##### Table of Contents

---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---




FORM 10-Q





[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 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 of incorporation or organization)

(I.R.S. Employer Identification No.)





The Allfirst Building 25 South
Charles Street Baltimore, Maryland

21201(Address of principal executive offices)

(zip code)





410-244-4000


(Registrants telephone number, including area code)





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





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





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





---



---

##### Table of Contents




ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





FORM 10-Q





FOR THE QUARTER ENDED SEPTEMBER 30, 2002





INDEX





PagePART 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

6Note to Consolidated Financial Statements

7Item 2.

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

17Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32Item 4.

Controls and Procedures

32PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

33Item 6.

Exhibits and reports on Form 8-K

33Signatures

34Certifications

35







2




---

##### Table of Contents




Item 1.    
Financial Statements





ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF INCOME





(Unaudited)





Three Months Ended September
30,

Nine Months Ended September
30,2002

2001 As
Restated

2002


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

$
145,246

$
180,459

$
444,762


$
574,575Interest and dividends on investment securities:Taxable


32,152


50,594


107,902



160,897Tax-exempt


5,833


5,936


18,116



18,186Dividends


3,992


3,739


10,859



10,644Interest on loans held for sale


657


953


2,336



2,369Other interest income


2,329


875


8,894



1,645Total interest and dividend income


190,209


242,556


592,869



768,316Interest ExpenseInterest on deposits


44,134


77,301


147,421



269,326Interest on Federal funds purchased and other short-term borrowings


10,365


17,101


27,375



63,433Interest on long-term debt


12,411


14,280


38,954



46,527Total interest expense


66,910


108,682


213,750



379,286Net Interest Income


123,299


133,874


379,119



389,030Provision for loan and lease losses


32,906


5,912


74,076



21,421Net Interest Income After Provision for Loan and Lease Losses


90,393


127,962


305,043



367,609Noninterest IncomeService charges on deposit accounts


31,454


28,676


92,701



82,476Trust and investment advisory income


20,455


22,397


63,575



65,638Electronic banking income


9,328


8,788


26,593



24,471Mortgage banking income


4,567


4,650


15,709



15,375FX Income (Losses)





46,419


(16,988
)


(104,856
)Trading income  other


1,874


3,353


5,270



9,556Consulting income


12,331


10,378


37,676



15,336Other income


27,627


24,504


74,117



68,193Securities gains (losses), net


25


338


(5,035
)


759Total noninterest income


107,661


149,503


293,618



176,948Noninterest ExpenseSalaries and other personnel costs


89,328


86,399


267,148



242,207Early Retirement Charge


27,336





27,336



Equipment costs


14,934


12,301


41,310



35,343Occupancy costs


10,133


9,629


29,849



28,100Postage and communications


5,063


5,282


15,064



14,840Advertising and public relations


3,329


4,204


12,481



11,291FX Related Charge








13,714



Other operating expenses


21,960


25,090


78,737



67,409Intangible assets amortization expense


1,837


12,786


5,142



35,964Total noninterest expenses


173,920


155,691


490,781



435,154Income before income taxes


24,134


121,774


107,880



109,403Income tax expense


3,187


40,916


25,119



32,684Net Income


20,947


80,858


82,761



76,719Dividends on preferred stock





101


203



304Net Income to Common Stockholders

$
20,947

$
80,757

$
82,558


$
76,415





See accompanying notes to consolidated financial statements




3




---

##### Table of Contents

ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION





(Unaudited)





September 30, 2002


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

$
1,165,493


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


3,188



4,869Trading account securities


69



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


757,400



922,675Investment securities available for sale


4,295,881



4,101,133Loans held for sale


37,388



38,186Loans, net of unearned income of $152,470 in 2002 and $185,601 in 2001, respectively:Commercial


3,804,203



3,930,556Commercial real estate


2,392,566



2,395,841Residential mortgage


396,474



472,082Direct retail


2,567,310



2,420,376Commercial leases receivable


623,119



679,554Indirect retail loans and leases receivable


398,505



654,359Foreign


217,225



201,103Total loans, net of unearned income


10,399,402



10,753,871Allowance for loan and lease losses


(181,039
)


(152,539
)Loans, net


10,218,363



10,601,332Premises and equipment


243,790



244,607Due from customers on acceptances


1,906



3,274Goodwill


769,082



770,092Other intangible assets


16,957



19,825Other assets


806,111



784,131Total assets

$
18,315,628


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

$
3,489,568


$
3,848,733Interest bearing deposits


6,831,604



6,993,744Total core deposits


10,321,172



10,842,477Large denomination time deposits


716,565



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


87,824



305,490Total deposits


11,125,561



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


2,410,648



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


1,079,153



566,904Bank acceptances outstanding


1,906



3,274Other liabilities


705,463



1,376,571Long-term debt


1,208,831



1,010,116Total liabilities


16,531,562



17,153,4584.50% Cumulative, Redeemable Preferred Stock, $5 par value per share, $100 liquidation preference per share: authorized
and issued 0 and 90,000 shares in 2002 and 2001, respectively






8,858Minority interest


107



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


1,054,290



971,874Accumulated other comprehensive income


61,458



15,417Total stockholders equity


1,783,959



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

$
18,315,628


$
18,817,931





See accompanying notes to consolidated financial statements




4




---

##### Table of Contents




ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY





(Unaudited)





Common Stock

Capital Surplus

Accumulated Other Comprehensive Income (Loss)


Retained Earnings


Total(in thousands)Nine Months Ended September 30, 2001 As RestatedBalance, December 31, 2000 As Restated

$
85,395

$
582,816

$
(14,932
)

$
1,103,323


$
1,756,602Net income As Restated












76,719



76,719Other comprehensive income, net of tax:Minimum pension liability adjustment








(505
)






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








40,101







40,101Other comprehensive income
















39,596Comprehensive income
















116,315Accretion of redeemable preferred stock












(200
)


(200
)Dividends declared on common stock












(94,400
)


(94,400
)Dividends declared on redeemable preferred stock












(304
)


(304
)Balance, September 30, 2001 As Restated

$
85,395

$
582,816

$
24,664


$
1,085,138


$
1,778,013Nine Months Ended September 30, 2002Balance, December 31, 2001

$
85,395

$
582,816

$
15,417


$
971,874


$
1,655,502Net income












82,761



82,761Other comprehensive income, net of tax:Minimum pension liability adjustment








228







228Foreign exchange translation adjustment








(6
)






(6
)Change in unrealized gains/losses on investment securities, net of reclassification adjustment (1)








45,819







45,819Other comprehensive income
















46,041Comprehensive income
















128,802Accretion of redeemable preferred stock












(142
)


(142
)Dividends declared on redeemable preferred stock












(203
)


(203
)Balance, September 30, 2002

$
85,395

$
582,816

$
61,458


$
1,054,290


$
1,783,959





(1) Disclosure of reclassification amount:

Nine Months Ended September
30,2002


2001Net unrealized holding gains on investment securities arising during period

$
42,775


$
40,893Less: reclassification adjustment for realized gains (losses) included in net income


(3,044
)


792Change in unrealized gains on investment securities, net of tax

$
45,819


$
40,101





See accompanying notes to consolidated financial statements




5




---

##### Table of Contents




ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS





(Unaudited)





Nine Months Ended September
30,2002


2001 As
Restated(in thousands)Operating ActivitiesNet income

$
82,761


$
76,719Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan and lease losses


74,076



21,421Provision for other real estate losses


1,479



15Amortization of intangibles


5,142



35,964Depreciation and amortization


34,507



25,000Deferred income tax expense


17,234



6,715Net gain on the sale of assets


(7,095
)


(819
)Net decrease in loans held for sale


798



13,851Net decrease (increase) in trading account securities


41,607



(2,746
)Net decrease in accrued interest receivable


1,021



16,007Net decrease in accrued interest payable


(14,597
)


(27,955
)Net (decrease) increase in derivative and FX net liabilities


(536,840
)


183,422Net decrease in current taxes receivable


64,370



49,548Other, net


31,959



24,230Net cash provided by (used for) operating activities


(203,578
)


421,372Investing ActivitiesProceeds from sales of investment securities available for sale


