<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MAY 5, 1998
-----------------------------------------------------------------------
FLEET FINANCIAL GROUP, INC.
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
RHODE ISLAND
-----------------------------------------------------------------------
(State or other jurisdiction of incorporation)
1-6366 05-0341324
---------------------------- ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
One Federal Street, Boston, MA 02211
------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-346-4000
------------
----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. OTHER EVENTS.
On February 1, 1998, Fleet Financial Group, Inc. ("Fleet")
consummated the merger of The Quick & Reilly Group, Inc.
("Quick & Reilly") with and into Fleet. Each Quick & Reilly
stockholder received for each share of Quick & Reilly common
stock ("Quick & Reilly Common Stock") held by such
stockholder, except for shares held by dissenting
shareholders, 0.578 shares of the Common Stock, $0.01 par
value (including the associated preferred share purchase
rights), of Fleet ("Fleet Common Stock").
The Merger was accounted for as a pooling-of-interests. Fleet
hereby files financial statements for the years ended December
31, 1997, 1996, and 1995.
Item 7. FINANCIAL STATEMENTS AND OTHER EXHIBITS.
(a) Not applicable
(b) Not applicable
(c) Exhibits
The following exhibits are filed as part of this report:
11 Computations of Equivalent Shares and Per Share Earnings
12 Computations of Consolidated Ratio of Earnings to Fixed
Charges
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules
99 Management's Discussion and Analysis; Supplemental Financial
Information; Selected Financial Highlights; Management's
Report on Financial Statements; Report of Independent
Auditors; Consolidated Balance Sheets of Fleet as of December
31, 1997, and 1996, Consolidated Statements of Income of Fleet
for years ended December 31, 1997, 1996, and 1995,
Consolidated Statements of Changes in Stockholders' Equity and
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
FLEET FINANCIAL GROUP, INC.
Registrant
By: /s/ Robert C. Lamb, Jr.
----------------------------
Robert C. Lamb, Jr.
Controller
Chief Accounting Officer
Dated: May 5, 1998
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
FLEET FINANCIAL GROUP, INC.
COMPUTATIONS OF EQUIVALENT SHARES AND PER SHARE EARNINGS
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
1997 1996 1995
------------------------------ ----------------------------- ---------------------------
Basic Diluted Basic Diluted Basic Diluted
--------------- ------------- ------------ --------------- ------------ -------------
Equivalent shares:
<S> <C> <C> <C> <C> <C> <C>
Average shares outstanding 275,978,241 275,978,241 284,448,131 284,448,131 265,459,028 265,459,028
Additional shares due to:
Stock options - 2,897,825 - 1,599,088 - 952,901
Warrants - 5,426,339 - 3,965,768 - 3,549,616
Dual convertible preferred stock - - - - - 16,033,994
=============== ============= ============ =============== ============ =============
Total equivalent shares 275,978,241 284,302,405 284,448,131 290,012,987 265,459,028 285,995,539
=============== ============= ============ =============== ============ =============
(Dollars in millions, except per
share data)
Earnings per share:
Net income $1,367 $1,367 $1,221 $1,221 $ 679 $ 679
Less: Preferred stock dividends (62) (62) (72) (72) (37) (37)
Exchange of dual convertible
preferred stock - - - - (157) (157)
--------------- ------------- ------------ --------------- ------------ -------------
Adjusted net income $1,305 $1,305 $1,149 $1,149 $ 485 $ 485
=============== ============= ============ =============== ============ =============
Total equivalent shares 275,978,241 284,302,405 284,448,131 290,012,987 265,459,028 285,995,539
=============== ============= ============ =============== ============ =============
Earnings per share on net income $ 4.73 $ 4.59 $ 4.04 $ 3.96 $ 1.83 $ 1.70
=============== ============= ============ =============== ============ =============
</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
(DOLLARS IN MILLIONS)
Year ended December 31
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C>
Income before income taxes and cumulative effect of
accounting changes $2,294 $2,070 $1,156 $1,460 $1,173
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 737 813 1,413 1,074 790
(2) 1/3 of rent 53 55 52 53 54
(b) Preferred dividends 104 117 62 51 54
============ =========== ============ =========== ============
(c) Adjusted earnings $3,188 $3,055 $2,683 $2,638 $2,071
============ =========== ============ =========== ============
Fixed charges and preferred dividends $ 894 $ 985 $1,527 $1,178 $ 898
============ =========== ============ =========== ============
Adjusted earnings/fixed charges 3.57 x 3.10 x 1.76 x 2.24 x 2.31 x
============ =========== ============ =========== ============
<CAPTION>
INCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C>
Income before income taxes and cumulative effect of
accounting changes $2,294 $2,070 $1,156 $1,460 $1,173
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 737 813 1,413 1,074 790
(2) 1/3 of rent 53 55 52 53 54
(3) Interest on deposits 1,654 1,754 1,726 1,170 1,165
(b) Preferred dividends 104 117 63 51 54
============ =========== ============ =========== ============
(c) Adjusted earnings $4,842 $4,809 $4,410 $3,808 $3,236
============ =========== ============ =========== ============
Fixed charges and preferred dividends $2,548 $2,739 $3,254 $2,348 $2,063
============ =========== ============ =========== ============
Adjusted earnings/fixed charges 1.90 x 1.76 x 1.36 x 1.62 x 1.57 x
============ =========== ============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12 (CONTINUED)
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
Year ended December 31
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C>
Income before income taxes and cumulative effect of
accounting changes $2,294 $2,070 $1,156 $1,460 $1,173
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 737 813 1,413 1,074 790
(2) 1/3 of rent 53 55 52 53 54
============ =========== ============ =========== ============
(b) Adjusted earnings $3,084 $2,938 $2,621 $2,587 $2,017
============ =========== ============ =========== ============
Fixed charges $ 790 $ 868 $1,465 $1,127 $ 844
============ =========== ============ =========== ============
Adjusted earnings/fixed charges 3.90 x 3.38 x 1.79 x 2.30 x 2.39 x
============ =========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
INCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
Year ended December 31
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C> <C>
Income before income taxes and cumulative effect of
accounting changes $2,294 $2,070 $1,156 $1,460 $1,173
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 737 813 1,413 1,074 790
(2) 1/3 of rent 53 55 52 53 54
(3) Interest on deposits 1,654 1,754 1,726 1,170 1,165
============ =========== ============ =========== ============
(b) Adjusted earnings $4,738 $4,692 $4,347 $3,757 $3,182
============ =========== ============ =========== ============
Fixed charges $2,444 $2,622 $3,191 $2,297 $2,009
============ =========== ============ =========== ============
Adjusted earnings/fixed charges 1.94 x 1.79 x 1.36 x 1.64 x 1.58 x
============ =========== ============ =========== ============
</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.
33-19425, 33-25872, 33-65230, 33-48818, 33-56061, 33-62367, 33-58933, 33-64635,
33-59139, 333-16037 and 333-44517) on Form S-8, the registration statements
(Nos. 333-00701, 333-37231, 333-43625, 33-36707 and 333-48043) on Form S-3, and
the registration statements (Nos. 33-58573, 33-58933 and 333-42247) on Form S-4
of Fleet Financial Group, Inc. of our report dated February 1, 1998, relating to
the consolidated balance sheets of Fleet Financial Group, Inc. as of December
31, 1997 and 1996, 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, 1997, which report appears in the Current Report on
Form 8-K of Fleet Financial Group, Inc. dated May 1, 1998.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1997 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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,000
<INT-BEARING-DEPOSITS> 76
<FED-FUNDS-SOLD> 498
<TRADING-ASSETS> 290
<INVESTMENTS-HELD-FOR-SALE> 8,113
<INVESTMENTS-CARRYING> 1,249
<INVESTMENTS-MARKET> 1,254
<LOANS> 62,565
<ALLOWANCE> 1,432
<TOTAL-ASSETS> 91,047
<DEPOSITS> 63,735
<SHORT-TERM> 7,505
<LIABILITIES-OTHER> 6,855
<LONG-TERM> 4,500
0
691
<COMMON> 3,332
<OTHER-SE> 4,429
<TOTAL-LIABILITIES-AND-EQUITY> 91,047
<INTEREST-LOAN> 5,357
<INTEREST-INVEST> 570
<INTEREST-OTHER> 164
<INTEREST-TOTAL> 6,091
<INTEREST-DEPOSIT> 1,654
<INTEREST-EXPENSE> 2,391
<INTEREST-INCOME-NET> 3,700
<LOAN-LOSSES> 322
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 3,715
<INCOME-PRETAX> 2,294
<INCOME-PRE-EXTRAORDINARY> 2,294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,367
<EPS-PRIMARY> 4.73
<EPS-DILUTED> 4.59
<YIELD-ACTUAL> 5.01
<LOANS-NON> 392
<LOANS-PAST> 202
<LOANS-TROUBLED> 12
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,488
<CHARGE-OFFS> 514
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 1,432
<ALLOWANCE-DOMESTIC> 1,432
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 304
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1997 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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,474
<INT-BEARING-DEPOSITS> 858
<FED-FUNDS-SOLD> 1,772
<TRADING-ASSETS> 237
<INVESTMENTS-HELD-FOR-SALE> 7,503
<INVESTMENTS-CARRYING> 1,177
<INVESTMENTS-MARKET> 1,172
<LOANS> 59,861
<ALLOWANCE> 1,488
<TOTAL-ASSETS> 89,650
<DEPOSITS> 67,071
<SHORT-TERM> 4,194
<LIABILITIES-OTHER> 5,481
<LONG-TERM> 5,114
0
953
<COMMON> 3,226
<OTHER-SE> 3,611
<TOTAL-LIABILITIES-AND-EQUITY> 89,650
<INTEREST-LOAN> 5,169
<INTEREST-INVEST> 723
<INTEREST-OTHER> 136
<INTEREST-TOTAL> 6,028
<INTEREST-DEPOSIT> 1,754
<INTEREST-EXPENSE> 2,566
<INTEREST-INCOME-NET> 3,462
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 3,512
<INCOME-PRETAX> 2,070
<INCOME-PRE-EXTRAORDINARY> 2,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,221
<EPS-PRIMARY> 4.04
<EPS-DILUTED> 3.96
<YIELD-ACTUAL> 4.68
<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, 1997 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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,478
<INT-BEARING-DEPOSITS> 161
<FED-FUNDS-SOLD> 61
<TRADING-ASSETS> 219
<INVESTMENTS-HELD-FOR-SALE> 18,533
<INVESTMENTS-CARRYING> 798
<INVESTMENTS-MARKET> 782
<LOANS> 52,566
<ALLOWANCE> 1,321
<TOTAL-ASSETS> 87,955
<DEPOSITS> 57,122
<SHORT-TERM> 13,332
<LIABILITIES-OTHER> 4,353
<LONG-TERM> 6,481
0
399
<COMMON> 3,229
<OTHER-SE> 3,039
<TOTAL-LIABILITIES-AND-EQUITY> 87,955
<INTEREST-LOAN> 4,792
<INTEREST-INVEST> 1,250
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 6,212
<INTEREST-DEPOSIT> 1,726
<INTEREST-EXPENSE> 3,139
<INTEREST-INCOME-NET> 3,073
<LOAN-LOSSES> 101
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 3,755
<INCOME-PRETAX> 1,156
<INCOME-PRE-EXTRAORDINARY> 1,156
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 679
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.03
<LOANS-NON> 440
<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>
<PAGE>
Exhibit 99.
<TABLE>
<CAPTION>
SELECTED FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share amounts
Prepared on an FTE basis 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 3,739 $ 3,498 $ 3,118 $ 3,144 $ 3,198
Provision for credit losses 322 213 101 65 327
Noninterest income 2,631 2,333 1,939 1,654 1,833
Noninterest expense 3,715 3,512 3,755 3,221 3,479
Net income 1,367 1,221 679 890 859
PER COMMON SHARE
Basic earnings $ 4.73 $ 4.04 $ 1.83 $ 3.25 $ 3.18
Diluted earnings 4.59 3.96 1.70 3.00 2.95
Market value (year-end) 75.13 49.88 40.75 32.38 33.38
Cash dividends declared 1.84 1.74 1.63 1.40 1.03
Book value (year-end) 27.36 24.08 22.03 19.87 20.74
AT YEAR-END
Assets $91,047 $89,650 $87,955 $83,608 $81,727
Securities 9,362 8,680 19,331 21,141 24,839
Loans 62,565 59,861 52,566 46,687 44,347
Reserve for credit losses 1,432 1,488 1,321 1,496 1,669
Deposits 63,735 67,071 57,122 55,528 49,827
Short-term borrowings 7,505 4,194 13,332 13,038 16,837
Long-term debt 4,500 5,114 6,481 5,931 5,217
Total stockholders' equity 8,452 7,790 6,667 5,708 6,170
RATIOS
Return on average common equity 19.30% 17.68% 9.93% 15.74% 17.26%
Return on average assets 1.58 1.40 .79 1.08 1.11
Common dividend payout ratio 36.32 40.64 79.22 35.86 23.97
Net interest margin 5.01 4.68 4.03 4.23 4.52
Efficiency ratio 57.0 60.2 61.1 63.5 67.0
Common equity-to-assets (year-end) 8.52 7.63 7.13 6.16 6.70
Average total equity-to-assets 8.76 8.50 7.96 7.33 7.09
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL OVERVIEW
Fleet Financial Group (Fleet or the corporation) reported net income for 1997 of
$1.367 billion, or $4.59 per diluted share, compared with $1.221 billion, or
$3.96 per diluted share reported in 1996. Return on assets (ROA) and return on
equity (ROE) during 1997 were 1.58% and 19.30%, respectively, compared with
1.40% and 17.68%, respectively, for 1996.
Increases in both net income and earnings per share during 1997 primarily
reflect growth in the corporation's core revenue categories from the inclusion
of the former NatWest Bank, N.A. (NatWest) for the entire year of 1997 compared
to eight months in 1996, as well as continued expense control and efficient
capital management.
Net interest income on a fully taxable equivalent (FTE) basis totaled $3.7
billion for 1997 and $3.5 billion for 1996. The net interest margin for 1997 was
5.01% compared with 4.68% in 1996. The increase of 33 basis points was due
principally to increased loan fee revenue as well as a complete year's impact of
the balance sheet restructuring program undertaken during 1996 in connection
with the NatWest acquisition. This restructuring allowed the corporation to
replace lower-yielding assets and higher-cost sources of funds with a more
favorable mix of loans and core deposits.
The provision for credit losses was $322 million in 1997 compared to $213
million in 1996. The increase in provision was due principally to a higher level
of bankruptcies and delinquencies in the consumer loan portfolio.
Noninterest income increased $298 million to $2.6 billion in 1997. The
increase was due primarily to the inclusion of NatWest for four additional
months in 1997, in addition to net gains on sales of business units.
Noninterest expense totaled $3.7 billion for 1997, compared with $3.5
billion in 1996. Expenses only increased slightly in 1997, as a result of the
successful integrations of NatWest and Shawmut National Corporation (Shawmut) in
combination with the corporation's continuing cost containment efforts.
Total loans at December 31, 1997, were $62.6 billion, compared with $59.9
billion at December 31, 1996. The increase is attributable to strong loan growth
in the commercial and industrial, lease financing and residential portfolios,
which was partially offset by the sale of $2.2 billion of indirect auto loans
and a $1.3 billion decline in commercial real estate and credit card loans.
Total deposits decreased $3.3 billion to $63.7 billion at December 31,
1997. The decrease was due primarily to deposit runoff, which was anticipated as
a result of the corporation's efforts to maintain a competitive cost structure,
combined with the continued migration of deposits to higher-yielding investment
products, such as Fleet's Galaxy Mutual Fund family.
Consistent with Fleet's strategy to combine the strengths of a leading
regional bank with the national distribution capabilities of a diversified
financial services company, the corporation announced three acquisitions during
1997. The Quick & Reilly Group, Inc. (Quick & Reilly), one of the largest
national discount brokerage firms, Columbia Management Company (Columbia), an
institutional asset management firm with approximately $21 billion of assets
under management, and the consumer credit card operations of Advanta Corporation
(Advanta), with approximately $11.5 billion of managed credit card receivables.
The Columbia acquisition closed on December 10, 1997, the Quick & Reilly
acquisition closed on February 1, 1998, and the Advanta acquisition closed on
February 20, 1998. Fleet expects these acquisitions to double the number of
customers Fleet serves to more than 13 million. Furthermore, these acquisitions
will increase fee revenue as a percentage of total revenue as the corporation
strives for a more balanced revenue stream.
During 1997, the corporation completed the sale of three business units
that did not meet the long-term strategic goals of the corporation: Option One
Mortgage Corporation, a mortgage banking subsidiary; the corporate trust
division; and the indirect auto lending portfolio. The corporation recorded net
gains totaling $175 million (pre-tax) on these sales, which were offset in large
measure by additional charges of $155 million recorded in the second quarter of
1997.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Year Ended December 31
FTE basis
<TABLE>
<CAPTION>
Dollars in millions 1997 1996 1995
- ------------------------------------------ ------------ ------------- --------------
<S> <C> <C> <C>
Interest income $6,091 $6,028 $6,212
Tax-equivalent adjustment 39 36 45
Interest expense 2,391 2,566 3,139
- ------------------------------------------ ------------ ------------- --------------
Net interest income $3,739 $3,498 $3,118
- ------------------------------------------ ------------ ------------- --------------
</TABLE>
Net interest income on a fully taxable equivalent (FTE) basis totaled $3.7
billion for the year ended December 31, 1997, compared with $3.5 billion for
1996. The $241 million increase was principally the result of increased loan fee
revenue and a full year's impact of the NatWest acquisition, offset in part by
the impact of divested businesses.
NET INTEREST MARGIN AND INTEREST-RATE SPREAD
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Year ended December 31 1997 1996
FTE basis Average Average
Dollars in millions Balance Rate Balance Rate
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities $ 8,674 6.73 % $11,425 6.45 %
Loans 60,076 8.68 57,046 8.61
Mortgages held for resale 1,413 7.65 1,878 7.87
Due from brokers/dealers 2,884 4.62 2,179 4.35
Other earning assets 1,597 5.74 2,284 7.79
- -------------------------------------------------------------------------
Total interest-earning assets 74,644 8.21 74,812 8.11
- -------------------------------------------------------------------------
Deposits 47,514 3.48 47,334 3.70
Short-term borrowings 5,266 4.69 6,351 4.91
Due to brokers/dealers 3,463 4.39 2,645 4.20
Long-term debt 4,608 7.34 5,486 7.10
- -------------------------------------------------------------------------
Total interest-bearing
liabilities 60,851 3.93 61,816 4.15
- -------------------------------------------------------------------------
Interest-rate spread 4.28 3.96
Interest-free sources of funds 13,793 12,996
- -------------------------------------------------------------------------
Total sources of funds $74,644 3.20 % $74,812 3.43 %
- -------------------------------------------------------------------------
Net interest margin 5.01 % 4.68 %
- -------------------------------------------------------------------------
</TABLE>
Net interest margin is a measurement of how effectively 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 1997 increased 33 basis points to 5.01% from
4.68% in 1996. The increase in net interest margin is primarily attributable to
increased loan fee revenue and the corporation's balance sheet restructuring
program. This program resulted in a more favorable mix of interest-earning
assets and interest-bearing liabilities as a result of the $2.8 billion average
decrease in lower-yielding securities, which were replaced by more favorable
yielding loans through loan growth in the commercial and industrial, lease
financing and residential portfolios, coupled with the $1.1 billion average
decrease in higher-cost, short-term borrowings.
