UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for quarterly period ended March 31, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period _________ to __________
Commission File Number 1-6366
FLEET FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0341324
- ---------------------------------------------------- ------------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
- ---------------------------------------------------- ------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 292-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the Registrant was
required to file reports) and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---------------- ------------------
The number of shares of common stock of the Registrant outstanding as of April
30, 1996 was 263,054,161.
<PAGE>
FLEET FINANCIAL GROUP, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. ITEM 1. FINANCIAL INFORMATION ----
Consolidated Statements of Income
Three Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 6
Condensed Notes to Consolidated Financial Statements 7
PART I. ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. 25
SIGNATURES 27
EXHIBITS 28
2
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
For the three months ended March 31
Dollars in millions, except per share amounts 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans and leases $1,144 $1,103
Interest on taxable securities 185 336
Interest on tax-exempt securities 8 9
- -------------------------------------------------------------------------------------
Total interest income 1,337 1,448
- -------------------------------------------------------------------------------------
Interest expense:
Deposits 402 391
Short-term borrowings 106 186
Long-term debt 105 115
- -------------------------------------------------------------------------------------
Total interest expense 613 692
- -------------------------------------------------------------------------------------
Net interest income 724 756
- -------------------------------------------------------------------------------------
Provision for credit losses 35 20
- -------------------------------------------------------------------------------------
Net interest income after provision for credit 689 736
losses
- -------------------------------------------------------------------------------------
Noninterest income:
Mortgage banking 124 103
Service charges, fees, and commissions 119 120
Investment services revenue 87 79
Student loan servicing fees 22 15
Securities available for sale gains 18 1
Gain from branch divestitures 60 ---
Other 89 84
- -------------------------------------------------------------------------------------
Total noninterest income 519 402
- -------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 348 361
Occupancy 61 63
Equipment 57 50
Mortgage servicing rights amortization 41 24
Intangible asset amortization 25 22
Legal and other professional 23 18
Marketing 22 21
Printing and mailing 16 15
Telephone 16 15
FDIC assessment 2 29
Merger-related charges --- 37
Other 147 109
- -------------------------------------------------------------------------------------
Total noninterest expense 758 764
- -------------------------------------------------------------------------------------
Income before income taxes 450 374
Applicable income taxes 186 148
- -------------------------------------------------------------------------------------
Net income $ 264 $ 226
- -------------------------------------------------------------------------------------
Net income applicable to common shares $ 251 $ 218
- -------------------------------------------------------------------------------------
Fully diluted weighted average common shares 268,376,014 263,780,319
outstanding $0.94 $0.82
Fully diluted earnings per share 0.43 0.40
Dividends declared
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
March 31, December 31,
Dollars in millions, except share amounts 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 3,305 $ 4,505
Federal funds sold and securities purchased under 1,808 61
agreements to resell
Securities available for sale 9,243 18,533
Securities held to maturity (market value: $824 and $782) 848 798
Loans and leases 47,559 51,525
Reserve for credit losses (1,287 ) (1,321 )
- ---------------------------------------------------------------------------------------------------
Net loans and leases 46,272 50,204
- ---------------------------------------------------------------------------------------------------
Mortgages held for resale 2,398 2,005
Mortgage servicing rights 1,406 1,276
Intangible assets 1,071 1,116
Premises and equipment 974 991
Accrued interest receivable 416 503
Other assets 4,382 4,440
- ---------------------------------------------------------------------------------------------------
Total assets $72,123 $84,432
- ---------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Demand $10,485 $12,305
Regular savings, NOW, money market 21,783 22,835
Time 17,853 21,982
- ---------------------------------------------------------------------------------------------------
Total deposits 50,121 57,122
- ---------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under 3,810 7,425
agreements to repurchase
Other short-term borrowings 3,363 5,144
Accrued expenses and other liabilities 1,985 1,895
Long-term debt 6,000 6,481
- ---------------------------------------------------------------------------------------------------
Total liabilities 65,279 78,067
- ---------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock 824 399
Common stock (shares issued: 262,882,365 in 1996 and
262,864,257 in 1995; shares outstanding:
262,882,365 in 1996 and 262,721,926 in 1995) 3 3
Common surplus 3,122 3,149
Retained earnings 2,894 2,768
Net unrealized gain on securities 1 52
Less: Treasury stock, at cost, 142,331 shares in 1995 --- (6 )
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 6,844 6,365
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $72,123 $84,432
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Common Net
Stock Unrealized
Three months ended March 31 Preferred $.01(a) Common Retained Gain(Loss) Treasury
Dollars in millions, except share amounts Stock Par Surplus Earnings on Stock Total
Securities
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
- ----
Balance at December 31, 1994 $557 $244 $2,612 $2,719 $(411 ) $(250 ) $5,471
Net income 226 226
Cash dividends declared on common stock (59 ) (59 )
($0.40 per share)
Cash dividends declared on preferred stock (2 ) (2 )
Cash dividends declared by pooled company (33 ) (33 )
prior to merger
Issuance of preferred stock 125 125
Common stock issued in connection with
employee benefit and stock option plans 26 26
Treasury stock issued in connection with
the acquisition of NBB (17 ) (21 ) 234 196
Adjustment of valuation reserve for
securities available for sale 257 257
Other, net 2 (6 ) (35 ) (4 ) (43 )
- --------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 $682 $246 $2,615 $2,830 $(189 ) $(20 ) $6,164
- --------------------------------------------------------------------------------------------------------------
1996
- ----
Balance at December 31, 1995 $399 $ 3 $3,149 $2,768 $ 52 $ (6 ) $6,365
Net income 264 264
Cash dividends declared on common stock (113 ) (113 )
($0.43 per share)
Cash dividends declared on preferred stock (13 ) (13 )
Issuance of preferred stock, net of issuance
costs 425 (11) 414
Common stock issued in connection with:
Employee benefit and stock option plans 8 (6 ) 15 17
Warrants 15 15
Adjustment of valuation reserve for
securities available for sale (51 ) (51 )
Other-net (39 ) (6 ) (9 ) (54 )
- --------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 $824 $ 3 $3,122 $2,894 $ 1 $ --- $6,844
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) During the fourth quarter of 1995, the corporation changed the par value of
its common stock from $1 per share to $.01 per share.
See accompanying Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 264 $ 226
Adjustments for noncash items:
Depreciation and amortization of premises and 41 40
equipment
Amortization of mortgage servicing rights and 66 46
other intangible assets
Provision for credit losses 35 20
Deferred income tax expense 62 32
Securities gains (18 ) (1 )
Gain from branch divestitures (60 ) ---
Merger-related charges --- 37
Originations and purchases of mortgages held for (4,900 ) (1,317 )
resale
Proceeds from sales of mortgages held for resale 4,507 1,289
Net (increase) decrease in trading account assets (34 ) 28
(Increase) decrease in accrued receivables, net 109 (58 )
Increase in accrued liabilities, net 71 133
Other, net 121 148
- --------------------------------------------------------------------------------------
Net cash flow provided by operating activities 264 623
- --------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (3,331 ) (1,302 )
Proceeds from maturities of securities available for 2,891 514
sale
Proceeds from sales of securities available for sale 10,171 2,085
Purchases of securities held to maturity (171 ) (223 )
Proceeds from maturities of securities held to 125 355
maturity
Loans made to customers, nonbanking subsidiaries (274 ) (184 )
Principal collected on loans made to customers, 178 198
nonbanking subsidiaries
Net cash and cash equivalents paid for businesses --- (2,849 )
acquired
Loans purchased from third parties --- (272 )
Proceeds from sales of loans 281 80
Divestiture of loans 1,773 ---
Net (increase) decrease in loans and leases, banking 1,308 (630 )
subsidiaries
Acquisition of minority interest in subsidiary --- (158 )
Purchases of premises and equipment (43 ) (42 )
Purchases of mortgage servicing rights (79 ) (29 )
- --------------------------------------------------------------------------------------
Net cash flow (used) provided by investing 12,829 (2,457 )
activities
- --------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in deposits (4,652 ) (4,395 )
Divestiture of deposits (2,349 ) ---
Net increase (decrease) in short-term borrowings (5,395 ) 1,310
Proceeds from issuance of long-term debt 342 1,144
Repayments of long-term debt (823 ) (488 )
Proceeds from the issuance of common stock 31 27
Proceeds from the issuance of preferred stock 414 125
Cash dividends paid (114 ) (88 )
- --------------------------------------------------------------------------------------
Net cash flow (used) by financing activities (12,546 ) (2,365 )
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 547 (4,199 )
- --------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of the period 4,566 8,570
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 5,113 $ 4,371
- --------------------------------------------------------------------------------------
</TABLE>
6
See accompanying Condensed Notes to Consolidated Financial Statements
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
NOTE 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein has been
prepared in conformity with the accounting principles and practices in Fleet
Financial Group, Inc.'s ("Fleet, FFG or the corporation") consolidated financial
statements included in the Annual Report on Form 10-K filed with the Securities
and Exchange Commission ("SEC") for the year ended December 31, 1995. The
accompanying interim consolidated financial statements contained herein are
unaudited. However, in the opinion of the corporation, all adjustments
consisting of normal recurring items necessary for a fair statement of the
operating results for the periods shown, have been made. The results of
operations for the three months ended March 31, 1996 may not be indicative of
operating results for the year ending December 31, 1996. Certain prior year and
prior quarter amounts have been reclassified to conform to current
classifications.
NOTE 2. ACQUISITIONS AND DIVESTITURES
As previously disclosed in Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1995, the merger of Shawmut National
Corporation (the "Shawmut Merger") with and into Fleet was completed on November
30, 1995, and was accounted for as a pooling of interests. The financial
information for all prior periods presented has been restated to present the
combined financial condition and results of operations of both companies as if
the Shawmut Merger had been in effect for all periods presented. In connection
with the Shawmut Merger during the first quarter of 1996, the corporation
divested 64 branches consisting of $1.8 billion in loans and $2.3 billion in
deposits. The corporation realized a $24 million (post-tax) gain relating to
these divestitures. The corporation also expects to record between $10 million
and $20 million in post-tax gains during the second quarter as these
transactions are finalized.