2,420,296



1,109,708Proceeds from paydowns and maturities of investment securities available for sale


882,621



893,057Purchases of investment securities available for sale


(3,702,564
)


(1,813,512
)Net decrease in short-term investments


165,275



41,430Proceeds from the sale of loans


47,944



Purchase of commercial loan portfolio






(161,000
)Net receipts from lending activities of banking subsidiaries


270,603



273,710Principal collected on loans of nonbank subsidiaries


12,819



11,376Loans originated by nonbank subsidiaries


(29,831
)


(11,402
)Principal payments received under leases


4,282



3,450Purchases of assets to be leased


(1,838
)


(2,250
)Proceeds from the sale of other real estate and other assets owned


6,767



17,942Purchases of premises and equipment


(30,469
)


(59,929
)Proceeds from the sale of premises and equipment


765



1,370Purchase of non-bank subsidiary, net of cash acquired


(3,273
)


(43,423
)Other, net


(4,787
)


(29,262
)Net cash provided by investing activities


38,610



231,265Financing ActivitiesNet decrease in deposits


(1,944,730
)


(1,083,633
)Net increase in short-term borrowings


1,696,593



407,005Proceeds from short-term funding provided by AIB


100,000



Proceeds from long-term funding provided by AIB


300,000



Repayment of long-term debt


(100,000
)


Redemption of preferred stock


(9,000
)


Redemption of minority interest


(6
)


Cash dividends paid


(202
)


(94,704
)Net cash provided by (used for) financing activities


42,655



(771,332
)Foreign currency translation adjustment


(6
)


Decrease in cash and cash equivalents


(122,319
)


(118,695
)Cash and cash equivalents at January 1,


1,291,000



935,242Cash and cash equivalents at September 30,

$
1,168,681


$
816,547Supplemental DisclosuresInterest payments

$
228,348


$
407,241Income tax (refunds) payments


(46,071
)


12,157Noncash Investing And Financing ActivitiesLoan chargeoffs


53,385



28,308Transfers to other real estate and other assets owned


3,359



4,922





See accompanying notes to consolidated financial statements




6




---

##### Table of Contents



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. The financial statements and notes thereto for the first nine months 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 income (losses) are referred to as FX Income (Losses). FX Income (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 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The consolidated financial statements were
compiled in accordance with the accounting policies set forth in note 1 of Notes to Consolidated Financial Statements included in Allfirsts 2001 Annual Report on Form 10-K. In the opinion of management, all adjustments (which consist of only
normal, recurring accruals) necessary for a fair presentation have been included. Certain prior years amounts have been reclassified to conform with the presentation used for the current year. Operating results for the nine month period ended
September 30, 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 the 2001 Annual Report.





2.    Pending Merger with M&T





On September 26, 2002, Allfirst entered into a definitive Agreement and Plan of Reorganization with AIB and M&T Bank Corporation, a
New York corporation (M&T), dated as of September 26, 2002 (the Reorganization Agreement). Pursuant to the Reorganization Agreement, M&T will acquire Allfirst from AIB in exchange for 26,700,000 shares of common stock
of M&T, par value $0.50 per share and $886,107,000 in cash (the Exchange). As a result of the exchange, AIB will own approximately 22.5% of M&Ts outstanding common stock.





Consummation of the transaction is subject to a number of conditions, including regulatory approvals and the approval of M&Ts
and AIBs respective stockholders. For additional information on the Reorganization Agreement, refer to the Form 8-K filed with the Securities and Exchange Commission on October 4, 2002.





3.    Recent Accounting Pronouncements





SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued in April 2002. This Statement rescinds, amends, and clarifies various accounting
issues and is effective at various dates in 2002 and 2003, with earlier application encouraged. The impact of adopting the requirements of this Standard on Allfirsts financial position, results of operations, and cash flow is expected to be
immaterial.




7




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)




3.    Recent Accounting Pronouncements (continued)





SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in July 2002. This Statement applies to costs associated with an
exit activity, including restructuring, or with a disposal of long-lived assets. This Statement is to be applied prospectively for qualifying activities initiated after December 31, 2002. Allfirst is unable to determine the impact of this standard
due to its prospective application.





SFAS No. 147, Acquisitions of Certain Financial Institutions, was
issued in October 2002. This Statement provides guidance on the accounting for the acquisition of a financial institution and applies to all acquisitions except those between two or more mutual enterprises. This Statement is effective for
acquisitions for which the date of acquisition is on or after October 1, 2002, with earlier application permitted for certain provisions of the Statement. The impact of adopting the requirements of this Standard on Allfirsts financial
position, results of operations, and cash flow is expected to be immaterial.





4.    Goodwill and Other Intangible
Assets





On January 1, 2002, Allfirst adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. 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
requires that goodwill be allocated on a reporting unit level, which is either at the same level or one level below the operating segment. 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.





Goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the nonamortization and amortization provisions of this Statement. 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 three months and nine months ended September 30, 2002, there was no goodwill amortization expense
as compared to $10.8 million and $29.9 million for the three months and nine months ended September 30, 2001, respectively.




8




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







4.    Goodwill and Other Intangible Assets (continued)





The following tables provide a comparison between reported net income adjusted to exclude the impact of
goodwill amortization for the three months and nine months ended September 30, 2002 and 2001.





For the Three Months Ended September 30,2002

2001As Restated(in thousands)Reported net income

$
20,947

$
80,858Add back: Goodwill amortization, net of taxes1





10,184Adjusted net income

$
20,947

$
91,042








For the Nine Months Ended September 30,2002

2001As Restated(in thousands)Reported net income

$
82,761

$
76,719Add back: Goodwill amortization, net of taxes1





29,145Adjusted net income

$
82,761

$
105,864


---

|(1) |  | Goodwill related to Community Counselling Services, Inc. (CCS), which was acquired in May 2001, is tax deductible.
|--- |  | --------------------------------------------------------------------------------------------------------------------




As part of the implementation of SFAS No. 142, a transitional impairment test was required to be applied to all goodwill and
other indefinite-lived intangible assets within the first half of 2002. For purposes of testing for impairment, goodwill was allocated to reporting units at the acquisition date or to the reporting unit originally intended to benefit from prior
acquisitions. Allfirst has completed the impairment analysis, and no transitional impairment charge is required. However, 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.





The net carrying
amount of goodwill at September 30, 2002 was $769.1 million, a decrease of $1.0 million from December 31, 2001. This decrease was due to final goodwill adjustments related to the CCS acquisition. Goodwill was allocated to Allfirsts reportable
segments for purposes of testing for impairment as follows:





(in thousands)Regional Banking

$
606,534Capital Markets


Asset Management


120,505Treasury


Other1


42,043Total

$
769,082


---

|(1) |  | CCS and Ketchum Canada, Inc. (Ketchum) goodwill. Ketchum was acquired in May 2002.
|--- |  | ------------------------------------------------------------------------------------






9




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







4.    Goodwill and Other Intangible Assets (continued)





Allfirst continues to amortize other intangible assets over their remaining useful lives. The net carrying
amount of other intangible assets, excluding goodwill at September 30, 2002, are as follows:





Gross Carrying Amount

Accumulated Amortization

Net Carrying
Amount(in thousands)Premium on deposits

$
78,292

$
63,218

$
15,074Other


2,000


117


1,883Total

$
80,292

$
63,335

$
16,957





Estimated annual amortization for the last three months of 2002 and
future years for amortizable intangible assets is as follows:





(in thousands)Three months ending December 31, 2002

$
1,588Years ending December 31,2003


5,2442004


4,1542005


2,8852006


2,1772007


909Total

$
16,957





5.    Investment Securities





The amortized cost and fair value of available for sale securities at September 30, 2002 are as follows:





Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


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

$
1,816,947

$
24,751

$



$
1,841,698Mortgage-backed obligations


1,145,282


52,315






1,197,597Collateralized mortgage obligations


313,460


2,773


(155
)


316,078Asset-backed securities


42,193


1,629


(5
)


43,817Obligations of states and political subdivisions


505,559


34,213


(43
)


539,729Other debt securities


81,606


94






81,700Equity securities


289,514


224


(14,476
)


275,262Total

$
4,194,561

$
115,999

$
(14,679
)

$
4,295,881




10




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)







6.    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, 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.
Other also includes the fundraising / consulting activities conducted through CCS and Ketchum. FX Income (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 are allocated under an economic provision methodology 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. In addition, commercial loan and lease provisions include any additions to specific reserves that, in the judgment of management, are not appropriately
reflected within the economic provision.