Average securities decreased from $11.4 billion, or 15% of average
interest-earning assets, in 1996 to $8.7 billion, or 12% of average
interest-earning assets, in 1997, primarily the result of the corporation's
balance sheet restructuring program.
Average loans increased $3.0 billion to $60.1 billion, or 80% of average
interest-earning assets, in 1997, from $57.1 billion, or 76% of average
interest-earning assets, in 1996, due primarily to a full year's impact of the
NatWest acquisition, coupled with loan growth. Offsetting this growth was the
divestiture of $1.1 billion of average indirect auto loans relating to the sale
of this business unit during 1997.
Average interest-bearing deposits remained consistent over the two-year
span, but the interest rate paid on these deposits decreased to 3.48% in 1997
from 3.70% in 1996. The decrease in cost of deposits reflects the corporation's
efforts to maintain lower-cost, yet competitive, deposit pricing through a more
advantageous mix of deposits. Lower-cost savings deposits currently represent a
higher percentage of total interest-bearing deposits compared with 1996.
The $1.1 billion average decrease in short-term borrowings is attributable
to the use of proceeds from the sales of securities to pay down short-term
borrowings, which strengthened the corporation's net interest margin. The $878
million decrease in long-term debt and the 24 basis point increase in the
funding rate was due to scheduled maturities of lower-rate instruments partially
offset by the issuance of higher-rate instruments, which includes trust
preferred securities issued by the corporation's Fleet Capital Trust
subsidiaries.
The contribution to the net interest margin from interest-free sources of
funds during 1997 was 73 basis points, which was consistent with 72 basis points
in 1996.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
NONINTEREST INCOME
Year ended December 31
Dollars in millions 1997 1996 1995
- ---------------------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
Service charges, fees and
commissions $ 633 $ 537 $ 442
Investment services revenue 418 372 322
Brokerage revenue 399 329 280
Mortgage banking revenue, net 327 372 321
Student loan servicing fees 101 98 72
Trading revenue 74 55 39
Venture capital revenue 71 106 36
Securities gains 33 43 32
Gain from branch divestitures - 92 -
Other noninterest income 400 329 395
- ---------------------------------------- ------------- ------------- ------------
Total noninterest income before
net gains on sales of business
units 2,456 2,333 1,939
Net gains on sales of business
units 175 - -
- ---------------------------------------- ------------- ------------- ------------
Total noninterest income $2,631 $2,333 $1,939
- ---------------------------------------- ------------- ------------- ------------
</TABLE>
As a result of intensified competition and changing customers 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 lines to provide
additional revenue streams to complement Fleet's traditional banking products
and services. These product lines include mutual funds and annuity products,
venture capital, direct banking, corporate finance, and the newly acquired
businesses: Columbia Management Company, Quick & Reilly, and the consumer credit
card operations of Advanta.
Noninterest income totaled $2.63 billion for 1997, up 13% when compared to
$2.33 billion for 1996. Excluding the net gains on sales of business units
during 1997 and the gain from branch divestitures in 1996, noninterest income
increased $215 million, or 10%. This growth was due to a full year's impact of
NatWest during 1997, as well as continued growth in core revenue categories and
successful business initiatives, such as corporate finance. Additionally, the
initiatives mentioned above contributed to increases in service charges, fees
and commissions, investment services revenue, brokerage fees, and corporate
finance fees.
Service charges, fees and commissions totaled $633 million in 1997
compared with $537 million in 1996, an increase of 18%. The increase reflects an
overall increase in business activity, in part due to the NatWest acquisition,
targeted marketing efforts, as well as increased electronic banking fee income
as a result of additional ATMs in service in combination with the adoption of
convenience charges in certain markets.
<TABLE>
<CAPTION>
INVESTMENT SERVICES REVENUE
Year ended December 31
Dollars in millions 1997 1996 1995
- ------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Private clients group $200 $181 $175
Retirement plan services 63 59 52
Retail investments 62 46 17
Not-for-profit institutional services 47 41 33
Other 46 45 45
- ------------------------------------------ ------------ ------------ ------------
Total investment services revenue $418 $372 $322
- ------------------------------------------ ------------ ------------ ------------
</TABLE>
Investment services revenue increased $46 million, or 12%, in 1997 to $418
million. The improvement was due to continued strong sales of mutual funds and
annuity products, up 13% year over year, as well as 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 $48 billion at
December 31, 1996 to $77 billion at December 31, 1997. A significant portion of
this increase ($21 billion) resulted from the December, 1997 acquisition of
Columbia Management Company. The increase in revenue was partially offset by the
sale of the corporate trust division during the second quarter of 1997, which
generated $7 million of revenue in 1997 compared with $18 million in 1996.
<TABLE>
<CAPTION>
BROKERAGE REVENUE
December 31
Dollars in millions 1997 1996 1995
- ------------------------------------------ --------- ---------- ---------
<S> <C> <C> <C>
Brokerage fee and commission
revenue $299 $270 $227
Trading revenue 100 59 53
- ------------------------------------------ --------- ---------- ---------
Total brokerage revenue $399 $329 $280
- ------------------------------------------ --------- ---------- ---------
</TABLE>
Brokerage revenue, which includes brokerage fee and commission revenue and
brokerage trading revenue, increased $70 million, or 21%, in 1997 to $399
million. This improvement was due principally to increases in brokerage trading
revenue, which increased $41 million, or 69%, due to the 1997 acquisition of
Nash, Weiss & Co., an over-the-counter market-maker. Additionally, brokerage fee
and commission revenue increased $29 million, or 11%, due to increased customer
trading volumes as a result of the strong performance in the equity markets.
There can be no assurance that the equity markets will continue to perform at
previous levels, that brokerage commissions will not become increasingly more
competitive or that the corporation's market-making subsidiaries will continue
to earn similar spreads between bid and ask prices.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
MORTGAGE BANKING REVENUE, NET
Year ended December 31
Dollars in millions 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan servicing revenue $450 $395 $342
Mortgage production revenue 115 132 98
Gains on sales of mortgage
servicing 10 33 71
Mortgage servicing rights
amortization (248) (188) (190)
- -----------------------------------------------------------------------------
Total mortgage banking
revenue, net $327 $372 $321
- -----------------------------------------------------------------------------
</TABLE>
Mortgage banking revenue of $327 million in 1997 decreased $45 million over the
$372 million recorded in 1996. The decrease in mortgage banking revenue is due
principally to increased mortgage servicing rights amortization, decreased gains
on sales of mortgage servicing, as well as the sale of Option One, which
contributed $40 million and $53 million of mortgage banking revenue, primarily
mortgage production revenue in 1997 and 1996, respectively.
Loan servicing revenue represents fees received for servicing residential
mortgage loans. The $55 million, or 14%, increase in loan servicing revenue is
attributable to the corporation receiving a higher servicing spread on mortgage
servicing acquired, primarily in 1997, as loans serviced have remained stable at
$122 billion at December 31, 1997 and 1996.
Mortgage production revenue includes income derived from the loan
origination process and gains on sales of mortgage originations. Additionally,
the corporation sold mortgage servicing rights (MSRs) of approximately $1.4
billion and $5.0 billion in 1997 and 1996, respectively, resulting in pretax
gains of $10 million and $33 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 Fleet Mortgage Group.
Mortgage servicing rights amortization increased $60 million to $248
million in 1997 compared with $188 million in 1996. The level of amortization
increased due to an increase in prepayments resulting from a decline in mortgage
interest rates, coupled with a higher level of amortization of recently
purchased mortgage servicing rights, which provide a higher servicing spread. At
December 31, 1997, the carrying value and fair value of the corporation's MSRs
were $1.8 billion and $1.9 billion, respectively. Since mortgage servicing
rights are an interest-rate sensitive asset, the value of the corporation's
mortgage servicing portfolio and related mortgage banking revenue may be
adversely impacted if mortgage interest rates decline and actual or expected
loan prepayments increase. To mitigate the prepayment risk associated with
adverse changes in interest rates and the resultant impairment to MSRs and
effects on mortgage banking revenue, the corporation has established a hedge
program against a substantial portion of MSRs to protect its value and mortgage
banking revenue. There is no guarantee that significant declines in interest
rates will not have a material impact on the corporation's MSRs and mortgage
banking revenue or that this hedge program will be successful in protecting
against such a decline. For additional information on this hedge program see the
Asset-Liability Management discussion in Management's Discussion and Analysis.
Venture capital revenue decreased $35 million to $71 million in 1997, as
investments under management did not experience the same level of appreciation
as in 1996. 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 the economy and equity markets. Thus, the likelihood of revenue in
the future cannot be predicted.
During 1997, the corporation recorded nonrecurring net gains totaling $175
million (pretax) on the sales of certain business units, as previously
discussed. During 1996, as a condition to regulatory approval of the Shawmut
Merger, the corporation divested certain branches, loans and deposits and, as a
result, realized $92 million (pretax) of gains from these divestitures. These
sales will not have a material impact on the future operating results of the
corporation, as Fleet has redeployed the capital from these transactions.
Other noninterest income increased $71 million to $400 million in 1997,
due principally to higher corporate finance fees, which accounted for
approximately one-half of this increase, trading and foreign exchange gains and
increased credit card revenue. Corporate finance, a new line of business started
in the latter part of 1996, grew from $13 million in 1996 to $47 million in
1997, as a result of providing capital market financial products and advisory
services to corporate customers.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
December 31
Dollars in millions 1997 1996 1995
- ------------------------------------------ ---------- ----------- -----------
<S> <C> <C> <C>
Employee compensation and benefits $1,752 $1,735 $1,554
Equipment 317 300 234
Occupancy 294 293 257
Intangible asset amortization 169 140 108
Legal and other professional 118 136 106
Marketing 109 106 100
Telephone 78 89 66
Printing and mailing 79 81 66
Other 752 632 599
- ------------------------------------------ ---------- ----------- -----------
Total noninterest expense, excluding
special charges 3,668 3,512 3,090
Loss on assets held for sale or
accelerated disposition - - 175
Merger and restructuring-related charges 47 - 490
- ------------------------------------------ ---------- ----------- -----------
Total noninterest expense $3,715 $3,512 $3,755
- ------------------------------------------ ---------- ----------- -----------
</TABLE>
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 programs will continue to be an ongoing
process used to help Fleet meet its goals. The corporation's successful expense
management is illustrated by the improvement in the efficiency ratio.
Total noninterest expense was $3.71 billion in 1997 and $3.51 billion in
1996. The $200 million, or 6%, increase was due primarily to the acquisition of
NatWest, as well as certain charges taken during the year relating to the
impairment of an asset, additional severance costs pertaining to NatWest, and
costs related to operational restructurings.
An impairment charge of $41 million was recorded in 1997 to write-down a
front-end mortgage origination system. This charge resulted from a change in
Fleet Mortgage Group's retail production strategy, which involved closing
approximately 60% of its retail production offices outside of Fleet's Northeast
banking franchise. This strategic decision led to a review of the corporation's
investment in the system, the benefits of which depend on increased efficiencies
in the origination offices. The impairment charge was recorded to write-down the
system to its fair value, which was estimated based on the functionality of the
system and the remaining future benefits to be realized from its implementation.
In addition, $40 million of severance costs were recorded in connection with
various operational restructuring initiatives, including the NatWest
acquisition. The corporation also recorded an approximate $20 million charge
during this year in connection with the settlement of a lawsuit.
Employee compensation and benefits remained consistent at $1.8 billion in
1997 over the prior year due to a decline of over 4,000 full-time equivalent
employees during the year, offset by merit and promotional increases to
compensation as well as inflationary adjustments to benefits.
Intangible asset amortization increased $29 million from 1996 due to a
full year of amortization of the NatWest goodwill. Additional goodwill related
to the NatWest acquisition may be recognized in future periods based on an
earnout calculation. 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 $432 million during the next seven years.
The corporation anticipates additional intangible asset amortization in 1998 as
a result of NatWest and the acquisitions completed in late 1997 and early 1998.
Equipment expense increased $17 million during 1997 due primarily to
capital expenditures for technological upgrades and improvements, as well as to
support the integration of acquired companies. Legal and other professional
expense decreased $18 million during 1997, due to a lower level of professional
fees.
IMPACT OF THE YEAR 2000 ISSUE
Included in other noninterest expense in 1997 are $16 million of charges
incurred in connection with the modification or replacement of software or
hardware in order for the corporation's computer systems and chip- controlled
devices to properly recognize dates beyond December 31, 1999. The corporation
has completed its assessment of Year 2000 issues, developed a plan, and arranged
for the required resources to complete the necessary remediation efforts.
The corporation will utilize both internal and external resources to
reprogram, or replace, and test the software and hardware for Year 2000
modifications. The corporation plans to complete changes and testing for systems
by December 31, 1998, while systems-integrated testing will continue into 1999.
The total cost of the Year 2000 project is anticipated not to exceed $150
million. Purchased hardware and software will be capitalized in accordance with
the corporation's existing policy, while all other costs are being expensed when
incurred.
A significant portion of costs pertaining to the Year 2000 project are not
expected to be incremental to the corporation, but rather represent a
reprioritization of existing internal systems technology resources.
The corporation has initiated formal communications with all of its
significant vendors and service providers to determine the extent to which the
corporation is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. There can be no guarantee that the systems of other companies
on which the corporation's systems rely will be timely remediated. Therefore,
the corporation could possibly be negatively impacted to the extent other
entities not affiliated with Fleet are
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
unsuccessful in properly addressing this issue. Contingency plans are being
developed wherever possible.
The costs of the project and the date on which the corporation plans to
complete the Year 2000 modifications are based on management's best estimates.
However, actual results could differ from these plans.
INCOME TAXES
The corporation recorded income tax expense in the amount of $927 million for
1997 compared with $849 million for 1996. The effective tax rate was 40.4% in
1997 compared with 41.0% in 1996.
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: consumer banking, commercial financial services, investment
services, treasury, mortgage banking/venture capital, financial services, 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.
Business line returns also reflect the impact of purchase premiums, associated
equity, and amortization expense, which are charged directly to the businesses.
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 organizational changes.
In terms of net income, Fleet's three largest business lines are consumer
banking, commercial financial services, and investment services. Combined, these
three units comprise over 80% of the corporation's earnings. Strong earnings
growth resulted from the full year's impact of the NatWest acquisition, as well
as underlying strengths in commercial banking loan growth, increased fee-based
revenues from investment services growth in assets under management, increased
consumer banking fee revenues and lower consumer banking operating costs.
Results by lines of business for the years ended December 31, 1997 and 1996 are
as follows:
SELECTED FINANCIAL HIGHLIGHTS BY LINE OF BUSINESS
<TABLE>
<CAPTION>
Year Ended December 31 Net Income ROE ROA
Dollars in millions 1997 1996 1997 1996 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer Banking $ 544 $ 350 31.55% 20.78% 4.02%
Commercial Financial Services 380 283 17.25 14.73 0.98
Investment Services 196 168 29.26 28.98 2.82
Treasury 98 88 37.58 25.37 0.64
Mortgage Banking/Venture Capital 81 142 12.87 17.51 1.46
Financial Services 63 40 24.31 17.10 2.07
All Other 5 150 n/m n/m n/m
- --------------------------------------------------------------------------------------------------------------------
Total $1,367 $1,221 19.30% 17.68% 1.58%
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31 ROA Average Assets Average Loans
Dollars in millions 1996 1997 1996 1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer Banking 2.68% $13,538 $13,057 $10,572 $10,770
Commercial Financial Services 0.84 38,695 33,846 34,515 30,300
Investment Services 2.77 6,949 5,553 3,196 2,659
Treasury 0.40 15,340 21,615 6,609 7,992
Mortgage Banking/Venture Capital 2.21 5,536 6,421 161 99
Financial Services 1.41 3,063 2,845 2,863 2,552
All Other n/m 3,539 3,401 2,160 2,674
- -----------------------------------------------------------------------------------------------
Total 1.40% $86,660 $86,738 $60,076 $57,046
- -----------------------------------------------------------------------------------------------
</TABLE>
CONSUMER BANKING
Consumer banking includes retail banking and small business services through the
Fleet business and entrepreneurial services group. Retail banking offers
consumer banking services through its network of over 1,200 branches located
throughout the Northeast. Fleet customers can conveniently manage their
financial resources and transact business at any branch office in New England,
New York and New Jersey. These branches offer a full range of financial services
and products including an expanded offering of mutual funds and insurance
products through the newly formed alliance with The Travelers. By expanding its
product offerings Fleet continues to meet consumer's changing needs and provide
greater opportunities to cross-sell the existing customer base and further
leverage its extensive branch network. Fleet's business and entrepreneurial
services group provides a full range of accounts and services aimed at
businesses with annual sales up to $10 million. Fleet is the leading
small-business lender in New England and ranks sixth nationwide.
The increase in consumer banking earnings in 1997 to $544 million from
1996's level of $350 million was driven by increased revenues and lower
operating expenses. Higher revenues were partly attributable to the acquisition
of NatWest, as increases in net interest income and service charge revenue also
resulted from selected pricing and rate changes. The effect of slightly lower
loan balances was mostly offset through lower rates paid on deposits. Lower
operating costs resulted from improved distribution efficiencies through ongoing
branch reconfiguration and cost savings associated with
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
the NatWest integration. Total deposits of $43 billion were materially unchanged
compared with 1996. Lower deposit balances in certain products were offset by
the full year impact of the NatWest acquisition. Deposit balances year over year
reflect the highly competitive nature of the deposit products market and the
ongoing migration of consumers into higher-yielding investment products.
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, government
and leasing customers. In addition to traditional credit products, Fleet
supports commercial customers with corporate finance, cash management, trade
services, corporate trust, foreign exchange, interest-rate protection, and
investment products. Fleet's corporate finance business assists commercial
customers with capital formation, acquisition finance, and long-term financial
strategies. Fleet enjoys a strong regional and national presence with several
specialty businesses with national scope complementing a client base that is
largely based in the Northeast. 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.
Commercial financial services contributed $380 million of earnings in
1997, an increase of $97 million compared with those in 1996. Increased net
interest income was driven by significant loan growth in the existing commercial
and specialized lending units, as well as from the acquired NatWest franchise.
The corporate finance unit, which was established in the latter half of 1996,
provided a significant boost to noninterest income growth, as did improved
cross-selling of cash management and foreign exchange services. Lower operating
costs also contributed to the year over year improvement in earnings. Reduced
operating expenses are the result of expense management, improved back office
efficiencies, and eliminated NatWest-related costs.
INVESTMENT SERVICES
Investment services comprises Fleet's private clients group, retirement plan
services, discount brokerage unit, retail investment services, not-for-profit
institutional asset services, and Fleet Investment Advisors. The private clients
group focuses on high-net worth customers and offers a broad array of asset
management, estate settlement, deposit and credit products. Retirement plan
services focuses on investment management and fiduciary activities with special
emphasis on 401(k) plans. Retail investment services manages Fleet's mutual fund
product set, including fixed and variable annuity products and Fleet's Galaxy
Funds family of mutual funds. Not-for-profit institutional asset services is a
full-service investment management service that includes endowment management,
custody, trust and other services. Fleet's investment advisors unit has $77
billion in assets under management including $21 billion in assets under
management from the recently acquired Columbia Management Company.
In February, 1998, Fleet completed its acquisition of Quick & Reilly, one
of the largest discount brokerage firms. Fleet's discount brokerage unit will be
merged into the Quick & Reilly operations, resulting in one of the country's
largest bank-owned discount brokerage companies. Investment services results
have been restated to include the effect of the pooling-of-interests with Quick
& Reilly.
