---

UNITED STATES





SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended March 31, 2002





OR


| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




Commission file number 17273





---




Allfirst Financial Inc.


(Exact name of registrant as specified in its charter)





Delaware

52-0981378(State or other jurisdiction ofincorporation or organization)

(I.R.S. EmployerIdentification No.)The Allfirst Building25 South Charles StreetBaltimore, Maryland

21201(Address of principal executive offices)

(zip code)





4102444000


(Registrants telephone number, including area code)





Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for at least the past 90 days. Yes   x  No





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:





All 597,763 outstanding shares of Common Stock of the registrant are owned by Allied Irish Banks, p.l.c., an Irish banking corporation.


---



---

ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





FORM 10-Q





FOR THE QUARTER ENDED MARCH 31, 2002





INDEX





Page NoPart I.    Financial InformationItem 1.

Financial Statements (Unaudited)Consolidated Statements of Income

3Consolidated Statements of Financial Condition

4Consolidated Statements of Changes in Stockholders Equity

5Consolidated Statements of Cash Flows

6Notes to Consolidated Financial Statements

7Item 2.

Managements Discussion and Analysis of Financial    Condition and Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures about Market Risk

24Part II.    Other InformationItem 1.

Legal Proceedings

24Item 6.

Exhibits and reports on Form 8-K

24Signatures



25




2




---

Item 1.    Financial Statements





ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)





Three Months Ended March 31,2002


2001 As Restated(in thousands)Interest IncomeInterest and fees on loans and leases

$
150,408


$
204,704Interest and dividends on investment securities:Taxable interest


43,690



55,745Tax-exempt interest


6,301



6,076Dividends


5,834



5,081Interest on loans held for sale


995



680Other interest income


3,103



458Total interest and dividend income


210,331



272,744Interest ExpenseInterest on deposits


54,172



103,671Interest on Federal funds purchased and other short-term borrowings


8,929



26,124Interest on long-term debt


13,336



17,016Total interest expense


76,437



146,811Net Interest Income


133,894



125,933Provision for loan and lease losses


9,328



7,750Net Interest Income After Provision for Loan and Lease Losses


124,566



118,183Noninterest IncomeService charges on deposit accounts


30,138



25,516Trust and investment advisory fees


21,937



22,401Electronic banking income


7,980



7,158Mortgage banking income


5,933



4,791FX Losses


(16,988
)


(38,744
)Trading income  other


2,019



3,060Consulting income


12,309



Other income


21,873



20,887Securities gains, net


3,146



234Total noninterest income


88,347



45,303Noninterest ExpenseSalaries and other personnel costs


88,813



76,313Equipment costs


12,799



11,397Occupancy costs


9,662



9,405Postage and communications


5,129



4,513Advertising and public relations


4,306



2,295FX Related Charge


10,000



Other operating expenses


28,066



20,411Intangible assets amortization expense


1,645



11,414Total noninterest expenses


160,420



135,748Income Before Income Taxes


52,493



27,738Income tax expense


14,567



8,968Net Income


37,926



18,770Dividends on preferred stock


101



101Net Income to Common Stockholders

$
37,825


$
18,669





See accompanying notes to consolidated financial statements




3




---



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(Unaudited)







March 31, 2002


December 31, 2001(in thousands,except per share amounts)AssetsCash and due from banks

$
735,524


$
1,286,131Interest bearing deposits in other banks


3,811



4,869Trading account securities


1,631



41,676Federal funds sold and securities purchased under resale agreements


1,132,000



922,675Investment securities available for sale


3,599,589



4,101,133Loans held for sale


63,477



38,186Loans, net of unearned income of $173,891 in 2002 and $185,601 in 2001, respectively:Commercial


3,958,477



3,930,556Commercial real estate


2,420,088



2,395,841Residential mortgage


423,041



472,082Direct retail


2,451,636



2,420,376Indirect retail


355,291



418,469Commercial leases receivable


671,263



679,554Indirect retail leases receivable


210,953



235,890Foreign


201,886



201,103Total loans, net of unearned income


10,692,635



10,753,871Allowance for loan and lease losses


(156,039
)


(152,539
)Loans, net


10,536,596



10,601,332Premises and equipment


243,530



244,607Due from customers on acceptances


2,441



3,274Intangible assets


19,160



21,046Goodwill


770,092



770,092Other assets


829,625



782,910Total assets

$
17,937,476


$
18,817,931Liabilities and Stockholders EquityDomestic deposits:Noninterest bearing deposits

$
3,014,802


$
3,848,733Interest bearing deposits


6,796,401



6,993,744Total core deposits


9,811,203



10,842,477Large denomination time deposits


2,225,642



1,922,324Interest bearing deposits in foreign banking office


110,779



305,490Total deposits


12,147,624



13,070,291Federal funds purchased and securities sold under repurchase agreements


1,349,648



1,126,302Other borrowed funds, short-term


970,708



566,904Bank acceptances outstanding


2,441



3,274Other liabilities


561,193



1,376,571Long-term debt


1,209,669



1,010,116Total liabilities


16,241,283



17,153,4584.50% Cumulative, Redeemable Preferred Stock, $5 par value per share, $100 liquidation preference per share: authorized and issued
90,000 shares


8,928



8,858Minority interest


111



113Stockholders equity:Common Stock, no par value; authorized 1,200,000 shares, issued 597,763 shares


85,395



85,395Capital surplus


582,816



582,816Retained earnings


1,009,629



971,874Accumulated other comprehensive income


9,314



15,417Total stockholders equity


1,687,154



1,655,502Total liabilities, redeemable preferred stock, minority interest and stockholders equity

$
17,937,476


$
18,817,931





See accompanying notes to consolidated financial statements




4




---

ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY





(Unaudited)





Preferred Stock

Common Stock

Capital Surplus

Accumulated Other Compre-hensive Income (Loss)


Retained Earnings


Total(in thousands)Three Months Ended March 31, 2001 As RestatedBalance, December 31, 2000 As Restated

$


$
85,395

$
582,816

$
(14,932
)

$
1,103,323


$
1,756,602Net income















18,770



18,770Other comprehensive income, net of tax:Minimum pension liability adjustment











(505
)






(505
)Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1)











19,298







19,298Other comprehensive income



















18,793Comprehensive income



















37,563Accretion of redeemable preferred stock















(66
)


(66
)Dividends declared on common stock















(46,400
)


(46,400
)Dividends declared on redeemable preferred stock















(101
)


(101
)Balance, March 31, 2001 As Restated

$


$
85,395

$
582,816

$
3,861


$
1,075,526


$
1,747,598Three Months Ended March 31, 2002Balance, December 31, 2001

$


$
85,395

$
582,816

$
15,417


$
971,874


$
1,655,502Net income















37,926



37,926Other comprehensive income, net of tax:Minimum pension liability adjustment











228







228Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1)











(6,331
)






(6,331
)Other comprehensive income



















(6,103
)Comprehensive income



















31,823Accretion of redeemable preferred stock















(70
)


(70
)Dividends declared on common stock



















Dividends declared on redeemable preferred stock















(101
)


(101
)Balance, March 31, 2002

$


$
85,395

$
582,816

$
9,314


$
1,009,629


$
1,687,154





(1)    Disclosure of reclassification amount:





Three Months Ended March 31,2002


2001Net unrealized holding gains (losses) on investment securities arising during period

$
(4,428
)

$
19,493Less: reclassification adjustment for realized gains included in net income


1,903



195Change in unrealized gains/losses on investment securities, net of tax

$
(6,331
)