Line of business results are presented on a shareholder value based
management (SVBM) basis. Under SVBM, capital is allocated to each line of business based on the inherent risks within the business, primarily credit and operational risk. SVBM 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s businesses.




11




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)







6.    Line of Business Reporting (continued)





The following tables present operating information about each of Allfirsts business lines for the three months ended
September 30, 2002 and 2001.





Three Months Ended September 30, 2002





(in thousands)

Regional Banking

Capital Markets


Asset Management

Treasury


Other


Consolidated TotalNet interest income1

$
95,315

$
34,042


$
1,624

$
3,313


$
(7,592
)

$
126,702Noninterest income


37,976


26,501



21,627


318



21,214



107,636FX Income (Losses)




















Securities gains (losses), net












(6
)


31



25Total revenues


133,291


60,543



23,251


3,625



13,653



234,363Total noninterest expenses, excluding intangible asset amortization


80,982


30,628



17,051


1,996



41,426



172,083Intangible asset amortization


204













1,633



1,837Provision for loan and lease losses


5,678


34,032



36






(6,840
)


32,906Income (loss) before income taxes


46,427


(4,117
)


6,164


1,629



(22,566
)


27,537Income tax expense (benefit)1


17,643


(3,934
)


2,268


619



(10,006
)


6,590Net income (loss)

$
28,784

$
(183
)

$
3,896

$
1,010


$
(12,560
)

$
20,947(in millions)Average identifiable assets

$
5,801

$
4,770


$
74

$
3,861


$
2,558


$
17,064Average loans


5,503


4,094



50






841



10,488Average deposits


8,468


1,231



85


1,203



62



11,049





Three Months Ended September 30, 2001 (As Restated)





(in thousands)

Regional Banking

Capital Markets

Asset Management

Treasury

Other


Consolidated TotalNet interest income1

$
95,669

$
34,533

$
1,635

$
8,538

$
(2,375
)

$
138,000Noninterest income


37,172


25,394


23,039


935


16,206



102,746FX Income (Losses)














46,419



46,419Securities gains (losses), net











333


5



338Total revenues


132,841


59,927


24,674


9,806


60,255



287,503Total noninterest expenses, excluding intangible asset amortization


77,094


27,596


15,624


3,213


19,377



142,904Intangible asset amortization


208





274





12,304



12,786Provision for loan and lease losses


5,549


3,654


21





(3,312
)


5,912Income before income taxes


49,990


28,677


8,755


6,593


31,886



125,901Income tax expense1


18,858


7,766


3,214


2,129


13,076



45,043Net income

$
31,132

$
20,911

$
5,541

$
4,464

$
18,810


$
80,858(in millions)Average identifiable assets

$
5,681

$
4,555

$
41

$
4,199

$
2,952


$
17,428Average loans


5,391


3,870


19





1,357



10,637Average deposits


8,417


1,136


79


1,991


82



11,705


---

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



12




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)







6.    Line of Business Reporting (continued)





The following tables present operating information about each of Allfirsts business lines for the nine months ended
September 30, 2002 and 2001.





Nine Months Ended September 30, 2002





(in thousands)

Regional Banking

Capital Markets

Asset Management

Treasury

Other


Consolidated TotalNet interest income1

$
283,457

$
106,160

$
4,856

$
21,856

$
(26,385
)

$
389,944Noninterest income


112,567


76,102


67,077


957


58,938



315,641FX Income (Losses)














(16,988
)


(16,988
)Securities gains (losses), net











9,071


(14,106
)


(5,035
)Total revenues


396,024


182,262


71,933


31,884


1,459



683,562Total noninterest expenses, excluding intangible asset amortization


236,528


88,135


50,874


6,058


104,044



485,639Intangible asset amortization


618





354





4,170



5,142Provision for loan and lease losses


16,468


68,340


97





(10,829
)


74,076Income (loss) before income taxes


142,410


25,787


20,608


25,826


(95,926
)


118,705Income tax expense (benefit)1


54,117


2,691


7,593


9,097


(37,554
)


35,944Net income (loss)

$
88,293

$
23,096

$
13,015

$
16,729

$
(58,372
)

$
82,761(in millions)Average identifiable assets

$
5,754

$
4,895

$
65

$
3,974

$
2,671


$
17,359Average loans


5,450


4,146


42





957



10,595Average deposits


8,400


1,199


83


1,912


70



11,664





Nine Months Ended September 30, 2001 (As Restated)





(in thousands)

Regional Banking

Capital Markets

Asset Management

Treasury

Other


Consolidated TotalNet interest income1

$
287,786

$
99,272

$
4,454

$
17,409

$
(6,990
)

$
401,931Noninterest income


105,139


73,346


67,319


2,090


33,151



281,045FX Income (Losses)














(104,856
)


(104,856
)Securities gains (losses), net











717


42



759Total revenues


392,925


172,618


71,773


20,216


(78,653
)


578,879Total noninterest expenses, excluding intangible asset amortization


223,973


79,967


43,907


7,869


43,474



399,190Intangible asset amortization


623





821





34,520



35,964Provision for loan and lease losses


15,944


10,742


55





(5,320
)


21,421Income (loss) before income taxes


152,385


81,909


26,990


12,347


(151,327
)


122,304Income tax expense (benefit)1


57,768


23,430


9,905


3,450


(48,968
)


45,585Net income (loss)

$
94,617

$
58,479

$
17,085

$
8,897

$
(102,359
)

$
76,719(in millions)Average identifiable assets

$
5,587

$
4,479

$
38

$
4,379

$
2,986


$
17,469Average loans


5,304


3,816


15





1,502



10,637Average deposits


8,366


1,118


70


2,239


81



11,874


---

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






13




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







7.    Restatement of Third Quarter 2001 Financial Statements





As a result of the Fraudulent Activities described in the Explanatory Statement, Allfirst has restated the
financial statements for the three months and nine months ended September 30, 2001. Amounts affected are presented in the following tables.





For The Three Months Ended September 30, 2001:As Previously Reported In 10-Q

Restatement Adjustments


As Restated(in thousands)Statement of Income:Trading income

$
5,111

$
44,661
(d)

$
49,772Total noninterest income


104,842


44,661



149,503Income before taxes


77,113


44,661



121,774Income tax expense


25,284


15,632
(f)


40,916Net income


51,828


29,030
(f)


80,858





At And For The Nine Months EndedSeptember 30, 2001:As Previously Reported In 10-Q

Restatement Adjustments


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

$
1,112,403

$
(271,359
)(a)

$
841,044Other liabilities


991,538


(3,120
)(b)


988,418Retained earnings


1,353,376


(268,239
)(c)


1,085,137Total assets


17,713,098


(271,359
)


17,441,739Statement of Income:Trading income (losses)


16,599


(111,899
)(e)


(95,300
)Total noninterest income


288,847


(111,899
)


176,948Income (loss) before taxes


221,302


(111,899
)


109,403Income tax expense (benefit)


71,848


(39,164
)(g)


32,684Net income (loss)


149,453


(72,734
)(g)


76,719





|(a) |  | Other assets reduced as a net 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 net result of unrecorded FX Option Liabilities, 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 nine months of 2001 income statement effect of $(72.7) million and the cumulative effect of
restatements attributable to years 1997  2000 of $(195.5) million.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(d)   Trading income for the
3rd quarter increased due to the understatement of income resulting from the fictitious FX Option Assets and the unrecorded FX Option Liabilities. This line item also includes both FX Income (Loss) and Trading Income 
Other within the current 10-Q presentation.


|(e) |  | Trading income for the year reduced due to the overstatement of income resulting from the fictitious FX Option Assets and the unrecorded FX Option Liabilities.
This line item also includes both FX Income (Loss) and Trading Income  Other within the current 10-Q presentation.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(g) |  | 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%.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)





(Unaudited)







8.    Litigation





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.





Shareholder Class
Actions.    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.





