SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
"TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10102
SHAWMUT NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1212629
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Main Street, Hartford, Connecticut 06115
One Federal Street, Boston, Massachusetts 02211
(Addresses of principal executive offices)
(Zip Codes)
Registrant's telephone numbers, including area codes
(203) 728-2000 and (617) 292-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $0.01 New York Stock Exchange
Depositary Shares representing a one-tenth
interest in a share of 9.30% cumulative
preferred stock ($250 stated value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
(Cover Page 1 of 2 Pages)
Page 1 of 111 Pages
Exhibits Index on Page 20
<PAGE>
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant was
$2,073,835,013.12 on February 22, 1994.
As of February 22, 1994, 95,899,885 shares of the
Corporation's common stock, $0.01 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Corporation's 1994 Proxy
Statement for the annual meeting to be held April 26, 1994,
to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, are incorporated by reference
into Part III of this report.
(Cover Page 2 of 2 Pages)
<PAGE> 2
SHAWMUT NATIONAL CORPORATION
ANNUAL REPORT FOR 1993 ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART 1
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters To a Vote of Security
Holders 12
Executive Officers of the Registrant 12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
PART III
Item 10. Directors and Executive Officers of the
Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial
Owners and Management 16
Item 13. Certain Relationships and Related
Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 16
<PAGE> 3
PART I
ITEM 1. Business.
Shawmut National Corporation ("Corporation") is a
multibank holding company, registered under the Bank
Holding Company Act of 1956, as amended ("BHCA"). It
was organized under the laws of the State of Delaware in
October, 1987 and became a bank holding company on
February 29, 1988 through the consummation of a plan of
reorganization between Hartford National Corporation
("HNC") and Shawmut Corporation ("SC") pursuant to which
both HNC and SC became wholly owned subsidiaries of the
Corporation (the "Reorganization"). The Corporation
maintains dual headquarters in the States of Connecticut
and Massachusetts.
The principal business of the Corporation is to provide,
through its bank subsidiaries, comprehensive corporate,
commercial, correspondent and individual banking
services, and personal and corporate trust services
through its network of approximately 270 branches located
throughout Connecticut, Massachusetts and Rhode Island. The
Corporation's principal subsidiaries are Shawmut Bank
Connecticut, National Association ("SBC"), Hartford,
Connecticut and Shawmut Bank, National Association
("SBM"), Boston, Massachusetts.
SBC is among the oldest banks in the United States,
having opened for business on
August 9, 1792 under a charter granted by the State of
Connecticut to its first predecessor on May 29, 1792.
In 1865 SBC converted into a national banking
association, in 1969 it became a subsidiary of HNC, and
in 1993 its present name was adopted. At December 31,
1993, SBC had assets of $14.5 billion and deposits of
$8.4 billion. SBC had trust assets under management
totaling $8.4 billion as of December 31, 1993.
SBM, also among the oldest banks in the United States,
was established in 1836, under a charter granted by the
Commonwealth of Massachusetts to its first predecessor.
In 1864 SBM converted to a national banking association,
in 1964 it became a subsidiary of SC, and in 1986 its
present name was adopted. At December 31, 1993, SBM had
assets of $12.9 billion and deposits of $7.5 billion.
SBM had trust assets under management totaling
$4.2 billion as of December 31, 1993.
Through Shawmut Mortgage Company ("SMC"), which became a
subsidiary of SBC at close of business December 31,
1993, the Corporation provides other financial services.
With its principal office in West Hartford, Connecticut,
SMC originates, sells and services substantially all of
the residential mortgages among the Corporation's
subsidiaries. In addition to its principal office, SMC
maintains a network of 10 production offices in
Connecticut, Massachusetts, Rhode Island and New
Hampshire. At December 31, 1993 it had assets of $508
million.
At December 31, 1993, the Corporation had assets of
$27.2 billion, deposits of $15.3 billion, loans of $15.4
billion and shareholders' equity of $1.8 billion. A
more detailed discussion concerning the Corporation's
financial condition is contained in Part II of this
report.
<PAGE> 4
Supervision and Regulation
General
The Corporation is a bank holding company subject to
supervision and regulation by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board")
pursuant to the BHCA, and files with the Federal Reserve
Board an annual report and such additional reports as
the Federal Reserve Board may require. As a bank
holding company, the Corporation's activities and those
of its banking and nonbanking subsidiaries are limited
to the business of banking and activities closely
related or incidental to banking, and the Corporation
may not directly or indirectly acquire the ownership or
control of more than 5 percent of any class of voting
shares or substantially all of the assets of any
company, including a bank, without the prior approval of
the Federal Reserve Board.
The Corporation's subsidiary banks are subject to supervision
and examination by various regulatory authorities. The
Office of the Comptroller of the Currency (the "OCC") is
the primary bank supervisor of the Corporation's bank
subsidiaries, SBC and SBM, both of which are national
banks. The deposits of the Corporation's subsidiary
banks are insured by, and therefore the subsidiary banks
are subject to the regulations of, the Federal Deposit
Insurance Corporation (the "FDIC"), and are also subject
to requirements and restrictions under federal and state
law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans
that may be granted and the interest that may be charged
thereon, and limitations on the types of investments
that may be made and the types of services that may be
offered. Various consumer laws and regulations also
affect the operations of the Corporation's subsidiary
banks. Regulatory limitations on the payment of
dividends to the Corporation by its banking subsidiaries
are discussed in Note 16 (Regulatory Matters) to the
consolidated financial statements on page F-34 of this
report.
Holding Company Liability
Federal Reserve Board policy requires bank holding
companies to serve as a source of financial strength to
their subsidiary banks by standing ready to use
available resources to provide adequate capital funds to
subsidiary banks during periods of financial stress or
adversity. A bank holding company also could be liable
under certain provisions of a new banking law for the
capital deficiencies of an undercapitalized bank
subsidiary. In the event of a bank holding company's
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code,
the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any
commitment by the debtor to any of the federal banking
agencies to maintain the capital of an insured
depository institution, and any claim for a subsequent
breach of such obligation will generally have priority
over most other unsecured claims.
Transactions with Affiliates
The Corporation's subsidiary banks are subject to
restrictions under federal law which limit certain
transactions by each of them with the Corporation and
its nonbanking subsidiaries, including loans, other
extensions of credit, investments or asset purchases.
Such transactions by any subsidiary bank with any one
affiliate are limited in amount to 10 percent of such
subsidiary bank's capital and surplus and with all
affiliates to 20 percent of such subsidiary bank's
capital and surplus. Furthermore, such loans and
extensions of credit, as well as certain other
transactions, are required to be secured in accordance
with specific statutory requirements. The purchase of
<PAGE> 5
low quality assets from affiliates is generally
prohibited. Federal law also provides that certain
transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances,
including credit standards, that are substantially the
same, or at least as favorable to the institution as
those prevailing at the time for comparable transactions
involving other non-qualified companies or, in the
absence of comparable transactions, on terms and under
circumstances, including credit standards, that in good
faith would be offered to, or would apply to,
nonaffiliated companies.
Certain regulations require the maintenance of minimum
risk-based capital ratios, which are calculated with
reference to risk-weighted assets, which include on- and
off-balance sheet exposures. The Federal Reserve Board
and the OCC have established guidelines for both the
Corporation and its national banks, which are generally
similar. The Federal Reserve Board and the OCC have
also adopted minimum leverage ratios for bank holding
companies and national banks. For a further discussion
concerning capital guidelines and minimum leverage
ratios, see Note 16 (Regulatory Matters) to the
consolidated financial statements on page F-34 of this
report.
FIRREA
Recent federal legislation that affects the competitive
environment for the Corporation and its subsidiaries
includes the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") which, among other
things, provides for the acquisition of thrift
institutions by bank holding companies, increases
deposit insurance assessments for insured banks,
broadens the enforcement power of federal bank
regulatory agencies, and provides that any FDIC-insured
depository institution may be liable for any loss
incurred by the FDIC, or any loss which the FDIC
reasonably anticipates incurring, in connection with the
default of any commonly controlled FDIC-insured
depository institution or any assistance provided by the
FDIC to any such institution in danger of default.
Recent Statutory Changes
The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") substantially revises the
depository institution regulatory and funding provisions
of the Federal Deposit Insurance Act and makes revisions
to several other federal banking statutes.
Among other things, FDICIA requires the federal banking
regulators to take prompt supervisory and regulatory
actions against undercapitalized depository
institutions. FDICIA establishes five capital
categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the regulations, a "well capitalized" institution
has a minimum total capital to total risk-weighted
assets ratio of at least 10 percent, a minimum Tier I
capital to total risk-weighted assets ratio of at least
6 percent, a minimum leverage ratio of at least 5
percent and is not subject to any written order,
agreement, or directive; an "adequately capitalized"
institution has a total capital to total risk-weighted
assets ratio of at least 8 percent, a Tier I capital to
total risk-weighted assets ratio of at least 4 percent,
and a leverage ratio of at least 4 percent (3 percent if
given the highest regulatory rating and not experiencing
significant growth), but does not qualify as "well
capitalized." An "undercapitalized" institution fails
to meet any one of the three minimum capital
requirements. A "significantly undercapitalized"
institution has a total capital to total risk-weighted
assets ratio of less than 6 percent, a Tier 1 capital to
total risk-weighted assets ratio of less than 3 percent
<PAGE> 6
or a Tier 1 leverage ratio of less than 3 percent. A
"critically undercapitalized" institution has a Tier 1
leverage ratio of 2 percent or less. Under certain
circumstances, a "well capitalized," "adequately
capitalized" or "undercapitalized" institution may be
required to comply with supervisory actions as if the
institution were in the next lowest capital category.
FDICIA generally prohibits a depository institution from
making any capital distribution (including payment of a
dividend) or paying any management fee to its holding
company if the depository institution would thereafter
be undercapitalized. Effective December 19, 1993,
undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve
System. In addition, undercapitalized depository
institutions are subject to growth and activity
limitations and are required to submit "acceptable"
capital restoration plans. Such a plan will not be
accepted unless, among other things, the depository
institution's holding company guarantees the capital
plan, up to an amount equal to the lesser of five
percent of the depository institution's assets at the
time it becomes undercapitalized or the amount of the
capital deficiency when the institution fails to comply
with the plan. The federal banking agencies may not
accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository
institution's capital. If a depository institution
fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized and may be placed
into conservatorship or receivership.
Significantly undercapitalized depository institutions
may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting
stock to become adequately capitalized, more stringent
requirements to reduce total assets, cessation of
receipt of deposits from correspondent banks, further
activity restricting prohibitions on dividends to the
holding company and requirements that the holding
company divest its bank subsidiary, in certain
instances. Subject to certain exceptions, critically
undercapitalized depository institutions must have a
conservator or receiver appointed for them within a
certain period after becoming critically
undercapitalized.
Brokered Deposits
FDIC regulations adopted under FDICIA prohibit a bank
from accepting brokered deposits (which term is defined
to include any deposit obtained, directly or indirectly,
from any person engaged in the business of placing
deposits with, or selling interests in deposits of, an
insured depository institution) unless (i) it is well
capitalized, or (ii) it is adequately capitalized and
receives a waiver from the FDIC. For purposes of this
regulation, a bank is defined to be well capitalized if
it maintains a leverage ratio of at least 5 percent, a
risk-adjusted Tier 1 capital ratio of at least 6 percent
and a risk-adjusted total capital ratio of at least 10
percent and is not otherwise in a "troubled condition"
as specified by its appropriate federal regulatory
agency. A bank that is adequately capitalized and that
accepts brokered deposits under a waiver from the FDIC
may not pay an interest rate on any deposit in excess of
75 basis points over certain prevailing market rates.
There are no such restrictions on a bank that is well
capitalized. For the capital ratios of the Corporation's
bank subsidiaries, see "Capital Requirements and
Dividends" on page F-61 and Note 16 (Regulatory Matters)
on page F-34 of this report. The Corporation does not
believe that the brokered deposits regulation will have
a material effect on the funding or liquidity of any of
the Corporation's subsidiary banks.
<PAGE> 7
Regulatory Restrictions on Dividends
It is the policy of the Federal Reserve Board that bank
holding companies should pay cash dividends on common
stock only out of income available over the past year
and only if prospective earnings retention is consistent
with the organization's expected future needs. The
policy further provides that bank holding companies
should not maintain a level of cash dividends that
undermines the bank holding company's ability to serve
as a source of strength to its subsidiary banks.
Principal sources of revenues for the Corporation are
dividends received from its banks and other subsidiaries
and interest earned on short-term investments and
advances to subsidiaries. Federal law imposes
limitations on the payment of dividends by the
subsidiaries of the Corporation that are national banks.
Two different calculations are performed to measure the
amount of dividends that may be paid: a recent earnings
test and an undivided profits test. Under the recent
earnings test, a dividend may not be paid if the total
of all dividends declared by a national bank in any
calendar year is in excess of the current year's net
profits combined with the retained net profits of the
two preceding years unless the bank obtains the approval
of the OCC. Under the undivided profits test, a
dividend may not be paid in excess of a bank's undivided
profits then on hand, after deducting bad debts in
excess of the reserve for loan losses. Under the recent
earnings test, which is the more restrictive of the two
tests, at January 1, 1994, SBC could pay up to $113.8
million in dividends to HNC, the bank's lower-tiered
parent holding company. SBM, under the recent earnings
test at January 1, 1994, could pay up to $210.7 million
in dividends to SC, the bank's lower-tiered parent
holding company. SBC and SBM had undivided profits of
$262.9 million and $469.6 million, respectively, at
December 31, 1993.
In addition, the Federal regulatory agencies are
authorized to prohibit a banking organization from
engaging in an unsafe or unsound banking practice.
Depending upon the circumstances, the agencies could
take the position that paying a dividend would
constitute an unsafe or unsound banking practice.
FDIC Insurance Assessments
The Corporation's subsidiary banks, the deposits of
which are insured by the Bank Insurance Fund (the "BIF")
of the FDIC, are subject to FDIC deposit insurance
assessments.
The FDIC has adopted a risk-based assessment system
under which the assessment rate for an insured
depository institution varies according to the level of
risk involved in its activities. An institution's risk
category is based partly upon whether the institution is
well capitalized, adequately capitalized or less than
adequately capitalized. Each insured depository
institution is assigned to one of the following
"supervisory subgroups": "A", "B" or "C". Group "A"
institutions are financially sound institutions with
only a few minor weaknesses. Group "B" institutions are
institutions that demonstrate weaknesses which, if not
corrected, could result in significant deterioration.
Group "C" institutions are institutions for which there
is a substantial probability that the FDIC will suffer a
loss in connection with the institution unless effective
action is taken to correct the areas of weakness. Based
on its capital and supervisory subgroups, each BIF
member institution is assigned an annual FDIC assessment
rate varying between 0.23 percent and 0.31 percent of
deposits. It remains possible that assessments will be
raised to higher levels in the future. The FDIC is also
authorized to impose special additional assessments.
<PAGE> 8
Conservatorship and Receivership Powers of Federal
Banking Agencies
FDICIA significantly expanded the authority of the
federal banking regulators to place depository
institutions into conservatorship or receivership to
include, among other things, appointment of the FDIC as
conservator or receiver of an undercapitalized
institution under certain circumstances. In the event a
bank is placed into conservatorship or receivership, the
FDIC is required, subject to certain exceptions, to
choose the method for resolving the institution that is
least costly to the bank insurance fund ("BIF") of the
FDIC, such as liquidation. In any event, if any of the
Corporation's subsidiary banks were placed into
conservatorship or receivership, because of the
cross-guarantee provisions of the Federal Deposit
Insurance Act, as amended, the Corporation as the sole
stockholder of the Corporation's subsidiary banks would
likely lose its investment in its subsidiary banks.
The FDIC may provide federal assistance to a "troubled
institution" without placing the institution into
conservatorship or receivership. In such case,
pre-existing debtholders and shareholders may be
required to make substantial concessions and, insofar as
practical, the FDIC will succeed to their interests in
proportion to the amount of federal assistance
provided.
Various other legislation, including proposals to
overhaul the banking regulatory system and to limit the
investments that a depository institution may make with
insured funds are from time to time introduced in
Congress. The Corporation cannot determine the ultimate
effect that FDICIA and the implementing regulations to
be adopted thereunder, or any other potential
legislation, if enacted, would have upon its financial
condition or results of operations.
Competition
The banking business in New England is highly
competitive. All of the Corporation's subsidiary banks
and related financial services subsidiaries compete
actively with national and state banks, savings banks,
savings and loan associations, credit unions, finance
companies, money market funds, mortgage banks, insurance
companies, investment banking firms, brokerage firms and
other nonbank institutions that provide one or more of
the services offered by the Corporation's subsidiaries.
In addition to national and regional economic problems,
the banking industry is in a period of consolidation and
regulatory reform that will affect banks in all regions of the
country.
The Corporation does not believe that there will be any
material effect on capital expenditures, results of
operations, financial condition or the competitive
position of itself or any of its subsidiaries with
regard to compliance with federal, state or local
requirements related to the general protection of the
environment.
Employees
As of December 31, 1993, the Corporation and its
subsidiaries employed 10,060 persons (full-time
equivalent).
<PAGE> 9
Supplementary Information
The following supplementary information, some of which
is required under Guide 3 (Statistical Disclosure by
Bank Holding Companies), is found in this report on the
pages indicated below, and should be read in conjunction
with the related financial statements and notes
thereto.
Selected Financial Data F-43
Rate-volume Analysis F-50
Credit Risk Management F-64
Loan Portfolio F-65
Nonaccruing Loans, Restructured Loans
and Accruing Loans Past Due 90 Days
or More F-66
Loan Loss Experience F-69
Provision and Reserve for Loan Losses F-69
Foreclosed Properties F-71
Maturity of Loans F-76
Maturity of Securities F-76
Securities F-76
Consolidated Short-term Borrowings F-77
Domestic Time Deposits of $100 Thousand
or More F-78
Consolidated Average Balance Sheet, Net
Interest Income and Interest Rates F-80
ITEM 2. Properties.
The principal offices of the Corporation are located at
777 Main Street, Hartford, Connecticut and One Federal
Street, Boston, Massachusetts.
Properties and land owned and used by the Corporation
and its subsidiaries had a net book value at December
31, 1993 of $198.9 million. None of these properties is
subject to any material encumbrance.
The Corporation and its subsidiaries lease properties
from other parties and, during 1993, paid rentals of
$46.0 million on these properties, net of subleases of
$1.5 million. See Note 5 (Premises and Equipment) to
the consolidated financial statements, which appears in
Part II, Item 8, and on page F-18 of this report.
The premises occupied or leased by the Corporation and
its subsidiaries are considered to be well located and
suitably equipped to serve as banking facilities.
Neither the location of any particular office nor the
unexpired term of any lease is deemed material to the
business of the Corporation.
ITEM 3. Legal Proceedings.
The Corporation and certain of its officers and
directors were named as defendants in certain purported
class action and derivative lawsuits filed during 1990
and 1991. Among other things, the complaints in the
actions alleged violations of federal securities laws
and negligent misrepresentation based upon certain
allegedly false and misleading public statements
relating to the Corporation's financial position and
omissions in the Corporation's public reports, as well
as breach of fiduciary duty by the Corporation's board
of directors and senior executives.
<PAGE> 10
The Corporation and the plaintiffs entered into a
settlement that was approved by the Court on October 27,
1992 as fair, reasonable and adequate after notice to
all shareholders and members of an agreed upon class in
the actions (which was defined to include all purchasers
of the Corporation's common stock between December 8,
1988 and January 24, 1991) and a hearing. All claims
have been dismissed with prejudice. The settlement
provides that the Corporation will distribute to the
members of the class who file proofs of claims that are
approved by the court warrants to purchase the
Corporation's common stock. The warrants will have an
exercise price equal to the average closing price of the
Corporation's common stock for a fixed period prior to
the distribution, shall be listed on a national
securities exchange, shall be freely tradable upon
issuance and shall be exercisable for a period of one
year, beginning one year after the warrants are
distributed to class members. As a part of the
settlement, defendants agreed to pay the costs of
identifying and providing notice to members of the class
and all costs associated with issuance of the warrants
and the shares of common stock underlying the warrants
and certain fees and expenses of plaintiffs. On January
7, 1994, the Corporation entered into a warrant
agreement that provides for the issuance of 1,329,115
shares of the Corporation's common stock. The warrants
were issued January 18, 1994 with an exercise price of
$22.11. The warrants are traded on the New York Stock
Exchange.
Defendants vigorously denied all allegations of
wrongdoing in these actions, and agreed to settle these
actions solely to avoid the time and expense of
contesting this burdensome litigation. The settlement
did not have a material effect on the Corporation's
results of operations or financial condition.
During 1993, Shawmut Mortgage Company, which was then
the Corporation's nonbank, mortgage lending subsidiary,
was the subject of an investigation by the U.S.
Department of Justice ("DOJ") and the Federal Trade
Commission ("FTC") concerning possible discriminatory
mortgage lending practices. On December 13, 1993,
without admitting any wrongdoing, Shawmut Mortgage
Company entered into a consent decree with the DOJ and
the FTC regarding past lending practices. Pursuant to
the consent decree, Shawmut Mortgage Company established
a $960,000 monetary fund to compensate minority loan
applicants who were denied mortgages between January
1990 and October 1992 but whose applications would be
approved under the Corporation's more recent flexible
underwriting criteria. This settlement did not have a
material effect on the Corporation's results of
operations or financial condition. As of December 31,
1993, full ownership of SMC was transferred to the
Corporation's bank subsidiary, SBC.
In addition, the Attorney General in the Commonwealth of
Massachusetts started an investigation of Shawmut
Mortgage Company for racial bias in its lending
practices. The Corporation, together with the
Massachusetts Bankers Association (the "MBA") and other
banks in the region, resolved the investigation by
agreeing to submit certain application files to an
independent underwriting panel for review. Any
applicants that the panel determines were impermissibly
denied a loan will be given a $15,000 damage award. SMC
will submit approximately 25 files for review. The MBA
agreed to encourage its members to take affirmative
lending measures, virtually all of which are currently
in place at the Corporation.
Shawmut Bank Connecticut, N.A., one of the Corporation's
subsidiaries, which served as indenture trustee for
certain healthcare receivable backed bonds issued by
certain special purpose subsidiaries (the "Towers
subsidiaries") of Towers Financial Corporation
("Towers"), has been named in a lawsuit filed in federal
court in Manhattan by purchasers of the bonds. The suit
<PAGE> 11
seeks damages in an undetermined amount equal to the
difference between the current value of the bonds and
their face amount of approximately $200 million, plus
interest, as well as punitive damages. The Towers
subsidiaries defaulted on the bonds and Towers and the
subsidiaries later filed for bankruptcy protection. The
complaint, which also names as a defendant the company
that issued a double-A rating on the bonds, alleges that
Towers engaged in a massive fraud against bondholders
which, according to the complaint, should have been
detected at an early stage by the bond rating agency and
the indenture trustee. The Corporation believes that
its actions were not the cause of any loss by the
bondholders, and it is vigorously defending the action.
The Corporation is also subject to various other pending
and threatened lawsuits in which claims for monetary
damages are asserted. Management, after consultation
with legal counsel, does not anticipate that the
ultimate liability, if any, arising out of the other
pending and threatened lawsuits will have a material
effect on the Corporation's results of operations or
financial condition.
ITEM 4. Submission of Matters to a Vote of Security
Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT
All executive officers of the Corporation are appointed
annually and serve at the pleasure of the board of
directors. The terms of any positions in a subsidiary
company extend until the next annual meeting of that
company. The names, positions, ages and backgrounds of
the Corporation's executive officers as of February 28,
1994 are set forth below.
JOEL B. ALVORD, 55, is chairman, chief executive officer
and a director of the Corporation, and a director of SBC
and SBM. Mr. Alvord began his 30-year SBC tenure in
1963. He became an officer of SBC in 1965, a vice
president in 1967, and executive vice president in 1976.
During this period, he served in a variety of management
positions with SBC, and from early 1978 to 1986 he
served as president of SBC. From 1986 to 1988, Mr.
Alvord served as chief executive officer of SBC; from
1986 to October 1992, as chairman of SBC; and from 1988
to October 1992, as chairman of SBM. In early 1978 he
was elected president of HNC, and in 1986 he assumed the
additional positions of chairman and chief executive
officer of HNC. In early 1988, as part of the
Reorganization, Mr. Alvord was appointed president and
chief executive officer of the Corporation. In August
1988, Mr. Alvord assumed his current position as
chairman and chief executive officer. Mr. Alvord has
served as a director of the Corporation since 1987, SBC
since 1978 and SBM since 1988.
GUNNAR S. OVERSTROM, JR., 51, is president, chief
operating officer and a director of the Corporation, and
chairman, chief executive officer and a director of SBC
and SBM. Mr. Overstrom joined SBC in 1975 as vice
president of financial planning. He was promoted to
senior vice president in 1977, and executive vice
president and chief financial officer in 1979. He
became chief financial officer of HNC in 1979, and a
director and executive vice president of HNC in 1982.
From 1986 to October 1992, Mr. Overstrom served as
president of SBC. In 1988 Mr. Overstrom became chief
executive officer of SBC, and in October 1992, he was
also appointed chairman of SBC and chairman and chief
executive officer of SBM. As part of the Reorganization
in early 1988, Mr. Overstrom was named a vice chairman
and chief financial officer of the Corporation. In
August 1988, he was appointed president and chief
operating officer of the Corporation. Mr. Overstrom has
served as a director of the Corporation since 1987, SBC
since 1986 and SBM since 1989.
<PAGE> 12
DAVID L. EYLES, 54, is a vice chairman and chief credit
policy officer of the Corporation, and a vice chairman
and a director of SBC and SBM. Mr. Eyles joined the
Corporation in February 1992, following three months of
working with the Corporation as a consultant. Between
1988 and late 1991, he was vice chairman and chairman of
the credit policy committee at Mellon Bank
Corporation/Mellon Bank, N.A. He served in a variety of
executive management positions during his 27-year tenure
at Chemical Bank, the most recent being executive vice
president, chief credit officer and chairman of the
credit policy committee.
EILEEN S. KRAUS, 55, is a vice chairman of the
Corporation, president and a director of SBC, and a vice
chairman and a director of SBM. Mrs. Kraus joined SBC
in 1979 as vice president of human resources planning
and development, and was appointed senior vice president
in 1980. In 1986, Mrs. Kraus was appointed to the
position of executive vice president of SBC, responsible
for consumer banking. She became the senior manager for
consumer banking and marketing for the Corporation in
1988. In June 1990, Mrs. Kraus became vice chairman of
SBC, and in January 1991, she became vice chairman of
SBM. From January 1991 to May 1993, she was responsible
for personal trust. Mrs. Kraus was appointed president
of SBC in October 1992, and a vice chairman of the
Corporation in January 1993. Mrs. Kraus has served as a
director of SBC since June 1990, and as a director of
SBM since May 1992.
ALLEN W. SANBORN, 51, is a vice chairman of the
Corporation, president and a director of SBM, and a vice
chairman and a director of SBC. Mr. Sanborn joined the
Corporation in May 1992 as a vice chairman of the
Corporation and a vice chairman and director of SBM and
SBC. In October 1992, Mr. Sanborn was appointed
president of SBM. Prior to joining the Corporation, Mr.
Sanborn was vice chairman of commercial markets (1990 to
1992) and executive vice president of real estate
industries (1987 to 1990) at Bank of America.
BHARAT BHATT, 50, is an executive vice president and
chief financial officer of the Corporation and executive
vice president of SBC and SBM. Mr. Bhatt joined SBC in
September 1992 as executive vice president of credit
administration. In December 1992, he became chief
financial officer of the Corporation and in March 1993,
was appointed an executive vice president of the
Corporation. Prior to joining the Corporation, Mr.
Bhatt was senior vice president of credit policy and
portfolio management at Mellon Bank, N.A. (1989 to
1992), and vice president and head of less developed
countries swap group at Chemical Bank (1986 to 1989).
ALAN R. BUFFINGTON, 48, is an executive vice president
and head of the corporate services group of SBC and SBM.
Mr. Buffington joined SBC and SBM in August 1993 from
Cigna Corporation, where he was senior vice president
and head of systems for the employee benefits group from
1990 to 1993. He joined Cigna when it acquired Equicor
- Equitable HCA Corporation in 1990, where he was head
of technology and administration from 1986 to 1990.
NIELS JENSEN, 47, is an executive vice president and
head of the financial institutions business line of SBC
and SBM. Mr. Jensen joined SBC and SBM in October 1993.
From 1992 to 1993 he was senior vice president of
corporate financial services at Northern Trust Company.
<PAGE> 13
He served in a variety of management positions during
his 22-year tenure at Northern Trust Company, which
included overall management of the bank's corporate cash
management and correspondent services, and head of
commercial banking operations and systems development.
MICHAEL J. ROTHMEIER, 44, is executive vice president
and head of the investment services business line of SBC
and SBM. Mr. Rothmeier joined SBC and SBM in August
1992. From 1991 to 1992, Mr. Rothmeier was a member of
the office of the president of Fidelity Investments,
Inc. and was responsible for the financial, human
resources, strategic planning, business implementation,
systems technology and administrative functions of
retail telephone operations of Fidelity Investments Inc.
During 1990 and 1991, he was president and chief
executive officer of Fidelity Retail Distribution
Company and Fidelity Brokerage Services, Inc., and
president of Fidelity Retail Marketing Services from
1989 to 1990.
All of the named executive officers have been employed
by the Corporation or one of its subsidiaries during the
past five years, except for Messrs. Eyles, Sanborn,
Bhatt, Buffington, Jensen and Rothmeier. There are no
arrangements or understandings pursuant to which any of
the above named executive officers were selected to
serve in their respective capacities and no family
relationships exist among any of them.
<PAGE> 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Corporation's common stock is listed and traded
principally on the New York Stock Exchange under the
symbol "SNC." Information concerning the range of high
and low sales prices for the Corporation's common shares
for each quarterly period within the past two fiscal
years, as well as the dividends declared for 1993, is
set forth below. No dividends were declared for 1992.
Dividends
Quarter ended High Low Declared
1993
March 31 $23.88 $17.88 $.10
June 30 25.13 19.50 .10
September 30 26.38 22.50 .10
December 31 25.13 19.38 .20
1992
March 31 $15.88 $ 8.88 -
June 30 19.25 12.13 -
September 30 18.75 13.38 -
December 31 19.50 14.50 -
As of February 22, 1994, the closing price of the
Corporation's common stock on the New York Stock
Exchange was $21.63 per share. As of that date, there
were approximately 29,476 record holders of the
Corporation's common stock.
For a discussion of dividend restrictions on the
Corporation's common stock, see Note 10 (Shareholders'
Equity) and Note 16 (Regulatory Matters) to the
consolidated financial statements on pages F-21 and F-34
of this report.
ITEM 6. Selected Financial Data.
The information required by this item appears on page
F-43, under the caption "SELECTED FINANCIAL DATA," and
is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The information required by this item appears on pages
F-44 through F-75, under the caption "Financial Review,"
and is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data.
The information required by this item appears on pages
F-2 through F-39, and on page F-78 under the caption
"QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED),"
and is incorporated herein by reference.
<PAGE> 15
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of the
Registrant.