$
19,298





See accompanying notes to consolidated financial statements




5




---

ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three MonthsEnded March 31,2002


2001As Restated(in thousands)Operating ActivitiesNet income

$
37,926


$
18,770Adjustments to reconcile net income to net cash (used for) provided by operating activities:Provision for loan and lease losses


9,328



7,750Provision for other real estate losses


(1
)


150Amortization of intangibles


1,645



11,414Depreciation and amortization


10,228



7,817Deferred income tax expense


2,675



3,868Net gain on the sale of assets


(3,979
)


(203
)Net (increase) decrease in loans held for sale


(25,291
)


26,796Net decrease (increase) in trading account securities


40,045



(2,980
)Net decrease in accrued interest receivable


2,917



9,916Net decrease in accrued interest payable


(5,383
)


(15,233
)Net (decrease) increase in derivative and FX net liabilities


(536,589
)


171,496Net decrease in accrued taxes receivable


66,661



29,578Other, net


(34
)


(11,234
)Net cash (used for) provided by operating activities


(399,852
)


257,905Investing ActivitiesProceeds from sales of investment securities available for sale


1,303,695



88,870Proceeds from paydowns and maturities of investment securities available for sale


417,556



241,510Purchases of investment securities available for sale


(1,617,168
)


(565,050
)Net increase in shortterm investments


(209,325
)


(171,880
)Proceeds from the sale of loans


30,126



Net repayments from lending activities of banking subsidiaries


27,124



364,226Principal collected on loans of nonbank subsidiaries


3,109



3,001Loans originated by nonbank subsidiaries


(6,793
)


(3,901
)Principal payments received under leases


1,529



1,124Purchases of assets to be leased


(505
)


(696
)Proceeds from the sale of other real estate and other assets owned


1,643



2,077Purchases of premises and equipment


(8,519
)


(17,231
)Proceeds from the sale of premises and equipment


393



202Other, net


944



(27,726
)Net cash used for investing activities


(56,191
)


(85,474
)Financing ActivitiesNet decrease in deposits


(922,667
)


(569,917
)Net increase in shortterm borrowings


527,148



397,772Proceeds from short-term parent funding


100,000



Proceeds from long-term parent funding


200,000



Redemption of Preferred Stock


(2
)


Cash dividends paid


(101
)


(46,501
)Net cash used for financing activities


(95,622
)


(218,646
)Decrease in cash and cash equivalents


(551,665
)


(46,215
)Cash and cash equivalents at January 1,


1,291,000



935,242Cash and cash equivalents at March 31,

$
739,335


$
889,027Supplemental DisclosuresInterest payments

$
81,820


$
162,043Income tax refunds


(46,160
)


(6,375
)Noncash Investing And Financing ActivitiesLoan chargeoffs


8,043



10,997Transfers to other real estate and other assets owned


1,008



2,473





See accompanying notes to consolidated financial statements




6




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ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




EXPLANATORY STATEMENT





On February 6, 2002, Allfirst Financial Inc. and subsidiaries (Allfirst) announced that its parent, Allied Irish Banks, p.l.c. (AIB), was undertaking a full investigation into fraudulent
foreign exchange trading activities at Allfirst. This investigation was led by former U.S. Comptroller of the Currency Eugene Ludwig with Wachtell, Lipton, Rosen & Katz acting as outside counsel to Allfirst and AIB in connection with the
investigation. The losses arising from the fraudulent activities were disclosed by Allfirst in an earnings release dated February 20, 2002. Such losses were $17.2 million pretax ($11.2 million after tax) for the first quarter of 2002 and $41.8
million pretax ($27.2 million after tax) for the prior year period.The financial statements and notes thereto for the first quarter of 2001 are restated to reflect the effects of the fraudulent proprietary foreign exchange trading activities. The
fraudulent trading activities and the resulting losses are referred to from time to time in this report as the Fraudulent Activities and the Fraud Losses, respectively, and proprietary foreign exchange trading losses are
referred to as FX Losses. FX Losses include both authentic and fraudulent trading activity. For additional information on the Fraudulent Activities and the Fraud Losses, refer to the 2001 Annual Report on Form 10-K filed with the
Securities & Exchange Commission on April 1, 2002.





|1. |  | Basis of Presentation
|-- |  | ---------------------




The
accompanying unaudited consolidated financial statements of Allfirst Financial Inc. and subsidiaries (Allfirst) have been prepared in accordance with generally accepted accounting principles for interim financial reporting. Accordingly,
they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (which consist of only normal, recurring accruals) necessary for
a fair presentation have been included. Certain amounts in prior periods have been reclassified for comparative purposes. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in Allfirsts 2001 Annual Report on Form 10-K.





|2. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------




SFAS No. 142
 Goodwill and Other Intangible Assets





SFAS No. 142, Goodwill and Other Intangible Assets, was
issued in June 2001. This Statement addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition. This Statement also
addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This Statement supercedes APB Opinion No. 17, Intangible Assets, but carries forward
without reconsideration the provisions in Opinion 17 related to internally developed intangible assets.





This Statement requires
that goodwill be allocated on a reporting unit level. Additionally, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment at the reporting unit level.
Intangible assets that have finite lives will continue to be amortized over their useful lives.





Also, this Statement requires
disclosures related to the changes in the carrying amount of goodwill from period to period (in the aggregate and by reportable segment), the carrying amount of intangible assets by major intangible asset classes both for those assets subject to
amortization and for those not subject to amortization, and the estimated intangible asset amortization expense for the next five years.




7




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ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







|2. |  | Recent Accounting Pronouncements (continued)
|-- |  | --------------------------------------------




The provisions of this Statement are effective with fiscal years beginning after December 15, 2001. Goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the nonamortization and
amortization provisions of this Statement. Allfirst adopted the provisions of this Statement on January 1, 2002. Application of the nonamortization provision of this Standard is expected to reduce noninterest expense by approximately $40 million in
2002 as compared to 2001. For the quarter ended March 31, 2002, there was no goodwill amortization expense as compared to $9.4 million of goodwill amortization expense for the prior year period. As part of the implementation of SFAS No. 142, a
transitional impairment test is required to be applied to all goodwill and other indefinite-lived intangible assets within the first half of 2002. Any impairment loss as a result of this test is to be reported as a change in accounting principle.
Allfirst currently does not have any other indefinite lived intangible assets on its balance sheet. As of March 31, 2002, Allfirst has not completed the impairment analysis, but does not expect to record a transitional impairment charge in 2002. The
net carrying amount of goodwill of $770.1 million was unchanged from December 31, 2001. The future impact of this statement could result in income statement volatility due to the potential recognition of impairment losses for goodwill, as opposed to
the reduction of goodwill through recurring amortization. See note 5 for additional information on intangible assets.





The
following table provides a comparison between the first quarter of 2002 and the prior year period after excluding the goodwill amortization.