Shareholder Derivative
Action.    On May 13, 2002, Tomran, Inc., a holder of 4800 AIB ADRs, filed on behalf of Allfirst Bank a derivative action in the Circuit Court for Baltimore City, Maryland against certain current and former directors and
officers of Allfirst Bank. Allfirst, Allfirst Bank and Allied Irish Banks, p.l.c. were named as nominal defendants. The complaint alleges negligence and gross negligence by the defendants in the management and oversight of the foreign exchange
trading activities at Allfirst Bank and seeks recovery of the full amount of the foreign exchange trading losses. The current and former directors and officers moved to dismiss the action as did the nominal defendants. Following the filing of an
amended complaint by Tomran, the defendants moved to dismiss the amended complaint.





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





9.    Allfirst Enhanced Voluntary
Early Retirement Program





As part of the initiative to achieve efficiencies, the Allfirst Enhanced Voluntary
Early Retirement Program was offered, effective December 1, 2002, for eligible employees who are at least 55 years of age and have at least 15 years of service under the Allfirst pension plan. The closing date for eligible employees to participate
in this program was October 16, 2002. Of the 324 eligible employees, 228 elected to participate as of September 30, 2002. The three months ended September 30, 2002 includes a $27.3 million charge which represents the accrued retirement liability for
those employees who accepted by September 30, 2002. This charge is reflected in the noninterest expense tables on pages 23 and 24 as the Early Retirement Charge. An additional charge will be taken in the fourth quarter for any eligible employees who
elect to participate after September 30, 2002.




15




---

##### Table of Contents



ALLFIRST FINANCIAL INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)





(Unaudited)







10.    Subsequent Event  Investment Portfolio Restructuring





Following a review of the current interest rate environment and economic conditions by the Allfirst Asset and
Liability Committee, Allfirst commenced, during the month of October, a major investment portfolio restructuring designed to realize gains in the portfolio while producing a lower and more predictable risk profile. The restructuring, upon
completion, will likely result in the sale of the entire 15 year mortgage backed securities portfolio ($1.1 billion), the entire state and municipal bond portfolio ($0.46 billion), and approximately $0.55 billion of agency securities. At this time,
proceeds are being partially reinvested in a mix of short term U.S. Treasury and Agency securities. Securities gains are projected at $80 million, while the fourth quarter net interest income is projected to decline $9 million from third quarter
levels. Upon completion of the portfolio restructuring in the fourth quarter, the size of the investment portfolio is expected to be $1.0 billion smaller than at September 30.





Assuming that the partial reinvestment of the portfolio as described remains unchanged for all of 2003, the impact of the restructuring would be to reduce 2003 net interest
income by approximately $70 million. The company may, however, alter the reinvestment strategy, as deemed appropriate, based on its continually evolving assessment of market conditions and opportunities, which could mitigate this estimated reduction
of net interest income.




16




---

##### Table of Contents

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 September 30, 2002 of $20.9 million, compared to a restated net income to common stockholders of $80.8 million for the
three months ended September 30, 2001. Net income to common stockholders represents net income after deducting preferred stock dividends. Return on average assets and return on average common stockholders equity were 0.49% and 4.69%,
respectively, for the three months ended September 30, 2002 compared to 1.84% and 18.20% for the three months ended September 30, 2001.





Net income to common stockholders for the nine months ended September 30, 2002 was $82.6 million, compared to a restated net income to common stockholders of $76.4 million for the nine months ended September 30, 2001. Return
on average assets and return on average common stockholders equity were 0.64% and 6.37%, respectively, for the nine months ended September 30, 2002 compared to 0.59% and 5.89% for the nine months ended September 30, 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 $13.7 million pretax charge (the FX Related Charge) during the first half 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 nine months ended September 30, 2002 includes the $27.3 million charge in the third quarter related to the Allfirst Enhanced Voluntary Early Retirement Program. The 2002 results also include FX Losses
of $17.0 million as well as the FX Related Charge of $13.7 million, a $13.8 million other than temporary impairment loss on marketable equity securities (included in securities gains (losses), net) arising from continued declines in the U.S. equity
markets, a $52.7 million increase in the provision for loan losses primarily attributable to one large telecommunications loan, and an increase in operating expenses of $9.3 million attributable to the change in the automobile lease residual
valuation allowance. The impact of the change in accounting for goodwill amortization (reduces expenses by $29.9 million from 2001) is also reflected in the 2002 results. Additionally, Allfirsts results for the first nine months of 2002
include the results of CCS and Ketchum from the acquisition dates of May 17, 2001 and May 3, 2002, respectively. For comparative purposes, the revenues and expenses of CCS and Ketchum, as well as the FX Losses, the FX Related Charge, the Early
Retirement Charge, goodwill amortization, the change in the automobile lease residual valuation allowance and securities gains (losses) have been excluded from the analysis in the following paragraph.




17




---

##### Table of Contents

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





Allfirsts adjusted total revenues grew slightly in the first nine months of 2002 compared to the same
period of 2001. Net interest income decreased $9.9 million compared to the same period last year with a smaller and lower yielding investment portfolio in 2002 and higher levels of earning assets invested in low-rate Federal funds sold. The net
interest margin decreased to 3.49%, down 9 basis points from the first nine months of 2001. Revenue growth was driven by an increase in adjusted noninterest income of 7.6%, with a 12% increase in deposit service charges and a 9% rise in electronic
banking fees. Adjusted noninterest expenses increased by 4.6% in 2002 compared to 2001. Income tax expense for the three months ended September 30, 2002 has been adjusted to reflect a year to date effective tax rate equal to the 23.3% rate expected
for the full year.





Nonperforming assets at September 30, 2002 were $151.5 million, or 1.46% of loans, other real
estate and other assets owned, a $62.8 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 September 30, 2002 of $181.0 million
increased by $28.5 million over the December 31, 2001 level and represented 126% of nonperforming loans and 1.74% of period end loans. Asset quality is discussed in more detail on page 28.





Net Interest Income





Net interest income is the
difference between the interest and yield-related fee income generated by earning assets and the interest expense incurred on interest bearing liabilities. The amount of net interest income is affected by both changes in the level of interest rates
and the amount and composition of earning assets and interest bearing liabilities. When net interest income is presented on a tax-equivalent basis, interest income from tax exempt earning assets is increased by an amount equivalent to the Federal
income taxes that would have been paid if this income were taxable at the statutory Federal income tax rate of 35%. Net interest margin represents net interest income on a tax-equivalent basis as a percentage of average earning assets. The net
interest income that is presented on pages 19 and 20 is on a tax-equivalent basis. Net interest income as presented in the Consolidated Statements of Income on page 3 is on a non tax-equivalent basis.





Net interest income has been unfavorably impacted by market interest rates in 2002. Net interest income on a tax-equivalent basis for the
three months ended September 30, 2002 was $126.7 million, a decrease of $11.3 million when compared to net interest income of $138.0 million for the three months ended September 30, 2001. The net interest margin was 3.44% for the third quarter of
2002, down 23 basis points from the same period last year. The decline in net interest income was primarily attributable to a smaller and lower yielding investment portfolio in the 2002 period combined with higher levels of earning assets invested
in low-rate Federal funds sold. The decline in net interest margin was primarily attributable to the lower contribution of net free funds as a result of the low interest rate environment.





Net interest income on a tax-equivalent basis for the nine months ended September 30, 2002 was $389.9 million, a decrease of $12.0 million when compared to net interest
income of $401.9 million for the nine months ended September 30, 2001. The net interest margin of 3.49% declined by 9 basis points from the same period last year. The decline in net interest margin was primarily attributable to the lower
contribution of net free funds as a result of the low interest rate environment. The decline in net interest income was primarily attributable to a smaller and lower yielding investment portfolio in the 2002 period combined with higher levels of
earning assets invested in low-rate Federal funds sold. The net interest spread between the yield on earning assets and the rate paid on interest bearing liabilities for the first nine months of 2002 was 3.02%, up 26 basis points compared to the
first nine months of 2001. 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 the first nine months of 2001
levels with commercial loans up 15 basis points and direct retail loans up 29 basis points.




18




---

##### Table of Contents




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





The following tables provide additional information on Allfirsts
average balances, annualized interest yields, rates, and net interest margin for the three months and nine months ended September 30, 2002 and 2001.





