for-sale are computed on the level yield method. Realized gains and losses, and declines in value judged to be other than temporary, are included as part of noninterest income. The cost of securities sold is determined based on the specific identification method.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans Held-For-Sale--Loans held-for-sale are stated at the lower of aggregate cost or fair value.
Loans--Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan and lease losses. The net asset amounts for leased assets reflect related estimated residual values. Discounts on loans and interest on other loans are generally recognized as income on the level yield method (interest method). Commitment and origination fees greater than $15 thousand are recognized as income over the commitment and loan periods, respectively. Commercial, commercial real estate and residential mortgage loans are placed on nonaccrual status when one of the following conditions is met: (1) interest or principal has been in default for 90 days or more and the loan is not both well-secured and in the process of collection; (2) payment in full of interest or principal is not expected; or (3) there has been significant deterioration in the financial position of the borrower. Retail loans are generally charged-off prior to payments of principal or interest becoming more than 120 days delinquent. A loan remains on nonaccrual status until it is either current as to payment of both principal and interest with the borrower demonstrating the ability to pay and remain current, or it meets regulatory guidelines on returning to accrual status even though the loan has not been brought fully current.
A loan is impaired when, based upon current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The impairment of a loan is measured at the present value of expected future cash flows using the loan's effective interest rate, the fair value of the collateral if the loan is collateral dependent, or the loan's observable market price. Loans to be considered for evaluation of collectibility include loans classified as doubtful, certain substandard loans, certain nonaccrual loans and any other loans for which collection of all principal and interest payments under the contractual terms is not considered probable. A valuation allowance is recorded if the measured value of the impaired loan is less than its recorded investment (outstanding principal balance, accrued interest receivable, net deferred loan fees or costs and unamortized premium or discount). The valuation allowances for impaired loans are included in the allowance for loan and lease losses through changes in the provision for loan and lease losses. A loan would not be considered impaired during a period of "minimum delay" in payment, regardless of the shortfall, if the ultimate collectibility of all amounts due is expected. Allfirst defines "minimum delay" as past due less than 90 days.
Allowance for Loan and Lease Losses--The allowance for loan and lease losses ("allowance") is maintained to absorb all estimated losses in the loan and lease portfolio by direct charges against income in the form of provisions for credit losses. The level of the allowance is based on management's evaluations of various factors effecting the loan portfolio including overall growth in the portfolio, an analysis of significant individual credits and homogenous pools, adverse situations that could affect a borrower's ability to pay, prior and current loss experience and economic conditions. The allowance equals the cumulative total of the provisions made from time to time, reduced by loan charge-offs, and increased by recoveries of loans previously charged-off. The allowance is also increased by the allowance attributable to loans acquired and is reduced by the allowance attributable to loans sold.
Premises and Equipment--Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to operating expenses. Depreciation is computed on the straight line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the term of the respective leases or the lives of the assets. Maintenance and repairs are expensed as incurred, while improvements which extend the useful life are capitalized and depreciated over the remaining life. Leases are accounted for as operating leases since none which meet the criteria for capitalization would have a material effect if capitalized.
Intangible Assets--Intangible assets are primarily goodwill, or the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Goodwill is amortized
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) on a straight-line basis over periods ranging from 15 to 25 years. Core deposit intangibles are amortized using an accelerated method over a period of up to 10 years, while other intangible assets are amortized on a straight line basis over terms of up to 10 years. Management evaluates whether events or circumstances have occurred that would result in impairment of the value or life of goodwill and identifiable intangible assets. Impairment is measured using estimates of the future earnings potential of the entity or assets acquired.
Mortgage Servicing Rights--A portion of the total cost of applicable mortgage loans is allocated to originated mortgage servicing rights based upon their relative fair values on the date of mortgage origination. Allfirst recognizes mortgage servicing rights related to both retail and commercial mortgage originations. Market quotes, when available, are used to determine the fair value of the mortgage servicing rights at origination. When market quotes are not available, mortgage servicing rights are recorded using a discounted cash flow analysis. The capitalized mortgage servicing rights are amortized in proportion to and over the estimated period of net servicing income. As related loans pay off during the period of amortization, the related unamortized mortgage servicing rights are written off. Allfirst analyzes the capitalized mortgage servicing rights for impairment on a quarterly basis using a discounted cash flow analysis. Impairment losses are determined by stratifying the population of mortgage servicing rights based upon the risk characteristics of loan type and term. A valuation allowance is recorded if the unamortized mortgage servicing rights exceed the fair value. Loans serviced for third party investors at December 31, 1999 and 1998 totaled $1.2 billion and $862.7 million, respectively. These amounts are not included in the accompanying consolidated financial statements.
Other Real Estate and Assets Owned--Other real estate and other assets owned represents property acquired through foreclosure or deeded to Allfirst in lieu of foreclosure on loans on which borrowers have defaulted as to the payment of principal and interest. Other real estate and assets owned, at the time of foreclosure, are recorded at the asset's fair value minus estimated costs to sell. Any write-downs at the date of acquisition are charged to the allowance for loan and lease losses. Subsequent write downs to reflect declines in fair value minus the estimated costs to sell are charged to operating expenses through the establishment of a valuation allowance. If there is an improvement in fair value, the valuation allowance is reduced, but not below zero. Increases and decreases in the valuation allowance are charged or credited to income. Expenses incurred in maintaining assets are included in other operating expenses.
Other Nonperforming Assets--Other nonperforming assets include maritime loans where Allfirst is exposed to a higher than normal risk of loss from a decrease in the value of the loan's collateral due to high loan to value ratios. These loans are valued based on the estimated cash flows from the shipping vessel's operations using current shipping rates, as well as independent valuations.
Income Taxes--Allfirst files a consolidated Federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
Derivative Financial Instruments--Allfirst enters into risk management instruments to adjust the interest rate sensitivity of select interest earning assets and interest bearing liabilities and to hedge the risk of future fluctuations in interest rates. Allfirst accounts for these instruments on an accrual basis when the following conditions are met: (1) the specific assets or liabilities to be hedged expose Allfirst to interest rate risk; (2) the financial instruments manage the interest rate risk exposure; (3) the financial instruments are designated to specific groups of assets or liabilities; and (4) at inception and throughout the terms of the financial instruments, there is a high correlation between the indices of the financial instruments and the indices of the designated assets and liabilities. Changes in the fair value of risk management instruments are not included in the financial
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) statements. Interest income (expense) is adjusted on an accrual basis for the impact of payments to be made or received on these instruments in the category of the underlying hedged asset (liability). In addition, premiums related to the purchase of options are deferred and amortized as an adjustment to interest income or expense as determined by the nature of the underlying asset (liability). Gains or losses from the early termination of instruments are deferred and amortized into interest income (expense) over the shorter of the life of the underlying hedged asset (liability) or the remaining life of the instrument. Financial instruments that fail to meet the conditions noted above are considered trading instruments.
