<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20579
------------------------------------
FORM 8-K
CURRENT REPORT
------------------------------------
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) APRIL 13, 1995
SHAWMUT NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 06-1212629
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
777 MAIN STREET, HARTFORD, CONNECTICUT 06115
ONE FEDERAL STREET, BOSTON, MASSACHUSETTS 02211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 986-2000
(617) 292-2000
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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<PAGE> 2
ITEM 5. OTHER EVENTS
On February 20, 1995, Shawmut National Corporation ("Shawmut") and Fleet
Financial Group, Inc. ("Fleet") entered into an Agreement and Plan of Merger
(the "Merger Agreement") providing, among other things, for the merger (the
"Merger") of Shawmut with and into Fleet, with Fleet surviving the Merger.
Pursuant to the Merger Agreement, (I) each share of the common stock, par
value $0.01 per share (the "Shawmut Common Stock"), of Shawmut outstanding on
the date of the Merger (except for shares of Shawmut Common Stock held by
Shawmut as treasury stock or shares held by Fleet or any of its subsidiaries,
but including shares of Shawmut Common Stock (i) held directly or indirectly by
Fleet or Shawmut or any of their respective subsidiaries in trust accounts,
managed accounts and the like or otherwise held in a fiduciary capacity that are
beneficially owned by third parties and (ii) held by Fleet or Shawmut or any of
their respective subsidiaries in respect of a debt previously contracted) will
be converted into .8922 shares of the common stock, par value $1.00 per share,
of Fleet ("Fleet Common Stock") and (II) each share of the preferred stock with
cumulative and adjustable dividends, 9.30% cumulative preferred stock and 9.35%
cumulative preferred stock of Shawmut, respectively, ("Shawmut Preferred")
outstanding immediately prior to the Merger, except for shares of the series of
preferred stock with cumulative and adjustable dividends as to which dissenters'
rights have been properly exercised, will be converted into one share of Fleet
preferred stock ("Fleet New Preferred Stock") having terms substantially similar
to the terms of the Shawmut preferred stock converted in the Merger.
The shares of Fleet Common Stock issued in the Merger will include the
corresponding number of rights attached to such shares pursuant to Fleet's
shareholder rights plan. No fractional shares of Fleet Common Stock will be
issued in the Merger, and Shawmut's stockholders who otherwise would be entitled
to receive a fractional share of Fleet Common Stock will receive a cash payment
in lieu thereof.
Consummation of the Merger is subject to certain standard conditions,
including, but not limited to, approval of the Merger Agreement by the holders
of a majority of the shares of the Shawmut Common Stock and the Fleet Common
Stock and the receipt of all required regulatory approvals.
On January 31, 1995, Shawmut Bank Connecticut, National Association
purchased substantially all of the assets and assumed certain of the liabilities
(the "Barclays Acquisition") of the Business Finance Division of Barclays
Business Credit, Inc. ("Business Finance") for a purchase price equal to the net
book value of the assets acquired and the liabilities assumed plus a premium of
$290 million. The book value of the assets acquired was approximately $2.3
billion and the book value of the liabilities assumed was approximately $12.7
million. The total funding required for the transaction was approximately $2.6
billion.
Shawmut entered into an agreement (the "Northeast Merger Agreement") with
Northeast Federal Corp. ("Northeast"), dated as of June 13, 1994, to acquire
Northeast (the "Northeast Merger"). Northeast is a unitary savings and loan
holding company registered under the Home Owners' Loan Act of 1933, as amended,
which provides financial services through its subsidiary, Northeast Savings,
F.A. As of December 31, 1994, Northeast had assets of $3.3 billion, deposits of
$2.4 billion and stockholders' equity of $138.9 million. Northeast has 33
offices located in Connecticut, Massachusetts and the capital region of New
York.
Pursuant to the Northeast Merger Agreement, Northeast stockholders will
receive shares of Shawmut's Common Stock in the following manner. Each issued
and outstanding share of Northeast common stock, except for certain shares held
by affiliates, will be converted into and exchangeable for a number of shares of
Shawmut Common Stock equal to the exchange ratio (the "Northeast Exchange
Ratio") determined as follows:
(i) if the Shawmut Common Stock Average Price is greater than or equal
to $26.235, the Northeast Exchange Ratio will be .415;
(ii) if the Shawmut Common Stock Average Price is less than $26.235
but equal to or greater than $21.465, the Northeast Exchange Ratio will be
(a) $10.875 divided by (b) the Shawmut Common Stock Average Price; or
(iii) if the Shawmut Common Stock Average Price is less than $21.465,
the Northeast Exchange Ratio will be .507; provided, however, that, as
described below, under such circumstances Northeast has
2
<PAGE> 3
the right to terminate the Northeast Merger Agreement, subject to the right
of Shawmut to avoid such termination by an increase in the Northeast
Exchange Ratio.
The Northeast Merger Agreement may be terminated if the transaction is not
closed on or before June 30, 1995. In addition, if the Shawmut Common Stock
Average Price (defined as the average daily closing price of Shawmut Common
Stock as reported on the New York Stock Exchange Composite Transaction reporting
system for the 15 consecutive full trading days prior to the date on which the
last regulatory approval is obtained and all statutory waiting periods in
respect thereof have expired) is less than $21.465 (and therefore, based upon
the maximum Northeast Exchange Ratio of .507, Northeast stockholders would
receive less than $10.875 of Shawmut Common Stock for each share of Northeast
common stock), the Northeast Board of Directors may terminate the Merger
Agreement pursuant to its terms, whether before of after the approval of the
merger by Northeast's stockholders; provided, however, that Shawmut may avoid
such termination by increasing the Northeast Exchange Ratio so that the shares
of Shawmut Common Stock issued in exchange for each share of Northeast's common
stock have a value (valued at the Shawmut Common Stock Average Price) of
$10.875. On April 7, 1995, the closing price of Shawmut's Common Stock was
$26.75 per share. In addition, the transaction is subject to the satisfaction of
certain conditions, including certain regulatory approvals and approval by
Northeast stockholders.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Price Waterhouse LLP
99.1 Financial Statements of Fleet Financial Group, Inc. as of December 31, 1994
and 1993.
99.2 Financial Statements of Northeast Federal Corp. and Subsidiaries as of
December 31, 1994 and 1993.
