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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for quarterly period ended September 30, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period _________ to __________
Commission File Number 1-6366
FLEET FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0341324
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Federal Street
Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
(617) 292-2000
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
------------------ ------------------
The number of shares of common stock of the Registrant outstanding as of October
31, 1996 was 262,329,887.
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<PAGE>
FLEET FINANCIAL GROUP, INC.
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. ITEM 1. FINANCIAL INFORMATION
Consolidated Statements of Income
Three Months Ended September 30, 1996 and 1995 3
Nine Months Ended September 30, 1996 and 1995 4
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 5
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1996 and 1995 6
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 7
Condensed Notes to Consolidated Financial Statements 8
PART I. ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. 26
SIGNATURES 27
EXHIBITS 28
2
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
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For the three months ended September 30
Dollars in millions, except share data 1996 1995
- --------------------------------------------------------------------------------
Interest and fees on loans and leases $ 1,349 $ 1,224
Interest on securities 190 316
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Total interest income 1,539 1,540
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Interest expense:
Deposits 467 449
Short-term borrowings 57 205
Long-term debt 91 123
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Total interest expense 615 777
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Net interest income 924 763
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Provision for credit losses 65 27
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Net interest income after provision for credit losses 859 736
- --------------------------------------------------------------------------------
Noninterest income:
Service charges, fees, and commissions 172 124
Mortgage banking 146 137
Investment services revenue 93 81
Venture capital revenue 41 13
Student loan servicing fees 23 17
Securities available for sale gains -- 7
Other 80 69
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Total noninterest income 555 448
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Noninterest expense:
Employee compensation and benefits 425 361
Occupancy 74 63
Equipment 71 53
Mortgage servicing rights amortization 50 31
Intangible asset amortization 40 28
Legal and other professional 34 25
Marketing 26 28
Other 191 157
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Total noninterest expense 911 746
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Income before income taxes 503 438
Applicable income taxes 208 170
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Net income $ 295 $ 268
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Net income applicable to common shares $ 273 $ 259
================================================================================
Fully diluted weighted average common
shares outstanding 268,812,396 269,278,781
Fully diluted earnings per share $ 1.02 $ .96
Dividends declared $ .43 $ .40
================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
For the nine months ended September 30
Dollars in millions, except share data 1996 1995
- --------------------------------------------------------------------------------
Interest and fees on loans and leases $ 3,776 $ 3,525
Interest on securities 577 1,001
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Total interest income 4,353 4,526
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Interest expense:
Deposits 1,299 1,272
Short-term borrowings 251 613
Long-term debt 300 359
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Total interest expense 1,850 2,244
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Net interest income 2,503 2,282
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Provision for credit losses 148 75
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Net interest income after provision for credit losses 2,355 2,207
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Noninterest income:
Service charges, fees, and commissions 437 371
Mortgage banking 403 380
Investment services revenue 274 238
Venture capital revenue 94 28
Student loan servicing fees 67 47
Gain from branch divestitures 92 --
Securities available for sale gains 38 12
Other 219 253
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Total noninterest income 1,624 1,329
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Noninterest expense:
Employee compensation and benefits 1,184 1,086
Occupancy 210 186
Equipment 196 154
Mortgage servicing rights amortization 139 101
Intangible asset amortization 96 76
Legal and other professional 92 65
Marketing 72 70
Merger-related charges -- 50
Other 567 523
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Total noninterest expense 2,556 2,311
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Income before income taxes 1,423 1,225
Applicable income taxes 587 477
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Net income $ 836 $ 748
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Net income applicable to common shares $ 783 $ 721
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Fully diluted weighted average common
shares outstanding 269,259,878 267,644,122
Fully diluted earnings per share $ 2.91 $ 2.69
Dividends declared $ 1.29 $ 1.20
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See accompanying Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
====================================================================================================================
September 30, December 31,
Dollars in millions, except share data 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 6,399 $ 4,566
Securities available for sale 10,456 18,533
Securities held to maturity (market value: $1,269 and $782) 1,277 798
Loans and leases 60,086 51,525
Reserve for credit losses (1,548) (1,321)
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Net loans and leases 58,538 50,204
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Intangible assets 1,734 1,116
Mortgages held for sale 1,555 2,005
Mortgage servicing rights 1,540 1,276
Premises and equipment 1,375 991
Other assets 4,318 4,943
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Total assets $ 87,192 $ 84,432
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Liabilities
Deposits:
Demand $ 17,503 $ 12,305
Regular savings, NOW, money market 28,475 22,835
Time 21,573 21,982
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Total deposits 67,551 57,122
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Federal funds purchased and securities sold under agreements to repurchase 2,635 7,425
Other short-term borrowings 2,482 5,144
Accrued expenses and other liabilities 2,333 1,895
Long-term debt 4,923 6,481
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Total liabilities 79,924 78,067
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Stockholders' Equity
Preferred stock 1,001 399
Common stock (shares issued: 263,388,720 in 1996 and 262,864,257 in 1995;
shares outstanding: 262,262,380 in 1996 and 262,721,926 in 1995) 3 3
Common surplus 3,142 3,149
Retained earnings 3,186 2,768
Net unrealized gain (loss) on securities (17) 52
Less: Treasury stock, at cost, 1,126,340 shares in 1996 and 142,331 shares in 1995 (47) (6)
====================================================================================================================
Total stockholders' equity 7,268 6,365
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Total liabilities and stockholders' equity $ 87,192 $ 84,432
====================================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
====================================================================================================================================
Common Net
Stock Unrealized
Nine months ended September 30 Preferred $.01(a) Common Retained Gain(Loss) Treasury
Dollars in millions, except share data Stock Par Surplus Earnings on Securities Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
Balance at December 31, 1994 $ 557 $ 244 $ 2,612 $ 2,719 $ (411) $ (250) $ 5,471
Net income 748 748
Cash dividends declared on common stock
($1.20 per share) (169) (169)
Cash dividends declared on preferred stock (8) (8)
Cash dividends declared by pooled company
prior to merger (102) (102)
Issuance of preferred stock 125 125
Common stock issued in connection with:
Employee benefit plans 53 (23) 73 103
Acquisition of Northeast Federal Corp 6 187 193
Treasury stock issued in connection with
the acquisition of NBB Bancorp, Inc. (17) (21) 234 196
Adjustment of valuation reserve for
securities available for sale 482 482
Treasury stock purchased (280) (280)
Other, net (4) 4 (60) (1) (61)
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Balance at September 30, 1995 $ 682 $ 246 $ 2,835 $ 3,148 $ 11 $ (224) $ 6,698
====================================================================================================================================
1996
Balance at December 31, 1995 $ 399 $ 3 $ 3,149 $ 2,768 $ 52 $ (6) $ 6,365
Net income 836 836
Cash dividends declared on common stock
($1.29 per share) (339) (339)
Cash dividends declared on preferred stock (51) (51)
Issuance of preferred stock, net of
issuance cost 650 (15) 635
Redemption of preferred stock (50) (3) (53)
Common stock issued in connection with:
Employee benefit plans 36 (21) 28 43
Warrants 15 15
Adjustment of valuation reserve for
securities available for sale (69) (69)
Treasury stock purchased (69) (69)
Other, net 2 (43) (4) (45)
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Balance at September 30, 1996 $ 1,001 $ 3 $ 3,142 $ 3,186 $ (17) $ (47) $ 7,268
====================================================================================================================================
</TABLE>
(a) During the fourth quarter of 1995, the corporation changed the par value of
its common stock from $1 per share to $.01 per share. See accompanying
Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
================================================================================================
Nine months ended September 30
Dollars in millions 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 836 $ 748
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 144 117
Amortization of mortgage servicing rights and intangible assets 235 177
Provision for credit losses 148 75
Deferred income tax expense 202 99
Securities gains (38) (12)
Gain from branch divestitures (92) --
Merger-related charges -- 50
Originations and purchases of mortgages held for resale (14,621) (8,471)
Proceeds from sales of mortgages held for resale 15,891 6,872
(Increase) decrease in trading account assets (10) 64
(Increase) decrease in accrued receivables, net (448) 16
Decrease in accrued liabilities, net (176) (335)
Other, net 813 271
- ------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,884 (329)
- ------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (5,210) (13,900)
Proceeds from sales of securities available for sale 13,037 10,448
Proceeds from maturities of securities available for sale 3,870 7,916
Purchases of securities held to maturity (1,093) (562)
Proceeds from maturities of securities held to maturity 672 1,533
Loans made to customers, nonbanking subsidiaries (1,125) (882)
Principal collected on loans made to customers, nonbanking subsidiaries 746 632
Proceeds from the sale of subsidiary 1,344 --
Net cash and cash equivalents received (paid) for businesses acquired 2,386 (2,816)
Loans purchased from third parties (268) (396)
Proceeds from sales of loans 338 190
Divestiture of loans 1,773 --
Net (increase) decrease in loans and leases, banking subsidiaries 787 (1,402)
Acquisition of minority interest in subsidiary -- (158)
Purchases of premises and equipment (113) (102)
Purchases of mortgage servicing rights (171) (312)
- ------------------------------------------------------------------------------------------------
Net cash provided by investing activities 16,973 189
- ------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in deposits (5,659) (6,577)
Divestiture of deposits (2,349) --
Net increase (decrease) in short-term borrowings (8,614) 1,792
Proceeds from issuance of long-term debt 446 2,211
Repayments of long-term debt (2,048) (1,461)
Proceeds from the issuance of common stock 58 103
Proceeds from the issuance of preferred stock 631 121
Repurchase of common stock (69) (280)
Redemption of preferred stock (53) --
Cash dividends paid (367) (274)
- ------------------------------------------------------------------------------------------------
Net cash used by financing activities (18,024) (4,365)
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Net increase (decrease) in cash and cash equivalents 1,833 (4,505)
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Cash and cash equivalents at beginning of the period 4,566 8,570
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Cash and cash equivalents at end of the period $ 6,399 $ 4,065
================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements
7
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein has been
prepared in conformity with the accounting principles and practices in Fleet
Financial Group, Inc.'s ("Fleet", "FFG", or "corporation") consolidated
financial statements included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") for the year ended December 31, 1995.
The accompanying interim consolidated financial statements contained herein are
unaudited. However, in the opinion of the corporation, all adjustments
consisting of normal recurring items necessary for a fair statement of the
operating results for the periods shown have been made. The results of
operations for the nine months ended September 30, 1996 may not be indicative of
operating results for the year ending December 31, 1996. Certain prior period
amounts have been reclassified to conform to current classifications.