Allfirst also enters into derivatives for trading purposes. Trading instruments are carried at fair value. Fair value is generally determined based on quoted market rates and pricing models. If these methods cannot be applied, quoted prices of similar instruments may be used. Fair values and accrued interest receivable (payable) are included in other assets and liabilities in the consolidated statements of condition. Gains, both realized and unrealized, are included in trading income, which is a component of noninterest income.
Cash Flow--For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest bearing deposits in other banks.
Stock Based Compensation--Allfirst's stock based compensation plans are accounted for under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation", allows a company to recognize stock-based compensation using a fair-value based method of accounting if it so elects. The Corporation has elected not to adopt the recognition provisions of SFAS No. 123.
2. Recent Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of Effective Date of FASB Statement 133", is effective for financial statements for all fiscal quarters of fiscal years beginning after June 15, 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative financial instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security, or a foreign currency denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The impact of the adoption of SFAS 133 has not been determined.
3. Acquisition of Dauphin Deposit Corporation
On July 8, 1997, Allfirst and its parent, AIB, acquired Dauphin Deposit Corporation ("DDC") which was merged into Allfirst. Under terms of the Merger Agreement ("Agreement"), holders of approximately 86% of the outstanding DDC common stock received AIB American Depository Shares ("ADSs") at an exchange ratio of one AIB ADS for each share of DDC common stock. Each AIB ADS represents two EURO 0.32 ordinary shares of AIB after adjusting for the three for one stock split in May 1999. The remaining DDC shareholders received $43.00 per share in cash for their DDC common stock. The AIB ADSs were valued at $43.00 per ADS which was the value of an ADS on the date the exchange ratio was established in accordance with the terms of the Agreement and United States generally accepted accounting principles ("U.S. GAAP"). The aggregate value
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of the consideration paid to DDC shareholders under U.S. GAAP was $1.366 billion which was funded by cash and the issuance of $504.3 million in common stock to AIB as reported in the Consolidated Statements of Changes in Stockholders' Equity.
On the date of acquisition, DDC had total assets of $7.0 billion and total deposits of $4.2 billion. This acquisition was accounted for as a purchase business combination and the results of operations have been included with Allfirst's results of operations since July 1, 1997. Allfirst recorded $942 thousand in imputed interest on the consideration used to acquire DDC for the period of July 1, 1997 to July 8, 1997. As a result of the acquisition, Allfirst recorded $901.6 million in intangible assets which included $825.1 million in goodwill and a core deposit intangible of $69.9 million. Goodwill is amortized on a straight line basis over 25 years. The core deposit intangible is amortized under an accelerated method over 10 years.
Allfirst included a $44.0 million restructuring liability as a component of goodwill. This liability included $16.1 million for change in control agreements, $10.9 million in severance and bonus accruals associated with the elimination of approximately 500 full time equivalent positions, $10.1 million in costs associated with owned and leased facilities that have been vacated and furniture, equipment, software and leasehold improvements that have been abandoned or sold as a result of business or process changes, $5.4 million for contract terminations, and $1.5 million for other miscellaneous liabilities. The following table reflects a summary of activity with respect to the DDC restructuring reserve at December 31, 1999 and 1998. The remaining balances are primarily related to facilities closing costs.
A summary of unaudited pro forma combined financial information for the year ended December 31, 1997 as if the transaction had occurred on January 1, 1997 is presented below. The pro forma financial information does not purport to be indicative of the results that would have been obtained if the operations had actually been combined during the periods presented and is not necessarily indicative of operating results to be expected in future periods. The effect of anticipated cost savings from the merger has not been included in the pro forma information.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investment Securities
The amortized cost and fair values of available-for-sale securities at December 31, 1999 are as follows:
The amortized cost and fair values of available-for-sale securities at December 31, 1998 are as follows:
The amortized cost and fair values of available-for-sale debt securities at December 31, 1999 by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because many issuers have the right to call or prepay obligations with or without call or prepayment penalties.
- -------- (1) Includes mortgage-backed obligations, collateralized mortgage obligations and asset backed securities.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Proceeds from the sale of investment securities available-for-sale were $1.5 billion, $3.6 billion and $2.5 billion during 1999, 1998, and 1997 respectively. Gross gains and losses realized on the sale of investment securities available-for-sale were as follows:
Investment securities with a book value of $2.3 billion at December 31, 1999 and $2.4 billion at December 31, 1998 were pledged to secure public funds, trust deposits, repurchase agreements, Federal Home Loan Bank borrowings, and for other purposes required by law.
5. Impaired Loans and Allowance for Loan and Lease Losses
Impaired loans include commercial, commercial real estate and foreign loans. Impaired loans do not include certain groups of smaller, homogenous loans such as residential mortgages, retail loans and credit card loans that are evaluated collectively for impairment, or leases and loans measured at fair value or lower of cost or fair value. Reserves for possible future credit losses related to impaired loans are included in the allowance for loan and lease losses. Charge-offs on impaired loans are recorded when an impaired loan, or portion thereof, is considered uncollectible. Interest income received on impaired loans is either applied to principal or recognized on a cash basis. This policy is consistent with Allfirst's method of interest recognition on nonaccrual loans.
In certain circumstances, a nonaccrual loan may not meet the definition of an impaired loan. At December 31, 1999, total nonaccrual loans exceeded total impaired loans by $23.3 million. Nonaccrual loans that did not meet the definition of an impaired loan included nonaccrual residential mortgage loans of $20.5 million and a $2.8 million nonaccrual foreign loan which is classified as a nonaccrual loan due to regulatory requirements. All impaired loans are included in nonperforming assets. At December 31, 1999, the majority of the impaired loans were measured using observable market prices or the fair value of the loan's collateral. The valuation allowances for impaired loans and the activity related to impaired loans is included in the allowance for loan and lease losses.
The following tables present information on impaired loans.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the activity in the allowance for loan and lease losses:
6. Premises and Equipment
Components of premises and equipment at December 31, 1999 and 1998 are as follows:
Depreciation and amortization on premises and equipment charged to operations amounted to $32.1 million in 1999, $27.6 million in 1998, and $27.9 million in 1997.