7
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
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 an annual payment based upon the level of earnings from the NatWest
franchise with a cap of $560 million over an eight-year period. Following the
NatWest merger, Fleet will have approximately $90 billion in assets, reflecting
reductions of Fleet's and NatWest's assets. In connection with the NatWest
acquisition, Fleet is in the process of substantially restructuring its balance
sheet to replace lower-yielding assets, primarily securities, with
higher-earning assets acquired from NatWest and to replace higher-cost purchased
funding with lower-cost deposits acquired from NatWest. As part of the
corporation's balance sheet restructuring, $9.6 billion of securities were sold
during the first quarter of 1996 resulting in a gain of $17.6 million. The
acquisition of NatWest will add approximately 300 branches in New York and New
Jersey. On May 1, 1996, the corporation completed the acquisition of NatWest.
The corporation completed the purchases of NBB Bancorp, Inc. ("NBB"), the
Business Finance Division of Barclays Business Credit, Inc. ("Barclays"), Plaza
Home Mortgage Corporation ("Plaza"), and the repurchase of the 19% publicly-held
shares of Fleet Mortgage Group, Inc., ("FMG") during the first quarter of 1995,
and Northeast Federal Corp. ("Northeast") in June 1995. All of these
transactions were accounted for under the purchase method of accounting.
8
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
The information below presents, on a pro forma basis, certain historical
financial information for the corporation, adjusted for each of the NBB,
Barclays, Plaza, FMG and Northeast transactions as if such transactions had been
consummated on January 1, 1995.
Pro Forma Results
- -------------------------------------------
Three months ended March 31, 1995
(Dollars in millions, except per share data)
- -------------------------------------------
Pro Forma-Fleet, NBB, Barclays,
Plaza, FMG and Northeast
Net income $220
Net income applicable to common 211
stockholders
Net income per common share 0.79
- -------------------------------------------
Corporation as Reported
Net income $226
Net income applicable to common 218
stockholders
Net income per common share 0.82
- -------------------------------------------
NOTE 3. PREFERRED STOCK
During the first quarter, the corporation issued $425 million of its
preferred stock, $150 million and $275 million at fixed rates of 6.75% and
7.25%, respectively. On April 1, the corporation also issued $175 million of
fixed/adjustable rate preferred stock with an initial rate of 6.60% for the
first 10 years, after which the rate will adjust based on U.S. Treasury
securities. The corporation intends to use the proceeds from these transactions
for the purchase of NatWest.
NOTE 4. LONG-TERM DEBT
On March 25, 1996, the corporation received approval from the SEC for a
$1.0 billion universal shelf registration statement for the issuance of common
and preferred stock, senior and subordinated debt securities, and other
securities. The new shelf was combined with Fleet's existing shelf and had
$1.488 billion of securities available for issuance at March 31, 1996.
Subsequent to March 31, 1996, the corporation issued $175 million of 6.60%
preferred stock, $300 million of 7.125% subordinated debt, and $85 million of
medium-term notes with interest rates ranging from 7.30% to 7.50%. These
issuances in April further reduced the amounts available under the universal
shelf registration to $928.4 million.
9
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 5. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash-Flow Disclosure
- ----------------------------------------------------
Three months ended March 31
Dollars in millions 1996 1995
- ----------------------------------------------------
Supplemental disclosure for cash
paid during
the period for:
Interest expense $670 $651
Income taxes, net of refunds 24 33
- ----------------------------------------------------
- ----------------------------------------------------
Supplemental disclosure of noncash
investing and financing
activities:
Transfer of loans to
foreclosed property and
repossessed equipment 7 24
Securitization of
residential loans 498 ---
Adjustment to unrealized
gain/(loss) on securities
available for sale (51 ) 222
Retirement of common stock 34 ---
- ----------------------------------------------------
- ----------------------------------------------------
Assets acquired and liabilities
assumed in business
combinations were as follows:
Assets acquired, net of cash
and cash equivalents paid --- 5,557
Net cash and cash equivalents
paid for businesses acquired --- (2,849)
Liabilities assumed --- 2,512
Treasury stock reissued in
connection with businesses
acquired --- 196
- ----------------------------------------------------
NOTE 6. SUBSIDIARY MERGERS
Effective April 1, 1996, the five national bank subsidiaries of Fleet
Financial Group, Inc. located in Connecticut, Massachusetts and Rhode Island
were merged into one national bank. Specifically, Fleet Bank, National
Association, Fleet Bank of Massachusetts, National Association, Fleet National
Bank of Massachusetts and Fleet National Bank merged with and into Fleet
National Bank of Connecticut under the surviving name of Fleet National Bank.
The main office of the surviving bank is located in Springfield, Massachusetts.
Effective May 1, 1996, Fleet Mortgage Group, which formerly was a direct
subsidiary of the parent company, became a subsidiary of the aforementioned
Fleet National Bank.
10
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERALL PERSPECTIVE
-----------------------------------------
Three months ended
March 31
Dollars in millions, 1996 1995
except per share data
-----------------------------------------
Earnings
Net income $ 264 $ 226
Net interest
income (FTE) (a) 732 769
-----------------------------------------
Per Common Share
Fully diluted
earnings $ 0.94 $ 0.82
Cash dividends 0.43 0.40
declared
Book Value 22.90 22.49
-----------------------------------------
Operating Ratios
Return on average 1.41 % 1.14 %
assets
Return on common 16.96 16.24
equity
Efficiency ratio 60.6 62.1
Equity to assets 9.49 7.53
(period-end)
-----------------------------------------
At March 31
Total assets $72,123 $81,862
Stockholders' equity 6,844 6,164
Nonperforming assets(b) 553 819
-----------------------------------------
(a) Prepared on a fully taxable equivalent (FTE) basis. The FTE adjustment
included in net interest income was $8 million and $13 million for the
three months ended March 31, 1996 and 1995, respectively.
(b) Nonperforming assets and related ratios at March 31, 1996, do not include
$307 million of nonperforming assets classified as held for sale or
accelerated disposition.
Fleet reported net income of $264 million, or $0.94 per fully diluted
share, for the quarter ended March 31, 1996, compared to $226 million, or $0.82
per fully diluted share, in the first quarter of 1995. Return on average assets
and return on equity improved to 1.41% and 16.96%, respectively, for the first
quarter of 1996, from 1.14% and 16.24%, respectively, for the first quarter of
1995. These improved results reflect a stronger net interest margin, an increase
in mortgage banking revenue, continued expense control, as well as increased
revenues from several acquisitions consummated in the first six months of 1995,
partially offset by an increase in mortgage servicing rights amortization and
provision for credit losses. Additionally, the corporation recognized $60
million ($24 million post-tax) of branch divestitures gains and $17.6 ($10.9
million post-tax) million of securities gains during the first quarter of 1996.
During the first quarter of 1995, the corporation realized a merger-related
charge of $37 million ($23 million post-tax). Excluding this charge, net income
was $203 million, or $.91 per fully diluted share.
11
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME STATEMENT ANALYSIS
Net Interest Income
-------------------------------------------
Three months ended March 31
FTE Basis
Dollars in millions 1996 1995
-------------------------------------------
Interest income $1,337 $1,448
Tax-equivalent adjustment 8 13
Interest expense 613 692
-------------------------------------------
Net interest income $ 732 $ 769
-------------------------------------------
Net interest income on a fully taxable equivalent basis totaled $732
million for the three month period ended March 31, 1996, compared to $769
million for the same period of 1995. The $37 million decrease was principally
caused by required divestitures of core deposits and the related sale of
loans as a result of the Shawmut Merger and the corporation's balance sheet
restructuring program designed to reduce lower-yielding assets, primarily
securities, and paydown higher-cost wholesale funds in anticipation of the
NatWest acquisition.
Net Interest Margin and Interest-Rate Spread
- -----------------------------------------------------
Three months ended 1996 1995
March 31
- -----------------------------------------------------
Taxable equivalent Average Average
rates Balance Rate Balance Rate
Dollars in millions
- -----------------------------------------------------
Money market $ 699 5.11% $1,035 6.17 %
instruments
Securities 12,130 6.24 21,770 6.23
Loans and leases 49,497 8.61 48,806 9.05
Mortgages held for 2,085 7.48 564 8.52
resale
Other 1,851 10.70 112 ---
- -----------------------------------------------------
Total 66,262 8.15 72,287 8.14
interest-earning
assets
- -----------------------------------------------------
Deposits 41,249 3.92 42,164 3.76
Short-term borrowings 8,059 5.30 13,170 5.74
Long-term debt 6,080 6.92 6,313 7.37
- -----------------------------------------------------
Interest-bearing 55,388 4.45 61,647 4.55
liabilities
- -----------------------------------------------------
Interest-rate spread 3.70 3.59
Interest-free sources 10,874 10,640
of funds
- -----------------------------------------------------
Total sources of funds $66,262 3.72 %$72,287 3.87 %
=====================================================
Net interest margin 4.43 % 4.27 %
=====================================================
The net interest margin for the first quarter of 1996 increased 16 basis
points to 4.43% from the first quarter of 1995. The increase in net interest
margin is primarily attributable to a more favorable mix of interest-earning
assets and interest-bearing liabilities as a result of the sale of approximately
$9.6 billion of securities and the resultant paydown of higher-cost short-
12
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
term borrowings and wholesale deposits in anticipation of the NatWest
acquisition. The margin also improved due to both acquisitions and loan growth
during 1995 which also enabled the corporation to reduce its reliance on
lower-yielding securities.
Securities Portfolio
- ----------------------------------------------
March Dec. 31, March 31,
Dollars in 31, 1996 1995 1995
millions
- ----------------------------------------------
Carrying value $10,091 $19,331 $21,009
Average
maturity(a) 2.8 years 1.3 years 2.6 years
Yield(b) 6.52% 6.10% 6.14%
- ----------------------------------------------
(a) Average maturity relates to debt securities only and is calculated using
repricing dates rather than contract maturities.
(b) Relates to debt securities only.
