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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 19, 1996
FLEET FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
RHODE ISLAND
(State or other jurisdiction of incorporation)
1-6366 05-0341324
(Commission File Number) (IRS Employer Identification No.)
One Federal Street, Boston, Massachusetts 02211
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 617-292-2000
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<PAGE>
Item 5. Other Events
------------
On November 30, 1995, Fleet Financial Group, Inc.
("Fleet") consummated the merger of Shawmut National
Corporation ("Shawmut") with and into Fleet. Each Shawmut
stockholder received, for each share of Shawmut common stock
("Shawmut Common Stock") held by such stockholder, except for
shares held by dissenting shareholders or shares held by Fleet or
its subsidiaries or by Shawmut or its subsidiaries (other
than in both cases shares held in a fiduciary capacity or as
a result of debts previously contracted), 0.8922 shares of
the Common Stock, $0.01 par value (including the associated
preferred share purchase rights), of Fleet ("Fleet Common
Stock").
The Merger was accounted for as a pooling of
interests, Fleet hereby files supplemental financial
statements for the years ended December 31, 1994, 1993, and
1992 and for the interim periods ended September 30, 1995
and 1994.
Item 7. Financial Statements and Exhibits
---------------------------------
(a) Not applicable
<PAGE>
(b) Not applicable
(c) Exhibits
The following exhibits are filed as part of this report:
23 Consent of KPMG Peat Marwick LLP
<PAGE>
99(a) Management's Discussion and Analysis; Supplemental
Financial Information; Supplemental Consolidated Balance Sheets
of Fleet as of December 31, 1994 and 1993; Supplemental
Consolidated Statements of Income of Fleet for the years
ended December 31, 1994, 1993, and 1992, Supplemental Consolidated
Statements of Changes in Stockholders' Equity and
Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993, and 1992.
99(b) Management's Discussion and Analysis; Supplemental Consolidated
Balance Sheets of Fleet as of September 30, 1995 and December 31, 1994;
Supplemental Consolidated Statements of Income of Fleet for
the three and nine-month periods ended September 30, 1995 and 1994;
Supplemental Consolidated Statements of Changes in Stockholders' Equity,
and Supplemental Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 1995 and 1994(unaudited).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, as amended, Fleet has duly caused this report
to be signed in its behalf by the undersigned hereunto duly
authorized.
FLEET FINANCIAL GROUP, INC.
By /s/ Robert C. Lamb, Jr.
---------------------------
/s/ Robert C. Lamb, Jr.
Chief Accounting Officer and
Controller
Date: January 19, 1996
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
------------------------------
The Board of Directors
Fleet Financial Group, Inc.
We consent to incorporation by reference in the Registation Statements
(Nos. 33-19425, 33-22045, 33-48818, 33-56061, 33-57501, 33-57677,
33-62367, 33-58933, 33-64635 and 33-59139) on Form S-8, the Registration
Statements (Nos. 33-36707, 33-55555, 33-63631 and 33-58933) on Form
S-3, and the Registration Statements (Nos. 33-55579, 33-58573 and
33-58933) on Form S-4 of Fleet Financial Group, Inc. of our report dated
November 30, 1995, except for Note 20, as to which the date is
December 31, 1995, relating to the supplemental consolidated balance sheets
of Fleet Financial Group, Inc. as of December 31, 1994 and 1993 and the
related supplemental consolidated statements of income, changes in stockholders'
equity and cash flows, for each of the years in the three-year period ended
December 31, 1994, which report appears in the Current Report on Form 8-K of
Fleet Financial Group, Inc. dated January 19, 1996. Our report refers to a
change in the method of accounting for investments in debt and equity securities
and income taxes.
/s/KPMG Peat Marwick LLP
________________________________
Providence, Rhode Island
January 19, 1996
Item 7. FINANCIAL STATEMENTS
--------------------
Exhibit 99(a) Management's Discussion and Analysis; Supplemental Financial
Information; Supplemental Consolidated Balance Sheets of
Fleet as of December 31, 1994 and 1993;
Supplemental Consolidated Statements of Income
of Fleet for the years ended December 31, 1994, 1993,
and 1992; Supplemental Consolidated Statements
of Changes in Stockholders' Equity and Supplemental
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992.
<PAGE>
<TABLE><CAPTION>
SELECTED SUPPLEMENTAL FINANCIAL HIGHLIGHTS(A)
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December 31
Dollars in millions, except per share data 1994 1993 1992 1991 1990
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<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Interest income $ 5,260 $ 5,086 $ 5,318 $ 5,425 $ 5,888
Interest expense 2,161 1,917 2,337 3,142 3,783
Net interest income 3,099 3,169 2,981 2,283 2,105
Provision for credit losses 65 327 728 995 1,236
Securities gains (losses) (1) 295 301 253 (14)
Noninterest income 1,555 1,883 1,897 1,627 1,208
Noninterest expense 3,145 3,579 3,479 2,864 2,262
Net income (loss)(b) 849 764 348 (76) (230)
PER COMMON SHARE
Earnings (loss) (b) $ 3.09 $ 2.82 $ 1.33 $ (0.44) $ (1.28)
Market value (year-end) 32.38 33.38 32.75 24.88 11.00
Cash dividends declared 1.40 1.025 0.825 0.80 1.25
Book value (year-end) 20.68 21.76 17.65 16.81 17.60
AT YEAR-END
Assets $81,026 $79,250 $76,188 $72,323 $58,339
Securities 21,141 24,839 19,936 16,505 10,145
Loans and leases 46,035 43,713 43,722 43,700 37,297
Reserve for credit losses 1,496 1,669 1,937 2,065 1,671
Deposits 55,528 49,827 52,729 55,489 44,443
Short-term borrowings 12,586 16,376 11,446 7,516 5,907
Long-term debt 5,931 5,217 5,007 3,917 3,743
Total stockholders' equity 5,471 5,965 4,735 3,779 3,424
RATIOS
Return on average common equity (b) 15.66 % 15.94 % 8.62 % (2.73) % (6.65) %
Return on average assets (b) 1.07 1.01 0.49 (0.12) (0.37)
Common dividend payout ratio 33.80 23.50 28.69 N/A N/A
Net interest margin 4.30 4.63 4.57 3.85 3.70
Efficiency ratio 63.8 68.8 70.6 72.4 68.2
Common stockholders' equity-to-assets
(year-end) 6.06 6.65 5.15 4.69 5.59
Average total stockholders' equity-to-assets 7.27 7.05 6.14 5.52 6.08
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</TABLE>
(a) This schedule is prepared on a fully taxable equivalent (FTE) basis.
(b) Excludes impact of extraordinary credit of $18 million in 1992 and
cumulative effect of change in accounting method of $53 million
in 1993.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Fleet Financial Group (Fleet or the corporation) reported record net income
for 1994 of $849 million, or $3.09 per share compared to the $764 million or
$2.82 per share reported in 1993 which was before a cumulative effect of a
change in method of accounting. Return on assets (ROA) and return on equity
(ROE) were 1.07% and 15.66% for 1994 compared to 1.01% and 15.94% for 1993.
Net interest income on a fully taxable equivalent (FTE) basis totaled $3.1
billion for 1994, compared to $3.2 billion in 1993. The net interest margin for
1994 was 4.30% compared to 4.63% in 1993. The decrease of 33 basis points was
due principally to the rise in interest rates during 1994 as the increased cost
of funding sources outpaced the increase in yield on earning assets. The impact
of the narrower margin in 1994 was substantially offset by growth in the
corporation's average earning assets from $68.5 billion in 1993 to $72.0 billion
in 1994.
The provision for credit losses was $65 million in 1994 compared to $327
million in 1993, with the decline due to continued improvements in asset quality
and significant reductions in net charge-offs. Net charge-offs decreased $346
million and nonperforming assets (NPAs) decreased $277 million to $761 million.
Noninterest income, excluding securities gains (losses), totaled $1.56
billion during 1994 compared to $1.59 billion in 1993. Noninterest income was
adversely affected by a decrease in mortgage banking revenues resulting from the
negative impact of increasing interest rates on mortgage originations.
Noninterest expense, excluding $185 million of merger and restructuring
related charges, totaled $3.0 billion for the year ended December 31, 1994.
Excluding the $161 million of merger and restructuring related charges and the
$90 million charge related to accelerated amortization of mortgage servicing
assets in 1993, noninterest expense was reduced by $368 million, or 11%.
Significant reductions were noted in employee compensation and several other
expense categories. These reductions are attributable to the successful
implementation of strategies developed as part of the corporation's efficiency
improvement programs.
Total loans of $46.0 billion at December 31, 1994, represented an increase of
approximately $2.3 billion, or 5%, compared to $43.7 billion at December 31,
1993.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
- ------------------------------------ ---------- ---------
Year ended December 31
Dollars in millions
FTE basis 1994 1993 1992
- -------------------------- --------- ---------- ---------
Interest income $5,208 $5,040 $5,273
Tax-equivalent adjustment
52 46 45
Interest expense 2,161 1,917 2,337
- -------------------------- --------- ---------- ---------
Net interest income $3,099 $3,169 $2,981
- -------------------------- --------- ---------- ---------
Net interest income on an FTE basis for the year ended December 31, 1994,
decreased $70 million compared to 1993, due primarily to a reduction in net
interest margin. However, the negative impact of the reduction in net interest
margin was substantially offset by growth in the corporation's average earning
assets from $68.5 billion in 1993 to $72.0 billion in 1994.
NET INTEREST MARGIN AND INTEREST-RATE SPREAD
- ------------------------- --------- ------- ---------- -------
December 31 1994 1993
- ------------------------- --------- ------- ---------- -------
Taxable-equivalent rates Average Average
Dollars in millions Balance Rate Balance Rate
- ------------------------- --------- ------- ---------- -------
Money market
instruments $ 588 4.99% $ 617 3.07%
Securities 25,710 5.92 21,875 6.55
Loans and leases 44,102 8.17 43,283 7.99
Mortgages held for 1,322 6.90 2,384 7.10
resale
Other 265 --- 325 ---
- ------------------------- --------- ------- ---------- -------
Total interest-earning
assets 71,987 7.29 68,484 7.43
- ------------------------- --------- ------- ---------- -------
Deposits 40,113 2.92 39,766 2.93
Short-term borrowings 15,355 4.07 12,807 3.03
Long-term debt 5,383 6.76 5,039 7.20
- ------------------------- --------- ------- ---------- -------
Interest-bearing 60,851 3.55 57,612 3.33
liabilities
- ------------------------- --------- ------- ---------- -------
Interest-rate spread 3.74 4.10
Interest-free sources
of funds 11,136 10,872
- ------------------------- --------- ------- ---------- -------
Total sources of funds $71,987 2.99% $68,484 2.80%
- ------------------------- --------- ------- ---------- -------
Net interest margin 4.30% 4.63%
- ------------------------- --------- ------- ---------- -------
The net interest margin for 1994 decreased 33 basis points to 4.30% compared
to 4.63% for 1993, primarily due to the impact of 1994's rising interest-rate
environment on borrowed funds and narrowing spreads between interest earning
assets and interest bearing liabilities.
<PAGE>
Average securities increased $3.8 billion in 1994; however, on a period-end
basis, total securities decreased almost $3.7 billion. This decrease, comprised
of primarily U.S. Treasury securities, resulted from the corporation's
repositioning program aimed at reducing the corporation's exposure to rising
interest rates.
Average loans increased from $43.3 billion at December 31, 1993, to $44.1
billion at December 31, 1994. This $819 million increase reflects growth in
commercial and consumer loan originations, partially offset by the sale of the
corporation's factoring business and the loan discount recorded as part of the
release of the Federal Deposit Insurance Corp. (FDIC) from its federal financial
assistance agreements on certain loans purchased by Fleet.
The average balance of mortgages held for resale decreased approximately $1.1
billion as a result of a less favorable interest-rate environment and the
resultant negative impact on mortgage loan production.
Average deposits increased to $40.1 billion at December 31, 1994, from $39.8
billion a year ago due to increased wholesale funding. The net interest rate
paid on average deposits of 2.92% in 1994 remained relatively unchanged from the
2.93% in 1993. However, deposit costs rose in the latter part of 1994 and that
trend is expected to continue in 1995.
Average short-term borrowings increased $2.5 billion from $12.8 billion at
December 31, 1993. This increase corresponds to the increase in average
securities over the same period, partially offset by the decrease in short-term
borrowings at Fleet Mortgage Group (FMG) due to the decrease in mortgages held
for resale. Rising interest rates caused a 104 basis-point increase in the rate
paid on short-term borrowings in 1994.
The contribution to the net interest margin from interest-free sources during
1994 of 56 basis points increased slightly from 53 basis points in 1993.
NONINTEREST INCOME
- --------------------------------- --------- --------- --------
Year ended December 31
Dollars in millions 1994 1993 1992
- --------------------------------- --------- --------- --------
Service charges, fees, and
commissions $ 438 $ 423 $ 408
Mortgage banking revenue 391 445 390
Investment services revenue 294 291 275
Student loan servicing fees 54 51 61
FDIC loan administration fees 52 45 17
Merchant discount fees 35 31 24
Trading income 26 38 37
Brokerage fees and
commissions 18 23 20
Insurance 15 19 21
Other noninterest income 233 222 222
- --------------------------------- --------- --------- --------
Total operating noninterest
income 1,556 1,588 1,475
- --------------------------------- --------- --------- --------
Securities available for sale
gains (loses) (1) 295 301
Gain on partial sale of FMG --- --- 121
- --------------------------------- --------- --------- --------
Total noninterest income $1,555 $1,883 $1,897
- --------------------------------- --------- --------- --------
Total operating noninterest income totaled $1,556 million in 1994 compared to
$1,588 million in 1993. This decrease is due primarily to reductions in mortgage
banking revenue offset in part by an increase in fee-based revenues.
MORTGAGE BANKING REVENUE
- ----------------------------------- --------- ---------- ---------
Year ended December 31
Dollars in millions 1994 1993 1992
- ----------------------------------- --------- ---------- ---------
Net loan servicing revenue $285 $243 $249
Mortgage production revenue 31 176 120
Gains on sales of mortgage
servicing 75 26 21
- ----------------------------------- --------- ---------- ---------
Total mortgage banking
revenue $391 $445 $390
- ----------------------------------- --------- ---------- ---------
The 12% decline in mortgage banking revenue is largely due to lower mortgage
production revenue, which dropped from $176 million in 1993 to $31 million in
1994. Such revenue includes income derived from the loan origination process and
net gains on sales of mortgage loans, both of which have been adversely affected
by a less favorable interest-rate environment. Offsetting the mortgage
production revenue decline is increased net loan servicing revenue, which has
increased 17% from $243 million in 1993 to $285 million in 1994. This increase
is due mainly to reduced amortization charges on capitalized excess servicing
taken during 1993. The $12 billion, or 16%, increase in the corporation's loan
servicing portfolio from $77 billion at December 31, 1993, to $89 billion at
<PAGE>
December 31, 1994, also contributed to the increase in net loan servicing
revenue.
Investment services revenue was relatively unchanged from 1993 levels as the
poor overall performance of the stock and bond markets during 1994 made for a
continuing difficult environment. Investment services revenue comprises
primarily personal asset management fees, which include services provided to
meet the unique financial needs of affluent individuals with custom portfolio
management and trust services. Personal asset management fees also include
mutual funds revenue, which is derived from managing the $6.4 billion of mutual
funds created to meet the needs of specific market segments. Other components of
investment services revenue include fees generated from providing investment
management, record keeping, plan administration, and fiduciary services to
employee benefit plans and revenue earned from Fleet's endowment and foundation
management division. The investment services business had approximately $69
billion in assets under administration and management at December 31, 1994.
Service charges, fees and commissions, which consist primarily of cash
management services, electronic banking fees and other transaction related fees,
totaled $438 million in 1994 compared to $423 million in 1993. This increase was
primarily attributable to increases in electronic banking fees.
The $3-million increase in student loan servicing fees from 1993 to 1994 is
attributable to additional accounts added under the federal government's direct
student lending program. FDIC loan administration fees increased $7 million
during 1994. Such administration fees are expected to decline significantly in
1995 as loans are resolved. Merchant discount fees amounted to $35 million, a $4
million increase over 1993. The increase is attributable to a higher volume of
transactions being processed.
The corporation recognized $1 million of net losses on sales of securities in
1994, compared to $295 million of net securities gains in 1993. Although the
corporation had net sales of approximately $3.8 billion in the current year,
primarily U.S. Treasury securities, the interest-rate environment of 1994 did
not allow for similar securities gains.
TRADING INCOME
- ------------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992
- ------------------------------------------------------------
Debt securities $16 $27 $27
Foreign exchange contracts 11 6 11
Interest-rate contracts (1) 5 (1)
- ------------------------------------------------------------
Total trading income $26 $38 $37
- ------------------------------------------------------------
The $12 million decrease in total trading income is primarily attributable to
a $11 million decrease in debt securities trading income and a $6 million
decrease in interest-rate contracts offset by a $5 million increase in foreign
exchange gains. The decrease in securities trading gains was due to unfavorable
market conditions in 1994 as increases in interest rates caused a decline in the
bond market. Trading income on interest-rate contracts consists of gains and
losses recorded on interest-rate contracts used in managing prepayment risk for
the mortgage servicing portfolio as well as net gains recorded on
customer-oriented interest-rate contracts. The decrease in trading income on
interest-rate contracts is primarily due to $5.7 million of net losses on those
contracts used in managing the prepayment risk for the mortgage servicing
portfolio in 1994 compared to $3.3 million of net gains on these contracts in
1993.
Fleet's brokerage fees and commissions decreased $5 million due primarily to
unfavorable market conditions in the stock markets during 1994. Insurance
revenue, which represents commissions on insurance premiums paid by Fleet's
consumer customers, decreased $4 million primarily due to a decline in loan
production at FMG and Fleet Finance.
<PAGE>
NONINTEREST EXPENSE
- ----------------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992
- ----------------------------------- --------- -------- ---------
Employee compensation
and benefits $1,428 $1,529 $1,432
Occupancy 265 280 277
Equipment 188 188 186
FDIC assessment 114 128 120
Legal and other professional 95 100 89
Purchased mortgage servicing
rights amortization 90 247 113
Marketing 84 75 67
Core deposit and goodwill
amortization 65 60 51
Printing and mailing 54 54 49
Telephone 54 57 54
OREO expense 51 163 332
Office supplies 43 49 49
Travel and entertainment 36 34 31
Other 393 454 514
- ----------------------------------- --------- -------- ---------
Total operating
noninterest expense 2,960 3,418 3,364
Restructuring and merger
related charges 185 161 ---
Loss on sale of problem assets --- --- 115
- ----------------------------------- --------- -------- ---------
Total noninterest expense $3,145 $3,579 $3,479
- ----------------------------------- --------- -------- ---------
Total operating noninterest expense, excluding $185 million of restructuring
and merger-related charges, totaled $3.0 billion for the year ended December 31,
1994. Excluding the $185 million restructuring and merger-related charges
recorded in 1994 and the $161 million restructuring-related charge and the $90
million charge related to the accelerated amortization of mortgage servicing
assets, both recorded in 1993, noninterest expense was reduced by approximately
$368 million, or 11%. Significant reductions were noted in employee compensation
and several other noninterest expense categories. These reductions are
attributable to the successful implementation of numerous cost-cutting
strategies developed as part of the corporation's efficiency improvement
programs.
The 64% decrease in purchased mortgage servicing rights amortization is due
primarily to the $90-million charge related to mortgage servicing assets
recognized by FMG in 1993, as high prepayment activity combined with projections
of future prepayment activity significantly affected the value of such assets.
The decrease also reflects the decline in mortgage refinancings resulting from
the rising interest-rate environment experienced in 1994. FDIC assessment fees
decreased 11% due to upgrades in the corporation's banking subsidiaries'
regulatory ratings based upon the strength of their capital positions and other
factors. Marketing expense increased 12% from 1993 to 1994 resulting from
promotions relating to several new business initiatives undertaken during 1994,
including several credit card programs. Other real estate owned (OREO) expense
decreased 69% reflecting continued improvement in credit quality, down $112
million from the $163 million recorded in 1993. The decline in OREO expense over
this period reflects the decline in the level of foreclosed properties and
repossessed equipment, the stabilization of property values in the corporation's
primary markets and the effective management of these assets.
Charges totaling $84 million and $161 million were recorded in 1994 and 1993
respectively, in connection with a program to restructure the corporation's
banking operations. These programs which commenced in the second quarter of 1993
and continued into 1994 were intended to enhance the corporation's competitive
position through a comprehensive review of all its northeast banking operations.
In addition, FMG and Fleet Finance each initiated separate reengineering
programs in 1994 aimed at reducing costs, streamlining procedures, enhancing fee
income, and improving customer service. In connection with these programs, $7
million and $12 million of restructuring charges were recorded at FMG and Fleet
Finance, respectively. Refer to Note 8. of the Notes to the Supplemental
Consolidated Financial Statements for further information regarding the
corporation's restructuring accruals. Additionally, $101 million of merger
related charges were incurred in 1994 to reflect the cost to integrate several
acquisitions. Refer to Note 2. of the Notes to the Supplemental Consolidated
Financial Statements for further information regarding the corporation's merger
related charges.
INCOME TAXES
In 1994, the corporation recognized income tax expense of $531 million, an
effective rate of 38.2%. Tax expense for 1993 was $330 million, an effective tax
rate of 30.0%. The effective rate increase during 1994 was primarily due to a
reduction in the federal valuation reserve, which occurred in 1993. Deferred tax
assets, net of the valuation reserves are expected to be realized from the
recognition of future taxable income, and the reversal of existing deferred tax
liabilities. For further information concerning the corporation's provision for
income taxes, refer to Note 14 of the Notes to the Supplemental Consolidated
Financial Statements.
<PAGE>
<TABLE><CAPTION>
BALANCE SHEET ANALYSIS
SECURITIES
December 31 1994 1993 1992
Dollars in millions Amortized Cost Market Value Amortized Cost Market Value Amortized Cost Market Value
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government
agencies $ 3,851 $ 3,667 $ 7,511 $ 7,686 $ 6,106 $ 6,355
Mortgage-backed securities 8,352 7,898 8,238 8,434 7,133 7,329
State and municipal --- --- --- --- 712 724
Other debt securities 180 179 250 257 181 188
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
Total debt securities 12,383 11,744 15,999 16,377 14,132 14,596
Marketable equity securities 360 356 419 438 268 299
Other securities 150 150 93 93 59 59
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
Total securities available for
sale $12,893 $12,250 $16,511 $16,908 $14,459 $14,954
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
Securities held to maturity:
U.S. Treasury and government
agencies $ 1,980 $ 1,864 $ 1,746 $ 1,743 $ 365 $ 367
Mortgage-backed securities 4,158 3,924 3,677 3,735 4,037 4,030
State and municipal 843 842 734 748 3 3
Other debt securities 1,910 1,822 1,774 1,796 899 903
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
Total debt securities 8,891 8,452 7,931 8,022 5,304 5,303
Other securities --- --- --- --- 173 175
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
Total securities held to
maturity $ 8,891 $ 8,452 $ 7,931 $ 8,022 $ 5,477 $ 5,478
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
Total securities $21,784 $20,702 $24,442 $24,930 $19,936 $20,432
- ----------------------------------- --------------- ------------- --------------- ------------- --------------- --------------
</TABLE>
The total amortized cost of the securities portfolio decreased $2.6 billion
from $24.4 billion at December 31, 1993, to $21.8 billion at December 31, 1994.
This decrease resulted from the corporation's repositioning program aimed at
reducing the corporation's interest-rate exposure by generating cash to decrease
the level of short-term borrowings.
At December 31, 1994, the securities available for sale portfolio had net
unrealized losses of $643 million compared to net unrealized gains of $397
million at December 31, 1993.
LOANS AND LEASES
Loan and lease portfolios inherently include credit risk. Fleet attempts to
control such risk through review processes that include careful analysis of
credit applications, portfolio diversification, and ongoing examinations of
outstandings and delinquencies. Fleet strives to identify potential classified
assets early, to take charge-offs promptly based on realistic assessments of
probable losses, and to maintain strong loss reserves. The corporation's
portfolio is well-diversified by borrower, industry, product, and geographic
area, thereby reducing risk.
LOANS AND LEASES
- ------------------------------------- --------- ----------
December 31
Dollars in millions 1994 1993
- ------------------------------------- --------- ----------
Loans:
Commercial and industrial $19,675 $19,031
Consumer 10,893 10,229
Residential real estate 8,529 7,378
Commercial real estate:
Construction 666 637
Interim/permanent 4,789 5,279
Lease financing 1,483 1,159
- ------------------------------------- --------- ----------
Total loans and leases, net of
unearned income $46,035 $43,713
- ------------------------------------- --------- ----------
Total loans and leases increased $2.3 billion to $46.0 billion at December
31, 1994, from $43.7 billion at December 31, 1993. This growth, principally in
residential, consumer and commercial loans, was achieved through new loan
originations across all banking franchises.
<PAGE>
COMMERCIAL AND INDUSTRIAL
- -------------------------------------- --------- ----------
December 31
Dollars in millions 1994 1993
- -------------------------------------- --------- ----------
Bank and insurance $ 2,208 $ 1,824
Communications 2,094 1,547
Real estate/construction/contractors 1,771 1,852
Transportation 1,265 1,123
Healthcare 1,256 1,212
Food distribution and production 1,107 1,038
Business services 1,051 1,176
Precious metals/jewelry 915 964
Energy production and distribution 812 902
Tourism and entertainment 776 665
Apparel and textiles 736 764
Private households 716 846
Forest products 531 699
Other 4,437 4,419
- -------------------------------------- --------- ----------
Total $19,675 $19,031
- -------------------------------------- --------- ----------
Commercial and industrial (C&I) borrowers consist primarily of middle-market
corporate customers and are well-diversified as to industry and companies within
each industry, thereby mitigating risk.
COMMERCIAL REAL ESTATE--PRODUCT DIVERSIFICATION
- ------------------------------------------------------------
December 31
Dollars in millions 1994 1993
- ------------------------------------------------------------
Retail $1,225 $1,115
Office 1,223 1,292
Apartments 1,102 1,112
Industrial 436 526
Hotel 284 262
Land 131 213
Condominiums 81 94
Residential 75 186
Portfolio finance --- 24
Other 900 1,092
- ------------------------------------------------------------
Total $5,455 $5,916
- ------------------------------------------------------------
Fleet's Commercial Real Estate (CRE) portfolio decreased by $461 million in
1994. The corporation entered into several new lines of business, including
national lending, public project finance, and real estate investment trusts.
Fleet continues to look into new opportunities to help balance the portfolio and
provide growth and diversity in order to improve the overall credit quality of
the CRE portfolio.
CONSUMER AND RESIDENTIAL REAL ESTATE
- ------------------------------------- ------------ ------------
December 31
Dollars in millions 1994 1993
- ------------------------------------- ------------ ------------
Residential real estate $ 8,529 $ 7,378
Home equity 6,007 5,738
Installment 2,067 2,331
Credit card 1,474 1,059
Student loans 1,156 977
Other 189 124
- ------------------------------------- ------------ ------------
Total $19,422 $17,607
- ------------------------------------- ------------ ------------
Approximately 75% of the consumer and residential real estate portfolio
represented loans secured by residential real estate, including second mortgage
and home equity loans and lines of credit.
Outstanding residential real estate loans secured by one- to four-family
residences were $8.5 billion at December 31, 1994, compared to $7.4 billion at
December 31, 1993. Except for selected programs, loans obtained through business
acquisitions and loans held for asset/liability management purposes, residential
mortgage loans in the corporation's banking franchise area are generally
originated by FMG and are sold in the secondary market.