Lease Commitments
Allfirst occupies various office facilities under lease arrangements, virtually all of which are operating leases. Rental expense under these leases, net of subleases, was $18.6 million in 1999, $19.8 million in 1998, and $20.1 million in 1997. Rental expense under equipment lease arrangements, all of which are considered short-term commitments, was $4.7 million in 1999, $4.5 million in 1998, and $4.3 million in 1997. Aggregate minimum annual noncancellable long-term lease commitments, net of subleases, total approximately $20.5 million in 2000, $18.7 million in 2001, $16.3 million in 2002, $14.2 million in 2003, $12.7 million in 2004 and $55.4 million thereafter.
The lease amounts represent minimum rentals not adjusted for property tax and operating expenses which Allfirst may be obligated to pay. Such amounts are insignificant in relation to the minimum obligations. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) properties; thus, it is anticipated that future annual minimum lease commitments will not be less than the rental expense for 1999.
7. Intangible Assets
Intangible assets at December 31, 1999 and 1998 included the following:
8. Funds Sold and Purchased and Repurchase Agreements
Federal funds sold and purchased generally represent one-day transactions, a portion of which arise because of Allfirst's market activity in Federal funds on behalf of its correspondent banks. At December 31, 1999, Federal funds sold totaled $128.0 million and Federal funds purchased totaled $292.0 million. Securities sold or purchased under agreements to resell or repurchase are secured by U.S. Treasury and U.S. Government agency securities and generally mature within three months. At December 31, 1999, securities purchased under agreements to resell totaled $19.2 million. All securities purchased were delivered either directly to Allfirst or to an agent for safekeeping. The aggregate fair value of all securities purchased under agreements to resell did not exceed 10% of total assets and the amount at risk with any individual counterparty or group of related counterparties did not exceed 10% of total stockholders' equity. Securities purchased under agreements to resell averaged approximately $4.9 million during 1999, and the maximum amount outstanding at any month end during 1999 was $19.2 million.
At December 31, 1999, securities sold under agreements to repurchase totaled $629.3 million. The aggregate fair value of all securities sold under agreements to repurchase did not exceed 10% of total assets and the amount at risk with any individual counterparty or group of related counterparties did not exceed 10% of total stockholders' equity. Securities sold under agreements to repurchase averaged approximately $779.9 million during 1999, and the maximum amount outstanding at any month end during 1999 was $984.9 million.
9. Other Borrowed Funds, Short-term
Following is a summary of short-term borrowings exclusive of overnight Federal funds purchased and securities sold under agreements to repurchase at December 31, 1999 and 1998:
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, Allfirst had available lines of credit with third- party banks aggregating $50 million to support commercial paper borrowings for which a fee is generally paid in lieu of compensating balances.
10. Long-term Debt
Following is a summary of the long-term debt of Allfirst at December 31, 1999 and 1998. All of the long-term debt of Allfirst is unsecured, except the Federal Home Loan Bank Advances.
The combined maturities of all long-term debt are as follows:
There is no provision in any of the notes or related indentures for a sinking fund. Several of the notes or related indentures also prohibit the sale, transfer, or disposal of any capital stock of Allfirst.
Allfirst repaid the 10.375% notes on June 2, 1999, using $60 million of the proceeds from the issuance of the 6.875% Subordinated Notes.
Adjustable rate Federal Home Loan Bank Advances of $200 million each mature on December 4, 2000 and August 20, 2001, respectively, and are redeemable prior to maturity. The interest rates are equal to one month LIBOR minus 5 basis points and one month LIBOR minus 3 basis points, respectively. Interest is payable monthly on each reset date. Investment securities with a market value of $421 million were pledged to secure these borrowings at December 31, 1999.
The 8.375% Subordinated Notes mature May 15, 2002, with interest payable semiannually and are not redeemable prior to maturity.
The 7.20% Subordinated Notes mature July 1, 2007, with interest payable semiannually and are not redeemable prior to maturity. Concurrently with the issuance of these subordinated notes, Allfirst entered into an interest rate swap to convert the fixed rate on the subordinated notes to a floating rate.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 6.875% Subordinated Notes mature on June 1, 2009, with interest payable semi-annually and are not redeemable prior to maturity. Concurrently with the issuance of these subordinated notes, Allfirst entered into an interest rate swap to convert the fixed rate on the subordinated notes to a floating rate.
The Floating Rate Subordinated Capital Income Securities ("Capital Securities") were issued through two wholly owned subsidiaries, First Maryland Capital I ("Capital I") and First Maryland Capital II ("Capital II"), Delaware statutory business trusts ("the Trusts"). The Capital Securities represent undivided preferred ownership interests in the assets of the Trusts. Allfirst has fully and unconditionally guaranteed all of the Trusts' obligations under the Capital Securities. Allfirst purchased 9,280 Common Securities of the Trusts ($1,000 liquidation amount per security) for a purchase price of $9.14 million. The Trusts used the aggregate proceeds of $304.6 million from the issuance of the Capital Securities and Common Securities to purchase $309.3 million aggregate principal amount of Floating Rate Junior Subordinated Debentures ("Junior Subordinated Debentures") issued by Allfirst which represent the sole assets of the Trusts.
Holders of the Capital Securities are entitled to receive cumulative cash distributions at a variable annual rate equal to LIBOR plus 1.00 % for the $150 million issued in December 1996 by Capital I and LIBOR plus 0.85% for the $150 million issued in February 1997 by Capital II. Cash distributions in each case are based on the liquidation amount of $1,000 per Capital Security. Interest on the Junior Subordinated Debentures is calculated at the same rate as the Capital Securities.
The December 1996 Junior Subordinated Debentures mature on January 15, 2027 and are redeemable by Allfirst in whole or in part on or after January 15, 2007. The February 1997 Junior Subordinated Debentures mature on February 1, 2027 and are redeemable by Allfirst in whole or in part on or after February 1, 2007. The Junior Subordinated Debentures are redeemable by Allfirst in whole but not in part, upon the occurrence of certain special events. The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity, or are distributed in liquidation to the Trusts.
The Floating Rate Non-Cumulative Subordinated Capital Trust Enhanced Securities ("Capital Trust Securities") were issued through a consolidated subsidiary, Allfirst Preferred Capital Trust ("Allfirst Capital Trust"). Allfirst Capital Trust is a statutory business trust formed on June 29, 1999 under the laws of the State of Delaware for the exclusive purposes of (i) issuing the Capital Trust Securities and common securities, (ii) purchasing Asset Preferred Securities issued by Allfirst Preferred Asset Trust ("Allfirst Asset Trust") and (iii) engaging in only those other activities necessary or incidental thereto. Allfirst Asset Trust is a statutory business trust formed on June 29, 1999 under the laws of the State of Delaware for the exclusive purposes of (i) issuing its Asset Preferred Securities and common securities, (ii) investing the gross proceeds of the Asset Preferred Securities in a junior subordinated debenture of Allfirst Financial Inc. and other permitted investments and (iii) engaging in only those other activities necessary or incidental thereto. Allfirst Financial Inc. holds 100% of the common securities of both trusts.
