<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 13, 1995
FLEET FINANCIAL GROUP,INC.
(Exact name of registrant as specified in its charter)
RHODE ISLAND
(State or other jurisdiction of incorporation)
1-6366 05-0341324
(Commission File Number) (IRS Employer Identification No.)
50 Kennedy Plaza, Providence, Rhode Island 02903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 401-278-5800
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
On February 21, 1995, Fleet Financial Group, Inc. ("Fleet") and
Shawmut National Corporation ("Shawmut") announced that they had
entered into an Agreement and Plan of Merger dated February 20,
1995 (the "Merger Agreement") providing for the merger of Shawmut
with and into Fleet (the "Merger").
Fleet hereby files its Unaudited Pro Forma Condensed Combined
Financial Statements and Notes thereto in connection with the
Merger.
Fleet also hereby files the consolidated balance sheets of
Shawmut at December 31, 1994 and 1993 and the related consolidated
statements of income, of changes in shareholders' equity and of
cash flows for each of the three years in the period ending
December 31, 1994.
For additional information regarding the Merger, see the
Registrant's Current Report on Form 8-K dated February 20, 1995.
Item 7. Financial Statements and Exhibits.
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Item 601
Exhibit Table
Reference Exhibit Title
- ------------- -------------
<C> <S>
23 Consent of Price Waterhouse LLP
99(a) Unaudited Pro Forma Condensed Combined Financial
Statements and Notes Thereto
99(b) Consolidated Financial Statements of Shawmut
</TABLE>
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
FLEET FINANCIAL GROUP, INC.
Registrant
By /s/ William C. Mutterperl
----------------------------------
William C. Mutterperl
Senior Vice President,
Secretary and General Counsel
Dated: April 13, 1995
-3-
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-19425, 33-22045, 33-48818, 33-55095, 33-56061,
33-57501, 33-57677), in the Registration Statements on Form S-3 (Nos. 33-36707,
33-50214, 33-50216, 33-55555) and in the Registration Statement on Form S-4
(No. 33-55579) of Fleet Financial Group, Inc. of our report dated February 20,
1995 relating to the consolidated financial statements of Shawmut National
Corporation, which appears in the Current Report on Form 8-K of Fleet Financial
Group, Inc. dated April 13, 1995.
Hartford, Connecticut
April 13, 1995
<PAGE> 1
Exhibit 99(a)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Balance Sheet as
of December 31, 1994, and the Unaudited Pro Forma Condensed Combined Statement
of Income for the year ended December 31, 1994, give effect to the pending
merger (the "Merger") of Shawmut National Corporation ("Shawmut") into Fleet
Financial Group, Inc. ("Fleet"), accounted for as a pooling of interests, the
pending merger (the "Northeast Merger") of Northeast Federal Corp.
("Northeast") into Shawmut, the consummation of the merger (the "NBB Merger")
of NBB Bancorp, Inc. ("NBB") into Fleet, the consummation of the merger (the
"Plaza Merger") of a wholly-owned indirect subsidiary of Fleet into Plaza Home
Mortgage Corp. ("Plaza"), the consummation of the acquisition (the "Barclays
Acquisition") of substantially all of the assets of the Barclays Business
Finance Division of Barclays Business Credit, Inc. ("Barclays") by Shawmut, and
Fleet's pending repurchase (the "FMG Repurchase") of the publicly-held shares
of Fleet's majority-owned subsidiary, Fleet Mortgage Group, Inc. ("FMG") each
of which were or will be accounted for by the purchase method of accounting, in
each case as if such transactions had occurred on January 1, 1994. The
Unaudited Pro Forma Condensed Combined Statements of Income for the years ended
December 31, 1993 and December 31, 1992, give effect to the Merger as if the
Merger had occurred on January 1 in each such year and do not take into account
the effect of the Northeast Merger, the NBB Merger, the Plaza Merger, the
Barclays Acquisition and the FMG Repurchase since such transactions were or
will be accounted for under the purchase method of accounting.
The pro forma information is based on the historical consolidated
financial statements of Fleet, Shawmut, Northeast, NBB, Plaza, Barclays and FMG
and their subsidiaries under the assumptions and adjustments set forth in the
accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements. The pro forma condensed combined financial statements do not give
effect to the anticipated cost savings in connection with the Merger, the
Northeast Merger, the NBB Merger and the Plaza Merger or the effects of any
required regulatory divestitures.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the consolidated historical financial statements of
Fleet and Shawmut, including the respective notes thereto. The pro forma data
is presented for comparative purposes only and is not necessarily indicative
of the combined financial position or results of operations in the future or
of the combined financial position or results of operations which would have
been realized had the acquisitions been consummated during the periods or as
of the dates for which the pro forma data is presented.
Pro forma per share amounts for the combined Fleet and Shawmut entity are
based on the Common Exchange Ratio of 0.8922 shares of Fleet Common Stock for
each share of Shawmut Common Stock. In addition, the pro forma data assumes the
issuance of approximately 6,165,912 shares of Fleet Common Stock in the NBB
Merger. The pro forma data also assumes an exchange ratio of 0.415 shares of
Shawmut Common Stock for each outstanding share and stock option of Northeast,
calculated as set forth in the Shawmut/Northeast merger agreement, assuming for
illustrative purposes only, that the average closing price of Shawmut Common
Stock used to determine such exchange ratio is $26.75, the closing price of the
Shawmut Common Stock on April 7, 1995.
1
<PAGE> 2
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1994(a)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
FLEET SHAWMUT PRO FORMA PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS COMBINED
----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.....................................$ 5,109,009 $ 2,377,273 $ -- $ 7,486,282
Federal funds sold and securities purchased under
agreements to resell........................................ 648,681 331,425 -- 980,106
Securities available for sale, at market...................... 10,359,441 2,099,363 (95,169)(d) 12,363,635
Securities held to maturity................................... 891,076 9,877,281(b) -- 10,768,357(b)
Loans and leases.............................................. 28,816,314 21,871,784 -- 50,688,098
Reserve for credit losses..................................... (980,509) (595,605) -- (1,576,114)
Mortgages held for resale..................................... 658,077 77,017 -- 735,094
Premises and equipment........................................ 852,171 353,851 -- 1,206,022
Purchased mortgage servicing rights........................... 1,066,670 47,851 -- 1,114,521
Excess cost over net assets of subsidiaries acquired.......... 464,681 531,961 -- 996,642
Other intangibles............................................. 209,186 17,473 -- 226,659
Other assets.................................................. 2,723,673 1,417,641 147,405(d)(e) 4,288,719
----------- ----------- ----------- -----------
Total assets..................................................$50,818,470 $38,407,315 $ 52,236 $89,278,021
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand......................................................$ 6,974,389 $ 5,189,589 $ -- $12,163,978
Regular savings, NOW, money market.......................... 16,191,444 9,434,493 -- 25,625,937
Time........................................................ 14,009,389 8,513,589 -- 22,522,978
----------- ----------- ----------- -----------
Total deposits.............................................. 37,175,222 23,137,671 -- 60,312,893
----------- ----------- ----------- -----------
Federal funds purchased and securities sold under
agreements to repurchase.................................... 2,846,197 8,190,001 -- 11,036,198
Other short-term borrowings................................... 2,487,291 1,715,697 -- 4,202,988
Accrued expenses and other liabilities........................ 1,210,814 454,587 398,721(d)(e) 2,064,122
Long-term debt................................................ 3,503,866 2,421,788 -- 5,925,654
----------- ----------- ----------- -----------
Total liabilities............................................. 47,223,390 35,919,744 398,721 83,541,855
----------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock............................................. 378,815 303,185 --(c) 682,000
Common stock................................................ 141,574 1,274 107,156(c) 250,004
Common surplus.............................................. 1,547,228 1,454,157 (230,615)(c) 2,770,770
Retained earnings........................................... 1,936,165 783,223 (240,000)(e) 2,479,388
Net unrealized gain/(loss) on securities available
for sale.................................................. (374,200) (54,268)(b) 16,974(d) (411,494)(b)
Treasury stock, at cost..................................... (34,502) -- -- (34,502)
----------- ----------- ----------- -----------
Total stockholders' equity.................................... 3,595,080 2,487,571 (346,485) 5,736,166
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity....................$50,818,470 $38,407,315 $ 52,236 $89,278,021
========== ========== =========== ==========
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
2
<PAGE> 3
FLEET FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1994, CONTINUED(a)
<TABLE>
<CAPTION>
PRO FORMA FLEET
FLEET NBB PLAZA ADJUSTMENTS PRO FORMA
----------- ---------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............................. $ 5,208,938 $ 79,698 $ 31,188 $ (210,815)(f) $ 5,109,009
Federal funds sold and securities purchased
under agreements to resell........................... 648,681 -- -- -- 648,681
Securities available for sale, at market............... 10,352,656 663,461 164,215 (820,891)(g) 10,359,441
Securities held to maturity............................ 891,076 322,384 -- (322,384)(g) 891,076
Loans and leases....................................... 27,540,644 1,325,990 5,832 (56,152)(h) 28,816,314
Reserve for credit losses.............................. (953,449) (27,060) -- -- (980,509)
Mortgages held for resale.............................. 488,898 -- 405,253 (236,074)(g)(h) 658,077
Premises and equipment................................. 823,822 22,104 15,087 (8,842)(h) 852,171
Purchased mortgage servicing rights.................... 826,559 -- 53,701 186,410(h)(m) 1,066,670
Excess cost over net assets of subsidiaries acquired... 180,257 9,222 -- 275,202(i)(m) 464,681
Other intangibles...................................... 159,186 3,614 -- 46,386(h) 209,186
Other assets........................................... 2,589,822 68,767 46,961 18,123(h) 2,723,673
----------- ---------- -------- ----------- -----------
Total assets........................................... $48,757,090 $2,468,180 $722,237 $(1,129,037) $50,818,470
========== ========= ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand............................................... $ 6,889,763 $ 84,626 $ 4,472 $ (4,472)(g) $ 6,974,389
Regular savings, NOW, money market................... 15,220,444 971,000 2,341 (2,341)(g) 16,191,444
Time................................................. 12,695,896 1,134,948 189,132 (10,587)(g)(h) 14,009,389
----------- ---------- -------- ----------- -----------
Total deposits....................................... 34,806,103 2,190,574 195,945 (17,400) 37,175,222
----------- ---------- -------- ----------- -----------
Federal funds purchased and securities sold
under agreements to repurchase....................... 2,846,197 -- -- -- 2,846,197
Other short-term borrowings............................ 3,105,188 -- 427,797 (1,045,694)(g)(m) 2,487,291
Accrued expenses and other liabilities 1,162,256 23,032 18,846 6,680(h)(m) 1,210,814
Long-term debt......................................... 3,457,266 -- 46,600 -- 3,503,866
----------- ---------- -------- ----------- -----------
Total liabilities...................................... 45,377,010 2,213,606 689,188 (1,056,414) 47,223,390
----------- ---------- -------- ----------- -----------
Stockholders' equity:
Preferred stock...................................... 378,815 -- -- --(l) 378,815
Common stock......................................... 141,574 963 116 (1,079)(l) 141,574
Common surplus....................................... 1,547,228 136,557 25,767 (162,324)(l) 1,547,228
Retained earnings.................................... 1,936,165 140,337 7,166 (147,503)(l) 1,936,165
Net unrealized gain/(loss) on securities available
for sale........................................... (374,200) (13,342) -- 13,342(l) (374,200)
Treasury stock, at cost.............................. (249,502) (9,941) -- 224,941(l) (34,502)
----------- ---------- -------- ----------- -----------
Total stockholders' equity............................. 3,380,080 254,574 33,049 (72,623) 3,595,080
----------- ---------- -------- ----------- -----------
Total liabilities and stockholders' equity............. $48,757,090 $2,468,180 $722,237 $(1,129,037) $50,818,470
========== ========= ======== =========== ==========
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
3
<PAGE> 4
SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1994, CONTINUED (a)
<TABLE>
<CAPTION>
PRO FORMA SHAWMUT
SHAWMUT NORTHEAST BARCLAYS ADJUSTMENTS PRO FORMA
----------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 2,426,118 $ 34,145 $ 4,614 $ (87,604)(f) $ 2,377,273
Federal funds sold and securities purchased
under
agreements to resell.......................... 308,700 22,725 -- -- 331,425
Securities available for sale, at market........ 1,991,853 107,510 -- -- 2,099,363
Securities held to maturity..................... 8,000,382(b) 1,960,699(b) -- (83,800)(g) 9,877,281(b)
Loans and leases................................ 18,487,143 959,648 2,388,293 36,700(h) 21,871,784
Reserve for credit losses....................... (542,116) (11,746) (41,743) -- (595,605)
Mortgages held for resale....................... 72,205 4,812 -- -- 77,017
Premises and equipment.......................... 329,780 27,401 2,670 (6,000)(h) 353,851
Purchased mortgage servicing rights............. 13,851 1,686 -- 32,314(h) 47,851
Excess cost over net assets of subsidiaries
acquired...................................... 137,143 -- -- 394,818(i) 531,961
Other intangibles............................... 17,345 128 -- -- 17,473
Other assets.................................... 1,156,207 238,564 3,915 18,955(h) 1,417,641
----------- ---------- ---------- ----------- -----------
Total assets.................................... $32,398,611 $3,345,572 $2,357,749 $ 305,383 $38,407,315
========== ========= ========= =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand........................................ $ 5,161,182 $ 28,407 -- $ -- $ 5,189,589
Regular savings, NOW, money market............ 8,649,988 784,505 -- -- 9,434,493
Time.......................................... 6,935,083 1,580,172 -- (1,666) (h) 8,513,589
----------- ---------- ---------- ----------- -----------
Total deposits.................................. 20,746,253 2,393,084 -- (1,666) 23,137,671
----------- ---------- ---------- ----------- -----------
Federal funds purchased and securities sold
under
agreements to repurchase...................... 6,076,808 -- -- 2,113,193(j) 8,190,001
Other short-term borrowings..................... 1,009,771 707,772 -- (1,846)(h) 1,715,697
Accrued expenses and other liabilities.......... 346,818 63,573 13,556 30,640(h) 454,587
Long-term debt.................................. 2,021,788 42,243 -- 357,757(j)(k) 2,421,788
----------- ---------- ---------- ----------- -----------
Total liabilities............................... 30,201,438 3,206,672 13,556 2,498,078 35,919,744
----------- ---------- ---------- ----------- -----------
Stockholders' equity:
Preferred stock............................... 178,185 4 -- 124,996(j)(l) 303,185
Common stock.................................. 1,208 144 -- (78)(l) 1,274
Common surplus................................ 1,288,825 191,756 -- (26,424)(l) 1,454,157
Retained earnings............................. 783,223 (54,892) -- 54,892(l) 783,223
Net unrealized gain/(loss) on securities
available
for sale.................................... (54,268) 1,888 -- (1,888)(l) (54,268)(b)
Treasury stock, at cost....................... -- -- -- -- --
----------- ---------- ---------- ----------- -----------
Total stockholders' equity...................... 2,197,173 138,900 -- 151,498 2,487,571
----------- ---------- ---------- ----------- -----------
Total liabilities and stockholders' equity...... $32,398,611 $3,345,572 $ 13,556 $2,649,576 $38,407,315
========== ========= ========= =========== ==========
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
4
<PAGE> 5
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994(a)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
FLEET SHAWMUT PRO FORMA PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and fees on loans and leases............................. $2,513,235 $1,576,256 $ -- $4,089,491
Interest on securities............................................ 907,065 733,853 (2,346)(d) 1,638,572
---------- ---------- ----------- ----------
Total interest income......................................... 3,420,300 2,310,109 (2,346) 5,728,063
Interest expense:
Deposits........................................................ 847,475 509,065 -- 1,356,540
Short-term borrowings........................................... 263,997 476,815 -- 740,812
Long-term debt.................................................. 255,170 109,916 -- 365,086
---------- ---------- ----------- ----------
Total interest expense........................................ 1,366,642 1,095,796 -- 2,462,438
---------- ---------- ----------- ----------
Net interest income............................................... 2,053,658 1,214,313 (2,346) 3,265,625
Provision for credit losses....................................... 65,076 14,383 -- 79,459
---------- ---------- ----------- ----------
Net interest income after provision for credit losses............. 1,988,582 1,199,930 (2,346) 3,186,166
---------- ---------- ----------- ----------
Mortgage banking.................................................. 390,311 47,583 -- 437,894
Investment services revenue....................................... 174,764 117,501 -- 292,265
Service charges, fees and commissions............................. 326,807 201,842 -- 528,649
Securities available for sale gains (losses)...................... (2,779) 7,283 -- 4,504
Other noninterest income.......................................... 319,045 74,452 -- 393,497
---------- ---------- ----------- ----------
Total noninterest income...................................... 1,208,148 448,661 -- 1,656,809
---------- ---------- ----------- ----------
Employee compensation and benefits................................ 1,005,961 537,221 -- 1,543,182
Occupancy and equipment........................................... 324,721 177,020 -- 501,741
Purchased mortgage servicing rights amortization.................. 119,574 10,471 -- 130,045
FDIC assessment................................................... 74,962 52,470 -- 127,432
Marketing......................................................... 66,220 19,902 -- 86,122
Core deposit and goodwill amortization............................ 82,928 28,525 -- 111,453
OREO expense...................................................... 42,665 24,905 -- 67,570
Restructuring charges............................................. 44,000 39,800 -- 83,800
Merger-related charges............................................ -- 100,900 -- 100,900
Other noninterest expense......................................... 490,332 232,003 -- 722,335
---------- ---------- ----------- ----------
Total noninterest expense..................................... 2,251,363 1,223,217 -- 3,474,580
---------- ---------- ----------- ----------
Income before taxes............................................... 945,367 425,374 (2,346) 1,368,395
Applicable income taxes........................................... 373,210 155,637 (938) 527,909
---------- ---------- ----------- ----------
Net income before minority interest............................... 572,157 269,737 (1,408) 840,486
Minority interest................................................. -- -- -- --
---------- ---------- ----------- ----------
Net income........................................................ $ 572,157 $ 269,737 $ (1,408) $ 840,486
========== ========== =========== ==========
Net income applicable to common shares............................ $ 557,035 $ 242,615 $ 798,242(o)
Weighted average common shares outstanding:
Primary....................................................... 165,648,933 125,549,233 272,478,583(o)
Fully diluted................................................. 165,648,933 125,549,233 272,478,583(o)
Income from continuing operations per common share:
Primary....................................................... $3.36 $1.93 $2.93
Fully diluted................................................. $3.36 $1.93 $2.93
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
5
<PAGE> 6
FLEET FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994, CONTINUED(a)
<TABLE>
<CAPTION>
PRO FORMA FLEET
FLEET NBB PLAZA ADJUSTMENTS PRO FORMA
---------- -------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest and fees on loans and leases...................... $2,366,923 $108,081 $ 42,838 $ (4,607)(g)(h) $2,513,235
Interest on securities..................................... 905,350 59,507 6,119 (63,911)(g) 907,065
---------- -------- -------- ----------- ----------