For the Three Months Ended March 31,2002

2001(in thousands)Reported net income

$
37,926

$
18,770Add back: Goodwill amortization





9,377Adjusted net income

$
37,926

$
28,147





|3. |  | Investment Securities
|-- |  | ---------------------




The
amortized cost and fair value of available for sale securities at March 31, 2002 are as follows:





Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


Fair Value(in thousands)U.S. Treasury and U.S. Government agencies

$
122,594

$
706

$
(540
)

$
122,760Mortgagebacked obligations


1,549,691


16,336


(421
)


1,565,606Collateralized mortgage obligations


605,928


8,008


(570
)


613,366Asset-backed securities


133,524


5,065


(882
)


137,707Obligations of states and political subdivisions


778,936


12,651


(4,725
)


786,862Other debt securities


79,062


150






79,212Equity securities


313,161


300


(19,385
)


294,076Total

$
3,582,896

$
43,216

$
(26,523
)

$
3,599,589




8




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ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







|4. |  | Line of Business Reporting
|-- |  | --------------------------




Allfirst has determined that its major lines of business are those that are based on Allfirsts method of internal reporting, which separates its business on the basis of products and services. Allfirsts reportable business lines
are Regional Banking, Capital Markets, Asset Management, and Treasury. Regional Banking provides loans, deposits, letters of credit, derivative financial instruments, cash management products and services, mutual funds and credit life insurance to
consumers, small businesses, and middle market corporate customers. Capital Markets provides commercial loans, construction and property loans, letters of credit, derivative financial instruments, foreign exchange (FX) and cash
management products and services to large corporate customers. It is also involved in mortgage banking activities related to multi-family housing loan programs. Asset Management provides investment advisory, investment, and fiduciary services to
individual, institutional and corporate clients. The Asset Management Group also manages the ARK ® Funds, a family of
proprietary mutual funds. Treasury is responsible for managing and controlling the liquidity, funding and market risk needs of Allfirst. Other includes residential mortgage lending which was formerly included in Capital Markets and indirect lending
which was formerly included in Regional Banking. The activities in both of these businesses were curtailed prior to 2001. FX Losses, including the Fraud Losses, are included as a component of Other. Several smaller business units, inter-segment
income elimination and unallocated income and expenses, including goodwill and other intangible asset amortization are included in Other as well.





Allfirsts internal accounting process is based on practices which support the management structure of Allfirst, and the resulting data is not necessarily comparable with similar information from other financial
institutions. Net income reflects costs directly associated with each business line including centrally provided services which are allocated based on estimated usage of those services. Each business units assets and liabilities are
match-funded with interest rate risk centrally managed within Treasury. Loan loss provisions and the allowance for loan and lease losses are allocated based on a process that incorporates the loans risk rating and current economic trends for
commercial loans and leases and historical loss experience adjusted for current conditions for retail loans and residential mortgages.





The results for the first quarter of 2002 and 2001 are presented on a shareholder value based management (SVBM) basis. SVBM is a financial performance measure that allows management to: (1) manage capital more efficiently; (2)
reduce earnings volatility and enhance shareholder value; (3) compare businesses with different risk characteristics on a like-for-like basis; and (4) systematically address the risks inherent in Allfirst businesses.




9




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ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







|4.    Line |  | of Business Reporting (continued)
|---------- |  | ---------------------------------




The following tables present operating information about each of Allfirsts business lines for the three months ended March 31, 2002 and 2001.





Three Months Ended March 31, 2002Regional Banking

Capital Markets


Asset Management

Treasury

Other


Consolidated Total(in thousands)Net interest income (loss)(1)

$
93,455

$
36,887


$
1,709

$
14,456

$
(8,794
)

$
137,713Noninterest income


36,508


23,964



23,209


327


18,181



102,189FX Losses(2)















(16,988
)


(16,988
)Securities gains, net





(333
)





3,479






3,146Total revenues


129,963


60,518



24,918


18,262


(7,601
)


226,060Noninterest expenses, excluding intangible asset amortization


79,552


29,594



17,105


2,017


30,507



158,775Intangible asset amortization


208






177





1,260



1,645Provision for loan and lease losses


5,340


4,387



29





(428
)


9,328Income (loss) before income taxes


44,863


26,537



7,607


16,245


(38,940
)


56,312Income tax expense (benefit)(1)


17,047


7,715



2,805


5,457


(14,638
)


18,386Net income (loss)

$
27,816

$
18,822


$
4,802

$
10,788

$
(24,302
)

$
37,926(in millions)Average identifiable assets

$
5,675

$
4,970


$
57

$
4,386

$
2,851


$
17,939Average loans


5,384


4,169



33





1,081



10,667Average deposits


8,356


1,242



89


2,508


84



12,279





Three Months Ended March 31, 2001 (As Restated)Regional Banking

Capital Markets

Asset Management

Treasury

Other


Consolidated Total(in thousands)Net interest income (loss)(1)

$
95,037

$
31,358

$
1,354

$
2,719

$
(143
)

$
130,325Noninterest income


32,468


23,610


22,912


375


4,448



83,813FX Losses(2)














(38,744
)


(38,744
)Securities gains, net











197


37



234Total revenues


127,505


54,968


24,266


3,291


(34,402
)


175,628Noninterest expenses, excluding intangible asset amortization


73,586


26,038


13,713


1,997


9,000



124,334Intangible asset amortization


208





274





10,932



11,414Provision for loan and lease losses


5,046


3,633


16





(945
)


7,750Income (loss) before income taxes


48,665


25,297


10,263


1,294


(53,389
)


32,130Income tax expense (benefit)(1)


18,492


7,924


3,766


45


(16,867
)


13,360Net income (loss)

$
30,173

$
17,373

$
6,497

$
1,249

$
(36,522
)

$
18,770(in millions)Average assets

$
5,468

$
4,451

$
34

$
4,544

$
3,017


$
17,514Average loans


5,186


3,805


12





1,668



10,671Average deposits


8,262


1,066


63


2,548


87



12,026


---

|(1) |  | Includes tax-equivalent adjustment for tax-exempt interest income.
|--- |  | ------------------------------------------------------------------

|(2) |  | The term FX Losses means all FX trading losses both authentic and Fraud Losses.
|--- |  | ---------------------------------------------------------------------------------



10




---




ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)





(Unaudited)


|5. |  | Intangible Assets
|-- |  | -----------------




The net
carrying amount of amortized and unamortized intangible assets, excluding goodwill, at March 31, 2002, are as follows:





Gross Carrying Amount

Accumulated Amortization

NetCarryingAmount(in thousands)Amortized intangible assetsPremium on deposits

$
78,292

$
60,289

$
18,003Employment contracts


4,245


4,068


177Unamortized intangible assetsRetirement plan liability


980





980Total intangible assets, excluding goodwill

$
83,517

$
64,357

$
19,160





|6. |  | Restatement of First Quarter 2001 Financial Statements
|-- |  | ------------------------------------------------------




As a result of the Fraudulent Activities described in the Explanatory Statement, Allfirst has restated the financial statements for the first quarter of 2001. Amounts affected are presented on the following table.





At and For The Three Months Ended March 31, 2001:As Previously Reported in 10-Q

Restatement Adjustments


As Restated(in thousands)Statement of Condition:Other assets

$
1,830,422

$
(326,944
)(a)

$
1,503,478Other liabilities


1,400,728


(104,249
)(b)


1,296,479Retained earnings


1,298,221


(222,695
)(c)


1,075,526Total assets


18,550,878


(326,944
)


18,223,934Statement of Income:Trading income (losses)


6,148


(41,832
)(d)


(35,684
)Total noninterest income


87,135


(41,832
)


45,303Income before taxes


69,570


(41,832
)


27,738Income taxes


23,609


(14,641
)(e)


8,968Net income


45,961


(27,191
)(e)


18,770


---

|(a) |  | Other assets reduced as a result of the deletion of fictitious FX Option Assets, an overstatement of Due from Brokers  FX Options and by the restatement of income taxes
receivable.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Other liabilities reduced as a result of an overstatement of Due to Brokers  FX Options and by the restatement of income taxes payable.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Retained earnings reduced as a result of restatements to the Income Statement for current and prior periods resulting from the Fraud Losses. This adjustment consists of both
the first quarter 2001 income statement effect of $(27.2) million and the cumulative effect of restatements attributable to years 1997-2000 of $(195.5) million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | Trading income reduced due to the overstatement of income resulting from the fictitious FX Option Assets. This line item also includes both FX Losses and Trading Income
Other within the current 10-Q presentation.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | Income taxes and net income reduced due to the overstatement of income as a result of the Fraud Losses. The restatement adjustments were tax effected at a rate of 35.0%.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

Item 2.    
Managements Discussion and Analysis of Financial Condition and Results of Operations





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. Actual results may differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to: global, national and regional economic conditions; levels of market interest rates; credit or other risks of lending and investment activities; changes in accounting rules and policies;
legal and regulatory proceedings; competitive and regulatory factors; and technological change.