Average Balances, Interest Yields and Rates and Net Interest Margin


(Tax-Equivalent Basis)





Three Months EndedSeptember 30, 2002


September 30, 2001 As RestatedAverage Balance


Interest (1)

Yield/ Rate (1)


Average Balance


Interest (1)

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

$
2.7


$
0.1

2.65
%

$
5.3


$
0.1

2.96
%Money market investments


523.7



2.3

1.75



96.7



0.8

3.43Investment securities (2):Taxable


2,791.0



32.1

4.57



3,356.4



50.6

5.98Tax exempt


448.4



8.6

7.61



463.8



9.1

7.82Equity investments


292.3



4.1

5.61



302.7



3.9

5.10Total investment securities


3,531.7



44.8

5.04



4,122.9



63.6

6.12Loans held for sale


54.2



0.7

4.81



61.4



1.0

6.16Loans (net of unearned income) (3):Commercial


3,859.0



43.8

4.51



3,821.5



59.8

6.21Commercial real estate


2,410.9



33.1

5.45



2,331.9



40.6

6.91Residential mortgage


409.0



6.7

6.48



529.3



9.9

7.39Direct retail


2,526.0



45.2

7.10



2,832.1



55.6

7.79Commercial leases receivable


638.0



6.5

4.01



650.2



7.4

4.51Indirect retail loans and leases receivable


434.5



8.4

7.71



276.8



5.0

7.19Foreign


210.9



2.0

3.71



194.9



2.9

5.95Total loans


10,488.3



145.7

5.51



10,636.7



181.2

6.76Total earning assets


14,600.6



193.6

5.26



14,923.0



246.7

6.56Allowance for credit losses


(181.0
)








(152.6
)Cash and due from banks


803.1









804.7Other assets


1,841.6









1,853.3Total assets

$
17,064.3








$
17,428.4LIABILITIES AND STOCKHOLDERS EQUITYDeposits in domestic offices:Interest bearing demand

$
104.8


$
0.2

0.84
%

$
92.9


$
0.2

1.03
%Money market accounts


2,911.6



8.3

1.13



2,888.8



14.7

2.01Savings


1,235.4



3.0

0.96



1,151.3



4.0

1.38Other consumer time


2,639.4



25.7

3.87



2,845.3



38.6

5.38Large denomination time


1,030.4



6.4

2.48



1,695.8



17.7

4.14Deposits in foreign banking office


93.4



0.5

1.95



219.3



2.1

3.78Total interest bearing deposits


8,015.0



44.1

2.18



8,893.4



77.3

3.45Funds purchased


1,516.7



6.3

1.65



1,568.0



13.4

3.38Other borrowed funds, short-term


901.0



4.1

1.79



442.8



3.7

3.34Long-term debt


1,209.1



12.4

4.07



1,004.3



14.3

5.64Total interest bearing liabilities


11,641.8



66.9

2.28



11,908.5



108.7

3.62Noninterest bearing deposits


3,033.8









2,811.0Other liabilities


615.6









939.7Redeemable preferred stock


0.1









8.8Stockholders equity


1,773.0









1,760.4Total liabilities and stockholders equity

$
17,064.3








$
17,428.4Net interest income, tax-equivalent basis





$
126.7








$
138.0Net interest spread (4)








2.98
%








2.94
%Contribution of interest free sources of funds








0.46









0.73Net interest margin (5)








3.44









3.67


---

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

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

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

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

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



19




---

##### Table of Contents




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





Average Balances, Interest Yields and Rates and Net Interest Margin


(Tax-Equivalent Basis)





Nine Months EndedSeptember 30, 2002


September 30, 2001 As RestatedAverage Balance


Interest (1)

Yield/ Rate (1)


Average Balance


Interest (1)

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

$
5.9


$
0.1

2.31
%

$
5.9


$
0.2

4.52
%Money market investments


675.3



8.8

1.75



49.7



1.4

3.89Investment securities (2):Taxable


2,844.3



107.9

5.07



3,502.6



160.9

6.14Tax exempt


462.5



26.8

7.74



465.9



28.0

8.03Equity investments


310.0



11.3

4.86



292.2



11.1

5.08Total investment securities


3,616.8



146.0

5.40



4,260.7



200.0

6.28Loans held for sale


54.5



2.3

5.73



49.7



2.4

6.37Loans (net of unearned income) (3):Commercial


3,892.3



134.5

4.62



3,752.4



193.7

6.90Commercial real estate


2,413.5



100.5

5.57



2,326.8



130.2

7.48Residential mortgage


427.7



22.3

6.99



573.9



32.4

7.56Direct retail


2,480.8



133.4

7.19



2,827.9



171.2

8.09Commercial leases receivable


655.2



20.2

4.12



653.7



22.7

4.63Indirect retail loans and leases receivable


521.4



29.6

7.60



307.2



16.7

7.25Foreign


203.8



5.9

3.85



194.9



10.3

7.09Total loans


10,594.7



446.4

5.63



10,636.8



577.2

7.26Total earning assets


14,947.2



603.6

5.40



15,002.8



781.2

6.96Allowance for credit losses


(163.4
)








(152.5
)Cash and due from banks


794.6









789.7Other assets


1,780.8









1,828.9Total assets

$
17,359.2








$
17,468.9LIABILITIES AND STOCKHOLDERS EQUITYDeposits in domestic offices:Interest bearing demand

$
102.0


$
0.6

0.85
%

$
89.7


$
0.8

1.27
%Money market accounts


2,922.7



25.3

1.16



2,835.7



52.3

2.47Savings


1,217.6



8.9

0.97



1,144.5



12.7

1.48Other consumer time


2,610.0



80.2

4.11



2,883.9



120.6

5.59Large denomination time


1,691.7



29.9

2.36



1,953.1



75.5

5.17Deposits in foreign banking office


139.5



2.5

2.41



205.5



7.4

4.80Total interest bearing deposits


8,683.5



147.4

2.27



9,112.4



269.3

3.95Funds purchased


1,323.6



16.3

1.65



1,547.7



50.2

4.33Other borrowed funds, short-term


825.9



11.1

1.79



412.2



13.3

4.30Long-term debt


1,179.9



38.9

4.41



1,007.5



46.5

6.17Total interest bearing liabilities


12,012.9



213.7

2.38



12,079.8



379.3

4.20Noninterest bearing deposits


2,981.1









2,761.6Other liabilities


625.3









885.3Redeemable preferred stock


6.0









8.8Stockholders equity


1,733.9









1,733.4Total liabilities and stockholders equity

$
17,359.2








$
17,468.9Net interest income, tax-equivalent basis





$
389.9








$
401.9Net interest spread (4)








3.02
%








2.76
%Contribution of interest free sources of funds








0.47









0.82Net interest margin (5)








3.49









3.58


---

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

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

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

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

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



20




---

##### Table of Contents




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





Noninterest Income





The following table presents the components of noninterest income for the three months ended September 30, 2002 and 2001.





Noninterest Income





Three Months Ended September 30,

Net Change2002

2001 As
Restated

Amount


Percent(dollars in thousands)Service charges on deposit accounts

$
31,454

$
28,676

$
2,778


9.7
%Trust and investment advisory fees


20,455


22,397


(1,942
)

(8.7
)Electronic banking income


9,328


8,788


540


6.1Mortgage banking income


4,567


4,650


(83
)

(1.8
)FX Income (Losses)





46,419


(46,419
)

(100.0
)Trading income  other


1,874


3,353


(1,479
)

(44.1
)Consulting income


12,331


10,378


1,953


18.8Other income


27,627


24,504


3,123


12.7Total fees and other income


107,636


149,165


(41,529
)

(27.8
)Securities gains (losses), net


25


338


(313
)

(92.6
)Total noninterest income

$
107,661

$
149,503

$
(41,842
)

(28.0
)%





Allfirsts noninterest income of $107.7 million for the
quarter ended September 30, 2002 decreased by $41.8 million over the same period last year primarily due to FX Income of $46.4 million in 2001. Excluding the FX Income, consulting income, and securities gains, adjusted noninterest income increased
$2.9 million or 3.2% over the same period in 2001.