Total interest income.................................. 3,272,273 167,588 48,957 (68,518) 3,420,300
Interest expense:
Deposits............................................... 764,186 71,137 14,304 (2,152)(g)(h) 847,475
Short-term borrowings.................................. 294,186 -- 22,486 (52,675)(g)(m) 263,997
Long-term debt......................................... 232,211 -- 1,586 21,373(f) 255,170
---------- -------- -------- ----------- ----------
Total interest expense................................. 1,290,583 71,137 38,376 (33,454) 1,366,642
---------- -------- -------- ----------- ----------
Net interest income........................................ 1,981,690 96,451 10,581 (35,064) 2,053,658
Provision for credit losses................................ 62,130 500 2,446 -- 65,076
---------- -------- -------- ----------- ----------
Net interest income after provision for credit losses...... 1,919,560 95,951 8,135 (35,064) 1,988,582
---------- -------- -------- ----------- ----------
Mortgage banking........................................... 362,587 -- 27,724 --(g) 390,311
Investment services revenue................................ 174,764 -- -- -- 174,764
Service charges, fees and commissions...................... 321,170 5,637 -- -- 326,807
Securities available for sale gains (losses)............... (620) 68 (2,227) --(g) (2,779)
Other noninterest income................................... 315,240 1,191 2,614 -- 319,045
---------- -------- -------- ----------- ----------
Total noninterest income............................... 1,173,141 6,896 28,111 -- 1,208,148
---------- -------- -------- ----------- ----------
Employee compensation and benefits......................... 949,251 21,823 34,887 -- 1,005,961
Occupancy and equipment.................................... 300,646 4,352 20,891 (1,168)(h) 324,721
Purchased mortgage servicing rights amortization........... 85,349 -- 7,361 26,864(h)(m) 119,574
FDIC assessment............................................ 69,965 4,997 -- -- 74,962
Marketing.................................................. 64,520 1,113 587 -- 66,220
Core deposit and goodwill amortization..................... 57,309 2,615 -- 23,004(h)(i)(m) 82,928
OREO expense............................................... 39,471 3,194 -- -- 42,665
Restructuring charges...................................... 44,000 -- -- -- 44,000
Merger-related charges..................................... -- -- -- -- --
Other noninterest expense.................................. 459,334 13,898 17,100 -- 490,332
---------- -------- -------- ----------- ----------
Total noninterest expense.............................. 2,069,845 51,992 80,826 48,700 2,251,363
---------- -------- -------- ----------- ----------
Income before taxes........................................ 1,022,856 50,855 (44,580) (83,764) 945,367
Applicable income taxes.................................... 397,708 20,445 (16,199) (28,744) 373,210
---------- -------- -------- ----------- ----------
Net income before minority interest........................ 625,148 30,410 (28,381) (55,020) 572,157
Minority interest.......................................... (12,217) -- -- 12,217(m) --
---------- -------- -------- ----------- ----------
Net income................................................. $ 612,931 $ 30,410 $(28,381) $ (42,803) $ 572,157
========= ======== ======== =========== ==========
Net income applicable to common shares..................... $ 597,809 $ 557,035(n)
Weighted average common shares outstanding:
Primary................................................ 159,483,021 165,648,933(n)
Fully diluted.......................................... 159,483,021 165,648,933(n)
Income from continuing operations per common share:
Primary................................................ $3.75 $3.36
Fully diluted.......................................... $3.75 $3.36
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
6
<PAGE> 7
SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994, CONTINUED(a)
<TABLE>
<CAPTION>
PRO FORMA SHAWMUT
SHAWMUT NORTHEAST BARCLAYS ADJUSTMENTS PRO FORMA
---------- --------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest and fees on loans and leases.................. $1,326,542 $ 84,212 $180,782 $ (15,280)(h) $1,576,256
Interest on securities................................. 611,387 108,499 -- 13,967(g) 733,853
---------- --------- -------- ----------- ----------
Total interest income.............................. 1,937,929 192,711 180,782 (1,313) 2,310,109
Interest expense:
Deposits........................................... 406,346 101,886 -- 833(h) 509,065
Short-term borrowings.............................. 368,347 28,215 79,638 615(h) 476,815
Long-term debt..................................... 95,651 3,858 -- 10,407(j)(k) 109,916
---------- --------- -------- ----------- ----------
Total interest expense............................. 870,344 133,959 79,638 11,855 1,095,796
---------- --------- -------- ----------- ----------
Net interest income.................................... 1,067,585 58,752 101,144 (13,168) 1,214,313
Provision for credit losses............................ 3,000 4,900 6,483 -- 14,383
---------- --------- -------- ----------- ----------
Net interest income after provision for credit
losses............................................... 1,064,585 53,852 94,661 (13,168) 1,199,930
---------- --------- -------- ----------- ----------
Mortgage banking....................................... 28,852 18,731 -- -- 47,583
Investment services revenue............................ 117,501 -- -- -- 117,501
Service charges, fees and commissions.................. 195,774 6,068 -- -- 201,842
Securities available for sale gains (losses)........... -- 7,283 -- -- 7,283
Other noninterest income............................... 40,841 9,537 24,074 -- 74,452
---------- --------- -------- ----------- ----------
Total noninterest income........................... 382,968 41,619 24,074 -- 448,661
---------- --------- -------- ----------- ----------
Employee compensation and benefits..................... 478,142 27,459 31,620 -- 537,221
Occupancy and equipment................................ 154,511 16,168 6,941 (600)(h) 177,020
Purchased mortgage servicing rights amortization....... 4,486 1,946 -- 4,039(h) 10,471
FDIC assessment........................................ 43,711 8,759 -- -- 52,470
Marketing.............................................. 19,902 -- -- -- 19,902
Core deposit and goodwill amortization................. 8,068 136 -- 20,321(i) 28,525
OREO expense........................................... 11,702 13,203 -- -- 24,905
Restructuring charges.................................. 39,800 -- -- -- 39,800
Merger-related charges................................. 100,900 -- -- -- 100,900
Other noninterest expense.............................. 214,727 17,276 -- -- 232,003
---------- --------- -------- ----------- ----------
Total noninterest expense.......................... 1,075,949 84,947 38,561 23,760 1,223,217
---------- --------- -------- ----------- ----------
Income before taxes.................................... 371,604 10,524 80,174 (36,928) 425,374
Applicable income taxes................................ 134,252 (442) 32,070 (10,243) 155,637
---------- --------- -------- ----------- ----------
Net income before minority interest.................... 237,352 10,966 48,104 (26,685) 269,737
Minority interest...................................... -- -- -- -- --
---------- --------- -------- ----------- ----------
Net income............................................. $ 237,352 $ 10,966 $ 48,104 $ (26,685) $ 269,737
========= ========= ======== =========== ==========
Net income applicable to common shares................. $ 221,917 $ 242,615(n)
Weighted average common shares outstanding:
Primary............................................ 118,977,173 125,549,233(n)
Fully diluted...................................... 118,977,173 125,549,233(n)
Income from continuing operations per common share:
Primary............................................ $1.87 $1.93
Fully diluted...................................... $1.87 $1.93
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
7
<PAGE> 8
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993(a)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
PRO FORMA PRO FORMA
FLEET SHAWMUT ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and fees on loans and leases.................................. $2,339,609 $1,272,319 $ -- $3,611,928
Interest on securities................................................. 872,886 554,663 (80)(d) 1,427,469
--------- --------- ------- ---------
Total interest income.............................................. 3,212,495 1,826,982 (80) 5,039,397
Interest expense:
Deposits............................................................. 744,080 420,966 -- 1,165,046
Short-term borrowings................................................ 180,507 262,413 -- 442,920
Long-term debt....................................................... 236,794 72,040 -- 308,834
--------- --------- ------- ---------
Total interest expense............................................. 1,161,381 755,419 -- 1,916,800
--------- --------- ------- ---------
Net interest income.................................................... 2,051,114 1,071,563 (80) 3,122,597
Provision for credit losses............................................ 270,724 55,944 -- 326,668
--------- --------- ------- ---------
Net interest income after provision for credit losses.................. 1,780,390 1,015,619 (80) 2,795,929
--------- --------- ------- ---------
Mortgage banking....................................................... 414,086 30,737 -- 444,823
Service charges, fees and commissions.................................. 310,095 186,452 -- 496,547
Investment services revenue............................................ 173,762 116,845 -- 290,607
Securities available for sale gains (losses)........................... 282,444 12,468 -- 294,912
Other noninterest income............................................... 284,888 71,690 -- 356,578
--------- --------- ------- ---------
Total noninterest income........................................... 1,465,275 418,192 -- 1,883,467
--------- --------- ------- ---------
Employee compensation and benefits..................................... 1,018,124 500,254 -- 1,518,378
Occupancy and equipment................................................ 303,953 163,792 -- 467,745
Purchased mortgage servicing rights amortization....................... 239,940 7,343 -- 247,283
FDIC assessment........................................................ 75,854 52,302 -- 128,156
Marketing.............................................................. 53,141 22,240 -- 75,381
Core deposit and goodwill amortization................................. 53,594 6,289 -- 59,883
OREO expense........................................................... 57,364 105,173 -- 162,537
Restructuring charges.................................................. 125,000 36,319 -- 161,319
Other noninterest expense.............................................. 497,256 250,623 -- 747,879
--------- --------- ------- ---------
Total noninterest expense.......................................... 2,424,226 1,144,335 -- 3,568,561
--------- --------- ------- ---------
Income before income taxes and cumulative effect of
changes in accounting principles and minority interest............... 821,439 289,476 (80) 1,110,835
Applicable income taxes................................................ 327,407 6,628 (32) 334,003
--------- --------- ------- ---------
Income before cumulative effect of changes in accounting
principles and minority interest..................................... 494,032 282,848 (48) 776,832
Minority interest...................................................... (5,983) (5,983)
--------- --------- ------- ---------
Income before cumulative effect of changes in
accounting principles.............................................. $ 488,049 $ 282,848 $ (48) $ 770,849
========= ========= ======== =========
Net income applicable to common shares................................. $ 465,840 $ 267,379 $ 733,171(o)
========= ========= =========
Weighted average common shares outstanding:
Primary.............................................................. 154,666,307 113,908,148 255,938,277(o)
Fully diluted........................................................ 154,899,995 113,908,148 256,171,965(o)
Income from continuing operations per share before cumulative effect of
changes in accounting principles:
Primary.............................................................. $3.01 $2.35 $2.86
Fully diluted........................................................ $3.01 $2.35 $2.86
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
8
<PAGE> 9
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992(a)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
PRO FORMA PRO FORMA
FLEET SHAWMUT ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and fees on loans and leases................................ $2,513,587 $1,328,876 -- $3,842,463
Interest on securities............................................... 902,702 527,650 -- 1,430,352
--
---------- ---------- ----------
Total interest income............................................ 3,416,289 1,856,526 -- 5,272,815
Interest expense:
Deposits........................................................... 1,076,368 622,436 -- 1,698,804
Short-term borrowings.............................................. 164,171 192,240 -- 356,411
Long-term debt..................................................... 222,104 59,321 -- 281,425
--
---------- ---------- ----------
Total interest expense........................................... 1,462,643 873,997 -- 2,336,640
--
---------- ---------- ----------
Net interest income.................................................. 1,953,646 982,529 -- 2,936,175
Provision for credit losses.......................................... 485,823 242,128 -- 727,951
--
---------- ---------- ----------
Net interest income after provision for credit losses................ 1,467,823 740,401 -- 2,208,224
--
---------- ---------- ----------
Mortgage banking..................................................... 364,011 29,071 -- 393,082
Service charges, fees and commissions................................ 285,562 187,459 -- 473,021
Investment services revenue.......................................... 160,083 115,103 -- 275,186
Securities available for sale gains (losses)......................... 206,713 94,103 -- 300,816
Gain on sale of FMG.................................................. 121,274 -- -- 121,274
Other noninterest income............................................. 230,147 103,327 -- 333,474
--
---------- ---------- ----------
Total noninterest income......................................... 1,367,790 529,063 -- 1,896,853
--
---------- ---------- ----------
Employee compensation and benefits................................... 957,654 474,725 -- 1,432,379
Occupancy and equipment.............................................. 283,191 179,507 -- 462,698
Purchased mortgage servicing rights amortization..................... 106,716 6,258 -- 112,974
FDIC assessment...................................................... 75,444 44,937 -- 120,381
Marketing............................................................ 50,971 16,004 -- 66,975
Core deposit and goodwill amortization............................... 44,799 6,084 -- 50,883
OREO expense......................................................... 154,170 177,813 -- 331,983
Loss on sale of problem assets....................................... 115,000 -- -- 115,000
Other noninterest expense............................................ 530,118 255,511 -- 785,629
--
---------- ---------- ----------
Total noninterest expense........................................ 2,318,063 1,160,839 -- 3,478,902
--
---------- ---------- ----------
Income before income taxes and extraordinary tax credit and minority
interest........................................................... 517,550 108,625 -- 626,175
Applicable income taxes.............................................. 228,526 40,898 -- 269,424
--
---------- ---------- ----------
Income before extraordinary tax credit and minority interest......... 289,024 67,727 -- 356,751
Minority interest.................................................... (9,181) (9,181)
--
---------- ---------- ----------
Income before extraordinary tax credit............................... $ 279,843 $ 67,727 -- $ 347,570
========= ========= =========== =========
Net income applicable to common shares............................... $ 252,801 $ 62,944 $ 315,745(o)
========= ========= =========== =========
Weighted average common shares outstanding:
Primary............................................................ 141,469,658 104,379,621 234,597,156(o)
Fully diluted...................................................... 142,778,665 104,379,621 235,906,163(o)
Income from continuing operations per share before cumulative effect
of changes in accounting principles:
Primary............................................................ $1.78 $0.60 $1.35
Fully diluted...................................................... $1.77 $0.60 $1.34
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
9
<PAGE> 10
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) The pro forma information presented is not necessarily indicative of
the results of operations or the combined financial position that would have
resulted had the Merger, the Northeast Merger, the NBB Merger, the Plaza Merger,
the Barclays Acquisition and the FMG Repurchase been consummated at the
beginning of the periods indicated, nor is it necessarily indicative of the
results of operations in future periods or the future financial position of the
combined entities. The NBB Merger was consummated on January 27, 1995, the
Barclays Acquisition was consummated on January 31, 1995, and the Plaza Merger
was consummated on March 3, 1995. It is anticipated that the Merger will be
consummated in the fourth quarter of 1995 and the Northeast Merger and the FMG
Repurchase will be consummated in the second quarter of 1995.
Under generally accepted accounting principles ("GAAP"), the assets and
liabilities of Shawmut will be combined with those of Fleet at book value. In
addition, the statements of income of Shawmut will be combined with the
statements of income of Fleet as of the earliest period presented. Certain
reclassifications have been included in the Unaudited Pro Forma Condensed
Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of
Income to conform to Fleet's presentation. Certain transactions conducted in the
ordinary course of business between Fleet, Shawmut, Northeast, NBB, Barclays,
Plaza and FMG are immaterial and, accordingly, have not been eliminated.
The pro forma condensed combined financial statements do not give
effect to the anticipated cost savings in connection with the Merger, the
Northeast Merger, the NBB Merger and the Plaza Merger or the effects of any
required regulatory divestitures. While no assurance can be given, Fleet and
Shawmut expect to achieve cost savings of approximately $400 million (pre-tax)
within fifteen months following the Merger. Such cost savings are expected to
be realized primarily through reductions in staff, elimination, consolidation
or divestiture of certain branches and the consolidation of certain offices,
data processing and other redundant back-office operations and staff functions.
Cost reductions and branch consolidations will come from both companies and
will be spread throughout the geographic region. Cost savings are also expected
to be achieved in connection with the NBB Merger, the Northeast Merger and the
Plaza Merger. These cost savings are expected to be approximately $20 million,
$25 million and $15 million, respectively, and are expected to be achieved
within the first twelve months after the consummation of these respective
mergers. The extent to which cost savings will be achieved is dependent upon
various factors beyond the control of Fleet and Shawmut, including the
regulatory environment, economic conditions, unanticipated changes in business
conditions, inflation and the level of Federal Deposit Insurance Corporation
assessments. Therefore, no assurances can be given with respect to the ultimate
level of cost savings to be realized, or that such savings will be realized in
the time-frame currently anticipated. In addition, certain regulatory agencies
may seek the divestiture of certain assets and liabilities of the combined
company following the Merger. Such divestitures may affect certain pro forma
combined financial statement amounts, merger and restructuring costs and cost
savings.
All dollar amounts included in these Notes to Unaudited Pro Forma Condensed
Combined Financial Statements are in thousands unless otherwise indicated.
(b) Fleet is currently reviewing the investment securities portfolios of
Shawmut and Northeast to determine the classification of such securities as
either available for sale or held to maturity in connection with Fleet's
existing interest-rate risk position. As a result of this review, certain
reclassifications of Shawmut and Northeast investment securities may result. No
adjustments have been made to either the available for sale or the held to
maturity portfolios in the accompanying pro forma combined balance sheet to
reflect any such reclassification as management has not made a final
determination with respect to such matters. Any such reclassification will be
accounted for in accordance with Financial Accounting Standards Board Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires that securities transferred from held to maturity to available
for sale be transferred at fair value with any unrealized gain or loss, net of
taxes, at the date of transfer recognized as a separate component of
stockholders' equity. At December 31, 1994, securities held to maturity at
Shawmut and Northeast had unrealized losses of $438,492 and $83,800,
respectively.