NOTE 2. ACQUISITIONS
On May 1, 1996, the corporation purchased from National Westminster Plc,
the three main operating subsidiaries of NatWest Bancorp: NatWest Bank, N.A.,
NatWest (Delaware), and NatWest Services, Inc. These three operating entities
comprised NatWest Bank, National Association ("NatWest Bank"). The agreement
also specified that certain assets and liabilities of NatWest Bank be retained
by NatWest Bancorp. NatWest Bank continues its existence under the name Fleet
Bank, National Association ("Fleet Bank, N.A."). In accordance with the NatWest
Merger Agreement, Fleet may pay a purchase price of up to $3.26 billion
consisting of a payment made on May 1, 1996 of $2.7 billion and an earnout
payment (the "Earnout") of up to $560 billion over the next eight years. The
Earnout will be based on the level of earnings of Fleet Bank, N.A. during such
period. The acquisition of NatWest Bank contributed approximately $13 billion
and $18 billion of loans and deposits, respectively, and was accounted for using
the purchase method of accounting. Goodwill of approximately $660 million was
recorded in connection with this transaction and is being amortized on a
straight-line basis over 15 years.
In connection with the NatWest acquisition, Fleet substantially
restructured its balance sheet to replace lower-yielding assets, primarily
securities, with higher-earning assets, primarily loans, acquired from NatWest
and replaced higher-cost purchased funding with lower-cost core deposits
acquired from NatWest. The acquisition of NatWest added approximately 300
branches in New York and New Jersey.
As previously disclosed in Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1995, the merger of Shawmut National
Corporation (the "Shawmut Merger") with and into Fleet was completed on November
30, 1995, and was accounted for as a pooling of interests. The financial
information for all prior periods presented has been restated to present the
combined financial condition and results of operations of both companies as if
the Shawmut Merger had been in effect for all periods presented.
The corporation completed the purchases of NBB Bancorp, Inc. ("NBB"), the
Business Finance Division of Barclays Business Credit, Inc. ("Barclays"), Plaza
Home Mortgage Corporation ("Plaza"), and the repurchase of the 19% publicly-held
shares of Fleet Mortgage Group, Inc., ("FMG") during the first quarter of 1995,
and Northeast Federal Corp. ("Northeast") in June 1995. All of these
transactions were accounted for under the purchase method of accounting.
The following information presents, on a pro forma basis, certain
historical financial information for the corporation, adjusted for each of the
NatWest, NBB, Barclays, Plaza, FMG and Northeast transactions as if such
transactions had been consummated on January 1, 1995.
8
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
PRO FORMA RESULTS
- --------------------------------------------------------------------------------
Nine months ended September 30 (Dollars
in millions,
except per share data) 1996(a) 1995
- --------------------------------------------------------------------------------
Pro Forma-Fleet, NatWest, NBB, Barclays,
Plaza, FMG and Northeast
Net income $ 778 $ 895
Net income applicable to common
shares 718 836
Net income per common share 2.67 3.12
- --------------------------------------------------------------------------------
Corporation as Reported
Net income $ 836 $ 748
Net income applicable to common
shares 783 721
Net income per common share 2.91 2.69
- --------------------------------------------------------------------------------
(a) Includes $119 million (after-tax) of special charges recorded by NatWest
prior to the consummation of the NatWest acquisition.
NOTE 3. SALE OF FLEET FINANCE
On July 1, the corporation announced that it had entered into a
definitive agreement with Associates First Capital Corporation to sell certain
assets of Fleet Finance, the corporation's consumer finance subsidiary. On July
31, the corporation completed the sale of certain assets, including a loan
portfolio of approximately $1.2 billion.
NOTE 4. PREFERRED STOCK
During July, the corporation redeemed all of its Series III 10.12%
Perpetual Preferred Stock. The stock was redeemed at $26.265 per share which
resulted in a premium of $2.6 million. As a result of this transaction, the
corporation incurred a $.01 reduction to earnings per share for the third
quarter.
During September, the corporation completed a $50 million fixed/adjustable
rate preferred stock offering. The preferred stock has an initial rate of 6.59%
for the first five years, after which the rate will adjust based on a U.S.
Treasury securities rate. The corporation used the proceeds to replace the
Series III preferred stock.
The corporation has called for redemption all of its Series IV 9.375%
Perpetual Preferred Stock as of December 1, 1996. The Series IV Preferred Stock
will be redeemed at its stated value of $100 per share.
NOTE 5. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash-Flow Disclosure
- --------------------------------------------------------------------------------
Nine months ended September 30
Dollars in millions 1996 1995
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Supplemental disclosure for cash paid
during the period for:
Interest expense $ 1,808 $ 2,206
Income taxes, net of refunds 255 274
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash
investing and financial activities:
Transfer of loans to foreclosed
property and repossessed 15 73
equipment
Securitization of residential loans 1,998 --
Adjustment to unrealized
gain/(loss) on securities
available for sale (69) 422
Retirement of common stock 34 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assets acquired and liabilities
assumed in business combinations
were as follows:
Assets acquired, net of cash and
cash equivalents received/(paid) 17,848 8,920
Net cash and cash equivalents
received/(paid) 2,386 (2,816)
Liabilities assumed 20,234 5,715
Common stock issued -- 193
Treasury stock reissued -- 196
- --------------------------------------------------------------------------------
9
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERALL PERSPECTIVE
- --------------------------------------------------------------------------------
Three months Nine months
Dollars in millions, ended Sept. 30 ended Sept. 30
except per share data 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Earnings
Net income $ 295 $ 268 $ 836 $ 748
Net interest
income (FTE) (a) 934 772 2,529 2,318
- --------------------------------------------------------------------------------
Per Common Share
Fully diluted
earnings $ 1.02 $ 0.96 $ 2.91 $ 2.69
Cash dividends
declared 0.43 0.40 1.29 1.20
Book value 23.90 24.47 23.90 24.47
- --------------------------------------------------------------------------------
Operating Ratios
Return on average
assets 1.35% 1.27% 1.36% 1.21%
Return on common
equity 17.83 16.86 17.34 16.65
Efficiency ratio 61.2 61.2 61.5 62.0
Equity to assets
(period-end) 8.34 8.00 8.34 8.00
- --------------------------------------------------------------------------------
At September 30
Total assets $ 87,192 $ 83,751 $ 87,192 $ 83,751
Stockholders'
equity 7,268 6,698 7,268 6,698
Nonperforming
assets(b) 759 771 759 771
- --------------------------------------------------------------------------------
(a) Prepared on a fully taxable equivalent (FTE) basis. The FTE adjustment
included in net interest income was $10 million and $9 million for the
three months ended, and $26 and $36 million for the nine months ended,
September 30, 1996 and 1995, respectively.
(b) Nonperforming assets and related ratios at September 30, 1996 do not
include $287 million of nonperforming assets classified as held for sale or
accelerated disposition.
Fleet reported net income of $295 million, or $1.02 per fully diluted
share, for the quarter ended September 30, 1996, compared to $268 million, or
$.96 per fully diluted share, in the third quarter of 1995, an increase of 10%.
For the corporation's first nine months of 1996 net income was $836 million, or
$2.91 per fully diluted share, compared with $748 million, or $2.69 per fully
diluted share, in the first nine months of 1995, an increase of 12%. Return on
average assets and return on equity improved to 1.35% and 17.83%, respectively,
for the third quarter of 1996, from 1.27% and 16.86%, respectively, for the
third quarter of 1995. These results reflect the impact of the corporation's
acquisition of NatWest Bank, National Association ("NatWest") subsequent to its
consummation on May 1, 1996, as well as cost reductions related to the Shawmut
merger.
INCOME STATEMENT ANALYSIS
The results for the third quarter of 1996 represent the first full quarter
impact of NatWest.
Net Interest Income
- --------------------------------------------------------------------------------
Three months Nine months
FTE Basis ended Sept. 30 ended Sept. 30
Dollars in millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Interest income $ 1,539 $ 1,540 $ 4,353 $ 4,526
Tax-equivalent
adjustment 10 9 26 36
Interest expense 615 777 1,850 2,244
- --------------------------------------------------------------------------------
Net interest income $ 934 $ 772 $ 2,529 $ 2,318
- --------------------------------------------------------------------------------
Net interest income on a fully taxable equivalent basis totaled $934
million for the quarter ended September 30, 1996, compared to $772 million for
the same period in 1995. The $162 million increase was principally related to
the NatWest acquisition. This increase was partially offset by decreased net
interest income related to the divestitures of core deposits and loans as a
result of the Shawmut merger.
Net Interest Margin and Interest-Rate Spread
- --------------------------------------------------------------------------------
Three months ended Sept. 30 1996 1995
- --------------------------------------------------------------------------------
Taxable equivalent rates Average Average
Dollars in millions Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Securities $ 11,838 6.58% $ 19,651 6.21%
Loans and leases 59,536 8.66 51,831 9.10
Mortgages held for sale 1,676 8.16 2,064 7.76
Other 1,247 7.65 1,349 5.87
- --------------------------------------------------------------------------------
Total interest-earning
assets 74,297 8.30 74,895 8.23
- --------------------------------------------------------------------------------
Deposits 50,759 3.66 43,723 4.08
Short-term borrowings 4,512 5.04 14,849 5.73
Long-term debt 5,063 7.18 6,098 7.38
- --------------------------------------------------------------------------------
Interest-bearing
liabilities 60,334 4.06 64,670 4.77
- --------------------------------------------------------------------------------
Interest-rate spread 4.24 3.46
Interest-free sources
of funds 13,963 10,225
- --------------------------------------------------------------------------------
Total sources of funds $ 74,297 3.29% $ 74,895 4.11%
- --------------------------------------------------------------------------------
Net interest margin 5.01% 4.12%
- --------------------------------------------------------------------------------
The net interest margin for the third quarter of 1996 increased 89 basis
points to 5.01% from the third quarter of 1995. The increase in the net interest
margin is attributable to a more favorable mix of interest-earning assets and
interest-bearing liabilities as lower yielding average securities decreased $7.9
billion and higher-cost average short-term borrowings decreased $10.3 billion.
The securities were replaced by higher yielding loans while short-term
borrowings were replaced by lower yielding core deposits, principally the result
of the acquisition of NatWest.
10
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securities Portfolio
- --------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
Dollars in millions 1996 1995 1995
- --------------------------------------------------------------------------------
Carrying value $ 11,733 $ 19,331 $ 19,500
Average maturity(a) 2.6 years 1.3 years 1.6 years
Yield(b) 6.75% 6.10% 6.07%
- --------------------------------------------------------------------------------
(a) Average maturity relates to debt securities only and is calculated using
repricing dates rather than contractual maturities.
(b) Relates to debt securities only.
The average balance of securities decreased from $19.7 billion, or 26% of
average interest earning assets, for the third quarter of 1995 to $11.8 billion,
or 16% of average interest earning assets, for the same period of 1996. This
$7.9 billion decrease reflects the corporation's balance sheet restructuring
program in connection with the NatWest acquisition.