99.3 Financial Statements of Business Finance Division of Barclays Business Credit,
Inc. as of December 31, 1994 and 1993.
99.4 Shawmut National Corporation and Subsidiaries, Fleet Financial Group, Inc.,
Northeast Federal Corp. and Subsidiaries and Business Finance Division of
Barclays Business Credit, Inc. Unaudited Pro Forma Condensed Combined
Financial Information.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SHAWMUT NATIONAL CORPORATION
By: /s/ SUSAN E. LESTER
Susan E. Lester
Executive Vice President
and Chief Financial Officer
Dated: April 13, 1995
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- -------------------------------------------------------------------- ------
<C> <S> <C>
23.1 Consent of KPMG Peat Marwick LLP.................................... 5
23.2 Consent of Deloitte & Touche LLP.................................... 7
23.3 Consent of Price Waterhouse LLP..................................... 9
99.1 Financial Statements of Fleet Financial Group, Inc. as of December
31, 1994 and 1993................................................... 11
99.2 Financial Statements of Northeast Federal Corp. and Subsidiaries as
of December 31, 1994 and 1993....................................... 44
99.3 Financial Statements of Business Finance Division of Barclays
Business Credit, Inc. as of December 31, 1994 and 1993.............. 92
99.4 Shawmut National Corporation and Subsidiaries, Fleet Financial
Group, Inc., Northeast Federal Corp. and Subsidiaries and Business
Finance Division of Barclays Business Credit, Inc. Unaudited Pro
Forma Condensed Combined Financial Information...................... 108
</TABLE>
4
<PAGE> 1
EXHIBIT 23.1
5
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fleet Financial Group, Inc.:
= We consent to incorporation by reference in the Registration Statements (Nos.
33-17765-02 and 33-20387) on Form S-8, the Registration Statements (Nos.
33-50708 and 33-51311) on Form S-3 and the Registration Statement (No. 33-57627)
on Form S-4 of Shawmut National Corporation of our report dated January 18,
1995, with respect to the consolidated balance sheets of Fleet Financial Group,
Inc. as of December 31, 1994, and 1993, and the related consolidated statements
of income, changes in stockholders' equity and cash flows, for each of the years
in the three-year period ended December 31, 1994, which report appears in the
Current Report on Form 8-K of Shawmut National Corporation dated April 13, 1995.
Our report refers to a change in the method of accounting for investments.
/s/ KPMG PEAT MARWICK LLP
Providence, Rhode Island
April 13, 1995
6
<PAGE> 1
EXHIBIT 23.2
7
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 33-17765-02 and 33-20387), Form S-3 (Nos. 33-50708 and
33-51311) and Form S-4 (No. 33-57627) of Shawmut National Corporation of our
report dated January 20, 1995 related to the consolidated financial statements
of Northeast Federal Corp. and subsidiary, which appears in the Current Report
on Form 8-K of Shawmut National Corporation dated April 13, 1995.
Deloitte & Touche LLP
Hartford, Connecticut
April 13, 1995
8
<PAGE> 1
EXHIBIT 23.3
9
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-50708 and
33-51311) and Form S-4 (No. 33-57627) and to the incorporation by reference in
the Registration Statements on Form S-8 (Nos. 33-20387 and 33-17765-02) of
Shawmut National Corporation of our report dated April 7, 1995 relating to the
financial statements of the Business Finance Division of Barclays Business
Credit, Inc., which appears in the Current Report on Form 8-K of Shawmut
National Corporation dated April 13, 1995.
Price Waterhouse LLP
Hartford, Connecticut
April 13, 1995
10
<PAGE> 1
EXHIBIT 99.1
11
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Fleet Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Fleet
Financial Group, Inc., as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fleet
Financial Group, Inc., at December 31, 1994 and 1993, and the results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the Notes to Consolidated Financial Statements,
the corporation changed its method of accounting for investments to adopt the
provisions of the Financial Accounting Standards Board's Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on January
1, 1994.
/s/ KPMG PEAT MARWICK LLP
Providence, Rhode Island
January 18, 1995
12
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
------ ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest and fees on loans and leases.................... $2,367 $2,339 $2,514
Interest on securities (includes interest from tax-exempt
securities of $33 million, $27 million, and $24 million
in 1994, 1993, and 1992, respectively)................. 905 873 902
------ ------ ------
Total interest income.......................... 3,272 3,212 3,416
------ ------ ------
Interest expense:
Deposits............................................... 764 744 1,076
Short-term borrowings.................................. 294 180 164
Long-term debt......................................... 232 237 223
------ ------ ------
Total interest expense......................... 1,290 1,161 1,463
------ ------ ------
Net interest income...................................... 1,982 2,051 1,953
------ ------ ------
Provision for credit losses.............................. 62 271 486
------ ------ ------
Net interest income after provision for credit losses.... 1,920 1,780 1,467
------ ------ ------
Noninterest income:
Mortgage banking....................................... 363 414 364
Service charges, fees, and commissions................. 321 310 286
Investment services revenue............................ 175 174 160
Student loan servicing fees............................ 54 51 61
FDIC loan administration fees.......................... 52 31 12
Securities available for sale gains (losses)........... (1) 282 207
Gain on partial sale of FMG............................ -- -- 121
Other.................................................. 209 203 157
------ ------ ------
Total noninterest income....................... 1,173 1,465 1,368
------ ------ ------
Noninterest expense:
Employee compensation and benefits..................... 949 1,018 958
Occupancy.............................................. 168 174 165
Equipment.............................................. 133 130 118
Purchased mortgage servicing rights amortization....... 85 240 107
Legal and other professional........................... 75 74 74
FDIC assessment........................................ 70 76 75
Marketing.............................................. 65 53 51
Core deposit and goodwill amortization................. 57 54 45
OREO expense........................................... 39 57 154
Restructuring charges.................................. 44 125 --
Loss on sale of problem assets......................... -- -- 115
Other.................................................. 385 423 456
------ ------ ------
Total noninterest expense...................... 2,070 2,424 2,318
------ ------ ------
Income before income taxes............................... 1,023 821 517
Applicable income taxes.................................. 398 327 228
