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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 - COMMISSION FILE NUMBER 1-6366
________________________________________________________
FLEET FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
RHODE ISLAND 05-0341324
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
617 / 292-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Depositary Shares each representing
a one-tenth interest in a share of 9.30%
Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
Depositary Shares each representing a
one-tenth interest in a share of 9.35%
Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
Depositary Shares each representing a
one-tenth interest in a share of Series V
7.25% Perpetual Preferred Stock, $1 Par Value New York Stock Exchange
Depositary Shares each representing a one-fifth
interest in a share of Series VI 6.75%
Perpetual Preferred Stock, $1 Par Value New York Stock Exchange
Preferred Securities Guarantee by Fleet Financial
Group, Inc. of 8.00% Trust Originated Preferred
Securities issued by Fleet Capital Trust I New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Warrants to purchase common stock New York Stock Exchange
_________________________________________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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
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1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES XX NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 28, 1997, (the latest practicable date) the aggregate market
value of the voting stock held by nonaffiliates of the Registrant was $15.3
billion, which excludes $323 million held by directors, executive officers, and
banking subsidiaries of the Registrant under trust agreements and other
instruments.
The number of shares of common stock of the Registrant outstanding as of
February 28, 1997 was 255,933,312.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Pertinent extracts from Registrant's 1996 Annual Report to Shareholders
(Parts I, II, and IV).
2. Pertinent extracts from Registrant's Proxy Statement filed with the
Commission are incorporated into Part III.
Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
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TABLE OF CONTENTS
Description Page Number
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Part I. Item 1 __ Business . . . . . . . . . . . . . . . . . . . 3
Item 2 __ Properties . . . . . . . . . . . . . . . . . . 9
Item 3 __ Legal Proceedings. . . . . . . . . . . . . . . 9
Item 4 __ Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . 9
Part II. Item 5 __ Market for the Registrant's Common Stock and
Related Stockholder Matters. . . . . . . . . . 9
Item 6 __ Selected Financial Data. . . . . . . . . . . . 9
Item 7 __ Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8 __ Financial Statements and Supplementary Data. . 10
Item 9 __ Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . 10
Part III. Item 10 __ Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . 10
Item 11 __ Executive Compensation . . . . . . . . . . . . 13
Item 12 __ Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . 13
Item 13 __ Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . 13
Part IV. Item 14 __ Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . 13
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 17
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PART I.
ITEM 1. BUSINESS
GENERAL
Fleet Financial Group, Inc. (the "Registrant", "Corporation" or "Fleet") is
a diversified financial services company organized under the laws of the State
of Rhode Island. Fleet is a legal entity separate and distinct from its
subsidiaries, assisting such subsidiaries by providing financial resources and
management. By most measures, Fleet is among the eleven largest bank holding
companies in the United States, with total assets of $85.5 billion at December
31, 1996. Fleet has approximately 36,000 employees.
Fleet reported net income for 1996 of $1.14 billion, or $3.95 per share.
This compared to net income of $610 million, or $1.57 per share in 1995. For a
more detailed discussion of the Corporation's financial results, see
"Management's Discussion and Analysis" (pages 19-39) of the Corporation's 1996
Annual Report to Shareholders, which is incorporated by reference herein.
Fleet is engaged in general commercial banking and trust business
throughout the states of Rhode Island, New York, Connecticut, Massachusetts, New
Jersey, Maine, and New Hampshire through its banking subsidiaries: Fleet
National Bank ("Fleet-Southern New England"); Fleet Bank ("Fleet-New York");
Fleet Bank, National Association ("FBNA"); Fleet Bank of Maine ("Fleet-Maine");
and Fleet Bank-NH ("Fleet-NH"). All of the subsidiary banks are members of the
Federal Reserve System, and the deposits of each are insured by the Federal
Deposit Insurance Corporation ("FDIC") to the extent provided by law. The
Corporation also has a thrift subsidiary, Fleet Bank, F.S.B. ("Fleet-FSB")
located in Boca Raton, Florida.
Fleet provides, through its nonbanking subsidiaries, a variety of financial
services, including mortgage banking, asset-based lending, equipment leasing,
real estate financing, securities brokerage services, investment banking,
investment advice and management, data processing, and student loan servicing.
On May 1, 1996, the Corporation acquired from National Westminster Plc
substantially all of the net assets of the three main operating subsidiaries of
NatWest Bancorp ("NatWest Bank"). The former NatWest Bank was merged into Fleet
Bank, National Association. In accordance with the NatWest merger agreement,
Fleet paid a purchase price at closing of $2.7 billion. Subject to the level of
earnings of Fleet Bank, National Association, Fleet may be required to make
additional payments of up to $560 million over the next eight years, commencing
in 1997. The acquisition of NatWest Bank contributed approximately $13 billion
and $18 billion of loans and deposits, respectively, and approximately 300
branches in New York and New Jersey. The transaction was accounted for using
the purchase method of accounting.
On November 30, 1995, the merger of Fleet and Shawmut National Corporation
("Shawmut") was completed ("Shawmut Merger"), and was accounted for as a pooling
of interests. Fleet exchanged approximately 105 million common shares for all
the outstanding shares of Shawmut at an exchange ratio of .8922 shares of Fleet
for each share of Shawmut.
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The Corporation is organized along functional lines of business as follows:
Commercial Financial Services, Consumer Banking, Financial Services and National
Consumer, Investment Services and Treasury.
Commercial Financial Services includes a broad range of commercial and
corporate lending as well as commercial real estate, asset-based lending,
precious metals, and leasing. In addition to incorporating the commercial
function in each of the Corporation's banking subsidiaries, this business unit
also includes Fleet Capital and Fleet Capital-Leasing. Fleet Capital, a
national asset-based lending business, has 17 offices nationwide doing business
in 40 states. Fleet Capital-Leasing, which has 19 offices nationwide, engages
primarily in upper middle-market equipment leasing. This unit also includes the
recently formed corporate finance group that provides capital markets financing,
mergers and acquisition advisory services, private placements, securitized debt,
loan syndications and balance sheet restructuring.
Consumer Banking includes retail banking, small business banking and direct
financial services and has the largest branch-based banking franchise in the
Northeast and is the major provider of funds available for lending by the
Corporation. Retail banking offers consumers products and services to access,
move and manage their money. Retail banking delivers these services through its
network of over 1,200 branches, 2,000 ATMs and telephone banking centers. Small
business banking provides a full range of accounts and services aimed at
businesses with sales of up to $10 million. Fleet is the leading small-business
lender in the Northeast and ranks sixth nationwide. Direct financial services
encompasses credit card lending and alternative delivery vehicles including
ATMs, the telephone answer center, debit-card programs and Fleet's internet web
site.
Financial Services and National Consumer includes Fleet's government
banking, global services, mortgage banking, and student loan services
businesses. This business unit includes Fleet Mortgage Group, Inc. ("FMG"),
the Corporation's mortgage banking subsidiary, which conducts the purchase,
origination, sale, and servicing of residential first and second mortgage loans,
and the purchase and sale of servicing rights associated with mortgage loans.
This business unit also includes AFSA Data Corporation ("AFSA"), the
Corporation's student loan processing subsidiary, the nation's largest
third-party servicer of student loans servicing more than $23 billion of asset
value in more than 4.5 million accounts. AFSA's three basic product lines
include the Campus-Based student loan product, the Federal Direct Student Loan
Program; and the Federal Family Education Loan Program. In government banking,
Fleet is the principal depository for the states of New York, Massachusetts,
Connecticut, Rhode Island and Maine and the largest depository for government
entities in the United States. In addition, Fleet's government banking tax
processing unit provides advanced image capture and processing solutions to both
government agencies and corporations. Global Services provides multiple
products encompassing cash management, bankruptcy proceedings, and domestic and
international transaction processing to the insurance industry, mutual fund
companies and commercial banking customers.
The Investment Services line of business consists of personal asset
management, endowment and custody services, employee benefit management and
mutual funds. These services are provided by the Corporation's trust and
investment management subsidiaries, Fleet Investment Services Group and Fleet
Investment Advisors, Inc. This unit includes the Corporation's discount
brokerage subsidiary, Fleet Brokerage Securities, Inc., which is engaged in
providing securities brokerage services, including clearing services, related
securities credit extension, and other incidental activities through 12 offices
in 11 states.
The Treasury line of business includes the treasury function, which manages
the Corporation's securities and residential mortgage portfolios, trading
operations, asset/liability management function, and the wholesale funding needs
of the Corporation.
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COMPETITION
The Corporation's subsidiaries are subject to intense competition in all
aspects of the businesses in which they compete from domestic and foreign banks,
equipment leasing companies, finance companies, securities and investment
advisory firms, real estate financing companies, mortgage banking companies and
other financial institutions. The Corporation principally competes on interest
rates and other terms of financing arrangements, including specialized customer
services and various banking arrangements and conveniences designed to attract
depositors, borrowers, and other customers.
SUPERVISION AND REGULATION
Banking is a highly regulated industry, with numerous federal and state
laws and regulations governing the organization and operation of banks and their
affiliates. As a bank holding company, Fleet is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
under the Bank Holding Company Act of 1956, as amended (the "BHCA").
Fleet-Maine, Fleet-NH, and Fleet-New York as state-chartered member banks are
subject to regulation by the Federal Reserve Board and bank regulators in their
respective states. FBNA and Fleet-Southern New England are national banks
subject to regulation and supervision by the Office of the Comptroller of the
Currency (the "OCC"). Fleet-FSB is a federal savings association subject to
regulation and supervision by the Office of Thrift Supervision (the "OTS").
Each subsidiary bank's deposits are insured by the FDIC and each bank subsidiary
is a member of the Federal Reserve System. Fleet is also subject to the
reporting and other requirements of the Securities Exchange Act of 1934 (the
"Exchange Act").
The BHCA requires that Fleet obtain prior approval from the Federal Reserve
Board for bank and nonbank acquisitions and restricts the business operations
permitted to Fleet. The BHCA also restricts the acquisition of shares of
out-of-state banks unless the acquisition is specifically authorized by the laws
of the state in which the bank to be acquired is located. In addition, Fleet's
bank subsidiaries must obtain prior approval from their respective primary
regulators for most acquisitions. Virtually all aspects of the subsidiary
banks' businesses are subject to regulation and examination, depending on the
charter of the particular banking subsidiary, by the Federal Reserve Board, the
OCC, the OTS, the banking regulatory agencies of the states in which they
operate, or a combination of the above.
As a result of the enactment of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, ("FIRREA"), any or all of Fleet's
subsidiary banks can be held liable for any loss incurred by, or reasonably
expected to be incurred by the FDIC after August 9, 1989, in connection with (a)
the default of any other of Fleet's subsidiary banks or (b) any assistance
provided by the FDIC to any other of Fleet's subsidiary banks in danger of
default. "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur without
regulatory assistance.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA") provides for, among other things, increased funding for the Bank
Insurance Fund of the FDIC and expanded regulation of depository institutions
and their affiliates, including parent holding companies. The FDICIA provides
the federal banking agencies with broad powers to take prompt corrective action
to resolve problems of insured depository institutions, depending upon the
particular institution's level of capital. The FDICIA established five tiers of
capital measurement ranging from "well-capitalized" to "critically
undercapitalized". A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position under certain circumstances. As of December 31, 1996, all of Fleet's
subsidiary banking institutions met the requirements of a "well capitalized"
institution.
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Under the FDICIA, a depository institution that is well-capitalized may
accept brokered deposits. Other depository institutions are subject to
limitations on their ability to accept brokered deposits. In Fleet's opinion,
these limitations do not have a material effect on Fleet or its subsidiaries.
The FDICIA directs that each federal banking agency prescribe safety and
soundness standards for depository institutions relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, asset-quality,
earnings and stock valuation. Final interagency regulations to implement these
safety and soundness standards have recently been adopted by the federal banking
agencies. In July 1995, the federal banking agencies published proposed
guidelines establishing safety and soundness standards concerning asset-quality
and earnings. These guidelines were adopted and incorporated into the
Interagency Guidelines Establishing Standards for Safety and Soundness effective
October 1, 1996. The ultimate cumulative effect of these standards cannot
currently be forecast.
The FDICIA also contains a variety of other provisions that may affect
Fleet's operations, including reporting requirements, regulatory standards for
real estate lending, "truth in savings" provisions, and the requirements that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch.
Under the Federal Reserve Board capital guidelines, the minimum ratio of
total capital to risk-adjusted assets (including certain off-balance sheet
items, such as standby letters of credit) is 8%. At least half of the total
capital is to be comprised of common equity, retained earnings, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of cumulative and noncumulative perpetual preferred stock, less
deductible intangibles ("Tier 1 capital"). The remainder may consist of
perpetual debt, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves ("Tier 2 capital"). Fleet is also subject to a minimum leverage ratio
(Tier 1 capital to average quarterly assets, net of goodwill) requirement of 3%
for bank holding companies that meet certain specified criteria, including that
they have the highest regulatory rating. The rule indicates that the minimum
leverage ratio should be 1% to 2% higher for holding companies undertaking major
expansion programs or that do not have the highest regulatory rating. Fleet's
banking subsidiaries are subject to similar capital requirements except that
preferred stock must be noncumulative to qualify as Tier 1 capital. Under
federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including the termination
of deposit insurance by the FDIC and seizure of the institution. As of December
31, 1996, Fleet's capital ratios exceeded all minimum regulatory capital
requirements.
The federal banking agencies continue to consider capital requirements
applicable to banking organizations. Effective September 1, 1995, the federal
banking agencies adopted amendments to their risk-based capital regulations to
provide for the consideration of interest-rate risk in the determination of a
bank's minimum capital requirements. The amendments require that banks
effectively measure and monitor their interest-rate risk and that they maintain
capital adequate for that risk. Under the amendments, banks with excess
interest-rate risk would be required to maintain additional capital beyond that
generally required. In addition, effective January 17, 1995, the federal
banking agencies adopted amendments to their risk-based capital standards to
provide for the concentration of credit risk and certain risks arising from
nontraditional activities, as well as a bank's ability to manage these risks, as
important factors in assessing a bank's overall capital adequacy.
Fleet is a legal entity separate and distinct from its subsidiaries. The
ability of holders of debt and equity securities of Fleet to benefit from the
distribution of assets of any subsidiary upon the liquidation or reorganization
of such subsidiary is subordinate to prior claims of creditors of the subsidiary
except to the extent that a claim of Fleet as a creditor may be recognized.
There are various statutory and regulatory limitations on the extent to which
banking subsidiaries of Fleet can finance or otherwise transfer funds to, or
engage in other transactions with, Fleet or its nonbanking subsidiaries. Such
transfers and transactions between any subsidiary bank and Fleet or any
nonbanking subsidiary are limited in amount to 10% of the bank's capital and
surplus and, with respect to Fleet and all such nonbanking subsidiaries, to an
aggregate of 20% of each such bank's capital and surplus. Furthermore, loans
and extensions of credit are required to be secured in specified amounts and are
required to be on terms and conditions consistent with safe and sound banking
practices.
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In addition, there are regulatory limitations on the payment of dividends
directly or indirectly to Fleet from its banking subsidiaries. The payment of
dividends by any subsidiary bank may also be affected by other factors, such as
the maintenance of adequate capital for such subsidiary bank.
Under the policies of the Federal Reserve Board, Fleet is expected to act
as a source of financial strength to each subsidiary bank and to commit
resources to support such subsidiary bank in circumstances where it might not do
so absent such policy. In addition, any subordinated loans by Fleet to provide
capital to any of the subsidiary banks would also be subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
Further, in the event of the bankruptcy of Fleet, any commitment by Fleet to its
regulators to maintain the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
The Interstate Act facilitates the interstate expansion and consolidation of
banking organizations by permitting (i) beginning one year after enactment of
the legislation, bank holding companies that are adequately capitalized and
managed to acquire banks located in states outside their home states regardless
of whether such acquisitions are authorized under the law of the host state,
(ii) the interstate merger of banks after June 1, 1997, subject to the right of
individual states to "opt in" or "opt out" of this authority prior to such date,
(iii) banks to establish new branches on an interstate basis provided that such
action is specifically authorized by the law of the host state, (iv) foreign
banks to establish, with approval of the regulators in the United States,
branches outside their home states to the same extent that national or state
banks located in such state would be authorized to do so, and (v) beginning
September 29, 1995, banks to receive deposits, renew time deposits, close loans,
service loans and receive payments on loans and other obligations as agent for
any bank or thrift affiliate, whether the affiliate is located in the same or
different state. Connecticut, Massachusetts, New Jersey, New York and Rhode
Island, which are among the states in which Fleet subsidiaries conduct banking
operations, have adopted legislation opting into the interstate banking
provisions of the Interstate Act. New York has not opted into the interstate
branching provisions of the Interstate Act. During 1996, Fleet merged its
banking subsidiaries in the following states: Rhode Island, Fleet National Bank
("Fleet-RI"); in Connecticut, Fleet Bank, National Association ("Fleet-CT") and
Fleet National Bank of Connecticut ("FNB-CT"); and in Massachusetts, Fleet Bank
of Massachusetts, National Association ("Fleet-MA") and Fleet National Bank of
Massachusetts ("FNB-MA"). The merger of these banks formed the Fleet-Southern
New England bank. The merger was transacted in order to achieve cost savings
and to increase convenience to its customers. The Corporation continues to
explore other potential consolidations of its bank subsidiaries.
The banking industry is also affected by the monetary and fiscal policies
of the federal government, including the Federal Reserve Board, which exerts
considerable influence over the cost and availability of funds obtained for
lending and investing. Proposals to change the laws and regulations governing
the operations and taxation of banks, companies that control banks, and other
financial institutions are frequently raised in Congress, in the state
legislatures, and before various bank regulatory authorities. The likelihood of
any major changes and the impact such changes might have on Fleet are impossible
to determine.
See "Note 17. Commitments, Contingencies and Other Disclosures" (page 64)
and "Note 18. Regulatory Matters" (pages 64-65) of the Notes to Consolidated
Financial Statements and the "Liquidity Risk" (page 37) and "Capital" (page 38)
sections of Management's Discussion and Analysis in the 1996 Annual Report to
Shareholders (each of which are incorporated by reference herein) for
information concerning restrictions on the banking subsidiaries' ability to pay
dividends and other regulatory matters and legal proceedings.
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STATISTICAL INFORMATION BY BANK HOLDING COMPANIES
The following information from the following portions of the 1996
Annual Report to Shareholders is incorporated by reference herein:
"Rate/Volume Analysis" table (page 67) for changes in the
taxable-equivalent interest income and expense for each major category of
interest-earning assets and interest-bearing liabilities.
"Consolidated Average Balances/Interest Earned-Paid/Rates 1992-1996"
table (pages 68-69) for average balance sheet amounts, related
taxable-equivalent interest earned or paid, and related average yields and
rates paid.
"Note 3. Securities" of the Notes to Consolidated Financial
Statements (page 50) for information regarding book values, market values,
maturities, and weighted average yields of securities (by category).
"Note 4. Loans and Leases" of the Notes to the Consolidated Financial
Statements (page 51) for distribution of loans of the Registrant.
"Loan and Lease Maturity" table and "Interest Sensitivity of Loans
Over One Year" table (page 69) for maturities and sensitivities of loans to
changes in interest rates.
"Note 6. Nonperforming Assets" (page 52) and "Note 1. Summary of
Significant Accounting Policies - Loans and Leases" (page 46) of the Notes
to Consolidated Financial Statements for information on nonaccrual, past
due, and restructured loans and the Registrant's policy for placing loans
on nonaccrual status.
"Loans and Leases" section of Management's Discussion and Analysis
(page 28) for information regarding loan concentrations of the Registrant.
"Reserve for Credit Losses" section of Management's Discussion and
Analysis (page 30) for the analysis of loss experience, the allocation of
the reserve for credit losses, and a description of factors which
influenced management's judgment in determining the amount of additions to
the allowance charged to operating expense.
"Consolidated Average Balances/Interest Earned-Paid/Rates 1992-1996"
table (pages 68-69) and the "Funding Sources" section of Management's
Discussion and Analysis (pages 31) for deposit information.
"Selected Financial Highlights" for return on assets, return on
equity, common dividend payout ratio and equity to asset ratio.
"Note 9. Short-term Borrowings" of the Notes to Consolidated Financial
Statements (pages 53-54) for information on short-term borrowings of the
Registrant.
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ITEM 2. PROPERTIES
The Registrant maintains its corporate headquarters at One Federal Street,
Boston, Massachusetts. The registrant also maintains principal offices at 777
Main Street, Hartford, Connecticut, 50 Kennedy Plaza, Providence, Rhode Island,
and 10 Exchange Place, Jersey City, New Jersey.
A subsidiary of the registrant is a partner with certain other parties in
the ownership and management of 50 Kennedy Plaza, Providence, Rhode Island.
Adjacent to the Providence building, Fleet-Southern New England owns a
building which houses the offices of many of the Providence-based
subsidiaries. Fleet-Southern New England also owns an operations center,
located in Providence. Fleet Bank, National Association, owns an operations
center in Scranton, Pennsylvania. The Registrant also owns office buildings
in Buffalo, New York, and Albany, New York, which house operational
facilities of Fleet-New York. Portions of the Fleet-Southern New England and
Fleet-New York buildings are leased to nonaffiliates.
As of December 31, 1996, the Registrant's subsidiaries also operated
approximately 1,600 domestic offices, of which approximately 730 are owned and
870 are leased.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings of the Registrant is incorporated
by reference herein from "Note 17. Commitments, Contingencies and Other
Disclosures" (page 64) of the Registrant's 1996 Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the
fourth quarter of 1996.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
For information regarding the New York Stock Exchange, high and low
quarterly sales prices, and quarterly dividends declared and paid, in each case
on Fleet's common stock, see the "Common Stock Price and Dividend Information"
table (page 68) of the Registrant's 1996 Annual Report to Shareholders, which is
incorporated by reference herein. At December 31, 1996, Fleet had 57,072
stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in "Selected Financial Highlights" of the
Registrant's 1996 Annual Report to Shareholders is incorporated by reference
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth in Management's Discussion and Analysis (pages
19-39) of the Registrant's 1996 Annual Report to Shareholders is incorporated by
reference herein.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains statements relating to future
results of the Corporation (including certain projections and business trends)
that are considered "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures within the Corporation's
market, equity and bond market fluctuations, personal and corporate customers'
bankruptcies, inflation, acquisitions and integrations of
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acquired businesses, as well as other risks and uncertainties detailed from time
to time in the filings of the Corporation with the Securities and Exchange
Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information set forth in the Registrant's 1996 Annual Report
to Shareholders is incorporated by reference herein:
The Consolidated Financial Statements, together with the report thereon by
KPMG Peat Marwick LLP (pages 41-45); the Notes to the Consolidated Financial
Statements (pages 46-66); and the unaudited information presented in the
"Quarterly Summarized Financial Information" table (page 67).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure as defined by Item 304 of Regulation S-K.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" (pages
3-5), "Compensation of Executive Officers -- Severance Agreements and Employment
Contracts" (pages 23-24), and "Other Information Relating to Directors, Nominees
and Executive Officers" (pages 24-25) in the Registrant's Proxy Statement with
respect to the name of each nominee or director, his or her age, his or her
positions and offices with the Registrant, his or her service on the
Registrant's Board, any arrangement or understanding pursuant to which he or she
has or is to be selected as a director or nominee, his or her business
experience, his or her directorships held in other public companies, certain
family relationships and involvement in certain legal proceedings is
incorporated by reference herein.
The names, positions, ages and business experience during the past five
years of the executive officers of the Corporation as of March 1, 1997 are set
forth below. The term of office of each executive officer extends until the
annual meeting of the Board of Directors, and until a successor is chosen and
qualified or until they shall have resigned, retired, or have been removed.
NAME POSITIONS WITH THE CORPORATION AGE
Terrence Murray.... Chairman, President and Chief Executive Officer 57
Robert J. Higgins.. Vice Chairman 51
Gunnar S.
Overstrom, Jr...... Vice Chairman 54
H. Jay Sarles...... Vice Chairman 51
Michael R. Zucchini Vice Chairman 50
David L. Eyles..... Executive Vice President & Chief Credit Policy Officer 57
Eugene M. McQuade.. Executive Vice President & Chief Financial Officer 48
Anne M. Finucane... Senior Vice President 44
Robert B.
Hedges, Sr......... Senior Vice President 38
William
C. Mutterperl...... Senior Vice President, Secretary & General Counsel 50
Anne M. Slattery... Senior Vice President 49
M. Anne Szostak.... Senior Vice President 46
Douglas L. Jacobs.. Treasurer 49
Robert C. Lamb, Jr. Controller and Chief Accounting Officer 41
Brian T. Moynihan.. Managing Director, Corporate Strategy and Development 37
10
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Terrence Murray joined Fleet-RI in 1962. After serving in various
capacities for Fleet-RI and the Corporation, in 1978, he was elected President
of the Corporation. He became Chairman of the Board of Directors and Chief
Executive Officer of the Corporation in 1982. He has continued to serve in that
capacity, except in 1988 following the Norstar acquisition when he served as
President and Chief Operating Officer, and following the Shawmut Merger until
December 1996, when Mr. Murray served as President and Chief Executive Officer.
Mr. Murray has been a Director of Fleet since 1976.
Robert J. Higgins joined Fleet-RI in 1971 and was elected President in
1986. In 1984, he was named a Vice President of the Corporation. In 1989, he
was named an Executive Vice President of the Corporation and Chief Executive
Officer of Fleet-RI. In 1991, Mr. Higgins was named President of Fleet-CT. In
1993, he was named a Vice Chairman of the Corporation and is currently
responsible for the commercial services division.
Gunnar S. Overstrom is a Vice Chairman of the Corporation responsible for
consumer banking and investment services. Mr. Overstrom served as President and
Chief Operating Officer of Shawmut from 1988 to 1995. Prior to the merger in
1995 with Fleet, Mr. Overstrom was Chairman, Chief Executive Officer and a
Director of FNB-CT and President, Chief Executive Officer and a Director of
FNB-MA. Mr. Overstrom joined FNB-CT in 1975 and after serving in various
capacities for FNB-CT, he was elected President in 1986, Chief Executive Officer
in 1988, and in 1992, he became Chairman of FNB-CT and Chief Executive Officer
of FNB-MA. From October 1992 to September 1994, Mr. Overstrom also served as
Chairman of FNB-MA.
H. Jay Sarles is in charge of strategic planning, mergers and acquisitions,
staff support functions and mortgage banking. Mr. Sarles joined Fleet-RI in
1968. In 1980, he was appointed a Vice President of the Corporation. Mr.
Sarles was appointed Executive Vice President of the Corporation in February of
1986. In 1991, Mr. Sarles became President and Chief Executive Officer of Fleet
Banking Group, Inc., the parent company of Fleet-MA and Fleet-CT. In March
1993, he was named a Vice Chairman of the Corporation. In 1996, Mr. Sarles was
named Chairman of Fleet Bank, National Association.
Michael R. Zucchini is responsible for the financial services division and
national consumer businesses. Mr. Zucchini joined the Corporation in 1987 as
Executive Vice President and Chief Information Officer responsible for all data
processing activities of the Corporation and its subsidiaries. Since 1974, Mr.
Zucchini had served in various capacities for General RE Corp., Stamford,
Connecticut. In 1993, Mr. Zucchini was named a Vice Chairman of the
Corporation.
David L. Eyles is an Executive Vice President and Chief Credit Policy
Officer of the Corporation. Mr. Eyles was a Vice Chairman and Chief Credit
Policy Officer of Shawmut, and a Vice Chairman and a Director of FNB-CT and
FNB-MA until 1995. Mr. Eyles joined Shawmut in 1992, following three months of
working with Shawmut as a consultant. Between 1988 and 1991, he was Vice
Chairman and Chairman of the Credit Policy Committee at Mellon Bank
Corporation/Mellon Bank, N.A.
Eugene M. McQuade joined the Corporation in 1992 as Senior Vice
President-Finance. From 1980 to 1991, Mr. McQuade served in various capacities
with Manufacturers Hanover Corporation and Manufacturers Hanover Trust Company,
having served as its Executive Vice President and Controller from 1985 to 1991.
In March 1993, Mr. McQuade was named an Executive Vice President of the
Corporation and in July 1993 was elected as Chief Financial Officer.
Anne M. Finucane joined Fleet in 1995 as Senior Vice President and Director
of Corporate Marketing and Corporate Communications from her own consulting
firm. From 1980 to 1994, Ms. Finucane held various executive positions at the
advertising agency of Hill, Holliday, Connors, Cosmopulos, Inc.
11
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Robert B. Hedges is a Senior Vice President responsible for Fleet's
consumer banking alternative delivery systems, credit card business and data
base management. Mr. Hedges joined Shawmut in 1993 from First Manhattan
Consulting Group, where he was Vice President from 1992 to 1993. From 1983 to
1992, Mr. Hedges was Vice President and banking practice lender of the MAC
Group, New York, a consulting firm specializing in management consulting.
William C. Mutterperl joined Fleet-RI in 1977. In June 1985, Mr.
Mutterperl was named Vice President, Secretary and General Counsel of the
Corporation. In 1989, Mr. Mutterperl was named a Senior Vice President of the
Corporation.
Anne M. Slattery joined the Corporation in 1994 as Senior Vice President
and head of Consumer and Community Banking. From 1969 through 1993, Ms.
Slattery served in various capacities with Citicorp, having last served as a
managing director of U.S. Consumer Banking. In 1996, Ms. Slattery was named
Chairman of Fleet-FSB.
M. Anne Szostak joined Fleet-RI in 1973, where she was an executive vice
president from 1985 to 1988. In 1988 she was named Vice President of Human
Resources for the Corporation. In 1991 she was named Chairman, President and
Chief Executive Officer of Fleet-Maine. In 1994, Ms. Szostak was named a Senior
Vice President, Human Resources, of the Corporation.
Douglas L. Jacobs joined FMG in 1988 as Executive Vice President in
charge of secondary marketing. Prior to joining Fleet, Mr. Jacobs worked in a
variety of positions at Citicorp. Mr. Jacobs was named Director of Capital
Markets in 1994 and in 1995 was named Treasurer. Mr. Jacobs is responsible
for all funding, investment portfolio, capital markets trading and
asset/liability functions.
Robert C. Lamb, Jr. is the controller and chief accounting officer for the
Corporation. Mr. Lamb joined the Corporation in 1986 as controller of its data
processing subsidiary and was subsequently named controller of Fleet Services
Corp. in 1988. Mr. Lamb was appointed controller of another affiliate, Fleet
Credit Corporation, in 1990 and in 1991 was named senior vice president and
chief financial officer of RECOLL Management Corporation, Fleet's management and
collection subsidiary. In April 1993, Mr. Lamb was named controller of the
Corporation.
Brian T. Moynihan joined the Corporation in 1993 as Deputy General Counsel.
In March 1994, he was named Managing Director, Corporate Strategy and
Development for the Corporation. From 1991 to 1993, Mr. Moynihan was a partner
in the law firm of Edwards & Angell, where he had been an associate since 1984.
12
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ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Instruction G of Form 10-K and Item 402 of Regulation S-K,
information set forth in the following sections of the Corporation's Proxy
Statement is incorporated by reference herein: "Compensation of Directors"
(pages 10-11), "Compensation of Executive Officers" (pages 17-24) and
"Compensation Committee Interlocks and Insider Participation" (page 25). Such
incorporation by reference shall not be deemed to specifically incorporate by
reference the information required by Item 402 (a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G of Form 10-K and Item 403 of Regulation S-K,
information set forth in the following sections of the Corporation's Proxy
Statement is incorporated by reference herein: "Security Ownership of Certain
Beneficial Owners" (page 2) and "Security Ownership of Directors and Executive
Officers" (pages 11-12).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G of Form 10-K and Item 403 of Regulation S-K,
information set forth under "Indebtedness and Other Transactions" (pages 24-25)
in the Corporation's Proxy Statement is incorporated by reference herein.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). The financial statements of Fleet required in response to this Item
are listed in response to Item 8 of this Report and are incorporated by
reference herein.
(a)(2). All schedules to the consolidated financial statements required by
Article 9 of Regulation S-X and all other schedules to the financial statements
of the Registrant have been omitted because the information is either not
required, not applicable, or is included in the financial statements or notes
thereto.
(a)(3). See the exhibits listed below.
(b) Six Current Reports on Form 8-K were filed during the fourth quarter
of 1996 to the date of this Report:
- Current Report on Form 8-K dated October 16, 1996, announcing
third quarter earnings.
- Current Report on Form 8-K dated November 14, 1996, filing the
Unaudited Pro Forma Combined Financial Statements as of September
30, 1996, and Notes thereto, in connection with the NatWest
Merger.
- Current Report on Form 8-K dated December 5, 1996, restating
Delaware local counsel's opinion with respect to Fleet Capital
Trusts.
- Current Report on Form 8-K dated December 19, 1996, reporting the
sale of $250,000,000 7.92% Capital Securities.
- Current Report on Form 8-K dated January 15, 1997 announcing
fourth quarter earnings and the sale of Option One, the indirect
lending portfolio and corporate trust business, as well as the
common stock repurchase plan.
- Current Report on Form 8-K dated February 12, 1997 reporting the
exchange of 3.4 million shares of Series V 7.25% Perpetual
Preferred Stock for 3.4 million shares of 8.00% Trust Originated
Preferred Securities on February 4, 1997.
13
<PAGE>
(C) EXHIBIT INDEX
EXHIBIT
NUMBER
2 (a) Agreement and Plan of Merger dated December 19, 1995 between the
Registrant and National Westminster Bank Plc ("NatWest") (1)
2 (b) First Amendment to Agreement and Plan of Merger dated May 1, 1996
between the Registrant and NatWest (2)
3 (a) Restated Articles of Incorporation of the Registrant (3)
3 (b) Certificate of Designations establishing the Registrant's Series V
7.25% Perpetual Preferred Stock (4)
3 (c) Certificate of Designations establishing the Registrant's Series VI
6.75% Perpetual Prefered Stock (5)
3 (d) Certificate of Designations establishing the Registrant's Series VII
Fixed/ Adjustable Rate Cumulative Preferred Stock (6)
3 (e) Certificate of Designations establishing Registrant's Series VIII
Fixed/Adjustable Rate Noncumulative Preferred Stock (7)
3 (f) By Laws of the Registrant, as amended (8)
4 (a) Rights Agreement dated November 21, 1990 as amended by First Amendment
to Rights Agreement dated March 28, 1991, a Second Amendment to Rights
Agreement dated July 12, 1991, and a Third Amendment to Rights
Agreement dated February 20, 1995 (9)
4 (b) Instruments defining the rights of security holders, including
indentures (10)
4 (c) Form of Rights Certificate for stock purchase rights issued to
Whitehall Associates, L.P., and KKR Partners II, L.P. (11)
10 (a)* Form of Change in Control Agreement together with Schedule of Persons
who have entered into such contracts (12)
10 (b)* Form of Change in Control Agreement with Gunnar S. Overstrom, Jr. (13)
10 (c) Stock Purchase Agreement dated July 12, 1991 among Registrant and
Whitehall Associates, L.P., and KKR Partners II, L.P. (14)
10 (d) Exchange Agreement dated December 31, 1995 among Registrant and
Whitehall Associates, L.P. and KKR Partners II, L.P. (15)
10 (e)* Supplemental Compensation Plan for former Norstar directors (16)
10 (f)* Fleet Financial Group Directors Retirement Plan (17)
10 (g)* Supplemental Executive Retirement Plan (18)
10 (h)* 1994 Performance-Based Bonus Plan for the Named Executive Officers(19)
10 (i)* Amended and Restated 1992 Stock Option and Restricted Stock Plan
10 (j)* Employment Agreement dated as of February 20, 1995 between Registrant
and Joel B. Alvord (20)
10 (k)* Employment Agreement dated as of February 20, 1995 between Registrant
and Gunnar S. Overstrom Jr. (21)
10 (l)* Shawmut National Corporation Stock Option and Restricted Stock Award
Plan (assumed by Registrant on November 30, 1995) (22)
10 (m)* Shawmut National Corporation Secondary Stock Option and Restricted
Stock Award Plan (assumed by Registrant on November 30, 1995) (23)
10 (n)* Shawmut National Corporation 1989 Nonemployees Directors' Restricted
Stock Plan (assumed by Registrant on November 30, 1995) (24)
10 (o)* 1995 Restricted Stock Plan (25)
10 (p)* Executive Deferred Compensation Plan No. 1 (26)
10 (q)* Executive Deferred Compensation Plan No. 2 (27)
10 (r)* Executive Supplemental Plan (28)
10 (s)* Retirement Income Assurance Plan (29)
10 (t)* Trust Agreement for the Executive Deferred Compensation Plans
No. 1 and 2 (30)
10 (u)* Trust Agreement for the Executive Supplemental Plan (31)
10 (v)* Trust Agreement for the Retirement Income Assurance Plan and the
Supplemental Executive Retirement Plan (32)
11 Statement re: computation of per share earnings
12 Statement re: computation of ratios
13 1996 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 1996 Financial Data Schedule
27 (a) 1995 Financial Data Schedule
27 (b)` 1994 Financial Data Schedule
- ---------
* Management contract, or compensatory plan or arrangement.