Average loans and leases increased $7.7 billion to $59.5 billion for the
third quarter of 1996, when compared with the third quarter of 1995, due to the
NatWest acquisition. Offsetting these items were the divestiture of $1.8 billion
of loans in the first quarter of 1996, the securitization of $2.0 billion of
residential real estate loans during 1996, and the reclassification of $1.7
billion of loans, primarily consumer loans, to assets held for sale or
accelerated disposition during the fourth quarter of 1995, the majority of which
were sold in the third quarter of 1996 as part of the Fleet Finance, Inc.
disposition. The decrease in the yield on loans and leases from 9.10% for the
third quarter of 1995 to 8.66% for the third quarter of 1996 corresponds to the
approximately 50 basis point decline in the average prime rate from the third
quarter of 1995 compared to the same period in 1996.
Average interest bearing deposits increased $7.0 billion to $50.8 billion
for the third quarter of 1996 due to the NatWest acquisition which contributed
approximately $13.0 billion in interest bearing deposits. This increase was
partially offset by several factors, including: the divestiture of $2.4 billion
of deposits in connection with the Shawmut Merger; proceeds generated from
securities sold as part of the balance sheet restructuring program which were
used to reduce higher-cost wholesale time deposits; and deposit runoff that was
anticipated as a result of acquisitions completed during 1995. The net
interest-rate paid on average deposits decreased to 3.66% for the third quarter
of 1996 compared to 4.08% for the same period of 1995. The decrease in cost of
deposits reflects the NatWest acquisition which increased the level of lower
cost core deposits and an overall decline in interest-rates for the first nine
months of 1996 in comparison to the same period in 1995.
The $10.3 billion decrease in average short-term borrowings is attributable
to the use of proceeds from the sales of securities to pay down short-term
borrowings and the acquisition of NatWest which enabled the corporation to
replace short-term borrowings with low-cost core deposits.
The contribution to the net interest margin of interest-free sources of
funds during the third quarter of 1996 was 77 basis points compared to 66 basis
points for the third quarter of 1995. This increase is primarily due to the
increase in demand deposits acquired from NatWest, which resulted in a higher
percentage of interest-free sources of funds as a percentage of total sources of
funds.
Noninterest Income
- --------------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
Dollars in millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Service charges, fees and
commissions $ 172 $ 124 $ 437 $ 371
Mortgage banking revenue 146 137 403 380
Investment services
revenue 93 81 274 238
Venture capital revenue 41 13 94 28
Student loan servicing
fees 23 17 67 47
Securities available for
sale gains -- 7 38 12
Gain from branch
divestitures -- -- 92 --
Other noninterest income 80 69 219 253
- --------------------------------------------------------------------------------
Total noninterest income $ 555 $ 448 $ 1,624 $ 1,329
- --------------------------------------------------------------------------------
Noninterest income for the third quarter and the first nine months of 1996
totaled $555 million and $1,624 million, respectively, compared to $448 million
and $1,329 million for the same periods in 1995. The increase of $107 million
over the prior year quarter was due primarily to the NatWest acquisition, which
contributed $76 million of noninterest income, as well as increases in Fleet's
venture capital revenue, mortgage banking revenue, student loan servicing fees
and investment services revenue.
Excluding NatWest's contribution of $50 million, service charges, fees and
commissions remained consistent with the third quarter of 1995 despite the
regulatory required divestiture of $2.4 billion in deposits during the first
quarter of 1996. Investment services revenue increased $12 million, or 15%, from
the third quarter of 1995, due to continued strong sales of mutual funds and
annuity products and an increase in the overall value of assets managed due to
growth fueled by a strong equity market.
11
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mortgage Banking Revenue
- --------------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
Dollars in millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Net loan servicing revenue $ 101 $ 91 $ 293 $ 257
Mortgage production revenue 32 27 92 52
Gains on sales of
mortgage servicing 13 19 18 71
- --------------------------------------------------------------------------------
Total mortgage banking revenue $ 146 $ 137 $ 403 $ 380
- --------------------------------------------------------------------------------
Mortgage banking revenue of $146 million in the third quarter of 1996
increased $9 million over the $137 million recorded in the same period of 1995.
Loan servicing revenue represents fees received for servicing residential
mortgage loans. The 11% increase in loan servicing revenue is attributable to
the $10 billion increase in the corporation's servicing portfolio from $111
billion at September 30, 1995 to $121 billion at September 30, 1996. Mortgage
production revenue, which includes income derived from the loan origination
process and net gains on sales of mortgage loans, has been positively impacted
by a more favorable interest-rate environment in the third quarter and first
nine months of 1996 when compared with the same period of 1995. The corporation
sold mortgage servicing rights of approximately $2.8 billion and $2.5 billion in
the third quarter of 1996 and 1995, respectively, resulting in pre-tax gains of
$13 million and $19 million, respectively. The corporation's decision to sell
mortgage servicing rights depends on a variety of factors, including the
available markets and current market prices for such servicing rights and the
working capital requirements of the corporation. Thus, the likelihood or
profitability of any such sales in the future cannot be predicted.
Venture capital revenue increased $28 million to $41 million for the
quarter ended September 30, 1996 when compared to the same quarter of 1995 as
Fleet Private Equity, the corporation's venture capital business, continued to
experience increasing values in equity capital investments managed. The
corporation's ability to continue to experience increases in the value of these
investments depends on a variety of factors, including the state of the economy
and equity markets. Thus, the likelihood of such gains in the future cannot be
predicted.
The $6 million increase in student loan servicing fees from 1995 to 1996 is
attributable to increased levels of servicing and originations over the prior
year period at AFSA Data Corp., the corporation's student loan servicing
subsidiary.
As a condition to the regulatory approval of the Shawmut Merger, the
corporation divested certain branches, loans and deposits. The corporation
realized $92 million of gains from these divestitures during the first six
months of 1996.
Noninterest Expense
- --------------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
Dollars in millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Employee compensation $ 425 $ 361 $ 1,184 $ 1,086
Occupancy 74 63 210 186
Equipment 71 53 196 154
Mortgage servicing rights
amortization 50 31 139 101
Intangible asset
amortization 40 28 96 76
Legal and other
professional 34 25 92 65
Marketing 26 28 72 70
Telephone 21 15 60 46
Printing and mailing 21 14 54 43
Merger-related charges -- -- -- 50
Other 149 128 453 434
- --------------------------------------------------------------------------------
Total noninterest expense $ 911 $ 746 $ 2,556 $ 2,311
- --------------------------------------------------------------------------------
Noninterest expense for the third quarter and the first nine months of 1996
totaled $911 million and $2,556 million, respectively, compared to $746 million
and $2,311 million for the same periods of 1995. The increase of $165 million
over the prior year quarter was primarily due to the acquisition of NatWest,
which added $189 million of noninterest expense during the third quarter of
1996. Excluding NatWest, noninterest expense and operating noninterest expense
(defined as total noninterest expense less mortgage servicing rights and
intangible asset amortization) declined $24 million and $43 million,
respectively, from the third quarter of 1995. These decreases were primarily the
result of ongoing integration of the Shawmut merger and other smaller
acquisitions completed during 1995.
Excluding NatWest, employee compensation and benefits decreased $29
million, or 8.0%, as a result of ongoing successful integration of the Shawmut
merger.
Equipment expense, excluding NatWest, increased $4 million from the prior
year's quarter primarily as a result of technological upgrades and improvements,
as well as to support the integration of acquired companies. Occupancy expense,
excluding NatWest, decreased $8 million from the prior year's quarter primarily
due to ongoing successful integration from the Shawmut Merger and other smaller
acquisitions completed during 1995. Mortgage servicing rights
12
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(MSR) amortization increased $19 million to $50 million for the third quarter of
1996 as compared to $31 million for the same period of 1995. The level of
amortization increased due to the growth in the size of the servicing portfolio
which was $121 billion at September 30, 1996 compared with $111 billion at
September 30, 1995, coupled with an $11 million recovery of an impairment
reserve during the third quarter of 1995. At September 30, 1996, the carrying
value and fair value of the corporation's mortgage servicing rights were $1.5
billion and $1.9 billion, respectively.
Legal and other professional expense increased $5 million over the third
quarter of 1995, excluding NatWest, due to merger integration expenses as a
result of the Shawmut merger, as well as various strategic initiatives.
Intangible asset amortization increased to $40 million in the third quarter of
1996 from $28 million in the third quarter of 1995 as a result of the NatWest
acquisition. Other noninterest expense increased $21 million over the third
quarter of 1995 but declined slightly excluding NatWest.
In connection with the NatWest acquisition, the corporation recorded a
restructuring liability of $250 million, which was included as a component of
goodwill recorded as part of the transaction. The following table illustrates
the separate components of this restructuring liability:
NatWest Restructuring Liability
- --------------------------------------------------------------------------------
Dollars in millions
- --------------------------------------------------------------------------------
Personnel $ 130
Facilities 42
Data processing 27
Other 51
- --------------------------------------------------------------------------------
Total $ 250
- --------------------------------------------------------------------------------
Personnel charges relate primarily to the costs of employee severance,
termination of certain employee benefit plans, and employee assistance for
separated employees. Facilities charges are the result of the consolidation of
back-office operations, and consist of lease-termination costs, writedowns of
owned properties, and other facilities-related costs. Data processing costs
consist primarily of the write-off of duplicate or incompatible systems hardware
and software. Other merger expenses consist primarily of transaction-related
costs, such as professional and other fees.
The following table presents a summary of activity with respect to the
corporation's merger-related charges pertaining to Shawmut, in addition to the
NatWest related restructuring liability for the nine months ended September 30,
1996. The merger accrual was established in the fourth quarter of 1995 in
connection with the Shawmut Merger.
Merger Accrual
- --------------------------------------------------------------------------------
Nine Months Ended
September 30, 1996
Dollars in millions Shawmut NatWest Total
- --------------------------------------------------------------------------------
Balance at beginning of year $ 335 $ -- $ 335
Restructuring liability -- 250 250
Cash outlays (121) (85) (206)
Non-cash writedowns (3) (50) (53)
- --------------------------------------------------------------------------------
Balance at end of period $ 211 $ 115 $ 326
- --------------------------------------------------------------------------------
The cash outlays made during the first nine months of 1996 relate primarily
to severance costs. The corporation's liquidity has not been significantly
affected by these cash outlays, and future cash outlays are not anticipated to
significantly impact the corporation's liquidity. During the first nine months
of 1996, $31 million of incremental costs have been incurred relating to the
Shawmut Merger and NatWest acquisition and have not been charged against the
merger accrual. It is anticipated that approximately $25 million of additional
incremental costs will be incurred in 1996. The corporation expects that the
remaining accrual balance of $326 million at September 30, 1996 will be
sufficient to absorb the remaining merger-related costs.