------ ------ ------
Net income before minority interest...................... 625 494 289
Minority interest........................................ (12) (6) (9)
------ ------ ------
Net income............................................... $ 613 $ 488 $ 280
====== ====== ======
Net income applicable to common shares................... $ 598 $ 466 $ 252
====== ====== ======
Weighted average common shares outstanding:
Primary................................................ 159,483,021 154,666,307 141,469,658
Fully diluted.......................................... 159,483,021 154,899,995 142,778,665
Earnings per share:
Primary................................................ $ 3.75 $ 3.01 $ 1.78
Fully diluted.......................................... 3.75 3.01 1.77
Dividends declared....................................... 1.40 1.025 0.825
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
(DOLLARS IN
MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash, due from banks and interest-bearing deposits....................... $ 5,208 $ 2,213
Federal funds sold and securities purchased under agreements to resell... 649 --
Securities available for sale (1994 at market; 1993 at cost, market value
$12,931 at December 31, 1993).......................................... 10,353 12,577
Securities held to maturity (market value: $890 and $1,580).............. 891 1,546
Loans and leases......................................................... 27,541 26,310
Reserve for credit losses................................................ (953) (1,000)
------- -------
Net loans and leases........................................... 26,588 25,310
------- -------
Mortgages held for resale................................................ 489 2,622
Purchased mortgage servicing rights...................................... 827 560
Premises and equipment................................................... 824 733
Deferred taxes........................................................... 352 360
Accrued interest receivable.............................................. 342 347
Excess cost over net assets of subsidiaries acquired..................... 180 187
Other intangibles........................................................ 159 166
Other assets............................................................. 1,895 1,302
------- -------
Total assets................................................... $48,757 $47,923
======= =======
LIABILITIES
Deposits:
Demand................................................................. $ 6,890 $ 6,473
Regular savings, NOW, money market..................................... 15,220 16,437
Time................................................................... 12,696 8,175
------- -------
Total deposits................................................. 34,806 31,085
------- -------
Federal funds purchased and securities sold under agreements to
repurchase............................................................. 2,846 1,961
Other short-term borrowings.............................................. 3,105 6,146
Accrued expenses and other liabilities................................... 1,163 1,648
Long-term debt........................................................... 3,457 3,444
------- -------
Total liabilities.............................................. 45,377 44,284
------- -------
STOCKHOLDERS' EQUITY
Preferred stock.......................................................... 379 501
Common stock (shares issued: 141,574,162 in 1994 and 137,381,588 in 1993;
shares outstanding: 135,024,262 in 1994 and 137,381,588 in 1993)....... 142 137
Common surplus........................................................... 1,547 1,492
Retained earnings........................................................ 1,936 1,509
Net unrealized gain (loss) on securities available for sale.............. (374) --
Treasury stock, at cost, 6,549,900 shares................................ (250) --
------- -------
Total stockholders' equity..................................... 3,380 3,639
------- -------
Total liabilities and stockholders' equity............................... $48,757 $47,923
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE> 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
COMMON ON SECURITIES
PREFERRED STOCK COMMON RETAINED AVAILABLE TREASURY
STOCK $1 PAR SURPLUS EARNINGS FOR SALE STOCK TOTAL
--------- -------- ------- --------- -------------- -------- ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1991........................ $ 321 $121 $1,006 $ 1,062 $ -- $ -- $2,510
Net income.................... -- -- -- 280 -- --
Cash dividends declared on
common stock ($0.825 per
share)...................... -- -- -- (101) -- --
Cash dividends declared on
preferred stock............. -- -- -- (28) -- --
Dual convertible preferred
stock....................... 283(a) -- -- -- -- --
Common stock issued in
connection with:
Employee benefit and stock
option plans and
conversion of preferred
stock and convertible
debentures................ -- 1 48 (1) -- --
Dividend reinvestment....... -- 1 12 -- -- --
Adjustment of valuation
account for marketable
equity securities........... -- -- -- 5 -- --
--------- -------- ------- --------- ------ -------- ------
BALANCE AT DECEMBER 31,
1992........................ 604 123 1,066 1,217 -- -- 3,010
Net income.................... -- -- -- 488 -- --
Cash dividends declared on
common stock ($1.025 per
share)...................... -- -- -- (140) -- --
Cash dividends declared on
preferred stock............. -- -- -- (22) -- --
Purchase of Series III
preferred stock............. (50) -- -- (15) -- --
Purchase of Series IV
preferred stock............. (50) -- -- (11) -- --
Common stock issued in
connection with:
Common stock offering, net
of issuance costs of
$10....................... -- 12 379 -- -- --
Employee benefit and stock
option plans and
conversion of preferred
stock..................... (3) 1 23 (4) -- --
Dividend reinvestment......... -- 1 23 -- -- --
Other items, net.............. -- -- 1 (4) -- --
--------- -------- ------- --------- ------ -------- ------
BALANCE AT DECEMBER 31,
1993........................ 501 137 1,492 1,509 -- -- 3,639
Net unrealized gain on
securities available for
sale at January 1, 1994..... -- -- -- -- 224 --
Net income.................... -- -- -- 613 -- --
Cash dividends declared on
common stock
($1.40 per share)........... -- -- -- (192) -- --
Cash dividends declared on
preferred stock............. -- -- -- (15) -- --
Redemption of preferred
stock....................... (122) -- -- -- -- --
Common stock issued in
connection with employee
benefit and stock option
plans....................... -- 1 17 (4) -- --
Adjustment to valuation
reserve for securities
available for sale.......... -- -- -- -- (598) --
Treasury stock purchased...... -- -- -- -- -- (250)
Other items, net.............. -- 4 38 25 -- --
--------- -------- ------- --------- ------ -------- ------
BALANCE AT DECEMBER 31,
1994........................ $ 379 $142 $1,547 $ 1,936 $ (374) $ (250) $3,380
======== ========== ======= ======== ============= ======== ======
</TABLE>
- ---------------
(a) Shown separately at December 31, 1991.