Installment loans decreased 11% from $2.3 billion at December 31, 1993, to
$2.1 billion at December 31, 1994.
Credit card outstandings increased $415 million to $1.5 billion at December
31, 1994. The increase was due to new originations and special promotions
including cobranding arrangements with major retailers
The corporation manages the risk associated with most types of consumer loans
by utilizing uniform credit standards when extending credit, together with
enhanced computer systems that streamline the process of monitoring
delinquencies and assisting in customer contact.
LEASE FINANCING
Lease financing totaled $1.5 billion at December 31, 1994, compared to $1.2
billion at December 31, 1993. The 28% increase in lease financing is primarily
attributable to increased volume obtained through geographic expansion and
specialization in targeted industries. The corporation provides lease financing
for mid- to large-sized equipment acquisitions through a nationwide network of
sales offices.
FEDERAL FINANCIAL ASSISTANCE
At December 31, 1994, certain loans totaling $393 million, comprised
principally of commercial and CRE loans, are subject to FDIC loss-sharing
agreements, whereby the FDIC generally reimburses Fleet for 80% of net
charge-offs for periods ranging from three to five years from the date of
acquisition.
<PAGE>
NONPERFORMING ASSETS
ACTIVITY IN NONPERFORMING ASSETS
- ---------------------------------- ------------ ------------
Year ended December 31
Dollars in millions 1994 1993
- ---------------------------------- ------------ ------------
Balance at beginning of year $1,038 $2,014
Additions 704 1,027
Reductions:
Payments/interest (438) (810)
applied
Returned to accrual (81) (317)
Charge-offs/writedowns (330) (587)
Sales/other (132) (289)
- ---------------------------------- ------------ ------------
Total reductions (981) (2,003)
- ---------------------------------- ------------ ------------
Balance at end of year $ 761 $1,038
- ---------------------------------- ------------ ------------
NPAs decreased $277 million, or 27%, from December 31, 1993, due to continued
improvement in the portfolio. The largest decreases were noted in the
Connecticut, New York, and Rhode Island banking franchises. During 1994,
nonperforming asset additions were $704 million, a 31% improvement over 1993.
Reductions in NPAs during the year were primarily attributable to payments, loan
charge-offs, and sales.
NONPERFORMING ASSETS(a)
- ------------------------------------------------------------------
Dollars in Commercial and Commercial
millions Industrial Real Estate Consumer Total
- ------------------------------------------------------------------
Nonperforming loans
and leases:
Current or less than
90 days past due $ 76 $ 94 $ 16 $186
Noncurrent 157 110 213 480
OREO 3 57 35 95
- ------------------------------------------------------------------
Total NPAs at
December 31, 1994 $236 $261 $264 $ 761
- ------------------------------------------------------------------
Total NPAs at
December 31, 1993 $396 $332 $310 $1,038
- ------------------------------------------------------------------
(a)Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($139 million and $120
million at December 31, 1994 and 1993, respectively), or assets subject to
federal financial assistance ($59 million and $140 million at December 31, 1994
and 1993, respectively).
Consumer NPAs decreased $46 million to $264 million at December 31, 1994,
compared to $310 million at December 31, 1993, while commercial and industrial
NPAs decreased $160 million from December 31, 1993, due to reduced inflow,
workout measures, and improving economic conditions. Fleet's nonperforming loans
and leases decreased $171 million and OREO was reduced $106 million from
December 31, 1993.
NPAs at December 31, 1994, as a percentage of total loans, leases, and OREO,
and as a percentage of total assets, were 1.65% and .94%, respectively, compared
to 2.36 % and 1.31 %, respectively, at December 31, 1993. At December 31, 1994
and 1993, loans in the 90 days past due and still accruing interest category
amounted to $139 million and $120 million, respectively, which included
approximately $102 million and $76 million, respectively, of consumer loans.
Although these amounts are not included in NPAs, management reviews loans in
this category when considering risk elements to determine the adequacy of
Fleet's credit loss reserve.
RESERVE FOR CREDIT LOSSES
RESERVE FOR CREDIT LOSS ACTIVITY
- ----------------------------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------
Balance at beginning of year $1,669 $1,937 $2,065 $1,671 $1,097
Gross charge-offs:
Commercial and industrial 91 257 383 354 281
Consumer 130 133 136 169 131
Commercial real estate 95 269 367 329 280
Residential real estate 52 49 121 35 9
Lease financing 9 21 34 26 31
- ----------------------------------------------------------------------------
Total charge-offs, gross 377 729 1,041 913 732
- ----------------------------------------------------------------------------
Recoveries:
Commercial and industrial 60 63 50 39 26
Consumer 35 34 29 28 30
Commercial real estate 27 34 32 14 10
Residential real estate 11 4 4 1 ---
Lease financing 5 9 3 3 3
- ----------------------------------------------------------------------------
Total recoveries 138 144 118 85 69
- ----------------------------------------------------------------------------
Net charge-offs 239 585 923 828 663
Provision 65 327 728 995 1,236
Acquired/other 1 (10) 67 227 1
- ----------------------------------------------------------------------------
Balance at end of year $1,496 $1,669 $1,937 $2,065 $1,671
- ----------------------------------------------------------------------------
Ratio of net charge-offs
to average loans and leases .54% 1.35% 2.15% 2.02% 1.68%
- ----------------------------------------------------------------------------
Ratio of reserve for credit
losses to year-end loans and
leases 3.25% 3.82% 4.43% 4.73% 4.48%
- ----------------------------------------------------------------------------
Ratio of reserve for credit
losses to year-end NPAs 196% 161% 96% 65% 52%
- ----------------------------------------------------------------------------
Ratio of reserve for credit
losses to year-end nonper-
forming loans and leases 224% 199% 129% 93% 66%
- ----------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
RESERVE FOR CREDIT LOSS ALLOCATION
--------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loan of Loan of Loan of Loan of Loan
Type to Type to Type to Type to Type to
Dollars in millions Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and $ 620 42.7 % $ 678 43.5 % $ 895 43.1 % $ 878 39.6 % $ 942 40.9 %
industrial
Consumer 226 23.7 196 23.4 222 21.5 187 21.9 147 22.0
Commercial real estate:
Construction 17 1.5 7 1.4 39 3.3 --- 4.3 --- 7.2
Interim/permanent 190 10.4 241 12.1 317 12.5 353 14.4 263 11.3
Residential real estate 47 18.5 50 16.9 60 17.0 81 16.2 65 13.7
Lease financing 18 3.2 36 2.7 31 2.6 33 3.6 26 4.9
Other --- --- --- --- --- --- --- --- --- ---
Unallocated 378 --- 461 --- 373 --- 533 --- 228 ---
--------------------------------------------------------------------------------------------------------------------------
Total $1,496 100.0 % $1,669 100.0 % $1,937 100.0 % $2,065 100.0 % $1,671 100.0 %
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fleet's reserve for credit losses decreased $173 million from December 31,
1993, to $1,496 million at December 31, 1994. The corporation's ratios of
reserve for credit losses to NPAs and reserve for credit losses to nonperforming
loans and leases have steadily improved due to the decline in nonperforming
loans and leases. The decrease in the provision for credit losses from $327
million for 1993 to $65 million for 1994 reflects the continued reduction in
charge-offs and NPAs as well as a general improvement in economic conditions.
Net charge-offs decreased $346 million to $239 million in 1994, compared to $585
million in 1993. The ratio of net charge-offs to average loans and leases
decreased to .54 % at December 31, 1994, from 1.35% at December 31, 1993.
The reserve for credit losses represents amounts available for future credit
losses and reflects management's ongoing detailed review of certain individual
loans and leases, supplemented by analyses of historic net charge-off experience
of the portfolio and an evaluation of current and anticipated economic
conditions and other pertinent factors. Based on these analyses, the corporation
believes that its year-end reserve is adequate.
Loans and leases (or portions thereof) deemed uncollectable are charged
against the reserve, while recoveries of amounts previously charged off are
added to the reserve. Loss provisions charged to earnings are added to the
reserve. Amounts are charged off once the probability of loss has been
established, with consideration given to factors such as the customer's
financial condition, underlying collateral and guarantees, and general and
industry economic conditions.
FUNDING SOURCES
COMPONENTS OF FUNDING SOURCES
- ------------------------------------- ----------- -----------
December 31
Dollars in millions 1994 1993
- ------------------------------------- ----------- -----------
Deposits:
Demand $12,028 $11,228
Regular savings, NOW,
money market 23,870 25,414
Time:
Domestic 14,338 12,379
Foreign 5,292 806
- ------------------------------------- ----------- -----------
Total deposits 55,528 49,827
- ------------------------------------- ----------- -----------
Borrowed funds:
Federal funds purchased 2,753 2,151
Securities sold under
agreements to repurchase 6,170 7,304
Commercial paper 835 1,337
Other 2,828 5,584
- ------------------------------------- ----------- -----------
Total borrowed funds 12,586 16,376
- ------------------------------------- ----------- -----------
Notes and debentures 5,931 5,217
- ------------------------------------- ----------- -----------
Total $74,045 $71,420
- ------------------------------------- ----------- -----------
Total deposits increased $5.7 billion to $55.5 billion at December 31, 1994,
from $49.8 billion at December 31, 1993, primarily due to an increase in
wholesale funding. In addition, the corporation's mix of total deposits has
shifted slightly as foreign time deposits and domestic time deposits have
increased by $4.5 billion and $2.0 billion, respectively, while regular savings,
NOW, and money market deposits have decreased by $1.5 billion.
<PAGE>
Certificates of deposit (CDs) and other time deposits issued by domestic
offices in amounts of $100,000 or more as of December 31, 1994, will mature as
follows;
Maturity of Time Deposits
- --------------------------------------------------
December 31, 1994
Remaining maturity Certificates All Other
Dollars in millions of Deposit Time Deposits
- --------------------------------------------------
3 months or less $1,828 $108
3 to 6 months 429 116
6 to 12 months 629 102
Over 12 months 1,540 236
- --------------------------------------------------
Total $4,426 $562
- --------------------------------------------------
Total borrowed funds decreased $3.8 billion from December 31, 1993, to
December 31, 1994, as a result of the corporation's repositioning program aimed
at reducing interest-rate exposure through decreasing levels of short-term
borrowings. Other short-term borrowings include: treasury, tax, and loan; bank
notes; and revolving credit facilities at FMG and Fleet. The amount outstanding
under the revolving credit facility at FMG decreased $440 million to $500
million at December 31, 1994. This decrease and the $639 million decrease in
commercial paper resulted from the corresponding $2.5 billion decline in
mortgages held for resale.
The balance of notes and debentures increased $714 million as repayments of
$700 million were replaced by new issuances of approximately $1.4 billion. New
issuances included $1 billion of floating-rate bank notes due in 1995 and 1996,
$200 million of 5.50% Notes due 1995, $200 million of 7.25% Notes due 1999, $200
million of 7.25% Notes due 1997, and $25 million of 5.60% Notes due 1995. The
proceeds from these issuances were primarily used for general corporate
purposes, including the repurchase of Fleet's common stock in connection with
the NBB Bancorp merger and repayments of current maturities of long-term debt.
ASSET/LIABILITY MANAGEMENT
The asset/liability management process at Fleet ensures that the risk to
earnings fluctuations from changes in interest rates is prudently managed.
Asset/liability management uses three key measurements to monitor interest-
rate risk: (1) the interest-rate sensitivity "gap" analysis; (2) a "rate shock"
to measure earnings volatility due to an immediate increase or decrease in
market interest rates of up to 200 basis points; and (3) simulations of net
interest income under alternative balance sheet and interest-rate scenarios.
Internal parameters have been established as guidelines for monitoring the
gap analysis and the 200 basis-point rate shock, which are reported to both
corporate and bank asset/liability committees as well as the boards of
directors. These guidelines serve as benchmarks for determining actions to
balance the current position against overall strategic goals.
Interest-Rate Gap Analysis
- -------------------------------------------------------------------------------
Cumulatively Repriced Within
- -------------------------------------------------------------------------------
December 31, 1994
Dollars in millions 3 Months 4 to 12 1 to 5 After 5
by repricing date or Less Months Years Years Total
- -------------------------------------------------------------------------------
Cash and cash
equivalents $ 6,254 $ 49 $ --- $ 2,267 $ 8,570
Securities 1,968 4,844 10,213 4,235 21,260
Loans and Interests 25,980 7,294 8,239 4,522 46,035
Mortgages held for
resale 560 --- --- --- 560
Other assets 217 557 1,088 2,739 4,601
- -------------------------------------------------------------------------------
Total assets 34,979 12,744 19,540 13,763 81,026
- -------------------------------------------------------------------------------
Deposits:
Demand 3,336 --- 968 7,724 12,028
Savings 15,543 --- --- 8,327 23,870
Time 9,365 5,485 4,670 110 19,630
- -------------------------------------------------------------------------------
Total deposits 28,244 5,485 5,638 16,161 55,528
- -------------------------------------------------------------------------------
Short-term
borrowings 12,279 212 95 --- 12,586
Long-term debt 2,621 557 1,701 1,052 5,931
Other liabilities 242 --- 176 1,092 1,510
Stockholders' equity --- --- 273 5,198 5,471
- -------------------------------------------------------------------------------
Total liabilities and
equity 43,386 6,254 7,883 23,503 81,026
- -------------------------------------------------------------------------------
Net off-balance sheet (399) (312) 2,359 (1,648) ---
- -------------------------------------------------------------------------------
Periodic gap (8,806) 6,178 14,016 (11,388) ---
Cumulative gap (8,806) (2,628) 11,388 0 ---
Cumulative gap as a
percent of total
assets (10.9)% (3.2)% 14.1%
- -------------------------------------------------------------------------------
Interest-rate gap analysis provides a static analysis of the repricing
characteristics of the entire balance sheet. It is prepared by scheduling assets
and liabilities into time bands based on their next opportunity to reprice. For
floating-rate instruments, the entire balances are placed at the next date on
which their rates could be reset and for fixed-rate instruments the balances are
placed in time bands according to their principal repayment schedules. It is
necessary to apply further assumptions to refine this process. For instance, in
order to recognize the potential for mortgage-related instruments to experience
early payments of principal, a prepayment assumption based on management's
expectations is layered on top of the scheduled principal payments. Other
categories that are scheduled using management assumptions, which are based on
historic analysis of Fleet and industry data, include noncontractual deposits,
such as interest-bearing checking, savings, and money market deposits.
Management continues to analyze recent Fleet and industry data in order to
maintain reasonable gap placements, based upon historic and expected pricing
methodologies.
At December 31, 1994, the corporation was 3.2% liability sensitive at the
one-year cumulative gap interval. Fleet's one-year cumulative gap guideline is
plus or minus 10% of total assets.
<PAGE>
<TABLE>
<CAPTION>
INTEREST-RATE RISK-MANAGEMENT ANALYSIS
----------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Average
December 31, 1994 Notional Assets/ Liabilities Maturity Rate
Dollars in Millions Value Hedged (years) Fair Value Receive
Pay
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Receive-fixed/pay-variable swaps $1,290 Variable-rate loans
607 Fixed-rate deposits
485 Short-term borrowings
491 Long-term debt
------------
2,873 1.5 $ (44) 6.98 6.45
----------------------------------------------------------------------------------------------------------------------
Pay-fixed/receive-variable 2,084 Short-term borrowings 3.0 67 5.71 6.85
----------------------------------------------------------------------------------------------------------------------
Basis swaps 35 Fixed rate deposits
650 Long-term debt
2,920 Securities
------------
3,605 2.9 (1) 6.87 7.05
----------------------------------------------------------------------------------------------------------------------
Index-amortizing swaps
receive-fixed/pay-variable 4,119 Variable-rate loans 1.9 (234) 5.06 7.31
----------------------------------------------------------------------------------------------------------------------
Total interest rate swaps $12,681 2.3 $(212) 6.12 6.97
----------------------------------------------------------------------------------------------------------------------
OTHER INTEREST RATE INSTRUMENTS
Interest rate cap agreements $ 1,775 Short-term borrowings 0.9 $ 43
----------------------------------------------------------------------------------------------------------------------
Interest rate corridor agreements 1,031 Short-term borrowings 1.5 (5)
----------------------------------------------------------------------------------------------------------------------
Interest rate collar agreements 500 Short-term borrowings 0.2 (1)
----------------------------------------------------------------------------------------------------------------------
Futures contracts sold 6,005 Loans/Securities 0.8 21
----------------------------------------------------------------------------------------------------------------------
Total other instruments $ 9,311 0.9 $ 58
----------------------------------------------------------------------------------------------------------------------
Total interest rate instruments $21,992 $(154)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The off-balance-sheet position is comprised of interest rate instruments used
to manage interest-rate risk within clearly defined and prudent parameters on
the basis of the current interest-rate environment. Since interest-rate
instruments are used to hedge specific assets and liabilities, the analysis
considers the interest-rate sensitivity of specific portfolios, as well as the
entire balance sheet. There are situations where interest-rate instruments will
be executed that increase existing asset or liability sensitivity (as measured
by the gap position), but the resulting risk profile is desired and within
Fleet's asset/liability management guidelines. Fleet considers the duration of
the instruments hedge program within its asset/liability management parameters
for interest-rate risk management.
Derivative instruments totaling $22 billion (notional amount) are being used
for interest-rate risk-management purposes. These derivative instruments consist
of interest-rate swaps, options and financial futures.
At December 31, 1994 the corporation had approximately $12.7 billion of
interest rate swaps outstanding, including $4.1 billion of index-amortizing
swaps. Under the terms of the index-amortizing swaps, Fleet receives a fixed
rate and pays a floating rate based on certain indices. Under certain
conditions, if these indices fall below a specified range the swaps would
amortize (i.e., the swaps would wholly or partly mature); if these indices are
above the specified range, none of the swaps would amortize.
The periodic net settlement of interest rate swap agreements is recorded as
an adjustment to net interest income. Interest rate swaps generated $3.7 million
of net interest expense during 1994. In September 1994, Fleet terminated a
substantial portion of pay-fixed swaps resulting in a net deferred gain of $61
million, which is being amortized over the remaining contract life of the
interest rate swaps of approximately four years.
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 year-end 1994, the
corporation had approximately $1.8 billion in notional amounts of purchased
interest rate cap agreements and $500 million in notional amounts of interest
rate collar arrangements (consisting of a cap and floor) outstanding. The
corporation also had approximately $1.0 billion in notional amounts of interest
rate corridor agreements outstanding, which consist of a cap that is sold for a
higher strike rate than the one that is purchased. Interest rate corridors are
utilized to protect the corporation from a contraction in the interest rate
spread due to a moderate rise in interest rates. The periodic net settlement on
interest rate cap and floor agreements, inclusive of premium amortization,
resulted in a decrease in net interest income of $2.4 million in 1994. At
December 31, 1994 the unamortized
<PAGE>
premium recorded in the corporation's balance sheet related to such agreements
totaled $32.8 million.
Exchange-traded futures contracts are also used by the corporation to manage
interest rate exposure. The notional amounts of futures contracts sold at
December 31, 1994 were approximately $6.0 billion, an increase of $3.5 billion
from $2.5 billion at December 31, 1993.
The interest-rate risk-management instrument activity for the year ended
December 31, 1994, is summarized in the following table (all amounts are
notional amounts);
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-RATE RISK-MANAGEMENT INSTRUMENT ACTIVITY
Interest rate swaps
-------------------------------------------
Year ended December 31, Receive- Pay- Index-
1994
Dollars in millions Fixed Fixed Basis Amortizing Caps Corridors Collars Futures Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amounts:
Balance at beginning of year $2,390 $1,928 $ --- $3,670 $ 950 $2,406 $ --- $2,528 $13,872
Additions 1,611 1,886 3,605 500 825 275 500 30,497 39,699
Maturities (1,128) (434) --- (51) --- (1,650) --- (27,020) (30,283)
Terminations --- (1,296) --- --- --- --- --- (1,296)
--------------------------------------------------------------------------------------------------------------------------
Balance at end of year $2,873 $2,084 $3,605 $4,119 $1,775 $1,031 $500 $6,005 $21,992
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
MATURITIES OF THE INTEREST-RATE RISK
MANAGEMENT INSTRUMENTS
- -------------------------------------------------------------------
December
31, 1994
Dollars in Within 1 to 2 to 3 to 4 to After Total
millions 1 2 3 4 5 5
Year Years Years Years Years Years
- -------------------------------------------------------------------
Notional amounts:
Interest Rate
Swaps
Receive-fixed $1,497 $ 710 $ 375 $ 95 $ 136 $ 60 $2,873
Pay-fixed 94 680 660 --- 450 200 2,084
Basis 650 --- 890 2,030 35 --- 3,605
Index-
amortizing --- 3,219 500 200 200 --- 4,119
- -------------------------------------------------------------------
Total interest
rate swaps $2,241 $4,609 $2,425 $2,325 $ 821 $ 260 $12,681
- -------------------------------------------------------------------
Other
Caps $1,225 $400 $ --- $ --- $ 150 $ --- $ 1,775
Corridors 300 420 311 --- --- --- 1,031
Collars 500 --- --- --- --- --- 500
Futures 4,732 1,210 63 --- --- --- 6,005
- -------------------------------------------------------------------
Total other
instruments $6,757 $2,030 $374 $ --- $ 150 $ --- $ 9,311
- -------------------------------------------------------------------
Total interest
rate
instruments $8,998 $6,639 $2,799 $2,325 $ 971 $ 260 $21,992
- -------------------------------------------------------------------
LIQUIDITY
Liquidity is the ability of the corporation to meet each maturing obligation
or customer demand for funds. Liquidity is provided through issuing liabilities,
selling assets, or allowing assets to mature. The corporation's Senior Asset and
Liability Committee (Senior ALCO) is responsible for implementing the Board of
Directors' policies and guidelines for the maintenance of prudent levels of
liquidity. The Senior ALCO is responsible for monitoring the performance of each
of the banking subsidiaries and the parent company relative to these policies
and guidelines.
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries and access to the capital and money markets.
Dividends from banking subsidiaries are limited by various regulatory
requirements related to capital adequacy and earning trends. The dividend
payment capacity of Fleet Bank of Massachusetts and Fleet Bank, N.A. (Conn.) is
subject to agreements with certain investment partnerships. Refer to Note 11 to
the Notes to Supplemental Consolidated Financial Statements for further
information.
The corporation's subsidiaries rely on cash flows from operations, core
deposits, borrowings, short-term high-quality liquid assets, and in the case of
the nonbanking subsidiaries, funds from the parent company for liquidity. FMG
has a separate funding program that includes two revolving-warehouse credit
agreements totaling $2.2 billion at December 31, 1994, an increase from the
$1.75 billion available at December 31, 1993. FMG also has a shelf registration
that provides for the issuance of debt securities. At December 31, 1994, $47
million of debt securities were available for future issuance under this shelf
registration. FMG also sells commercial paper to fund short-term needs. At
December 31, 1994, FMG had commercial paper outstanding of $108 million compared
to $747 million at December 31, 1993.
<PAGE>
At December 31, 1994, Fleet, excluding FMG, had commercial paper outstanding
of $727 million, including $472 million placed directly by Fleet in its local
markets, compared to $591 million and $401 million, respectively, at December
31, 1993. The corporation has backup lines of credit to ensure that funding is
not interrupted if commercial paper is not available. In December 1994, Fleet
renegotiated its revolving line of credit agreement increasing the total amount
of funds available to $1.0 billion from $800 million previously. At December 31,
1994 and 1993, Fleet had no outstanding balances under the line of credit. The
corporation's banking subsidiaries, excluding the New Hampshire, Florida, and
the former Shawmut-New York banking subsidiaries, established a $4 billion bank
note program of which $2.6 billion is outstanding at December 31, 1994.
Through the issuance of senior debt, the corporation raised $400 million in
1994, thereby strengthening its liquidity position. During 1993, Fleet also
filed a universal shelf registration with the Securities and Exchange Commission
(SEC), which combined existing debt and preferred stock shelf registrations with
a registration of an additional $500 million of securities. This universal shelf
registration provides for the issuance of common and preferred stock, senior or
subordinated debt securities, and other debt securities. The total amount of
funds available as of December 31, 1994, under the corporation's shelf
registrations was $1.4 billion.
As of November 30, 1995, $193 million remained available from the
corporation's shelf registration. On October 24, 1995, the corporation filed a
new registration statement for an additional $750 million in securities, which
became effective on November 29, 1995.
The corporation's preferred stock, senior and subordinated debt, and
commercial paper regulatory ratings were upgraded by Moody's and Duff & Phelps
rating services during 1994. These upgrades reflect Fleet's strong balance
sheet, positive earnings trend, and continued improvement in asset quality.
As shown in the Supplemental Consolidated Statement of Cash Flows, cash and
cash equivalents increased by $4.7 billion during 1994. This increase was
primarily due to $3.6 billion of net cash provided by operating activities and
$1.1 billion of net cash provided by financing activities. Net cash provided by
operating activities was principally generated by income from operations and
proceeds from the sale of mortgages held for resale, offset in part by
originations and purchases of such mortgages.
Net cash provided by financing activities was generated principally from a net
increase in long-term debt.
CAPITAL
- ----------------------------------------------------------------
December 31
Dollars in millions 1994 1993
- ----------------------------------------------------------------
Risk-adjusted assets $60,650 $52,430
Tier 1 risk-based capital (4% minimum) 9.14 % 10.44 %
Total risk-based capital (8% minimum) 12.92 14.89
Leverage ratio 7.15 7.07
Common equity-to-assets 6.06 6.65
Total equity-to-assets 6.75 7.53
Tangible total equity-to-assets 5.18 6.30
Capital in excess of minimum
requirements:
Tier 1 risk-based $ 3,120 $ 3,376
Total risk-based 2,983 3,611
Leverage 2,445 2,375
- ----------------------------------------------------------------
A financial institution's capital serves to support growth and provide
protection against loss to depositors and creditors. Equity capital represents
the stockholders' investment in the corporation. Management strives to maintain
an optimal level of capital on which an attractive return to the stockholders
will be realized over both the short and long term, while serving depositors'
and creditors' needs.
Banks and bank holding companies must also observe the minimum requirements
enforced by the federal and, if applicable, state banking regulators. Regulatory
capital is defined in terms of Tier 1 and Tier 2 capital (together, total
capital). Tier 1 capital consists of stockholders' equity (both common and
perpetual preferred stock) and minority interest, net of goodwill, and certain
intangible assets. Tier 2 capital consists of a limited amount of loss reserves,
subordinated debt (weighted relative to years to maturity), and limited-life
preferred stock. Tier 1, total capital, and leverage ratios do not include any
adjustments for unrealized gains and losses relating to securities available for
sale except unrealized gains and losses relating to marketable equity
securities.
Regulatory capital requirements are set forth in terms of (1) the leverage
ratio (Tier 1/quarterly average assets); (2) risk-based Tier 1 capital (Tier
1/risk-weighted on- and off-balance-sheet assets); and (3) risk-based total
capital (total capital/risk-weighted on- and off-balance-sheet assets). The
minimum requirements for each of these ratios is 4%, 4%, and 8%, respectively.
In addition, under the FDIC Improvement Act (FDICIA), banks are categorized
according to their capital levels into one of five categories ranging from
"well-capitalized" to "critically undercapitalized." Each category serves to
determine a bank's deposit insurance premium (together with regulatory
evaluations) as well as any mandated restrictive regulatory actions. As of
December 31, 1994, all of the Fleet affiliate banks were categorized as
"well-capitalized," which provides for minimum leverage, Tier 1, and total
capital ratios of 5%, 6%, and 10%, respectively.