Income Taxes
For the third quarter of 1996, the corporation recognized income tax
expense of $208 million, an effective tax rate of 41.3%. Tax expense for the
same period of 1995 was $170 million, an effective tax rate of 38.8%. The
increase in the effective tax rate is attributable to a higher proportion of
income being realized in higher tax rate jurisdictions, principally as a result
of NatWest and the impact of higher non tax deductible levels of goodwill
amortization as a result of the NatWest acquisition.
13
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Lines of Business
The financial performance of the corporation is monitored by an internal
profitability measurement system, which provides line of business results and
key performance measures. The corporation is managed along the following
business lines: Financial Services and National Consumer, Commercial Financial
Services, Consumer Banking, Investment Services, Treasury, New York-Metro, and
All Other Banking.
Management accounting policies are in place for assigning expenses that are
not directly incurred by businesses, such as overhead, operations and technology
expense. Additionally, equity, loan loss provision and loan loss reserves are
assigned on an economic basis. The corporation has developed a risk-adjusted
methodology that quantifies risk types (i.e. credit, operating, market,
fiduciary, etc.) within business units and assigns capital accordingly. Within
each unit, assets and liabilities are match-funded utilizing similar maturity,
liquidity, and repricing information. Management accounting concepts are
periodically refined and results may be restated to reflect methodological
refinements and/or management organization changes. Results by line of business
for the second and third quarter of 1996 are presented below.
Selected Financial Highlights by Lines of Business
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Average Loans
Dollars in millions Net Income ROE ROA Revenues(a) Average Assets and Leases
- ------------------------------------------------------------------------------------------------------------------------------------
3rd 2nd 3rd 2nd 3rd 2nd 3rd 2nd 3rd 2nd 3rd 2nd
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Services and
National Consumer $ 38 $ 28 27.1% 19.0% 1.97% 1.42% $ 246 $ 231 $ 7,685 $ 7,897 $ 1,045 $ 1,021
Commercial Financial
Services 62 51 17.7 14.9 1.00 0.84 247 238 24,683 24,771 23,090 23,195
Consumer Banking 64 66 17.0 18.0 1.78 1.85 472 475 14,317 14,272 12,325 12,142
Investment Services 20 20 46.8 48.3 4.63 4.82 107 110 1,694 1,630 1,459 1,399
Treasury 23 39 40.3 45.2 0.60 0.83 55 85 15,459 18,982 4,675 7,851
New York-Metro(b) 58 29 11.0 8.4 1.00 0.72 353 224 22,982 16,258 16,884 10,259
All Other 30 45 NM NM NM NM 9 49 (17) 970 58 68
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 295 $ 278 17.8% 17.2% 1.35% 1.32% $1,489 $1,412 $86,803 $84,780 $59,536 $55,935
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes net interest income (calculated on an FTE basis) and noninterest
income.
(b) New York-Metro is a business unit formed in the second quarter of 1996
comprised of all financial services to retail and wholesale clients in the
metropolitan area surrounding New York City, primarily including the
acquired business of NatWest.
Financial Services and National Consumer
Financial Services and National Consumer is comprised of Fleet's Government
Banking, Global Services, Mortgage Banking and Student Loan Services businesses.
Fleet is a recognized leader in national and regional government banking
activities, providing deposit gathering activities, tax processing, cash
management and securities underwriting for local and state municipalities.
Global Services provides multiple products, encompassing corporate trust,
bankruptcy proceedings, and domestic and international transaction processing to
the insurance industry, mutual fund companies and commercial banking customers.
Fleet's Mortgage Banking business originates, sells and services first and
second mortgage products spanning all customer segments. This business services
a mortgage portfolio of $121 billion and 1.5 million loans. Student loan
processing, through the AFSA Data Corporation subsidiary, services 4.0 million
accounts nationwide and is the largest third-party servicer in the U.S. with $18
billion in loans serviced.
Financial Services and National Consumer reported third quarter earnings of
$38 million as compared to net income of $28 million in the prior quarter. The
increase in net income is primarily due to mortgage banking activity, as
earnings increased by $9 million from quarter to quarter.
14
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial Financial Services
Commercial Financial Services provides a full range of credit and banking
services to over 40,000 corporate, middle market, real estate and leasing
customers. In addition to traditional credit products, cash management, trade
services, corporate trust, foreign exchange, interest-rate protection and
investment products are provided to Fleet's commercial customers. The client
base is strongly rooted in the Northeast, where this unit holds the leading
positions in most core markets. Additionally, Commercial Financial Services has
several speciality businesses with national scope. Fleet's diversified
commercial and industrial loan portfolio is the fourth largest in the nation.
Also, Fleet is the nation's sixth largest middle market lender. Fleet
Capital-Leasing, Fleet's leasing subsidiary, is one of the nation's top five
bank lessors in domestic equipment leasing. In addition, Fleet Capital is a
leading national asset based lending company.
The recently formed Corporate Finance group provides full-service financial
solutions to wholesale customers. Offering a broad array of products, this group
provides capital markets financing, mergers and acquisition advisory services,
private placements, securitized debt, loan syndications and balance sheet
restructuring.
Commercial Financial Services contributed $52 million of earnings in the
third quarter of 1996, as compared to $51 million in the second quarter. The
earnings improvement is principally due to higher revenues generated from
corporate finance activities and nonreccuring interest payments.
Consumer Banking
Consumer Banking includes Retail Banking, Small Business Banking and Direct
Financial Services. Retail Banking offers consumers products and services to
conveniently access, move and manage their money. Small Business Banking
provides a full range of accounts and services aimed at businesses with sales of
up to $5 million. Direct Financial Services encompasses credit card lending and
alternate delivery vehicles including ATMs, the telephone answer center and
Fleet's Internet web site, http:\www.fleet.com.
Consumer Banking financial results for the third quarter of 1996 were $64
million, compared to $66 million in the prior quarter. The slight decline in
earnings from the prior quarter resulted from increased net charge-offs in the
credit card portfolio as the credit card portfolio has increased to $3.2 billion
at September 30, 1996 from $2.8 billion at June 30, 1996.
Investment Services
Investment Services is comprised of Personal Financial Services, Retirement
Plan Services, Fleet Brokerage Securities, Retail Investment Services and Fleet
Investment Advisors. Personal Financial Services targets high net worth clients
and offers a broad array of asset management, estate settlement, deposit and
credit products. Retirement Plan Services focuses on investment management and
fiduciary activities with special emphasis on 401K plans. Fleet Brokerage
Securities is one of the nation's largest bank-owned discount brokerage firms.
Retail Investment Services manages Fleet's mutual fund product set, including
the Galaxy Funds and annuities sold to consumers. Fleet Investment Advisors
manages in excess of $46 billion of assets supporting the investment service
business.
Investment Services reported net income of $20 million and an ROE of 47% in
the third quarter of 1996, which was consistent with $20 million and 48% in the
second quarter.
Treasury
Treasury is responsible for managing the corporation's securities and
residential mortgage portfolios, trading operations, asset/liability management
function and wholesale funding needs of the corporation.
The Treasury unit earned $23 million in the third quarter as compared to
$39 million in the prior quarter. Second quarter earnings include securities
gains of $12 million. Excluding securities gains, net income declined primarily
due to the impact of reductions in the unit's earning assets resulting from the
corporation's balance sheet restructuring program.
New York-Metro
New York-Metro is a business unit formed in the second quarter of 1996
comprised of all financial services to retail and wholesale clients in the
metropolitan area surrounding New York City. Fleet offices located in Long
Island, New York City Westchester combined with acquired business from NatWest
Bank, N.A. make Fleet the third-ranked banking institution in New York and
fourth-ranked in New Jersey.
15
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The acquisition of NatWest Bank, N.A. added approximately $13 billion of
loans and $18 billion of deposits, 300 branches in the New York and New Jersey
market, and enhancement of product capabilities to consumer, commercial, and
government banking customers.
New York-Metro's net income in the third quarter was $58 million compared
to $29 million in the second quarter, reflecting financial results from a full
quarter's impact of the NatWest acquisition, combined with expense reductions
related to integration efforts.
All Other
All other includes the parent company, Fleet Equity Partners, and certain
transactions not allocable to any specific business activity. In addition, the
impact of methodology allocations, such as loan loss provision, credit reserve,
equity, and the offsets to transfer pricing are reported in this unit.
All Other earned $30 million in the third quarter of 1996 compared to net
income of $45 million in the second quarter. This unit's earnings include branch
divestitures gains of $19 million in the second quarter. The quarterly decline
in average assets is primarily due to the sale of Fleet Finance in the third
quarter.
Fleet Equity Partners, the corporation's venture capital finance
subsidiary, earned $23 million in the third quarter as compared to $14 million
earned in the prior quarter. Strong quarterly earnings resulted from rising
values in this units' equity investments. Increasing value in these investments
depends on a variety of factors, including the condition of the economy and
equity markets. Thus, the likelihood of such gains in the future cannot be
predicted.
Earnings by Subsidiary
- --------------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
Dollars in millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Banking Group
New England $ 160 $ 211 $ 553 $ 614
New York-Upstate 28 38 90 116
New York-Metro 58 -- 87 --
- --------------------------------------------------------------------------------
Total Banking Group 246 249 730 730
- --------------------------------------------------------------------------------
Financial Services
Group
Fleet Private Equity 23 6 52 11
Fleet Mortgage 21 26 51 72
Fleet Capital-Leasing 6 4 16 15
Fleet Capital 7 3 16 11
AFSA 3 2 11 5
Other Financial
Services 6 3 13 10
- --------------------------------------------------------------------------------
Total Financial
Services Group 66 44 159 124
- --------------------------------------------------------------------------------
Parent (17) (25) (53) (74)
- --------------------------------------------------------------------------------
Merger related
charges -- -- -- (32)
- --------------------------------------------------------------------------------
Total $ 295 $ 268 $ 836 $ 748
- --------------------------------------------------------------------------------
The Banking Group generated $246 million and $249 million of net income for
the third quarter of 1996 and 1995, respectively. The third quarter of 1996
represents the first full quarter impact of the acquired NatWest franchise which
was combined with the corporation's existing downstate franchise to form the New
York-Metro Group. The Banking Group's results for the third quarter of 1996
declined $3 million as the group was negatively impacted by loan and deposit
divestitures related to the Shawmut merger and the balance sheet restructuring
program related to the NatWest acquisition, as well as increased loan loss
provision levels. In addition, noninterest income declined slightly due to lower
securities gains and FDIC loan administration fees as the contract with the FDIC
expired on December 31, 1995. Offsetting these items were lower noninterest
expense due to cost savings from the Shawmut merger integration efforts and
additional income from the NatWest franchise.