Distributions on the Capital Trust Securities are non-cumulative. The distribution rate on the Capital Trust Securities is a rate per annum of three month LIBOR plus 1.50% of the stated liquidation amount of $1,000 per Capital Trust Securities, reset quarterly two business days prior to the distribution dates of October 15, January 15, April 15, and July 15 in each year. The distributions will be paid if, as and when Allfirst Capital Trust has funds available for payment. The Capital Trust Securities are subject to mandatory redemption if the Asset Preferred Securities of Allfirst Asset Trust are redeemed. Allfirst Asset Trust will redeem the Asset Preferred Securities if the junior subordinated debenture of Allfirst Financial Inc. held by the Allfirst Asset Trust is redeemed. Allfirst Financial Inc. may redeem the junior subordinated debentures, in whole or in part, at any time on or after July 15, 2009 with the prior consent of the Federal Reserve Board and the Central Bank of Ireland. Allfirst Asset Trust will redeem the Asset Preferred Securities at an amount equal to $1,000 plus accrued and
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) unpaid distributions for the current quarterly period from the last distribution date. An equal amount of the Capital Trust Securities will be redeemed upon any redemption of the Asset Preferred Securities at an amount per Capital Trust Security equal to $1,000 plus accrued and unpaid distributions from the last distribution payment date. Allfirst Financial Inc. has guaranteed, on a subordinated basis, the payment in full of all distributions and other payments on the Capital Trust Securities and on the Asset Preferred Securities to the extent that Allfirst Capital Trust and Allfirst Asset Trust, respectively, have funds legally available.
11. Preferred Stock
On July 14, 1999, the proceeds from the issuance of the Capital Trust Securities, as well as other funding sources, were used to redeem Allfirst's 7.875% Non-cumulative Preferred Stock at a redemption price of $25.00 per share plus accrued and unpaid dividends from the immediately preceding dividend payment date to the redemption date of $2.4 million.
Allfirst authorized and issued 90 thousand shares of 4.50% cumulative, redeemable preferred stock with a $5 par value and a $100 liquidation preference per share in connection with the Zirkin-Cutler acquisition in 1996. The redeemable preferred stock was recorded at $7.6 million which was the fair value of the stock at the date of issue. The carrying amount will be increased to the mandatory redemption amount of $9.0 million by periodic accretions using the interest method with an offset to retained earnings. At December 31, 1999, all 90 thousand shares were outstanding and had a balance of $8.3 million. The cumulative dividends are payable quarterly when, and as declared by, Allfirst's Board of Directors out of funds legally available for such payments.
The shares are redeemable at Allfirst's option or the holders' options (on at least 30 days notice but no more than 60 days notice) during a redemption period commencing July 1, 2002 and ending June 30, 2003 at $100 per share (liquidation value) plus accrued and unpaid cumulative dividends through the redemption date.
12. Comprehensive Income (Loss)
The components of other comprehensive loss for the year ended December 31, 1999 are as follows:
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of other comprehensive loss for the year ended December 31, 1998 are as follows:
The components of other comprehensive income for the year ended December 31, 1997 are as follows:
13. Employee Benefit Plans
Allfirst sponsors three defined benefit pension plans. The largest plan ("the qualified plan") covers substantially all employees of Allfirst and its subsidiaries; the two smaller plans ("the nonqualified plans") provide supplemental benefits to certain key employees. Benefits under the plans are generally based on age, years of service and compensation levels.
In addition, Allfirst sponsors defined benefit post retirement plans that provide medical and life insurance coverage to eligible retirees and dependents based on age and length of service. Medical coverage options are similar to those available to active employees. The cost of plan coverage for retirees and their qualifying dependents is based upon a credit system that combines age and years of service. Substantially all employees become eligible for these benefits when they retire. Benefits are provided through a variety of health care programs including Health Maintenance Organizations and insurance companies whose premiums are based on the benefits paid during the year. Information related to these plans is presented under "Other Benefits" in the following table.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the beginning and ending balances of the benefit obligation, the fair value of plan assets, an analysis of funded status of the plans and the amounts recognized in the consolidated statements of condition for the years ending December 31, 1999 and 1998.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic benefit costs were based on the following assumptions:
The 1999 health care trend rate is assumed to be 7.5% for non-HMO healthcare benefits and 4.5% for HMO medical benefits. These rates are assumed to decrease gradually to 4.5% in the year 2002 and remain at that level thereafter, for the non-HMO plans. The HMO plans are currently at their ultimate rate of 4.5%.
The components of net periodic benefit costs for Allfirst's defined benefit pension plans for the years ended December 31, 1999, 1998 and 1997 are as follows:
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $12.2 million, $9.3 million, and $0, respectively, as of December 31, 1999, and $22.2 million, $17.6 million, and $0, respectively, as of December 31, 1998.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of Allfirst's net periodic postretirement benefit costs for the years ended December 31, 1999, 1998, and 1997 are as follows:
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
Allfirst provides all salaried and eligible hourly employees with a defined contribution plan. Eligible employees can enter the plan on January 1, April 1, July 1, or October 1 following their date of employment. Employees can contribute varying percentages of their annual compensation up to a maximum of 16% (highly compensated maximum of 10% during 1999). Allfirst matches 100% of the first 3% and 50% of the next 3% of an employee's contribution. Defined contribution plan expenses totaled $7.3 million, $7.4 million and $4.7 million in 1999, 1998 and 1997, respectively.
14. Restricted Stock Awards and Stock Options
Allfirst's 1989 Long-Term Incentive Plan and Trust (the "1989 Plan") provides for the award to key employees who contribute to the continued growth, development and financial success of Allfirst of up to 7 million Ordinary shares of AIB ("Common Stock') EURO 0.32 each (or the equivalent thereof in Common Stock ADSs). Awards are made to participants, without payment of consideration by the participant, in the form of Restricted Stock purchased by Allfirst in the open market and are held in trust under the 1989 Plan until the expiration of the relevant restriction period. Awards aggregating the equivalent of 96 thousand shares of Common Stock were made during 1999. During 1998 and 1997, awards were made under the 1989 Plan aggregating the equivalent of 130 thousand and 208 thousand shares of Common Stock, respectively. Expenses relative to this plan totaled $827 thousand, $602 thousand, and $913 thousand, in 1999, 1998, and 1997, respectively. The awards are subject to a restriction period of at least three years.