Service charges on deposit accounts were $31.5 million, up
$2.8 million from the prior year. Corporate deposit service charges were up $1.5 million primarily as a result of cash management customers paying for more of their services in fees than in compensating balances. Retail deposit service charges
increased $1.3 million from the third quarter of 2001 due to improved fee waiver management. Trust and investment advisory fees of $20.5 million decreased $1.9 million compared to 2001 with fee declines driven by continued weakness in the equities
markets. Electronic banking income, consisting of fee income from automated teller machines and interchange income from VISA debit card transactions, increased $0.5 million in the third quarter of 2002 compared to 2001 as debit card usage continues
to expand.





Other trading income decreased $1.5 million primarily as a result of lower sales of securities and
derivative products to customers. Other income, which consists primarily of bank owned life insurance income, unused line of credit fees, standby letter of credit fees, merchant income, joint venture investment income, and fees from the sale of
other bank products and services to customers, was $27.6 million for the third quarter of 2002 compared to $24.5 million for the third quarter of 2001. The increase of $3.1 million was primarily due to Allfirst recording a one-time interest refund
receivable of $6.5 million on amended tax returns resulting from the Fraudulent Activities. This was offset by lower income from bank owned life insurance of $1.0 million and lower joint venture investment income of $2.3 million resulting from
impairment writedowns on certain investments.




21




---

##### Table of Contents




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





Noninterest Income





The following table presents the components of noninterest income for the nine months ended September 30, 2002 and 2001.





Noninterest Income





Nine Months Ended September 30,


Net Change2002


2001 As
Restated


Amount


Percent(dollars in thousands)Service charges on deposit accounts

$
92,701


$
82,476


$
10,225


12.4
%Trust and investment advisory fees


63,575



65,638



(2,063
)

(3.1
)Electronic banking income


26,593



24,471



2,122


8.7Mortgage banking income


15,709



15,375



334


2.2FX Income (Losses)


(16,988
)


(104,856
)


87,868


83.8Trading incomeother


5,270



9,556



(4,286
)

(44.9
)Consulting income


37,676



15,336



22,340


145.7Other income


74,117



68,193



5,924


8.7Total fees and other income


298,653



176,189



122,464


69.5Securities gains (losses), net


(5,035
)


759



(5,794
)

(763.4
)Total noninterest income

$
293,618


$
176,948


$
116,670


65.9
%





Allfirsts noninterest income for the nine months ended
September 30, 2002 was $293.6 million, a $116.7 million increase from noninterest income for the first nine months of 2001 primarily due to lower FX Losses of $87.9 million and higher consulting income of $22.3 million related to CCS and Ketchum.
The nine months ended September 30, 2002 includes a $13.8 million other than temporary impairment loss on marketable equity securities recorded during the second quarter that is included in securities gains (losses). This loss is partially offset by
net realized securities gains of $8.8 million driven primarily by the second quarter reduction in Allfirsts investment portfolio. Excluding the FX Losses, consulting income, and securities gains (losses), adjusted noninterest income was $278.0
million, representing a $12.2 million or 4.6% increase over the same period in 2001.





Service charges on deposit
accounts of $92.7 million were up $10.2 million from the prior year. Corporate deposit service charges were up $6.8 million primarily as a result of cash management customers paying for more of their services in fees than in compensating balances.
Retail deposit service charges grew $3.4 million due to improved fee waiver management. Trust and investment advisory fees of $63.6 million were down 3.1% from 2001, with fee declines driven by the continued weakness in the equities markets.
Electronic banking income grew in 2002 to $26.6 million, an increase of $2.1 million primarily due to increased interchange income from VISA debit card transactions.





Other trading income decreased $4.3 million primarily as a result of lower sales of securities and derivative products to customers. Other income was $74.1 million for the
first nine months of 2002 compared to $68.2 million for the same period in 2001. Growth in other income includes a $6.5 million interest refund receivable on amended tax returns resulting from the Fraudulent Activities, higher gains on sales of
loans and leases of $3.5 million, and an increase in standby letter of credit fees of $1.7 million. These were partially offset by lower joint venture income of $4.3 million due to impairment writedowns, and losses of $1.5 million on the disposition
of fixed assets.




22




---

##### Table of Contents




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





Noninterest Expenses





The following table presents the components of noninterest expenses for the three months ended September 30, 2002 and 2001.





Noninterest Expenses





Three Months EndedSeptember 30,

Net Change2002

2001 As Restated

Amount


Percent(dollars in thousands)Salaries and other personnel costs

$
89,328

$
86,399

$
2,929


3.4
%Early Retirement Charge


27,336





27,336


100.0Total compensation costs


116,664


86,399


30,265


35.0Equipment costs


14,934


12,301


2,633


21.4Occupancy costs


10,133


9,629


504


5.2Postage and communications


5,063


5,282


(219
)

(4.2
)Advertising and public relations


3,329


4,204


(875
)

(20.8
)FX Related Charge











Other operating expenses


21,960


25,090


(3,130
)

(12.5
)Total operating expenses


172,083


142,905


29,178


20.4Intangible assets amortization expense


1,837


12,786


(10,949
)

(85.6
)Total noninterest expenses

$
173,920

$
155,691

$
18,229


11.7
%





Allfirsts noninterest expenses for the quarter ended
September 30, 2002 were $173.9 million, an $18.2 million increase from noninterest expenses for the quarter ended September 30, 2001. As described in Note 4 of the Notes to Consolidated Financial Statements, the change in accounting for goodwill
amortization is reflected in the 2002 results. The third quarter of 2002 also includes the Early Retirement Charge of $27.3 million as well as the expenses of CCS and Ketchum. Excluding goodwill amortization, the Early Retirement Charge, the CCS and
Ketchum expenses, the FX Related Charge, and the change in the automobile lease residual valuation allowance, adjusted noninterest expenses were $135.1 million, representing a $0.1 million increase over the third quarter of 2001.





Excluding the Early Retirement Charge and CCS and Ketchum for purposes of comparability, salaries and other personnel costs
increased to $80.7 million in the third quarter of 2002, a $0.9 million increase from the third quarter of 2001 resulting primarily from an increase in pension expense and payroll taxes offset by a decrease in incentive compensation. Pension costs
were $3.2 million higher in 2002 due to the impact of weak financial markets on plan asset values. Equipment costs increased $2.6 million due to higher depreciation and increased maintenance. Occupancy costs increased by $0.5 million primarily as a
result of higher property rental expense.





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 additional Federal Deposit Insurance Corporation (FDIC) premiums. There were no additional FX Related Charges recorded during the third quarter of 2002.





Other operating expenses for the third quarter of 2002 were $22.0 million, down $3.1 million from the third quarter of 2001. The decrease was primarily due to lower
deferred compensation expenses of $2.1 million and lower auto lease residual losses of $1.2 million.




23




---

##### Table of Contents




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





Noninterest Expenses





The following table presents the components of noninterest expenses for the nine months ended September 30, 2002 and 2001.





Noninterest Expenses





Nine Months EndedSeptember 30,

Net Change2002

2001 As
Restated

Amount


Percent(dollars in thousands)Salaries and other personnel costs

$
267,148

$
242,207

$
24,941


10.3
%Early Retirement Charge


27,336





27,336


100.0Total compensation


294,484


242,207


52,277


21.6Equipment costs


41,310


35,343


5,967


16.9Occupancy costs


29,849


28,100


1,749


6.2Postage and communications


15,064


14,840


224


1.5Advertising and public relations


12,481


11,291


1,190


10.5FX Related Charge


13,714





13,714


100.0Other operating expenses


78,737


67,409


11,328


16.8Total operating expenses


485,639


399,190


86,449


21.7Intangible assets amortization expense


5,142


35,964


(30,822
)

(85.7
)Total noninterest expenses

$
490,781

$
435,154

$
55,627


12.8
%





Allfirsts noninterest expenses for the nine months ended
September 30, 2002 were $490.8 million, a $55.6 million increase from noninterest expenses for the nine months ended September 30, 2001. As described previously, the Early Retirement Charge, the change in accounting for goodwill amortization as well
as the expenses of CCS and Ketchum are reflected in the 2002 results. In addition, the 2002 results include the FX Related Charge of $13.7 million and an increase in the automobile lease residual valuation allowance of $9.3 million. Excluding
goodwill amortization, the Early Retirement Charge, CCS and Ketchum expenses, the FX Related Charge, and the change in the automobile lease residual valuation allowance, adjusted noninterest expenses were $408.2 million, representing an
$18.1 million or 4.6% increase over 2001.