Investment services earned $196 million in 1997 compared with $168 million
in 1996, reflecting a 17% increase in the earnings for this unit. Improved
earnings were the result of increased noninterest revenues, driven by increased
assets under management as well as higher brokerage related revenues.
Increased assets under management reflect improved portfolio valuations
and the increasing popularity of mutual fund and annuity products, including the
Fleet family of mutual funds, The Galaxy Funds. Sales of these products
increased 13% compared with those of 1996. Investment services earnings were
also favorably affected by increased operating efficiencies as operating
expenses were materially unchanged versus 1996, despite increased volumes of
sales and assets under management. Investment services earnings in 1997 were not
materially impacted by the Columbia transaction, which closed in December.
TREASURY
Treasury includes products and services which support corporate lending,
customer interest-rate risk-management needs and foreign exchange. Treasury also
manages the corporation's securities and residential mortgage portfolios,
trading operations, asset-liability management function and wholesale funding
needs. The treasury unit earned $98 million in 1997, an increase of $10 million
from 1996. Increased earnings were due to lower funding and operating costs.
Lower processing costs are the result of lower balance sheet volumes from the
balance sheet restructuring attributable to the NatWest acquisition. Increased
capture of corporate customer cross-selling opportunities and increased foreign
exchange revenue also contributed to the higher earnings.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
MORTGAGE BANKING/VENTURE CAPITAL
Mortgage banking/venture capital businesses include mortgage banking and Fleet
Private Equity.
Fleet's mortgage banking business originates, sells and services first
mortgage products across multiple customer segments. During 1997, Fleet's
mortgage banking business originated over $19 billion in mortgages through its
extensive network of correspondents, brokers, telemarketing and retail channels.
The mortgage banking unit also serviced an average of 1.5 million loans
comprising over $121 billion in balances. Fleet Private Equity provides private
equity capital to management teams to acquire, recapitalize or grow private and
public companies. Fleet Private Equity revenues reflect increased values on
equity investments and gains from the sale of investments.
Fleet's mortgage banking business earned $42 million in 1997 compared with
$77 million in 1996. Lower earnings were the result of lower loan production
volumes coupled with lower levels of portfolio servicing sales in 1997 and
higher amortization of mortgage servicing assets. Fleet Private Equity also
experienced lower gains and equity valuations compared with those in 1996.
Valuations and gains on the sale of equity investments depend on a variety of
factors, including the condition of both the economy and equity markets.
Thus, the likelihood of such revenue cannot be predicted and earnings will
normally fluctuate from year to year.
FINANCIAL SERVICES
Financial services includes student loan processing, credit card services and
technology banking. Fleet services 5.5 million accounts nationwide for
approximately 700 colleges, universities, and financial institutions through its
student loan processing subsidiary, AFSA. Fleet is the largest third-party
servicer in the country with $34 billion of student loans serviced. Fleet is
also expanding its presence nationally in the consumer credit card business with
its recent acquisition of the credit card operations of Advanta. Fleet will
merge its existing credit card business with that of Advanta.
Technology banking includes such alternative delivery vehicles as ATMs,
telephone banking, debit-card programs, and Fleet's internet Web site. Aimed at
meeting the changing needs of consumers, these channels offer customers quick
and convenient access to Fleet products and services from virtually anywhere in
the country. Fleet's remote ATM network, a source of growing fee revenues, has
grown to over 900 machines with the addition of 400 ATMs in retail chains and
convenience stores in 1997. An additional 200 ATMs are scheduled for deployment
in 1998. Combined with branch located ATMs, Fleet's total ATM network now
includes over 2,400 machines.
Financial services earned $63 million in 1997, an increase of $23 million
over 1996. This increase is driven by ATM fees, increased ATM deployment, higher
debit card revenue related to interchange fees, contractual repricing of the
credit card portfolios and increased student loan account volumes due to
government contracts awarded in 1997. Fleet's student loan business earned $20
million in 1997 compared with $17 million in 1996.
ALL OTHER
All other includes discontinued operations, the parent company and certain
transactions not allocable to discrete business units. In addition, this unit
includes the impact of economic value-oriented methodologies, such as equity
allocations, loan loss provision, credit reserves, and transfer pricing. All
other earned $5 million in 1997 compared with $150 million in 1996. The decline
in earnings was primarily due to a $92 million pretax gain on the sale of
regulatorily required branch divestitures taken in 1996 in connection with the
acquisition of Shawmut, as well as a $25 million charge taken in 1997 related to
the Quick & Reilly acquisition. In 1997, Fleet also increased its level of loan
loss provision. As a result, earnings in this unit have been negatively impacted
to the extent loan loss provision has increased in excess of amounts required by
the business units on an economic basis.
BALANCE SHEET ANALYSIS
Total assets increased $1.4 billion to $91.0 billion as of December 31, 1997, as
loan growth was offset by lower levels of cash and short-term investments, which
were utilized to fund anticipated deposit runoff, long-term debt maturities and
the acquisition of Columbia.
Fleet's investment securities portfolio plays a significant role in the
management of the corporation's balance sheet as the liquid nature of the
securities portfolio enhances the efficiency of the balance sheet. The amortized
cost of securities available for sale increased $503 million to $8.0 billion at
December 31, 1997 compared to $7.5 billion at December 31, 1996. The valuation
reserve for securities available for sale increased $107 million to an
unrealized gain position of $158 million at December 31, 1997, due to a more
favorable interest rate environment.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
SECURITIES
1997 1996 1995
December 31 Amortized Market Amortized Market Amortized Market
Dollars in millions Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government agencies $1,126 $1,134 $1,077 $1,083 $ 7,891 $7,889
Mortgage-backed securities 6,177 6,298 5,987 6,006 8,457 8,470
Other debt securities 186 189 - - 1,621 1,662
- -------------------------------------------------------------------------------------------------------------------------------
Total debt securities 7,489 7,621 7,064 7,089 17,969 18,021
- -------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 256 282 229 255 359 393
Other securities 210 210 159 159 119 119
- -------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 7,955 8,113 7,452 7,503 18,447 18,533
- -------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,249 1,254 1,177 1,172 798 782
- -------------------------------------------------------------------------------------------------------------------------------
Total securities $9,204 $9,367 $8,629 $8,675 $19,245 $19,315
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995
December 31 Market Amortized Market
Dollars in millions Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Securities available for sale
<S> <C> <C> <C>
U.S. Treasury and government agencies $1,083 $ 7,891 $7,889
Mortgage-backed securities 6,006 8,457 8,470
Other debt securities - 1,621 1,662
- -------------------------------------------------------------------------------------------------------------
Total debt securities 7,089 17,969 18,021
- -------------------------------------------------------------------------------------------------------------
Marketable equity securities 255 359 393
Other securities 159 119 119
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale 7,503 18,447 18,533
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,172 798 782
- -------------------------------------------------------------------------------------------------------------
Total securities $8,675 $19,245 $19,315
- -------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS
The loan portfolio inherently includes 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.
Total loans excluding the sale of the $2.2 billion indirect auto lending
portfolio, increased $4.9 billion, or 8.5% over December 31, 1996. This increase
was due primarily to loan growth in the commercial and industrial, lease
financing and residential portfolios. Excluding the sale of the indirect auto
lending portfolio, commercial and industrial (C&I) loans increased $3.6 billion,
or 12%, from December 31, 1996 to December 31, 1997, due primarily to growth in
middle-market lending and national banking.
COMMERCIAL AND INDUSTRIAL - PRODUCT DIVERSIFICATION
December 31
<TABLE>
<CAPTION>
Dollars in millions 1997 1996
- ------------------------------------------------------ ------------- ------------
<S> <C> <C>
Banks and insurance $4,596 $4,130
Communications 2,568 2,225
Real estate/construction/contractors 2,188 1,888
Health care 1,969 1,695
Retail 1,750 2,209
Business services 1,699 1,524
Transportation 1,656 1,419
Precious metals/jewelry 1,637 1,704
Computer and electronics 1,457 1,090
Tourism and entertainment 1,306 1,231
Machine and equipment 1,280 978
Apparel and textiles 1,077 1,142
Energy production and distribution 1,018 779
Forest products 1,015 765
Food distribution and production 880 866
Printing and publishing 839 932
Plastics, ceramics, rubber and misc. products 827 789
Other 4,238 3,741
- ------------------------------------------------------ ------------- ------------
Total $32,000 $29,107
- ------------------------------------------------------ ------------- ------------
</TABLE>
C&I borrowers consist primarily of middle-market and corporate customers and are
well-diversified as to industry and companies within each industry. Although the
corporation is engaged in business nationwide, the lending done by the banking
subsidiaries is primarily concentrated in New England, New York and New Jersey.
Lease financing totaled $3.4 billion at December 31, 1997, compared with
$2.6 billion at December 31, 1996. This 29% 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.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
COMMERCIAL REAL ESTATE-PRODUCT DIVERSIFICATION
December 31
Dollars in millions 1997 1996
- ------------------------------------------- ------------------ ------------------
<S> <C> <C>
Retail $1,365 $1,668
Apartments 1,196 1,471
Office 1,184 1,367
Industrial 366 476
Other 1,566 1,471
- ------------------------------------------- ------------------ ------------------
Total $5,677 $6,453
- ------------------------------------------- ------------------ ------------------
</TABLE>
Commercial real estate (CRE) loans decreased by $776 million, or 12%, from
December 31, 1996 to December 31, 1997, due to strategically designed attrition,
increased syndication of loans, coupled with higher-than- normal pay downs due
to a lower interest-rate environment.
<TABLE>
<CAPTION>
CONSUMER AND RESIDENTIAL REAL ESTATE
December 31
Dollars in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate $10,019 $ 8,048
Home equity 4,851 5,061
Credit card 2,742 3,227
Student loans 1,029 1,255
Installment/other 2,871 4,099
- --------------------------------------------------------------------------------
Total $21,512 $21,690
- --------------------------------------------------------------------------------
</TABLE>
Approximately 69% of the consumer and residential real estate portfolio at
December 31, 1997, 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 increased $2.0 billion to $10.0 billion at December 31, 1997. This
growth is the result of the corporation's efforts to steadily build the loan
portfolio with quality interest-earning assets and attractive liquidity.
Consumer loans, excluding the sale of the $1.5 billion consumer portion of
the indirect auto lending portfolio, decreased $649 million from December 31,
1996. The decrease is primarily the result of a $485 million decline in credit
card loans due to balance payoffs as the contractual repricing to higher rates
resulted in customer attrition. The acquisition of the consumer credit card
operations of Advanta will be completed in the first quarter of 1998 and will
add approximately $11.5 billion of managed credit card loans, of which
approximately $2 billion will reside on the balance sheet in consumer loans.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
NONPERFORMING ASSETS(a)
Dollars in millions C&I CRE Consumer Total
- ------------------------------- ------------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
Nonperforming loans:
Current or less than
90 days past due $163 $ 49 $ 4 $216
Noncurrent 94 31 51 176
OREO --- 3 21 24
- ------------------------------- ------------- ------------ -------------- ----------
Total NPAs
December 31, 1997 $257 $ 83 $ 76 $416
- ------------------------------- ------------- ------------ -------------- ----------
Total NPAs
December 31, 1996 $351 $166 $206 $723
- ------------------------------- ------------- ------------ -------------- ----------
</TABLE>
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($202 million and
$247 million at December 31, 1997 and 1996, respectively), and $214 million
and $265 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 decreased $307 million, or 42% over the prior year. NPAs at December
31, 1997, as a percentage of total loans and other real estate owned (OREO), and
as a percentage of total assets, were .66% and .46%, respectively, compared to
1.21% and .81%, respectively, at December 31, 1996. This improvement was due
primarily to declining levels of nonperforming assets in all loan and OREO
portfolios as a result of the successful resolution of certain commercial and
industrial and commercial real estate loans, as well as $231 million of
nonperforming assets transferred to assets held for sale or accelerated
disposition.
ACTIVITY IN NONPERFORMING ASSETS
Year ended December 31
<TABLE>
<CAPTION>
Dollars in millions 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $723 $499
Additions 696 966
Acquisitions - 196
Reductions:
Payments/interest applied (441) (400)
Returned to accrual (68) (103)
Charge-offs/write-downs (174) (245)
Sales/other (89) (93)
- -----------------------------------------------------------------------
Total reductions (772) (841)
- -----------------------------------------------------------------------
Subtotal 647 820
- -----------------------------------------------------------------------
Assets reclassified as held for sale
or accelerated disposition (231 ) (97 )
- -----------------------------------------------------------------------
Balance at end of year $416 $723
- -----------------------------------------------------------------------
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
At December 31, 1997 and 1996, loans in the 90 days past due and still accruing
interest category amounted to $202 million and $247 million, respectively, which
included approximately $172 million and $192 million, respectively, of consumer
and residential 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, 1997 and 1996, NPAs classified as held for sale or
accelerated disposition totaled $214 million and $265 million, respectively, as
follows:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS HELD FOR SALE OR ACCELERATED DISPOSITION
Dollars in millions C&I CRE Consumer Total
- ------------------------------ -------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Nonaccrual loans and
leases $28 $ 72 $101 $201
OREO 1 3 9 13
- ------------------------------ -------- --------- -------------- ----------
December 31, 1997 $29 $ 75 $110 $214
- ------------------------------ -------- --------- -------------- ----------
December 31, 1996 $93 $147 $25 $265
- ------------------------------ -------- --------- -------------- ----------
</TABLE>
RESERVE FOR CREDIT LOSSES
RESERVE FOR CREDIT LOSSES ALLOCATION
<TABLE>
<CAPTION>
1997 1996
Percent of Percent of
December 31 Loan Type to Loan Type to
Dollars in millions Amount Total Loans Amount Total Loans Amount
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 626 51.15 % $ 668 48.63 % $ 606
Consumer 345 18.37 365 22.79 209
Commercial real estate:
Construction 15 1.42 26 1.79 23
Interim/permanent 83 7.65 129 8.99 138
Residential real estate 41 16.01 67 13.44 90
Lease financing 18 5.40 20 4.36 19
Unallocated 304 - 213 - 236
- -------------------------------------------------------------------------------------------------------
Total $1,432 100.0 % $1,488 100.0 % $1,321
- -------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994 1993
Percent of Percent of Percent of
December 31 Loan Type to Loan Type to Loan Type to
Dollars in millions Total Loans Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial 43.85 % $ 620 41.80 % $ 678 42.57 %
Consumer 20.54 226 25.06 196 24.84
Commercial real estate:
Construction 1.15 17 1.43 7 1.44
Interim/permanent 8.40 190 10.26 241 11.90
Residential real estate 21.83 47 18.27 50 16.64
Lease financing 4.23 18 3.18 36 2.61
Unallocated - 378 - 461 -
- -------------------------------------------------------------------------------------------------------
Total 100.0 % $1,496 100.0 % $1,669 100.0 %
- -------------------------------------------------------------------------------------------------------
</TABLE>
The reserve for credit losses represents the amount available for credit losses
inherent in the bank's portfolio and reflects management's ongoing detailed
review of certain individual loans, supplemented by an analysis of the
historical net charge-off experience of the portfolio, 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 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, as well as general and industry economic
conditions.
Fleet's reserve for credit losses decreased $56 million from December 31,
1996, to $1.432 billion at December 31, 1997. The 1997 provision for credit
losses was $322 million, $109 million higher than the prior year level of $213
million. The increase in the provision for credit losses was due primarily to a
higher level of bankruptcies and delinquencies in the consumer loan portfolio.
The provision for credit losses is expected to increase in 1998 due to a higher
level of credit card activity resulting from the acquisition of Advanta's
consumer credit card portfolio, which is anticipated to be offset by the
additional earnings from this acquisition.
<TABLE>
<CAPTION>
RESERVE FOR CREDIT LOSSES ACTIVITY
Year ended December 31
Dollars in millions 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning
of year $1,488 $1,321 $1,496 $1,669 $1,937
Gross charge-offs:
Consumer 321 230 141 130 133
Commercial and industrial 132 160 109 91 257
Commercial real estate 38 60 99 95 269
Residential real estate 21 30 65 52 49
Lease financing 2 4 4 9 21
- ----------------------------------------------------------------------------------
Total gross charge-offs 514 484 418 377 729
- ----------------------------------------------------------------------------------
Recoveries:
Consumer 43 30 34 35 34
Commercial and industrial 64 59 48 60 63
Commercial real estate 26 17 25 27 34
Residential real estate 3 4 4 11 4
Lease financing 2 4 5 5 9
- ----------------------------------------------------------------------------------
Total recoveries 138 114 116 138 144
- ----------------------------------------------------------------------------------
Net charge-offs 376 370 302 239 585
Provision 322 213 101 65 327
Acquired/other (2) 324 26 1 (10)
- ----------------------------------------------------------------------------------
Balance at end of year $1,432 $1,488 $1,321 $1,496 $1,669
- ----------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans .63% .65% .58% .53% 1.33%
Ratio of reserve for credit
losses to year-end loans 2.29% 2.49% 2.51% 3.20% 3.76%
Ratio of reserve for credit
losses to year-end NPAs 344% 206% 265% 196% 161%
Ratio of reserve for credit
losses to year-end nonper-
forming loans 365% 214% 301% 224% 199%
- ----------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net charge-offs increased $6 million to $376 million in 1997 compared with $370
million in 1996. Net charge-offs from the credit card portfolio increased $64
million to $189 million, due to an increase of $310 million of average credit
card loans year to year, coupled with higher delinquency levels. The ratio of
net charge-offs to average loans remained consistent at .63% with the prior year
ratio of .65%. Net charge-offs are expected to increase in 1998, driven
principally by higher anticipated charge-offs on consumer loans due to the
significant increase in credit card receivables from the acquisition of the
consumer credit card operations of Advanta in the first quarter of 1998. 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
<TABLE>
<CAPTION>
COMPONENTS OF FUNDING SOURCES
December 31
Dollars in millions 1997 1996
- ------------------------------------------------ ---------------- ---------------
Deposits:
<S> <C> <C>
Demand $13,148 $17,903
Regular savings, NOW, money market 30,485 27,976
Time:
Domestic 16,258 18,583
Foreign 3,844 2,609
- ------------------------------------------------ ---------------- ---------------
Total deposits 63,735 67,071
- ------------------------------------------------ ---------------- ---------------
Borrowed funds:
Federal funds purchased 1,004 488
Securities sold under agreements
to repurchase 2,630 2,382
Commercial paper 811 676
Other 3,060 648
- ------------------------------------------------ ---------------- ---------------
Total short-term borrowed funds 7,505 4,194
- ------------------------------------------------ ---------------- ---------------
Due to broker/dealer 4,316 3,080
- ------------------------------------------------ ---------------- ---------------
Long-term debt 4,500 5,114
- ------------------------------------------------ ---------------- ---------------
Total $80,056 $79,459
- ------------------------------------------------ ---------------- ---------------
</TABLE>
Total deposits decreased $3.3 billion to $63.7 billion at December 31, 1997. The
decrease was due primarily to demand and time deposit runoff. Demand deposits
decreased $4.8 billion as a result of runoff due to customers seeking alternate
investment products and the reclassification of $3.6 billion of
noninterest-bearing demand deposits to money market accounts as part of the
implementation of a new sweep product. Time deposits decreased $1.1 billion due
to decreases in retail certificates of deposit and individual retirement
accounts resulting from the corporation's efforts to maintain a competitive cost
structure combined with the continued migration of customer interest-bearing
accounts to higher-yielding investment products.