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 613 $ 488 $ 280
Adjustments for noncash items:
Depreciation and amortization of premises and equipment............ 112 95 76
Amortization of purchased mortgage servicing rights and other
intangible assets................................................ 142 294 152
Writedown of OREO to fair value.................................... 27 47 126
Provision for credit losses........................................ 62 271 486
Deferred income tax expense (benefit).............................. 62 (114) 2
Loss on sale of problem assets..................................... -- -- 115
Minority interest.................................................. 12 6 9
Securities (gains) losses.......................................... 1 (282) (207)
Gain on partial sale of FMG........................................ -- -- (121)
Other gains on sales of assets..................................... (86) (39) (28)
Originations and purchases of mortgages held for resale.............. (10,607) (19,719) (17,408)
Proceeds from sales of mortgages held for resale..................... 12,740 19,184 17,117
(Increase) decrease in accrued receivables, net...................... (41) (176) 663
(Decrease) increase in accrued liabilities, net...................... (408) 288 (148)
Other, net........................................................... (176) 417 477
-------- -------- --------
Net cash flow provided by operating activities.............. 2,453 760 1,591
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale........................... (20,787) (8,506) (7,080)
Proceeds from maturities and sales of securities available for
sale............................................................... 23,743 7,439 7,215
Purchases of securities held to maturity............................. (865) (60) (1,714)
Proceeds from maturities of securities held to maturity.............. 750 308 12
Net cash and cash equivalents received from banking institutions
acquired........................................................... -- -- 400
Loans made to customers, nonbanking subsidiaries..................... (1,109) (3,413) (2,796)
Principal collected on loans made to customers, nonbanking
subsidiaries....................................................... 1,097 3,386 3,105
Loans purchased from third parties (including FDIC).................. (330) (179) (1,892)
Proceeds from sales of loans......................................... 73 344 871
Net (increase) decrease in loans and leases, banking subsidiaries.... (1,099) (571) 405
Putable loans transferred to the FDIC................................ 76 274 632
Proceeds from sales of OREO.......................................... 89 148 259
Purchases of premises and equipment.................................. (210) (205) (124)
Purchases of mortgage servicing rights............................... (374) (255) (148)
-------- -------- --------
Net cash flow provided (used) by investing activities....... 1,054 (1,290) (855)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits.................................. 3,097 (1,650) (4,674)
Net (decrease) increase in short-term borrowings..................... (2,391) 1,708 2,925
Proceeds from issuance of long-term debt............................. 684 645 876
Repayments of long-term debt......................................... (700) (1,013) (68)
Proceeds from issuance of common stock............................... 14 432 27
Proceeds from issuance of FMG common stock........................... -- -- 207
Redemption and repurchase of common and preferred stock.............. (372) (269) --
Cash dividends paid.................................................. (195) (147) (125)
-------- -------- --------
Net cash flow provided (used) by financing activities....... 137 (294) (832)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................. 3,644 (824) (96)
-------- -------- --------
Cash and cash equivalents at beginning of year....................... 2,213 3,037 3,133
-------- -------- --------
Cash and cash equivalents at end of year............................. $ 5,857 $ 2,213 $ 3,037
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fleet conform to generally
accepted accounting principles and prevailing practices within the banking
industry. Certain prior year amounts have been reclassified to conform to
current year classifications. The following is a summary of the significant
accounting policies.
Basis of Presentation. The consolidated financial statements of Fleet
include the accounts of the corporation and its subsidiaries. All material
intercompany transactions and balances have been eliminated. For purposes of the
Consolidated Statements of Cash Flows, the corporation defines cash and cash
equivalents to include cash, due from banks, interest-bearing deposits, federal
funds sold, and securities purchased under agreements to resell.
Securities. Securities are classified at the time of purchase, based on
management's intentions, as securities held to maturity, securities available
for sale, or trading account securities. Securities held to maturity are those
that management has the positive intent and ability to hold to maturity and are
carried at amortized cost.
Effective January 1, 1994, the corporation adopted Financial Accounting
Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The standard requires that securities available for
sale be reported at fair value, with any net after-tax unrealized gains (losses)
reflected as a separate component of stockholders' equity. Previously, debt
securities were recorded at the lower of amortized cost or fair value with any
net unrealized losses included in earnings. In connection with the adoption of
Statement No. 115, the corporation transferred securities netting to $767
million from the held to maturity portfolio to the available for sale portfolio.
Securities available for sale, which include marketable equity securities,
are those that management intends to hold for an indefinite period of time,
including securities used as part of the asset/liability management strategy,
and that may be sold in response to changes in interest rates, prepayment risk,
liquidity needs, the desire to increase capital, or other similar factors.
Any portion of unrealized loss on an individual security deemed to be other
than temporary is recognized as a realized loss in the accounting period in
which such determination is made. The specific identification method is used to
determine gains and losses on sales of securities.
Loans and Leases. Loans and leases are placed on nonaccrual status either
as a result of past-due status or a judgment by management that, although
payments are current, such action is prudent. Except in the case of most
consumer and residential real estate loans, loans and leases on which payments
are past due 90 days or more are placed on nonaccrual status unless they are
well-secured and in the process of normal collection or renewal. Consumer loans,
including residential real estate, are placed on nonaccrual status at 120 days
past due and generally charged off at 180 days past due. When a loan is placed
on nonaccrual status, all interest previously accrued in the current year, but
not collected, is reversed against interest income. Any interest accrued in
prior years is charged against the reserve for credit losses. Assets can be
returned to accrual status when they become current as to principal and interest
or demonstrate a period of performance under the contractual terms, and, in
management's opinion, are fully collectable.
Foreclosed Property and Repossessed Equipment. Property and equipment
acquired through foreclosure (other real estate owned, or OREO) are stated at
the lower of cost or fair value less selling costs. Credit losses arising at the
time of foreclosure are charged against the reserve for credit losses. Any
additional writedowns to the carrying value of these assets that may be required
are charged to expense and recorded in a valuation reserve that is maintained on
an asset-by-asset basis.
Reserve for Credit Losses. The corporation continually evaluates its
reserve for credit losses by performing detailed reviews of certain individual
loans and leases in view of the historic net charge-off experience of the
portfolio, and evaluations of current and anticipated economic conditions and
other pertinent
17
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
factors. Based on these analyses, the reserve for credit losses is maintained at
levels considered adequate by management to provide for loan and lease losses
inherent in these portfolios.
Loans and leases, or portions thereof, deemed uncollectable are charged off
against the reserve while recoveries of amounts previously charged off are
credited to the reserve. Amounts are charged off once the probability of loss
has been established, giving consideration to such factors as the customer's
financial condition, underlying collateral and guarantees, and general and
industry economic conditions.