Excluding the Early Retirement Charge, as well as CCS and Ketchum,
salaries and other personnel costs increased to $241.9 million in 2002, up $9.1 million with $10.2 million of the increase attributable to higher pension costs. The pension cost increase is due primarily to lower earnings on plan assets
resulting from the weak financial markets. Equipment costs increased $6.0 million due to higher depreciation and maintenance and repairs expense. Occupancy costs increased $1.7 million due to increased property rental and depreciation expense.





Advertising and public relations costs were $12.5 million, an increase of $1.2 million over the same period in
2001. Other operating expenses for the first nine months of 2002 were $78.7 million, up $11.3 million from 2001. Expense growth was driven by an $8.6 million increase in the lease residual losses and higher deferred compensation expenses of
$1.7 million.




24




---

##### Table of Contents

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. At September 30, 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 transactions on behalf of corporate customers. There has been no material change in the market risk of these portfolios during the first nine months of 2002. As a result of the Fraudulent Activities, Allfirst has ceased all
proprietary fixed income and derivative trading risk management activities.





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. As a result of 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 Statement 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). The current Allfirst parent company and Allfirst Bank 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+








25




---

##### Table of Contents




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





Shortly after the announcement of the Allfirst / M&T merger, S&P
placed the ratings of the Allfirst parent company and Allfirst Bank on Credit Watch with positive implications. Moodys placed the ratings of the Allfirst parent company and Allfirst Bank under review for possible downgrade while Fitch placed
the ratings on Negative Rating Watch. Final ratings outcomes are likely to be determined by the completion date of the merger.





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. From the announcement of the Fraudulent Activities on February 6 through
July 31, Allfirst managed liquidity in accordance with its contingency funding plan. As a result of actions taken while managing liquidity under the contingency funding plan, which included the funding of investment securities through repurchase
agreements, the sale of investment securities and acquisition of short-term funding from AIB, Allfirst Bank has been a net seller of Federal funds. At September 30, 2002, AIB had provided $250 million of short-term funding with maturities of less
than 30 days priced at LIBOR.





At September 30, 2002, Allfirst Bank was holding $45 million of variable rate
demand bonds (VRDBs) categorized as investment securities available for sale. 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. The customer benefits from lower funding costs as its credit rating is enhanced by the letter of credit. The interest rate on the bonds resets weekly according to market conditions, and
investors generally have the right to sell the bonds back to the remarketing agent with seven days notice. Allfirst will continue to buy back and externally remarket VRDBs in the normal course of its business. As of September 30, 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. The long-term portion of this funding consists of $200 million of debt with a term of five years (maturing
in February 2007) priced at LIBOR + 40 basis points and $100 million of debt with a term of five years (maturing in May 2007) priced at LIBOR + 75 basis points. The short-term portion of this funding, $100 million with a three-month term priced at
three month LIBOR, matured in November 2002 and was rolled over for an additional three-month term (maturing in February 2003).





At September 30, 2002, approximately $5.8 billion of loans and investment securities available for sale were pledged as collateral for securities sold under agreement to repurchase transactions, collateralized deposit programs, FHLB
borrowings, and at the Federal Reserve discount window. This represents a $3.4 billion increase since June 30. Securities sold under repurchase agreements increased by approximately $1.2 billion during the quarter. In addition, Allfirst finalized a
secured credit facility with the FHLB Atlanta that results in an additional $2.3 billion of assets, primarily loans secured by real estate, pledged as collateral. At September 30, there were no advances outstanding under this facility.




26




---

##### Table of Contents




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





ANALYSIS OF FINANCIAL CONDITION





Allfirsts total assets at September 30, 2002 were $18.3 billion, a $500 million decrease from total assets of $18.8 billion at December 31, 2001. The decrease was
primarily due to a reduction in the curtailed loan portfolios of $331 million, lower federal funds sold and securities purchased under resale agreements of $165 million, and reduced cash balances of $122 million. These decreases were slightly offset
by increases in investment securities available for sale of $195 million.





Investment securities available for
sale of $4.3 billion at September 30, 2002 increased $195 million from the December 31, 2001 level of $4.1 billion, as a result of interest rate risk management activities. At September 30, 2002, the investment securities available for sale
portfolio had net unrealized gains of $101.3 million as compared to $26.3 million at December 31, 2001. The taxable equivalent yield on the entire securities portfolio for the nine months ended September 30, 2002 was 5.40% compared to 6.28% for the
same period in 2001. Investment securities sold in the first nine months of 2002 totaled $2.4 billion and generated pretax gains of $9.1 million, while purchases totaled $3.4 billion and maturities, calls and paydowns of securities totaled $0.9
million.





Total loans and leases of $10.4 billion at September 30, 2002 decreased $355 million from December 31,
2001. Excluding curtailed portfolios, loans and leases decreased by $23 million from December 31, 2001 with an increase in direct retail loans of $147 million offset by decreases in commercial loans of $126 million and commercial leases of $56
million. Curtailed or runoff portfolios, consisting of indirect retail lending / leasing and residential mortgages, decreased $331 million from year end levels. Indirect retail loans and leases of $399 million at September 30, 2002 decreased $256
million from December 31, 2001 as a result of portfolio runoff. Allfirst continues to service its existing indirect loan portfolio. Residential mortgage loans declined $76 million due to the sale of $25 million in residential mortgage loans during
the first quarter of 2002 as well as portfolio runoff.





At September 30, 2002, core deposits of $10.3 billion were
down $0.5 billion from year end levels. Core noninterest bearing deposits of $3.5 billion decreased $0.3 billion from December 31, 2001 due to lower deposit balances generated from corporate customers. Core interest bearing deposits of $6.8 billion
decreased $0.2 million due primarily to lower money market balances and retail certificates of deposit balances.




27




---

##### Table of Contents

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





Asset Quality





Nonperforming assets were $151.5 million at September 30, 2002, compared to $88.7 million at December 31, 2001, an increase of $62.8 million. Nonperforming assets consist primarily of nonaccrual loans. During the first nine
months of 2002, nonaccrual loans increased $67.2 million, due primarily to four additions from the communications portfolio during the second and third quarters. Total additions to nonaccrual loans in the first nine months of 2002 aggregated $152.4
million, while reductions in nonaccrual loans totaled $85.2 million, comprised of paydowns and payoffs of $36.8 million, chargeoffs of $39.3 million, loans returned to accrual status of $6.6 million and transfers to other real estate and other
assets owned of $2.5 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 internal and external environmental factors; 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. All
nonaccrual and criticized loans in the commercial, commercial real estate (construction and mortgages), foreign and commercial lease categories above certain defined exposure thresholds are analyzed quarterly 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 that are 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.





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 trends in the economy, the levels and trends in past due and nonaccrual loans, trends in loan volume, effects of any
changes in lending policies and procedures, changes in underwriting, and the experience and depth of lending management. Historical factors by risk rating are carefully reviewed and 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 significantly increase loan loss risk when influenced by external industry factors.





Reserves for the retail and residential mortgage portfolios are intended to absorb approximately twelve months of inherent losses based upon the historical loss experience over the prior twelve months. 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.




28




---

##### Table of Contents




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 not yet able to be 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.





The provision
for loan and lease losses for the first nine months of 2002 was $74.1 million, an increase of $52.7 million from the $21.4 million provision for the first nine months of 2001. The provision covered net chargeoffs of $45.6 million, including a
$20 million chargeoff on a $50 million telecommunications credit and a $9.2 million full chargeoff on a leveraged aircraft lease to an airline in bankruptcy. The provision also resulted in a $28.5 million increase in the allowance from $152.5
million to $181.0 million. Based on the application of quantitative empirical methodologies, the increase in criticized assets, nonaccrual loans and specific reserves, and seasoned credit management judgment, Allfirst determined that a $28.5 million
increase in the allowance was warranted.