14
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(1) Incorporated by reference to Exhibit 2 of Registrant's Form 8-K
Current Report dated December 19, 1995.
(2) Incorporated by reference to Exhibit 2 of Registrant's Form 8-K
Current Report dated May 1, 1996.
(3) Incorporated by reference to Exhibit 3(a) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(4) Incorporated by reference to Exhibit 4(a) of Registrant's Form
8-K Current Report dated February 21, 1996.
(5) Incorporated by reference to Exhibit 4(b) of Registrant's Form
8-K Current Report dated February 21, 1996.
(6) Incorporated by reference to Exhibit 4(a) of Registrant's Form
8-K Current Report dated March 26, 1996.
(7) Incorporated by reference to Exhibit 4(a) of Registant's Form 8-K
Current Report dated September 27, 1996.
(8) Incorporated by reference to Exhibit 3(b) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(9) Incorporated by reference to Registrant's Registration Statement
Form 8-A dated November 29, 1990, as amended by an Amendment to
Application on Report on Form 8-A dated September 6, 1991, and as
further amended by a Form 8-A/A dated March 17, 1995.
(10) 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.
(11) Incorporated by reference to Exhibit 4(c) of Registrant's Form
8-K Current Report dated July 12, 1991.
(12) Incorporated by reference to Exhibit 10(a) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(13) Incorporated by reference to Exhibit 10(b) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(14) Incorporated by reference to Exhibit 4 of Registrant's Form 8-K
Current Report dated July 12, 1991.
(15) Incorporated by reference to Exhibit 2(b) of Registrant's Form
8-K Current Report dated December 19, 1995.
(16) Incorporated by reference to Exhibit 10(i) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1993.
(17) Incorporated by reference to Exhibit 10(j) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1993.
(18) Incorporated by reference to Exhibit 10(d) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(19) Incorporated by reference to Exhibit 10(h) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1994.
(20) Incorporated by reference to Exhibit 10(j) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
15
<PAGE>
(21) Incorporated by reference to Exhibit 10(k) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10.1 of Shawmut's Form 10-K
Annual Report for the fiscal year ended December 31, 1994.
(23) Incorporated by reference to Exhibit 10(m) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(24) Incorporated by reference to Shawmut's 1989 Proxy Statement dated
March 13, 1989.
(25) Incorporated by reference to Exhibit 10(o) of Registrant's Form
10-K Annual Report for the fiscal year ended December 31, 1995.
(26) Incorporated by reference to Exhibit 10(a) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(27) Incorporated by reference to Exhibit 10(b) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(28) Incorporated by reference to Exhibit 10(c) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(29) Incorporated by reference to Exhibit 10(e) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(30) Incorporated by reference to Exhibit 10(f) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(31) Incorporated by reference to Exhibit 10(g) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(32) Incorporated by reference to Exhibit 10(h) of Registrant's Form
10-Q for the quarter ended June 30, 1996.
(d) Financial Statement Schedules -- None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 /s/ Robert C. Lamb, Jr.
- ------------------------- --------------------------------
EUGENE M. MCQUADE ROBERT C. LAMB, JR.
EXECUTIVE VICE PRESIDENT AND CONTROLLER AND
CHIEF FINANCIAL OFFICER CHIEF ACCOUNTING OFFICER
DATED MARCH 27, 1997 DATED MARCH 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated.
/s/ Terrence Murray /s/ Raymond C. Kennedy
- ------------------------------------ ----------------------------------
TERRENCE MURRAY, CHAIRMAN, PRESIDENT, RAYMOND C. KENNEDY, DIRECTOR
CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ Joel B. Alvord /s/ Robert J. Matura
- ------------------------------------ ----------------------------------
JOEL B. ALVORD, DIRECTOR ROBERT J. MATURA, DIRECTOR
/s/ William Barnet, III /s/ Arthur C. Milot
- ------------------------------------ ----------------------------------
WILLIAM BARNET, III, DIRECTOR ARTHUR C. MILOT, DIRECTOR
/s/ Bradford R. Boss
- ------------------------------------ ----------------------------------
BRADFORD R. BOSS, DIRECTOR THOMAS D. O'CONNOR, DIRECTOR
/s/ Stillman B. Brown /s/ Michael B. Picotte
- ------------------------------------ ----------------------------------
STILLMAN B. BROWN, DIRECTOR MICHAEL B. PICOTTE, DIRECTOR
/s/ Lois D. Rice
- ------------------------------------ ----------------------------------
PAUL J. CHOQUETTE, JR., DIRECTOR LOIS D. RICE, DIRECTOR
/s/ John T. Collins /s/ John R. Riedman
- ------------------------------------ ----------------------------------
JOHN T. COLLINS, DIRECTOR JOHN R. RIEDMAN, DIRECTOR
/s/ Bernard M. Fox /s/ John S. Scott
- ------------------------------------ ----------------------------------
BERNARD M. FOX, DIRECTOR JOHN S. SCOTT, DIRECTOR
/s/ James F. Hardymon /s/ Samuel O. Thier
- ------------------------------------ ----------------------------------
JAMES F. HARDYMON, DIRECTOR SAMUEL O. THIER, DIRECTOR
/s/ Robert M. Kavner /s/ Paul R. Tregurtha
- ------------------------------------ ----------------------------------
ROBERT M. KAVNER, DIRECTOR PAUL R. TREGURTHA, DIRECTOR
17
<PAGE>
EXHIBIT 10(i)
FLEET FINANCIAL GROUP, INC.
AMENDED AND RESTATED 1992 STOCK OPTION AND RESTRICTED STOCK PLAN
1. Purpose
This Amended and Restated 1992 Stock Option and Restricted Stock Plan (the
"Plan") constitutes an amendment and restatement of the 1992 Stock Option and
Restricted Stock Plan which was adopted by the Board of Directors of Fleet
Financial Group, Inc. (the "Corporation") on January 15, 1992, and approved by
the stockholders of the Corporation on April 15, 1992, further amended on
February 16, 1994 and approved by the stockholders on April 20, 1994 (the "1994
Amendment"), and further amended on February 21, 1996 and approved by the
stockholders on April 17, 1996 (the "1996 Amendment"). The purpose of this Plan
is to advance the interests of the Corporation by enhancing the ability of the
Corporation and its subsidiaries to attract and retain officers, employees and
non-employee directors to the Corporation, to reward such individuals for their
contributions and to encourage them to take into account the long-term interests
of the Corporation through interests in the Corporation's Common Stock, $.01 par
value per share (the "Stock"). Any officer, director or employee selected to
receive an award under the Plan is referred to as a "participant".
The Plan provides for the grant of options to acquire Stock ("Options"),
which may be incentive options ("ISOs") within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"), and awards of Stock subject to
certain restrictions ("Restricted Stock"). Under the Plan, Restricted Stock
consists exclusively of (i) Stock subject to performance-based restrictions
intended to comply with the provisions of Section 162(m) of the Code
("Performance-Based Restricted Stock") and (ii) Stock awarded to non-employee
directors in lieu of some or all of the cash compensation such directors would
otherwise receive for their service as directors ("Non-employee Director
Restricted Stock"). Grants of Options and awards of Restricted Stock are
referred to herein as "Awards". The grant of an Option may also involve the
grant of stock appreciation rights as described in Section 6.
2. Administration
The Plan shall be administered, construed and interpreted by the Board of
Directors or by one or more committees appointed by the Board of Directors of
the Corporation (any such committee being hereafter referred to as the
"Committee"). The Committee shall have discretionary authority, not inconsistent
with the express provisions of the Plan, (a) to make Awards to such participants
as the Committee may select; (b) to determine the time or times when Awards
shall be granted and the number of shares of Stock subject to each Award; (c) to
determine which Options are, and which Options are not, intended to be ISOs; (d)
to determine the terms and conditions of each Award; (e) to prescribe the form
or forms of any instruments evidencing Awards and any other instruments required
under the Plan and to change such forms from time to time; (f) to adopt, amend,
and rescind rules and regulations for the administration of the Plan; and (g) to
interpret the Plan and to decide any questions and settle all controversies and
disputes that may arise in connection with the Plan. Such determinations of the
Committee shall be conclusive and shall bind all parties.
No member of the Board of Directors or the Committee shall be liable for
any action or determination made in good faith, and the members shall be
entitled to indemnification and reimbursement in the manner provided in the
Corporation's By-laws.
As used in the Plan, the "fair market value" of Stock as of any date shall
be the mean of the high and low sale prices of the shares of Stock on the
principal exchange on which the Stock is traded on such date or as the Committee
may otherwise determine.
1
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3. Eligibility
Persons eligible to receive Awards under the Plan shall be those key
employees and officers, who, in the opinion of the Committee, are in a position
to make a significant contribution to the success of the Corporation and its
subsidiaries. No person who beneficially owns five percent or more of the
outstanding Stock of the Corporation shall be eligible to participate in the
Plan, to exercise an Option previously granted to him or her or to take full
possession of Restricted Stock previously issued to him or her. A "subsidiary"
of the Corporation shall mean a corporation, whether domestic or foreign, in
which the Corporation shall own, directly or indirectly, a majority of the
capital shares entitled to vote at the annual meeting thereof. Non-employee
directors shall be eligible to receive Awards under the Plan in lieu of some or
all of the cash compensation they would otherwise receive for their service as
directors, to the extent that their eligibility for such Awards would not
disqualify them as disinterested persons for purposes of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
4. Stock Subject to Awards
The Stock subject to Awards under the Plan shall be either authorized but
unissued shares or treasury shares. Subject to adjustment in accordance with the
provisions of Paragraph 5(g) and 7(e) hereof, the total number of shares (the
"Eligible Shares") of such Stock shall be 10,500,000 shares (the number of
shares authorized under the Plan prior to adoption of the 1996 Amendment) plus
an additional 13,000,000 shares. Subject to like adjustment, the total amount of
Stock as to which Options may be granted or Stock Awards may be issued to any
one person participating under the Plan shall not exceed in the aggregate that
number of shares equal to ten percent of the total amount of outstanding Stock
of the Corporation. Subject to like adjustment, the maximum number of shares
issuable upon the exercise of Options that are ISOs shall be 15,000,000.
In the event that any outstanding Option or Restricted Stock Award under
the Plan for any reason expires, is forfeited or is terminated prior to the end
of the period during which Awards may be made under the Plan, the shares of
Stock allocable to the unexercised portion of such Option or the portion of such
Restricted Stock Award that has terminated or been forfeited may again be
subject to award under the Plan. Shares of Stock delivered to the Corporation to
pay the exercise price of any Option or to satisfy the tax withholding
consequences of an Option exercise or the grant or vesting of Restricted Stock
shall again be subject to award under the Plan.
5. Terms and Conditions Applicable to all Options Granted Under the Plan
Options granted pursuant to the Plan shall be evidenced by agreements in
such form as the Committee shall, from time to time, approve, which agreements
shall in substance include and comply with and be subject to the following terms
and conditions:
a. Medium and Time of Payment
The exercise price of an Option shall be payable either (i) in United
States dollars in cash or by check, bank draft or money order payable to the
order of the Corporation, (ii) through the delivery of shares of Stock owned by
the optionee with a fair market value equal to the option price or (iii) by a
combination of (i) and (ii). Fair market value of Stock so delivered shall be
determined on the date of exercise. Unless the Committee otherwise determines,
an optionee may engage in a successive exchange (or series of exchanges) in
which Stock such optionee is entitled to receive upon exercise of an Option may
be simultaneously utilized as payment for the exercise of an additional Option
or Options.
To the extent permitted by applicable law, the Committee may permit payment
of the Option exercise price through arrangements with a brokerage firm under
which such firm, on behalf of the optionee, will pay the exercise price to the
Corporation and the Corporation will promptly deliver to such firm the number of
shares of Stock subject to the Option so that the firm may sell such shares, or
a portion thereof, for the account of the optionee. In addition, the Committee
may permit payment of the
2
<PAGE>
Option exercise price by delivery of an unconditional and irrevocable
undertaking by a broker to deliver promptly to the Corporation sufficient funds
to pay the exercise price as soon as the shares subject to the Option, or a
portion thereof, are sold on behalf of the optionee.
b. Numbers of shares
The Option shall state the total number of shares to which it pertains. No
Option may be exercised in part for fewer than ten shares. Subject to adjustment
as provided in Section 5(g), in any fiscal year of the Corporation, the
aggregate number of shares of Stock of the Corporation as to which Options may
be granted to any one participant shall not exceed 325,000.
c. Option Price
The exercise price of an Option shall be not less than the fair market
value of the shares of Stock covered by the Option on the date of grant except
that (i) in connection with an amendment of an Option which does not reduce the
exercise price of the Option but which, in the opinion of the Committee, is or
may be treated for tax or other technical purposes (including, in particular,
for purposes of Section 16 of the Exchange Act) as a new grant of the Option,
the exercise price of such amended Option may be less than the then fair market
value of the shares of Stock subject to such Option so long as such exercise
price is equal to or greater than the exercise price of the original Option, and
(ii) in connection with an acquisition, consolidation, merger or other
extraordinary transaction, Options may be granted at less than the then fair
market value in order to replace Options previously granted by one or more
parties to such transaction (or their affiliates) so long as the aggregate
spread on such replacement Options for any recipient of such Options is equal to
or less than the aggregate spread on the Options being replaced.
d. Expiration of Options
Each Option granted under the Plan shall expire on a date determined by the
Committee which date may not be more than ten years from the date the Option is
granted.
e. Date of Exercise
The Committee may, in its discretion, provide that an Option may not be
exercised in whole or in part for any period or periods of time specified by the
Committee. Except as may be so provided, any Option may be exercised in whole at
any time, or in part from time to time, during its term. In the case of an
Option not immediately exercisable in full, the Committee may at any time
accelerate the time at which all or any part of the Option may be exercised.
f. Termination of Service
The Committee shall, subject to the provisions of Section 5(d), determine
for each Award of an Option the extent to which the participant (or his legal
representative) shall have the right to exercise the Option following
termination of such participant's service to the Corporation or any subsidiary.
Such provisions may reflect distinctions based on the reasons for the
termination of service and any other relevant factors that the Committee may
determine.
g. Adjustments on Changes in Stock
The aggregate number of shares of Stock as to which Options may be granted
under the Plan, the aggregate number of shares of Stock as to which Options may
be granted to any one such participant, the number of shares of Stock covered by
each outstanding Option, and the exercise price per share of each outstanding
Option, shall be proportionately adjusted by the Committee for any increase or
decrease in the number of issued shares of Stock resulting from subdivisions or
consolidation of shares or other capital adjustments, the payment of a Stock
dividend or any other increase or decrease in such shares effected without
receipt of consideration by the Corporation; provided, however, that no such
adjustment shall be made unless and until the aggregate effect of all such
increases and decreases accruing after the effective date of the 1996 Amendment
shall have increased or decreased the number
3
<PAGE>
of issued shares of Stock by five percent or more; and provided further, that
any fractional shares resulting from any such adjustment shall be eliminated.
Any such determination by the Committee shall be conclusive.
h. Assignability
Except as permitted by the Committee, Options shall be nontransferable
except by the laws of descent and distribution or pursuant to a qualified
domestic relations order. So long as nontransferability of an Option shall be
required to exempt the grant of an Option from the provisions of Section 16(b)
of the Exchange Act, no Option that the Committee intends to grant in a
transaction exempted from such Section may be assigned or transferred except by
will or by the laws of descent and distribution. So long as nontransferability
of ISOs is a requirement of the Code, unless the Committee specifies otherwise,
no Option granted as an ISO may be assigned or transferred except by will, by
the laws of descent and distribution or pursuant to a qualified domestic
relations order.
i. Rights as a Stockholder
An optionee shall have no rights as a stockholder with respect to shares
covered by an Option until the date the shares are issued and only after such
shares are fully paid. No adjustment will be made for dividends or other rights
the record date for which is prior to the date of such issuance.
j. Tax Withholding
The Committee shall have the right to require that the participant
exercising the Option remit to the Corporation an amount sufficient to satisfy
any federal, state, or local withholding tax requirements (or make other
arrangements satisfactory to the Committee with regard to such taxes) prior to
the delivery of any Stock pursuant to the exercise of the Option. If permitted
by the Committee, either at the time of the grant of the Option or in connection
with its exercise, the participant may elect, at such time and in such manner as
the Committee may prescribe, to satisfy such withholding obligation by (i)
delivering Stock having a fair market value equal to such withholding
obligation, or (ii) requesting that the Corporation withhold from the shares of
Stock to be delivered upon the exercise a number of shares of Stock having a
fair market value equal to such withholding obligation.
In the case of an ISO, the Committee may require as a condition of exercise
that the participant exercising the Option agree to inform the Corporation
promptly of any disposition (within the meaning of section 424(c) of the Code
and the regulations thereunder) of Stock received upon exercise.
k. Change in Control
Notwithstanding the provisions of any Option that provide for its exercise
in installments, such Option shall become immediately exercisable in the event
of a change in control or offer to effect a change in control. For purposes of
this Paragraph 5(k), a "change in control" shall mean either of the following
events; (a) the acquisition of the beneficial ownership (as that term is defined
in Rule 13d-3 under the Exchange Act) of 20 percent or more of the voting
securities of the Corporation by purchase, merger, consolidation or otherwise by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Exchange Act; provided, however, a change in control shall not be deemed
to have occurred if the acquisition of such securities is by one or more
employee benefit plans of the Corporation or (b) in any two-year period,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason, to constitute at least a
majority of the Board of Directors of the Corporation at, or at any time prior
to the conclusion of, such two-year period. The term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision as to whether a
change in control or offer to effect a change in control has occurred shall be
made by a majority of the Continuing Directors (as defined in the Restated
Articles of Incorporation as in effect on February 21, 1996) and shall be
conclusive and binding.
4
<PAGE>
Notwithstanding Paragraph 8 of the Plan, this provision shall not be
amended or revoked in any manner without the affirmative vote of 80% of the
Board of Directors and a majority of the Continuing Directors (as defined
above).
l. Additional Restrictions and Conditions
The Committee may impose such other restrictions and conditions (in
addition to those required by the provisions of this Plan) on any Award of
Options hereunder and may waive any such additional restrictions and conditions,
so long as (i) any such additional restrictions and conditions are consistent
with the terms of this Plan and (ii) such waiver does not waive any restriction
or condition required by the provisions of this Plan.
m. Repricing
The Committee shall not, without further approval of the stockholders of
the Corporation, (i) authorize the amendment of any outstanding Option to reduce
the exercise price of such Option or (ii) grant a replacement Option upon the
surrender and cancellation of a previously granted Option for the purpose of
reducing the exercise price of such Option. Nothing contained in this section
shall affect the Committee's right to make the adjustments permitted under
Section 5(g).
6. Stock Appreciation Rights
At the discretion of the Committee, a participant who has been granted an
Option may also be granted the right to require the Corporation to purchase all
or a portion of such Option for cancellation (a "stock appreciation right"). To
the extent that the participant exercises this right, the Corporation shall pay
him in cash and/or Stock the excess of the fair market value of each share of
Stock covered by the Option (or a portion thereof purchased), determined on the
date the election is made, over the exercise price of the Option. The election
shall be made by delivering written notice thereof to the Committee. Shares
subject to the Option so purchased shall not again be available for purposes of
the Plan. Subject to adjustment as provided in Section 5(g), in any fiscal year
of the Corporation, the aggregate number of shares of Stock as to which stock
appreciation rights may be granted to any one person participating under the
Plan shall not exceed 325,000.
7. Terms and Conditions Applicable to Restricted Stock Awards
Awards of Restricted Stock may be Performance-Based Restricted Stock, as
described in Section 7(i), or Non-employee Director Restricted Stock, as
described in Section 7(j). The provisions of Sections 7(a) through 7(h) are
applicable to all shares of Restricted Stock.
a. Number of Shares
The total number of shares of Restricted Stock that may be awarded under
the Plan on a cumulative basis shall not exceed one percent of the Stock of the
Corporation outstanding at the date of any such Award. In any fiscal year of the
Corporation, the aggregate number of shares of Stock as to which Restricted
Stock Awards may be granted to any one person participating under the Plan shall
not exceed 100,000.
Each Restricted Stock Award under the Plan shall be evidenced by a stock
certificate of the Corporation, registered in the name of the participant,
accompanied by an agreement in such form as the Committee shall prescribe from
time to time. The Restricted Stock Awards shall comply with the following terms
and conditions and with such other terms and conditions not inconsistent with
the terms of this Plan as the Committee, in its discretion, shall establish.
b. Stock Legends; Prohibition on Disposition
Certificates for shares of Restricted Stock shall bear an appropriate
legend referring to the restrictions to which they are subject, and any attempt
to dispose of any such shares of Stock in
5
<PAGE>
contravention of such restrictions shall be null and void and without effect.
The certificates representing shares of Restricted Stock shall be held by the
Corporation until the restrictions are satisfied.
c. Termination of Service
The Committee shall determine the extent to which the restrictions on any
Restricted Stock Award shall lapse upon the termination of the participant's
service to the Corporation and its subsidiaries, due to death, disability,
retirement or for any other reason. If the restrictions on all or any portion of
a Restricted Stock Award shall not lapse, the participant, or in the event of
his death, his personal representative, shall forthwith deliver to the Secretary
of the Corporation such instruments of transfer, if any, as may reasonably be
required to transfer the shares back to the Corporation.
d. Change in Control
Upon the occurrence of a change in control or an offer to effect a change
in control of the Corporation, as determined in Paragraph 5(k) of this Plan, all
restrictions then outstanding with respect to shares of Restricted Stock shall
automatically expire and be of no further force and effect and all certificates
representing such shares of Stock shall be delivered to the participant.
e. Adjustment for Changes in Stock
The Committee shall proportionately adjust the aggregate number of shares
of Stock as to which Restricted Stock Awards may be granted to participants
under the Plan and the aggregate number of shares of Stock as to which
Restricted Stock Awards may be granted to any one such person for any increase
or decrease in the number of issued shares of Stock resulting from the
subdivision or consolidation of shares or other capital adjustments, the payment
of a stock dividend, or any other increase or decrease in such shares without
the payment of consideration; provided, however, that no such adjustment shall
be made unless and until the aggregate effect of all such increases and
decreases accruing after the effective date of the 1996 Amendment shall have
increased or decreased the number of issued shares of Stock of the Corporation
by five percent or more; and provided, further, that any fractional shares
resulting from any such adjustment shall be eliminated. Any such determination
by the Committee shall be conclusive. Shares of Stock issued with respect to any
outstanding Awards as a result of any of the foregoing events shall be subject
to the same restrictions.
f. Effect of Attempted Transfer
No benefit payable or interest in any Restricted Stock Award shall be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge and any such attempted action shall be void and no
such interest in any Restricted Stock Award shall be in any manner liable for or
subject to debts, contracts, liabilities, engagements or torts of any
participant or his beneficiary. If any participant or beneficiary shall become
bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber or charge any benefit payable under or interest in any
Restricted Stock Award, then the Committee, in its discretion, may hold or apply
such benefit or interest or any part thereof to or for the benefit of such
participant or his beneficiary, his spouse, children, blood relatives or other
dependents, or any of them, in any such manner and such proportions as the
Committee may consider proper.
g. Payment of Taxes
The Corporation shall have the right to deduct from any Restricted Stock
Award or other payment hereunder any amount that federal, state, local or
foreign tax law requires to be withheld with respect to such Award or payment or
to require that the participant, prior to or simultaneously with the Corporation
incurring any obligation to withhold any such amount, pay such amount to the
Corporation in cash or, at the option of the Corporation, shares of Stock (which
shall be valued at the fair market value on the date of payment). There is no
obligation under the Plan that any participant be advised of the existence of
the tax or the amount required to be withheld. Without limiting the generality
of the foregoing, in any case where it is determined that tax is required to be
withheld in connection with the
6
<PAGE>
issuance, transfer or delivery of shares of Stock under this Plan, the
Corporation may, pursuant to such rules as the Committee may establish, reduce
the number of shares so issued, transferred or delivered by such number of
shares as the Corporation may deem appropriate in its sole discretion to comply
with such withholding. Notwithstanding any other provision of this Plan, the
Committee may impose such conditions on the payment of any withholding
obligations as may be required to satisfy applicable regulatory requirements,
including without limitation, those under the Exchange Act.
h. Rights as a Stockholder
A participant shall have the right to receive dividends on shares of Stock
subject to the Restricted Stock Award during the applicable Restricted Period,
to vote the Stock subject to the award and to enjoy all other stockholder
rights, except that the employee shall not be entitled to delivery of the stock
certificate until the applicable Restricted Period shall have lapsed (if at
all).
i. Performance-Based Restricted Stock
Awards of Performance-Based Restricted Stock are intended to qualify as
performance-based for the purposes of Section 162(m) of the Code. The Committee
shall provide that shares of Stock issued to a participant in connection with an
Award of Performance-Based Restricted Stock may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of, except by will or
the laws of descent and distribution, for such period as the Committee shall
determine, beginning on the date on which the Award is granted (the "Restricted
Period") and that the Restricted Period applicable to such Restricted Stock
shall lapse (if at all) only if certain preestablished objectives are attained.
Performance goals may be based on any of the following criteria: (i) earnings or
earnings per share, (ii) return on equity, (iii) return on assets, (iv)
revenues, (v) expenses, (vi) one or more operating ratios, (vii) stock price,
(viii) stockholder return, (ix) market share, (x) charge-offs, (xi) credit
quality, (xii) reductions in non-performing assets, (xiii) customer satisfaction
measures and (xiv) the accomplishment of mergers, acquisitions, dispositions or
similar extraordinary business transactions. The Committee shall establish one
or more objective performance goals for each such Award of Restricted Stock on
the date of grant. The performance goals selected in any case need not be
applicable across the Corporation, but may be particular to an individual's
function or business unit. The Committee shall determine whether such
performance goals are attained and such determination shall be final and
conclusive. In the event that the performance goals are not met, the Restricted
Stock shall be forfeited and transferred to, and reacquired by, the Corporation
at no cost to the Corporation.
The Committee may impose such other restrictions and conditions (in
addition to the performance-based restrictions described above) on any Award of
shares of Performance-Based Restricted Stock as the Committee deems appropriate
and may waive any such additional restrictions and conditions, so long as such
waiver does not waive any restriction described in the previous paragraph.
Nothing herein shall limit the Committee's ability to reduce the amount payable
under an Award upon the attainment of the performance goal(s), provided,
however, that the Committee shall have no right under any circumstance to
increase the amount payable under, or waive compliance with, any applicable
performance goal(s).
j. Non-employee Director Restricted Stock
Awards of Non-employee Director Restricted Stock shall be made exclusively
to directors of the Corporation who are not employees of the Corporation or any
of its subsidiaries. The Committee shall provide that shares issued in
connection with an Award of Non-employee Director Restricted Stock may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, until the earlier of (i)
the director's retirement as a director of the Corporation at or after the
retirement age specified in the Corporation's By-laws, (ii) the director's death
or total and permanent disability or (iii) the director's resignation from the
Board of Directors of the Corporation with the consent of such Board. Shares of
Non-employee Director Restricted Stock may be awarded only in lieu of cash
compensation that would otherwise have been payable to the
7
<PAGE>
director receiving such Award and such cash compensation shall be reduced by the
fair market value of the shares of Stock so awarded on the date of such Award.
The Committee may impose such other restrictions and conditions (in
addition to the restrictions described above) on any Award of shares of
Non-employee Director Restricted Stock as the Committee deems appropriate and
may waive any such additional restrictions and conditions applicable to such
shares so long as such waiver does not waive any restriction described in the
preceding paragraph.
8. Amendment; Applicability to Outstanding Options
The Committee may alter, amend or suspend the Plan at any time or alter and
amend Awards granted hereunder; provided, however, that no such amendment may,
without the consent of any participant to whom an Option shall theretofore have
been granted or to whom a Restricted Stock Award shall theretofore have been
issued, adversely affect the right of such participant under such Award. Unless
the Committee otherwise determines, any amendment to this Plan effected by the
1996 Amendment shall not apply to any Option outstanding on the date of
stockholder approval of the 1996 Amendment held by a participant subject to
Section 16(a) of the Exchange Act if the effect of such application would be to
cause the Option to be deemed to have been regranted for purposes of Rule 16b-3
under the Exchange Act, and provided, further, that no material amendment of the
Plan may, without stockholder approval thereof, become effective if such
approval is required for purposes of Rule 16b-3 under the Exchange Act.
9. Termination
Options and Restricted Stock Awards may be granted pursuant to the Plan
from time to time within a period of ten years from January 15, 1992. The Board
of Directors may terminate the Plan at any time, and no Options shall be granted
nor Restricted Stock awarded thereafter. Such termination shall not affect the
validity of any Award then outstanding.
10. Legality of Grant
The granting of any Award under this Plan and the issuance or transfer of
Options and shares of Stock pursuant hereto are subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
regulatory or government agency (including, without limitation, no-action
positions of the Securities and Exchange Commission) which may, in the opinion
of counsel for the Corporation, be necessary or advisable in connection
therewith. Without limiting the generality of the foregoing, no Awards may be
granted under this Plan and no Options or shares shall be issued by the
Corporation, nor cash payments made by the Corporation pursuant to or in
connection with any such Award unless and until in any such case all legal
requirements applicable to the issuance or payment have, in the opinion of
counsel for the Corporation, been complied with. In connection with any Option
or Stock issuance or transfer, the person acquiring the shares or the Option
shall, if requested by the Corporation, give assurance satisfactory to counsel
to the Corporation with respect to such matters as the Corporation may deem
desirable to assure compliance with all applicable legal requirements.
11. Effective Date
The 1996 Amendment shall become effective upon the adoption thereof by the
affirmative vote of a majority of Stock, present in person or represented by
proxy, and entitled to vote thereon at the 1996 Annual Meeting of Stockholders
when a quorum is present.
8
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
COMPUTATIONS OF EQUIVALENT SHARES AND PER SHARE EARNINGS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
For the Twelve months Ended December 31
--------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ---------------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 262,619,983 262,619,983 243,796,880 243,796,880 243,027,593 243,027,593
Additional shares due to:
Stock options 2,382,998 3,273,320 1,415,727 2,074,661 1,952,805 1,952,805
Warrants 3,916,363 4,500,693 3,549,616 3,980,828 3,814,077 3,814,077
Dual convertible preferred
stock - - 16,033,994 16,033,994 16,033,994 16,033,994
----------- ----------- ----------- ----------- ------------ -----------
Total equivalent shares 268,919,344 270,393,996 264,796,217 265,886,363 264,828,469 264,828,469
----------- ----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ----------- ------------ -----------
Earnings per share:
Net income $ 1,138,789 $ 1,138,789 $ 609,953 $ 609,953 $ 848,875 $ 848,875
Less: Preferred stock
dividends 69,413 69,413 36,618 36,618 30,557 30,557
Exchange of KKR
preferred stock - - 156,965 156,965 - -
Premium paid on
redemption of Series
II Preferred Stock 2,630 2,630 - - - -
----------- ----------- ----------- ----------- ----------- ------------
Adjusted net income $ 1,066,746 $ 1,066,746 $ 416,370 $ 416,370 $ 818,318 $ 818,318
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
Total equivalent shares 268,919,344 270,393,996 264,796,217 265,886,363 264,828,469 264,828,469
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
Earnings per share
on net income $ 3.97 $ 3.95 $ 1.57 $ 1.57 $ 3.09 $ 3.09
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED DIVIDENDS
EXCLUDING INTEREST ON DEPOSITS
(THOUSANDS)
1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes,
extraordinary credit and cumulative
effect of accounting charges $1,930,598 $1,033,756 $1,379,639 $1,094,456 $617,369
Adjustments:
(a) Fixed Charges:
(1) Interest on borrowed funds 685,056 1,278,598 990,395 751,754 638,430
(2) 1/3 of Rent 52,264 49,921 50,597 52,254 49,197
(b) Preferred dividends 117,676 62,064 48,859 60,365 65,658
----------- ----------- ----------- ----------- ------------
(c) Adjusted earnings $2,785,594 $2,424,339 $2,469,490 $1,958,829 $1,370,654
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Fixed charges and preferred dividends $ 854,996 $1,390,583 $1,089,851 $864,373 $753,285
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Adjusted earnings/fixed charges 3.26x 1.74x 2.27x 2.27x 1.82x
----------- ----------- ----------- ----------- ------------
<CAPTION>
INCLUDING INTEREST ON DEPOSITS
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes,
extraordinary credit and cumulative
effect of accounting charges $1,930,598 $1,033,756 $1,379,639 $1,094,456 $ 617,369
Adjustments:
(a) Fixed Charges:
(1) Interest on borrowed funds 685,056 1,278,598 990,395 751,754 638,430
(2) 1/3 of Rent 52,264 49,921 50,597 52,254 49,197
(3) Interest on deposits 1,753,723 1,726,403 1,170,532 1,165,046 1,698,804
(b) Preferred dividends 117,676 62,064 48,859 60,365 65,658
----------- ----------- ----------- ----------- ------------
(c) Adjusted earnings $4,539,317 $4,150,742 $3,640,022 $3,123,875 $3,069,458
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Fixed charges and preferred dividends $2,608,719 $ 3,116,986 $2,260,383 $ 2,029,419 $2,452,089
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Adjusted earnings/fixed charges 1.74x 1.33x 1.61x 1.54x 1.25x
----------- ----------- ----------- ----------- ------------
</TABLE>
<PAGE>
EXHIBIT 12 (continued)
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS
(THOUSANDS)
1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes,
extraordinary credit and cumulative
effect of accounting charges $1,930,598 $1,033,756 $1,379,639 $1,094,456 $617,369
Adjustments:
(a) Fixed Charges:
(1) Interest on borrowed funds 685,056 1,278,598 990,395 751,754 638,430
(2) 1/3 of Rent 52,264 49,921 50,597 52,254 49,197
----------- ----------- ----------- ----------- ------------
(b) Adjusted earnings $2,667,918 $2,362,275 $2,420,631 $1,898,464 $1,304,996
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Fixed charges $ 737,320 $1,328,519 $1,040,992 $804,008 $687,627
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Adjusted earnings/fixed charges 3.62x 1.78x 2.33x 2.36x 1.90x
----------- ----------- ----------- ----------- ------------
<CAPTION>
INCLUDING INTEREST ON DEPOSITS
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes,
extraordinary credit and cumulative
effect of accounting charges $1,930,598 $1,033,756 $1,379,639 $1,094,456 $ 617,369
Adjustments:
(a) Fixed Charges:
(1) Interest on borrowed funds 685,056 1,278,598 990,395 751,754 638,430
(2) 1/3 of Rent 52,264 49,921 50,597 52,254 49,197
(3) Interest on deposits 1,753,723 1,726,403 1,170,532 1,165,046 1,698,804
----------- ----------- ----------- ----------- ------------
(b) Adjusted earnings $4,421,641 $4,088,678 $3,591,163 $3,063,510 $3,003,800
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Fixed charges $2,491,043 $ 3,054,922 $2,211,524 $ 1,969,054 $2,386,431
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Adjusted earnings/fixed charges 1.78x 1.34x 1.62x 1.56x 1.26x
----------- ----------- ----------- ----------- ------------
</TABLE>
<PAGE>
Fleet Financial Group
1996 Annual Report
Building on Success
[LOGO]
<PAGE>
Selected
Financial Highlights
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts
Prepared on an FTE basis 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year
Interest income $ 5,878 $ 6,069 $ 5,260 $ 5,086 $ 5,318
Interest expense 2,439 3,005 2,161 1,917 2,337
Net interest income 3,439 3,064 3,099 3,169 2,981
Provision for credit losses 213 101 65 327 728
Securities gains (losses) 43 32 (1) 295 301
Noninterest income 2,201 1,855 1,558 1,883 1,897
Noninterest expense 3,460 3,740 3,160 3,585 3,488
Net income 1,139 610 849 817 366
Per Common Share
Earnings $ 3.95 $ 1.57 $ 3.09 $ 3.03 $1.40
Market value (year-end) 49.88 40.75 32.38 33.38 32.75
Cash dividends declared 1.74 1.63 1.40 1.03 0.83
Book value (year-end) 24.66 22.71 20.68 21.76 17.65
At Year-End
Assets $85,518 $84,432 $81,026 $79,250 $76,188
Securities 8,680 19,331 21,141 24,839 19,936
Loans and leases 58,844 51,525 46,035 43,713 43,722
Reserve for credit losses 1,488 1,321 1,496 1,669 1,937
Deposits 67,071 57,122 55,528 49,827 52,729
Short-term borrowings 3,627 12,569 12,586 16,376 11,446
Long-term debt 5,114 6,481 5,931 5,217 5,007
Total stockholders' equity 7,415 6,365 5,471 5,965 4,735
Operating Ratios
Return on average common equity 17.43% 9.32% 15.66% 17.11% 9.12%
Return on average assets 1.37 .74 1.07 1.09 .51
Common dividend payout ratio 42.8 90.4 36.8 24.6 31.5
Net interest margin 4.81 4.12 4.30 4.63 4.57
Efficiency ratio 61.3 62.5 63.8 68.8 70.6
Common equity-to-assets (year-end) 7.56 7.07 6.06 6.65 5.15
Average total equity-to-assets 8.45 7.91 7.27 7.05 6.14
=================================================
</TABLE>
<PAGE>
Dear Stockholder,
I am proud to report that the achievements of 1996 represented a major step
toward realizing the potential of the incredibly rich franchise Fleet has built
over the past decade. Our goal for 1997 is to build a great company worthy of
our market position and with the capabilities to continue the process of wealth
creation for you our shareholders, as well as our customers, our communities,
and our employees.