Mortgages Held for Resale. Mortgages held for resale are recorded at the
lower of aggregate cost or market value. Market value is determined by
outstanding commitments from investors or by current investor yield
requirements.
Purchased Mortgage Servicing Rights (PMSRs). The acquisition costs of
bulk-servicing purchases and servicing rights acquired through the purchase of
mortgage loans originated by others, net of aggregate gains from the sale of
these purchased loans, are capitalized as PMSRs. The acquisition costs
capitalized do not exceed the present value of the expected net future servicing
income at the time of acquisition.
The cost of PMSRs is amortized over the estimated period of net servicing
revenues. The corporation evaluates PMSRs for impairment by making its best
estimate of the undiscounted anticipated future net cash flows considering
market consensus prepayment predictions, portfolio prepayment rates, the range
of reported prepayment predictions, mortgage interest rates, mortgage pipeline
information, and the economic value of its purchased servicing portfolio. If
recorded balances for any of the disaggregated PMSRs categories exceed the
undiscounted anticipated future net cash flows, a current impairment adjustment
equal to the difference between the carrying value and the undiscounted
anticipated future net cash flows is recorded. The corporation's method of
disaggregation provides for the evaluation of PMSRs that have similar economic
characteristics, such as prepayment risk and credit factors, and are within a
reasonable range of purchase dates. The corporation periodically reviews its
method of disaggregation to ensure that it continues to provide for the
evaluation of PMSRs with similar underlying economic characteristics. The
corporation's methodology is to evaluate individual large (bulk) servicing
acquisitions and to evaluate correspondent acquisitions by quarter of
acquisition. Additionally, the corporation will prospectively accelerate
amortization of PMSRs if a change in expected future net servicing income is
indicated.
Excess Cost over Net Assets of Subsidiaries Acquired. The excess cost over
net assets of subsidiaries acquired (goodwill) is amortized on a straight-line
basis over periods of up to 40 years. Goodwill relating to banking subsidiaries
acquired subsequent to 1981 is amortized over 25 years or less. On a periodic
basis, the corporation reviews goodwill for events or changes in circumstances
that may indicate that the carrying amount of goodwill may not be recoverable.
Other Intangible Assets. The excess of the purchase price over the fair
value of the tangible net assets of certain acquisitions has been allocated to
core deposits (core deposit intangibles) based on valuations, and is amortized
on a straight-line basis, generally over seven years. On a periodic basis, the
corporation reviews its intangible assets for events or changes in circumstances
that may indicate that the carrying amount of the assets may not be recoverable.
Trading Instruments. Financial instruments (including derivatives) used
for trading purposes are stated at market value. Realized and unrealized gains
and losses are currently recognized in net trading revenue. Interest revenue
arising from trading instruments is included in the income statement as part of
interest income.
Income Taxes. The corporation changed its method of accounting for income
taxes from the deferred method to the liability method, in accordance with FASB
Statement No. 109, "Accounting for Income Taxes," effective January 1, 1993.
This statement requires deferred tax assets and liabilities to be recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are
18
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
change is enacted.
Interest-Rate Risk-Management Activities. The corporation enters into
interest-rate swaps to manage exposure to interest-rate risk. For swaps that are
designated and effective as hedges of assets and liabilities, the net
differential to be paid or received on the swaps is treated as an adjustment to
the yield on the hedged item. In addition, interest-rate swaps that hedge
securities available for sale are reported at fair value with unrealized gains
and losses reported in the same manner as the hedged item.
The corporation applies hedge accounting to an interest-rate swap if the
asset or liability being hedged exposes the corporation to interest-rate risk,
and the swap is designated and effective as a hedge of specific assets or
liabilities or pools of assets or liabilities. To be effective as a hedge, the
interest-rate swaps must contribute to an overall interest-rate sensitivity that
is within the corporation's asset/liability management guidelines and, for
interest-rate swaps hedging a variable-rate asset, there must be correlation
between the interest-rate index on the asset and the variable rate paid on the
swap. Initial and ongoing correlation is measured by statistical analysis of the
relative movements of the interest-rate indices over time. If correlation were
to cease, hedge accounting would be discontinued and the interest-rate swap
would be accounted for as a trading instrument.
If an interest-rate swap is terminated, the gain or loss is deferred and
amortized over the shorter of the remaining contract life or the maturity of the
hedged item. If a hedged item is sold or settled or the balance of the hedged
item falls below the notional amount of the swap, hedge accounting is
discontinued to the extent that the notional amount exceeds the balance, and
accounting for trading instruments is applied.
Earnings Per Share. Earnings per share is computed by dividing earnings
(after deducting dividends on preferred stock) by the weighted average number of
common shares and common stock equivalents outstanding during the period,
assuming the conversion of the convertible preferred stock. Common stock
equivalents include stock options and rights and the dual convertible preferred
(DCP) stock.
Minority Interest. Minority interest represents the minority stockholders'
proportionate share of the equity of Fleet Mortgage Group (FMG). At December 31,
1994 and 1993, the corporation owned approximately 81% of FMG's common stock.
NOTE 2. ACQUISITIONS
On August 15, 1994, the corporation completed its acquisition of Sterling
Bancshares Corp. for approximately $125 million in stock, or $39.50 for each
share of Sterling common stock. The acquisition agreement provided Sterling
stockholders with 1.096 shares of Fleet common stock for each share of Sterling
common stock, or 3,595,398 shares. The acquisition added approximately $1
billion of assets to Fleet. The transaction was accounted for as a pooling of
interests. Due to the immateriality of this transaction, the corporation has not
restated prior periods, however all 1994 information has been restated to
include the acquisition as if it occurred on January 1, 1994.
On January 27, 1995, the corporation completed its acquisition of NBB
Bancorp. The corporation issued approximately 6.2 million treasury shares with
an aggregate carrying value of approximately $200 million as well as
approximately $230 million in cash. In addition, Fleet issued 2.5 million
warrants to purchase Fleet common stock to NBB stockholders with an exercise
price of $43.875 per share and a term of six years. The warrants are exercisable
beginning one year after closing the acquisition. The transaction was accounted
for under the purchase method of accounting. Goodwill and core deposit premium
amounts are being amortized on a straight-line basis over 15 years and 7 years,
respectively.