The information required by this item, to the extent not
included under the caption "Executive officers of the
registrant" in Part I of this report, or below, will
appear under the caption "Election of directors" in the
Corporation's 1994 proxy statement, and is incorporated
herein by reference.
ITEM 11. Executive Compensation.
The information required by this item will appear under
the captions "Executive compensation" and "Transactions
with directors and executive officers" in the
Corporation's 1994 proxy statement, and is incorporated
herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.
The information required by this item will appear under
the caption "Common stock ownership" in the
Corporation's 1994 proxy statement, and is incorporated
herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this item will appear under
the caption "Transactions with directors and executive
officers" in the Corporation's 1994 proxy statement, and
is incorporated herein by reference. Also see Note 4
(Loans and Reserve for Loan Losses) to the consolidated
financial statements on page F-16 of this report.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) The following documents are part of this report and
appear on the pages indicated.
(1) Financial Statements:
Management's Report F-2
Report of Independent Accountants F-3
Consolidated Statement of Income F-4
Consolidated Balance Sheet F-5
Consolidated Statement of Changes in
Shareholders' Equity F-6
Consolidated Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
<PAGE> 16
(2) Financial Statement Schedules:
Schedules are omitted because the information is
either not required, not applicable or is included
in Part II, Items 6-8 of this report.
(3) Exhibits:
The exhibits listed on the Exhibits Index on page
20 of this report are filed herewith or are
incorporated herein by reference.
(b) Reports on Form 8-K - The Corporation filed three
reports on Form 8-K during the quarter ended December
31, 1993.
The report dated November 16, 1993 (Items 5 and 7)
reported that on November 16, 1993 the Corporation
issued a press release relating to its application with
the Board of Governors of the Federal Reserve System
regarding its proposed acquisition of New Dartmouth
Bank. The report filed a copy of the November 16, 1993
press release.
The report dated December 1, 1993 (Items 5 and 7),
reported that:
(1)On December 2, 1993, the Massachusetts Bankers
Association ("MBA") announced an agreement in
principle with the Attorney General of Massachusetts,
to resolve legal issues arising out of Civil
Investigative Demands that were served on numerous
financial institutions in Massachusetts. The
agreement in principle, dated December 1, 1993,
provides that institutions from which mortgage loan
application files were sought will turn those files
over to a three member panel for review to determine
whether the applications were unfairly denied and
whether the loans should have been approved using
1990 secondary market mortgage lending standards.
Any individual whose loan application is determined
to have been unfairly denied is entitled to receive
$15,000. The Attorney General sought a total of 25
files from Shawmut Mortgage Company. The MBA also
agreed to use its best efforts to encourage its
members to engage in certain affirmative lending
activities, virtually all of which Shawmut Mortgage
Company currently makes available to consumers. The
settlement will not have a material effect on Shawmut
Mortgage Company or on the Corporation;
(2)On December 13, 1993, the Corporation issued a press
release relating to Shawmut Mortgage Company's
announcement that it had entered a consent decree in
U.S. District Court with the U.S. Department of
Justice and the Federal Trade Commission regarding
past lending practices. The report filed a copy of
the December 13, 1993 press release; and
(3)On December 20, 1993, the Corporation and New
Dartmouth Bank announced a revision to their
previously announced merger agreement extending the
deadline for completing the transaction to June 30,
1994. The report filed the December 20, 1993 press
release.
The report dated December 20, 1993 (Item 7), filed:
(1)Consent of Independent Accountants of New Dartmouth Bank;
<PAGE> 17
(2)Consent of Independent Auditors of Peoples Bancorp of
Worcester, Inc. and Subsidiaries;
(3)Consent of Independent Auditors of Gateway Financial
Corporation and Subsidiaries;
(4)Unaudited Financial Information of New Dartmouth Bank
as of September 30, 1993;
(5)Financial Statements of New Dartmouth Bank as of
June 30, 1993;
(6)Unaudited Financial Information of Peoples Bancorp of
Worcester, Inc. and Subsidiaries as of
September 30, 1993;
(7)Financial Statements of Peoples Bancorp of Worcester, Inc.
and Subsidiaries as of December 31, 1992;
(8)Unaudited Financial Information of Gateway Financial
Corporation and Subsidiaries as of September 30, 1993;
(9)Financial Statements of Gateway Financial Corporation
and Subsidiaries as of December 31, 1992; and
(10)Shawmut National Corporation and Subsidiaries/
New Dartmouth Bank;
Peoples Bancorp of Worcester, Inc. and Subsidiaries and
Gateway Financial Corporation and Subsidiaries Unaudited
Pro Forma Condensed Financial Information.
(c) The exhibits listed on the Exhibits Index on page 20 of
this report are filed herewith or are incorporated
herein by reference.
For the purposes of complying with the amendments to the
rules governing Form S-8 (effective July 13, 1990) under
the Securities Act of 1933 (the "Act"), the undersigned
registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 No.
33-20387 (filed March 1, 1988) and 33-17765-02 (filed
September 27, 1988).
Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 1, 1994.
SHAWMUT NATIONAL CORPORATION
By (Joel B. Alvord)
-----------------------------
Joel B. Alvord
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on March 1, 1994.
(Joel B. Alvord) (Robert J. Matura)
--------------------------------- -----------------------------
Joel B. Alvord Robert J. Matura
Chairman, Chief Executive Director
Officer and Director
(Gunnar S. Overstrom, Jr.)
--------------------------------- -----------------------------
Gunnar S. Overstrom, Jr. Lois D. Rice
President, Chief Operating Director
Officer and Director
(Stillman B. Brown)
--------------------------------- -----------------------------
Stillman B. Brown Maurice Segall
Director Director
(John T. Collins) (Paul R. Tregurtha)
--------------------------------- -----------------------------
John T. Collins Paul R. Tregurtha
Director Director
(Ferdinand Colloredo-Mansfeld) (Wilson Wilde)
---------------------------------- -----------------------------
Ferdinand Colloredo-Mansfeld Wilson Wilde
Director Director
(Bernard M. Fox) (Bharat Bhatt)
---------------------------------- ----------------------------
Bernard M. Fox Bharat Bhatt
Director Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
----------------------------------
Herbert W. Jarvis
Director
<PAGE> 19
EXHIBITS INDEX
FILED AS PART OF THIS REPORT ON FORM 10-K
Sequentially
Numbered
Designation Description Page
3.1 Restated certificate of incorporation
(incorporated by reference to Exhibit 3.1 to
Registration Statement No. 33-17765 filed on
October 7, 1987) N/A
3.2 By-laws, as amended on September 23, 1993
(incorporated by reference to the
Corporation's Form 10-Q for the
quarter ended September 30, 1993) N/A
3.3 Designation of adjustable rate preferred stock
(incorporated by reference to Exhibit 3.1 to
Registration Statement No. 33-17765, filed on
October 7, 1987) N/A
3.4 Certificate of designation of 9.30% cumulative
preferred stock (without par value, $250
stated value) (incorporated by reference to
the Corporation's current report on Form 8-K,
dated October 27, 1992, File No. 1-10102) N/A
3.5 Certificate of correction of certificate of
designation of 9.30% cumulative preferred
stock dated November 13, 1992 (incorporated
by reference to Exhibit No. 4 to the
Corporation's Form 10-Q for the period ended
September 30, 1992, File No. 1-10102) N/A
3.6 Amended certificate of designation of 9.30%
cumulative preferred stock, dated
November 30, 1992 (incorporated by reference
to the Corporation's annual report for 1992
on Form 10-K) N/A
4.1 Restated certificate of incorporation, articles
fourth and seventh (incorporated by reference
to Exhibit 3.1 to Registration Statement
No. 33-17765 filed on October 7, 1987) N/A
4.2 By-laws, as amended on September 23, 1993
(incorporated by reference to the
Corporation's Form 10-Q for the
quarter ended September 30, 1993) N/A
<PAGE> 20
Sequentially
Numbered
Designation Description Page
4.3 The indentures and other instruments defining
the rights of holders of long-term debt of
the Corporation and its consolidated
subsidiaries are omitted pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K.
The Corporation agrees to furnish copies of
such indentures and other instruments to
the Commission upon request N/A
4.4 Shareholder rights plan (incorporated by
reference to Form 8-A Registration Statement
dated March 7, 1989, File No. 1-10102) N/A
4.5 Designation of adjustable rate preferred stock
(incorporated by reference to Exhibit 3.1 to
Registration Statement No. 33-17765, filed on
October 7, 1987) N/A
4.6 Certificate of designation of 9.30% cumulative
preferred stock (without par value, $250
stated value) (incorporated by reference to
the Corporation's current report on Form 8-K,
dated October 27, 1992, File No. 1-10102) N/A
4.7 Certificate of correction of certificate of
designation of 9.30% cumulative preferred
stock dated November 13, 1992 (incorporated
by reference to Exhibit No. 4 to the
Corporation's Form 10-Q for the period ended
September 30, 1992, File No. 1-10102) N/A
4.8 Amended certificate of designation of 9.30%
cumulative preferred stock, dated
November 30, 1992 (incorporated by reference
to the Corporation's annual report for 1992
on Form 10-K) N/A
4.9 Form of depositary share representing a one-tenth
interest in a share of 9.30% preferred stock
(incorporated by reference to the
Corporation's current report on Form 8-K,
dated October 27, 1992) N/A
4.10 Form of 9.30% preferred stock (incorporated by
reference to the Corporation's current report
on Form 8-K, dated October 27, 1992) N/A
<PAGE> 21
Sequentially
Numbered
Designation Description Page
4.11 Deposit agreement, dated as of November 3,
1992, among the Corporation, Chemical Bank,
as depositary, and the holders from time to
time of the depositary receipts
(incorporated by reference to the
Corporation's current report on Form 8-K,
dated October 27, 1992) N/A
*10.1 Stock option and restricted stock award plan
(incorporated by reference to Form S-8
Registration Statement No. 33-20387 filed on
March 1, 1988), as amended March 28, 1989 and
January 28, 1993 (incorporated by reference
to the Corporation's annual report for 1992 on
Form 10-K) N/A
*10.2 Form of executive employment agreement dated
February 23, 1988 (incorporated by reference
to the Corporation's Form 10-Q for the quarter
ended March 31, 1988), as amended effective
June 27, 1989 (incorporated by reference to
the Corporation's annual report for 1990 on
Form 10-K), as amended effective January 22,
1993 (incorporated by reference to the
Corporation's annual report for 1992 on Form
10-K) N/A
*10.3 Form of executive severance agreement dated
February 23, 1988 (incorporated by reference
to the Corporation's Form 10-Q for the
quarter ended March 31, 1988), as amended
effective June 27, 1989 (incorporated by
reference to the Corporation's annual
report for 1990 on Form 10-K) N/A
*10.4 Form of executive severance agreement dated
July 15, 1987, as amended July 27, 1989
(incorporated by reference to the
Corporation's annual report for 1990 on
Form 10-K) N/A
*10.5 Deferred compensation plan for directors of
Shawmut National Corporation effective
February 23, 1988 (incorporated by reference
to the Corporation's annual report for 1990
on Form 10-K) N/A
*10.6 Shawmut National Corporation 1989 nonemployee
directors' restricted stock plan effective
April 25, 1989 (incorporated by reference to
the Corporation's 1989 Proxy Statement dated
March 13, 1989 and filed with the Securities
and Exchange Commission) N/A
<PAGE> 22
Sequentially
Numbered
Designation Description Page
*10.7 Shawmut National Corporation executive
supplemental retirement plan effective
July 1, 1990 (incorporated by reference
to the Corporation's annual report for 1990
on Form 10-K) N/A
*10.8 Shawmut National Corporation performance unit
plan, as amended June 27, 1989 (incorporated
by reference to the Corporation's annual
report for 1990 on Form 10-K) N/A
*10.9 Shawmut National Corporation executive group
life insurance plan, as adopted September 10,
1991, effective October 31, 1991 (incorporated
by reference to the Corporation's Form 10-Q
for the quarter ended September 30, 1991) N/A
*10.10 Shawmut National Corporation split-dollar life
insurance plan, as adopted September 10, 1991,
effective October 31, 1991, as amended and
restated as of November 24, 1992 (incorporated
by reference to the Corporation's current
report on Form 8-K dated February 28, 1994,
File No. 1-10102) N/A
*10.11 Form of executive employment agreement
dated March 1, 1992 (incorporated by reference
to the Corporation's annual report for 1992
on Form 10-K) N/A
*10.12 Form of executive employment agreement
dated May 11, 1992 (incorporated by reference
to the Corporation's annual report for 1992 on
Form 10-K) N/A
12 Statements re computation of ratios 106
21 Principal subsidiaries 107
23 Consent of independent accountants 108
99.1 Notice of annual meeting of shareholders,
April 26, 1994, and proxy statement to be
filed within 120 days of the Corporation's
fiscal year end pursuant to General
Instruction G(3) of Form 10-K N/A
<PAGE> 23
Sequentially
Numbered
Designation Description Page
99.2 Shawmut National Corporation press release dated
February 10, 1994, announcing the signing of
a definitive agreement to purchase ten
branches of Northeast Savings, F.A. located
in Eastern Massachusetts and in Rhode Island 109
_______________________________________________
*Denotes management contract or compensation plan or
arrangement.
<PAGE> 24
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL DATA
Page
<S> <C>
Management's Report F-2
Report of Independent Accountants F-3
FINANCIAL STATEMENTS
Consolidated Statement of Income F-4
Consolidated Balance Sheet F-5
Consolidated Statement of Changes
in Shareholders' Equity F-6
Consolidated Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
Financial Glossary F-40
Selected Financial Data F-43
Financial Review F-44
Maturity of Loans F-76
Maturity of Securities F-76
Consolidated Short-term Borrowings F-77
Domestic Time Deposits of $100 Thousand or More F-78
Quarterly Consolidated Financial Information F-78
Consolidated Average Balance Sheet,
Net Interest Income and Interest Rates F-80
<PAGE>F-1 25
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S REPORT
MANAGEMENT'S REPORT
The financial statements of Shawmut National Corporation and its subsidiaries
have been prepared by management in accordance with generally accepted
accounting principles. The supplementary financial data included in this annual
report were also prepared by management and are consistent with the data
included in the financial statements.
The Corporation maintains a system of internal accounting controls intended to
provide reasonable assurance that transactions are executed in accordance with
corporate authorization and are properly recorded and reported in the financial
statements and that assets are safeguarded. The concept of reasonable assurance
recognizes that the cost of a system of internal accounting controls should not
exceed the benefits derived. Such costs and benefits are not usually
quantifiable and, accordingly, depend upon estimates and judgment. The internal
control environment includes a framework of processes used to identify and
monitor risk. Such processes include a corporate loan review staff to monitor
compliance with prescribed lending and risk identification policies, an internal
audit function which reviews, evaluates, monitors and makes recommendations on
administrative and accounting control and a compliance function which
establishes and monitors corporate-wide compliance with internal and regulatory
policies.
The financial statements have been reviewed by the audit committee of the Board
of Directors, composed solely of outside directors. The committee recommends to
the board the engaging, subject to shareholder approval, of the Corporation's
independent accountants and reviews with the independent accountants the scope
and results of the audit of the financial statements. The committee also reviews
the scope and results of the Corporation's internal audit activities, the
results of reviews performed by the corporate loan review staff and the
compliance function and other matters involving risk management.
The financial statements have been audited by Price Waterhouse whose report
follows.
<PAGE>F-2 26
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Shawmut National Corporation
In our opinion, the consolidated financial statements appearing on pages F-4 to
F-39 of this report present fairly, in all material respects, the financial
position of Shawmut National Corporation and its subsidiaries at December 31,
1993 and 1992, the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Corporation changed its methods of accounting for investments in debt and equity
securities, postretirement benefits other than pensions, postemployment benefits
and income taxes.
(PRICE WATERHOUSE)
Hartford, Connecticut
January 19, 1994
<PAGE>F-3 27
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
Year ended December 31, (in thousands, except per share data) 1993 1992 1991
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C>
Loans $ 1,046,832 $ 1,057,438 $ 1,302,907
Securities
At lower of aggregate cost or fair value 210,445 210,733 18,996
Held to maturity 264,162 231,305 433,619
Residential mortgages held for sale 29,636 27,312 19,243
Federal funds sold and securities purchased
under agreements to resell 9,330 15,832 32,163
Interest-bearing deposits in other banks 223 1,582 4,791
Trading account securities 1,562 1,564 2,176
Total 1,562,190 1,545,766 1,813,895
INTEREST EXPENSE
Interest on deposits
Savings, money market and NOW accounts 140,330 217,354 356,248
Domestic time 162,633 253,260 449,875
Foreign time 5,146 2,516 4,008
Total 308,109 473,130 810,131
Other borrowings 257,411 187,987 206,038
Notes and debentures 72,040 59,321 60,436
Total 637,560 720,438 1,076,605
NET INTEREST INCOME 924,630 825,328 737,290
Provision for loan losses 29,186 189,515 466,440
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 895,444 635,813 270,850
NONINTEREST INCOME
Customer service fees 171,774 172,569 175,399
Trust and agency fees 116,845 115,103 112,030
Securities gains, net 5,728 85,903 78,154
Other 74,878 104,517 164,093
Total 369,225 478,092 529,676
NONINTEREST EXPENSES
Compensation and benefits 453,869 430,418 426,249
Occupancy and equipment 147,223 156,413 157,143
Foreclosed properties provision and expense 95,728 167,113 110,057
Other 330,897 282,445 276,191
Total 1,027,717 1,036,389 969,640
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY CREDIT AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 236,952 77,516 (169,114)
Income taxes (benefit) (7,600) 20,685 1,530
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 244,552 56,831 (170,644)
Extraordinary credit 18,378
Cumulative effect of changes in methods of accounting 46,200
NET INCOME (LOSS) $ 290,752 $ 75,209 $ (170,644)
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 275,283 $ 70,426 $ (172,906)
COMMON SHARE DATA
Income (loss) before extraordinary credit and cumulative
effect of accounting changes $ 2.44 $ 0.60 $ (2.35)
Net income (loss) 2.93 0.81 (2.35)
Weighted average shares outstanding 93,895 86,565 73,714
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>F-4 28
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31, (in thousands) 1993 1992
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,435,286 $ 1,368,251
Interest-bearing deposits in other banks 1,073 100,302
Federal funds sold and securities purchased
under agreements to resell 7,500 613,000
Trading account securities 19,625 36,444
Residential mortgages held for sale 415,812 426,483
Securities
Available for sale, at fair value 2,596,382
At lower of aggregate cost or fair value
(fair value $3,437,034) 3,361,511
Held to maturity
(fair value $6,470,945 and $2,722,021) 6,394,201 2,716,326
Loans, less reserve for loan
losses of $633,000 and $863,000 14,751,450 14,036,799
Premises and equipment 307,033 336,536
Foreclosed properties 47,986 244,434
Customers' acceptance liability 13,747 27,553
Other assets 1,254,647 2,020,669
Total assets $ 27,244,742 $ 25,288,308
LIABILITIES
Deposits
Demand $ 4,587,156 $ 4,572,222
Savings, money market and NOW accounts 7,304,708 7,463,319
Domestic time 3,158,631 4,247,568
Foreign time 246,740 126,702
Total deposits 15,297,235 16,409,811
Other borrowings 9,187,606 5,328,462
Acceptances outstanding 13,747 27,553
Accrued taxes and other liabilities 183,923 1,230,248
Notes and debentures 758,941 809,833
Total liabilities 25,441,452 23,805,907
SHAREHOLDERS' EQUITY
Preferred stock, without par value
Authorized - 10,000,000 shares
Issued - 1,275,000 shares 178,750 178,750
Common stock, $.01 par value
Authorized - 150,000,000 shares
Issued - 95,546,359 and 94,186,394 shares 955 942
Surplus 1,074,793 1,048,509
Retained earnings 541,455 324,452
Net unrealized gain (loss) on securities 9,680 (23,654)
Treasury stock, common stock at cost
(106,487 and 1,658,467 shares) (2,343) (46,598)
Total shareholders' equity 1,803,290 1,482,401
Total liabilities and shareholders' equity $ 27,244,742 $ 25,288,308
The accompanying notes are an integral part of this financial statement.
<PAGE>F-5 29
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Year ended December 31, (in thousands) 1993 1992 1991
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY at beginning of year $ 1,482,401 $ 1,039,838 $ 1,191,710
PREFERRED STOCK
Issuance of preferred stock (575,000 shares) 143,750
COMMON STOCK , $.01 par value
Shares issued under Dividend Reinvestment
and Stock Purchase Plans (962,946 shares) 9
Shares issued (cancelled) under stock option and employee
benefit plans (397,019; 310,358 and (36,859) shares) 4 3 (1)
Issuance of common stock (17,250,000 shares) 173
SURPLUS
Additional proceeds from
Shares issued under Dividend Reinvestment
and Stock Purchase Plans 22,334
Shares issued (cancelled) under
stock option and employee benefit plans 3,950 2,071 (1,423)
Issuance of common stock 199,127
Preferred stock issuance costs (5,731)
RETAINED EARNINGS
Net income (loss) 290,752 75,209 (170,644)
Cash dividends declared
Preferred stock (15,469) (4,783) (2,262)
Common stock (47,205)
Restricted stock awards 31 (1,496) 928
Reissuance of common stock from treasury (11,106) (15,444) (2,465)
NET UNREALIZED GAIN (LOSS) ON SECURITIES
Unrealized appreciation on securities available for sale 9,680
Unrealized appreciation on securities at lower of
aggregate cost or fair value 23,654 16,045 20,720
TREASURY STOCK
Purchase of common stock (114,009 and 672 shares) (2,509) (10)
Reissuance of common stock under
Dividend Reinvestment and Stock Purchase Plans
(1,665,989; 1,202,954 and 124,455 shares) 46,764 33,649 3,275
SHAREHOLDERS' EQUITY at end of year $ 1,803,290 $ 1,482,401 $ 1,039,838
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>F-6 30
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Year ended December 31, (in thousands) 1993 1992 1991
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 290,752 $ 75,209 $ (170,644)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Extraordinary credit related to the realization of
net operating loss carryforwards (18,378)
Cumulative effect of changes in methods of accounting (46,200)
Provision for loan losses 29,186 189,515 466,440
Provision for foreclosed properties 68,097 134,153 77,171
Depreciation, amortization and other 121,042 68,936 57,986
Deferred income taxes (13,969) 33,101 15,679
Gains from the sale of securities held to maturity (68,426) (78,154)
Gains from the sale of loans, premises and equipment
and other assets (7,963) (39,546) (90,357)
Decrease in securities reported at the lower of
aggregate cost or fair value 95,503 1,501,736
Decrease (increase) in trading account securities 16,819 (17,942) 15,951
Decrease (increase) in residential mortgages held for sale 10,671 (153,059) (99,528)
Decrease (increase) in other assets and accrued taxes
and other liabilities (289,280) 41,788 53,682
CASH PROVIDED BY OPERATING ACTIVITIES 274,658 1,747,087 248,226
FINANCING ACTIVITIES
Decrease in total deposits (1,112,576) (103,039) (3,042,485)
Increase in other borrowings 3,859,144 1,096,462 2,178,231
Proceeds from issuance of subordinated notes 149,700 149,631
Principal payments on notes and debentures (200,802) (4,981) (9,162)
Proceeds from issuances of common and preferred stock 61,955 356,599 847
Purchases of common stock (2,509) (10)
Cash dividends paid (42,918) (2,131) (1,715)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,711,994 1,492,531 (874,284)
INVESTING ACTIVITIES
Decrease (increase) in short-term investments 704,729 (532,394) 378,628
Maturities of securities held to maturity 1,135,178 434,932 265,563
Proceeds from sales of securities held to maturity 1,683,956 3,902,905
Purchases of securities held to maturity (4,112,162) (4,430,692) (4,932,848)
Proceeds from sales of loans 439,437 649,024 213,571
Purchases of loans (367,378) (417,468) (387,635)
Loans originated less principal collected (774,327) (1,380,464) 582,792
Purchases of premises and equipment and other assets (51,258) (49,826) (26,160)
Proceeds from the sale of premises and equipment and
other assets 106,164 177,208 119,731
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,919,617) (3,865,724) 116,547
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 67,035 (626,106) (509,511)
Cash and due from banks at beginning of year 1,368,251 1,994,357 2,503,868
CASH AND DUE FROM BANKS AT END OF YEAR $ 1,435,286 $ 1,368,251 $ 1,994,357
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 630,702 $ 749,318 $ 1,020,937
Income taxes paid $ 4,728 $ 19,952 $ 7,026
Securities aggregating $708,172, previously reported at the lower of aggregate
cost or fair value, were transferred during 1993 to securities classified as
held to maturity. Securities aggregating $4,663,247, previously classified as
held to maturity, were transferred during 1992 to securities reported at the
lower of aggregate cost or fair value.
Loans totaling $22,117, $252,260 and $338,849 were transferred to foreclosed
properties during 1993, 1992 and 1991, respectively.
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>F-7 31
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Shawmut National Corporation and its
subsidiaries (the Corporation) are in conformity with generally accepted
accounting principles followed within the banking industry. Certain amounts for
prior years have been reclassified to conform to current year presentation. The
significant accounting policies followed by the Corporation are summarized
below.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Shawmut National Corporation and its subsidiaries after elimination
of material intercompany balances and transactions.
TRADING ACCOUNT SECURITIES - Trading account securities include debt securities
that are purchased and held principally for the purpose of selling them in the
near term and are stated at fair value, as determined by quoted market prices.
Gains and losses realized on the sale of trading account securities and
adjustments to fair value are included in trading account profits.
RESIDENTIAL MORTGAGES HELD FOR SALE - Residential mortgages held for sale are
primarily one to four family real estate mortgage loans which are reported at
the lower of cost or market, as determined by outstanding commitments from
investors or current investor yield requirements, calculated on an aggregate
basis. Forward mandatory, standby and put option contracts are entered into to
limit market risk on residential mortgages held for sale. Gains and losses from
sales of residential mortgages held for sale are recognized upon settlement with
investors and recorded in noninterest income. These activities, together with
underwriting and servicing of residential mortgage loans, comprise the
Corporation's mortgage banking business.
SECURITIES - The Corporation adopted, as of December 31, 1993, Statement of
Financial Accounting Standards (FAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at cost, adjusted for the
amortization of premiums and accretion of discounts. Debt and equity securities
which are not classified as held to maturity or as trading securities are
classified as available for sale and reported at fair value, with unrealized
gains and losses excluded from the results of operations and reported as a
separate component of shareholders' equity, net of income taxes. See "Note
3 - Securities".
Prior to adoption of this new accounting standard, debt securities that were to
be held for indefinite periods of time, including securities that management
intended to use as part of its asset/liability strategy or that may be sold in
response to changes in interest rates, prepayment risk or other factors, were
reported at the lower of aggregate cost or fair value. Changes in net
unrealized losses were included in the Corporation's results of operations.
Equity securities were stated at the lower of aggregate cost or fair value with
net unrealized losses reported as a reduction of retained earnings.
Fair values of securities are determined by prices obtained from independent
market sources. Realized gains and losses on securities sold are computed on
the identified cost basis on the trade date and are included in the results of
operations.
<PAGE>F-8 32
FOREIGN EXCHANGE TRADING - Foreign exchange trading positions, including spot,
forward and option contracts, are reported at market value. The resulting
realized and unrealized gains and losses from foreign exchange trading are
included in other noninterest income.
INTEREST RATE INSTRUMENTS - Interest rate instruments, such as futures contracts
and forward rate agreements, are used in conjunction with foreign exchange
trading activities. These instruments are carried at market value with realized
and unrealized gains and losses recognized currently in other noninterest
income.
Interest rate swap and cap agreements and futures contracts are used to manage
the Corporation's interest rate risk. The periodic net settlements on interest
rate swap and cap agreements are recorded as an adjustment to interest expense.
Deferred gains or losses on futures contracts are amortized over the expected
remaining life of the underlying asset or liability.
The Corporation also utilizes combination options, which involve a group of
options consisting of at least one put and one call entered into as a unit in
relation to specific underlying securities classified as available for sale, in
order to limit the market risk of the securities. The market value of the
options are included with the valuation of securities available for sale.
LOANS - Loans are stated at the principal amounts outstanding, net of unearned
income.
Interest on undiscounted loans is recognized primarily utilizing the simple
interest method based upon the principal amount outstanding. Interest on
discounted loans is recognized utilizing the effective yield method.
The net amount of loan origination and commitment fees and direct costs incurred
to underwrite and issue a loan are deferred and amortized as an adjustment of
the related loan's yield over the contractual life of the loan in a manner which
approximates the interest method.
When a loan is past due 90 days or more or the ability of the borrower to repay
principal or interest is in doubt, the Corporation discontinues the accrual of
interest and reverses any unpaid accrued amounts. If there is doubt as to
subsequent collectibility, cash interest payments are applied to reduce
principal. A loan is not restored to accruing status until the borrower has
brought the loan current and demonstrated the ability to make payments of
principal and interest, and doubt as to the collectibility of the loan is not
present. The Corporation may continue to accrue interest on loans past due 90
days or more which are well secured and in the process of collection.
Restructured loans are loans with original terms which have been modified as a
result of a change in the borrower's financial condition. Interest income on
restructured loans is accrued at the modified rates.
A commitment to extend credit is a binding agreement to make a loan to a
customer in the future if certain conditions are met and is subject to the same
risk, credit review and approval process as a loan. Many commitments expire
without being used and, therefore, do not represent future funding requirements.
<PAGE>F-9 33
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
RESERVE FOR LOAN LOSSES - The reserve for loan losses is maintained at a level
determined by management to be adequate to provide for probable losses inherent
in the loan portfolio, including commitments to extend credit. The reserve is
maintained through the provision for loan losses, which is a charge to
operations. When a loan, or a portion of a loan, is considered uncollectible,
the loss is charged to the reserve. Recoveries of previously charged off loans
are credited to the reserve. The potential for loss in the portfolio reflects
the risks and uncertainties inherent in the extension of credit.
The determination of the adequacy of the reserve is based upon management's
assessment of risk elements in the portfolio, factors affecting loan quality and
assumptions about the economic environment in which the Corporation operates.
The process includes identification and analysis of loss potential in various
portfolio segments utilizing a credit risk grading process and specific reviews
and evaluations of significant individual problem credits. In addition,
management reviews overall portfolio quality through an analysis of current
levels and trends in charge-off, delinquency and nonaccruing loan data, and a
review of forecasted economic conditions and the overall banking environment.
These reviews are of necessity dependent upon estimates, appraisals and
judgments, which may change quickly because of changing economic conditions, and
the Corporation's perception as to how these factors may affect the financial
condition of debtors.
PREMISES AND EQUIPMENT - Premises, leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization computed primarily
on the straight-line method. Depreciation of buildings and equipment is based
on the estimated useful lives of the assets. Amortization of leasehold
improvements is based on the term of the related lease or the estimated useful
lives of the improvements, whichever is shorter. Major renewals and betterments
are capitalized and recurring repairs and maintenance are charged to operations.
Gains or losses on dispositions of premises and equipment are included in income
as realized.
FORECLOSED PROPERTIES - Properties acquired through foreclosure or in settlement
of loans and in-substance foreclosures are classified as foreclosed properties
and are valued at the lower of the loan value or estimated fair value of the
property acquired less estimated selling costs. An in-substance foreclosure
occurs when a borrower has little or no equity in the collateral, repayment can
only be expected to come from the operation or sale of the collateral and the
borrower has effectively abandoned the collateral or has doubtful ability to
rebuild equity in the collateral. At the time of foreclosure the excess, if
any, of the loan value over the estimated fair value of the property acquired
less estimated selling costs is charged to the reserve for loan losses.