ANALYSIS OF RESULTS OF OPERATIONS





Performance Overview





Allfirst reported net income to common stockholders for the three months ended March 31, 2002 of $37.8 million, compared to restated net income to common stockholders of $18.7 million for the three months ended March
31, 2001. Net income to common stockholders represents net income after deducting preferred stock dividends. Return on average assets and return on average common stockholders equity were 0.86% and 9.03%, respectively, for the three months
ended March 31, 2002 compared to 0.43% and 4.31% for the three months ended March 31, 2001.





Both periods include the effect of
the previously announced Fraudulent Activities that were more fully disclosed in Allfirsts 2001 Annual Report on Form 10-K filed on April 1, 2002. In addition, Allfirst recorded a $10.0 million pretax charge (the FX Related Charge)
during the first quarter of 2002 to cover the costs associated with the special investigation into the Fraudulent Activities as well as other incremental direct costs associated with the Fraudulent Activities.





Allfirsts results for the three months ended March 31, 2002 include Community Counselling Services, Inc., (CCS), which was acquired in May 2001.
CCS is the largest consulting firm to the Not-for-Profit (NFP) sector worldwide. For comparative purposes, CCS revenue and expenses, as well as the FX Losses, the FX Related Charge, and goodwill amortization, have been excluded from the performance
commentary below.





Allfirsts adjusted total revenues grew by 8% in the first quarter of 2002 compared to 2001. Net
interest income showed a 6% improvement over the same quarter last year bolstered by higher loan product margins and the favorable impact of the lower interest rate environment. The net interest margin increased to 3.60%, up 10 basis points from the
first quarter of 2001. Revenue growth was also supported by an 11% increase in noninterest income, driven by an 18% increase in deposit service charges and 11% rise in electronic banking fees. The favorable interest rate environment contributed to a
24% increase in mortgage banking income. Noninterest expenses increased by 12% in the first quarter of 2002 compared to 2001. Higher pension and healthcare costs represented 4% of the overall growth in noninterest expense compared to the same
quarter last year.





Nonperforming assets at March 31, 2002 were $92.7 million, or 0.87% of loans, other real estate and other
assets owned, a $4.0 million increase from the December 31, 2001 level of $88.7 million, or 0.82% of loans, other real estate and other assets owned. The allowance for loan and lease losses at March 31, 2002 of $156.0 million increased by $3.5
million over the December 31, 2001 level and represented 192% of nonperforming loans and 1.46% of period end loans. Asset quality is discussed in more detail on page 20.




12




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





Net Interest Income





Net interest income is the difference between the interest and yield-related fee income generated by earning assets and the interest expense incurred on interest bearing liabilities. The amount of net interest income is affected by both
changes in the level of interest rates and the amount and composition of earning assets and interest bearing liabilities. When net interest income is presented on a tax-equivalent basis, interest income from tax exempt earning assets is increased by
an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the statutory Federal income tax rate of 35%. Net interest margin represents net interest income on a tax-equivalent basis as a percentage of
average earning assets. The net interest income that is presented on page 14 is on a tax-equivalent basis. Net interest income as presented in the Consolidated Statements of Income on page 3 is on a non tax-equivalent basis.





Net interest income on a tax-equivalent basis for the three months ended March 31, 2002 was $137.7 million, an increase of $7.4 million when compared to
net interest income of $130.3 million for the first three months of 2001. The net interest margin was 3.60% for the first quarter of 2002, up ten basis points from the same period last year. The growth in net interest income and net interest margin
is attributable to a continuing favorable interest rate environment, combined with the effects of replacing lower margin runoff portfolio loans with higher margin loans. Loan product margins, which represent the difference between the interest yield
on loans and the cost of funding loans under the Allfirst internal funds transfer pricing system, increased from first quarter 2001 levels with commercial loans up 29 basis points and direct retail loans up 24 basis points.




13




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





The following table provides additional information on Allfirsts average balances, interest yields and rates, and net interest margin for the
three months ended March 31, 2002 and 2001.





Average Balances, Interest Yields and Rates and Net Interest Margin


(Tax-Equivalent Basis)





Three Months EndedMarch 31, 2002


March 31, 2001 As RestatedAverage Balance


Interest (1)

Yield/Rate (1)


AverageBalance


Interest (1)

Yield/Rate (1)(dollars in millions)ASSETSEarning assets:Trading account securities

$
13.2


$
0.1

2.08
%

$
9.0


$
0.1

5.29
%Money market investments


719.3



3.1

1.72



24.5



0.3

5.62Investment securities (2):Taxable


3,232.2



43.7

5.48



3,595.7



55.8

6.29Tax exempt


474.9



9.3

7.98



462.9



9.3

8.19Equity investments


327.6



6.0

7.39



287.8



5.2

7.38Total investment securities


4,034.7



59.0

5.93



4,346.4



70.3

6.56Loans held for sale


65.2



1.0

6.19



41.1



0.7

6.71Loans (net of unearned income) (3):Commercial


3,882.8



45.1

4.71



3,684.4



70.4

7.75Commercial real estate


2,409.4



33.9

5.70



2,337.4



46.7

8.10Residential mortgage


453.4



8.1

7.30



630.8



12.0

7.73Direct retail


2,435.2



43.4

7.23



2,144.9



45.8

8.66Indirect retail


386.3



7.3

7.65



679.4



12.8

7.64Commercial leases receivable


674.0



7.0

4.23



659.0



7.7

4.76Retail leases receivable


224.0



4.1

7.42



338.1



6.1

7.32Foreign


201.9



2.1

4.13



196.8



4.2

8.61Total loans


10,667.0



151.0

5.74



10,670.8



205.7

7.82Total earning assets


15,499.4



214.2

5.60



15,091.8



277.1

7.45Allowance for loan and lease losses


(152.6
)








(152.5
)Cash and due from banks


830.4









783.7Other assets


1,836.8









1,790.8Total assets

$
18,014.0








$
17,513.8LIABILITIES AND STOCKHOLDERS EQUITYDeposits in domestic offices:Interest bearing demand

$
98.6


$
0.2

0.86
%

$
85.0


$
0.3

1.43
%Money market accounts


2,964.2



8.6

1.17



2,737.4



20.4

3.02Savings


1,185.1



2.9

0.99



1,130.9



4.5

1.60Other consumer time


2,607.1



28.0

4.35



2,923.7



41.5

5.75Large denomination time


2,189.4



12.9

2.39



2,202.4



33.2

6.11Deposits in foreign banking office


236.0



1.6

2.74



264.9



3.8

5.90Total interest bearing deposits


9,280.4



54.2

2.37



9,344.3



103.7

4.50Funds purchased


1,336.5



5.5

1.66



1,535.5



20.7

5.46Other borrowed funds, short-term


791.4



3.5

1.78



401.8



5.4

5.50Long-term debt


1,118.9



13.3

4.83



1,007.1



17.0

6.85Total interest bearing liabilities


12,527.2



76.5

2.47



12,288.7



146.8

4.85Noninterest bearing deposits


2,998.5









2,681.9Other liabilities


779.7









778.0Redeemable preferred stock


9.0









8.7Stockholders equity


1,699.6









1,756.5Total liabilities and stockholders equity

$
18,014.0








$
17,513.8Net interest income, tax-equivalent basis





$
137.7








$
130.3Net interest spread (4)