From December 31, 2001 to September 30, 2002, specific reserves
increased by $24.6 million to $35.6 million due to the $25 million reserve attributable to the remaining balance on the telecommunications credit previously discussed. Total allocated reserves for all portfolios increased by $13.9 million to
$138 million. Higher reserves in the commercial portfolio resulted from increased criticized exposure, primarily in the communications and premium finance sectors, and higher specific reserves. In the commercial real estate portfolio, stable
reserves reflected continuing strong asset quality. Reserves for the $70 million commercial aircraft leveraged lease portfolio were reduced by $9 million as a result of the chargeoff of the leveraged aircraft lease that was fully reserved. Reserves
on the aircraft portfolio were substantially increased in the third quarter of 2001 reflecting the vulnerability of the airline industry post September 11 th . Overall reserves for retail loans and leases decreased by $0.6 million driven by accelerated runoff on the curtailed indirect portfolios.





At September 30, 2002, unallocated reserves totaled $43.0 million, representing 23.7% of the total allowance for loan and lease losses,
compared to $28.4 million, or 18.6% at year end 2001. The increase in unallocated reserves is warranted given the lack of clarity about the direction of the economy and the uncertainty about the loss volatility associated with capital markets loan
portfolios, particularly shared national credits, communications, and aircraft leasing. Allocations of reserves to these portfolios are subject to the methodology described above for determining specific and general reserves. However, management
deems it prudent to retain a higher level of unallocated reserves, given overall uncertainty in the marketplace surrounding these sectors, and to maintain adequate reserve coverages for its overall loan portfolio, particularly nonaccrual loans,
consistent with perceived levels of risk and peer coverages. While the allowance as a percentage of nonaccrual loans declined from 199% at December 31, 2001 to 126% at September 30, 2002, in managements judgment, the overall allowance
remains adequate.




29




---

##### Table of Contents




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





The following table details information on the Allowance for Loan and Lease
Losses and Net Loan Losses for the nine months ended September 30, 2002 and 2001 and Nonperforming Assets at September 30, 2002 and December 31, 2001.





ALLOWANCE FOR LOAN AND LEASE LOSSES


Nine Months Ended September
30,2002


2001(in thousands)Beginning balance

$
152,539


$
152,539Provision for loan and lease losses


74,076



21,421Net losses charged off


(45,576
)


(21,421
)Allowance attributable to loans sold






Ending balance

$
181,039


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


1.74
%


1.42
%Nonperforming loans


125.9



207.4





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





Commercial loans

0.93
%

0.37
%Commercial real estate loans

0.00


0.03Residential mortgages

0.17


0.34Direct retail loans

0.35


0.37Commercial leases receivable

1.86


(0.06
)Indirect retail loans and leases receivable

0.51


0.82Foreign loans

0.30


(0.16
)Total

0.58
%

0.27
%





NONPERFORMING ASSETS





September 30,2002


2001(in thousands)Nonaccrual loans:Domestic:Commercial

$
118,653


$
47,764Commercial real estate


6,060



4,038Residential mortgage


11,550



16,035Direct retail


521



Commercial lease receivable


5,580



6,750Foreign


1,335



1,943Total nonaccrual loans


143,699



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


7,636



9,777Other


122



2,411Total nonperforming assets

$
151,457


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


1.46
%


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

$
25,986


$
36,848Foreign


9,568



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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------






30




---

##### Table of Contents




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





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 September
30, 2002, Allfirsts Tier 1 risk based capital ratio was 8.19% ($1.2 billion of Tier 1 capital) and its total risk based capital ratio was 11.74% ($1.8 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 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 7.61% at September 30, 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 September 30, 2002, the capital ratios
of Allfirst Bank, Allfirsts principal banking subsidiary, compare favorably with the well capitalized standard as defined by regulatory authorities.





Capital Adequacy Ratios





Regulatory Capital RatiosTier 1


Total


LeverageAllfirst

8.19
%

11.74
%

7.61
%Allfirst Bank

8.03


11.54


7.32Regulatory 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 partial recourse. The application of the new capital rule will reduce Allfirsts regulatory capital ratios by adding up to $1.0 billion in
risk adjusted assets related to loans sold with partial recourse. The capital ratios of Allfirst Bank will not be impacted by this rule.




31




---

##### Table of Contents




EXECUTIVE MANAGEMENT CHANGE





Susan C. Keating, president and chief executive officer of Allfirst, resigned effective July 31, 2002. Eugene Sheehy, Chairman of the Board of Allfirst, assumed the added
responsibilities of president and chief executive officer.





WRITTEN AGREEMENT





On May 16, 2002, Allfirst, Allfirst Bank and Allied Irish Banks, p.l.c. entered into a written agreement with the Federal Reserve Board,
the Federal Reserve Bank of Richmond, the Maryland Commissioner of Financial Regulation and the Central Bank of Ireland (the Written Agreement). The Written Agreement requires Allfirst, among other things, to:





| | (a) |  | submit a management plan to strengthen management and improve the board of directors oversight of Allfirsts officers and operations;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | prepare written findings and conclusions regarding managements adherence to established risk management policies and procedures;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | establish policies acceptable to its supervisory authorities to enhance the risk management, internal controls and management information systems of Allfirst;
and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | enhance the written internal audit program for Allfirst in a manner acceptable to its supervisory authorities.
| | --- |  | --------------------------------------------------------------------------------------------------------------




Compliance with the terms of the written agreement is not expected to have a material impact on Allfirsts consolidated financial
position or results of operations.





POTENTIAL REGULATORY ACTION





A potential enforcement action by the U.S. Securities and Exchange Commission (SEC) could be imposed with respect to the Fraudulent Activities. However, at this
time there have been no discussions between Allfirst and the SEC regarding this issue. 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.





Item 4.    
Controls and Procedures





Under the supervision and with the participation of
Allfirsts management, including the Chief Executive Officer and Chief Financial Officer, Allfirst has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this
quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the date of their evaluation.




32




---

##### Table of Contents




Part II. - Other Information





Item 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.





Shareholder Class Actions.    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.





Shareholder Derivative Action.    On May 13, 2002, Tomran, Inc., a holder of 4800 AIB ADRs, filed on behalf of Allfirst Bank a derivative action in the Circuit Court for
Baltimore City, Maryland against certain current and former directors and officers of Allfirst Bank. Allfirst, Allfirst Bank and Allied Irish Banks, p.l.c. were named as nominal defendants. The complaint alleges negligence and gross negligence by
the defendants in the management and oversight of the foreign exchange trading activities at Allfirst Bank and seeks recovery of the full amount of the foreign exchange trading losses. The current and former directors and officers moved to dismiss
the action as did the nominal defendants. Following the filing of an amended complaint by Tomran, the defendants moved to dismiss the amended complaint.





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





Item 6.    
Exhibits and Reports on Form 8-K





(a)  Exhibits





None.





(b)  Reports on Form 8-K





| | (1) |  | Allfirst Financial Inc., dated June 26, 2002 and filed July 3, 2002 (item 4)
| | --- |  | ----------------------------------------------------------------------------

| | (2) |  | Allfirst Financial Inc., dated and filed July 17, 2002 (item 7)
| | --- |  | ---------------------------------------------------------------

| | (3) |  | Allfirst Financial Inc., dated and filed August 13, 2002 (item 4)
| | --- |  | -----------------------------------------------------------------






33




---

##### Table of Contents




SIGNATURES





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








Allfirst Financial Inc.November 14, 2002

By /s/ Maurice J. CrowleyExecutive Vice President and Chief Financial OfficerNovember 14, 2002

By /s/ Robert L. Carpenter, Jr.Executive Vice President and Controller




34




---

##### Table of Contents




Certifications:





Principal Executive Officer:





I, Eugene J. Sheehy, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Allfirst Financial Inc.
| | -- |  | -----------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent function):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Date: November 14, 2002Eugene J. Sheehy Chairman, President and Chief Executive Officer










35




---

##### Table of Contents




Principal Financial Officer:





I, Maurice J. Crowley, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Allfirst Financial Inc.
| | -- |  | -----------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent function):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Date: November 14, 2002Maurice J. Crowley Executive Vice
President and Chief Financial Officer




36