The decrease in the corporation's risk-based regulatory ratios during 1994
was primarily due to increased
<PAGE>
standby letters of credit and a change in the composition of the balance sheet
due to higher risk-weighted commercial loans and the expiration of the federal
financial assistance agreement with the FDIC relating to loans acquired as part
of the BNE acquisition in 1991.
COMPARISON OF 1993 WITH 1992
Fleet reported net income for 1993 of $764 million, or $2.82 per share before
cumulative effect of a change in method of accounting, an increase of 120% over
1992 net income of $348 million, or $1.33 per share before an extraordinary
credit. The improved results reflect increased net interest income due to
favorable interest-rate spreads and reduced asset-quality costs as a result of a
significant reduction in NPAs and a lower level of net credit losses. The
provision for credit losses decreased by $401 million, and OREO expense declined
by $169 million.
NET INTEREST MARGIN AND INTEREST-RATE SPREAD
- ------------------------- ---------------- ----------------
December 31 1993 1992
- ------------------------- ---------------- ----------------
Taxable equivalent rates Average Average
Dollars in millions Balance Rate Balance Rate
- ------------------------- --------- ------ -------- -------
Securities $21,875 6.55% $18,361 7.69%
Loans and leases 43,283 7.99 43,029 8.57
Other 3,326 5.80 3,869 5.63
- ------------------------- --------- ------ -------- -------
Total interest-earning 68,484 7.43 65,259 8.15
assets
- ------------------------- --------- ------ -------- -------
Interest-bearing liabilities57,612 3.33 54,995 4.25
- ------------------------- --------- ------ -------- -------
Interest-rate spread 4.10 3.90
Interest-free sources of
funds 10,872 10,264
- ------------------------- --------- ------ -------- -------
Total sources of funds $68,484 2.80% $65,259 3.58%
- ------------------------- --------- ------ -------- -------
Net interest margin 4.63% 4.57%
- ------------------------- --------- ------ -------- -------
Net interest income on an FTE basis for the year ended December 31, 1993,
increased 6% to $3,169 million reflecting a higher net interest margin, caused
by the decreased cost of liabilities outpacing the decreased yield on assets
during 1993 while earning asset levels increased slightly.
RECENT ACCOUNTING DEVELOPMENTS
The FASB has issued Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," which the corporation adopted on January 1, 1995,
requiring, among other things, that creditors value all loans for which it
is probable that the creditor will be unable to collect all amounts due
according to the terms of the loan agreement at the present value of expected
future cash flows discounted at the loan's effective interest rate, or
observable market price of the impaired loan, or the fair value of the
collateral if the loan is collateral-dependent. The FASB also issued
Statement No. 118, which amended Statement No. 114, by allowing creditors
to use their existing methods of recognizing interest income.
The adoption of these standards does not have a material impact on the
corporation or its results of operations.
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage
Servicing Rights" (SFAS 122). SFAS 122 requires that an entity recognize, as
separate assets, rights to service mortgage loans for others irrespective of
how those servicing rights are acquired (i.e., whether purchased or originated)
by allocating the total cost of the loans between the loan and the servicing
rights thereto based on their relative fair values. The corporation adopted
this statement as of April 1, 1995, with application to transactions in
which the corporation acquires mortgage servicing rights (MSRs) through either
purchase or origination of mortgage loans and sells those loans with servicing
rights retained, and to impairment evaluations of all capitalized MSRs. The
incremental impact of capitalizing originated mortgage servicing rights in
accordance with SFAS 122 is not anticipated to have a material impact on the
corporation or its results of operations.
SFAS 122 requires that capitalized mortgage servicing rights be assessed
for impairment based upon the fair value of those rights. Fair value is
estimated using a valuation model which considers market consensus loan
prepayment predictions, historic prepayment rates, mortgage interest rates,
and other economic factors. For purposes of impairment evaluation and
measurement, MSRs are stratified based on the predominant risk characteristics
of the underlying loans which for the corporation's MSRs, includes ranges
of interest rates within product types. To the extent that the carrying
value of MSRs exceeds fair value by individual stratum, a valuation allowance
is established. The allowance may be adjusted in the future as MSR values
increase or decrease. The cost of MSRs is amortized over the estimated period
of net servicing revenues.
<PAGE>
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS (UNAUDITED)
- ------------------------------------------------- ------------------------------------ ------------------------------------
1994 Compared to 1993 1993 Compared to 1992
Increase (Decrease) Due to(a) Increase (Decrease) Due to(a)
Dollars in millions Volume Rate Net Volume Rate Net
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:(b)
Interest-bearing deposits $ 10 $ 3 $13 $(1) $(1) $(2)
Federal funds sold and securities purchased
under agreements to resell 12 (15) (3) (16) --- (16)
Trading account securities (1) 1 --- --- (1) (1)
Securities available for sale 142 (79) 63 6 (148) (142)
Securities held to maturity 44 (27) 17 184 (40) 144
Nontaxable securities 8 (1) 7 14 6 20
Loans and leases 71 84 155 22 (251) (229)
Mortgages held for resale (73) (5) (78) (183) 177 (6)
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Total interest-earning assets 213 (39) 174 26 (258) (232)
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Interest paid on:
Deposits:
Savings (6) (26) (32) 51 (242) (191)
Time 28 9 37 (183) (159) (342)
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Total interest-bearing liabilities 22 (17) 5 (132) (401) (533)
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Short-term borrowings 87 151 238 113 (31) 82
Long-term debt 10 (9) 1 59 (28) 31
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Total interest-bearing liabilities 119 125 244 40 (460) (420)
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Net interest differential(c) $ 94 $(164) $(70) $(14) $202 $188
- ------------------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
</TABLE>
(a)The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the
absolute dollar amounts of the changes in each.
(b)A tax-equivalent adjustment has been included in the calculations to
reflect this income as if it had been fully taxable. The tax-equivalent
adjustment is based upon the applicable federal and state income
tax rates. The FTE adjustment included in interest income was $52 million in
1994; $46 million, 1993; $45 million, 1992; $68 million, 1991; and $134
million, 1990.
(c)Includes fee income of $108 million, $119 million, and $124 million for
the years ended December 31, 1994, 1993, and 1992, respectively.
LOAN AND LEASE MATURITY (UNAUDITED)
- -------------------------- ------- -------- -------- --------
December 31, 1994 Within 1 to 5 After
Dollars in millions 1 Year Years 5 Years Total
- -------------------------- ------- -------- -------- --------
Commercial and industrial $13,972 $ 3,849 $ 1,854 $19,675
Consumer 5,111 3,856 1,926 10,893
Commercial real estate:
Construction 451 159 56 666
Interim/permanent 2,760 1,426 603 4,789
Residential real estate 3,024 1,159 4,346 8,529
Lease financing 865 559 59 1,483
- -------------------------- ------- -------- -------- --------
Total $26,183 $11,008 $ 8,844 $46,035
- -------------------------- ------- -------- -------- --------
INTEREST SENSITIVITY OF LOANS OVER ONE YEAR (UNAUDITED)
- ----------------------- --------------- ------------- ---------
December 31, 1994 Predetermined Floating
Dollars in millions Interest Rates Interest Total
Rates
- ----------------------- --------------- ------------- ---------
1 to 5 years $ 7,443 $ 3,565 $11,008
After 5 years 5,958 2,886 8,844
- ----------------------- --------------- ------------- ---------
Total $13,401 $ 6,451 $19,852
- ----------------------- --------------- ------------- ---------
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES/INTEREST EARNED-PAID/RATES 1990-1994 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Earned/ Average Earned/
Dollars in millions(a) Balance Paid(b) Rate Balance Paid(b) Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 292 $ 14 4.79 % $ 47 $ 1 2.13 %
Federal funds sold and securities purchased
under agreements to resell 296 15 5.07 570 18 3.16
Trading account securities 99 5 4.95 114 5 4.17
Securities available for sale 16,923 1,023 6.05 14,140 960 6.79
Securities held to maturity 7,971 447 5.61 7,056 430 6.09
Nontaxable securities 816 51 6.25 679 44 6.48
Loans and leases(c) 44,102 3,614 8.17 43,283 3,459 7.99
Mortgages held for resale 1,322 91 6.90 2,384 169 7.10
Foreclosed property and repossessed equipment 166 --- --- 211 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 71,987 5,260 7.29 68,484 5,086 7.43
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 533 --- --- 512 --- ---
Reserve for credit losses (1,600) --- --- (1,829) --- ---
Other assets 8,641 --- --- 8,119 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $79,561 $5,260 --- $75,286 $5,086 ---
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Deposits:
Savings $24,803 $ 495 2.00% $25,086 $ 527 2.10%
Time 15,310 676 4.41 14,680 639 4.35
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 40,113 1,171 2.92 39,766 1,166 2.93
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 15,355 626 4.07 12,807 388 3.03
Long-term debt 5,383 364 6.76 5,039 363 7.20
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 60,851 2,161 3.55 57,612 1,917 3.33
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3,099 3.74 3,169 4.10
- ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits 11,227 --- --- 10,854 --- ---
Other liabilities 1,701 --- --- 1,509 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 73,779 2,161 --- 69,975 1,917 ---
- ----------------------------------------------------------------------------------------------------------------------------------
Dual convertible preferred stock --- --- --- --- --- ---
Stockholders' equity and dual
convertible preferred stock 5,782 --- --- 5,311 --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $79,561 $2,161 $75,286 $1,917 ---
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.30% 4.63%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)The data in this table is presented on a taxable-equivalent basis.
The tax-equivalent adjustment is based upon the applicable
federal and state income tax rates.
(b)Includes fee income of $108 million, $119 million, $124 million, $105
million, and $97 million for the years ended December 31,
1994, 1993, 1992, 1991, and 1990, respectively.
(c)Nonperforming loans are included in average balances used to
determine rates.
<PAGE>
<TABLE><CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/
Balance Paid(b) Rate Balance Paid(b) Rate Balance Paid(b) Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 74 $ 3 4.05% $ 178 $ 10 5.41% $ 411 $ 35 8.64%
1,195 34 3.16 2,167 123 5.66 3,304 269 8.13
113 6 5.31 107 8 7.36 74 7 9.10
14,061 1,102 7.84 1,597 121 7.56 394 51 12.93
3,846 286 7.44 11,409 1,009 8.84 9,682 929 9.60
454 24 5.29 949 66 6.91 1,654 117 7.04
43,029 3,688 8.57 40,986 3,950 9.64 39,407 4,324 10.98
1,974 175 8.88 1,447 138 9.51 1,460 156 10.66
513 --- --- 468 --- --- 503 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
65,259 5,318 8.15% 59,308 5,425 9.15% 56,889 5,888 10.35%
- -----------------------------------------------------------------------------------------------------------------------------
522 --- --- 523 --- --- 257 --- ---
(2,063) --- --- (1,894) --- --- (1,349) --- ---
7,915 --- --- 7,162 --- --- 6,178 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
$71,633 $5,318 --- $65,099 $5,425 --- $61,975 $5,888 ---
- -----------------------------------------------------------------------------------------------------------------------------
$23,532 $ 718 3.05% $19,195 $ 926 4.82% $15,490 $ 918 5.93%
18,499 981 5.30 21,672 1,488 6.87 19,798 1,649 8.33
- -----------------------------------------------------------------------------------------------------------------------------
42,031 1,699 4.04 40,867 2,414 5.91 35,288 2,567 7.28
- -----------------------------------------------------------------------------------------------------------------------------
8,848 306 3.46 6,520 414 6.34 10,825 921 8.51
4,116 332 8.06 3,947 314 7.96 3,231 295 9.13
- -----------------------------------------------------------------------------------------------------------------------------
54,995 2,337 4.25 51,334 3,142 6.12 49,344 3,783 7.67
- -----------------------------------------------------------------------------------------------------------------------------
2,981 3.90% --- 2,283 3.03% --- 2,105 2.68%
- -----------------------------------------------------------------------------------------------------------------------------
10,999 --- --- 9,198 --- --- 8,063 --- ---
1,238 --- --- 837 --- 799 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
67,232 2,337 --- 61,369 3,142 --- 58,206 3,783 ---
- -----------------------------------------------------------------------------------------------------------------------------
283 --- --- 134 --- --- --- --- ---
4,118 --- --- 3,596 --- --- 3,769 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
$71,633 $2,337 --- $65,099 $3,142 --- $61,975 $3,783 ---
- -----------------------------------------------------------------------------------------------------------------------------
4.57% 3.85% 3.70%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE><CAPTION>
QUARTERLY SUMMARIZED FINANCIAL INFORMATION (Unaudited)
- ----------------------------------------------------------------------------------------------------------
By quarter 1994 1993
- ----------------------------------------------------------------------------------------------------------
Dollars in millions,
except per share data 1 2 3 4 Year 1 2 3 4 Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,239 $1,285 $1,339 $1,345 $5,208 $1,256 $1,262 $1,262 $1,260 $5,040
Interest expense 463 518 580 600 2,161 502 483 467 465 1,917
- ----------------------------------------------------------------------------------------------------------
Net interest income 776 767 759 745 3,047 754 779 795 795 3,123
- ----------------------------------------------------------------------------------------------------------
Provision for credit losses 25 12 11 17 65 103 86 72 66 327
- ----------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 751 755 748 728 2,982 651 693 723 729 2,796
Securities available for sale
gains (losses) (1) 19 2 (21) (1) 25 116 130 24 295
Other noninterest income 390 353 378 435 1,556 392 379 416 401 1,588
- ----------------------------------------------------------------------------------------------------------
1,140 1,127 1,128 1,142 4,537 1,068 1,188 1,269 1,154 4,679
Noninterest expense 797 890 728 730 3,145 906 910 949 814 3,579
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 343 237 400 412 1,392 162 278 320 340 1,100
Applicable income taxes 128 105 148 150 531 69 102 105 54 330
- ----------------------------------------------------------------------------------------------------------
Net income before
minority interest 215 132 252 262 861 93 176 215 286 770
Minority interest (2) (3) (3) (4) (12) (5) 7 (5) (3) (6)
Cumulative effect of change
in method of accounting --- --- --- --- --- 53 --- --- --- 53
- ----------------------------------------------------------------------------------------------------------
Net income $ 213 $ 129 $ 249 $ 258 $ 849 $ 141 $ 183 $ 210 $ 283 $ 817
- ----------------------------------------------------------------------------------------------------------
Earnings per share before
cumulative effect of change in
method of accounting $0.75 $0.46 $0.91 $0.97 $3.09 $0.52 $0.67 $0.78 $0.84 $2.82
Earnings per share 0.75 0.46 0.91 0.97 3.09 0.52 0.67 0.78 1.06 3.03
- ----------------------------------------------------------------------------------------------------------
Taxable-equivalent basis:
Interest income--as above $1,239 $1,285 $1,339 $1,345 $5,208 $1,256 $1,262 $1,262 $1,260 $5,040
Taxable-equivalent
adjustment 11 13 14 14 52 11 12 13 10 46
- ----------------------------------------------------------------------------------------------------------
Interest income--taxable-
equivalent basis 1,250 1,298 1,353 1,359 5,260 1,267 1,274 1,275 1,270 5,086
Interest expense 463 518 580 600 2,161 502 483 467 465 1,917
- ----------------------------------------------------------------------------------------------------------
Net interest income
--taxable-equivalent basis $ 787 $ 780 $ 773 $ 759 $3,099 $ 765 $ 791 $ 808 $ 805 $3,169
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE><CAPTION>
COMMON STOCK PRICE AND DIVIDEND INFORMATION(a) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
By quarter 1994 1993
- ----------------------------------------------------------------------------------------------------------
Dollars in millions,
except per share data 1 2 3 4 Year 1 2 3 4 Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Price
High 38 41 3/8 40 1/2 37 7/8 41 3/8 37 7/8 37 5/8 35 1/2 35 5/8 37 7/8
Low 31 3/4 34 3/8 34 7/8 29 7/8 29 7/8 30 1/4 28 1/4 30 3/8 29 1/2 28 1/4
- ----------------------------------------------------------------------------------------------------------
Dividends declared .30 .35 .35 .40 1.40 .225 .25 .25 .30 1.025
Dividends paid .25 .30 .35 .35 1.25 .225 .225 .25 .25 .95
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a)Fleet's common stock is listed on the New York Stock Exchange (NYSE). The
table above sets forth, for the periods indicated, the range of high and
low sale prices per share of Fleet's common stock on the composite tape and
dividends declared and paid per share.
<PAGE>
Independent Auditors' Report
------------------------------
The Board of Directors and Stockholders
Fleet Financial Group, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Fleet Financial Group, Inc. and subsidiaries as of December 31, 1994
and 1993, and the related supplemental consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1994. These supplemental consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Fleet Financial Group, Inc. and Shawmut National Corporation on
November 30, 1995, which has been accounted for as a pooling of interests as
described in Note 1 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Fleet Financial Group, Inc. and subsidiaries after financial
statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Fleet
Financial Group, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
As discussed in Notes 3 and 14 to the supplemental consolidated financial
statements, in 1993 the Corporation changed its methods of accounting for
investments in debt and equity securities and income taxes.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
November 30, 1995, except for Note 20,
as to which the date is December 31, 1995
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31
Dollars in millions, except per share amounts 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans and leases $3,694 $3,612 $3,844
Interest on securities (includes interest from tax-exempt securities of $33
million, $27 million, and $24 million in 1994, 1993, and 1992, respectively) 1,514 1,428 1,429
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 5,208 5,040 5,273
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,171 1,166 1,699
Short-term borrowings 628 388 306
Long-term debt 362 363 332
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,161 1,917 2,337
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,047 3,123 2,936
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 65 327 728
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 2,982 2,796 2,208
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges, fees, and commissions 438 423 408
Mortgage banking 391 445 390
Investment services revenue 294 291 275
Student loan servicing fees 54 51 61
Securities available for sale gains (losses) (1) 295 301
Gain on partial sale of FMG --- --- 121
Other 379 378 341
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,555 1,883 1,897
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,428 1,529 1,432
Occupancy 265 280 277
Equipment 188 188 186
FDIC assessment 114 128 120
Legal and other professional 95 100 89
Purchased mortgage servicing rights amortization 90 247 113
Marketing 84 75 67
Core deposit and goodwill amortization 65 60 51
OREO expense 51 163 332
Merger and restructuring related charges 185 161 ---
Loss on sale of problem assets --- --- 115
Other 580 648 697
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,145 3,579 3,479
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,392 1,100 626
Applicable income taxes 531 330 269
- -----------------------------------------------------------------------------------------------------------------------------------
Net income before minority interest, extraordinary credit and cumulative
effect of change in method of accounting 861 770 357
Minority interest (12) (6) (9)
Extraordinary credit --- --- 18
Cumulative effect of change in method of accounting --- 53 ---
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 849 $ 817 $ 366
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common shares $ 818 $ 780 $ 333
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted weighted average common shares outstanding 264,828,469 257,373,073 237,116,784
Fully diluted earnings per share before extraordinary credit and cumulative
effect of change in method of accounting $ 3.09 $ 2.82 $ 1.33
Fully diluted earnings per share 3.09 3.03 1.40
Dividends declared 1.40 1.025 0.825
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
December 31
Dollars in millions, except share amounts 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $7,613 $3,766
Federal funds sold and securities purchased under agreements to resell 957 72
Securities available for sale 12,250 16,908
Securities held to maturity (market value: $8,452 and $8,022) 8,891 7,931
Loans and leases 46,035 43,713
Reserve for credit losses (1,496) (1,669)
- ---------------------------------------------------------------------------------------------------------------------
Net loans and leases 44,539 42,044
- ---------------------------------------------------------------------------------------------------------------------
Mortgages held for resale 560 3,094
Premises and equipment 985 1,066
Purchased mortgage servicing rights 840 579
Accrued interest receivable 570 518
Deferred taxes 506 412
Excess cost over net assets acquired 317 297
Other intangibles 177 166
Other assets 2,821 2,397
- ---------------------------------------------------------------------------------------------------------------------
Total assets $81,026 $79,250
- ---------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Demand $12,028 $11,228
Regular savings, NOW, money market 23,870 25,414
Time 19,630 13,185
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 55,528 49,827
- ---------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 8,923 9,455
Other short-term borrowings 3,663 6,921
Accrued expenses and other liabilities 1,510 1,865
Long-term debt 5,931 5,217
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 75,555 73,285
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock 557 695
Common stock (shares issued: 244,140,469 in 1994 and 242,259,887 in 1993;
shares outstanding: 237,590,569 in 1994 and 242,164,879 in 1993) 244 242
Common surplus 2,612 2,625
Retained earnings 2,719 2,167
Net unrealized gain (loss) on securities available for sale (411) 238
Treasury stock, at cost, 6,549,900 shares in 1994 and 95,008 in 1993 (250) (2)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,471 5,965
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $81,026 $79,250
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gain (Loss)
Common on Securities
December 31 Preferred Stock $1 Common Retained Available For Treasury
Dollars in millions, except per share amounts Stock Par Surplus Earnings Sale Stock Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992 $387 $202 $1,899 $1,371 $--- $(80) $3,779
Net income --- --- --- 366 --- --- 366
Cash dividends declared on common stock
($0.825 per share) --- --- --- (101) --- --- (101)
Cash dividends declared on preferred stock --- --- --- (28) --- --- (28)
Cash dividends declared by pooled companies
prior to mergers:
Cash dividends declared on common stock --- --- --- (4) --- --- (4)
Cash dividends declared on preferred stock --- --- --- (5) --- --- (5)
Issuance of 9.30% preferred stock 144 --- --- --- --- --- 144
Dual convertible preferred stock 283 --- --- --- --- --- 283
Common stock issued in connection with:
Common stock offering, net of issuance
costs of $8 --- 18 194 --- --- --- 212
Employee benefit plans and conversion
of preferred stock and convertible
debentures --- 2 63 (1) --- 34 98
Adjustment of valuation account for
securities at lower of cost or market --- --- --- 21 --- --- 21
Other items, net --- --- (13) (17) --- --- (30)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 $814 $222 $2,143 $1,602 $--- $(46) $4,735
- --------------------------------------------------------------------------------------------------------------------------------
Net income --- --- --- 817 --- --- 817
Cash dividends declared on common
stock ($1.025 per share) --- --- --- (140) --- --- (140)
Cash dividends declared on preferred stock --- --- --- (22) --- --- (22)
Cash dividends declared by pooled
companies prior to mergers:
Cash dividends declared on common stock --- --- --- (52) --- --- (52)
Cash dividends declared on preferred stock --- --- --- (15) --- --- (15)
Purchase of Series III preferred stock (50) --- --- (15) --- --- (65)
Purchase of Series IV preferred stock (50) --- --- (11) --- --- (61)
Redemption of FDIC preferred stock (16) --- --- (2) --- --- (18)
Common stock issued in connection with:
Common stock offering, net of
issuance costs of $10 --- 15 404 --- --- --- 419
Employee benefit plans and conversion of
preferred stock (3) 5 70 (4) --- 47 115
Net unrealized gain on securities available for
sale at December 31, 1993 --- --- --- --- 238 --- 238
Adjustment of valuation account for
securities at lower of cost or market --- --- --- 24 --- --- 24
Treasury stock purchased --- --- --- --- --- (3) (3)
Other items, net --- --- 8 (15) --- --- (7)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $695 $242 $2,625 $2,167 $238 $(2) $5,965
- --------------------------------------------------------------------------------------------------------------------------------
Net income --- --- --- 849 --- --- 849
Cash dividends declared on common
stock ($1.40 per share) --- --- --- (192) --- --- (192)
Cash dividends declared on preferred stock --- --- --- (15) --- --- (15)
Cash dividends declared by pooled
companies prior to mergers:
Cash dividends declared on common stock --- --- --- (94) --- --- (94)
Cash dividends declared on preferred stock --- --- --- (15) --- --- (15)
Redemption of adjustable rate preferred stock (122) --- --- --- --- --- (122)
Redemption of FDIC preferred stock (16) --- --- (3) --- --- (19)
Common stock issued in connection
with employee benefit plans --- 4 66 (4) --- 4 70
Adjustment to valuation reserve-
securities available for sale --- --- --- --- (666) --- (666)
Treasury stock purchased --- --- --- --- --- (252) (252)
Other items, net --- (2) (79) 26 17 --- (38)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $557 $244 $2,612 $2,719 $(411) $(250) $5,471
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $849 $817 $366
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 161 147 131
Amortization of purchased mortgage servicing rights and other intangible assets 196 372 169
Writedown of OREO to fair value 31 124 266
Provision for credit losses 65 327 728
Deferred income tax expense (benefit) 130 (129) 37
Loss on sale of problem assets --- --- 115
Cumulative effect of change in method of accounting --- (53) ---
Extraordinary credit --- --- (18)
Securities (gains) losses 1 (295) (301)
Gain on partial sale of FMG --- --- (121)
Originations and purchases of mortgages held for resale (11,549) (22,556) (20,168)
Proceeds from sales of mortgages held for resale 14,326 22,025 19,678
(Increase) decrease in accrued receivables, net (98) (183) 726
(Decrease) increase in accrued liabilities, net (345) 336 (177)
Other, net (124) (69) 197
- ------------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 3,643 863 1,628
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of securities available for sale (24,116) (14,542) (11,828)
Proceeds from sales of securities available for sale 26,859 11,887 11,152
Proceeds from maturities of securities available for sale 1,027 1,628 2,313
Purchases of securities held to maturity (2,983) (6,905) (7,771)
Proceeds from maturities of securities held to maturity 2,272 2,522 1,440
Proceeds from sales of securities held to maturity --- 1,561 1,908
Net cash and cash equivalents received from banking institutions acquired --- --- 401
Loans made to customers, nonbanking subsidiaries (1,109) (3,413) (2,796)
Principal collected on loans made to customers, nonbanking subsidiaries 1,097 3,386 3,105
Loans purchased from third parties (including FDIC) (817) (607) (2,329)
Proceeds from sales of loans 135 904 1,798
Net increase in loans and leases, banking subsidiaries (1,958) (1,021) (531)
Putable loans transferred to the FDIC 76 274 632
Proceeds from sales of OREO 134 245 439
Purchases of premises and equipment (266) (259) (182)
Purchases of mortgage servicing rights (377) (266) (157)
- ------------------------------------------------------------------------------------------------------------------
Net cash flow used by investing activities (26) (4,606) (2,406)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits 5,077 (2,902) (4,923)
Net (decrease) increase in short-term borrowings (4,025) 4,931 3,930
Proceeds from issuance of long-term debt 1,385 1,422 1,153
Repayments of long-term debt (700) (1,214) (73)
Proceeds from issuance of common stock 70 523 260
Proceeds from issuance of FMG common stock --- --- 207
Proceeds from issuance of preferred stock --- --- 138
Redemption and repurchase of common and preferred stock (393) (289) ---
Cash dividends paid (299) (194) (131)
- ------------------------------------------------------------------------------------------------------------------
Net cash flow provided by financing activities 1,115 2,277 561
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,732 (1,466) (217)
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 3,838 5,304 5,521
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $8,570 $3,838 $5,304
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
<PAGE>
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fleet Financial Group ("Fleet"
or "corporation") conform to generally accepted accounting principles and
prevailing practices within the banking industry. Certain prior year amounts
have been reclassified to conform to current year classifications.
FLEET-SHAWMUT MERGER. On November 30, 1995, Shawmut National
Corporation ("Shawmut") merged with and into Fleet (the "Merger"). The Merger
was accounted for as a pooling of interests and, accordingly, 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 Merger had been in effect for all periods presented. Further details
pertaining to the Merger are presented in Note 2. Mergers and Acquisitions.
The following is a summary of the significant accounting policies:
BASIS OF PRESENTATION. The supplemental consolidated financial
statements of Fleet include the accounts of the corporation and its
subsidiaries. All material intercompany transactions and balances have been
eliminated.