(c) Pro forma adjustments to common shares and capital surplus at December
31, 1994, reflect the Merger accounted for as a pooling of interests, through:
(a) the exchange of 108,429,899 shares of Fleet Common Stock (using the Common
Exchange Ratio of 0.8922) for the 121,530,934 outstanding shares of Shawmut
Common Stock at December 31, 1994 (which includes the 6,572,060 shares of
Shawmut Common Stock issued to acquire all the outstanding shares of Northeast
common stock and stock options, and excludes the 5,811,900 shares of Shawmut
Common Stock held by Fleet as of such date, which are assumed to be retired for
combining purposes), and (b) the exchange of shares of Fleet New Preferred Stock
for all shares of Shawmut Preferred on a share-for-share basis.
(d) Pro forma adjustments to securities available for sale at December 31,
1994, and to dividend income on securities for the years ended December 31, 1994
and December 31, 1993 reflect the elimination of the 5,811,900 shares of Shawmut
Common Stock held by Fleet at December 31, 1994, and the corresponding dividend
income recorded on such shares during each of the years in the three-year period
ending December 31, 1994. Pro forma adjustments to other assets and accrued
expenses and other liabilities at December 31, 1994, include the elimination of
Fleet's dividend receivable related to such shares and the elimination of
Shawmut's corresponding dividend payable. The Unaudited Pro Forma Condensed
Combined Balance Sheet also eliminates the after-tax unrealized loss on these
securities recorded in equity and the related deferred tax benefit.
10
<PAGE> 11
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(e) A liability of $400,000 has been recorded in the Unaudited Pro Forma
Condensed Combined Balance Sheet to reflect management's best estimate of merger
and restructuring related charges in connection with the Merger. This liability
resulted in a $240,000 after-tax charge to retained earnings in the Unaudited
Pro Forma Condensed Combined Balance Sheet. It is anticipated that substantially
all of these charges will be recognized during 1995 upon consummation of the
Merger and paid during the first 15 months subsequent to the Merger. The
following table provides details of the estimated charges by type:
<TABLE>
<CAPTION>
ESTIMATED COSTS
TYPE OF COST ----------------------
----------------------------------------- (DOLLARS IN THOUSANDS)
<S> <C>
Personnel related........................ $255,000
Facilities and equipment................. 68,000
Branch related........................... 37,000
Other merger expenses.................... 40,000
-----------
Total.................................... $400,000
=================
</TABLE>
Personnel related costs consist primarily of charges related to employee
severance, termination of certain employee benefits plans and employee
assistance costs for separated employees. Facilities and equipment charges
consist of lease termination costs and other related exit costs resulting from
consolidation of duplicate headquarters and operational facilities, and computer
equipment and software write-offs due to duplication or incompatibility. Branch
related costs are primarily related to the cost of exiting branches anticipated
to be closed, including lease terminations and equipment write-offs. The effect
of the proposed charge has been reflected in the Unaudited Pro Forma Condensed
Combined Balance Sheet as of December 31, 1994; however, since the proposed
charge is nonrecurring, it has not been reflected in the pro forma combined
statements of income.
(f) The pro forma adjustments to cash include the redemption of the
Northeast $8.50 Cumulative Preferred Stock, Series B based on the redemption
value of such stock at December 31, 1994 ($42,879), and the redemption of all of
the Northeast Uncertificated Debentures ("the Northeast Debentures") based on
the face value of the Northeast Debentures at December 31, 1994 ($44,725), as if
such redemptions had occurred on January 1, 1994.
Also included in the pro forma adjustments to cash is the amount paid in
cash by Fleet in connection with the NBB Merger. The total consideration paid to
NBB shareholders in the NBB Merger was $425,815. Fleet paid $210,815 in cash and
issued $215,000 of Fleet Common Stock to NBB shareholders, which was repurchased
by Fleet in the open market in the fourth quarter of 1994 and held in treasury
at December 31, 1994. Proceeds from Fleet's senior debt issuances during the
third and fourth quarters of 1994 were used to fund both the cash payment made
to NBB shareholders and such repurchase of shares of Fleet Common Stock. The
1994 Unaudited Pro Forma Condensed Combined Income Statement also includes an
adjustment increasing interest expense for the year ended December 31, 1994, by
$21,373 to reflect the estimated interest expense that would have been recorded
on Fleet's senior indebtedness if such indebtedness had been outstanding as of
January 1, 1994.
(g) The pro forma adjustments also include fair value adjustments of
$(83,800) and $(11,373) to securities held to maturity of Northeast and NBB,
respectively. The pro forma adjustments also reflect Fleet's sale of NBB's
available for sale and held to maturity securities portfolios as if such sales
occurred on January 1, 1994, and includes adjustments to eliminate the
corresponding interest income for such period. The proceeds from the sale of
$974,472 were assumed to have reduced Fleet's short-term borrowings as of
January 1, 1994 and, accordingly, interest expense on short-term borrowings has
also been reduced by $47,307 for such period reflecting a weighted average
short-term borrowing rate of 4.75%.
The pro forma adjustments also reflect the sale of $157,430 of Plaza's
mortgage-backed securities, the sale of $230,000 of Plaza's adjustable rate
loans, and the sale of $18,445 of Plaza's retail consumer deposits, in
11
<PAGE> 12
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
each case as if such sales had occurred on January 1, 1994, and includes
adjustments to eliminate the corresponding interest income and expense for such
period. The net proceeds from the sales of $368,985 were assumed to have reduced
short-term borrowings as of January 1, 1994 and, accordingly, interest expense
on short-term borrowings has also been reduced by $17,904 for such period
reflecting a weighted average short-term borrowings rate of 4.75%. The pro
forma adjustments also assume that Fleet funded the Plaza Merger by the
issuance of commercial paper on January 1, 1994, and accordingly reflect the
corresponding incremental interest expense of $4,358 for such period.
(h) These pro forma adjustments reflect the purchase accounting adjustments
related to the assets acquired and liabilities assumed for the Northeast Merger,
NBB Merger, Barclays Acquisition, Plaza Merger and the FMG Repurchase. These
adjustments are based on the best available information and may be different
from the actual adjustments to reflect the fair value of the net assets
purchased as of the date of the acquisition. The core deposit intangible is
being amortized over seven years.
(i) The 1994 pro forma statements include adjustments for the excess cost
over net assets of subsidiaries acquired for each of the material pending and/or
completed mergers and acquisitions calculated as follows:
<TABLE>
<CAPTION>
NORTHEAST NBB BARCLAYS PLAZA FMG
-------- -------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchase price.............................. $171,398 $425,815 $2,634,193 $88,015 $194,241
Historical net tangible assets acquired... 95,893 241,738 2,344,193 33,049 93,604
Estimated fair value adjustments....... (94,313) (33,700) 65,000 17,491 71,465
-------- -------- ---------- ------- --------
Estimated fair value of net assets.......... 1,580 208,038 2,409,193 50,540 165,069
-------- -------- ---------- ------- --------
Excess cost over net assets of
subsidiaries acquired.................. $169,818 $217,777 $ 225,000 $37,475 $ 29,172
======== ======== ========= ======= ========
</TABLE>
Adjustments have been made to the Unaudited Pro Forma Condensed Combined
Balance Sheet to reflect the recording of these intangibles as calculated above
as well as to eliminate any intangible balances previously recorded at these
companies, in accordance with the purchase method of accounting. Reflected in
the 1994 Unaudited Pro Forma Condensed Combined Income Statement are adjustments
to reflect the amortization of Northeast's, NBB's and Plaza's excess cost over
net assets of subsidiaries acquired ("goodwill") over 15 years, the amortization
of Barclays' goodwill over 25 years, and the amortization of FMG's goodwill over
20 years.
(j) The pro forma adjustments to these items show the effects of the
funding of the Barclays Acquisition as if such funding transactions occurred on
January 1, 1994. Such funding transactions included short-term borrowings
(primarily federal funds purchased and repurchase agreements) of $2,113,193, the
issuance of $250,000 of subordinated notes, the issuance of $150,000 of senior
bank notes, and the issuance of $125,000 of Shawmut 9.35% Preferred Stock.
Adjustments to increase interest expense in the amount of $14,265 for the year
ended December 31, 1994 were made to reflect an estimate of the incremental
interest expense which would have been incurred as if such borrowings had
occurred on January 1, 1994.
(k) These pro forma adjustments include the redemption of all of the
Northeast Debentures based on the face value of the Debentures ($44,275), as if
such redemption had occurred on January 1, 1994, and a related adjustment to
eliminate the interest expense recorded on such debentures ($3,858) for the year
ended December 31, 1994.
(l) The pro forma stockholders' equity accounts of Northeast, NBB and Plaza
have been adjusted in the Unaudited Pro Forma Condensed Combined Balance Sheet
to reflect the elimination of the stockholders' equity accounts in accordance
with the purchase method of accounting. The Fleet Pro Forma adjustments
12
<PAGE> 13
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
reflect the issuance of 6,165,912 shares of Fleet Common Stock in connection
with the NBB Merger. The Shawmut Pro Forma adjustments reflect the issuance of
6,572,060 shares of Shawmut Common Stock in exchange for all of the outstanding
shares of Northeast common stock and stock options (assuming that the exchange
ratio in connection with the Northeast Merger is 0.415 which is based on the
closing sales price for Shawmut Common Stock on the Stock Exchange on April 7,
1995 and the redemption of the Northeast Series B preferred stock. Also
included in Shawmut's pro forma adjustments is the $125,000 of Shawmut 9.35%
Preferred Stock, proceeds from which were used to fund the Barclays
Acquisition. Shawmut's pro forma net income applicable to common shares was
decreased to include the effect of additional preferred dividends of $11,688,
as if such Shawmut 9.35% Preferred Stock had been issued on January 1, 1994.
(m) Pro forma adjustments reflect the payment of $194,241 for the 19.3%
publicly-held shares of FMG Common Stock in connection with the FMG Repurchase
as if such transaction had occurred on January 1, 1994. The excess of such
purchase price over the fair value of net assets acquired of $165,069 resulted
in $29,172 of excess cost over net assets acquired that will be amortized over
20 years. Pro forma adjustments for such period reflect the fair market value
adjustment of $118,867 to FMG's purchased mortgage servicing rights as well as
the related amortization expense of $14,264, the corresponding deferred tax
liability and the elimination of the minority interest in both the balance sheet
and income statement. The pro forma adjustments also assume that Fleet funded
the FMG Repurchase by the issuance of commercial paper on January 1, 1994, and
accordingly reflect the corresponding $8,178 incremental interest expense for
such period.
(n) The Fleet Pro Forma weighted average shares outstanding for the year
ended December 31, 1994 reflect Fleet's historical weighted average shares
outstanding plus the issuance of 6,165,912 shares of Fleet Common Stock in
connection with the NBB Merger.
The Shawmut Pro Forma weighted average shares outstanding for the year
ended December 31, 1994 reflect Shawmut's historical weighted average shares
outstanding plus the issuance of 6,572,060 shares of Shawmut Common Stock in
connection with the Northeast Merger. Shawmut's pro forma net income applicable
to common shares was decreased to include the effect of additional preferred
dividends of $11,688, as if such Shawmut 9.35% Preferred Stock had been issued
on January 1, 1994.
(o) The Fleet/Shawmut Pro Forma weighted average shares outstanding for the
year ended December 31, 1994 reflect the Fleet Pro Forma weighted average shares
plus the converted Shawmut Pro Forma weighted average shares outstanding (after
adjustment to eliminate the 5,811,900 shares of Shawmut Common Stock owned by
Fleet, which are assumed to be retired for combining purposes). Each share of
Shawmut Common Stock is converted into 0.8922 shares of Fleet Common Stock.
The Fleet/Shawmut Pro Forma net income applicable to common shares reflects
the sum of the Fleet Pro Forma net income applicable per common share and the
Fleet Pro Forma net income applicable per common shares adjusted for any
Fleet/Shawmut Pro Forma adjustments.
13
<PAGE> 1
Exhibit 99(b)
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans................................................................... $1,311,719 $1,242,683 $1,301,564
Securities
Available for sale, at fair value................................... 145,036
At lower of aggregate cost or fair value............................ 236,455 232,406
Held to maturity.................................................... 443,946 303,217 272,007
Residential mortgages held for sale..................................... 14,823 29,636 27,312
Federal funds sold and securities purchased under agreements to resell.. 8,698 12,590 19,550
Interest-bearing deposits in other banks................................ 12,610 839 2,123
Trading account securities.............................................. 1,097 1,562 1,564
---------- ---------- ----------
Total.......................................................... 1,937,929 1,826,982 1,856,526
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits
Savings, money market and NOW accounts.............................. 163,345 183,287 272,665
Domestic time....................................................... 226,434 232,533 347,255
Foreign time........................................................ 16,567 5,146 2,516
---------- ---------- ----------
Total.......................................................... 406,346 420,966 622,436
Other borrowings........................................................ 368,347 262,413 192,240
Notes and debentures.................................................... 95,651 72,040 59,321
---------- ---------- ----------
Total.......................................................... 870,344 755,419 873,997
---------- ---------- ----------
NET INTEREST INCOME..................................................... 1,067,585 1,071,563 982,529
Provision for credit losses............................................. 3,000 55,944 242,128
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES................... 1,064,585 1,015,619 740,401
---------- ---------- ----------
NONINTEREST INCOME
Customer service fees................................................... 195,774 186,452 187,459
Trust and agency fees................................................... 117,501 116,845 115,103
Securities gains, net................................................... 12,468 94,103
Other................................................................... 65,207 95,084 126,140
---------- ---------- ----------
Total.......................................................... 378,482 410,849 522,805
---------- ---------- ----------
NONINTEREST EXPENSES
Compensation and benefits............................................... 478,142 500,254 474,725
Occupancy and equipment................................................. 154,511 163,792 179,507
Merger related charges.................................................. 100,900
Restructuring related charges........................................... 39,800 36,319
Foreclosed properties provision and expense............................. 11,702 105,173 177,813
Other................................................................... 286,408 331,454 322,536
---------- ---------- ----------
Total.......................................................... 1,071,463 1,136,992 1,154,581
---------- ---------- ----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY CREDIT
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES........................... 371,604 289,476 108,625
Income taxes............................................................ 134,252 6,628 40,898
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY CREDIT AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES.......................................... 237,352 282,848 67,727
Extraordinary credit.................................................... 18,378
Cumulative effect of changes in methods of accounting................... 46,200
---------- ---------- ----------
NET INCOME.............................................................. $ 237,352 $ 329,048 $ 86,105
========== ========== ==========
NET INCOME APPLICABLE TO COMMON SHARES.................................. $ 221,917 $ 313,579 $ 81,322
========== ========== ==========
COMMON SHARE DATA
Income before extraordinary credit and cumulative
effect of accounting changes...................................... $1.87 $2.35 $0.60
Net income.......................................................... 1.87 2.75 0.78
Weighted average shares outstanding................................. 118,977 113,908 104,380
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 2
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
1994 1993
------------ ------------
DECEMBER 31, (IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks................................................. $ 1,986,182 $ 1,539,690
Interest-bearing deposits in other banks................................ 439,936 13,252
Federal funds sold and securities purchased under agreements to resell.. 308,700 71,500
Trading account securities.............................................. 27,859 19,625
Residential mortgages held for sale..................................... 72,205 472,450
Securities
Available for sale, at fair value................................... 1,991,853 3,189,616
Held to maturity (fair value $7,561,890 and $7,228,796)............. 8,000,382 7,152,326
Loans, less reserve for credit losses of $542,116 and $669,156.......... 17,945,027 16,928,532
Premises and equipment.................................................. 329,780 332,960
Foreclosed properties................................................... 18,831 64,518
Customers' acceptance liability......................................... 5,166 13,747
Other assets............................................................ 1,272,690 1,304,589
----------- -----------
Total assets................................................... $32,398,611 $31,102,805
=========== ===========
LIABILITIES
Deposits
Demand.............................................................. $5,161,182 $4,755,036
Savings, money market and NOW accounts.............................. 8,649,988 8,976,640
Domestic time....................................................... 6,058,769 4,763,463
Foreign time........................................................ 876,314 246,740
----------- -----------
Total deposits................................................. 20,746,253 18,741,879
Other borrowings........................................................ 7,086,579 9,282,951
Acceptances outstanding................................................. 5,166 13,747
Accrued expenses and other liabilities.................................. 341,652 202,916
Notes and debentures.................................................... 2,021,788 758,941
----------- -----------
Total liabilities.............................................. 30,201,438 29,000,434
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, without par value
Authorized-10,000,000 shares
Outstanding-1,263,700 and 1,275,000 shares.......................... 178,185 178,750
Preferred stock, $.01 par value
Authorized-193,000 shares
Outstanding-170,073 shares.......................................... 15,215
Common stock, $.01 par value
Authorized-300,000,000 and 150,000,000 shares
Issued-120,770,774 and 117,550,211 shares........................... 1,208 1,176
Surplus................................................................. 1,288,825 1,237,177
Retained earnings....................................................... 783,223 658,607
Net unrealized gain (loss) on securities available for sale............. (54,268) 13,789
Treasury stock, common stock at cost (106,487 shares)................... (2,343)
----------- -----------
Total shareholders' equity..................................... 2,197,173 2,102,371
----------- -----------
Total liabilities and shareholders' equity..................... $32,398,611 $31,102,805
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY AT BEGINNING OF YEAR........................... $2,102,371 $1,731,543 $1,268,631
PREFERRED STOCK
Issuance of preferred stock (575,000 shares)........................ 143,750
Redemption of preferred stock (170,073 and 177,000 shares).......... (15,215) (15,835)
Purchase of preferred stock (11,300 shares)......................... (565)
COMMON STOCK, $.01 PAR VALUE
Shares issued under Dividend Reinvestment and Stock Purchase
Plans (2,190,550 and 962,946 shares).............................. 22 9
Shares issued under stock option and employee benefit plans
(1,030,013; 551,730 and 438,469 shares)........................... 10 6 4
Issuance of common stock (3,233,508 and 18,569,760 shares).......... 33 186
SURPLUS
Additional proceeds from:
Shares issued under Dividend Reinvestment and Stock
Purchase Plans................................................ 43,883 22,334
Shares issued under stock option and employee benefit plans..... 7,765 5,062 2,869
Issuance of common stock........................................ 28,236 211,638
Preferred stock issuance costs...................................... (5,731)
RETAINED EARNINGS
Net income.......................................................... 237,352 329,048 86,105