Certificates of deposit and other time deposits issued by domestic offices
in amounts of $100,000 or more as of December 31, 1997 will mature as follows:
MATURITY OF TIME DEPOSITS
<TABLE>
<CAPTION>
December 31, 1997 Foreign
Dollars in millions, Certificates Time
Remaining maturity of Deposit Deposits
- --------------------------- -------------------------- --------------------------
<S> <C> <C>
3 months or less $2,345 $3,836
3 to 6 months 321 3
6 to 12 months 352 5
Over 12 months 1,365 -
- --------------------------- -------------------------- --------------------------
Total $4,383 $3,844
- --------------------------- -------------------------- --------------------------
</TABLE>
Total short-term borrowed funds increased $3.3 billion from December 31, 1996,
due primarily to increasing levels of treasury, tax and loan borrowings as the
corporation utilized this favorably priced funding vehicle to replace time and
demand deposit outflows.
Long-term debt decreased by $614 million due to $1.1 billion of scheduled
maturities, partially offset by $408 million of newly issued debt and $84
million of trust preferred securities issued in exchange for Series V preferred
stock.
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.
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity, and capital. Asset-liability management is governed by policies
reviewed and approved annually by the corporation's Board of Directors (the
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 market risk,
liquidity, and capital management programs.
MARKET RISK
Market risk is the sensitivity of income to variations in interest rates,
foreign exchange rates, commodity prices, and other market-driven rates or
prices. As discussed below, the corporation is exposed to market risk in both
its non-trading and trading operations.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-TRADING MARKET RISK
The corporation's earnings from non-trading operations are not directly and
materially impacted by movements in foreign currency rates or commodity prices.
Movements in equity prices may have an indirect but modest impact on earnings by
affecting the volume of activity or the amount of fees from investment-related
businesses.
Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-trading market risk to which the corporation is exposed.
Interest-rate risk is the sensitivity of income to variations in interest rates.
This risk arises directly from the corporation's core banking activities -
lending, deposit gathering, and loan servicing.
The primary goal of interest-rate risk management is to control the
corporation's exposure to interest-rate risk both within limits approved by the
Board and within narrower guidelines approved by ALCO. These limits and
guidelines reflect the corporation's tolerance for interest-rate risk over both
short-term and long-term time horizons.
The corporation controls interest-rate risk by identifying, quantifying
and hedging its exposures. The corporation identifies and quantifies its
interest-rate exposures using sophisticated simulation and valuation models, as
well as simpler gap analyses, reflecting the known or assumed maturity,
repricing and other cash flow characteristics of the corporation's assets and
liabilities.
The corporation manages the interest-rate risk inherent in its core
banking operations using both on-balance sheet instruments, mainly fixed-rate
portfolio securities, and a variety of off-balance sheet instruments. The most
frequently used off-balance sheet instruments are interest-rate swaps and
options (particularly interest-rate caps and floors). When appropriate,
forward-rate agreements, options on swaps, and exchange-traded futures and
options are also used.
The major source of the corporation's non-trading interest-rate risk is
the difference in the repricing characteristics of the corporation's core
banking assets and liabilities - loans and deposits. This difference or mismatch
is a risk to net interest income.
Most significantly, the corporation's core banking assets and liabilities
are mismatched with respect to repricing frequency and/or maturity. Most of the
corporation's commercial loans, for example, reprice rapidly in response to
changes in short-term interest rates (e.g., London Interbank Offered Rate
(LIBOR) and Prime). In contrast, many of its consumer deposits reprice slowly,
if at all, in response to changes in market interest rates. As a result, the
core bank is asset-sensitive.
Additionally, the corporation's core banking assets and liabilities are
mismatched with respect to repricing index. For example, many of the
corporation's commercial and consumer loans reprice in response to changes in
the Prime rate, while few, if any, deposits reprice as Prime changes. As a
result, the core bank is exposed to spread or "basis" risk.
In managing net interest income, the corporation uses fixed-rate portfolio
securities and interest-rate swaps to offset the general asset-sensitivity of
the core bank. Additionally, the corporation uses interest-rate swaps to offset
basis risk, including the specific exposure to changes in Prime. At December 31,
1997, interest-rate swaps totaling $12.2 billion (notional amount) were being
used to manage risk to net interest income.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its mortgage servicing rights (MSRs) to prepayments. The
mortgage borrower has the option to prepay the mortgage loan at any time. When
mortgage interest rates decline, borrowers have a greater incentive to prepay
mortgage loans through a refinancing; when mortgage interest rates rise, this
incentive is reduced or eliminated. Since MSRs represent the right to service
mortgage loans, 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,
therefore, economic value of MSRs is sensitive to movements in interest rates
due to this sensitivity to mortgage prepayments.
To mitigate the risk of declining long-term interest rates,
higher-than-expected mortgage prepayments, and the potential impairment of the
MSRs, the corporation uses a variety of risk management instruments, primarily
interest-rate swaps and floors tied to yields on 10-year "constant maturity"
Treasury notes. These instruments gain value as interest rates decline,
mitigating the impairment of MSRs. At December 31, 1997, the corporation had
approximately $2.5 billion of interest-rate swaps and $23.9 billion of purchased
option agreements, primarily interest-rate floors outstanding, to manage risk to
the MSRs' valuation.
To reduce the cost of this hedging program, the corporation has sold
interest-rate cap "corridors." Each corridor includes a sold interest-rate cap
paired with a purchased interest-rate cap at a higher strike rate. This strategy
monetizes some of the expected appreciation in the value of the MSRs in a rising
rate environment. Premiums received from cap corridor sales have been used to
fund purchases of protective interest-rate floors discussed above with the
restriction that each combination of floors purchased and cap corridors sold
results in a net
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
purchased option position. At December 31, 1997, the corporation had
approximately $4.3 billion of cap corridors outstanding.
Complicating management's efforts to control non-trading exposure to
interest-rate risk is the fundamental uncertainty of the maturity, repricing,
and/or runoff characteristics of some of the corporation's core banking assets
and liabilities. This uncertainty often reflects optional features contained in
these financial instruments. The most important optional features are contained
in consumer deposits and loans.
For example, many of the corporation's interest-bearing retail deposit
products (e.g., interest checking, savings and money market deposits) have no
contractual maturity. Customers have the right to withdraw funds from these
deposit accounts freely. Deposit balances may therefore run off unexpectedly due
to changes in competitive or market conditions. To forestall such runoff, rates
on interest-bearing deposits may have to be increased more (or reduced less)
than expected. Such repricing may not be highly correlated with the repricing of
Prime-based or LIBOR-based loans. Finally, balances that are lost may have to be
replaced with other more expensive retail or wholesale deposits. Given the
uncertainties surrounding deposit runoff and repricing, the interest-rate
sensitivity of core bank liabilities cannot be determined precisely.
Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, without penalty. As a result, the corporation's
mortgage-based assets (including mortgage loans and securities as well as
mortgage servicing rights) are subject to prepayment risk. This risk tends to
increase when interest rates fall due to the benefits of refinancing. Since the
future prepayment behavior of the bank's customers is uncertain, the
interest-rate sensitivity of mortgage assets cannot be determined exactly.
To cope with such uncertainties, management gives careful attention to its
assumptions. Depending on the product or behavior in question, each assumption
will reflect some combination of market data, research analysis, and business
judgment. For example, assumptions for mortgage prepayments are derived from
published dealer median prepayment estimates for comparable mortgage loans,
adjusted for factors specific to the corporation's portfolio, such as geography
and credit quality. Assumptions for noncontractual deposits are based on a
historical analysis of repricing and runoff trends, heavily weighted to the
recent past, modified by business judgment concerning prospective competitive
market influences.
To measure the sensitivity of its income to changes in interest rates, the
corporation uses a variety of methods, including simulation, gap, and valuation
analyses.
Simulation analysis involves dynamically modeling interest income and
expense from the corporation's balance sheet and off-balance-sheet positions
over a specified time period under various interest-rate scenarios and balance
sheet structures. The corporation uses simulation analysis to measure the
sensitivity of net interest income over relatively short (i.e., 1-2 year) time
horizons.
Key assumptions in these simulation analyses (and in the gap and valuation
analyses discussed below) relate to the behavior of interest rates and spreads,
the growth or shrinkage of product balances and the behavior of the bank's
deposit and loan customers. As indicated above, the most material assumptions
relate to the prepayment of mortgage assets as well as the repricing and/or
runoff of noncontractual deposits.
As the future path of interest rates cannot be known in advance,
management uses simulation analysis to project earnings under various
interest-rate scenarios. Some scenarios reflect reasonable or "most likely"
economic forecasts. Other scenarios are deliberately extreme, including
immediate interest-rate "shocks," gradual interest-rate "ramps," spread
widenings, and yield curve "twists."
Usually, each analysis incorporates what management believes to be the
most appropriate assumptions about customer and competitor behavior in the
specified interest-rate scenario. But in some analyses, assumptions are
deliberately manipulated to test the corporation's exposure to "assumption
risk."
The corporation's Board 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 corporation was in compliance with this limit at December 31, 1997.
The following table reflects the estimated exposure of the corporation's net
interest income for the next 12 months, assuming an immediate shift in interest
rates.
Estimated Exposure to
Rate Change Net Interest Income (Dollars
(Basis Points) in millions)
- ------------------------------ ------------------------------
+ 200 $ 72
- 200 (127)
- ------------------------------ ------------------------------
Management believes that these estimates reflect a complete and accurate
representation of the corporate balance sheet. It should be emphasized, however,
that the results are dependent on material assumptions such as those discussed
above.
Management believes that the exposure of the corporation's net interest
income to gradual and/or modest changes in interest rates is relatively small.
As
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
indicated by the results of the simulation analyses, however, a sharp decline
in interest rates will tend to reduce net interest income, but by amounts that
are within corporate limits. This exposure is primarily related to two major
risk factors discussed earlier - the anticipated slow repricing of
noncontractual deposits and the assumed rapid prepayment of mortgage loans and
securities.
The most significant factors affecting the risk exposure of net interest
income during 1997 were the sales of assets such as indirect auto loans, the
runoff of maturing interest-rate swaps, the addition of both new interest-rate
swaps and residential mortgage loans, the restructuring of the mortgage-backed
securities portfolio by lowering coupons, the continued runoff of consumer
savings deposits, and an increase in net free funds. In its management of these
and other factors influencing the current environment, the corporation has
attempted to maintain a modestly asset-sensitive position.
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 complement to simulation analysis.
The corporation's Board limits on interest-rate risk specify that the
cumulative one-year gap should be less than 10% of total assets. As of December
31, 1997, the estimated exposure was 3.6% asset-sensitive (see the following
table).
INTEREST-RATE GAP ANALYSIS
<TABLE>
<CAPTION>
Cumulatively Repriced Within
December 31, 1997 3 months 4 to 12 12 to 24 2 to 5 After 5
Dollars in millions, by repricing date or less months months years years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $53,783 $ 8,733 $ 5,587 $ 9,552 $13,392 $91,047
Total liabilities and stockholders' equity (39,101) (12,768) (10,848) (5,950) (22,380) (91,047)
Net off-balance sheet (10,437) 3,024 4,141 2,412 860
- -----------------------------------------------------------------------------------------------------------------------------------
Periodic gap 4,245 (1,011) (1,120) 6,014 (8,128) -
Cumulative gap 4,245 3,234 2,114 8,128 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total assets-1997 4.7 % 3.6 % 2.3 % 8.9 %
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total assets-1996 1.8 2.4 0.7 9.1
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Valuation analysis involves projecting future cash flows from the corporation's
assets, liabilities and off-balance sheet positions over a very long-term
horizon, discounting those cash flows at appropriate interest rates, and then
summing the discounted cash flows. The corporation's "economic value of equity"
(EVE) is the estimated net present value of the discounted cash flows. The
interest sensitivity of EVE is a measure of the sensitivity of long-term
earnings to changes in interest rates. The corporation uses valuation analysis
(specifically, the sensitivity of EVE) to measure the exposure of earnings and
equity to changes in interest rates over a relatively long (i.e., >2-year) time
horizon.
Valuation analysis provides a more comprehensive measure of the
corporation's exposure to interest-rate risk than simulation analysis. Valuation
analysis incorporates a longer time horizon, and it also includes certain
interest-rate sensitive components of noninterest income and expense,
specifically fee income and amortization from mortgage servicing rights.
The corporation's Board 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
corporation was in compliance with this limit at December 31, 1997. The
following table reflects the corporation's estimated exposure to economic value
assuming an immediate shift in interest rates. Exposures are reported for shifts
of +/- 100 basis points as well as +/- 200 basis points because the sensitivity
of EVE (in particularly the sensitivity of the hedged MSRs) to changes in
interest rates can be nonlinear:
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (Dollars in Millions)
- -------------------------------------------------------------------------
+200 $(158)
+100 9
-100 (381)
-200 (798)
- -------------------------------------------------------------------------
It should be emphasized that valuation analysis focuses on the long-term
economic value of the corporation's future cash flows, but it does not reflect
accounting rules. For some financial instruments, the adverse impact of current
movements in interest rates on expected future cash flows must be recognized
immediately. For example, if interest rates decline, thereby reducing estimated
future fee income from MSRs such that the estimated economic value of the MSRs
falls below book value, an immediate impairment charge is required. In contrast,
for other financial instruments, such as fixed-rate investment securities, the
beneficial impact of a decline in interest rates on future income is
unrecognized unless the instruments are sold.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
As a result of such accounting requirements, a portion of the EVE exposure
attributable to mortgage servicing rights could materially impact earnings
within the next 12 months if interest rates were to decline sharply. Given
current hedges, the exposure to MSR impairment appears to reach a peak with
long-term interest rates approximately 100 basis points below year-end 1997
levels. Management anticipates that in such a scenario, the corporation would
execute transactions, such as security sales, to mitigate the impact on
earnings.
Off-balance sheet interest-rate instruments used to manage net interest
income are designated as hedges of specific assets and liabilities. Accrual
accounting is applied to these hedges, and the income or expense is recorded in
the same category as that of the 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 $52 million, $12 million, and $(18) million of net interest income
(expense) during 1997, 1996, and 1995, respectively. As of December 31, 1997,
the corporation had net deferred income of $19 million relating to terminated
interest-rate swap contracts, which will be amortized over the remaining life of
the underlying terminated interest-rate contracts of approximately 5 years.
During 1997, the corporation altered its interest-rate risk-management
portfolio to limit an increase in asset-sensitivity resulting from balance sheet
changes and swap runoff. In particular, $1.8 billion of receive-fixed swaps were
added through new transactions, partially offsetting maturities of $2.5 billion.
Separately, the corporation reduced its position in other interest-rate
risk-management instruments, mainly through the termination of basis swaps that
were no longer needed after the sale of the hedged assets.
Off-balance sheet interest-rate instruments used to manage potential
impairment of MSRs are designated as hedges of the MSRs. Changes in fair value
of the hedges are recorded as adjustments to the carrying value of the MSRs. At
December 31, 1997, net hedge gains of $83 million have been deferred and
recorded as adjustments to the carrying value of the MSRs. Deferred hedge gains
include $24 million of realized hedge losses related to the termination of
certain risk-management instruments. 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, 1997, the carrying value and fair value of the
corporation's MSRs were $1.8 billion and $1.9 billion, respectively.
During 1997, the corporation also altered its interest-rate
risk-management portfolio to enhance its protection of the value of the MSRs. In
particular, $8.0 billion of long-term interest-rate floors were purchased,
including synthetic floors created from combinations of swaps and caps.
Additionally, $1.5 billion of interest-rate swaps, as well as a small notional
amount of mortgage principal-only (PO) swaps were added through new
transactions. To partially mitigate the cost of these hedges, $2.4 billion of
interest-rate cap corridors were sold.
These risk-management activities do not eliminate interest-rate risk in
the MSRs. Treasury rates, to which most of the MSR hedges are indexed, may not
move in tandem with mortgage interest rates. As mortgage interest rates change,
actual prepayments may not respond exactly as anticipated. Other pricing
factors, such as the volatility of market yields, may affect the value of the
option hedges without similarly impacting the MSRs. Finally, the corporation's
hedging activity has not been sufficient to offset prepayment risk completely in
all interest-rate scenarios. A continued decline in long-term interest rates
accompanied by a further acceleration of mortgage prepayments could result in a
significant impairment charge.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RISK-MANAGEMENT INSTRUMENT ANALYSIS
<TABLE>
<CAPTION>
Assets-
Notional Liabilities
Dollars in millions Value Hedged
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-RATE RISK-MANAGEMENT INSTRUMENTS
Interest-rate swaps:
<S> <C> <C>
Receive-fixed/pay-variable $ 8,015 Variable-rate loans
626 Fixed-rate deposits
693 Long-term debt
175 Short-term borrowings
----------------------
9,509
- -----------------------------------------------------------------------------------------------------------------------------
Basis swaps 2,729 Deposits
- -----------------------------------------------------------------------------------------------------------------------------
Total hedges of net-interest income 12,238
- -----------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING RISK-MANAGEMENT INSTRUMENTS
Interest rate swaps:
Mortgage servicing rights
Receive-fixed/pay-variable, PO swaps 2,502 and escrow deposits
Options:
Interest-rate floors, synthetic floors and swaptions
purchased 23,870 Mortgage servicing rights
Interest-rate cap corridors sold 4,309 Mortgage servicing rights
- -----------------------------------------------------------------------------------------------------------------------------
Total options 28,179
- -----------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights and escrow
deposits 30,681
- -----------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $42,919
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Weighted Weighted Average
Average Rate
Maturity Fair ---------------------
Dollars in millions (Years) Value Receive Pay
- -----------------------------------------------------------------------------------------------------------------
INTEREST-RATE RISK-MANAGEMENT INSTRUMENTS Interest-rate swaps:
<S> <C> <C> <C> <C>
Receive-fixed/pay-variable
2.3 $ 48 7.09 % 6.94 %
- -----------------------------------------------------------------------------------------------------------------
Basis swaps 1.3 (1) 5.85 6.01
- -----------------------------------------------------------------------------------------------------------------
Total hedges of net-interest income 2.0 47 6.82 6.73
- -----------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING RISK-MANAGEMENT INSTRUMENTS Interest rate swaps:
Receive-fixed/pay-variable, PO swaps 3.1 - 6.00 5.88
Options:
Interest-rate floors, synthetic floors and swaptions
purchased 3.5 138 - (a) - (a)
Interest-rate cap corridors sold 2.9 (25 ) - (a) - (a)
- -----------------------------------------------------------------------------------------------------------------
Total options 3.4 113 - -
- -----------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights and escrow
deposits 3.4 113 6.00 5.88
- -----------------------------------------------------------------------------------------------------------------
Total risk-management instruments 3.0 $160 6.68 % 6.59 %
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The mortgage-banking risk-management interest-rate floors, synthetic floors
and swaptions purchased, and interest-rate cap corridors sold have weighted
average strike rates of 5.31% and 7.69%,respectively.
TRADING MARKET RISK
The corporation's trading portfolios are exposed to market risk due to
variations in interest rates, currency exchange rates, precious metals prices,
and related market volatilities. This exposure arises in the normal course of
the corporation's business as a financial intermediary. Interest rate, foreign
exchange, and precious metals contracts are primarily entered into to satisfy
the investment and risk-management needs of our customers. The corporation
generally enters into offsetting interest-rate, foreign exchange, and precious
metals contracts to mitigate the risk to earnings. The corporation also enters
into some proprietary on-balance sheet trading positions which principally
include U.S. federal and state government and agency securities.
The corporation uses an "earnings at risk" (EAR) system, based on an
industry-standard risk measurement methodology, to measure the overall market
risk inherent in its trading activities. The system, using historical data to
estimate market volatility, measures the risk to earnings at a 99% confidence
level based on an assumed ten-day holding period. In simple terms, the
corporation's EAR measure estimates the loss that would be suffered if its
trading positions were held for a full ten days during an adverse and extreme
(less than a 1% probability) market move.