The supplemental consolidated financial statements of the corporation
have been prepared to give retroactive effect to the Merger with Shawmut
on November 30, 1995. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the corporation after financial statements
covering the date of consummation of the business combination are issued.
For purposes of the Supplemental Consolidated Statements of Cash Flows,
the corporation defines cash and cash equivalents to include cash, due from
banks, interest-bearing deposits, federal funds sold, and securities purchased
under agreements to resell.
SECURITIES. Securities are classified at the time of purchase, based
on management's intentions, as securities held to maturity, securities
available for sale, or trading account securities.
Effective December 31, 1993, the corporation adopted Financial
Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The standard requires that
securities available for sale be reported at fair value, with any net after-tax
unrealized gains (losses) reflected as a separate component of stockholders'
equity. Previously, debt securities that were held for indefinite periods of
time were recorded at the lower of amortized cost or fair value with any net
unrealized losses included in earnings; equity securities were stated at the
lower of aggregate cost or fair value with net unrealized losses reported as a
reduction of retained earnings. Securities held to maturity are those that
management has the positive intent and ability to hold to maturity and are
carried at amortized cost.
Securities available for sale, which include marketable equity
securities, are those that management intends to hold for an indefinite period
of time, including securities used as part of the asset/liability management
strategy, and that may be sold in response to changes in interest rates,
prepayment risk, liquidity needs, the desire to increase capital, or other
similar factors.
Any portion of unrealized loss on an individual security deemed to be
other than temporary is recognized as a realized loss in the accounting period
in which such determination is made. The specific identification method is used
to determine gains and losses on sales of securities.
Trading account securities include securities, principally debt
securities, that are purchased and held principally for the purpose of selling
them in the near term and are stated at fair value, as determined by quoted
market prices. Gains and losses realized on the sale of trading account
securities and adjustments to fair value are included in securities trading
gains.
LOANS AND LEASES. Loans are stated at the principal amounts
outstanding, net of unearned income. Loans and leases are placed on nonaccrual
status either as a result of past-due status or a judgment by management that,
although payments are current, such action is prudent. Except in the case of
most consumer and residential real estate loans, loans and leases on which
payments are past due 90 days or more are placed on nonaccrual status unless
they are well-secured and in the process of normal collection or renewal.
Consumer loans, including residential real estate, are placed on nonaccrual
status at 120 days past due and generally charged off at 180 days past due. When
a loan is placed on nonaccrual status, all interest previously accrued in the
current year, but not collected, is reversed against interest income. Any
interest accrued in prior years is charged against the reserve for credit
losses. Assets can be returned to accrual status when they become current as to
principal and interest or demonstrate a period of performance under the
contractual terms, and, in management's opinion, are fully collectable.
FORECLOSED PROPERTY AND REPOSSESSED EQUIPMENT. Property and equipment
acquired through foreclosure (other real estate owned, or OREO) are stated at
the lower of cost or fair value less estimated selling costs. Credit losses
arising at the time of foreclosure are charged against the reserve for credit
losses. Any additional writedowns to the carrying value of these assets that may
be required are charged to expense and recorded in a valuation reserve that is
maintained on an asset-by-asset basis.
<PAGE>
RESERVE FOR CREDIT LOSSES. The corporation continually evaluates its
reserve for credit losses by performing detailed reviews of certain individual
loans and leases in view of the historic net charge-off experience of the
portfolio, and evaluations of current and anticipated economic conditions and
other pertinent factors. Based on these analyses, the reserve for credit losses
is maintained at levels considered adequate by management to provide for loan
and lease losses inherent in these portfolios.
Loans and leases, or portions thereof, deemed uncollectable are charged off
against the reserve while recoveries of amounts previously charged off are
credited to the reserve. Amounts are charged off once the probability of loss
has been established, giving consideration to such factors as the customer's
financial condition, underlying collateral and guarantees, and general and
industry economic conditions.
MORTGAGES HELD FOR RESALE. Mortgages held for resale are recorded at the
lower of aggregate cost or market value. Market value is determined by
outstanding commitments from investors or by current investor yield
requirements.
PURCHASED MORTGAGE SERVICING RIGHTS (PMSRs). The acquisition costs of
bulk-servicing purchases and servicing rights acquired through the purchase of
mortgage loans originated by others, net of aggregate gains from the sale of
these purchased loans, are capitalized as PMSRs. The acquisition costs
capitalized do not exceed the present value of the expected net future servicing
income at the time of acquisition.
The cost of PMSRs is amortized over the estimated period of net servicing
revenues. The corporation evaluates PMSRs for impairment by making its best
estimate of the undiscounted anticipated future net cash flows considering
market consensus prepayment predictions, portfolio prepayment rates, the range
of reported prepayment predictions, mortgage interest rates, mortgage pipeline
information, and the economic value of its purchased servicing portfolio. If
recorded balances for any of the disaggregated PMSRs categories exceed the
undiscounted anticipated future net cash flows, a current impairment adjustment
equal to the difference between the carrying value and the undiscounted
anticipated future net cash flows is recorded. The corporation's method of
disaggregation provides for the evaluation of PMSRs that have similar economic
characteristics, such as prepayment risk and credit factors, and are within a
reasonable range of purchase dates. The corporation periodically reviews its
method of disaggregation to ensure that it continues to provide for the
evaluation of PMSRs with similar underlying economic characteristics. The
corporation's methodology is to evaluate individual large (bulk) servicing
acquisitions and to evaluate correspondent acquisitions by quarter of
acquisition. Additionally, the corporation will prospectively accelerate
amortization of PMSRs if a change in expected future net servicing income is
indicated.
EXCESS COST OVER NET ASSETS ACQUIRED. The excess cost over net assets of
subsidiaries acquired (goodwill) is amortized on a straight-line basis over
periods of up to 40 years. Goodwill relating to banking subsidiaries acquired
subsequent to 1981 is amortized over periods ranging up to 25 years. On a
periodic basis, the corporation reviews goodwill for events or changes in
circumstances that may indicate that the carrying amount of goodwill may not be
recoverable.
OTHER INTANGIBLE ASSETS. The excess of the purchase price over the fair
value of the tangible net assets of certain acquisitions has been allocated to
core deposits (core deposit intangibles) based on valuations, and is amortized
on a straight-line basis, generally over seven years. On a periodic basis, the
corporation reviews its intangible assets for events or changes in circumstances
that may indicate that the carrying amount of the assets may not be recoverable.
TRADING INSTRUMENTS. Financial instruments (principally foreign exchange
and interest rate instruments) used for trading purposes are stated at market
value. Realized and unrealized gains and losses are currently recognized in net
trading revenue. Interest revenue arising from trading instruments is included
in the income statement as part of interest income.
INCOME TAXES. The corporation changed its method of accounting for income
taxes from the deferred method to the liability method, in accordance with FASB
Statement No. 109, "Accounting for Income Taxes," effective January 1, 1993.
This statement requires deferred tax assets and liabilities to be recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period the change is enacted.
INTEREST-RATE RISK-MANAGEMENT ACTIVITIES. The corporation enters into
certain interest rate instruments, including interest-rate swap, cap and floor
agreements, and futures contracts to manage exposure to interest-rate risk. For
those interest-rate instruments that alter the repricing characteristics of
assets or liabilities, the net differential to be paid or received on the
instruments is treated as an adjustment to the yield on the underlying assets or
liabilities (the accrual method). For those interest-rate instruments entered
into in connection with the securities available for sale portfolio that
synthetically alter the interest-rate characteristics of the securities, the net
differential to be paid or received on the
<PAGE>
instruments is recorded on the accrual method and the instruments are reported
at fair value with unrealized gains and losses reflected as a separate component
of stockholders' equity consistent with the reporting of unrealized gains and
losses on the securities.
To qualify for accrual accounting, the interest-rate instrument must be
designated to specific assets or liabilities or pools of assets or liabilities,
and must be effective at altering the interest-rate characteristics of the
related assets or liabilities. To be effective, there must be correlation
between the interest-rate index on the underlying asset or liability and the
variable rate paid on the instrument. The corporation measures initial and
ongoing correlation by statistical analysis of the relative movements of the
interest-rate indices over time. If correlation were to cease, the interest-rate
instrument would be accounted for as a trading instrument.
Fleet has entered into certain swaps with imbedded written options which,
under certain interest-rate scenarios, can cause the duration of the swaps to
extend. If the maximum duration of these swaps is within a range of acceptable
duration in accordance with asset/liability management parameters, Fleet applies
the same policies as are applied to swaps without imbedded written options.
If an interest-rate instrument is terminated, the gain or loss is deferred
and amortized over the shorter of the remaining contract life or the maturity of
the designated assets or liabilities. If the designated asset or liability is
sold or settled or its balance falls below the notional amount of the
instrument, accrual accounting is discontinued to the extent that the notional
amount exceeds the balance, and accounting for trading instruments is applied.
Gains and losses on futures contracts are included in income unless the
futures contract qualifies for hedge accounting. To qualify for hedge
accounting, futures contracts must be designated as hedges of specific assets or
liabilities and must reduce the corporation's exposure to interest-rate risk.
In addition, at the inception of the hedge and throughout the hedge period,
there must be high correlation between the futures contracts and the related
hedged assets or liabilities. Gains and losses on futures contracts accounted
for as hedges are deferred and amortized over the expected remaining lives of
the related hedged assets or liabilities as an adjustment of interest income or
interest expense.
EARNINGS PER SHARE. Earnings per share is computed by dividing earnings
(after deducting dividends on preferred stock) by the weighted average number of
common shares and common stock equivalents outstanding during the period,
assuming the conversion of the convertible preferred stock. Common stock
equivalents include stock options and rights and the dual convertible preferred
(DCP) stock.
MINORITY INTEREST. Minority interest represents the minority
stockholders' proportionate share of the equity of Fleet Mortgage Group, Inc.,
(FMG). At December 31, 1994 and 1993, the corporation owned approximately 81%
of FMG's common stock.
NOTE 2.
MERGERS AND ACQUISITIONS
FLEET - SHAWMUT MERGER
As previously disclosed, Shawmut merged with and into Fleet on November
30, 1995. The Merger was accounted for as a pooling of interests and under the
terms of the Merger agreement, Fleet common shares were exchanged for all of
the outstanding shares of Shawmut common shares (based on an exchange ratio of
0.8922 for each share of Shawmut). The outstanding preferred stock of Shawmut
was exchanged for comparable issues of Fleet preferred stock. 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 Merger had been in effect for all periods presented.
In connection with the Merger, the corporation has signed definitive
agreements to divest 64 branches to comply with anti-trust concerns. The sale
will consist of approximately $2.6 billion in deposits and $1.9 billion in
loans, including $1.1 billion in residential mortgages.
The following table presents net interest income, net income and net income
per common share reported by each of the companies and on a combined basis.
Year ended December 31,
In millions,
Except per share amounts 1994 1993 1992
- -------------------------------------------------
Net interest income:
Fleet $1,980 $2,051 $1,953
Shawmut 1,067 1,072 983
- -------------------------------------------------
Combined $3,047 $3,123 $2,936
- -------------------------------------------------
Net Income:
Fleet $ 612 $ 488 $ 280
Shawmut 237 329 86
- -------------------------------------------------
Combined $ 849 $ 817 $ 366
- -------------------------------------------------
Net Income per common share:
Fleet $ 3.75 $ 3.01 $1.77
Shawmut 1.87 2.75 0.78
-------------------------------------------------
Combined 3.09 3.03 1.40
-------------------------------------------------
On January 27, 1995, the corporation completed its acquisition of NBB
Bancorp ("NBB"). The corporation issued approximately 6.2 million treasury
shares with an aggregate carrying value of approximately $200 million as well
as approximately $230 million in cash. In addition, Fleet issued 2.5 million
warrants to purchase Fleet common stock to NBB stockholders with an exercise
price of $43.875 per share and a term of six years. The warrants are exercisable
beginning one year after closing the acquisition. The transaction was accounted
for under the purchase method of accounting. Goodwill is being amortized on a
straight-line basis over 15 years.
<PAGE>
On January 31, 1995, the corporation completed its purchase of
substantially all the assets of the Business Finance Division of Barclays
Business Credit, Inc. ("Barclays"). The book value of the assets acquired was
approximately $2.3 billion. The transaction was acounted for under the purchase
method of accounting. Goodwill is being amortized on a straight-line basis over
25 years.
The corporation also completed its tender offer to purchase the
approximately 19% publicly-held shares of FMG common stock for $20.00 in
cash per share on February 28, 1995. Goodwill is being amortized on a
straight-line basis over 15 years.
On March 3, 1995, the corporation purchased Plaza Home Mortgage Corporation
("Plaza") which operates a mortgage banking franchise, principally in
California, for approximately $88 million in cash. Goodwill is being amortized
on a straight-line basis over 15 years. This acquisition added approximately
$9.2 billion in mortgage servicing and expanded the corporation's mortgage
banking franchise by 40 additional offices.
On June 9, 1995, the corporation completed its acquisition of Northeast
Federal Corp. ("Northeast") of Farmington, Connecticut, with assets of $3.3
billion. This acquisition was accounted for under the purchase method of
accounting. Goodwill is being amortized on a straight-line basis over 15 years.
The information below presents, on a pro forma basis, certain historical
financial information for the corporation, adjusted for each of the NBB, Plaza,
FMG, Northeast and Barclays transactions which occurred in 1995 as if such
transactions had been consummated on January 1, 1994.
PRO FORMA RESULTS
Fleet, NBB, Plaza, FMG, Northeast, Barclays
- ---------------------------------------------------------
Net interest income $3,242
Net income available to common stockholders 786
Net income per common share 2.95
- ---------------------------------------------------------
CORPORATION AS REPORTED
Net interest income $3,047
Net income available to common stockholders 818
Net income per common share 3.09
- ---------------------------------------------------------
The corporation completed several acquisitions of banking organizations
during 1994. The acquisitions in the following table were accounted for as
poolings of interests. The acquisitions of these organizations are reflected in
the supplemental consolidated financial statements as though they had been
combined with the corporation as of the beginning of the earliest period
presented.
Assets
Added at Common
(In millions, except Completion Acquisition Shares Exchange
exchange ratio) Date Date Issued Ratio
- ---------------------------------------------------------------------
Peoples Bancorp of
Worcester, Inc. May 23, 1994 $871 7.4 2.181
New Dartmouth
Bank June 6, 1994 1,724 5.7 13.523
Gateway Financial
Corporation June 27, 1994 1,259 6.6 0.499
Sterling Bancshares
Corp. August 15, 1994 1,000 3.6 1.096
Merger related charges of $100.9 million were recorded during the second
quarter of 1994 to reflect the costs to integrate these acquisitions. The merger
related charges include: $18.9 million for severance and benefits costs for
workforce reductions; $39.4 million for the closing of duplicative branches and
facilities and cancellation of vendor contracts; $11.1 million for financial
advisory, legal and accounting expenses; and $7.0 million for losses on the
accelerated sales of foreclosed properties. In addition, the sales of securities
and disposition of residential loans of the acquired entities to maintain an
interest rate risk profile consistent with that of the corporation resulted in
losses of $12.5 million and $12.0 million, respectively, which are included in
merger related charges. Accrued merger expenses totaled $13.8 million at
December 31, 1994.
During 1994, the corporation acquired two smaller banks with combined total
assets of $332 million which were accounted for under the purchase method of
accounting. In addition, ten branches with deposits of $427 million, deposits
held by the Resolution Trust Corporation totaling $25 million and the processing
services division of a bankruptcy claims processing company were acquired.
<PAGE>
<TABLE><CAPTION>
NOTE 3.
SECURITIES
1994 1993
Gross Gross Gross Gross
December 31 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government agencies $ 3,851 $--- $184 $ 3,667 $ 7,511 $184 $ 9 $ 7,686
Mortgage-backed securities 8,352 5 459 7,898 8,238 202 6 8,434
Other debt securities 180 --- 1 179 250 7 --- 257
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 12,383 5 644 11,744 15,999 393 15 16,377
- ------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 360 6 10 356 419 23 4 438
Other securities 150 --- --- 150 93 --- --- 93
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $12,893 $ 11 $654 $12,250 $16,511 $416 $19 $16,908
- ------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Treasury and government agencies $ 1,980 $--- $116 $ 1,864 $ 1,746 $ 3 $ 6 $ 1,743
State and municipal 843 5 6 842 734 15 1 748
Mortgage-backed securities 4,158 1 235 3,924 3,677 61 3 3,735
Other debt securities 1,910 1 89 1,822 1,774 27 5 1,796
- ------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 8,891 $ 7 $446 $ 8,452 $ 7,931 $106 $15 $ 8,022
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Effective December 31, 1993 the corporation adopted FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
connection with the adoption of Statement No. 115, the corporation transferred
securities netting to $345 million from the held to maturity portfolio to the
available for sale portfolio.
The corporation is currently reviewing its investment securities
portfolio to determine the classification of such securities as either available
for sale or held to maturity in connection with the corporation's existing
interest-rate risk position. As a result of this review, certain
reclassifications of its investment securities may result. Any such
reclassification will be accounted for in accordance with Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires that securities transferred from held to
maturity to available for sale be transferred at fair value with any unrealized
gain or loss, net of taxes, at the date of transfer recognized as a separate
component of stockholders' equity.
The securities available for sale portfolio had net unrealized gains
(losses) of $(643) million and $397 million at December 31, 1994 and 1993,
respectively. Accordingly, stockholders' equity has been increased (reduced) by
a valuation reserve of $(411) million and $238 million at December 31, 1994 and
1993, respectively, which represents the after-tax effect of the unrealized
gains (losses).
At December 31, 1994, securities available for sale and securities
held to maturity with carrying values of $2.6 billion and $5.3 billion,
respectively, were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes, compared to $8.0 billion and
$5.7 billion, respectively, at December 31, 1993.
Proceeds from sales of debt securities during 1994, 1993, and 1992 were
$24.1 billion, $11.3 billion, and $9.9 billion, respectively. Gross gains of $24
million and gross losses of $51 million were realized on those sales in 1994,
gross gains of $252 million and gross losses of $3 million were realized on
those sales in 1993, and gross gains of $304 million and gross losses of $7
million were realized on those sales in 1992. Net realized gains on sales of
marketable equity securities were $14 million, $45 million, and $4 million in
1994, 1993, and 1992, respectively.
Income tax expense (benefit) on securities available for sale gains
(losses) was $(1) million in 1994, $121 million in 1993, and $115 million in
1992.
As part of the acquisitions completed during the second quarter of
1994, certain securities previously classified as held to maturity by the
acquired entities were transferred to securities classified as available for
sale and certain securities classified as available for sale were sold in order
to maintain the corporation's interest rate risk profile. The amortized cost and
fair value of the securities transferred from the held to maturity category to
available for sale were $112.1 million and $106.9 million, respectively. Also,
securities previously classified as available for sale by the acquired entities,
with a fair value of $377.5 million, were transferred to securities classified
as held to maturity.
<PAGE>
The amortized cost and estimated market value of debt securities held
to maturity and securities available for sale by contractual maturity are shown
in the following table. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
MATURITIES OF SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------
December 31, 1994 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
- --------------------------------------------------------------------------
Amortized cost:
U.S. Treasury and
government
agencies $88 $3,568 $195 --- $3,851
Mortgage-backed
securities --- 3 68 8,281 8,352
Other debt securities --- 85 81 14 180
- --------------------------------------------------------------------------
Total debt securities $88 $3,656 $344 $8,295 $12,383
- --------------------------------------------------------------------------
Percent of total
debt securities 0.7% 29.5% 2.8% 67.0% 100.0%
Weighted average
yield(a) 5.45 5.61 6.47 6.68 6.35
- --------------------------------------------------------------------------
Market value $88 $3,487 $326 $7,843 $11,744
- --------------------------------------------------------------------------
MATURITIES OF SECURITIES HELD TO MATURITY
- --------------------------------------------------------------------------
December 31, 1994 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
- --------------------------------------------------------------------------
Amortized cost:
U.S. Treasury and
government
agencies $ 545 $1,433 $ 2 $ --- $1,980
Mortgage-backed
securities --- 916 2,238 1,004 4,158
State and municipal 552 208 63 20 843
Other securities 14 948 111 837 1,910
- --------------------------------------------------------------------------
Total debt securities $1,111 $3,505 $2,414 $1,861 $8,891
- --------------------------------------------------------------------------
Percent of total
debt securities 12.5% 39.4% 27.2% 20.9% 100.0%
Weighted average
yield(a) 5.07 5.65 6.47 6.12 5.92
- --------------------------------------------------------------------------
Market value $1,098 $3,334 $2,265 $1,755 $8,452
- --------------------------------------------------------------------------
(a)A tax-equivalent adjustment has been included in the calculations of
the yields to reflect this income as if it had been fully taxable.
The tax-equivalent adjustment is based upon the applicable federal and
state income tax rates.
<PAGE>
<TABLE><CAPTION>
NOTE 4.
LOANS AND LEASES
- ------------------------------------------------------------------------------------------------------------------
December 31
Dollars in millions 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Commercial and industrial $19,675 $19,031 $18,818 $17,310 $15,245
Consumer 10,893 10,229 9,415 9,558 8,188
Commercial real estate:
Construction 666 637 1,436 1,890 2,693
Interim/permanent 4,789 5,279 5,480 6,315 4,211
Residential real estate 8,529 7,378 7,444 7,063 5,098
- ------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 44,552 42,554 42,593 42,136 35,435
- ------------------------------------------------------------------------------------------------------------------
Lease financing:
Lease receivables 1,765 1,291 1,194 1,698 2,093
Estimated residual value 212 165 172 190 169
Unearned income (494) (297) (237) (324) (400)
- ------------------------------------------------------------------------------------------------------------------
Lease financing, net of unearned income(a) 1,483 1,159 1,129 1,564 1,862
- ------------------------------------------------------------------------------------------------------------------
Total loans and leases, net of unearned income $46,035 $43,713 $43,722 $43,700 $37,297
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The corporation's leases consist principally of full-payout, direct
financing leases. For federal income tax purposes, the corporation has
the tax benefit of depreciation on the entire leased unit and interest
on the long-term debt. Deferred taxes arising from leveraged leases
totaled $ 60 million in 1994 and $ 13 million in 1993. Future minimum
lease payments to be received are $608 million in 1995; $317 million,
1996; $225 million, 1997; $177 million, 1998; $109 million, 1999;$329
million, 2000 and thereafter.
Total loans and leases at December 31, 1994 include $393 million of loans
subject to loss-sharing arrangements with the Federal Deposit Insurance
Corp.(FDIC), whereby the FDIC generally reimburses Fleet for 80% of net
charge-offs for periods ranging from three to five years from the date of
acquisition.
Certain directors and executive officers of the corporation and its
subsidiaries, including companies with which they are affiliated, borrowed from
the subsidiaries during 1994. Such loans were made in the ordinary course of
business under the subsidiaries' normal credit terms, including interest rate
and collateral. Loans to these individuals and affiliated companies were as
follows.
RELATED PARTY LOANS
- ------------------------------------------------------------
Dollars in millions
- ------------------------------------------------------------
Balance Balance
December 31, 1993 Additions Repayments December 31, 1994
- ------------------------------------------------------------
$284 $120 $140 $264
- ------------------------------------------------------------
Concentrations of Credit Risk. Although the corporation is engaged in
business nationwide, the lending done by the banking subsidiaries is
primarily concentrated in the Northeast.
NOTE 5.
RESERVE FOR LOSSES
RESERVE FOR CREDIT LOSS ACTIVITY
- -----------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992
- -----------------------------------------------------------
Balance at beginning of year $1,669 $1,937 $2,065
Provision charged to income 65 327 728
Loans and leases charged off (377) (729) (1,041)
Recoveries of loans and
leases charged off 138 144 118
Acquisitions/other 1 (10) 67
- -----------------------------------------------------------
Balance at end of year $1,496 $1,669 $1,937
- -----------------------------------------------------------
Acquisitions/other includes reserves acquired as a result of acquisitions,
offset in part by reserve transfers to the FDIC.
RESERVE FOR OREO ACTIVITY
- ----------------------------------------------
Year ended December 31
Dollars in millions 1994 1993
- ----------------------------------------------
Balance at beginning of year $ 45 $51
Provision 31 124
Dispositions, net (26) (130)
- ----------------------------------------------
Balance at end of year $50 $45
- ----------------------------------------------
<PAGE>
NOTE 6.
NONPERFORMING ASSETS
- ----------------------------------------------------------
December 31
Dollars in millions 1994 1993 1992 1991 1990
- ----------------------------------------------------------
Nonperforming loans
and leases:
Current or less than
90 days past due $186 $ 254 $ 622 $ 575 $ 747
Noncurrent 480 584 885 1,654 1,793
OREO 95 200 507 941 658
- ----------------------------------------------------------
Total NPAs $761 $1,038 $2,014 $3,170 $3,198
- ----------------------------------------------------------
NPAs as a percent of
outstanding loans,
leases, and OREO 1.65% 2.35% 4.53% 7.05% 8.43%
- ----------------------------------------------------------
Accruing loans and
leases contractually
past due
90 days or more $139 $120 $163 $267 $254
- ----------------------------------------------------------
The corporation has no material outstanding commitments to lend additional
funds to customers whose loans have been placed on nonperforming status or the
terms of which have been modified.
The gross interest income that would have been recorded if the
nonperforming loans and leases had been current in accordance with their
original terms and had been outstanding throughout the period (or since
origination if held for part of the period) was $66 million, $106 million, and
$165 million in 1994, 1993, and 1992, respectively. The actual amount of
interest income on those loans included in net income for the period was $19
million, $27 million, and $57 million in 1994, 1993, and 1992, respectively.
Renegotiated loans that were returned to accrual status totaled $51
million and $102 million at December 31, 1994 and 1993, respectively. These
loans, which are not included in nonperforming assets (NPAs), were renegotiated
at existing market interest rates and are performing in accordance with their
renegotiated terms. The average current yield on these loans was 7.5 % and 7.1 %
at December 31, 1994 and 1993, respectively. In addition, approximately $5
million and $23 million of loans renegotiated in 1994 and 1993, respectively,
are reflected in NPAs as a sufficient payment performance history has not yet
been established.
The FASB has issued Statement No. 114, "Accounting by Creditors for
Impairment of a Loan", which the corporation adopted on January 1, 1995,
requiring, among other things, that creditors value all loans for which it is
probable that the creditor will be unable to collect all amounts due according
to the terms of the loan agreement at the present value of expected future cash
flows discounted at the loan's effective interest rate, or observable market
price of the impaired loans, or the fair value of the collateral if the loan is
collateral-dependent. The FASB also issued Statement No. 118, which amended
Statement No. 114, by allowing creditors to use their existing methods of
recognizing interest income. The adoption of these standards does not have a
material impact on the corporation or its results of operations.
NOTE 7.
PURCHASED MORTGAGE SERVICING RIGHTS
The corporation's PMSRs activity for the years ended December 31, 1994,
1993, and 1992 is as follows;
PURCHASED MORTGAGE SERVICING RIGHTS
- -------------------------------------------------------------
Year-ended December 31
Dollars in millions 1994 1993 1992
- -------------------------------------------------------------
Balance at beginning of
year $579 $563 $525
Additions 377 266 157
Servicing sales (26) (3) (6)
Amortization (90) (142) (110)
Impairment charge --- (105) (3)
- -------------------------------------------------------------
Balance at end of year $840 $579 $563
- -------------------------------------------------------------
<PAGE>
NOTE 8.
RESTRUCTURING CHARGES
The corporation recorded restructuring charges of $84 million and $161
million in connection with efficiency improvement programs during 1994 and 1993,
respectively. These programs, which commenced in the second quarter of 1993 and
continued into 1994, were intended to enhance the corporation's competitive
position through a comprehensive review of all its Northeast banking, mortgage
banking, and consumer finance activities and operations. The charges included
only identified direct and incremental costs associated with these programs. The
components of the restructuring charges were as follows.