Today, with $85 billion in assets and net income of $1.1 billion,
Fleet--currently the 11th largest U.S. bank holding company--is a strong and
profitable institution, well-positioned to meet the current and future needs of
our customers. And those customers--now six million strong--are among our
greatest assets. Our core New England franchise, where Fleet is the undisputed
banking leader, includes some of the nation's most attractive markets based on
the demographics and financial services needs of their populations.
We further enhanced the attractive demographic profile of our customer
base in May of last year when we entered the New Jersey market through the
NatWest acquisition, which also strengthened our Long Island presence. Today,
the four largest states where Fleet does business rank as the wealthiest four in
the nation. The full seven states where Fleet's banking franchise is located
represent 16% of U.S. gross domestic product. In fact, 15% of the U.S.
population lives within 20 miles of a Fleet branch, which puts into perspective
the significance of Fleet's presence in a very large market.
To help leverage Fleet's size and fuel continued earnings growth, we made
several important investments this year, many of which involved technology
initiatives.
For example, we are currently developing a state-of-the-art customer
database, which will allow us to better understand each of our retail and
corporate customers. This will enable us to match financial solutions with their
specific needs and to offer more choices in how, when, and where they do
business with us.
Our new Fleet Web site, up and running since March 1996--at
http://www.fleet.com--allows customers to obtain product information on-line
and, if they choose, to complete a personal profile enabling us to recommend
specific products and opportunities to them.
We've launched our PC banking technology with Managing Your Money(R)
software, and made other on-line banking investments, including the Integrion
partnership to offer interactive banking and electronic commerce services
beginning in 1997.
We enhanced our branch network, currently 1,200 strong, by creating "Cross
Border Banking from Fleet," a program that allows customers to walk into a Fleet
branch in any of eight states and conduct business exactly as if they were in
the Fleet branch in their hometown.
1
<PAGE>
"Our goal for 1997 is to build a great company worthy of our market position."
In Boston, we opened our first Investor Center. This facility offers our
customers a comprehensive array of financial solutions under one roof--a feat
only a large institution can provide.
Our scale also enhances our ability to attract industry talent. In 1996,
we continued to do that, augmenting our current management with individuals who
possess expertise in such areas as corporate finance and retirement planning.
That expertise will enable us to accelerate the development of new products and
services, and thereby enhance our financial performance.
Our accomplishments last year were evident in our solid financial results.
In addition to $1.1 billion in net income, our profitability ratios were strong,
with return on assets and on common equity of 1.37% and 17.43%, respectively.
Reconfiguration of our balance sheet, made possible by the Shawmut and NatWest
transactions, enabled us to efficiently leverage our capital and widen our net
interest margin. Reflecting the strength of the year's results, the Board of
Directors approved a 5% dividend increase, to $.45 per quarter from $.43, as
well as a program to repurchase up to 20 million shares of common stock during
1997.
We are also proud of the solid progress of our continuing diversity
initiative. Fleet is committed to building a work environment throughout the
company that supports and nurtures a diverse workforce. In that regard, 1996 was
a foundation year. Accomplishments to date include the participation of more
than 800 employees--among them 90% of Fleet's senior managers--in diversity
awareness workshops; ongoing meetings of the Corporate Diversity Council devoted
to providing direction, reviewing progress, and discussing issues; and the
hiring of a full-time ombudsman. Further reflecting Fleet's strong commitment to
employee diversity, all executive management bonuses are now linked to the
success of our diversity efforts as well as our business results.
Notwithstanding our strength and progress, we have a lot of work to do in
1997. Our goal is to grow revenues by doing what we do better than anyone else.
Our success will largely depend on how well we know our customers--and help them
meet their financial goals by leveraging our product breadth, delivery channel
options, and industry expertise. Whether the goal is to save for college, buy a
home, plan for retirement, or grow a business, Fleet has the breadth of products
to tailor an effective financial solution.
Communicating all the ways we can serve our customers, to all our
customers, is one of our biggest challenges--and growth opportunities. We know
that selling one more product to each of our customers--given the size of our
current customer base--will have a major positive impact on our financial
performance. As the Fleet brand becomes firmly entrenched in our markets, our
customers will increasingly turn to Fleet as a trusted provider of financial
solutions to real-life problems.
2
<PAGE>
[PHOTO]
While we continue to grow our core businesses, we also will make tough
decisions about businesses that do not meet our profitability hurdles. In 1996,
we sold Fleet Finance and Fleet Real Estate Capital. We recently announced our
intention to divest our Option One Mortgage Corporation, indirect auto lending,
and corporate trust business units. We also modified the business strategies of
our credit card and mortgage origination businesses to enhance their
performance.
The consolidation of the banking industry will undoubtedly continue, but
for Fleet, the consolidation and integration process in our core New England
region is now substantially behind us. In 1997 and beyond, we plan to devote
unprecedented attention to building value-added relationships with our consumer,
small-business, and corporate customers, earning their trust and winning their
business by anticipating, meeting, and exceeding their need for financial
products and services.
At the end of 1996, Joel Alvord retired as chairman of Fleet Financial
Group. Joel joined Fleet following the Shawmut merger and did a terrific job in
helping us integrate the two companies. Joel is an astute banker who has been in
the industry for more than 34 years. I want to express my sincerest thanks to
him for his leadership and contributions. Fortunately, Joel is not leaving Fleet
completely. He will continue to serve on the Board of Directors and will chair
the Executive Committee. We look forward to continuing to tap into his insight
and expertise.
I also want to thank Fleet's employees, whose skill, hard work, and
dedication have enabled Fleet to make significant progress in building our
franchise and achieving our business goals. In 1997, we will continue to depend
on these outstanding people to meet the financial needs of our customers.
Finally, I want to thank our shareholders, directors, customers, and
communities, whose loyal support contributes immeasurably to Fleet's ongoing
success.
/s/ Terrence Murray
Terrence Murray
Chairman, President, and
Chief Executive Officer
3
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
RON MITTENDORF ANNE SLATTERY FILOMENA PAUL DELFINO
Consumer Lending Director of SOYSTER Branch Banking
Division Manager Retail Banking Business Banking Division Manager
Division Manager
- --------------------------------------------------------------------------------
<PAGE>
"We're using technology and our extensive multistate branch network to bring
together Fleet's retail and small-business strengths to focus on customer needs.
This is the foundation for future growth."
Retail
Banking
Fleet has 1,200 retail branches from Maine to New Jersey. In each community it
serves, the Fleet branch is a welcome sign and a local hub for a vast array of
products and services meeting the financial services needs of our millions of
individual and small-business customers.
Our customer base is a demographically diverse group, with equally diverse
business goals. They come to us on their terms--whether it be through the phone
center, on the Internet or home PC, at an ATM, or in the branch. Customers are
attracted to Fleet because we know who they are, what they want, and how they
want to bank.
We've redefined the role and revenue potential of our branches. Each
branch is a sales outlet to cross-sell total financial solutions, including
mortgages, debit and credit cards, mutual funds, brokerage services, insurance,
annuities, retirement savings, and loans. Cross Border Banking, which allows
customers to walk into any Fleet branch and conduct business as if they were in
a branch in their home state, has created even greater access and convenience
for our customers.
Bringing Technological Sophistication to Small Businesses Small business is the
fastest-growing segment of the U.S. economy. Small businesses require a
full-service financial partner that understands their needs and provides the
tools to help them grow. Designated by the U.S. Small Business Administration
(SBA) as the nation's first financial institution to receive Regional Preferred
Lender status, Fleet offers a significant breadth of small-business services.
These services include daily Fleet AM Fax(R) business updates, cash management
and payroll services, automated tax payment, investment and 401(k) services, SBA
and other guaranteed loans, Easy Business Credit, and tailored financing for
larger loan needs.
Technology brings Fleet's dedicated small-business resources together in a
way that generates value for the customer. One example is our RADAR (Rules-based
Application to Detect and Access Risk) system, which now monitors almost 40,000
commercial loan accounts each day, identifying and prioritizing loans that need
attention and providing daily management reporting. RADAR not only improves our
asset quality and risk-management techniques, but builds a customer behavior
database that supports automated loan renewals and preapproved credit offers--a
key capability to growing and expanding our business.
Through the effective application of technology, our unwavering focus on
our customers, and the largest multistate branch and ATM network in the
Northeast, we're committed to growing all our retail banking relationships.
[PHOTO]
The Fleet Investor Center in Boston offers a broad array of financial solutions
under one roof to individuals and small businesses.
5
- --------------------------------------------------------------------------------
Continually building customer value
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
BOB Director of
HEDGES Direct Financial
Services
- --------------------------------------------------------------------------------
<PAGE>
"Technology is a means of strengthening and deepening the one-on-one
relationships we have with each of our customers."
New
Technologies
Through the application of technology, driven by the needs of our customers, we
have redefined the nature and accessibility of banking with Fleet. Technology,
in and of itself, is ineffective unless it addresses the priorities of our
customers and is integrated into the overall growth strategy of the company. Our
investment in leading edge technology has and will continue to play an important
role in our leadership position in the marketplace. It also determines the
quality of the relationships we have with our individual, small-business, and
corporate customers. Superior information, and the tools to employ it, are
enabling us to transform our customer relationships from transaction-oriented
encounters to broader, more profitable long-term relationships.
The Customer Impact of Technology Fleet is developing data warehouse and
telesales capabilities to bring us closer to our customers and give us a clearer
picture of who they are and what they need. Using this information we can
develop targeted financial solutions that are tailored specifically for unique
individual needs.
We've taken major strides in creating multiple distribution channels to
provide more convenient access to Fleet. We are responding more quickly to our
customers in whatever way they find most comfortable.
As a recognized leader in the application of banking technology, Fleet was
on the ground floor of bringing powerful new banking products and emerging
technology to our customers with the introduction of PC banking services and
Internet capabilities. Consumers now have the convenience of PC and Internet
banking services with access to Fleet 24 hours a day, seven days a week. Through
a direct on-line link, consumers can request on-line information about specific
Fleet products and services of interest to them as well as manage their personal
and business finances, check and transfer balances, pay bills, manage and plan
their budgets and investments, and plan and prepare taxes. In addition, they can
comfortably obtain information and support regarding mortgages, student loans,
and refinancing options.
As the pace of our customers' busy lives at home and work continues to
accelerate, Fleet will keep pace, responding quickly and efficiently to their
evolving financial needs. Through technology we are now delivering convenience
in a way that no bank could just a few years ago.
[PHOTO]
Fleet is processing 30% of all its loan applications over the phone...the
equivalent of 285 branches.
7
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Reaching our customers
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
TIM Managing Director,
CONWAY Corporate Finance
- --------------------------------------------------------------------------------
<PAGE>
"Fleet's new corporate finance capabilities allow us to provide innovative
financial solutions and enhance our position as the preferred business bank."
Corporate
Finance
Delivering corporate finance product capabilities to our business customers is a
logical step in the evolution of our full-service, relationship banking
strategy. By providing a broad range of financial advisory and capital markets
solutions to our corporate customers, Fleet is able to help business managers
and owners craft financial solutions that support their business objectives and
create value for their shareholders. With the resources of Fleet Financial Group
and the experience of our professional staff, Fleet corporate finance delivers
the capabilities of a major investment bank with the thoughtful and personal
approach of a true financial advisor.
Strategic Staffing With big prizes at stake, and stiff competition to win them,
we didn't try to build our corporate banking capability from scratch. Instead,
we hired a widely respected team of financial professionals with strong records
of achievement. The ability to operate in a collaborative environment was
another critical attribute in order to fully leverage Fleet's existing customer
base, which already includes more than 17,000 corporate relationships. Since its
formation in March 1996, the corporate finance group's responsiveness and
innovative thinking has already generated high-visibility successes.
Tangible Results We leveraged our 10-year, multiproduct relationship with
manufacturer Columbus McKinnon by helping it move quickly to exploit a strategic
business opportunity, raising $325 million to finance its 1996 acquisition of
Yale International.
The corporate finance unit also participated in a very important
transaction in the life of PSC, Inc., a manufacturer of laser bar-code reading
devices and long-time Fleet prospect. PSC had the opportunity to become the
leading producer of bar-code scanners by acquiring a competitor that would
double its size. Fleet quickly delivered an integrated financial solution,
tapping the bank market for $100 million and raising an additional $30 million
in a subordinated private placement. PSC clinched the deal, and Fleet acquired a
new customer.
Aggressive Attitude We've developed strong product capabilities, including bank
loan syndications, private placements, asset securitization, mergers and
acquisitions, and financial advisory services. These product capabilities
provide access to large, rapidly growing capital markets and Fleet is pursuing
them aggressively as a means of making additional sources of capital available
to our customers. We are now actively structuring underwriting and executing
these corporate financings, significantly enhancing our position in the markets.
The combination of our extensive corporate relationship base and our newly
created corporate finance product capabilities produced outstanding results in
1996 and represents exciting growth prospects for 1997 and beyond.
[PHOTO]
Fleet's new corporate finance unit now offers products to our customers with
extensive access to the capital markets.
9
- --------------------------------------------------------------------------------
Creating new solutions
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
TOM O'NEILL MIKE NOBLE GARY ANDERSON
CEO and President, Managing Director, Managing Director,
Fleet Investment Advisors, Fleet Investment Services Retirement Plan Sales
Managing Director and and Services
Chief Investment Officer
- --------------------------------------------------------------------------------
<PAGE>
"Fleet's continued success as a provider of total investment management services
derives from some of the best talent in the industry and our significant
investment in trading technology and asset management techniques."
Investment
Services
With $48 billion under management, including nearly $10 billion in mutual fund
assets, Fleet is a leading provider of investment management services for
individuals, corporations, government agencies, not-for-profit organizations,
and endowments nationwide. The strength of this business is clearly evident in
our ranking among the 30 largest U.S. investment managers as measured by assets.
In 1996, we embarked on a variety of strategies to enhance our
capabilities in this increasingly complex and highly competitive business. We
invested in technology, tripled our equity research staff, and enticed some of
the industry's most prominent fixed-income professionals to join our team.
Additionally, we have placed new emphasis on our management of assets and trust
services for not-for-profit institutions across the Fleet franchise.
Retail Investments One of the highlights of Fleet's investment management
business in 1996 was the increase in Galaxy Mutual Fund assets. This growth can
be traced to the strong performance of many of the company's equity funds as
well as Fleet's distribution power. In fact, equity fund assets of our Galaxy
family increased by 36.5% last year. Further growth is expected as Fleet's
retail banking customers begin to understand the value of not only our banking
expertise, but that of our investment management services. Fleet Brokerage
Securities, which offers discount brokerage services to more than 300,000
customers nationwide and ranks as one of the largest bank-owned discount
brokerage units with 1996 revenues of $45 million, is already realizing the
benefits of leveraging Fleet's retail customers.
Private Banking and Trust Services In addition to strengthening our research and
investment capabilities, we have continued to expand and improve the array of
reasonably priced products and services we make available to our affluent
customers. During 1996, we upgraded the resources available to our staff of
sales and service personnel and strategically positioned them in key markets.
Fleet has become the preeminent provider of private banking and trust services
in our franchise area.
Retirement Plan Services We're beginning to leverage Fleet's leadership position
in large corporate, middle-market, and small-business banking by providing an
innovative product for defined benefit and defined contribution plan services.
The introduction of a comprehensive retirement 401(k) program for small
businesses is just one of the ways we are using Fleet's position as the nation's
sixth largest small-business lender as a means of growing our investment
services business.
[PHOTO]
Fleet installed a state-of-the-art trading room, complete with the latest in
technology and portfolio management tools. This investment has enabled us to
capitalize on the rapid changes in today's global and domestic securities
markets.
11
- --------------------------------------------------------------------------------
Expanding on success
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
ANNE Director
FINUCANE Corporate Marketing
and Communications
- --------------------------------------------------------------------------------
<PAGE>
"Fleet is positioned as a total financial solutions company with relevant,
customized products and services, multiple delivery channels, and a corporate
culture focused on success for our customers, our employees, and our
shareholders."
Marketing/
Communications
Given the enormous changes that have taken place in our industry and within the
Fleet organization, it is more important than ever that we firmly establish and
communicate the Fleet brand in all our markets. Our intent is not to impose upon
the marketplace a slogan about who we are. Rather, our approach is more
strategic--to focus on our customers and to position ourselves as a complete
financial solutions company--adding value for our existing customers and
attracting new ones by offering meaningful products and services through more
channels of delivery than anyone else.
Understanding the Customer To maximize our relationships with our customers, we
developed comprehensive customer segmentation and market research programs in
1996. This marketing investment has enabled us to define customer similarities,
understand their differences, and recognize product and service opportunities.
Our ability to deliver meaningful options and solutions to our customers
ultimately determines our value to them. We have focused our marketing efforts
on communicating that value throughout our corporation and with each of our
businesses, with an aggressive mass marketing advertising program, highly
effective targeted direct marketing, and comprehensive community relations and
employee communication programs.
The Right Message We have defined our areas of opportunity by matching the needs
of our customers to both the attributes and services of the Fleet organization
and we have set the course for 1997. We will communicate the Fleet brand value,
throughout our franchise, with an integrated campaign that combines advertising,
direct marketing, public relations, and employee communication. It will focus on
our understanding of customer needs and Fleet's unique ability to provide
relevant financial solutions today. We are also focused on helping to create
meaningful community solutions through supporting the grassroots efforts of
community organizations. One such program, Fleet Youth All-Stars, launched in
1996, inspired more than 5,000 young people throughout our franchise to
volunteer their time to community service.
Generating Results The return on our investment in research and strong marketing
approaches can already be felt. Customer favorability and satisfaction are
strong, our customer retention levels have outpaced industry averages, and our
products and services provide solutions to our customers' financial concerns.
[PHOTO]
Fleet Youth All-Stars inspired more than 5,000 young people throughout the
Northeast to volunteer their time to meaningful community service.
13
- --------------------------------------------------------------------------------
Defining our brand
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
MIKE Managing Director,
CURRAN Global Services
Division
- --------------------------------------------------------------------------------
<PAGE>
"With each acquisition, we were able to integrate the best of theirs with the
best of ours resulting in the new whole being greater, both quantitatively and
qualitatively, than the sum of its parts."
Best
Practices
Bank mergers and acquisitions add shareholder value in various ways, including
cost savings, geographic expansion, efficiencies of scale, and business
synergies. Fleet has realized all of these benefits during its acquisition
history. Business synergies, extracting the "best of the best," are particularly
satisfying. The acquired institution adds future revenue generation
opportunities and the business complement strengthens the product and services
offering more efficiently than building the expertise from scratch.
Our goal during the Shawmut and NatWest integrations has been to ensure
that the new Fleet represents the best of the best from each franchise. This has
meant offering our customers the best products and services and retaining the
most talented employees who will help Fleet grow its businesses, resulting in
revenue opportunities for the new Fleet that are significantly greater than the
potential of any of the predecessor banks as independent entities.
Leveraging Technology and Scale Leveraging Fleet's technology is key to our
growth. Image-enabled technology is revolutionizing the cash management process
and is rapidly becoming the industry standard by which bank services are
measured going forward. In 1996, we reengineered highly sophisticated
document-imaging technology, previously developed by Shawmut for its larger
corporate clients, and migrated it into Fleet's mainstream collection and
disbursement products. Doing so significantly benefited Fleet's large
middle-market franchise and transformed emerging technology for a limited market
into broad-based revenue-generating products with tremendous growth potential.
The acquisition of NatWest had an immediate positive impact on the global
services division's international offerings, adding a state-of-the-art
operational facility that provides a full array of international and domestic
funds transfer capabilities. Fleet's small-business customers also benefited
from the Shawmut transaction with daily access to their latest account
information via fax through Fleet AM Fax(R), a product originally offered by
Shawmut.
Our continued efforts in identifying the best of the best in products and
services have positioned Fleet as an industrywide leader, in several businesses.
Global services and business banking are just two examples where Fleet has
turned best practice studies into practical comprehensive solutions for our
customers.
[PHOTO]
Shawmut's sophisticated document-imaging software enhanced Fleet's broad-based
cash management product set, which is offering Fleet customers the technology to
expedite treasury decisions.
15
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Managing new capabilities
<PAGE>
[PHOTO]
- --------------------------------------------------------------------------------
AGNES Director,
BUNDY Corporate Community
Development
- --------------------------------------------------------------------------------
<PAGE>
"The small-business owners we serve not only provide jobs and strengthen
communities, they represent tomorrow's mainstream banking customers."
Community
Development
Meeting the Needs of Our Communities Fleet is committed to the economic
development of communities throughout the Northeast. As a result, we made one of
the banking industry's largest investments in community development. Fleet
promotes greater access to credit for businesses and consumers in low- and
moderate-income neighborhoods and communities through our $8.5-billion INCITY
outreach initiative. Our priority is to create opportunities for consumers and
women- and minority-owned small businesses who have been underserved by
traditional banks. Their success is the engine of growth that will carry our
communities into the next century. In addition, Fleet's affordable housing
programs are making homeownership a reality for individuals and families in
need. Overall, our innovations in risk management enable us to be more
responsive to both our customers and the marketplace.
We made great progress in our INCITY initiative to date, providing $5.6
billion in consumer, small-business, and residential mortgage loans. We also
expanded our commitment by $500 million to support communities in New Jersey and
downstate New York, and met with more than 100 community-based organizations to
ensure that our involvement best meets their needs and the needs of the
community.
Building Partnerships In addition to lending, the community development unit
initiates many other programs to fuel economic revitalization. We work closely
with local community-based organizations to provide technical assistance and
counseling to individuals seeking to open their own businesses, to own their own
home, or to obtain an education.
In 1996, more than 700 people, primarily women, attended "Women & Money,"
a four-part seminar series that Fleet cosponsored to empower women with
information about starting their own small businesses, managing personal
finances, and saving for retirement. As a result of these seminars, we not only
generated goodwill, but we also received more than 250 inquiries about
small-business loans.
The Fleet Community Development Corporation invested in young people who
will be in a position to give back to their communities as future leaders of
business. In partnership with the National Foundation for Teaching
Entrepreneurship, we provided at-risk youth from urban areas with the basics of
entrepreneurship and the concepts of self-esteem and self-sufficiency in a
free-market society.
Fleet's active involvement in community development is not a matter of
regulated policy. It makes sense from a business perspective and as a member of
the very communities we support.
[PHOTO]
INCITY has promoted progress through partnerships within our banking franchise.
17
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Building new bridges
<PAGE>
Financial
Table of Contents
19 Management's Discussion and Analysis
40 Management's Report on Financial Statements
41 Report of Independent Auditors
Consolidated Financial Statements
42 Consolidated Statements of Income
43 Consolidated Balance Sheets
44 Consolidated Statements of Changes in Stockholders' Equity
45 Consolidated Statements of Cash Flows
46 Notes to Consolidated Financial Statements
Supplemental Financial Information
67 Rate/Volume Analysis
67 Quarterly Summarized Financial Information
68 Consolidated Average Balances/Interest Earned-Paid/Rates 1992-1996
68 Common Stock Price and Dividend Information
69 Loan and Lease Maturity
69 Interest Sensitivity of Loans Over One Year
<PAGE>
Management's Discussion
and Analysis
OVERVIEW
Fleet Financial Group (Fleet, FFG or corporation) reported net income for 1996
of $1.14 billion, or $3.95 per share, compared to the $610 million, or $1.57 per
share, reported in 1995. Return on assets (ROA) and return on equity (ROE)
improved during 1996 and were 1.37% and 17.43%, respectively, compared to .74%
and 9.32%, respectively, for 1995. Excluding the impact of special charges, 1995
earnings and earnings per share were $1.04 billion and $3.77, respectively.
Return on assets and return on equity were 1.26% and 16.29%, respectively, in
1995, excluding these special charges.
[The following table was represented as a line chart in the printed material.]
Earnings Per Share
(excluding special charges in 1995)
1993 1994 1995 1996
- ---- ---- ---- ----
$3.03 $3.09 $3.77 $3.95
Growth in both net income and earnings per share during 1996 primarily reflects
the impact of the corporation's acquisition on May 1, 1996, of NatWest Bank,
N.A. (NatWest), as well as cost reductions related to the 1995 merger with
Shawmut National Corporation (Shawmut Merger) that occurred on November 30,
1995.
Net interest income on a fully taxable equivalent (FTE) basis totaled $3.4
billion for 1996 and $3.1 billion for 1995. The net interest margin for 1996 was
4.81% compared to 4.12% in 1995. The increase of 69 basis points was due
principally to the balance sheet restructuring undertaken in connection with the
NatWest acquisition, which allowed the corporation to replace lower-yielding
securities and higher-cost sources of funds with a more favorable mix of loans
and core deposits, as well as various programs to sell lower-margin assets and
pay down higher-cost funding.
The provision for credit losses was $213 million in 1996 compared to $101
million in 1995, with the increase due to a higher level of net charge-offs
during 1996, primarily as a result of the addition of NatWest.
Noninterest income increased $346 million to $2.2 billion in 1996. The
increase was due primarily to the NatWest acquisition, which contributed $200
million of noninterest income. Noninterest income was also positively impacted
by increases of 10% or more in several business segments, including mortgage
banking revenue, venture capital revenue, brokerage fees and commissions,
student loan servicing fees and investment services revenue.
Noninterest expense totaled $3.46 billion for 1996, compared to $3.07
billion in 1995, which excludes the $665 million of special charges previously
mentioned. The increase is primarily attributable to the acquisition of NatWest,
offset by cost reductions related to the Shawmut Merger. Excluding NatWest,
operating noninterest expense (defined as total noninterest expense, less
mortgage servicing rights and intangible asset amortization) declined $133
million.
Total loans and leases at December 31, 1996, were $58.8 billion, compared
to $51.5 billion at December 31, 1995. The increase is attributable to the
acquisition of NatWest, which provided $13 billion of loans, partially offset by
$1.8 billion of loan divestitures related to the Shawmut Merger and the
securitization of $2 billion of residential real estate loans during 1996 for
liquidity purposes.
Total deposits increased $10 billion to $67.1 billion at December 31,
1996. The increase was due primarily to the acquisition of NatWest, which
provided $18 billion of deposits, partially offset by the reduction of
higher-cost wholesale time deposits related to a balance sheet restructuring
program and the regulatory required divestitures of $2.4 billion of deposits as
a result of the Shawmut Merger.
On January 15, 1997, the corporation announced its intention to sell three
business units: Option One Mortgage Corporation (Option One); our indirect auto
lending operation; and our corporate trust business. The corporation does not
expect the disposition of these business units to have a material impact on its
operating results. Also, on January 15, 1997, the Board of Directors approved
the repurchase of up to 20 million shares of common stock during the subsequent
12 months.
19
<PAGE>
INCOME STATEMENT ANALYSIS
Net Interest Income
Year ended December 31
FTE basis
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Interest income $5,842 $6,025 $5,208
Tax-equivalent adjustment 36 44 52
Interest expense 2,439 3,005 2,161
- --------------------------------------------------------------------------------
Net interest income $3,439 $3,064 $3,099
================================
Net interest income on an FTE basis totaled $3.4 billion for the year ended
December 31, 1996, compared to $3.1 billion for 1995. The $375 million increase
was principally the result of the NatWest acquisition, offset in part by a
balance sheet restructuring program and divestitures of $2.4 billion in deposits
and $1.8 billion in loans as a result of the Shawmut Merger. In anticipation of
the NatWest acquisition, Fleet underwent a major balance sheet restructuring
during early 1996. Fleet sold lower-yielding securities and used the proceeds to
pay down short-term borrowings. Following the balance sheet restructuring
program, these securities and borrowings were replaced with higher-yielding
earning assets, principally loans, and lower-cost sources of funds, principally
deposits, from NatWest.
Net Interest Margin and
Interest-Rate Spread
Year ended December 31 1996 1995
- ---------------------------------------------------------------------------
FTE basis Average Average
Dollars in millions Balance Rate Balance Rate
- ---------------------------------------------------------------------------
Securities $11,425 6.45% $20,594 6.18%
Loans and leases 56,074 8.61 51,043 9.03
Mortgages held for resale 1,878 7.87 1,459 7.96
Other 2,120 7.75 1,084 5.74
- ---------------------------------------------------------------------------
Total interest-earning
assets 71,497 8.22 74,180 8.17
- ---------------------------------------------------------------------------
Deposits 47,334 3.70 43,120 4.00
Short-term borrowings 5,844 5.05 14,046 5.69
Long-term debt 5,486 7.10 6,581 7.26
- ---------------------------------------------------------------------------
Total interest-bearing
liabilities 58,664 4.16 63,747 4.71
- ---------------------------------------------------------------------------
Interest-rate spread 4.06 3.46
Interest-free sources
of funds 12,833 10,433
- ---------------------------------------------------------------------------
Total sources of funds $71,497 3.41% $74,180 4.05%
- ---------------------------------------------------------------------------
Net interest margin 4.81% 4.12%
=======================================
Net interest margin is a measurement of how efficiently the corporation manages
the difference between the yield on earning assets and the rate paid on funds
used to support those assets, as well as the overall mix of interest-earning
assets and interest-bearing liabilities.
Net interest margin is affected by several factors including fluctuations
in the overall interest-rate environment, funding strategies of the corporation,
the mix of interest-earning assets, interest-bearing liabilities and
noninterest-bearing liabilities, as well as interest-rate derivatives that are
used to manage interest-rate risk.
The net interest margin for 1996 increased 69 basis points to 4.81% from
4.12% in 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 $9.2 billion decrease in lower-yielding average securities,
coupled with the $8.2 billion decrease in higher-cost average short-term
borrowings. The securities and short-term borrowings were replaced by more
favorable yielding loans and lower-cost core deposits acquired from NatWest. The
corporation expects that under the current interest-rate environment the net
interest margin will increase modestly during 1997, due to a full year's impact
of the NatWest acquisition.
[The following table was represented as a pie graph in the printed material.]
Average Earning Asset Mix
1996 1995
---- ----
Securities 16.0% 27.8%
Loans and Leases 78.4% 68.8%
Other 5.6% 3.4%
20
<PAGE>
Average securities decreased from $20.6 billion, or 28% of average
interest-earning assets, in 1995 to $11.4 billion, or 16% of average
interest-earning assets, in 1996 resulting from the corporation's balance sheet
restructuring program.
Average loans and leases increased $5.1 billion to $56.1 billion in 1996,
from $51.0 billion in 1995, due primarily to the NatWest acquisition. Offsetting
this growth were the divestiture of $1.5 billion of average loans relating to
the Shawmut Merger, the securitization on average of $1.3 billion of residential
real estate loans during 1996, as well as the reclassification of $1.7 billion,
primarily loans at Fleet Finance, to assets held for sale or accelerated
disposition during the fourth quarter of 1995. The decrease in the yield on
loans and leases from 9.03% in 1995 to 8.61% in 1996 corresponds to the decline
in the average prime rate from 1995 to 1996.
Average interest-bearing deposits increased $4.2 billion in 1996 due to
the NatWest acquisition, which contributed $13 billion in interest-bearing
deposits. This increase was partially offset by several factors including the
divestiture of $2.1 billion on average of deposits in connection with the
Shawmut Merger and proceeds generated from securities sold as part of the
balance sheet restructuring program, which were used to reduce higher-cost
wholesale time deposits. The interest rate paid on average deposits decreased to
3.70% in 1996 from 4.00% in 1995. The decrease in cost of deposits reflects the
NatWest acquisition, which increased the level of lower-cost core deposits, as
well as an overall decline in interest rates in 1996 when compared to 1995.
The $8.2 billion decrease in average short-term borrowings is attributable
to the use of proceeds from the sales of securities to pay down short-term
borrowings and the acquisition of NatWest, which enabled the corporation to
replace higher-cost short-term borrowings with lower-cost core deposits.
The contribution to the net interest margin from interest-free sources of
funds during 1996 was 75 basis points, compared to 66 basis points in 1995. This
increase is due primarily to the demand deposits acquired from NatWest, which
resulted in a higher percentage of interest-free sources of funds as a
percentage of total sources of funds.