Additional decreases in the carrying values of foreclosed properties or changes
in estimated selling costs, subsequent to the time of foreclosure, are
recognized through a provision charged to operations. A valuation reserve is
maintained for estimated selling costs and to record the excess of the carrying
values over the fair market values of properties if changes in the carrying
values are judged to be temporary.
The fair value of foreclosed properties is determined based upon appraised
value, which primarily utilizes the selling price of properties for similar
purposes, or discounted cash flow analyses of the properties' operations.
GOODWILL - The excess cost over the fair value of net assets acquired from
acquisitions accounted for as purchases is included in other assets and
amortized on a straight-line basis over periods of up to 25 years.
<PAGE>F-10 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENSION AND OTHER EMPLOYEE BENEFIT PLANS - The Corporation maintains a
noncontributory defined benefit pension plan, which covers substantially all
full-time employees. Pension expense is based upon an actuarial computation of
current and future benefits for employees. The pension plan is funded annually
in an amount consistent with the funding requirements of federal law and
regulations.
The Corporation adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", effective January 1, 1993. The Corporation
sponsors postretirement health care and life insurance benefit plans that
provide health care and life insurance benefits for retired employees that have
met certain age and service requirements. Postretirement health care and life
insurance benefits expense is based upon an actuarial computation of current and
future benefits for employees and retirees. See "Note 11 - Pension and Other
Employee Benefit Plans".
The Corporation also adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits", during the fourth quarter of 1993, retroactive to
January 1, 1993. The Corporation provides disability and workers' compensation
related benefits to former or inactive employees after employment but before
retirement and had also provided supplemental severance benefits to certain
former employees. Postemployment benefits expense is determined based upon
various criteria depending on the type of benefit. See "Note 11 - Pension and
Other Employee Benefit Plans".
INCOME TAXES - The Corporation adopted FAS No. 109, "Accounting for Income
Taxes", prospectively, effective January 1, 1993. Income tax expense is based
on estimated taxes payable or refundable on a tax return basis for the current
year and the changes in the amount of deferred tax assets and liabilities during
the year. Deferred tax assets and liabilities are established for temporary
differences between the accounting basis and the tax basis of the Corporation's
assets and liabilities at enacted tax rates expected to be in effect when the
amounts related to such temporary differences are realized or settled. Prior to
January 1, 1993, the Corporation recognized income taxes based on income
reported in the financial statements. See "Note 13 - Income Taxes".
PER COMMON SHARE CALCULATIONS - Income (loss) per common share is calculated by
dividing net income (loss) less preferred stock dividends by the weighted
average common shares outstanding for each period presented.
CASH FLOWS STATEMENT - For the purpose of reporting cash flows, the Corporation
has defined cash equivalents as those amounts included in the balance sheet
caption "Cash and due from banks".
FAIR VALUE OF FINANCIAL INSTRUMENTS - FAS No. 107, "Disclosures about Fair Value
of Financial Instruments", requires the disclosure of the fair value of
financial instruments. A financial instrument is defined as cash, evidence of
an ownership interest in an entity, or a contract that conveys or imposes the
contractual right or obligation to either receive or deliver cash or another
financial instrument. Examples of financial instruments included in the
Corporation's balance sheet are cash, federal funds sold or purchased, debt and
equity securities, loans, demand, savings and other interest-bearing deposits,
notes and debentures and foreign exchange contracts. Examples of financial
instruments which are not included in the Corporation's balance sheet are
commitments to extend credit, standby letters of credit, loans sold with
recourse and interest rate swap, cap and option agreements.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.
<PAGE>F-11 35
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
The statement requires the fair value of deposit liabilities with no stated
maturity, such as demand deposits, NOW and money market accounts, to equal the
carrying value of these financial instruments and does not allow for the
recognition of the inherent value of core deposit relationships, when
determining fair value. While the statement does not require disclosure of the
fair value of nonfinancial instruments, such as the Corporation's premises and
equipment, its banking and trust franchises and its core deposit relationships,
the Corporation believes these nonfinancial instruments have significant fair
value.
The Corporation has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair values
were based on the quoted market price of a financial instrument with similar
characteristics, the present value of expected future cash flows or other
valuation techniques. Each of these alternative valuation techniques utilize
assumptions which are highly subjective and judgmental in nature. Subjective
factors include, among other things, estimates of cash flows, the timing of cash
flows, risk and credit quality characteristics and interest rates. Accordingly,
the results may not be precise and modifying the assumptions may significantly
affect the values derived. In addition, fair values established utilizing
alternative valuation techniques may or may not be substantiated by comparison
with independent markets. Further, fair values may or may not be realized if a
significant portion of the financial instruments were sold in a bulk transaction
or a forced liquidation. Therefore, any aggregate unrealized gains or losses
should not be interpreted as a forecast of future earnings or cash flows.
Furthermore, the fair values disclosed should not be interpreted as the
aggregate current value of the Corporation. The fair value of financial
instruments is disclosed in the related notes to the consolidated financial
statements except for time deposits, which is disclosed below.
The methodology and assumptions utilized to estimate the fair value of the
Corporation's financial instruments, not previously discussed in the policy
statements above, are described below.
Financial instruments with fair value approximate to carrying value - The
carrying value of cash and due from banks, interest-bearing deposits in other
banks, federal funds sold and securities purchased under agreements to resell,
residential mortgages held for sale, demand deposits, savings, NOW and money
market deposits, foreign time deposits, other borrowings and accrued interest
income and expense approximates fair value due to the short-term nature of these
financial instruments.
Loans - The fair value of loans was estimated for groups of similar loans based
on the type of loan, interest rate characteristics, credit risk and maturity.
The fair value of performing fixed-rate commercial and commercial real estate
loans was estimated by discounting expected future cash flows utilizing
risk-free rates of return, adjusted for credit risk and servicing costs. The
carrying value of performing variable-rate commercial and commercial real estate
loans was estimated to approximate fair value due to the short-term and frequent
repricing characteristics of these loans. Prepayments were not anticipated for
either fixed-rate or variable-rate commercial and commercial real estate loans.
The fair value of performing residential mortgage, home equity and installment
loans was estimated utilizing quoted market values for securities backed by
similar loans. The fair value of nonaccruing loans was estimated by discounting
expected future cash flows utilizing risk-free rates of returns, adjusted for
credit risk and servicing costs commensurate with a portfolio of nonaccruing
loans.
<PAGE>F-12 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposits - The fair value of time deposits with fixed maturities was estimated
by discounting expected future cash flows utilizing interest rates currently
being offered on deposits with similar characteristics and maturities. The fair
value of these deposits was approximately $3.4 billion and $4.3 billion at
December 31, 1993 and 1992, respectively.
Notes and debentures - The fair value of notes and debentures was estimated
based on quoted market prices.
Off-balance sheet financial instruments - The fair value of interest rate swap
agreements was based on the amount the Corporation would receive or pay to
terminate the agreements as of the reporting date based on the terms of the
agreements, the creditworthiness of the counterparties and interest rates. The
fair value of commitments to extend credit and standby letters of credit was
determined based on the discounted value of fees currently charged for similar
agreements. The fair value of other off-balance sheet financial instruments,
such as interest rate cap and option agreements, was based on quoted market
prices.
NOTE 2 - ACQUISITIONS
The Corporation announced during 1993 the signing of definitive agreements to
acquire three banking organizations: New Dartmouth Bank of Manchester, New
Hampshire, with assets of $1.7 billion at year end, was announced on March 24,
1993; Peoples Bancorp of Worcester, Inc. of Worcester, Massachusetts, with
assets of $891.1 million at year end, was announced on August 26, 1993; and
Gateway Financial Corporation of Norwalk, Connecticut, with assets of $1.3
billion at year end, was announced on November 5, 1993. The transactions will
be accounted for as poolings of interests and are subject to approvals by the
shareholders of the respective banks and federal and state regulatory agencies.
On November 15, 1993, the Federal Reserve Board issued an order not approving
the Corporation's application to acquire New Dartmouth Bank. The Federal
Reserve Board cited a then-pending investigation of possible discriminatory
lending at Shawmut Mortgage Company, the Corporation's mortgage banking
subsidiary, by the United States Department of Justice (DOJ) and the Federal
Trade Commission (FTC). The Federal Reserve Board further stated that in order
to obtain approval, the Corporation would need to submit evidence of compliance
with fair lending laws and accurate reporting pursuant to the Home Mortgage
Disclosure Act.
As discussed further in "Note 15 - Litigation", Shawmut Mortgage Company entered
into a consent decree with the DOJ and FTC regarding past lending practices and
established a $960 thousand monetary fund to compensate minority loan applicants
who were denied mortgages between January 1990 and October 1992 but whose
applications would be approved under the Corporation's more recent flexible
underwriting criteria. The Federal Reserve Board has granted the Corporation an
extension of time until March 1, 1994 within which to resubmit a petition
requesting reconsideration of the Federal Reserve Board's November 15, 1993
decision. The amended New Dartmouth Bank merger agreement, dated December 20,
1993, provides for the establishment of an escrow fund which would be paid to
New Dartmouth Bank in the event that the transaction is not consummated by June
30, 1994 and New Dartmouth Bank is not in breach of certain provisions of the
agreement. Required deposits to the escrow fund will equal $10 million by May
1, 1994. The Corporation anticipates that the New Dartmouth Bank acquisition and
the other transactions will be completed during 1994.
<PAGE>F-13 37
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
NOTE 3 - SECURITIES
A summary of the amortized cost and fair value of securities classified as
available for sale at December 31, 1993 is as follows:
<CAPTION>
Amortized Unrealized Unrealized Fair
(in thousands) cost gains losses value
U.S. Government and agency securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,554,048 $ 1,671 $ 3,832 $ 1,551,887
Mortgage backed 332,566 21,186 774 352,978
State and municipal obligations 142 16 4 154
Equity securities 214,558 2,486 4,426 212,618
Corporate mortgage backed and
other securities 480,176 730 2,161 478,745
Total $ 2,581,490 $ 26,089 $ 11,197 $ 2,596,382
</TABLE>
The net unrealized gain on securities classified as available for sale at
December 31, 1993 of $9.7 million, which is net of income taxes of $5.2 million,
is reported as a separate component of shareholders' equity.
U.S. Treasury securities with an aggregate carrying amount of $786.0 million,
included in the table above, were subject to combination options at December 31,
1993, which limited the risk of changes in the market value of these securities.
U.S. Treasury securities with a carrying amount of $311.0 million were put to
the counterparty on January 5, 1994 upon expiration of the option, resulting in
no realized gain or loss. The combination options on the remainder of the
securities expired on January 6, 1994, unexercised by either party.
<TABLE>
A summary of the carrying amount and fair value of securities reported at the
lower of aggregate cost or fair value at December 31, 1992 is as follows:
<CAPTION>
Carrying Unrealized Unrealized Fair
(in thousands) amount gains losses value
U.S. Government and agency securities
<S> <C> <C> <C> <C>
Mortgage backed $ 1,974,223 $ 69,071 $ 738 $ 2,042,556
U.S. Treasury 931,391 9,464 9,749 931,106
State and municipal obligations 4,088 403 3,685
Equity securities 192,891 192,891
Corporate mortgage backed and
other securities 258,918 8,353 475 266,796
Total $ 3,361,511 $ 86,888 $ 11,365 $ 3,437,034
Unrealized depreciation on equity securities of $23.7 million at December 31,
1992 is reported as a reduction of shareholders' equity.
</TABLE>
<PAGE>F-14 38
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities classified as held to maturity
at December 31, 1993 and 1992 are summarized as follows:
<CAPTION>
Amortized Unrealized Unrealized Fair
(in thousands) cost gains losses value
December 31, 1993
U.S. Government and agency securities
<S> <C> <C> <C> <C>
Mortgage backed $ 3,155,070 $ 61,260 $ 486 $ 3,215,844
U.S. Treasury 1,546,569 1,978 6,970 1,541,577
Asset backed and other securities 1,692,562 25,620 4,658 1,713,524
Total $ 6,394,201 $ 88,858 $ 12,114 $ 6,470,945
Amortized Unrealized Unrealized Fair
(in thousands) cost gains losses value
December 31, 1992
U.S. Government and agency securities
<S> <C> <C> <C> <C>
Mortgage backed $ 1,799,703 $ 7,179 $ 285 $ 1,806,597
Asset backed and other securities 916,623 5,842 7,041 915,424
Total $ 2,716,326 $ 13,021 $ 7,326 $ 2,722,021
</TABLE>
Securities with a carrying amount of $6.3 billion were pledged to secure public
deposits, borrowings and for other purposes required by law at December 31,
1993.
Proceeds from sales of debt securities during 1993, 1992 and 1991 totaled
approximately $4.4 billion, $4.5 billion and $2.6 billion, respectively, and
resulted in gains of $11.2 million, $85.7 million and $86.8 million.
<TABLE>
The amortized cost and fair value of securities at December 31, 1993, by
maturity date, are summarized below. Mortgage backed securities are included in
the table based upon contractual maturity.
<CAPTION>
Available for sale Held to maturity
Amortized Fair Amortized Fair
(in thousands) cost value cost value
<S> <C> <C> <C> <C>
Due in one year or less $ 65,400 $ 66,803 $ 2,850 $ 2,864
Due after one year through five years 868,218 868,794 2,175,050 2,176,311
Due after five years through ten years 667,006 663,066 3,399,682 3,470,005
Due after ten years 766,308 785,101 816,619 821,765
2,366,932 2,383,764 6,394,201 6,470,945
Equity securities 214,558 212,618
Total $ 2,581,490 $ 2,596,382 $ 6,394,201 $ 6,470,945
<PAGE>F-15 39
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 4 - LOANS AND RESERVE FOR LOAN LOSSES
The components of the Corporation's loan portfolio at December 31, 1993 and
1992, net of unearned income of $5.4 million and $12.1 million, respectively,
are summarized below:
<CAPTION>
(in thousands) 1993 1992
<S> <C> <C>
Commercial and industrial $ 6,321,289 $ 5,822,389
Owner-occupied commercial real estate 1,388,065 1,601,652
Real estate investor/developer
Commercial mortgage 1,225,050 1,390,404
Construction and other 152,849 346,185
Total investor/developer 1,377,899 1,736,589
Consumer
Residential mortgage 4,036,791 3,886,946
Home equity 1,387,593 1,199,016
Installment and other 872,813 653,207
Total consumer 6,297,197 5,739,169
Total 15,384,450 14,899,799
Less reserve for loan losses 633,000 863,000
Total $ 14,751,450 $ 14,036,799
</TABLE>
The fair value of the Corporation's loan portfolio was approximately $15.4
billion and $14.7 billion at December 31, 1993 and 1992, respectively.
Loans outstanding to directors, executive officers, principal holders of equity
securities or to any of their associates totaled $22.2 million at December 31,
1993 and $17.6 million at December 31, 1992. A total of $48.2 million in loans
were made or added, while a total of $43.6 million were repaid or deducted
during 1993. Changes in the composition of the board of directors or the group
comprising executive officers result in additions to or deductions from loans
outstanding to directors, executive officers or principal holders of equity
securities.
<PAGE>F-16 40
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The details of the Corporation's nonaccruing loans, restructured loans and
accruing loans past due 90 days or more at December 31, 1993 and 1992 are
summarized below:
<CAPTION>
(in thousands) 1993 1992
<S> <C> <C>
Commercial and industrial $ 72,632 $ 152,802
Owner-occupied commercial real estate 75,561 140,615
Real estate investor/developer
Commercial mortgage 81,881 164,113
Construction and other 23,254 68,990
Total investor/developer 105,135 233,103
Consumer
Residential mortgage 46,459 72,975
Home equity 5,073 6,652
Installment and other 4,636 11,804
Total consumer 56,168 91,431
Total nonaccruing loans $ 309,496 $ 617,951
Restructured loans $ 66,188 $ 165,021
Accruing loans past due 90 days or more $ 33,493 $ 42,615
</TABLE>
Interest income related to nonaccruing and restructured loans would have been
approximately $42.8 million in 1993 and $72.1 million in 1992 had these loans
been current and the terms of the loans had not been modified. Interest income
recorded on these loans totaled approximately $9.6 million in 1993 and $25.1
million in 1992. Interest income received on these loans and applied as a
reduction of principal totaled approximately $14.4 million and $31.3 million in
1993 and 1992, respectively. The yield on the portfolio of restructured loans
was 7.00 percent in 1993 and 7.85 percent in 1992.
<TABLE>
Changes affecting the reserve for loan losses for the years ended December 31,
1993, 1992 and 1991, respectively, are summarized below:
<CAPTION>
(in thousands) 1993 1992 1991
<S> <C> <C> <C>
Balance at beginning of year $ 863,000 $ 1,000,000 $ 941,296
Provision charged to operations 29,186 189,515 466,440
Loans charged off (309,655) (371,817) (447,509)
Recoveries on loans charged off 50,469 45,302 39,773
Balance at end of year $ 633,000 $ 863,000 $ 1,000,000
</TABLE>
The Financial Accounting Standards Board issued FAS No. 114, "Accounting By
Creditors for Impaired Loans", in May 1993. The new accounting standard will
require that impaired loans, which are defined as loans where it is probable
that a creditor will not be able to collect both the contractual interest and
principal payments, be measured at the present value of expected future cash
flows discounted at the loan's effective rate when assessing the need for a loss
accrual. The new accounting standard is effective for the Corporation's
financial statements beginning January 1, 1995. The effect on the Corporation
of adopting this new accounting standard is currently being evaluated.
<PAGE>F-17 41
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 1993 and 1992 are
summarized below:
<CAPTION>
Estimated
(in thousands) useful life 1993 1992
<S> <C> <C>
Land $ 23,558 $ 25,035
Buildings 10 to 40 years 176,885 179,569
Leasehold improvements 5 to 10 years 137,598 146,552
Equipment 4 to 15 years 378,133 392,459
Total 716,174 743,615
Less accumulated depreciation and amortization 409,141 407,079
Total $ 307,033 $ 336,536
</TABLE>
Depreciation and amortization expense of $48.6 million in 1993, $51.5 million in
1992 and $48.1 million in 1991 is included in occupancy expense or equipment
expense, depending upon the nature of the asset.
The Corporation occupies certain other premises and rents equipment, primarily
data processing equipment, under leases that are accounted for as operating
leases. These leases have expiration dates through 2023. Operating lease
rentals aggregated $47.6 million in 1993, $52.1 million in 1992 and $54.8
million in 1991. Such amounts are recorded net of sublease income totaling
$1.5 million in 1993 and $1.2 million in 1992 and 1991.
The minimum rental commitments of the Corporation at December 31, 1993 under the
terms of operating leases in excess of one year were as follows: $35.3 million
in 1994; $31.0 million in 1995; $25.0 million in 1996; $19.2 million in 1997;
$14.2 million in 1998; and $39.8 million after 1998.
NOTE 6 - FORECLOSED PROPERTIES
Foreclosed properties of $48.0 million and $244.4 million are stated net of
reserves of $6.6 million and $34.5 million at December 31, 1993 and 1992,
respectively. Provisions charged to operations for changes in the carrying
value of foreclosed properties amounted to $68.1 million, $134.2 million and
$77.1 million in 1993, 1992 and 1991, respectively.
<TABLE>
NOTE 7 - OTHER ASSETS AND ACCRUED TAXES AND OTHER LIABILITIES
The components of other assets at December 31, 1993 and 1992 are presented
below:
<CAPTION>
(in thousands) 1993 1992
<S> <C> <C>
Receivable for securities sold $ 215,564 $ 1,028,434
Net deferred income taxes 202,321 135,411
Accrued interest income 154,674 143,465
Prepaid pension expense 129,493 126,218
Goodwill 105,104 111,188
Other 447,491 475,953
Total $ 1,254,647 $ 2,020,669
<PAGE>F-18 42
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred income taxes of $135.4 million at December 31, 1992 represent
amounts computed under the prior accounting standard for income taxes.
Effective January 1, 1993, net deferred income taxes computed under the new
accounting standard were $188.2 million.
<TABLE>
The components of accrued taxes and other liabilities at December 31, 1993 and
1992 are presented below:
<CAPTION>
(in thousands) 1993 1992
<S> <C> <C>
Payable for securities purchased $ 83 $ 1,102,027
Accrued interest expense 67,648 60,790
Accrued dividends payable 22,955 3,199
Accrued restructuring expenses 6,854
Accrued postemployment benefits expense 8,400
Accrued postretirement health care and life insurance benefits expense 6,214
Other 71,769 64,232
Total $ 183,923 $ 1,230,248
</TABLE>
<TABLE>
NOTE 8 - OTHER BORROWINGS
Other borrowings of the Corporation at December 31, 1993 and 1992 were as
follows:
<CAPTION>
(in thousands) 1993 1992
<S> <C> <C>
Federal funds purchased $ 1,709,315 $ 260,779
Securities sold under agreements to repurchase 5,742,087 4,319,919
Treasury tax and loan funds 599,962 271,458
Private placement notes 174,996 150,256
Federal Home Loan Bank of Boston borrowings 961,246 326,050
Total $ 9,187,606 $ 5,328,462
</TABLE>
The scheduled maturities of Federal Home Loan Bank of Boston borrowings are as
follows: $802.0 million due in 1994 with interest rates at 3.20 to 3.97
percent; and $159.2 million due in 1995 and thereafter with interest rates at
4.12 to 9.01 percent.
<TABLE>
Securities sold under agreements to repurchase, representing primarily U.S.
Government agency securities, at December 31, 1993 are detailed below by due
date:
<CAPTION>
Less than 30-90
(in thousands) Overnight 30 days days Total
Securities sold
<S> <C> <C> <C> <C>
Amortized cost $ 974,640 $ 4,725,415 $ 45,117 $ 5,745,172
Fair value 979,636 4,776,400 45,348 5,801,384
Repurchase borrowings 976,746 4,720,207 45,134 5,742,087
Average borrowing interest rate 2.37 % 3.10 % 3.12 % 2.98 %
<PAGE>F-19 43
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 9 - NOTES AND DEBENTURES
The Corporation's notes and debentures at December 31, 1993 and 1992 are
summarized below:
<CAPTION>
(in thousands) 1993 1992
<S> <C> <C>
8 7/8% notes due 1996, net of discount $ 149,769 $ 149,680
8 1/8% notes due 1997, net of discount 99,880 99,848
Floating rate subordinated notes due 1997 50,000 50,000
9.85% subordinated capital notes due 1999, net of discount 149,915 149,900
8 5/8% subordinated notes due 1999, net of discount 149,684 149,631
7.20% subordinated notes due 2003, net of discount 149,720
8 1/4% notes due 1993 114,680
11 3/4% notes due 1995 50,000
8 5/8% sinking fund debentures due 1999 17,961
Other 9,973 28,133
Total $ 758,941 $ 809,833
</TABLE>
The fair value of the Corporation's notes and debentures was approximately
$827.4 million and $828.4 million at December 31, 1993 and 1992, respectively.
Both the 8 7/8% and 8 1/8% notes are unsecured obligations with interest payable
semiannually. The floating rate subordinated notes bear interest at a rate of
3/8 percent above LIBOR (London Inter Bank Offered Rate). Both the 8 5/8% and
7.20% subordinated notes may not be redeemed prior to maturity. Interest is
payable semiannually. The 7.20% subordinated notes were issued during April
1993.
The agreement for the 9.85% subordinated capital notes provides that, on the
maturity date of June 1, 1999, the notes, at the Corporation's option, 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 Corporation redeemed the outstanding balances of the following notes with
balances aggregating $85.2 million during 1993: 11 3/4% notes due 1995; 8 5/8%
sinking fund debentures due 1999; 8 1/2% sinking fund debentures due 1996 and 8
1/8% promissory notes due 1998 included in other notes above. The redemption of
these notes did not have a material effect on the Corporation's results of
operations or financial condition. During 1993, the 8 1/4% notes matured and
were fully paid.
<PAGE>F-20 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of the Corporation's note and debenture agreements include provisions
that limit the ability of the Corporation to sell the capital stock of its
subsidiary banks or dispose of significant portions of assets of these
subsidiaries.
The Corporation has agreed to guarantee payment of certain notes and debentures
of Hartford National Corporation totaling $149.9 million and of Shawmut
Corporation totaling $249.6 million at December 31, 1993. See "Note 18 -
Summarized Financial Information of Certain Note and Debenture Issuers".
The scheduled maturities of the Corporation's notes and debentures for each of
the next five years are as follows: $.4 million in 1994; $.4 million in 1995;
$150.2 million in 1996; $150.4 million in 1997; $.5 million in 1998; and $457.0
million after 1998.
NOTE 10 - SHAREHOLDERS' EQUITY
The payment of dividends is determined by the Board of Directors in light of the
earnings, capital levels, cash requirements and the financial condition of the
Corporation and its subsidiaries, applicable government regulations and policies
and other factors deemed relevant by the Board of Directors, including the
amount of dividends payable to the Corporation by its subsidiary banks. Various
federal laws, regulations and policies limit the ability of the Corporation's
subsidiary banks to pay dividends. See "Note 16 - Regulatory Matters".
Shawmut National Corporation's Board of Directors is authorized to issue up to
10,000,000 shares of preferred stock without par value in series and to
determine the designation, dividend rates, redemption provisions, liquidation
preferences, sinking fund provisions and all other rights of each series.
Shawmut National Corporation had outstanding at December 31, 1993 a series of
575,000 shares of 9.30% Cumulative Preferred Stock with a stated value of $250
per share represented by Depositary Shares and a series of 700,000 shares of
Preferred Stock with Cumulative and Adjustable Dividends with a stated value
of $50 per share. Both series of preferred stock rank senior to the
Corporation's common stock as to dividends and liquidation preference.
The Depositary Shares represent a one-tenth interest in a share of 9.30%
Cumulative Preferred Stock and are not subject to any mandatory redemption or
sinking fund provisions. The 9.30% Cumulative Preferred Stock will be
redeemable on at least 30 but not more than 60 days notice, at the option of the
Corporation, as a whole or in part, at any time on and after October 15, 1997 at
a redemption price equal to $250 per share plus dividends accrued and
accumulated but unpaid to the redemption date.
<PAGE>F-21 45
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
The dividend rate on the Preferred Stock with Cumulative and Adjustable
Dividends is established quarterly and is based on a rate that is 2.25
percent below the highest interest rate of selected short- and long-term U. S.
Treasury securities prevailing at the time the rate is set. The dividend rate
for any dividend period will in no event be less than 6.00 percent or greater
than 12.00 percent per annum. This series of preferred stock is redeemable, at
the Corporation's option, at $50.00 per share.
Dividends of $23.25 and $4.65 per share were declared on the 9.30% Cumulative
Preferred Stock during 1993 and 1992, respectively. Dividends of $3.00, $3.01
and $3.23 per share were declared during 1993, 1992 and 1991, respectively, on
the Preferred Stock with Cumulative and Adjustable Dividends. Dividends
declared per common share were $.50 during 1993. There were no dividends
declared on common shares during 1992 or 1991.
The Corporation's Board of Directors previously adopted a rights plan which
provides for the distribution of one right for each outstanding share of common
stock. Each right entitles common stockholders to buy one-one hundredth of a
newly issued share of Series A Junior Participating Preferred Stock of the
Corporation at an exercise price of $100 per share, subject to adjustment. The
rights, which will expire March 10, 1999, can be redeemed by the Corporation
under certain circumstances at one cent per right. The rights become
exercisable if certain events relating to the acquisition or proposed
acquisition of common shares of the Corporation occur. When exercisable, under
certain circumstances, each right will enable its holder to purchase, at the
right's then current exercise price, common shares of the Corporation (or, under
certain circumstances, a combination of cash, property, common shares or other
securities) having a value of twice the right's exercise price. In addition, if
thereafter the Corporation is involved in a merger or other business combination
transaction with another person in which its shares are changed or exchanged, or
if the Corporation sells more than 50 percent of its assets, cash flow, or
earning power to another person or persons, each right (with certain exceptions)
that has not previously been exercised will entitle its holder to purchase, at
the right's then current exercise price, common shares of such other person
having a value of twice the right's exercise price.
Common shares totaling 19,716,617 at December 31, 1993 were reserved for
issuance under the Dividend Reinvestment and Stock Purchase Plan and the
Corporation's Stock Option and Restricted Stock Award Plan. In addition,
approximately 25,438,198 common shares have been reserved for issuance relating
to the Corporation's pending acquisitions. See "Note 2 - Acquisitions".
In connection with the settlement of certain litigation, on January 18, 1994 the
Corporation issued warrants for the purchase of up to 1,329,115 shares of common
stock. The warrants have an exercise price of $22.11 per share, are listed on
the New York Stock Exchange, are freely tradable and are exercisable for a
period of one year, commencing January 18, 1995. See "Note 15 - Litigation".
<PAGE>F-22 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Pension and Thrift Plans - The Corporation has a noncontributory, qualified
defined benefit pension plan covering substantially all full-time employees
meeting certain requirements as to age and length of service. For those vested,
the plan provides a monthly benefit upon retirement based on compensation during
the five consecutive highest paid years of employment and years of credited
service. It is the Corporation's policy to fund annually an amount consistent
with the funding requirements of federal law and regulations and not to exceed
an amount which would be deductible for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. The
assets of the plan are primarily invested in listed stocks.
The Corporation also has supplemental retirement plans that cover certain
employees and pay benefits that supplement any benefits paid under the qualified
plan. Benefits under the supplemental plans are generally based on compensation
not includible in the calculation of benefits to be paid under the qualified
plan.
<TABLE>
The following table sets forth the funding status and the prepaid pension
expense of the Corporation's pension and supplemental benefit plans recognized
in the balance sheet at December 31, 1993 and 1992:
<CAPTION>
(in thousands) 1993 1992
Actuarial present value of benefit obligations
<S> <C> <C>
Vested benefit obligation $ (103,579) $ (73,514)
Accumulated benefit obligation $ (119,123) $ (88,148)
Projected benefit obligation for services rendered to date $ (167,908) $ (126,339)
Plan assets at fair market value 240,896 240,852
Plan assets in excess of projected benefit obligation 72,988 114,513
Unrecognized net actuarial (gain) loss 44,286 (2,417)
Unrecognized prior service cost 15,637 17,530
Unrecognized net asset (3,418) (3,408)
Prepaid pension expense $ 129,493 $ 126,218
<PAGE>F-23 47
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
The Corporation's net pension income was $.2 million in 1993 and $3.0 million in
1992 and 1991.
<TABLE>
The components of net pension income for the years ended December 31, 1993, 1992
and 1991 for all plans were as follows:
<CAPTION>
(in thousands) 1993 1992 1991
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 8,523 $ 8,230 $ 7,224
Interest cost on projected benefit obligation 10,869 8,654 7,110
Actual return on plan assets (22,557) (20,659) (18,614)
Net amortization and deferral of gains and losses 2,962 1,830 1,296
Settlement and curtailment gains, net (1,049)
Net pension income $ (203) $ (2,994) $ (2,984)
Significant rate assumptions as of December 31, 1993, 1992 and 1991, used in
determining 1993, 1992 and 1991 net pension income and related pension
obligations were as follows:
1993 1992 1991
Discount rate used in determining
<S> <C> <C> <C>
projected benefit obligation 7.5 % 8.5 % 8.5 %
Rate of increase in compensation levels 4.5 4.5 5.0
Long-term rate of return on plan assets 10.0 10.0 10.0
</TABLE>
The Corporation also sponsors defined contribution plans covering substantially
all employees. Contributions under such plans totaled $6.5 million in 1993,
$6.1 million in 1992 and $6.4 million in 1991.