COMPONENTS OF RESTRUCTURING CHARGES
- ----------------------------------------------
Dollars in millions
- ----------------------------------------------
Severance $122
Occupancy 71
Other (including project costs) 52
- ----------------------------------------------
Total restructuring charges $245
- ----------------------------------------------
Severance charges include the cost of terminations, other benefits, and
outplacement costs. The occupancy charge consists of the cost of leases expected
to be terminated, space consolidation, and losses anticipated to be incurred on
the sale of certain vacated properties. Project costs represent expenses
incurred during the restructuring program.
All funding for cash expenditures relating to the restructuring plan have
been made from the operating activities of the corporation. The corporation's
liquidity has not been significantly affected by these cash outlays. During
1994, $20 million of incremental costs has been incurred relating to the
restructuring plan and has not been charged against the restructuring accrual.
It is anticipated that approximately $38 million of additional incremental costs
will be incurred in 1995.
The following table presents a summary of activity with respect to the
restructuring charges.
<PAGE>
RESTRUCTURING ACCRUAL
- --------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993
- --------------------------------------------------------
Balance at beginning of year $126 $---
Provision charged against income 84 161
Cash outlays (90) (25)
Noncash writedowns (43) (10)
Balance at end of year $ 77 $126
- --------------------------------------------------------
The cash outlays made during 1994 relate primarily to severance costs and
project-related costs. Noncash writedowns relate to vacated facilities and
building and leasehold improvement write-offs. The majority of the remaining
cash outlays are expected to be made during 1995 and will consist primarily of
severance-related costs. Additional noncash writedowns are not expected to be
significant.
<TABLE><CAPTION>
NOTE 9.
SHORT-TERM BORROWINGS
- ---------------------------------------------------------------------------------------------------------------------------------
Securities
Federal Sold Under Other Total
Funds Agreements to Commercial Short-Term Short-Term
Dollars in millions Purchased Repurchase Paper Borrowings Borrowings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Balance at December 31 $2,753 $ 6,170 $ 835 $ 2,828 $12,586
Highest balance at any month-end 4,368 10,835 1,199 5,041 18,069
Average balance for the year 3,943 7,769 1,005 2,638 15,355
Weighted average interest rate as of December 31 5.14 % 5.69 % 5.96 % 5.51 % 5.55 %
Weighted average interest rate paid for the year 4.22 4.05 4.36 3.94 4.07
- ---------------------------------------------------------------------------------------------------------------------------------
1993
Balance at December 31 $2,151 $7,304 $1,337 $5,584 $16,376
Highest balance at any month-end 2,151 9,122 1,415 5,584 16,376
Average balance for the year 1,632 7,505 1,036 2,634 12,807
Weighted average interest rate as of December 31 3.10 % 2.90 % 3.38 % 3.16 % 3.06 %
Weighted average interest rate paid for the year 3.08 2.96 3.52 3.04 3.03
- ---------------------------------------------------------------------------------------------------------------------------------
1992
Balance at December 31 $1,026 $6,479 $ 743 $3,198 $11,446
Highest balance at any month-end 1,366 6,888 866 3,285 11,572
Average balance for the year 1,076 5,316 610 1,846 8,848
Weighted average interest rate as of December 31 3.13 % 3.13 % 3.71 % 4.09 % 3.44 %
Weighted average interest rate paid for the year 3.36 3.28 4.20 3.76 3.46
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
generally mature within thirty days of the transaction date. Commercial paper
and other short-term borrowings generally mature within 90 days, although
commercial paper may have a term of up to 270 days.
Total credit facilities available were $3.2 billion with $500 million
outstanding at December 31, 1994, compared to $2.6 billion with $940 million
outstanding at December 31, 1993. The amounts outstanding under the lines of
credit relate entirely to FMG at both December 31, 1994 and 1993. During 1994,
the corporation and its subsidiaries paid commitment fees ranging from 0.125% to
0.25% on the lines.
NOTE 10.
LONG-TERM DEBT
During 1994, the corporation filed a universal shelf registration statement with
the Securities and Exchange Commission (SEC), which combined existing debt and
preferred stock shelf registrations with a registration of an additional $500
million of securities. This universal shelf registration provides for the
issuance of common and preferred stock, senior or subordinated debt securities,
and other debt securities. The corporation's shelf registrations provided for
the issuance of an aggregate $1.4 billion in securities, all of which remain
available for issuance at December 31, 1994. As of November 30, 1995, $193
million remained available from the corporation's shelf registrations. On
October 24, 1995, the corporation filed a new registration statement for an
additional $750 million in securities, which became effective on November
29, 1995.
<PAGE>
The following table presents components of long-term debt for the parent company
and its affiliates.
LONG-TERM DEBT
----------------------------------------------------------
December 31 Maturity
Dollars in millions Date 1994 1993
----------------------------------------------------------
Senior notes and debentures
Parent company:
MTNs 5.17%-10.22% 1994-1997 $ 80 $ 280
9.375%-11.75% notes 1994 --- 115
5.625% notes 1995 200 200
8.875% subordinated
notes 1996 150 150
7.65% - 8.125% notes 1997 200 200
7.25% notes 1997-1999 400 ---
Other 1 1
---------------------------------------------------------
Total parent company 1,031 946
---------------------------------------------------------
Affiliates:
MTNs 5.35%-7.48% 1994-2003 285 373
Floating-rate notes 1994 --- 250
Floating-rate notes 1995 400 400
Floating-rate bank
notes 1995 1,038 ---
9.80% notes 1995 250 250
5.50% - 5.60% 1995 225 ---
Floating-rate bank
notes 1996 250 ---
9.98% notes 1996 70 70
6.125% notes 1997 150 150
6.50% notes 1999 150 150
FHLB borrowings 482 1,014
Other 16 27
---------------------------------------------------------
Total affiliates 3,316 2,684
---------------------------------------------------------
Total senior notes
and debentures 4,347 3,630
---------------------------------------------------------
Subordinated notes and
debentures:(a)
Floating-rate
subordinated notes 1997 50 50
Floating-rate
subordinated notes 1998 100 100
7.625% - 9.85%
subordinated notes 1999 450 450
9.00%-9.90%
subordinated notes 2001 325 325
6.875% subordinated
notes 2003 150 150
7.20% subordinated
notes 2003 150 150
8.125% subordinated
notes 2004 250 250
8.625% subordinated
notes 2007 107 107
Other 2 5
---------------------------------------------------------
Total subordinated
notes and
debentures 1,584 1,587
---------------------------------------------------------
Total long-term debt $5,931 $5,217
---------------------------------------------------------
(a)At December 31, 1994 and 1993, all subordinated debt
was at the parent company with the exception of
$400,000 at an affiliate in 1993, and is included in
total risk-based capital.
The $200 million of 5.625%, $100 million of 7.65%, and $400 million of
7.25% notes provide for single principal payments and are not redeemable prior
to maturity. The $150 million of 8.875% and $100 million of 8.125% notes are
unsecured obligations with interest payable semiannually and are not redeemable
prior to maturity.
Long-term senior borrowings of affiliates include $285 million of
medium-term notes (MTNs), $200 million of 5.50% notes due 1995, $150 million of
6.125% notes and $150 million of 6.50% notes issued by FMG, and $250 million of
9.80% and $70 million of 9.98% notes issued by Fleet Financial Corp.
The $400 million of floating-rate notes due 1995 were issued by subsidiary
banks and have a rate which floats with the London Interbank Offered Rate
(LIBOR). The notes are secured by the Bank's qualifying student loan portfolios
or collateralized by mortgage backed securities (MBS). The $250 million of
floating-rate notes due 1996 currently have interest rates ranging from 5.64% to
6.58%. Of the $1,038 million floating-rate bank notes due 1995 issued by
subsidiary banks, $250 million float with the federal funds rate and $788
million have interest rates ranging from 5.64% to 6.58% with a weighted average
interest rate of 6.10% at December 31, 1994 .
The fixed-rate subordinated notes all provide for single principal payments
at maturity with the exception of the $150 million of 9.85% subordinated notes.
These notes mature on June 1, 1999, and at the corporation's option the notes
will either be exchanged for common stock, preferred stock or certain other
primary capital securities of the corporation having a market value equal to the
principal amount of the notes, or will be repaid from the proceeds of other
issuances of such securities. The corporation may, however, at its option,
revoke its obligation to redeem the notes with capital securities based upon the
capital treatment of the notes by its primary regulator or consent by its
primary regulator for such revocation. The holders of the capital notes are
subordinate in rights to depositors and other creditors.
The floating-rate subordinated notes due 1997 are not redeemable prior to
maturity. All the floating-rate subordinated notes due 1998 are redeemable at
the option of the corporation, in whole or in part, at their principal amount
plus accrued interest. Both these notes pay interest based on the three-month
LIBOR, reset quarterly.
The aggregate payments required to retire long-term debt are: 1995,$2,519
million; 1996, $665 million; 1997, $747 million; 1998, $143 million; 1999,
$805 million; 2000 and thereafter, $1,052 million.
<PAGE>
NOTE 11.
PREFERRED STOCK
- --------------------------------------------- -------- --------
December 31
Dollars in millions, except per share data 1994 1993
- --------------------------------------------- -------- --------
9.30% cumulative preferred stock, $250 stated
value, 575,000 shares issued and out-
standing at December 31, 1994 and 1993 $144 $144
10.12% Series III perpetual preferred stock, $1
par, 519,758 shares issued and outstanding
at December 31, 1994 and 1993 50 50
9.375% Series IV perpetual preferred stock, $1
par, 478,838 shares issued and outstanding
at December 31, 1994 and 1993 46 46
Preferred stock with cumulative and adjustable
dividends, $50 stated value, 700,000 shares
issued with 688,700 and 700,000 shares
outstanding at December 31, 1994 and
1993, respectively 34 35
Non-voting, convertible, redeemable, prefer-
red stock (FDIC preferred stock), $.01 par,
170,073 shares issued and outstanding at
December 31, 1993 --- 15
Preferred stock with cumulative and adjustable
dividends, $20 par, 1,500,000 shares issued --- 73
and outstanding at December 31, 1993
Preferred stock with cumulative and adjustable
dividends, $1 par, 1,000,000 shares issued
and outstanding at December 31, 1993 --- 49
Dual convertible preferred stock $200 stated
value, 1,415,000 shares issued and out-
standing at December 31, 1994 and 1993 283 283
- ------------------------------------------------- -------- --------
Total $557 $695
- ------------------------------------------------- -------- --------
The 9.30% Cumulative Preferred stock is redeemable at the option of the
Corporation on or after October 15, 1997, at $250 per share ($25 per depositary
share), plus accrued and unpaid dividends thereon. The Series III perpetual
preferred stock is redeemable at the option of Fleet on or after June 1, 1996,
at $105.06 per share ($26.265 per depositary share), declining each year to $100
per share ($25 per depositary share) on or after June 1, 2001, plus accrued and
unpaid dividends thereon. The Series IV perpetual preferred stock is redeemable
at the option of Fleet on or after December 1, 1996, at $100 per share ($25 per
depositary share), plus accrued and unpaid dividends thereon. The Preferred
Stock with cumulative and adjustable dividends is redeemable at the option of
the Corporation at $50 per share. Except in certain circumstances, the holders
of the preferred stock have no voting rights.
During 1994, the corporation called for redemption all of its $1 par and
$20 par adjustable-rate preferred stock. The redemption price was $50 for
each share of $1 par and $20 par adjustable-rate preferred stock plus accrued
dividends.
On January 26, 1995, the Corporation completed a $125 million
offering of 500,000 shares of 9.35% Cumulative Preferred Stock with a stated
value of $250 per share represented by Depositary Shares.
In connection with the acquisition of the Bank of New England in 1991, The
Corporation issued to limited partnerships managed by affiliates of Kohlberg,
Kravis, Roberts & Co. $283 million of dual convertible preferred stock (DCP),
$200 stated value, convertible into approximately 16 million shares of Fleet
common stock at a conversion price of $17.65 per common share. Shares of DCP
stock carry limited voting rights until conversion and will pay dividends equal
to 50% of the common dividends paid (if any, in excess of $15 million) by Fleet
Banking Group, a wholly-owned subsidiary of the corporation, which owns all of
the common stock of Fleet Bank of Massachusetts and Fleet Bank, N.A. (Conn.).
No such dividends in excess of $15 million have been declared to date nor are
any anticipated to be declared in 1995.
In certain instances, no sooner than six years after issuance (four
years with regulatory approval, or earlier if certain capital ratios of Fleet
are not met), DCP stockholders can convert their stock into a 50% interest of
Fleet Banking Group. However, Fleet will have the option to redeem DCP stock at
a redemption price equal to 50% of the appraised value of Fleet Banking Group
less the sum of (1) the market value of the shares of Fleet common stock into
which the DCP stock is then convertible (and such shares of common stock will be
distributed to the holders of the DCP stock), and (2) the value of the rights
referred to below. Fleet has the option to pay such redemption price in cash or
in any combination of Fleet securities having a realizable market value equal to
such redemption price. It is the corporation's intent to exercise its unilateral
right to issue shares of its own common stock in connection with such a
conversion, and the corporation has reserved shares of its common stock for this
purpose.
In addition, Fleet issued to the holders of the DCP stock
nontransferable rights to purchase 6,500,000 shares of common stock at an
exercise price of $17.65 per share (the rights). The rights, which are
exercisable immediately, will expire on July 12, 2001, and are not transferable.
Fleet has the option to pay appreciation on the rights in lieu of delivering the
shares upon exercise.
<PAGE>
NOTE 12.
COMMON STOCK
At December 31, 1994, Fleet had 237.6 million common shares outstanding.
Shares reserved for future issuance in connection with the corporation's stock
plans, the DCP stock, the rights, stock options and the acquisition of Northeast
totaled 70 million. The Northeast acquisition was completed on June 9, 1995
with 5.8 million shares issued. In connection with the Merger, shareholders
approved an increase in the authorized shares of Fleet common stock
to 600 million on June 21, 1995.
In connection with the settlement of certain litigation, the
Corporation issued warrants for the purchase of up to 1.2 million shares of
common stock on January 18, 1994. The warrants have an exercise price of $24.78
per share, are listed on the New York Stock Exchange, are freely tradable and
are exercisable for a period of one year, commencing January 18, 1995.
During 1994, the corporation purchased a total of 6.6 million shares of
common stock in the public market at a total cost of $252 million, of which 6.2
million shares were issued to NBB stockholders in January 1995 when the
acquisition was completed. Refer to Note 2 for more information on the NBB
acquisition.
Fleet's Board of Directors declared a dividend of one preferred share
purchase right for each outstanding share of Fleet common stock in 1990. Under
certain conditions, a right may be exercised to purchase 1/100 of the
corporation's cumulative participating preferred stock at a price of $50,
subject to adjustment. The rights become exercisable if a party acquires 10% or
more (in the case of certain qualified investors, 15% or more) of the issued and
outstanding shares of Fleet common stock, or after the commencement of a tender
or exchange offer for 10% or more of the issued and outstanding shares. When
exercisable under certain conditions, each right would entitle the holder to
receive upon exercise of a right that number of shares of common stock having a
market value of two times the exercise price of the right. The rights will
expire in the year 2000 and may be redeemed in whole, but not in part, at a
price of $0.01 per share at any time prior to expiration or the acquisition of
10% of Fleet common stock.
NOTE 13.
EMPLOYEE BENEFITS
Stock Option Plan. The corporation has a stock option plan, which provides
for the granting of incentive and nonqualified stock options to certain
employees for the purchase of Fleet common stock at 100 percent of fair market
value at the date of grant. In most cases, options granted under the plan vest
in five equal installments and expire at the end of ten years, otherwise,
options granted under the Plans are exercisable after a minimum of one year but
within ten years of the date of grant. Option plans resulted in charges to
expense of $5 million in 1994, $2 million in 1993, and $7 million in 1992. At
December 31, 1994, 1993, and 1992, exercisable options totaled 3,347,706,
3,183,814, and 2,739,430, respectively. The following table shows the activity
for the stock option plans.
STOCK OPTIONS
- -------------------------- ----------- ----------- ----------
1994 1993 1992
- -------------------------- ----------- ----------- ----------
Balance at January 1 8,464,792 6,714,687 5,638,238
Granted 3,827,637 3,051,620 2,380,927
Exercised 1,539,021 898,656 889,397
Expired or canceled 680,578 402,859 415,081
Balance at December 31 10,072,830 8,464,792 6,714,687
Price range--high
Balance at January 1 $37.31 $34.75 $34.75
Granted 36.94 37.31 30.31
Exercised 32.75 28.44 26.63
Expired or canceled 36.94 34.75 33.06
Balance at December 31 37.31 37.31 34.75
Price range--low
Balance at January 1 $5.19 $5.19 $5.19
Granted 8.07 11.21 8.97
Exercised 5.19 5.19 5.19
Expired or canceled 5.19 5.19 5.19
Balance at December 31 5.19 5.19 5.19
- -------------------------- ----------- ----------- ----------
At December 31, 1994, approximately 1.9 million stock options were issued
in tandem with SARs that entitle the holder to tender an option for cancellation
and receive the appreciation in value in cash and common stock of the
corporation.
Restricted Stock Plan. The corporation has a restricted stock plan under
which key employees are awarded shares of the corporation's common stock. Grants
of restricted stock awards are determined using certain guidelines based upon
salary and responsibility levels, as well as predetermined performance
criteria. Compensation expense related to restricted stock awards totaled
$1.9 million in 1994, $1.7 million in 1993 and $1.3 million in 1992. As of
December 31, 1994 and 1993, 323,734 grants and 295,237 grants were unvested
and outstanding, respectively, with an average grant price of $26.38 and
$19.81, respectively.
<PAGE>
Performance Share Units. A performance share unit represents an interest in
a restricted share of common stock and any dividends declared. Grants of
performance share units are determined using certain guidelines based on salary
and responsibility levels, as well as predetermined performance criteria. A
grant of 145,429 shares of performance share units occurred in March 1994, for
the performance periods beginning January 1, 1994 through December 31, 1996. A
grant of 274,976 shares of performance share units occurred in October 1993, for
the performance periods beginning January 1, 1994 through December 31, 1995.
Compensation expense is recognized based on the fair value of the performance
share units over these periods and totaled $4.6 million in 1994.
Pension Plans. The corporation maintains noncontributory, defined-benefit
retirement and pension plans covering substantially all employees. The
corporation maintains a supplemental plan to provide benefits to certain
employees whose calculated benefits under the qualified plan exceeds the
Internal Revenue Service (IRS) limitation. Benefit payments to retired employees
are based upon years of service and a percentage of qualifying compensation
during the final years of employment. The amounts contributed to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act (ERISA) funding standards. Assets of the plans
are primarily invested in listed stocks, corporate obligations, and U.S.
Treasury and government agency obligations. As of December 31, 1994 and 1993,
Fleet's qualified pension plan's assets exceeded its accumulated benefit
obligations by $45 million and $79 million, respectively, while Shawmut's
qualified pension plan's assets exceeded its accumulated benefit obligations
by $108 million and $113 million, respectively. In addition, as of December
31, 1994 and 1993, Fleet's nonqualified pension plan's assets were less than its
accumulated benefit obligations by $14 million and $12 million,
respectively, while Shawmut's nonqualified pension plan's assets exceeded its
accumulated benefit obligations, by $15 million and $14 million, respectively.
FUNDED STATUS OF PLANS
- ----------------------------------- ------------- --------------
Qualified Nonqualified
December 31 Plans Plans
Dollars in millions 1994 1993 1994 1993
- ----------------------------------------------------------------
Actuarial present value of
accumulated benefit obligations:
Vested benefits $221 $192 $30 $25
Nonvested benefits 28 25 1 5
- ----------------------------------------------------------------
Accumulated benefit obligations 249 217 31 30
Additional benefits related to
future compensation levels 86 135 14 9
- ----------------------------------------------------------------
Projected benefits obligation
rendered to date 335 352 45 39
Plan assets at fair value 402 409 32 32
- ----------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligations 67 57 (13) (7)
Unrecognized net transition (asset)
obligation being amortized (13) (14) 5 5
Unrecognized prior service cost
being amortized 32 28 10 2
Unrecognized net loss from past
experience different from that
assumed 18 62 22 23
Additional amounts recognized
due to minimum level funding --- --- (5) (5)
- ----------------------------------------------------------------
Prepaid pension cost $104 $133 $19 $18
- ----------------------------------------------------------------
COMPONENTS OF PENSION EXPENSE
- --------------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992
- --------------------------------------------------------------
Service cost for benefits
earned during the period $37 $30 $27
Interest cost on projected
benefit obligation 31 27 21
Actual return on plan assets (3) (31) (37)
Net amortization and deferral (32) (2) 5
Settlement and curtailment
gains, net --- --- (1)
- --------------------------- -------- ------- -------- --------
Net pension expense $33 $24 $15
- --------------------------- -------- ------- -------- --------
For December 31, 1994, 1993, and 1992, the assumed discount rates were
8.50%, 7.25% to 7.50%, and 7.85% to 8.50%, respectively, while the rate of
increase in compensation levels used to measure the projected benefit obligation
was 4.5% to 5.0% in 1994, 1993, and 1992. The expected long-term rate-of-return
on plan assets was 8.85% to 10.0% for 1994 and 1993 and 9.0% to 10.0% for
1992. During 1994, the mortality table was revised to the 1983 Group Annuity
Mortality Table. The assumed discount rate change reflects the substantial
increase in the level of interest rates during 1994, while the revised mortality
table reflects the improvement in life expectancy.
<PAGE>
Postretirement Healthcare Benefits. In addition to providing pension
benefits, the corporation provides healthcare cost assistance and life insurance
benefits for retired employees. The cost of providing these benefits was $22
million, $25 million, and $13 million in 1994, 1993, and 1992, respectively.
The following table presents the plan's funded status reconciled with
amounts recognized on the corporation's balance sheet.
FUNDED STATUS OF POSTRETIREMENT PLAN
- --------------------------------------------- ------- ------
December 31
Dollars in millions 1994 1993
- --------------------------------------------- ------- ------
Accumulated postretirement benefit obligation:
Retirees $115 $127
Fully eligible active plan participants 28 31
Other active plan participants 16 19
- --------------------------------------------- ------- ------
Total accumulated postretirement
benefit obligation 159 177
Plan assets 2 2
- --------------------------------------------- ------- ------
Plan assets less than projected benefit
obligation (157) (175)
Unrecognized net (gain) loss (14) 1
Unrecognized transition obligation 155 163
- --------------------------------------------- ------- ------
Accrued postretirement benefit cost $(16) $(11)
- --------------------------------------------- ------- ------
The components of the net periodic postretirement benefit cost of $22
million and $25 million for the years ended December 31, 1994 and 1993,
respectively, include service cost, interest, amortization of the transition
obligation, and amortization of gains (losses) of $3 million, $11 million, $9
million, and $(1) million, respectively, for 1994 compared to $2 million, $14
million, $9 million and $0, respectively for 1993. The transition obligation,
which represents the unfunded accumulated benefit obligation as of January 1,
1993, is being amortized on a straight-line basis over 20 years. Discount rates
of 8.50% and 7.25% to 7.50% were used in determining the accumulated
postretirement benefit obligation for the years ended December 31, 1994 and
1993, respectively. During 1994, the mortality table was revised to the 1983
Group Annuity Mortality Table. The assumed discount rate change reflects the
substantial increase in the level of interest rates during 1994, while the
revised mortality table reflects the improvement in the life expectancy. The
healthcare cost-trend rate is 10.5% to 12.0% for 1995, decreasing gradually to
4.5% to 5.0% through the year 2002, and level thereafter. The healthcare
cost-trend rate assumption has a minimal effect on the amounts reported. For
example, increasing the assumed healthcare cost-trend rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1994, by $6.3 million, and the aggregate of the
service cost and interest cost components of the net periodic postretirement
benefit cost for 1994 by approximately $483,000.
Postemployment benefits. In 1994, the corporation adopted the provisions of
FASB Statement No. 112 "Employers' Accounting for Postemployment Benefits." The
initial impact of adopting this statement was immaterial.
Other Plans. Fleet and its subsidiaries have various savings and thrift
plans covering substantially all employees. The corporation's savings and thrift
plan expense was $28 million, $22 million, and $20 million for 1994, 1993, and
1992, respectively.
NOTE 14.
INCOME TAXES
The corporation changed its method of accounting for income taxes from the
deferred method to the liability method as required by FASB Statement No. 109,
"Accounting for Income Taxes", effective January 1, 1993. The cumulative effect
of this accounting change was the recognition of a $53.1 million income tax
benefit in the first quarter of 1993.
Deferred tax assets and liabilities reflect the tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the corporation's deferred tax assets and deferred tax liabilities
as of December 31, 1994 and 1993, are presented in the following table.
NET DEFERRED TAX ASSETS
- -------------------------------------------- ------- -------
December 31
Dollars in millions 1994 1993
- -------------------------------------------- ------- -------
Deferred tax assets:
Reserve for credit losses $ 569 $ 621
Reserve for unrealized losses on securities
available for sale 245 ---
Net operating loss carry forward 77 69
Expenses not currently deductible 69 114
Core deposit intangibles 66 69
Mortgage banking --- 92
Other 186 147
- -------------------------------------------- ------- -------
Total gross deferred tax assets 1,212 1,112
Less: valuation reserve 104 131
- -------------------------------------------- ------- -------
Deferred tax assets 1,108 981
- -------------------------------------------- ------- -------
Deferred tax liabilities:
Lease financing 154 138
Mortgage banking 84 ---
Purchase accounting adjustments, net 69 91
Depreciation 65 59
Subsidiary stock transaction 49 50
Employee benefits 49 52
Reserve for unrealized gains on securities
available for sale --- 155
Other 132 24
- -------------------------------------------- ------- -------
Total gross deferred tax liabilities 602 569
- -------------------------------------------- ------- -------
Net deferred tax assets $ 506 $ 412
- -------------------------------------------- ------- -------
The realization of the corporation's deferred tax assets is dependent
upon the ability to generate taxable income in future periods, and from the
reversal of existing deferred tax liabilities.
<PAGE>
The corporation has evaluated the available evidence supporting the
realization of its deferred tax assets of $1,212 million and $1,112 million at
December 31, 1994 and 1993, respectively, including the amount and timing of
future taxable income, and determined it is more likely than not the asset will
be realized. Given the nature of state tax laws, the corporation believes that
uncertainty remains concerning the realization of tax benefits in various state
jurisdictions, therefore, state valuation reserves of $104 million and $131
million have been established at December 31, 1994 and 1993, respectively. These
benefits may, however, be recorded in the future as realized or as it becomes
more likely than not, in the corporation's best judgment, that such tax benefits
or portions thereof will be realized.
The deferred tax expense/(benefit) of $130 million and $(129) million
in 1994 and 1993, respectively, include a (benefit) of $(27) million and $(88)
million, respectively, due to a change from the beginning of the respective
year's deferred tax asset valuation reserve. The current and deferred components
of income taxes for the years ended December 31, 1994, 1993, and 1992 are as
follows:
INCOME TAX EXPENSE (BENEFIT)
- -------------------------------------- ------- ------- ------
December 31
Dollars in millions 1994 1993 1992
- -------------------------------------- ------- ------- ------
Current income taxes:
Federal $323 $352 $166
State and local 78 107 66
- -------------------------------------- ------- ------- ------
401 459 232
Deferred income tax expense (benefit):
Federal 107 (100) 34
State and local 23 (29) 3
- -------------------------------------- ------- ------- ------
130 (129) 37
Total:
Federal 430 252 200
State and local 101 78 69
- -------------------------------------- ------- ------- ------
$531 $330 $269
- -------------------------------------- ------- ------- ------
The extraordinary credit in 1992 represents the realization of net
operating loss carryforwards for financial reporting purposes and is net of a
$1.4 million federal alternative tax expense.