Noninterest Income
Year ended December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Services charges, fees
and commissions $ 592 $ 486 $ 441
Mortgage banking revenue 560 511 391
Investment services revenue 372 322 294
Venture capital revenue 106 36 6
Student loan servicing fees 98 72 54
Securities gains (losses) 43 32 (1)
Gain from branch divestitures 92 -- --
Other noninterest income 338 396 373
- --------------------------------------------------------------------------------
Total noninterest income $2,201 $1,855 $ 1,558
=================================
Noninterest income totaled $2.20 billion for 1996, up 19% when compared to $1.85
billion for 1995. The increase of $346 million over the prior year was due
primarily to the NatWest acquisition, which contributed $200 million of
noninterest income.
As a result of intensified competition and changing customer needs in the
banking industry, Fleet has made strategic decisions directed at future revenue
producing activities. Throughout the past several years, the corporation has
developed new products and service lines and broadened existing products and
service lines to provide additional revenue streams. These product lines include
mutual funds and annuity products, venture capital, direct banking and corporate
finance and were developed to complement Fleet's traditional banking products
and services. These new and broadened lines were reflected in the 8% increase,
excluding the impact of NatWest, in noninterest income for 1996 versus 1995.
Additionally, the initiatives mentioned above contributed to increases in
mortgage banking revenue, venture capital revenue, student loan servicing fees
and investment services revenue. Further, the corporation realized $92 million
(pretax) of branch divestiture gains associated with the Shawmut Merger.
Service charges, fees and commissions totaled $592 million in 1996
compared to $486 million in 1995, an increase of 22%. Included in service
charges, fees and commissions are service charges on deposits, letter of credit
fees, electronic banking and network fees, safe deposit income and other fees.
The increase is principally a result of the NatWest acquisition, which accounted
for $130 million of the increase. Excluding NatWest, service charges on deposits
decreased $13 million due primarily to the aforementioned branch divestitures.
21
<PAGE>
Mortgage Banking Revenue
Year ended December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Net loan servicing revenue $395 $342 $285
Mortgage production revenue 132 98 31
Gains on sales of mortgage servicing 33 71 75
- --------------------------------------------------------------------------------
Total mortgage banking revenue $560 $511 $391
==========================
Mortgage banking revenue of $560 million in 1996 increased $49 million, or 10%,
over the $511 million recorded in 1995. The increase in mortgage banking revenue
is largely due to higher net loan servicing revenue, which increased 15% from
$342 million in 1995 to $395 million in 1996 as a result of an increase in the
corporation's loan servicing portfolio from $116 billion at December 31, 1995,
to $122 billion at December 31, 1996.
[The following table was represented as a bar graph in the printed material.]
Mortgage Servicing Portfolio
(dollars in billions)
1992 1993 1994 1995 1996
- ---- ---- ---- ---- ----
$63 $77 $89 $116 $122
The increase in the mortgage servicing portfolio was due to $22 billion of
originations of mortgage loans by Fleet Mortgage Group (FMG) and correspondent
lenders, as well as $5 billion of servicing obtained in the NatWest acquisition,
partially offset by principal pay-downs and sales of servicing. The
corporation's strategy is to continue to grow the servicing portfolio in order
to benefit from economies of scale and consolidations taking place in the
mortgage servicing industry. Additionally, mortgage production revenue increased
35% from $98 million in 1995 to $132 million in 1996. Such revenue includes
income derived from the loan origination process and gains on sales of mortgage
originations, both of which have been positively impacted by a more favorable
interest-rate environment. Option One contributed $53 million of mortgage
banking revenue in 1996, the majority of which was mortgage production revenue.
Additionally, the corporation sold mortgage servicing rights (MSRs) of
approximately $5 billion and $7 billion in 1996 and 1995, respectively,
resulting in pretax gains of $33 million and $71 million, respectively. The
corporation's decision to sell mortgage servicing rights depends on a variety of
factors, including the available markets and current market prices for such
servicing rights and the working capital requirements of FMG. The likelihood or
profitability of any such sales in the future cannot be predicted.
Investment Services Revenue
Year ended December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Personal financial services $181 $175 $160
Retirement plan services 59 52 47
Retail investments 46 17 16
Not-for-profit institutional services 41 33 30
Corporate trust 35 33 30
Investment management 10 12 11
- --------------------------------------------------------------------------------
Total investment services revenue $372 $322 $294
==========================
Investment services revenue increased 16% in 1996 to $372 million. The increase
was due to continued strong sales of mutual funds and annuity products and an
increase in the overall value of assets under management and administration due
to growth aided by a strong equity market. Assets under management increased
from $43 billion at December 31, 1995 to $48 billion at December 31, 1996. As
previously mentioned, the corporation has announced its intention to sell most
of its corporate trust business, such business generated $20-$25 million of
revenue in 1996.
Venture capital revenue increased $70 million to $106 million in 1996, as
Fleet Private Equity, the corporation's venture capital business, continued to
experience increases in the value of its equity capital investments. At December
31, 1996, the value of such investments totaled $259 million. The corporation's
ability to continue to experience increases in the value of these investments
depends on a variety of factors, including the state of the economy and equity
markets. The strong performance of the equity markets in 1995 and 1996 may not
be indicative of 1997's performance; therefore, the likelihood of such gains in
the future cannot be predicted.
The $26 million increase in student loan servicing fees in 1996 is
attributable to increased levels of servicing and originations as well as the
extension of the corporation's direct loan servicing contracts with the
government at AFSA Data Corp. (AFSA), the corporation's student loan servicing
business. AFSA services 4.5 million accounts nationwide and is the largest
third-party student loan servicer in the United States, with $23 billion in
loans serviced.
22
<PAGE>
As a condition to the regulatory approval of the Shawmut Merger, the
corporation divested certain branches, loans and deposits and realized $92
million (pretax) of gains from these divestitures during 1996.
Other noninterest income decreased $58 million to $338 million in 1996,
due principally to gains that were recognized in 1995 attributable to
interest-rate contracts used in managing prepayment risk associated with the
corporation's mortgage servicing portfolio that offset increased mortgage
servicing rights amortization due to a declining interest-rate environment.
Noninterest Expense
Year ended December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Employee compensation and benefits $1,607 $1,448 $1,428
Occupancy 284 250 265
Equipment 266 209 188
Mortgage servicing rights amortization 188 190 90
Intangible assets amortization 135 105 65
Legal and other professional 131 102 95
Marketing 97 93 84
Telephone 84 61 54
Printing and mailing 74 58 54
Other 594 559 652
- --------------------------------------------------------------------------------
Total noninterest expense,
excluding special charges 3,460 3,075 2,975
Loss on assets held for sale or
accelerated disposition -- 175 --
Merger and restructuring-
related charges -- 490 185
- --------------------------------------------------------------------------------
Total noninterest expense $3,460 $3,740 $3,160
==============================
Critical to Fleet's goals of maximizing long-term profitability and increasing
shareholder value is the corporation's expense management strategy. The
corporation has implemented various programs in the past several years to reduce
expenses. These expense management strategies will continue to be an ongoing
process used to help Fleet meet and maintain its goals. This successful expense
management is illustrated by the improvement in the corporation's efficiency
ratio.
[The following table was represented as a bar graph in the printed material.]
Efficiency Ratio
1992 1993 1994 1995 1996
- ---- ---- ---- ---- ----
70.6% 68.8% 63.8% 62.5% 61.3%
Total noninterest expense was $3.46 billion in 1996 and $3.07 billion in 1995,
excluding $665 million of special charges in 1995. The $385 million increase, or
approximately 13%, was due to the acquisition of NatWest, which added $504
million of noninterest expense during 1996. Excluding NatWest, noninterest
expense declined $139 million, or 4.5%, from 1995. These decreases resulted
primarily from the ongoing integration of the Shawmut franchise and other
smaller acquisitions completed during 1995.
Employee compensation and benefits increased $159 million to $1,607
million in 1996. Excluding NatWest, employee compensation and benefits decreased
$83 million, or 5.7%, as a result of ongoing integration of the Shawmut
franchise.
The net $2 million decrease in mortgage servicing rights amortization is
due primarily to a recovery of the MSR valuation reserve, partially offset by
the amortization of the net investment in interest-rate contracts purchased to
manage the prepayment risk associated with the mortgage servicing portfolio,
coupled with an increase in MSR amortization due to a $6 billion increase in the
servicing portfolio. The corporation's results could be adversely affected by
declines in interest rates, which could result in unanticipated prepayments of
the mortgage loans underlying its MSRs. Prepayments in excess of those
anticipated at the time MSRs are recorded result in decreased anticipated future
net servicing income. Such decreases in expected future net servicing income
could result in accelerated amortization and/or impairment of MSRs. However, the
corporation uses various risk-management instruments to protect a substantial
portion of MSRs against prepayment risk.
Intangible asset amortization increased $30 million from 1995, as $660
million of goodwill was recognized in connection with the NatWest acquisition
during 1996. Additional goodwill related to the NatWest acquisition may be
recognized in future periods based on an earnout calculation.
23
<PAGE>
The contingent earnout provision stipulates that additional payments be made
annually based upon a percentage of the level of earnings from the NatWest
franchise, not to exceed $560 million during an eight-year period.
Equipment expense, excluding NatWest, increased $19 million during 1996
primarily due to capital expenditures for technological upgrades and
improvements, as well as to support the integration of acquired companies.
Occupancy expense, excluding NatWest, decreased $22 million from 1995 due
primarily to ongoing successful integration of the Shawmut Merger and other
smaller acquisitions completed during 1995, as well as branch divestitures.
Legal and other professional expense increased $20 million during 1996,
excluding NatWest, due to Shawmut Merger integration expenses and various
strategic initiatives.
In connection with the NatWest purchase price, the corporation recognized
a restructuring liability in 1996 of $250 million. This liability includes
personnel charges of $130 million, which relate primarily to the costs of
employee severance, termination of certain employee benefit plans and employee
assistance for separated employees. Facilities charges of $42 million are the
result of the consolidation of branch offices as well as back-office operations,
and consist of lease-termination costs, write-downs of owned properties to be
sold and other facilities-related costs. Data processing costs of $27 million
consist primarily of the write-off of duplicate or incompatible systems hardware
and software. Other merger expenses of $51 million consist primarily of
transaction-related costs, such as professional and other fees.
During 1996, $43 million of integration costs were incurred relating to
the Shawmut and NatWest transactions but under recent accounting pronouncements
have not been charged against the merger and restructuring accrual. It is
anticipated that approximately $14 million of additional costs will be incurred
in 1997.
Income Taxes
In 1996, the corporation recognized income tax expense of $792 million, an
effective rate of 41.0%. Tax expense for 1995 was $424 million, an effective tax
rate of 40.9%.
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: Commercial Financial Services, Consumer Banking, Financial
Services and National Consumer, Investment Services, New York-Metro, Treasury
and All Other.
Management accounting policies are in place for assigning expenses that
are not directly incurred by businesses, such as overhead, operations and
technology expense. Additionally, equity, loan loss provision and loan loss
reserves are assigned on an economic basis. The corporation has developed a
risk-adjusted methodology that quantifies risk types (e.g., credit, operating,
market, fiduciary) within business units and assigns capital accordingly. Within
business units, assets and liabilities are match-funded utilizing similar
maturity, liquidity and repricing information. Management accounting concepts
are periodically refined and results may be restated to reflect methodological
and/or management organization changes. Results by line of business for the
years ended December 31, 1996 and 1995 are presented below:
Selected Financial Highlights by Line of Business
<TABLE>
<CAPTION>
Average Loans
Dollars in millions Net Income ROE ROA Average Assets and Leases
Year ended December 31 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Financial Services $ 219 $ 195 15.79% 15.07% 0.87% 0.76% $25,061 $25,681 $23,453 $24,304
Consumer Banking 261 310 17.84 23.38 1.81 2.17 14,444 14,236 12,310 12,184
Financial Services and
National Consumer 139 159 22.20 20.18 1.80 2.55 7,748 6,214 1,029 1,136
Investment Services 79 72 46.25 34.57 4.72 4.20 1,670 1,726 1,447 1,317
New York-Metro(a) 145 -- 10.04 -- 0.86 -- 15,579 -- 10,981 --
Treasury 124 142 40.71 23.19 0.70 0.43 17,843 33,427 6,799 9,277
Merger-related charges and
other nonrecurring items -- (438) -- N/M -- N/M -- -- -- --
All Other 172 170 N/M N/M N/M N/M 779 1,443 55 2,825
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,139 $ 610 17.43% 9.32% 1.37% 0.74% $82,124 $82,727 $56,074 $51,043
====================================================================================================
</TABLE>
(a) This unit includes acquired businesses of NatWest as well as the
corporation's existing metropolitan New York franchise for the eight
months subsequent to the NatWest acquisition. Prior period results for the
corporation's existing business in the metropolitan New York market are
reported as part of the appropriate business unit. During 1995, the
corporation's existing metropolitan New York franchise earned
approximately $27 million, predominantly from the consumer banking unit.
24
<PAGE>
Commercial Financial Services
Commercial Financial Services provides a full range of credit and banking
services to more than 40,000 corporate, middle-market, real estate and leasing
customers. In addition to traditional credit products, cash management, trade
services, corporate trust, foreign exchange, interest-rate protection and
investment products are provided to Fleet's commercial customers. The client
base is strongly rooted in the Northeast, where it holds the leading positions
in most core markets. Additionally, the Commercial Financial Services unit has
several specialty businesses with national scope. The diversified commercial and
industrial loan portfolio at Fleet is the fourth largest in the nation. Also,
Fleet is the nation's sixth largest middle-market lender. Fleet Capital-Leasing,
Fleet's leasing subsidiary, ranks among the top five bank-owned equipment
lessors in the country. In addition, Fleet Capital is a leading national
asset-based lending company. The recently formed Corporate Finance group
provides full-service financial solutions to wholesale customers. Offering a
broad array of products, this group provides capital markets financing, mergers
and acquisition advisory services, private placements, securitized debt, loan
syndications and balance sheet restructuring. Commercial Financial Services
contributed $219 million of earnings in 1996, an increase of $24 million
compared to 1995, resulting from deposit growth coupled with increased revenue
generated by cash management, Corporate Finance and other fee-based activities.
Consumer Banking
Consumer Banking includes Retail Banking, Small Business Banking and Direct
Financial Services. Retail Banking offers consumers products and services to
conveniently access, move and manage their money. Including the acquired NatWest
franchise, Retail Banking delivers these services through its network of over
1,200 branches, 2,000 ATMs and one of the nation's largest telephone banking
centers. Small Business Banking provides a full range of accounts and services
aimed at businesses with sales of up to $10 million. Fleet is the leading
small-business lender in the Northeast and ranks sixth nationwide. Direct
Financial Services encompasses credit card lending and alternative delivery
vehicles including ATMs, the telephone answer center, debit-card programs and
Fleet's Internet Web site. The decline in Consumer Banking earnings in 1996 to
$261 million from 1995's level of $310 million results principally from the
divestiture of 64 branches associated with the Shawmut Merger and the transfer
of 74 branches to Fleet Bank N.A., where results are reported separately for
1996. In addition, in 1996, Consumer Banking made significant investments of
people and technology in direct banking, the credit card business and the
insurance business.
Financial Services and National Consumer
Financial Services and National Consumer is composed of Fleet's Government
Banking, Global Services, Mortgage Banking and Student Loan Services businesses.
Fleet is a recognized leader in national and regional government banking,
providing deposit gathering activities, tax processing, cash management and,
through Fleet Securities, Inc., underwriting and municipal advisory services to
state and local governments. Fleet is the principal depository for the states of
New York, Massachusetts, Connecticut, Rhode Island and Maine and the largest
depository for government entities in the United States. In addition, Fleet's
Government Banking Tax Processing unit provides advanced image capture and
processing solutions to both government agencies and corporations. Fleet was
awarded the tax processing contract for the state of New York and processed in
excess of seven million personal income tax returns in 1996.
Global Services provides multiple products, encompassing cash management,
bankruptcy proceedings, and domestic and international transaction processing to
the insurance industry, mutual fund companies and commercial banking customers.
Fleet's Mortgage Banking business originates, sells and services first-
and second-mortgage products spanning all customer segments. With offices
located in 27 states and an extensive network of alternative origination
channels, FMG originated approximately $22 billion of loans in 1996. This
business services a mortgage portfolio of $122 billion and 1.5 million loans.
Mortgage banking earned $69 million in 1996 compared to $86 million in 1995 as a
result of a lower level of servicing sales in 1996, offset by increases in
servicing revenue due to growth in the servicing portfolio coupled with higher
production revenue.
Student loan processing, through the AFSA subsidiary, services 4.5 million
accounts nationwide and is the largest third-party servicer in the United
States, with $23 billion in loans serviced.
Financial Services and National Consumer earned $139 million in 1996
compared to $159 million in 1995, resulting from reduced earnings in the
mortgage banking business.
Investment Services
Investment Services is composed of Personal Financial Services, Retirement Plan
Services, Fleet Brokerage Services, Retail Investment Services, Not-for-Profit
Institutional Services and Fleet Investment Advisors. Personal Financial
Services targets high-net-worth clients and offers a broad array of
25
<PAGE>
asset management, estate settlement, deposit and credit products. Retirement
Plan Services focuses on investment management and fiduciary activities with
special emphasis on 401(k) plans. Fleet Brokerage Securities is one of the
nation's largest bank-owned discount brokerage firms. Retail Investment Services
manages Fleet's mutual fund product set, including the Galaxy Funds and
annuities sold to consumers. Not-for-Profit Institutional Services is a
full-service investment management service that includes endowment management,
custody, trust and other services. Fleet Investment Advisors manages assets in
excess of $48 billion supporting the investment service business. Investment
services earned $79 million in 1996, an increase of $7 million compared to 1995.
The increase in earnings reflects this unit's 16% growth in noninterest revenue.
New York-Metro
New York-Metro is a business unit formed in the second quarter of 1996 composed
of financial services to retail and wholesale clients in the metropolitan area
surrounding New York City. Fleet businesses in Long Island, New York City and
Westchester County, when combined with acquired businesses from NatWest, make
Fleet the fourth largest banking institution based in this region.
The acquisition of NatWest on May 1, 1996, added approximately $13 billion
of loans, $18 billion of deposits, and 300 branches in the New York and New
Jersey market. This acquisition also enhanced product capabilities for consumer,
commercial and government banking customers in the New York metropolitan area.
New York-Metro's net income in 1996 was $145 million, reflecting financial
results of the acquired NatWest operation as well as Fleet's existing
metropolitan New York franchise for the eight months subsequent to the NatWest
acquisition. Prior period results for Fleet's existing business in the
metropolitan New York market are reported as part of the appropriate business
unit.
Treasury
Treasury is responsible for managing the corporation's securities and
residential mortgage portfolios, trading operations, asset-liability management
function and wholesale funding needs. The Treasury unit earned $124 million in
1996, a decline of $18 million from 1995 reflecting the decision to reduce
lower-yielding securities and residential mortgages as part of the corporation's
balance sheet restructuring program. The associated decline in net interest
income was partially offset by higher revenue from foreign exchange and
interest-rate protection products, and by lower operating expenses resulting
from savings achieved in the Shawmut integration.
All Other
All Other includes the parent company, Fleet Private Equity, and certain
transactions not allocable to any specific business unit. In addition, the
impact of methodology allocations such as loan loss provision, credit reserve
and equity, combined with transfer pricing offsets are reported in this unit.
All Other earned $172 million in 1996 and $170 million in 1995.
Fleet Private Equity provides management teams with the private equity
capital necessary to acquire, recapitalize or grow private and public companies.
Fleet Private Equity earned $58 million for 1996 versus $16 million for 1995.
Strong earnings resulted from gains relating to sales of investments and
increased values in this unit's equity investments. The corporation's ability to
continue to experience increases in the value of these investments depends on a
variety of factors, including the condition of both the economy and equity
markets. Thus, the likelihood of such gains in the future cannot be predicted.
BALANCE SHEET ANALYSIS
Total assets remained relatively unchanged at $85.5 billion at December 31,
1996. However, the composition of earning assets and funding sources has changed
significantly, due to the NatWest acquisition and related balance sheet
restructuring.
Balance Sheet Highlights
December 31
Dollars in millions 1996 1995 Change
- --------------------------------------------------------------------------------
Total assets $85,518 $84,432 1.3%
Earning assets 72,239 75,021 (3.7)
Securities 8,680 19,331 (55.1)
Loans and leases 58,844 51,525 14.2
Core deposits 45,879 35,140 30.6
Other funding 24,819 34,551 (28.2)
Equity 7,415 6,365 16.5
========================================
The corporation acquired approximately $13 billion of loans and $18 billion of
deposits in connection with the NatWest transaction. The acquisition of NatWest
enabled the corporation to restructure its balance sheet to obtain a more
efficient mix of interest-earning assets and interest-bearing liabilities.
Lower-yielding securities decreased $10.6 billion and were replaced by
higher-yielding loans, while higher-cost short-term borrowings and time deposits
decreased $9.7 billion and were replaced by lower-cost core deposits. Core
deposits represents demand deposits, regular savings, NOW and money market
deposits. This improved balance sheet mix resulted in an increase to the net
interest margin from 4.12% in 1995 to 4.81% in 1996. Additionally, the
corporation's balance sheet was impacted by the divestitures of $2.4 billion of
deposits and $1.8 billion of loans in connection with the Shawmut Merger.
26
<PAGE>
Securities
<TABLE>
<CAPTION>
1996 1995 1994
December 31 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
U.S. Treasury and government agencies $1,077 $1,083 $ 7,891 $ 7,889 $ 3,851 $ 3,667
Mortgage-backed securities 5,987 6,006 8,457 8,470 8,352 7,898
Other debt securities -- -- 1,621 1,662 180 179
- -------------------------------------------------------------------------------------------------------
Total debt securities 7,064 7,089 17,969 18,021 12,383 11,744
- -------------------------------------------------------------------------------------------------------
Marketable equity securities 229 255 359 393 360 356
Other securities 159 159 119 119 150 150
- -------------------------------------------------------------------------------------------------------
Total securities available for sale $7,452 $7,503 $18,447 $18,533 $12,893 $12,250
- -------------------------------------------------------------------------------------------------------
Securities held to maturity
State and municipal $1,054 $1,059 $ 687 $ 695 $ 843 $ 842
Other debt securities 123 113 111 87 8,048 7,610
- -------------------------------------------------------------------------------------------------------
Total securities held to maturity $1,177 $1,172 $ 798 $ 782 $ 8,891 $ 8,452
- -------------------------------------------------------------------------------------------------------
Total securities $8,629 $8,675 $19,245 $19,315 $21,784 $20,702
===============================================================
</TABLE>
Fleet's investment securities portfolio plays a significant role in the
management of the corporation's balance sheet. Due to the liquid nature of the
securities portfolio, the corporation was able to execute its balance sheet
restructuring program, which enhanced the efficiency of the balance sheet as the
proceeds from the sale of lower-yielding securities were used to pay-down
higher-cost wholesale funds.
The amortized cost of securities available for sale decreased from $18.4
billion at December 31, 1995, to $7.5 billion at December 31, 1996, as the
corporation sold securities in connection with the balance sheet restructuring
program. These sales generated $43 million (pretax) of securities gains. The
decision to sell or purchase such securities depends on a variety of factors,
including off-balance-sheet activities, as well as economic and market
conditions that are impacted by the interest-rate environment. Thus, the
likelihood or profitability of any such sales in the future cannot be predicted.
The valuation reserve on securities available for sale decreased to an
unrealized gain level of $51 million at December 31, 1996, from an unrealized
gain level of $86 million at December 31, 1995.
Loans and Leases
Loan and lease portfolios inherently include credit risk. Fleet attempts to
control such risk through review processes that include analysis of credit
applications, portfolio diversification and ongoing examinations of outstandings
and delinquencies. Fleet strives to identify potential classified assets early,
to take charge-offs promptly based on realistic assessments of probable losses
and to maintain adequate reserves for credit losses. The corporation's portfolio
is well-diversified by borrower, industry and product, thereby reducing risk.
[The following table was represented as a pie chart in the printed material.]
Loan Portfolio Composition
(dollars in billions)
1996 1995
---- ----
Consumer $12.5 $ 9.6
CRE 6.4 5.0
Leasing 2.6 2.2
C&I 29.3 23.2
Residential 8.0 11.5
----- -----
Total Loans $58.8 $51.5
===== =====
Total loans and leases increased $7.3 billion from $51.5 billion at December 31,
1995, to $58.8 billion at December 31, 1996. This increase was due primarily to
the NatWest acquisition, which added $13 billion of loans and leases, as well as
growth in the credit card portfolio during 1996. The increase related to NatWest
was partially offset by the securitization of $2 billion of residential real
estate loans for liquidity and collateral purposes and have been reclassified to
securities, as well as $1.8 billion of divestitures as a result of the Shawmut
Merger. In addition, the increase was also offset by several other programs
designed to reduce industry and product concentrations as a result of both the
Shawmut and NatWest transactions, coupled with portfolio runoff brought about by
small- to mid-sized companies accessing capital markets for their funding needs.
27
<PAGE>
Commercial and Industrial--
Product Diversification
December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Banks and insurance $ 4,130 $ 2,007
Retail 2,806 1,168
Communications 2,225 1,901
Real estate/construction/contractors 1,888 1,557
Precious metals/jewelry 1,704 1,467
Health care 1,695 1,246
Business services 1,524 1,254
Transportation 1,419 1,498
Tourism and entertainment 1,231 1,076
Apparel and textiles 1,142 961
Machine and equipment 978 1,219
Printing and publishing 932 834
Food distribution and production 866 978
Plastics, ceramics, rubber and misc. products 789 600
Energy production and distribution 779 827
Forest products 765 656
Other 4,405 4,002
- --------------------------------------------------------------------------------
Total $29,278 $23,251
====================
Commercial and industrial (C&I) loans increased $6.0 billion from December 31,
1995, to December 31, 1996, due primarily to the NatWest acquisition, which
added $8.1 billion of C&I loans. The increase was partially offset by $450
million of divestitures and several large pay-downs during 1996. C&I borrowers
consist primarily of middle-market corporate customers and are well-diversified
as to industry and companies within each industry.
Lease financing totaled $2.6 billion at December 31, 1996, compared to
$2.2 billion at December 31, 1995. This increase is primarily attributable to
new lease originations obtained through geographic expansion and specialization
in targeted industries. The corporation provides lease financing for mid- to
large-sized equipment acquisitions.
Commercial Real Estate--Product Diversification
December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Retail $1,668 $1,159
Apartments 1,471 1,137
Office 1,367 1,077
Industrial 476 444
Other 1,471 1,203
- --------------------------------------------------------------------------------
Total $6,453 $5,020
==========================
Commercial real estate (CRE) loans increased by $1.4 billion, or 29%, from
December 31, 1995, to December 31, 1996, due to the addition of $1.9 billion of
CRE loans from the NatWest acquisition.
Consumer and Residential Real Estate
December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Residential real estate $ 8,048 $11,475
Home equity 5,061 4,791
Credit card 3,227 1,588
Student loans 1,255 1,179
Installment/other 2,911 1,998
- --------------------------------------------------------------------------------
Total $20,502 $21,031
=========================
Approximately 64% of the consumer and residential real estate portfolio at
December 31, 1996, represented loans secured by residential real estate,
including second mortgages, home equity loans and lines of credit. The
corporation manages the risk associated with most types of consumer loans by
utilizing uniform credit standards when extending credit, together with enhanced
computer systems that streamline the process of monitoring delinquencies and
assisting in customer contact.
Outstanding residential real estate loans secured by one- to four-family
residences decreased $3.5 billion, or 30%, to $8.0 billion at December 31, 1996,
compared to $11.5 billion at December 31, 1995. The decrease was due primarily
to $1.1 billion of divestitures and the securitization of $2 billion of
residential real estate loans in 1996. The NatWest acquisition added $650
million in residential loans. Except for selected programs, such as loans
obtained through business acquisitions or held for asset-liability management
purposes, residential mortgage loans are generally originated by FMG and sold in
the secondary market.
Consumer loans of $12.5 billion at December 31, 1996, increased $2.9
billion when compared to a portfolio of $9.6 billion at December 31, 1995.
Excluding the acquisition of NatWest, which added $2.4 billion, consumer loans
increased $547 million. The increase from 1995 is principally attributed to
increased credit card loans of $1 billion, excluding NatWest, due to continued
strong growth related to several promotions aimed at attracting new customers
and the purchase of a $250 million credit card portfolio. Offsetting the
increase in the credit card portfolio was decreased home equity loans, excluding
NatWest, of $487 million due primarily to divestitures in the first quarter of
1996. On January 15, 1997, the corporation announced its intention to sell its
indirect auto lending operation, a business unit with approximately $2 billion
in loans, that provides new and used car financing originated by auto dealers in
New England, New York and New Jersey.
28
<PAGE>
Nonperforming Assets
Nonperforming Assets(a)
Dollars in millions C&I CRE Consumer Total
- --------------------------------------------------------------------------------
Nonperforming loans
and leases:
Current or less than
90 days past due $182 $ 71 $ 11 $264
Noncurrent 169 87 176 432
OREO -- 8 19 27
- --------------------------------------------------------------------------------
Total NPAs
December 31, 1996 $351 $166 $206 $723
- --------------------------------------------------------------------------------
Total NPAs
December 31, 1995 $244 $112 $143 $499
========================================
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($247 million
and $168 million at December 31, 1996 and 1995, respectively). NPAs and
related ratios at December 31, 1996 and 1995, do not include $265 million
and $317 million, respectively, of NPAs classified as held for sale or
accelerated disposition.
Nonperforming assets (NPAs) are assets on which income recognition in the form
of principal and/or interest has either ceased or is limited. NPAs negatively
affect the corporation's earnings by reducing interest income. In addition to
NPAs, asset quality is measured by the amount of provision, charge-offs and
certain credit quality related ratios as disclosed in the Reserve for Credit
Losses Activity table.
NPAs increased $28 million, or 6%, from December 31, 1995, to December 31,
1996, excluding $196 million of NPAs related to NatWest. NPAs at December 31,
1996, as a percentage of total loans, leases and other real estate owned (OREO),
and as a percentage of total assets, were 1.23% and .85%, respectively, compared
to .97% and .59%, respectively, at December 31, 1995. The increase in NPAs is
attributable to the NatWest acquisition, together with a $56 million increase in
residential loan NPAs. These increases more than offset the NPA decline in other
loan types, principally C&I and CRE. NPAs are expected to increase during 1997
as the region in which Fleet operates has had slower growth than the nation as a
whole, and this trend is expected to continue.
Activity in Nonperforming Assets
Year ended December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $ 499 $ 761
Additions 966 956
Acquisitions 196 70
Reductions:
Payments/interest applied (400) (486)
Returned to accrual (103) (306)
Charge-offs/write-downs (245) (110)
Sales/other (93) (69)
- --------------------------------------------------------------------------------
Total reductions (841) (971)
- --------------------------------------------------------------------------------
Subtotal 820 816
- --------------------------------------------------------------------------------
Assets reclassified as held for sale or
accelerated disposition (97) (317)
- --------------------------------------------------------------------------------
Balance at end of year $ 723 $ 499
===================
At December 31, 1996 and 1995, loans in the 90 days past due and still accruing
interest category amounted to $247 million and $168 million, respectively, which
included approximately $192 million and $132 million, respectively, of consumer
loans. Although these amounts are not included in NPAs, management reviews these
loans when considering risk elements to determine the adequacy of Fleet's credit
loss reserve.
At December 31, 1996 and 1995, NPAs classified as held for sale or
accelerated disposition totaled $265 million and $317 million, respectively, as
follows:
Nonperforming Assets Held for Sale or
Accelerated Disposition
Dollars in millions C&I CRE Consumer Total
- --------------------------------------------------------------------------------
Nonaccrual loans
and leases $91 $144 $ 15 $250
OREO 2 3 10 15
- --------------------------------------------------------------------------------
December 31, 1996 $93 $147 $ 25 $265
- --------------------------------------------------------------------------------
December 31, 1995 $46 $ 77 $194 $317
=======================================
29
<PAGE>
Reserve for Credit Losses
Reserve for Credit Losses Allocation
<TABLE>
<CAPTION>
1996 1995 1994
Percent of Percent of Percent of
December 31 Loan Type to Loan Type to Loan Type to
Dollars in millions Amount Total Loans Amount Total Loans Amount Total Loans
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial
and industrial $ 656 49.8% $ 606 45.1% $ 620 42.7%
Consumer 365 21.2 209 18.5 226 23.7
Commercial real estate:
Construction 26 1.8 23 1.2 17 1.5
Interim/permanent 129 9.1 138 8.6 190 10.4
Residential real estate 67 13.7 90 22.3 47 18.5
Lease financing 32 4.4 19 4.3 18 3.2
Unallocated 213 -- 236 -- 378 --
- ----------------------------------------------------------------------------------------------------------------------
Total $1,488 100.0% $1,321 100.0% $1,496 100.0%
=======================================================================================
</TABLE>
1993 1992
Percent of Percent of
December 31 Loan Type to Loan Type to
Dollars in millions Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------
Commercial
and industrial $ 678 43.5% $ 895 43.1%
Consumer 196 23.4 222 21.5
Commercial real estate:
Construction 7 1.4 39 3.3
Interim/permanent 241 12.1 317 12.5
Residential real estate 50 16.9 60 17.0
Lease financing 36 2.7 31 2.6
Unallocated 461 -- 373 --
- -------------------------------------------------------------------------------
Total $1,669 100.0% $1,937 100.0%
=================================================
The reserve for credit losses represents amounts available for future
credit losses and reflects management's ongoing detailed review of certain
individual loans and leases, supplemented by an analysis of the historical net
charge-off experience of the portfolio and an evaluation of current and
anticipated economic conditions and other pertinent factors. Based on these
analyses, the corporation believes that its year-end reserve is adequate.
Loans and leases are charged off once the probability of loss has been
established, with consideration given to factors such as the customer's
financial condition, underlying collateral and guarantees, and general and
industry economic conditions.
Fleet's reserve for credit losses increased $167 million from December 31,
1995, to $1,488 million at December 31, 1996, which included $335 million of
acquired reserves related to NatWest. The 1996 provision for credit losses was
$213 million, $112 million higher than the prior year level of $101 million. The
increase in the provision for credit losses was due primarily to $73 million of
provision for credit losses related to the NatWest franchise and increased net
charge-offs in the credit card portfolio. The provision for credit losses is
expected to increase in 1997 as the gap between the provision for credit losses
and charge-offs is expected to narrow.
Reserve for Credit Losses Activity
Year ended December 31
Dollars in millions 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
Balance at beginning
of year $1,321 $1,496 $1,669 $ 1,937 $2,065
Gross charge-offs:
Consumer 230 141 130 133 136
Commercial and industrial 160 109 91 257 383
Commercial real estate 60 99 95 269 367
Residential real estate 30 65 52 49 121
Lease financing 4 4 9 21 34
- ------------------------------------------------------------------------------
Total gross
charge-offs 484 418 377 729 1,041
- ------------------------------------------------------------------------------
Recoveries:
Consumer 30 34 35 34 29
Commercial and industrial 59 48 60 63 50
Commercial real estate 17 25 27 34 32
Residential real estate 4 4 11 4 4
Lease financing 4 5 5 9 3
- ------------------------------------------------------------------------------
Total recoveries 114 116 138 144 118
- ------------------------------------------------------------------------------
Net charge-offs 370 302 239 585 923
Provision 213 101 65 327 728
Acquired/other 324 26 1 (10) 67
- --------------------------------------------------------------------------------
Balance at end of year $1,488 $1,321 $1,496 $ 1,669 $1,937
================================================
Ratio of net charge-offs to
average loans and leases .66% .59% .54% 1.35% 2.15%
- ------------------------------------------------------------------------------
Ratio of reserve for credit
losses to year-end loans
and leases 2.53% 2.56% 3.25% 3.82% 4.43%
- ------------------------------------------------------------------------------
Ratio of reserve for credit
losses to year-end NPAs 206% 265% 196% 161% 96%
- ------------------------------------------------------------------------------
Ratio of reserve for credit
losses to year-end
nonperforming loans
and leases 214% 301% 224% 199% 129%
================================================
30
<PAGE>
Net charge-offs of $370 million increased $68 million in 1996 compared to 1995,
as a $32 million decline in the pre-NatWest merger portfolio was more than
offset by $100 million of net charge-offs pertaining to NatWest. Net charge-offs
from the credit card portfolio increased $73 million to $125 million, due to an
increase of $1.6 billion of credit card loans year to year, coupled with higher
delinquency levels. The ratio of net charge-offs to average loans and leases
increased to .66% at December 31, 1996, from .59% at December 31, 1995.