The average balance of securities decreased from $21.8 billion, or 30.2% of
average interest earning assets, for the first quarter of 1995 to $12.1 billion
or 18.2% of average interest earning assets for the same period of 1996. This
$9.7 billion decrease reflects the corporation's balance sheet restructuring
program in anticipation of the NatWest acquisition.
Average loans and leases increased $691 million to $49.5 billion for the
first quarter of 1996 due to acquisitions during the first half of 1995, as well
as loan growth. Offsetting these items were $1.8 billion of loans divested,
primarily residential loans, during the quarter as a result of the Shawmut
Merger, which reduced average loans by $700 million, as well as the
reclassification of $1.7 billion of loans, primarily consumer loans, to assets
held for sale or accelerated disposition during the fourth quarter of 1995. The
decrease in the yield on loans and leases from 9.05% for the first quarter of
1995 to 8.61% for the first quarter of 1996 corresponds to the approximate 50
basis point decline in the average prime rate for the first quarter of 1995
compared to the same period in 1996. The corporation expects average loans and
leases to increase significantly as a result of the NatWest acquisition.
Average deposits decreased $915 million to $41.2 billion for the first
quarter of 1996 due to several factors including: the divestiture of $2.3
billion of deposits in connection with the Shawmut Merger, which reduced average
deposits by $1.0 billion; proceeds generated from securities sold as part of the
balance sheet restructuring program which were used to reduce higher-cost
wholesale time deposits; and expected deposit runoff as a result of the
acquisitions completed during 1995. These items were offset by deposits acquired
through acquisitions. The net interest rate paid on average deposits rose to
3.92% for the first quarter of 1996 compared to 3.76% for the same period of
1995. The increase in cost of deposits 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 corporation
expects core deposit funding to increase significantly as a result of the
NatWest acquisition.
The $5.1 billion decrease in average short-term borrowings is attributable
to the partial use of proceeds from the sales of securities to pay down
short-term borrowings, offset by the funding required to support the growth of
the corporation's mortgages held for resale portfolio.
Average long-term debt decreased $233 million from the first quarter of
1995 with a decrease in the average interest rate paid on long-term debt of 45
basis points as maturing higher-rate long-term debt was replaced by new
issuances of lower-rate debt.
The contribution to the net interest margin of interest-free sources during
the first quarter of 1996 was 73 basis points compared to 68 basis points for
the first quarter of 1995. This increase is primarily due to the issuance of
preferred stock, the proceeds of which will be used to fund the NatWest
acquisition which resulted in a higher percentage of interest-free sources of
funds as a percentage of total sources of funds. However, dividends paid
relating to the issuance of preferred stock reduces net income available to
common shareholders.
Noninterest Income
- ---------------------------------------------
Three months ended March 31
Dollars in millions 1996 1995
- ---------------------------------------------
Mortgage banking revenue $124 $103
Service charges, fees and 119 120
commissions
Investment services revenue 87 79
Student loan servicing fees 22 15
Trading revenue 8 9
Brokerage fees and 6 4
commissions
Insurance 4 3
Securities available for 18 1
sale gains
Gain from branch divestitures 60 ---
Other noninterest income 71 68
- ---------------------------------------------
Total noninterest income $519 $402
- ---------------------------------------------
13
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Noninterest income totaled $519 million for the first quarter of 1996
compared to $402 million for the same period in 1995, an increase of $117
million. The increase was due primarily to increases in mortgage banking
revenue, student loan servicing fees, investment services revenue, gains from
branch divestitures, and securities sales.
Mortgage Banking Revenue
- ---------------------------------------------
Three months ended March 31
Dollars in millions 1996 1995
- ---------------------------------------------
Net loan servicing revenue $ 93 $ 79
Mortgage production revenue 25 1
Gains on sales of mortgage 6 23
servicing
=============================================
Total mortgage banking $124 $103
revenue
=============================================
Mortgage banking revenue of $124 million in the first quarter of 1996
increased $21 million over the $103 million recorded in the same period of 1995,
reflecting a $24 million increase in mortgage production revenue coupled with an
18% increase in loan servicing revenue from $79 million in the first quarter of
1995 to $93 million in the first quarter of 1996, offset by a $17 million
decrease in gains on sales of servicing. 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 first quarter of 1996. The first quarter of
1996 mortgage production revenue of $25 million includes $23 million of income
from the adoption of Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights", which was adopted as of April 1,
1995. Loan servicing revenue represents fees received for servicing residential
mortgage loans. The 18% increase in loan servicing revenue is attributable to
the $18 billion increase in the corporation's servicing portfolio from $98
billion at March 31, 1995 to $116 billion at March 31, 1996. The increase in the
servicing portfolio is primarily due to net acquisitions of $17.3 billion in
1995. The corporation sold mortgage servicing of approximately $1.0 billion and
$3.3 billion in the first quarter of 1996 and 1995, respectively, resulting in
pre-tax gains of $6 million and $23 million, respectively. The corporation's
decision to sell any 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.
14
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Service charges, fees and commissions remained relatively consistent at
$119 million for the first quarter of 1996 compared to $120 million for the
first quarter of 1995 despite divesting $1.8 billion in loans and $2.3 billion
in deposits during the quarter. Investment services revenue increased $8
million, or 10%, from the first quarter of 1995, due to a strong stock market
during 1995 and 1996, which resulted in an increase in the overall value of
assets managed.
In connection with the Shawmut Merger, the corporation divested certain
branches, loans and deposits. The corporation realized $60 million of gains
($24 million post-tax) from these divestitures. The corporation expects to
recognize between $10 and $20 million in post-tax gains during the second
quarter as these transactions are finalized.
Securities gains increased $17 million for the first quarter of 1996 over
the same period of 1995 as the corporation realized gains on sales of securities
in conjunction with its balance sheet restructuring program. The likelihood of
profitability of any such sales in the future cannot be predicted.
The $7 million increase in student loan servicing fees from 1995 to 1996 is
attributable to increased levels of servicing and originations over the prior
year period at AFSA Data Corp., the corporation's student loan servicing
subsidiary.
Other noninterest income increased $3 million, due primarily to gains
in equity capital investments at Fleet Private Equity of $26 million, compared
to $8 million in gains for the same period in 1995. Offsetting this increase
was lower income at the parent company in the first quarter of 1996 compared
to the first quarter of 1995 due primarily to $10 million of interest received
on a tax refund received in conjunction with a settlement with the Internal
Revenue Service during the first quarter of 1995.
15
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
- --------------------------------------------
Three months ended March 31
Dollars in millions 1996 1995
- --------------------------------------------
Employee compensation and $348 $361
benefits
Occupancy 61 63
Equipment 57 50
Mortgage servicing rights 41 24
amortization
Intangible asset amortization 25 22
Legal and other professional 23 18
Marketing 22 21
Printing and mailing 16 15
Telephone 16 15
Office supplies 14 12
Travel and entertainment 9 9
Credit card 6 4
OREO expense 3 5
FDIC assessment 2 29
Other 115 79
- --------------------------------------------
Total noninterest expense,
before 758 727
merger-related charges
Merger-related charges --- 37
- --------------------------------------------
============================================
Total noninterest expense $758 $764
============================================
Noninterest expense, before merger-related charges, for the first quarter
of 1996 totaled $758 million compared to $727 million for the first quarter of
1995. The increase is primarily attributable to increased mortgage servicing
rights amortization and implementation costs related to the Shawmut Merger as
well as the impact of several purchase acquisitions completed late in the first
quarter of 1995 and the second quarter of 1995, offset by cost savings achieved
through ongoing successful merger integration and reductions in FDIC
assessments.
Employee compensation and benefits decreased $13 million, or 4%, primarily
due to a reduction of 1,700 full time equivalent employees from 31,000 at March
31, 1995 to 29,300 at March 31, 1996. This reduction is a result of the
continuing successful integration of the acquisitions completed during 1995
and branch divestitures in 1996.
Mortgage servicing rights (MSR) amortization increased $17 million to $41
million for the first quarter of 1996 compared to $24 million for the first
quarter of 1995. The increased level of MSR amortization reflects the impact of
the repurchase of FMG, several large purchases in 1995, and the amortization of
the investment in interest-rate contracts purchased to hedge the prepayment risk
associated with the mortgage servicing portfolio (see page 22 for discussion of
mortgage servicing rights prepayment risk-management), offset by a recovery of
the mortgage servicing rights valuation reserve that was established at December
31, 1995.
At March 31, 1996 the aggregate carrying value and fair value of the
corporation's mortgage servicing rights (MSRs) was $1.4 billion and $1.7
billion, respectively.
Intangible asset amortization expense increased $3 million on a year to
year comparison over the first quarter of 1995 due to the completion of the NBB,
Barclays, Plaza, FMG and Northeast transactions during the first half of 1995.
Other expenses increased as a result of implementation costs associated with the
Shawmut Merger and as a result of several acquisitions completed during 1995.
FDIC assessment decreased $27 million as the assessment was virtually
eliminated on all deposits except for thrift deposits insured by the Savings
Association Insurance Fund ("SAIF").
The following table presents a summary of activity with respect to the
corporation's merger-related charges for the three months ended March 31, 1996.
The merger accrual was established in the fourth quarter of 1995 in connection
with the Shawmut Merger.
Merger Accrual
- ----------------------------------------
Three months ended March 31, 1996
Dollars in millions
- ----------------------------------------
Balance at beginning of year $335
Provision charged against ---
income
Cash outlays 55
Non-cash writedowns 3
========================================
Balance at end of period $277
========================================
16
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The cash outlays made during the first three months of 1996 relate
primarily to severance costs. The corporation's liquidity has not been
significantly affected by these cash outlays. During the first three months of
1996, $12.8 million of incremental costs have been incurred relating to the
Shawmut Merger and have not been charged against the merger accrual. It is
anticipated that approximately $22 million of additional incremental costs will
be incurred in 1996. The corporation expects that the remaining accrual balance
of $277 million at March 31, 1996 will be sufficient to absorb the remaining
merger-related costs.
During the first quarter of 1995 the corporation incurred a merger-related
charge of $37 million relating to the Shawmut Merger.