Allfirst's 1997 and 1999 Stock Option Plans provide for the grant to key employees of options to acquire AIB ADSs. The options are granted at no less than the fair market value of the stock at the date of the grant. Options granted in 1998 and 1999, with the exception of the options granted under the Allfirst Shares Plan and the 1999 stock option plan, vest one half in 24 months and one half in 36 months from the grant date and must be exercised within 10 years of the grant date or they will expire. Options granted on December 29, 1997 vested six months from the grant date and must be exercised within seven years of the grant date or they will expire. During 1999, Allfirst implemented an all employee stock option program called Allfirst Shares which is part of
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the 1997 Stock Option Plan. Each full and part-time employee who was eligible for employee benefits and was employed by Allfirst as of May 4, 1999 received an option to purchase up to 100 AIB ADSs. The options may be exercised (i) any time after May 4, 2002 and before May 4, 2004, as long as the closing price of AIB ADSs has equaled or exceeded 150% of the exercise price for five consecutive days at any time after the grant date; or (ii) any time after May 4, 2004, regardless of the price of the ADRs. The options must be exercised within 10 years or they will expire. Options under the 1999 stock option plan vest based on certain performance objectives.
Allfirst and an independent Trustee created a trust which acquired AIB ADSs in the open market with the proceeds of a loan from Allfirst. Proceeds from option exercises and any dividends and other earnings on the trust assets will be used to repay the loan to the trust. Option holders have no preferential rights with respect to the trust assets, and the trust assets are subject to the claims of Allfirst's general creditors in the event of insolvency. The AIB ADSs held by the trust are classified on Allfirst's financial statements as investment securities available-for-sale. At December 31, 1999 and 1998 investment securities available-for-sale included $86.1 million and $66.3 million, in AIB ADSs, respectively, related to the 1997 and 1999 Stock Option Plans. Any decline in value of the AIB ADSs in the trust will be reflected as an unrealized loss on investment securities available-for-sale and reflected in other comprehensive income in stockholders' equity. AIB will not issue any securities in connection with the 1997 or 1999 Stock Option Plan, will not receive any proceeds from the exercise of the options, and otherwise has no rights or obligations with respect to the Stock Option Plans.
The summary of the status of Allfirst's stock option plans as of December 31, 1999 and 1998, and changes during the years ending on those dates is presented below:
- -------- (a) adjusted for a 3 for 1 stock split in May 1999. (b) shares represent AIB ADSs.
The following table summarizes information about fixed options outstanding at December 31, 1999:
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair values of stock options granted were estimated at the date of the grants using a Black-Scholes option pricing model. The following details the weighted average assumptions used and the resulting fair values provided by the option pricing model:
The pro forma net income of Allfirst that would have been recognized in the consolidated statements of income if the fair value method of accounting for stock options had been used is $173.9 million, $213.7 million and $151.1 million, respectively for the years ended December 31, 1999, 1998 and 1997.
15. Other Income and Operating Expenses
The following table summarizes the more significant elements of other income and other operating expenses for the three years ended December 31, 1999:
16. Merger Related Expenses
In the fourth quarter of 1997, Allfirst completed its target environment and integration plan in connection with the acquisition of DDC. As a result, Allfirst recorded $20 million in merger related expenses including professional fees of $5.4 million related to the development of the target environment and integration plan and a $14.6 million restructuring charge. These costs were in addition to acquisition costs related to DDC which were
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) recorded as a component of goodwill. Included in the restructuring charge were $5.7 million in severance and outplacement costs associated with the elimination of approximately 101 non-DDC full-time equivalent employees; $7.7 million in costs associated with owned and leased facilities that will be vacated, and furniture, equipment, software and leasehold improvements that will be abandoned or sold as a result of business or process changes; and $1.2 million in other costs. There was no balance remaining in the severance accrual at December 31, 1998. The following table reflects a summary of activity with respect to the restructuring liability at December 31, 1999 and 1998. The remaining balances are primarily related to facilities closing costs.
17. Income Taxes
The components of income tax expense are as follows:
- -------- (1) Foreign income taxes represent taxes on interest received from foreign borrowers and foreign dividends received.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between actual income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
18. Regulatory Matters and Dividend Restrictions
Allfirst and its subsidiary banks are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Allfirst's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Allfirst and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of Allfirst and its subsidiary banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Allfirst and its subsidiary banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Qualitative measures established by regulation to ensure capital adequacy require Allfirst and its subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). As of December 31, 1999, Allfirst and its subsidiary banks met all capital requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation categorized Allfirst and its subsidiary banks as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", Allfirst and its subsidiary banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed Allfirst or its subsidiary banks' categories.
Allfirst and its subsidiary banks' actual capital amounts and ratios at December 31, 1999 and 1998 are presented in the following table.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends paid by Allfirst's subsidiary banks are subject to various legal and regulatory restrictions. The subsidiary banks can initiate dividend payments in 2000, without prior regulatory approval of $189.2 million, plus an amount equal to their net profits for 2000, as defined by statute, up to the date of any such dividend declaration.
Section 23A of the Federal Reserve Act limits extensions of credit that can be made from the Banks to any affiliate (with certain exceptions), including the Parent Company. Loans to any one affiliate may not exceed 10% of a bank subsidiary's capital and surplus and loans to all affiliates cannot exceed 20% of such bank subsidiary's capital and surplus. Additionally, all loans must be collateralized and must have terms comparable to those with unaffiliated companies.
The Banks are required to maintain reserves, included in cash and due from banks, with the Federal Reserve Bank against their deposits. Average reserve balances maintained during 1999 and 1998 were $30.6 million and $58.1 million, respectively.
19. Fair Value of Financial Instruments
The following is information about the fair value of financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Allfirst.
Trading account assets--Fair values are based on quoted market prices as recognized in the statements of condition.
Investment securities--Fair values are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market values for similar securities.
Loans held-for-sale--Market quotes are used to estimate the value of loans held-for-sale which are primarily residential and commercial mortgages unless there is a firm commitment to sell the loans in which case the commitment price is used.
Loans--For credit card and home equity loans/lines of credit with short-term or variable characteristics, the total loans outstanding approximate fair value. This amount excludes any value related to the account relationship. The fair value of other types of loans is estimated by discounting the future cash flows using the comparable risk-free rate and adjusting for an appropriate spread to cover credit risk and operating costs.
Deposits--The fair values disclosed for demand deposits (e.g., interest and noninterest bearing demand, savings and money market savings) are equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated by discounting the future cash flows using the current rates at which similar deposits could be acquired.