Charge-offs are expected to increase approximately 10% in 1997 driven
principally by higher charge-offs on consumer loans due to the significant
increase in credit card receivables in 1996. The rate of increase in the level
of charge-offs could be even higher if the rate of personal bankruptcies, which
are unpredictable, increases.
Funding Sources
Components of Funding Sources
December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Deposits:
Demand $17,903 $12,305
Regular savings, NOW, money market 27,976 22,835
Time:
Domestic 18,583 17,554
Foreign 2,609 4,428
- --------------------------------------------------------------------------------
Total deposits $67,071 $57,122
- --------------------------------------------------------------------------------
Borrowed funds:
Federal funds purchased $ 488 $ 4,461
Securities sold under
agreements to repurchase 2,382 2,964
Commercial paper 676 2,138
Other 81 3,006
- --------------------------------------------------------------------------------
Total short-term borrowed funds 3,627 12,569
- --------------------------------------------------------------------------------
Long-term debt 5,114 6,481
- --------------------------------------------------------------------------------
Total $75,812 $76,172
======================
Total deposits increased $10 billion to $67.1 billion at December 31, 1996. The
increase was due primarily to the NatWest contribution of $18 billion in total
deposits, partially offset by the reduction of $3.2 billion of higher-rate
wholesale time deposits related to the balance sheet restructuring program and
$2.4 billion of deposits divested as a condition to regulatory approval of the
Shawmut Merger. Deposits were divested across all deposit categories and
included approximately $300 million of demand deposits, $1.1 billion of savings
deposits and $900 million of time deposits.
The funding mix illustrates the corporation's successful effort to replace
higher-cost borrowings with lower-cost core deposits in connection with the
balance sheet restructuring program undertaken in anticipation of the NatWest
acquisition. The mix of deposits as a percentage of total sources of funds
increased from 75% at December 31, 1995 to 88% at December 31, 1996. In addition
to this favorable mix, there was a shift within deposits from higher-cost time
deposits to demand deposits and lower-cost regular savings, NOW and money market
deposits. The percentage of lower-cost demand deposits and regular savings, NOW
and money market deposits to total sources of funds increased from 46% at
December 31, 1995, to 61% at December 31, 1996. This decrease resulted from the
corporation's use of the proceeds from securities sales to pay down higher-cost
borrowings, which were subsequently replaced with NatWest's lower-cost deposits.
Certificates of deposit and other time deposits issued by domestic offices
in amounts of $100,000 or more as of December 31, 1996, will mature as follows:
Maturity of Time Deposits
December 31, 1996 All Other
Dollars in millions, Certificates Time
Remaining maturity of Deposit Deposits
- --------------------------------------------------------------------------------
3 months or less $2,807 $2,656
3 to 6 months 445 3
6 to 12 months 586 2
Over 12 months 1,417 --
- --------------------------------------------------------------------------------
Total $5,255 $2,661
=========================
Total short-term borrowed funds decreased $8.9 billion from December 31, 1995,
compared to December 31, 1996, due primarily to the aforementioned balance sheet
restructuring program.
The balance of long-term debt decreased by $1.6 billion, as repayments of
$2.1 billion were replaced by new issuances of approximately $.5 billion, which
primarily consisted of $400 million of subordinated notes due 2006 through 2011.
Payments and maturities of long-term debt included $434 million of senior notes,
$50 million of subordinated notes and $1.6 billion of affiliate notes consisting
of $890 million of bank notes, $185 million of medium-term notes, $459 million
of FHLB borrowings and $70 million of senior notes.
Management believes Fleet has sufficient liquidity to meet its liabilities
of customer deposits and debtholders. The effect of maturing liabilities is
discussed in the Asset-Liability Management section that follows.
31
<PAGE>
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is to ensure that liquidity, capital and
market risk are prudently managed. Asset-liability management is governed by
policies reviewed and approved annually by the corporation's Board of Directors
(Board). The Board delegates responsibility for asset-liability management to
the corporate Asset-Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset-liability management activities of
the corporation. ALCO also reviews and approves all major funding, capital and
market risk-management programs.
Interest-Rate Risk
Interest-rate risk is the sensitivity of income to variations in interest rates
over both short-term and long-term time horizons. The primary goal of
interest-rate risk management is to control this risk within limits approved by
the Board and narrower guidelines approved by ALCO. These limits and guidelines
reflect the corporation's tolerance for interest-rate risk. The corporation
attempts to control interest-rate risk by identifying exposures, quantifying and
hedging them. The corporation quantifies its interest-rate exposures using
sophisticated simulation and valuation models, as well as simpler gap analyses.
The corporation manages its interest-rate exposures using a combination of on-
and off-balance-sheet instruments, primarily fixed-rate portfolio securities,
interest-rate swaps and options. Both the analytical and transactional
activities that are required to control interest-rate risk are centrally
managed. The corporation uses a variety of methods to analyze the sensitivity of
its income to changes in interest rates.
The corporation uses simulation analysis to analyze the sensitivity of net
interest income over a relatively short (i.e., 1-2 year) time horizon.
Simulation analysis involves dynamically modeling interest income and expense
from the corporation's balance sheet and off-balance-sheet positions during a
specified time period under various interest-rate scenarios and balance sheet
structures. Simulation analysis is used to examine the impact on earnings of
immediate interest-rate "shocks," gradual interest-rate "ramps," yield curve
"twists," as well as numerous other forecasted interest-rate scenarios. Each
scenario incorporates what management believes to be the most appropriate
assumptions about such variables as volumes, prepayment rates for mortgage
assets and repricing characteristics of noncontractual deposits.
The corporation's limits on interest-rate risk specify that if interest
rates were to shift immediately up or down 200 basis points, estimated net
interest income for the subsequent 12 months should decline by less than 7.5%.
The following table reflects the corporation's estimated exposure as a
percentage of estimated net interest income for the next 12 months, assuming an
immediate shift in interest rates:
Rate Change Estimated Exposure as a Percentage of
(Basis Points) Net Interest Income
- --------------------------------------------------------------------------------
+200 1.0%
- -200 (2.3)
- --------------------------------------------------------------------------------
The corporation uses valuation analysis to provide insight into the exposure of
earnings and equity to changes in interest rates over a relatively long (i.e.,
>2-year) time horizon. Valuation analysis involves projecting future cash flows
from the corporation's assets, liabilities and off-balance-sheet positions and
then discounting such cash flows at appropriate interest rates. The
corporation's economic value of equity is the estimated net present value of its
assets, liabilities and off-balance-sheet positions. The interest sensitivity of
economic value of equity is a measure of the sensitivity of long-term earnings.
The corporation's limits on interest-rate risk specify that if interest
rates were to shift immediately up or down 200 basis points, the estimated
economic value of equity should decline by less than 10%. The following table
reflects the corporation's estimated exposure as a percentage of estimated
economic value of equity, assuming an immediate shift in interest rates:
Rate Change Estimated Exposure as a Percentage of
(Basis Points) Economic Value
- --------------------------------------------------------------------------------
+200 (1.8)%
- -200 (5.8)
- --------------------------------------------------------------------------------
Interest-rate gap analysis provides a static view of the maturity and repricing
characteristics of the on- and off-balance-sheet positions. The interest-rate
gap is prepared by scheduling all assets, liabilities and off-balance-sheet
positions according to scheduled or anticipated repricing or maturity.
Interest-rate gap analysis can be viewed as a short-hand complement to
simulation and valuation analysis.
The corporation's limits on interest-rate risk specify that the cumulative
one-year gap should be less than 10% of total assets. As of December 31, 1996,
the estimated exposure was 2.4% asset-sensitive (see the following table).
32
<PAGE>
Interest-Rate Gap Analysis
<TABLE>
<CAPTION>
Cumulatively Repriced Within
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 3 Months 4 to 12 12 to 24 2 to 5 After 5
Dollars in millions, by repricing date or Less Months Months Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities $ 1,144 $ 1,702 $ 916 $ 2,799 $ 2,119 $ 8,680
Loans and leases 33,567 10,778 3,754 6,815 2,442 57,356
Other assets 10,397 269 545 542 7,729 19,482
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 45,108 12,749 5,215 10,156 12,290 85,518
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits 28,472 14,580 8,424 6,093 9,502 67,071
Other liabilities 4,222 292 424 1,947 4,147 11,032
Stockholders' equity -- -- -- 300 7,115 7,415
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 32,694 14,872 8,848 8,340 20,764 85,518
- ------------------------------------------------------------------------------------------------------------------------------------
Net off-balance-sheet (10,836) 2,584 2,206 5,381 665 --
- ------------------------------------------------------------------------------------------------------------------------------------
Periodic gap 1,578 461 (1,427) 7,197 (7,809)
Cumulative gap 1,578 2,039 612 7,809 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total assets-1996 1.8% 2.4% 0.7% 9.1%
Cumulative gap as a percent of total assets-1995 2.4 2.1 1.4 9.6
=======================================================================
</TABLE>
Management believes that the exposure of the corporation's income to gradual
and/or modest changes in interest rates is relatively small. This modest
exposure is reflected in the results of the interest-rate gap analysis. As
indicated by the results of the valuation analyses, however, sudden and extreme
changes in interest rates in either direction will tend to reduce both net
income and economic value of equity, but by amounts that are within corporate
limits. This exposure to extreme rate movements in either direction is primarily
related to two factors: first, the anticipated unfavorable repricing and/or
runoff of noncontractual deposits (e.g., interest checking, retail savings and
money market deposits) and second, the assumed disadvantageous prepayment of
mortgage assets (e.g., loans, securities and servicing rights). Finally, net
interest income will be affected by movements in spreads between rates, most
notably the spread between the prime rate and noncontractual deposit rates.
Management attempts to use hedge instruments to protect the corporation
from exposure to the following major interest-rate risk factors: first, the
corporation's nondiscretionary assets and liabilities (e.g., loans and deposits)
are mismatched with respect to repricing and maturity. As a result, the core
bank is asset-sensitive. Second, the corporation's assets are sensitive to
movements in the prime rate, whereas its liabilities are not. Third, many of the
corporation's mortgage-based assets (e.g., mortgage loans, securities and
servicing rights) are subject to prepayment risk, which tends to increase when
interest rates fall. Finally, many of the corporation's liabilities (e.g., DDA,
interest checking, savings and money market deposits) have no contractual
maturity or repricing. Balances may runoff unexpectedly due to changes in
competitive or market conditions; therefore, deposit rates may need to be
increased more than planned to prevent such runoff.
As indicated previously, the corporation manages its interest-rate
exposures using a combination of on- and off-balance-sheet instruments,
primarily fixed-rate portfolio securities, interest-rate swaps and options. For
example, the corporation uses interest-rate swaps to offset both the general
asset-sensitivity of the core bank and the specific exposure to the prime rate.
Interest-rate caps and floors are used to reduce prepayment risk in mortgage
servicing rights. Uncertainty concerning noncontractual deposits cannot be
explicitly hedged; therefore, management gives careful attention to modeling
assumptions relating to deposit repricing and runoff.
The most significant factors affecting the interest-rate risk position
during 1996 were the divestiture of loans and deposits related to the Shawmut
Merger; balance sheet restructuring in anticipation of the NatWest acquisition;
the NatWest acquisition itself, including related funding and hedging
transactions; the sale of Fleet Finance; the sale of investment securities in
various downsizing programs; and, finally, the execution of interest-rate swap
and option transactions in order to manage exposure to interest rates. In its
management of these and other factors influencing the current environment, the
corporation has attempted to maintain an approximately neutral position relative
to the level of interest rates.
33
<PAGE>
Risk-Management Instrument Analysis
<TABLE>
<CAPTION>
Weighted Weighted Average
Assets- Average Rate
December 31, 1996 Notional Liabilities Maturity Fair ------------------
Dollars in millions Value Hedged (Years) Value Receive Pay
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Rate Risk-Management
Instruments
Interest-rate risk-management swaps:
Receive-fixed/pay-variable $ 7,890 Variable-rate loans
2,025 Fixed-rate deposits
765 Long-term debt
375 Short-term borrowings
-------
11,055 2.5 $ (20) 6.92% 6.51%
- ------------------------------------------------------------------------------------------------------------------------------------
Pay-fixed/receive-variable 4 Variable-rate loans 1.8 -- 5.50 6.25
- ------------------------------------------------------------------------------------------------------------------------------------
Basis swaps 2,729 Deposits
1,064 Securities
30 Long-term debt
-------
3,823 1.9 (1) 5.65 5.67
- ------------------------------------------------------------------------------------------------------------------------------------
Index-amortizing swaps
receive-fixed/pay-variable 11 Variable-rate loans 1.8 -- 4.47 5.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-rate swaps $14,893 $ (21)
- ------------------------------------------------------------------------------------------------------------------------------------
Other instruments(a) $ 112 Short-term borrowings 1.8 $ -- --(a) --(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-rate risk-management
instruments $15,005 2.3 $ (21) 6.59 6.29
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-Banking Risk-Management
Instruments
Interest-rate floors--purchased $14,511 Mortgage servicing rights 3.8 $ 50 --(b) --(b)
Interest-rate caps--purchased 3,915 Mortgage servicing rights 4.4 52 --(b) --(b)
Interest-rate caps--sold 3,915 Mortgage servicing rights 4.2 (103) --(b) --(b)
Call options--purchased 1,276 Mortgage servicing rights 0.4 4 -- --
Call options--sold 225 Mortgage servicing rights 0.4 (1) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-banking risk-
management instruments $23,842 4.1 $ 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $38,847 $ (19) 6.59% 6.29%
===========================================================================================
</TABLE>
(a) Other instruments include interest-rate floors. Weighted average receive
and pay rates are not meaningful for interest-rate floors.
(b) The mortgage-banking risk-management interest-rate floors-purchased,
caps-purchased and caps-sold have weighted average strike rates of 5.28%,
7.50% and 6.20%, respectively.
Fleet uses interest-rate derivative instruments primarily to manage
interest-rate risk associated with interest-earning assets and interest-bearing
liabilities, as well as prepayment risk associated with the corporation's
mortgage servicing portfolio, within management guidelines designed to limit
risk to the corporation's earnings. At December 31, 1996, derivative instruments
totaling $38.8 billion (notional amount) were being used for interest-rate and
mortgage-banking risk- management purposes. The corporation had approximately
$14.9 billion of interest-rate swaps outstanding and $23.9 billion of option
contracts outstanding for interest-rate and mortgage-banking risk-management
purposes.
The most frequently used off-balance-sheet financial instruments are
various types of interest-rate swaps, caps and floors; however, forward-rate
agreements, options on swaps, as well as exchange-traded futures and options may
also be utilized. These interest-rate instruments are used to manage the impact
of fluctuating interest rates on earnings. In particular, the off-balance-sheet
derivative portfolios are used to manage Fleet's natural asset sensitivity and
basis risk.
Off-balance-sheet interest-rate instruments that are used for interest-rate
risk-management are typically classified as hedges of specific assets and
liabilities, Fleet's analysis considers the interest-rate sensitivity of
specific portfolios as well as the sensitivity of the entire balance sheet.
There may be situations in which new interest-rate instruments are executed that
increase existing asset or liability sensitivity (as measured by the gap
position), but the resulting risk profile is desired and within Fleet's
asset-liability management guidelines.
Accrual accounting is applied to off-balance-sheet interest-rate
instruments used for hedging purposes and the income or expense is recorded in
the same category as that of the
34
<PAGE>
related balance sheet item. The periodic net settlement of the interest-rate
risk-management instruments is recorded as an adjustment to net interest income.
The interest-rate risk-management instruments generated $12 million, $(18)
million and $(6) million of net interest income (expense) during 1996, 1995 and
1994, respectively. As of December 31, 1996, the corporation had net deferred
income of $28 million relating to terminated interest-rate swap contracts, which
will be amortized over the remaining life of the underlying interest-rate
contracts of approximately 2.5 years.
Mortgage servicing rights are a very interest-rate sensitive asset due to
the mortgage borrower's option to prepay the mortgage loan. When mortgage
interest rates decline, borrowers have a greater incentive to prepay mortgage
loans through refinancing; when mortgage interest rates rise, this incentive is
reduced or eliminated. Since mortgage loans underlie MSRs, a decline in interest
rates and an actual (or probable) increase in mortgage prepayments shorten the
expected life of the MSR asset and reduce its economic value. Correspondingly,
an increase in interest rates and an actual (or probable) decline in mortgage
prepayments lengthen the expected life of the MSR asset and enhance its economic
value. The expected income from (and economic value of) MSRs is sensitive to
movements in interest rates due to this sensitivity to mortgage prepayments.
Risk-management instruments are used not only to hedge net interest income,
as described above, but also to protect the value of the corporation's mortgage
banking assets, particularly MSRs.
To mitigate the prepayment risk of declining long-term interest rates,
higher than expected mortgage prepayments, and a potential impairment to MSRs,
the corporation uses combinations of purchased interest-rate floors together
with purchased and sold interest-rate caps with strike rates tied to yields on
the 3-, 5- and 10-year "constant maturity" Treasury notes. Each combination
results in a net purchased option position. At December 31, 1996, the
corporation had approximately $14.5 billion of purchased interest-rate floor
agreements outstanding in combination with $3.9 billion of purchased and sold
interest-rate cap agreements. Finally, the corporation also buys and sells call
option contracts on long-term U.S. Treasury securities. These instruments when
combined are structured such that they gain value as interest rates decline,
eliminating or mitigating the impairment of MSRs.
These risk-management instruments are designated as hedges. Changes in the
value are recorded as adjustments to the carrying value of the MSRs. At December
31, 1996, unrecognized net losses of $40 million had been recorded as
adjustments to the carrying value of the MSRs. Amounts paid for interest-rate
contracts are amortized over the life of the contracts and are included as a
component of MSR amortization. At December 31, 1996, the carrying value and fair
value of the corporation's MSRs were $1.6 billion and $1.8 billion,
respectively.
These risk-management activities are not without risk. Treasury and swap
rates may not move in tandem with mortgage interest rates. Also, as mortgage
interest rates change, actual prepayments may not respond exactly as
anticipated. Finally, other pricing factors, such as the volatility of market
yields, may affect the value of the option hedges without similarly impacting
the MSRs.
Risk-management instrument activity for the two years ended December 31,
1996, is summarized in the following table (all amounts are notional amounts):
Risk-Management Instrument Activity
<TABLE>
<CAPTION>
Interest-Rate Risk-Management
- ----------------------------------------------------------------------------------------
Receive- Pay- Index-
Dollars in millions Fixed Fixed Basis Amortizing Other
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Notional amounts:
Balance at January 1, 1995 $ 2,873 $ 2,084 $ 3,605 $ 4,119 $ 9,311
Additions 4,928 370 615 -- 2,781
Maturities (1,600) (94) (650) (831) (2,659)
Terminations (425) (475) (828) (1,250) (8,667)
- ----------------------------------------------------------------------------------------
Balance at December 31, 1995 5,776 1,885 2,742 2,038 766
Additions 6,179 4 2,850 -- 834
Maturities (900) (585) (735) (1,827) (997)
Terminations -- (1,300) (1,034) (200) (491)
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 11,055 $ 4 $ 3,823 $ 11 $ 112
========================================================
<CAPTION>
Mortgage-Banking Risk-Management
- ------------------------------------------------------------------------------------------------------
Interest-Rate
--------------------------------- Call Call
Floors Caps Caps Options Options
Dollars in millions Purchased Purchased Sold Purchased Sold Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Notional amounts:
Balance at January 1, 1995 $ 1,400 $ -- $ -- $ -- $ -- $ 23,392
Additions 5,585 100 100 2,155 750 17,384
Maturities -- -- -- -- -- (5,834)
Terminations (1,100) -- -- (1,330) (750) (14,825)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,885 100 100 825 -- 20,117
Additions 9,126 4,315 4,315 4,154 2,204 33,981
Maturities -- -- -- (880) -- (5,924)
Terminations (500) (500) (500) (2,823) (1,979) (9,327)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 14,511 $ 3,915 $ 3,915 $ 1,276 $ 225 $ 38,847
=======================================================================
</TABLE>
35
<PAGE>
During 1996, Fleet altered its interest-rate risk-management portfolio mainly to
limit the increased asset sensitivity resulting from asset sales, including
sales of investment securities. In particular, positions in receive-fixed swaps
were increased by a net $5.3 billion through new transactions; positions in
pay-fixed swaps were reduced by $1.9 billion through maturities and
terminations. Separately, Fleet substantially reduced its position in other
interest-rate risk-management instruments through maturities and terminations.
These positions were no longer consistent with risk-management needs.
During 1996, the corporation contracted to hedge its mortgage-banking
risk-management portfolio mainly to protect the value of MSRs. The maturities of
the risk-management instruments are shown in the following table:
Maturities of Risk-Management Instruments
<TABLE>
<CAPTION>
December 31, 1996 Within 1 to 2 2 to 3 3 to 4 4 to 5 After
Dollars in millions 1 Year Years Years Years Years 5 Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Notional amounts:
Interest-Rate Risk-Management Instruments
Interest-rate swaps
Receive-fixed $2,664 $2,195 $3,637 $ 594 $ 1,300 $665 $11,055
Pay-fixed -- 4 -- -- -- -- 4
Basis 680 414 2,729 -- -- -- 3,823
Index-amortizing -- 11 -- -- -- -- 11
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-rate swaps $3,344 $2,624 $6,366 $ 594 $ 1,300 $665 $14,893
- ----------------------------------------------------------------------------------------------------------------------------------
Other interest-rate instruments $ 76 $ -- $ 2 $ -- $ -- $ 34 $ 112
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-rate risk-management instruments $3,420 $2,624 $6,368 $ 594 $ 1,300 $699 $15,005
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage-Banking
Risk-Management Instruments
Interest-rate floors--purchased $ -- $ -- $1,191 $ 8,085 $ 5,235 $ -- $14,511
Interest-rate caps--purchased -- -- -- 1,847 2,068 -- 3,915
Interest-rate caps--sold -- -- -- 1,847 2,068 -- 3,915
Call options--purchased 1,276 -- -- -- -- -- 1,276
Call options--sold 225 -- -- -- -- -- 225
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage-banking risk-management
instruments $1,501 $ -- $1,191 $11,779 $ 9,371 $ -- $23,842
- ----------------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $4,921 $2,624 $7,559 $12,373 $10,671 $699 $38,847
=====================================================================================
</TABLE>
Trading Risk
The corporation's trading portfolios are exposed to market risk due to
variations in interest rates, currency exchange rates and related market
volatilities. This exposure arises in the normal course of the Corporation's
business as a financial intermediary. Interest-rate and foreign exchange
contracts are primarily entered into to satisfy the investment and
risk-management needs of our customers. The corporation generally enters into
offsetting interest-rate and foreign exchange contracts to mitigate the risk to
earnings. At December 31, 1996, the corporation had $11.6 billion (notional
amounts) of trading instruments with off-balance-sheet risk. The corporation
also enters into proprietary on-balance-sheet trading positions, which
principally include U.S. federal and state government and agency securities.
The corporation has established procedures for measuring and controlling
this market risk. The average daily exposure to this market risk was $2 million;
and the maximum daily exposure was $5 million.
36
<PAGE>
Liquidity Risk
Liquidity risk-management's objective is to assure the ability of the
corporation and its subsidiaries to meet their financial obligations. These
obligations are the withdrawal of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and to take advantage of business opportunities.
Liquidity is composed of the maintenance of a strong base of core customer
funds, maturing short-term assets, the ability to sell marketable securities,
committed lines of credit and access to capital markets. Increasingly, liquidity
is enhanced through the securitization of consumer asset receivables. Liquidity
at Fleet is measured and monitored daily, allowing management to better
understand and react to balance sheet trends. ALCO is responsible for
implementing the Board's policies and guidelines governing liquidity.
Liquidity at the bank level is managed through the monitoring of
anticipated changes in loans, core deposits and wholesale funds. Diversification
of liquidity sources by maturity, market, product and counterparty are mandated
through ALCO guidelines. The corporation's banking subsidiaries routinely model
liquidity under three economic scenarios, two of which involve increasing levels
of economic difficulty and financial market strain. Management also maintains a
detailed contingency liquidity plan designed to respond either to an overall
decline in the condition of the banking industry or a problem specific to Fleet.
The strength of Fleet's liquidity position is a result of its base of core
customer deposits. These core deposits are supplemented by wholesale funding
sources in the national and international capital markets as well as from direct
customer contacts. Wholesale funding sources include large certificates of
deposit, foreign branch deposits, federal funds, collateralized borrowings and a
$4 billion bank-note program.
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries, committed lines of credit and access to the money
and capital markets. Dividends from banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and earning trends. The
corporation's subsidiaries rely on cash flows from operations, core deposits,
borrowings, short-term high-quality liquid assets, and in the case of nonbanking
subsidiaries, funds from the parent company.
At December 31, 1996, the corporation's parent company had commercial paper
outstanding of $676 million, all of which was placed directly by Fleet in its
local markets, compared to $772 million at December 31, 1995. The corporation
has backup lines of credit totaling $1 billion to ensure that funding is not
interrupted if commercial paper is not available. At December 31, 1996 and 1995,
Fleet had no outstanding balances under the line of credit.
Fleet had $963 million available for the issuance of common or preferred
stock, senior or subordinated securities, and other debt securities at December
31, 1996 under existing shelf registrations filed with the Securities and
Exchange Commission (SEC). Fleet's ability to access the capital markets was
demonstrated in 1996 through the issuance of $400 million in subordinated debt,
$650 million of preferred stock and $250 million of trust preferred securities.
The corporation also repaid $2.1 billion of debt and called $96 million in
preferred securities during 1996.
As shown in the consolidated statement of cash flows, cash and cash
equivalents increased by $4.4 billion during 1996. This increase was due to cash
provided by investing activities of $18.9 billion and cash provided by operating
activities of $3.2 billion, offset by cash used in financing activities of $17.7
billion. Net cash provided by investing activities was attributable to a net
decrease in securities, due primarily to balance sheet restructuring in
preparation of the NatWest acquisition, net cash received of $768 million from
divestitures and a net decrease in loans. Net cash provided by operating
activities was attributable to net income of $1.1 billion and net proceeds
provided from sales of mortgages held for resale of $1.3 billion. Net cash used
in financing activities was due to a decrease in deposits of $6.1 billion
relating primarily to balance sheet restructuring, and an $11.5 billion net
pay-down of short-term borrowings and long-term debt relating primarily to
balance sheet restructuring, offset by the issuance of $650 million of preferred
stock, of which $600 million relates to the funding of the NatWest acquisition.
37
<PAGE>
CAPITAL
December 31
Dollars in millions 1996 1995
- -------------------------------------------------------------------------------
Risk-adjusted assets $78,890 $69,384
Tier 1 risk-based capital (4% minimum) 7.67% 7.61%
Total risk-based capital (8% minimum) 11.36 11.29
Leverage ratio (4% minimum) 7.14 6.40
Common equity-to-assets 7.56 7.07
Total equity-to-assets 8.67 7.54
Tangible common equity-to-assets 5.68 5.82
Tangible total equity-to-assets 6.82 6.30
======================
A financial institution's capital serves to support asset growth and provide
protection against loss to depositors and creditors. Common equity represents
the stockholders' investment in the corporation. In addition to common equity,
regulatory capital includes, within certain limits, preferred stock,
subordinated debt and loss reserves.
The corporation strives to maintain an optimal level of capital,
commensurate with its risk profile, on which an attractive return to
stockholders will be realized over both the short and long term, while serving
depositors', creditors' and regulatory needs. In determining optimal capital
levels, the corporation also considers the capital levels of its peers and the
evaluations of the major rating agencies that assign ratings to the
corporation's public debt.
In blending the requirements of each of these constituencies, the
corporation has established target capital ranges that it believes will provide
for management flexibility and the deployment of capital in an optimally
efficient and profitable manner. These targets are reviewed periodically
relative to the corporation's risk profile and prevailing economic conditions.
The corporation strives to maintain regulatory capital at approximately
0.75%-1.25% above the minimum regulatory requirements for a well-capitalized
institution, as defined in the FDIC Improvement Act, to provide management
flexibility. In addition, the corporation currently has a tangible common equity
ratio target range of 5.50%-6.00% and a total equity-to-assets target range of
7.25%-7.75%.
Excess capital, defined as common equity above the capital target, is
available for core business investments and acquisitions. If attractive
long-term opportunities are not available over time in core businesses,
management intends to return to stockholders any excess capital, typically
through stock repurchase programs and/or dividend increases.
On January 15, 1997, the Board approved the repurchase of up to 20 million
shares of common stock during the subsequent 12 months. The stock repurchase is
to facilitate capital management as the corporation generates excess capital
through earnings.
At the end of 1995, having completed the Shawmut Merger, the corporation
exceeded its capital targets. With the subsequent acquisition of NatWest, the
corporation issued $600 million of preferred stock and $400 million of
subordinated debt and allowed the tangible common ratio to fall below the target
level with a projection that the target level would be achieved by the end of
1996. As illustrated in the table, the corporation has achieved this objective.
At December 31, 1996, the corporation exceeded all regulatory required
minimum capital ratios and was categorized as well capitalized, as Fleet's Tier
1 and Total risk-based capital ratios were 7.67% and 11.36%, respectively,
compared with 7.61% and 11.29%, respectively, at December 31, 1995. The leverage
ratio was 7.14% at December 31, 1996, compared with 6.40% at December 31, 1995.
The corporation's ratios, excluding tangible common equity-to-assets, increased
compared to December 31, 1995, as a result of growth in retained earnings and
the issuance of $600 million of preferred stock and $400 million of subordinated
debt. Tangible common equity-to-assets decreased as a result of the level of
intangible assets recorded in the NatWest acquisition which was funded by the
new preferred stock, subordinated debt and internal excess capital.
38
<PAGE>
COMPARISON OF 1995 AND 1994
Fleet reported net income for 1995 of $610 million, or $1.57 per share, compared
to the $849 million, or $3.09 per share, reported in 1994. ROA and ROE were .74%
and 9.32%, respectively, for 1995 compared to 1.07% and 15.66%, respectively,
for 1994. Excluding the impact of special charges, earnings and earnings per
share were $1,039 million and $3.77, respectively, in 1995, compared to $952
million and $3.48, respectively, in 1994 representing an increase of $87
million, or 9.1%. ROA and ROE were 1.26% and 16.29%, respectively, in 1995,
excluding special charges related to the Shawmut Merger and sale of Fleet
Finance.
Net interest income on an FTE basis totaled $3.1 billion for both 1995 and
1994. The net interest margin for 1995 was 4.12% compared to 4.30% in 1994. The
decrease of 18 basis points was due principally to an increase in the cost of
interest-bearing liabilities outpacing the increase in yields on
interest-earning assets, which reflects an increasingly competitive market for
customer deposits. The impact of the narrower margin in 1995 was substantially
offset by a $2.2 billion increase in the corporation's average interest-earning
assets from $72.0 billion in 1994 to $74.2 billion in 1995.
The provision for credit losses was $101 million in 1995 compared to $65
million in 1994, due to an increase in net charge-offs during 1995. Net
charge-offs increased by $63 million, while NPAs decreased $262 million, after
the reclassification of $317 million of NPAs to assets held for sale or
accelerated disposition.
Noninterest income increased 19% to $1.85 billion in 1995 compared to $1.56
billion in 1994. Noninterest income was positively impacted by increases of 10%
or more in several categories, including: mortgage banking revenue; service
charges, fees and commissions; and investment services revenue.
Noninterest expense, excluding $490 million of merger-related charges and a
$175 million loss on assets held for sale or accelerated disposition, totaled
$3.1 billion for 1995 compared to $3.0 billion in 1994, excluding $185 million
of merger and restructuring-related charges. The slight increase was due
primarily to inflation and several acquisitions during 1995, offset by tight
expense controls that enabled the corporation to keep expenses essentially flat.
Total loans at December 31, 1995, were $51.5 billion compared to $46.0
billion at December 31, 1994. The increase was attributable to both acquisitions
and new originations, offset by the reclassification of $1.6 billion of loans to
assets held for sale or accelerated disposition during the fourth quarter of
1995.
RECENT ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for transactions occurring after December 31, 1996 (subsequently
amended, in part, to December 31, 1997). This standard requires that, after a
transfer of financial assets, an entity recognize the financial and servicing
assets it controls and the liabilities it has incurred, and derecognize
financial assets when control has been surrendered. It is management's belief
that the adoption of this standard will not have a material impact on the
corporation or its results of operations.
39
<PAGE>
Management's Report on
Financial Statements
The accompanying consolidated financial statements and related notes of the
corporation were prepared by management in conformity with generally accepted
accounting principles. Management is responsible for the integrity and fair
presentation of these financial statements.
Management has in place an internal accounting control system designed to
safeguard corporate assets from material loss or misuse and to ensure that all
transactions are first properly authorized and then recorded in its records. The
internal control system includes an organizational structure that provides
appropriate delegation of authority and segregation of duties, established
policies and procedures, and comprehensive internal audit and loan review
programs. Management believes that this system provides assurance that the
corporation's assets are adequately safeguarded and that its records, which are
the basis for the preparation of all financial statements, are reliable.
The Audit and Risk Management Committees of the Board of Directors consist
solely of directors who are not employees of the corporation or its
subsidiaries. During 1996, the committees met nine times with internal auditors,
loan review management, the independent auditors, and representatives of senior
management to discuss the results of examinations and to review their activities
to ensure that each is properly discharging its responsibilities. The
independent auditors, internal auditors, and loan review management have direct
and unrestricted access to these committees at all times.
The corporation's consolidated financial statements have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. Its independent
auditors' report, which is based on an audit made in accordance with generally
accepted auditing standards, expresses an opinion as to the fair presentation of
the consolidated financial statements. In performing its audit, KPMG Peat
Marwick LLP considers the corporation's internal control structure to the extent
it deems necessary in order to issue its opinion on the consolidated financial
statements.