17
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Income Taxes
For the first quarter of 1996, the corporation recognized income tax
expense of $186 million, an effective tax rate of 41.4%. Tax expense for the
same period of 1995 was $148 million, an effective tax rate of 39.6%. The
increase in the effective tax rate is attributable to a higher proportion of
income being realized in higher tax rate jurisdictions as well as the
nondeductibility of goodwill written off in conjunction with branch
divestitures.
Earnings by Subsidiary
---------------------------------------------
Three months ended March
31 1996 1995
Dollars in millions
---------------------------------------------
Banking Group
New England $217 $173
New York 32 45
---------------------------------------------
Total Banking Group 249 218
---------------------------------------------
Financial Services Group
Fleet Mortgage 17 16
Fleet Private Equity 15 4
Fleet Credit 7 5
AFSA 4 2
Fleet Capital 4 2
Other Financial Services 2 3
---------------------------------------------
Total Financial 49 32
Services Group
---------------------------------------------
Parent (34 ) (24 )
---------------------------------------------
Total $264 $226
---------------------------------------------
The Banking Group generated $249 million and $218 million of income for the
first quarter of 1996 and 1995, respectively. The results for the first quarter
of 1996 were negatively impacted by a $27 million increase in provision for
credit losses. However, the Banking Group benefited from an increase in
noninterest income which was attributable to branch divestiture gains of $60
million ($24 million post-tax) and increased security gains of $17 million
related to the balance sheet restructuring program. The Banking Group also
benefited from lower noninterest expense of $65 million primarily due to a $37
million merger-related charge taken in the first quarter of 1995, lower FDIC
assessments of $27 million, and other expense reductions, as the Banking Group
generated cost savings from successful merger integration. Offsetting these
benefits was lower net interest income of $45 million primarily due to deposit
and loan divestitures and the balance sheet restructuring program. This group's
nonperforming assets increased $41 million, or 9%, from December 31, 1995 to
$481 million.
The Financial Services Group's net income increased $17 million to $49
million in the first quarter of 1996. Fleet Mortgage, the corporation's mortgage
banking subsidiary, contributed $17 million to Fleet's earnings for the quarter
compared to earnings of $16 million in the first quarter of 1995, as increases
in mortgage banking revenue were offset by higher levels of mortgage servicing
rights amortization.
Fleet Private Equity had net income of $15 million for the first quarter of
1996, compared to $4 million for the first quarter of 1995. Results for the
first quarter of 1996 included $26 million of gains on equity capital
investments compared to $8 million for the same period in 1995.
Fleet Credit reported net income of $7 million for the first quarter of
1996, a $2 million increase over the $5 million of net income reported in the
first quarter of 1995, reflecting the $810 million increase in lease volume over
the prior year.
AFSA Data Corp. contributed net income of $4 million for the first quarter
of 1996 compared to $2 million for the same period in 1995. This increase
reflects the additional volume of loans serviced.
Fleet Capital earned $15 million in the first quarter of 1996, compared to
$9 million in the first quarter of 1995. The increase in earnings is
attributable to strong loan growth and expense control. After the application of
goodwill and loan premium amortization relating to the purchase of Fleet Capital
by the corporation on January 31, 1995, Fleet Capital recorded net income of $4
million for the first quarter of 1996 compared to $2 million for the first
quarter of 1995.
18
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Lines of Business
The financial performance of the corporation is monitored by an internal
profitability measurement system, which provides line of business results and
key performance measures. The corporation is managed along the following
business lines: Financial Services and National Consumer, Commercial
Financial Services, Consumer Banking, Investment Services, Treasury,
Equity Capital/Asset Collection, and All Other Banking.
A comprehensive set of management accounting policies has been developed
and implemented to ensure that reported results reflect the underlying economics
of the businesses, and provide management with consistent reporting that
facilitates evaluating business line performance on a risk-adjusted basis.
Guidelines are in place for assigning expenses that are not directly
incurred by businesses, such as overhead, operations and technology expense.
Additionally, equity, loan loss provision and loan loss reserves are assigned on
an economic basis. The corporation has developed a risk-adjusted methodology
that quantifies risk types (i.e. credit, operating, market, fiduciary, etc.)
within business units and assigns capital accordingly. Credit risk is quantified
using a risk grading system, which is applied consistently across the company.
Within each unit, assets and liabilities are match-funded utilizing similar
maturity, liquidity and repricing information. All businesses are evaluated on a
fully taxed basis.
Management accounting concepts are periodically refined and results may be
restated from time to time to reflect methodological enhancements and/or
management organization changes. Although valuable in managing the enterprise,
no authoritative guidance exists for management accounting, therefore, Fleet's
reported results may not be comparable with results of other companies.
<TABLE>
<CAPTION>
Selected Financial Highlights by Line of Business
- ---------------------------------------------------------------------------------------------------
Average
Three months ended March 31, 1996 Net Average Loans
Dollars in millions Revenues(a) Income ROE ROA Assets and
Leases
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Services and National $ 224 $ 31 16.25 % 1.73 % $ $ 1,000
Consumer 7,307
Commercial Financial Services 247 52 15.36 0.80 25,925 24,375
Consumer Banking 487 63 17.44 1.70 14,923 12,445
Investment Services 110 20 49.26 4.93 1,655 1,413
Treasury 87 35 32.09 0.62 23,143 10,141
Equity Capital/Asset Collection 27 16 81.54 30.80 208 ---
All Other 69 47 8.73 --- 1,866 123
- ---------------------------------------------------------------------------------------------------
Total $1,251 $264 16.96 % 1.41 % $75,026 $49,497
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes net interest income (calculated on an FTE basis) and noninterest
income.
Financial Services and National Consumer
The Financial Services and National Consumer business line earned $31.4
million in the first quarter of 1996. For the first quarter, Financial Services
and National Consumer had a ROE of 16.25% and a ROA of 1.73%. This business
group includes government banking, financial institutions, mortgage banking and
student loan servicing. This business line holds a market leadership position in
government banking deposits and cash management services provided in New
England. In addition, Financial Services and National Consumer is the fourth
largest mortgage servicer (loan portfolio in excess of $115 billion with 1.5
million households served), and is the largest third party student loan servicer
in the country.
19
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Commercial Financial Services
Commercial Financial Services earned $51.7 million in the first quarter.
For the first quarter, ROE was 15.36% and ROA was 0.80%. This business line has
a loan and lease portfolio in excess of $24 billion. Commercial Financial
Services provides a full range of products and services to national,
middle-market and commercial real estate customers as well as certain specialty
businesses, including leasing, media and precious metals. This business group
also includes Fleet Capital, a national asset-based lending business that was
acquired in January, 1995. For the first quarter, Commercial Financial Services
earned $62.7 million and had a ROE of 18.75%, excluding the impact of purchase
premiums .
Consumer Banking
Consumer Banking earned $63.1 million in the first quarter. For the
quarter, Consumer Banking had a ROE of 17.44% and a ROA of 1.70%. This business
line includes retail banking, small business banking, and credit card products.
This business serves as the major provider of funding for the corporation with
total deposits in excess of $35 billion. These deposits are serviced through a
network of more than 900 branches across Connecticut, Maine, Massachusetts, New
Hampshire, New York and Rhode Island. For the first quarter, Consumer Banking
earned $76.2 million and had a ROE of 21.25%, excluding the impact of purchase
premiums.
Investment Services
Investment Services earned $20.3 million in the first quarter. For the
quarter, Investment Services had a ROE of 49.26% and a ROA of 4.93%. This
business line includes Fleet's investment management, personal financial
services and discount brokerage businesses. The investment management business
includes endowment and custody services, employee benefit management and mutual
funds, led by the corporation's proprietary Galaxy fund family. Currently,
Investment Services has in excess of $46 billion in assets under management. For
the first quarter, Investment Services earned $21.6 million and had a ROE of
52.39%, excluding the impact of purchase premiums.
Treasury
The Treasury unit earned $35.4 million in the first quarter, had a ROE of
32.09% and a ROA of 0.62%. This business is responsible for managing the
corporation's securities and residential mortgage portfolios, trading
operations, asset/liability management (interest-rate risk) and wholesale
funding needs of the corporation. During the quarter, Treasury sold $9.6 billion
of securities with a resultant pretax gain of approximately $18 million. These
transactions were initiated as an element of the corporation's balance sheet
downsizing program in preparation for the second quarter acquisition of NatWest.
Equity Capital/Asset Collection
The Equity Capital/Asset Collection businesses earned $15.9 million in the
first quarter. For the first quarter, this unit had a ROE of 81.54% and a ROA of
30.80%. Strong quarterly earnings resulted from rising values in the equity
capital units' investments. RECOLL, the principal asset collection business,
recorded earnings of $0.9 million, for the quarter. This business fulfilled its
contract with its sole customer (the FDIC) in January, 1996 and ceased
operations by quarter-end.
All Other
All Other includes the parent company and certain executive functions, as
well as the differences between financial and economic allocation of loan loss
provision, credit reserve and equity, and the mismatch unit which is used to
shield the business units from interest-rate risk. During the first quarter of
1996, All Other had net income of $47 million which included $23 million
(post-tax) related to branch divestiture gains.
20
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Total assets decreased from $84.4 billion at December 31, 1995 to $72.1
billion at March 31, 1996 as the aforementioned balance sheet restructuring,
which was implemented in anticipation of the NatWest acquisition, reduced
securities as well as wholesale time deposits and short-term debt. Additionally,
the divestitures of both deposits and loans also contracted the balance sheet.