Long-term debt--The fair value is based on dealer quotes, where available, and on estimates made by discounting the future cash flows using the current rates at which similar borrowings could be acquired.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Many of Allfirst's assets and liabilities are short-term financial instruments whose carrying amounts reported in the statements of condition approximate fair value. These items include cash and due from banks, interest- bearing deposits in other banks, federal funds sold and securities purchased under resale agreements, due from customers on acceptances, short-term borrowed funds, acceptances outstanding, and the financial instruments included in other assets and liabilities. The estimated fair values of Allfirst's remaining assets and liabilities as of December 31 are summarized below.
- -------- (1) Leases receivable with carrying values totaling $986.9 million and $846.2 million at December 31, 1999 and 1998, respectively are excluded. The carrying values are net of the allowance for lease losses and related unearned income.
Off-Balance Sheet Instruments--The fair value of loan commitments and letters of credit, both commercial and standby, is assumed to equal the carrying value which is immaterial. Extensions of credit under these commitments, if exercised, would result in loans priced at market terms. The fair value of foreign exchange contracts represents the net asset or liability of Allfirst, since these contracts are revalued on a monthly basis. The fair value of interest rate contracts is the estimated amount Allfirst would receive or pay to terminate the contracts or agreements, taking into account current interest rates, volatility factors and, when appropriate, the credit worthiness of the counterparties. See notes 20 and 21 for additional information about off-balance sheet financial instruments.
The estimated fair values of Allfirst's off-balance sheet financial instruments as of December 31 are summarized below.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Off-Balance-Sheet Trading and Lending Activities
Off-Balance-Sheet Financial Instruments--Trading Activities
Allfirst maintains active trading positions in a variety of financial derivatives including foreign exchange and interest rate futures, interest rate swaps, interest rate caps and floors, forward rate agreements, and interest rate and foreign exchange options. Many of these positions are a result of activity generated by corporate customers. The balance of the positions represent strategic trading decisions of Allfirst's derivative and foreign exchange traders.
The following table presents the notional amounts, the end-of-period fair values and the average fair values of the classes of trading instruments at December 31, 1999 and 1998.
Allfirst's credit risk exposure is represented by the instruments detailed above with a positive fair value. Allfirst would incur a loss if it was necessary to replace these instruments due to counterparty default. Allfirst minimizes the credit risk of these instruments through adherence to credit approvals, risk control limits, and monitoring procedures. Market risk is the risk of decline in the value of the contract arising from adverse movements in price, index or rate of the instrument underlying the contract. Exposure to market risk is managed in accordance with Allfirst's approved risk limits and by entering into offsetting positions. In addition, trading systems are in place which measure risks and profitability associated with trading positions as market movements occur.
Interest Rate Swaps--These transactions generally involve the exchange of fixed and floating payments without the exchange of the underlying principal amounts. Payments made or received under swap contracts are accrued based on contractual terms and are reported as trading income. The related accrued amounts receivable and payable to customers or counterparties are included in other assets or liabilities. Revenues from the customer portfolio represent a small profit margin on intermediated transactions. The difference in the fair value of the offsetting amounts is not material.
Interest Rate Caps and Floors--These instruments are written by Allfirst to enable customers to transfer, modify, or reduce their interest rate risk exposure. In a cap or floor contract, the purchaser pays a premium at the
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) initiation of the contract for the right to receive payments if market interest rates are greater than the strike price of a cap or less than the strike price of a floor. Payments made or received under cap or floor contracts are accrued based on contractual terms and are reported as trading income.
Swaptions--These instruments are written by Allfirst to enable customers to transfer, modify or reduce their interest rate risk exposure. The purchaser of a swaption pays a premium up front to the seller for the opportunity to enter into a swap with specified terms or to cancel or extend an existing swap at a specified date in the future. Payments made or received under swaption contracts are accrued based on contractual terms and are reported as trading income.
Commitments to Purchase and Sell Securities, Futures and Forward Contracts-- These instruments are contracts for delayed delivery of securities or money market instruments in which the seller agrees to deliver a specified instrument at a specified price or yield at a specified date. Commitments to purchase and sell securities, futures and forward contracts used in securities trading operations are recognized currently at market value and are reported as trading account profits (losses).
Commitments to Purchase and Sell Foreign Exchange--Forward commitments involve the purchase or sale of foreign currency amounts for delivery at a specified future date. Payments on forward commitments are exchanged on the delivery date based on the exchange rate in the contract. Forward commitments to purchase and sell foreign exchange are recognized at market value and are reported as trading income.
Foreign Exchange Options--These agreements represent rights to purchase or sell foreign currency at a predetermined price at a future date. The purchaser pays a premium at the initiation of the contract for the right to exchange a specified amount at the contracts exchange rate at the maturity of the option.
Revenues from trading activities are shown below.
Off-Balance Sheet Financial Instruments Issued for Lending Activities
Allfirst issues off-balance sheet financial instruments as part of its commercial and consumer lending activities. The contract amounts of these instruments represent potential credit risk at December 31, as shown below:
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments to extend credit--Allfirst enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at both fixed and variable specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. The credit risk associated with loan commitments is essentially the same as that involved in extending loans to customers. Collateral requirements and loan to value ratios are the same as those for funded transactions and are established based on management's assessment of the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby, Commercial and Similar Letters of Credit--Standby letters of credit can be either financial or performance based. Financial standby letters of credit obligate Allfirst to disburse funds to a third party if Allfirst's customer fails to repay an outstanding loan or debt instrument under the terms of the agreement with the beneficiary. Performance standby letters of credit obligate Allfirst to disburse funds if the customer fails to perform some contractual or non-financial obligation under the terms of the agreement with the beneficiary. In either case, the beneficiary must also comply with the terms of the letter of credit. Allfirst's policies generally require that all standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. The credit risk involved in issuing both commercial and standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Commercial letters of credit are conditional commitments issued by Allfirst in connection with obligations of customers (account parties) to other persons (beneficiaries). A draw on a letter of credit by the beneficiary creates a reimbursement obligation from the account party to Allfirst. A commercial letter of credit is normally a short-term instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller upon compliance with specific terms of the commercial letter of credit.
Loans sold with recourse--Loans sold with recourse are loans sold to a third party with an agreement that Allfirst will reimburse the purchaser for losses resulting from the purchased loans. In addition, a nonbanking subsidiary of Allfirst originates, sells and services loans in conjunction with the Federal National Mortgage Association ("FNMA") Delegated Underwriting and Servicing ("DUS") program. Under this program, Allfirst's credit risk associated with these loans sold with recourse is limited to a maximum loss of 20% of each loan's original principal balance for the life of the loan. At December 31, 1999 and 1998 Allfirst's credit risk on loans sold with recourse under the FNMA DUS program totaled $186.6 million and $151.3 million, respectively.