Postretirement Health Care and Life Insurance Benefits - The Corporation
sponsors four postretirement benefit plans that provide health care and life
insurance benefits for retired employees that have met certain age and service
requirements. One plan provides medical benefits and the other three plans
provide life insurance benefits. The postretirement medical plan and one of the
life insurance plans are contributory with contributions adjusted annually to
reflect certain cost-sharing provisions of the plans. The remaining two
postretirement life insurance plans are noncontributory. It is the
Corporation's policy to fund the postretirement benefit plans as claims are
paid. Plan assets represent the cash surrender value of life insurance policies
related to one of the plans described above.
The Corporation adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", effective January 1, 1993. This new accounting
standard requires the expected cost of these postretirement health care and life
insurance benefits to be accrued and charged to operations during the years the
employees render the service. The Corporation is amortizing the transition
obligation of $94.8 million on a straight-line basis over 20 years. The
postretirement benefit expense for 1993 was $14.7 million. Previously, the
the Corporation's postretirement benefits were expensed as claims were paid
and totaled approximately $5.0 million for 1992 and $4.5 million for 1991.
<PAGE>F-24 48
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the funded status and the accrued postretirement
health care and life insurance benefits expense of the Corporation's
postretirement benefit plans recognized in the balance sheet at December 31,
1993:
<CAPTION>
(in thousands) 1993
Accumulated postretirement benefit obligation
<S> <C>
Retirees $ (63,340)
Fully eligible active plan participants (19,884)
Other active plan participants (16,461)
Total (99,685)
Plan assets at fair market value 2,292
Accumulated postretirement benefit obligation
in excess of plan assets (97,393)
Unrecognized net actuarial gain 1,117
Unrecognized transition obligation 90,062
Accrued postretirement health care and life insurance benefits expense $ (6,214)
Significant rate assumptions as of December 31, 1993 used in determining 1993
postretirement health care and life insurance benefits expense and related
obligation were as follows:
1993
Discount rate used in determining
accumulated postretirement benefit obligation 7.5 %
Rate of increase in compensation levels 4.5
Long-term rate of return on plan assets 5.0
Medical cost trend rate 12.0
Medicare benefits trend rate 10.5
</TABLE>
The assumptions for medical costs and Medicare benefits trend to 5.0 percent by
the year 2001 and remain constant thereafter. Increasing the assumed health
care cost trend rate by one percentage point would increase the accumulated
postretirement benefit obligation at December 31, 1993 by $5.6 million and
increase the aggregate of the service and interest cost components of net
periodic postretirement benefits expense for 1993 by $.8 million.
<TABLE>
The components of the annual postretirement health care and life insurance
benefits expense for the year ended December 31, 1993 are summarized below:
<CAPTION>
(in thousands) 1993
<S> <C>
Service cost for benefits earned during the period $ 2,290
Interest cost on projected benefit obligation 7,762
Actual return on plan assets (112)
Net amortization of the transition obligation 4,741
Postretirement health care and life insurance benefits expense $ 14,681
<PAGE>F-25 49
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
Postemployment Benefits - The Corporation provides disability and workers'
compensation related benefits to former or inactive employees after employment
but before retirement and had also provided supplemental severance benefits to
certain former employees. The Corporation adopted, in the fourth quarter of
1993 retroactive to January 1, 1993, FAS No. 112, "Employers' Accounting for
Postemployment Benefits". The new accounting standard requires that the cost of
these benefits be accrued and charged to operations if the obligation is
attributable to services already rendered, rights to such benefits accumulate or
vest, payment of the benefits is probable and the amount of the benefits can be
reasonably estimated. Previously, the Corporation's postemployment benefits
were expensed as payments were made. The Corporation recognized an after-tax
charge of $6.6 million recorded as a cumulative effect of a change in method of
accounting for 1993 relating to the adoption of this new accounting standard.
Stock Option and Restricted Stock Award Plan - The Corporation has a Stock
Option and Restricted Stock Award Plan (the Plan), which provides for the
granting of incentive and nonqualified stock options to certain employees for
the purchase of Shawmut National Corporation common stock at 100 percent of fair
market value at the date of grant. Options granted under the Plan are
exercisable after a minimum of one year but within ten years of the date of
grant. Also, options granted may be accompanied by stock appreciation rights
(SARs) or limited stock appreciation rights (LSRs), or both. SARs and LSRs
entitle the holder to receive payment equal to the increase in the market value
of the common stock from the date of grant to the date of exercise. LSRs may
be exercised only during the 60-day period following a change of control. SARs
and LSRs may be granted only in tandem with stock options and may be paid in
cash or common stock at the election of the employee.
The Plan also provides for the granting of restricted stock and performance
share units to certain key executives. A performance share unit represents an
interest in a restricted share of common stock and any dividends declared.
Grants of performance share units are determined using certain guidelines based
on salary and responsibility levels, as well as predetermined performance
criteria. A total of 7,600,000 shares of common stock have been reserved for
the Plan, including the performance share units. Charges for the Plan related
to restricted stock awards totaled $1.0 million in 1993 and $.8 million in 1992.
There were no charges associated with the Plan in 1991. A grant of 308,200
shares of performance share units occurred on October 28, 1993, for the
performance periods beginning January 1, 1994 through December 31, 1995.
Compensation expense will be recognized based on the fair value of the
performance share units over this period.
50
<PAGE>F-26
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions in the Corporation's stock options for the three year period ended
December 31, 1993 are summarized below:
<CAPTION>
Option
Number of price Total
shares per share (in thousands)
<S> <C> <C> <C>
Outstanding December 31, 1990 2,165,162 $ 6 - 31 $ 40,248
Granted in 1991 2,500 5 12
Cancelled in 1991 (281,609) 6 - 30 (4,410)
Exercised in 1991 (6,021) 6 (37)
Outstanding December 31, 1991 1,880,032 5 - 31 35,813
Granted in 1992 689,500 11 - 19 7,603
Cancelled in 1992 (383,285) 6 - 30 (7,659)
Exercised in 1992 (154,671) 6 - 11 (1,072)
Outstanding December 31, 1992 2,031,576 5 - 31 34,685
Granted in 1993 1,386,187 17 - 25 31,332
Cancelled in 1993 (264,534) 6 - 31 (6,528)
Exercised in 1993 (337,369) 6 - 23 (2,662)
Outstanding December 31, 1993 2,815,860 $ 5 - 30 $ 56,827
Options exercisable
at December 31, 1993 1,150,092 $ 5 - 30 $ 22,808
Shares available for future grants
at December 31, 1993 3,399,791
</TABLE>
At December 31, 1993, SARs had previously been issued in tandem with 605,000
outstanding stock options. Common stock issued relating to restricted stock
awards amounted to 48,000 shares in 1993 and 226,000 shares in 1992. There were
no restricted stock awards in 1991.
<TABLE>
NOTE 12 - OTHER NONINTEREST INCOME AND NONINTEREST EXPENSES
The components of other noninterest income for the years ended December 31,
1993, 1992 and 1991 were as follows:
<CAPTION>
(in thousands) 1993 1992 1991
<S> <C> <C> <C>
Loan servicing $ 10,914 $ 19,895 $ 32,941
Foreign exchange trading 2,948 9,288 5,586
Trading account profits 6,379 6,559 7,078
Residential mortgage sales 23,524 5,400 754
Loan securitizations and sales 22,335
Gain on sale of credit card portfolio and
merchant card business 71,471
Other 31,113 41,040 46,263
Total $ 74,878 $ 104,517 $ 164,093
<PAGE>F-27 51
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
The components of noninterest expenses for the years ended December 31, 1993,
1992 and 1991 were as follows:
<CAPTION>
(in thousands) 1993 1992 1991
<S> <C> <C> <C>
Compensation $ 376,801 $ 366,516 $ 364,260
Benefits 77,068 63,902 61,989
Total $ 453,869 $ 430,418 $ 426,249
Occupancy $ 93,519 $ 97,629 $ 94,169
Equipment 53,704 58,784 62,974
Total $ 147,223 $ 156,413 $ 157,143
Foreclosed properties
Provision $ 68,097 $ 134,153 $ 77,171
Expense 27,631 32,960 32,886
Total $ 95,728 $ 167,113 $ 110,057
Federal Deposit Insurance Corporation premiums $ 43,459 $ 36,789 $ 38,234
Communications 40,220 40,791 43,515
Restructuring charges 36,319
Advertising 20,560 13,160 10,156
Other 190,339 191,705 184,286
Total $ 330,897 $ 282,445 $ 276,191
</TABLE>
NOTE 13 - INCOME TAXES
The Corporation adopted FAS No. 109, "Accounting for Income Taxes" (FAS 109),
prospectively, effective January 1, 1993. The Corporation's deferred tax asset
(deferred tax assets less deferred tax liabilities) at December 31, 1992 was
$135.4 million. The Corporation's deferred tax asset represents future
deductible temporary differences attributable primarily to provisions for loan
losses in excess of the deductible amounts for tax purposes. The Corporation's
deferred federal tax asset recorded upon adoption of FAS 109 (prior to valuation
allowance) at January 1, 1993 was $268.2 million. The income tax benefits of
these deductible temporary differences recognized under FAS 109 were subjected
to an evaluation of whether it was more likely than not that the income tax
benefits will be realized and, as a result, a valuation allowance of $80.0
million was established, resulting in a net deferred tax asset of $188.2 million
at January 1, 1993. The level of the valuation allowance reflected
management's best judgment regarding the amounts and timing of future taxable
income and the estimated reversal pattern of these temporary differences.
Deferred state tax assets, net of the valuation allowance, were nil. The
cumulative effect of this accounting change was the recognition of a $52.8
million income tax benefit in the first quarter of 1993.
At December 31, 1993, the Corporation's deferred federal tax asset was $202.3
million. Based upon management's best judgment regarding the amounts and timing
of future taxable income and the estimated pattern of temporary differences, no
valuation allowance was recorded at year end.
<PAGE>F-28 52
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes at December 31, 1993 were as follows:
<CAPTION>
Deferred Deferred
tax tax
(in thousands) assets liabilities
<S> <C> <C>
Loan loss reserve $ 226,738
Writedowns for foreclosed properties 18,483
Employee benefits $ 38,136
Depreciation and leasing 24,919
Other, net 20,155
Total deferred income taxes $ 265,376 $ 63,055
The current and deferred components of income taxes (benefit) for the years
ended December 31, 1993, 1992 and 1991 were as follows:
<CAPTION>
(in thousands) 1993 1992 1991
Current
<S> <C> <C> <C>
Federal $ 5,175 $ (13,347) $ (15,679)
State and other 1,194 931 1,530
Total current income taxes 6,369 (12,416) (14,149)
Deferred income taxes (13,969) 33,101 15,679
Total income taxes (benefit) $ (7,600) $ 20,685 $ 1,530
The components of deferred income tax expense under the prior accounting
standard for income taxes for each of the two years in the period ended December
31, 1992 were as follows:
<CAPTION>
(in thousands) 1992 1991
<S> <C> <C>
Provision for loan losses $ 56,740 $ (20,255)
Provision for foreclosed properties (24,306) (13,433)
Direct leasing (6,415) (3,510)
Pension expense 972 (61)
Gain on assets securitized and sold 5,618 (5,301)
Operating loss generating no current tax benefit 66,319
Other, net 492 (8,080)
Total deferred income taxes $ 33,101 $ 15,679
<PAGE>F-29 53
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
A reconciliation of the difference between consolidated income tax expense
(benefit) and the amount computed by applying the federal statutory rate of 35
percent for the year ended December 31, 1993 and 34 percent for the years ended
December 31, 1992 and 1991 is presented below:
<CAPTION>
(in thousands) 1993 1992 1991
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate on income (loss) $ 82,933 $ 26,355 $ (57,499)
Tax-exempt securities and loan income,
net of interest disallowance (3,407) (3,957) (6,143)
Dividend received exclusion (3,615) (3,799) (4,526)
Effect of change in tax rates (7,888)
Reduction in valuation allowance (80,000)
State income tax expense, net of federal tax benefit 776 614 1,010
Operating loss generating no current tax benefit 66,319
Other items 3,601 1,472 2,369
Total income tax expense (benefit) $ (7,600) $ 20,685 $ 1,530
</TABLE>
Income tax expense associated with securities gains and losses, computed by
applying the federal statutory rate of 35 percent (34 percent in 1992 and 1991)
to securities transactions, was $2.0 million, $29.2 million and $26.6 million
for the years ended December 31, 1993, 1992 and 1991, respectively.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Corporation provides deposit and loan products and other financial services
to consumer and commercial customers located principally in New England. The
Corporation's loan portfolio at December 31, 1993 consisted of commercial and
industrial loans (41 percent), consumer loans (41 percent), real estate
investor/developer loans (9 percent) and owner-occupied commercial real estate
loans (9 percent). Securities, short-term investments and off-balance sheet
interest rate instruments, such as futures contracts and interest rate swaps,
option and cap agreements, are among the financial instruments used by the
Corporation in its balance sheet management activities.
Securities and short-term investment activities are conducted with a diverse
group of domestic and foreign governments, corporations and depository and other
financial institutions. The Corporation evaluates the counterparty's
creditworthiness and the need for collateral on a case by case basis.
The Corporation manages its loan portfolio to avoid concentration by industry or
loan size to minimize its credit exposure. Commercial loans may be
collateralized by the assets underlying the borrowers' business such as accounts
receivable, equipment, inventory and real property. Consumer loans such as
residential mortgage and installment loans are generally secured by the real or
personal property financed. Commercial real estate loans are generally secured
by the underlying real property and rental agreements.
<PAGE>F-30 54
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of certain financial instruments at December 31, 1993 and 1992 is
presented below:
<CAPTION>
(in thousands) 1993 1992
Financial instruments whose contract amounts
represent credit risk
<S> <C> <C>
Commitments to extend credit $ 7,706,278 $ 5,707,176
Standby letters of credit 1,364,778 789,083
Residential mortgage loans sold with recourse 167,559 251,072
Financial instruments whose contract amounts
do not represent credit risk
Commitments to purchase and sell foreign exchange 11,034,179 5,573,824
Notional balance of interest rate swap agreements 1,983,500 702,800
Notional balance of interest rate cap agreements
Written 2,446,907
Purchased 3,396,907 45,000
Notional balance of futures contracts 2,528,000
Notional balance of option contracts
Written 786,000 1,244,000
Purchased 786,000 1,244,000
</TABLE>
Commitments to extend credit at December 31, 1993 included commercial and
industrial lines of $6.5 billion, consumer equity credit lines of $1.1 billion
and commercial real estate lines of $170.6 million. The fair value of these
commitments at December 31, 1993 and 1992, representing the discounted value of
potential fee income, was approximately $25.4 million and $13.0 million,
respectively.
Standby letters of credit are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements
and are subject to the same risk, credit review and approval process as a loan.
Letters of credit are primarily used to enhance credit for public and private
borrowing arrangements and to guarantee a customer's financial performance. The
fair value of the Corporation's standby letters of credit, representing the
discounted value of potential fee income, was approximately $6.4 million and
$5.4 million at December 31, 1993 and 1992, respectively.
Residential mortgage loans sold with recourse represent loans sold to U.S.
Government agencies which allows the purchaser the option of requiring the
Corporation to reacquire a loan in the event of default by the borrower. The
option may extend for a period of five years or for the life of the loan. The
Corporation has determined that the liability under the terms of the option
agreements is not material. Residential mortgage loans are underwritten and
sold by the Corporation's mortgage banking subsidiary.
Foreign exchange contracts are entered into primarily for trading activities.
The risk associated with foreign exchange contracts arises from the
counterparties' failure to meet the terms of the contracts. An additional risk
is that the value of a foreign currency might change in relation to the U.S.
dollar. In the event of a default by a counterparty, the cost to the
Corporation, if any, would be the replacement cost of the contract at the
current market rate. Exposure to changes in market rate is substantially
lessened since the Corporation limits its risk by entering into offsetting
contracts. The Corporation's foreign exchange contracts are valued monthly
at current market value and changes in market value are included in other
noninterest income. The Corporation has accrued net unrealized losses of
approximately $4.9 million and $48.0 million in the balance sheet at December
31, 1993 and 1992, respectively, and estimates the liability to settle the
foreign exchange contracts would not exceed these amounts at these dates.
<PAGE>F-31 55
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
Interest rate swap agreements are used by the Corporation to manage its interest
rate risk. These agreements involve the exchange of fixed and variable rate
interest payments based upon a notional principal amount and maturity date.
Interest rate cap agreements are similar to interest rate swap agreements
except that interest payments are only made or received if current interest
rates rise above a predetermined rate. Included in both written and purchased
interest rate cap agreements are approximately $2.4 billion in notional
balances of agreements which consist of a simultaneous purchase and sale of a
cap. This combination of agreements are also known as interest rate
corridors. The risk associated with these agreements arises from the
counterparties' failure to meet the terms of agreements. Limits are set on
the exposure to any one counterparty. The Corporation estimated it would pay
approximately $21.5 million and $30.0 million at December 31, 1993 and 1992,
respectively, if it were to terminate the agreements at these dates. The
fair value of interest rate cap agreements at December 31, 1993 was
approximately $4.2 million, which represents the amount that the Corporation
would recognize as a loss if the agreements were terminated at that date.
Futures contracts are also used by the Corporation to manage interest rate
exposure. These instruments are exchange-traded contracts for the future
delivery of securities, other financial instruments or cash settlement at a
specified price or yield. The fair value of the futures contracts at
December 31, 1993 was approximately $.3 million, which represents the amount
that the Corporation would receive if the contracts were terminated at that
date.
The Corporation utilizes option contracts to limit its exposure to market
fluctuations on securities classified as available for sale. Options give the
holder the right to purchase or sell securities at a specified price at a future
date. The risk associated with options arises from the counterparties' failure
to meet the terms of the agreements. The fair value of the Corporation's option
contracts approximated the carrying amount, or the net unamortized premium, at
December 31, 1993 and 1992.
NOTE 15 - LITIGATION
The Corporation, certain of its officers and directors were named as defendants
in several complaints during 1990 and 1991, purportedly brought on behalf of
purchasers of the Corporation's common stock between December 8, 1988 and
January 24, 1991. Among other things, the complaint in the actions alleged
violations of federal securities laws and negligent misrepresentation based
upon certain allegedly false and misleading public statements relating to the
Corporation's financial position and omissions in the Corporation's public
reports.
The Corporation and the plaintiffs entered into a settlement which was approved
by the court on October 27, 1992. The settlement provides that, in full and
complete settlement of all claims that have been or could have been brought in
the class actions, the defendants will distribute to the members of the class
including all persons who purchased the Corporation's common stock during the
period December 8, 1988 to January 24, 1991, inclusive, warrants to purchase the
Corporation's common stock. On January 18, 1994 the Corporation issued warrants
for the purchase of up to 1,329,115 shares of common stock. The warrants have
an exercise price of $22.11 per share, are listed on the New York Stock
Exchange, are freely tradable and are exercisable for a period of one year,
commencing January 18, 1995.
<PAGE>F-32 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Defendants denied all allegations of wrongdoing contained in the pleadings in
these actions and agreed to settle these actions solely to avoid the time and
expense of contesting this burdensome litigation. The settlement did not have
a material effect on the Corporation's results of operations or financial
condition.
During 1993, Shawmut Mortgage Company, the Corporation's mortgage banking
subsidiary, was the subject of an investigation of possible discriminatory
lending by the United States Department of Justice (DOJ) and the Federal Trade
Commission (FTC). On December 13, 1993, without admitting any wrongdoing,
Shawmut Mortgage Company entered into a consent decree with the DOJ and FTC
regarding past lending practices. Pursuant to the consent decree, Shawmut
Mortgage Company established a $960 thousand monetary fund to compensate
minority loan applicants who were denied mortgages between January 1990 and
October 1992 but whose applications would be approved under the Corporation's
more recent flexible underwriting criteria. This settlement did not have a
material effect on the Corporation's results of operations or financial
condition.
The Corporation's Shawmut Bank Connecticut subsidiary, which served as indenture
trustee for certain healthcare receivable backed bonds issued by certain special
purpose subsidiaries of Towers Financial Corporation, and another defendant,
have been named in a lawsuit in federal court in Manhattan by purchasers of the
bonds. The suit seeks damages in an undetermined amount equal to the difference
between the current value of the bonds and their face amount of approximately
$200 million, plus interest, as well as punitive damages. The Corporation
believes its actions were reasonable and appropriate and were not the cause of
any loss by the bondholders, and is vigorously defending the action.
The Corporation is subject to various other pending and threatened lawsuits in
which claims for monetary damages are asserted. Management, after consultation
with legal counsel, does not anticipate that the ultimate liability, if any,
arising out of other pending and threatened lawsuits will have a material effect
on the Corporation's results of operations or financial condition.
<PAGE>F-33 57
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 16 - REGULATORY MATTERS
The Corporation is a bank holding company subject to supervision and regulation
by the Board of Governors of the Federal Reserve System (the Board) under the
Bank Holding Company Act of 1956. As a bank holding company, the Corporation's
activities and those of its banking and nonbanking subsidiaries are limited to
the business of banking and activities closely related or incidental to banking.
The Corporation's subsidiary banks, Shawmut Bank Connecticut, National
Association (Shawmut Bank Connecticut) and Shawmut Bank, National Association
(Shawmut Bank Massachusetts), are subject to supervision and examination by the
Office of the Comptroller of the Currency (OCC). The deposits of the
Corporation's subsidiary banks are insured by, and therefore the subsidiary
banks are subject to the regulations of, the Federal Deposit Insurance
Corporation (FDIC). The banks are also subject to requirements and restrictions
under federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be granted and
the interest that may be charged thereon, limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the
Corporation's subsidiary banks. In October 1993, the Federal Reserve Bank of
Boston (FRB) and the OCC removed certain regulatory agreements under which the
Corporation and its subsidiary banks had been operating. The regulatory
agreements focused on the need to improve asset quality and credit
administration policies, as well as prior approval for dividend payments.
The Board and the OCC have adopted minimum risk-based capital and leverage
guidelines for bank holding companies and national banks. The minimum Total
capital ratio requirement is 8.00 percent, of which one-half must be Tier 1
capital. The minimum Leverage ratio requires Tier 1 capital of at least 3.00
percent of average quarterly assets less goodwill and other intangibles. This
Leverage ratio is the minimum requirement for the most highly rated banking
organizations and other banking organizations are expected to maintain an
additional level of at least 100 to 200 basis points.
The Board, OCC and FDIC implemented regulations, pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), effective on December
19, 1992, concerning prompt supervisory and regulatory actions to be taken
against undercapitalized depository institutions. FDICIA establishes five
capital categories: "well-capitalized"; "adequately capitalized";
"undercapitalized"; "significantly undercapitalized"; and "critically
undercapitalized". Under these regulations, an institution will be deemed
"well-capitalized" if it has a Risk-based Total capital ratio of 10.00 percent
or greater, a Risk-based Tier 1 capital ratio of 6.00 percent or greater and a
Leverage ratio of 5.00 percent or greater. In addition, the institution cannot
be subject to an order, written agreement, capital directive or prompt
correction action directive.
The Tier 1 capital, Total capital and Leverage ratios for the Corporation at
December 31, 1993 were 8.15 percent, 12.32 percent and 6.34 percent,
respectively. The Tier 1 capital, Total capital and Leverage ratios for Shawmut
Bank Connecticut were 10.09 percent, 11.37 percent and 7.79 percent,
respectively, while these ratios for Shawmut Bank Massachusetts were 9.77
percent, 11.32 percent and 7.39 percent, respectively, at December 31, 1993.
The Corporation and its subsidiary banks at December 31, 1993 met the definition
for a "well-capitalized" institution.
<PAGE>F-34 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's subsidiary banks are required to maintain reserves against
certain deposit liabilities in either cash or balances on deposit with the
Federal Reserve System. The Corporation's subsidiary banks maintained combined
average reserves of approximately $561 million in 1993 with the FRB.
The Board issued proposed revisions to its capital adequacy guidelines in
February 1993 which proposes to limit the amount of deferred tax assets recorded
under FAS 109 that can be used to meet risk-based capital requirements. This
proposal would limit deferred tax assets to those assets which may be realized
from income taxes paid in prior carryback years, the reversal of future taxable
temporary differences and the lesser of: (1) the amount of deferred tax assets
expected to be realized within one year of the quarter-end date based on future
taxable income (exclusive of tax carryforwards and reversals of existing
temporary differences) for that year, or (2) ten percent of Tier 1 capital. The
Corporation believes the deferred tax asset at December 31, 1993 would be
allowable in computing regulatory risk-based capital because the deferred tax
asset would not exceed the amount of income taxes previously paid in prior
carryback years. The Corporation cannot determine whether, or in what form,
this proposal may be enacted.
Principal sources of revenues for the Corporation are dividends received
directly and indirectly from its banks and other subsidiaries and interest
earned on short-term investments and advances to subsidiaries. Federal law
imposes limitations on the payment of dividends by the subsidiaries of the
Corporation that are national banks. Two different calculations are performed
to measure the amount of dividends that may be paid: a recent earnings test and
an undivided profits test. Under the recent earnings test, a dividend may not
be paid if the total of all dividends declared by a national bank in any
calendar year is in excess of the current year's net profits combined with the
retained net profits of the two preceding years, unless the bank obtains the
approval of the OCC. Under the undivided profits test, a dividend may not be
paid in excess of a bank's undivided profits then on hand, after deducting bad
debts in excess of the reserve for loan losses. Under the recent earnings test
at January 1, 1994, which is the more restrictive of the two tests, Shawmut Bank
Connecticut could pay up to $113.8 million in dividends to its parent holding
company without prior approval. Shawmut Bank Massachusetts, under the recent
earnings test at January 1, 1994, could pay up to $210.7 million in dividends
to its parent holding company without prior approval. Shawmut Bank Connecticut
and Shawmut Bank Massachusetts had undivided profits of $262.9 million and
$469.6 million, respectively, at December 31, 1993.
The Corporation's subsidiary banks are also restricted under federal law with
respect to the transfer of funds from the subsidiary banks to the Corporation
and its nonbanking subsidiaries. Such transfers are limited to certain
percentages of the subsidiary bank's capital and surplus. Loans and extensions
of credit must be secured in specified amounts. The Corporation had no
borrowings outstanding from either of its subsidiary banks at December 31, 1993.
<PAGE>F-35 59
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 17 - PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information of Shawmut National Corporation (parent
company only) is presented below:
CONDENSED BALANCE SHEET
<CAPTION>
December 31, (in thousands) 1993 1992
ASSETS
<S> <C> <C>
Cash and short-term investments with subsidiary banks $ 293,984 $ 339,126
Equity securities 48,700
Investments in and advances to consolidated subsidiaries(equity basis) 2,083,030 1,607,248
Accrued income and other assets 24,985 7,262
Total $ 2,450,699 $ 1,953,636
LIABILITIES AND SHAREHOLDERS' EQUITY
Private placement notes $ 174,996 $ 150,256
Borrowings from subsidiary 143,917 153,000
Other liabilities 29,092 18,348
Subordinated notes 299,404 149,631
Shareholders' equity 1,803,290 1,482,401
Total $ 2,450,699 $ 1,953,636
CONDENSED STATEMENT OF INCOME
Year ended December 31, (in thousands) 1993 1992 1991
REVENUES
<S> <C> <C> <C>
Dividend income from subsidiary $ 81,900
Interest and dividend income
Advances to subsidiaries 4,578 $ 2,883 $ 4,918
Short-term investments 8,896 8,146 5,851
Equity securities 2,307
Other 7,973 8,588 10,783
Total 105,654 19,617 21,552
EXPENSES
Interest 30,279 10,563 14,906
Other 9,293 12,420 16,491
Total 39,572 22,983 31,397
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT), EQUITY
IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES,
EXTRAORDINARY CREDIT AND ACCOUNTING CHANGES 66,082 (3,366) (9,845)
Income taxes (benefit) (7,744) (864) 584
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME(LOSS) OF SUBSIDIARIES, EXTRAORDINARY CREDIT
AND ACCOUNTING CHANGES 73,826 (2,502) (10,429)
Equity in undistributed income (loss) of subsidiaries
before extraordinary credit and accounting changes 170,726 59,333 (160,215)
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT
AND ACCOUNTING CHANGES 244,552 56,831 (170,644)
Extraordinary credit 18,378
Cumulative effect of changes
in methods of accounting 46,200
NET INCOME (LOSS) $ 290,752 $ 75,209 $ (170,644)
<PAGE>F-36 60
</TABLE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
Year ended December 31, (in thousands) 1993 1992 1991
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 290,752 $ 75,209 $ (170,644)
Equity in undistributed (income) loss of subsidiaries (170,726) (59,333) 160,215
Extraordinary credit on income (loss) of subsidiaries (18,288)
Cumulative effect of accounting changes of subsidiaries (40,431)
Other 4,573 7,620 9,720
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 84,168 5,208 (709)
FINANCING ACTIVITIES
Increase (decrease) in borrowings (15,657) 39,320 1,696
Proceeds from issuance of subordinated notes 149,700 149,631
Proceeds from issuances of common and preferred stock 61,955 356,599 847
Purchases of common stock (2,509) (10)
Cash dividends paid (42,918) (2,131) (1,715)
CASH PROVIDED BY FINANCING ACTIVITIES 150,571 543,409 828
INVESTING ACTIVITIES
Increase in equity securities (48,700)
Decrease (increase) in investments in and
advances to consolidated subsidiaries (231,181) (320,100) 11,130
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (279,881) (320,100) 11,130
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (45,142) 228,517 11,249
Cash and short-term investments at beginning of year 339,126 110,609 99,360
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR $ 293,984 $ 339,126 $ 110,609
</TABLE>
<PAGE>F-37 61
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NOTE 18 - SUMMARIZED FINANCIAL INFORMATION OF CERTAIN NOTE AND DEBENTURE ISSUERS
The Corporation has guaranteed payment of certain notes and debentures of
Hartford National Corporation (HNC) and Shawmut Corporation (SC), whose
subsidiaries include Shawmut Bank Connecticut and Shawmut Bank Massachusetts.
See "Note 16 - Regulatory Matters" about the ability of subsidiary banks to pay
dividends. The summarized financial information of Hartford National
Corporation and Shawmut Corporation (parent companies only) is presented below.