The Financial Services Group's net income increased $22 million to $66
million for the quarter ended September 30, 1996 primarily due to increases at
Fleet Private Equity, Fleet Capital, and AFSA, partially offset by a decrease at
Fleet Mortgage.
Fleet Private Equity, the corporation's venture capital business, reported
net income of $23 million for the third quarter of 1996, an increase of $17
million compared to $6 million for the third quarter of 1995. Results for the
third quarter of 1996 include
16
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$41 million of gains on equity capital investments compared to $13 million for
the same period in 1995.
Fleet Mortgage, the corporation's mortgage banking subsidiary, contributed
$21 million to the corporation's earnings for the third quarter of 1996,
compared to $26 million in the third quarter of 1995. The $5 million decrease
was due to an $11 million recovery of an impairment reserve during the third
quarter of 1995, partially offset by increased servicing revenues due to growth
in the servicing portfolio.
Fleet Capital earned $7 million in the third quarter of 1996, more than
doubling the $3 million recorded in the third quarter of 1995. The $4 million
increase was due to strong loan growth and expense control.
BALANCE SHEET ANALYSIS
Total assets increased from $84.4 billion at December 31, 1995 to $87.2
billion at September 30, 1996, primarily due to the NatWest acquisition offset
by the aforementioned balance sheet restructuring. The balance sheet
restructuring, implemented in anticipation of the NatWest acquisition, reduced
securities as well as wholesale time deposits and short-term debt. Additionally,
the divestitures of both deposits and loans also contracted the balance sheet.
The corporation acquired approximately $13 billion of loans and $18 billion of
deposits in connection with the NatWest transaction.
<TABLE>
<CAPTION>
Securities
- -------------------------------------------------------------------------------------------------------------------
September 30, 1996 June 30, 1996 December 31, 1995
------------------ ------------- -----------------
Amortized Market Amortized Market Amortized Market
Dollars in millions Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
US Treasury and government agencies $ 2,113 $ 2,088 $ 1,853 $ 1,823 $ 7,891 $ 7,889
Mortgage-backed securities 7,846 7,831 8,150 8,100 8,457 8,470
Other debt securities -- -- -- -- 1,621 1,662
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 9,959 9,919 10,003 9,923 17,969 18,021
- -------------------------------------------------------------------------------------------------------------------
Marketable equity securities 341 348 341 348 359 393
Other securities 187 189 181 181 119 119
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 10,487 $ 10,456 $ 10,525 $ 10,452 $ 18,447 $ 18,533
- -------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
State and municipal $ 1,152 $ 1,156 $ 842 $ 847 $ 687 $ 695
Other debt securities 125 113 121 103 111 87
- -------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 1,277 $ 1,269 $ 963 $ 950 $ 798 $ 782
- -------------------------------------------------------------------------------------------------------------------
Total securities $ 11,764 $ 11,725 $ 11,488 $ 11,402 $ 19,245 $ 19,315
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost of securities available for sale decreased from $18.4
billion at December 31, 1995 to $10.5 billion at September 30, 1996, as a result
of the corporation's balance sheet restructuring program executed primarily
during the first quarter of 1996. This program was designed to sell
lower-yielding securities and use the proceeds to pay down higher-cost wholesale
funds. During the first quarter of 1996, the corporation sold approximately $5.8
billion of U.S. Agency securities, $1.4 billion of mortgage-backed securities,
and $2.4 billion of other securities.
The corporation recognized $18 million of gains during the first quarter as
a result of these transactions. During the second quarter of 1996, the
corporation realized approximately $20 million of securities gains, primarily on
sales of marketable equity securities. The likelihood of profitability of any
such sales in the future cannot be predicted.
The valuation reserve on securities available for sale declined to an
unrealized loss position of $31 million at September 30, 1996 from an unrealized
gain position of $86 million at December 31, 1995, due to unfavorable bond
market conditions and gains realized on sales of securities during the first
nine months of 1996.
17
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
- --------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
Dollars in millions 1996 1996 1995
- --------------------------------------------------------------------------------
Commercial and industrial $ 30,376 $ 29,996 $ 23,251
Lease financing 2,473 2,323 2,223
Commercial real estate:
Construction 1,081 907 606
Interim/permanent 5,580 5,486 4,414
Residential real estate 8,186 8,222 11,475
Consumer 12,390 12,159 9,556
- --------------------------------------------------------------------------------
Total loans and leases $ 60,086 $ 59,093 $ 51,525
- --------------------------------------------------------------------------------
Total loans and leases increased $8.6 billion from $51.5 billion at
December 31, 1995 to $60.1 billion at September 30, 1996, primarily due to the
NatWest acquisition which added $13 billion of loans and leases. The increase
related to NatWest was partially offset by the securitization of $2.0 billion of
residential real estate loans, which have been reclassified to securities for
liquidity and collateral purposes, as well as $1.8 billion of divestitures as a
result of the Shawmut Merger. In addition, the corporation experienced the
impact of several other programs designed to reduce industry and product
concentrations as a result of both the Shawmut and NatWest transactions, as well
as portfolio runoff. Total loans and leases were up 7%, on an annualized basis,
compared to June 30, 1996, as a result of growth in the commercial and
industrial, commercial real estate, and credit card portfolios during the
quarter.
Commercial and industrial (C&I) loans increased $7.1 billion from December
31, 1995 to September 30, 1996, due primarily to the NatWest addition of $8.1
billion in C&I loans. The increase was partially offset by $450 million of
divestitures and several large paydowns during the first nine months of 1996.
The C&I portfolio increased $380 million over the prior quarter due in part to
growth in loans to companies in the technology sector. Additionally, lease
financing increased $250 million from December 31, 1995 to September 30, 1996.
Commercial real estate (CRE) loans increased $1.6 billion from December 31,
1995 to September 30, 1996, due to NatWest's contribution of $1.9 billion in
commercial real estate. The CRE portfolio increased $268 million over the prior
quarter due to loan growth in specialized real estate, including shopping
centers and real estate investment trusts.
Outstanding residential real estate loans secured by one- to four-family
residences decreased $3.3 billion to $8.2 billion at September 30, 1996,
compared to $11.5 billion at December 31, 1995. The decrease was primarily due
to $1.1 billion of divestitures and the securitization of $2.0 billion of
residential real estate loans in the first half of 1996, as well as the impact
of other programs designed to decrease the corporation's level of residential
mortgages in anticipation of the NatWest acquisition. The NatWest acquisition
contributed $650 million in residential loans.
Consumer Loans
- --------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
Dollars in millions 1996 1996 1995
- --------------------------------------------------------------------------------
Home equity $ 5,058 $ 5,108 $ 4,791
Credit card 3,191 2,815 1,588
Student loans 1,226 1,188 1,179
Installment/Other 2,915 3,048 1,998
- --------------------------------------------------------------------------------
Total $ 12,390 $ 12,159 $ 9,556
- --------------------------------------------------------------------------------
Consumer loans of $12.4 billion at September 30, 1996 increased $2.8
billion when compared to a portfolio of $9.6 billion at December 31, 1995.
Excluding the addition of NatWest, which accounted for $2.4 billion, consumer
loans increased $400 million. The increase from December 31, 1995 is principally
attributed to increased credit card loans of $1.6 billion due to the acquisition
of NatWest which contributed approximately $600 million, the purchase of a $250
million credit card portfolio, as well as continued strong growth related to
several promotions aimed at attracting new customers. In addition, home equity
loans increased $267 million to $5.1 billion at September 30, 1996 from $4.8
billion at December 31, 1995, primarily due to the acquisition of NatWest which
accounted for $757 million in home equity loans, partially offset by
divestitures in the first quarter of 1996.
18
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming Assets(a)
- --------------------------------------------------------------------------------
Dollars in millions C&I CRE Consumer Total
- --------------------------------------------------------------------------------
Nonperforming loans and
leases:
Current or less than 90
days past due $ 144 $ 115 $ 10 $ 269
Noncurrent 199 78 164 441
OREO 2 16 31 49
- --------------------------------------------------------------------------------
Total NPAs
September 30, 1996 $ 345 $ 209 $ 205 $ 759
- --------------------------------------------------------------------------------
Total NPAs
June 30, 1996 $ 399 $ 188 $ 158 $ 745
- --------------------------------------------------------------------------------
Total NPAs
December 31, 1995 $ 244 $ 112 $ 143 $ 499
- --------------------------------------------------------------------------------
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($215 million,
$221 million and $168 million at September 30, 1996, June 30, 1996, and
December 31, 1995, respectively). Included in the 90 days past due and
still accruing interest were $184 million, $182 million, and $132 million
of consumer loans at September 30, 1996, June 30, 1996, and December 31,
1995, respectively. NPAs and related ratios at September 30, 1996, June 30,
1996, and December 31, 1995 do not include $287 million, $365 million, and
$317 million, respectively, of NPAs classified as held for sale or
accelerated disposition.
Nonperforming assets (NPAs) increased $95 million from December 31, 1995 to
September 30, 1996, excluding $165 million of nonperforming assets obtained in
connection with the NatWest acquisition. NPAs at September 30, 1996, as a
percentage of total loans, leases and OREO, and as a percentage of total assets
were 1.26% and 0.87%, respectively, compared to 0.97% and 0.59%, respectively,
at December 31, 1995. These increases were primarily due to increases in the
commercial and industrial, and commercial real estate portfolios, as well as the
expiration of a portion of loans subject to federal financial assistance.
At September 30, 1996, the recorded investment in impaired loans was $539
million, substantially all of which were on nonaccrual status, compared to $538
million at June 30, 1996. Loans are considered impaired when it is probable that
the corporation will be unable to collect all amounts due according to the terms
of the loan agreement. Included in this quarter's amount is $417 million of
impaired loans for which the related impairment reserve is $144 million, and
$122 million of impaired loans that, due primarily to charge-offs, do not have
an impairment reserve. The average recorded investment in impaired loans during
the quarter was $489 million.