Securities Lent--Securities lent represent securities owned by Allfirst or its customers which are lent to third parties. The contract amount represents potential credit risk. However, Allfirst obtains collateral, with a fair value exceeding 100 percent of the contract amount, for all securities lent which is used to indemnify Allfirst and customers against possible losses resulting from third party defaults.
Concentrations of Credit Risk
The majority of Allfirst's loan activity is with customers within the Baltimore/Washington and greater Harrisburg, Pennsylvania marketplaces which encompass all of Maryland, Washington, D.C., Northern Virginia and South Central Pennsylvania. As such, its performance will be influenced by the economies of those regions. The loan portfolio is diversified with no single industry comprising a significant portion of the total portfolio. Investment real estate outstandings comprise 13% of total loans, but are geographically diversified by product type.
21. Off -Balance Sheet Risk Management Activities
Allfirst uses a variety of off-balance sheet financial instruments as part of its overall interest rate risk management process. Allfirst's principal objective of asset/liability management activities is to provide maximum
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating Allfirst's funding needs. Accordingly, Allfirst uses a combination of derivative financial instruments such as interest rate swaps, interest rate caps and floors, and options with indices that correlate to on-balance sheet instruments to modify the repricing characteristics of interest earning assets and interest bearing liabilities.
The amounts disclosed below represent the period end notional values and fair values of derivative financial instruments held for risk management purposes. Allfirst's credit risk exposure is represented by the instruments detailed below with a positive fair value. Allfirst would incur a loss if it was necessary to replace these instruments due to counterparty default.
Deferred losses on the early termination of interest rate swaps designated to Allfirst's prime based commercial loans were $858 thousand at December 31, 1997. These losses were amortized into income in 1998. At December 31, 1997, there was a $57 thousand deferred gain on the early termination of an interest rate swap designated to Allfirst's Federal funds purchased. This gain was amortized into income in 1998. At December 31, 1997, there was a $5.2 million deferred gain on the early termination of an interest rate swap designated to Allfirst's credit card securitization. This gain was amortized over the life of the securitization as a component of servicing income until the credit card securitization was sold in 1998 when it was recognized at a component of the gain on the sale of credit card loans.
22. Line of Business Reporting
Allfirst's major lines of business are based on Allfirst's method of internal reporting, which separates its business on the basis of products and services. Allfirst's reportable business lines are Retail Banking, Corporate Banking, Real Estate Finance, Trust and Investment Advisory Services, and Treasury. Retail Banking provides loans, deposits, and credit life insurance to consumers and commercial small business customers. Corporate Banking provides commercial loans, letters of credit, derivative financial instruments, foreign exchange and cash management products and services to domestic and international corporate customers. Real Estate Finance provides construction and property loans and letters of credit to domestic corporate customers. It is also involved in mortgage banking activities related to multi-family housing loan programs and residential mortgage lending. Trust and Investment Advisory Services provides investment advisory, investment and fiduciary services to individual, institutional and corporate clients, including mutual fund and annuity products sold through retail branches. Treasury is responsible for managing and controlling the liquidity, funding and market risk needs of
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Allfirst. Other business lines include smaller business units. The revenues and expenses in other business lines is primarily related to merchant services. Lines of business that Allfirst has exited are classified under discontinued business lines. Discontinued business lines also includes any gain or loss realized on the sale of the assets of the business line. As the table indicates, gains on the sale of credit card loans in 1997 and 1998 have been classified under discontinued business lines. Other includes inter- segment income elimination and unallocated income and expenses, including goodwill and other intangible asset amortization of $49.0 million in 1999, $53.3 million in 1998 and $30.0 million in 1997. Other also receives a credit for funds provided and charges for funds used.
Allfirst's internal accounting process is based on practices which support the management structure of Allfirst, and the resulting data is not necessarily comparable with similar information from other financial institutions. Net income reflects costs directly associated with each business line plus an appropriate share of corporate overhead expenses. A match funded transfer pricing system is used to allocate interest income and expense, with a business line receiving credit for funds provided and charges for funds used. Loan loss provisions and the allowance for loan and lease losses are allocated based on the credit of each business line's loan portfolio and the changes therein. Capital is assigned to each business line based on regulatory risk-based capital guidelines. Interest rate risk is aggregated from all business lines and classified under "Treasury". In addition, Treasury includes investment portfolio revenue, wholesale funding expenses and other revenue and expenses associated with the Treasury unit.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents operating information about each of Allfirst's business lines for the year ended December 31, 1999. Net interest income is presented on a fully tax equivalent ("FTE") basis, therefore, interest income from tax exempt earning assets is increased by an amount equivalent to the federal income taxes that would have been paid if this income was taxable at the statutory Federal Income tax rate of 35%. The offset to this adjustment is made to income tax expense.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents operating information about each of Allfirst's business lines for the year ended December 31, 1998. Net interest income is presented on a fully tax equivalent ("FTE") basis, therefore, interest income from tax exempt earning assets is increased by an amount equivalent to the federal income taxes that would have been paid if this income was taxable at the statutory Federal Income tax rate of 35%. The offset to this adjustment is made to income tax expense.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents operating information about each of Allfirst's business lines for the year ended December 31, 1997.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. Litigation
Various legal actions and proceedings are pending involving Allfirst Financial Inc. or its subsidiaries. Management believes that the aggregate liability or loss, if any, resulting from such legal actions and proceedings will not be material to Allfirst's financial condition or results of operations.
24. Condensed Parent Company Financial Information
Following is condensed financial information of Allfirst Financial Inc. (parent company only):
CONDENSED STATEMENTS OF INCOME
Allfirst Financial Inc.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF CONDITION
Allfirst Financial Inc.
ALLFIRST FINANCIAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) CONDENSED STATEMENTS OF CASH FLOWS
Allfirst Financial Inc.
- -------- (1) Includes purchases and maturities of short-term Federal Agency discount notes which were utilized by the parent company for liquidity management purposes. (2) Cash and cash equivalents include those amounts under the captions "Cash" and "Interest bearing deposits in other banks" on the condensed statements of condition.
REPORT OF MANAGEMENT
The management of Allfirst Financial Inc. is responsible for the preparation, integrity and fair presentation of its published financial statements and all other information presented in this Annual Report on Form 10-K. The financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts some of which are based on judgments and estimates of management.
Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. The system contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets regularly with management, internal auditors and independent auditors, and reviews audit plans and results as well as management's actions taken in discharging responsibilities for accounting, financial reporting and internal controls. PricewaterhouseCoopers LLP, independent auditors, and the internal auditors have direct and confidential access to the Audit Committee at all times to discuss the results of their examinations.