Cash dividends declared by the Corporation on:
Preferred stock................................................. (15,435) (15,469) (4,783)
Common stock.................................................... (93,471) (47,205)
Cash dividends declared by merged companies prior to mergers........ (1,143) (4,411) (3,870)
Restricted stock awards............................................. 638 31 (1,496)
Reissuance of common stock from treasury............................ (211) (11,106) (15,444)
Redemption of preferred stock....................................... (3,114) (1,603)
NET UNREALIZED GAIN (LOSS) ON SECURITIES
Unrealized appreciation (depreciation) on securities
available for sale.............................................. (68,057) 13,789
Unrealized appreciation on securities at lower of
aggregate cost or fair value.................................... 23,654 16,045
TREASURY STOCK
Purchase of common stock (95,223; 114,009 and 672 shares)........... (2,169) (2,509) (10)
Reissuance of common stock under Dividend Reinvestment and
Stock Purchase Plans (201,710; 1,665,989 and 1,202,954 shares).. 4,512 46,764 33,649
---------- ---------- ----------
SHAREHOLDERS' EQUITY AT END OF YEAR................................. $2,197,173 $2,102,371 $1,731,543
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................... $ 237,352 $ 329,048 $ 86,105
Adjustments to reconcile net income to cash provided by operating activities:
Extraordinary credit................................................................. (18,378)
Cumulative effect of changes in methods of accounting................................ (46,200)
Provision for credit losses.......................................................... 3,000 55,944 242,128
Provision for foreclosed properties.................................................. 3,993 76,598 140,417
Depreciation, amortization and other................................................. 102,593 129,952 71,916
Deferred income taxes................................................................ 67,949 (15,247) 35,366
Gains from the sale of securities held to maturity................................... (76,617)
Losses (gains) from the sale of loans, securities, premises and equipment
and other assets................................................................... 15,001 (10,575) (44,194)
Decrease in securities reported at the lower of aggregate cost or fair value......... 39,880 1,501,695
Decrease (increase) in trading account securities.................................... (8,234) 16,819 (17,942)
Decrease (increase) in residential mortgages held for sale........................... 644,245 3,880 (198,353)
Decrease (increase) in other assets and accrued expenses and other
liabilities........................................................................ 80,201 (263,494) 68,064
----------- ----------- ------------
CASH PROVIDED BY OPERATING ACTIVITIES................................................ 1,146,100 316,605 1,790,207
----------- ----------- ------------
FINANCING ACTIVITIES
Increase (decrease) in total deposits................................................ 2,004,374 (1,252,362) (249,361)
Increase (decrease) in other borrowings.............................................. (2,196,372) 3,850,428 1,132,497
Proceeds from issuance of bank notes, net............................................ 1,263,000
Proceeds from issuance of subordinated notes......................................... 149,700 149,631
Principal payments on notes and debentures........................................... (384) (200,802) (4,981)
Proceeds from issuances of common and preferred stock................................ 55,981 91,338 370,921
Purchases of common and preferred stock.............................................. (21,063) (19,947) (10)
Cash dividends paid.................................................................. (103,710) (47,279) (5,779)
----------- ----------- ------------
CASH PROVIDED BY FINANCING ACTIVITIES................................................ 1,001,826 2,571,076 1,392,918
----------- ----------- ------------
INVESTING ACTIVITIES
Decrease (increase) in short-term investments........................................ (663,884) 718,506 (487,201)
Proceeds from sales of securities available for sale................................. 3,582,694
Maturities of securities available for sale.......................................... 560,545
Purchases of securities available for sale........................................... (3,328,586)
Maturities of securities held to maturity............................................ 1,521,887 2,214,542 1,427,693
Proceeds from sales of securities held to maturity................................... 1,560,902 1,908,615
Purchases of securities held to maturity............................................. (2,118,395) (6,845,381) (6,057,170)
Proceeds from sales of loans......................................................... 62,021 560,178 926,597
Purchases of loans................................................................... (487,415) (427,611) (437,208)
Loans originated less principal collected............................................ (852,302) (645,216) (1,212,373)
Purchases of premises and equipment and other assets................................. (55,661) (54,123) (58,472)
Proceeds from the sale of premises and equipment and other assets.................... 77,662 106,484 197,714
----------- ----------- ------------
CASH USED BY INVESTING ACTIVITIES.................................................... (1,701,434) (2,811,719) (3,791,805)
----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS....................................... 446,492 75,962 (608,680)
Cash and due from banks at beginning of year......................................... 1,539,690 1,463,728 2,072,408
----------- ---------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR............................................... $ 1,986,182 $ 1,539,690 $ 1,463,728
=========== =========== ===========
ADDITIONAL CASH FLOW INFORMATION
Interest paid........................................................................ $ 845,149 $ 747,857 $ 907,382
Income taxes paid.................................................................... $ 28,729 $ 26,176 $ 41,224
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Shawmut National Corporation and its
subsidiaries (the Corporation) are in conformity with generally accepted
accounting principles followed within the banking industry. Certain amounts for
prior years have been reclassified to conform to current year presentation. As
more fully discussed in Note 2--"Merger and Acquisitions", the Corporation
consummated the acquisitions of three banking organizations accounted for as
poolings of interests during 1994. These consolidated financial statements and
notes thereto give effect to the acquisitions and, therefore, the financial
position, results of operations and cash flows are presented as if the
Corporation and the acquired banking organizations had been combined for all
periods presented. The significant accounting policies followed by the
Corporation are summarized below.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of Shawmut National Corporation and its subsidiaries after elimination
of material intercompany balances and transactions.
TRADING ACCOUNT SECURITIES--Trading account securities include debt securities
that are purchased and held principally for the purpose of selling them in the
near term and are stated at fair value, as determined by quoted market prices.
Gains and losses realized on the sale of trading account securities and
adjustments to fair value are included in trading account profits.
RESIDENTIAL MORTGAGES HELD FOR SALE--Residential mortgages held for sale are
primarily one to four family real estate mortgage loans which are reported at
the lower of cost or market, as determined by outstanding commitments from
investors or current investor yield requirements, calculated on an aggregate
basis. Forward mandatory, standby and put option contracts are entered into to
limit market risk on residential mortgages held for sale. Gains and losses from
sales of residential mortgages held for sale are recognized upon settlement with
investors and recorded in noninterest income. These activities, together with
underwriting and servicing of residential mortgage loans, comprise the
Corporation's mortgage banking business.
SECURITIES--Debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held to maturity and reported at
cost, adjusted for the amortization of premiums and accretion of discounts. Debt
and equity securities which are not classified as held to maturity or as trading
securities are classified as available for sale and reported at fair value, with
unrealized gains and losses excluded from the results of operations and reported
as a separate component of shareholders' equity, net of income taxes.
Prior to adoption of Statement of Financial Accounting Standards (FAS) No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (FAS 115),
effective December 31, 1993, debt securities that were to be held for indefinite
periods of time, including securities that management intended to use as part of
its asset/liability strategy or that may be sold in response to changes in
interest rates, prepayment risk or other factors, were reported at the lower of
aggregate cost or fair value. Changes in net unrealized losses were included in
the Corporation's results of operations. Equity securities were stated at the
lower of aggregate cost or fair value with net unrealized losses reported as a
reduction of retained earnings.
Fair values of securities are determined by prices obtained from independent
market sources. Realized gains and losses on securities sold are computed on
the identified cost basis on the trade date and are included in the results of
operations.
5
<PAGE> 6
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN EXCHANGE TRADING INSTRUMENTS--Foreign exchange trading positions,
including spot, forward and option contracts, are reported at market value. The
resulting realized and unrealized gains and losses from foreign exchange
trading are included in other noninterest income.
INTEREST RATE INSTRUMENTS--Interest rate instruments, such as futures
contracts and forward rate agreements, are used in conjunction with foreign
exchange trading activities. These instruments are carried at net market value
with realized and unrealized gains and losses recognized currently in other
noninterest income.
Interest rate swap, cap and floor agreements and futures contracts are used
to manage the Corporation's interest rate risk. Those agreements meeting the
criteria for hedge accounting treatment are designated as hedges and are
accounted for on an accrual basis. Premiums paid for interest rate instruments
are amortized as an adjustment to interest expense over the term of the
agreements. The periodic net settlements on interest rate swap, cap and floor
agreements are recorded as an adjustment to interest expense. Gains or losses
on futures contracts that are effective hedges are deferred and amortized over
the expected remaining life of the hedged asset or liability. The market value
of futures contracts used to hedge the available for sale securities portfolio
are included with the valuation of those securities.
Disclosures required under FAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments", are included in
Note 15--"Interest Rate Financial Instruments".
LOANS--Loans are stated at the principal amounts outstanding, net of unearned
income. Interest on undiscounted loans is recognized primarily utilizing the
simple interest method based upon the principal amount outstanding. Interest on
discounted loans is recognized utilizing the effective yield method.
The net amount of loan origination and commitment fees and direct costs
incurred to underwrite and issue a loan are deferred and amortized as an
adjustment of the related loan's yield over the contractual life of the loan in
a manner which approximates the interest method.
When a loan is past due 90 days or more or the ability of the borrower to
repay principal or interest is in doubt, the Corporation discontinues the
accrual of interest and reverses any unpaid accrued amounts. If there is doubt
as to subsequent collectibility, cash interest payments are applied to reduce
principal. A loan is not restored to accruing status until the borrower has
brought the loan current and demonstrated the ability to make payments of
principal and interest, and doubt as to the collectibility of the loan is not
present. The Corporation may continue to accrue interest on loans past due 90
days or more which are well secured and in the process of collection.
Restructured loans are loans with original terms which have been modified as
a result of a change in the borrower's financial condition. Interest income on
restructured loans is accrued at the modified rates.
A commitment to extend credit is a binding agreement to make a loan to a
customer in the future if certain conditions are met and is subject to the same
risk, credit review and approval process as a loan. Many commitments expire
without being used and, therefore, do not represent future funding
requirements.
RESERVE FOR CREDIT LOSSES--The reserve for credit losses is maintained at a
level determined by management to be adequate to provide for probable losses
inherent in the loan portfolio, including commitments to extend credit. The
reserve is maintained through the provision for credit losses, which is a
charge to operations. When a loan, or a portion of a loan, is considered
uncollectible, the loss is charged to the reserve. Recoveries of previously
charged off loans are credited to the reserve. The potential for loss in the
portfolio reflects the risks and uncertainties inherent in the extension of
credit.
6
<PAGE> 7
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The determination of the adequacy of the reserve is based upon management's
assessment of risk elements in the portfolio, factors affecting loan quality
and assumptions about the economic environment in which the Corporation
operates. The process includes identification and analysis of loss potential in
various portfolio segments utilizing a credit risk grading process and specific
reviews and evaluations of significant individual problem credits. In addition,
management reviews overall portfolio quality through an analysis of current
levels and trends in charge-off, delinquency and nonaccruing loan data, and a
review of forecasted economic conditions and the overall banking environment.
These reviews are of necessity dependent upon estimates, appraisals and
judgments, which may change quickly because of changing economic conditions,
and the Corporation's perception as to how these factors may affect the
financial condition of debtors.
PREMISES AND EQUIPMENT--Premises, leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization computed
primarily on the straight-line method. Depreciation of buildings and equipment
is based on the estimated useful lives of the assets. Amortization of leasehold
improvements is based on the term of the related lease or the estimated useful
lives of the improvements, whichever is shorter. Major renewals and betterments
are capitalized and recurring repairs and maintenance are charged to
operations. Gains or losses on dispositions of premises and equipment are
included in income as realized.
FORECLOSED PROPERTIES--Properties acquired through foreclosure or in
settlement of loans and in-substance foreclosures are classified as foreclosed
properties and are valued at the lower of the loan value or estimated fair
value of the property acquired less estimated selling costs. At the time of
foreclosure the excess, if any, of the loan value over the estimated fair value
of the property acquired less estimated selling costs is charged to the reserve
for credit losses. Additional decreases in the carrying values of foreclosed
properties or changes in estimated selling costs, subsequent to the time of
foreclosure, are recognized through a provision charged to operations. A
valuation reserve is maintained for estimated selling costs and to record the
excess of the carrying values over the fair market values of properties if
changes in the carrying values are judged to be temporary.
The fair value of foreclosed properties is determined based upon appraised
value, which primarily utilizes the selling price of properties for similar
purposes, or discounted cash flow analyses of the properties' operations.
GOODWILL--The excess cost over the fair value of net assets acquired from
acquisitions accounted for as purchases is included in other assets and
amortized on a straight-line basis over periods of up to 25 years.
PENSION AND OTHER EMPLOYEE BENEFIT PLANS--The Corporation maintains a
noncontributory defined benefit pension plan, which covers substantially all
full-time employees. Pension expense is based upon an actuarial computation of
current and future benefits for employees. The pension plan is funded annually
in an amount consistent with the funding requirements of federal law and
regulations.
The Corporation sponsors postretirement health care and life insurance
benefit plans that provide health care and life insurance benefits for retired
employees that have met certain age and service requirements. Postretirement
health care and life insurance benefits expense is based upon an actuarial
computation of current and future benefits for employees and retirees. See Note
11--"Pension and Other Employee Benefit Plans" for discussion of the adoption of
FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", effective January 1, 1993.
7
<PAGE> 8
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation provides disability and workers' compensation related
benefits to former or inactive employees after employment but before retirement
and had also provided supplemental severance benefits to certain former
employees. Postemployment benefits expense is determined based upon various
criteria depending on the type of benefit. See Note 11--"Pension and Other
Employee Benefit Plans" for discussion of the adoption of FAS No. 112,
"Employers' Accounting for Postemployment Benefits", effective January 1, 1993.
INCOME TAXES--Income tax expense is based on estimated taxes payable or
refundable on a tax return basis for the current year and the changes in the
amount of deferred tax assets and liabilities during the year. Deferred income
tax assets and liabilities are established for temporary differences between
the accounting basis and the tax basis of the Corporation's assets and
liabilities at enacted tax rates expected to be in effect when the amounts
related to such temporary differences are realized or settled. See Note
13--"Income Taxes" for discussion of the adoption of FAS No. 109, "Accounting
for Income Taxes", effective January 1, 1993.
PER COMMON SHARE CALCULATIONS--Income per common share is calculated by
dividing net income less preferred stock dividends by the weighted average
common shares outstanding for each period presented.
CASH FLOWS STATEMENT--For the purpose of reporting cash flows, the Corporation
has defined cash equivalents as those amounts included in the balance sheet
caption "Cash and due from banks".
NOTE 2--MERGER AND ACQUISITIONS
AGREEMENT AND PLAN OF MERGER
On February 20, 1995, the Corporation and Fleet Financial Group, Inc.
("Fleet"), a corporation organized and existing under the laws of the State of
Rhode Island, entered into an agreement and plan of merger, pursuant to which
the Corporation will merge with and into Fleet (the "Merger"). As a result of
the Merger, each share of the $.01 par value common stock of the Corporation
outstanding immediately prior to the effective time of the Merger, other than
shares held directly or indirectly by the Corporation or Fleet, will be
converted into the right to receive .8922 shares of $1.00 par value common
stock of Fleet.
Each share of the Corporation's Preferred Stock with Cumulative and
Adjustable Dividends with a stated value of $50 per share, 9.30% Cumulative
Preferred Stock and 9.35% Cumulative Preferred Stock outstanding immediately
prior to the effective time of the Merger will be converted into the right to
receive one equivalent share of each of the respective series of Fleet
preferred stock.
The Merger is intended to constitute a tax-free transaction and to be
accounted for as a pooling of interests. It is anticipated that the Merger will
be consummated in the fourth quarter of 1995, and is subject to the approval of
the common stock shareholders of Fleet and the Corporation, the receipt of
various regulatory approvals, and the satisfaction (or, where permissible,
waiver) of certain other standard closing conditions.
COMPLETED ACQUISITIONS
The Corporation completed its acquisitions of the following banking
organizations during the second quarter of 1994:
<TABLE>
<CAPTION>
COMMON
ASSETS AT SHARES EXCHANGE
MARCH 31, 1994 ISSUED RATIO
-------------- ------ --------
(IN THOUSANDS, EXCEPT EXCHANGE RATIO)
<S> <C> <C> <C>
Peoples Bancorp of Worcester, Inc. ("Peoples")--(May 23, 1994).. $ 870,673 8,320 2.444
New Dartmouth Bank ("New Dartmouth")--(June 6, 1994)............ $1,724,458 6,430 15.157
Gateway Financial Corporation ("Gateway")--(June 27, 1994)...... $1,259,563 7,421 0.559
</TABLE>
8
<PAGE> 9
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These acquisitions were accounted for as poolings of interests and as such
are reflected in the consolidated financial statements as though the
Corporation, Peoples, New Dartmouth and Gateway had been combined as of the
beginning of the earliest period presented.
Merger related charges of $100.9 million were recorded during the second
quarter of 1994 to reflect the costs to integrate these acquisitions. The
merger related charges include: $18.9 million for severance and benefits costs
for workforce reductions; $39.4 million for the closure of duplicative branches
and facilities and cancellation of vendor contracts; $11.1 million for
financial advisory, legal and accounting expenses; and $7.0 million for losses
on the accelerated sales of foreclosed properties. In addition, the sales of
securities and disposition of residential loans of the acquired entities to
maintain an interest rate risk profile consistent with that of the Corporation
resulted in losses of $12.5 million and $12.0 million, respectively, which are
included in merger related charges. Accrued merger expenses totaled $13.8
million at December 31, 1994.