CONDENSED BALANCE SHEET
<CAPTION>
HNC SC
December 31, (in thousands) 1993 1992 1993 1992
ASSETS
Investments in and advances to consolidated subsidiaries
(equity basis)
<S> <C> <C> <C> <C>
Bank subsidiaries $ 1,142,148 $ 908,420 $ 1,013,707 $ 892,549
Nonbank subsidiaries 221,317 264,464 34,891 33,003
Equity securities and other investments 146,070 167,276 19,071 28,226
Advances to affiliates 143,702 162,350
Cash, accrued income and other assets 13,875 9,205 5,060 3,530
Total $ 1,523,410 $ 1,349,365 $ 1,216,431 $ 1,119,658
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from affiliate $ 239,581 $ 94,500
Other liabilities 19,253 12,049 $ 13,945 $ 15,452
Notes and debentures 149,915 324,780 299,649 324,489
Shareholders' equity 1,114,661 918,036 902,837 779,717
Total $ 1,523,410 $ 1,349,365 $ 1,216,431 $ 1,119,658
<PAGE>F-38 62
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
CONDENSED STATEMENT OF INCOME
<CAPTION>
HNC SC
Year ended December 31,(in thousands) 1993 1992 1991 1993 1992 1991
REVENUES
Income from bank subsidiaries
<S> <C> <C> <C> <C> <C> <C>
Dividend $ 3,129 $ 78,771
Interest 301 $ 1,778 $ 3,394 3,345 $ 4,219 $ 6,029
Interest and dividend income from
nonbank subsidiaries 18,054 9,071 484
Other 12,795 11,107 15,517 (365) 8,341 6,227
Total 34,279 21,956 19,395 81,751 12,560 12,256
EXPENSES
Interest 29,659 33,732 35,864 25,142 27,028 28,156
Other 1,018 653 1,828 210 621 843
Total 30,677 34,385 37,692 25,352 27,649 28,999
INCOME (LOSS) BEFORE INCOME
TAX BENEFIT, EQUITY IN
UNDISTRIBUTED INCOME (LOSS)
OF SUBSIDIARIES, EXTRAORDINARY
CREDIT AND ACCOUNTING CHANGES 3,602 (12,429) (18,297) 56,399 (15,089) (16,743)
Income tax benefit (156) (10,132) (11,123) (9,833) (6,078) (1,071)
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME (LOSS)
OF SUBSIDIARIES, EXTRAORDINARY
CREDIT AND ACCOUNTING CHANGES 3,758 (2,297) (7,174) 66,232 (9,011) (15,672)
Equity in undistributed income (loss) of
subsidiaries before extraordinary credit
and accounting changes
Bank subsidiaries 83,240 (9,060) (127,909) 106,964 78,608 (26,071)
Nonbank subsidiaries 581 5,148 14,431 1,624 635 2,417
INCOME (LOSS) BEFORE
EXTRAORDINARY CREDIT AND
ACCOUNTING CHANGES 87,579 (6,209) (120,652) 174,820 70,232 (39,326)
Extraordinary credit 2,479 15,869
Cumulative effect of changes
in methods of accounting 32,874 7,543
NET INCOME (LOSS) $ 120,453 $ (3,730)$ (120,652)$ 182,363 $ 86,101 $ (39,326)
<PAGE>F-39 63
</TABLE>
FINANCIAL GLOSSARY
Basis Point
A basis point is equal to one one-hundredth of one percent (25
basis points equal 0.25 percent and 100 basis points equal one
percent).
Book value per Common Share
The amount of the Corporation's net worth represented by each
share of outstanding common stock. It is obtained by dividing
common shareholders' equity by the number of shares of common
stock outstanding.
Core Deposits
The deposit base represented by ongoing account relationships
maintained by consumer, commercial, corporate, and institutional
customers with the Corporation's banks. Demand deposits,
savings, money market, NOW and domestic time accounts comprise
Core Deposits.
Efficiency Ratio
The efficiency ratio is a measure of relative overhead expense
levels and is computed by dividing total noninterest expenses,
excluding the foreclosed properties provision, by the sum of
tax-equivalent net interest income plus noninterest income,
excluding securities gains and losses.
Federal Funds
Immediately available funds on deposit at a Federal Reserve Bank.
Banks with excess reserves lend such funds, generally on an
overnight basis, to banks that are temporarily deficient in
required reserves or that want to borrow federal funds to fund
short-term assets.
Interest-Earning Assets and Interest-Bearing Liabilities
Interest is a price paid by a borrower to a lender for the use of
money. The Corporation's interest-earning assets result from
transactions in which it acts as a provider of funds. These
include loans to customers, purchases of debt and equity
securities and various transactions in the short-term money
markets. Interest-bearing liabilities are those for which the
Corporation acts as borrower and pays interest to depositors and
other suppliers of funds.
Interest Rate Sensitivity
The exposure to financial gain or loss due to a change in the
level of interest rates. In a given period, if more
interest-earning assets than interest-bearing liabilities are
subject to a change in interest rates because the assets are
maturing or the contract calls for a rate change, the Corporation
is asset sensitive (or positive) for that period. Rising
interest rates during that time would enhance earnings, while
declining interest rates would reduce earnings. The reverse
earnings effect would occur if the Corporation were liability
sensitive.
<PAGE>F- 40 64
Interest Rate Spread
The difference between two interest rates. The phrase is most
often used to refer to the difference between the interest yield
on average interest-earning assets and the interest cost of
average interest-bearing liabilities.
Leverage Ratio
The ratio was established by federal bank regulators and is
computed by dividing Tier 1 capital by average quarterly assets
less goodwill and other intangibles. A minimum Leverage ratio of
at least 3.00 percent must be maintained. This Leverage ratio is
a minimum requirement for the most highly rated banking
organizations and other banking organizations will be expected to
maintain an additional cushion of at least 100 to 200 basis
points.
Net Available Demand Deposits
The remaining portion of demand deposits available for investment
in interest-earning assets after deducting uncollected checks and
federally mandated reserves required to be kept against such
deposits.
Net Interest Income
Net interest income is the difference between the interest earned
on assets and the interest paid on liabilities. Interest income
and expense are affected by changes in the volume and mix of
average interest-earning assets and interest-bearing liabilities,
as well as changes in the level of interest rates.
Net Interest Margin
Net interest margin represents the tax-equivalent yield on
interest-earning assets. This is obtained by dividing net
interest income for a given accounting period by the average
level of interest-earning assets for the period. This
relationship is usually expressed on a tax-equivalent basis.
Nonaccruing Loans
Loans on which the accrual of interest income has been
discontinued because of the uncertainty that exists regarding the
collection of interest or principal. This circumstance typically
results from the borrower's financial difficulties. Interest
received on such loans is recorded as a reduction of principal or
interest income if there is no doubt as to the collectibility of
the loan.
Repurchase Agreement
A transaction in which securities are sold under an agreement
that the selling institution will repurchase the securities from
the buyer at a specified future date and price. In effect, the
original seller is borrowing money for the period, using the
securities as collateral.
Restructured Loans
Loans with original terms which have been modified as a result of
a change in the borrower's financial condition. Typically,
interest rate concessions are made or repayment schedules are
lengthened in these cases.
<PAGE>F-41 65
Return on Average Assets
A ratio obtained by dividing net income by average assets. It is
a measure of profitability in banking.
Return on Average Common Equity
A ratio obtained by dividing net income applicable to common
shareholders' (after payment of preferred stock dividends) by
average common shareholders' equity. This is a standard measure
of the rate of return on the common shareholders' investment.
Risk-weighted Assets
Established by federal bank regulators, this is computed based on
the sum of Risk-weighted balance sheet assets and off-balance
sheet credit equivalent amounts calculated in accordance with
federal guidelines.
Tax-equivalent Basis
An adjustment of income exempt from federal and state taxes or
taxed at preferential rates, such as interest income on state and
municipal bonds or dividends on equity securities, to an amount
that would yield the same pre-tax income had the income been
subject to taxation. The result is to equate the true earnings
value of tax-exempt and taxable income.
Tier 1 Capital
Established by federal bank regulators, this is composed of
common equity, retained earnings and perpetual preferred stock
reduced by goodwill and certain nonqualifying intangible assets.
Tier 1 Capital and Total Capital Ratios
These measures of capital adequacy have been established by
federal bank regulators, who require institutions to have a
minimum ratio of Tier 1 capital to Risk-weighted assets of 4.00
percent and a minimum ratio of Total capital to Risk-weighted
assets of 8.00 percent. The ratios are obtained by dividing Tier
1 capital or Total capital by Risk-weighted assets.
Total Capital
Established by federal bank regulators, this consists of Tier 1
capital plus a limited amount of allowable debt, certain other
financial instruments and a limited amount of the reserve for
loan losses.
<PAGE>F-42 66
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<CAPTION>
Year ended December 31, (in millions, except
per share and ratio data) 1993 1992 1991 1990 1989
RESULTS OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Net interest income $ 924.6 $ 825.3 $ 737.3 $ 759.5 $ 888.5
Provision for loan losses 29.2 189.5 466.4 434.3 625.8
Net interest income after
provision for loan losses 895.4 635.8 270.9 325.2 262.7
Securities gains, net 5.7 85.9 78.2 26.2 39.9
Noninterest income 363.5 392.2 451.5 439.6 355.1
Noninterest expenses 1,027.7 1,036.4 969.7 918.3 877.4
Income (loss) before income taxes,
extraordinary credit and accounting changes 236.9 77.5 (169.1) (127.3) (219.7)
Income taxes (benefit) (7.6) 20.7 1.5 5.7 (90.8)
Income (loss) before extraordinary credit
and accounting changes 244.5 56.8 (170.6) (133.0) (128.9)
Extraordinary credit 18.4
Cumulative effect of accounting changes 46.2
Net income (loss) $ 290.7 $ 75.2 $ (170.6) $ (133.0) $ (128.9)
Net income (loss) applicable to common stock $ 275.2 $ 70.4 $ (172.9) $ (135.3) $ (131.3)
COMMON SHARE DATA
Income (loss) before extraordinary credit
and accounting changes $ 2.44 $ 0.60 $ (2.35) $ (1.84) $ (1.77)
Net income (loss) 2.93 0.81 (2.35) (1.84) (1.77)
Dividends declared 0.50 0.75 1.40
Book value 17.02 14.09 13.62 15.70 18.63
Average shares 93.9 86.6 73.7 73.4 74.3
END OF PERIOD BALANCES
Loans $ 15,384.4 $ 14,899.8 $ 14,300.7 $ 15,388.5 $ 19,201.4
Reserve for loan losses 633.0 863.0 1,000.0 941.3 738.9
Interest-earning assets 24,819.0 22,153.9 19,867.9 20,503.8 23,853.3
Nonaccruing loans 309.5 618.0 1,037.5 1,450.4 838.6
Foreclosed properties 48.0 244.4 360.9 230.6 174.9
Total assets 27,244.7 25,288.3 22,815.5 23,703.3 27,855.2
Core deposits 14,756.8 15,726.1 15,734.4 17,647.3 17,464.7
Notes and debentures 758.9 809.8 665.1 679.2 698.6
Shareholders' equity 1,803.3 1,482.4 1,039.8 1,191.7 1,397.7
Tier 1 capital 1,686.6 1,371.2 922.6 1,068.4 1,273.0
Total capital 2,549.0 2,164.2 1,645.7 1,881.2 2,255.0
RATIOS
Net income (loss) to:
Average assets 1.14 % 0.34 % (0.76)% (0.52)% (0.47)%
Average shareholders' equity 18.22 5.99 (15.62) (9.54) (7.41)
Net income (loss) applicable to common stock
to average common shareholders' equity 19.43 5.87 (16.35) (9.96) (7.70)
Efficiency 69.61 73.18 73.68 72.67 63.71
Net charge-offs to average loans outstanding 1.75 2.38 2.87 1.38 0.89
Nonaccruing loans to loans 2.01 4.15 7.25 9.43 4.37
Reserve for loan losses to nonaccruing loans 205.00 140.00 96.00 65.00 88.00
Nonaccruing loans plus foreclosed properties to
loans plus foreclosed properties 2.32 5.69 9.54 10.76 5.23
Average shareholders' equity to average assets 6.28 5.60 4.88 5.47 6.37
Leverage 6.34 5.90 4.22 4.53 4.59
Risk-based capital:
Tier 1 capital 8.15 7.52 5.49 5.82 5.01
Total capital 12.32 11.87 9.79 10.25 8.74
Dividends declared on common stock to
net income applicable to common stock 17.15
<PAGE>F-43 67
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
SUMMARY
Shawmut National Corporation (the Corporation) reported net income of $290.7
million, or $2.93 per common share, for the year ended December 31, 1993,
compared with $75.2 million, or $.81 per common share for 1992 and a net
loss of $170.6 million, or $2.35 per common share, for 1991.
Several items influenced 1993 net income:
- restructuring charges of $36.3 million relating to
branch closings and personnel reductions, foreclosed
properties provisions of $20.0 million related to a bulk
sale of foreclosed properties and a $14.1 million
writedown in the value of excess servicing rights in
various securitized loan portfolios, all recorded in
the first quarter of 1993;
- expenses of $3.5 million related to the settlement with
the United States Department of Justice and the Federal
Trade Commission as well as for the strengthening of
fair lending compliance programs;
- an increase in annual employee benefits expense of
approximately $9.7 million as a result of adopting
Statement of Financial Accounting Standards (FAS) No.
106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions";
- income tax benefits of $140.7 million attributable to
the adoption of a new accounting standard for income
taxes, FAS No. 109, "Accounting for Income Taxes"; and
- an after-tax charge of $6.6 million relating to the
adoption of FAS No. 112, "Employers' Accounting for
Postemployment Benefits".
Income before the cumulative effect of accounting changes for the year ended
December 31, 1993 was $244.5 million, or $2.44 per common share, compared
with income before extraordinary credit of $56.8 million, or $.60 per common
share for 1992. This compares to a loss of $170.6 million, or $2.35 per
common share, for the year ended December 31, 1991. The cumulative effect
of accounting changes of $46.2 million in the first quarter of 1993
represents the Corporation's adoption of FAS No. 109 and FAS No. 112. The
extraordinary credit of $18.4 million during 1992 represents the
realization of net operating loss carryforwards. There were no
extraordinary credits or accounting changes during 1991. Securities gains
of $5.7 million, $85.9 million and $78.2 million for the years ended
December 31, 1993, 1992 and 1991, respectively, are included in the results
of operations. In addition, the results for 1992 included gains of $22.3
million from the sale of automobile and home equity loan pass-through
certificates and the results for 1991 included gains of $71.5 million from
the sale of the Corporation's credit card portfolio and merchant card
business and $5.0 million from the repurchase of long-term debt obligations.
Asset quality improved as nonaccruing loans plus foreclosed properties
decreased $504.9 million, or 59 percent, during 1993 to $357.5 million at
December 31, 1993 from $862.4 million at December 31, 1992. Contributing
to the decline in these assets were bulk sales of nonaccruing real estate
loans and foreclosed properties in the second quarter of 1993 with a
carrying value of $225.1 million. The ratio of nonaccruing loans plus
foreclosed properties to loans plus foreclosed properties improved to 2.32
percent at December 31, 1993 from 5.69 percent at December 31, 1992.
<PAGE>F-44 68
Nonaccruing loans were $309.5 million at December 31, 1993, a decrease of
$308.5 million, or 50 percent, from $618.0 million at December 31, 1992.
The ratio of nonaccruing loans to loans improved to 2.01 percent at December
31, 1993 from 4.15 percent at December 31, 1992, while the ratio of the
reserve for loan losses to nonaccruing loans improved to 205 percent at
December 31, 1993 from 140 percent at December 31, 1992.
Foreclosed properties decreased $196.4 million, or 80 percent, to $48.0
million at December 31, 1993 from $244.4 million at December 31, 1992. The
Corporation provided $68.1 million during 1993 to reduce the carrying value
of foreclosed properties, compared with $134.2 million during 1992. The
1993 provision for foreclosed properties included a charge of $20.0 million
related to a bulk sale of foreclosed properties. The 1992 provision for
foreclosed properties also included three special charges totaling $23.6
million: $5.5 million related to the bulk sale of $18.6 million of
foreclosed residential properties; $9.4 million related to an auction of
foreclosed commercial properties aggregating approximately $34 million; and
$8.7 million to reduce the carrying value of the remaining foreclosed
properties for estimated selling costs.
The reserve for loan losses was $633.0 million at December 31, 1993,
compared with $863.0 million at December 31, 1992. The provision for loan
losses was $29.2 million for 1993, compared with $189.5 million in 1992.
Net charge-offs for 1993 were $259.2 million and included a charge-off of
$108.6 million related to bulk sales of nonaccruing real estate loans.
Excluding this charge-off, net charge-offs for 1993 would have been $150.6
million, equal to a rate of 1.02 percent of average loans outstanding,
compared with $293.4 million in net charge-offs for 1992, which are also
exclusive of bulk sale related charge-offs, and a rate of 2.14 percent of
average loans outstanding.
Capital continued to improve as shareholders equity increased $320.9
million to $1.8 billion, or 6.62 percent of assets, at December 31, 1993
from $1.5 billion, or 5.86 percent of assets, at December 31, 1992.
The increase in shareholders' equity is primarily attributable to current
year net income. The Corporation's Tier 1 capital and Total capital ratios
were 8.15 percent and 12.32 percent, respectively, at December 31, 1993,
compared with a Tier 1 capital ratio of 7.52 percent and a Total capital
ratio of 11.87 percent at December 31, 1992. The improvement in the Total
capital ratio also reflects the addition of $150 million in subordinated
notes issued in April 1993. The Leverage ratio for the Corporation at
December 31, 1993 was 6.34 percent, compared with 5.90 percent at December
31, 1992. The Corporation and its subsidiary banks' at December 31, 1993
met the definition for a well capitalized institution under banking
regulations.
The Corporation's common stock closed at $21.75 per share on December 31,
1993, representing 128 percent of the $17.02 book value per common share,
compared with a common stock closing price of $18.38 per share and
130 percent of the $14.09 book value per common share a year ago.
The Corporation announced during 1993 the signing of definitive agreements
to acquire three banking organizations: New Dartmouth Bank of Manchester,
New Hampshire, with assets of $1.7 billion at year end, was announced on
March 24, 1993; Peoples Bancorp of Worcester, Inc. of Worcester,
Massachusetts, with assets of $891.1 million at year end, was announced on
August 26, 1993; and Gateway Financial Corporation of Norwalk, Connecticut,
with assets of $1.3 billion at year end, was announced on November 5, 1993.
The transactions will be accounted for as poolings of interests and are
subject to approvals by the shareholders of the respective banks and federal
and state regulatory agencies. The transactions are expected to be
completed during 1994.
<PAGE>F-45 69
BANKING ACTIVITIES
The Corporation's banking activities primarily include consumer banking,
commercial banking and investment services. Consumer banking consists of
banking services for consumers and small businesses and includes such
products as installment and residential mortgage loans. Commercial banking
consists of various banking services to middle-market and large corporate
customers and includes such products as commercial and real estate loans.
Commercial banking also includes loans to financial institutions such as
insurance companies and correspondent banks, as well as municipal and
governmental entities. Investment services activities include trust and
advisory services to personal, corporate and institutional clients.
Revenues from these banking activities consist primarily of interest income
on loans and fees for services. Net interest income for commercial and
consumer banking and other activities is discussed further in "Net Interest
Income". Noninterest income related to commercial and consumer banking and
trust and advisory services is discussed further in "Noninterest Income".
The Corporation operates these various banking activities as profit centers
and noninterest expenses associated with these activities are accumulated on a
functional, rather than a product line basis.
AVERAGE BALANCES AND RATES
The following table presents the Corporation's average interest-earning
assets and interest-bearing liabilities and tax-equivalent interest rates
for the years 1991 through 1993.
<TABLE>
<CAPTION>
1993 1992 1991
Average Average Average Average Average Average
Year ended December 31, (in millions) balance rate balance rate balance rate
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans $ 14,792 7.11% $ 13,696 7.77% $ 14,215 9.24%
Securities
At lower of aggregate cost
or market value
Subject to federal income taxes 2,969 6.60 2,531 7.71
Equity securities 269 8.17 204 11.31 221 13.33
Held to maturity
Subject to federal income taxes 4,467 5.91 2,921 7.91 4,805 8.97
Exempt from federal income taxes 6 6.74 50 8.17
Residential mortgages held for sale 405 7.32 344 7.93 222 8.67
Short-term investments 301 3.16 478 3.64 624 5.91
Trading account securities 35 4.44 32 7.59 33 8.36
Total interest-earning assets $ 23,238 6.78 $ 20,212 7.73 $ 20,170 9.11
INTEREST-BEARING LIABILITIES
Savings, money market and
NOW accounts $ 7,428 1.89% $ 7,121 3.05% $ 7,002 5.09%
Time certificates of deposit
of $100 thousand or more 480 4.62 693 6.15 1,235 8.16
Domestic time deposits 3,174 4.42 4,096 5.14 4,989 7.00
Foreign time deposits 173 2.97 76 3.30 72 5.56
Total interest-bearing deposits 11,255 2.74 11,986 3.95 13,298 6.09
Federal funds purchased and
securities sold under agreements
to repurchase 6,380 3.06 3,667 3.44 2,730 5.59
Other borrowings 827 7.54 673 9.17 598 8.93
Total other borrowings 7,207 3.57 4,340 4.33 3,328 6.19
Notes and debentures 839 8.58 668 8.89 669 9.04
Total interest-bearing liabilities $ 19,301 3.30 $ 16,994 4.24 $ 17,295 6.23
<PAGE>F-46 70
</TABLE>
INTEREST-EARNING ASSETS
The Corporation manages its interest-earning assets by utilizing available
capital resources within certain leverage, credit, interest rate and
liquidity risk constraints. Loans and securities comprise the majority of
the Corporation's interest-earning assets. The remaining leverage capacity
is utilized by short-term investments, residential mortgages held for sale
and trading account securities.
Interest-earning assets averaged $23.2 billion in 1993, an increase of $3.0
billion, or 15 percent, from $20.2 billion in 1992 and 1991. Loans
comprised 64 percent of average interest-earning assets in 1993, compared
with 68 percent and 70 percent in 1992 and 1991, respectively. Securities
represented 33 percent of average interest-earning assets in 1993, compared
with 28 percent and 25 percent in 1992 and 1991, respectively. The change
in the composition of average interest-earning assets is attributable to an
increase in the securities portfolio.
Average loans increased $1.1 billion to $14.8 billion in 1993 from $13.7
billion in 1992. Loans averaged $14.2 billion in 1991. The increase in
average loans during 1993 is primarily attributable to higher levels of
corporate and money market loans, as well as growth in consumer lending.
Real estate investor/developer and owner occupied real estate loans also
continued to decline during 1993. Commercial and industrial loans increased
$499 million during 1993 to $6.3 billion from $5.8 billion at year end 1992.
Consumer lending, which includes residential mortgage, home equity and
installment loans, increased $558 million to $6.3 billion at year end 1993
from $5.7 billion at year end 1992.
Average commercial and industrial loans increased during 1992 compared with
1991, due to the $686 million growth in money market loans and loans to
securities brokers. Average consumer loans decreased $159 million in 1992
due to the sale of $551.4 million in home equity and automobile loan pass-
through certificates, which was partially offset by the $379.6 million
growth in residential mortgages.
Securities principally include mortgage backed securities issued by the U.S.
Government and its agencies and U.S. Treasury securities. The Corporation's
Asset and Liability Committee establishes credit quality criteria and limits
for individual securities. Approximately 96 percent of the securities
portfolio is AAA rated.
The Corporation adopted, as of December 31, 1993, FAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (FAS 115). Under
this new accounting standard, debt securities that the Corporation has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at cost, adjusted for the amortization of premiums and
accretion of discounts. Debt and equity securities which are not classified
as held to maturity or as trading securities are classified as available for
sale and reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity,
net of income taxes.
Prior to the adoption of FAS 115, debt securities that were to be held for
indefinite periods of time, including securities that management intended to
use as part of its asset/liability strategy or that may be sold in response
to changes in interest rates, prepayment risk or other factors, were
reported at the lower of aggregate cost or market value. Changes in net
unrealized losses were included in the results of operations.
Securities averaged $7.7 billion for 1993, compared with $5.7 billion in
1992 and $5.1 billion in 1991. Securities classified as available for sale
totaled $2.6 billion at December 31, 1993. Included in shareholders' equity
at December 31, 1993 is $9.7 million of net unrealized gains (net of income
taxes) relating to the of securities classified as available for sale. Debt
securities classified as held to maturity totaled $6.4 billion at
December 31, 1993, compared with $2.7 billion at December 31, 1992. The fair
value of debt securities classified as held to maturity exceeded amortized
cost by approximately $76.7 million at December 31, 1993, consisting of
unrealized gains of approximately $88.8 million and unrealized losses of
approximately $12.1 million.
<PAGE>F-47 71
Securities reported at the lower of aggregate cost or fair value totaled
$3.4 billion at December 31, 1992. The fair value of debt securities
reported at the lower of aggregate cost or fair value exceeded amortized
cost by approximately $75.5 million at December 31, 1992, consisting of
unrealized gains of approximately $86.9 million and unrealized losses of
approximately $11.4 million. Unrealized depreciation on equity securities
included in shareholders' equity at December 31, 1992 totaled $23.7 million.
The Corporation sold approximately $4.4 billion of debt securities in 1993
that were reported at the lower of aggregate cost or fair value. The
Corporation sold $4.5 billion and $2.6 billion in 1992 and 1991, respectively,
of mortgage backed securities in response to the significant reduction in
interest rates and the resulting increase in prepayment risk as interest rates
declined over the period.
U.S. Treasury securities classified as available for sale with an aggregate
carrying amount of $786.0 million were subject to combination options at
December 31, 1993, which limited the risk of changes in the market value of
these securities. U.S. Treasury securities with a carrying amount of $311.0
million were put to the counterparty on January 5, 1994 upon expiration of
the option, resulting in no realized gain or loss. The combination options
on the remainder of the securities expired on January 6, 1994, unexercised
by either party.
Short-term investments (federal funds sold, securities purchased under
agreements to resell and time deposits in other banks) averaged $301 million
for the year ended December 31, 1993, compared with $478 million for 1992
and $624 million for 1991. Residential mortgages held for sale averaged
$405 million in 1993, compared with $344 million in 1992 and $222 million in
1991. Trading account securities averaged $35 million in 1993, compared with
$32 million in 1992 and $33 million in 1991.
SOURCES OF FUNDS
The Corporation's liability management objective is to maintain liquidity
through a diversified and stable base of funds suppliers. Management
accomplishes this objective by offering competitively priced and attractive
products to customers and by exercising prudent and sound balance sheet
management practices. The Corporation funds interest-earning assets with
interest-bearing deposits, other borrowings, notes and debentures,
noninterest-bearing demand deposits and shareholders' equity.
Interest-bearing liabilities averaged $19.3 billion during 1993, compared
with $17.0 billion during 1992 and $17.3 billion in 1991. Interest-bearing
liabilities represented 83 percent of interest-earning assets in 1993,
compared with 84 percent in 1992 and 86 percent in 1991.
Average interest-bearing deposits totaled $11.3 billion, or 58 percent of
total interest-bearing liabilities, during 1993, compared with $12.0
billion, or 71 percent of total interest-bearing liabilities, during 1992.
Average interest-bearing deposits were $13.3 billion, or 77 percent of total
interest-bearing liabilities, during 1991. The decrease in the relationship
of average interest-bearing deposits to total interest-bearing liabilities
during 1993 was primarily due to an increase in other borrowings which
supported, in part, the growth in the securities portfolio. The decline in
interest-bearing deposits is attributable to the relatively lower interest
rates offered on time deposits and time certificates of deposit of $100
thousand or more when compared to alternative savings and investment
products.
Total savings, money market and NOW accounts averaged $7.4 billion in 1993,
compared with $7.1 billion in 1992 and $7.0 billion in 1991. Domestic time
deposits averaged $3.2 billion in 1993, or 23 percent less than the $4.1
billion in 1992. Similarly, average time certificates of deposit of $100
thousand or more decreased $213 million, or 31 percent, to $480 million in
1993 from $693 million in 1992.
<PAGE>F-48 72
Core deposits averaged $14.9 billion in 1993, $15.2 billion in 1992 and
$15.8 billion in 1991. Large denomination certificates of deposit, brokered
retail deposits and foreign time deposits are not included in core deposits.
The ratio of average loans to average core deposits was 99 percent in 1993,
compared with 90 percent in both 1992 and 1991.
Other borrowings include federal funds purchased, securities sold under
agreements to repurchase, Treasury tax and loan funds, private placement
notes and Federal Home Loan Bank of Boston borrowings. Other borrowings
averaged $7.2 billion during 1993, $4.3 billion during 1992 and $3.3 billion
in 1991.
Notes and debentures averaged $839 million in 1993, compared with $668
million in 1992 and $669 million in 1991. The Corporation completed an
offering of $150 million 7.20% subordinated notes due 2003 in April 1993.
The Corporation redeemed, during the second quarter of 1993, the
outstanding balances of four senior notes totaling $85.2 million. The
redemption of these notes did not have a material effect on the
Corporation's results of operations or financial condition. In the third
quarter of 1993, 8 1/4% notes in the amount of $114.7 million matured and
were fully paid.
Average demand deposits increased $254 million, or 6 percent, to $4.3
billion for 1993 from $4.0 billion for 1992. Demand deposits averaged $3.8
billion for 1991. Net available demand deposits (that portion of demand
deposits available for investment) averaged $2.8 billion during 1993,
compared with $2.5 billion for 1992 and $2.2 billion for 1991.
<TABLE>
NET INTEREST INCOME
<CAPTION>
Year ended December 31, (in millions) 1993 1992 1991 1990 1989
INTEREST AND DIVIDEND INCOME
(tax-equivalent basis)
<S> <C> <C> <C> <C> <C>
Loans $ 1,052.2 $ 1,064.1 $ 1,313.0 $ 1,737.8 $ 2,123.4
Securities
At lower of aggregate cost or market value
Subject to federal income taxes 195.9 195.2
Dividend on equity securities 22.0 23.1 29.5 51.0 106.6
Held to maturity
Subject to federal income taxes 264.0 231.1 431.1 331.8 330.5
Exempt from federal income taxes 0.4 4.1 22.1 122.3
Residential mortgages held for sale 29.6 27.3 19.2 22.4 29.7
Short-term investments 9.5 17.4 36.9 145.1 8.1
Trading account securities 2.0 2.4 2.8 4.8 3.8
Total interest income 1,575.2 1,561.0 1,836.6 2,315.0 2,724.4
INTEREST EXPENSE
Savings, money market and NOW accounts 140.3 217.3 356.2 455.7 434.4
Time certificates of deposit of $100 thousand or more 22.2 42.6 100.8 150.1 99.8
Domestic time deposits 140.5 210.7 349.1 486.2 488.6
Foreign time deposits 5.1 2.5 4.0 20.0 13.6
Total interest on deposits 308.1 473.1 810.1 1,112.0 1,036.4
Other borrowings 257.4 188.0 206.0 340.6 634.2
Notes and debentures 72.1 59.3 60.5 63.1 66.3
Total interest expense 637.6 720.4 1,076.6 1,515.7 1,736.9
NET INTEREST INCOME
(tax-equivalent basis) 937.6 840.6 760.0 799.3 987.5
Tax-equivalent adjustment 13.0 15.3 22.7 39.8 99.0
NET INTEREST INCOME $ 924.6 $ 825.3 $ 737.3 $ 759.5 $ 888.5
NET INTEREST SPREAD
(tax-equivalent basis) 3.48 % 3.49 % 2.88 % 2.44 % 2.82 %
NET INTEREST MARGIN
(tax-equivalent basis) 4.04 % 4.16 % 3.77 % 3.47 % 3.99 %
<PAGE>F-49 73
</TABLE>
<TABLE>
RATE - VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects
the changes in net interest income stemming from changes in interest rates
and from asset and liability volume, including mix. The change in interest
attributable to both rate and volume has been allocated to the changes in
the rate and volume on a pro rata basis.