Management recognizes that this methodology, while standard, can
underestimate risk. The actual probability of an extreme market move is
generally greater than the statistics suggest because returns on financial
instruments are not normally distributed. Nevertheless, as applied to the
corporation's trading positions, the method appears to be a conservative measure
of risk because in any sustained adverse market move, it is unlikely that
trading positions would be held for a full ten days.
Measured market risk is controlled by earning at risk limits, which are
reviewed and approved annually by the Board. Additionally, more restrictive
guidelines may be established by ALCO. During 1997, the total Board limit was
$12 million, while the more restrictive ALCO guideline was approximately $9
million. Actual daily exposures were uniformly much lower than either the Board
limit or ALCO guideline. The average daily exposure to this market risk was $.8
million, and the maximum daily exposure was $2.7 million.
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 the ability to take advantage of new business
opportunities. Liquidity is achieved by 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. Liquidity
may also be 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.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 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, 1997, the corporation had commercial paper outstanding of
$811 million, all of which was placed directly by Fleet in its local markets,
compared with $676 million at December 31, 1996. The corporation has a backup
line of credit totaling $1 billion to ensure that funding is not interrupted if
commercial paper is not available. At December 31, 1997 and 1996, Fleet had no
outstanding balance under the line of credit.
Fleet had $2.0 billion available for the issuance of common or preferred
stock, and senior or subordinated securities at December 31, 1997 under existing
shelf registrations filed with the Securities and Exchange Commission (SEC).
Subsequent to December 31, 1997, the corporation issued $750 million of
subordinated debt, $120 million of trust preferred securities, and filed a $350
million shelf registration for trust preferred securities, bringing the
availability of the shelf registration to $1.8 billion. Fleet's ability to
access the capital markets was demonstrated in 1997 through the issuance of $195
million in subordinated debt and the issuance of 10.75 million shares of common
stock. The corporation also repaid $455 million of debt and exchanged $84
million of preferred securities for trust originated preferred securities during
1997.
As shown in the consolidated statement of cash flows, cash and cash
equivalents decreased by $3.5 billion during 1997. The decrease was due to cash
used in investing activities of $4.5 billion and cash used in financing
activities of $1.3 billion, offset by cash provided by operating activities of
$2.2 billion. Net cash used in investing activities was attributable to a net
increase in loans resulting primarily from loan growth in the commercial and
industrial, lease financing and residential portfolios and a net increase in
securities. Net cash used in financing activities was due to a decrease in
deposits of $3.3 billion relating to deposit runoff, dividends paid and
repayments of long-term debt, offset by an increase in short-term borrowings.
Net cash provided by operating activities was attributable to net income of $1.4
billion.
CAPITAL
December 31
Dollars in millions 1997 1996
- ------------------------------------------------------------------------
Risk-adjusted assets $90,063 $82,563
Tier 1 risk-based capital
(4% minimum) 7.26 % 7.70 %
Total risk-based capital
(8% minimum) 10.71 11.27
Leverage ratio (4% minimum) 7.66 7.19
Common equity-to-assets 8.52 7.63
Total equity-to-assets 9.28 8.69
Tangible common equity-to-assets 6.26 5.79
Tangible total equity-to-assets 7.04 6.88
- ------------------------------------------------------------------------
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
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. In addition, the
corporation currently has a tangible common equity-to-assets ratio target range
of 5.50%-6.00% and a total equity-to-assets target range of 7.25%-7.75%.
At December 31, 1997, 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 7.26% and 10.71%, respectively,
compared with 7.70% and 11.27%, respectively, at December 31, 1996. The leverage
ratio was 7.66% at December 31, 1997, compared with 7.19% at December 31, 1996.
The corporation's risk-based capital ratios decreased compared with December 31,
1996, due mainly to growth in risk-adjusted assets. All other capital ratios
increased compared with the prior year. Excess capital, defined as common equity
above the capital target, is available for core business investments and
acquisitions.
As registered brokers-dealers and member firms of the New York Stock
Exchange, Inc. (the "NYSE"), five subsidiaries are subject to certain rules of
both the Securities and Exchange Commission and the NYSE. These rules require
registrants to maintain minimum levels of net capital, as defined, and may
restrict a member from expanding its business and declaring dividends as its net
capital approaches specified levels. At December 31, 1997, the subsidiaries had
net capital, in the aggregate, of approximately $226 million which exceeded
aggregate minimum net capital requirements by approximately $186 million.
During 1997, prior to the announcement of the Columbia, Quick & Reilly and
Advanta acquisitions, the corporation repurchased 13.3 million shares of common
stock at an average price of $59.00 per share as part of a previously announced
program to manage capital levels more effectively. However, in conjunction with
the corporation's announcement of its intention to acquire Quick & Reilly, the
Board of Directors rescinded the remaining portion of its prior authority
granted in January, 1997 to repurchase up to 20 million shares of common stock.
In advance of the Quick & Reilly acquisition, which has been accounted for as a
pooling-of-interests, the corporation reissued 10.75 million treasury shares on
December 10, 1997 at $70.375 per share. The corporation anticipates using the
proceeds from the reissuance for the acquisition of the consumer credit card
operations of Advanta, as well as for general corporate purposes.
COMPARISON OF 1996 AND 1995
Fleet reported net income for 1996 of $1.22 billion, or $3.96 per diluted share,
compared with the $679 million, of $1.70 per diluted share, reported in 1995.
ROA and ROE were 1.40% and 17.68%, respectively, for 1996 compared with .79% and
9.93%, respectively, in 1995. Excluding the impact of special charges, 1995
earnings and diluted earnings per share were $1.11 billion and $3.90,
respectively. ROA and ROE were 1.29% and 16.55%, respectively, in 1995,
excluding the special charges.
Net interest income on an FTE basis totaled $3.5 billion in 1996, compared
with $3.1 billion in 1995. The net interest margin for 1996 was 4.68% compared
with 4.03% in 1995. The increase of 65 basis points was due principally to the
balance sheet restructuring undertaken in connection with the NatWest
acquisition in May 1996, 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 with
$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 $394 million to $2.33 billion in 1996. The
increase was due primarily to the NatWest acquisition, which contributed $200
million of noninterest income. Noninterest income was positively impacted by
increases of 10% or more in several business segments, including mortgage
banking revenue, venture capital revenue, brokerage revenue, student loan
servicing fees, and investment services revenue.
Noninterest expense totaled $3.51 billion for 1996, compared with $3.10
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. The special charges
related to $490 million of merger and restructuring charges and $175 million of
a loss on assets held for sale or accelerated disposition.
Total loans at December 31, 1996 were $59.9 billion, compared with $52.6
billion at December 31, 1995. The increase is attributable to the acquisition of
NatWest, partially offset by loan divestitures related to the Shawmut Merger and
the securitization of residential real estate loans during 1996. Total deposits
increased $10.0 billion to $67.1 billion at December 31, 1996. The increase was
due primarily to the acquisition of NatWest, partially offset by the reduction
of higher-cost wholesale time deposits related to a balance sheet restructuring
program and the regulatory required divestitures of deposits as a result of the
Shawmut Merger.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate as
other comprehensive income. This statement is effective for 1998 interim and
annual financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting information about operating segments. This statement requires a
company to disclose certain income statement and balance sheet information by
operating segment, as well as provide a reconciliation of operating segment
information to the company's consolidated balances. An operating segment is
defined as a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and evaluate performance. This statement is
effective for 1998 annual financial statements.
40
<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 1997, 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 and Vice Chairman and
Chief Executive Officer Chief Financial Officer
<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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 1, 1998
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------
December 31
Dollars in millions, except share amounts 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 5,076 $ 7,332
Federal funds sold and securities purchased under agreements to resell 498 1,772
Securities (market value: $9,367 and $8,675) 9,362 8,680
Loans 62,565 59,861
Reserve for credit losses (1,432) (1,488)
- ------------------------------------------------------------------------------------------------------------
Net loans 61,133 58,373
- ------------------------------------------------------------------------------------------------------------
Due from brokers/dealers 3,510 2,618
Mortgages held for resale 1,526 1,560
Premises and equipment 1,205 1,364
Mortgage servicing rights 1,768 1,566
Intangible assets 2,196 1,745
Other assets 4,773 4,640
- ------------------------------------------------------------------------------------------------------------
Total assets $91,047 $89,650
- ------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Demand $13,148 $17,903
Regular savings, NOW, money market 30,485 27,976
Time 20,102 21,192
- ------------------------------------------------------------------------------------------------------------
Total deposits 63,735 67,071
- ------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 3,635 2,871
Other short-term borrowings 3,870 1,323
Due to brokers/dealers 4,316 3,080
Long-term debt 4,500 5,114
Accrued expenses and other liabilities 2,539 2,401
- ------------------------------------------------------------------------------------------------------------
Total liabilities 82,595 81,860
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock 691 953
Common stock (shares issued: 285,602,282 in 1997 and 285,316,025 in 1996) 3 3
Common surplus 3,329 3,223
Retained earnings 4,437 3,640
Net unrealized gain on securities available for sale 97 31
Treasury stock, at cost (1,939,464 shares in 1997 and 1,460,763 shares in 1996) (105) (60)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,452 7,790
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $91,047 $89,650
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31
Dollars in millions, except per share amounts 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans and leases $5,357 $5,169 $4,792
Interest on securities 570 723 1,250
Other 164 136 170
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 6,091 6,028 6,212
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,654 1,754 1,726
Short-term borrowings 247 311 816
Long-term debt 338 390 478
Other 152 111 119
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 2,391 2,566 3,139
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 3,700 3,462 3,073
- ---------------------------------------------------------------------------------------------------------------------
Provision for credit losses 322 213 101
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 3,378 3,249 2,972
- ---------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges, fees and commissions 633 537 442
Investment services revenue 418 372 322
Brokerage revenue 399 329 280
Mortgage banking revenue, net 327 372 321
Student loan servicing fees 101 98 72
Trading revenue 74 55 39
Venture capital revenue 71 106 36
Securities gains 33 43 32
Net gains on sales of business units 175 --- ---
Other 400 421 395
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,631 2,333 1,939
- ---------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,752 1,735 1,554
Equipment 317 300 234
Occupancy 294 293 257
Intangible asset amortization 169 140 108
Legal and other professional 118 136 106
Marketing 109 106 100
Merger and restructuring-related charges 47 --- 490
Loss on assets held for sale or accelerated disposition --- --- 175
Other 909 802 731
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,715 3,512 3,755
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,294 2,070 1,156
Applicable income taxes 927 849 477
- ---------------------------------------------------------------------------------------------------------------------
Net income $1,367 $1,221 $ 679
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding (in millions) 284.3 290.0 286.0
Net income applicable to common shares $1,305 $1,149 $ 485
Basic earnings per share 4.73 4.04 1.83
Diluted earnings per share 4.59 3.96 1.70
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gain (Loss)
Common on Securities
Preferred Stock at Common Retained Available Treasury
Dollars in millions, except per share amounts Stock $.01 Par Surplus Earnings for Sale Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $557 $244 $2,687 $2,885 $(411) $(254) $5,708
Net income --- --- --- 679 --- --- 679
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 --- --- --- (111) --- --- (111)
Issuance of preferred stock 125 --- --- --- --- --- 125
Common stock issued in connection with:
Acquisitions --- 6 170 (21) --- 234 389
Employee benefit plans --- --- 55 (26) --- 100 129
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 $3,226 $2,994 $ 52 $ (7) $6,667
- -----------------------------------------------------------------------------------------------------------------------------------
Net income --- --- --- 1,221 --- --- 1,221
Cash dividends declared on common
stock ($1.74 per share) --- --- --- (457) --- --- (457)
Cash dividends declared on preferred stock --- --- --- (69) --- --- (69)
Cash dividends declared by pooled
company prior to merger --- --- --- (10) --- --- (10)
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) --- 64 63
Warrants --- --- 15 --- --- --- 15
Treasury stock purchased --- --- --- --- --- (105) (105)
Adjustment to valuation reserve on securities
available for sale --- --- --- --- (21) --- (21)
Other items, net --- --- (33) (5) --- (12) (50)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $953 $ 3 $3,223 $3,640 $ 31 $ (60) $7,790
- -----------------------------------------------------------------------------------------------------------------------------------
Net income --- --- --- 1,367 --- --- 1,367
Cash dividends declared on common
stock ($1.84 per share) --- --- --- (467) --- --- (467)
Cash dividends declared on preferred stock --- --- --- (62) --- --- (62)
Cash dividends declared by pooled
company prior to merger --- --- --- (7) --- --- (7)
Redemption of preferred stock (178) --- --- --- --- --- (178)
Common stock issued in connection with:
Employee benefit plans --- --- (51) (11) --- 162 100
Reissuance of treasury stock --- --- 161 --- --- 595 756
Acquisition of Nash Weiss & Co. --- --- 16 --- --- --- 16
Treasury stock purchased --- --- --- --- --- (803) (803)
Adjustment to retained earnings reflecting
pooled entity different year end --- --- --- (23) --- --- (23)
Adjustment to valuation reserve on securities
available for sale --- --- --- --- 66 --- 66
Exchange of Series V preferred stock for trust
preferred securities (84) --- --- --- --- --- (84)
Other items, net --- --- (20) --- --- 1 (19)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $691 $ 3 $3,329 $4,437 $ 97 $(105) $8,452
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31
Dollars in millions 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,367 $1,221 $ 679
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 213 200 167
Amortization of mortgage servicing rights and intangible assets 417 328 298
Provision for credit losses 322 213 101
Deferred income tax expense 341 443 13
Securities gains (33) (43) (32)
Net gains on sale of business units (175) --- ---
Merger and restructuring-related charges 47 --- 425
Loss on assets held for sale or accelerated disposition --- --- 175
Originations and purchases of mortgages held for resale (15,400) (18,760) (13,349)
Proceeds from sales of mortgages held for resale 14,997 20,025 11,997
(Increase) decrease in due from brokers/dealers (1,162) (692) (320)
(Increase) decrease in due accrued receivables, net (132) (430) 118
Increase (decrease) in to brokers/dealers 1,585 739 520
Increase (decrease) in accrued liabilities, net 88 (229) (206)
Other, net (241) 468 177
- ----------------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 2,234 3,483 763
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (3,998) (5,682) (23,307)
Proceeds from sales of securities available for sale 2,766 16,313 10,836
Proceeds from maturities of securities available for sale 884 4,161 15,473
Purchases of securities held to maturity (1,428) (1,125) (746)
Proceeds from maturities of securities held to maturity 1,317 791 3,462
Net cash and cash equivalents (paid)/received for businesses acquired (525) 2,386 (2,863)
Loans made to customers, nonbanking subsidiaries (2,675) (1,510) (1,791)
Principal collected on loans made to customers, nonbanking subsidiaries 1,267 1,180 905
Net cash and cash equivalents received from sale of business units 2,719 --- ---
Net (increase) decrease in loans, banking subsidiaries (4,369) 1,947 (2,446)
Net cash received from divestiture of assets and liabilities --- 768 ---
Purchases of mortgage servicing rights (271) (293) (331)
Purchases of premises and equipment (152) (164) (147)
- ----------------------------------------------------------------------------------------------------------------------
Net cash flow (used in) provided by investing activities (4,465) 18,772 (955)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (3,335) (6,139) (3,206)
Net increase (decrease) in short-term borrowings 3,311 (10,300) (490)
Proceeds from issuance of long-term debt 492 697 3,290
Repayments of long-term debt (1,106) (2,108) (2,740)
Proceeds from issuance of common stock 856 78 129
Proceeds from issuance of preferred stock --- 635 125
Redemption and repurchase of common and preferred stock (981) (204) (446)
Cash dividends paid (536) (509) (382)
- ----------------------------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (1,299) (17,850) (3,720)
- ----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,530) 4,405 (3,912)
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 9,104 4,699 8,611
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $5,574 $9,104 $4,699
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fleet Financial Group (Fleet or the
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: consumer
banking, commercial financial services, investment services, treasury, mortgage
banking/venture capital, financial services, and all other.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. 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, 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 held to maturity, available for sale or trading
account.
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 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
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.
Securities owned and securities sold, but not yet purchased, are valued at
market and the resulting unrealized gains and losses are reflected in the
consolidated statements of income.
LOANS. Loans are stated at the principal amounts outstanding, net of unearned
income. Loans 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 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 generally placed
on nonaccrual status at 180 days past due, or earlier if deemed to be
uncollectible, and 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. Cash receipts are generally applied to reduce the
unpaid principal balance, except in the case of consumer loans for which
interest income is recognized on a cash basis. 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 individual loans, reviewing
historical net charge-off experience of the portfolio as a whole and evaluating
current and anticipated economic conditions and other pertinent factors. The
reserve for credit losses related to loans that are identified as impaired,
which are primarily commercial and commercial real estate loans on nonaccrual
status, 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. Based on these analyses, the
reserve for credit losses is maintained at levels considered adequate by
management to provide for loan losses inherent in these portfolios.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans, 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.
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,
interest rates, servicing costs 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), and note rate. 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.
DUE TO/DUE FROM BROKERS/DEALERS. Receivables from brokers-dealers and
clearing organizations include amounts receivable for securities failed to
deliver, certain deposits for securities borrowed, amounts receivable from
clearing organizations relating to open transactions, good faith and margin
deposits, and commissions and floor-brokerage receivables. Payables to
brokers-dealers and clearing organizations include amounts payable for
securities failed to receive, certain deposits received for securities
loaned, amounts payable to clearing organizations on open transactions, and
floor-brokerage payables. In addition, the net receivable or payable arising
from unsettled trades is reflected in these captions.
INTANGIBLE ASSETS. The excess of cost over the fair value of net assets acquired
(goodwill) is amortized on a straight-line basis over appropriate periods given
the characteristics of the assets acquired. 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 for events or changes in circumstances that may indicate that
the carrying amount of the assets may not be recoverable.
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. 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.
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 effectively alter 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.
If correlation were to cease on any interest-rate instrument hedging net
interest income, it would then be accounted for as a trading instrument. If an
interest-rate instrument hedging net interest income is terminated, the gain or
loss is deferred and amortized over the shorter of the remaining contractual
life of the terminated risk-management instrument or the maturity of the
designated assets or liabilities. If the designated asset or liability matures,
is sold, is settled or its balance falls below the notional amount of the
instrument, the hedge is usually terminated; if not accrual accounting is
discontinued to the extent that the notional amount exceeds the balance, and
accounting for trading instruments is applied.
The corporation also uses interest-rate instruments and combinations of
interest-rate instruments to hedge the value of the corporation's mortgage
servicing portfolio. Such instruments are designated as hedges of specific pools
of MSRs. To qualify for hedge accounting, net changes in value of the hedges are
expected to be highly correlated with changes in the value of the hedged MSRs
throughout the hedge period, and combinations of options purchased and sold must
be entered into simultaneously and must result in a net purchased option
position. Net premiums paid are amortized against income over the life
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the contract. Changes in the value of risk-management instruments are treated
as adjustments to the carrying value of the hedged MSRs.
If correlation were to cease on the interest-rate instrument hedging MSRs,
they would then be accounted for as a trading instrument. If an interest-rate
instrument hedging MSRs is terminated, the gain or loss is treated as an
adjustment to the carrying value of hedged MSRs and amortized over its remaining
life.
EARNINGS PER SHARE. Effective December 31, 1997, the corporation adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." This standard changes the previous standards for computing earnings per
share (EPS).