The following table sets forth the results of operations of Peoples, New
Dartmouth, Gateway and the Corporation for the years ended December 31, 1993
and 1992:
<TABLE>
<CAPTION>
1993 1992
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Net interest income:
Peoples.................................. $ 37,232 $ 36,598
New Dartmouth............................ 62,743 69,128
Gateway.................................. 46,958 51,475
The Corporation, as previously reported.. 924,630 825,328
---------- --------
Combined............................ $1,071,563 $982,529
========== ========
Net income (loss):
Peoples.................................. $ 10,787 $ 11,034
New Dartmouth............................ 19,088 20,264
Gateway.................................. 8,421 (20,402)
The Corporation, as previously reported.. 290,752 75,209
---------- --------
Combined............................ $ 329,048 $ 86,105
========== ========
</TABLE>
The Corporation also completed its acquisitions of West Newton Savings Bank,
with assets of approximately $254 million, and Cohasset Savings Bank, with
assets of approximately $78 million, on September 30, 1994, which were
accounted for as purchases. Also completed during 1994 were the purchases of:
ten branches from Northeast Savings, F.A., which had deposits of approximately
$427 million, on June 11, 1994; $25 million in deposits of a failed thrift
institution from the Resolution Trust Company on July 18, 1994 (renamed Shawmut
Bank, FSB); and the processing services division of Poorman-Douglas, a
bankruptcy claims processing company, on October 3, 1994.
PENDING ACQUISITIONS
In November 1994, the Corporation entered into a purchase agreement with
Barclays Bank PLC and Barclays Business Credit, Inc. pursuant to which the
Corporation agreed to purchase substantially all of the assets and to assume
certain of the liabilities of the Business Finance Division ("Barclays
Finance") of Barclays Business Credit, Inc., for a purchase price equal to the
net book value of the assets to be acquired and the liabilities to be assumed
plus a premium of $290 million. The book value of the assets to be acquired was
approximately $2.3 billion at December 31, 1994, and the book value of the
liabilities to be assumed was approximately $12.7 million at such date.
Barclays Finance, based in Glastonbury, Connecticut, provides
9
<PAGE> 10
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
asset-based financing to middle market companies through a network of offices
nationwide. The acquisition was completed on January 31, 1995 and recorded
under the purchase method of accounting.
In June 1994, the Corporation entered into an agreement to acquire Northeast
Federal Corp. ("Northeast"). Northeast is a unitary savings and loan holding
company which provides financial services through its subsidiary, Northeast
Savings, F.A. As of December 31, 1994, Northeast had assets of $3.3 billion,
deposits of $2.4 billion and stockholders' equity of $138.9 million. Northeast
has 33 offices located in Connecticut, Massachusetts and upstate New York.
Pursuant to the agreement, Northeast stockholders will receive shares of the
Corporation's common stock in exchange for Northeast shares in accordance with
the exchange ratio provisions set forth therein, subject to a minimum exchange
ratio of .415 and a maximum exchange ratio of .507. The Northeast transaction
may be terminated if the transaction is not consummated on or before June 30,
1995 or if the Corporation's common stock average price, as defined, is less
than $21.465 per share for the fifteen consecutive full trading days prior to
the date on which the last regulatory approval required to consummate the
transaction has been obtained and all statutory waiting periods have expired
and, therefore, resulting in Northeast stockholders receiving less than $10.875
of the Corporation's common stock.
On January 11, 1995, Northeast publicly stated that the position of the
Northeast Board of Directors at the time it approved the agreement was to
terminate the agreement after receipt of the last regulatory approval if the
consideration to be received by Northeast stockholders is valued at less than
$10.875 per share of Northeast common stock and that the Northeast Board of
Directors has not changed that position. If Northeast terminates the agreement,
the Corporation's present intention is not to increase the exchange ratio above
.507.
NOTE 3--SECURITIES
A summary of the amortized cost and fair value of securities classified as
available for sale at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994
U.S. Government and agency securities
U.S. Treasury............................... $1,275,041 $ 15 $52,344 $1,222,712
Mortgage backed............................. 204,498 2,046 451 206,093
Equity securities............................... 149,521 746 9,867 140,400
Corporate mortgage backed and other securities.. 446,186 23,633 422,553
State and municipal obligations................. 96 1 2 95
---------- ------ ------- ----------
Total.................................. $2,075,342 $2,808 $86,297 $1,991,853
========== ====== ======= ==========
</TABLE>
10
<PAGE> 11
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1993
U.S. Government and agency securities
U.S. Treasury.............................. $1,695,536 $1,694 $4,077 $1,693,153
Mortgage backed............................ 730,321 27,689 1,757 756,253
Equity securities............................... 217,390 3,390 4,472 216,308
Corporate mortgage backed and other securities.. 525,090 914 2,256 523,748
State and municipal obligations................. 142 16 4 154
---------- ---------- ---------- ----------
Total.................................... $3,168,479 $33,703 $12,566 $3,189,616
========== ========== ========== ==========
</TABLE>
The amortized cost of securities classified as available for sale exceeded
fair value by approximately $83.5 million at December 31, 1994, consisting of
unrealized losses of approximately $86.3 million and unrealized gains of
approximately $2.8 million. The fair value of securities classified as
available for sale exceeded amortized cost by approximately $21.1 million at
December 31, 1993, consisting of unrealized gains of approximately $33.7
million and unrealized losses of approximately $12.6 million. As a result, net
unrealized losses of $54.3 million and net unrealized gains of $13.8 million on
securities classified as available for sale at December 31, 1994 and 1993,
respectively, were included as a separate component of shareholders' equity.
These net unrealized losses and gains are net of income tax effects of $29.2
million and $7.3 million, respectively.
The amortized cost and fair value of securities classified as held to
maturity at December 31, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994
U.S. Government and agency securities
Mortgage backed................. $3,556,103 $1,010 $211,345 $3,345,768
U.S. Treasury................... 1,953,820 16 115,157 1,838,679
Asset backed and other securities.... 2,490,459 42 113,058 2,377,443
---------- ---------- ---------- ----------
Total......................... $8,000,382 $1,068 $439,560 $7,561,890
========== ========== ========== ==========
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1993
U.S. Government and agency securities
Mortgage backed................. $3,332,189 $61,427 $ 1,392 $3,392,224
U.S. Treasury................... 1,713,534 3,072 7,067 1,709,539
Asset backed and other securities.... 2,106,603 26,754 6,324 2,127,033
---------- ---------- ---------- ----------
Total......................... $7,152,326 $91,253 $14,783 $7,228,796
========== ========== ========== ==========
</TABLE>
11
<PAGE> 12
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the acquisitions completed during the second quarter of 1994,
certain securities previously classified as held to maturity by the acquired
entities were transferred to securities classified as available for sale and
certain securities classified as available for sale were sold in order to
maintain the Corporation's interest rate risk profile. The net loss recognized
upon the sale of these securities of $12.5 million is included in merger
related charges. The amortized cost and fair value of the securities
transferred from the held to maturity category to available for sale were
$112.1 million and $106.9 million, respectively. Also, securities previously
classified as available for sale by the acquired entities, with a fair value of
$377.5 million, were transferred to securities classified as held to maturity.
The proceeds from sales of these securities classified as available for sale,
inclusive of certain securities previously classified as held to maturity by
the acquired entities, were $264.0 million, which resulted in gross realized
losses of $14.7 million and gross realized gains of $2.2 million during the
second quarter of 1994.
Proceeds from sales of debt securities during 1994, 1993 and 1992 totaled
approximately $3.1 billion, $4.5 billion and $4.7 billion, respectively, and
resulted in gains of approximately $4.7 million, $19.3 million and $94.4
million and losses of approximately $17.2 million, $2.8 million and $1.2
million. Securities with a carrying amount of $5.7 billion were pledged to
secure public deposits, borrowings and for other purposes required by law at
December 31, 1994.
Upon the adoption of FAS 115 as of December 31, 1993, securities aggregating
$708.2 million, previously reported at the lower of aggregate cost or fair
value or at amortized cost, were transferred to securities classified as held
to maturity. Also, securities aggregating $286.1 million were transferred from
the held to maturity portfolio to securities available for sale.
The amortized cost and fair value of securities at December 31, 1994, by
maturity date, are summarized below. Mortgage backed securities are included in
the table based upon contractual maturity.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less................. $87,532 $87,128 $532,377 $518,608
Due after one year through five years... 992,122 955,261 3,282,550 3,103,219
Due after five years through ten years.. 231,917 213,549 2,343,130 2,195,847
Due after ten years..................... 614,250 595,515 1,842,325 1,744,216
---------- ---------- ---------- ----------
1,925,821 1,851,453 8,000,382 7,561,890
Equity securities....................... 149,521 140,400
---------- ---------- ---------- ----------
Total............................ $2,075,342 $1,991,853 $8,000,382 $7,561,890
========== ========== ========== ==========
</TABLE>
12
<PAGE> 13
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--LOANS AND RESERVE FOR CREDIT LOSSES
The components of the Corporation's loan portfolio at December 31, 1994 and
1993, net of unearned income of $32.8 million and $12.8 million, respectively,
are summarized below:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Commercial and industrial.............. $7,006,396 $6,393,501
----------- -----------
Owner-occupied commercial real estate.. 1,412,007 1,492,820
----------- -----------
Real estate investor/developer
Commercial mortgage............... 1,309,224 1,526,457
Construction and other............ 157,391 160,740
----------- -----------
Total investor/developer........ 1,466,615 1,687,197
----------- -----------
Consumer
Residential mortgage.............. 5,592,084 5,325,904
Home equity....................... 1,625,662 1,637,773
Installment and other............. 1,384,379 1,060,493
----------- -----------
Total consumer.................. 8,602,125 8,024,170
----------- -----------
Total........................... 18,487,143 17,597,688
Less reserve for credit losses......... 542,116 669,156
----------- -----------
Total........................... $17,945,027 $16,928,532
=========== ===========
</TABLE>
Loans totaling $19.5 million, $37.2 million and $275.6 million were
transferred to foreclosed properties during 1994, 1993 and 1992, respectively.
In connection with the acquisitions completed during the second quarter of
1994, fixed-rate residential mortgage loans with a carrying amount of
approximately $244.0 million were transferred to residential mortgages held for
sale and sold during the third quarter of 1994. The Corporation recognized a
loss of $12.0 million on this sale which is included in merger related charges.
Loans outstanding to directors, executive officers, principal holders of
equity securities or to any of their associates totaled $55.7 million at
December 31, 1994 and $22.7 million at December 31, 1993. A total of $79.4
million in loans were made or added, while a total of $46.4 million were repaid
or deducted during 1994. Changes in the composition of the board of directors
or the group comprising executive officers result in additions to or deductions
from loans outstanding to directors, executive officers or principal holders of
equity securities.
13
<PAGE> 14
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The details of the Corporation's nonaccruing loans, restructured loans and
accruing loans past due 90 days or more at December 31, 1994 and 1993 are
summarized below:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial and industrial................ $35,982 $85,008
-------- --------
Owner-occupied commercial real estate.... 57,560 79,561
-------- --------
Real estate investor/developer
Commercial mortgage................. 66,909 97,346
Construction and other.............. 16,012 25,054
-------- --------
Total investor/developer.......... 82,921 122,400
-------- --------
Consumer
Residential mortgage................ 38,398 71,722
Home equity......................... 6,548 8,673
Installment and other............... 2,542 5,536
-------- --------
Total consumer.................... 47,488 85,931
-------- --------
Total nonaccruing loans........... $223,951 $372,900
======== ========
Restructured loans....................... $41,752 $73,345
======== ========
Accruing loans past due 90 days or more.. $43,264 $42,616
======== ========
</TABLE>
Interest income related to nonaccruing and restructured loans would have been
approximately $25.0 million in 1994 and $48.0 million in 1993 had these loans
been current and the terms of the loans had not been modified. Interest income
recorded on these loans totaled approximately $3.5 million in 1994 and $11.0
million in 1993. Interest income received on these loans and applied as a
reduction of principal totaled approximately $9.8 million and $15.1 million in
1994 and 1993, respectively.
Changes affecting the reserve for credit losses for the years ended December
31, 1994, 1993 and 1992, respectively, are summarized below:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year..... $669,156 $908,394 $1,043,689
Provision charged to operations.. 3,000 55,944 242,128
Addition for loans purchased..... 4,287
Loans charged off................ (190,552) (349,631) (423,051)
Recoveries on loans charged off.. 56,225 54,449 45,628
---------- ---------- -----------
Balance at end of year........... $542,116 $669,156 $908,394
========== ========== ===========
</TABLE>
The Financial Accounting Standards Board issued FAS No. 114, "Accounting By
Creditors for Impaired Loans", in May 1993. The new accounting standard will
require that impaired loans, which are defined as loans where it is probable
that a creditor will not be able to collect both the contractual interest and
principal payments, be measured at the present value of expected future cash
flows discounted at the loan's effective rate when assessing the need for a
loss accrual. The new accounting standard is effective for the Corporation's
financial statements beginning January 1, 1995. The Corporation does not
anticipate that adoption of the new accounting standard will have a material
effect on its financial position or results of operations.
14
<PAGE> 15
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 1994 and 1993 are
summarized below:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1994 1993
-------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ $30,070 $30,563
Buildings....................................... 10 to 40 years 193,073 191,558
Leasehold improvements.......................... 5 to 10 years 125,551 144,233
Equipment....................................... 4 to 15 years 395,834 400,263
-------- --------
Total.................................... 744,528 766,617
Less accumulated depreciation and amortization.. 414,748 433,657
-------- --------
Total.................................... $329,780 $332,960
======== ========
</TABLE>
Depreciation and amortization expense of $49.2 million in 1994, $52.3 million
in 1993 and $54.7 million in 1992 is included in occupancy expense or equipment
expense, depending upon the nature of the asset.
The Corporation occupies certain other premises and rents equipment,
primarily data processing equipment, under leases that are accounted for as
operating leases. These leases have expiration dates through 2023. Operating
lease rentals aggregated $51.7 million in 1994, $54.2 million in 1993 and $59.9
million in 1992. Such amounts are recorded net of sublease income totaling $1.4
million in 1994, $1.5 million in 1993 and $1.2 million in 1992.
The minimum rental commitments of the Corporation at December 31, 1994 under
the terms of operating leases in excess of one year were as follows: $34.1
million in 1995; $29.8 million in 1996; $23.9 million in 1997; $19.6 million in
1998; $16.8 million in 1999; and $119.5 million after 1999.
NOTE 6--FORECLOSED PROPERTIES
Foreclosed properties of $18.8 million and $64.5 million are stated net of
reserves of $12.6 million and $15.2 million at December 31, 1994 and 1993,
respectively. Provisions charged to operations for changes in the carrying
value of foreclosed properties amounted to $4.0 million, $76.6 million and
$140.4 million in 1994, 1993 and 1992, respectively.
NOTE 7--OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES
The components of other assets at December 31, 1994 and 1993 are presented
below:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued interest income................. $227,654 $171,084
Net deferred income taxes............... 164,958 200,871
Cash surrender value of life insurance.. 156,913
Goodwill and other intangibles.......... 154,488 109,671
Prepaid pension expense................. 128,614 128,302
Receivable for securities sold.......... 10,000 219,111
Other................................... 430,063 475,550
---------- ----------
Total............................ $1,272,690 $1,304,589
========== ==========
</TABLE>
15
<PAGE> 16
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of accrued expenses and other liabilities at December 31, 1994
and 1993 are presented below:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued interest expense................................................ $96,082 $70,887
Accrued dividends payable............................................... 30,429 24,090
Accrued restructuring expenses.......................................... 19,045 6,854
Accrued merger expenses................................................. 13,772
Accrued postretirement health care and life insurance benefits expense.. 13,117 8,057
Accrued postemployment benefits expense................................. 8,645 8,400
Other................................................................... 160,562 84,628
-------- --------
Total............................................................ $341,652 $202,916
======== ========
</TABLE>
NOTE 8--OTHER BORROWINGS
Other borrowings of the Corporation at December 31, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Federal funds purchased......................... $1,342,961 $1,709,315
Securities sold under agreements to repurchase.. 4,733,847 5,784,932
Treasury tax and loan funds..................... 323,883 599,962
Private placement notes......................... 210,997 174,996
Federal Home Loan Bank of Boston borrowings..... 452,108 1,013,746
Other........................................... 22,783
---------- ----------
Total.................................... $7,086,579 $9,282,951
========== ==========
</TABLE>
The scheduled maturities of Federal Home Loan Bank of Boston borrowings at
December 31, 1994 are as follows: $254.2 million due in 1995 with interest
rates at 4.12 to 9.01 percent; and $197.9 million due in 1996 and thereafter
with interest rates at 4.88 to 8.51 percent.
Securities sold under agreements to repurchase, representing primarily U.S.
Government agency securities, at December 31, 1994 are detailed below by due
date:
<TABLE>
<CAPTION>
LESS THAN 30-90
OVERNIGHT 30 DAYS DAYS TOTAL
----------- ----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities sold
Amortized cost.............. $2,649,686 $2,422,656 $64,341 $5,136,683
Fair value.................. 2,453,220 2,261,054 59,027 4,773,301
Repurchase borrowings............ 2,447,720 2,227,784 58,343 4,733,847
Average borrowing interest rate.. 5.85% 5.94% 5.47% 5.89%
</TABLE>
16
<PAGE> 17
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--NOTES AND DEBENTURES
The Corporation's notes and debentures at December 31, 1994 and 1993 are
summarized below:
<TABLE>
<CAPTION>
1994 1993
---------- --------
(IN THOUSANDS)
<S> <C> <C>
BANK HOLDING COMPANIES
9.85% subordinated capital notes due June 1, 1999, net of discount.. $149,931 $149,915
8-7/8% notes due April 1, 1996, net of discount..................... 149,866 149,769
7.20% subordinated notes due April 15, 2003, net of discount........ 149,750 149,720
8-5/8% subordinated notes due December 15, 1999, net of discount.... 149,736 149,684
8-1/8% notes due February 1, 1997, net of discount.................. 99,916 99,880
Floating rate subordinated notes due February 14, 1997.............. 50,000 50,000
---------- --------
Total........................................................ 749,199 748,968
---------- --------
BANK SUBSIDIARIES:
Floating rate senior notes due 1995 and 1996........................ 1,038,000
5.50% senior note due June 30, 1995................................. 200,000
5.60% senior note due February 1, 1995.............................. 25,000
Other............................................................... 9,589 9,973
---------- --------
Total........................................................ 1,272,589 9,973
---------- --------
Total................................................. $2,021,788 $758,941
========== ========
</TABLE>
The agreement for the 9.85% subordinated capital notes provides that, on the
maturity date of June 1, 1999, the notes, at the Corporation's option, will
either be exchanged for common stock, preferred stock or certain other primary
capital securities of the Corporation having a market value equal to the
principal amount of the notes, or will be repaid from the proceeds of other
issuances of such securities. The Corporation may, however, at its option,
revoke its obligation to redeem the notes with capital securities based upon
the capital treatment of the notes by its primary regulator or consent by its
primary regulator for such revocation. The holders of the capital notes are
subordinate in rights to depositors and other creditors.
