Beleaguered Allfirst registers profits rise of 8%

Profits at AIB's US subsidiary, Allfirst, rose by 8 per cent to $82.8 million (€82.1 million) in the nine months to the end of September.

The bank, which AIB has agreed to sell to the New York-based M&T bank, was the victim of a $691 million fraud perpetrated by one of its foreign currency traders, John Rusnak. The sale to M&T is expected to go ahead in March 2003 and under the terms of the deal AIB will take a 22.5 per cent stake in the New York bank.

According to documents filed with the US Securities and Exchange Commission (SEC,) Allfirst profits were hit by a number of exceptional charges in the three months to the end of September, that sharply reduced its performance in the third quarter.

The biggest charge included the $27.3 million cost of an early retirement scheme which has been put in place at Allfirst. The bank's chief financial officer, Mr Maurice Crowley, said yesterday that 224 of its 6,000 staff have already been signed up as eligible for the scheme. In total, 270 people had applied by the cut-off date at the end of October.

The bank, based in Baltimore, Maryland, has also raised its provisions for potential bad debts on one large telecommunications loan, believed to have been to WorldCom, by $52.7 million. The bank also incurred foreign exchange losses of $17 million and there is a foreign exchange related charge of $13.8 million which arose directly from Rusnak's fraudulent activities.

The third-quarter figures, which reflect these charges, show a 74 per cent drop in profits from $80.9 million to $20.9 million. The bank absorbed the $691 million fraud in its 2001 profits. AIB provided $400 million of funding to Allfirst following the fraud.

In the nine months to the end of September, Allfirst's total assets decreased by $500 million to $18.3 billion.

The bank is facing a series of legal actions from disgruntled investors seeking financial compensation for the fraud.

These include one filed in New York by Mr Walter Linn against several of the bank's current and former officers.

Another was filed by Mr Rodger Koons, also in New York, and in May a motion to consolidate those two cases was filed in court.

On May 13th another action was filed in Baltimore by Tomran Inc which is also seeking the recovery of the full amount of the foreign exchange losses.

In the SEC filing, Allfirst states that it could not determine the likely impact of these lawsuits on the bank.

M&T Bank is currently seeking shareholder approval for the Allfirst deal. It is expected before Christmas. M&T will then have to be granted approval by the Federal Reserve to complete the Allfirst transaction with the deal expected to happen by March next year.

Under the terms of its agreement with AIB which has a total value of $3.1 billion, Allfirst will be merged with M&T.

Together the two banks will have 700 branches in six states and the Allfirst branches will be rebranded M&T.

AIB had been under pressure to sell Allfirst following the fraud. An investigation showed the fraud had been perpetrated over five years and had not been detected because of a combination of lax management, weak controls and poor communications between AIB and its Baltimore bank.

Rusnak has pleaded guilty to fraud charges and has been sentenced to 7½ years in an open prison for his part in the fourth-largest bank fraud in history.

He will not be entitled to parole, but will have his sentence reduced by 56 days a year under normal remission, and could end up serving six years and four months.

The sentence will be followed by five years of supervised release.