The tax effects of timing differences that give rise to a significant
portion of deferred tax expense (benefit) for the year ended December 31, 1992,
are as follows.
COMPONENTS OF DEFERRED INCOME TAX EXPENSE
- -------------------------------------------- -----------
December 31
Dollars in millions 1992
- -------------------------------------------- -----------
Gain on partial sale of FMG $ 49
Provision for credit losses 48
Gains on assets securitized and sold 6
Pension funding (5)
Lease financing transactions (15)
Expenses not currently deductible (14)
Purchase accounting adjustments (17)
Other, net (15)
- -------------------------------------------- -----------
Total deferred income tax expense $ 37
- -------------------------------------------- -----------
The income tax expense for the years ended December 31, 1994, 1993, and
1992, varied from the amount computed by applying the statutory income tax rate
to income before taxes. The reasons for the differences are as follows.
STATUTORY RATE ANALYSIS
- --------------------------------- -------- -------- --------
December 31 1994 1993 1992
- --------------------------------- -------- -------- --------
Tax at statutory rate 35.0% 35.0% 34.0%
Increases (decreases) in
taxes resulting from:
Tax-exempt income (1.5) (1.8) (3.1)
Alternative minimum tax --- --- (1.1)
State and local income taxes, net
of federal income tax benefit 4.6 4.7 7.2
Change in federal valuation
reserve (0.8) (7.7) ---
Other, net 0.9 (0.1) 6.0
- --------------------------------- -------- -------- --------
Effective tax rate 38.2% 30.1% 43.0%
- --------------------------------- -------- -------- --------
The corporation has state net operating loss carryforwards of approximately
$921 million at December 31, 1994, primarily in one taxing jurisdiction.
These carryforwards will begin to expire in 1995 and continue through 1999.
NOTE 15.
TRADING ACTIVITIES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS, AND OFF-BALANCE-
SHEET ITEMS
Trading Activities. All of the corporation's trading positions are
currently stated at market value with realized and unrealized gains and losses
reflected in other noninterest income. The corporation recognized trading
income of $26 million, $38 million, and $37 million for 1994, 1993, and 1992,
respectively. Trading income comprises gains and losses recorded on the
corporation's trading debt securities, foreign exchange contracts, and
interest-rate contracts.
Trading positions in debt securities consist of U.S. federal and state
government and agency securities. The types of interest-rate contracts traded
include interest-rate swaps, caps, floors, and collars as well as futures and
option contracts. Foreign exchange contracts consist primarily of foreign
exchange forwards and foreign currency options and futures contracts.
The following table represents the notional or contractual amount of
Fleet's off-balance-sheet trading instruments and related credit exposure.
Notional principal amounts are a measure of the volume of agreements transacted,
but the level of credit risk is significantly less. The amount of credit risk
can be estimated by calculating the cost to replace, on a present value basis
and at current market rates, all profitable contracts outstanding at year-end.
Credit risk disclosures relate to accounting losses that would be recognized if
the counterparties completely failed to perform their obligations. To manage its
level of credit risk the corporation deals with counterparties of good credit
standing, establishes counterparty credit limits and enters into netting
agreements whenever possible. Credit exposure amounts are presented gross and
disregard any netting agreements. Interest rate instrument activities are
subject to the same credit review, analysis and approval process as those
applied to commercial loans. Netting agreements contain rights of set-off that
provide for the net settlement of certain contracts with the
<PAGE>
same counterparty in the event of default. In the event of a default by a
counterparty, the cost to the corporation, if any, would be the replacement cost
of the contract at the current market rate.
TRADING INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
- ---------------------------- ------------------- ---------------
Contract or
Notional Credit
Dollars in millions Amount Exposure
- ---------------------------- ------------------- ---------------
December 31 1994 1993 1994 1993
- ---------------------------- --------- --------- ------- -------
Interest-rate contracts $7,067 $3,371 $50 $31
Foreign exchange contracts 11,916 12,493 183 181
- ---------------------------- --------- --------- ------- -------
The amounts disclosed below present the end-of-period fair value of
derivative financial instruments held or issued for trading purposes and the
average aggregate fair values during the year for those instruments.
TRADING INSTRUMENTS
- ---------------------------- ------------ -----------
Fair Value Average
December 31, 1994 (Carrying Fair
Dollars in millions Amount) Value
- ---------------------------- ------------ -----------
Interest-rate contracts:
Assets $40 $29
Liabilities (33) (18)
Foreign exchange contracts:
Assets 108 127
Liabilities (106) (121)
- ---------------------------- ------------ -----------
Interest-Rate Risk-Management Activities. The corporation's principal
objective in holding or issuing derivatives for purposes other than trading is
interest-rate risk management. The operations of Fleet are subject to a risk of
interest-rate fluctuations to the extent that there is a difference between the
amount of the corporation's interest-earning assets and the amount of
interest-bearing liabilities that mature or reprice in specified periods. The
principal objective of Fleet's asset/liability management activities is the
management of interest-rate risk and liquidity within parameters established by
various boards of directors. To achieve its risk management objective, the
corporation uses a combination of interest rate instruments, including interest
rate swaps, caps, floors and corridors, options and futures contracts.
The following table presents the notional amount and fair value of
interest-rate risk management instruments at December 31, 1994 and 1993.
INTEREST-RATE RISK-MANAGEMENT INSTRUMENTS
- ------------------ ------------------ ------------------
1994 1993
December 31 Notional Fair Notional Fair
Dollars in Amount Value Amount Value
millions
- ------------------ --------- -------- -------- ---------
Interest-rate
swaps:
Receive-fixed/
pay-variable $2,873 $(44) $2,390 $76
Pay fixed/receive-
variable 2,084 67 1,928 (31)
Basis swaps 3,605 (1) --- ---
Index-amortizing
swaps 4,119 (234) 3,670 4
Interest rate cap
agreements 1,775 43 950 (2)
Interest rate
corridor
agreements 1,031 (5) 2,406 (5)
Interest rate collar
agreements 500 (1) --- ---
Future contracts
sold 6,005 21 2,528 1
- ------------------ --------- -------- -------- ---------
Total $21,992 $(154) $13,872 $43
- ------------------ --------- -------- -------- ---------
Interest rate swap agreements involve the exchange of fixed and variable
rate interest payments based upon a notional principal amount and maturity date.
Basis interest rate swaps involve floating interest rates such as U.S. Treasury
bill and LIBOR. Index amortizing interest rate swaps involve the exchange of
fixed and variable rate interest payments based upon a notional principal amount
which amortizes based on an index rate and decreases over the life of the swap.
Interest rate cap agreements are similar to interest rate swap agreements except
that cash interest payments are made or received only if current interest rates
rise above predetermined interest rates. Similarly, in an interest rate floor
agreement, cash interest payments are made or received only if current interest
rates fall below a predetermined interest rate. An interest rate collar consists
of a cap and a floor. Interest rate corridor agreements consist of a
simultaneous purchase and sale of a cap. The corporation enters into interest
rate swap, cap, floor and corridor agreements to manage the impact of
fluctuating interest rates on earnings. Futures contracts are also used by the
corporation to manage interest rate exposure. These instruments are
exchange-traded contracts for the future delivery of securities, other financial
instruments or cash settlement at a specified price or yield. At December 31,
1994, the corporation had entered into U.S. Treasury rate futures contracts with
approximately $708 million in notional amounts to manage the risk associated
with the available for sale securities portfolio. The unrealized loss of
approximately $.3 million at December 31, 1994, relating to these contracts has
been recorded as part of the fair value of these securities.
The corporation's interest-rate risk-management instruments had an exposure
to credit risk of $87 million at December 31, 1994, versus $131 million at
December 31, 1993. The credit exposure represents the cost to replace, on a
present value basis and at current market rates, all profitable contracts
outstanding at year-end. The decrease in the credit exposure from year to year
reflects the receipt of payments upon termination of swaps and the decrease in
market value of the remaining swaps.
<PAGE>
During 1994, Fleet terminated a series of pay-fixed swaps resulting
in a net deferred gain of $61 million to be amortized over the remaining
contract life of the interest-rate swaps, approximately four years.
OTHER FINANCIAL INSTRUMENTS
- -------------------------------------- ---------------------
Contract or
December 31 Notional Amount
Dollars in millions 1994 1993
- -------------------------------------- ---------- ----------
Other financial instruments whose
notional or contractual amounts exceed
the amount of potential credit risk:
Commitments to sell loans $1,884 $3,106
Commitments to originate or
purchase loans 355 1,918
Assets sold with recourse 378 575
- -------------------------------------- ---------- ----------
Financial instruments whose notional
or contractual amounts
represent potential credit risk:
Commitments to extend credit 27,452 22,043
Letters of credit, financial
guarantees, and foreign office
and foreign office guarantees
(net of participations) 3,108 2,670
- -------------------------------------- ---------- ----------
Commitments to sell loans have off-balance-sheet market risk to the extent
that the corporation does not have available loans to fill those commitments,
which would require the corporation to purchase loans in the open market.
Commitments to originate or purchase loans have off-balance-sheet market risk to
the extent the corporation does not have matching commitments to sell loans
obtained under such commitments, which could expose the corporation to
lower-of-cost or market-valuation adjustments in a rising interest-rate
environment.
Commitments to extend credit are agreements to lend to customers in
accordance with contractual provisions. These commitments usually are for
specific periods or contain termination clauses and may require the payment of a
fee. The total amounts of unused commitments do not necessarily represent future
cash requirements in that commitments often expire without being drawn upon.
COMMITMENTS TO EXTEND CREDIT
- -------------------------------- ----------- ----------
December 31
Dollars in millions 1994 1993
- -------------------------------- ----------- ----------
Commercial and industrial loans $18,351 $12,466
Revolving, open-end loans
secured by residential
properties(e.g., home equity
lines) 3,660 3,750
Credit card lines 3,008 1,844
Commercial real estate 1,373 791
Other unused commitments 1,060 3,192
- -------------------------------- ----------- ----------
Total $27,452 $22,043
- -------------------------------- ----------- ----------
Letters of credit and financial guarantees are agreements whereby the
corporation guarantees the performance of a customer to a third party.
Collateral is required to support letters of credit in accordance with
management's evaluation of the creditworthiness of each customer. The credit
risk assumed in issuing letters of credit is essentially equal to that in other
lending activities. Management does not anticipate any material losses as a
result of these transactions.
NOTE 16.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and judgments made regarding risk characteristics of various
financial instruments, discount rates, estimates of future cash flows, future
expected loss experience, and other factors. Changes in assumptions could
significantly affect these estimates and the resulting fair values. Derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in an immediate sale of the
instrument. Also, because of differences in methodologies and assumptions used
to estimate fair values, Fleet's fair values should not be compared to those of
other financial institutions.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the corporation.
The following describes the methods and assumptions used by Fleet in
estimating the fair values.
CASH AND CASH EQUIVALENTS. The carrying amounts reported in the balance
sheet approximate fair values because maturities are less than 90 days.
SECURITIES. Fair values are primarily based on quoted market prices.
LOANS. The fair values of fixed rate and certain variable-rate commercial
and CRE loans and certain consumer loans are estimated by discounting the
contractual cash flows using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying value of
certain other variable-rate commercial and CRE loans approximates fair value due
to the short-term and frequent repricing characteristics of these loans. For
certain variable-rate consumer loans, including home equity lines of credit and
credit card receivables, the carrying amounts approximate fair value. This
method of estimating the fair value of the credit card portfolio excludes the
value of the ongoing customer relationships, a factor that can represent a
significant premium over book value. For residential real estate and certain
consumer loans, fair value is estimated by reference to quoted market prices for
securities backed by similar types of loans adjusted for servicing costs. For
nonperforming loans and certain loans where the credit quality of the borrower
has deteriorated significantly, fair values are estimated by discounting
expected cash flows at a rate commensurate with the risk associated with the
estimated cash
<PAGE>
flows, based on recent appraisals of the underlying collateral or by reference
to recent loan sales.
MORTGAGES HELD FOR RESALE. Fair value is estimated using the quoted market
prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained (as is the corporation's ordinary course of business).
DEPOSITS. The fair value of deposits with no stated maturity or a maturity
of less than 90 days is considered to be equal to the carrying amount. The fair
value of time deposits is estimated by discounting contractual cash flows using
interest rates currently offered on the deposit products. While the fair value
at December 31, 1994 indicated that time deposits could be settled for an amount
less than their carrying value, depositors have the right to withdraw funds at
carrying value less a penalty, prior to contractual maturity. The fair value
estimates for deposits do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of alternative
forms of funding (core base intangibles).
SHORT-TERM BORROWINGS. Short-term borrowings generally mature in 90 days or
less; therefore, the carrying amount reported in the balance sheet approximates
fair value.
LONG-TERM DEBT. The fair value of Fleet's long-term debt, including the
short-term portion, is estimated based on quoted market prices for the issues
for which there is a market or by discounting cash flows based on current rates
available to Fleet for similar types of borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS. Fair values for off-balance-sheet
instruments are based on quoted market prices, current settlement values, or
established pricing models using current assumptions.
ON-BALANCE-SHEET FINANCIAL INSTRUMENTS
- --------------------------------- ------------------ ------------------
December 31 1994 1993
Carrying Fair Carrying Fair
Dollars in millions Value Value Value Value
- --------------------------------- --------- -------- --------- --------
Financial assets:
Financial assets for which
carrying value
approximates fair value $ 9,162 $ 9,162 $ 4,356 $ 4,356
Securities 21,141 20,702 24,839 24,930
Loans(a) 43,074 44,857 40,921 44,050
Mortgages held for resale 560 560 3,094 3,102
Trading account
securities 120 120 111 111
Trading instruments 59 59 64 64
Other 111 148 173 222
Financial liabilities:
Deposits with no
stated maturity 35,898 35,898 36,642 36,642
Time deposits 19,630 19,304 13,185 13,517
Short-term borrowings 12,586 12,586 16,376 16,376
Long-term debt 5,931 5,855 5,217 5,461
Trading instruments 50 50 30 30
Other 253 253 179 179
- --------------------------------- --------- -------- --------- --------
(a)Excludes net book value of lease financing of $1,483 million and $1,159
million at December 31, 1994 and 1993, respectively.
At December 31, 1994 interest rate risk management derivatives contracts
had an unrealized loss of $154 million compared to a net unrealized gain of $43
million at December 31, 1993. Certain assets, which are not financial
instruments and, accordingly, are not included in the above fair values,
contribute substantial value to the corporation in excess of the related amounts
recognized in the balance sheet. These include the core deposit intangibles and
the related retail banking network, the value of customer relationships
associated with certain types of consumer loans (particularly the credit card
portfolio), lease financing business, and mortgage servicing rights.
NOTE 17.
COMMITMENTS, CONTINGENCIES, AND
OTHER DISCLOSURES
The corporation's subsidiary, Fleet Finance, has been a defendant in
several class-action lawsuits filed in federal and state courts in Georgia and
Alabama, including the Alexander class-action lawsuit and the Starr class-action
lawsuit. The court gave its final approval of these two lawsuits on July 18,
1994 and November 9, 1994, respectively. Pursuant to these settlement
agreements, Fleet Finance will provide benefits that include cash payments to
certain borrowers. At December 31, 1994, Fleet Finance had accrued approximately
$15 million related to these settlements, and the corporation believes that such
accruals are sufficient to cover costs.
One of the corporation's banking subsidiaries, which served as indenture
trustee for certain healthcare receivable backed bonds issued by certain special
purpose subsidiaries of Towers Financial Corporation, and another defendant,
have been named in a lawsuit in federal court in Manhattan by purchasers of the
bonds. The suit seeks damages in an undetermined amount equal to the difference
between the current value of the bonds and their face amount of approximately
$200 million, plus interest, as well as punitive damages. The Corporation
believes its actions were reasonable and appropriate and were not the cause of
any loss by the bondholders, and is vigorously defending the action.
Subsequent to the announcement of the Merger, certain alleged
stockholders of Shawmut filed several purported class action lawsuits against
Shawmut, Fleet, and members of Shawmut's Board of Directors. The complaints all
make similar allegations concerning the proposed merger. The corporation
believes the allegations contained in these complaints are entirely without
merit and intends to contest them vigorously.
The corporation and its subsidiaries are involved in various other legal
proceedings arising out of, and incidental to, their respective businesses.
Management of the corporation, based on its review with counsel of the
development of these matters to date, does not anticipate that any losses
incurred as a result of these legal proceedings would have a materially adverse
effect on the corporation's financial position.
LEASE COMMITMENTS. The corporation has entered into a number of
noncancelable operating lease agreements for premises and equipment. The minimum
annual rental commitments under these leases at December 31, 1994, exclusive of
taxes and other charges, were $118 million in 1995; $97 million, 1996; $75
million, 1997; $63 million, 1998; $51 million, 1999; and $294 million, 2000 and
subsequent years.
<PAGE>
Total rental expense for 1994, 1993, and 1992, including cancelable and
noncancelable leases, amounted to $153 million, $157 million, and $149 million,
respectively.
Certain leases contain escalation clauses, which correspond with increased
real estate taxes and other operating expenses, and renewal options calling for
increased rents as the leases are renewed. No restrictions are imposed by any
lease agreement regarding the payment of dividends, additional debt financing,
or entering into further lease agreements.
REGULATORY MATTERS. As a bank holding company and a unitary savings and
loan holding company, Fleet is subject to regulation by the Federal Reserve
Board (the Federal Reserve) and the Office of Thrift Supervision (OTS). Banking
subsidiaries are subject to regulation by the Federal Reserve, the Office of the
Comptroller of the Currency (OCC) and OTS, as well as state regulators. Each
subsidiary bank's deposits are insured by the FDIC.
In addition to Fleet's own monitoring of activities, the credit quality of
the assets held by certain Fleet subsidiaries is subject to periodic review by
the state and federal regulatory agencies noted above. While Fleet believes its
current reserves for credit losses are adequate in light of prevailing economic
conditions and the current regulatory environment, there can be no assurance
that Fleet's subsidiaries will not be required to make certain adjustments to
the reserve for credit losses and charge-off policies in response to changing
economic conditions or regulatory examinations. Neither Fleet nor any of its
subsidiaries has entered into formal written agreements with state and federal
regulators.
TRANSACTION AND DIVIDEND RESTRICTIONS: Fleet's banking subsidiaries are
subject to restrictions under federal law that limit the transfer of funds by
the subsidiary banks to Fleet and its nonbanking subsidiaries. Such transfers
by any subsidiary bank to Fleet or any nonbanking subsidiary are limited in
amount to 10% of the bank's capital and surplus.
Various federal and state banking statutes limit the amount of dividends
the subsidiary banks can pay to Fleet without regulatory approval. The payment
of dividends by any subsidiary bank may also be affected by other factors such
as the maintenance of adequate capital for such subsidiary bank. Various
regulators and the boards of directors of the affected institutions continue to
review dividend declarations and capital requirements of Fleet and its
subsidiaries consistent with current earnings, future earning prospects, and
other factors.
RESTRICTIONS ON CASH AND DUE FROM BANKS. The corporation's banking
subsidiaries are subject to requirements of the Federal Reserve to maintain
certain reserve balances. At December 31, 1994 and 1993, these reserve balances
were $1,502 million and $1,581 million, respectively.
NOTE 18.
SUPPLEMENTAL DISCLOSURE FOR STATEMENTS
OF CASH FLOWS
Cash paid for interest and income taxes, net of refunds, totaled $2,096
million and $370 million in 1994; $2,087 million and $454 million in 1993; and
$2,466 million and $301 million in 1992. Loans transferred to foreclosed
property and repossessed equipment totaled $86 million, $186 million, and $654
million in 1994, 1993, and 1992, respectively. Additional supplemental
disclosures include an adjustment to the unrealized gain (loss) on securities
available for sale of $(649) and $238 million in 1994 and 1993, respectively,
and the acquisition of $1,966 million of assets, net of $401 million of cash
and cash equivalents received, and $2,367 million of liabilities in 1992.
NOTE 19.
PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF INCOME
- ------------------------------- -------- ------- --------
Year ended December 31
Dollars in millions 1994 1993 1992
- ------------------------------- -------- ------- --------
Dividends from subsidiaries:
Banking subsidiaries $427 $287 $132
Other subsidiaries 37 24 88
Interest 140 134 134
Gain on partial sale of FMG --- --- 121
Other 114 97 66
- ------------------------------- -------- ------- --------
Total income 718 542 541
- ------------------------------- -------- ------- --------
Interest 215 193 194
Noninterest expense 74 195 130
- ------------------------------- -------- ------- --------
Total expenses 289 388 324
- ------------------------------- -------- ------- --------
Income before income taxes
and equity in undistributed
income of subsidiaries 429 154 217
Applicable income taxes (benefit) 34 (53) 26
- ------------------------------- -------- ------- --------
Income before equity in
undistributed income
of subsidiaries 395 207 191
Equity in undistributed income
of subsidiaries 454 557 157
- ------------------------------- -------- ------- --------
Income before extraordinary
credit and cumulative effect of
change in method of
accounting 849 764 348
Extraordinary credit --- --- 18
Cumulative effect of change in
method of accounting --- 53 ---
- ------------------------------- -------- ------- --------
Net income $849 $817 $366
- ------------------------------- -------- ------- --------
BALANCE SHEET
- --------------------------------------------------
December 31
Dollars in millions 1994 1993
- --------------------------------------------------
Money market instruments $476 $559
Securities 428 255
Loans receivable from:
Banking subsidiaries 116 167
Other subsidiaries 1,768 1,603
- --------------------------------------------------
1,884 1,770
Investment in subsidiaries:
Banking subsidiaries 5,534 3,282
Other subsidiaries 1,065 2,900
- --------------------------------------------------
6,599 6,182
- --------------------------------------------------
Other 386 588
- --------------------------------------------------
Total assets $9,773 $9,354
- --------------------------------------------------
Short-term borrowings $1,207 $910
Accrued liabilities 480 397
Long-term debt 2,615 2,082
- --------------------------------------------------
Total liabilities 4,302 3,389
- --------------------------------------------------
Stockholders' equity 5,471 5,965
- --------------------------------------------------
Total liabilities and
stockholders' equity $9,773 $9,354
- --------------------------------------------------
<PAGE>
<TABLE><CAPTION>
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------
Year ended December 31
Dollars in millions 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $849 $817 $366
Adjustments for noncash items:
Equity in undistributed income of subsidiaries (454) (557) (157)
Depreciation and amortization 16 17 13
Net securities gains (13) (47) (4)
Gain on partial sale of FMG --- --- (121)
Increase in accrued liabilities, net 38 102 130
Other, net 136 (34) 13
- ------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 572 298 240
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of securities (908) (478) (27)
Proceeds from sales and maturities of securities 739 435 18
Net increase in loans made to affiliates (52) (278) (68)
Capital contributions to subsidiaries (210) (258) (611)
- ------------------------------------------------------------------------------------------------
Net cash flow used by investing activities (431) (579) (688)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in short-term borrowings 297 61 (344)
Proceeds from issuance of long-term debt 400 450 1,018
Repayments of long-term debt (317) (603) (63)
Proceeds from issuance of common stock 70 494 383
Redemption and repurchase of common and preferred stock (375) (129) ---
Cash dividends paid (299) (194) (131)
- ------------------------------------------------------------------------------------------------
Net cash flow (used) provided by financing activities (224) 79 863
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (83) (202) 415
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 559 761 346
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $476 $559 $761
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE 20.
SUBSEQUENT EVENTS
During the fourth quarter of 1995 the Corporation incurred merger costs of
$317 million (after-tax) related to its merger with Shawmut National
Corporation, which was effective November 30, 1995. These charges primarily
include severance costs, branch consolidation costs, and transaction related
charges. Additionally, during the fourth quarter the Corporation made the
strategic decision to sell Fleet Finance, Inc., the Corporation's consumer
finance subsidiary based in Atlanta, Georgia, and certain nonperforming assets
from its banking franchise that have been identified for sale or accelerated
disposition. The Corporation recognized a charge of $112 million (after-tax)
relating to this transaction.
On December 19, 1995, Fleet signed a definitive agreement to purchase
NatWest Bank N.A. ("NatWest") for $2.7 billion in cash and up to an additional
$560 million in accordance with an earnout provision. The earnout provision
calls for annual payments based upon the level of earnings from the NatWest
franchise with a cap of $560 million over an eight year life. NatWest has
approximately $35 billion in assets and the corporation intends to restructure
the NatWest balance sheet by liquidating approximately $13 billion of
low-return assets and reducing an equal amount of borrowed funds. The
acquisition of NatWest will add approximately 300 branches in New York and New
Jersey and is expected to close in the second quarter of 1996, subject to
regulatory approval.
On December 31, 1995, Fleet reached a definitive agreement with Kohlberg,
Kravis and Roberts ("KKR") to exchange KKR's ownership interest represented
by its holdings of Dual Convertible Preferred Stock (DCP) into direct
ownership of Fleet common stock. Under the terms of the agreement, KKR
exchanged its position into 19.9 million shares of Fleet's common stock on
December 31, 1995. In connection with this transaction, Fleet recognized a
premium on the DCP conversion of $157 million that is considered to be a
dividend in the Corporation's earnings per share calculation, which had the
effect of reducing fully diluted earnings per share by $.59 per share.
Item 7. FINANCIAL STATEMENTS
--------------------
Exhibit 99(b) Management's Discussion Analysis; Supplemental
Consolidated Balance Sheets of Fleet as of September 30, 1995
and December 31, 1994; Supplemental Consolidated Statements of
Income of Fleet for the three and nine month periods ended
September 30, 1995 and 1994; Supplemental Consolidated Statements
of Changes in Stockholders' Equity and Supplemental Consolidated
Statements of Cash Flows for the nine month periods ended
September 30, 1995 and 1994.
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERALL PERSPECTIVE
- -------------------------------------------------------------
Dollars in millions, Three months Nine months
except per share data ended September 30 ended September 30
- -------------------------------------------------------------
1995 1994 1995 1994
- -------------------------------------------------------------
EARNINGS
Net income $ 268 $ 249 $ 748 $ 591
- -------------------------------------------------------------
PER COMMON SHARE
Fully diluted $ .96 $ .91 $ 2.69 $ 2.12
earnings
Cash dividends .40 .35 1.20 1.00
declared
Book Value 24.47 20.71 24.47 20.71
- -------------------------------------------------------------
OPERATING RATIOS
Return on average
assets 1.27 % 1.22 % 1.21 % 0.99 %
Return on common
equity 16.86 18.66 16.65 15.35
Equity to assets
(period-end) 8.00 7.03 8.00 7.03
- -------------------------------------------------------------
AT SEPTEMBER 30
Total assets $83,751 $78,259 $83,751 $78,259
Stockholders' equity 6,698 5,502 6,698 5,502
Nonperforming assets 771 824 771 824
- -------------------------------------------------------------
Fleet reported net income of $268 million, or $.96 per fully diluted
share, for the quarter ended September 30, 1995, compared to $249 million, or
$.91 per fully diluted share, in the third quarter of 1994. Net income for the
first nine months of 1995 was $748 million, or $2.69 per share, compared with
$591 million, or $2.12 per share in the first nine months of 1994. Return on
average assets and return on equity were 1.27% and 16.86% for the third quarter
of 1995, respectively, and 1.22% and 18.66% for the third quarter of 1994,
respectively. These results reflect an increase in mortgage banking revenue,
continued expense control, and steady loan growth, as well as increased revenues
from several acquisitions consummated during the first six months of 1995,
partially offset by an increase in mortgage servicing rights amortization and
provision for credit losses as well as a reduction in net interest margin due to
narrower spreads between interest earning assets and interest bearing
liabilities.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
- -----------------------------------------------------------
Three months Nine months
Dollars in millions ended ended
FTE basis September 30 September 30
- -----------------------------------------------------------
1995 1994 1995 1994
- -----------------------------------------------------------
Interest income $1,540 $1,339 $4,526 $3,863
Tax-equivalent adjustment 9 14 35 39
Interest expense 777 580 2,244 1,560
- -----------------------------------------------------------
Net interest income $ 772 $ 773 $2,317 $2,342
- -----------------------------------------------------------
Net interest income on a fully taxable equivalent basis of $772 million
for the three month period ended September 30, 1995 was relatively consistent
with the $773 million for the same period of 1994, as a decrease in net interest
margin of 7 basis points from 4.19% in 1994 to 4.12% in 1995 was substantially
offset by growth in average earning assets and an improvement in the mix of
earnings assets as lower yielding securities have been replaced with higher
yielding loans and leases.