Floating rate senior notes issued under the Corporation's subsidiary banks'
note program at December 31, 1994 mature from three months to two years and
currently have interest rates of 5.64 to 6.58 percent. The weighted average
interest rate on the floating rate senior notes at December 31, 1994 was 6.10
percent.
Both the 8-7/8% and 8-1/8% notes are unsecured obligations with interest
payable semiannually. The floating rate subordinated notes bear interest at a
rate of 3/8 percent above LIBOR (London Inter Bank Offered Rate). Both the
8-5/8% and 7.20% subordinated notes may not be redeemed prior to maturity.
Interest is payable semiannually.
Certain of the Corporation's note and debenture agreements include provisions
that limit the ability of the Corporation to sell the capital stock of its
subsidiary banks or dispose of significant portions of assets of these
subsidiaries.
The scheduled maturities of the Corporation's notes and debentures for each
of the next five years are as follows: $1,013.4 million in 1995; $400.3 million
in 1996; $150.4 million in 1997; $.5 million in 1998; $300.2 million in 1999;
and $157.0 million after 1999.
On February 14, 1995, Shawmut Bank Connecticut completed a $250 million
offering of 8-5/8% subordinated bank notes due 2005.
Refer to Note 20-"Parent Company Financial Information" for further
discussion of parent company notes and debentures.
17
<PAGE> 18
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--SHAREHOLDERS' EQUITY
The payment of dividends is determined by the Board of Directors in light of
the earnings, capital levels, cash requirements and the financial condition of
the Corporation and its subsidiaries, applicable government regulations and
policies and other factors deemed relevant by the Board of Directors, including
the amount of dividends payable to the Corporation by its subsidiary banks.
Various federal laws, regulations and policies limit the ability of the
Corporation's subsidiary banks to pay dividends. See Note 18-"Regulatory
Matters".
The Corporation's Board of Directors is authorized to issue up to 10,000,000
shares of preferred stock without par value in series and to determine the
designation, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions and all other rights of each series. The Corporation
had outstanding at December 31, 1994 a series of 575,000 shares of 9.30%
Cumulative Preferred Stock with a stated value of $250 per share represented by
Depositary Shares and a series of 688,700 shares of Preferred Stock with
Cumulative and Adjustable Dividends with a stated value of $50 per share. Both
series of preferred stock rank senior to the Corporation's common stock as to
dividends and liquidation preference.
The Depositary Shares represent a one-tenth interest in a share of 9.30%
Cumulative Preferred Stock and are not subject to any mandatory redemption or
sinking fund provisions. The 9.30% Cumulative Preferred Stock will be
redeemable on at least 30 but not more than 60 days notice, at the option of
the Corporation, as a whole or in part, at any time on and after October 15,
1997 at a redemption price equal to $250 per share plus dividends accrued and
accumulated but unpaid to the redemption date.
The dividend rate on the Preferred Stock with Cumulative and Adjustable
Dividends is established quarterly and is based on a rate that is 2.25 percent
below the highest interest rate of selected short- and long-term U. S. Treasury
securities prevailing at the time the rate is set. The dividend rate for any
dividend period will in no event be less than 6.00 percent or greater than
12.00 percent per annum. This series of preferred stock is redeemable, at the
Corporation's option, at $50.00 per share.
Dividends of $23.25, $23.25 and $4.65 per share were declared on the 9.30%
Cumulative Preferred Stock during 1994, 1993 and 1992, respectively. Dividends
of $3.00, $3.00 and $3.01 per share were declared during 1994, 1993 and 1992,
respectively, on the Preferred Stock with Cumulative and Adjustable Dividends.
Dividends declared per common share were $.82 and $.50 during 1994 and 1993,
respectively. There were no dividends declared on common shares during 1992.
On January 26, 1995, the Corporation completed a $125 million offering of
500,000 shares of 9.35% Cumulative Preferred Stock with a stated value of $250
per share represented by Depositary Shares.
On October 10, 1991, New Dartmouth (which was subsequently merged with
Shawmut Bank NH upon consummation of the acquisition discussed in Note
2-"Merger and Acquisitions") issued 347,073 shares of non-voting, convertible,
redeemable, preferred stock ("FDIC Preferred Stock") to the Federal Deposit
Insurance Corporation ("FDIC") at a price of $89.46 per share. The shares of
FDIC Preferred Stock were redeemable at New Dartmouth's option. During 1993,
New Dartmouth redeemed 177,000 shares of FDIC Preferred Stock at the stipulated
redemption prices. On May 27, 1994, New Dartmouth redeemed the remaining shares
of FDIC Preferred Stock from the FDIC at a redemption price of $107.77 per
share.
The Corporation's rights plan provides for the distribution of one right for
each outstanding share of common stock. Each right entitles common stockholders
to buy one-one hundredth of a newly issued share of Series A Junior
Participating Preferred Stock of the Corporation at an exercise price of $100
per share, subject to adjustment. The rights, which will expire March 10, 1999,
can be redeemed by the Corporation
18
<PAGE> 19
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under certain circumstances at one cent per right. The rights become
exercisable if certain events relating to the acquisition or proposed
acquisition of common shares of the Corporation occur. When exercisable, under
certain circumstances, each right will enable its holder to purchase, at the
right's then current exercise price, common shares of the Corporation (or,
under certain circumstances, a combination of cash, property, common shares or
other securities) having a value of twice the right's exercise price. In
addition, if thereafter the Corporation is involved in a merger or other
business combination transaction with another person in which its shares are
changed or exchanged, or if the Corporation sells more than 50 percent of its
assets, cash flow, or earning power to another person or persons, each right
(with certain exceptions) that has not previously been exercised will entitle
its holder to purchase, at the right's then current exercise price, common
shares of such other person having a value of twice the right's exercise price.
Common shares totaling 20,531,741 at December 31, 1994 were reserved for
issuance under the Dividend Reinvestment and Stock Purchase Plan and the
Corporation's Stock Option and Restricted Stock Award Plans. Common shares
totaling 8,023,915 at December 31, 1994 were reserved for issuance for the
pending acquisition of Northeast.
In connection with the settlement of certain litigation, the Corporation
issued warrants for the purchase of up to 1,329,115 shares of common stock on
January 18, 1994. The warrants have an exercise price of $22.11 per share, are
listed on the New York Stock Exchange, are freely tradable and are exercisable
for a period of one year, commencing January 18, 1995.
NOTE 11--PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Pension and Thrift Plans-The Corporation has noncontributory, qualified
defined benefit pension plans covering substantially all full-time employees
meeting certain requirements as to age and length of service. For those vested,
the plans provide a monthly benefit upon retirement based on compensation
during the five consecutive highest paid years of employment and years of
credited service. It is the Corporation's policy to fund annually an amount
consistent with the funding requirements of federal law and regulations and not
to exceed an amount which would be deductible for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. The
assets of the plans are primarily invested in listed stocks.
The Corporation also has supplemental retirement plans that cover certain
employees and pay benefits that supplement any benefits paid under the
qualified plans. Benefits under the supplemental plans are generally based on
compensation not includible in the calculation of benefits to be paid under the
qualified plans.
The following table sets forth the funding status and the prepaid pension
expense of the Corporation's pension and supplemental benefit plans recognized
in the balance sheet at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation.............................. $(128,213) $(119,942)
=========== ===========
Accumulated benefit obligation......................... $(139,990) $(136,727)
=========== ===========
Projected benefit obligation for services rendered to date.. $(162,273) $(192,107)
Plan assets at fair market value............................ 263,427 262,629
----------- -----------
Plan assets in excess of projected benefit obligation....... 101,154 70,522
Unrecognized net actuarial loss............................. 17,706 46,225
Unrecognized prior service cost............................. 13,997 15,928
Unrecognized net asset...................................... (4,243) (4,373)
----------- -----------
Prepaid pension expense..................................... $128,614 $128,302
=========== ===========
</TABLE>
19
<PAGE> 20
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's net pension expense (income) was $4.3 million in 1994, $1.7
million in 1993 and $(1.4) million in 1992.
The components of net pension expense (income) for the years ended December
31, 1994, 1993 and 1992 for all plans were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost for benefits earned during the period.. $13,577 $10,374 $9,820
Interest cost on projected benefit obligation....... 14,153 12,385 9,998
Actual return on plan assets........................ (4,041) (17,262) (27,110)
Net amortization and deferral of gains and losses... (19,396) (3,780) 6,911
Settlement and curtailment gains, net............... (1,049)
---------- ---------- ----------
Net pension expense (income)........................ $4,293 $1,717 $(1,430)
========== ========== ==========
</TABLE>
Significant rate assumptions as of December 31, 1994, 1993 and 1992, used in
determining 1994, 1993 and 1992 net pension expense (income) and related
pension obligations were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Discount rate used in determining projected benefit obligation.. 8.5% 7.5% 8.5%
Rate of increase in compensation levels......................... 4.5 4.5 4.5
Long-term rate of return on plan assets......................... 10.0 10.0 10.0
</TABLE>
The Corporation also sponsors defined contribution plans covering
substantially all employees. Contributions under such plans totaled $7.2
million in 1994, $6.8 million in 1993 and $6.3 million in 1992.
Postretirement Health Care and Life Insurance Benefits-The Corporation
provides health care and life insurance benefits for retired employees that
have met certain age and service requirements. The postretirement medical plan
and one of the life insurance plans are contributory with contributions
adjusted annually to reflect certain cost-sharing provisions of the plans. The
remaining two postretirement life insurance plans are noncontributory. It is
the Corporation's policy to fund the postretirement benefit plans as claims are
paid. Plan assets represent the cash surrender value of life insurance policies
related to one of the plans described above.
The Corporation adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", effective January 1, 1993. This
accounting standard requires the expected cost of these postretirement health
care and life insurance benefits to be accrued and charged to operations during
the years the employees render the service. The Corporation is amortizing the
transition obligation of $95.5 million on a straight-line basis over 20 years.
The postretirement benefits expense was $15.0 million and $14.9 million in 1994
and 1993, respectively. Previously, the Corporation's postretirement benefits
were expensed as claims were paid and totaled approximately $5.0 million in
1992.
20
<PAGE> 21
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the funded status and the accrued
postretirement health care and life insurance benefits expense of the
Corporation's postretirement benefit plans recognized in the balance sheet at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees............................................................... $(61,771) $ (65,870)
Fully eligible active plan participants................................ (23,123) (19,899)
Other active plan participants......................................... (12,899) (16,526)
-------- ---------
Total............................................................... (97,793) (102,295)
Plan assets at fair market value.......................................... 2,211 2,292
-------- ---------
Accumulated postretirement benefit obligation in excess of plan assets.... (95,582) (100,003)
Unrecognized net actuarial (gain) loss.................................... (2,857) 1,173
Unrecognized transition obligation........................................ 85,322 90,773
-------- ---------
Accrued postretirement health care and life insurance benefits expense.... $(13,117) $ (8,057)
======== =========
</TABLE>
The components of the annual postretirement health care and life insurance
benefits expense for the years ended December 31, 1994 and 1993 are summarized
below:
<TABLE>
<CAPTION>
1994 1993
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost for benefits earned during the period........................ $ 3,010 $ 2,398
Interest cost on projected benefit obligation............................. 7,272 7,821
Actual return on plan assets.............................................. (115) (112)
Net amortization of the transition obligation............................. 4,740 4,778
Net amortization and deferral of gains and losses......................... 48
------- -------
Postretirement health care and life insurance benefits expense............ $14,955 $14,885
------- -------
</TABLE>
Significant rate assumptions as of December 31, 1994 and 1993 used in
determining 1994 and 1993 postretirement health care and life insurance
benefits expense and related obligation were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Discount rate used in determining accumulated postretirement benefit obligation... 8.5% 7.5%
Rate of increase in compensation levels........................................... 4.5 4.5
Long-term rate of return on plan assets........................................... 5.0 5.0
Medical cost trend rate........................................................... 12.0 12.0
Medicare benefits trend rate...................................................... 10.5 10.5
</TABLE>
The assumptions for medical costs and Medicare benefits trend to 5.0 percent
by the year 2002 and remain constant thereafter. Increasing the assumed health
care cost trend rate by one percentage point would increase the accumulated
postretirement benefit obligation at December 31, 1994 by $5.2 million and
increase the aggregate of the service and interest cost components of net
periodic postretirement benefits expense for 1994 by $.4 million.
21
<PAGE> 22
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postemployment Benefits--The Corporation provides disability and workers'
compensation related benefits to former or inactive employees after employment
but before retirement and has also provided supplemental severance benefits to
certain former employees. The Corporation adopted, in the fourth quarter of
1993 retroactive to January 1, 1993, FAS No. 112, "Employers' Accounting for
Postemployment Benefits". This accounting standard requires that the cost of
these benefits be accrued and charged to operations if the obligation is
attributable to services already rendered, rights to such benefits accumulate
or vest, payment of the benefits is probable and the amount of the benefits can
be reasonably estimated. The Corporation recognized an after-tax charge of $6.6
million recorded as a cumulative effect of a change in method of accounting in
1993 relating to the adoption of this new accounting standard. Severance
related amounts of $16.3 million were included in restructuring related charges
in 1993. The Corporation's postemployment benefits expense for 1994, including
severance amounts of $26.6 million included in restructuring related charges,
was $28.3 million.
Stock Option and Restricted Stock Award Plans--The Corporation has Stock
Option and Restricted Stock Award Plans (the Plans), which provide for the
granting of incentive and nonqualified stock options to certain employees for
the purchase of Shawmut National Corporation common stock at 100 percent of
fair market value at the date of grant. Options granted under the Plans are
exercisable after a minimum of one year but within ten years of the date of
grant. Also, options granted may be accompanied by stock appreciation rights
(SARs) or limited stock appreciation rights (LSRs), or both. SARs and LSRs
entitle the holder to receive payment equal to the increase in the market value
of the common stock from the date of grant to the date of exercise. LSRs may be
exercised only during the 60-day period following a change of control. SARs and
LSRs may be granted only in tandem with stock options and may be paid in cash
or common stock at the election of the employee. At December 31, 1994, 534,200
outstanding stock options had been issued with SARs attached. Common stock
issued relating to restricted stock awards amounted to 18,000 shares in 1994,
48,000 shares in 1993 and 226,000 shares in 1992.
The Plans also provide for the granting of restricted stock and performance
share units to certain key executives. A performance share unit represents an
interest in a restricted share of common stock and any dividends declared.
Grants of performance share units are determined using certain guidelines based
on salary and responsibility levels, as well as predetermined performance
criteria. A total of 9,382,790 shares of common stock have been reserved for
the Plans at December 31, 1994, including the performance share units. Charges
for the Plans related to restricted stock awards totaled $.9 million in 1994,
$1.0 million in 1993 and $.8 million in 1992. A grant of 163,000 shares of
performance share units occurred in March 1994, for the performance periods
beginning January 1, 1994 through December 31, 1996. A grant of 308,200 shares
of performance share units occurred in October 1993, for the performance
periods beginning January 1, 1994 through December 31, 1995. Compensation
expense is recognized based on the fair value of the performance share units
over these periods and totaled $4.6 million in 1994.
22
<PAGE> 23
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions in the Corporation's stock options for the three year period
ended December 31, 1994 are summarized below:
<TABLE>
<CAPTION>
OPTION
NUMBER OF PRICE TOTAL
SHARES PER SHARE (IN THOUSANDS)
---------- --------- --------------
<S> <C> <C> <C>
Outstanding December 31, 1991............................ 2,555,080 $ 5-31 $ 40,686
Granted in 1992.......................................... 888,116 8-19 9,274
Cancelled in 1992........................................ (397,871) 4-30 (7,846)
Exercised in 1992........................................ (282,782) 4-11 (1,740)
---------- ------ --------
Outstanding December 31, 1992............................ 2,762,543 5-31 40,374
---------- ------ --------
Granted in 1993.......................................... 1,462,027 10-25 32,234
Cancelled in 1993........................................ (290,136) 4-31 (6,950)
Exercised in 1993........................................ (475,310) 4-23 (3,424)
---------- ------ --------
Outstanding December 31, 1993............................ 3,459,124 4-30 62,234
---------- ------ --------
Granted in 1994.......................................... 1,979,199 7-24 36,309
Cancelled in 1994........................................ (440,841) 4-30 (11,111)
Exercised in 1994........................................ (1,094,982) 4-24 (9,228)
---------- ------ --------
Outstanding December 31, 1994............................ 3,902,500 $ 4-26 $ 78,204
========== ====== ========
Options exercisable at December 31, 1994................. 1,295,902 $ 4-26 $ 19,281
========== ====== ========
Shares available for future grants at December 31, 1994.. 5,320,535
==========
</TABLE>
NOTE 12--OTHER NONINTEREST INCOME AND NONINTEREST EXPENSES
The components of other noninterest income for the years ended December 31,
1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan servicing............................................... $32,185 $16,005 $ 20,222
Foreign exchange trading..................................... 989 2,964 9,288
Trading account profits...................................... 4,488 6,379 6,559
Residential mortgage sales................................... 1,944 26,933 10,042
FDIC assistance.............................................. 13,792 5,010
Loan securitizations and sales............................... 22,335
Other........................................................ 25,601 29,011 52,684
------- ------- --------
Total........................................................ $65,207 $95,084 $126,140
======= ======= ========
</TABLE>
23
<PAGE> 24
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of noninterest expenses, excluding merger and restructuring
related charges, for the years ended December 31, 1994, 1993 and 1992 were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation............................... $391,994 $414,074 $402,198
Benefits................................... 86,148 86,180 72,527
-------- -------- --------
Total............................ $478,142 $500,254 $474,725
======== ======== ========
Occupancy.................................. $ 99,265 $105,389 $112,257
Equipment.................................. 55,246 58,403 67,250
-------- -------- --------
Total............................ $154,511 $163,792 $179,507
======== ======== ========
Foreclosed properties
Provision............................. $ 3,993 $76,598 $140,417
Expense............................... 7,709 28,575 37,396
-------- -------- --------
Total............................ $ 11,702 $105,173 $177,813
======== ======== ========
FDIC insurance premiums.................... $ 43,711 $52,302 $44,937
Communications............................. 42,983 45,890 48,195
Advertising................................ 19,902 22,240 16,004
Other...................................... 179,812 211,022 213,400
-------- -------- --------
Total............................ $286,408 $331,454 $322,536
======== ======== ========
</TABLE>
MERGER AND RESTRUCTURING RELATED CHARGES
Merger related charges of $100.9 million recorded during the second quarter
of 1994 are discussed more fully in Note 2--"Merger and Acquisitions".