As required by this statement, basic EPS is computed by dividing net
income, after deducting dividends on preferred stock, by the weighted average
number of common shares outstanding during the period. Diluted EPS incorporates
the effect of common stock equivalents outstanding on an average basis during
the period.
NOTE 2.
MERGERS, ACQUISITIONS AND DIVESTITURES
On December 10, 1997, Fleet consummated its acquisition of Columbia Management
Company (Columbia), a Portland, Oregon-based asset management company with
approximately $21 billion of assets under management. Goodwill of approximately
$466 million was initially recorded in connection with this transaction and is
being amortized on a straight-line basis over 30 years. Fleet may be required to
make additional payments up to $110 million in accordance with an earnout
calculation which will be recorded as goodwill. Fleet accounted for this
acquisition under the purchase method of accounting. Accordingly, the
corporation's financial statements include the effect of Columbia for the period
subsequent to the December 10, 1997 acquisition date.
During the third quarter of 1997, the corporation entered into a
definitive agreement to acquire The Quick & Reilly Group, Inc. (Quick & Reilly),
one of the largest national discount brokerage firms. The acquisition closed on
February 1, 1998 and was accounted for as a pooling of interests and therefore,
these consolidated financial statements have been restated for all periods
presented to include the results of operations, financial position and changes
in cash flows of Quick & Reilly. Quick and Reilly had a February 28 fiscal
year-end and, therefore, adjustments have been made to conform Quick & Reilly's
year-end to Fleet's calendar year-end. These adjustments did not have a material
impact on the consolidated financial statements. Under the terms of the Quick &
Reilly merger, approximately 22 million Fleet common shares were exchanged for
all of the outstanding Quick & Reilly common shares at an exchange ratio of
0.578 shares of Fleet for each share of Quick & Reilly. Additional payments may
be required over the next five years if certain retention and performance
targets are attained.
During the fourth quarter of 1997, the corporation entered into a
definitive agreement to acquire the consumer credit card operations of Advanta
Corporation (Advanta). The Advanta acquisition will provide approximately $11.5
billion of managed credit card receivables, of which approximately $2 billion
will reside on the balance sheet in consumer loans. This acquisition closed
February 20, 1998 under the purchase method of accounting. Goodwill of
approximately $500 million will be recorded in 1998 in connection with this
transaction and will be amortized on a straight-line basis over 15 years.
Additionally, purchased credit card intangible of approximately $150 million
will be recorded and will be amortized on a straight-line basis over 6 years.
Fleet may be required to make additional payments up to $100 million which will
be recorded as goodwill.
During 1997, the corporation sold Option One, a mortgage banking
subsidiary; the corporate trust division; and its indirect auto lending
portfolio. The pretax net gain recorded on these sales totaled $175 million.
On May 1, 1996, the corporation acquired from National Westminster Plc
substantially all of the net assets of certain subsidiaries of NatWest Bancorp
(NatWest). The acquisition of NatWest contributed approximately $13 billion and
$18 billion of loans and deposits, respectively, and approximately 300 branches
in New York and New Jersey. 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 NatWest, Fleet may be required to make additional earnout payments
of up to $560 million over eight years, of which $128 million was paid in 1997.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the corporation's financial statements include the effect of
NatWest for the period subsequent to the May 1, 1996 acquisition date. Goodwill
of approximately $660 million was initially recorded in connection with this
transaction and is being amortized on a straight-line basis over 15 years.
Additional goodwill of $128 million was recorded during 1997 under the earnout,
with potential goodwill of $432 million to be recorded in future years.
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.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 3.
SECURITIES
<TABLE>
<CAPTION>
1997
GROSS GROSS
DECEMBER 31 AMORTIZED COST UNREALIZED UNREALIZED MARKET VALUE
DOLLARS IN MILLIONS GAINS LOSSES
- ----------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $1,126 $ 8 $ - $1,134
Mortgage-backed securities 6,177 123 2 6,298
Other debt securities 186 3 - 189
- ----------------------------------------------------------------------------------------------------------------
Total debt securities 7,489 134 2 7,621
- ----------------------------------------------------------------------------------------------------------------
Marketable equity securities 256 27 1 282
Other securities 210 - - 210
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale 7,955 161 3 8,113
- ----------------------------------------------------------------------------------------------------------------
Securities held to maturity:
State and municipal 1,238 5 - 1,243
Other debt securities 11 - - 11
- ----------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,249 5 - 1,254
- ----------------------------------------------------------------------------------------------------------------
Total securities $9,204 $166 $ 3 $9,367
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1996
GROSS GROSS
DECEMBER 31 AMORTIZED COST UNREALIZED UNREALIZED MARKET VALUE
DOLLARS IN MILLIONS GAINS LOSSES
- -------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $1,077 $ 6 $ - $1,083
Mortgage-backed securities 5,987 51 32 6,006
Other debt securities --- - - -
- -------------------------------------------------------------------------------------------------------
Total debt securities 7,064 57 32 7,089
- -------------------------------------------------------------------------------------------------------
Marketable equity securities 229 28 2 255
Other securities 159 - - 159
- -------------------------------------------------------------------------------------------------------
Total securities available for sale 7,452 85 34 7,503
- -------------------------------------------------------------------------------------------------------
Securities held to maturity:
State and municipal 1,054 6 1 1,059
Other debt securities 123 - 10 113
- -------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,177 6 11 1,172
- -------------------------------------------------------------------------------------------------------
Total securities $8,629 $ 91 $ 45 $8,675
- -------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, $4.0 billion of securities were pledged to secure public
deposits, securities sold under agreements to repurchase, and for other
purposes, compared with $4.7 billion at December 31, 1996.
Proceeds from sales of debt securities during 1997, 1996, and 1995 were $3
billion, $16 billion, and $11 billion, respectively. Gross gains of $19 million
and gross losses of $9 million were realized on those sales in 1997, gross gains
of $73 million and gross losses of $48 million were realized on those sales in
1996, and gross gains of $49 million and gross losses of $48 million were
realized on those sales in 1995. Net realized gains on sales of marketable
equity securities were $23 million, $18 million, and $31 million in 1997, 1996,
and 1995, 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 tables. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997 WITHIN 1 1 TO 5 5 TO 10 AFTER
DOLLARS IN MILLIONS YEAR YEARS YEARS 10 YEARS TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury and
government agencies $ 9 $920 $ 197 $ --- $1,126
Mortgage-backed
securities --- 1 884 5,292 6,177
Other debt securities 6 55 74 51 186
- -------------------------------------------------------------------------------------------
Total debt securities $ 15 $976 $1,155 $5,343 $7,489
- -------------------------------------------------------------------------------------------
Percent of total debt
securities .21 % 13.03 % 15.42 % 71.35 % 100 %
Weighted average yield(a) 7.38 6.08 6.96 6.83 6.75
- -------------------------------------------------------------------------------------------
Market value $ 15 $979 $1,179 $5,448 $7,621
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES HELD TO MATURITY
DECEMBER 31, 1997 WITHIN 1 TO 5 5 TO 10 AFTER
DOLLARS IN MILLIONS 1 YEAR YEARS YEARS 10 YEARS TOTAL
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amortized cost:
State and municipal $1,096 $111 $ 23 $ 8 $1,238
Other debt securities --- 11 --- --- 11
- --------------------------------------------------------------------------------------------
Total debt securities $1,096 $122 $ 23 $ 8 $1,249
- --------------------------------------------------------------------------------------------
Percent of total debt
securities 87.69 % 9.80 % 1.87 % 0.64 % 100 %
Weighted average yield (a) 6.04 7.83 9.42 7.52 6.27
- --------------------------------------------------------------------------------------------
Market value $1,096 $124 $ 26 $ 8 $1,254
- --------------------------------------------------------------------------------------------
</TABLE>
(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.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4.
LOANS
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Loans:
<S> <C> <C> <C> <C> <C>
Commercial and industrial $32,000 $29,107 $23,052 $19,520 $18,876
Residential real estate 10,019 8,048 11,475 8,529 7,378
Consumer 11,493 13,642 10,796 11,700 11,018
Commercial real estate:
Construction 890 1,074 606 666 637
Interim/permanent 4,787 5,379 4,414 4,789 5,279
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 59,189 57,250 50,343 45,204 43,188
- --------------------------------------------------------------------------------------------------------------------------------
Lease financing:
Lease receivables 3,342 2,587 2,267 1,765 1,291
Estimated residual value 936 688 520 212 165
Unearned income (902) (664) (564) (494) (297)
- --------------------------------------------------------------------------------------------------------------------------------
Lease financing, net of unearned income(a) 3,376 2,611 2,223 1,483 1,159
- --------------------------------------------------------------------------------------------------------------------------------
Total loans net of unearned income $62,565 $59,861 $52,566 $46,687 $44,347
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The corporation's leases consist principally of full-payout, direct
financing leases. The corporation's investment in leverage leases
totaled $935 million and $644 million for 1997 and 1996, 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 $503 million
in 1997 and $344 million in 1996. Future minimum lease payments to be
received are $575 million in 1998; $488 million, 1999; $426 million,
2000; $320 million, 2001; $244 million, 2002; $1,289 million, 2003, and
thereafter.
Total loans increased $2.7 billion from $59.9 billion at December 31, 1996 to
$62.6 billion at December 31, 1997. Excluding the sale of the $2.2 billion
indirect auto lending portfolio, loans and leases increased $4.9 billion, or
8.5% over December 31, 1996, due primarily to growth in the commercial and
industrial portfolio, lease financings and purchases of residential mortgages.
CONCENTRATIONS OF CREDIT RISK. Although the corporation is engaged in business
nationwide, the lending done by the banking subsidiaries is primarily
concentrated in New England, New York and New Jersey.
NOTE 5.
RESERVE FOR CREDIT LOSSES
YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $1,488 $1,321 $1,496
Provision charged to income 322 213 101
Loans charged off (514) (484) (418)
Recoveries of loans charged off 138 114 116
Acquisitions/other (2) 324 26
- --------------------------------------------------------------------------------
Balance at end of year $1,432 $1,488 $1,321
- --------------------------------------------------------------------------------
The reserve for credit losses decreased $56 million from December 31, 1996, to
$1.432 billion at December 31, 1997. The 1997 provision for credit losses was
$322 million, $109 million higher than the prior year level of $213 million. The
increase in the provision for credit losses was due primarily to a higher level
of bankruptcies and delinquencies related to the consumer loan portfolio.
During 1996, "Acquisitions/Other" primarily related to the acquisition of
NatWest, which added $335 million to the reserves, offset in part by reserve
transfers to the FDIC and reserves related to assets held for sale or
accelerated disposition.
NOTE 6.
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Nonperforming loans:
Current or less
than 90 days
past due $216 $264 $157 $186 $ 254
Noncurrent 176 432 283 480 584
OREO 24 27 59 95 200
- --------------------------------------------------------------------------------
Total NPAs(a) $416 $723 $499 $761 $1,038
- --------------------------------------------------------------------------------
NPAs as a percent of
outstanding loans
and OREO .66 % 1.21 % 0.95 % 1.63 % 2.33 %
- --------------------------------------------------------------------------------
Accruing loans
contractually past due 90
days or more $202 $247 $198 $139 $120
- --------------------------------------------------------------------------------
(a) Excludes $214 million, $265 million, and $317 million of NPAs classified
as held for sale or accelerated disposition at December 31, 1997, 1996,
and 1995, respectively.
Nonperforming assets (NPAs) decreased $307 million from December 31, 1996 to
December 31, 1997, due primarily to declining levels of nonperforming assets in
all loan and OREO portfolios as a result of the successful
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
resolution of certain commercial and industrial and commercial real estate
loans, as well as $231 million of nonperforming assets transferred to assets
held for sale or accelerated disposition.
The gross interest income that would have been recorded if the
nonperforming loans 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 $43 million, $71 million, and $59 million in 1997, 1996,
and 1995, respectively. The actual amount of interest income on those loans
included in net income for the period was $11 million, $18 million, and $26
million in 1997, 1996, and 1995, respectively.
The following table displays the status of impaired loans, which are
primarily commercial and commercial real estate loans on nonaccrual status:
IMPAIRED LOANS
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996
- ------------------------------------------------------- ---------- ---------
Impaired loans with a reserve $228 $359
Impaired loans without a reserve 95 154
- ------------------------------------------------------- ---------- ---------
Total impaired loans $323 $513
- ------------------------------------------------------- ---------- ---------
Reserve for impaired loans(a) $ 63 $103
- ------------------------------------------------------- ---------- ---------
Average balance of impaired loans
during the year ended December 31 $422 $471
- ------------------------------------------------------- ---------- ---------
(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 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 mortgage servicing rights (MSRs) activity for the years ended
December 31, 1997, 1996, and 1995 is as follows:
MORTGAGE SERVICING RIGHTS
YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $1,566 $1,276 $840
Additions 586 429 678
Sales (20) (39) (52)
Deferred hedge loss/(gain) (116) 40 -
Amortization (248) (188) (142)
Impairment reserve - 48 (48)
- --------------------------------------------------------------------------------
Balance at end of year $1,768 $1,566 $1,276
- --------------------------------------------------------------------------------
The aggregate fair value of the corporation's MSRs was approximately $1.9
billion as of December 31, 1997. MSR amortization increased $60 million from
$188 million during 1996 to $248 million during 1997. The level of amortization
increased due to an increase in prepayments resulting from a decline in mortgage
interest rates, coupled with a higher level of amortization of recently
purchased mortgage servicing rights which provide a higher servicing spread.
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 in 1996. This liability
included 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
were 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 consisted
primarily of the write-off of duplicate or incompatible systems hardware and
software. Other merger expenses of $51 million consisted primarily of
transaction-related costs, such as professional and other fees. This liability
was supplemented with an additional $22 million of personnel charges during
1997, resulting from the refinement of previous severance estimates.
During 1997, the corporation incurred $25 million of merger-related
charges, primarily investment banking fees, pertaining to the acquisition of
Quick & Reilly. 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 corporation's merger-related charges pertaining to NatWest, as well as
the Shawmut related restructuring liability as of December 31, 1997 and 1996.
MERGER AND RESTRUCTURING-RELATED LIABILITIES
NATWEST SHAWMUT
DOLLARS IN MILLIONS 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $89 $ - $158 $335
Provision charged against
income 22 - - -
Restructuring liability - 250 - -
Cash outlays (67) (111) (119) (174)
Noncash writedowns - (50) - (3)
- --------------------------------------------------------------------------------
Balance at end of year $44 $ 89 $ 39 $158
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The corporation expects that the remaining accrual balances at
December 31, 1997 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>
1997
Balance at December 31 $1,004 $2,630 $ 811 $3,060 $7,505
Highest balance at any monthend 2,002 2,630 940 3,733 9,305
Average balance for the year 778 2,284 799 1,405 5,266
Weighted average interest rate as of December 31 5.92 % 4.77 % 5.77 % 4.70 % 5.06 %
Weighted average interest rate paid for the year 5.52 4.48 5.51 4.20 4.69
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Balance at December 31 $ 488 $2,382 $ 676 $ 648 $ 4,194
Highest balance at any monthend 1,221 3,579 2,889 4,238 11,927
Average balance for the year 838 2,730 1,368 1,415 6,351
Weighted average interest rate as of December 31 5.54 % 4.72 % 5.41 % 4.44 % 4.82 %
Weighted average interest rate paid for the year 5.21 4.63 5.46 4.73 4.91
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Balance at December 31 $4,461 $2,964 $2,138 $3,769 $13,332
Highest balance at any monthend 4,840 6,944 2,138 5,675 19,597
Average balance for the year 4,451 5,159 1,582 3,630 14,822
Weighted average interest rate as of December 31 5.20 % 5.21 % 5.86 % 4.89 % 5.21 %
Weighted average interest rate paid for the year 6.02 5.70 6.07 4.33 5.50
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
generally mature within thirty 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.
Total credit facilities available were $1.0 billion with no amount
outstanding at December 31, 1997 and 1996. During 1997, the corporation and its
subsidiaries paid commitment fees ranging from .06% to .09% on the credit
facilities.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10.
<TABLE>
<CAPTION>
LONG-TERM DEBT
December 31 Maturity
Dollars in millions Date 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Senior notes and debentures
Parent company:
MTNs 5.60%-7.18% 1997-2005 $ 165 $ 218
7.25% - 8.125% notes 1997 - 400
6.00% notes 1998 250 250
7.25% notes 1999 200 200
7.125% notes 2000 250 250
Floating rate note 2000 50 50
Other 2013 1 1
- --------------------------------------------------------------------------------------
Total parent company 916 1,369
- --------------------------------------------------------------------------------------
Affiliates:
Floating-rate notes 1997 - 350
6.125% notes 1997 - 150
6.50% notes 1999-2000 350 350
MTNs 5.72%-7.48% 1997-2003 192 209
FHLB borrowings 1997-2016 244 170
Other 1997-2026 87 82
- --------------------------------------------------------------------------------------
Total affiliates 873 1,311
- --------------------------------------------------------------------------------------
Total senior notes and debentures 1,789 2,680
- --------------------------------------------------------------------------------------
Subordinated notes and debentures:
Floating-rate subordinated notes 1998 100 100
7.625% - 9.85% subordinated notes 1999 450 450
9.00% - 9.90% subordinated notes 2001 325 325
6.875% -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 300 300
8.625% subordinated notes 2007 107 107
7.00-7.75% subordinated MTNs 2011-2012 295 100
Other 1997 - 2
- --------------------------------------------------------------------------------------
Total subordinated notes
and debentures 2,377 2,184
- --------------------------------------------------------------------------------------
Company-obligated mandatorily
redeemable capital securities
of Fleet Capital Trust 7.92%-8.00% 334 250
- --------------------------------------------------------------------------------------
Total long-term debt $4,500 $5,114
- --------------------------------------------------------------------------------------
</TABLE>
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 with $2.0 billion of funds available
at December 31, 1997.
During 1996, the corporation formed new statutory business trusts, Fleet
Capital Trust I and Trust II (Trust I and Trust II), of which the corporation
owns all of the common stock. Trust I and Trust II exist for the sole purpose of
issuing trust securities and investing the proceeds thereof in an equivalent
amount of junior subordinated debt securities of Fleet. During 1996, Trust II
completed a $250 million underwritten public offering of 7.92% capital
securities. During 1997, Trust I completed an $84 million exchange offer of 8.0%
preferred securities for Series V Preferred Stock.
The sole assets of Trust I and Trust II are $84 million of 8.0% and $250
million of 7.92%, respectively, junior subordinated deferrable interest
debentures due in 2027 and 2026, respectively. The junior subordinated debt
securities are unsecured obligations of Fleet and are subordinate and junior in
right of payment to all present and future senior and subordinated indebtedness
and certain other financial obligations of Fleet. The subordinated debentures
and related income statement effects are eliminated in the corporation's
consolidated financial statements. Fleet fully and unconditionally guarantees
each Trust's obligations under the preferred securities and capital securities.
During 1997, the corporation issued $195 million of subordinated
medium-term notes (MTNs) (callable four years from issuance) with interest rates
ranging from 7.00% to 7.19%. The $165 million of parent company senior MTNs
outstanding at December 31, 1997 consist of $150 million of floating-rate notes
that has interest based on the London Interbank Offered Rate (LIBOR), and $15
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 rate
is based on the three month LIBOR rate payable quarterly and is not redeemable
prior to maturity.
Long-term senior borrowings of affiliates include $350 million of 6.50%
notes and $192 million of MTNs with rates ranging from 5.72% to 7.48% issued by
Fleet Mortgage Group.