NET INTEREST MARGIN AND INTEREST-RATE SPREAD
- -----------------------------------------------------------------
Three months ended September 30,
1995 1994
- -----------------------------------------------------------------
Taxable equivalent Average Average
rates Balance Rate Balance Rate
Dollars in millions
- -----------------------------------------------------------------
Money market
instruments $ 1,261 6.28 % $ 602 5.05 %
Securities 19,576 6.21 27,435 5.82
Loans and leases 51,831 9.10 44,120 8.33
Mortgages held for
resale 2,064 7.76 1,077 5.99
Other 163 --- 250 ---
- -----------------------------------------------------------------
Total interest-earning
assets 74,895 8.23 73,484 7.31
- -----------------------------------------------------------------
Deposits 43,723 4.08 41,446 3.02
Short-term borrowings 14,849 5.73 15,393 4.32
Long-term debt 6,098 7.38 5,641 6.77
- -----------------------------------------------------------------
Interest-bearing 64,670 4.77 62,480 3.68
liabilities
- -----------------------------------------------------------------
Interest-rate spread 3.46 3.63
Interest-free sources
of funds 10,225 11,004
- -----------------------------------------------------------------
Total sources of funds $74,895 4.11 $73,484 3.12
=================================================================
Net interest margin 4.12 % 4.19 %
=================================================================
<PAGE>
The net interest margin for the third quarter of 1995 decreased 7 basis
points to 4.12% from the third quarter of 1994, primarily due to the overall
increase in the cost of funds resulting from customers moving into higher
yielding time deposits and the increased usage of wholesale deposits to fund
asset growth coupled with the impact of the numerous increases in short-term
borrowing rates by the Federal Reserve throughout 1994 and again in the first
quarter of 1995. However, the increase in the corporation's overall cost of
funds from 3.68% in 1994 to 4.77% in 1995 was substantially offset by increases
in higher yielding average loan outstandings, due to both acquisitions and
growth coupled with increases in the corporation's prime lending rate over the
past year all of which have resulted in an increase in the corporation's yield
on interest earning assets to 8.23 % in third quarter of 1995 compared to 7.31%
in third quarter of 1994.
The three-month average balance of securities decreased from $27.4
billion as of September 30, 1994 to $19.6 billion as of September 30, 1995. This
$7.8 billion decrease reflects the corporation's repositioning program unveiled
during 1994.
Average loans and leases for the three-month period ended September 30,
1995 increased $7.7 billion to $51.8 billion due primarily to several
acquisitions completed during the first six months of 1995 as well as steady
loan growth during the period. The substantial increase in the yield on loans
and leases from 8.33% for the third quarter of 1994 to 9.10% for the third
quarter of 1995 reflects the increase in Fleet's prime lending rate to 8.75%
during the period.
Average mortgages held for resale increased $1.0 billion to $2.1 billion
as of September 30, 1995 from $1.1 billion as of September 30, 1994 due to
increased loan production.
Average deposits increased $2.3 billion to $43.7 billion as of September
30, 1995. The net interest rate paid on average deposits rose to 4.08% for the
third quarter of 1995 compared to 3.02% for the same period of 1994. The
increase reflects several factors including a more competitive environment for
customer deposits and a shift in mix of deposits as customers have migrated to
higher yielding time deposits.
The $544 million decrease in average short-term borrowings corresponds in
part to the decrease in average securities, offset by an increase in mortgages
held for resale.
Average long-term debt increased $457 million due to the funding of
acquisitions and loan growth. In addition, the interest rate paid on long-term
debt increased 61 basis points as maturing lower-rate long-term debt was
replaced by new issuances of higher rate debt.
The contribution to the net interest margin of interest free sources
during the third quarter of 1995 was 66 basis points compared to the 56 basis
points for the third quarter of 1994. Although the balance of interest-free
sources of funds decreased from $11.0 billion to $10.2 billion during the
period, the increase from 56 basis points to 66 basis points is the result of
the increase in cost of funds as interest-free sources of funds become more
valuable during periods of rising interest rates.
NONINTEREST INCOME
- -------------------------------------------------------------
Three months Nine months
ended ended
September 30 September 30
- ------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994
- ------------------------------------------------------------
Mortgage banking revenue $ 137 $ 97 $ 380 $ 295
Service charges, fees
and commissions 124 109 369 323
Investment services revenue 81 72 238 219
Student loan servicing fees 17 15 47 39
FDIC loan administration
fees 5 18 16 42
Trading revenue 8 8 56 15
Brokerage fees and
commissions 6 4 15 14
Insurance 4 4 11 12
Securities available for
sale gains 7 2 12 21
Other noninterest income 59 51 182 161
- ------------------------------------------------------------
Total noninterest income $448 $380 $1,326 $1,141
- ------------------------------------------------------------
Noninterest income totaled $448 million for the third quarter of 1995
compared to $380 million for the same period in 1994, an increase of 18%, and
$1.3 billion for the first nine months of 1995 compared to $1.1 billion for the
first nine months of 1994. The increase was due primarily to increases in
mortgage banking revenues, service charges, fees and commissions, and investment
services revenues.
MORTGAGE BANKING REVENUE
=========================================================
Three months Nine months
ended ended
September 30 September 30
- ----------------------------------------------------------
Dollars in millions 1995 1994 1995 1994
- ----------------------------------------------------------
Net loan servicing revenue $ 92 $76 $258 $208
Mortgage production revenue 27 2 52 31
Gains on sales of mortgage
servicing 18 19 70 56
==========================================================
Total mortgage banking $137 $97 $380 $295
revenue
==========================================================
Mortgage banking revenue of $137 million in the third quarter of 1995
increased $40 million over the $97 million recorded in the same period of 1994.
<PAGE>
This increase reflected a $25 million increase in mortgage production revenue
coupled with a 21% increase in loan servicing revenue from $76 million in the
third quarter of 1994 to $92 million in the third quarter of 1995. 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 of 1995.
Loan servicing revenue represents fees received for servicing residential
mortgage loans. The 21% increase in loan servicing revenue is attributable to
the $21 billion increase in the corporation's servicing portfolio from $90
billion at September 30, 1994 to $111 billion at September 30, 1995. The
increase in the servicing portfolio is attributable primarily to several
acquisitions of servicing, including the acquisition of Plaza in the first
quarter which added $9.2 billion in servicing, and the purchase of $14 billion
of loan servicing from Household Financial Corporation in the second quarter.
The corporation sold mortgage servicing rights in the third quarter of 1995 and
1994, respectively, resulting in pre-tax gains of $18 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.
Service charges, fees and commissions increased $15 million to $124
million for the third quarter of 1995 from $109 million for the third quarter of
1994. These improved results primarily reflect the implementation of various fee
enhancement programs.
Investment services revenue increased $9 million, or 12 %, from the third
quarter of 1994, due to the strengthening interest rate environment and
improvement in the bond market which resulted in an increase in the overall
value of assets managed. The investment services business had approximately $74
billion in assets under administration and management at September 30, 1995.
The $2 million increase in student loan servicing fees from 1994 to 1995
is attributable to additional accounts added under the federal government's
direct student lending program. FDIC loan administration fees decreased $13
million from $18 million for the third quarter of 1994 to $5 million for the
third quarter of 1995, as the pool of loans being administered for the FDIC is
being resolved. The corporation's agreement to administer these FDIC loans
terminates on December 31, 1995.
TRADING REVENUE
=============================================================
Three months Nine months
ended ended
September 30 September 30
- -------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994
- -------------------------------------------------------------
Interest-rate contracts $--- $1 $32 $(2 )
Debt securities 4 4 14 12
Foreign exchange 4 3 10 5
=============================================================
Total trading revenue $8 $8 $56 $15
=============================================================
Trading revenue of $8 million was flat with the corresponding third
quarter of 1994; but, increased $41 million for the nine month period ended
September 30, 1995, compared to the same period in 1994. This increase is
primarily attributable to increases in gains on interest-rate contracts. Trading
income on interest-rate contracts consists of gains and losses recorded on
interest-rate contracts used in managing prepayment risk for the mortgage
servicing portfolio as well as net gains recorded on customer-oriented
interest-rate contracts. During the nine month period ended September 30, 1995,
the corporation recognized net gains of $26 million relating to interest-rate
contracts used to mitigate the risk related to adverse changes in interest rates
and the potential resultant impairment to mortgage servicing rights affected by
prepayments compared to net losses of $6 million for the nine months ended
September 30, 1994 on these instruments.
<PAGE>
NONINTEREST EXPENSE
==============================================================
Three months Nine months ended
ended September 30
September 30
- -------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994
- -------------------------------------------------------------
Employee compensation and
benefits $361 $348 $1,086 $1,095
Occupancy 63 66 186 203
Equipment 53 46 154 140
Mortgage servicing rights
amortization 31 18 101 72
Core deposit and goodwill
amortization 28 16 76 49
Legal and other
professional 25 25 65 71
Marketing 28 22 70 60
FDIC assessment 3 28 61 86
Printing and mailing 14 13 43 40
Telephone 15 13 46 40
Office supplies 12 10 38 33
Travel and entertainment 10 9 31 27
OREO expense 5 11 13 32
Other 99 96 288 296
- -------------------------------------------------------------
Total operating
noninterest 747 721 2,258 2,244
expense
- -------------------------------------------------------------
Restructuring and merger
related charges --- 7 50 173
- -------------------------------------------------------------
Total noninterest expense $747 $728 $2,308 $2,417
=============================================================
Noninterest expense for the third quarter of 1995 totaled $747 million
compared to $728 million for the third quarter of 1994. The increase is
primarily attributable to a $13 million increase in the amortization of mortgage
servicing rights (MSRs) coupled with increases in several other expense
categories, including amortization of intangibles and employee compensation and
benefits, as a result of the completion of several acquisitions in the first and
second quarters of 1995. Additionally, expenses included the costs of several
new business initiatives, such as direct student loan originations, co-branded
credit card marketing expenses and the high volume requirements of tax
processing services under contract with the State of New York.
Employee compensation and benefits increased $13 million, or 3.7%,
primarily due to the previously mentioned acquisitions and new business
initiatives.
Mortgage servicing rights amortization increased $13 million
to $31 million for the third quarter of 1995 compared to $18 million for the
third quarter of 1994. As previously stated, the increase in amortization is
directly related to the $21 billion increase in the servicing portfolio over
September 30, 1994.
Core deposit and goodwill amortization expense increased $12 million on a
year to year comparison over the third quarter of 1994 due to the completion of
several acquisitions during the first and second quarters of 1995. OREO expense
decreased $6 million from the third quarter of 1994 compared to the third
quarter of 1995 reflecting a decrease in the level of OREO assets managed.
FDIC assessment charges decreased $25 million from $28 million for the
third quarter of 1994 to $3 million for the third quarter of 1995. The decrease
is attributable to the FDIC reducing the deposit insurance premium from
twenty-three cents to four cents per $100 of domestic deposits. The refund was
retroactive to June 1, 1995 and the corporation expects to benefit from the
lower rate on an ongoing basis.
As previously reported, merger related charges of $13 million were
recognized in the second quarter of 1995 relating to the settlement of certain
compensation expenses as a result of shareholder approval of the Merger and $37
million were recognized in the first quarter of 1995 relating to the settlement
of certain employee retirement benefits, also in connection with the Merger.
Total merger related charges for the nine months ended September 30, 1995 were
$50 million. Merger related charges of $101 million recorded during the second
quarter of 1994 reflect the costs to integrate three banking organizations which
were acquired and accounted for as poolings of interests. The merger related
charges included severance and benefits costs for work force reductions, closure
of duplicative branches and facilities, cancellation of vendor contracts,
financial and advisory fees and losses for disposition of loans and securities.
Restructuring related charges of $72 million were also recorded during the
nine month period ended September 30, 1994 reflecting the expansion of the
corporation's cost management program and other efficiency initiatives.
Restructuring related charges included severance and benefit related costs for
work force reductions, branch and operational facilities consolidation, and
other costs.
INCOME TAXES.
For the third quarter of 1995, the corporation recognized income tax
expense of $169 million, an effective tax rate of 38.7%. Tax expense for the
same period of 1994 was $148 million, an effective tax rate of 37%.
<PAGE>
<TABLE><CAPTION>
BALANCE SHEET ANALYSIS
SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
September 30, 1995 June 30, 1995 December 31, 1994
------------------ ------------- -----------------
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 $ 5,656 $5,648 $ 5,928 $ 5,919 $ 3,851 $ 3,667
Mortgage-backed securities 5,036 4,995 5,417 5,383 8,352 7,898
Other debt securities 441 467 340 339 180 179
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities 11,133 11,110 11,685 11,641 12,383 11,744
- --------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 318 363 459 480 360 356
Other securities 130 130 260 259 150 150
- --------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $11,581 $11,603 $12,404 $12,380 $12,893 $12,250
- --------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
US Treasury and government agencies $ 1,952 $ 1,920 $ 1,956 $ 1,937 $ 1,980 $ 1,864
Mortgage-backed securities 3,793 3,769 3,974 3,935 4,158 3,924
State and municipal 651 659 686 691 843 842
Other debt securities 1,501 1,461 1,648 1,611 1,910 1,822
- --------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 7,897 $ 7,809 $ 8,264 $ 8,174 $ 8,891 $ 8,452
- --------------------------------------------------------------------------------------------------------------------------
Total securities $19,478 $19,412 $20,668 $20,554 $21,784 $20,702
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost of securities available for sale decreased $823 million
from June 30, 1995 to September 30, 1995 and reflects the corporation's
intention to reduce the level of lower yielding assets. The valuation adjustment
on securities available for sale improved significantly to an unrealized
appreciation level of $22 million at September 30, 1995 from an unrealized
depreciation level of $24 million at June 30, 1995, due to significant
improvements in the bond markets during the third quarter of 1995.
LOANS AND LEASES
- ---------------------------------------------------------------
September 30, June 30, December 31,
Dollars in millions 1995 1995 1994
- ---------------------------------------------------------------
Commercial and industrial $23,229 $23,533 $19,675
Consumer 11,059 11,070 10,893
Commercial real estate:
Construction 634 685 666
Interim/permanent 4,509 4,690 4,789
Residential real estate 11,100 10,641 8,529
Lease financing 1,904 1,706 1,483
- ---------------------------------------------------------------
Total loans and leases $52,435 $52,325 $46,035
- ---------------------------------------------------------------
Total loans and leases remained relatively consistent from June 30, 1995
to September 30, 1995. Total loans and leases increased $6.4 billion from $46
billion at December 31, 1994 primarily as a result of the acquisition of NBB,
Barclays and Northeast which added $4.6 billion of principally residential real
estate loans, and steady loan growth in both the commercial and industrial, and
leasing portfolios during the period.
Commercial and industrial (C&I) loans decreased $304 million, from June
30, 1995 to September 30, 1995, but increased $3.6 billion from December
31, 1994 to September 30, 1995 due primarily to the acquisition of Barclays
which added approximately $2.4 billion of loans and new loan originations
experienced across nearly all banking franchises.
CONSUMER LOANS
- ---------------------------------------------------------
September 30, June 30, December 31,
Dollars in 1995 1995 1994
millions
- ---------------------------------------------------------
Home equity $ 6,007 $ 6,029 $ 6,007
Credit card 1,569 1,600 1,474
Student loans 1,171 1,143 1,156
Installment 2,208 2,052 2,067
Other 104 246 189
- ---------------------------------------------------------
Total $11,059 $11,070 $10,893
- ---------------------------------------------------------
Consumer loans of $11,059 million at September 30, 1995 remained
relatively unchanged compared to the $11,070 million at June 30, 1995 as slight
decreases in home equity and credit card balances were partially offset by an
increase in the installment and student loan portfolios.
Commercial real estate (CRE) loans decreased $232 million from June 30,
1995 to September 30, 1995 primarily due to large paydowns during the quarter.
Lease financing increased $198 million from June 30, 1995 to September 30, 1995
and $421 million from December 31, 1994 to September 30, 1995, as a result of
new lease originations.
<PAGE>
Outstanding residential real estate loans secured by one-to four-family
residences were $11.1 billion at September 30, 1995, compared to $10.6 billion
at June 30, 1995. The $500 million increase was due to $899 million of
residential real estate loan purchases offset by approximately $200 million of
residential real estate loan sales and principal paydowns occurring in the
normal course of business.
NONPERFORMING ASSETS(a)
- ---------------------------------------------------------
Dollars in millions C & I CRE Consumer Total
- ---------------------------------------------------------
Nonperforming loans
and leases: $236 $159 $294 $689
OREO 7 41 34 82
- ---------------------------------------------------------
Total NPAs
September 30, 1995 $243 $200 $328 $771
- ---------------------------------------------------------
Total NPAs
June 30, 1995 $247 $231 $295 $773
=========================================================
Total NPAs
December 31, 1994 $236 $261 $264 $761
=========================================================
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($181 million, $177
million and $139 million at September 30, 1995, June 30, 1995 and December
31,1994, respectively), or assets subject to federal financial assistance ($38
million, $47 million and $59 million at September 30, 1995, June 30, 1995, and
December 31, 1994, respectively).
Nonperforming assets (NPAs) remained constant over the period from June
30, 1995 to September 30, 1995. NPAs at September 30, 1995, as a percentage of
total loans, leases and OREO, and as a percentage of total assets were 1.47% and
0.92%, respectively, compared to 1.47% and 0.89%, respectively, at June 30,
1995.
ACTIVITY IN NONPERFORMING ASSETS
- -----------------------------------------------------------
3rd 2nd 3rd
Quarter Quarter Quarter
Dollars in millions 1995 1995 1994
- -----------------------------------------------------------
Balance at beginning of
period $773 $819 $891
Additions 244 235 167
Reductions:
Payments/interest
applied (118) (129) (126)
Returned to accrual (12) (31) (15)
Charge-offs/writedowns (84) (41) (30)
Sales/other (32) (80) (63)
- -----------------------------------------------------------
Total reductions (246) (281) (234)
- -----------------------------------------------------------
Balance at end of period $771 $773 $824
===========================================================
RESERVE FOR CREDIT LOSS ACTIVITY
- ----------------------------------------------------------
Nine months ended
September 30
Dollars in millions 1995 1994
- ----------------------------------------------------------
Balance at beginning of year $1,496 $1,669
Provision charged to income 75 48
Loans and leases charged off (292) (285)
Recoveries of loans and leases
charged off 85 105
Acquisition/other 84 ---
- ----------------------------------------------------------
Balance at end of period $1,448 $1,537
- ----------------------------------------------------------
Ratio of net charge-offs to
average .41 % .44 %
loans and leases
- ----------------------------------------------------------
Ratio of reserve for credit
losses to 2.76 3.44
period-end loans and leases
- ----------------------------------------------------------
Ratio of reserve for credit
losses to 188 187
period-end NPAs
- ----------------------------------------------------------
Ratio of reserve for credit
losses to
period-end nonperforming 210 222
loans
and leases
- ----------------------------------------------------------
Fleet's reserve for credit losses decreased $89 million from September 30,
1994 to $1,448 million at September 30, 1995. The September 30, 1995 reserve for
credit losses includes $84 million of reserves acquired in connection with
acquisitions completed during the first and second quarters of 1995. The first
nine months of 1995 provision for credit losses was $75 million, $27 million
higher than the prior year's first nine months. Net charge-offs increased to
$207 million for the first nine months of 1995 from $180 million for the same
period in 1994 due to a $20 million decrease in recoveries and a $7 million
increase in charge-offs primarily relating to credit card and consumer finance
loans. Slight deterioration of Fleet's credit quality ratios was noted when
comparing the first nine months of 1995 results to the same period of 1994 as
nonperforming asset levels have increased over that period.
<PAGE>
FUNDING SOURCES
- ----------------------------------------------------------------
September 30, June 30, December 31,
Dollars in millions 1995 1995 1994
- ----------------------------------------------------------------
Deposits:
Demand $10,658 $11,075 $12,028
Regular savings, NOW,
money market 22,817 23,319 23,870
Time:
Domestic 17,593 18,002 14,338
Foreign 2,754 3,319 5,292
- ----------------------------------------------------------------
Total deposits 53,822 55,715 55,528
- ----------------------------------------------------------------
Borrowed funds:
Federal funds purchased 3,771 4,840 2,753
Securities sold under
agreements to 5,046 5,345 6,170
repurchase
Commercial paper 1,901 1,663 835
Other 4,281 4,775 2,828
- ----------------------------------------------------------------
Total borrowed funds 14,999 16,623 12,586
- ----------------------------------------------------------------
Notes and debentures 6,734 6,728 5,931
================================================================
Total $75,555 $79,066 $74,045
================================================================
Total deposits of $53.8 billion at September 30, 1995 decreased slightly
when compared to $55.7 billion at June 30, 1995. Core deposit funding levels
(demand, regular savings, NOW and money market) also decreased slightly from
June 30, 1995.
Total borrowed funds, including deposits, decreased $3.5 billion at
September 30, 1995 from June 30, 1995; however, the corporation has experienced
a shift in the borrowing mix as federal funds purchased has decreased by $1.1
billion from $4.8 billion at June 30, 1995 to $3.8 billion at September 30,
1995. Alternatively, commercial paper has increased by $238 million from $1.7
billion at June 30, 1995 to $1.9 billion at September 30, 1995 and other
borrowings have decreased by $494 million to $4.3 billion as of September 30,
1995. The change in the borrowing mix is primarily attributable to an increase
in mortgages held for resale at the corporation's mortgage banking subsidiary,
FMG, which funds its growth primarily with commercial paper.
ASSET AND LIABILITY MANAGEMENT
The asset/liability management process at Fleet ensures that the risk to
earnings fluctuations from changes in interest rates is prudently managed. The
following table presents the corporation's interest-rate gap position on
September 30, 1995. Interest-rate gap analysis provides a static analysis of the
repricing characteristics of the entire balance sheet. Therefore, the table
presents a one-day position which is continually changing and not necessarily
indicative of the corporation's position at any other time. In addition to
interest-rate gap analysis, the corporation also analyzes interest rate
sensitivity through sophisticated asset/liability simulation models.
<TABLE><CAPTION>
INTEREST-RATE GAP ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulatively Repriced Within
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1995
Dollars in millions 3 months 4 to 12
By repricing date or less months 1 to 5 years After 5 years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $43,793 $11,366 $18,749 $ 9,843 $83,751
Total Liabilities 38,338 13,832 16,079 15,502 83,751
Net Off Balance Sheet (3,282 ) 385 3,747 (850 ) ---
- ---------------------------------------------------------------------------------------------------------------------------------
Periodic Gap 2,173 (2,081 ) 6,417 (6,509 ) ---
Cumulative Gap 2,173 92 6,509 --- ---
Cumulative Gap as a percent of Total Assets 2.6 % 0.1 % 7.8 %
9/30/95
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Gap as a percent of Total Assets (10.9) % (3.2) % 14.1 %
12/31/94
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1995, the corporation was 0.1% asset sensitive at the
one-year cumulative gap interval compared to 3.2% liability sensitive at
December 31, 1994. This change is primarily attributable to a reduction in the
average maturity of the securities portfolio.
The off-balance sheet position is comprised of interest-rate swaps,
options and financial futures which are utilized to manage interest-rate risk
and to establish the proper interest-rate risk profile within clearly defined
and prudent parameters on the basis of the current interest-rate environment.
Also, because interest-rate instruments are used to alter the repricing
characteristics of certain assets and liabilities, the interest-rate sensitivity
of specific portfolios is analyzed, as well as the impact of interest-rate
instruments on the entire balance sheet.
On a consolidated basis, the corporation had $16.4 billion (notional
amount) of interest-rate risk management instruments with external
counterparties at September 30, 1995.
<PAGE>
<TABLE><CAPTION>
INTEREST-RATE RISK-MANAGEMENT ANALYSIS
- ----------------------------------- ------------ ------------------- ------------ ------------ -----------------------
Weighted
Average Weighted Average
September 30, 1995 Notional Assets/ Maturity Rate
Dollars in Millions Value Liabilities (years) Fair Value
Hedged Receive
Pay
- ----------------------------------- ------------ ------------------- ------------ ------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Receive-fixed/pay-variable swaps $ 3,075 Variable-rate
loans
1,605 Fixed-rate
deposits
1,035 Short-term
borrowings
491 Long-term debt
------------
6,206 2.1 $28 6.29% 5.86%
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Pay-fixed/receive-variable 2,316 Short-term
borrowings
100 Long-term debt
------------
2,416 2.0 (33) 5.85 6.68
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Basis swaps 35 Fixed-rate
deposits
890 Long-term debt
2,147 Securities
------------
3,072 2.0 (4) 6.40 6.39
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Index-amortizing swaps
receive-fixed/pay-variable 2,384 Variable-rate 1.3 (21) 5.06 5.80
loans
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Total interest rate swaps $14,078 1.9 $(30) 6.03% 6.11%
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
OTHER INTEREST RATE INSTRUMENTS
Interest rate cap agreements $ 550 Short-term 1.6 $ 11
borrowings
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Interest rate corridor agreements 824 Short-term 1.0 3
borrowings
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Futures contracts sold 960 Loans/Securities 0.9 ---
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Total other instruments $ 2,334 1.1 $ 14
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
Total interest rate instruments $16,412 $(16)
- ----------------------------------- ------------ ------------------- ------------ ------------ ----------- -----------
</TABLE>
At September 30, 1995, the corporation had approximately $14.1 billion of
interest rate swaps outstanding, including $2.4 billion of index-amortizing
swaps. Under the terms of the index-amortizing swaps, Fleet receives a fixed
rate and pays a floating rate based on certain indices. Under certain
conditions, if those indices fall below a specified range, the swaps would
amortize (i.e., the swaps would wholly or partly mature); if these indices are
above the specified range, none of the swaps would amortize.
The interest-rate risk management instrument activity for the nine months
ended September 30, 1995 is summarized in the following table (all amounts are
notional amounts):
<TABLE><CAPTION>
INTEREST-RATE RISK-MANAGEMENT INSTRUMENT ACTIVITY
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate swaps
----------------------------------------------
September 30, 1995 Receive- Pay- Index-
Dollars in millions Fixed Fixed Basis Amortizing Caps Corridors Collars Futures Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amounts:
Balance at beginning of $ 2,873 $ 2,084 $3,605 $ 4,119 $ 1,775 $ 1,031 $ 500 $ 6,005 $21,992
year
Additions 4,513 370 585 --- --- --- --- 2,771 8,239
Maturities (1,180 ) (38 ) (345 ) (485 ) (1,225 ) (207 ) (500 ) (677 ) (4,657 )
Terminations --- --- (773 ) (1,250 ) --- --- --- (7,139 ) (9,162 )
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 6,206 $ 2,416 $ 3,072 $ 2,384 $ 550 $ 824 $ --- $ 960 $16,412
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1995, Fleet had deferred gains relating to the
termination of interest rate swaps of $47 million (which will be amortized over
a remaining life of approximately 41 months) and deferred losses of $21 million
(which will be amortized over a remaining life of approximately 10 months). The
amortization of deferred gains and losses on terminated swaps is recognized as
an adjustment to the yield on the assets or liabilities to which the swaps were
designated.