3.13
%








2.60
%Contribution of interest free sources of funds








0.47









0.90Net interest margin (5)








3.60









3.50


---

|(1) |  | Interest on loans to and obligations of public entities is not subject to Federal income tax. In order to make pre-tax yields comparable to taxable loans and investments, a
tax-equivalent adjustment is used based on a 35% Federal tax rate.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Yields on investment securities available for sale are calculated based upon average amortized cost.
|--- |  | ----------------------------------------------------------------------------------------------------

|(3) |  | Nonaccrual loans are included under the appropriate loan categories as earning assets.
|--- |  | --------------------------------------------------------------------------------------

|(4) |  | Net interest spread is the difference between the yield on average earning assets and the rate paid on average interest bearing liabilities.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Net interest margin is the ratio of net interest income on a fully tax-equivalent basis to average earning assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------



14




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





Noninterest Income





The following table presents the components of noninterest income for the three months ended March 31, 2002 and 2001.





Noninterest Income





Three Months Ended March 31,


Net Change2002


2001As Restated


Amount


Percent(dollars in thousands)Service charges on deposit accounts

$
30,138


$
25,516


$
4,622


18.1
%Trust and investment advisory fees


21,937



22,401



(464
)

(2.1
)Electronic banking income


7,980



7,158



822


11.5Mortgage banking income


5,933



4,791



1,142


23.8FX Losses


(16,988
)


(38,744
)


21,756


56.2Trading income  other


2,019



3,060



(1,041
)

(34.0
)Consulting income


12,309







12,309


100.0Other income


21,873



20,887



986


4.7Total fees and other income


85,201



45,069



40,132


89.0Securities gains, net


3,146



234



2,912


1,244.4Total noninterest income

$
88,347


$
45,303


$
43,044


95.0
%Total noninterest income excluding FX Losses

$
105,335


$
84,047


$
21,288


25.3
%





Allfirsts noninterest income of $88.3 million for the first quarter of 2002
increased by $43.0 million over the same period last year due to lower FX Losses of $21.8 million and consulting income of $12.3 million as a result of the CCS acquisition. Excluding the FX Losses and consulting income generated by CCS, total
noninterest income was $93.0 million, representing a $9.0 million or 10.7% increase over the same period in 2001.





Deposit
service charges were $30.1 million, up $4.6 million from the prior year. Corporate deposit service charges were up $3.3 million mainly due to lower compensation to customers for deposit balances held in lieu of cash payments for depository services.
Retail deposit service charges increased $1.3 million from the first quarter of 2001 due to higher retail deposit and non-sufficient funds fee income as a result of business growth and more effective fee waiver management. Trust and investment
advisory fees of $21.9 million declined slightly compared to the first quarter of 2001 due to the adverse impact of a weak equities market. Electronic banking income captures fee income from automated teller machines and interchange income from VISA
debit card transactions and rose $0.8 million in the first quarter of 2002 compared to 2001.





Mortgage banking income increased
$1.1 million as a result of $0.6 million in gains arising from the sale of residential mortgage loans as well as higher loan origination and placement fees of $0.5 million. Other trading income decreased $1.0 million primarily as a result of lower
sales of securities and derivative products to customers. Other income was $21.9 million for the first quarter of 2002 compared to $20.9 million for the first quarter of 2001, an increase of $1.0 million. This increase was due to higher standby
letter of credit fees of $1.1 million, an increase in bank owned life insurance income of $1.2 million, and a $1.0 million increase in commercial lease fee income. These increases were offset by a decrease in joint venture investment income of $2.8
million due to impairment writedowns on certain investments.




15




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





Noninterest Expenses





The following table presents the components of noninterest expenses for the three months ended March 31, 2002 and 2001.





Noninterest Expenses





Three Months Ended March 31,

Net Change2002

2001

Amount


Percent(dollars in thousands)Salaries and other personnel costs

$
88,813

$
76,313

$
12,500


16.4
%Equipment costs


12,799


11,397


1,402


12.3Occupancy costs


9,662


9,405


257


2.7Other operating expenses:Postage and communications


5,129


4,513


616


13.6Advertising and public relations


4,306


2,295


2,011


87.6FX Related Charge


10,000





10,000


100.0Other operating expenses


28,066


20,411


7,655


37.5Total operating expenses


158,775


124,334


34,441


27.7Intangible assets amortization expense


1,645


11,414


(9,769
)

(85.6
)Total noninterest expenses

$
160,420

$
135,748

$
24,672


18.2
%





Allfirsts noninterest expenses for the quarter ended March 2002 were $160.4
million, a $24.7 million increase from noninterest expenses for the quarter ended March 31, 2001. As described in Note 2 of the Notes to Consolidated Financial Statements, the change in accounting for goodwill amortization is reflected in the first
quarter 2002 results. In addition, the first quarter of 2002 includes the expenses of CCS, which was acquired in May 2001, as well as the FX Related Charge of $10.0 million. Excluding intangible asset amortization, CCS expenses and the FX Related
Charge, adjusted noninterest expenses were $139.5 million, representing a $15.1 million or 12% increase over the first quarter of 2001.





Excluding CCS, salaries and other personnel costs increased to $81.4 million in the first quarter of 2002, a $5.1 million increase resulting from higher base pay and increases in pension and healthcare expenses. Base salary expenses and
incentives were up $0.8 million. Pension costs were $4.0 million higher in 2002 due to the impact of weak financial markets on plan asset values. Healthcare costs increased $0.4 million due to higher claims volume and medical costs. Equipment costs
increased $1.4 million due to higher depreciation and equipment maintenance and repairs. Occupancy costs exhibited a modest increase of $0.3 million due to higher property rental expense.





Postage and communications expenses increased by $0.6 million, as a result of higher telephone expenses. Advertising and public relations costs were $4.3 million, an increase of $2.0
million due to the acceleration of marketing campaigns in the first quarter of 2002. The FX Related Charge represents the costs associated with the special investigation of the Fraudulent Activities discussed in the Explanatory Statement, as well as
other incremental direct costs arising from the Fraudulent Activities. Other incremental direct costs include legal fees, consulting fees associated with risk management processes, and marketing costs associated with restoring Allfirsts
corporate image. If the FX Related Charge were not shown as a separate line item, other operating expenses would increase by $8.3 million and advertising and public relations by $1.7 million. Other operating expenses for the first quarter of
2002 were $28.1 million, up $7.7 million from the first quarter of 2001. Increases include higher deferred compensation expense of $3.7 million, as well as a $1.4 million increase to the automobile lease residual valuation allowance.




16




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





MARKET RISK MANAGEMENT





Market risk is the risk
of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The effective management of market risk is essential to achieving Allfirsts objectives. As a
financial institution, Allfirsts primary market risk exposure is interest rate risk.