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 $195 million of subordinated MTNs. The 9.85% subordinated notes mature
on June 1, 1999, and at the corporation's option, the notes will either be
exchanged for common stock, preferred stock or certain other primary capital
securities of the corporation having a market value equal to the principal
amount of the notes, or will be repaid from the proceeds of other issuances of
such securities. The corporation may, however, at its option, revoke its
obligation to redeem the notes with capital securities based upon the capital
treatment of the notes by its primary regulator or consent by its primary
regulator for such revocation. The holders of the capital notes are subordinate
in rights to depositors and other creditors.
The floating-rate subordinated notes due 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 three-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 16 to the Consolidated Financial Statements.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate payments required to retire long-term debt are: $781 million
in 1998; $803 million in 1999; $507 million in 2000; $326 million in 2001; $78
million in 2002; and $2,005 million thereafter.
NOTE 11.
PREFERRED STOCK
The following is a summary of the corporation's preferred stock outstanding at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
EARLIEST
STATED OUTSTANDING OUTSTANDING REDEMPTION REDEMPTION INTEREST
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA VALUE SHARES AT 1997 AT 1996 DATE PRICE(A) PER SHARE(D)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7.25% Series V perpetual preferred $250 765,000(E) $191 $275 04/15/2001 250.00 10
6.75% Series VI perpetual preferred 250 600,000 150 150 04/15/2006 250.00 20
6.60% Series VII cumulative(b) 250 700,000 175 175 04/01/2006 250.00 20
6.59% Series VIII noncumulative(c) 250 200,000 50 50 10/01/2001 250.00 20
9.35% cumulative 250 500,000 125 125 01/15/2000 250.00 10
9.30% cumulative 250 575,000 --- 144 - - -
Cumulative and adjustable 50 688,700 --- 34 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock $691 $953
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Plus accrued but unpaid dividends.
(b) After April 1, 2006, the rate will adjust based on a U.S. Treasury security rate.
(c) After October 1, 2006, the rate will adjust based on a U.S. Treasury security rate.
(d) Represents ownership interest in depositary shares.
(e) 1,100,000 shares outstanding at December 31, 1996.
</TABLE>
During 1997, the corporation redeemed all of the outstanding shares of its 9.30%
cumulative preferred stock, as well as its cumulative and adjustable preferred
stock at their stated values. The corporation and Fleet Capital Trust I
consummated an exchange offer on February 4, 1997, which resulted in an exchange
of 3.4 million 8.0% capital securities with an aggregate liquidation value of
$84 million for $84 million (3.4 million depositary shares, 335 thousand shares)
of Series V preferred stock.
Dividends on outstanding preferred stock issues 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, 1997, Fleet had 600 million common shares authorized for
issuance with 283.7 million common shares outstanding. Shares reserved for
future issuance in connection with the corporation's stock plans, outstanding
rights and warrants and stock options totaled 33.8 million.
The following table presents the warrants that are outstanding as of
December 31, 1997:
STOCK WARRANTS
DECEMBER 31, 1997 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.
49
<PAGE>
NOTE 13.
EARNINGS PER SHARE.
The following table presents a reconciliation of EPS as of December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995
BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 275,978,241 275,978,241 284,448,131 284,448,131 265,459,028 265,459,028
Additional shares due to:
Stock options - 2,897,825 - 1,599,088 - 952,901
Warrants - 5,426,339 - 3,965,768 - 3,549,616
Dual convertible preferred stock - - - - - 16,033,994
- ----------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 275,978,241 284,302,405 284,448,131 290,012,987 265,459,028 285,995,539
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share date)
Earnings per share:
Net income $1,367 $1,367 $1,221 $1,221 $ 679 $ 679
Less: Preferred stock dividends (62) (62) (72) (72) (37) (37)
Exchange of dual convertible
preferred stock - - - - (157) (157)
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $1,305 $1,305 $1,149 $1,149 $ 485 $ 485
- ----------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 275,978,241 284,302,405 284,448,131 290,012,987 265,459,028 285,995,539
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per share on net income $ 4.73 $ 4.59 $ 4.04 $3.96 $ 1.83 $1.70
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options and warrants to purchase 4,118,530 shares of common stock at exercise
prices between $63.75 and $74.03; 3,852,465 shares of common stock at exercise
prices between $44.44 and $55.00; and 4,537,488 shares of common stock at
exercise prices between $36.00 and $43.88 at December 31, 1997, 1996, and 1995,
respectively, were outstanding but not included in the computation of diluted
EPS because the options and warrants were anti-dilutive.
NOTE 14.
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 ten years.
The following tables summarize information about stock options outstanding
at December 31, 1997:
STOCK OPTIONS
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 13,054,434 $37.47 11,730,308 $31.84 10,597,946 $26.72
Granted 4,560,258 64.00 4,399,435 44.71 5,437,626 34.66
Exercised (2,017,750) 29.03 (2,570,979) 24.29 (3,712,613) 21.99
Forfeited (773,920) 39.16 (504,330) 37.07 (592,651) 27.84
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 14,823,022 $46.69 13,054,434 $37.47 11,730,308 $31.84
- ----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 5,490,862 $35.95 4,392,571 $29.72 5,099,290 $25.02
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
STOCK OPTIONS OUTSTANDING AND EXERCISABLE
DECEMBER 31, 1997
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------ -------------------------------------------------------------------- -----------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING AVERAGE NUMBER EXERCISE PRICE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING
- ------------------------ -------------------- -------------------------- -------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$7 - $35 2,704,393 5.2 years $28.47 2,351,301 $27.82
$36 - $45 4,435,793 7.3 years 39.93 1,961,603 39.46
$46 - $75 7,682,836 9.2 years 57.00 1,177,958 46.35
- ------------------------ -------------------- -------------------------- -------------------- ----------------- -----------------
$7 - $75 14,823,022 7.9 years $46.69 5,490,862 $35.95
- ------------------------ -------------------- -------------------------- -------------------- ----------------- -----------------
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997 and 1996, vests, in whole or in
part, only if certain preestablished performance goals are obtained. The
performance periods range from two to five years. The remaining restricted stock
vests over three years. During 1997, 1996, and 1995, grants of 237,500, 97,000,
and 51,000 shares, respectively, of restricted stock were made. As of December
31, 1997, 1996, and 1995, outstanding shares totaled 314,500; 304,750; and
224,750, respectively, with average grant prices of $59.69, $35.67, and $33.40,
respectively. Compensation cost recognized for restricted stock during 1997,
1996, and 1995 was $7 million, $3 million, and $2 million, respectively.
PRO FORMA FAIR VALUE INFORMATION. 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. 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 6.09% for 1997, 6.37%
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. The weighted average grant date
fair values of stock options granted during 1997, 1996, and 1995 were $17.89,
$12.37, and $11.53, 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.
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 1997 1996 1995
- ---------------------------- ---------------- ----------- ----------- ---------
Net income As reported $1,367 $1,221 $679
Pro forma 1,346 1,212 667
Diluted earnings per As reported 4.59 3.96 1.70
share Pro forma 4.53 3.94 1.66
- ---------------------------- ---------------- ----------- ----------- ---------
PENSION PLANS. The corporation maintains noncontributory, defined benefit
pension plans covering substantially all employees. 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.
Benefits are based on length of service, level of compensation and an interest
crediting rate. The amounts contributed to the plans are determined annually
based upon the amount needed to satisfy the Employment 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
DECEMBER 31 OVERFUNDED PLANS UNDERFUNDED PLANS
DOLLARS IN MILLIONS 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $ 679 $539 $ 95 $ 63
Nonvested 18 45 3 3
- -------------------------------------------------------------------------------
Accumulated benefit obligation 697 584 98 66
Effect of projected future com-
pensation levels 121 192 41 21
- -------------------------------------------------------------------------------
Projected benefits obligation 818 776 139 87
Plan assets at fair value 1,043 915 12 8
- -------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 225 139 (127) (79)
Unrecognized net transition (asset)
obligation (9) (5) 8 5
Unrecognized prior service cost (24) 25 18 12
Unrecognized net loss 7 32 51 22
Additional minimum liability - - (36) (19)
- -------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 199 $191 $(86) $ (59)
- -------------------------------------------------------------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPONENTS OF PENSION EXPENSE
YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995
- -------------------------------------------------------------------------------
Service cost for benefits
earned during the year $ 40 $43 $29
Interest cost on projected
benefit obligation 64 57 35
Actual return on plan assets (180) (89) (72)
Net amortization and deferral 90 20 39
- -------------------------------------------------------------------------------
Net pension expense $ 14 $31 $31
- -------------------------------------------------------------------------------
Actuarial assumptions:
Discount rate 7.25% 7.85% 7.25%
Return on plan assets 10.00 10.00 10.00
Compensation increase 5.00 5.00 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.
The corporation maintains various defined contribution savings plans
covering substantially all employees. The corporation's savings plan expense was
$50 million, $43 million, and $38 million for 1997, 1996, and 1995,
respectively.
POSTRETIREMENT HEALTHCARE BENEFITS. In addition to providing pension benefits,
the corporation provides healthcare cost assistance and life insurance benefits
for retired employees. The cost of providing these benefits was $12 million, $13
million, and $21 million in 1997, 1996, and 1995, respectively.
FUNDED STATUS OF POSTRETIREMENT PLAN
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996
- --------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $135 $135
Fully eligible active plan participants 3 3
Other active plan participants 2 3
- --------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 140 141
Plan assets at fair value 19 16
- --------------------------------------------------------------------------
Plan assets (less than) projected
benefit obligation (121) (125)
Unrecognized net (gain) loss (1) (10)
Unrecognized transition obligation 66 69
- --------------------------------------------------------------------------
Accrued postretirement benefit cost $(56) $(66)
- --------------------------------------------------------------------------
COMPONENTS OF POSTRETIREMENT BENEFIT EXPENSE
Year ended December 31
Dollars in millions 1997 1996 1995
- -----------------------------------------------------------------------
Service cost $ - $ 1 $ 1
Interest cost 11 10 12
Net amortization expense 4 4 8
Actual return on plan assets (3) (2) -
- -----------------------------------------------------------------------
Net postretirement benefit expense $12 $13 $21
- -----------------------------------------------------------------------
Actuarial assumptions:
Discount rate 7.25% 7.85% 7.25%
Return on plan assets 10.00 10.00 10.00
- -----------------------------------------------------------------------
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 healthcare cost trend rate was 8.50% as of December 31, 1997,
decreasing gradually to 4.50% through the year 2001, and level thereafter. The
healthcare cost trend rate assumption has a minimal effect on the amounts
reported. For example, increasing the assumed healthcare cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $2.1 million, and the aggregate of
the service cost and interest cost components of the net periodic postretirement
benefit cost for 1997 by approximately $191 thousand.
NOTE 15.
INCOME TAXES
The components of income tax expense for the years ended December 31, 1997,
1996, and 1995 are as follows:
INCOME TAX EXPENSE
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995
- -------------------------------------------------------------------------------
Current income taxes:
Federal $512 $305 $379
State and local 74 101 85
- -------------------------------------------------------------------------------
586 406 464
Deferred income tax expense:
Federal 244 369 11
State and local 97 74 2
- -------------------------------------------------------------------------------
341 443 13
Total income tax expense:
Federal 756 674 390
State and local 171 175 87
- -------------------------------------------------------------------------------
Applicable income taxes $927 $849 $477
- -------------------------------------------------------------------------------
52
<PAGE>
The deferred tax expense of $341 million and $443 million in 1997 and 1996,
respectively, includes a benefit of $1 million and $51 million, respectively,
due to a change from the beginning of the respective years' deferred tax asset
valuation reserve, related primarily to state deferred tax assets.
The income tax expense for the years ended December 31, 1997, 1996, and
1995, varied from the amount computed by applying the statutory income tax rate
to income before taxes. A reconciliation between the statutory and effective tax
rates follows:
STATUTORY RATE ANALYSIS
DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------
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 4.9 6.4 7.4
Goodwill amortization 1.4 1.6 1.5
Merger-related costs --- --- 1.4
Tax-exempt income (1.0) (1.0) (1.8)
Other, net 0.1 (1.0) (2.3)
- -----------------------------------------------------------------------------
Effective tax rate 40.4% 41.0% 41.2%
- -----------------------------------------------------------------------------
The corporation had $521 million and $408 million of state net operating loss
carryforwards at December 31, 1997 and 1996, respectively. These
carryforwards will begin to expire in 1998 and continue through 2012.
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 amount used for income tax purposes.
Significant components of the corporation's deferred tax assets and deferred tax
liabilities as of December 31, 1997 and 1996, are presented in the following
table:
NET DEFERRED TAX ASSET/(LIABILITY)
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996
- ----------------------------------------------------------------------
Deferred tax assets:
Reserve for credit losses $ 540 $ 588
Expenses not currently deductible 248 197
Purchase accounting adjustments, net --- 82
Other 231 330
- ----------------------------------------------------------------------
Total gross deferred tax assets 1,019 1,197
Less: valuation reserve 23 24
- ----------------------------------------------------------------------
Deferred tax assets 996 1,173
- ----------------------------------------------------------------------
Deferred tax liabilities:
Lease financing 805 528
Mortgage banking 292 283
Other 273 242
- ----------------------------------------------------------------------
Total gross deferred tax liabilities 1,370 1,053
- ----------------------------------------------------------------------
Net deferred tax asset/(liability) $ (374) $ 120
- ----------------------------------------------------------------------
The corporation has evaluated the available evidence supporting the realization
of its gross tax assets of $1.0 billion and $1.2 billion at December 31, 1997
and 1996, respectively, 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. State valuation reserves of $23 million and $24 million have
therefore been established at December 31, 1997 and 1996, respectively. These
benefits may, however, be recorded in the future either as realized or, as it
becomes more likely than not, that such tax benefits or portions thereof will be
realized.
NOTE 16.
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 following table represents the notional or
contractual amount of Fleet's off-balance sheet, interest rate and foreign
exchange trading instruments and related credit exposure:
TRADING INSTRUMENTS WITH OFF-BALANCE SHEET RISK
CONTRACT OR
NOTIONAL CREDIT
DOLLARS IN MILLIONS AMOUNT EXPOSURE
DECEMBER 31 1997 1996 1997 1996
- ------------------------------------------------------------------------------
Interest-rate contracts $8,959 $8,205 $55 $55
Foreign exchange contracts 2,395 3,381 53 55
- ------------------------------------------------------------------------------
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, in certain cases has the ability to require securities collateral and
enters into netting agreements whenever possible.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 (CARRYING FAIR
DOLLARS IN MILLIONS AMOUNT) VALUE
- -----------------------------------------------------------------------------
Interest-rate contracts:
Assets $ 55 $48
Liabilities (40) (36)
Foreign exchange contracts:
Assets 53 67
Liabilities (52) (62)
- -----------------------------------------------------------------------------
RISK-MANAGEMENT ACTIVITIES. The corporation's principal objective in holding
or issuing derivatives for purposes other than trading is the management of
interest-rate risk.
The major source of the corporation's non-trading interest-rate risk is
the difference in the repricing characteristics of the corporation's core
banking assets and liabilities - loans and deposits. This difference or mismatch
is a risk to net interest income. In managing net interest income, the
corporation uses interest-rate swaps to offset the general asset-sensitivity of
the core bank. Additionally, the corporation uses interest-rate swaps to offset
basis risk, including the specific exposure to changes in Prime rate.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its MSRs to prepayments. The mortgage borrower has the
option to prepay the mortgage loans at any time. When mortgage interest rates
decline, borrowers have a greater incentive to prepay mortgage loans through a
refinancing. To mitigate the risk of declining long-term interest rates, higher-
than-expected mortgage prepayments, and the potential impairment of the MSRs,
the corporation uses a variety of risk management instruments, primarily
interest-rate swaps and floors tied to yields on 10-year "constant maturity"
Treasury notes. Options sold and purchased may be combined provided that each
combination results in a net purchased option position. Increases in the value
of such contracts aggregating $116 million have been recorded as adjustments to
the carrying value of the MSRs at December 31, 1997.
The following table presents the notional amount and fair value of
risk-management instruments at December 31, 1997 and 1996:
RISK-MANAGEMENT INSTRUMENTS
1997 1996
December 31 Notional Fair Notional Fair
Dollars in millions Amount Value Amount Value
- --------------------------------------------------------------------------
Interest-rate risk-
management
instruments:
Receive-fixed/
pay-variable $9,509 $ 48 $10,205 $ (7)
Pay-fixed/receive-
variable - - 4 -
Basis swaps 2,729 (1) 3,823 (1)
Index-amortizing
swaps - - 11 -
Other instruments - - 112 -
Mortgage banking risk-
management instruments:
Receive-fixed/pay-
variable, PO swaps 2,502 - 891 (12)
Interest-rate floors-
synthetic floors
and swaptions
purchased 23,870 138 14,470 49
Interest-rate cap
corridors sold 4,309 (25) 3,915 (51)
Call options-
purchased - - 1,276 4
Call options-sold - - 225 (1)
- -------------------------------------------------------------------------
Total risk-manage-
ment instruments $42,919 $160 $34,932 $(19)
- -------------------------------------------------------------------------
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. 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.
The corporation's interest-rate risk-management instruments had credit
exposure of $61 million at December 31, 1997, versus $35 million at December 31,
1996. The corporation's mortgage banking risk-management instruments had credit
exposure of $114 million at December 31, 1997, versus $27 million at December
31, 1996. The increase in the credit exposure from year to year mainly reflects
the increase in the market value of the remaining risk-management instruments.
The periodic net settlement of interest-rate risk-management instruments is
recorded as an adjustment to net interest income and generated $52 million, $12
million and $(18) million of net interest income (expense) during 1997, 1996,
and 1995, respectively. As of December 31, 1997, the corporation had net
deferred income of $19 million related to terminated interest-rate swap
contracts, which will be amor-
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
tized over the remaining life of the underlying terminated contracts of
approximately 5 years.
OTHER FINANCIAL INSTRUMENTS
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996
- ----------------------------------------------- -------------- --------------
Other financial instruments whose notional
or contractual amounts exceed the amount
of potential credit risk:
Commitments to sell loans $ 2,247 $ 2,685
Commitments to originate or
purchase loans 1,308 1,394
Financial instruments whose notional or
contractual amounts represent potential
credit risk:
Commitments to extend credit 50,865 41,367
Letters of credit, financial guarantees
and foreign office guarantees
(net of participations) 4,996 4,691
Assets sold with recourse 386 596
- ----------------------------------------------- -------------- --------------
Commitments to sell loans have off-balance sheet market risk to the extent that
the corporation does not have available loans to fill those commitments, which
would require the corporation to purchase loans in the open market. Commitments
to originate or purchase loans have off-balance sheet market risk to the extent
the corporation does not have matching commitments to sell loans obtained under
such commitments, which could expose the corporation to lower-of-cost or
market-valuation adjustments in a rising interest-rate environment.
Commitments to extend credit are agreements to lend to customers in
accordance with contractual provisions. These commitments usually are for
specific periods or contain termination clauses and may require the payment of a
fee. The total amounts of unused commitments do not necessarily represent future
cash requirements in that commitments often expire without being drawn upon.
COMMITMENTS TO EXTEND CREDIT
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996
- ------------------------------------------- ---------------- --------------
Commercial and industrial loans $34,059 $22,755
Revolving, open-end loans
secured by residential properties
(e.g., home equity lines) 3,641 3,609
Credit card lines 6,919 8,884
Residential mortgages 1,531 1,551
Commercial real estate 1,776 1,817
Other unused commitments 2,939 2,751
- ------------------------------------------- ---------------- --------------
Total $50,865 $41,367
- ------------------------------------------- ---------------- --------------
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 17.