The maturities of the interest-rate risk management instruments are shown
in the following table.
<PAGE>
Maturities Interest-Rate Risk
Management Instruments
<TABLE><CAPTION>
- -------------------------------------------------------------------------------------------
September 30, 1995
Dollars in Within 1 to 2 2 to 3 3 to 4 4 to 5 After 5
Millions 1 Year Years Years Years Years Years Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Notional
Amounts:
Interest Rate
Swaps
Receive-Fixed $1,297 $ 2,419 $1,710 $ 75 $ 670 $35 $ 6,206
Pay-Fixed 981 515 250 325 325 20 2,416
Basis 890 ... 2,147 35 ... ... 3,072
Index
Amortizing 1,042 981 ... 161 200 ... 2,384
- -------------------------------------------------------------------------------------------
Total Interest
Rate swaps $4,210 $ 3,915 $4,107 $596 $1,195 $55 $ 14,078
- -------------------------------------------------------------------------------------------
Other
Instruments
Caps $ ... $ 400 $ ... $150 $ ... $... $ 550
Corridors 513 311 ... ... ... ... 824
Futures 764 184 12 ... ... ... 960
- -------------------------------------------------------------------------------------------
Total Other $1,277 $895 $12 $150 $ ... $... $2,334
- -------------------------------------------------------------------------------------------
Total $5,487 $ 4,810 $4,119 $746 $1,195 $ 55 $ 16,412
- -------------------------------------------------------------------------------------------
</TABLE>
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. Dividends paid by the
corporation's banking subsidiaries are limited by various regulatory
requirements related to capital adequacy and historic earnings.
As shown in the consolidated statement of cash flows, cash and cash
equivalents decreased by $4.5 billion during the nine month period ended
September 30, 1995. Net cash used by operating activities was mainly
attributable to a net increase in originations and purchases of mortgages held
for resale. Net cash provided by investing activities was generally caused by
proceeds from sales and maturities of securities offset by a net increase in
loans and leases at the corporation's banking subsidiaries. Net cash used by
financing activities was due to a net decrease in deposits partially offset by
increases in short-term borrowings and issuances of long-term debt.
At September 30, 1995 and December 31, 1994, the corporation had total
commercial paper outstanding of $1.9 billion and $835 million, respectively. The
parent company had $693 million and $727 million of commercial paper outstanding
at September 30, 1995 and December 31, 1994, respectively, while the remaining
balance related to FMG. The corporation has backup lines of credit to ensure
that funding is not interrupted if commercial paper is not available. Total
amount of funds available under these lines of credit was $1.0 billion at
September 30, 1995. Fleet had no outstanding balance under the line of credit.
Fleet has shelf registrations 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 $859 million at September
30, 1995. In August 1995, the corporation issued $150 million of its senior
medium-term notes, all of which are due in 1996. On October 26, 1995, the
corporation issued $250 million of 6.00% senior notes due October 26, 1998,
thereby reducing the amount of funds available using the shelf registrations to
$449 million. On October 24, 1995, the corporation filed a new registration
statement for an additional $750 million in securities which became effective on
November 29, 1995.
FMG has a separate funding program that includes two revolving-warehouse
credit agreements which totaled $2.2 billion at December 31, 1994. On April 3,
1995, FMG renegotiated these agreements and incorporated the terms of these two
facilities into one credit facility totaling $1.8 billion. FMG has $560 million
outstanding under the new credit facility at September 30, 1995, compared to
$500 million at December 31, 1994. FMG also sells commercial paper to fund
short-term needs and had $1.2 billion and $108 million outstanding at September
30, 1995 and December 31, 1994, respectively. During the second quarter, FMG
filed a shelf registration providing for the issuance of debt securities and
warrants to purchase debt securities. During the third quarter, FMG issued $150
million of medium-term notes with a range of maturities from 3 to 7 years, which
reduces the amount of funds available under FMG's shelf registration to $150
million.
<PAGE>
CAPITAL
- ----------------------------------------------------------------
September 30, June 30, December 31,
1995 1995 1994
- ----------------------------------------------------------------
Risk-adjusted assets $67,313 $68,403 $60,650
Tier 1 risk-based
capital 8.36 % 8.22 % 9.14 %
(4% minimum)
Total risk-based
capital 12.20 12.01 12.92
(8% minimum)
Leverage ratio 6.83 6.84 7.15
Common equity-to-assets 7.18 7.17 6.06
Total equity-to-assets 8.00 7.60 6.75
Tangible total
equity-to 5.28 5.06 5.18
-assets
Capital in excess of
minimum
requirements:
Tier 1 risk-based $2,937 $2,885 $ 3,120
Total risk-based 2,829 2,746 2,983
Leverage 2,335 2,333 2,445
================================================================
At September 30, 1995, the corporation exceeded all regulatory required
minimum capital ratios. The corporation's risk-based regulatory ratios improved
slightly over June 30, 1995. Reductions in risk-adjusted assets from June 30,
1995 primarily reflected the reduction of lower yielding assets.
RECENT ACCOUNTING DEVELOPMENTS
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method of
accounting for employee stock options and similar equity instruments. The
standard also permits companies to continue to measure compensation cost 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 expects to continue 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
Statement No. 123 in the 1996 annual report for awards granted in both 1995 and
1996.
<PAGE>
<TABLE><CAPTION>
FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------
For the three months ended September 30
Dollars in millions, except per share amounts 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans and leases $1,224 $ 941
Interest on taxable securities 308 389
Interest on tax-exempt securities 8 9
- -------------------------------------------------------------------------------------------------------
Total interest income 1,540 1,339
- -------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 449 315
Short-term borrowings 205 168
Long-term debt 123 97
- -------------------------------------------------------------------------------------------------------
Total interest expense 777 580
- -------------------------------------------------------------------------------------------------------
Net interest income 763 759
- -------------------------------------------------------------------------------------------------------
Provision for credit losses 27 11
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 736 748
- -------------------------------------------------------------------------------------------------------
Noninterest income:
Mortgage banking 137 97
Service charges, fees, and commissions 124 109
Investment services revenue 81 72
Student loan servicing fees 17 15
Securities available for sale gains 7 2
Trading revenue 8 8
Other 74 77
- -------------------------------------------------------------------------------------------------------
Total noninterest income 448 380
- -------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 361 348
Occupancy 63 66
Equipment 53 46
Mortgage servicing rights amortization 31 18
Core deposit and goodwill amortization 28 16
Marketing 28 22
Legal and other professional 25 25
FDIC assessment 3 28
Restructuring charge --- 7
Other 155 152
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 747 728
- -------------------------------------------------------------------------------------------------------
Income before income taxes 437 400
Applicable income taxes 169 148
- -------------------------------------------------------------------------------------------------------
Net income before minority interest 268 252
Minority interest --- 3
- -------------------------------------------------------------------------------------------------------
Net income $ 268 $ 249
- -------------------------------------------------------------------------------------------------------
Net income applicable to common shares $ 259 $ 242
- -------------------------------------------------------------------------------------------------------
Fully diluted weighted average common shares outstanding: 269,278,781 265,818,628
Fully diluted earnings per share: $ .96 $ .91
Dividends declared: .40 .35
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Supplemental Consolidated
Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------
For the nine months ended September 30
Dollars in millions, except per share amounts 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans and leases $3,525 $2,707
Interest on taxable securities 973 1,132
Interest on tax-exempt securities 28 24
- -------------------------------------------------------------------------------------------------------
Total interest income 4,526 3,863
- -------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,272 828
Short-term borrowings 613 473
Long-term debt 359 259
- -------------------------------------------------------------------------------------------------------
Total interest expense 2,244 1,560
- -------------------------------------------------------------------------------------------------------
Net interest income 2,282 2,303
- -------------------------------------------------------------------------------------------------------
Provision for credit losses 75 48
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 2,207 2,255
- -------------------------------------------------------------------------------------------------------
Noninterest income:
Mortgage banking 380 295
Service charges, fees, and commissions 369 323
Investment services revenue 238 219
Trading revenue 56 15
Student loan servicing fees 47 39
Securities available for sale gains 12 21
Other 224 229
- -------------------------------------------------------------------------------------------------------
Total noninterest income 1,326 1,141
- -------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,086 1,095
Occupancy 186 203
Equipment 154 140
Mortgage servicing rights amortization 101 72
Core deposit and goodwill amortization 76 49
Marketing 70 60
Legal and other professional 65 71
FDIC assessment 61 86
Merger and restructuring related charges 50 173
Other 459 468
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 2,308 2,417
- -------------------------------------------------------------------------------------------------------
Income before income taxes 1,225 979
Applicable income taxes 477 380
- -------------------------------------------------------------------------------------------------------
Net income before minority interest 748 599
Minority interest --- 8
- -------------------------------------------------------------------------------------------------------
Net income $ 748 $ 591
- -------------------------------------------------------------------------------------------------------
Net income applicable to common shares $ 721 $ 567
- -------------------------------------------------------------------------------------------------------
Fully diluted weighted average common shares outstanding: 267,644,122 267,395,653
Fully diluted earnings per share: $ 2.69 $ 2.12
Dividends declared: 1.20 1.00
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Supplemental Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions, except share amounts 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash, due from banks and interest-bearing deposits $ 3,517 $ 7,613
Federal funds sold and securities purchased under agreements to resell 548 957
Securities available for sale 11,603 12,250
Securities held to maturity (market value: $7,809 and $8,452) 7,897 8,891
Loans and leases 52,435 46,035
Reserve for credit losses (1,448) (1,496)
- -------------------------------------------------------------------------------------------------------------------------
Net loans and leases 50,987 44,539
- -------------------------------------------------------------------------------------------------------------------------
Mortgages held for resale 2,252 560
Mortgage servicing rights 1,263 840
Premises and equipment 1,010 985
Intangible assets 1,141 494
Accrued interest receivable 581 570
Other assets 2,952 3,327
- -------------------------------------------------------------------------------------------------------------------------
Total assets $83,751 $81,026
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand $10,658 $12,028
Regular savings, NOW, money market 22,817 23,870
Time 20,347 19,630
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 53,822 55,528
- -------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 8,817 8,923
Other short-term borrowings 6,182 3,663
Accrued expenses and other liabilities 1,498 1,510
Long-term debt 6,734 5,931
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 77,053 75,555
- -------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 682 557
Common stock (shares issued: 252,099,138 in 1995 and 244,140,469 in
1994; shares outstanding: 245,811,130 in 1995 and 237,590,569 in 1994) 246 244
Common surplus 2,835 2,612
Retained earnings 3,148 2,719
Net unrealized gain (loss) on securities 11 (411)
Less: Treasury stock, at cost, 6,288,008 in 1995 and
6,549,900 shares in 1994 (224) (250)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,698 5,471
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $83,751 $81,026
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Supplemental Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Net
Common Unrealized
Nine months ended September 30 Preferred Stock Common Retained Gain(Loss) Treasury
Dollars in millions, except share amounts Stock $1 Par Surplus Earnings on Stock Total
Securities
- ----------------------------------------------------------------------------------------------------------------------------------
1994
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $695 $242 $2,625 $2,167 $238 $ (2) $5,965
Net income 591 591
Cash dividends declared on common stock ($1.00 per share) (138) (138)
Cash dividends declared on preferred stock (13) (13)
Cash dividends declared by pooled companies prior to
mergers:
Cash dividends declared on common stock (69) (69)
Cash dividends declared on preferred stock (12) (12)
Redemption of adjustable rate preferred stock (122) (122)
Redemption of FDIC preferred stock (16) (3) (19)
Common stock issued in connection with employee
benefit plans 3 43 (1) 4 49
Adjustment of valuation reserve for securities
available for sale (528) (528)
Treasury stock purchases (198) (198)
Other-net (1) (33) 27 3 (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 $557 $244 $2,635 $2,549 $(287) $(196) $5,502
- ------------------------------------------------------------------------------------------------------------------------------------
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 companies prior to
mergers:
Cash dividends declared on common stock (82) (82)
Cash dividends declared on preferred stock (20) (20)
Issuance of preferred stock 125 125
Common stock issued in connection with:
Acquisition of Northeast Federal Corp. 6 187 193
Employee benefit plans 53 (23) 73 103
Treasury stock issued in connection with
the acquisition of NBB (17) (21) 234 196
Adjustment of valuation reserve for securities
available for sale 482 482
Treasury stock purchases (280) (280)
Other-net (4) 4 (60) (1) (61)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $682 $246 $2,835 $3,148 $ 11 $(224) $6,698
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Supplemental Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
Nine months ended September 30
Dollars in millions 1995 1994
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 748 $ 591
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 117 118
Amortization of servicing rights and other intangible assets 223 155
Provision for credit losses 75 48
Deferred income tax expense 99 53
Merger related charges 50 101
Other gains on sales of assets (87) (34)
Originations and purchases of mortgages held for resale (8,471) (10,402)
Proceeds from sales of mortgages held for resale 6,872 13,061
Net decrease in trading account assets 64 1
(Increase) decrease in accrued receivables, net 16 (107)
Decrease in accrued liabilities, net (335) (186)
Other, net 234 (24)
- ---------------------------------------------------------------------------------------------------------
Net cash flow provided (used) by operating activities (395) 3,375
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (13,900) (23,200)
Proceeds from maturities of securities available for sale 7,916 969
Proceeds from sales of securities available for sale 10,448 23,713
Purchases of securities held to maturity (562) (2,791)
Proceeds from maturities of securities held to maturity 1,533 1,855
Loans made to customers, nonbanking subsidiaries (882) (934)
Principal collected on loans made to customers, nonbanking subsidiaries 632 779
Net cash and cash equivalents paid for businesses acquired (2,816) (56)
Loans purchased from third parties (396) (294)
Proceeds from sales of loans 190 92
Net increase in loans and leases, banking subsidiaries (1,402) (794)
Proceeds from sales of OREO 81 101
Proceeds from sale of subsidiary --- 76
Acquisition of minority interest in subsidiary (158) ---
Purchases of premises and equipment (102) (177)
Purchases of acquired servicing rights (312) (319)
- ---------------------------------------------------------------------------------------------------------
Net cash flow provided (used) by investing activities 270 (980)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (6,577) 2,679
Net increase (decrease) in short-term borrowings 1,792 (4,510)
Proceeds from issuance of long-term debt 2,211 1,470
Repayments of long-term debt (1,461) (1,056)
Proceeds from the issuance of common stock 88 49
Proceeds from the issuance of preferred stock 121 ---
Redemption of preferred stock --- (140)
Repurchase of common stock (280) (198)
Cash dividends paid (274) (221)
- ---------------------------------------------------------------------------------------------------------
Net cash flow used by financing activities (4,380) (1,927)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,505) 468
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of the period 8,570 3,838
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 4,065 $ 4,306
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Supplemental Consolidated Financial
Statements.
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1. FINANCIAL STATEMENTS
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and prevailing practices within the
banking industry. The accompanying interim supplemental 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, 1995
may not be indicative of operating results for the year ending December 31,
1995. Certain prior year and prior quarter amounts have been reclassified to
conform to current classifications.
On November 30, 1995, Shawmut National Corporation ("Shawmut") merged with
and into Fleet Financial Group, Inc. The supplemental consolidated financial
statements of Fleet Financial Group, Inc., give retroactive effect to the
merger. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation,
however, they will become the historical consolidated financial statements of
the corporation after financial statements covering the date of consummation
of the business combination are issued.
NOTE 2. MERGER/ACQUISITIONS
On November 30, 1995, Shawmut merged with and into Fleet. The merger
agreement provided that each share of Shawmut common stock, other than shares
held in Shawmut's treasury or directly or indirectly by Fleet or its
subsidiaries or by Shawmut or its subsidiaries (except for in both cases shares
held in a fiduciary capacity or in respect of debts previously contracted), be
exchanged for 0.8922 shares of Fleet common stock on a tax-free basis. As a
result of the merger, cost savings of approximately $400 million are expected to
be realized primarily through: reductions in staff; elimination, consolidation
or divestiture of certain branches; and the consolidation of certain offices,
data processing and other redundant back office operations and staff functions.
The extent to which cost savings will be achieved is dependent upon various
factors beyond the control of Fleet and Shawmut, including the regulatory
environment, economic conditions, unanticipated changes in business conditions
and inflation. Therefore, no assurances can be given with respect to the
ultimate level of cost savings to be realized, or that such savings will be
realized in the time-frame currently anticipated.
In connection with the Shawmut merger, Fleet and Shawmut have signed
definitive agreements to divest 64 branches to comply with anti-trust concerns.
The sale will consist of approximately $2.6 billion in deposits and $1.9 billion
in loans, including $1.1 billion in residential mortgages.
Due to the merger with Shawmut, certain financial data herein may
not be indicative of Fleet's future results of operations or financial position.
As previously disclosed in Form 10-Q filed with the Securities
and Exchange Commission for the quarters ended June 30, 1995 and March 31, 1995,
the Corporation completed the purchases of NBB Bancorp, Inc. ("NBB"), Plaza Home
Mortgage Corporation ("Plaza"), Northeast Federal Corporation ("Northeast"),
purchased substantially all of the assets and assumed certain of the liabilities
of the Business Finance Division of Barclay's Business Credit, Inc., and
purchased the 19% publicly-held shares of Fleet Mortgage Group, Inc., ("FMG").
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
The information below presents, on a pro forma basis, certain historical
financial information for the Corporation, adjusted for each of the NBB, Plaza,
Barclays, Northeast and FMG transactions as if such transactions had been
consummated on January 1, 1995 and 1994, respectively.
PRO FORMA RESULTS
- -----------------------------------------------------------
Nine months ended September 30
(Dollars in millions except per share data) 1995 1994
- -----------------------------------------------------------
Net interest income $2,316 $2,439
- -----------------------------------------------------------
Net income available to common stockholders $ 709 $ 534
- -----------------------------------------------------------
Net income per common share $ 2.65 $ 2.01
- -----------------------------------------------------------
CORPORATION AS REPORTED
Net interest income $2,282 $2,303
- -----------------------------------------------------------
Net income available to common stockholders $ 721 $ 567
- -----------------------------------------------------------
Net income per common share $ 2.69 $ 2.12
- -----------------------------------------------------------
The pro forma results reflect the sale of NBB's entire securities
portfolio of approximately $1 billion as if such sales had occurred at the
beginning of each such period, elimination of any corresponding interest income
recognized on these securities, and the use of the proceeds from the sale of
these securities to reduce short-term borrowings and related interest expense
using a cost of funds rate of 5.44% and 4.62 % for 1995 and 1994, respectively.
Similarly, the pro forma results reflect the sale of $157 million, $230 million
and $18 million of Plaza's mortgage-backed securities, adjustable-rate loans,
and deposits, respectively, as if such sales had occurred at the beginning of
each such period, the elimination of any corresponding interest income or
expense recognized, and the use of the net proceeds from these sales to reduce
short-term borrowings and related interest expense using a cost of funds rate of
5.98% and 4.05% for 1995 and 1994, respectively. In addition, the pro forma
results reflect the redemption of approximately $50 million of Northeast's 9%
Uncertificated Sinking Fund Debentures. Pro forma results reflect the
amortization of adjustments recorded to reflect the fair value of the net assets
acquired as of the date of acquisition as if the adjustments were recorded at
the beginning of the period. Additional funding costs for the purchase prices of
the acquisitions of NBB, Plaza, Barclays and the 19% publicly-held shares of FMG
have also been reflected in the pro forma results.
NOTE 3. RESERVE FOR CREDIT LOSSES
Effective January 1, 1995, the corporation adopted Financial Accounting
Standards Board (FASB) Statement No. 114 "Accounting by Creditors for Impairment
of a Loan", as amended by Statement No. 118. Under these standards, the 1995
reserve for credit losses related to loans that are identified as impaired is
based on discounted cash flows using the loan's effective interest rate, or the
fair value of the collateral for collateral-dependent loans, or observable
market price of the impaired loans.
Commercial and commercial real estate loans are considered impaired when
it is probable that the corporation will not collect all amounts due in
accordance with the contractual terms of the loan. Except for certain
restructured loans, impaired loans are loans that are on nonaccrual status.
Upon adoption of Statement No. 114, the corporation did not change its method
of recognizing interest income on impaired loans. When a loan is placed on
nonaccrual status, all interest previously accrued in the current year, but not
collected, is reversed against interest income. Any interest accrued in prior
years is charged against the reserve for credit losses. Subsequent cash
receipts are generally applied to reduce the unpaid principal balance. Loans
are returned to accrual status and are no longer considered to be impaired when
they become current as to principal and interest or demonstrate a period of
performance under the contractual terms, and, in management's opinion, are
fully collectable.
Loans which were restructured prior to the adoption of Statement No. 114,
and which are performing in accordance with the renegotiated terms are not
required to be reported as impaired. Loans restructured subsequent to the
adoption of Statement No. 114 are required to be reported as impaired in the
year of restructuring. Thereafter, such loans can be removed from the impaired
loan disclosure if the loans were paying a market rate of interest at the time
of restructuring and are performing in accordance with their renegotiated terms.
In accordance with Statement No. 114, a loan is classified as an
insubstance foreclosure when the corporation has taken possession of the
collateral regardless of whether formal foreclosure proceedings have taken
place. Loans classified as insubstance foreclosures prior to adoption of
Statement No. 114, but for which the corporation had not taken possession of
the collateral, were immaterial to the financial statements taken as a whole
and, therefore, were not reclassified upon adoption.
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
At September 30, 1995, the recorded investment in impaired loans was $395
million, substantially all of which were on nonaccrual status. Included in this
amount is $228 million of impaired loans for which the related impairment
reserve is $48 million, and $167 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 $417 million. The amount of
interest income recognized on impaired loans during the nine month period ended
September 30, 1995 was immaterial. The reserve for credit losses contains
additional amounts for impaired loans as deemed necessary to maintain reserves
at levels considered adequate by management.
NOTE 4. MORTGAGE SERVICING RIGHTS
In May 1995, FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 requires
that an entity recognize, as separate assets, rights to service mortgage loans
for others irrespective of how those servicing rights are acquired (i.e.,
whether purchased or originated) by allocating the total cost of the loans
between the loan and the servicing rights thereto based on their relative fair
values. The corporation adopted this statement as of April 1, 1995, with
application to transactions in which the corporation acquires mortgage servicing
rights (MSRs) through either purchase or origination of mortgage loans and sells
those loans with servicing rights retained, and to impairment evaluations of all
capitalized MSRs. The incremental impact of capitalizing originated mortgage
servicing rights in accordance with SFAS 122 resulted in an increase of $23.8
million in mortgage production revenues for the nine month period ended
September 30, 1995.
SFAS 122 requires that capitalized mortgage servicing rights be assessed
for impairment based upon the fair value of those rights. Fair value is
estimated using a valuation model which considers market consensus loans,
prepayment predictions, historic prepayment rates, mortgage interest rates, and
other economic factors. For purposes of impairment evaluation and measurement,
MSRs are stratified based on the predominant risk characteristics of the
underlying loans which for the corporation's MSRs exceeds fair value by
individual stratum, a valuation allowance is established. The allowance may
be adjusted in the future as MSR values increase or decrease. The cost of MSRs
is amortized over the estimated period of net servicing revenues.
A schedule of mortgage servicing rights activity for the nine months ended
September 30, 1995 and 1994 is as follows:
Mortgage Servicing Rights
- ------------------------------------------------------------------------
Nine months ended September 30
Dollars in millions 1995 1994
- ------------------------------------------------------------------------
Balance at beginning of period $ 841 $579
Additions 569 315
Servicing sales (54) (17)
Amortization (101) (72)
Deferral of servicing hedge loan 8 ---
- ------------------------------------------------------------------------
Balance at end of period $1,263 $(805)
- ------------------------------------------------------------------------
At September 30, 1995 the aggregate fair value of the corporation's
MSRs was approximately $1.6 billion.
NOTE 5. LONG TERM DEBT
During the first nine months of 1995, the Corporation issued $269 million
of its senior medium-term notes, all of which are due in 1996, $250 million of 7
1/8% senior notes due May 1, 2000 and $50 million of 6.09% senior notes due June
9, 2000. In addition, a banking subsidiary of the Corporation issued $250
million of 8 5/8% subordinated bank notes due February 15, 2005. On October 26,
1995, the Corporation issued $250 million of 6.00% senior notes due October 26,
1998. The Corporation intends to use the proceeds of these issuances for general
corporate purposes.
NOTE 6. SUPPLEMENTAL DISCLOSURE FOR
STATEMENTS OF CASH FLOWS
CASH-FLOW DISCLOSURE
- -------------------------------------------------------------
Nine months ended September 30
Dollars in millions 1995 1994
- -------------------------------------------------------------
Supplemental disclosure for cash paid during
the period for:
Interest expense $2,206 $1,535
Income taxes, net of refunds 274 200
- -------------------------------------------------------------
- -------------------------------------------------------------
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to foreclosed property
and repossessed equipment 73 73
Adjustment to unrealized gain (loss) on
securities available for sale 665 (846)
- -------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------
Assets acquired and liabilities assumed in business
combinations were as follows:
Assets acquired, net of cash and cash
equivalents paid 8,920 347
Net cash and cash equivalents paid
for businesses acquired (2,816) (56)
Liabilities assumed 5,715 291
Common stock issued in connection with
businesses acquired 193 ---
Treasury stock issued in connection with
businesses acquired 196 ---
- -------------------------------------------------------------
NOTE 7.
SUBSEQUENT EVENTS
During the fourth quarter of 1995 the Corporation incurred merger costs of
$317 million (after-tax) related to its merger with Shawmut National
Corporation, which was effective November 30, 1995. These charges primarily
include severance costs, branch consolidation costs, and transaction related
charges. Additionally, during the fourth quarter the Corporation made the
strategic decision to sell Fleet Finance, Inc., the Corporation's consumer
finance subsidiary based in Atlanta, Georgia, and certain nonperforming assets
from its banking franchise that have been identified for sale or accelerated
disposition. The Corporation recognized a charge of $112 million (after-tax)
relating to this transaction.
On December 19, 1995, Fleet signed a definitive agreement to purchase
NatWest Bank N.A. ("NatWest") for $2.7 billion in cash and up to an additional
$560 million in accordance with an earnout provision. The earnout provision
calls for annual payments based upon the level of earnings from the NatWest
franchise with a cap of $560 million over an eight year life. NatWest has
approximately $35 billion in assets and the corporation intends to restructure
the NatWest balance sheet by liquidating approximately $13 billion of
low-return assets and reducing an equal amount of borrowed funds. The
acquisition of NatWest will add approximately 300 branches in New York and New
Jersey and is expected to close in the second quarter of 1996, subject to
regulatory approval.
On December 31, 1995, Fleet reached a definitive agreement with Kohlberg,
Kravis and Roberts ("KKR") to exchange KKR's ownership interest represented
by its holdings of Dual Convertible Preferred Stock (DCP) into direct
ownership of Fleet common stock. Under the terms of the agreement, KKR
exchanged its position into 19.9 million shares of Fleet's common stock on
December 31, 1995. In connection with this transaction, Fleet recognized a
premium on the DCP conversion of $157 million that is considered to be a
dividend in the Corporation's earnings per share calculation, which had the
effect of reducing fully diluted earnings per share by $.59 per share.