<TABLE>
<CAPTION>
Securities
- ----------------------------------------------------------------------------------------------------
March 31, 1996 December 31, 1995 March 31, 1995
-------------- ----------------- --------------
Amortized Market Amortized Market Amortized Market
Dollars in millions Cost Value Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
US Treasury and government $ 1,722 $ 1,703 $ 7,891 $ 7,889 $ 4,481 $ 4,355
agencies
Mortgage-backed securities 7,011 7,005 8,457 8,470 7,067 6,882
Other debt securities 1 1 1,621 1,662 408 407
- ----------------------------------------------------------------------------------------------------
Total debt securities 8,734 8,709 17,969 18,021 11,956 11,644
- ----------------------------------------------------------------------------------------------------
Marketable equity securities 359 389 359 393 450 460
Other securities 145 145 119 119 155 155
- ----------------------------------------------------------------------------------------------------
Total securities available for $ 9,238 $ 9,243 $18,447 $18,533 $12,561 $12,259
sale
- ----------------------------------------------------------------------------------------------------
Securities held to maturity:
US Treasury and government $ $ $ $ $ 1,971 $ 1,901
agencies --- --- --- ---
Mortgage-backed securities --- --- --- --- 4,097 3,995
State and municipal 736 741 687 695 902 905
Other debt securities 112 83 111 87 1,780 1,704
- ----------------------------------------------------------------------------------------------------
Total securities held to $ 848 $ 824 $ 798 $ 782 $ 8,750 $ 8,505
maturity
- ----------------------------------------------------------------------------------------------------
Total securities $10,086 $10,067 $19,245 $19,315 $21,311 $20,764
- ----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost of securities available for sale decreased significantly
from $18.4 billion at December 31, 1995 to $9.2 billion at March 31, 1996, as
the corporation executed its balance sheet restructuring program designed to
sell lower-yielding securities and use the proceeds to pay down higher-cost
wholesale funds in anticipation of the NatWest acquisition. During the first
quarter of 1996, the corporation sold approximately $5.8 billion of U.S. Agency
securities, $1.4 billion of mortgage-backed securities, and approximately $2.4
billion of other securities. The corporation recognized $17.6 million of gains
as a result of these transactions. As a result of these actions, the corporation
has substantially completed the downsizing of its securities portfolio in
anticipation of the NatWest acquisition. The valuation reserve on securities
available for sale declined to an unrealized appreciation level of $5 million at
March 31, 1996 from an unrealized appreciation level of $86 million at December
31, 1995, due to unfavorable bond markets conditions at the end of the first
quarter of 1996 and gains realized during the quarter.
21
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
--------------------------------------------
March Dec. 31, March
Dollars in 31, 1995 31,
millions 1996 1995
--------------------------------------------
Commercial and $21,931 $23,251 $22,771
industrial
Lease financing 2,282 2,223 1,472
Commercial real
estate:
Construction 645 606 698
Interim/permanent 4,007 4,414 4,817
Residential real 9,370 11,475 9,708
estate
Consumer 9,324 9,556 11,009
--------------------------------------------
Total loans and $47,559 $51,525 $50,475
leases
============================================
Total loans and leases decreased $3.9 billion from $51.5 billion at
December 31, 1995 to $47.6 billion at March 31, 1996, primarily due to $1.8
billion of divestitures as a result of the Shawmut Merger and the impact of
several other programs to reduce industry and product concentrations as a
result of both the Shawmut and NatWest transactions, as well as portfolio
runoff.
Commercial and industrial (C&I) loans decreased $1.3 billion, due primarily
to $450 million of divestitures and several large paydowns during the quarter.
Lease financing increased $59 million from December 31, 1995 to March 31, 1996,
as a result of new lease originations. Commercial real estate (CRE) loans
decreased $368 million from December 31, 1995 to March 31, 1996.
Outstanding residential real estate loans secured by one-to four-family
residences decreased $2.1 billion to $9.4 billion at March 31, 1996, compared to
$11.5 billion at December 31, 1995. The decrease was primarily due to $1.1
billion of divestitures and the impact of other programs designed to
decrease the corporation's level of residential mortgages in anticipation of the
NatWest acquisition.
Consumer Loans
- -----------------------------------------
March Dec. March
Dollars in 31, 31, 31,
millions 1996 1995 1995
- -----------------------------------------
Home equity $4,467 $4,791 $ 5,952
Credit card 1,674 1,588 1,515
Student loans 1,226 1,179 1,252
Installment/Other 1,957 1,998 2,290
- -----------------------------------------
Total $9,324 $9,556 $11,009
- -----------------------------------------
Consumer loans of $9,324 million at March 31, 1996 decreased $232 million
when compared to the $9,556 million at December 31, 1995. Home equity loans
decreased $324 million from December 31, 1995 to March 31, 1996 primarily due to
$128 million of divestitures. Partially offsetting the decrease in consumer
loans was an increase of $86 million in credit card loans from December 31,
1995, to March 31, 1996, as this portfolio continues to show strong growth, and
a $47 million increase in student loans from December 31, 1995 to March 31, 1996
as a result of seasonal volume.
22
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Nonperforming Assets(a)
- --------------------------------------------------
Dollars in millions C & I CRE ConsumerTotal
- --------------------------------------------------
Nonperforming loans
and leases:
Current or less
than 90 days past due $128 $ 32 $ 9 $169
Noncurrent 135 59 136 330
OREO 4 35 15 54
- --------------------------------------------------
Total NPAs
March 31, 1996 $267 $126 $160 $553
- --------------------------------------------------
Total NPAs
December 31, 1995 $244 $112 $143 $499
==================================================
Total NPAs
March 31, 1995 $254 $279 $286 $819
==================================================
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($180 million, $168
million and $170 million at March 31, 1996, December 31, 1995, and March 31,
1995, respectively), or assets subject to federal financial assistance ($16
million, $28 million and $55 million at March 31, 1996, December 31, 1995, and
March 31, 1995, respectively). NPAs and related ratios at March 31, 1996 and
December 31, 1995 do not include $307 million and $317 million of NPAs
classified as held for sale or accelerated disposition.
Nonperforming assets (NPAs) increased $54 million from December 31, 1995 to
March 31, 1996, primarily due to increases in the commercial and industrial, and
residential mortgage portfolios, as well as the expiration of a portion of loans
subject to federal financial assistance. NPAs at March 31, 1996, as a percentage
of total loans, leases and OREO, and as a percentage of total assets were 1.16%
and 0.77%, respectively, compared to 0.97% and 0.59%, respectively, at December
31, 1995.
The increase in Commercial and Industrial nonperforming assets was the
result of a slight softening in the portfolio. The corporation's current view of
this development is that it is transitory and does not represent a decline in
overall portfolio quality. Residential mortgage nonperforming assets also
increased as inflows remained consistent, but were not offset by a bulk sale as
has been the case in four of the most recent twelve quarters. Additionally, the
expiration of Fleet's federal financial assistance agreement that specifically
related to the purchase of Eastland Bank in 1992 contributed to the increase in
nonperforming assets.
23
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At March 31, 1996, the recorded investment in impaired loans was $323
million, substantially all of which were on nonaccrual status, compared to $295
million at December 31, 1995. Included in this quarter's amount is $285 million
of impaired loans for which the related impairment reserve is $84 million, and
$38 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 $317 million.
Activity in Nonperforming Assets
- ---------------------------------------------
1st 4th 1st
Quarter Quarter Quarter
Dollars in 1996 1995 1995
millions
- ---------------------------------------------
Balance at
beginning $499 $771 $761
of period
Additions 221 296 199
Acquisitions --- --- 46
Reductions:
Payments/interest (88 ) (138 ) (101 )
applied
Returned to (17 ) (11 ) (15 )
accrual
Charge-offs/
writedowns (37 ) (84 ) (58 )
Sales/other (25 ) (18 ) (13 )
- ---------------------------------------------
Total (167 ) (251 ) (187 )
reductions
- ---------------------------------------------
Subtotal 553 816 819
Assets held for
sale or
accelerated --- (317 ) ---
disposition
- ---------------------------------------------
Balance at end of
period $553 $499 $819
- ---------------------------------------------
NPA totals and related ratios do not include nonperforming assets
classified as held for sale or accelerated disposition. At March 31, 1996, NPAs
classified as held for sale or accelerated disposition totaled $307 million as
follows:
Nonperforming Assets Held for Sale or
Accelerated Disposition(a)
- ---------------- -------- -------- ------ -----
Commer- Commer-
cial cial Con-
Dollars in and Real sumer Total
millions IndustrialEstate
- ---------------- -------- -------- ------ -----
Nonaccrual
loans $46 $63 $176 $285
and leases
OREO --- --- 22 22
- ---------------- -------- -------- ------ -----
Total March
31, 1996 $46 $63 $198 $307
- ---------------- -------- -------- ------ -----
Total December
31, 1995 $46 $77 $194 $317
- ---------------- -------- -------- ------ -----
(a) Nonperforming assets held for sale or accelerated disposition do not
include loans greater than 90 days past due and still accruing interest ($19
million and $30 million at March 31, 1996 and December 31, 1995, respectively).
Nonperforming assets held for sale or accelerated disposition decreased
from $317 million at December 31, 1995 to $307 million at March 31, 1996. The
decrease of $10 million is due to loan sales and payoffs in the commercial real
estate area offset by the migration of consumer loans from the ninety day past
due and still accruing interest category to nonaccrual. The commercial and
industrial, and commercial real estate loans included as nonperforming assets
held for sale or accelerated disposition are primarily loans originated by the
corporation's banking franchise, while consumer loans were predominantly loans
originated by Fleet Finance, the corporation's consumer finance subsidiary, that
is currently held for sale as it no longer fits the core strategic business plan
of the corporation.
24
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reserve for Credit Loss Activity
- ---------------------------------------------
Three months ended March
31, 1996 1995
Dollars in millions
- ---------------------------------------------
Balance at beginning of $1,321 $1,496
year Provision charged to 35 20
income Loans and leases
charged off (83 ) (83 )
Recoveries of loans and
leases charged off 23 24
Acquisition/other (9 ) 68
- ---------------------------------------------
Balance at end of period $1,287 $1,525
- ---------------------------------------------
Ratios of net
charge-offs to 0.49 % 0.49 %
average loans and
leases
- ---------------------------------------------
Ratios of reserve for
credit losses to
period-end 2.71 3.02
loans and
leases
- ---------------------------------------------
Ratio of reserve for
credit losses to period-end 233 186
NPAs
- ---------------------------------------------
Ratio of reserve for
credit losses to period-end 258 212
nonper-forming loans and
leases
- ---------------------------------------------
Fleet's reserve for credit losses decreased $238 million from March 31,
1995, to $1,287 million at March 31, 1996. The first quarter 1996 provision for
credit losses was $35 million, $15 million higher than the prior year's first
quarter. Net charge-offs of $60 million remained relatively unchanged for the
first quarter of 1996 when compared to the same period in 1995. Slight
improvement of Fleet's credit quality ratios was noted when comparing the first
quarter of 1996 results to the same period of 1995 as nonperforming asset levels
have decreased over that period, primarily as a result of the reclassification
of certain nonperforming assets to held for sale or accelerated disposition.