<CAPTION>
1993 1992
Increase Changes due to Increase Changes due to
Year ended December 31, (in millions) (Decrease) Rate Volume (Decrease) Rate Volume
INTEREST AND DIVIDEND
INCOME CHANGE
<S> <C> <C> <C> <C> <C> <C>
Loans $ (11.9) $ (93.6) $ 81.7 $ (248.9) $ (202.3) $ (46.6)
Securities
At lower of aggregate cost
or market value
Subject to federal income taxes 0.7 (30.4) 31.1 195.2 195.2
Dividend on equity securities (1.1) (7.4) 6.3 (6.4) (4.2) (2.2)
Held to maturity
Subject to federal income taxes 32.9 (68.4) 101.3 (200.0) (46.5) (153.5)
Exempt from federal income taxes (0.4) (0.4) (3.7) (0.6) (3.1)
Residential mortgages held for sale 2.3 (2.2) 4.5 8.1 (1.7) 9.8
Short-term investments (7.9) (2.0) (5.9) (19.5) (12.1) (7.4)
Trading account securities (0.4) (.6) 0.2 (0.4) (0.2) (0.2)
Total interest income change 14.2 (204.6) 218.8 (275.6) (267.6) (8.0)
INTEREST EXPENSE CHANGE
Savings, money market
and NOW accounts (77.0) (86.0) 9.0 (138.9) (144.8) 5.9
Time certificates of deposit
of $100 thousand or more (20.4) (9.1) (11.3) (58.2) (20.9) (37.3)
Domestic time deposits (70.2) (26.9) (43.3) (138.4) (82.7) (55.7)
Foreign time deposits 2.6 (0.3) 2.9 (1.5) (1.7) 0.2
Total interest on deposits change (165.0) (122.3) (42.7) (337.0) (250.1) (86.9)
Other borrowings 69.4 (37.5) 106.9 (18.0) (71.2) 53.2
Notes and debentures 12.8 (2.1) 14.9 (1.2) (1.1) (0.1)
Total interest expense change (82.8) (161.9) 79.1 (356.2) (322.4) (33.8)
NET INTEREST
INCOME CHANGE $ 97.0 $ (42.7) $ 139.7 $ 80.6 $ 54.8 $ 25.8
<PAGE>F-50 74
</TABLE>
<TABLE>
NET INTEREST MARGIN ON INTEREST-EARNING ASSETS
Net interest income, net interest spread and net interest margin are
presented on a tax-equivalent basis.
<CAPTION> Percentage
Quarters change from
(in millions) First Second Third Fourth Year prior year
1993
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 215.5 $ 236.4 $ 240.1 $ 245.6 $ 937.6 11.5 %
Average interest-earnings assets 21,579 23,120 23,683 24,532 23,238 15.0
Net interest spread 3.37 % 3.53 % 3.52 % 3.48 % 3.48 % (0.3)
Net interest margin 4.01 4.10 4.05 4.00 4.04 (2.9)
1992
Net interest income $ 197.0 $ 203.2 $ 210.9 $ 229.5 $ 840.6 10.6 %
Average interest-earning assets 19,715 19,944 20,162 21,129 20,212 0.2
Net interest spread 3.27 % 3.35 % 3.54 % 3.72 % 3.49 % 21.1
Net interest margin 4.02 4.10 4.16 4.32 4.16 10.3
1991
Net interest income $ 183.1 $ 188.2 $ 193.5 $ 195.2 $ 760.0 (4.9)%
Average interest-earning assets 20,527 20,340 19,893 19,921 20,170 (12.5)
Net interest spread 2.61 % 2.79 % 3.03 % 3.13 % 2.88 % 18.0
Net interest margin 3.62 3.71 3.86 3.89 3.77 8.6
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets
and the interest paid on liabilities. Interest income and expense are
affected by changes in the volume and mix of average interest-earning assets
and interest-bearing liabilities, as well as changes in interest rates.
The Corporation's tax-equivalent net interest income for 1993 was $937.6
million, an increase of $97.0 million, or 12 percent, from $840.6 million in
1992. The increase in tax-equivalent net interest income reflects higher
levels of interest-earning assets, primarily securities, as well as an
improvement in funding costs. Average interest-earning assets increased
$3.0 billion, to $23.2 billion in 1993 from $20.2 billion in 1992. The
increase in average interest-earning assets for 1993 reflects growth in the
securities portfolio of $2.0 billion and in the loan portfolio of $1.1
billion. The growth in the securities portfolio in 1993 resulted from the
reinvestment of earnings into available investment alternatives given the
lack of overall loan demand. As the demand for loans increases, the
Corporation will utilize the maturities of the securities portfolio to fund
the growth.
The net interest margin for 1993 decreased 12 basis points from 4.16 percent
in 1992 to 4.04 percent in 1993, reflecting a shift in the mix of average
interest-earning assets from loans to securities. Should the spread between
the Corporation's interest earning assets and funding sources return to
lower historical levels in the future, the Corporation's net interest margin
would be expected to contract.
<PAGE>F-51 75
The Corporation's tax-equivalent net interest income increased $80.6
million, or 11 percent, in 1992 compared with 1991 as a result of
improvement in the net interest margin. The net interest margin for 1992
increased 39 basis points from 3.77 percent in 1991 to 4.16 percent in 1992.
The improvement in the 1992 net interest margin was principally due to lower
levels of nonaccruing loans and wider spreads between the yield on average
interest-earning assets and the ratio paid on average interest-bearing
liabilities, primarily attributable to lower deposit costs.
Interest income from consumer banking, commercial banking and other
activities (investment in securities for liquidity and funds management
purposes) was approximately $457.3 million, $594.9 million and $523.0
million, respectively, during 1993. Interest expense allocated to these banking
activities was approximately $162.8 million, $242.5 million and $232.3 million,
respectively, resulting in net interest income of $294.5 million, $352.4 million
and $290.7 million, respectively. Average interest-earning assets related to
these activities during 1993 were approximately $5.9 billion, $8.9 billion and
$8.4 billion, respectively.
Interest income from these activities during 1992 was approximately $408.5
million, $655.6 million and $496.9 million, respectively. Interest expense
was approximately $169.6 million, $318.6 million and $232.2 million,
respectively, resulting in net interest income of $238.9 million, $337.0
million and $264.7 million, respectively. Average interest-earning assets
related to these activities during 1992 were approximately $4.8 billion,
$8.9 billion and $6.5 billion, respectively.
Interest income from these activities during 1991 was approximately $453.2
million, $859.8 million and $523.6 million, respectively. Interest expense
was approximately $236.7 million, $522.1 million and $317.8 million,
respectively, resulting in net interest income of $216.5 million, $337.7
million and $205.8 million, respectively. Average interest-earning assets
related to these activities during 1991 were approximately $4.4 billion,
$9.8 billion and $6.0 billion, respectively.
Interest expense was allocated to these activities based on the
Corporation's interest expense on total interest-bearing liabilities for each of
these years and may not be indicative of the interest expense that would be
allocated to such activities had a different allocation methodology been used or
if the activities were operated as separate segments of the Corporation.
<PAGE>F-52 76
<TABLE>
NONINTEREST INCOME
<CAPTION>
Year ended December 31, (in millions) 1993 1992 1991 1990 1989
Customer service fees
<S> <C> <C> <C> <C> <C>
Commercial banking $ 83.7 $ 91.0 $ 86.7 $ 74.7 $ 66.1
Consumer banking 88.0 81.5 88.6 82.2 70.9
Total 171.7 172.5 175.3 156.9 137.0
Trust and agency fees
Personal 72.7 71.4 70.1 68.3 65.3
Corporate 15.8 14.9 13.0 12.4 9.7
Employee benefits 19.0 19.2 20.0 18.4 17.7
Institutional 9.3 9.6 8.9 7.4 6.8
Total 116.8 115.1 112.0 106.5 99.5
Loan servicing 10.9 19.9 32.9 23.3 33.1
Foreign exchange trading 2.9 9.3 5.6 7.4 9.7
Residential mortgage sales 23.5 5.4 .8 26.3 2.5
Trading account profits 6.4 6.6 7.1 6.4 5.2
Other 31.3 41.1 41.3 33.7 56.6
Total 363.5 369.9 375.0 360.5 343.6
Loan securitizations and sales 22.3 32.4
Other gains 76.5 46.7 11.5
Securities gains, net 5.7 85.9 78.2 26.2 39.9
Total noninterest income $ 369.2 $ 478.1 $ 529.7 $ 465.8 $ 395.0
</TABLE>
Customer service fees decreased $.8 million to $171.7 million in 1993 from
$172.5 million in 1992, which was a decrease of $2.8 million from $175.3
million in 1991. Commercial banking fees include revenues from customer
transaction analysis, cash management services and letter of credit fees.
Consumer banking fees include deposit service charges, mutual funds commissions,
and automatic teller, safe deposit and customer check order fees. The decline
in commercial banking fees from 1992 to 1993 resulted primarily from customer
preference for maintaining higher demand deposit balances in lieu of direct
fee payments. The increase in consumer banking fees for this same period
was due to increased fees for deposit service charges and commissions on new
mutual fund products.
Trust and agency fees increased $1.7 million to $116.8 million in 1993 from
$115.1 million in 1992, which in turn was an increase of $3.1 million from
$112.0 million in 1991. The improvement during both 1993 and 1992 resulted
from higher levels of assets under management as well as increases in fees
for services.
Loan servicing income totaled $10.9 million in 1993, $19.9 million in 1992
and $32.9 million in 1991. Included in loan servicing income were gains of
$1.1 million in 1993, $5.0 million in 1992 and $12.8 million in 1991 from
the sale of mortgage servicing rights. Excluding these gains, the decline
in loan servicing income in 1993, compared with 1992, is attributable to
increased prepayments in the mortgage servicing portfolio.
Gains from residential mortgage sales totaled $23.5 million in 1993, $5.4
million in 1992 and $.8 million in 1991. The 1993 increase in gains on
residential mortgage sales was due to declining interest rates during the
year as these loans were sold into the secondary market. Foreign exchange
trading income declined $6.4 million to $2.9 million in 1993 from $9.3 million
in 1992, due to less favorable interest rate differentials between the United
States and foreign countries during 1993.
<PAGE>F-53 77
Total noninterest income in 1992 included gains of $22.3 million from the
sale of automobile and home equity loan pass-through certificates. Income
for 1991 included gains of $71.5 million from the sale of the Corporation's
credit card portfolio and merchant card business and $5.0 million from the
repurchase of long-term debt obligations.
<TABLE>
NONINTEREST EXPENSES
<CAPTION>
Year ended December 31, (in millions) 1993 1992 1991 1990 1989
Compensation and benefits
<S> <C> <C> <C> <C> <C>
Compensation $ 376.8 $ 366.5 $ 364.3 $ 386.8 $ 382.3
Benefits 77.1 63.9 62.0 63.4 60.8
Total 453.9 430.4 426.3 450.2 443.1
Occupancy and equipment
Occupancy 93.5 97.6 94.2 100.8 92.3
Equipment 53.7 58.8 63.0 67.3 77.1
Total 147.2 156.4 157.2 168.1 169.4
Federal Deposit Insurance Corporation premiums 43.5 36.8 38.2 21.5 13.6
Communications 40.2 40.8 43.5 50.0 48.0
Foreclosed properties expense 27.6 32.9 32.9 9.4 10.6
Advertising 20.6 13.2 10.2 14.3 14.3
Other 172.7 191.7 184.3 186.8 156.4
Total 905.7 902.2 892.6 900.3 855.4
Foreclosed properties provision 68.1 134.2 77.1 18.0 22.0
Special expenses 53.9
Total noninterest expenses $ 1,027.7 $ 1,036.4 $ 969.7 $ 918.3 $ 877.4
</TABLE>
Total noninterest expenses for both 1993 and 1992 were $1.0 billion,
compared with $969.7 million in 1991. Included in total noninterest
expenses for 1993 were special expenses of $36.3 million relating to
restructuring charges for branch closings and personnel reductions, a $14.1
million writedown in the value of excess servicing rights in various
securitized loan portfolios and $3.5 million related to the Corporation's
settlement with the United States Department of Justice and the Federal
Trade Commission as well as for the strengthening of fair lending compliance
programs.
Excluding the foreclosed properties provision and special expenses, total
noninterest expenses totaled $905.7 million in 1993, $902.2 million in 1992
and $892.6 million in 1991. The change from 1992 to 1993 represented an
increase of $3.5 million, or less than 1 percent, notwithstanding increases
in compensation and benefits as a result of the Corporation's adoption of a
new accounting standard for postretirement employment benefits, normal
salary increases and increases in the Corporation's FDIC premiums and
advertising expenses. Offsetting these increases were declines in expenses
associated with the resolution of problem assets, ongoing cost saving
initiatives and savings achieved under the restructuring program discussed
below. The increase of $9.6 million, or 1 percent, during 1992 is
attributable to the Corporation's efforts to reduce nonaccruing loans and
foreclosed properties.
<PAGE>F-54 78
The restructuring program announced in the first quarter of 1993, which
resulted in charges of $36.3 million, included personnel reductions in data
processing and operations, corporate staff and services and credit
administration and has resulted in reductions of approximately 435 full-time
employees at year end 1993. The program also included a number of branch
closings and consolidations. Accrued restructuring expenses at December 31,
1993 relating to this program were $6.9 million, representing primarily
severance related costs. Management expects that these restructuring
activities will be completed during 1994. Noninterest expenses, exclusive
of the provision for foreclosed properties and special expenses, were $220.7
million in the fourth quarter of 1993, compared with $230.0 million in the
first quarter of 1993 and continued reductions in noninterest expenses are
expected as further progress in implementing the restructuring program and
ongoing cost saving initiatives are achieved.
The provision to reduce the carrying value of foreclosed properties was
$68.1 million in 1993, $134.2 million in 1992 and $77.1 million in 1991.
The 1993 provision for foreclosed properties includes a charge of $20.0
million related to a bulk sale of foreclosed properties in the second
quarter. The 1992 provision for foreclosed properties included three
special charges totaling $23.6 million: $5.5 million related to the bulk
sale of $18.6 million of foreclosed residential properties; $9.4 million
related to a pool of foreclosed commercial properties aggregating
approximately $34 million subject to auction; and $8.7 million to reduce the
carrying value of the remaining foreclosed properties for estimated selling
costs. The foreclosed properties expenses were $27.6 million in 1993 and
$32.9 million in both 1992 and 1991. The decrease in the provision and
expense in 1993 reflects the decline in the level of foreclosed properties.
Legal, accounting and other costs associated with collection efforts prior
to foreclosure are included in "Other noninterest expenses".
The Corporation adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", effective January 1, 1993.
This new accounting standard requires the expected cost of these postretirement
health care and life insurance benefits to be accrued and charged to
operations during the years the employees render the service. The
Corporation is amortizing the transition obligation of $94.8 million on a
straight-line basis over 20 years. The postretirement benefit expense for
1993 was $14.7 million. Previously, the Corporation's postretirement
benefits were expensed as claims were paid and totaled approximately
$5.0 million for 1992 and $4.5 million for 1991.
The Corporation also adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits," in the fourth quarter of 1993, retroactive to
January 1, 1993. The Corporation provides disability and workers'
compensation related benefits to former or inactive employees after
employment but before retirement and had also provided supplemental
severance benefits to certain former employees. The new accounting standard
requires that the cost of these benefits be accrued and charged to operations
if the obligation is attributable to services already rendered, rights to
such benefits accumulate or vest, payment of the benefits is probable and
the amount of the benefits can be reasonably estimated. The effect of
adopting this new accounting standard resulted in an after-tax charge of
$6.6 million recorded as a cumulative effect of a change in method of
accounting for 1993. Previously, these benefits were expensed as payments
were made.
<PAGE>F-55 79
INCOME TAXES
The Corporation adopted FAS No. 109, "Accounting for Income Taxes" (FAS
109), prospectively, effective January 1, 1993. The Corporation's deferred
tax asset (deferred tax assets less deferred tax liabilities) at December
31, 1992 was $135.4 million. The Corporation's deferred tax asset
represents future deductible temporary differences attributable primarily to
provisions for loan losses in excess of the deductible amounts for tax
purposes. The Corporation's deferred federal tax asset recorded upon
adoption of FAS 109 (prior to valuation allowance) at January 1, 1993 was
$268.2 million. The income tax benefits of these deductible temporary
differences recognized under FAS 109 were subjected to an evaluation of
whether it was more likely than not that the income tax benefits will be
realized and, as a result, a valuation allowance of $80.0 million was
established, resulting in a net deferred tax asset of $188.2 million at
January 1, 1993. The level of valuation allowance reflected management's
best judgment regarding the amounts and timing of future taxable income and
the estimated reversal pattern of these temporary differences. Deferred
state tax assets, net of the valuation allowance, were nil. The cumulative
effect of this accounting change was the recognition of a $52.8 million
income tax benefit in the first quarter of 1993.
At December 31, 1993, the Corporation's deferred federal tax asset was
$202.3 million. Based upon management's best judgment regarding the amounts
and timing of future taxable income and the estimated pattern of temporary
differences, no valuation allowance was recorded at year end. Taxable
income necessary to be generated in future periods to realize the deferred
tax asset would be approximately $578 million.
The Corporation's total income tax expense for 1993, prior to income tax
benefits, was $80.3 million, representing an effective income tax rate of 34
percent. Income tax expense for 1992 was $20.7 million, representing an
effective income tax rate of 27 percent. The increase in the effective
income tax rate for 1993 when compared to 1992 was due to a decline in the
level of nontaxable income during 1993.
The income tax benefits for 1993 included the reduction of the deferred tax
asset valuation allowance of $80.0 million during 1993 and $7.9 million
recognized in the third quarter of 1993 for the increase in the deferred tax
asset due to new higher corporate income tax rates. In addition, the
cumulative effect from the adoption of the new accounting standard for
income taxes resulted in a $52.8 million income tax benefit. These income
tax benefits totaled $140.7 million in 1993.
The Board of Governors of the Federal Reserve System (the Board) issued
proposed revisions to capital adequacy guidelines in February 1993 which
would limit the amount of deferred tax assets that can be used to meet
risk-based capital requirements. This recommendation limits deferred tax
assets to those assets which may be realized from income taxes paid in prior
carryback years, the reversal of future taxable temporary differences and
the lesser of: (1) the amount of deferred tax assets expected to be realized
within one year of the quarter-end date based on future taxable income
(exclusive of tax carryforwards and reversals of existing temporary
differences) for that year, or (2) ten percent of Tier 1 capital. The
Corporation believes the deferred tax asset at December 31, 1993 would be
allowable in computing regulatory risk-based capital because the deferred
tax asset would not exceed the amount of income taxes previously paid in
prior carryback years. The Corporation cannot determine whether, or in what
form, this proposal may be enacted.
<PAGE>F-56 80
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures about Fair Value of Financial Instruments" (FAS
107), requires the disclosure of the fair value of financial instruments. A
financial instrument is defined as cash, evidence of an ownership in an
entity, or a contract that conveys or imposes the contractual right or
obligation to either receive or deliver cash or another financial
instrument. Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation, and is best evidenced
by a quoted market price if one exists.
The statement requires the fair value of deposit liabilities with no stated
maturity, such as demand deposit, NOW and money market accounts, to equal
the carrying value of these financial instruments and, therefore, does not
allow for the recognition of the inherent value of these core deposit
relationships. In addition, the statement does not require disclosure of
the fair value of nonfinancial instruments, such as the Corporation's
premises and equipment, and its banking and trust franchises or the fair
value of its core deposit relationships. The Corporation believes these
nonfinancial instruments have significant fair value.
As discussed in the notes to the consolidated financial statements, the
Corporation has estimated the fair value of financial instruments in
accordance with FAS 107. The most significant difference between the
carrying value and the fair value of the Corporation's financial instruments
is attributable to the loan portfolio. Utilizing the assumptions described
in the notes to the consolidated financial statements, the Corporation
estimated the fair value of loans exceeded the carrying value by
approximately $611 million and $600 million at December 31, 1993 and 1992,
respectively. The assumptions utilized for credit risk in estimating the
fair value of the loan portfolio were based on estimated future credit
losses as reflected in the Corporation's current pricing structure.
However, the assumptions utilized in determining the adequacy of the reserve
for loan losses, included in the Corporation's consolidated financial
statements, is based upon management's assessment of risk elements in the
loan portfolio, factors affecting loan quality and assumptions about the
economic environment. The Corporation's reserve for loan losses was
established over a period of economic recession and weakness in the real
estate market. The Corporation's reserve for loan losses was $633.0 million
at December 31, 1993, which represents 205 percent of nonaccruing loans at
that date.
The Corporation has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair
values were based on the quoted market price of a financial instrument with
similar characteristics, the present value of expected future cash flows or
other valuation techniques. Each of these alternative valuation techniques
utilize assumptions which are highly subjective and judgmental in nature.
Subjective factors include, among other things, estimates of cash flows, the
timing of cash flows, risk and credit quality characteristics and interest
rates. Accordingly, the results may not be precise and modifying the
assumptions may significantly affect the values derived. In addition, fair
values established utilizing alternative valuation techniques may or may not
be substantiated by comparison with independent markets. Further, fair
values may or may not be realized if a significant portion of the financial
instruments were sold in a bulk transaction or forced liquidation. Therefore,
any aggregate unrealized gains or losses should not be interpreted as a forecast
of future earnings or cash flows. Furthermore, the fair values disclosed should
not be interpreted as the aggregate current value of the Corporation.
<PAGE>F-57 81
INTEREST RATE SENSITIVITY
The table below depicts the Corporation's interest rate sensitivity as of
December 31, 1993. Allocations of assets and liabilities, including
noninterest-bearing sources of funds, to specific periods are based upon
management's assessment of contractual or anticipated repricing
characteristics. Those gaps are then adjusted for the net effect of off-
balance sheet financial instruments such as interest rate swap and option
agreements and futures contracts.
<TABLE>
<CAPTION>
Repricing Periods
Two- Four- Seven- Ten- Over
One three six nine twelve one
(in millions) month months months months months year Total
Short-term investments
and other interest-
<S> <C> <C> <C> <C> <C> <C> <C>
earning assets $ 232 $ 212 $ 444
Securities 1,149 420 $ 423 $ 386 $ 341 $ 6,271 8,990
Loans 6,293 2,697 1,157 639 582 4,016 15,384
Total interest-
earning assets 7,674 3,329 1,580 1,025 923 10,287 24,818
Interest-bearing
deposits 4,257 2,906 536 239 219 2,553 10,710
Other borrowings 8,267 757 4 1 159 9,188
Notes and debentures 50 709 759
Noninterest-bearing
sources of funds 438 877 2,846 4,161
Total 13,012 4,540 540 239 220 6,267 24,818
Off-balance sheet
financial instruments (209) 90 404 356 638 (1,279)
Interest rate
sensitivity gap $ (5,547) $ (1,121) $ 1,444 $ 1,142 $ 1,341 $ 2,741
Cumulative gap $ (5,547) $ (6,668) $ (5,224) $ (4,082) $ (2,741) $ 0
Interest rate sensitivity
gap as a percent
of interest-earning
assets (22.4)% (4.5)% 5.9 % 4.6 % 5.4 %
Cumulative gap as
a percent of
interest-earning assets (22.4)% (26.9)% (21.0)% (16.4)% (11.0)%
</TABLE>
INTEREST RATE RISK
Interest rate risk for the Corporation and its subsidiaries is managed by
the Asset and Liability Committee of the Corporation. Interest rate risk
measurement and management techniques incorporate the repricing and cash
flow attributes of balance sheet and off-balance sheet instruments as they
relate to parallel and non-parallel shifts in interest rates, as well as
changes in the spread relationships between asset and liability interest
rates. Interest rate risk is measured in terms of the effect on net
interest income and changes in the market value of the Corporation's assets
and liabilities under different interest rate scenarios through the use of
modeling and other analytical techniques.
<PAGE>F-58 82
Interest rate risk is evaluated continuously and reviewed by the Asset and
Liability Committee at least monthly. The Asset and Liability Committee
evaluates the Corporation's overall risk profile and determines actions
required to maintain and achieve a profile that is consistent with the
Corporation's policies and strategic direction. Actions taken will include
utilizing specific asset, liability and interest rate instruments to achieve
directives by the Asset and Liability Committee.
Integrated into interest rate risk management is the use of interest rate
instruments such as interest rate swaps, options and futures contracts. The
Corporation actively uses these instruments in programs designed to achieve
the established directives. These products are not reflected in the
Corporation's balance sheet. However, these products are included in the
interest rate sensitivity table above for purposes of analyzing interest
rate risk.
At December 31, 1993, the Corporation had approximately $2.0 billion in
notional balances of interest rate swap contracts outstanding, an increase
of $1.3 billion from $.7 billion at December 31, 1992. 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 swap agreements are utilized to synthetically alter the maturity
and repricing characteristics of assets and liabilities. The periodic net
settlement on interest rate swap agreements is recorded as an adjustment to
interest expense and resulted in a decrease in net interest income of $20.4
million in 1993 and $23.3 million in 1992. The decrease in net interest
income was the result of certain higher rate fixed-pay swaps recorded in
prior years. The average final maturity of the fixed-pay and fixed-receive
interest rate swap agreements at December 31, 1993 was approximately 2.0
years and 3.0 years, respectively.
In addition to the interest rate swap contracts, the Corporation also
utilizes interest rate cap agreements to manage interest rate risk.
Interest rate cap agreements are similar to interest rate swap agreements except
that interest payments are only made or received if current interest rates rise
above a predetermined interest rate. At year end 1993, the Corporation had
approximately $950 million in notional balances of purchased interest rate
cap agreements outstanding. The Corporation also had approximately $2.4
billion in notional balances of interest rate cap agreements which consisted
of a simultaneous purchase and sale of a cap, which consists of a cap that
is sold for a higher rate than the one that is purchased. This combination
of agreements are also known as interest rate corridors. Interest rate
corridors are utilized to protect the Corporation from a contraction in the
interest rate spread due to a moderate rise in interest rates. At December
31, 1993, the fair value of the interest rate cap agreements, inclusive of
interest rate corridors, was approximately $4.2 million, which represents
the amount that the Corporation would recognize as a loss if the agreements were
terminated at that date. The average final maturity of the interest rate cap
portfolio at December 31, 1993 was approximately 1.2 years.
Futures contracts are also used by the Corporation to manage interest rate
exposure. These instruments are exchange-traded contracts for the future
delivery of securities, other financial instruments or cash settlement at a
specified price or yield and are also utilized as a protection against rising
interest rates. The notional balances of futures contracts at December 31, 1993
were approximately $2.5 billion. The fair value of the futures contracts at
December 31, 1993 was approximately $.3 million, which represents the amount
that the Corporation would receive if the contracts were terminated at that
date. Maturities of the notional balances of futures contracts are as follows:
$1.3 billion in 1994; $.8 billion in 1995; and $.4 billion in 1996.
<PAGE>F-59 83
The Corporation's reported twelve month cumulative gap was liability
sensitive in the amount of $2.7 billion at December 31, 1993. A liability
sensitive interest rate gap would reduce earnings during periods of rising
interest rates, while declining rates would enhance earnings.
However, incorporating the effects of the interest rate caps and corridors
would reduce the effective interest sensitivity of the Corporation. Based
on an analysis of a moderate 100 basis point increase in interest rates, the
twelve month cumulative liability sensitive gap at December 31, 1993 would
decrease to $1.9 billion and the impact on net interest income would be a
decrease of $18.7 million, or approximately 2 percent of 1993 tax-equivalent
net interest income.
LIQUIDITY
Liquidity is the ability to meet cash needs arising from fluctuations in
loans, securities, deposits and other borrowings. The Corporation manages
liquidity on three levels: at a consolidated level; at the subsidiary banks
level; and at the parent companies level. The parent companies include
Shawmut National Corporation and its two bank holding companies, Hartford
National Corporation and Shawmut Corporation. In each case, the objectives
reflect management's most current assessment of economic and financial
factors that could affect funding activities. Management has adjusted its
strategy in response to the rapid changes occurring within the banking
environment, the changing economic conditions in New England, the
significant reductions in interest rates and the volatile nature of funding
sources.
Uncollateralized purchased funds (UPFs) consist of federal funds purchased,
large denomination certificates of deposit, Eurodollar deposits and private
placement notes. When measuring liquidity, UPFs are offset by available
short-term investments including federal funds sold, bid-based money market
loans, reverse repurchase agreements and unused repurchase agreement
collateral (U.S. Government and agency securities and highly liquid
marketable securities).
The Corporation manages liquidity at the consolidated level and at the
subsidiary banks level by measuring the difference between the volume of
UPFs and the level of short-term investments and unused repurchase agreement
collateral. At December 31, 1993, UPFs were $2.3 billion. This was offset
by $3.8 billion in short-term investments and unused repurchase agreement
collateral.
The Corporation manages the parent companies' liquidity by measuring the
difference between the volume of short-term investments and short-term
funding sources and the parent companies' ongoing obligations, including
debt maturities and interest payments.
The parent companies had consolidated short-term borrowings of approximately
$175 million and notes and debentures of $749 million at December 31, 1993.
The parent companies had consolidated cash and cash equivalents at December
31, 1993 of approximately $294 million and securities, consisting of
preferred stock holdings, with a fair value of $214 million. There are no
scheduled maturities on notes and debentures in 1994 and 1995. Scheduled
maturities are $150 million in 1996.
The parent companies' long-term ability to meet obligations will depend on
the Corporation's ability to raise funds from outside sources or the ability
of the subsidiary banks to pay dividends. See "Capital Requirements and
Dividends".
<PAGE>F-60 84
<TABLE>
CAPITAL REQUIREMENTS AND DIVIDENDS
The Corporation's Risk-based capital and Leverage ratios at December 31,
1993 and 1992 were as follows:
<CAPTION>
December 31, (in millions) 1993 1992
<S> <C> <C>
Shareholders' equity $ 1,803.3 $ 1,482.4
Tier 1 capital 1,686.6 1,371.2
Total capital 2,549.0 2,164.2
Risk-weighted assets 20,692.4 18,238.1
Ratios:
Shareholders' equity to assets 6.62 % 5.86 %
Risk-based capital
Tier 1 capital 8.15 7.52
Total capital 12.32 11.87
Leverage 6.34 5.90
</TABLE>
Shareholders' equity at December 31, 1993 was $1.8 billion, an increase of
$320.9 million, or 22 percent, from $1.5 billion at December 31, 1992.
The ratio of shareholders' equity to assets was 6.62 percent at December 31,
1993, compared with 5.86 percent at December 31, 1992. The growth in
shareholders' equity is primarily attributable to current year net income
and common stock issued under the Corporation's Dividend Reinvestment and
Stock Purchase Plan.