Management assessed its internal control structure over financial reporting as of December 31, 1999. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control-- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that Allfirst maintained an effective internal control structure over financial reporting as of December 31, 1999.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder Allfirst Financial Inc.:
In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Allfirst Financial Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Allfirst's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland February 3, 2000
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10.
Item 10. Executive Officers of the Registrant
The following table presents information concerning the executive officers of Allfirst as of December 31, 1999. Unless otherwise noted, each was elected at the April 1999 meeting of the Board of Directors to serve until the April 2000 meeting of the Board of Directors, and each executive officer has been employed by Allfirst or one of its subsidiaries for the past five years.
- -------- (1) Until December 14, 1999, Mr. Bramble was also the Chief Executive Officer of Allfirst and Allfirst Bank. Prior to joining Allfirst in January, 1997, Mr. Cregg was Head of Group Human Resources and Strategic Technology of Allied Irish Banks, p.l.c., director of AIB European Investment Ltd. and a member of the Bank Council of Wielkopolski Bank Kredytowy SA. Prior to joining Allfirst in February 2000, Ms. Foss was Senior Vice President, Human Resources and Development for Fortis Financial Group. She had previously served as Senior Vice President, Human Resources, for First Bank System and MNC Financial, Inc. Prior to joining the Corporation in July 1997, Mr. Gold was an Executive Vice President and head of the Trust Division of Dauphin Deposit Corporation. On December 14, 1999, Ms. Keating was appointed to the additional office of Chief Executive Officer of Allfirst and Allfirst Bank. Prior to joining Allfirst in January 1996, Ms. Keating was President and Senior Bank Executive of NationsBank of Maryland, N.A. and an Executive Vice President of MNC Financial, Inc. Mr. Ripienski and Ms. Scully were elected executive officers at the December 1999 meeting of the Board of Directors. Ms. Foss was elected an executive officer at the January 2000 meeting of the Board of Directors.
The information required by Items 10-13 of this report relating to directors, executive compensation, ownership of Allfirst's securities, and certain relationships and transactions is incorporated herein by reference to the sections headed "Election of Directors" and "Compensation of Executive Officers" contained in Allfirst's definitive Information Statement, to be filed on or about March 31, 2000 pursuant to Regulation 14C under the Securities Exchange Act of 1934; provided that the subsection headed "Report of Management and Compensation Committee" is not incorporated herein by reference or otherwise.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: None.
3. Exhibits:
(3.1) (i) Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Allfirst on October 1, 1999).
(ii) Bylaws (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Allfirst on October 1, 1999).
(4.1) Allfirst agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument defining the rights of holders of long-term debt of Allfirst and its consolidated subsidiaries.
(10.1) Executive Incentive Pay Plan**
(10.2) Allfirst Financial Inc. 1989 Long-Term Incentive Plan and Trust, dated June 20, 1989, and Amendment No. 1 thereto dated as of January 18, 1991**
(10.3) Amendment No. 2, dated April 1, 1994, to Allfirst Financial Inc. 1989 Long-Term Incentive Plan and Trust, as amended***
(10.4) Allfirst Financial Inc. Pension Plan for Executive Employees, as amended, effective January 1, 1986**
(10.5) Amendment to Allfirst Financial Inc. Pension Plan for Executive Employees, effective December 14, 1993***
(10.6) Allfirst Financial Inc. Deferred Compensation Plan, as amended and restated, effective January 1, 1990**
(10.7) Amendment No. 1 effective October 1, 1992, Amendment No. 2 effective January 20,1993 and Amendment No. 3 effective September 20, 1993, to Allfirst Financial Inc.Deferred Compensation Plan***
(10.8) Allfirst Financial Inc. Deferred Compensation Amended and Restated Trust Agreement, dated September 23, 1988, Provident National Bank, trustee**
(10.9) Allfirst Financial Inc. Deferred Compensation Trust Agreement No. 2, effective July 13, 1990, Provident National Bank, trustee**
(10.10) Allfirst Financial Inc. Deferred Compensation Trust Agreement No. 3, effective January, 25 1993, Provident National Bank, trustee***
(10.11) Allfirst Financial Inc. Deferred Compensation Plan, effective January 1, 1994***
(10.12) Allfirst Financial Inc. Deferred Compensation Trust Agreement No. 4, effective January 1, 1994, Provident National Bank, trustee***
(10.13) Allfirst Financial Inc. Supplemental Retirement Trust Agreement, dated September 23, 1988, Provident National Bank, trustee**
(10.14) Allfirst Financial Inc. Executive Post-Retirement Trust Agreement, dated October 7, 1988, Provident National Bank, trustee**
(10.15) Allfirst Financial Inc. Executive Life Plan, effective January 1, 1990**
(10.16) Allfirst Financial Inc. Executive Optional Life Plan, effective January 1, 1990**
(10.17) Allfirst Financial Inc. Excess Benefit Plan, effective October 1, 1989**
(10.18) Allfirst Financial Inc. 1997 Stock Option Plan and Trust (incorporated herein by reference to Exhibits 99.1 and 99.2 to registration statement on Form S-8, Registration No. 333- 8212)
(10.19) Allfirst Financial Inc. 1999 Stock Option Plan
(21) Subsidiaries of the Registrant
(23) Consent of PricewaterhouseCoopers LLP
(24) Power of Attorney
(27) Financial Data Schedule - -------- ** Incorporated by reference to Allfirst's Registration Statement on Form S-1, Registration No. 33-46277, filed with the Commission on March 13, 1992. *** Incorporated by reference to Allfirst's Annual Report on Form 10-K for the year ended December 31, 1995 filed with the Commission on March 22, 1996.
(b) Reports on Form 8-K
Current Report on Form 8-K filed October 1, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Allfirst Financial Inc.
/s/ Susan C. Keating By___________________________________ (Susan C. Keating, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
MAJORITY OF THE BOARD OF DIRECTORS:
Sherry F. Bellamy, James T. Brady, Frank P. Bramble, Benjamin L. Brown, Michael D. Buckley, Jeremiah E. Casey, J. Owen Cole, Edward A. Crooke, John F. Dealy, Mathias J. DeVito, Jerome W. Evans, Jerome W. Geckle, Frank A. Gunther, Jr., Margaret M. Heckler, Lee H. Javitch, Susan C. Keating, Gary Kennedy, William T. Kirchhoff, Henry J. Knott, Jr., Andrew Maier II, Thomas P. Mulcahy, and R. Champlin Sheridan