Funding Sources
- -------------------- --------- -------- ---------
Dollars in March Dec. March
millions 31, 1996 31, 1995 31, 1995
- ----------------- --------- -------- ---------
Deposits:
Demand $10,485 $12,305 $10,045
Regular
savings,
NOW, money
market 21,783 22,835 23,077
Time:
Domestic 16,163 17,554 16,896
Foreign 1,690 4,428 3,417
- ----------------- --------- -------- ---------
Total deposits 50,121 57,122 53,435
- ----------------- --------- -------- ---------
Short-term
borrowed funds:
Federal funds
purchased 552 4,461 3,631
Securities
sold under
agreements to
repurchase 3,258 2,964 6,584
Commercial
paper 1,399 2,138 1,215
Other 1,964 3,006 2,533
- ----------------- --------- -------- ---------
Total short-
term borrowed 7,173 12,569 13,963
funds
- ----------------- --------- -------- ---------
Long-term debt 6,000 6,481 6,587
- ----------------- --------- -------- ---------
Total $63,294 $76,172 $73,985
- ----------------- --------- -------- ---------
Total deposits decreased $7.0 billion at March 31, 1996, when compared to
December 31, 1995 primarily due to a reduction of $3.2 billion of higher-cost
wholesale time deposits related to the balance sheet restructuring program and
$2.3 billion of deposits divested as a condition to regulatory approval of the
Shawmut Merger. Deposits were divested across all deposit categories and
included $300 million of demand deposits, $1.1 billion of savings deposits, and
$900 million of time deposits. Demand deposits also declined from year end due
to seasonally high balances at December 31, 1995.
25
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total short-term borrowed funds decreased $5.4 billion at March 31, 1996,
compared to December 31, 1995, primarily due to utilizing the proceeds from the
sales of securities to pay down borrowed funds. Long-term debt decreased $481
million from year end due to scheduled maturities and early retirements.
ASSET AND LIABILITY MANAGEMENT
The Asset/Liability Management process at Fleet ensures that the risk to
earnings from changes in interest rates is prudently managed.
The corporation analyzes interest-rate sensitivity through sophisticated
asset/liability simulation models. Simulation analysis provides a dynamic and
detailed analysis of the earnings sensitivity of the balance sheet. Simulation
analyses are used to examine the earnings impact of immediate interest-rate
"shocks", gradual interest rate "ramps", yield curve "twists", as well as
numerous other forecasted or planned scenarios. Within each scenario, the
analysis incorporates what management believes to be the most reasonable
assumptions about such variables as the prepayment rates on mortgages and the
repricing of noncontractual deposits.
Utilizing a 200 basis point immediate rate shock, the most recent earnings
simulation projects net interest income for the next twelve months would
decrease by less than 1% if rates changed by plus or minus 200 basis points. The
projection is within the corporation's policy limit of 7.5%.
Interest-rate gap analysis provides a static analysis of the repricing
characteristics of the entire balance sheet. The following table represents the
corporation's interest-rate gap position on March 31, 1996.
<TABLE>
<CAPTION>
Interest-Rate Gap Analysis
- ---------------------------------------------------------------------------------------------
Cumulatively Repriced Within
- ---------------------------------------------------------------------------------------------
March 31, 1996
Dollars in millions 3 months 4 to 12 12 to 24 2 to 5 After 5
by repricing date or less months months years years Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $35,970 $10,265 $4,620 $11,291 $9,977 $72,123
Total Liabilities 29,056 12,509 6,737 6,787 17,034 72,123
Net Off Balance Sheet (6,477 ) 1,188 1,794 3,981 (486 ) ---
- ---------------------------------------------------------------------------------------------
Periodic Gap 437 (1,056 ) (323 ) 8,485 (7,543 ) ---
Cumulative Gap 437 (619 ) (942 ) 7,543 --- ---
Cumulative Gap as a percent of 0.6 % (0.9 )% (1.3 )% 10.5 %
Total Assets
- ---------------------------------------------------------------------------------------------
Cumulative Gap as a percent of
Total Assets at December 31, 2.4 % 2.1 % 1.4 % 9.6 %
1995
- ---------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, the corporation's one year cumulative gap was 0.9%
liability sensitive. This relatively neutral position represents a decline from
the 2.1% asset sensitive position reported on December 31, 1995. Fleet's one
year cumulative gap guideline is plus or minus 10% of total assets.
The most significant factors which affected the interest-rate risk position
in the first quarter included the divestiture of loans and deposits related to
the Shawmut Merger, investment portfolio programs to reduce and restructure the
investment portfolio prior to the NatWest acquisition, and the execution of
interest-rate swaps to offset the change in interest-rate risk resulting from
these divestitures and portfolio sales. In its management of these and other
factors influencing the current environment, the corporation has targeted a
strategy to maintain a relatively neutral interest-rate risk position.
26
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The corporation uses interest-rate instruments to manage interest-rate risk
within management guidelines limiting risk to earnings. Since interest-rate
instruments are used to manage the interest-rate risk of specific assets and
liabilities, the analysis considers the interest-rate sensitivity of specific
portfolios, as well as the sensitivity of the entire balance sheet.
Derivative instruments totaling $16.7 billion (notional amount) are being
used for interest-rate risk-management purposes. These derivative instruments
consist primarily of interest-rate swaps.
<TABLE>
<CAPTION>
Interest-Rate Risk-Management Instrument Analysis
- --------------------------------------------------------------------------------------------------------------
Weighted
Assets/ Average Weighted Average
March 31, 1996 Notional Liabilities Maturity Fair Rate
Dollars in millions Value Hedged (Years) Value Receive Pay
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-rate risk management swaps:
Receive fixed/pay variable $ 3,932 Variable rate
loans
Fixed rate
2,462 deposits
Short-term
635 borrowings
1,149 Long-term debt
---------
8,178 2.4 $(15 ) 6.68 % 6.10 %
- -------------------------------------------------------------------------------------------------------------
Pay fixed/receive variable 1,785 Short-term 2.0 (27 ) 5.15 5.47
borrowings
- -------------------------------------------------------------------------------------------------------------
Basis swaps 85 Deposits
1,115 Long-term debt
3,092 Securities
---------
4,292 2.1 (8 ) 5.58 5.57
- -------------------------------------------------------------------------------------------------------------
Index-amortizing swaps receive 1,467 Variable rate 1.0 (1 ) 5.15 5.47
fixed/pay variable loans
- -------------------------------------------------------------------------------------------------------------
Total interest-rate swaps $15,722 $(51 ) 6.06 % 5.83 %
- -------------------------------------------------------------------------------------------------------------
Total other instruments(a) 962 Short-term 0.8 6 --- (b) --- (b)
borrowings
- -------------------------------------------------------------------------------------------------------------
Total interest-rate instruments $16,684 2.0 $(45 ) 6.06 % 5.83 %
=============================================================================================================
</TABLE>
(a) Other instruments include interest rate caps and floors.
(b) Average rates are not meaningful for interest rate caps and floors.
At March 31, 1996, the corporation had approximately $15.7 billion of
interest-rate swaps outstanding for interest-rate risk-management purposes. In
addition to interest-rate swap agreements, the corporation utilizes
interest-rate cap and floor agreements to manage the 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 March 31,
1996, the corporation has approximately $962 million in notional amounts of
purchased interest-rate cap and floor agreements.
The periodic net settlement of interest-rate risk-management instruments is
recorded as an adjustment to net interest income. As of March 31, 1996, the
corporation has net deferred income of $30.2 million relating to terminated
interest-rate contracts, which will be amortized over the remaining life of the
underlying interest-rate contracts of approximately 3 years.
27
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The interest-rate risk-management instrument activity for the three months
ended March 31, 1996 is summarized in the following table (all amounts are
notional amounts):
<TABLE>
<CAPTION>
======================================================================================
Interest-Rate Risk-Management Instrument Activity
======================================================================================
Interest-Rate Swaps
-------------------------------------
Receive Pay- Index- Other
Dollars in millions Fixed Fixed Basis Amortizing Instruments Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $5,776 $1,885 $2,742 $2,038 $766 $13,207
Additions 2,772 --- 1,550 --- 196 4,518
Maturities (370 ) (100 ) --- (571 ) --- (1,041)
Terminations --- --- --- --- --- ---
- --------------------------------------------------------------------------------------
Balance at March 31, 1996 $8,178 $1,785 $4,292 $1,467 $962 $16,684
- --------------------------------------------------------------------------------------
</TABLE>
The maturities of the interest-rate risk-management instruments are shown
in the following table:
Maturities of the Interest-Rate Risk-Management Instruments
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
March 31, 1996 Within 1 to 2 2 to 3 3 to 4 4 to 5 After 5
Dollars in millions 1 year Years Years Years Years Years Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Notional amounts:
Interest-rate swaps
Receive-fixed $ 726 $2,404 $3,612 $ 457 $699 $280 $8,178
Pay-fixed 455 660 --- 650 --- 20 1,785
Basis 735 1,045 2,512 --- --- --- 4,292
Index-amortizing 1,267 --- 200 --- --- --- 1,467
- --------------------------------------------------------------------------------------
Total interest-rate
swaps $3,183 $4,109 $6,324 $1,107 $699 $300 $15,722
- --------------------------------------------------------------------------------------
Other interest-rate
instruments 300 512 150 --- --- --- 962
- --------------------------------------------------------------------------------------
Total interest-rate
instruments $3,483 $4,621 $6,474 $1,107 $699 $300 $16,684
- --------------------------------------------------------------------------------------
</TABLE>
Mortgage Servicing Rights Prepayment Risk-Management. The corporation also
uses interest-rate contracts to manage the prepayment risk associated with the
corporation's mortgage servicing portfolio. The value of the corporation's
mortgage servicing portfolio may be adversely impacted if mortgage interest
rates decline and actual or estimated loan prepayments increase. As a result,
the carrying value of the corporation's mortgage servicing rights are subject to
a great degree of volatility in the event of unanticipated prepayments or
defaults. To mitigate the risk related to adverse changes in interest rates and
the potential resultant impairment to MSRs, the corporation holds interest-rate
contracts (primarily purchased interest-rate floor contracts and purchased-call
option contracts on US Treasury securities). During the first quarter of 1996,
such contracts were designated as hedges, and changes in the value, net of
amortization, were recorded as adjustments to the carrying value of the
underlying assets. At March 31, 1996, unrecognized losses of $45 million had
been recorded as adjustments to the carrying value of the underlying assets.