Restructuring related charges of $39.8 million recorded in the second quarter
of 1994 reflect the expansion of the Corporation's cost management program. The
program included an organizational streamlining and the elimination of more
than 600 full-time equivalent positions. The expanded program had also
identified cost reductions to be achieved through improved management of
occupancy costs and consolidation of purchasing activities. The restructuring
related charges include $26.6 million for severance and benefit related costs
and $13.2 million for the consolidation of branch and operations facilities and
other costs. Accrued restructuring expenses totaled $19.0 million at December
31, 1994. It is anticipated that the restructuring program will be
substantially completed by the end of the second quarter of 1995.
NOTE 13--INCOME TAXES
The current and deferred components of income taxes for the years ended
December 31, 1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal................................. $ 56,378 $ 17,943 $ 1,136
State and other......................... 9,925 3,932 4,396
-------- -------- -------
Total current income taxes........ 66,303 21,875 5,532
-------- -------- -------
Deferred
Federal................................. 58,099 (14,459) 35,211
State and other......................... 9,850 (788) 155
-------- -------- -------
Total deferred income taxes....... 67,949 (15,247) 35,366
-------- -------- -------
Total income taxes................ $134,252 $ 6,628 $40,898
======== ======== =======
</TABLE>
24
<PAGE> 25
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the difference between consolidated income tax expense
and the amount computed by applying the federal statutory rate of 35 percent
for the years ended December 31, 1994 and 1993 and 34 percent for the year
ended December 31, 1992 is presented below:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rate on income...................................... $130,061 $101,317 $36,933
Tax-exempt securities, loan and other income, net of interest disallowance... (4,651) (3,451) (3,987)
Dividend received exclusion.................................................. (2,992) (3,615) (3,839)
Effect of change in tax rates................................................ (7,928)
Reduction in federal valuation allowance..................................... (11,231) (85,000)
Acquisition related tax expense.............................................. 5,000
State income tax expense, net of federal tax benefit......................... 10,975 2,943 3,017
Operating loss generating no current tax benefit............................. (1,175) 6,627
Nondeductible merger expenses................................................ 3,833
Purchase accounting adjustment............................................... 775
Other items.................................................................. 3,257 3,537 1,372
-------- -------- -------
Total income tax expense............................................ $134,252 $ 6,628 $40,898
======== ======== =======
</TABLE>
Income tax expense associated with net securities gains, computed by applying
the federal statutory rate of 35 percent (34 percent in 1992) to securities
transactions, was $4.4 million and $32.0 million for the years ended December
31, 1993 and 1992, respectively. There were no net securities gains in 1994.
The Corporation has state net operating loss carryforwards of $921.0 million
at December 31, 1994, primarily in one taxing jurisdiction. These carryforwards
will expire during the years 1995 to 1999. Federal net operating loss
carryforwards totaled $21.2 million at December 31, 1994 and will expire in the
years 2007 and 2008.
The Corporation adopted FAS No. 109, "Accounting for Income Taxes",
prospectively, effective January 1, 1993. The cumulative effect of this
accounting change was the recognition of a $52.8 million income tax benefit in
the first quarter of 1993.
The realization of the Corporation's net deferred tax assets is dependent
upon the ability to generate taxable income in future periods. The Corporation
has evaluated the available evidence supporting the realization of its net
deferred federal tax asset of $165.0 million at December 31, 1994, including
the amount and timing of future taxable income, and determined it is more
likely than not that the asset will be realized. Deferred state tax assets, net
of related federal tax, totaled $98.4 million at December 31, 1994 and were
reduced in their entirety by a valuation allowance of the same amount. Given
the nature of state tax laws, the Corporation believes that uncertainty remains
concerning the realization of tax benefits in various state jurisdictions.
These benefits may, however, be recorded in the future as realized or as it
becomes more likely than not, in management's best judgment, that such tax
benefits or portions thereof will be realized.
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for the same items for income
tax reporting purposes. Significant components of the Corporation's deferred
tax assets and liabilities as of December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Credit loss reserves................................ $177,198 $222,764
State deferred taxes, net of federal amounts........ 98,359 115,119
Writedowns of foreclosed properties................. 19,537 22,766
Net operating loss carryforward..................... 8,903 6,726
Loan discount accretion............................. 3,831 4,836
Federal financial assistance........................ 7,390
Other, net.......................................... 26,395 19,771
-------- --------
Gross deferred tax assets...................... 334,223 399,372
-------- --------
Deferred tax liabilities:
Employee benefits................................... 38,336 38,049
Excess of book over tax basis of assets acquired.... 2,856 10,246
Depreciation and leasing............................ 29,714 23,856
-------- --------
Gross deferred tax liabilities................. 70,906 72,151
-------- --------
Deferred tax asset valuation allowances:
Federal........................................ 11,231
State.......................................... 98,359 115,119
-------- --------
Net deferred tax assets............................. $164,958 $200,871
======== ========
</TABLE>
NOTE 14--CREDIT CONCENTRATIONS AND CREDIT RELATED FINANCIAL INSTRUMENTS
The Corporation provides deposit and loan products and other financial
services to a wide variety of consumer and commercial customers. Approximately
80 percent of the lending relationships are to customers located within New
England, while the remaining lending relationships are to customers diversified
throughout the United States. The Corporation's loan portfolio at December 31,
1994 consisted of commercial and industrial loans (38 percent), consumer loans
(46 percent), real estate investor/developer loans (8 percent) and
owner-occupied commercial real estate loans (8 percent). For details of the
Corporation's loan portfolio by type as of December 31, 1994 and 1993, see
Tables 11 through 15 on pages 37 through 39 of the Corporation's Annual Report
of Form 10-K.
The Corporation manages its loan portfolio to avoid concentration by industry
or loan size to minimize its credit exposure. Commercial loans may be
collateralized by the assets underlying the borrowers' business such as
accounts receivable, equipment, inventory and real property. Consumer loans
such as residential mortgage and installment loans are generally secured by the
real or personal property financed. Commercial real estate loans are generally
secured by the underlying real property and rental agreements.
Credit-related financial instruments that have off-balance sheet credit risk
are used by the Corporation to meet the financing need of its customers. Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed to perform as contracted and the underlying
collateral is worthless. However, the majority of the Corporation's commitments
to extend credit are secured by collateral with sufficient value as prescribed
by internal underwriting guidelines. Therefore, credit risk should not be
interpreted as the amount of loss the Corporation would incur.
26
<PAGE> 27
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of credit-related financial instruments at December 31, 1994 and
1993 is presented below:
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT RISK AMOUNT RISK
----------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Instruments whose contract amounts represent
credit risk
Commitments to extend credit...................... $12,210,524 $12,210,524 $7,907,890 $7,907,890
Standby letters of credit......................... 1,836,381 1,836,381 1,366,373 1,366,373
Residential mortgage loans sold with recourse..... 153,335 153,335 283,722 283,722
</TABLE>
Commitments to extend credit at December 31, 1994 included commercial and
industrial lines of $10.5 billion, consumer home equity credit lines of $1.2
billion and commercial real estate lines of $.5 billion. Since the Corporation
expects many of its commitments will expire without being drawn upon, total
commitment amounts do not necessarily represent the Corporation's future
liquidity requirements.
Standby letters of credit are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements
and are subject to the same risk, credit review and approval process as a loan.
Letters of credit are primarily used to enhance credit for public and private
borrowing arrangements and to guarantee a customer's financial performance.
Residential mortgage loans sold with recourse represent loans sold to U.S.
Government agencies which allow the purchaser the option of requiring the
Corporation to reacquire a loan in the event of default by the borrower. The
option may extend for a period of five years or for the life of the loan. The
Corporation has determined that the liability under the terms of the option
agreements is not material.
NOTE 15--INTEREST RATE FINANCIAL INSTRUMENTS
A summary of interest rate financial instruments at December 31, 1994 and
1993 is presented below:
<TABLE>
<CAPTION>
1994 1993
------------------------ ---------------------
NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Trading instruments:
Commitments to purchase foreign exchange............. $5,345,157 $131,136 $5,581,220 $51,949
Commitments to sell foreign exchange................. 5,355,377 34,100 5,589,002 88,838
Futures contracts purchased.......................... 1,115,000 557
Futures contracts sold............................... 1,115,000 557 400,000 200
Risk management interest rate instruments:
Interest rate swap agreements
Plain fixed-pay...................................... 1,658,500 61,123 943,000 435
Plain fixed-receive.................................. 60,000 988 141,000 4,603
Amortizing fixed-receive............................. 1,349,300 900,000 660
Basis................................................ 605,000 437
Interest rate cap agreements............................. 1,775,000 42,551 950,000
Interest rate corridor agreements........................ 1,031,000 20,197 2,406,000
Interest rate collar agreements.......................... 500,000
Futures contracts sold................................... 6,005,000 8,655 2,528,000 1,264
</TABLE>
27
<PAGE> 28
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notional amounts, except for foreign exchange instruments which represent the
contract amount, do not represent the amounts exchanged by the counterparties
and do not measure the Corporation's exposure to credit or market risks. The
amounts exchanged are based on the notional amounts and other terms of the
financial instruments.
The Corporation's credit exposure from interest rate instruments held for
trading or risk management is represented by the market value of the
instruments with a positive market value. The credit risk of futures contracts
is limited to the daily settlement of the net change in the value of open
contracts with the exchange on which the instruments are traded and the margin
requirement held by the broker. Futures contracts are traded on exchanges,
further reducing the credit risk in comparison with dealing with other
counterparties. Credit risk disclosures relate to accounting losses that would
be recognized if the counterparties completely failed to perform their
obligations. To manage its level of credit risk, the Corporation deals with
counterparties of good credit standing, establishes counterparty credit limits
and enters into netting agreements whenever possible. Credit exposure amounts
are presented gross and disregard any netting agreements. Interest rate
instrument activities are subject to the same credit review, analysis and
approval process as those applied to commercial loans. Netting agreements
contain rights of set-off that provide for the net settlement of certain
contracts with the same counterparty in the event of default. In the event of a
default by a counterparty, the cost to the Corporation, if any, would be the
replacement cost of the contract at the current market rate.
Market risk is the risk that future changes in market conditions may make an
instrument less valuable or more burdensome. Fluctuations in market prices,
interest rates or currency exchange rates change the market value of the
instrument. Exposure to market risk is managed in accordance with risk limits
set by management or by entering into offsetting positions. The fair value of
all financial instruments is discussed more fully in Note 16--"Fair Value of
Financial Instruments".
TRADING INSTRUMENTS
Foreign exchange contracts are entered into primarily for trading activities.
A portion of these trading activities are customer-oriented, and trading
positions, including any offsetting hedges, are established as necessary to
accommodate customers' requirements. Foreign exchange contracts generally
involve the exchange of currencies at agreed upon rates with various
counterparties. The Corporation also enters into Eurodollar futures contracts
for trading purposes. These contracts are commitments to purchase or sell a
financial instrument at a future date for a specified price.
The Corporation's foreign exchange and Eurodollar futures contracts are
valued monthly at current market value and changes in market value are included
in other noninterest income. Net gains realized from the trading of foreign
exchange and Eurodollar futures contracts are included in other noninterest
income. Foreign exchange trading income totaled $1.0 million, $3.0 million and
$9.3 million in 1994, 1993 and 1992, respectively. The average fair values of
commitments to purchase and sell foreign exchange during 1994 were unrealized
gains of $97.6 million and unrealized losses of $97.7 million, respectively.
Comparable amounts for 1993 were unrealized losses of $39.7 million and
unrealized gains of $45.3 million, respectively. The average fair values of
futures contracts purchased and sold during 1994 were $.4 million and $.8
million, respectively.
RISK MANAGEMENT INTEREST RATE INSTRUMENTS
The Corporation's objective in utilizing interest rate instruments is the
management of its interest rate risk. The operations of the Corporation's bank
subsidiaries are subject to risk of interest rate fluctuations to the extent
that interest-earning assets and interest-bearing liabilities mature or reprice
at different times or in differing amounts. Risk management activities are
aimed at optimizing net interest income, given levels of
28
<PAGE> 29
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest rate risk consistent with the Corporation's business strategies. To
achieve its risk management objective, the Corporation uses a combination of
interest rate instruments, including interest rate swaps, options and futures
contracts. The instruments utilized are described below.
Interest rate swap agreements involve the exchange of fixed and variable rate
interest payments based upon a notional principal amount and maturity date.
Basis interest rate swaps involve floating interest rates such as U.S. Treasury
bill and LIBOR. Index amortizing interest rate swaps involve the exchange of
fixed and variable rate interest payments based upon a notional principal
amount which amortizes based on an index rate and decreases over the life of
the swap. Interest rate cap agreements are similar to interest rate swap
agreements except that cash interest payments are made or received only if
current interest rates rise above predetermined interest rates. Similarly, in
an interest rate floor agreement, cash interest payments are made or received
only if current interest rates fall below a predetermined interest rate. An
interest rate collar consists of a cap and a floor. Interest rate corridor
agreements consist of a simultaneous purchase and sale of a cap. The
Corporation enters into interest rate swap, cap, floor and corridor agreements
to manage the impact of fluctuating interest rates on earnings. The unamortized
premium recorded in the Corporation's balance sheet related to interest rate
risk management agreements was $32.8 million at December 31, 1994.
Futures contracts are also used by the Corporation to manage interest rate
exposure. These instruments are exchange-traded contracts for the future
delivery of securities, other financial instruments or cash settlement at a
specified price or yield. Initial margin requirements are met in cash or other
instruments. At December 31, 1994, the Corporation had entered into U.S.
Treasury rate futures contracts with approximately $708 million in notional
amounts to manage the risk associated with the available for sale securities
portfolio. The unrealized loss of approximately $.3 million at December 31,
1994 relating to these contracts has been recorded as part of the fair value of
these securities. At December 31, 1994, the Corporation had approximately $100
million in notional amounts of U.S. Treasury rate futures contracts to manage
the interest rate risk associated with the issuance of subordinated bank notes
that occurred during the first quarter of 1995 in connection with the
acquisition of Barclays Finance. At December 31, 1994, an unrealized gain of
$.2 million relating to these contracts had been deferred and recorded in other
liabilities. Upon the issuance of the subordinated bank notes, the futures
contracts will be settled and the resulting gain or loss will be recognized as
an adjustment to interest expense over the life of the subordinated bank notes.
The Corporation also utilizes Eurodollar futures contracts to manage interest
rate risk on the repricing of the Corporation's short-term funding sources. The
unrealized gain relating to these Eurodollar futures contracts at December 31,
1994 of approximately $21.3 million has been deferred and recorded as an
adjustment to the carrying amount of other borrowings. Upon settlement of these
futures contracts, the resulting gain or loss will be recognized as an
adjustment to interest expense over the average period of these short-term
borrowings.
For additional discussion of risk management interest rate instruments, see
"Interest Rate Risk" on page 31 of the Corporation's Annual Report on Form 10-K.
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires the disclosure of the fair value of financial instruments. A financial
instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that conveys or imposes the contractual right or obligation to
either receive or deliver cash or another financial instrument. Examples of
financial instruments included in the Corporation's balance sheet are cash,
federal funds sold or purchased, debt and equity securities, loans, demand,
savings and other interest-bearing deposits, notes and debentures and foreign
exchange contracts. Examples of financial instruments which are not included in
the Corporation's balance sheet are commitments to extend credit, standby
letters of credit, loans sold with recourse and interest rate swaps, options
and futures contracts.
29
<PAGE> 30
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.
The statement requires the fair value of deposit liabilities with no stated
maturity, such as demand deposits, NOW and money market accounts, to equal the
carrying value of these financial instruments and does not allow for the
recognition of the inherent value of core deposit relationships when
determining fair value. While the statement does not require disclosure of the
fair value of nonfinancial instruments, such as the Corporation's premises and
equipment, its banking and trust franchises and its core deposit relationships,
the Corporation believes these nonfinancial instruments have significant fair
value.
The Corporation has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair values
were based on the quoted market price of a financial instrument with similar
characteristics, the present value of expected future cash flows or other
valuation techniques. Each of these alternative valuation techniques utilize
assumptions which are highly subjective and judgmental in nature. Subjective
factors include, among other things, estimates of cash flows, the timing of
cash flows, risk and credit quality characteristics and interest rates.
Accordingly, the results may not be precise and modifying the assumptions may
significantly affect the values derived. In addition, fair values established
utilizing alternative valuation techniques may or may not be substantiated by
comparison with independent markets. Further, fair values may or may not be
realized if a significant portion of the financial instruments were sold in a
bulk transaction or a forced liquidation. Therefore, any aggregate unrealized
gains or losses should not be interpreted as a forecast of future earnings or
cash flows. Furthermore, the fair values disclosed should not be interpreted as
the aggregate current value of the Corporation.