/s/ Terrence Murray /s/ Eugene M. McQuade
Terrence Murray Eugene M. McQuade
Chairman, President, and Executive Vice President and
Chief Executive Officer Chief Financial Officer
40
<PAGE>
Report of
Independent Auditors
The Board of Directors and Stockholders of Fleet Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Fleet Financial
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fleet
Financial Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 15, 1997
41
<PAGE>
Consolidated Statements of
Income
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions, except per share amounts 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans and leases $ 5,087 $ 4,721 $ 3,694
Interest on securities (includes interest from tax-exempt
securities of $42 million, $36 million and $33 million in
1996, 1995 and 1994, respectively) 755 1,304 1,514
- --------------------------------------------------------------------------------------------
Total interest income 5,842 6,025 5,208
- --------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,754 1,726 1,171
Short-term borrowings 295 801 628
Long-term debt 390 478 362
- --------------------------------------------------------------------------------------------
Total interest expense 2,439 3,005 2,161
- --------------------------------------------------------------------------------------------
Net interest income 3,403 3,020 3,047
- --------------------------------------------------------------------------------------------
Provision for credit losses 213 101 65
- --------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 3,190 2,919 2,982
- --------------------------------------------------------------------------------------------
Noninterest income:
Service charges, fees and commissions 592 486 441
Mortgage banking revenue 560 511 391
Investment services revenue 372 322 294
Venture capital revenue 106 36 6
Student loan servicing fees 98 72 54
Trading revenue 55 39 32
Securities gains (losses) 43 32 (1)
Other 375 357 341
- --------------------------------------------------------------------------------------------
Total noninterest income 2,201 1,855 1,558
- --------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,607 1,448 1,428
Occupancy 284 250 265
Equipment 266 209 188
Mortgage servicing rights amortization 188 190 90
Intangible asset amortization 135 105 65
Legal and other professional 131 102 95
Marketing 97 93 84
Merger and restructuring-related charges -- 490 185
Loss on assets held for sale or accelerated disposition -- 175 --
Other 752 678 760
- --------------------------------------------------------------------------------------------
Total noninterest expense 3,460 3,740 3,160
- --------------------------------------------------------------------------------------------
Income before income taxes 1,931 1,034 1,380
Applicable income taxes 792 424 531
- --------------------------------------------------------------------------------------------
Net income $ 1,139 $ 610 $ 849
=============================
Fully diluted weighted average common shares
outstanding (in millions) 270.4 265.9 264.8
Net income applicable to common shares $ 1,067 $ 416 $ 818
Fully diluted earnings per share 3.95 1.57 3.09
Dividends declared 1.74 1.63 1.40
=============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
42
<PAGE>
Consolidated
Balance Sheets
<TABLE>
<CAPTION>
December 31
Dollars in millions 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 7,243 $ 4,505
Federal funds sold and securities purchased under
agreements to resell 1,772 61
Securities available for sale 7,503 18,533
Securities held to maturity (market value: $1,172
and $782) 1,177 798
Loans and leases 58,844 51,525
Reserve for credit losses (1,488) (1,321)
- -------------------------------------------------------------------------------------
Net loans and leases 57,356 50,204
- -------------------------------------------------------------------------------------
Mortgage servicing rights 1,566 1,276
Mortgages held for resale 1,560 2,005
Premises and equipment 1,347 991
Intangible assets 1,699 1,116
Other assets 4,295 4,943
- -------------------------------------------------------------------------------------
Total assets $ 85,518 $ 84,432
=====================
Liabilities
Deposits:
Demand $ 17,903 $ 12,305
Regular savings, NOW, money market 27,976 22,835
Time 21,192 21,982
- -------------------------------------------------------------------------------------
Total deposits 67,071 57,122
- -------------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements to repurchase 2,871 7,425
Other short-term borrowings 756 5,144
Accrued expenses and other liabilities 2,291 1,895
Long-term debt 5,114 6,481
- -------------------------------------------------------------------------------------
Total liabilities 78,103 78,067
- -------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock 953 399
Common stock (shares issued: 263,395,054 in 1996
and 262,864,257 in 1995; shares outstanding:
261,992,124 in 1996 and 262,721,926 in 1995) 3 3
Common surplus 3,145 3,149
Retained earnings 3,342 2,768
Net unrealized gain on securities available for sale 31 52
Treasury stock, at cost (1,402,930 shares in 1996
and 142,331 shares in 1995) (59) (6)
- -------------------------------------------------------------------------------------
Total stockholders' equity 7,415 6,365
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 85,518 $ 84,432
=====================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
43
<PAGE>
Consolidated Statements of Changes in
Stockholders' Equity
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common on Securities
Preferred Stock at $.01 Common Retained Available Treasury
Dollars in millions, except per share amounts Stock Par Surplus Earnings for Sale Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 695 $ 242 $ 2,625 $ 2,167 $ 238 $ (2) $ 5,965
Net income -- -- -- 849 -- -- 849
Cash dividends declared on common
stock ($1.40 per share) -- -- -- (192) -- -- (192)
Cash dividends declared on preferred stock -- -- -- (15) -- -- (15)
Cash dividends declared by pooled
companies prior to mergers -- -- -- (109) -- -- (109)
Redemption of preferred stock (138) -- -- (3) -- -- (141)
Common stock issued in connection
with employee benefit plans -- 4 66 (4) -- 4 70
Adjustment to valuation reserve on
securities available for sale -- -- -- -- (666) -- (666)
Treasury stock purchased -- -- -- -- -- (252) (252)
Other items, net -- (2) (79) 26 17 -- (38)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 557 $ 244 $ 2,612 $ 2,719 $ (411) $ (250) $ 5,471
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 610 -- -- 610
Cash dividends declared on common
stock ($1.63 per share) -- -- -- (274) -- -- (274)
Cash dividends declared on preferred stock -- -- -- (17) -- -- (17)
Cash dividends declared by pooled
company prior to merger -- -- -- (102) -- -- (102)
Issuance of preferred stock 125 -- -- -- -- -- 125
Common stock issued in connection with:
Acquisitions -- 6 170 (21) -- 234 389
Employee benefit plans -- -- 53 (26) -- 97 124
Conversion of dual convertible preferred
stock to common stock (283) -- 427 (156) -- 12 --
Retirement of treasury stock -- -- (371) 24 -- 347 --
Treasury stock purchased -- -- -- -- -- (446) (446)
Adjustment to valuation reserve on
securities available for sale -- -- -- -- 523 -- 523
Conversion of par value to
$.01 per share from $1 -- (242) 242 -- -- -- --
Other items, net -- (5) 16 11 (60) -- (38)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 399 $ 3 $ 3,149 $ 2,768 $ 52 $ (6) $ 6,365
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 1,139 -- -- 1,139
Cash dividends declared on common
stock ($1.74 per share) -- -- -- (457) -- -- (457)
Cash dividends declared on preferred stock -- -- -- (69) -- -- (69)
Issuance of preferred stock 650 -- (15) -- -- -- 635
Redemption of preferred stock (96) -- -- (3) -- -- (99)
Common stock issued in connection with:
Employee benefit plans -- -- 30 (31) -- 63 62
Warrants -- -- 15 -- -- -- 15
Treasury stock purchased -- -- -- -- -- (104) (104)
Adjustment to valuation reserve on
securities available for sale -- -- -- -- (21) -- (21)
Other items, net -- -- (34) (5) -- (12) (51)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 953 $ 3 $ 3,145 $ 3,342 $ 31 $ (59) $ 7,415
===================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
Consolidated Statements of
Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,139 $ 610 $ 849
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 196 165 161
Amortization of mortgage servicing rights and intangible assets 323 295 155
Provision for credit losses 213 101 65
Deferred income tax expense 301 73 130
Securities (gains) losses (43) (32) 1
Merger and restructuring-related charges -- 425 185
Loss on assets held for sale or accelerated disposition -- 175 --
Originations and purchases of mortgages held for resale (18,760) (13,349) (11,549)
Proceeds from sales of mortgages held for resale 20,025 11,997 14,326
(Increase) decrease in accrued receivables, net (430) 118 (98)
Decrease in accrued liabilities, net (224) (250) (530)
Other, net 497 290 80
- ----------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 3,237 618 3,775
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of securities available for sale (5,682) (23,307) (24,116)
Proceeds from sales of securities available for sale 16,313 10,836 26,859
Proceeds from maturities of securities available for sale 4,161 15,473 1,027
Purchases of securities held to maturity (1,125) (746) (2,983)
Proceeds from maturities of securities held to maturity 791 3,462 2,272
Net cash and cash equivalents received (paid) for businesses acquired 2,386 (2,816) (56)
Loans made to customers, nonbanking subsidiaries (1,534) (1,430) (1,109)
Principal collected on loans made to customers, nonbanking subsidiaries 1,180 905 1,097
Net decrease (increase) in loans and leases, banking subsidiaries 1,947 (2,446) (2,640)
Net cash received from divestitures of assets and liabilities 768 -- --
Proceeds from sales of OREO 102 99 134
Acquisition of minority interest in subsidiary -- (158) --
Purchases of mortgage servicing rights (293) (331) (377)
Purchases of premises and equipment (159) (136) (266)
- ----------------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) investing activities 18,855 (595) (158)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits (6,139) (3,206) 5,077
Net decrease in short-term borrowings (10,104) (801) (4,025)
Proceeds from issuance of long-term debt 697 3,290 1,385
Repayments of long-term debt (2,108) (2,740) (700)
Proceeds from issuance of common stock 77 124 70
Proceeds from issuance of preferred stock 635 125 --
Redemption and repurchase of common and preferred stock (203) (446) (393)
Cash dividends paid (498) (373) (299)
- ----------------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) financing activities (17,643) (4,027) 1,115
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,449 (4,004) 4,732
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 4,566 8,570 3,838
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,015 $ 4,566 $ 8,570
================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
Notes to Consolidated
Financial Statements
NOTE 1.
Summary of Significant Accounting Policies
The accounting and reporting policies of Fleet Financial Group (Fleet or
corporation) conform to generally accepted accounting principles and prevailing
practices within the financial services industry. The corporation is a
diversified financial services company headquartered in Boston, Massachusetts,
and is organized along functional lines of business, which include: financial
services and national consumer, commercial financial services, consumer banking,
investment services, treasury and all other.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of the significant accounting policies:
Basis of Presentation. The consolidated financial statements of Fleet include
the accounts of the corporation and its subsidiaries. All material intercompany
transactions and balances have been eliminated. Certain prior year amounts have
been reclassified to conform to current year classifications.
Cash and Cash Equivalents. For purposes of the Consolidated Statements of Cash
Flows, the corporation defines cash and cash equivalents to include cash, due
from banks, interest-bearing deposits, and federal funds sold and securities
purchased under agreements to resell.
Securities. Securities are classified at the time of purchase, based on
management's intentions, as securities held to maturity, securities available
for sale or trading account securities.
Securities held to maturity are those that management has the positive
intent and ability to hold to maturity. Securities held to maturity are stated
at cost, net of the amortization of any premium and the accretion of any
discount. Securities available for sale, which include marketable equity
securities, are those that management intends to hold for an indefinite period
of time, including securities used as part of the asset/ liability management
strategy, that may be sold in response to changes in interest rates, prepayment
risk, liquidity needs, the desire to increase capital or other similar factors.
Securities available for sale are recorded at their readily determinable fair
value. Securities that do not have a readily determinable fair value are stated
at cost.
Unrealized losses on an individual security deemed to be other than
temporary are recognized as realized losses in the accounting period in which
such determination is made. The specific identification method is used to
determine gains and losses on sales of securities.
Trading account securities, principally debt securities, and other trading
instruments, including foreign exchange and interest-rate derivatives, are
purchased and held primarily for the purpose of sale in the near term. Realized
and unrealized gains and losses on trading instruments are included in trading
revenue. Interest income realized on trading instruments is included in interest
income.
Loans and Leases. Loans are stated at the principal amounts outstanding,
net of unearned income. Loans and leases are placed on nonaccrual status as a
result of past-due status or a judgment by management that, although payments
are current, such action is prudent. Except in the case of most consumer and
residential real estate loans, loans and leases on which payments are past due
90 days or more are placed on nonaccrual status unless they are well-secured and
in the process of collection or renewal. Consumer loans, including residential
real estate, are placed on nonaccrual status at 120 days past due and generally
charged off at 180 days past due. When a loan is placed on nonaccrual status,
all interest accrued in the current year, but uncollected, is reversed against
interest income; prior year amounts are charged against the reserve for credit
losses. Loans can be returned to accrual status when they become current as to
principal and interest or demonstrate a period of performance under the
contractual terms and, in management's opinion, are fully collectible.
Reserve for Credit Losses. The corporation continually evaluates the reserve for
credit losses by performing detailed reviews of certain individual loans and
leases in view of the historical net charge-off experience of the portfolio and
evaluations of current and anticipated economic conditions and other pertinent
factors. Based on these analyses, the reserve for credit losses is maintained at
levels considered adequate by management to provide for loan and lease losses
inherent in these portfolios.
46
<PAGE>
Loans and leases, or portions thereof, deemed uncollectible are charged off
against the reserve, while recoveries of amounts previously charged off are
credited to the reserve. Amounts are charged off once the probability of loss
has been established, giving consideration to such factors as the customer's
financial condition, underlying collateral and guarantees, and general and
industry economic conditions.
The reserve for credit losses related to loans that are identified as
impaired is based on discounted cash flows using the loan's effective interest
rate, or the fair value of the collateral for collateral-dependent loans, or the
observable market price of the impaired loan.
Mortgages Held for Resale. Mortgages held for resale are recorded at the lower
of aggregate cost or market value. Market value is determined by outstanding
commitments from investors or by current investor yield requirements.
Mortgage Servicing Rights (MSRs). The corporation recognizes, as separate
assets, rights to service mortgage loans. Capitalized MSRs are assessed for
impairment based upon the fair value of those rights. Fair values are estimated
based on market prices for similar MSRs and on the discounted anticipated future
net cash flows considering market consensus loan prepayment predictions,
historic prepayment rates, interest rates and other economic factors. For
purposes of impairment evaluation and measurement, the corporation stratifies
MSRs based on predominant risk characteristics of the underlying loans,
including loan type, amortization type (fixed or adjustable), note rate and
prepayment risk. To the extent that the carrying value of MSRs exceeds fair
value by individual stratum, a valuation reserve is established, which is
adjusted in the future as the value of MSRs increases or decreases. The cost of
MSRs is amortized in proportion to and over the period of estimated net
servicing income. Intangible Assets. The excess of cost over the fair value of
net assets acquired (goodwill) is amortized on a straight-line basis over
periods of up to 25 years.
In certain acquisitions, core deposit intangible is recorded and amortized
on a straight-line basis over the estimated period benefited, not to exceed ten
years. The corporation reviews its intangible assets, including goodwill, for
events or changes in circumstances that may indicate that the carrying amount of
the assets may not be recoverable.
Long-Lived Assets. Effective January 1, 1996, the corporation adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This standard 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. Adoption of
this standard did not have a material impact on the corporation or its results
of operations.
Stock-Based Compensation. Effective January 1, 1996, the corporation adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." This standard defines a
fair value-based method of accounting for employee stock options and similar
equity instruments, but permits companies to continue to use the intrinsic
value-based method. The corporation has elected to continue the intrinsic
value-based method.
Income Taxes. The corporation records deferred tax assets and liabilities for
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Risk-Management Activities. The corporation enters into certain interest-rate
instruments, including interest-rate swaps, cap and floor agreements, and
futures contracts to manage exposure to interest-rate risk associated with
interest-earning assets and interest-bearing liabilities and prepayment risk on
mortgage servicing assets. For those interest-rate instruments that alter the
repricing characteristics of assets or liabilities, the net differential to be
paid or received on the instruments is treated as an adjustment to the yield on
the underlying assets or liabilities (the accrual method). For those
interest-rate instruments entered into in connection with the securities
available for sale portfolio, the instruments are reported at fair value with
unrealized gains and losses reflected as a separate component of stockholders'
equity, consistent with the reporting of unrealized gains and losses on the
securities.
47
<PAGE>
To qualify for accrual accounting, the interest-rate instrument must be
designated to specific assets or liabilities or pools of similar assets or
liabilities and must be effective at altering the interest-rate characteristics
of the related assets or liabilities. For instruments that are designated to
floating-rate assets or liabilities to be effective, there must be high
correlation between the floating interest-rate index on the underlying asset or
liability and the offsetting rate on the derivative. The corporation measures
initial and ongoing correlation by statistical analysis of the relative
movements of the interest-rate indices over time.
The corporation also uses combinations of interest-rate instruments to
hedge the value of the mortgage servicing portfolio. Such combinations of
instruments are designated as hedges of specific pools of MSRs. To qualify for
hedge accounting, such combinations of instruments are entered into
simultaneously, resulting in a net purchased option position. Net changes in
value of the combination are expected to be highly correlated with changes in
the value of the hedged MSRs throughout the hedge period. Net premiums paid are
amortized against income over the life of the contract. Changes in the value of
combination instruments are treated as adjustments to the carrying value of the
hedged MSRs.
If correlation were to cease on any interest-rate instrument it would then
be accounted for as a trading instrument. If an interest-rate instrument
designated to interest-earning assets or interest-bearing liabilities is
terminated, the gain or loss is deferred and amortized over the shorter of the
remaining contractual life or the maturity of the designated assets or
liabilities. If the designated asset or liability is sold or settled, or to the
extent the balance falls below the notional amount of the instrument, accrual or
hedge accounting is discontinued and accounting for trading instruments is
applied.
Earnings Per Share. Earnings per share is computed by dividing earnings, after
deducting dividends on preferred stock, by the weighted average number of common
shares and common stock equivalents outstanding during the period. Common stock
equivalents include stock options, rights and warrants.
NOTE 2.
Mergers, Acquisitions and Divestitures
On May 1, 1996, the corporation acquired from National Westminster Plc
substantially all of the net assets of the three main operating subsidiaries of
NatWest Bancorp (NatWest Bank). NatWest Bank continues its existence as part of
Fleet Bank, National Association. In accordance with the NatWest merger
agreement, Fleet paid a purchase price at closing of $2.7 billion. Subject to
the level of earnings of Fleet Bank, National Association, Fleet may be required
to make additional payments (the earnout) of up to $560 million over the next
eight years, commencing in 1997. The acquisition of NatWest Bank contributed
approximately $13 billion and $18 billion of loans and deposits, respectively
and approximately 300 branches in New York and New Jersey. The transaction was
accounted for using the purchase method of accounting. Accordingly, the
corporation's financial statements include the effect of NatWest only for the
period subsequent to the May 1, 1996, acquisition date. Goodwill of
approximately $660 million was recorded in connection with this transaction and
is being amortized on a straight-line basis over 15 years. Additional goodwill
will be recorded for any payments under the earnout.
On July 31, 1996, the corporation completed the sale of certain assets of
Fleet Finance, the corporation's consumer finance subsidiary, including a loan
portfolio of approximately $1.2 billion.
On November 30, 1995, the merger of Shawmut National Corporation (Shawmut
Merger) was completed. Under the terms of the Shawmut Merger, which was
accounted for as a pooling of interests, approximately 105 million Fleet common
shares were exchanged for all of the outstanding Shawmut common shares at an
exchange ratio of 0.8922 shares of Fleet for each share of Shawmut. The
outstanding preferred stock of Shawmut was exchanged for comparable issues of
Fleet preferred stock. The financial information for all prior periods presented
has been restated to present the combined financial condition and results of
operations of both companies as if the Shawmut Merger had been in effect for all
periods presented.
48
<PAGE>
In connection with the Shawmut Merger, the corporation divested 64 branches
as a condition of regulatory approval. The sales, which occurred during 1996,
consisted of approximately $2.4 billion in deposits and $1.8 billion in loans.
The corporation realized a $42 million after-tax gain as a result of these
divestitures.
On January 27, 1995, the corporation completed its acquisition of NBB
Bancorp (NBB). The corporation issued approximately 6.2 million treasury shares
with an aggregate carrying value of approximately $200 million as well as
approximately $230 million in cash. In addition, Fleet issued 2.5 million
warrants to purchase Fleet common stock to NBB stockholders with an exercise
price of $43.88 per share and a term of six years. The warrants are exercisable
for a five-year period beginning one year after the date of the acquisition. The
transaction was accounted for under the purchase method of accounting. Goodwill
is being amortized on a straight-line basis over 15 years.
On January 31, 1995, the corporation completed its purchase of
substantially all the assets of the Business Finance Division of Barclays
Business Credit, Inc. (Barclays) for approximately $2.6 billion in cash.
Barclays continues its existence under the name Fleet Capital. The transaction
was accounted for under the purchase method of accounting. Goodwill is being
amortized on a straight-line basis over 25 years.
On February 28, 1995, the corporation completed its tender offer to
purchase the approximately 19% publicly held shares of Fleet Mortgage Group
(FMG) common stock for $20.00 per share in cash. Goodwill is being amortized on
a straight-line basis over 15 years.
On March 3, 1995, the corporation acquired Plaza Home Mortgage Corporation
(Plaza), which operates a mortgage banking franchise, principally in California,
for approximately $88 million in cash. Goodwill is being amortized on a
straight-line basis over 15 years. This acquisition added approximately $9.2
billion in mortgage loans serviced and expanded the corporation's mortgage
banking franchise by 40 additional offices.
On June 9, 1995, the corporation completed its acquisition of Northeast
Federal Corp. (Northeast) with assets of $3.3 billion. The corporation issued
approximately 5.8 million common shares with an aggregate value of approximately
$193 million. This acquisition was accounted for under the purchase method of
accounting. Goodwill is being amortized on a straight-line basis over 15 years.
The information below presents, on a pro forma basis, certain historical
financial information for the corporation, adjusted for each of the NatWest,
NBB, Barclays, FMG, Plaza and Northeast transactions as if such transactions had
been consummated on January 1, 1996 and 1995, respectively.
Pro Forma Results
Dollars in millions, except per share data 1996(a) 1995
- -----------------------------------------------------------------
Net interest income $3,699 $3,995
Net income available to
common stockholders 1,000 639
Net income per common share 3.70 2.41
- -----------------------------------------------------------------
Corporation As Reported
Net interest income $3,403 $3,020
Net income available to
common stockholders 1,067 416
Net income per common share 3.95 1.57
================
(a) Pro forma results include $119 million (after-tax) of special charges
recognized by NatWest in 1996 prior to the consummation of the NatWest
acquisition.
On January 15, 1997, the corporation announced its intention to sell three
business units: Option One Mortgage Corporation, a subsidiary that originates
and services residential mortgages nationwide; the indirect auto lending
portfolio, a business unit with approximately $2 billion in loans; and the
corporate trust unit. The corporation does not expect the disposition of these
business units to have a material impact on its operating results.
49
<PAGE>
NOTE 3.
Securities
<TABLE>
<CAPTION>
1996 1995
Gross Gross Gross Gross
December 31 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury and
government agencies $1,077 $ 6 $ -- $1,083 $ 7,891 $ 12 $ 14 $ 7,889
Mortgage-backed securities 5,987 51 32 6,006 8,457 38 25 8,470
Other debt securities -- -- -- -- 1,621 47 6 1,662
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 7,064 57 32 7,089 17,969 97 45 18,021
- ------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 229 28 2 255 359 37 3 393
Other securities 159 -- -- 159 119 -- -- 119
- ------------------------------------------------------------------------------------------------------------------------------
Total securities
available for sale $7,452 $ 85 $ 34 $7,503 $18,447 $134 $ 48 $ 18,533
- ------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity
State and municipal $1,054 $ 6 $ 1 $1,059 $ 687 $ 9 $ 1 $ 695
Other debt securities 123 -- 10 113 111 -- 24 87
- ------------------------------------------------------------------------------------------------------------------------------
Total securities
held to maturity $1,177 $ 6 $ 11 $1,172 $ 798 $ 9 $ 25 $ 782
- ------------------------------------------------------------------------------------------------------------------------------
Total securities $8,629 $ 91 $ 45 $8,675 $19,245 $143 $ 73 $ 19,315
==============================================================================================
</TABLE>
At December 31, 1996, securities available for sale and securities held to
maturity with carrying values of $3.8 billion and $868 million, respectively,
were pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes, compared to $6.7 billion and $542 million,
respectively, at December 31, 1995.
Proceeds from sales of debt securities available for sale during 1996, 1995
and 1994 were $16 billion, $11 billion and $24 billion, respectively. Gross
gains of $73 million and gross losses of $48 million were realized on those
sales in 1996, gross gains of $49 million and gross losses of $48 million were
realized on those sales in 1995, and gross gains of $24 million and gross losses
of $39 million were realized on those sales in 1994. Net realized gains on sales
of marketable equity securities were $18 million, $31 million and $14 million in
1996, 1995 and 1994, respectively.
The amortized cost and estimated market value, by contractual maturity, of
debt securities held to maturity and securities available for sale are shown in
the following table. Actual maturities may differ from contractual maturities
because, in certain cases, borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
Maturities of Securities
Available for Sale
December 31, 1996 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
- -------------------------------------------------------------------------------
Amortized cost:
U.S. Treasury and
government agencies $ 3 $1,074 $ -- $ -- $1,077
Mortgage-backed
securities 1 685 151 5,150 5,987
- -------------------------------------------------------------------------------
Total debt securities $ 4 $1,759 $ 151 $5,150 $7,064
- -------------------------------------------------------------------------------
Percent of total
debt securities 0.06% 24.90% 2.14% 72.90% 100.00%
Weighted average
yield(a) 6.63 6.43 7.48 6.95 6.83
- -------------------------------------------------------------------------------
Market value $ 4 $1,770 $ 154 $5,161 $7,089
==================================================
Maturities of Securities
Held to Maturity
December 31, 1996 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
- -------------------------------------------------------------------------------
Amortized cost:
State and municipal $ 877 $ 136 $ 27 $ 14 $1,054
Other debt securities 6 15 10 92 123
- -------------------------------------------------------------------------------
Total debt securities $ 883 $ 151 $ 37 $ 106 $1,177
- -------------------------------------------------------------------------------
Percent of total
debt securities 75.02% 12.83% 3.14% 9.01% 100.00%
Weighted average
yield(a) 6.21 7.79 9.10 6.80 6.55
- -------------------------------------------------------------------------------
Market value $ 883 $ 154 $ 38 $ 97 $1,172
==================================================
(a) A tax-equivalent adjustment has been included in the calculations of the
yields to reflect this income as if it had been fully taxable. The
tax-equivalent adjustment is based upon the applicable federal and state
income tax rates.
50
<PAGE>
NOTE 4.
Loans and Leases
<TABLE>
<CAPTION>
December 31
Dollars in millions 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Commercial and industrial $ 29,278 $ 23,251 $ 19,675 $ 19,031 $ 18,818
Commercial real estate:
Construction 1,074 606 666 637 1,436
Interim/permanent 5,379 4,414 4,789 5,279 5,480
Residential real estate 8,048 11,475 8,529 7,378 7,444
Consumer 12,454 9,556 10,893 10,229 9,415
- ----------------------------------------------------------------------------------------
Loans, net of unearned income 56,233 49,302 44,552 42,554 42,593
- ----------------------------------------------------------------------------------------
Lease financing:
Lease receivables 2,587 2,267 1,765 1,291 1,194
Estimated residual value 688 520 212 165 172
Unearned income (664) (564) (494) (297) (237)
- ----------------------------------------------------------------------------------------
Lease financing, net of
unearned income(a) 2,611 2,223 1,483 1,159 1,129
- ----------------------------------------------------------------------------------------
Total loans and leases,
net of unearned income $ 58,844 $ 51,525 $ 46,035 $ 43,713 $ 43,722
========================================================
</TABLE>
(a) The corporation's leases consist principally of full-payout,
direct-financing leases. The corporation's investment in leverage leases
totaled $644 million and $455 million for 1996 and 1995, respectively. For
federal income tax purposes, the corporation has the tax benefit of
depreciation on the entire leased unit and interest on the long-term debt.
Deferred taxes arising from leverage leases totaled $344 million in 1996
and $182 million in 1995. Future minimum lease payments to be received are
$498 million in 1997; $439 million in 1998; $351 million in 1999; $282
million in 2000; $208 million in 2001; $809 million in 2002 and thereafter.
Total loans and leases increased $7.3 billion from $51.5 billion at December 31,
1995 to $58.8 billion at December 31, 1996, due primarily to the NatWest
acquisition, which added approximately $13 billion of loans and leases. This
increase was partially offset by the securitization of $2.0 billion of
residential real estate loans that have been reclassified to securities for
liquidity and collateral purposes, as well as $1.8 billion of divestitures as a
result of the Shawmut Merger. Concentrations of Credit Risk. Although the
corporation is engaged in business nationwide, the lending done by the banking
subsidiaries is concentrated primarily in New England, New York and New Jersey.
NOTE 5.
Reserve for Credit Losses
Reserve for Credit Losses Activity
Year ended December 31
Dollars in millions 1996 1995 1994
- -------------------------------------------------------------------------------
Balance at beginning of year $ 1,321 $ 1,496 $ 1,669
Provision charged to income 213 101 65
Loans and leases charged off (484) (418) (377)
Recoveries of loans and
leases charged off 114 116 138
Acquisitions/other 324 26 1
- -------------------------------------------------------------------------------
Balance at end of year $ 1,488 $ 1,321 $ 1,496
===================================
Acquisitions/other includes reserves acquired as a result of acquisitions,
offset in part by reserve transfers to the FDIC and reserves related to assets
held for sale or accelerated disposition. During 1996, acquisitions/other
activity relates primarily to $335 million of reserves acquired in the NatWest
acquisition.
51
<PAGE>
NOTE 6.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31
Dollars in millions 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans and leases:
Current or less than 90 days past due $ 264 $ 157 $ 186 $ 254 $ 622
Noncurrent 432 283 480 584 885
OREO 27 59 95 200 507
- ----------------------------------------------------------------------------------------
Total NPAs(a) $ 723 $ 499 $ 761 $1,038 $2,014
- ----------------------------------------------------------------------------------------
NPAs as a percent of outstanding
loans, leases and OREO 1.23% 0.97% 1.65% 2.35% 4.53%
- ----------------------------------------------------------------------------------------
Accruing loans and leases
contractually past due
90 days or more $ 247 $ 198 $ 139 $ 120 $ 163
==============================================
</TABLE>
(a) Excludes $265 million and $317 million of NPAs classified as held for sale
or accelerated disposition at December 31, 1996 and 1995, respectively.
Nonperforming assets (NPAs) increased $224 million from December 31, 1995, to
December 31, 1996, including $196 million of NPAs related to NatWest.
The gross interest income that would have been recorded if the
nonperforming loans and leases had been current in accordance with their
original terms, and had been outstanding throughout the period (or since
origination if held for part of the period), was $71 million, $59 million and
$66 million in 1996, 1995 and 1994, respectively. The actual amount of interest
income on those loans included in net income for the period was $18 million, $26
million and $19 million in 1996, 1995 and 1994, respectively.
The following table displays the status of impaired loans at the
respective year-ends.
Impaired Loans
December 31
Dollars in millions 1996 1995
- ---------------------------------------------------------------------------
Impaired loans with a reserve $359 $207
Impaired loans without a reserve 154 88
- ---------------------------------------------------------------------------
Total impaired loans 513 295
Reserve for impaired loans(a) 103 54
- ---------------------------------------------------------------------------
Average balance of impaired loans
during the year 471 428
==================
(a) The reserve for impaired loans is part of Fleet's overall reserve for
credit losses.
Substantially all of the impaired loans were on nonaccrual status and the amount
of interest income recognized on impaired loans during 1996 and 1995 was not
material. The corporation has no material outstanding commitments to lend
additional funds to customers whose loans have been placed on nonperforming
status or the terms of which have been modified.
NOTE 7.
Mortgage Servicing Rights
The corporation's MSRs activity for the years ended December 31, 1996, 1995 and
1994 is as follows:
Mortgage Servicing Rights
Year ended December 31
Dollars in millions 1996 1995 1994
- -------------------------------------------------------------------------------
Balance at beginning of year $ 1,276 $ 840 $ 579
Additions:
Originated 82 50 --
Acquired 346 628 377
Sales (39) (52) (26)
Deferred hedge loss 40 -- --
Amortization (187) (142) (90)
(Increase)/decrease in
impairment reserve 48 (48) --
- -------------------------------------------------------------------------------
Balance at end of year $ 1,566 $ 1,276 $ 840
===================================
The aggregate fair value of the corporation's MSRs was approximately $1.8
billion as of December 31, 1996. The corporation adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights," as of April 1, 1995. The incremental
impact of capitalizing originated MSRs in accordance with this standard resulted
in an increase of $82 million and $50 million in mortgage production revenues
for the years ended December 31, 1996 and 1995, respectively.
52
<PAGE>
NOTE 8.
Merger and Restructuring - Related Liabilities
In connection with the allocation of the NatWest purchase price, the corporation
recognized a restructuring liability of $250 million. This liability includes
personnel charges of $130 million which relate primarily to the costs of
employee severance, termination of certain employee benefit plans, and employee
assistance for separated employees. Facilities charges of $42 million are the
result of the consolidation of back-office operations and consist of lease
termination costs, write-downs of owned properties to be sold and other
facilities-related costs. Data processing costs of $27 million consist primarily
of the write-off of duplicate or incompatible systems hardware and software.
Other merger expenses of $51 million consist primarily of transaction-related
costs, such as professional and other fees.
During 1995, the corporation recorded merger and restructuring-related
charges totaling $490 million in connection with the Shawmut Merger.
The following table presents a summary of activity with respect to the
Shawmut Merger and restructuring-related liabilities pertaining to the NatWest
acquisition.
Merger and Restructuring-Related Liabilities
Year ended December 31 NatWest Shawmut Shawmut
Dollars in millions 1996 1996 1995
- -------------------------------------------------------------------------------
Balance at beginning of year $ -- $ 335 $ --
Provision charged against income -- -- 490
Restructuring liability 250 -- --
Cash outlays (111) (174) (65)
Noncash write-downs (50) (3) (90)
- -------------------------------------------------------------------------------
Balance at end of year $ 89 $ 158 $ 335
=============================
Cash outlays have consisted primarily of severance costs. The corporation's
liquidity has not been significantly affected by these cash outlays and future
cash outlays are not anticipated to significantly impact the corporation's
liquidity. During 1996 and 1995, $43 million and $15 million, respectively, of
incremental costs were incurred relating to the NatWest acquisition and the
Shawmut Merger and have not been charged against the merger and restructuring
accrual. It is anticipated that approximately $14 million of additional
incremental costs will be incurred in 1997. The corporation expects that the
remaining accrual balances at December 31, 1996, will be sufficient to absorb
the remaining merger and restructuring-related costs.
NOTE 9.
Short-Term Borrowings
<TABLE>
<CAPTION>
Securities
Federal Sold Under Other Total
Funds Agreements to Commercial Short-Term Short-Term
Dollars in millions Purchased Repurchase Paper Borrowings Borrowings
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Balance at December 31 $ 488 $ 2,382 $ 676 $ 81 $ 3,627
Highest balance at any month-end 1,221 3,579 2,889 3,801 10,705
Average balance for the year 838 2,730 1,368 908 5,844
Weighted average interest rate
as of December 31 5.54% 4.72% 5.41% 5.25% 4.96%
Weighted average interest rate
paid for the year 5.21 4.63 5.46 5.54 5.05
- --------------------------------------------------------------------------------------------------------
1995
Balance at December 31 $ 4,461 $ 2,964 $ 2,138 $ 3,006 $12,569
Highest balance at any month-end 4,840 6,944 2,138 4,912 16,557
Average balance for the year 4,451 5,159 1,582 2,854 14,046
Weighted average interest rate
as of December 31 5.20% 5.21% 5.86% 5.54% 5.40%
Weighted average interest rate
paid for the year 6.02 5.70 6.07 4.98 5.69
- --------------------------------------------------------------------------------------------------------
1994
Balance at December 31 $ 2,753 $ 6,170 $ 835 $ 2,828 $12,586
Highest balance at any month-end 4,368 10,835 1,199 5,041 18,069
Average balance for the year 3,943 7,769 1,005 2,638 15,355
Weighted average interest rate
as of December 31 5.14% 5.69% 5.96% 5.51% 5.55%
Weighted average interest rate
paid for the year 4.22 4.05 4.36 3.94 4.07
===================================================================
</TABLE>
53
<PAGE>
Federal funds purchased and securities sold under agreements to repurchase
generally mature within 30 days of the transaction date. The corporation
generally maintains the control of the securities in repurchase transactions.