The Corporation completed an offering of 17.25 million shares of common
stock in April 1992, which resulted in net proceeds of $199.3 million. The
Corporation also completed an offering of depositary shares representing an
interest in the Corporation's 9.30% Cumulative Preferred Stock in November
1992. This offering resulted in net proceeds of $138.0 million to the
Corporation. The Corporation's Dividend Reinvestment and Stock Purchase
Plan allows registered shareholders to purchase up to $5,000 per calendar
quarter of the Corporation's common stock at a 3 percent discount from the
market price. Proceeds from this plan resulted in an increase in
shareholders' equity of $58.0 million and $17.9 million during 1993 and
1992, respectively.
The final risk-based capital guidelines for bank holding companies, such as
the Corporation, became effective on December 31, 1992. The guidelines
require that assets recorded on the balance sheet and the credit equivalent
amounts of off-balance sheet items be risk-weighted. Additionally, capital
is divided into two tiers. Tier 1 capital is composed of common equity,
retained earnings and perpetual preferred stock reduced by goodwill and
other intangibles. Tier 2 capital consists of a limited amount of allowable
debt, other preferred stock, certain other instruments and a limited amount
of reserve for loan losses. The Tier 1 capital ratio is Tier 1 capital
divided by risk-weighted assets and the Total capital ratio is the sum of
Tier 1 and Tier 2 capital divided by risk-weighted assets. The regulatory
minimum Total capital ratio is 8.00 percent of which one-half (4.00 percent)
must be Tier 1 capital. Additionally, a minimum Leverage ratio has been
adopted for bank holding companies requiring banking organizations to
maintain Tier 1 capital of at least 3.00 percent of average quarterly assets
less goodwill and other intangibles. This Leverage ratio is the minimum
requirement for the most highly rated banking organizations and other
banking organizations are expected to maintain an additional level of
at least 100 to 200 basis points.
<PAGE>F-61 85
The Federal Reserve Board, OCC and FDIC implemented regulations, pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
effective on December 19, 1992, concerning prompt supervisory and regulatory
actions to be taken against undercapitalized depository institutions.
FDICIA establishes five capital categories: "well-capitalized"; "adequately
capitalized"; "undercapitalized"; "significantly undercapitalized"; and
"critically undercapitalized". Under these regulations, an institution will
be deemed "well-capitalized" if it has a Risk-based Total capital ratio of
10.00 percent or greater, a Risk-based Tier 1 capital ratio of 6.00 percent
or greater and a Leverage ratio of 5.00 percent or greater. In addition,
the institution cannot be subject to an order, written agreement, capital
directive or prompt correction action directive. The Corporation and its
subsidiary banks at December 31, 1993 met the definition for a
"well-capitalized" institution.
The Corporation's Tier 1 capital ratio of 8.15 percent, Total capital ratio
of 12.32 percent and Leverage ratio of 6.34 percent at December 31, 1993,
are above the minimum requirements. Tier 1 capital and Total capital ratios
were 7.52 percent and 11.87 percent, respectively, at December 31, 1992.
The Corporation's Leverage ratio at December 31, 1992 was 5.90 percent. The
improvement in the Corporation's Risk-based capital and Leverage ratios is
primarily attributable to the increase in shareholders' equity.
<TABLE>
The following table presents the Risk-based capital and Leverage ratios for
the Corporation's subsidiary banks, Shawmut Bank Connecticut, National
Association (Shawmut Bank Connecticut or SBC) and Shawmut Bank, National
Association (Shawmut Bank Massachusetts or SBM).
<CAPTION>
SBC SBM
December 31, (in millions) 1993 1992 1993 1992
<S> <C> <C> <C> <C>
Shareholders' equity $ 1,131.6 $ 880.9 $ 984.6 $ 851.4
Tier 1 capital 1,075.0 821.0 948.6 821.4
Total capital 1,210.8 936.4 1,099.2 970.8
Risk-weighted assets 10,652.1 8,951.6 9,709.4 8,969.8
Ratios:
Shareholders' equity to assets 7.80 % 7.33 % 7.64 % 6.26 %
Risk-based capital
Tier 1 capital 10.09 9.17 9.77 9.16
Total capital 11.37 10.46 11.32 10.82
Leverage 7.79 7.53 7.39 6.75
</TABLE>
The Corporation's subsidiary banks are subject to similar risk-based capital
guidelines and minimum Leverage ratio requirements as the Corporation. The
Tier 1 capital and Total capital ratios at both banks exceeded the
regulatory minimum capital ratios of 4.00 percent for Tier 1 capital and
8.00 percent for Total capital at December 31, 1993.
Shareholder's equity at Shawmut Bank Connecticut increased $250.7 million to
$1.1 billion at December 31, 1993, from $880.9 million at December 31,
1992. The increase in shareholder's equity is attributable to additional
capital contributions by the Corporation during 1993 and current year net
income. The Tier 1 capital and Total capital ratios for Shawmut Bank
Connecticut were 10.09 percent and 11.37 percent, respectively, at December
31, 1993, compared with 9.17 percent and 10.46 percent, respectively, at
December 31, 1992.
<PAGE>F-62 86
Shareholders' equity at Shawmut Bank Massachusetts increased $133.2 million
to $984.6 million at December 31, 1993 from $851.4 million at December 31,
1992. The increase is attributable to current year net income. The Tier 1
capital and Total capital ratios for Shawmut Bank Massachusetts were 9.77
percent and 11.32 percent, respectively, at December 31, 1993, compared with
9.16 percent and 10.82 percent, respectively, at December 31, 1992.
Principal sources of the parent companies' revenues are dividends received
from its bank and other subsidiaries and interest earned on short-term
investments and advances to subsidiaries. Dividends of $81.9 million were
declared and paid by Shawmut Bank Massachusetts to the Corporation in 1993.
No dividends were paid by the subsidiary banks to the Corporation in 1992.
Federal law imposes limitations on the payment of dividends by the
subsidiaries of the Corporation that are national banks. Two different
calculations are performed to measure the amount of dividends that may be
paid: a "recent earnings" test and an "undivided profits" test.
Under the recent earnings test, a dividend may not be paid if the total of
all dividends declared by a national bank in any calendar year is in excess
of the current year's net profits combined with the retained net profits of
the two preceding years, unless the bank obtains the approval of the OCC.
Pursuant to regulations (Regulations) adopted in December 1990 by the OCC,
"net profits" is defined as the net income reported by a bank in its Reports
of Condition and Income and "retained net profits" is "net profits" less any
common or preferred dividends declared for that reporting period. Under the
recent earnings test, to the extent that a national bank has a loss in any
year, the national bank must subtract that loss (as well as any dividends
paid) from earnings during the next two years in determining its capacity to
pay dividends.
Under the undivided profits test, a dividend may not be paid in excess of a
bank's undivided profits then on hand, after deducting (i) losses and (ii)
bad debts in excess of the allowance for loan and lease losses. Under the
Regulations, "allowance for loan and lease losses" and "undivided profits"
are defined as the amounts reported as such by a bank in its Reports of
Condition and Income; and "bad debts" is defined to include matured
obligations due a bank on which the interest is past due and unpaid for six
months, unless the debts are well-secured and in the process of collection.
Generally, a debt is considered "matured" when all or part of the principal
is due and payable as a result of demand, arrival of the stated maturity
date, or acceleration by contract or by operation of law. In addition, the
Regulations specify that only the portion of a bank's surplus account that
is earned surplus (surplus derived from earnings of prior periods in excess
of the minimum amount of surplus required under federal law to be maintained
by the bank) may be transferred to undivided profits for the purpose of
paying dividends, provided the transfer is approved by the OCC.
Under the recent earnings test, which is the more restrictive of the two
tests, at January 1, 1994, Shawmut Bank Connecticut could pay up to $113.8
million in dividends to its parent holding company without prior approval.
Shawmut Bank Massachusetts could pay up to $210.7 million in dividends to
its parent holding company, under the recent earnings test at January 1,
1994 without prior approval. Shawmut Bank Connecticut and Shawmut Bank
Massachusetts had undivided profits of $262.9 million and $469.6 million,
respectively, at December 31, 1993.
<PAGE>F-63 87
It is the policy of both the OCC and the Federal Reserve Board that banks
and bank holding companies, respectively, should pay dividends only out of
current earnings. Finally, the Federal regulatory agencies are authorized
to prohibit a banking organization from engaging in an unsafe or unsound
banking practice. Depending upon the circumstances, the agencies could take
the position that paying a dividend would constitute an unsafe or unsound
banking practice.
The Corporation's subsidiary banks are subject to restrictions under federal
law which limit the transfer of funds to the Corporation and its nonbanking
subsidiaries, whether in the form of loans, other extensions of credit,
investments or asset purchases. Such transfers by any subsidiary bank to
the Corporation or any nonbanking subsidiary are limited in amount to 10
percent of such subsidiary bank's capital and surplus and, with respect to
the Corporation and certain of its affiliates, to an aggregate of 20 percent
of such subsidiary bank's capital and surplus. Furthermore, such loans and
extensions of credit are required to be secured in specified amounts. In
October 1993, the Federal Reserve Bank of Boston and OCC removed certain
regulatory agreements under which the Corporation and its subsidiary banks
had been operating. The regulatory agreements focused on the need to
improve asset quality and credit administration policies, as well as prior
approval for dividend payments.
CREDIT RISK MANAGEMENT
Credit risk entails both general risk, which is inherent in the process of
lending, and risk specific to individual borrowers. The management of
credit risk involves two fundamental disciplines, loan underwriting and loan
administration. The Corporation manages credit risk through a strategy of
portfolio diversification, which seeks to avoid concentrations of credit by
loan type and industry, and to limit total exposure to individual and
affiliated borrowers. The evaluation of specific risk is a basic function
of underwriting and loan administration and concerns the analysis of the
borrower's ability to service debt as well as the value of pledged
collateral.
The Corporation's lending and loan administration staffs are charged with
monitoring the Corporation's loan portfolio and identifying changes in the
economy or in a borrower's circumstances, which may affect the ability to
repay debt or the value of pledged collateral. In order to assess and
monitor the degree of risk in the Corporation's loan portfolio, several
credit risk identification and monitoring processes are utilized. A credit
risk assessment process is employed that assigns a risk grade to each loan
based upon an assessment of the borrower's financial capacity to service the
debt and the presence and value of collateral for the loan. Credit grading
of the portfolio is achieved through loan officers' monitoring of individual
loans supplemented by periodic reviews performed by the Credit Review
Department. Further, a special division of loan administration monitors
adversely graded loans, recommending and approving courses of action and
ensuring the accuracy and timeliness of recognizing changes in risk.
<PAGE>F-64 88
<TABLE>
LOAN PORTFOLIO
<CAPTION>
December 31, (in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 6,321.3 $ 5,822.4 $ 4,900.0 $ 5,347.3 $ 7,042.0
Owner-occupied commercial real estate 1,388.0 1,601.7 1,794.1 1,814.1
Real estate investor/developer
Commercial mortgage 1,225.1 1,390.4 1,563.5 1,903.3 2,673.7
Construction and other 152.8 346.2 593.1 964.2 1,489.1
Total investor/developer 1,377.9 1,736.6 2,156.6 2,867.5 4,162.8
Consumer
Residential mortgage 4,036.8 3,886.9 3,104.0 2,846.1 3,477.6
Home equity 1,387.6 1,199.0 1,203.7 1,081.3 1,898.6
Installment and other 872.8 653.2 1,142.3 1,432.2 2,620.4
Total consumer 6,297.2 5,739.1 5,450.0 5,359.6 7,996.6
Total 15,384.4 14,899.8 14,300.7 15,388.5 19,201.4
Reserve for loan losses (633.0) (863.0) (1,000.0) (941.3) (738.9)
Total $ 14,751.4 $ 14,036.8 $ 13,300.7 $ 14,447.2 $ 18,462.5
</TABLE>
LENDING ACTIVITIES
The Corporation extends credit primarily to consumers, large corporate
customers, and middle market companies within New England. Commercial and
industrial loans, which represented 41 percent of the Corporation's $15.4
billion loan portfolio at year end, consisted primarily of loans to a mix of
middle market customers, typically with revenues of less than $150 million
and loans to large corporate customers. Owner-occupied commercial real
estate loans, which represented 9 percent of loans at year end, included
loans to commercial borrowers for the construction or purchase of business
space, primarily for the borrower's own use, or loans to commercial
borrowers for operating purposes in which the Corporation has taken business
real estate as collateral. The operating cash flow of the enterprise,
rather than the real estate, is the primary source of repayment. Real
estate investor/developer loans, which represented 9 percent of loans
outstanding at year end, included a diverse mix of construction projects and
commercial mortgages. Consumer loans, which represented 41 percent of the
loan portfolio at year end, included residential mortgages, home equity
loans and lines of credit and installment loans.
The Corporation's commercial and industrial loans totaled $6.3 billion at
year end 1993. Manufacturing, finance, insurance and real estate and
communications made up 26 percent, 21 percent and 19 percent, respectively,
of the portfolio at year end. Commercial and industrial loans increased
$499 million in 1993 from $5.8 billion at December 31, 1992, primarily as a
result of higher levels of corporate and money market loans.
Owner-occupied commercial real estate loans represented $1.4 billion and
$1.6 billion, respectively, of the Corporation's loan portfolio at year end
1993 and 1992.
Loans to real estate investor/developers of $1.4 billion decreased $359
million in 1993, a 21 percent decline from $1.7 billion at December 31,
1992. The decrease in loans to real estate investor/developers is primarily
attributable to the economic decline in the real estate market and
management's decision to curtail lending in this area and loans sold in a
bulk sale during the second quarter of 1993.
<PAGE>F-65 89
The Corporation's consumer loan portfolio was $6.3 billion at December 31,
1993, an increase of $558 million from $5.7 billion at December 31, 1992.
The residential mortgage loan portfolio grew by $150 million and was
generated principally by the Corporation's mortgage banking subsidiary.
Installment loans increased $220 million primarily due to growth in indirect
automobile lending.
<TABLE>
NONACCRUING LOANS, RESTRUCTURED LOANS AND ACCRUING LOANS PAST DUE 90 DAYS OR MORE
<CAPTION>
December 31, (in millions) 1993 1992 1991 1990 1989
Nonaccruing loans
<S> <C> <C> <C> <C> <C>
Current $ 72.0 $ 201.3 $ 182.1 $ 245.8
From 30 to 89 days past due 28.4 61.7 79.8 173.1
90 or more days past due 209.1 355.0 775.6 1,031.5
Total nonaccruing loans $ 309.5 $ 618.0 $ 1,037.5 $ 1,450.4 $ 838.6
Restructured loans
(not included in categories above) $ 66.2 $ 165.0 $ 98.5 $ 4.6 $ 5.0
Accruing loans past due 90 days or more
(not included in categories above) 33.5 42.6 82.5 92.9 53.0
Nonaccruing loans to loans 2.01 % 4.15 % 7.25 % 9.43 % 4.37 %
Reserve for loan losses to
nonaccruing loans 205.00 140.00 96.00 65.00 88.00
</TABLE>
Information on aging of nonaccruing loans is not available for 1989.
When a loan is past due 90 days or more or the ability of a borrower to
repay principal or interest is in doubt, the Corporation's policy is to
discontinue the accrual of interest and reverse any unpaid accrued amounts.
If there is doubt as to collectibility, cash interest payments are applied
to reduce principal. A loan is not restored to accruing status until the
borrower has brought the loan current and demonstrated the ability to make
payments of principal and interest, and doubt as to the collectibility of
the loan is not present. The Corporation may continue to accrue interest on
loans past due 90 days or more which are well secured and in the process of
collection.
The classification of a loan as nonaccruing does not necessarily indicate
that loan principal and interest will be uncollectible. Nonaccruing loans
can be reduced as a result of payments, restructurings, return to accruing
status, liquidation or sale of collateral and charge-offs.
<PAGE>F-66 90
Nonaccruing loans declined $308.5 million, or 50 percent, to $309.5 million
at December 31, 1993, from $618.0 million at December 31, 1992.
Contributing to the decline were bulk sales of approximately $177.0 million
of nonaccruing real estate loans during the second quarter of 1993. The
ratio of nonaccruing loans to loans improved to 2.01 percent at
December 31, 1993 from 4.15 percent at December 31, 1992. The ratio of the
reserve for loan losses to nonaccruing loans also improved increasing to
205 percent at December 31, 1993, from 140 percent at December 31, 1992.
Approximately $72.0 million, or 23 percent, of nonaccruing loans were
current at December 31, 1993, compared with $201.3 million, or 33 percent, at
December 31, 1992. These loans have been classified as nonaccruing because
of concerns regarding future collectibility. Real estate investor/developer
loans represented 34 percent of this balance at December 31, 1993.
The Corporation seeks to limit its exposure to individual and affiliated
borrowers. The ten largest nonaccruing loan relationships totaled $35.9
million, or less than .5 percent, of loans outstanding at December 31, 1993.
At December 31, 1992 the ten largest nonaccruing loan relationships totaled
$78.0 million.
Restructured loans, which are loans with original terms that have been
modified as a result of a change in the borrower's financial condition,
totaled $66.2 million at December 31, 1993, compared with $165.0 million at
the end of 1992. Contributing to the decline were bulk sales of
approximately $75.4 million of restructured loans during the second quarter
of 1993. Restructured loans included real estate investor/developer loans
and owner-occupied loans of $47.8 million and $3.9 million, respectively, at
December 31, 1993. The yield from the portfolio of restructured loans was
7.00 percent in 1993, compared with 7.85 percent for the year ended December
31, 1992.
Interest income related to nonaccruing and restructured loans would have
been approximately $42.8 million in 1993 and $72.1 million in 1992 had these
loans been current and the terms of the loans had not been modified.
Interest income recorded on these loans totaled approximately $9.6 million
in 1993 and $25.1 million in 1992. Interest income received on these loans
and applied as a reduction of principal totaled approximately $14.4 million
and $31.3 million in 1993 and 1992, respectively.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $33.5 million at December 31, 1993, compared
with $42.6 million at December 31, 1992. These loans represented less than
.5 percent of loans at December 31, 1993 and 1992, respectively. Consumer
loans represented 40 percent and 50 percent of loans past due 90 days or
more and still accruing interest at the end of 1993 and 1992, respectively.
<PAGE>F-67 91
<TABLE>
NONACCRUING LOANS BY LOAN TYPE
<CAPTION>
December 31, (in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 72.6 $ 152.8 $ 225.0 $ 359.7 $ 258.9
Owner-occupied commercial real estate 75.6 140.6 182.2 195.1
Real estate investor/developer
Commercial mortgage 81.9 164.1 281.3 329.2 202.3
Construction and other 23.2 69.0 159.6 396.9 309.5
Total investor/developer 105.1 233.1 440.9 726.1 511.8
Consumer
Residential mortgage 46.5 73.0 141.9 114.3 37.8
Home equity 5.1 6.6 13.4 10.8 5.3
Installment and other 4.6 11.9 34.1 44.4 24.8
Total consumer 56.2 91.5 189.4 169.5 67.9
Total $ 309.5 $ 618.0 $ 1,037.5 $ 1,450.4 $ 838.6
</TABLE>
Information on nonaccruing owner-occupied commercial real estate loans is
not available for 1989.
<TABLE>
CHANGES IN NONACCRUING LOANS
The changes in the Corporation's nonaccruing loans for each of the years
ended December 31, 1993 and 1992, respectively, are summarized below:
<CAPTION>
Year ended December 31, (in millions) 1993 1992
<S> <C> <C>
Balance at beginning of year $ 618.0 $ 1,037.5
New nonaccruing loans 377.1 684.9
Decreases in nonaccruing loans
Sales 80.9 68.3
Payments 220.2 321.1
Returns to accruing loans 142.2 153.1
Transfers to restructured loans 17.2 80.7
Transfers to foreclosed properties 27.4 217.9
Charge-offs 182.7 258.3
Total 670.6 1,099.4
Net other changes (1) (15.0) (5.0)
Balance at end of year $ 309.5 $ 618.0
(1) Amount represents the net change in nonaccruing consumer loans.
<PAGE>F-68 92
</TABLE>
<TABLE>
LOAN LOSS EXPERIENCE
<CAPTION>
Year ended December 31, (in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at beginning of year $ 863.0 $ 1,000.0 $ 941.3 $ 738.9 $ 281.7
Loans charged off
Commercial and industrial 56.6 100.1 163.1 127.0 78.7
Owner-occupied commercial real estate 41.7 43.8 40.7 12.3
Real estate investor/developer
Commercial mortgage 112.2 67.4 65.6 31.9 24.1
Construction and other 37.0 50.9 74.5 22.6 35.8
Total investor/developer 149.2 118.3 140.1 54.5 59.9
Consumer
Residential mortgage 38.4 75.5 22.7 5.2 3.1
Home equity 4.3 6.0 8.2 3.3
Installment and other 19.5 28.1 72.7 52.0 42.6
Total consumer 62.2 109.6 103.6 60.5 45.7
Total loans charged off 309.7 371.8 447.5 254.3 184.3
Recoveries on loans charged off
Commercial and industrial 22.8 18.3 27.2 11.4 8.7
Real estate 17.7 16.9 4.3 2.3 2.2
Consumer 10.0 10.1 8.3 8.7 4.8
Total recoveries 50.5 45.3 39.8 22.4 15.7
Net loans charged off 259.2 326.5 407.7 231.9 168.6
Provision charged to operations 29.2 189.5 466.4 434.3 625.8
Reserve for loan losses at end of year $ 633.0 $ 863.0 $ 1,000.0 $ 941.3 $ 738.9
Loans at end of year $ 15,384.4 $ 14,899.8 $ 14,300.7 $ 15,388.5 $ 19,201.4
Average loans for the year 14,792.0 13,695.8 14,215.4 16,851.6 18,874.6
Reserve for loan losses to loans 4.11 % 5.79 % 6.99 % 6.12 % 3.85 %
Net charge-offs to average loans 1.75 2.38 2.87 1.38 0.89
</TABLE>
PROVISION AND RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level determined by
management to be adequate to provide for probable losses inherent in the
loan portfolio including commitments to extend credit. The reserve is
maintained through the provision for loan losses, which is a charge to
operations. The potential for loss in the portfolio reflects the risks and
uncertainties inherent in the extension of credit.
The determination of the adequacy of the reserve is based upon management's
assessment of risk elements in the portfolio, factors affecting loan quality
and assumptions about the economic environment in which the Corporation
operates. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading
process and specific reviews and evaluations of significant individual
problem credits. In addition, management reviews overall portfolio quality
through an analysis of current levels and trends in charge-off, delinquency
and nonaccruing loan data, review of forecasted economic conditions and the
overall banking environment. These reviews are of necessity dependent upon
estimates, appraisals and judgments, which may change quickly because of
changing economic conditions and the Corporation's perception as to how
these factors may affect the financial condition of debtors.
<PAGE>F-69 93
The reserve for loan losses was $633.0 million at December 31, 1993,
compared with $863.0 million at December 31, 1992. The ratio of the reserve
for loan losses to nonaccruing loans increased to 205 percent at December
31, 1993, from 140 percent at the end of 1992. The reserve for loan losses
to total loans was 4.11 percent at December 31, 1993, compared with 5.79
percent at December 31, 1992. The reserve for loan losses at December 31,
1993 and 1992 was equal to 2.44 times net charge-offs for 1993 and 2.64
times net charge-offs for 1992, respectively.
The provision for loan losses was $29.2 million for the year ended December
31, 1993, compared with $189.5 million and $466.4 million for the years
ended December 31, 1992 and 1991, respectively. Net charge-offs for 1993
were $259.2 million, equal to 1.75 percent of average loans. Net
charge-offs for 1993 included a charge-off of $108.6 million related to a bulk
sale of nonaccruing real estate loans. Excluding this charge-off, net
charge-offs for 1993 would have been $150.6 million, equal to 1.02 percent
of average loans. The comparable net charge-offs experienced in 1992 were
$293.4 million, or 2.14 percent of average loans, after excluding a
charge-off of $33.1 million related to the bulk sale of nonaccruing
residential mortgage loans, and for 1991 net charge-offs were $407.7
million, or 2.87 percent of average loans. The decrease in net charge-offs
reflects improving asset quality over the periods presented.
Management anticipates that net charge-offs for 1994, as a percent of
average loans outstanding, will not exceed 1993 levels, after excluding
charge-offs associated with bulk sales and also anticipates further
reduction in the reserve for loan losses if loan quality trends continue to
improve. However, future levels of net charge-offs and the reserve for loan
losses will be affected by changing economic conditions and loan quality.
Continued economic weakness in New England may adversely affect the level of
net charge-offs and the reserve for loan losses in future periods.
Real estate investor/developer charge-offs were $149.2 million, or 48
percent of total charge-offs in 1993, compared with $118.3 million, or 32
percent, and $140.1 million, or 31 percent, in 1992 and 1991, respectively.
Commercial and industrial loans accounted for $56.6 million, or 18 percent
of total charge-offs in 1993, compared with $100.1 million, or 27 percent,
in 1992 and $163.1 million, or 36 percent, in 1991. Owner-occupied
commercial real estate charge-offs were $41.7 million in 1993, $43.8 million
in 1992 and $40.7 million in 1991, representing 13, 12 and 9 percent of
total charge-offs in each of the years, respectively. Charge-offs
of consumer loans were $62.2 million, or 20 percent of total charge-offs in
1993, compared with $109.6 million, or 29 percent, in 1992 and $103.6
million, or 23 percent, in 1991.
The Financial Accounting Standards Board issued FAS No. 114, "Accounting By
Creditors for Impaired Loans", in May 1993. The new accounting standard
will require that impaired loans, which are defined as loans where it is
probable that a creditor will not be able to collect both the contractual
interest and principal payments, be measured at the present value of
expected future cash flows discounted at the loan's effective rate when
assessing the need for a loss accrual. The new accounting standard is
effective for the Corporation's financial statements beginning January 1,
1995. The effect on the Corporation of adopting this new accounting
standard is currently being evaluated.
<PAGE>F-70 94
<TABLE>
FORECLOSED PROPERTIES BY PROJECT TYPE
<CAPTION>
December 31, (in millions) 1993 1992
<S> <C> <C>
Land $ 10.7 $ 35.3
Offices 8.6 42.9
Residential mortgage 6.0 12.5
Hotels, resorts, inns 5.7 8.9
Industrial 5.6 43.3
Retail space 4.0 28.8
Mixed use 2.1 15.7
Residential developers
Condominium 1.6 11.8
Single family 1.6 6.2
Apartment/rental 0.9 17.3
Other 1.2 21.7
Total $ 48.0 $ 244.4
</TABLE>
FORECLOSED PROPERTIES
Properties acquired through foreclosure or in settlement of loans and
in-substance foreclosures are classified as foreclosed properties. An
in-substance foreclosure occurs when a borrower has little or no equity in
the collateral, repayment can only be expected to come from the operations
or sale of the collateral, and the borrower has effectively abandoned the
collateral or has doubtful ability to rebuild equity in the collateral. A
valuation reserve is maintained for estimated selling costs and to record
the excess of the carrying values over the fair market values of properties
if a change in the carrying values are judged to be temporary.
Foreclosed properties decreased $196.4 million, or 80 percent, to $48.0
million at December 31, 1993 from $244.4 million at December 31, 1992. The
decrease in foreclosed properties resulted primarily from ongoing
disposition efforts and also reflects the bulk sale of real estate loans and
foreclosed properties in the second quarter of 1993.
The provision to reduce the carrying values of foreclosed properties was
$68.1 million during 1993, compared with $134.2 million in 1992 and $77.1
million in 1991. The 1993 provision for foreclosed properties included a
charge of $20.0 million relating to a bulk sale of foreclosed properties in
the second quarter of 1993. The provision for 1992 included three special
charges totaling $23.6 million: $5.5 million related to the bulk sale of
$18.6 million of foreclosed residential properties; $9.4 million related to
a pool of foreclosed commercial properties aggregating approximately $34
million subject to auction; and $8.7 million to reduce the carrying value of
the remaining foreclosed properties for estimated selling costs. The
decrease in the foreclosed properties provision in 1993 reflects the overall
decline in the levels of foreclosed properties throughout 1993.
Foreclosed properties expense totaled $27.6 million in 1993 and $32.9
million in 1992 and 1991. Foreclosed properties expense includes the cost
of managing, upgrading and maintaining the properties as well as legal fees,
property taxes and appraisal fees, net of rental income. Gains or losses
realized upon the sale of properties are included in the foreclosed
properties provision. The decline in foreclosed properties expense in 1993
is consistent with the lower level of foreclosed properties throughout 1993.
The increased level of foreclosed properties expense in 1992 and 1991
reflected the effort to maintain and sell these foreclosed properties.
<PAGE>F-71 95
<TABLE>
The table below presents the aging of foreclosed properties at December 31,
1993 and 1992.
<CAPTION>
December 31, (in millions) 1993 1992
<S> <C> <C>
From 0 to 180 days $ 10.3 $ 67.1
From 181 days to 1 year 8.6 91.8
From 1 to 2 years 15.9 66.1
Over 2 years 13.2 19.4
Total $ 48.0 $ 244.4
NONACCRUING LOANS PLUS FORECLOSED PROPERTIES
<CAPTION>
December 31, (in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 309.5 $ 618.0 $ 1,037.5 $ 1,450.4 $ 838.6
Foreclosed properties 48.0 244.4 360.9 230.6 174.9
Total $ 357.5 $ 862.4 $ 1,398.4 $ 1,681.0 $ 1,013.5
Nonaccruing loans plus foreclosed properties
to loans plus foreclosed properties 2.32 % 5.69 % 9.54 % 10.76 % 5.23 %
</TABLE>
Nonaccruing loans plus foreclosed properties decreased $504.9 million, or 59
percent, during 1993 to $357.5 million at December 31, 1993 from $862.4
million at December 31, 1992. Contributing to the decline in these assets
were ongoing disposition efforts and bulk sales of nonaccruing loans and
foreclosed properties in the second quarter of 1993. The ratio of
nonaccruing loans plus foreclosed properties to loans plus foreclosed
properties declined to 2.32 percent at December 31, 1993 from 5.69 percent
at December 31, 1992.
PORTFOLIO STATISTICS
The following tables set forth detailed portfolio statistics for commercial
and industrial loans, owner-occupied commercial real estate loans, real
estate investor/developer loans, consumer loans, and the Corporation's ten
largest nonaccruing loan relationships.
<TABLE>
COMMERCIAL AND INDUSTRIAL LOANS - BY INDUSTRY SECTOR
<CAPTION>
1993 1992
Loans Charge- Loans Charge-
December 31, (in millions) outstanding Nonaccruing offs outstanding Nonaccruing offs
<S> <C> <C> <C> <C> <C> <C>
Manufacturing $ 1,649.9 $ 24.2 $ 6.4 $ 1,514.7 $ 30.0 $ 5.7
Finance, insurance and
real estate 1,351.6 7.3 8.9 1,000.6 22.7 24.4
Communications 1,173.5 5.8 9.3 1,181.0 22.8 5.0
Services 702.3 10.8 6.0 568.9 17.9 20.8
Wholesale 455.3 8.0 5.2 491.3 22.7 11.0
Retail 422.4 6.6 8.4 503.9 14.1 14.9
Other 566.3 9.9 12.4 562.0 22.6 18.3
Total $ 6,321.3 $ 72.6 $ 56.6 $ 5,822.4 $ 152.8 $ 100.1
<PAGE>F-72 96
</TABLE>
Nonaccruing commercial and industrial loans declined $80.2 million, or 52
percent, from $152.8 million at December 31, 1992 to $72.6 million at
December 31, 1993 and represented 23 percent of total nonaccruing loans.