The methodology and assumptions utilized to estimate the fair value of the
Corporation's financial instruments, not previously discussed in the policy
statements above, are described below.
Financial instruments with fair value approximate to carrying value-The
carrying value of cash and due from banks, interest-bearing deposits in other
banks, federal funds sold and securities purchased under agreements to resell,
residential mortgages held for sale, demand deposits, savings, NOW and money
market deposits, foreign time deposits, other borrowings and accrued interest
income and expense approximates fair value due to the short-term nature of
these financial instruments.
Securities--The fair value of securities was estimated based on prices
obtained from independent market sources.
Loans--The fair value of loans was estimated for groups of similar loans based
on the type of loan, interest rate characteristics, credit risk and maturity.
The fair value of performing fixed-rate commercial and commercial real estate
loans was estimated by discounting expected future cash flows utilizing
risk-free rates of return, adjusted for credit risk and servicing costs. The
carrying value of performing variable-rate commercial and commercial real
estate loans was estimated to approximate fair value due to the short-term and
frequent repricing characteristics of these loans. Prepayments were not
anticipated for either fixed-rate or variable-rate commercial and commercial
real estate loans. The fair value of performing residential mortgage, home
equity and installment loans was estimated utilizing quoted market values for
securities backed by similar loans. The fair value of nonaccruing loans was
estimated by discounting expected future cash flows utilizing risk-free rates
of returns, adjusted for credit risk and servicing costs commensurate with a
portfolio of nonaccruing loans. Where appropriate, the fair value reflects any
FDIC loss protection arrangements.
Deposits--The fair value of time deposits with fixed maturities was estimated
by discounting expected future cash flows utilizing interest rates currently
being offered on deposits with similar characteristics and maturities.
30
<PAGE> 31
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes and debentures-The fair value of notes and debentures was estimated
based on quoted market prices.
Interest rate financial instruments-The fair value of futures contracts and
foreign exchange trading instruments was based on quoted market prices. The
fair value of risk management interest rate instruments was based on the amount
the Corporation would receive or pay to terminate the agreements as of the
reporting date based on the terms of the agreements, the creditworthiness of
the counterparties and interest rates. The fair value of commitments to extend
credit and standby letters of credit was based on the discounted value of fees
currently charged for similar agreements. The fair value of residential
mortgage loans sold with recourse was based on the estimated liability under
the terms of the option agreements and is not material.
The following table presents the carrying amount and fair value of the
Corporation's financial instruments at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
------------------------ -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks.................... $1,986,182 $1,986,182 $1,539,690 $1,539,690
Interest-bearing deposits in other banks... 439,936 439,936 13,252 13,252
Federal funds sold and securities purchased
under agreements to resell............... 308,700 308,700 71,500 71,500
Trading account securities................. 27,859 27,859 19,625 19,625
Residential mortgages held for sale........ 72,205 72,205 472,450 472,450
Available for sale securities.............. 1,991,853 1,991,853 3,189,616 3,189,616
Held to maturity securities................ 8,000,382 7,561,890 7,152,326 7,228,796
Loans, less reserve for credit losses...... 17,945,027 18,132,000 16,928,532 17,591,000
Foreclosed properties...................... 18,831 18,831 64,518 64,518
Customers' acceptance liability............ 5,166 5,166 13,747 13,747
----------- ----------- ---------- -----------
Total financial assets............. 30,796,141 $30,544,622 29,465,256 $30,204,194
=========== ===========
NONFINANCIAL ASSETS:
Premises and equipment..................... 329,780 332,960
Other assets............................... 1,272,690 1,304,589
----------- -----------
Total assets....................... $32,398,611 $31,102,805
=========== ===========
FINANCIAL LIABILITIES:
Deposits................................... $20,746,253 $20,544,157 $18,741,879 $18,978,416
Other borrowings........................... 7,086,579 7,086,579 9,282,951 9,282,951
Acceptances outstanding.................... 5,166 5,166 13,747 13,747
Notes and debentures....................... 2,021,788 2,014,546 758,941 827,400
----------- ----------- ----------- -----------
Total financial liabilities........ 29,859,786 $29,650,448 28,797,518 $29,102,514
=========== ===========
NONFINANCIAL LIABILITIES:
Other liabilities.......................... 341,652 202,916
----------- -----------
Total liabilities.................. 30,201,438 29,000,434
Shareholders' equity....................... 2,197,173 2,102,371
----------- -----------
Total liabilities and shareholders'
equity........................... $32,398,611 $31,102,805
=========== ===========
</TABLE>
31
<PAGE> 32
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FAIR VALUE
---------------------
1994 1993
---------- ----------
(in thousands)
<S> <C> <C>
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Trading instruments:
Commitments to purchase foreign exchange.. $89,572 $(36,598)
Commitments to sell foreign exchange...... (89,657) 41,449
Futures contracts purchased............... (679)
Futures contracts sold.................... 1,174 (30)
Risk management interest rate instruments:
Interest rate swap agreements............. (42,345) (21,471)
Interest rate cap agreements.............. 42,551 12,648
Interest rate corridor agreements......... (5,143) 6,177
Interest rate collar agreements........... (1,471)
Futures contracts......................... 21,127 302
Credit-related financial instruments:
Commitments to extend credit.............. 19,724 26,000
Standby letters of credit................. 8,360 6,400
</TABLE>
NOTE 17-LITIGATION
The Corporation's Shawmut Bank Connecticut subsidiary, which served as
indenture trustee for certain healthcare receivable backed bonds issued by
certain special purpose subsidiaries of Towers Financial Corporation, and
another defendant, have been named in a lawsuit in federal court in Manhattan by
purchasers of the bonds. The suit seeks damages in an undetermined amount equal
to the difference between the current value of the bonds and their face amount
of approximately $200 million, plus interest, as well as punitive damages. The
Corporation believes its actions were reasonable and appropriate and were not
the cause of any loss by the bondholders, and is vigorously defending the
action.
The Corporation is subject to various other pending and threatened lawsuits
in which claims for monetary damages are asserted. Management, after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of such other pending and threatened lawsuits
will have a material effect on the Corporation's results of operations or
financial condition.
NOTE 18-REGULATORY MATTERS
The Corporation is a multibank holding company subject to regulation and
supervision by the Board of Governors of the Federal Reserve System ("the
Board") under the Bank Holding Company Act of 1956. As a bank holding company,
the Corporation's activities and those of its banking and nonbanking
subsidiaries are limited to the business of banking and activities closely
related or incidental to banking. The Corporation is also a unitary savings and
loan holding company subject to regulation and supervision by the Office of
Thrift Supervision ("OTS") under the Home Owners' Loan Act of 1933.
32
<PAGE> 33
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's national banks, Shawmut Bank Connecticut, National
Association ("Shawmut Bank Connecticut") and Shawmut Bank, National Association
("Shawmut Bank Massachusetts"), are subject to regulation and supervision by
the Office of the Comptroller of the Currency ("OCC"). The Corporation's
state-chartered bank, Shawmut Bank NH, is subject to regulation and supervision
by the FDIC and the Bank Commissioner of the State of New Hampshire. Shawmut
Bank, FSB, a federal savings bank, is subject to regulation and supervision by
the OTS. The deposits of the Corporation's subsidiary banks are insured by, and
therefore the subsidiary banks are subject to the regulations of, the FDIC. The
banks are also subject to requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that may
be charged thereon, and limitations on the types of investments that may be
made and the types of services that may be offered. Various consumer laws and
regulations also affect the operations of the Corporation's subsidiary banks.
The Board and the OCC have adopted minimum risk-based capital and leverage
guidelines for bank holding companies and national banks. The minimum Total
capital ratio requirement is 8.00 percent, of which one-half must be Tier 1
capital. The minimum Leverage ratio requires Tier 1 capital of at least 3.00
percent of average quarterly assets less goodwill and other intangibles. This
Leverage ratio is the minimum requirement for the most highly rated banking
organizations and other banking organizations are expected to maintain an
additional level of at least 100 to 200 basis points.
The Board, OCC and FDIC implemented regulations, pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), effective on
December 19, 1992, concerning prompt supervisory and regulatory actions to be
taken against undercapitalized depository institutions. FDICIA establishes five
capital categories: "well-capitalized"; "adequately capitalized";
"undercapitalized"; "significantly undercapitalized"; and "critically
undercapitalized". Under these regulations, an institution will be deemed
"well-capitalized" if it has a Risk-based Total capital ratio of 10.00 percent
or greater, a Risk-based Tier 1 capital ratio of 6.00 percent or greater and a
Leverage ratio of 5.00 percent or greater. In addition, the institution cannot
be subject to an order, written agreement, capital directive or prompt
correction action directive.
The Tier 1 capital, Total capital and Leverage ratios for the Corporation at
December 31, 1994 were 8.27 percent, 11.55 percent and 6.62 percent,
respectively. The Tier 1 capital, Total capital and Leverage ratios for Shawmut
Bank Connecticut were 9.01 percent, 10.27 percent and 7.51 percent,
respectively, while these ratios for Shawmut Bank Massachusetts were 9.97
percent, 11.40 percent and 7.93 percent, respectively, at December 31, 1994.
These ratios for Shawmut Bank NH were 13.88 percent, 15.14 percent and 5.67
percent, respectively, at December 31, 1994. The Corporation and its subsidiary
banks at December 31, 1994 met the definition for a "well-capitalized"
institution.
The Corporation's subsidiary banks are required to maintain reserves against
certain deposit liabilities in either cash or balances on deposit with the
Federal Reserve System. The Corporation's subsidiary banks maintained combined
average reserves of approximately $621 million in 1994 with the Federal Reserve
Bank of Boston.
33
<PAGE> 34
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal sources of revenues for the Corporation are dividends received
directly and indirectly from its banks and other subsidiaries and interest
earned on short-term investments and advances to subsidiaries. Federal law
imposes limitations on the payment of dividends by the subsidiaries of the
Corporation that are national banks. Two different calculations are performed
to measure the amount of dividends that may be paid: a recent earnings test and
an undivided profits test. Under the recent earnings test, a dividend may not
be paid if the total of all dividends declared by a national bank in any
calendar year is in excess of the current year's net profits combined with the
retained net profits of the two preceding years, unless the bank obtains the
approval of the OCC. Under the undivided profits test, a dividend may not be
paid in excess of a bank's undivided profits then on hand, after deducting bad
debts in excess of the reserve for loan losses. Under the recent earnings test
at January 1, 1995, which is the more restrictive of the two tests, Shawmut
Bank Connecticut could pay up to approximately $170.8 million in dividends to
its parent holding company without prior approval. Shawmut Bank Massachusetts,
under the recent earnings test at January 1, 1995, could pay up to
approximately $180.4 million in dividends to its parent holding company without
prior approval. Shawmut Bank Connecticut and Shawmut Bank Massachusetts had
undivided profits of $319.9 million and $558.1 million, respectively, at
December 31, 1994.
The Corporation's subsidiary banks are also restricted under federal law with
respect to the transfer of funds from the subsidiary banks to the Corporation
and its nonbanking subsidiaries. Such transfers are limited to certain
percentages of the subsidiary bank's capital and surplus. Loans and extensions
of credit must be secured in specified amounts. The Corporation had no
borrowings outstanding from either of its subsidiary banks at December 31,
1994.
NOTE 19--FDIC ASSISTED TRANSACTIONS
New Dartmouth was merged with and into Shawmut Bank NH concurrent with the
acquisition of New Dartmouth (See Note 2-"Merger and Acquisitions"). New
Dartmouth, concurrent with its formation on October 10, 1991, acquired certain
assets and assumed certain liabilities of a number of failed institutions from
the FDIC as receiver of these failed banks (the "1991 P&A Transaction"). New
Dartmouth acquired from the FDIC $1.7 billion in assets and assumed $2.1
billion in deposits. The FDIC paid New Dartmouth $55.3 million in federal
financial assistance to complete the transaction in addition to a payment of
$400.8 million for the assumption of net liabilities. As part of the 1991 P&A
Transaction, the FDIC provided certain assistance to New Dartmouth that
included the ability to "put" classified loans to the FDIC upon certain
conditions through October 10, 1994 and the sharing of losses on certain
consumer and residential loans through December 31, 1994. New Dartmouth
allocated approximately $42.6 million of the federal financial assistance it
received from the FDIC as a discount on the acquired loan portfolio
representing the estimate of potential future losses in excess of the
protection provided by the FDIC.
As discussed in Note 2-"Merger and Acquisitions", the Corporation acquired
Gateway and merged its banking subsidiary into Shawmut Bank Connecticut.
Previously, Gateway acquired certain assets and assumed certain liabilities of
a failed institution from the FDIC as receiver of the failed bank. Under the
terms of this acquisition, the FDIC agreed to repurchase from Gateway any
acquired commercial loans and commercial mortgages that became delinquent, as
defined, prior to December 13, 1993. Through that date, approximately $58.1
million of loans had been "put" to the FDIC, of which $21.1 million was
classified as a receivable from the FDIC and included in other assets at
December 31, 1993, which was received in 1994.
34
<PAGE> 35
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20-PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information of Shawmut National Corporation (parent
company only) is presented below:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
1994 1993
----------- -----------
DECEMBER 31, (IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and short-term investments with subsidiary banks.. $ 328,114 $ 293,984
Securities available for sale, at fair value........... 225,895 48,700
Investments in subsidiaries
Banking subsidiaries............................... 2,421,902
Other subsidiaries................................. 319,636 2,140,830
Advances to subsidiaries............................... 241,281
Other assets........................................... 90,779 24,985
---------- ----------
Total............................................ $3,386,326 $2,749,780
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Private placement notes................................ $ 210,997 $ 174,996
Borrowings from affiliates............................. 145,734 143,917
Other borrowings....................................... 23,594
Other liabilities...................................... 59,629 29,092
Notes and debentures................................... 749,199 299,404
Shareholders' equity................................... 2,197,173 2,102,371
---------- ----------
Total............................................ $3,386,326 $2,749,780
========== ==========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
1994 1993 1992
------------ ----------- ----------
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Dividend income from subsidiaries.................................. $126,928 $ 81,900
Interest and dividend income
Advances to subsidiaries....................................... 5,099 4,578 $ 2,883
Short-term investments......................................... 10,038 8,896 8,146
Securities available for sale, at fair value................... 10,704 2,307
Other.............................................................. 7,802 7,973 8,588
--------- --------- --------
Total........................................................ 160,571 105,654 19,617
--------- --------- --------
EXPENSES
Interest........................................................... 54,185 30,279 10,563
Other.............................................................. 17,573 9,293 12,420
--------- --------- --------
Total........................................................ 71,758 39,572 22,983
-------- -------- -------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT, EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES,
EXTRAORDINARY CREDIT AND ACCOUNTING CHANGES...................... 88,813 66,082 (3,366)
Income tax benefit................................................. (8,454) (7,744) (864)
-------- -------- -------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES, EXTRAORDINARY CREDIT
AND ACCOUNTING CHANGES........................................... 97,267 73,826 (2,502)
Equity in undistributed income of subsidiaries before extraordinary
credit and accounting changes...................................... 140,085 209,022 70,229
-------- -------- -------
INCOME BEFORE EXTRAORDINARY CREDIT AND
ACCOUNTING CHANGES............................................... 237,352 282,848 67,727
Extraordinary credit............................................... 18,378
Cumulative effect of changes in methods of accounting.............. 46,200
-------- -------- -------
NET INCOME......................................................... $237,352 $329,048 $86,105
======== ======== =======
</TABLE>
35
<PAGE> 36
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ----------
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 237,352 $ 329,048 $ 86,105
Equity in undistributed income of subsidiaries......... (140,085) (209,022) (70,229)
Extraordinary credit................................... (18,378)
Cumulative effect of changes in methods of accounting.. (46,200)
Other.................................................. (34,312) (20,972) 7,710
---------- ---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES.................. 62,955 52,854 5,208
---------- ---------- ----------
FINANCING ACTIVITIES
Increase in borrowings................................. 61,412 15,657 39,320
Proceeds from issuance of subordinated notes........... 149,700 149,631
Proceeds from issuances of common and preferred stock.. 55,981 61,955 356,599
Purchases of common stock and preferred stock.......... (2,734) (2,509) (10)
Cash dividends paid.................................... (101,432) (42,918) (2,131)
---------- ---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES.................. 13,227 181,885 543,409
---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of securities available for sale............. (741,421) (346,300)
Proceeds from sales and maturities of securities
available for sale................................... 698,011 297,600
Increase in investments in subsidiaries................ (61,226) (86,400) (301,400)
Decrease (increase) in advances to subsidiaries........ 62,584 (144,781) (18,700)
---------- ---------- ----------
CASH USED BY INVESTING ACTIVITIES...................... (42,052) (279,881) (320,100)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS............................... 34,130 (45,142) 228,517
Cash and short-term investments at beginning of year... 293,984 339,126 110,609
---------- ---------- ----------
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR....................................... $ 328,114 $ 293,984 $ 339,126
========== ========= =========
</TABLE>
During 1994, the ownership of Shawmut Bank Connecticut and Shawmut Bank
Massachusetts was transferred to Shawmut National Corporation ("Parent Company")
from the respective bank holding companies, Hartford National Corporation
("HNC") and Shawmut Corporation ("SC"), which are lower tiered holding companies
of the Parent Company. Noncash transactions affecting investments in
subsidiaries during 1994 included the transfer of $142.2 million of securities
and $449.6 million of notes and debentures from HNC and SC to the Parent Company
and a reduction of $18.3 million related to the redemption of FDIC Preferred
Stock by New Dartmouth. Also, advances to subsidiaries totaling $178.7 million
were converted to investments in subsidiaries during 1994.
36
<PAGE> 37
[PRICE WATERHOUSE LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Shawmut National Corporation
In our opinion, the consolidated balance sheets and the related consolidated
statements of income, of changes in shareholders' equity and of cash flows
appearing on pages 46 to 81 of this report present fairly, in all material
respects, the financial position of Shawmut National Corporation and its
subsidiaries at December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Corporation's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Corporation changed its methods of accounting for postretirement benefits other
than pensions, postemployment benefits and income taxes.
/s/ Price Waterhouse LLP
Hartford, Connecticut
February 20, 1995
37