Commercial paper and other short-term borrowings generally mature within 90
days, although commercial paper may have a term of up to 270 days.
NOTE 10.
Long-Term Debt
December 31 Maturity
Dollars in millions Date 1996 1995
- ---------------------------------------------------------------------------
Senior notes and debentures Parent company:
8.875% notes 1996 $ -- $ 150
MTNs 5.60%-7.18% 1997-2005 218 501
7.65%-8.125% notes 1997 200 200
7.25% notes 1997-1999 400 400
6.00% notes 1998 250 250
7.125% notes 2000 250 250
Floating-rate note 2000 50 50
Other 2013 1 1
- ---------------------------------------------------------------------------
Total parent company 1,369 1,802
- ---------------------------------------------------------------------------
Affiliates:
9.98% notes 1996 -- 70
Floating-rate bank notes 1996 -- 840
7.03% bank notes 1996 -- 50
Floating-rate notes 1997 350 350
6.125% notes 1997 150 150
6.50% notes 1999-2000 350 350
MTNs 5.72%-7.48% 1997-2003 209 394
FHLB borrowings 1997-2016 170 629
Other 1997-2026 82 12
- ---------------------------------------------------------------------------
Total affiliates 1,311 2,845
- ---------------------------------------------------------------------------
Total senior notes and debentures 2,680 4,647
- ---------------------------------------------------------------------------
Subordinated notes and debentures:
Floating-rate subordinated notes 1996 -- 50
Floating-rate subordinated notes 1998 100 100
7.625%-9.85% subordinated notes 1999 450 450
7.30%-7.75% subordinated MTNs 2011 100 --
9.00%-9.90% subordinated notes 2001 325 325
6.875%-7.20% subordinated notes 2003 300 300
8.125% subordinated notes 2004 250 250
8.625% subordinated notes 2005 250 250
7.125% subordinated notes 2006 300 --
8.625% subordinated notes 2007 107 107
Other 1997 2 2
- ---------------------------------------------------------------------------
Total subordinated notes
and debentures 2,184 1,834
- ---------------------------------------------------------------------------
Company-Obligated Mandatorily
Redeemable Capital Securities
of Fleet Capital Trust 250 --
- ---------------------------------------------------------------------------
Total long-term debt $5,114 $6,481
===========================
Total credit facilities available were $1.0 billion with no amount
outstanding at December 31, 1996, compared to $2.8 billion with $430 million
outstanding at December 31, 1995. During 1996, the corporation and its
subsidiaries paid commitment fees ranging from .10% to .125% on the credit
facilities.
Fleet has shelf registrations with the Securities and Exchange Commission (SEC),
providing for the issuance of common and preferred stock, senior or subordinated
debt securities and other debt securities. The total amount of funds available
as of December 31, 1996, under the corporation's shelf registrations was $963
million.
During 1996, the corporation formed a new statutory business trust, Fleet
Capital Trust II (Trust II), of which the corporation owns all of the common
stock. Trust II exists for the sole purpose of issuing trust securities and
investing the proceeds thereof in an equivalent amount of subordinated debt
securities of Fleet. On December 11, 1996, Trust II completed a $250 million
underwritten public offering of 250,000, 7.92% Company-Obligated Mandatorily
Redeemable Capital Securities of Fleet Capital Trust (capital securities). The
sole asset of Trust II is $250 million of Fleet's 7.92% junior subordinated
deferrable interest debentures due in 2026 (subordinated debt securities),
purchased by Trust II on December 11, 1996. The subordinated debt securities are
unsecured obligations of Fleet and are subordinate and junior in right of
payment to all present and future senior indebtedness of Fleet. The subordinated
debt securities and related income statement effects are eliminated in the
corporation's consolidated financial statements. Fleet fully and unconditionally
guarantees the Trust's obligations under the capital securities. Fleet has
entered into a guarantee, which together with Fleet's obligations under the
subordinated debt securities and the declaration of trust governing Trust II,
including its obligations to pay costs, expenses, debts and liabilities of Trust
II (other than the trust securities), provides a full and unconditional
guarantee of amounts on the capital securities.
During 1996, the corporation issued $300 million of 7.125% subordinated
notes and $100 million of subordinated medium-term notes (MTNs) (callable four
years from issuance) with interest rates ranging from 7.30% to 7.75%, which the
corporation used to assist in the funding of the acquisition of NatWest. The
corporation simultaneously entered into interest-rate swap agreements that
effectively converted the $400 million of fixed-rate notes into floating-rate
notes with initial current rates between 5.65% and 5.85%.
54
<PAGE>
The $218 million of MTNs consists of $180 million of floating-rate notes
that have interest based on the London Interbank Offered Rate (LIBOR) and $38
million of fixed-rate notes. All of the parent company fixed-rate senior notes
pay interest semiannually, provide for single principal payments and are not
redeemable prior to maturity. The $50 million floating-rate notes interest is
based on the 3-month LIBOR rate payable quarterly and is not redeemable prior to
maturity.
Long-term senior borrowings of affiliates include $150 million of 6.125%
notes, $350 million of 6.50% notes issued by FMG and $209 million of MTNs. The
$350 million of floating-rate notes due 1997 were issued by subsidiary banks and
have a rate that floats with LIBOR. These notes are secured by the bank's
qualifying student loan portfolios or collateralized by mortgage-backed
securities.
The fixed-rate subordinated notes all provide for single principal payments
at maturity with the exception of $150 million of 9.85% subordinated notes and
$100 million of subordinated MTNs. The 9.85% subordinated notes mature on June
1, 1999, and, at the corporation's option, the notes will be exchanged for
either common stock, preferred stock or certain other primary capital securities
of the corporation having a market value equal to the principal amount of the
notes, or will be repaid from the proceeds of other issuances of such
securities. The corporation may, however, at its option, revoke its obligation
to redeem the notes with capital securities based upon the capital treatment of
the notes by its primary regulator or consent by its primary regulator for such
revocation. The holders of the capital notes are subordinate in rights to
depositors and other creditors.
The floating-rate subordinated notes due 1998 are redeemable at the option
of the corporation, in whole or in part, at their principal amount plus accrued
interest. These notes pay interest based on the 3-month LIBOR, reset quarterly.
As part of its interest-rate risk-management process, the corporation uses
interest-rate swaps to modify the repricing and maturity characteristics of
certain long-term debt. These interest-rate risk-management activities are
discussed in greater detail in Note 15.
The aggregate payments required to retire long-term debt are: $1,089
million in 1997; $616 million in 1998; $806 million in 1999; $507 million in
2000; $326 million in 2001; and $1,770 million thereafter.
NOTE 11.
Preferred Stock
The following is a summary of the corporation's preferred stock outstanding at
December 31, 1996 and 1995:
Preferred Stock
<TABLE>
<CAPTION>
December 31 Outstanding Outstanding Earliest Interest
Dollars in millions, Stated at at Redemption Redemption Per
except per share data Value Shares 1996 1995 Date Price(a) Share(b)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10.12% Series III
perpetual preferred $ 1.00 519,758 $ -- $ 50 06/01/1996 $ 105.06 25%
9.375% Series IV
perpetual preferred 1.00 478,838 -- 46 12/01/1996 100.00 25
7.25% Series V
perpetual preferred 250.00 1,100,000 275 -- 04/15/2001 250.00 10
6.75% Series VI
perpetual preferred 250.00 600,000 150 -- 04/15/2006 250.00 20
6.60% Series VII cumulative(c) 250.00 700,000 175 -- 04/01/2006 250.00 20
6.59% Series VIII
noncumulative(d) 250.00 200,000 50 -- 10/01/2001 250.00 20
9.30% cumulative 250.00 575,000 144 144 10/15/1997 250.00 10
9.35% cumulative 250.00 500,000 125 125 01/15/2000 250.00 10
Cumulative and adjustable(e) 50.00 688,700 34 34 Current 50.00
- -------------------------------------------------------------------------------------------------------------------------------
Total preferred stock $ 953 $ 399
============================================================================================
</TABLE>
(a) Plus accrued but unpaid dividends.
(b) Represents ownership interest in depositary shares.
(c) After April 1, 2006, the rate will adjust based on a U.S. Treasury security
rate.
(d) After October 1, 2006, the rate will adjust based on a U.S. Treasury
security rate.
(e) Floating rates are based on certain money market rates. The minimum and
maximum rates are 6.00% and 12.00%, respectively.
55
<PAGE>
The corporation redeemed all of the outstanding shares of its Series IV
perpetual preferred stock at its stated value and all of the outstanding shares
of its Series III perpetual preferred stock at a price of $26.265 per depositary
share resulting in a premium of $2.6 million. The premium resulted in a decrease
in retained earnings and approximately a $.01 reduction in fully diluted
earnings per share in 1996. The corporation also issued Series V through Series
VIII in 1996 for general corporate purposes and to assist in the funding of the
NatWest acquisition.
On December 30, 1996, the corporation and Fleet Capital Trust I (Trust I)
launched an exchange offer pursuant to which Trust I would exchange 8.00%
capital securities for the corporation's depositary shares, each representing a
1/10 interest in a share of the corporation's Series V 7.25% Perpetual Preferred
Stock. The exchange offer was consummated on February 4, 1997, and resulted in
an exchange of 3.4 million capital securities with an aggregate liquidation
value of $84 million for 3.4 million depositary shares (335 thousand shares of
Series V preferred stock).
Dividends on shares of each preferred stock issue are payable quarterly.
All the preferred stock outstanding has preference over the corporation's common
stock with respect to the payment of dividends and distribution of assets in the
event of a liquidation or dissolution of the corporation. Except in certain
circumstances, the holders of preferred stock have no voting rights.
NOTE 12.
Common Stock
At December 31, 1996, Fleet had 600 million common shares authorized for
issuance, with 261,992,124 common shares outstanding. Shares reserved for future
issuance in connection with the corporation's stock plans, outstanding rights
and warrants, and stock options totaled 36,115,015.
On December 31, 1995, the corporation's dual convertible preferred stock
(DCP) was converted into approximately 16 million shares of Fleet common stock
at a conversion price of $17.65 per common share. The holders of the DCP
received an additional 3.9 million common shares as part of the consideration
for the exchange. These additional shares were exchanged at the closing market
price of Fleet common shares on the day of the conversion and treated as a
reduction of retained earnings and earnings available to common shareholders.
This exchange resulted in a $0.59 reduction to fully diluted earnings per share
for 1995.
The following table presents the warrants that are outstanding as of
December 31, 1996:
Stock Warrants
December 31, 1996 Exercise Expiration
Shares in millions Shares Price Date
- ----------------------------------------------------------------------
6.5 $ 17.65 7/12/01
2.5 43.88 1/27/01
==================================
During 1990, Fleet's Board of Directors declared a dividend of one preferred
share purchase right for each outstanding share of Fleet common stock. Under
certain conditions, a right may be exercised to purchase 1/100 of the
corporation's cumulative participating preferred stock at a price of $50,
subject to adjustment. The rights become exercisable if a party acquires 10% or
more (in the case of certain qualified investors, 15% or more) of the issued and
outstanding shares of Fleet common stock, or after the commencement of a tender
or exchange offer for 10% or more of the issued and outstanding shares. When
exercisable under certain conditions, each right would entitle the holder to
receive upon exercise of a right that number of shares of common stock having a
market value of two times the exercise price of the right. The rights will
expire in the year 2000 and may be redeemed in whole, but not in part, at a
price of $0.01 per share at any time prior to expiration or the acquisition of
10% of Fleet common stock.
NOTE 13.
Employee Benefits
Stock Option Plan. The corporation has a stock option plan under which incentive
and nonqualified stock options are granted to certain employees for the purchase
of Fleet common stock at the fair value on the date of grant. Options granted
under the plan generally vest over a three- to five-year period and expire at
the end of 10 years.
56
<PAGE>
The following tables summarize information about stock options:
Stock Options
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Average Weighted Average Weighted Average
December 31 Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 11,407,703 $32.35 10,109,283 $27.35 8,599,145 $23.87
Granted 4,043,965 46.06 5,408,365 34.75 3,442,879 31.68
Exercised (2,519,800) 24.56 (3,517,294) 22.42 (1,220,294) 14.80
Forfeited (504,330) 37.07 (592,651) 27.84 (712,447) 27.76
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 12,427,538 $38.20 11,407,703 $32.35 10,109,283 $27.35
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 3,977,251 $30.10 4,937,988 $25.38 3,347,706 $23.13
============================================================================================
</TABLE>
Stock Options Outstanding and Exercisable
<TABLE>
<CAPTION>
December 31, 1996 Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7-$30 2,252,637 5.6 years $ 23.99 2,010,101 $ 23.49
$ 31-$40 3,158,006 7.3 years 35.25 1,376,940 34.86
$ 41-$55 7,016,895 9.3 years 44.10 590,210 41.39
- ------------------------------------------------------------------------------------------------------
$ 7-$55 12,427,538 8.1 years $ 38.20 3,977,251 $ 30.10
==================================================================================
</TABLE>
Restricted Stock Plan. The corporation has a restricted stock plan under which
key employees are awarded shares of the corporation's common stock subject to
certain vesting requirements.
Certain restricted stock granted in 1996 and 1994 vests, in whole or in
part, on the third anniversary of the award only if certain preestablished
performance goals are attained. The remaining restricted stock vests ratably
over three years. During 1996, 1995 and 1994, grants of 97,000, 51,000 and
91,250 shares of restricted stock were made. As of December 31, 1996, 1995 and
1994, outstanding shares totaled 304,750, 224,750 and 323,734, respectively,
with average grant prices of $35.67, $33.40 and $26.38, respectively.
Compensation cost recognized for restricted stock during 1996, 1995 and 1994 was
$3 million, $2 million and $5 million, respectively.
Pro Forma Fair Value Information. Pro forma net income and earnings per share
information, as required by SFAS No. 123, has been calculated as if the
corporation had accounted for employee stock options and other stock-based
compensation under the fair value method. The fair value was estimated as of the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rates of 6.39% for 1996 and
6.36% for 1995, a dividend yield approximating the current yield, volatility of
the corporation's common stock of 25%, and a weighted average expected life of
the stock options of 7 years and for restricted stock of 3 years. The weighted
average grant date fair values of stock options granted during 1996 and 1995
were $12.57 and $11.56, respectively.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility. Because
the corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock-based compensation.
57
<PAGE>
For purposes of pro forma disclosures, the estimated fair value is
amortized on a straight-line basis over the vesting period.
Pro Forma Information
Dollars in millions,
except per share data 1996 1995
- --------------------------------------------------------------------
Net income As reported $ 1,139 $ 610
Pro forma 1,131 597
Fully diluted As reported 3.95 1.57
earnings per share Pro forma 3.93 1.52
=====================================
Pension Plans. The corporation maintains noncontributory, defined benefit
pension plans covering substantially all employees. Benefit payments to retired
employees are based upon years of service and a percentage of qualifying
compensation during the final years of employment. The amounts contributed to
the plans are determined annually based upon the amount needed to satisfy the
Employee Retirement Income Security Act (ERISA) funding standards. Assets of the
plans are primarily invested in listed stocks, corporate obligations, and U.S.
Treasury and government agency obligations.
The corporation also maintains supplemental, noncontributory defined
benefit plans covering certain employees whose benefits exceed the Internal
Revenue Service limitation under the corporation's qualified defined benefit
plans.
Funded Status of Pension Plans
<TABLE>
<CAPTION>
Overfunded Underfunded
December 31 Plans Plans
Dollars in millions 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 539 $ 343 $ 63 $ 42
Nonvested 45 36 3 4
- ---------------------------------------------------------------------------------------------
Accumulated benefit
obligation 584 379 66 46
Effect of projected future
compensation levels 192 132 21 25
- ---------------------------------------------------------------------------------------------
Projected benefit obligation 776 511 87 71
Plan assets at fair value 915 522 8 5
- ---------------------------------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 139 11 (79) (66)
Unrecognized net transition
(asset) obligation (5) (11) 5 11
Unrecognized prior
service cost 25 28 12 8
Unrecognized net loss 32 86 22 21
Additional minimum liability -- -- (19) (13)
- ---------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 191 $ 114 $ (59) $ (39)
===========================================
</TABLE>
Components of Pension Expense
Year ended December 31
Dollars in millions 1996 1995 1994
- -----------------------------------------------------------------------
Service cost for benefits
earned during the year $ 43 $ 29 $ 37
Interest cost on projected
benefit obligation 57 35 31
Actual return
on plan assets (89) (72) (3)
Net amortization
and deferral 20 39 (32)
- -----------------------------------------------------------------------
Net pension expense $ 31 $ 31 $ 33
- -----------------------------------------------------------------------
Actuarial assumptions:
Discount rate 7.85% 7.25% 8.50%
Return on plan assets 10.00 10.00 8.85-10.00
Compensation increase 5.00 5.00 4.50-5.00
====================================
The Shawmut Merger resulted in settlement and curtailment charges relating to
the pension plans of $44 million, which are included in merger and
restructuring-related charges in the accompanying statement of income for the
year ended December 31, 1995. Effective January 1, 1997, the corporation amended
the defined benefit pension plan that covers the majority of its employees from
a final average pay plan to a cash balance plan. The amended plan is not
reflected in the table showing the funded status of the pension plans. The plan
change will be reflected beginning in 1997.
The corporation maintains various defined contribution savings plans
covering substantially all employees. The corporation's savings plan expense was
$39 million, $34 million and $28 million for 1996, 1995 and 1994, respectively.
Postretirement Benefits. In addition to providing pension benefits, the
corporation provides health care cost assistance and life insurance benefits for
retired employees. The cost of providing these benefits was $13 million, $21
million and $22 million in 1996, 1995 and 1994, respectively.
58
<PAGE>
Funded Status of Postretirement Plan
December 31
Dollars in millions 1996 1995
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 135 $ 117
Fully eligible active plan participants 3 5
Other active plan participants 3 3
- ---------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 141 125
Plan assets at fair value 16 8
- ---------------------------------------------------------------------------
Plan assets (less than)
projected benefit obligation (125) (117)
Unrecognized net (gain) loss (10) (1)
Unrecognized transition obligation 69 79
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost $ (66) $ (39)
====================
Components of Postretirement
Benefit Expense
Year ended December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------
Service cost $ 1 $ 1 $ 3
Interest cost 10 12 11
Net amortization and deferral 4 8 8
Actual return on plan assets (2) -- --
- --------------------------------------------------------------------------
Net postretirement benefit expense $ 13 $ 21 $ 22
- --------------------------------------------------------------------------
Actuarial assumptions:
Discount rate 7.85% 7.25% 8.50%
Return on plan assets 10.00 10.00 8.85
=================================
The Shawmut Merger resulted in settlement and curtailment charges relating to
the postretirement plan of $23 million, which are included in merger and
restructuring-related charges in the accompanying statement of income for the
year ended December 31, 1995.
The health care cost-trend rate was 9.50% as of December 31, 1996,
decreasing gradually to 4.50% through the year 2001 and level thereafter. The
health care cost-trend rate assumption has a minimal effect on the amounts
reported. For example, increasing the assumed health care cost-trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996, by $2.4 million, and the aggregate
of the service cost and interest cost components of the net periodic
postretirement benefit cost for 1996 by approximately $354 thousand.
NOTE 14.
Income Taxes
The current and deferred components of income tax expense for the years ended
December 31, 1996, 1995 and 1994 are as follows:
Income Tax Expense
December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------
Current income taxes:
Federal $ 267 $ 346 $ 323
State and local 79 65 78
- --------------------------------------------------------------------
346 411 401
Deferred income tax expense:
Federal 371 11 107
State and local 75 2 23
- --------------------------------------------------------------------
446 13 130
Total:
Federal 638 357 430
State and local 154 67 101
- --------------------------------------------------------------------
Applicable income taxes $ 792 $ 424 $ 531
===============================
The deferred tax expense of $446 million and $13 million in 1996 and 1995,
respectively, includes a benefit of $51 million and $29 million, respectively,
due to a change from the beginning of the respective year's deferred tax asset
valuation reserve, related primarily to state deferred tax assets.
The income tax expense for the years ended December 31, 1996, 1995 and 1994
varied from the amount computed by applying the statutory income tax rate to
income before taxes. The reasons for the differences are as follows:
Statutory Rate Analysis
December 31 1996 1995 1994
- ----------------------------------------------------------------------------
Tax at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in taxes resulting from:
State and local income taxes, net
of federal income tax benefit 5.2 4.2 4.6
Goodwill amortization 1.7 1.7 0.3
Merger-related costs -- 1.4 0.7
Change in federal valuation reserve -- -- (0.8)
Tax-exempt income (1.0) (1.8) (1.5)
Other, net 0.1 0.4 (0.1)
- ----------------------------------------------------------------------------
Effective tax rate 41.0% 40.9% 38.2%
===========================
59
<PAGE>
The corporation has state net operating loss carryforwards of approximately $408
million and $474 million at December 31, 1996 and 1995, respectively. These
carryforwards will begin to expire in 1997 and continue through 2011.
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the corporation's deferred tax assets and deferred tax
liabilities as of December 31, 1996 and 1995 are presented in the following
table:
Net Deferred Tax Assets
December 31
Dollars in millions 1996 1995
- -----------------------------------------------------------------
Deferred tax assets:
Reserve for credit losses $ 588 $ 495
Expenses not currently deductible 197 326
Purchase accounting adjustments, net 82 --
Other 326 356
- -----------------------------------------------------------------
Total gross deferred tax assets 1,193 1,177
Less: valuation reserve 24 75
- -----------------------------------------------------------------
Deferred tax assets 1,169 1,102
- -----------------------------------------------------------------
Deferred tax liabilities:
Lease financing 528 326
Mortgage banking 283 115
Other 242 422
- -----------------------------------------------------------------
Total gross deferred tax liabilities 1,053 863
- -----------------------------------------------------------------
Net deferred tax assets $ 116 $ 239
======================
The realization of the corporation's net deferred tax assets is dependent upon
the ability to generate taxable income in future periods and upon the reversal
of existing deferred tax liabilities.
The corporation has evaluated the available evidence supporting the
realization of its gross deferred tax assets of $1.2 billion at both December
31, 1996 and 1995, including the amount and timing of future taxable income, and
has determined it is more likely than not that the asset will be realized. Given
the nature of state tax laws, the corporation believes that uncertainty remains
concerning the realization of tax benefits in various state jurisdictions,
therefore state valuation reserves of $24 million and $75 million have been
established at December 31, 1996 and 1995, respectively. These benefits may,
however, be recorded in the future either as realized or as it becomes more
likely than not, in the corporation's best judgment, that such tax benefits or
portions thereof will be realized.
NOTE 15.
Trading Activities, Other Derivative Financial Instruments and Off-Balance-Sheet
Items
Trading Activities. All of the corporation's trading positions are currently
stated at market value with realized and unrealized gains and losses reflected
in other noninterest income. The corporation recognized trading revenue of $55
million, $39 million and $32 million for 1996, 1995 and 1994, respectively.
Trading revenue is composed of gains and losses resulting from trading positions
taken by the corporation in debt securities, foreign exchange contracts and
interest-rate contracts.
Trading positions in debt securities consist of U.S. federal and state
government and agency securities. The types of interest-rate contracts traded
include interest-rate swaps, caps, floors and collars as well as futures and
options contracts. Foreign exchange contracts consist primarily of foreign
exchange forwards and foreign currency options and futures contracts.
Notional principal amounts are a measure of the volume of agreements
transacted, but the level of credit exposure is significantly less. The amount
of credit exposure can be estimated by calculating the cost to replace, on a
present value basis and at current market rates, all profitable contracts
outstanding at year-end. Credit exposure disclosures relate to accounting losses
that would be recognized if the counterparties completely failed to perform
their obligations. To manage its level of credit exposure, the corporation deals
with counterparties of good credit standing, establishes counterparty credit
limits and enters into netting agreements whenever possible.
Interest-rate and foreign exchange instrument activities are subject to
credit review, analysis and approval process. Netting agreements contain rights
of offset that provide for the net settlement of certain contracts with the same
counterparty in the event of default. Gross credit exposure amounts are
presented below and disregard any netting agreements. The following table
represents the notional or contractual amount of Fleet's off-balance-sheet
trading-instruments and related credit exposure.
60
<PAGE>
Trading Instruments with
Off-Balance-Sheet Risk
Contract or
Notional Credit
Dollars in millions Amount Exposure
December 31 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Interest-rate contracts $8,205 $4,568 $ 55 $ 45
Foreign exchange
contracts 3,381 5,341 55 153
================================================
The amounts disclosed below represent the end-of-period fair value of derivative
financial instruments held or issued for trading purposes and the average
aggregate fair values during the year for those instruments.
Trading Instruments
Fair Value Average
December 31, 1996 (Carrying Fair
Dollars in millions Amount) Value
- -------------------------------------------------------------
Interest-rate contracts:
Assets $ 55 $ 48
Liabilities (45) (39)
Foreign exchange contracts:
Assets 55 79
Liabilities (52) (75)
=================
Risk-Management Activities. The corporation's principal objective in holding or
issuing derivatives for purposes other than trading is risk management. The
operations of Fleet are subject to a risk of interest-rate fluctuations to the
extent that there is a difference between the amount of the corporation's
interest-earning assets and the amount of interest-bearing liabilities that
mature or reprice in specified periods as well as prepayment risk associated
with the corporation's mortgage servicing portfolio. The principal objective of
Fleet's asset-liability management activities is the management of interest-rate
and liquidity risk. To achieve its risk-management objective, the corporation
uses a combination of interest-rate instruments, including interest-rate swaps,
caps, floors and options.
The value of the corporation's mortgage servicing portfolio may be
adversely impacted if mortgage interest rates decline and actual or expected
loan prepayments increase. To mitigate the prepayment 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
floors in combination with purchased and sold interest-rate caps and purchased
and sold call options). Declines in the value of such contracts aggregating $40
million have been recorded as adjustments to the carrying value of the MSRs.
The following table presents the notional amount and fair value of
risk-management instruments at December 31, 1996 and 1995:
Risk-Management Instruments
<TABLE>
<CAPTION>
1996 1995
December 31 Notional Fair Notional Fair
Dollars in millions Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-rate risk-management instruments:
Receive-fixed/pay-variable $11,055 $ (20) $ 5,776 $ 69
Pay-fixed/receive-variable 4 -- 1,885 (25)
Basis swaps 3,823 (1) 2,742 (4)
Index-amortizing swaps 11 -- 2,038 1
Other instruments 112 -- 766 7
Mortgage banking risk-
management instruments:
Interest-rate
floors-purchased 14,511 50 5,885 71
Interest-rate
caps-purchased 3,915 52 100 1
Interest-rate caps-sold 3,915 (103) 100 (2)
Call options-purchased 1,276 4 825 18
Call options-sold 225 (1) -- --
- ---------------------------------------------------------------------------------------------
Total risk-management
instruments $38,847 $ (19) $20,117 $ 136
==========================================
</TABLE>
Interest-rate swap agreements involve the exchange of fixed-and variable-rate
interest payments based upon a notional principal amount and maturity date.
Interest-rate basis swaps involve the exchange of floating-rate interest
payments based on various indices, such as U.S. Treasury bill and LIBOR.
Mortgage banking instruments include purchased interest-rate floors in
combination with purchased and sold interest-rate caps and purchased and sold
call options to manage prepayment risk on the mortgage servicing portfolio. In a
purchased interest-rate floor agreement, cash interest payments are received
only if current interest rates fall below a predetermined interest rate.
Purchased or sold interest-rate cap agreements are similar to interest-rate
floor agreements except that cash interest payments are received or made only if
current interest rates rise above predetermined interest rates. Call option
contracts increase in value as the underlying instrument approaches or exceeds
the strike price within a given period of time.
The corporation's interest-rate risk-management instruments had credit
exposure of $35 million at December 31, 1996, versus $197 million at December
31, 1995. The corporation's mortgage banking risk-management instruments had
credit exposure of $27 million at December 31, 1996, versus $89 million at
December 31, 1995. The credit exposure represents the cost to replace, on a
present value basis and at
61
<PAGE>
current market rates, all profitable contracts outstanding at year-end. The
decrease in the credit exposure from year to year mainly reflects a decrease in
the market value of the remaining interest-rate instruments. The periodic net
settlement of interest-rate risk-management instruments is recorded as an
adjustment to net interest income and generated $12 million, $(18) million and
$(6) million of net interest income (expense) during 1996, 1995 and 1994,
respectively. As of December 31, 1996, the corporation had net deferred income
of $28 million related to terminated interest-rate swap contracts, which will be
amortized over the remaining life of the underlying contracts of approximately
2.5 years.
Other Financial Instruments
Contract or Notional
December 31 Amount
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Other financial instruments whose
notional or contractual amounts exceed
the amount of potential credit risk:
Commitments to sell loans $ 2,685 $ 2,680
Commitments to originate or
purchase loans 1,394 1,591
- --------------------------------------------------------------------------------
Financial instruments whose notional
or contractual amounts represent
potential credit risk:
Commitments to extend credit 41,367 29,247
Letters of credit, financial guarantees
and foreign office guarantees
(net of participations) 4,691 3,880
Assets sold with recourse 596 283
========================
Commitments to sell loans have off-balance-sheet market risk to the extent that
the corporation does not have available loans to fill those commitments, which
would require the corporation to purchase loans in the open market. Commitments
to originate or purchase loans have off-balance-sheet market risk to the extent
that the corporation does not have matching commitments to sell loans obtained
under such commitments, which could expose the corporation to lower of cost or
market-valuation adjustments in a rising interest-rate environment.
Commitments to extend credit are agreements to lend to customers in
accordance with contractual provisions. These commitments usually are for
specific periods or contain termination clauses and may require the payment of a
fee. The total amounts of unused commitments do not necessarily represent future
cash requirements, in that commitments often expire without being drawn upon.
Commitments to Extend Credit
December 31
Dollars in millions 1996 1995
- ---------------------------------------------------------------
Commercial and industrial loans $22,755 $18,617
Credit card lines 8,884 3,838
Revolving open-end loans secured
by residential properties
(e.g., home equity lines) 3,609 3,124
Commercial real estate 1,817 2,035
Residential mortgages 1,551 189
Other unused commitments 2,751 1,444
- ---------------------------------------------------------------
Total $41,367 $29,247
======================
Letters of credit and financial guarantees are agreements whereby the
corporation guarantees the performance of a customer to a third party.
Collateral is required to support letters of credit in accordance with
management's evaluation of the creditworthiness of each customer. The credit
exposure assumed in issuing letters of credit is essentially equal to that in
other lending activities. Management does not anticipate any material losses as
a result of these transactions.
NOTE 16.
Fair Value of Financial Instruments
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and judgments made regarding risk characteristics of various
financial instruments, discount rates, estimates of future cash flows, future
expected loss experience and other factors. Changes in assumptions could
significantly affect these estimates and the resulting fair values. Derived fair
value estimates cannot necessarily be substantiated by comparison to independent
markets and, in many cases, could not be realized in an immediate sale of the
instrument. Also, because of differences in methodologies and assumptions used
to estimate fair values, Fleet's fair values should not be compared to those of
other financial institutions.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the corporation.
62
<PAGE>
The following describes the methods and assumptions used by Fleet in
estimating the fair values of financial instruments:
Cash and Cash Equivalents. The carrying amounts reported in the balance sheet
approximate fair values because maturities are less than 90 days.
Securities. Fair values are based primarily on quoted market prices.
Loans. The fair values of certain commercial and consumer loans are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. The
carrying value of certain other loans approximates fair value due to the
short-term and/or frequent repricing characteristics of these loans. The fair
value of the credit card portfolio excludes the value of the ongoing customer
relationships, a factor that can represent a significant premium over the
carrying value. For residential real estate loans, fair value is estimated by
reference to quoted market prices. For nonperforming loans and certain loans
where the credit quality of the borrower has deteriorated significantly, fair
values are estimated by discounting expected cash flows at a rate commensurate
with the risk associated with the estimated cash flows, based on recent
appraisals of the underlying collateral, or by reference to recent loan sales.
Mortgages Held for Resale. Fair value is estimated using the quoted market
prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained.
Deposits. The fair value of deposits with no stated maturity or a maturity of
less than 90 days is considered to be equal to the carrying amount. The fair
value of time deposits is estimated by discounting contractual cash flows using
interest rates currently offered on the deposit products. The fair value
estimates for deposits do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of alternative
forms of funding (core deposit intangibles).
Short-Term Borrowings. Short-term borrowings generally mature in 90 days or less
and, accordingly, the carrying amount reported in the balance sheet approximates
fair value.
Long-Term Debt. The fair value of Fleet's long-term debt, including the
short-term portion, is estimated based on quoted market prices for the issues
for which there is a market or by discounting cash flows based on current rates
available to Fleet for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet instruments are
estimated based on quoted market prices or dealer quotes and are the amounts the
corporation would receive or pay to execute a new agreement with identical terms
considering current interest rates.
Fair Value of Financial Instruments
1996 1995
December 31 Carrying Fair Carrying Fair
Dollars in millions Value Value Value Value
- --------------------------------------------------------------------------
On-balance-sheet
financial assets:
Financial assets for
which carrying value
approximates fair value $ 9,573 $ 9,573 $ 5,069 $ 5,069
Securities 8,680 8,675 19,331 19,315
Loans(a) 54,778 55,984 48,009 48,639
Mortgages held for resale 1,560 1,560 2,005 2,005
Trading account securities 76 76 64 64
Trading instruments 110 110 187 187
Other 930 945 1,999 2,006
On-balance-sheet
financial liabilities:
Deposits with no
stated maturity 45,879 45,879 35,140 35,140
Time deposits 21,192 21,629 21,982 22,263
Short-term borrowings 3,627 3,627 12,569 12,569
Long-term debt 5,114 5,241 6,481 6,728
Trading instruments 97 97 157 157
Other 617 617 303 303
Off-balance-sheet
financial instruments:
Interest-rate risk-
management 12 (21) (3) 48
Commitments to
originate or
purchase loans -- (3) -- 20
Commitments to
sell loans 1 8 1 (17)
============================================
(a) Excludes net book value of leases of $2,578 million and $2,195 million at
December 31, 1996 and 1995, respectively.
Certain assets, which are not financial instruments and, accordingly, are not
included in the above fair values, contribute substantial value to the
corporation in excess of the related amounts recognized in the balance sheet.
These include the core deposit intangibles and the related retail banking
network, the value of customer relationships associated with certain types of
consumer loans (particularly the credit card portfolio), lease financing
business and mortgage servicing rights.
63
<PAGE>
NOTE 17.
Commitments, Contingencies and Other Disclosures
One of the corporation's banking subsidiaries, which served as indenture trustee
for certain health care receivable-backed bonds issued by certain
special-purpose subsidiaries of Towers Financial Corporation and another
defendant, have been named in a lawsuit in federal court in Manhattan by
purchasers of the bonds. The suit was seeking damages in an undetermined amount
equal to the difference between the current value of the bonds and their face
amount, plus interest, as well as punitive damages. The outcome should not have
a material adverse effect on the corporation's financial position or results of
operations.
Subsequent to the announcement of the Shawmut Merger, certain alleged
stockholders of Shawmut filed several purported class action lawsuits against
Shawmut, Fleet and members of Shawmut's Board of Directors. The complaints all
make similar allegations concerning the Shawmut Merger. The corporation believes
the allegations contained in these complaints are entirely without merit and
intends to contest them vigorously. The plaintiffs have taken no action to
pursue this matter since these cases were filed.