During 1994, Fleet signed a definitive agreement to purchase Plaza Home
Mortgage Corp. for $89 million in cash. This acquisition will add approximately
$9.2 billion in mortgage servicing and will expand Fleet's mortgage banking
franchise by adding 40 new offices. On December 28, 1994, Fleet announced a
merger proposal under which Fleet would acquire, at $20 per share, all of the
shares of FMG currently held by
19
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the minority stockholders. On January 30, 1995, Fleet commenced a tender offer
to reacquire such shares. The aggregate amount of the transaction would be
approximately $190 million. The merger proposal is subject to obtaining certain
approvals and other customary conditions.
NOTE 3. SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
1994 1993
--------------------------------------------- ---------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ------- --------- ---------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and government
agencies................... $ 2,577 $ -- $133 $ 2,444 $ 5,775 $180 $ 5 $ 5,950
Mortgage-backed securities... 7,897 3 435 7,465 5,739 143 4 5,878
State and municipal.......... -- -- -- -- 733 15 1 747
Other debt securities........ 180 -- 1 179 250 7 -- 257
--------- --- ----- ------- --------- ----- --- -------
Total debt
securities........... 10,654 3 569 10,088 12,497 345 10 12,832
Marketable equity
securities................. 187 -- 22 165 64 19 -- 83
Other securities............. 100 -- -- 100 16 -- -- 16
--------- --- ----- ------- --------- ----- --- -------
Total securities
available for sale... $10,941 $ 3 $591 $10,353 $12,577 $364 $ 10 $12,931
--------- --- ----- ------- --------- ----- --- -------
SECURITIES HELD TO MATURITY:
State and municipal.......... $ 843 $ 5 $ 6 $ 842 $ -- $ -- $ -- $ --
Mortgage-backed securities... -- -- -- -- 1,382 32 -- 1,414
U.S. Treasury and government
agencies................... -- -- -- -- 74 2 -- 76
Other debt securities........ 48 -- -- 48 13 -- -- 13
--------- --- ----- ------- --------- ----- --- -------
Total debt
securities........... 891 5 6 890 1,469 34 -- 1,503
Other securities............. -- -- -- -- 77 -- -- 77
--------- --- ----- ------- --------- ----- --- -------
Total securities held to
maturity..................... $ 891 $ 5 $ 6 $ 890 $ 1,546 $ 34 $ -- $ 1,580
========= ========== ========== ======= ========= ========== ========== =======
</TABLE>
Effective January 1, 1994, the corporation adopted FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
connection with the adoption of Statement No. 115, the corporation transferred
securities netting to $767 million from the held to maturity portfolio to the
available for sale portfolio.
The securities available for sale portfolio had net unrealized losses of
$588 million at December 31, 1994. Accordingly, stockholders' equity has been
reduced by a valuation reserve of $374 million, which represents the after-tax
effect of the unrealized loss.
At December 31, 1994, securities available for sale and securities held to
maturity with carrying values of $1.4 billion and $733 million, respectively,
were pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes, compared to $6.6 billion and $820 million,
respectively, at December 31, 1993.
Proceeds from sales of debt securities available for sale during 1994,
1993, and 1992 were $21.0 billion, $6.8 billion, and $5.2 billion, respectively.
Gross gains of $19 million and gross losses of $34 million were realized on
those sales in 1994, gross gains of $233 million and gross losses of $49,000
were realized on those sales in 1993, and gross gains of $210 million and gross
losses of $6 million were realized on those sales in 1992. Net realized gains on
sales of marketable equity securities were $14 million, $49 million, and $3
million in 1994, 1993, and 1992, respectively. There were no sales of securities
held to maturity in 1994, 1993, or 1992.
Income tax expense (benefit) on securities available for sale gains
(losses) was $(1) million in 1994, $117 million in 1993, and $83 million in
1992.
20
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt securities held to
maturity and securities available for sale by contractual maturity are shown in
the following table. Actual maturities will differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
MATURITIES OF SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------
WITHIN 1 1 TO 5 5 TO 10 AFTER 10
YEAR YEARS YEARS YEARS TOTAL
-------- ------ ------- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Amortized cost:
State and municipal.................................... $552 $208 $63 $ 20 $ 843
Other securities....................................... 27 15 6 -- 48
-------- ------ ------- --- -----
Total debt securities.......................... $579 $223 $69 $ 20 $ 891
-------- ------ ------- --- -----
Percent of total debt securities......................... 65.0% 25.0% 7.7% 2.3% 100%
Weighted average yield(a)................................ 5.9 7.9 8.7 9.7 6.7
-------- ------ ------- --- -----
Market value............................................. $579 $221 $70 $ 20 $ 890
====== ==== ===== ====== ====
</TABLE>
- ---------------
(a) A tax-equivalent adjustment has been included in the calculations of the
yields to reflect this income as if it had been fully taxable. The
tax-equivalent adjustment is based upon the applicable federal and state
income tax rates.
MATURITIES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------
WITHIN 1 1 TO 5 5 TO 10 AFTER 10
YEAR YEARS YEARS YEARS TOTAL
-------- ------ ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury and government agencies.............. $ -- $2,577 $ -- $ -- $ 2,577
Mortgage-backed securities......................... -- 3 67 7,827 7,897
Other debt securities.............................. -- 86 80 14 180
-------- ------ ------- -------- -------
Total debt securities...................... $ -- $2,666 $ 147 $7,841 $10,654
-------- ------ ------- -------- -------
Percent of total debt securities..................... -- 25.0% 1.4% 73.6% 100%
Weighted average yield(a)............................ -- 5.4 7.0 6.6 6.3
-------- ------ ------- -------- -------
Market value......................................... $ -- $2,534 $ 146 $7,408 $10,088
====== ====== ===== ====== =======
</TABLE>
- ---------------
(a) A tax-equivalent adjustment has been included in the calculations of the
yield to reflect this income as if it had been fully taxable. The
tax-equivalent adjustment is based upon the applicable federal and state
income tax rates.