Activity in Nonperforming Assets
- --------------------------------------------------------------------------------
3rd 2nd 3rd
Quarter Quarter Quarter
Dollars in millions 1996 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning
of period $ 745 $ 553 $ 773
Additions 275 221 244
NatWest acquisition -- 165 --
Reductions:
Payments/interest applied (104) (98) (118)
Returned to accrual (55) (19) (12)
Charge-offs/writedowns (80) (57) (84)
Sales/other (22) (20) (32)
- --------------------------------------------------------------------------------
Total reductions (261) (194) (246)
- --------------------------------------------------------------------------------
Balance at end of period $ 759 $ 745 $ 771
- --------------------------------------------------------------------------------
NPA totals and related ratios do not include nonperforming assets
classified as held for sale or accelerated disposition. At September 30, 1996,
NPAs classified as held for sale or accelerated disposition totaled $287 million
as follows:
Nonperforming Assets Held for Sale or Accelerated Disposition(a)
- --------------------------------------------------------------------------------
Commer- Commer-
cial and cial Real
Dollars in millions Industrial Estate Consumer Total
- --------------------------------------------------------------------------------
Nonaccrual loans
and leases $ 131 $ 106 $ 38 $ 275
OREO 5 6 1 12
- --------------------------------------------------------------------------------
September 30, 1996 $ 136 $ 112 $ 39 $ 287
- --------------------------------------------------------------------------------
June 30, 1996 $ 129 $ 77 $ 159 $ 365
- --------------------------------------------------------------------------------
December 31, 1995 $ 46 $ 77 $ 194 $ 317
- --------------------------------------------------------------------------------
(a) Nonperforming assets held for sale or accelerated disposition do not
include loans greater than 90 days past due and still accruing interest
($1 million, $14 million, and $30 million at September 30, 1996, June 30,
1996, and December 31, 1995, respectively).
Nonperforming assets held for sale or accelerated disposition decreased
from $365 million at June 30, 1996 to $287 million at September 30, 1996. The
decrease of $78 million is due primarily to the sale of Fleet Finance related
loans. The commercial and industrial, and commercial real estate loans included
as nonperforming assets held for sale or accelerated disposition are primarily
loans originated by the corporation's banking franchise, while consumer loans
were predominantly loans originated by Fleet Finance, the corporation's consumer
finance subsidiary which was sold on July 31, 1996.
19
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reserve for Credit Loss Activity
- --------------------------------------------------------------------------------
Nine months ended September 30
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $ 1,321 $ 1,496
Provision charged against income 148 75
Loans and leases charged off (335) (292)
Recoveries of loans and leases charged off 89 85
Acquisitions/other 325 84
- --------------------------------------------------------------------------------
Balance at end of period $ 1,548 $ 1,448
- --------------------------------------------------------------------------------
Ratios of net charge-offs to average
loans and leases 0.60% 0.55%
- --------------------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end loans and leases 2.58 2.76
- --------------------------------------------------------------------------------
Ratio of reserve for credit losses to
period-end NPAs 204 188
- --------------------------------------------------------------------------------
Ratio of reserve for credit losses to
period-end nonperforming loans and
leases 218 210
- --------------------------------------------------------------------------------
Fleet's reserve for credit losses increased $100 million from September 30,
1995, to $1,548 million at September 30, 1996, which included $335 million of
acquired reserves related to NatWest. The third quarter 1996 provision for
credit losses was $65 million, $38 million higher than the prior year's third
quarter. The increase is due to $27 million of provision for credit losses
related to the NatWest franchise and higher provision being recorded primarily
as a result of increased net charge-offs in the credit card portfolio. Net
charge-offs were $110 million in the third quarter of 1996 compared to $71
million in the third quarter of 1995 as a result of the addition of the NatWest
franchise, coupled with increasing charge-offs in the credit card portfolio.
Fleet's credit quality ratios were relatively consistent when comparing the
first nine months of 1996 results to the same period of 1995 due to the
acquisition of NatWest, offset by the reclassification of certain nonperforming
assets to held for sale or accelerated disposition.
Funding Sources
- --------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
Dollars in millions 1996 1996 1995
- --------------------------------------------------------------------------------
Deposits:
Demand $ 17,503 $ 17,527 $ 12,305
Regular savings, NOW,
money market 28,475 28,801 22,835
Time:
Domestic 19,218 19,832 17,554
Foreign 2,355 1,985 4,428
- --------------------------------------------------------------------------------
Total deposits 67,551 68,145 57,122
- --------------------------------------------------------------------------------
Short-term borrowed funds:
Federal funds purchased 378 452 4,461
Securities sold under agree-
ments to repurchase 2,257 2,304 2,964
Commercial paper 667 1,611 2,138
Other 1,815 270 3,006
- --------------------------------------------------------------------------------
Total short-term borrowed
funds 5,117 4,637 12,569
- --------------------------------------------------------------------------------
Long-term debt 4,923 5,303 6,481
- --------------------------------------------------------------------------------
Total $ 77,591 $ 78,085 $ 76,172
- --------------------------------------------------------------------------------
Total deposits increased $10.4 billion to $67.6 billion at September 30,
1996, when compared to December 31, 1995. The increase was primarily due to the
NatWest contribution of $18 billion in total deposits, partially offset by the
reduction of $3.2 billion of higher-rate wholesale time deposits related to the
balance sheet restructuring program and $2.4 billion of deposits divested as a
condition to regulatory approval of the Shawmut merger. Deposits were divested
across all deposit categories and included approximately $300 million of demand
deposits, $1.1 billion of savings deposits, and $900 million of time deposits.
Total short-term borrowed funds decreased $7.5 billion to $5.1 billion at
September 30, 1996, when compared to December 31, 1995, primarily due to the
aforementioned balance sheet restructuring program, which replaced the
corporation's higher cost short-term borrowings with NatWest's lower cost core
deposits.
20
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET AND LIABILITY MANAGEMENT
The corporation manages its interest-rate risk sensitivity using a
combination of on and off-balance sheet instruments. Interest-rate risk is
analyzed and measured using simulation and valuation models as well as
interest-rate gap analysis. Together these tools provide a dynamic view of the
earnings sensitivity of the corporation over both relatively short-term and
long-term horizons.
Simulation analysis and interest-rate gap analysis are used to analyze the
sensitivity of corporate net interest income over a relatively short (i.e. 1-2
year) time horizon. Simulation analysis involves dynamically modeling the
corporation's interest-rate position over a specified time period under various
interest-rate scenarios and balance sheet structures. Simulation analyses are
used to examine the impact on earnings of immediate interest-rate "shocks,"
gradual interest-rate "ramps," yield curve "twists," as well as numerous other
forecasted interest rate scenarios. Each scenario incorporates what management
believes to be the most reasonable assumptions about such variables as volumes,
prepayment rates for mortgage assets, and repricing characteristics of
noncontractual deposits.
The corporation's limits on interest-rate risk specify that if interest
rates were to shift immediately up or down 200 basis points, estimated net
interest income for the next 12 months should decline by less than 7.5%.
Assuming an immediate 200 basis point decline in interest rates as of September
30, 1996, the estimated exposure to the corporation's net interest income was
3.2%.
Valuation analysis is also used to analyze the sensitivity of corporate net
interest and noninterest income. Valuation analysis involves projecting future
cash flows from the corporation's assets, liabilities, and off-balance sheet
positions and then discounting such cash flows at appropriate interest rates.
The corporation's economic value of equity is the estimated net present value of
its assets, liabilities, and off-balance sheet positions. The interest-rate
sensitivity of economic value of equity is a measure of the sensitivity of
long-term earnings. The corporation's limits on interest-rate risk specify that
if interest-rates were to shift immediately up or down 200 basis points, the
estimated economic value of equity should decline by less than 10%. Assuming an
immediate 200 basis point decline in interest rates as of September 30, 1996,
the estimated exposure to the economic value of equity was 6.3%.
Interest-rate gap analysis provides a static view of the maturity and
repricing characteristics of the on and off-balance sheet positions. The
interest-rate gap is prepared by scheduling all assets, liabilities, and
off-balance sheet positions according to scheduled repricing or maturity.
The following table represents the corporation's interest-rate gap position
on September 30, 1996.
<TABLE>
<CAPTION>
Interest-Rate Gap Analysis
- --------------------------------------------------------------------------------------------------------------------
Repriced Within
- --------------------------------------------------------------------------------------------------------------------
September 30, 1996 3 months 4 to 12 12 to 24 2 to 5 After 5
Dollars in millions by repricing date or less months months years years Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $ 48,337 $ 9,252 $ 6,287 $ 10,923 $ 12,393 $ 87,192
Total Liabilities and Stockholders'
Equity 33,705 15,472 9,028 8,029 20,958 87,192
Net Off Balance Sheet (7,209) 2,428 1,335 2,831 615
- --------------------------------------------------------------------------------------------------------------------
Periodic Gap 7,423 (3,792) (1,406) 5,725 (7,950) --
Cumulative Gap 7,423 3,631 2,225 7,950 -- --
Cumulative Gap as a percent of Total
Assets 8.5% 4.2% 2.6% 9.1%
- --------------------------------------------------------------------------------------------------------------------
Cumulative Gap as a percent of Total
Assets at June 30, 1996 3.7% 0.6% (1.8)% 8.3%
- --------------------------------------------------------------------------------------------------------------------
Cumulative Gap as a percent of Total
Assets at December 31, 1995 2.4% 2.1% 1.4% 9.6%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The corporation's limits on interest-rate risk specify that the cumulative
one-year gap should be less than 10% of total assets. As of September 30, 1996,
the estimated exposure was 4.2%.
The most significant factors affecting the interest-rate risk position in
the third quarter were the sale of Fleet Finance and the aging of the
interest-rate swap portfolio. In its management of these and other factors
influencing the current environment, the corporation has attempted to maintain a
moderately asset sensitive position.
Derivative instruments totaling $15.5 billion (notional amount) at
September 30, 1996 are being used for interest-rate risk-management purposes.
These derivative instruments consist primarily of interest-rate swaps, which
total approximately $14.2 billion.
<TABLE>
<CAPTION>
Interest-Rate Risk-Management Instrument Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted
Assets/ Average Weighted Average
September 30, 1996 Notional Liabilities Maturity Fair Rate
Dollars in millions Value Hedged (Years) Value Receive Pay
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-rate risk management swaps:
Receive fixed/pay variable $4,705 Variable rate loans
2,402 Fixed rate deposits
914 Long-term debt
----------
8,021 2.5 $(43.9) 6.70 % 6.21 %
- ------------------------------------------------------------------------------------------------------------------------------------
Pay fixed/receive variable 1,439 Short-term 2.0 (15.9) 5.55 6.57
borrowings
- ------------------------------------------------------------------------------------------------------------------------------------
Basis swaps 2,735 Fixed rate deposits
1,064 Securities
180 Long-term debt
----------
3,979 2.1 (3.9) 5.62 5.58
- ------------------------------------------------------------------------------------------------------------------------------------
Index-amortizing swaps receive fixed/pay 766 Variable rate loans 1.0 (0.7) 5.20 5.76
variable
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-rate swaps $ 14,205 2.1 (64.4) 6.20. % 6.05 %
- ------------------------------------------------------------------------------------------------------------------------------------
$ 598 Fixed rate deposits
662 Short-term borrowings
----------
Total other instruments(a) 1,260 .7 8.3 --- (b) --- (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-rate instruments $15,465 2.0 $(56.1) 6.20 % 6.05 %
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Other instruments include interest-rate caps and floors.