The corporation and its subsidiaries are involved in various other legal
proceedings arising out of, and incidental to, their respective businesses.
Management of the corporation, based on its review with counsel of the
development of these matters to date, does not anticipate that any losses
incurred as a result of these legal proceedings would have a materially adverse
effect on the corporation's financial position.
Lease Commitments. The corporation has entered into a number of
noncancelable operating lease agreements for premises and equipment. The minimum
annual rental commitments under these leases at December 31, 1996, exclusive of
taxes and other charges were as follows: $145 million in 1997; $127 million in
1998; $112 million in 1999; $98 million in 2000; $88 million in 2001; and $555
million in 2002 and subsequent years. Total rental expense for 1996, 1995 and
1994, including cancelable and noncancelable leases, amounted to $135 million,
$162 million and $153 million, respectively.
Certain leases contain escalation clauses that correspond to increased real
estate taxes and other operating expenses, and renewal options calling for
increased rents as the leases are renewed. No restrictions are imposed by any
lease agreement regarding the payment of dividends, additional debt financing or
entering into further lease agreements.
Transaction and Dividend Restrictions. Fleet's banking subsidiaries are subject
to restrictions under federal law that limit the transfer of funds by the
subsidiary banks to Fleet and its nonbanking subsidiaries. Such transfers by any
subsidiary bank to Fleet or any nonbanking subsidiary are limited in amount to
10% of the bank's capital and surplus.
Various federal and state banking statutes limit the amount of dividends
the subsidiary banks can pay to Fleet without regulatory approval. The payment
of dividends by any subsidiary bank may also be affected by other factors such
as the maintenance of adequate capital for such subsidiary bank. Various
regulators and the boards of directors of the affected institutions continue to
review dividend declarations and capital requirements of Fleet and its
subsidiaries consistent with current earnings, future earning prospects and
other factors.
Restrictions on Cash and Due from Banks. The corporation's banking subsidiaries
are subject to requirements of the Federal Reserve to maintain certain reserve
balances. At December 31, 1996 and 1995, these reserve balances were $964
million and $1,363 million, respectively.
NOTE 18.
Regulatory Matters
As a bank holding company, Fleet is subject to regulation by the Federal Reserve
Board (Federal Reserve), the Office of Thrift Supervision (OTS), and the Office
of the Comptroller of the Currency (OCC), as well as state regulators. Under
capital adequacy guidelines and the regulatory framework to be well capitalized
under the prompt corrective action provision, Fleet and its banking subsidiaries
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. These regulatory capital requirements are set
forth in terms of (1) Risk-based Total Capital (Total Capital/risk-weighted on-
and off-balance-sheet assets); (2) Risk-based Tier 1 Capital (Tier 1
Capital/risk-weighted on- and off-balance-sheet assets); and (3) Leverage (Tier
1 Capital/ average quarterly assets).
To meet all minimum regulatory capital requirements, Fleet and its banking
subsidiaries must maintain a minimum risk-based Total Capital ratio of at least
8%, a risk-based Tier 1 Capital ratio of at least 4% and a Tier 1 Leverage ratio
of at least 4%. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial statements. To
be categorized
64
<PAGE>
as well-capitalized under the prompt corrective action provision, Fleet's
banking subsidiaries must maintain a risk-based Total Capital ratio of at least
10%, a risk-based Tier 1 Capital ratio of at least 6% and a Leverage ratio of at
least 5%, and not be subject to a written agreement, order or capital directive.
Neither Fleet nor any of its subsidiaries has entered into formal written
agreements with state and federal regulators or is subject to any orders or
capital directives.
The following table presents capital information for the corporation as of
December 31, 1996 and 1995:
Regulatory Capital Ratios
December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------
Fleet Financial Group
Actual:
Risk-Based Total Capital $8,929 11.36% $7,830 11.29%
Risk-Based Tier 1 Capital 6,027 7.67 5,283 7.61
Leverage 6,027 7.14 5,283 6.40
Required to meet
regulatory minimum
capital standards:
Risk-Based Total Capital 6,286 8.00 6,551 8.00
Risk-Based Tier 1 Capital 3,143 4.00 2,775 4.00
Leverage 3,374 4.00 2,358 4.00
=======================================
As of December 31, 1996, Fleet's banking subsidiaries were categorized as
well-capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
NOTE 19.
Disclosure for Statements of Cash Flows
Cash Flow Disclosure
Year ended December 31
Dollars in millions 1996 1995 1994
- -------------------------------------------------------------------------------
Supplemental disclosure for
cash paid during the period for:
Interest expense $ 2,405 $ 2,995 $ 2,096
Income taxes, net of refund 299 194 370
- -------------------------------------------------------------------------------
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to
foreclosed property and
repossessed equipment $ 27 $ 72 $ 86
Securitization of residential loans 1,998 -- --
Reclassification of securities from
securities held to maturity to
available for sale -- 5,308 --
Conversion of DCP
to common stock -- 439 --
Retirement of treasury stock -- 347 --
Retirement of common stock 34 -- --
Transfer of assets to held for sale
or accelerated disposition 110 1,725 --
Adjustment to
unrealized gain (loss) on
securities available for sale (21) 463 (649)
- -------------------------------------------------------------------------------
Assets acquired and liabilities
assumed in business
combinations were as follows:
Assets acquired, net of
cash and cash equivalents
received (paid) $ 17,848 $ 8,920 $ 347
Net cash and cash equivalents
received (paid) 2,386 (2,816) (56)
Liabilities assumed 20,234 5,715 291
Common stock issued -- 193 --
Treasury stock reissued -- 196 --
- -------------------------------------------------------------------------------
Divestitures:
Assets sold, net of cash received $ 3,119 $ -- $ --
Net cash received for divestitures 768 -- --
Liabilities sold 2,351 -- --
==================================
65
<PAGE>
NOTE 20.
Parent Company Only Financial Statements
Statements of Income
Year ended December 31
Dollars in millions 1996 1995 1994
- --------------------------------------------------------------------------------
Dividends from subsidiaries:
Banking subsidiaries $ 727 $ 817 $ 427
Other subsidiaries 130 246 37
Interest income 205 153 140
Other 38 67 114
- --------------------------------------------------------------------------------
Total income 1,100 1,283 718
- --------------------------------------------------------------------------------
Interest expense 306 296 215
Noninterest expense 50 156 74
- --------------------------------------------------------------------------------
Total expenses 356 452 289
- --------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
income of subsidiaries 744 831 429
Applicable income taxes (benefit) (47) (54) 34
- --------------------------------------------------------------------------------
Income before equity in
undistributed income
of subsidiaries 791 885 395
Equity in undistributed
income of subsidiaries 348 (275) 454
- --------------------------------------------------------------------------------
Net income $ 1,139 $ 610 $ 849
=======================================
Balance Sheets
December 31
Dollars in millions 1996 1995
- --------------------------------------------------------------------------------
Assets:
Money market instruments $ 813 $ 194
Securities 100 150
Loans receivable from:
Banking subsidiaries 1,838 519
Other subsidiaries 874 2,120
- --------------------------------------------------------------------------------
2,712 2,639
Investment in subsidiaries:
Banking subsidiaries 8,265 6,597
Other subsidiaries (153) 1,005
- --------------------------------------------------------------------------------
8,112 7,602
- --------------------------------------------------------------------------------
Other 398 404
- --------------------------------------------------------------------------------
Total assets $ 12,135 $ 10,989
===========================
Liabilities:
Short-term borrowings $ 676 $ 803
Accrued liabilities 492 435
Long-term debt 3,552 3,386
- --------------------------------------------------------------------------------
Total liabilities 4,720 4,624
Stockholders' equity 7,415 6,365
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 12,135 $ 10,989
===========================
Statements of Cash Flows
Year ended December 31
Dollars in millions 1996 1995 1994
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,139 $ 610 $ 849
Adjustments for noncash items:
Equity in undistributed
income of subsidiaries (348) 275 (454)
Depreciation and amortization 11 18 16
Net securities gains (18) (29) (13)
Increase (decrease) in
accrued liabilities, net (26) (56) 38
Other, net (131) (79) 136
- -------------------------------------------------------------------------------
Net cash flow provided
by operating activities 627 739 572
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities (3) (205) (908)
Proceeds from sales and
maturities of securities 65 543 739
Net increase in loans
made to affiliates (57) (780) (52)
Return of capital from
subsidiaries 1,756 -- --
Capital contributions
to subsidiaries (1,802) (219) (210)
Acquisition of minority interest
in subsidiary -- (158) --
- -------------------------------------------------------------------------------
Net cash flow used in
investing activities (41) (819) (431)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in
short-term borrowings (144) (404) 297
Proceeds from issuance of
long-term debt 650 1,014 400
Repayments of long-term debt (484) (242) (317)
Proceeds from issuance
of common stock 77 124 70
Proceeds from issuance
of preferred stock 635 125 --
Redemption and repurchase
of common and preferred stock (203) (446) (375)
Cash dividends paid (498) (373) (299)
- -------------------------------------------------------------------------------
Net cash flow (used in)
provided by financing activities 33 (202) (224)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 619 (282) (83)
Cash and cash equivalents
at beginning of year 194 476 559
- -------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 813 $ 194 $ 476
===================================
66
<PAGE>
Supplemental
Financial Information
RATE/VOLUME ANALYSIS (Unaudited)
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Dollars in millions Increase (Decrease) Due to(a) Increase (Decrease) Due to(a)
- ---------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:(b)
Interest-bearing deposits $ (13) $ (6) $ (19) $ 2 $ 7 $ 9
Federal funds sold and securities purchased
under agreements to resell -- (1) (1) 21 3 24
Trading account securities 1 (2) (1) (3) 2 (1)
Securities available for sale (161) 28 (133) (260) 34 (226)
Securities held to maturity (517) 114 (403) (63) 28 (35)
Nontaxable securities 6 (4) 2 (2) 10 8
Loans and leases 398 (188) 210 602 403 1,005
Mortgages held for resale 33 (1) 32 10 15 25
Assets held for disposition 122 -- 122 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (131) (60) (191) 307 502 809
- ---------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits--
Savings 63 (41) 22 (33) 130 97
Time 32 (27) 5 244 215 459
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 95 (68) 27 211 345 556
- ---------------------------------------------------------------------------------------------------------------------
Short-term borrowings (423) (82) (505) (47) 221 174
Long-term debt (78) (10) (88) 85 29 114
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (406) (160) (566) 249 595 844
- ---------------------------------------------------------------------------------------------------------------------
Net interest differential(c) $ 275 $ 100 $ 375 $ 58 $ (93) $ (35)
===================================================================
</TABLE>
(a) The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
(b) Tax-equivalent adjustment has been included in the calculations to reflect
this income as if it had been fully taxable. The tax-equivalent adjustment
is based upon the applicable federal and state income tax rates. The FTE
adjustment included in interest income was $36 million in 1996, $44 million
in 1995 and $52 million in 1994.
(c) Includes fee income of $165 million, $110 million and $108 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
QUARTERLY SUMMARIZED FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
By quarter 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
except per share data 1 2 3 4 Year 1 2 3 4 Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,337 $1,477 $1,539 $1,489 $5,842 $1,448 $1,539 $1,540 $1,498 $6,025
Interest expense 613 622 615 589 2,439 692 775 777 761 3,005
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 724 855 924 900 3,403 756 764 763 737 3,020
- -------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 35 48 65 65 213 20 28 27 26 101
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 689 807 859 835 3,190 736 736 736 711 2,919
Securities available for sale
gains 18 20 -- 5 43 1 4 7 20 32
Other noninterest income 501 529 555 573 2,158 403 472 442 506 1,823
- -------------------------------------------------------------------------------------------------------------------------
1,208 1,356 1,414 1,413 5,391 1,140 1,212 1,185 1,237 4,774
Noninterest expense 758 885 911 906 3,460 765 797 747 1,431 3,740
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 450 471 503 507 1,931 375 415 438 (194) 1,034
Applicable income taxes 186 193 208 205 792 149 161 170 (56) 424
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 264 $ 278 $ 295 $ 302 $1,139 $ 226 $ 254 $ 268 $ (138) $ 610
===========================================================================================
Earnings (loss) per share $ 0.94 $ 0.96 $ 1.02 $ 1.05 $ 3.95 $ 0.82 $ 0.91 $ 0.96 $(1.17) $ 1.57
===========================================================================================
</TABLE>
67
<PAGE>
CONSOLIDATED AVERAGE BALANCES/INTEREST EARNED-PAID/RATES 1992-1996 (Unaudited)
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Interest Interest
December 31 Average Earned/ Average Earned/
Dollars in millions(a) Balance Paid(b) Rate Balance Paid(b) Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 82 $ 4 4.39% $ 325 $ 23 7.08%
Federal funds sold and securities purchased
under agreements to resell 733 38 5.24 662 39 5.89
Trading account securities 93 3 3.42 79 4 5.06
Securities available for sale 10,287 664 6.45 12,779 797 6.24
Securities held to maturity 121 9 7.20 6,954 412 5.92
Nontaxable securities 924 61 6.60 782 59 7.54
Loans and leases(c) 56,074 4,829 8.61 51,043 4,619 9.03
Mortgages held for resale 1,878 148 7.87 1,459 116 7.96
Assets held for disposition 1,253 122 9.77 -- -- --
Foreclosed property and repossessed equipment 52 -- -- 97 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 71,497 5,878 8.22 74,180 6,069 8.17
- ---------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 481 -- -- 539 -- --
Reserve for credit losses (1,493) -- -- (1,489) -- --
Other assets 12,639 -- -- 9,497 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 83,124 $ 5,878 -- $ 82,727 $ 6,069 --
=======================================================================
Liabilities and stockholders' equity:
Deposits--
Savings $ 26,363 $ 614 2.33% $ 22,987 $ 592 2.57%
Time 20,971 1,140 5.44 20,133 1,135 5.64
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 47,334 1,754 3.70 43,120 1,727 4.00
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 5,844 295 5.05 14,046 800 5.69
Long-term debt 5,486 390 7.10 6,581 478 7.26
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 58,664 2,439 4.16 63,747 3,005 4.71
- ---------------------------------------------------------------------------------------------------------------------------
Net interest spread 3,439 4.06 3,064 3.46
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits 15,042 -- -- 10,910 -- --
Other liabilities 2,397 -- -- 1,525 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 76,103 2,439 76,182 3,005 --
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity and dual
convertible preferred stock 7,021 -- -- 6,545 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 83,124 $ 2,439 -- $ 82,727 $ 3,005 --
=======================================================================
Net interest margin 4.81% 4.12%
=======================================================================
<CAPTION>
1994
- ---------------------------------------------------------------------------------------------------------
Interest
December 31 Average Earned/ Average
Dollars in millions(a) Balance Paid(b) Rate Balance
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 292 $ 14 4.79% $ 47
Federal funds sold and securities purchased
under agreements to resell 296 15 5.07 570
Trading account securities 99 5 4.95 114
Securities available for sale 16,923 1,023 6.05 14,140
Securities held to maturity 7,971 447 5.61 7,056
Nontaxable securities 816 51 6.25 679
Loans and leases(c) 44,102 3,614 8.17 43,283
Mortgages held for resale 1,322 91 6.90 2,384
Assets held for disposition -- -- -- --
Foreclosed property and repossessed equipment 166 -- -- 211
- ---------------------------------------------------------------------------------------------------------
Total interest-earning assets 71,987 5,260 7.29 68,484
- ---------------------------------------------------------------------------------------------------------
Accrued interest receivable 533 -- -- 512
Reserve for credit losses (1,600) -- -- (1,829)
Other assets 8,641 -- -- 8,119
- ---------------------------------------------------------------------------------------------------------
Total assets $ 79,561 $ 5,260 -- $ 75,286
=====================================================
Liabilities and stockholders' equity:
Deposits--
Savings $ 24,803 $ 495 2.00% $ 25,086
Time 15,310 676 4.41 14,680
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 40,113 1,171 2.92 39,766
- ---------------------------------------------------------------------------------------------------------
Short-term borrowings 15,355 626 4.07 12,807
Long-term debt 5,383 364 6.76 5,039
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 60,851 2,161 3.55 57,612
- ---------------------------------------------------------------------------------------------------------
Net interest spread 3,099 3.74
- ---------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits 11,227 -- -- 10,854
Other liabilities 1,701 -- -- 1,509
- ---------------------------------------------------------------------------------------------------------
Total liabilities 73,779 2,161 -- 69,975
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity and dual
convertible preferred stock 5,782 -- -- 5,311
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 79,561 $ 2,161 -- $ 75,286
=====================================================
Net interest margin 4.30%
=====================================================
<CAPTION>
1993 1992
- --------------------------------------------------------------------------------------------------------------
Interest Interest
December 31 Earned/ Average Earned/
Dollars in millions(a) Paid(b) Rate Balance Paid(b) Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 1 2.13% $ 74 $ 3 4.05%
Federal funds sold and securities purchased
under agreements to resell 18 3.16 1,195 34 3.16
Trading account securities 5 4.17 113 6 5.31
Securities available for sale 960 6.79 14,061 1,102 7.84
Securities held to maturity 430 6.09 3,846 286 7.44
Nontaxable securities 44 6.48 454 24 5.29
Loans and leases(c) 3,459 7.99 43,029 3,688 8.57
Mortgages held for resale 169 7.10 1,974 175 8.88
Assets held for disposition -- -- -- -- --
Foreclosed property and repossessed equipment -- -- 513 -- --
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,086 7.43 65,259 5,318 8.15
- --------------------------------------------------------------------------------------------------------------
Accrued interest receivable -- -- 522 -- --
Reserve for credit losses -- -- (2,063) -- --
Other assets -- -- 7,915 -- --
- --------------------------------------------------------------------------------------------------------------
Total assets $ 5,086 -- $ 71,633 $ 5,318 --
==========================================================
Liabilities and stockholders' equity:
Deposits--
Savings $ 527 2.10% $ 23,532 $ 718 3.05%
Time 639 4.35 18,499 981 5.30
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,166 2.93 42,031 1,699 4.04
- --------------------------------------------------------------------------------------------------------------
Short-term borrowings 388 3.03 8,848 306 3.46
Long-term debt 363 7.20 4,116 332 8.06
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,917 3.33 54,995 2,337 4.25
- --------------------------------------------------------------------------------------------------------------
Net interest spread 3,169 4.10 2,981 3.90
- --------------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits -- -- 10,999 -- --
Other liabilities -- -- 1,238 -- --
- --------------------------------------------------------------------------------------------------------------
Total liabilities 1,917 -- 67,232 2,337 --
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity and dual
convertible preferred stock -- -- 4,401 -- --
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,917 -- $ 71,633 $ 2,337 --
==========================================================
Net interest margin 4.63% 4.57%
==========================================================
</TABLE>
(a) The data in this table is presented on a taxable-equivalent basis. The
tax-equivalent adjustment is based upon the applicable federal and state
income tax rates.
(b) Includes fee income of $165 million, $110 million, $108 million, $119
million and $124 million for the years ended December 31, 1996, 1995, 1994,
1993 and 1992, respectively.
(c) Nonperforming loans are included in average balances used to determine
rates.
COMMON STOCK PRICE AND DIVIDEND INFORMATION(a) (Unaudited)
<TABLE>
<CAPTION>
By quarter 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 3 4 Year 1 2 3 4 Year
- ------------------------------------------------------------------------------------------------------------------------------------
Stock price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 42 1/2 $ 45 3/8 $ 44 5/8 $ 55 7/8 $ 55 7/8 $ 34 5/8 $ 38 3/8 $ 39 1/8 $ 43 $ 43
Low 39 1/4 40 3/8 38 1/2 44 7/8 38 1/2 30 7/8 32 1/8 35 38 1/8 30 7/8
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends
declared .43 .43 .43 .45 1.74 .40 .40 .40 .43 1.63
Dividends paid .43 .43 .43 .43 1.72 .40 .40 .40 .40 1.60
====================================================================================================================================
</TABLE>
(a) Fleet's common stock is listed on the New York Stock Exchange (NYSE). The
table above sets forth, for the periods indicated, the range of high and
low sale prices per share of Fleet's common stock on the composite tape and
dividends declared and paid per share.
LOAN AND LEASE MATURITY
(Unaudited)
December 31, 1996 Within 1 to 5 After 5
Dollars in millions 1 Year Years Years Total
- ----------------------------------------------------------------------
Commercial and industrial $ 8,696 $17,287 $ 3,295 $29,278
Residential real estate 1,048 3,233 3,767 8,048
Consumer 2,214 4,821 5,419 12,454
Commercial real estate:
Construction 564 452 58 1,074
Interim/permanent 2,113 2,242 1,024 5,379
Lease financing 412 2,148 51 2,611
- ----------------------------------------------------------------------
Total $15,047 $30,183 $13,614 $58,844
========================================
INTEREST SENSITIVITY OF LOANS OVER ONE YEAR (Unaudited)
December 31, 1996 Predetermined Floating
Dollars in millions Interest Rates Interest Rates Total
- -------------------------------------------------------------------------
1 to 5 years $ 9,295 $20,888 $30,183
After 5 years 3,887 9,727 13,614
- -------------------------------------------------------------------------
Total $13,182 $30,615 $43,797
=========================================
68-69
<PAGE>
Officers and Directors
OFFICERS
Terrence Murray
Chairman, President, and
Chief Executive Officer
Robert J. Higgins
Vice Chairman
Gunnar S. Overstrom, Jr.
Vice Chairman
H. Jay Sarles
Vice Chairman
Michael R. Zucchini
Vice Chairman
David L. Eyles
Executive Vice President and
Chief Credit Policy Officer
Eugene M. McQuade
Executive Vice President and
Chief Financial Officer
Anne M. Finucane
Senior Vice President
Robert B. Hedges, Jr.
Senior Vice President
William C. Mutterperl
Senior Vice President,
Secretary, and General Counsel
Anne M. Slattery
Senior Vice President
M. Anne Szostak
Senior Vice President
Douglas L. Jacobs
Treasurer
Robert C. Lamb, Jr.
Controller and Chief
Accounting Officer
Brian T. Moynihan
Managing Director,
Corporate Strategy
and Development
Thomas R. Rice
Director, Investor Relations
Edwin J. Santos
Director, Corporate Auditing
BOARD OF DIRECTORS
Terrence Murray
Chairman, President, and
Chief Executive Officer
Fleet Financial Group
Boston, MA
Joel B. Alvord
Retired Chairman
Fleet Financial Group
Boston, MA
William Barnet, III
President and
Chief Executive Officer
William Barnet & Son, Inc.
Spartanburg, SC, processing
and trading natural and
synthetic yarns, fibers,
and resins
Bradford R. Boss
Chairman
A.T. Cross Company
Lincoln, RI, a manufacturer
and distributor of fine writing
instruments and leather goods
Stillman B. Brown
President
Harcott Corporation
Hartford, CT, an
investments firm
Paul J. Choquette, Jr.
President
Gilbane Building Company
Providence, RI, a national
construction firm
John T. Collins
Chairman and
Chief Executive Officer
The Collins Group, Inc.
Boston, MA, an
acquisition company
Bernard M. Fox
Chairman, President, and
Chief Executive Officer
Northeast Utilities
Hartford, CT, an
electric utility company
James F. Hardymon
Chairman and
Chief Executive Officer
Textron Inc.
Providence, RI, a
multi-industry company
Robert M. Kavner
Chief Executive Officer and
President
On Command Corporation
San Jose, CA, providers of
in-room video services to
the lodging industry
Raymond C. Kennedy
Chairman
Kendell Holdings, Inc.
Hudson, NY, a private venture
capital company investing in
small, new companies
Robert J. Matura
Chairman and
Chief Executive Officer
Treefort Fellows and
Robert J. Matura & Associates
Stamford, CT, consulting
firm specializing in international
textiles, apparel, and retailing
Arthur C. Milot
Private Investor
Jamestown, RI
Thomas D. O'Connor, Sr.
Chairman and
Chief Executive Officer
Mohawk Paper Mills, Inc.
Cohoes, NY, a manufacturer
and distributor of fine
printing papers
Michael B. Picotte
Managing General Partner and
Chief Executive Officer
The Picotte Companies
Albany, NY, investment
builders of commercial
office buildings
Lois D. Rice
Guest Scholar
Program in Economic Studies
Brookings Institution
Washington, DC
John R. Riedman
Chairman
Riedman Corp.
Rochester, NY, a national
insurance brokerage firm
John S. Scott
Retired Chairman
Richardson-Vicks Inc.
Wilton, CT, a worldwide
marketer of consumer
products
Samuel O. Thier, M.D.
Chief Executive Officer
Partners HealthCare
System, Inc.
Boston, MA
Paul R. Tregurtha
Chairman and
Chief Executive Officer
Mormac Marine Group, Inc.
Stamford, CT
Chairman
Moran Towing & Transportation
Company
Greenwich, CT,
marine shipping companies
70
<PAGE>
Affiliates
and Stockholder Information
BANKING COMPANIES
Fleet National Bank Fleet Bank-NH
Gunnar S. Overstrom Michael C. Whitney
Chairman Chairman, President, and CEO
Robert J. Higgins 1155 Elm Street
President Manchester, NH 03101
Ph: (603) 647-3700
Eileen S. Kraus
Chairman-CT Fleet Bank
Richard A. Higginbotham Erland E. Kailbourne
President and CEO-CT Chairman and CEO
777 Main Street Hermes L. Ames
Hartford, CT 06115 President
Ph: (860) 986-2000 Peter D. Kiernan Plaza
Albany, NY 12207
Leo R. Breitman Ph: (518) 447-4100
Chairman and CEO-MA
John P. Hamill Fleet Bank, N.A.
President-MA H. Jay Sarles
One Federal Street Chairman
Boston, MA 02110 John Tugwell
Ph: (617) 346-4000 President and CEO
10 Exchange Place
Thomas J. Skala Jersey City, NJ 07302
Chairman-RI Ph: (201) 547-7000
Dean T. Holt
President and CEO-RI Fleet Bank, F.S.B.
111 Westminster Street Anne Slattery
Providence, RI 02903 Chairman
Ph: (401) 278-6000 2255 Glades Road
Boca Raton, FL 33431
Fleet Bank of Maine Ph: (407) 989-2241
Paul R. McConnell
Chairman, President, and CEO
2 Portland Square
Portland, ME 04104-5091
Ph: (207) 874-5000
FINANCIAL Fleet Mortgage Group, Inc.
SERVICES COMPANIES H. Jay Sarles
Chairman
AFSA Data Corp. Michael J. Torke
Douglas A. Leafstedt President
Chairman and CEO 1333 Main Street
Steven Snyder P.O. Box 11988
President Columbia, SC 29211
2277 East 220th Street Ph: (803) 929-7900
Long Beach, CA 90810-1690
Ph: (310) 513-2700 Fleet Investment Advisors
Thomas M. O'Neill
Fleet Brokerage Securities Managing Director and
Frieda Z. Lewis Chief Investment Officer
President and CEO 75 State Street
67 Wall Street Boston, MA 02109
New York, NY 10005 Ph: (617) 346-4000
Ph: (212) 806-2888
Fleet Investment Services
Fleet Capital Michael C. Noble
Peter G. Bland Managing Director
Chairman and CEO 50 Kennedy Plaza
Irwin Teich Providence, RI 02903
President Ph: (401) 278-6000
200 Glastonbury Boulevard
Glastonbury, CT 06033 Fleet Securities, Inc.
Ph: (860) 659-3200 Joseph A. Harcum
Chairman and CEO
Fleet Capital Leasing John P. O'Brien
Ronald H. Chamides President
President 14 Wall Street, 23rd Floor
50 Kennedy Plaza New York, NY 10005
Providence, RI 02903 Ph: (212) 285-0800
Ph: (401) 278-6000
Fleet Trust and Investment
Fleet Private Equity Services Company, N.A.
(Fleet Equity Partners) H. James Field, Jr.
Robert M. Van Degna Chairman and CEO
Chairman and CEO Luther H.Hodge
Habib Y. Gorgi President
President 819 South Federal Highway
111 Westminster Street Suite 100
Providence, RI 02903 Stuart, FL 34994
Ph: (401) 278-6770 Ph: (407) 283-6404
STOCKHOLDER INFORMATION
Stockholder Accounts
If you have questions regarding your stockholder account, including address
changes, dividend payments, and Fleet's dividend reinvestment program, please
contact our stock transfer agent and registrar: Fleet National Bank, One Talcott
Plaza, Hartford, CT 06108 (800) 666-6431
Dividend Policy
The Fleet Financial Group Board of Directors considers dividends at least
annually. The current annualized dividend rate is $1.80 per common share.
Dividend Reinvestment Service
Fleet's automatic dividend reinvestment service, available upon request, enables
stockholders to have their quarterly dividends reinvested into shares of the
corporation and/or to make voluntary cash investments. All brokerage fees and
commissions for these transactions are absorbed by the corporation.
Dividend Disbursing Agent
Fleet National Bank, Hartford, CT
Independent Auditors
KPMG Peat Marwick LLP, Boston, MA
Common Stock Data
Traded: New York Stock Exchange (NYSE)
Symbol: FLT
Stockholders of record (12/31/96): 57,072
Shares outstanding (12/31/96): 261,992,124
Investor Relations
Analysts and investors seeking financial information
about Fleet Financial Group should contact:
Thomas R. Rice
Senior Vice President and Director, Investor Relations
Fleet Financial Group
One Federal Street
Boston, MA 02110-2010
(617) 346-0142
Designed by: Frankfurt Balkind Partners NY/LA/SF
<PAGE>
[LOGO] Fleet
Fleet Financial Group
One Federal Street [LOGO]
Boston, MA 02110-2010
<PAGE>
EXHIBIT 21
FLEET FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
<S> <C>
BANKING SUBSIDIARIES:
Fleet National Bank United States
Fleet Bank New York
Fleet Bank, National Association United States
Fleet Bank (Delaware) Delaware
Fleet Bank of Maine Maine
Fleet Bank-NH New Hampshire
Fleet Bank, F.S.B. United States
Non-Banking Subsidiaries:
Fleet Mortgage Group, Inc. Rhode Island
Fleet Services Corporation New York
Fleet Brokerage Securities, Inc. Delaware
Fleet Securities, Inc. New York
Fleet Private Equity Co., Inc. Rhode Island
Fleet Investment Services, Inc. Rhode Island
Fleet Investment Advisors, Inc. New York
Fleet Capital Corporation Connecticut
Fleet Capital-Leasing Corporation Rhode Island
AFSA Data Corporation Delaware
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Fleet Financial Group, Inc.
We consent to incorporation by reference in the Registration Statements
(Nos. 333-00701, 333-15435 and 33-36707) on Form S-3, the Registration
Statements (Nos. 33-19425, 33-22045, 33-48818, 33-56061, 33-57501, 33-57677,
33-62367, 33-58933, 33-64635, 33-59139 and 333-16037) on Form S-8, and the
Registration Statements (Nos. 33-58573 and 33-58933) on Form S-4 of Fleet
Financial Group, Inc. of our report dated January 15, 1997, relating to the
consolidated balance sheets of Fleet Financial Group, Inc. as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows, for each of the years in the three-year
period ended December 31, 1996, which report has been incorporated by
reference in the Annual Report on Form 10-K of Fleet Financial Group, Inc for
the year ended December 31, 1996.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED IN THE FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,385
<INT-BEARING-DEPOSITS> 858
<FED-FUNDS-SOLD> 1,772
<TRADING-ASSETS> 76
<INVESTMENTS-HELD-FOR-SALE> 7,503
<INVESTMENTS-CARRYING> 1,177
<INVESTMENTS-MARKET> 1,172
<LOANS> 58,844
<ALLOWANCE> 1,488
<TOTAL-ASSETS> 85,518
<DEPOSITS> 67,071
<SHORT-TERM> 3,627
<LIABILITIES-OTHER> 2,291
<LONG-TERM> 5,114
953
0
<COMMON> 3,148
<OTHER-SE> 3,314
<TOTAL-LIABILITIES-AND-EQUITY> 85,518
<INTEREST-LOAN> 5,087
<INTEREST-INVEST> 755
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,842
<INTEREST-DEPOSIT> 1,754
<INTEREST-EXPENSE> 2,439
<INTEREST-INCOME-NET> 3,403
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 3,460
<INCOME-PRETAX> 1,931
<INCOME-PRE-EXTRAORDINARY> 1,931
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,139
<EPS-PRIMARY> 3.97
<EPS-DILUTED> 3.95
<YIELD-ACTUAL> 4.81
<LOANS-NON> 696
<LOANS-PAST> 247
<LOANS-TROUBLED> 9
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,321
<CHARGE-OFFS> 484
<RECOVERIES> 114
<ALLOWANCE-CLOSE> 1,488
<ALLOWANCE-DOMESTIC> 1,488
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 CONSOLIDATD FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AN
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED IN THE FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,344
<INT-BEARING-DEPOSITS> 161
<FED-FUNDS-SOLD> 61
<TRADING-ASSETS> 64
<INVESTMENTS-HELD-FOR-SALE> 18,533
<INVESTMENTS-CARRYING> 798
<INVESTMENTS-MARKET> 782
<LOANS> 51,525
<ALLOWANCE> 1,321
<TOTAL-ASSETS> 84,432
<DEPOSITS> 57,122
<SHORT-TERM> 12,569
<LIABILITIES-OTHER> 1,895
<LONG-TERM> 6,481
399
0
<COMMON> 3,152
<OTHER-SE> 2,814
<TOTAL-LIABILITIES-AND-EQUITY> 84,432
<INTEREST-LOAN> 4,721
<INTEREST-INVEST> 1,304
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,025
<INTEREST-DEPOSIT> 1,726
<INTEREST-EXPENSE> 3,005
<INTEREST-INCOME-NET> 3,020
<LOAN-LOSSES> 101
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 3,740
<INCOME-PRETAX> 1,034
<INCOME-PRE-EXTRAORDINARY> 1,034
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 610
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 4.12
<LOANS-NON> 499
<LOANS-PAST> 198
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,496
<CHARGE-OFFS> 418
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 1,321
<ALLOWANCE-DOMESTIC> 1,321
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 236
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1995 CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED IN THE
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 4,641
<INT-BEARING-DEPOSITS> 2,972
<FED-FUNDS-SOLD> 957
<TRADING-ASSETS> 120
<INVESTMENTS-HELD-FOR-SALE> 12,250
<INVESTMENTS-CARRYING> 8,891
<INVESTMENTS-MARKET> 8,452
<LOANS> 46,035
<ALLOWANCE> 1,496
<TOTAL-ASSETS> 81,026
<DEPOSITS> 55,528
<SHORT-TERM> 12,586
<LIABILITIES-OTHER> 1,510
<LONG-TERM> 5,931
557
0
<COMMON> 2,856
<OTHER-SE> 2,058
<TOTAL-LIABILITIES-AND-EQUITY> 81,026
<INTEREST-LOAN> 3,694
<INTEREST-INVEST> 1,514
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,208
<INTEREST-DEPOSIT> 1,171
<INTEREST-EXPENSE> 2,161
<INTEREST-INCOME-NET> 3,047
<LOAN-LOSSES> 65
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 3,160
<INCOME-PRETAX> 1,380
<INCOME-PRE-EXTRAORDINARY> 1,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849
<EPS-PRIMARY> 3.09
<EPS-DILUTED> 3.09
<YIELD-ACTUAL> 4.30
<LOANS-NON> 761
<LOANS-PAST> 139
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,669
<CHARGE-OFFS> 377
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 1,496
<ALLOWANCE-DOMESTIC> 1,496
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 378
</TABLE>