Investments in interest-rate contracts are amortized over the life of the
contracts and are included as a component of mortgage servicing rights
amortization.
28
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mortgage Servicing Rights Prepayment Risk- Management Instruments
- -----------------------------------------------
InteresInterest-Purchased
March 31, Rate Rate Call
1996 Floors Caps Options Total
Dollars in
millions
- -----------------------------------------------
Balance at
Decem- $5,885 $ 200 $ 825 $6,910
ber 31,
1995
Additions 1,075 --- 1,255 2,330
--- --- (300 ) (300 )
Maturities
--- --- (900 ) (900 )
Terminations
- -----------------------------------------------
Total $6,960 $ 200 $ 880 $8,040
- -----------------------------------------------
Fair value $ 28.7 $ (0.6 ) $ 0.2 $ 28.3
- -----------------------------------------------
Average
maturity 4.18 4.27 0.25 3.75
(years)
- -----------------------------------------------
The above instruments are used in an effort to protect the economic value
of the corporation's mortgage servicing rights. Interest-rate caps and floors
have a strike price that are indexed to the 5 to 10 year constant maturity
treasury rate. Purchased-call options consist of option contracts on long-term
US Treasury securities. The following table presents the maturity of the
mortgage servicing rights prepayment risk-management instruments.
Maturities of the Mortgage Servicing Rights
Prepayment Risk-Management Instruments
- --------------- -------- ----- ------ -------
March 31, 1996 Within 3 to 4 4 to 5
Dollars in 1 Year Years Years Total
millions
- --------------- -------- ----- ------ -------
Interest-rate $ --- $700 $6,260 $6,960
floors
Interest-rate --- --- 200 200
caps
Purchased call
options 880 --- --- 880
- --------------- -------- ----- ------ -------
Total $880 $700 $6,460 $8,040
- --------------- -------- ----- ------ -------
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, excluding Fleet Mortgage, funds from the parent for liquidity.
During the first quarter of 1996, the parent received $249 million in interest
and dividends from subsidiaries and paid $175 million in interest and dividends
to third parties. Dividends paid by the corporation's banking subsidiaries are
limited by various regulatory requirements related to capital adequacy and
historical earnings.
As shown in the consolidated statement of cash flows, cash and cash
equivalents increased by $547 million during the three month period ended March
31, 1996. This increase was due to cash provided by investing activities of
$12.8 billion and cash provided by operating activities of $253 million, offset
by cash used in financing activities of $12.5 billion. Net cash provided by
investing activities was attributable to a net decrease in securities primarily
due to balance sheet restructuring in preparation for the NatWest acquisition
and a net decrease in loans. Net cash used in financing activities was due to a
decrease in deposits of $7.0 billion relating primarily to balance sheet
restructuring and divestitures and a $5.4 billion paydown of short-term
borrowings from cash generated from the balance sheet restructuring, offset by
the corporation issuing $425 million in preferred stock.
FMG had a separate funding program that included a revolving-warehouse
credit agreement of $1.8 billion at March 31, 1996. FMG had $1.0 billion
outstanding under the credit agreement at March 31, 1996, compared to $425
million at December 31, 1995. FMG also had a shelf registration that provided
for the issuance of debt securities and at March 31, 1996, $100 million of debt
securities were available for future issuance. FMG sold commercial paper to fund
short-term needs. At March 31, 1996, FMG had commercial paper outstanding of
$784 million compared to $1.4 billion at December 31, 1995.
On May 1, 1996, FMG became a subsidiary of a Fleet bank affiliate and as a
result, it is anticipated that substantially all future funding will be provided
by such bank. FMG's revolving credit agreement will be paid off and canceled,
and all other debt is expected to be paid as it matures.
29
<PAGE>
At March 31, 1996 and December 31, 1995, the parent company had commercial
paper outstanding of $615 million and $772 million, respectively. The
corporation has backup lines of credit to ensure that funding is not interrupted
if commercial paper is not available. The total amount of funds available under
these agreements was $1.0 billion at both March 31, 1996 and December 31, 1995,
with no outstanding balance under these lines of credit.
Fleet has a universal shelf registration that provides for the issuance of
common and preferred stock, senior or subordinated debt securities, and other
securities with total amount of funds available of approximately $1,488 million
at March 31, 1996. Subsequent to March 31, 1996, the corporation issued $175
million of 6.60% preferred stock, $300 million of 7.125% subordinated debt, and
$85 million of medium-term notes with interest rates ranging from 7.30% to
7.50%. These issuances further reduced the amounts available under the universal
shelf registration to $928.4 million.
CAPITAL
- -----------------------------------------------
March Dec. March
31, 31, 31,
1996 1995 1995
- -----------------------------------------------
Risk-adjusted
assets $63,676 $69,384 $63,987
Tier 1
risk-based
capital (4% 9.18 % 7.62 % 8.45 %
mini-
mum)
Total
risk-based
capital 13.02 11.29 12.47
(8%
minimum)
Leverage ratio 7.90 6.41 6.83
Common
equity- 8.35 7.07 6.70
to- assets
Total
equity-to- 9.49 7.54 7.53
assets
Tangible total
equity- 8.13 6.30 6.44
to-assets
Capital in
excess of
minimum
reuire-
ments:
Tier 1
risk- $3,298 $2,507 $2,849
based
Total 3,198 2,280 2,862
risk-based
Leverage 2,886 1,983 2,241
- -----------------------------------------------
At March 31, 1996, the corporation exceeded all regulatory required minimum
capital ratios. The corporation's ratios exceeded December 31, 1995 due to the
issuance of additional preferred stock. Decreased risk-adjusted assets reflects
the divestiture of assets related to the Shawmut Merger. The corporation
anticipates that the capital ratios will decrease from March 31, 1996 levels as
a result of the consummation of the NatWest acquisition on May 1, 1996; however,
such ratios are still expected to exceed minimum regulatory required levels.
RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the
corporation adopted on January 1, 1996. This statement requires that long-lived
assets and certain identifiable intangibles to be held, be reviewed for
impairment whenever management becomes aware of events or changes in
circumstances indicating that the carrying amount of an asset may not be
recoverable. An impairment loss based on the fair value of the asset is
recognized if the expected cash flows from the use and eventual disposition of
the asset, on an undiscounted basis and without interest charges, are less than
the carrying amount of the asset. Long-lived assets and certain identifiable
intangibles to be disposed of are required to be reported at the lower of the
carrying amount or fair value less cost to sell, except for assets being
disposed of in connection with the disposal of a segment of a business, which
will continue to be reported at the lower of the carrying amount or net
realizable value. Adoption of this statement did not have a material impact on
the corporation or its results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
employee stock options and similar equity instruments. This statement also
permits companies to continue to measure compensation costs for these plans
using the current accounting method which is intrinsic value based. Companies
that elect to continue to use the intrinsic value method must provide pro forma
disclosure of net income and earnings per share as if the fair value method of
accounting had been applied. This standard is effective for the year ended
December 31, 1996. The corporation continues to use the intrinsic value based
method of accounting and will provide the additional disclosure on the pro forma
impact of the fair value based method under SFAS No. 123 in the 1996 annual
report for awards granted in both 1995 and 1996.
30
<PAGE>
PART II. ITEM 6.
(a) Exhibit Index
Page of
Exhibit this
Number Report
------- -------
4 Instruments defining the right of security holders,
including *
debentures
11 Statement re-computation of per share earnings 28
12 Statement re-computation of ratios 29
27 Financial data schedule 31
* Registrant has no instruments defining the rights of holders of equity or
debt securities where the amount of securities authorized thereunder exceeds
10% of the total assets of the registrant and its subsidiaries on a
consolidated basis. Registrant hereby agrees to furnish a copy of any such
instrument to the Commission upon request.
(b) Twelve Form 8-K's were filed during the period from January 1, 1996
to the date of the filing of this report. - Current Report on Form
8-K dated January 17, 1996 announcing 1995 and fourth quarter
earnings.
- Current Report on Form 8-K dated January 19, 1996 filing its
Supplemental Consolidated Financial Statements.
- Current Report on Form 8-K dated February 8, 1996 filing the
Unaudited Pro Forma Combined Financial Statements and NatWest
historical financial statements, both as of September 30, 1995,
and notes thereto, in connection with the NatWest Merger.
- Current Report on Form 8-K dated February 21, 1996, reporting
the issuance and sale of (a) 11,000,000 Depositary Shares, each
representing a one-tenth interest in a share of Registrant's
Series V 7.25% Perpetual Preferred Stock at a purchase price of
$25 per Depositary Share and (b) 3,000,000 Depositary Shares,
each representing a one-fifth interest in a share of
Registrant's Series VI 6.75% Perpetual Preferred Stock at a
purchase price of $50 per Depositary Share.
- Current Report on Form 8-K dated March 15, 1996, filing the
Unaudited Pro Forma Combined Financial Statements as of December
31, 1995, and notes thereto, in connection with the NatWest
Merger, and the Registrant's 1995 historical financial
statements and notes thereto, management's discussion and
analysis, and selected financial highlights, as amended by a
Form 8-K/A dated April 5, 1996.
- Current Report on Form 8-K dated March 25, 1996, filing the
Consolidated Financial Statements of NatWest as of December 31,
1995.