21
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LOANS AND LEASES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans:
Commercial and industrial...................... $11,102 $11,104 $11,149 $10,435 $ 8,093
Consumer....................................... 7,882 7,531 7,116 6,738 5,442
Commercial real estate:
Construction................................ 509 477 1,062 1,292 1,729
Interim/permanent........................... 3,830 3,917 3,798 4,061 2,070
Residential real estate........................ 2,937 2,052 2,154 2,402 1,448
Other.......................................... 161 195 276 353 --
------- ------- ------- ------- -------
Loans, net of unearned income.......... 26,421 25,276 25,555 25,281 18,782
------- ------- ------- ------- -------
Lease financing:
Lease receivables.............................. 1,396 1,161 1,165 1,632 1,903
Estimated residual value....................... 177 161 161 165 161
Unearned income................................ (453) (288) (234) (317) (381)
------- ------- ------- ------- -------
Lease financing, net of unearned income(a)....... 1,120 1,034 1,092 1,480 1,683
------- ------- ------- ------- -------
Total loans and leases, net of unearned
income............................... $27,541 $26,310 $26,647 $26,761 $20,465
======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) The corporation's leases consist principally of full-payout, direct
financing leases. For federal income tax purposes, the corporation has the
tax benefit of depreciation on the entire leased unit and interest on the
long-term debt. Deferred taxes arising from leveraged leases totaled $51
million in 1994 and $13 million in 1993. Future minimum lease payments to be
received are $379 million in 1995; $272 million, 1996; $210 million, 1997;
$173 million, 1998; $107 million, 1999; $255 million, 2000 and thereafter.
Total loans and leases include $554 million, primarily commercial and
commercial real estate (CRE) loans, subject to either repurchase by, or
loss-sharing arrangements with, the Federal Deposit Insurance Corp. (FDIC).
As part of the acquisition of Maine Savings Bank (MSB) in 1991, specified
MSB loans that became classified prior to February 1, 1993, were put to a
special asset pool (MSB special asset pool). The MSB special asset pool
consisting of $161 million of loans at December 31, 1994, will be acquired by
the FDIC on February 1, 1996, for cash. Also, loans aggregating $393 million at
December 31, 1994, are subject to FDIC loss-sharing agreements, whereby the FDIC
generally reimburses Fleet for 80% of net charge-offs for periods ranging from
three to five years from the date of acquisition. The federal financial
assistance agreement with the FDIC relating to loans acquired as part of the
Bank of New England (BNE) acquisition expired on July 14, 1994. On this date,
Fleet retained the majority of the remaining putable loans ($1.8 billion).
Certain directors and executive officers of the corporation and its
subsidiaries, including companies with which they are affiliated, borrowed from
the subsidiaries during 1994. Such loans were made in the ordinary course of
business under the subsidiaries' normal credit terms, including interest rate
and collateral.
22
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans to these individuals and affiliated companies were as follows.
RELATED PARTY LOANS
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, 1993 ADDITIONS REPAYMENTS DECEMBER 31, 1994
- ----------------- --------- ---------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
$ 261 $41 $ 94 $ 208
</TABLE>
Concentrations of Credit Risk. Although the corporation is engaged in
business nationwide, the lending done by the banking subsidiaries is primarily
concentrated in the Northeast.
NOTE 5. RESERVES FOR LOSSES
RESERVE FOR CREDIT LOSS ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of year............................. $1,000 $1,029 $1,021
Provision charged to income.............................. 62 271 486
Loans and leases charged off............................. (186) (379) (618)
Recoveries of loans and leases charged off............... 82 89 73
Acquisitions/other....................................... (5) (10) 67
------ ------ ------
Balance at end of year................................... $ 953 $1,000 $1,029
====== ====== ======
</TABLE>
Acquisitions/other includes reserves acquired as a result of acquisitions,
offset in part by reserve transfers to the FDIC.
RESERVE FOR OREO ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
---- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Balance at beginning of year.............................. $ 30 $ 12
Provision................................................. 27 47
Dispositions, net......................................... (20) (29)
---- ----
Balance at end of year.................................... $ 37 $ 30
==== ====
</TABLE>
NOTE 6. NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Nonperforming loans and leases:
Current or less than 90 days past due.................... $114 $147 $359 $ 313 $ 328
Noncurrent............................................... 328 318 390 739 659
OREO....................................................... 76 136 241 557 399
---- ---- ---- ------ ------
Total NPAs....................................... $518 $601 $990 $1,609 $1,386
---- ---- ---- ------ ------
NPAs as a percent of outstanding loans, leases, and OREO... 1.88% 2.27% 3.68% 5.89% 6.64%
---- ---- ---- ------ ------
Accruing loans and leases contractually past due 90 days or
more..................................................... $ 96 $ 77 $118 $ 163 $ 157
==== ==== ==== ====== ======
</TABLE>
23
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The corporation has no material outstanding commitments to lend additional
funds to customers whose loans have been placed on nonperforming status or the
terms of which have been modified.
The gross interest income that would have been recorded if the
nonperforming loans and leases had been current in accordance with their
original terms and had been outstanding throughout the period (or since
origination if held for part of the period) was $41 million, $58 million, and
$87 million in 1994, 1993, and 1992, respectively. The actual amount of interest
income on those loans included in net income for the period was $15 million, $16
million, and $30 million in 1994, 1993, and 1992, respectively.
Renegotiated loans that were returned to accrual status totaled $9 million
and $29 million at December 31, 1994 and 1993, respectively. These loans, which
are not included in nonperforming assets (NPAs), were renegotiated at existing
market interest rates and are performing in accordance with their renegotiated
terms. The average current yield on these loans was 8.3% and 7.4% at December
31, 1994 and 1993, respectively. In addition, approximately $2 million and $21
million of loans renegotiated in 1994 and 1993, respectively, are reflected in
NPAs as a sufficient payment performance history has not yet been established.
NOTE 7. PURCHASED MORTGAGE SERVICING RIGHTS
The corporation's PMSRs activity for the years ended December 31, 1994,
1993, and 1992 is as follows.
PURCHASED MORTGAGE SERVICING RIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
---- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of year................................ $560 $ 548 $ 511
Additions................................................... 374 255 148
Servicing sales............................................. (22) (3) (4)
Amortization................................................ (85) (138) (107)
Impairment charge........................................... -- (102) --
---- ----- -----
Balance at end of year...................................... $827 $ 560 $ 548
==== ===== =====
</TABLE>
NOTE 8. RESTRUCTURING ACCRUAL
The corporation recorded restructuring charges of $125 million and $44
million in connection with efficiency improvement programs during 1993 and 1994,
respectively. These programs, which commenced in the third quarter of 1993 and
continued into 1994, were intended to enhance the corporation's competitive
position through a comprehensive review of all its Northeast banking, mortgage
banking, and consumer finance activities and operations. The charges included
only identified direct and incremental costs associated with these programs. The
components of the restructuring charges were as follows.