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.
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
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is the amount the
corporation would receive or pay to execute a new agreement with identical terms
considering current interest rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
1997 1996
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 $ 6,085 $ 6,085 $ 9,662 $ 9,662
Securities 9,362 9,367 8,680 8,675
Loans(a) 57,805 59,146 55,795 57,002
Mortgages held for resale 1,526 1,526 1,560 1,560
Trading account securities 290 290 237 237
Trading instruments 108 108 110 110
Other 412 412 930 945
On-balance sheet financial
liabilities:
Deposits with no
stated maturity 43,633 43,633 45,879 45,879
Time deposits 20,102 20,470 21,192 21,629
Short-term borrowings 7,505 7,505 4,194 4,194
Long-term debt 4,500 4,612 5,114 5,241
Trading instruments 92 92 97 97
Other 212 212 617 617
Off-balance sheet financial
instruments:
Interest-rate risk-
management instruments 1 47 12 (20)
Commitments to originate or
purchase loans --- 7 --- (3)
Commitments to sell loans 1 (5) 1 8
- --------------------------------------------------------------------------------
(a) Excludes net book value of leases of $3,328 million and $2,578 million at
December 31, 1997 and 1996, 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.
NOTE 18.
COMMITMENTS, CONTINGENCIES, AND OTHER DISCLOSURES
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.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, exclusive of taxes and
other charges were as follows: $122 million, 1998; $112 million, 1999; $101
million, 2000; $88 million, 2001; $72 million, 2002; and $339 million, 2003, and
subsequent years. Total rental expense for 1997, 1996, and 1995, including
cancelable and noncancelable leases, amounted to $136 million, $144 million, and
$169 million, respectively.
Certain leases contain escalation clauses, which correspond with increased
real estate taxes and other operating expenses, and renewal options calling for
increased rents as the leases are renewed. No restrictions are imposed by any
lease agreement regarding the payment of dividends, additional debt financing,
or entering into further lease agreements.
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, 1997 and 1996, these reserve balances were $1,110
million and $964 million, respectively.
NOTE 19.
REGULATORY MATTERS
As a bank holding company, Fleet is subject to regulation by the Federal Reserve
Board (the 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%, risk-based Tier 1 Capital ratio of at least 4%, and 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 financial statements. To be categorized
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 are subject to any
orders or capital directives.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents capital information for the corporation as
of December 31, 1997 and 1996.
REGULATORY CAPITAL RATIOS
DECEMBER 31
DOLLARS IN MILLIONS 1997 1996
- ----------------------------------------------------------------------------
FLEET FINANCIAL GROUP
Actual:
Risk-Based Tier 1 Capital $6,542 7.26 % $6,356 7.70 %
Risk-Based Total Capital 9,649 10.71 9,307 11.27
Leverage 6,542 7.66 6,356 7.19
Minimum regulatory capital
standards:
Risk-Based Tier 1 Capital 3,603 4.00 3,303 4.00
Risk-Based Total Capital 7,205 8.00 6,605 8.00
Leverage 3,416 4.00 3,538 4.00
- ----------------------------------------------------------------------------
As of December 31, 1997, 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 institutions category.
As registered brokers-dealers and member firms of the New York Stock
Exchange, Inc. (the "NYSE"), five subsidiaries are subject to certain rules
of both the Securities and Exchange Commission and the NYSE. These rules
require registrants to maintain minimum levels of net capital, as defined,
and may restrict a member from expanding its business and declaring dividends
as its net capital approaches specified levels. At December 31, 1997, the
subsidiaries had net capital, in the aggregate, of approximately $226
million, which exceeded aggregate minimum net capital requirements by
approximately $186 million.
NOTE 20.
DISCLOSURE FOR STATEMENTS OF CASH FLOWS
CASH FLOW DISCLOSURE
YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS 1997 1996 1995
- ---------------------------------------------------------------------
Supplemental disclosure for cash
paid during the period for:
Interest expense $2,484 $2,531 $3,113
Income taxes, net of refund 428 356 242
- ---------------------------------------------------------------------
Supplemental disclosure of
noncash investing and financial
activities:
Transfer of loans to
foreclosed
property and repossessed
equipment $ 30 $ 27 $ 72
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 - - 439
stock
Retirement of treasury stock - - 347
Retirement of common stock - 34 -
Transfer of assets to held
for sale or accelerated
disposition 231 110 1,725
Adjustment to unrealized gain
(loss) on securities
available for sale 66 (21) 463
- ---------------------------------------------------------------------
Assets acquired and liabilities
assumed in business
combinations were as follows:
Assets acquired, net of cash
and cash equivalents
received (paid) $ 544 $17,848 $8,920
Net cash and cash equivalents
received (paid) (523) 2,386 (2,816)
Liabilities assumed 21 20,234 5,715
Common stock issued - - 193
Treasury stock issued - - 196
- ---------------------------------------------------------------------
Divestitures:
Assets sold, net of cash $2,552 $3,119 $ -
received
Net cash received for 2,719 768 -
divestitures
Liabilities sold 24 2,351 -
- ---------------------------------------------------------------------
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21.
PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF INCOME
Year ended December 31
Dollars in millions 1997 1996 1995
- --------------------------------------------------------------
Dividends from subsidiaries:
Banking subsidiaries $1,098 $ 727 $ 817
Other subsidiaries 170 130 246
Interest income 192 205 153
Other 35 38 67
- --------------------------------------------------------------
Total income 1,495 1,100 1,283
- --------------------------------------------------------------
Interest expense 294 306 296
Noninterest expense 34 50 156
- --------------------------------------------------------------
Total expenses 328 356 452
- --------------------------------------------------------------
Income before income taxes
and equity in undistributed
income of subsidiaries 1,167 744 831
Applicable income taxes
(benefit) (61) (47) (54)
- --------------------------------------------------------------
Income before equity in
undistributed income of
subsidiaries 1,228 791 885
Equity in undistributed
income of subsidiaries 139 430 (206)
- --------------------------------------------------------------
Net income $1,367 $1,221 $ 679
- --------------------------------------------------------------
BALANCE SHEETS
December 31
Dollars in millions 1997 1996
- -------------------------------------------------------------
Assets:
Money market instruments $ 859 $ 813
Securities 78 100
Loans receivable from:
Banking subsidiaries 2,159 1,838
Other subsidiaries 860 874
- -------------------------------------------------------------
3,019 2,712
Investment in subsidiaries:
Banking subsidiaries 8,028 8,265
Other subsidiaries 615 222
- -------------------------------------------------------------
8,643 8,487
Other 532 398
- -------------------------------------------------------------
Total assets $13,131 $12,510
- -------------------------------------------------------------
Liabilities:
Short-term borrowings $ 811 $ 676
Accrued liabilities 481 492
Long-term debt 3,387 3,552
- -------------------------------------------------------------
Total liabilities 4,679 4,720
- -------------------------------------------------------------
Stockholders' equity 8,452 7,790
- -------------------------------------------------------------
Total liabilities and
stockholders' equity $13,131 $12,510
- -------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended December 31
Dollars in millions 1997 1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $1,367 $1,221 $ 679
Adjustments for noncash items:
Equity in undistributed income of subsidiaries (139) (430) 206
Depreciation and amortization 11 11 18
Net securities gains (22) (18) (29)
Increase (decrease) in accrued liabilities, net (11) (26) (56)
Other, net 40 (131) (79)
- --------------------------------------------------------------------------------
Net cash flow provided by operating activities 1,246 627 739
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities (15) (3) (205)
Proceeds from sales and maturities of securities 58 65 543
Net increase in loans made to affiliates (307) (57) (780)
Return of capital from subsidiaries 3 1,756 -
Capital contributions to subsidiaries (253) (1,802) (219)
Acquisition of minority interest in subsidiary - - (158)
- --------------------------------------------------------------------------------
Net cash flow used in investing activities (514) (41) (819)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings 135 (144) (404)
Proceeds from issuance of long-term debt 281 650 1,014
Repayments of long-term debt (455) (484) (242)
Proceeds from issuance of common stock 848 77 124
Proceeds from issuance of preferred stock - 635 125
Redemption and repurchase of common
and preferred stock (966) (203) (446)
Cash dividends paid (529) (498) (373)
- --------------------------------------------------------------------------------
Net cash flow (used in) provided by
financing activities (686) 33 (202)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 46 619 (282)
- --------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 813 194 476
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 859 $ 813 $ 194
- --------------------------------------------------------------------------------
59
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL FINANCIAL INFORMATION
RATE/VOLUME ANALYSIS (Unaudited)
1997 Compared to 1996 1996 Compared to 1995
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>
Interest earned on:(b)
Interest-bearing deposits $ 3 $ --- $ 3 $(13) $(6) $(19)
Federal funds sold and securities purchased
under agreements to resell (16) 1 (15) --- (1) (1)
Trading account securities --- 2 2 (1) --- (1)
Securities available for sale (193) 32 (161) (161) 28 (133)
Securities held to maturity (10) 4 (6) (517) 114 (403)
Nontaxable securities 17 (1) 16 6 (4) 2
Loans and leases 262 42 304 407 (185) 222
Receivable due from broker/dealer 32 6 38 19 (33) (14)
Mortgages held for resale (36) (4) (40) 33 (1) 32
Assets held for disposition (40) (35) (75) 122 --- 122
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 19 47 66 (105) (88) (193)
- ---------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits-
Savings 22 (17) 5 63 (41) 22
Time (49) (56) (105) 32 (27) 5
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (27) (73) (100) 95 (68) 27
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (51) (13) (64) (424) (80) (504)
- ---------------------------------------------------------------------------------------------------------------------------
Due to broker/dealer 36 5 41 23 (31) (8)
Long-term debt (66) 14 (52) (78) (10) (88)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (108) (67) (175) (384) (189) (573)
- ---------------------------------------------------------------------------------------------------------------------------
Net interest differential(c) $127 $114 $241 $279 $101 $380
- --------------------------------------------------------------------------------------------------------------------------
</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 $40 million
in 1997, $36 million in 1996 and $44 million in 1995.
(c) Includes fee income of $210 million, $165 million and $110 million for
the years ended December 31, 1997, 1996, and 1995, respectively.
<TABLE>
<CAPTION>
QUARTERLY SUMMARIZED FINANCIAL INFORMATION (Unaudited)
By quarter
Dollars in millions, 1997 1996
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 $1,490 $1,507 $1,540 $1,554 $6,091 $1,381 $1,522 $1,584 $1,541 $6,028
Interest expense 581 583 606 621 2,391 643 653 646 624 2,566
- -----------------------------------------------------------------------------------------------------------------
Net interest income 909 924 934 933 3,700 738 869 938 917 3,462
- -----------------------------------------------------------------------------------------------------------------
Provision for credit losses 65 83 85 89 322 35 48 65 65 213
- -----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 844 841 849 844 3,378 703 821 873 852 3,249
Securities gains 12 4 4 13 33 18 20 0 5 43
Other noninterest income 601 771 615 611 2,598 549 552 578 611 2,290
- -----------------------------------------------------------------------------------------------------------------
1,457 1,616 1,468 1,468 6,009 1,270 1,393 1,415 1,468 5,582
Noninterest expense 904 1,025 873 913 3,715 780 893 918 921 3,512
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 553 591 595 555 2,294 490 500 533 547 2,070
Applicable income taxes 219 244 243 221 927 204 204 220 221 849
- -----------------------------------------------------------------------------------------------------------------
Net income $ 334 $ 347 $ 352 $ 334 $1,367 $ 286 $ 296 $ 313 $ 326 $1,221
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.13 $ 1.20 $ 1.23 $ 1.17 $ 4.73 $ .96 $ .97 $ 1.02 $ 1.08 $ 4.04
Diluted earnings per share $ 1.10 $ 1.17 $ 1.20 $ 1.13 $ 4.59 $ .94 $ .95 $ 1.01 $ 1.06 $ 3.96
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES/INTEREST EARNED-PAID/RATES 1993-1997 (Unaudited)
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 141 $ 7 4.96% $ 82 $ 4 4.39%
Federal funds sold and securities purchased
under agreements to resell 423 23 5.44 733 38 5.24
Trading account securities 259 15 5.79 257 13 5.37
Securities available for sale 7,461 503 6.74 10,287 664 6.45
Securities held to maturity 32 3 7.12 121 9 7.20
Nontaxable securities 1,181 77 6.52 924 61 6.60
Loans and leases(c) 60,076 5,214 8.68 57,046 4,910 8.61
Receivable due from broker/dealer 2,884 133 4.62 2,179 95 4.35
Mortgages held for resale 1,413 108 7.65 1,878 148 7.87
Assets held for disposition 746 47 6.17 1,253 122 9.77
Foreclosed property and repossessed equipment 28 --- --- 52 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 74,644 6,130 8.21 74,812 6,064 8.11
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 473 --- --- 481 --- ---
Reserve for credit losses (1,454) --- --- (1,493) --- ---
Other assets 12,997 --- --- 12,938 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $86,660 $6,130 --- $86,738 $6,064 ---
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Deposits
Savings $27,478 $ 619 2.25% $26,363 $ 614 2.33%
Time 20,036 1,035 5.16 20,971 1,140 5.44
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 47,514 1,654 3.48 47,334 1,754 3.70
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 5,266 247 4.69 6,351 311 4.91
Due to broker/dealer 3,463 152 4.39 2,645 111 4.20
Long-term debt 4,608 338 7.34 5,486 390 7.10
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 60,851 2,391 3.93 61,816 2,566 4.15
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3,739 4.28 3,498 3.96
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits and other
Noninterest-bearing time deposits 15,882 --- --- 15,042 --- ---
Other liabilities 2,338 --- --- 2,511 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 79,071 2,391 --- 79,369 2,566 ---
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity and dual
Convertible preferred stock 7,589 --- --- 7,369 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $86,660 $2,391 --- $86,738 $2,566 ---
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.01% 4.68%
- -----------------------------------------------------------------------------------------------------------------------------------
</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 $210 million, $165 million, $110 million, $108
million and $119 million for the years ended December 31, 1997, 1996,
1995, 1994 and 1993, respectively.
(c) Nonperforming loans are included in average balances used to determine
rates.
<TABLE>
<CAPTION>
COMMON STOCK PRICE AND DIVIDEND INFORMATION(a) (Unaudited)
By quarter 1997 1996
- --------------------- --------- ---------- --------- ---------- ----------- -------- -------- -------- --------- --------
1 2 3 4 Year 1 2 3 4 Year
- --------------------- --------- ---------- --------- ---------- ----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Price
High $62 3/4 $65 13/16 $70 3/4 $75 1/8 $75 1/8 $42 1/2 $45 3/8 $44 5/8 $55 7/8 $55 7/8
Low 49 5/8 55 1/2 63 3/8 61 15/16 49 5/8 39 1/4 40 3/8 38 1/2 44 7/8 38 1/2
- --------------------- --------- ---------- --------- ---------- ----------- -------- -------- -------- --------- --------
Dividends declared .45 .45 .45 .49 1.84 .43 .43 .43 .45 1.74
Dividends paid .45 .45 .45 .45 1.80 .43 .43 .43 .43 1.72
- --------------------- --------- ---------- --------- ---------- ----------- -------- -------- -------- --------- --------
</TABLE>
(a) Fleet's common stock is listed on the New York Stock Exchange (NYSE).
The table above sets forth, for the periods indicated, the range of high
and low sale prices per share of Fleet's common stock on the composite
tape and dividends declared and paid per share.
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/
Balance Paid(b) Rate Balance Paid(b) Rate Balance Paid(b) Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 325 $ 23 7.08% $ 292 $ 14 4.79% $ 47 $ 1 2.13%
662 39 5.89 296 15 5.07 570 18 3.16
238 14 5.45 205 10 4.88 179 7 3.91
12,779 797 6.24 16,923 1,023 6.05 14,140 960 6.79
6,954 412 5.92 7,971 447 5.61 7,056 430 6.09
782 59 7.54 816 51 6.25 679 44 6.48
52,164 4,688 8.99 44,754 3,668 8.20 43,917 3,495 7.96
1,927 109 5.64 1,606 70 4.36 1,611 30 1.86
1,459 116 7.96 1,322 91 6.90 2,384 169 7.10
--- --- --- --- --- --- --- --- ---
97 --- --- 166 --- --- 211 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
77,387 6,257 8.09 74,351 5,389 7.25 70,794 5,154 7.28
- -----------------------------------------------------------------------------------------------------------------------------------
539 --- --- 533 --- --- 512 --- ---
(1,489 ) --- --- (1,600) --- --- (1,829) --- ---
9,804 --- --- 8,859 --- --- 8,286 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
$86,241 $6,257 --- $82,143 $5,389 --- $77,763 $5,154 ---
- -----------------------------------------------------------------------------------------------------------------------------------
$22,987 $ 592 2.57% $24,803 $ 495 2.00% $25,086 $ 527 2.10%
20,133 1,135 5.64 15,310 676 4.41 14,680 639 4.35
- -----------------------------------------------------------------------------------------------------------------------------------
43,120 1,727 4.00 40,113 1,171 2.92 39,766 1,166 2.93
- -----------------------------------------------------------------------------------------------------------------------------------
14,807 815 5.50 15,807 636 4.02 13,268 393 2.96
2,341 119 5.08 1,821 74 4.06 1,759 34 1.93
6,581 478 7.26 5,383 364 6.76 5,039 363 7.20
- -----------------------------------------------------------------------------------------------------------------------------------
66,849 3,139 4.69 63,124 2,245 3.56 59,832 1,956 3.27
- -----------------------------------------------------------------------------------------------------------------------------------
3,118 3.40 3,144 3.69 3,198 4.01
- -----------------------------------------------------------------------------------------------------------------------------------
10,910 --- --- 11,227 --- --- 10,854 --- ---
1,619 --- --- 1,773 --- --- 1,561 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
79,378 3,139 --- 76,124 2,245 --- 72,247 1,956 ---
- -----------------------------------------------------------------------------------------------------------------------------------
6,863 --- --- 6,019 --- --- 5,516 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
$86,241 $3,139 --- $82,143 $2,245 --- $77,763 $1,956 ---
- -----------------------------------------------------------------------------------------------------------------------------------
4.03% 4.23% 4.52%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOAN MATURITY (UNAUDITED)
December 31, 1997 Within 1 1 to 5 After 5
Dollars in millions Year Years Years Total
- --------------------------------- ----------- ----------- ----------- ----------
Commercial and industrial $ 9,306 $16,845 $ 5,849 $32,000
Residential real estate 1,354 3,734 4,931 10,019
Consumer 2,630 3,723 5,140 11,493
Commercial real estate:
Construction 257 465 168 890
Interim/permanent 1,382 2,502 903 4,787
Lease financing 2 5 3,369 3,376
- --------------------------------- ----------- ----------- ----------- ----------
Total $14,931 $27,274 $20,360 $62,565
- --------------------------------- ----------- ----------- ----------- ----------
<PAGE>
INTEREST SENSITIVITY OF LOANS OVER ONE YEAR
(Unaudited)
- ------------------------- ---------------------- ------------------ -----------
December 31, 1997 Predetermined Floating
Dollars in millions Interest Rates Interest Rates Total
- ------------------------- ---------------------- ------------------ -----------
1 to 5 years $ 5,776 $21,498 $27,274
After 5 years 8,472 11,888 20,360
- ------------------------- ---------------------- ------------------ -----------
Total $14,248 $33,386 $47,634
- ------------------------- ---------------------- ------------------ -----------