Interest Rate Risk Management





Management of interest rate risk is effected through adjustments to the size and duration of the available-for-sale
investment portfolio, the duration of purchased funds and other borrowings, and through the use of off-balance sheet financial instruments such as interest rate swaps, interest rate caps and floors, financial futures, and options. At March 31, 2002,
Allfirsts equity at risk and earnings at risk remained in compliance with Allfirsts policy limits.





Fixed
Income and Derivative Trading Risk Management





Allfirst maintains active securities and interest rate derivative trading
positions resulting from activity generated for corporate customers. There has been no material change in the market risk of these portfolios during the three months of 2002.





Foreign Exchange Risk Management





In 2001 and prior
years, Allfirst maintained active FX trading positions to service the needs of its corporate and retail customers as well as for its own trading account. Due to the Fraudulent Activities, Allfirst has ceased all proprietary FX trading activities.
However, Allfirst will continue to meet the FX needs of customers.





LIQUIDITY RISK MANAGEMENT





Liquidity refers to the ability of Allfirst to meet current and future financial obligations as well as to take advantage of investment opportunities in
a timely and cost effective manner. These financial obligations include but are not limited to deposit withdrawals, loan funding, liability maturities and general corporate requirements. Liquidity needs are met through the issuance of liabilities at
acceptable costs within an acceptable period of time, through the maturity or sale of assets, and through funds provided by operations. Refer to the Consolidated Statements of Cash Flows for an analysis of cash flows from operating, investing and
financing activities.





The ability to maintain regular access to competitively priced wholesale funds is dependent on strong
credit ratings from the major credit rating agencies (Moodys, Standard & Poors (S&P), and Fitch). At May 14, 2002, the Allfirst parent company and Allfirst Banks short-term and long-term ratings are as follows:





Moodys

S&P

FitchAllfirst parent company:Subordinated debt

A3

A-

A+Commercial paper

P-1

A-2

F1Allfirst Bank:Long term deposits

A1

A-

A+Short term deposits

P-1

A-2

F1Bank financial strength

D+








17




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





Shortly after Allfirst announced the Fraudulent Activities in February 2002, Moodys confirmed the long-term and short-term credit ratings of the
Allfirst parent company and Allfirst Bank but lowered Allfirst Banks strength rating from C+ to D+. The strength rating is a rating that represents Moodys opinion of a banks intrinsic safety and soundness. Banks with a D rating
possess adequate financial strength that may be limited by a factor such as an unstable operating environment while banks with a C rating possess good intrinsic financial strength. Moodys ratings outlook is stable.





On April 15, 2002, S&P downgraded the long-term and short-term credit ratings of the Allfirst parent company and Allfirst Bank. At the same time,
S&P removed the ratings of the Allfirst parent company and Allfirst Bank from CreditWatch, where they were placed on February 6, 2002. S&Ps ratings outlook is stable.





Fitch Ratings downgraded the long-term and short-term credit ratings of the Allfirst parent company and Allfirst Bank on May 9, 2002. At the same time, Fitch removed the ratings from
Negative Rating Watch, where they were placed following Allfirsts announcement of the Fraudulent Activities in February 2002. Fitchs ratings outlook is stable.





Allfirst maintains a contingency funding plan to prepare for the possibility of a liquidity crisis and to establish a framework for dealing with such a crisis. Since the announcement of
the Fraudulent Activities, Allfirst has managed liquidity in accordance with its contingency funding plan. Since February 6, Allfirst Bank has experienced a slight drop in core deposits and the temporary loss of a large portion of its Federal funds
purchased capacity. However, Allfirst Bank has been a net seller of Federal funds as a result of actions taken under the contingency funding plan, which have included the funding of investment securities through repurchase agreements, the sale of
investment securities and acquisition of short-term funding from AIB. At March 31, 2002, AIB had provided $500 million of short-term funding with maturities of less than 30 days priced at LIBOR. As of May 14, 2002, the balance of short-term funding
had declined to $250 million.





At March 31, 2002, Allfirst Bank, serving in the capacity of remarketing agent, was holding $286
million of variable rate demand bonds (VRDBs) within investment securities available for sale. As of May 14, 2002, VRDBs held had declined to $245 million. The VRDBs, which are enhanced by a direct-pay letter of credit provided by
Allfirst Bank, are an attractive credit product for Allfirsts corporate customers by providing direct access to the capital markets. This results in lower funding costs by replacing the customers credit rating with Allfirst Banks
credit rating. Investors generally have the right to sell the bonds to the remarketing agent with seven days notice. The typical interest rate reset is weekly and is based primarily on Allfirst Banks credit rating. Allfirst will continue to
externally remarket the VRDBs currently held. As of March 31, 2002, the total amount of VRDBs outstanding backed by an Allfirst Bank letter of credit was $1.2 billion.





Dividends from subsidiaries are generally the primary source of funds for the liquidity requirements of the Allfirst parent company. However, in light of current dividend restrictions at
Allfirst Bank arising from the FX Losses, the Allfirst parent companys funding requirements will be managed through funding provided by AIB. AIB has provided $400 million of funding to the Allfirst parent company. $100 million of this funding
is for a term of six months (maturing in August 2002) priced at six month LIBOR while $200 million is long-term debt with a term of five years (maturing in February 2007) priced at three month LIBOR + 40 basis points. An additional $100 million of
long-term debt with a term of five years (maturing in May 2007) priced at three month LIBOR + 75 basis points was provided on May 14, 2002 to cover a $100 million subordinated debt issue maturing on May 15, 2002. The long-term debt components do not
qualify as regulatory capital.





At March 31, 2002, approximately $2.8 billion of loans and investment securities available for
sale were pledged as collateral for securities sold under agreement to repurchase transactions, treasury tax and loan and other collateralized deposit programs, FHLB borrowings, and the Federal Reserve discount window. Allfirst is currently
negotiating a secured credit facility that, if completed, would result in an additional $2.5 billion of assets, primarily loans secured by commercial real estate, pledged as collateral.




18




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





As a result of recent ratings actions and the removal of any negative credit watch outlooks, Allfirst is focusing on regaining access to wholesale
funding sources that have not been utilized since February 6. Allfirst now has differing, or split ratings from Moodys, S&P, and Fitch, although all ratings remain investment grade. Since Allfirsts short-term ratings are
still satisfactory, renewed access to these wholesale funding sources at market interest rates is anticipated.





ANALYSIS OF FINANCIAL CONDITION





Allfirsts total assets at March 31, 2002 were $17.9 billion, a $880 million decrease from total assets of $18.8
billion at December 31, 2001. The decrease was primarily due to a decrease in cash and due from banks of $551 million, as well as decreases in investments securities available for sale of $501 million and loans, net of unearned income of $61
million. These decreases were offset by an increase in federal funds sold and securities purchased under resale agreements of $209 million for the quarter ended March 31, 2002.





Investment securities available for sale at March 31, 2002 of $3.6 billion decreased $501 million from the December 31, 2001 levels of $4.1 billion, in order to enhance Allfirsts
liquidity position. At March 31, 2002, investment securities available for sale had net unrealized gains of $16.7 million as compared to $26.3 million at December 31, 2001. The taxable equivalent yield on the entire securities portfolio for the
quarter ended March 31, 2002 was 5.93% compared to 6.56% for the first quarter of 2001. Investment securities sold in the first three months of 2002 totaled $1.7 billion and generated pretax gains of $3.6 million. In the first three months of 2002,
Allfirst purchased $1.7 billion of investment securities offsetting $1.7 billion of securities sold, and $478 million of maturities, calls and paydowns of securities.