Nonaccruing loans represented 1 percent and 3 percent of total loans in this
sector at December 31, 1993 and 1992, respectively.
<TABLE>
OWNER-OCCUPIED COMMERCIAL REAL ESTATE LOANS - BY INDUSTRY SECTOR
<CAPTION>
1993 1992
Loans Charge- Loans Charge-
December 31, (in millions) outstanding Nonaccruing offs outstanding Nonaccruing offs
<S> <C> <C> <C> <C> <C> <C>
Finance, insurance and
real estate $ 380.9 $ 21.7 $ 18.6 $ 539.8 $ 55.0 $ 15.7
Services 361.6 7.0 6.6 361.8 17.1 8.0
Manufacturing 170.0 5.9 3.6 168.7 11.4 4.0
Retail 167.1 19.8 4.1 166.1 25.6 5.6
Wholesale 89.0 3.6 1.3 79.1 4.3 4.0
Communications 30.4 0.9 0.1 25.2 0.4 0.4
Other 189.0 16.7 7.4 261.0 26.8 6.1
Total $ 1,388.0 $ 75.6 $ 41.7 $ 1,601.7 $ 140.6 $ 43.8
</TABLE>
Nonaccruing owner-occupied commercial real estate loans declined $65.0
million, or 46 percent, from $140.6 million at December 31, 1992 to $75.6
million at December 31, 1993 and represented 24 percent of total nonaccruing
loans. Nonaccruing loans represented 5 percent and 9 percent of total loans
in this sector at December 31, 1993 and 1992, respectively.
<TABLE>
REAL ESTATE INVESTOR/DEVELOPER LOANS - BY PROJECT
<CAPTION>
1993 1992
Loans Charge- Loans Charge-
December 31, (in millions) outstanding Nonaccruing offs outstanding Nonaccruing offs
<S> <C> <C> <C> <C> <C> <C>
Offices $ 277.5 $ 14.9 $ 49.1 $ 394.7 $ 44.9 $ 31.5
Retail space 253.6 7.6 17.9 254.0 13.4 8.2
Apartment/rental 236.7 14.8 21.4 283.2 39.8 17.1
Mixed use 180.9 15.1 8.2 216.0 19.4 12.1
Industrial 147.6 13.7 24.0 195.9 37.0 9.7
Special purposes 59.3 5.5 3.0 73.0 7.2 11.2
Research and development space 44.9 6.0 67.2 13.3 2.7
Land 44.8 17.0 6.5 70.0 20.8 18.0
Residential developers
Condominium 36.7 4.9 4.3 53.1 11.7 3.6
Single family 35.1 5.9 3.2 54.3 12.8 1.7
Hotels, resorts, inns 21.6 1.8 4.6 29.9 8.1 0.7
Other 39.2 3.9 1.0 45.3 4.7 1.8
Total $ 1,377.9 $ 105.1 $ 149.2 $ 1,736.6 $ 233.1 $ 118.3
</TABLE>
Nonaccruing real estate investor/developer loans decreased $128.0 million,
or 55 percent, from $233.1 million at December 31, 1992 to $105.1 million at
December 31, 1993 and represented 34 percent of total nonaccruing loans.
Nonaccruing loans represented 8 percent and 13 percent of total loans in
this sector at December 31, 1993 and 1992, respectively.
<PAGE>F-73 97
<TABLE>
CONSUMER LOANS - BY TYPE
<CAPTION>
1993 1992
Loans Charge- Loans Charge-
December 31, (in millions) outstanding Nonaccruing offs outstanding Nonaccruing offs
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages $ 4,036.8 $ 46.5 $ 38.4 $ 3,886.9 $ 73.0 $ 75.5
Home equity lines 1,149.4 4.2 3.5 1,078.3 4.7 4.3
Indirect automobile 619.3 0.5 11.0 345.2 1.3 10.0
Home equity loans 238.2 0.8 0.8 120.7 1.9 1.7
Direct installment 159.2 1.0 2.1 175.0 1.6 3.3
Other 94.3 3.2 6.4 133.0 9.0 14.8
Total $ 6,297.2 $ 56.2 $ 62.2 $ 5,739.1 $ 91.5 $ 109.6
</TABLE>
Nonaccruing consumer loans decreased $35.3 million, or 39 percent, from
$91.5 million at December 31, 1992 to $56.2 million at December 31, 1993 and
represented 19 percent of total nonaccruing loans. Nonaccruing loans
represented 1 percent and 2 percent of total loans in this sector at
December 31, 1993 and 1992, respectively.
<TABLE>
TEN LARGEST NONACCRUING LOAN RELATIONSHIPS AS OF DECEMBER 31, 1993
Loan Type (in millions)
<S> <C>
Real estate investor/developer: mixed use $ 7.4
Real estate investor/developer: office 6.0
Commercial: manufacturing 4.0
Commercial: wholesale 3.1
Real estate investor/developer: condominium, land 3.0
Commercial: manufacturing 2.7
Real estate investor/developer: retail, industrial use 2.7
Commercial: communications, real estate 2.5
Real estate investor/developer: apartment, condominium 2.3
Owner-occupied commercial real estate: retail 2.2
Total $ 35.9
</TABLE>
ACQUISITIONS
The Corporation announced during 1993 the signing of definitive agreements
to acquire three banking organizations: New Dartmouth Bank of Manchester,
New Hampshire, with assets of $1.7 billion at year end, was announced on
March 24, 1993; Peoples Bancorp of Worcester, Inc. of Worcester,
Massachusetts, with assets of $891.1 million at year end, was announced on
August 26, 1993; and Gateway Financial Corporation of Norwalk, Connecticut,
with assets of $1.3 billion at year end, was announced on November 5, 1993.
The transactions will be accounted for as poolings of interests and are
subject to approvals by the shareholders of the respective banks and federal
and state regulatory agencies. The transactions are expected to be
completed during 1994.
On November 15, 1993, the Federal Reserve Board issued an order not
approving the Corporation's application to acquire New Dartmouth Bank. The
Federal Reserve Board cited a then-pending investigation of possible
discriminatory lending at Shawmut Mortgage Company, the Corporation's
mortgage banking subsidiary, by the United States Department of Justice
(DOJ) and the Federal Trade Commission (FTC). The Federal Reserve Board
further stated that in order to obtain approval, the Corporation would need
to submit evidence of compliance with fair lending laws and accurate
reporting pursuant to the Home Mortgage Disclosure Act.
<PAGE>F-74 98
On December 13, 1993, without admitting any wrongdoing, Shawmut Mortgage
Company entered into a consent decree with the DOJ and FTC regarding past
lending practices. Pursuant to the consent decree, Shawmut Mortgage Company
established a $960 thousand monetary fund to compensate minority loan applicants
who were denied mortgages between January 1990 and October 1992 but whose
applications would be approved under the Corporation's more recent flexible
underwriting criteria. This settlement did not have a material effect on
the Corporation's results of operations or financial condition.
The Federal Reserve Board has granted the Corporation an extension of time
until March 1, 1994 within which to resubmit a petition requesting
reconsideration of the Federal Reserve Board's November 15, 1993 decision.
The amended New Dartmouth Bank merger agreement, dated December 20, 1993,
provides for the establishment of an escrow fund which would be paid to New
Dartmouth Bank in the event that the transaction is not consummated by June
30, 1994 and New Dartmouth Bank is not in breach of certain provisions of
the agreement. Required deposits to the escrow fund will equal $10 million
by May 1, 1994. The Corporation anticipates that the New Dartmouth Bank
acquisition and the other transactions will be completed during 1994. The
Corporation anticipates that it will continue to pursue selected
acquisitions of financial institutions in the future.
FOURTH QUARTER RESULTS
The Corporation reported net income of $133.6 million, or $1.36 per common
share, for the fourth quarter of 1993, versus net income of $10.3 million,
or 8 cents per common share, in the previous year's fourth quarter. Income
before extraordinary credit for the fourth quarter of 1992 was $7.1 million,
or 4 cents per common share. The extraordinary credit of $3.2 million for
the 1992 fourth quarter was attributable to the realization of a net
operating loss carryforward. The results for the fourth quarter of 1993
include income tax benefits of $70.2 million due to the reduction of the
deferred tax asset valuation allowance recorded in the first quarter of
1993. Also included were $3.5 million of expenses related to the
Corporation's settlement with the United States Department of Justice and
the Federal Trade Commission as well as for the strengthening of fair
lending compliance programs. The results for the fourth quarter of 1992
included securities gains of $6.3 million.
Net interest income during the fourth quarter of 1993 rose to $242.6
million, up 2 percent, from $236.7 million in the third quarter of 1993 and
an increase of 7 percent from $225.8 million in the fourth quarter of 1992.
The tax-equivalent net interest margin for the fourth quarter of 1993 was
4.00 percent, compared with 4.05 percent in the third quarter of 1993 and
4.32 percent in the fourth quarter of 1992.
The provision for loan losses was $5.0 million during the fourth quarter,
unchanged from the three-month period ending September 30, 1993, compared
with $28.7 million for the fourth quarter of 1992.
Noninterest income for the fourth quarter of 1993 was $89.6 million, versus
$88.0 million in the third quarter of 1993 and $93.1 million in the fourth
quarter of 1992.
Noninterest expenses (exclusive of foreclosed properties provisions and
expenses related to the Corporation's settlement with the United States
Department of Justice and the Federal Trade Commission as well as for the
strengthening of fair lending compliance programs) during the fourth quarter
of 1993 were $220.7 million. Comparable noninterest expenses were $225.4
million and $235.8 million for the third quarter of 1993 and the fourth
quarter of 1992, respectively. The decline in noninterest expense levels
over these periods is the result of actions under the restructuring program
announced in the first quarter of 1993 as well as from declining problem
asset resolution expenses.
The provision to reduce the carrying value of foreclosed properties was $4.9
million during the fourth quarter of 1993, compared with $8.6 million during
the third quarter of 1993 and $43.8 million for the comparable period a year
ago. The fourth quarter provision in 1992 included three special charges
totaling $20.9 million: $2.8 million related to the bulk sale of $8.9
million of foreclosed residential properties; $9.4 million related to a pool
of foreclosed commercial properties aggregating approximately $34 million
subject to auction; and $8.7 million to reduce the carrying value of the
remaining foreclosed properties for estimated selling costs.
<PAGE>F-75 99
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
MATURITY OF LOANS
The following table presents the maturities of loans at December 31, 1993
and the interest sensitivity of such loans. The determination of maturities
in the loan portfolio is generally as contained in the contractual note
agreements. Occasionally extensions or renewals of loan obligations are
requested. These are reviewed on an individual basis and granted if deemed
appropriate. Such extensions, however, do not materially alter the
anticipated loan maturity schedule as reported.
<CAPTION>
Under 1-5 Over
(in millions) 1 year years 5 years Total
<S> <C> <C> <C> <C>
Commercial and industrial $ 5,015.1 $ 929.9 $ 376.3 $ 6,321.3
Real estate 770.9 1,215.2 779.9 2,766.0
Consumer 1,309.3 1,800.9 3,186.9 6,297.1
Total $ 7,095.3 $ 3,946.0 $ 4,343.1 $ 15,384.4
Interest sensitivity of above loans
Loans with predetermined interest rates $ 1,302.4 $ 1,711.2 $ 2,558.6 $ 5,572.2
Loans with floating interest rates 5,792.9 2,234.8 1,784.5 9,812.2
Total $ 7,095.3 $ 3,946.0 $ 4,343.1 $ 15,384.4
</TABLE>
<TABLE>
MATURITY OF SECURITIES
The following table presents the maturities of securities at December 31,
1993 and the weighted average yields of such securities. Mortgage backed
securities are included in the table based upon contractual maturity. The
weighted average yields were calculated based on the cost and effective
yields to maturity of each security. The weighted average yield on income
from municipal obligations and equity securities was adjusted to a
tax-equivalent basis, using a federal income tax rate of 35 percent.
<CAPTION>
Under 1-5 5-10 Over No fixed
(in millions) 1 year years years 10 years maturity Total
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
securities $ 66.8 $ 2,460.8 $ 3,614.3 $ 464.6 $ 6,606.5
State and municipal obligations 0.1 0.1 0.2
Equity securities $ 212.6 212.6
Other securities 2.9 582.9 448.4 1,137.1 2,171.3
Total $ 69.7 $ 3,043.8 $ 4,062.7 $ 1,601.8 $ 212.6 $ 8,990.6
Weighted average yield
(tax-equivalent basis) 6.60 % 5.43 % 6.35 % 7.64 % 7.85 % 6.31 %
</TABLE>
<TABLE>
The following table summarizes the Corporation's securities classified as
available for sale at December 31, 1993 and the carrying amount of
securities reported at the lower of aggregate cost or fair value at December
31, 1992 and 1991.
<CAPTION>
December 31, (in millions) 1993 1992 1991
<S> <C> <C> <C>
U.S. Government and agency securities
U.S. Treasury $ 1,551.9 $ 931.4
Mortgage backed 353.0 1,974.2
State and municipal obligations 0.2 4.1
Equity securities 212.6 192.9 $ 212.7
Corporate mortgage backed and other securities 478.7 258.9
Total $ 2,596.4 $ 3,361.5 $ 212.7
<PAGE>F-76 100
</TABLE>
<TABLE>
The following table summarizes the Corporation's securities classified as
held to maturity for the periods indicated.
<CAPTION>
December 31, (in millions) 1993 1992 1991
U.S. Government and agency securities
<S> <C> <C> <C>
Mortgage backed $ 3,155.1 $ 1,799.7 $ 3,986.8
U.S. Treasury 1,546.5 140.5
State and municipal obligations 26.2
Other securities
Mortgage backed 22.0 455.4
Asset backed and other 1,670.6 916.6 272.7
Total $ 6,394.2 $ 2,716.3 $ 4,881.6
</TABLE>
<TABLE>
CONSOLIDATED SHORT-TERM BORROWINGS
The following table summarizes average outstandings, maximum month-end
outstandings, daily average interest rates and average interest rates on
year-end balances. Average interest rates during each year were computed by
dividing total interest expense by the average amount borrowed.
<CAPTION>
(in millions) 1993 1992 1991
Federal funds purchased
<S> <C> <C> <C>
Average outstanding $ 610.7 $ 222.7 $ 306.0
Maximum outstanding at any month-end 1,709.3 386.0 344.2
Average interest rate during year 3.09 % 3.48 % 5.81 %
Interest rate at year-end 3.12 3.01 3.93
Securities sold under agreements to repurchase
Average outstanding $ 5,769.4 $ 3,444.5 $ 2,423.6
Maximum outstanding at any month-end 7,156.6 4,548.5 3,477.9
Average interest rate during year 3.05 % 3.44 % 5.56 %
Interest rate at year-end 2.98 3.24 4.58
Treasury tax and loan funds
Average outstanding $ 239.9 $ 221.2 $ 213.1
Maximum outstanding at any month-end 600.0 380.4 351.8
Average interest rate during year 2.82 % 3.34 % 5.33 %
Interest rate at year-end 2.75 2.78 3.94
Private placement notes
Average outstanding $ 162.1 $ 118.8 $ 117.6
Maximum outstanding at any month-end 189.8 150.3 171.7
Average interest rate during year 3.16 % 3.72 % 6.01 %
Interest rate at year-end 3.06 3.34 4.28
<PAGE>F-77 101
</TABLE>
<TABLE>
DOMESTIC TIME DEPOSITS OF $100 THOUSAND OR MORE
Domestic time deposits in denominations of $100 thousand or more and the
related maturities at December 31, 1993, were as follows:
<CAPTION>
Less than Three Six to Over
three to six twelve twelve
(in millions) months months months months Total
<S> <C> <C> <C> <C> <C>
Time certificates of deposit $ 230.9 $ 7.0 $ 29.7 $ 26.1 $ 293.7
Other time deposits 102.2 30.0 22.3 69.8 224.3
</TABLE>
<TABLE>
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Following is the quarterly financial information of Shawmut National
Corporation and its subsidiaries for 1993 and 1992. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the Corporation's results of
operations for such periods are reflected.
<CAPTION>
(in millions, except First quarter (1) Second quarter Third quarter Fourth quarter
per share data) 1993 1992 1993 1992 1993 1992 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 212.2 $ 192.8 $ 233.1 $ 199.3 $ 236.7 $ 207.4 $ 242.6 $ 225.8
Provision for
loan losses 12.2 68.5 7.0 48.7 5.0 43.6 5.0 28.7
Securities gains, net 5.1 68.4 0.1 0.1 11.2 0.4 6.3
Noninterest income 95.5 102.0 90.9 109.1 87.9 94.3 89.2 86.8
Noninterest expenses 323.5 250.3 241.1 250.8 234.0 255.7 229.1 279.6
Income taxes (benefit) (6.4) 11.1 19.7 2.5 14.6 3.6 (35.5) 3.5
Income (loss) before
extraordinary credit
and cumulative effect
of accounting changes (16.5) 33.3 56.3 6.4 71.1 10.0 133.6 7.1
Extraordinary credit 10.0 2.2 3.0 3.2
Cumulative effect of
changes in methods
of accounting 46.2
Net income $ 29.7 $ 43.3 $ 56.3 $ 8.6 $ 71.1 $ 13.0 $ 133.6 $ 10.3
Net income
applicable to
common shares $ 25.9 $ 42.8 $ 52.4 $ 8.0 $ 67.2 $ 12.5 $ 129.7 $ 7.1
Income (loss) before
extraordinary credit
and cumulative effect
of accounting changes
per common share $ (0.22) $ 0.44 $ 0.56 $ 0.07 $ 0.72 $ 0.10 $ 1.36 $ 0.04
Net income
per common share 0.28 0.58 0.56 0.09 0.72 0.14 1.36 0.08
See discussion of fourth quarter results in the Financial Review Section
of this annual report on page F-75.
(1) First quarter of 1993 has been restated to reflect the adoption of
FAS 112.
<PAGE>F-78 102
</TABLE>
[This Page Intentionally Left Blank]
<PAGE>F-79 103
<TABLE>
CONSOLIDATED AVERAGE BALANCE SHEET, NET INTEREST INCOME AND INTEREST RATES
The table below presents the Corporation's average balance sheet, net
interest income and interest rates for the years 1989 through 1993.
Average loans outstanding include nonaccruing loans. Interest income
and interest rates on loans and municipal obligations are presented on a
tax-equivalent basis, which reflects a federal income tax rate of 35
percent for 1993 and 34 percent for 1992 to 1989.
<CAPTION>
1993 1992
Average Average Average Average
Year ended December 31, (in millions) balance Interest rate balance Interest rate
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans $ 14,792 $ 1,052.2 7.11 %$ 13,696 $ 1,064.1 7.77 %
Securities
At lower of aggregate cost or market value
Subject to federal income taxes 2,969 195.9 6.60 2,531 195.2 7.71
Dividend on equity securities 269 22.0 8.17 204 23.1 11.31
Held to maturity
Subject to federal income taxes 4,467 264.0 5.91 2,921 231.1 7.91
Exempt from federal income taxes 6 0.4 6.74
Residential mortgages held for sale 405 29.6 7.32 344 27.3 7.93
Short-term investments
Time deposits in other banks 6 0.2 4.04 39 1.6 4.10
Federal funds sold and securities
purchased under agreements to resell 295 9.3 3.16 439 15.8 3.60
Trading account securities 35 2.0 4.44 32 2.4 7.59
Total interest-earning assets 23,238 1,575.2 6.78 20,212 1,561.0 7.73
Reserve for loan losses (754) (957)
Cash and due from banks 1,443 1,515
Other assets 1,484 1,680
Total assets $ 25,411 $ 22,450
LIABILITIES
Savings, money market and
NOW accounts $ 7,428 140.3 1.89 %$ 7,121 217.3 3.05 %
Time certificates of deposit
of $100 thousand or more 480 22.2 4.62 693 42.6 6.15
Domestic time deposits 3,174 140.5 4.42 4,096 210.7 5.14
Foreign time deposits 173 5.1 2.97 76 2.5 3.30
Total interest-bearing deposits 11,255 308.1 2.74 11,986 473.1 3.95
Federal funds purchased and securities
sold under agreements to repurchase 6,380 195.0 3.06 3,667 126.2 3.44
Other borrowings 827 62.4 7.54 673 61.8 9.17
Total other borrowings 7,207 257.4 3.57 4,340 188.0 4.33
Notes and debentures 839 72.1 8.58 668 59.3 8.89
Total interest-bearing liabilities 19,301 637.6 3.30 16,994 720.4 4.24
Demand deposits 4,274 4,020
Other liabilities 240 180
Total liabilities 23,815 21,194
Shareholders' equity 1,596 1,256
Total liabilities and shareholders' equity $ 25,411 $ 22,450
Net interest income
(tax-equivalent basis) 937.6 4.04 840.6 4.16
Less tax-equivalent adjustment (13.0) (15.3)
Net interest income $ 924.6 $ 825.3
<PAGE>F-80 104
</TABLE>
<TABLE>
1991 1990 1989
Average Average Average Average Average Average
balance Interest rate balance Interest rate balance Interest rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
* $ 14,215 $ 1,313.0 9.24 %$ 16,852 $ 1,737.8 10.31 %$ 18,875 $ 2,123.4 11.25 %
* 221 29.5 13.33 394 51.0 12.93 934 106.6 11.42
* 4,805 431.1 8.97 3,549 331.8 9.35 3,519 330.5 9.39
* 50 4.1 8.17 208 22.1 10.70 1,026 122.3 11.93
* 222 19.2 8.67 233 22.4 9.64 304 29.7 9.74
* 81 4.8 5.94 180 15.1 8.37 25 2.5 9.93
* 543 32.1 5.92 1,583 130.0 8.21 54 5.6 10.48
* 33 2.8 8.36 43 4.8 10.99 36 3.8 10.54
* 20,170 1,836.6 9.11 23,042 2,315.0 10.05 24,773 2,724.4 11.00
* (1,022) (757) (293)
* 1,603 1,735 1,717
* 1,640 1,441 1,078
* $ 22,391 $ 25,461 $ 27,275
* $ 7,002 356.2 5.09 %$ 7,315 455.7 6.23 %$ 6,657 434.4 6.52 %
* 1,235 100.8 8.16 1,706 150.1 8.80 1,048 99.8 9.53
* 4,989 349.1 7.00 5,855 486.2 8.31 5,653 488.6 8.64
* 72 4.0 5.56 237 20.0 8.43 149 13.6 9.14
* 13,298 810.1 6.09 15,113 1,112.0 7.36 13,507 1,036.4 7.67
* 2,730 152.6 5.59 3,165 254.7 8.05 6,252 570.8 9.13
* 598 53.4 8.93 956 85.9 8.98 764 63.4 8.29
* 3,328 206.0 6.19 4,121 340.6 8.27 7,016 634.2 9.04
* 669 60.5 9.04 687 63.1 9.18 714 66.3 9.29
* 17,295 1,076.6 6.23 19,921 1,515.7 7.61 21,237 1,736.9 8.18
* 3,813 3,892 4,030
* 191 254 269
* 21,299 24,067 25,536
* 1,092 1,394 1,739
* $ 22,391 $ 25,461 $ 27,275
* 760.0 3.77 799.3 3.47 987.5 3.99
* (22.7) (39.8) (99.0)
* $ 737.3 $ 759.5 $ 888.5
*Captions continued from page F-80.
105
<PAGE>F-81
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
<CAPTION>
(in thousands) Year ended December 31,
1993 1992 1991 1990 1989
EARNINGS
Income (loss) before income taxes,
extraordinary credit and
<S> <C> <C> <C> <C> <C>
cumulative effect of accounting changes $ 236,952 $ 77,516 $ (169,114) $ (127,304) $ (219,679)
Portion of rents representative
of the interest factor 15,852 16,937 18,268 18,831 20,841
Interest on other borrowings 257,411 187,987 206,038 340,650 634,175
Interest on notes and debentures 70,646 59,321 60,436 63,105 66,287
Amortization of debt issuance cost 1,394 594 618 578 563
Earnings including interest on deposits 582,255 342,355 116,246 295,860 502,187
Interest on deposits 308,109 473,130 810,131 1,112,007 1,036,433
Earnings excluding interest on deposits $ 890,364 $ 815,485 $ 926,377 $ 1,407,867 $ 1,538,620
FIXED CHARGES
Portion of rents representative
of the interest factor $ 15,852 $ 16,937 $ 18,268 $ 18,831 $ 20,841
Interest on other borrowings 257,411 187,987 206,038 340,650 634,175
Interest on notes and debentures 70,646 59,321 60,436 63,105 66,287
Amortization of debt issuance cost 1,394 594 618 578 563
Fixed charges excluding interest on deposits 345,303 264,839 285,360 423,164 721,866
Interest on deposits 308,109 473,130 810,131 1,112,007 1,036,433
Fixed charges including interest on deposits $ 653,412 $ 737,969 $ 1,095,491 $ 1,535,171 $ 1,758,299
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND
REQUIREMENTS
Fixed charges excluding interest on deposits $ 345,303 $ 264,839 $ 285,360 $ 423,164 $ 721,866
Preferred stock dividend requirements 23,438 15,952 2,262 2,328 2,341
$ 368,741 $ 280,791 $ 287,622 $ 425,492 $ 724,207
Fixed charges including interest on deposits $ 653,412 $ 737,969 $ 1,095,491 $ 1,535,171 $ 1,758,299
Preferred stock dividend requirements 23,438 15,952 2,262 2,328 2,341
$ 676,850 $ 753,921 $ 1,097,753 $ 1,537,499 $ 1,760,640
RATIOS
Earnings to fixed charges
Excluding interest on deposits 1.69 x 1.29 x 0.41 x 0.70 x 0.70 x
Including interest on deposits 1.36 1.11 0.85 0.92 0.88
Earnings to combined fixed charges and
preferred stock dividend requirements
Excluding interest on deposits 1.58 1.22 0.41 0.70 0.70
Including interest on deposits 1.32 1.08 0.84 0.92 0.87
106
</TABLE>
EXHIBIT 21
SHAWMUT NATIONAL CORPORATION
PRINCIPAL SUBSIDIARIES
____________________________________________________________________
Registrant Shawmut National Corporation
(Delaware Corporation)
Subsidiary, all of whose voting Shawmut Service Corporation
securities are owned by the (Delaware Corporation)
registrant:
Subsidiary, all of whose voting Hartford National Corporation
securities are owned by Shawmut (Delaware Corporation)
Service Corporation:
Subsidiary, all of whose voting Shawmut Corporation
securities are owned by (Massachusetts Corporation)
Hartford National Corporation
and Shawmut Service Corporation:
Subsidiary, all of whose voting Shawmut Bank Connecticut, National
securities are owned by Hartford Association (United States
National Corporation: Corporation doing business in
Rhode Island as Shawmut Bank)
Subsidiary, all of whose voting Shawmut Bank, National Association
securities are owned by Hartford (United States Corporation)
National Corporation and Shawmut
Corporation:
Nonbank Subsidiaries
Subsidiary, all of whose voting Shawmut Brokerage, Inc.
shares are owned by Shawmut (Connecticut Corporation)
Bank Connecticut, National
Association:
Subsidiary, all of whose voting Shawmut Mortgage Company
shares are owned by Shawmut (Connecticut Corporation)
Bank Connecticut, National
Association:
Subsidiary, all of whose voting Shawmut Investment Advisers, Inc.
shares are owned by Shawmut (Massachusetts Corporation)
Corporation:
Subsidiary, all of whose voting Shawmut National Trust Company
shares are owned by Hartford (United States Corporation)
National Corporation:
Subsidiary, all of whose voting Shawmut Trust Company
shares are owned by Hartford (New York Trust Company)
National Corporation:
* * *
107
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 33-17765-02 and 33-20387) and
Form S-3 (Nos. 33-50710 and 33-50708) of our report dated
January 19, 1994 appearing on page F-3 of Shawmut National
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
(Price Waterhouse)
Hartford, CT
March 1, 1994
108
EXHIBIT 99.2
SHAWMUT 777 Main Street
NATIONAL Hartford, Connecticut 06115
CORPORATION One Federal Street
Boston, Massachusetts 02211
Contact:
Brent S. Di Giorgio FOR IMMEDIATE RELEASE Laurie Norris
Shawmut National Corp. Northeast Savings, F.A.
(203) 240-7632 (203) 280-1043
SHAWMUT NATIONAL TO PURCHASE 10 BRANCHES OF NORTHEAST SAVINGS
HARTFORD, Conn. and BOSTON, Mass., February 10, 1994 -- Shawmut
National Corporation (NYSE:SNC) and Northeast Federal Corp.
(NYSE: NSB) announced today the signing of a definitive agreement
for the acquisition by Shawmut of 10 Northeast Savings branches
located in Eastern Massachusetts and in Rhode Island. Five of
the branches to be purchased are in Massachusetts and five are in
Rhode Island.
Deposits held in these branches totaled approximately $427
million as of December 31, 1993. Shawmut will pay a premium of 3
percent to Northeast Savings for deposits on hand in these
branches at the time of closing. The transaction is expected to
close by the end of the second quarter of 1994 and is subject to
regulatory approval.
"These branches will strengthen Shawmut's franchise in key
markets and will add significantly to our deposit base," said
Joel B. Alvord, chairman and chief executive officer of Shawmut
National Corporation. The acquisitions will add approximately
$279 million to Shawmut's deposit base in Massachusetts and $148
million to Shawmut's deposit base in Rhode Island.
-more-
<PAGE> 109
Shawmut Acquires 10 Northeast Branches
Page Two
"Customers in these branches will benefit from this purchase as
they will have available to them a broader array of products,
like mutual funds, business loans, and trust services, as well as
the convenience of banking at an extensive New England branch
network and use of a 24-hour information service,
1-800-SHAWMUT," Alvord added.
Kirk W. Walters, president and chief executive officer of
Northeast Federal Corp., said , "Our sale of the 10 branches
strengthens our financial position and should enhance our
profitability. The sale will also permit Northeast to focus its
resources on four significant markets: the capital region of
New York State; Hartford , Connecticut; and Springfield and
Worcester, Massachusetts." When the transaction is finalized,
Northeast will operate 38 branches, 32 of which are in those
markets.
Walters said the agreement announced today represents a "win,
win" situation for both companies as well as the customers of the
10 branches. "For Northeast, the opportunity to target areas of
strongest potential is consistent with the company's overall
strategic plan. Our focus continues to be on originating
residential mortgage loans and gathering retail deposits through
our branch network. The customers will benefit from Shawmut's
extensive branch network and small business related services."
-more-
<PAGE> 110
Shawmut Acquires 10 Northeast Branches
Page Three
The branches Shawmut will acquire from Northeast in Massachusetts
are located in Boston, Newtonville, Watertown, Randolph and
Stounghton. In Rhode Island, the branches to be acquired are
located in East Providence, North Providence, Warwick and
Cranston (2).
Shawmut National Corporation is a $27 billion banking company
serving the financial needs of business, consumers and
institutions through 276 branches in Connecticut, Massachusetts
and Rhode Island. It also provides financial services to
corporate customers, correspondent banks and government units
throughout New England and in select national markets.
Northeast Savings is one of the largest thrift institutions based
in New England, with 160 years of continuous service to its
customers. After the completion of this transaction, Northeast
Savings will have branches in New York, Connecticut,
Massachusetts, and Southern California.
-30-
111