(b) Average rates are not meaningful for interest-rate caps and floors.
In addition to interest-rate swap agreements, the corporation utilizes
interest-rate cap and floor agreements to manage interest-rate risk.
Interest-rate cap and floor agreements are similar to interest-rate swap
agreements except that interest payments are only made or received if current
interest-rates rise above/below a predetermined interest-rate. At September 30,
1996, the corporation had approximately $1.3 billion in notional amounts of
purchased interest-rate cap and floor agreements.
The periodic net settlement of interest-rate risk-management instruments is
recorded as an adjustment to net interest income. As of September 30, 1996, the
corporation has net deferred income of $32.2 million relating to terminated
interest-rate contracts, which will be amortized over the remaining life of the
underlying interest-rate contracts of approximately three years.
The interest-rate risk-management instrument activity for the three months
ended September 30, 1996 is summarized in the following table (all amounts are
notional amounts):
22
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Interest-Rate Risk-Management Instrument Activity
- ------------------------------------------------------------------------------------------------------------------
Interest-Rate Swaps
------------------------------------------------
Receive- Pay- Index- Other
Dollars in millions Fixed Fixed Basis Amortizing Instruments Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 8,221 $ 1,535 $ 4,179 $ 1,137 $ 1,448 $ 16,520
Additions -- 4 -- -- -- 4
Maturities (200) (100) (200) (371) (188) (1,059)
Terminations -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 8,021 $ 1,439 $ 3,979 $ 766 $ 1,260 $ 15,465
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
During the third quarter of 1996, there was a net decrease of approximately
$1.1 billion of interest-rate risk-management instruments as maturities were not
replaced, which effectively assisted in increasing the corporation's asset
sensitive position.
The maturities of the interest-rate risk-management instruments are
shown in the following table:
<TABLE>
<CAPTION>
Maturities of the Interest-Rate Risk-Management Instruments
- ------------------------------------------------------------------------------------------------------------------------
September 30, 1996 Within 1 to 2 2 to 3 3 to 4 4 to 5 After 5
Dollars in millions 1 Year Years Years Years Years Years Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Notional amounts:
Interest-rate swaps
Receive-fixed $ 2,390 $ 1,735 $ 2,125 $ 871 $ 285 $ 615 $ 8,021
Pay-fixed 515 250 329 325 -- 20 1,439
Basis 150 1,094 2,735 -- -- -- 3,979
Index-amortizing 566 -- 200 -- -- -- 766
- ------------------------------------------------------------------------------------------------------------------------
Total interest-rate swaps $ 3,621 $ 3,079 $ 5,389 $ 1,196 $ 285 $ 635 $ 14,205
- ------------------------------------------------------------------------------------------------------------------------
Other interest-rate instruments 1,072 -- 150 -- 4 34 1,260
- ------------------------------------------------------------------------------------------------------------------------
Total interest-rate instruments $ 4,693 $ 3,079 $ 5,539 $ 1,196 $ 289 $ 669 $ 15,465
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mortgage Servicing Rights Prepayment Risk-Management. The corporation also
uses interest-rate contracts to manage the prepayment risk associated with the
corporation's mortgage servicing portfolio. The value of the corporation's
mortgage servicing portfolio may be adversely impacted if mortgage
interest-rates decline and actual or estimated loan prepayments increase. As a
result, the carrying value of the corporation's mortgage servicing rights are
subject to a great degree of volatility in the event of unanticipated
prepayments or defaults. To attempt to mitigate the risk related to adverse
changes in interest-rates and the potential resultant impairment to MSRs, the
corporation holds interest-rate contracts (primarily purchased interest-rate
floor contracts). Such contracts are designated as hedges, and changes in the
value, net of amortization, are recorded as adjustments to the carrying value of
mortgage servicing rights. At September 30, 1996, declines in the value of such
contracts aggregating $45 million had been recorded as adjustments to the
carrying value of the mortgage servicing rights. The decline in value of such
contracts are deferred and amortized over the remaining life of the contracts.
At September 30, 1996, the carrying value and fair value of the corporation's
mortgage servicing rights were $1.5 billion and $1.9 billion, respectively.
Amounts paid for interest-rate contracts are amortized over the life of the
contracts and are included as a component of mortgage servicing rights
amortization.
23
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mortgage Servicing Rights Prepayment Risk-Management Instruments
- --------------------------------------------------------------------------------
Interest- Interest-
September 30, 1996 Rate Rate Call
Dollars in millions Floors Caps Options Total
- --------------------------------------------------------------------------------
Balance at
June 30, 1996 $ 8,320 $ 200 $ 450 $ 8,970
Additions 3,050 -- 1,348 4,398
Maturities -- -- -- --
Terminations -- -- (895) (895)
- --------------------------------------------------------------------------------
Balance at Sept. 30, 1996 $ 11,370 $ 200 $ 903 $ 12,473
- --------------------------------------------------------------------------------
Fair value $ 27.4 $ (1.1) $ 1.3 $ 27.6
- --------------------------------------------------------------------------------
Average maturity
(years) 3.8 3.8 0.25 3.6
- --------------------------------------------------------------------------------
The above instruments are used in an effort to protect the economic value
of the corporation's mortgage servicing rights. Interest-rate caps and floors
have strike prices that are indexed to the 3, 5, and 10-year constant maturity
treasury rate. Call options consist of purchased and written call option
contracts on long-term US Treasury securities. The following table presents the
maturity of the mortgage servicing rights prepayment risk-management
instruments.
Maturities of the Mortgage Servicing Rights
Prepayment Risk-Management Instruments
- --------------------------------------------------------------------------------
September 30, 1996 Within 3 to 4 4 to 5
Dollars in millions 1 Year Years Years Total
- --------------------------------------------------------------------------------
Interest-rate floors $ -- $ 5,125 $ 6,245 $ 11,370
Interest-rate caps -- 200 -- 200
Call options 903 -- -- 903
- --------------------------------------------------------------------------------
Total $ 903 $ 5,325 $ 6,245 $ 12,473
- --------------------------------------------------------------------------------
LIQUIDITY
The primary sources of liquidity at the parent level are interest and
dividends from subsidiaries and access to the capital and money markets. The
corporation's subsidiaries rely on cash flows from operations, core deposits,
borrowings, short-term high-quality liquid assets, and in the case of nonbanking
subsidiaries, funds from the parent for liquidity. During the first nine months
of 1996, the parent received $2.5 billion in interest and dividends from
subsidiaries and paid $596 million in interest and dividends to third parties.
The $1.9 billion difference between interest and dividends received from
subsidiaries over interest and dividends paid to third parties is primarily the
result of the subsidiaries paying cash dividends or returning capital to the
parent company in order to assist in the funding of the NatWest acquisition.
Dividends paid by the corporation's banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and historical earnings.
As shown in the consolidated statement of cash flows, cash and cash
equivalents increased by $1.8 billion during the nine month period ended
September 30, 1996. This increase was due to cash provided by investing
activities of $17.0 billion and cash provided by operating activities of $2.9
billion, offset by cash used in financing activities of $18.0 billion. Net cash
provided by investing activities was attributable to a net decrease in
securities, primarily due to balance sheet restructuring, a net decrease in
loans, and $1.3 billion received from the assets sold at Fleet Finance. Net cash
provided by operating activities was attributable to net income of $836 million
and net proceeds provided from sales of mortgages held for resale of $1.3
billion. Net cash used in financing activities was due to a decrease in deposits
of $8.0 billion relating primarily to the balance sheet restructuring and
divestitures, and a net paydown of $10.2 billion in short-term borrowings and
long-term debt relating primarily to the balance sheet restructuring, offset by
the issuance of $650 million in preferred stock, of which $600 million relates
to the funding of the NatWest acquisition. During the second quarter FMG became
a subsidiary of a Fleet bank affiliate, and as a result substantially all future
funding of FMG will be provided by such bank. FMG's existing shelf registration
was canceled, the revolving credit agreement was paid off and canceled, and all
other debt is expected to be paid as it matures.
At September 30, 1996 and December 31, 1995, the corporation had commercial
paper outstanding of $667 million and $2.1 billion, respectively. The
corporation has backup lines of credit to ensure that funding is not interrupted
if commercial paper is not available. The total amount of funds available under
these agreements was $1.0 billion at September 30, 1996, with no outstanding
balance under these lines of credit.
Fleet has a universal shelf registration that provides for the issuance of
common and preferred stock, senior or subordinated debt securities, and other
securities with total amount of funds available of approximately $863.4 million
at September 30, 1996.
24
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL
- --------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
Dollars in millions 1996 1996 1995
- --------------------------------------------------------------------------------
Risk-adjusted assets $ 80,036 $ 80,389 $ 69,384
Tier 1 risk-based capital
(4% minimum) 7.06% 6.85% 7.62%
Total risk-based capital
(8% minimum) 10.82 10.60 11.29
Leverage ratio 6.63 6.59 6.41
Common equity-to-
assets 7.19 6.98 7.07
Total equity-to-assets 8.34 8.12 7.54
Tangible equity-to-assets 6.48 6.22 6.30
Capital in excess of
minimum requirements:
Tier 1 risk-based $ 2,450 $ 2,287 $ 2,507
Total risk-based 2,260 2,088 2,280
Leverage 2,243 2,163 1,983
- --------------------------------------------------------------------------------
At September 30, 1996, the corporation exceeded all regulatory required
minimum capital ratios as Fleet's preliminary Tier 1 and Total risk based
capital ratios were 7.06 percent and 10.82 percent, respectively, compared with
6.85 percent and 10.60 percent, respectively, at June 30, 1996. The leverage
ratio, a measure of Tier 1 capital to average quarterly assets, was 6.63 percent
at September 30, 1996, compared with 6.59 percent at June 30, 1996. The
corporation's ratios increased compared to June 30, 1996 as a result of an
increase in retained earnings and a reduction in risk-adjusted assets.
RECENT ACCOUNTING DEVELOPMENTS
In October, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method of
accounting for employee stock options and similar equity instruments. This
statement also permits companies to continue to measure compensation costs for
these plans using the current accounting method which is intrinsic value based.
Companies that elect to continue to use the intrinsic value method must provide
pro forma disclosure of net income and earnings per share as if the fair value
method of accounting had been applied. This standard is effective for the year
ended December 31, 1996. The corporation continues to use the intrinsic value
based method of accounting and will provide the additional disclosure on the pro
forma impact of the fair value based method under SFAS No. 123 in the 1996
annual report for awards granted in both 1995 and 1996.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which will be effective
for transactions occurring after December 31, 1996. This Statement requires
that, after a transfer of financial assets, an entity recognize the financial
and servicing assets it controls and the liabilities it has incurred, and
derecognize financial assets when control has been surrendered. The transferor
has surrendered control over financial assets only if such assets have been
isolated from the transferor, the transferee obtains the right to pledge or
exchange the transferred assets, and any agreement to repurchase the transferred
assets can be satisfied by delivery of assets that are readily obtainable.