Loans and leases of $10.7 billion at March 31, 2002 decreased $61 million when compared to December 31, 2001 with the decrease attributable to Allfirsts decision to curtail its
exposure to indirect retail lending / leasing and residential mortgages in late 2000. Excluding curtailed portfolios, loans and leases increased $76 million compared to December 31, 2001 with increases in commercial loans of $28 million, commercial
real estate loans of $24 million, and direct retail loans of $31 million.





Indirect retail loans and leases of $566 million at
March 31, 2002 decreased $88 million compared to December 31, 2001 as a result of portfolio runoff and the curtailment of indirect automobile loan and lease originations. Allfirst continues to service its existing indirect loan portfolio.
Residential mortgage loans declined $49 million due to the sale of $25 million in residential mortgage loans during the first quarter of 2002 as well as portfolio runoff.





Total deposits at March 31, 2002 were $12.1 billion, a $0.9 billion decrease from December 31, 2001 levels. At March 31, 2002, core deposits of $9.8 billion were down $1.0 billion from
year end with noninterest bearing deposits down $0.8 billion and interest bearing core deposits down $0.2 billion. The decline in noninterest bearing deposits was driven primarily by the daily volatility of commercial demand deposits, which are
historically higher on Mondays (as at December 31) and decline throughout the week with lows generally on Fridays (as at March 29, the last business day in the first quarter). In addition, commercial demand deposit balances are normally higher at
year end. Core interest bearing deposits decreased $197 million to $6.8 billion due primarily to a drop of $144 million in money market balances and an $86 million decrease in consumer time balances offset by an increase of $42 million in savings
balances. Excluding the daily volatility impact of commercial demand deposit balances, core deposits have dropped slightly since the Fraudulent Activities were disclosed on February 6, 2002.




19




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





Asset Quality





Nonperforming assets were $92.7 million at March 31, 2002, compared to $88.7 million at December 31, 2001, an increase of $4.0 million. During the first quarter of 2002, nonaccrual loans increased $4.7 million. Additions to nonaccrual loans
in the first three months of 2002 aggregated $22.1 million. These additions were offset by reductions in nonaccrual loans totaling $17.4 million, comprised of paydowns and payoffs of nonaccrual loans totaling $10.7 million, chargeoffs of $3.4
million, loans returned to accrual status of $2.7 million and transfers to other real estate and other assets owned of $0.6 million.





The allowance consists of three elements: (1) specific reserves for individually impaired credits; (2) general reserves for types or portfolios of loans based on historical loan loss experience, judgmentally adjusted for concentrations and
the current environment; and (3) unallocated reserves. Combined specific reserves and general reserves by loan type are considered allocated reserves. 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 Allfirst generally requires all accrued but unpaid interest to be reversed once a loan is
placed on nonaccrual status.





The process of establishing and managing the allowance with respect to Allfirsts commercial
portfolios begins when a loan officer initially assigns each loan or lease a risk rating, based on a ten-point numerical scale and using established credit criteria. Risk ratings are reviewed at least annually and are also validated periodically on
a selective basis by the independent Credit Review Department. Management meets quarterly to discuss current conditions that affect various lines of business and that may warrant adjustments to historical loss experience; adjustment factors that are
considered include: the levels and trends in past due and non-accrual loans; trends in loan volume; effects of any changes in lending policies and procedures; changes in underwriting; and the experience and depth of lending management.





Historical factors by risk rating are carefully adjusted each quarter based on documentation reflective of managements seasoned
judgment. Management also evaluates credit risk concentration, including trends in large dollar exposures to related borrowers, shared national credit exposure and industry concentrations. Experience has demonstrated that concentration risk has the
potential to increase loan loss risk when influenced by external industry factors. All nonaccrual and classified loans in the commercial, commercial real estate (construction and mortgages), foreign and commercial lease categories above certain
defined thresholds are analyzed individually to confirm the appropriate risk rating and accrual status and to determine the need for a specific reserve.





During 2000, management introduced enhancements to support the calculation of the general reserves for loans and leases in the commercial portfolios not specifically reserved. Each risk rating is assigned a graduated
risk factor based on probability of default and loss in event of default reflective of historical loss rates over a full economic cycle. The cycle currently being used covers the last 10 years. Management believes that use of the graduated risk
factors allows it to further refine the determination of the allowance for this group of loans.





Reserves for the retail and
residential mortgage portfolios are intended to absorb approximately twelve months of inherent losses. These loans and leases are segregated into homogeneous pools with similar risk characteristics and the rolling twelve month historical loss
experience for each pool is updated quarterly. Trends in each retail and residential pool are analyzed and adjusted to reflect current conditions. Adjustment factors for the residential and retail portfolios are consistent with those for the
commercial portfolios.




20




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





The unallocated portion of the allowance is not attributable to any specific components of the loan portfolio, but is available to support losses that
are probable within the high end of the range of losses that management has identified when establishing the specific and general portions of the allowance. Allfirst has risk management practices designed to ensure timely identification of changes
in loan risk profiles; however, undetected losses may exist within the loan portfolios. The judgmental aspects involved in application of risk rating criteria, the quality of individual loan analyses and initial assessments of collateral values can
also contribute to undetected, but probable, losses. Management uses quantitative tools to assist it in evaluating the overall reasonableness of the unallocated reserve. The unallocated reserve protects Allfirst from errors or subjectivity that
might occur in testing or reviewing the allowance for adequacy. As of March 31, 2002, the unallocated reserve represented 19.8% of the total allowance for loan and lease losses, compared to 18.6% at year end 2001.





The provision for loan and lease losses for the first three months of 2002 was $9.3 million, an increase of $1.5 million from the $7.8 million provision
for the first three months of 2001. The provision covered net chargeoffs of $5.8 million and provided for a $3.5 million increase in the allowance to $156.0 million. Concurrent with the quarterly application of quantitative empirical methodologies
and the sound and conservative judgmental process, senior management determined that a $3.5 million increase in the allowance was warranted due to the increase in criticized assets and specific reserves.





At March 31, 2002, specific reserves were $4.2 million higher than December 31, 2001 as a result of the increase in nonaccrual loans and higher
impairment valuations on nonaccrual loans. From December 31, 2001 to March 31, 2002, total allocated reserves increased by $1.7 million. Higher reserves in the commercial portfolio resulted from increased criticized exposure and higher specific
reserves, partially offset by improving trends in the national and regional economy. In the commercial real estate portfolio, continuing strong asset quality balanced with some weakening in the regional commercial real estate markets resulted in
marginally higher reserves. The level of reserves for the $81 million aircraft commercial lease portfolio remains stable. Management continues to monitor the vulnerability of the airline industry post September 11 th . Reserves for retail loans and leases decreased by $0.6 million. Accelerated runoff for the indirect portfolios contributed to lower reserves, but was
offset somewhat by increasing loss rates on these portfolios; Changes in reserves for other retail portfolios were slight, reflecting stable and strong asset quality.




21




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





The following tables detail information on the Allowance for Loan and Lease Losses and Net Loan Losses for the three months ended March 31, 2002 and
2001 and Nonperforming Assets at March 31, 2002 and December 31, 2001.