- Current Report on Form 8-K dated March 26, 1996, reporting the
issuance and sale of 3,500,000 Depositary Shares, each
representing a one-fifth interest in a share of Series VII
Fixed/Adjustable Rate Cumulative Preferred stock at a purchase
price of $50 per Depositary Share.
31
<PAGE>
PART II. ITEM 6. (continued)
- Current Report on Form 8-K dated March 27, 1996, reporting the
closing of Fleet's medium-term note programs, Series J and K.
- Current Report on Form 8-K dated April 1, 1996, reporting the
merger of the southern New England national banks and litigation
relating thereto.
- Current Report on Form 8-K dated April 15, 1996, reporting the
issuance and sale of $300 million 7 1/8% Subordinated Notes due
April 15, 2006.
- Current Report on Form 8-K dated April 17, 1996, announcing 1996
first quarter earnings.
- Current Report on Form 8-K dated May 1, 1996, the closing of
the NatWest acquisition.
32
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fleet Financial Group, Inc.
----------------------------
(Registrant)
/s/ Eugene M. McQuade
----------------------------
Eugene M. McQuade
Executive Vice President
Chief Financial Officer
/s/ Robert C. Lamb, Jr.
----------------------------
Robert C. Lamb, Jr.
Chief Accounting Officer
Controller
DATE: May 10, 1996
EXHIBIT 11
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
($ in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended March 31
-----------------------------------------------------------------------
1996 1995
-------------------------------- ----------------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 262,525,888 262,525,888 242,678,428 242,678,428
Additional shares due to:
Stock options 2,163,012 2,178,472 1,661,789 1,690,109
Warrants 3,663,854 3,671,654 3,346,635 3,377,788
Dual convertible preferred --- --- 16,033,994 16,033,994
stock(a)
---------------- ---------------- --------------- ----------------
Total equivalent shares 268,352,754 268,376,014 263,720,846 263,780,319
---------------- ---------------- --------------- ----------------
Earnings per share
Net income $263,802 $263,802 $225,993 $225,993
Less: Preferred stock dividends (12,538 ) (12,538 ) (8,432 ) (8,432 )
---------------- ---------------- --------------- ----------------
Adjusted net income $251,264 $251,264 $217,561 $217,561
---------------- ---------------- --------------- ----------------
Total equivalent shares 268,352,754 268,376,014 263,720,846 263,780,319
---------------- ---------------- --------------- ----------------
Earnings per share on adjusted
net income $0.94 $0.94 $0.83 $0.82
---------------- ---------------- --------------- ----------------
</TABLE>
(a) The dual convertible preferred stock was converted into common stock on
December 31, 1995.
EXHIBIT 12
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS EXCLUDING INTEREST ON DEPOSITS
(thousands)
<TABLE>
<CAPTION>
Three
months
ended
March 31 Year ended December 31
- -------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
income taxes, extra-ordinary credit
and cumulative effect of
change in method of accounting $450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $(16,375)
Adjustments:
(a) Fixed charges:
(1) Interest on
borrowed funds 210,925 1,278,598 990,395 751,754 638,430 728,337
(2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524
(b) Preferred dividends 21,396 62,064 48,859 60,365 65,658 24,220
- -------------------------------------------------------------------------------------------------------
(c) Adjusted earnings $ 694,355 $2,424,339 $2,469,490 $1,958,829 $1,370,654 $778,706
- --------------------------------------------------------------------------------------------------------
Fixed charges and preferred
dividends $ 244,217 $1,390,583 $1,089,851 $ 864,373 $ 753,285 $795,081
- --------------------------------------------------------------------------------------------------------
Adjusted earnings/fixed charges 2.84x 1.74x 2.27x 2.27x 1.82x 0.98x*
- --------------------------------------------------------------------------------------------------------
<CAPTION>
INCLUDING INTEREST ON DEPOSITS
Three
months
ended Year ended December 31
March 31
- ----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income
taxes, extraordinary credit
and cumulative effect
of change in method of
accounting $ 450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $ (16,375)
Adjustments:
(a) Fixed charges:
(1) Interest on 210,925 1,278,598 990,395 751,754 638,430 728,337
borrowed funds
(2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524
(3) Interest on deposits 402,316 1,726,403 1,170,532 1,165,046 1,698,804 2,414,060
(b) Preferred dividends 21,396 62,064 48,859 60,365 65,658 24,220
- ----------------------------------------------------------------------------------------------------
(c) Adjusted earnings $1,096,671 $4,150,742 $3,640,022 $3,123,875 $3,069,458 $3,192,766
- ----------------------------------------------------------------------------------------------------
Fixed charges and preferred $ 646,533 $3,116,986 $2,260,383 $2,029,419 $2,452,089 $3,209,141
dividends
- ----------------------------------------------------------------------------------------------------
Adjusted earnings/fixed charges 1.70x 1.33x 1.61x 1.54x 1.25x 0.99x *
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Note that adjusted earnings are inadequate to cover fixed charges, the
deficiency being $16,375 for both the ratio excluding and including interest
on deposits.
33
<PAGE>
EXHIBIT 12
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
EXCLUDING INTEREST ON DEPOSITS
(thousands)
<TABLE>
<CAPTION>
Three
months
ended
March 31 Year ended December 31
- ----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
Earnings:
Income (loss) before
income taxes, extra-
ordinary credit and
cumulative effect of
change in method of
accounting $450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $(16,375)
Adjustments:
(a) Fixed charges:
(1) Interest on 210,925 1,278,598 990,395 751,754 638,430 728,337
borrowed funds
(2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524
- ----------------------------------------------------------------------------------------------------
(b) Adjusted earnings $672,959 $2,362,275 $2,420,631 $1,898,464 $1,304,996 $754,486
- ----------------------------------------------------------------------------------------------------
Fixed charges and preferred
dividends $222,821 $1,328,519 $1,040,992 $ 804,008 $ 687,627 $770,861
- ----------------------------------------------------------------------------------------------------
Adjusted earnings/fixed charges 3.02x 1.78x 2.33x 2.36x 1.90x 0.98x *
- ----------------------------------------------------------------------------------------------------
<CAPTION>
INCLUDING INTEREST ON DEPOSITS
Three
months
ended Year ended December 31
March 31
- ----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
income taxes, extra-
ordinary credit and
cumulative effect of
change in method of
accounting $ 450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $ (16,375)
Adjustments:
(a) Fixed charges:
(1) Interest on 210,925 1,278,598 990,395 751,754 638,430 728,337
borrowed funds
(2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524
(3) Interest 402,316 1,726,403 1,170,532 1,165,046 1,698,804 2,414,060
on deposits
- ----------------------------------------------------------------------------------------------------
(b) Adjusted earnings $1,075,275 $4,088,678 $3,591,163 $3,063,510 $3,003,800 $3,168,546
- ----------------------------------------------------------------------------------------------------
Fixed charges and preferred
dividends $ 625,137 $3,054,922 $2,211,524 $1,969,054 $2,386,431 $3,184,921
- ----------------------------------------------------------------------------------------------------
Adjusted earnings/fixed charges 1.72x 1.34x 1.62x 1.56x 1.26x 0.99x *
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Note that adjusted earnings are inadequate to cover fixed charges, the
deficiency being $16,375 for both the ratio excluding and including interest
on deposits.
34
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains restated summary financial information for the March
31, 1995 quarter giving effect to the merger of Shawmut National Corporation
with and into Fleet, accounted for as a pooling of interests and
consummated on November 30, 1995.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,495
<INT-BEARING-DEPOSITS> 352
<FED-FUNDS-SOLD> 524
<TRADING-ASSETS> 92
<INVESTMENTS-HELD-FOR-SALE> 12,259
<INVESTMENTS-CARRYING> 8,750
<INVESTMENTS-MARKET> 8,505
<LOANS> 50,475
<ALLOWANCE> 1,525
<TOTAL-ASSETS> 81,862
<DEPOSITS> 53,435
<SHORT-TERM> 13,963
<LIABILITIES-OTHER> 1,712
<LONG-TERM> 6,587
0
682
<COMMON> 2,861
<OTHER-SE> 2,621
<TOTAL-LIABILITIES-AND-EQUITY> 81,862
<INTEREST-LOAN> 1,103
<INTEREST-INVEST> 345
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,448
<INTEREST-DEPOSIT> 391
<INTEREST-EXPENSE> 692
<INTEREST-INCOME-NET> 756
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 764
<INCOME-PRETAX> 374
<INCOME-PRE-EXTRAORDINARY> 374
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 226
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 4.27
<LOANS-NON> 718
<LOANS-PAST> 170
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,496
<CHARGE-OFFS> 83
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 1,525
<ALLOWANCE-DOMESTIC> 1,525
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1996 consolidated financial statements and management's
discussion and analysis of financial condition and results of
operations contained in the Form 10-Q and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,287
<INT-BEARING-DEPOSITS> 18
<FED-FUNDS-SOLD> 1,808
<TRADING-ASSETS> 98
<INVESTMENTS-HELD-FOR-SALE> 9,243
<INVESTMENTS-CARRYING> 848
<INVESTMENTS-MARKET> 824
<LOANS> 47,559
<ALLOWANCE> 1,287
<TOTAL-ASSETS> 72,123
<DEPOSITS> 50,121
<SHORT-TERM> 7,173
<LIABILITIES-OTHER> 1,985
<LONG-TERM> 6,000
0
824
<COMMON> 3,125
<OTHER-SE> 2,895
<TOTAL-LIABILITIES-AND-EQUITY> 72,123
<INTEREST-LOAN> 1,144
<INTEREST-INVEST> 193
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,337
<INTEREST-DEPOSIT> 402
<INTEREST-EXPENSE> 613
<INTEREST-INCOME-NET> 724
<LOAN-LOSSES> 35
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 758
<INCOME-PRETAX> 450
<INCOME-PRE-EXTRAORDINARY> 450
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 4.43
<LOANS-NON> 499
<LOANS-PAST> 180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,321
<CHARGE-OFFS> 83
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,287
<ALLOWANCE-DOMESTIC> 1,287
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