Liabilities and derivatives incurred or obtained in exchange for transferred
assets are initially measured at fair value. Servicing assets and other retained
interests in the transferred assets are measured by allocating the carrying
amount between the assets and the retained interests based on their relative
fair values. It is management's belief that the adoption of this Statement will
not have a material impact on the corporation or its results of operations.
25
<PAGE>
PART II. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit
Number
- ------------
11 Statement re-computation of per share earnings
12 Statement re-computation of ratios
27 Financial data schedule
*Registrant has no instruments defining the rights of holders of equity or debt
securities where the amount of securities authorized thereunder exceeds 10% of
the total assets of the registrant and its subsidiaries on a consolidated basis.
Registrant hereby agrees to furnish a copy of any such instrument to the
Commission upon request.
(b) The following Form 8-K's and Form 8-K/A's were filed during the period from
July 1, 1996 to the date of this report.
- Current Report on Form 8-K dated July 17, 1996 announcing second
quarter earnings.
- Amendment to Current Report on Form 8-K/A dated August 5, 1996,
amending the Current Report on Form 8-K dated May 15, 1996, filing the
Unaudited Pro Forma Combined Financial Statements and NatWest
historical financial statements, both as of March 31, 1996, and notes
thereto, in connection with the NatWest Merger.
- Current Report on Form 8-K dated August 15, 1996, filing the Unaudited
Pro Forma Combined Financial Statements as of June 30, 1996, and notes
thereto, in connection with the NatWest Merger.
- Current Report on Form 8-K dated August 23, 1996, reporting the
decision of the United States District Court for the District of
Connecticut that the Comptroller of the Currency exceeded its
authority in approving the April merger of five of Fleet's national
banking subsidiaries in Connecticut, Massachusetts and Rhode Island.
- Current Report on Form 8-K dated September 27, 1996, reporting the
issuance and sale of 1,000,000 Depositary Shares, each representing a
one-fifth interest in a share of Series VIII Fixed/Adjustable Rate
Non-cumulative Preferred stock at a purchase price of $50 per
Depositary Share.
- Current Report on Form 8-K dated October 16, 1996, announcing third
quarter earnings.
26
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fleet Financial Group, Inc.
---------------------------
(Registrant)
/s/ Eugene M. McQuade
------------------------
Eugene M. McQuade
Executive Vice President
Chief Financial Officer
/s/ Robert C. Lamb, Jr.
------------------------
Robert C. Lamb, Jr.
Chief Accounting Officer
Controller
Date: November 13, 1996
27
EXHIBIT 11
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
($ in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended September 30
------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 262,603,407 262,603,407 247,323,989 247,323,989
Additional shares due to:
Stock options 1,946,598 2,287,079 1,684,360 1,909,212
Warrants 3,799,826 3,921,910 3,844,396 4,011,586
Dual convertible preferred stock(a) -- -- 16,033,994 16,033,994
------------ ------------ ------------ ------------
Total equivalent shares 268,349,831 268,812,396 268,886,739 269,278,781
============ ============ ============ ============
Earnings per share:
Net income $ 294,942 $ 294,942 $ 268,020 $ 268,020
Less: Preferred stock dividends (18,977) (18,977) (9,244) (9,244)
Premium paid on redemption of Series
III preferred stock (2,630) (2,630) -- --
------------ ------------ ------------ ------------
Adjusted net income $ 273,335 $ 273,335 $ 258,776 $ 258,776
============ ============ ============ ============
Total equivalent shares 268,349,831 268,812,396 268,886,739 269,278,781
============ ============ ============ ============
Earnings per share on adjusted net
income $ 1.02 $ 1.02 $ .96 $ .96
============ ============ ============ ============
</TABLE>
(a) The dual convertible preferred stock was converted into common stock on
December 31, 1995.
28
<PAGE>
EXHIBIT 11
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
($ in thousands, except per share data)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 262,767,969 262,767,969 245,618,362 245,618,362
Additional shares due to:
Stock options 2,118,316 2,569,999 1,708,533 1,980,270
Warrants 3,769,752 3,921,910 3,692,856 4,011,496
Dual convertible preferred stock(a) -- -- 16,033,994 16,033,994
------------ ------------ ------------ ------------
Total equivalent shares 268,656,037 269,259,878 267,053,745 267,644,122
============ ============ ============ ============
Earnings per share:
Net income $ 836,471 $ 836,471 $ 748,036 $ 748,036
Less: Preferred stock dividends (50,829) (50,829) (27,374) (27,374)
Premium paid on redemption of Series
III preferred stock (2,630) (2,630) -- --
------------ ------------ ------------ ------------
Adjusted net income $ 783,012 $ 783,012 $ 720,662 $ 720,662
============ ============ ============ ============
Total equivalent shares 268,656,037 269,259,878 267,053,745 267,644,122
============ ============ ============ ============
Earnings per share on adjusted net
income $ 2.91 $ 2.91 $ 2.70 $ 2.69
============ ============ ============ ============
</TABLE>
(a) The dual convertible preferred stock was converted into common stock on
December 31, 1995.
29
EXHIBIT 12
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS EXCLUDING INTEREST ON DEPOSITS
(millions)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30 September 30 Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes, extra-
ordinary credit and cumulative effect of
change in method of accounting $ 503 $ 1,423 $ 1,034 $ 1,380 $ 1,094 $ 617 $ (16)
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 148 551 1,279 990 752 639 728
(2) 1/3 of Rent 13 39 50 51 52 49 43
(b) Preferred dividends 32 87 62 49 60 66 24
- --------------------------------------------------------------------------------------------------------------------------------
(c) Adjusted earnings $ 696 $ 2,100 $ 2,425 $ 2,470 $ 1,958 $ 1,371 $ 779
================================================================================================================================
Fixed charges and preferred dividends $ 193 $ 677 $ 1,391 $ 1,090 $ 864 $ 754 $ 795
================================================================================================================================
Adjusted earnings/fixed charges 3.60x 3.10x 1.74x 2.27x 2.27x 1.82x 0.98x*
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INCLUDING INTEREST ON DEPOSITS
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30 September 30 Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes, extra-
ordinary credit and cumulative effect of
change in method of accounting $ 503 $ 1,423 $ 1,034 $ 1,380 $ 1,094 $ 617 $ (16)
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 148 551 1,279 990 752 639 728
(2) 1/3 of Rent 13 39 50 51 52 49 43
(3) Interest on deposits 467 1,299 1,726 1,171 1,165 1,699 2,414
(b) Preferred dividends 32 87 62 49 60 66 24
- --------------------------------------------------------------------------------------------------------------------------------
(c) Adjusted earnings $ 1,163 $ 3,399 $ 4,151 $ 3,641 $ 3,123 $ 3,070 $ 3,193
- --------------------------------------------------------------------------------------------------------------------------------
Fixed charges and preferred dividends $ 660 $ 1,976 $ 3,117 $ 2,261 $ 2,029 $ 2,453 $ 3,209
================================================================================================================================
Adjusted earnings/fixed charges 1.76x 1.72x 1.33x 1.61x 1.54x 1.25x 0.99x*
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Note that adjusted earnings are inadequate to cover fixed charges, the
deficiency being $16,375 for both the ratio excluding and including
interest on deposits.
30
<PAGE>
EXHIBIT 12
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
EXCLUDING INTEREST ON DEPOSITS
(millions)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30 September 30 Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes, extra-
ordinary credit and cumulative effect of
change In method of accounting $ 503 $ 1,423 $ 1,034 $ 1,380 $ 1,094 $ 617 $ (16)
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 148 551 1,279 990 752 639 728
(2) 1/3 of Rent 13 39 50 51 52 49 43
- --------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted earnings $ 664 $ 2,013 $ 2,363 $ 2,421 $ 1,898 $ 1,305 $ 755
================================================================================================================================
Fixed charges $ 161 $ 590 $ 1,329 $ 1,041 $ 804 $ 688 $ 771
================================================================================================================================
Adjusted earnings/fixed charges 4.12x 3.41x 1.78x 2.33x 2.36x 1.90x 0.98x*
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INCLUDING INTEREST ON DEPOSITS
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30 September 30 Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes, extra-
ordinary credit and cumulative effect of
change in method of accounting $ 503 $ 1,423 $ 1,034 $ 1,380 $ 1,094 $ 617 $ (16)
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 148 551 1,279 990 752 639 728
(2) 1/3 of Rent 13 39 50 51 52 49 43
(3) Interest on deposits 467 1,299 1,726 1,171 1,165 1,699 2,414
- --------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted earnings $ 1,131 $ 3,312 $ 4,089 $ 3,592 $ 3,063 $ 3,004 $ 3,169
- --------------------------------------------------------------------------------------------------------------------------------
Fixed charges $ 628 $ 1,889 $ 3,055 $ 2,212 $ 1,969 $ 2,387 $ 3,185
================================================================================================================================
Adjusted earnings/fixed charges 1.80x 1.75x 1.34x 1.62x 1.56x 1.26x 0.99x*
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Note that adjusted earnings are inadequate to cover fixed charges, the
deficiency being $16,375 for both the ratio excluding and including
interest on deposits.
31
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1996 consolidated financial statements and management's discussion
and analysis of financial condition and results of operations contained in the
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,332
<INT-BEARING-DEPOSITS> 35
<FED-FUNDS-SOLD> 32
<TRADING-ASSETS> 74
<INVESTMENTS-HELD-FOR-SALE> 10,456
<INVESTMENTS-CARRYING> 1,277
<INVESTMENTS-MARKET> 1,269
<LOANS> 60,086
<ALLOWANCE> 1,548
<TOTAL-ASSETS> 87,192
<DEPOSITS> 67,551
<SHORT-TERM> 5,117
<LIABILITIES-OTHER> 2,333
<LONG-TERM> 4,923
0
1,001
<COMMON> 3,145
<OTHER-SE> 3,122
<TOTAL-LIABILITIES-AND-EQUITY> 7,268
<INTEREST-LOAN> 3,776
<INTEREST-INVEST> 577
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,353
<INTEREST-DEPOSIT> 1,299
<INTEREST-EXPENSE> 1,850
<INTEREST-INCOME-NET> 2,503
<LOAN-LOSSES> 148
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 2,556
<INCOME-PRETAX> 1,423
<INCOME-PRE-EXTRAORDINARY> 836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 836
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.91
<YIELD-ACTUAL> 4.75
<LOANS-NON> 710
<LOANS-PAST> 215
<LOANS-TROUBLED> 39
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,321
<CHARGE-OFFS> 335
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 1,548
<ALLOWANCE-DOMESTIC> 1,548
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