ALLOWANCE FOR LOAN AND LEASE LOSSES

Three Months Ended March 30,2002


2001(in thousands)Beginning balance

$
152,539


$
152,539Provision for loan and lease losses


9,328



7,750Net losses charged off


(5,828
)


(7,750
)Allowance attributable to loans sold






Ending balance

$
156,039


$
152,539Allowance for loan and lease losses as a percentage of :Period end loans


1.46
%


1.42
%Nonperforming loans


192.10



199.32





NET LOAN LOSSES (RECOVERIES) AS A PERCENTAGE OF AVERAGE LOANS BY CATEGORY





Commercial loans

0.26
%

0.49
%Commercial real estate loans

0.00


0.04Residential mortgages

0.50


0.32Direct retail loans

0.31


0.37Commercial leases receivable

(0.02
)

(0.16
)Indirect retail loans and leases receivable

1.13


0.64Foreign loans

0.00


(0.70
)Total

0.22
%

0.29
%








NONPERFORMING ASSETS

March 31, 2002


December 31, 2001(in thousands)Nonaccrual loans:Domestic:Commercial

$
56,940


$
47,764Commercial real estate


2,585



4,038Residential mortgage


14,439



16,035Commercial lease receivable


6,218



6,750Foreign


1,044



1,943Total nonaccrual loans


81,226



76,530Other real estate and assets owned (1)


9,077



9,777Other


2,368



2,411Total nonperforming assets

$
92,671


$
88,718Nonperforming assets as a percentage of :Total loans, net of unearned income plus other foreclosed assets owned


0.87
%


0.82
%Accruing loans contractually past due 90 days or more as to principal or interestDomestic

$
40,065


$
36,848Foreign


11,528



8,352


---

|(1) |  | Other real estate and assets owned represent collateral on loans to which Allfirst has taken title. This property, which is held for resale, is carried at fair value less
estimated costs to sell.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22




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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)





CAPITAL ADEQUACY AND RESOURCES





The Federal
Reserve Boards regulatory capital guidelines require a minimum total capital to risk adjusted assets ratio of 8.0%. One-half of the 8.0% minimum must consist of tangible common stockholders equity (Tier 1 capital). The leverage ratio
measures Tier 1 capital to average assets less goodwill and other disallowed intangible assets and must be maintained in conjunction with the risk-based capital standards. The regulatory minimum for the leverage ratio is 3.0%; however, this minimum
applies only to top rated banking organizations without any operating, financial or supervisory deficiencies. Other organizations (including those experiencing or anticipating significant growth) are expected to hold an additional capital cushion of
at least 100 to 200 basis points of Tier 1 capital and, in all cases, banking organizations should hold capital commensurate with the level and nature of all risks, including the volume and severity of problem loans, to which they are exposed.





At March 31, 2002, Allfirsts Tier 1 risk based capital ratio was 7.51% ($1.2 billion of Tier 1 capital) and its total
risk based capital ratio was 11.15% ($1.7 billion of total regulatory capital). Tier 1 capital consists primarily of common stockholders equity and qualifying amounts of subordinated capital trust preferred securities less goodwill and certain
intangible assets, while total regulatory capital adds qualifying subordinated debt and capital trust preferred securities, 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 leverage ratio was 6.82% at March 31, 2002.





Substantially the same capital requirements are applied to Allfirsts banking subsidiaries under guidelines issued by the Federal Reserve Board and the Office of the Comptroller of
the Currency. As illustrated in the following table, at March 31, 2002, the capital ratios of Allfirst Bank, Allfirsts principal banking subsidiary, met the well capitalized standard as defined by regulatory authorities.





Capital Adequacy Ratios





Regulatory Capital RatiosTier 1


Total


LeverageAllfirst

7.51
%

11.15
%

6.82
%Allfirst Bank

7.54


10.91


6.64Regulatory Guidelines:Minimum

4.00


8.00


3.00Minimum to be Well Capitalized

6.00


10.00


5.00





In November 2001, U.S. banking regulators adopted revised rules concerning
regulatory capital standards. The new rules amend the regulatory capital treatment of recourse arrangements, direct credit substitutes, residual interests in asset securitizations, and asset and mortgage-backed securities to better align regulatory
capital requirements with the risk associated with these positions. This rule became effective January 1, 2002, and any transactions settled on or after the effective date are subject to the capital requirements of this rule. Companies that entered
into transactions which settled before the effective date that result in increased capital requirements may delay the application of this rule until December 31, 2002.





A nonbank 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, loans are sold by Allfirst with recourse. The application of the new capital rule will reduce Allfirsts regulatory capital ratios by adding up to $1.5 billion in risk adjusted assets
related to loans sold with recourse. The application of the new capital rule will reduce Allfirsts regulatory capital ratios. The capital ratios of Allfirst Bank will not be impacted by this rule.




23




---

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations (concluded)





Additionally, in January 2002, U.S. banking regulators adopted rules governing the capital guidelines to establish special minimum capital requirements
for equity investments in nonfinancial companies held by banks, banking holding companies, and financial holding companies. This rule became effective April 1, 2002 and is not expected to have a material impact on Allfirsts capital adequacy.





POTENTIAL REGULATORY ACTIONS





While the Corporation anticipates enforcement action by its primary banking regulators as a consequence of the FX Losses, the impact of any such action is not expected to be significant. Further while a potential enforcement action by the
U.S. Securities Exchange Commission (SEC) could be imposed, there have been no discussions between Allfirst and the SEC regarding this issue. In these circumstances, the nature and effects of any potential SEC enforcement action cannot
be predicted.





Item 3.    
Quantitative and Qualitative Disclosures about Market Risk





Information required by this item is under
the caption, Market Risk Management.





Part II.  Other Information





It
em 1.    
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, except for the matters discussed below, disposition of all pending litigation will not
materially affect the consolidated financial position, results of operations or liquidity of Allfirst and its subsidiaries.





On
March 5, 2002, a class action lawsuit was filed in the United States District Court for the Southern District of New York by Walter P. Linn against AIB, Allfirst and several current and former officers of Allfirst and Allfirst Bank (the
Defendants). On April 26, 2002, an amended complaint was filed by Mr. Linn. Mr. Linn purports to represent a class of all purchasers of the securities of AIB from February 6, 1999 through February 6, 2002 (excluding the named Defendants
and any officers or directors of AIB and their immediate family members). The suit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder arising out of the $691 million of foreign exchange currency
trading losses at Allfirst Bank (the FX Trading Losses).





On April 24, 2002, a second class action lawsuit was filed
in the United States District Court for the Southern District of New York by Rodger D. Koons against the Defendants. Mr. Koons purports to represent a class of all purchasers of the securities of AIB from January 1, 2001 through February 6, 2002
(excluding the named Defendants and any officers or directors of AIB and their immediate family members). The suit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder arising out of the FX Trading
Losses.





On May 3, 2002, a motion to consolidate the Linn case and the Koons case and to appoint a lead plaintiff was filed with
the court.





Demand also has been made on AIB and Allfirst to initiate an action against the current and former members of the
Board of Directors and the Senior Executive Officers of both AIB and Allfirst Bank to recover the FX trading losses.





The likely
disposition of the lawsuits and the demand and their effect on Allfirst cannot be determined at this time.





Ite
m 6.    
Exhibits and Reports on Form 8-K





(a)  Exhibits





None.





(b)  Reports on Form 8-K





(1)  Allfirst Financial, Inc., dated and filed February
20, 2002


(2)  Allfirst Financial, Inc., dated and filed March 15, 2002


(3)  Allfirst Financial, Inc. dated and filed April 25, 2002


(4)  Allfirst Financial, Inc. dated
and filed May 1, 2002




24




---

S
IGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





ALLFIRST FINANCIAL INC.By:

/s/    MAURICE J. CROWLEYExecutive Vice President and Chief Financial Officer


May 15, 2002





By:

/s/    ROBERT L. CARPENTER,
JR.Executive Vice President and Controller


May 15, 2002




25