COMPONENTS OF RESTRUCTURING CHARGES
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Severance.......................................................... $ 83
Occupancy.......................................................... 50
Other (including project costs).................................... 36
------
Total restructuring charges........................................ $ 169
===============
</TABLE>
Severance charges include the cost of terminations, other benefits, and
outplacement costs. The occupancy charge consists of the cost of leases expected
to be terminated, space consolidation, and losses anticipated to be incurred on
the sale of certain vacated properties. Project costs represent expenses
incurred during the restructuring program.
24
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All funding for cash expenditures relating to the restructuring plan have
been made from the operating activities of the corporation. The corporation's
liquidity has not been significantly affected by these cash outlays. During
1994, $20 million of incremental costs has been incurred relating to the
restructuring plan and has not been charged against the restructuring accrual.
It is anticipated that approximately $38 million of additional incremental costs
will be incurred in 1995.
The following table presents a summary of activity with respect to the
restructuring charges.
RESTRUCTURING ACCRUAL
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1993
---- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Balance at beginning of year............................................. $119 $ --
Provision charged against income......................................... 44 125
Cash outlays............................................................. (69) (6)
Noncash writedowns....................................................... (36) --
---- ----
Balance at end of year................................................... $ 58 $119
==== ====
</TABLE>
The cash outlays made during 1994 relate primarily to severance costs and
project-related costs. Noncash writedowns relate to vacated facilities and
building and leasehold improvement write-offs. The majority of the remaining
cash outlays are expected to be made during 1995 and will consist primarily of
severance-related costs. Additional noncash writedowns are not expected to be
significant.
25
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
SECURITIES
FEDERAL SOLD UNDER OTHER TOTAL
FUNDS AGREEMENTS TO COMMERCIAL SHORT- TERM SHORT- TERM
PURCHASED REPURCHASE PAPER BORROWINGS BORROWINGS
--------- ------------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1994
Balance at December 31........... $ 1,410 $ 1,436 $ 835 $2,270 $5,951
Highest balance at any
month-end...................... 1,993 5,106 1,199 4,456 9,469
Average balance for the year..... 1,572 2,859 1,005 2,209 7,645
Weighted average interest rate as
of December 31................. 4.76% 5.03% 5.96% 5.71% 5.29%
Weighted average interest rate
paid for the year.............. 4.23 3.95 4.36 3.20 3.85
1993
Balance at December 31........... $ 442 $ 1,519 $1,337 $4,809 $8,107
Highest balance at any
month-end...................... 1,238 2,302 1,415 4,809 8,107
Average balance for the year..... 1,021 1,690 1,036 2,224 5,971
Weighted average interest rate as
of December 31................. 3.01% 2.60% 3.38% 3.22% 3.12%
Weighted average interest rate
paid for the year.............. 3.08 2.64 3.52 3.06 3.02
1992
Balance at December 31........... $ 765 $ 2,115 $ 743 $2,776 $6,399
Highest balance at any
month-end...................... 981 2,706 866 2,776 6,399
Average balance for the year..... 853 1,856 610 1,434 4,753
Weighted average interest rate as
of December 31................. 3.17% 2.91% 3.71% 4.26% 3.62%
Weighted average interest rate
paid for the year.............. 3.33 2.97 4.20 3.83 3.45
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days of the transaction date. Commercial
paper and other short-term borrowings generally mature within 90 days, although
commercial paper may have a term of up to 270 days.
Total credit facilities available were $3.2 billion with $500 million
outstanding at December 31, 1994, compared to $2.6 billion with $940 million
outstanding at December 31, 1993. The amounts outstanding under the lines of
credit relate entirely to FMG at both December 31, 1994 and 1993. During 1994,
the corporation and its subsidiaries paid commitment fees ranging from 0.125% to
0.25% on the lines.
NOTE 10. LONG-TERM DEBT
During 1994, the corporation filed a universal shelf registration statement
with the Securities and Exchange Commission (SEC), which combined existing debt
and preferred stock shelf registrations with a registration of an additional
$500 million of securities. This universal shelf registration provides for the
issuance of common and preferred stock, senior or subordinated debt securities,
and other debt securities. This universal shelf registration provided for the
issuance of an aggregate $1.1 billion in securities, all of which remain
available for issuance at December 31, 1994.
26
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents components of long-term debt for the parent
company and its affiliates.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
MATURITY
DATE 1994 1993
--------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Senior notes and debentures
Parent company:
MTNs 5.17%-10.22%................................... 1994-1997 $ 80 $ 280
9.375%-11.75% notes................................. 1994 -- 115
5.625% notes........................................ 1995 200 200
7.65% notes......................................... 1997 100 100
7.25% notes......................................... 1997-1999 400 --
Other............................................... 1 1
------ ------
Total parent company........................ 781 696
====== ======
Affiliates:
MTNs 5.35%-7.48%.................................... 1994-2003 285 373
Floating-rate notes................................. 1994 -- 250
Floating-rate notes................................. 1995 400 400
9.80% notes......................................... 1995 250 250
Floating-rate bank notes............................ 1995 250 --
9.98% notes......................................... 1996 70 70
6.125% notes........................................ 1997 150 150
6.50% notes......................................... 1999 150 150
Other............................................... 37 18
------ ------
Total affiliates............................ 1,592 1,661
====== ======
Total senior notes and debentures...... 2,373 2,357
====== ======
Subordinated notes and debentures:(a)
Floating-rate subordinated notes.................... 1998 100 100
7.625% subordinated notes........................... 1999 150 150
9.00%-9.90% subordinated notes...................... 2001 325 325
6.875% subordinated notes........................... 2003 150 150
8.125% subordinated notes........................... 2004 250 250
8.625% subordinated notes........................... 2007 107 107
Other............................................... 2 5
------ ------
Total subordinated notes and debentures..... 1,084 1,087
------ ------
Total long-term debt........................ $3,457 $3,444
====== ======
</TABLE>
- ---------------
(a) At December 31, 1994 and 1993, all subordinated debt was at the parent
company with the exception of $400,000 at an affiliate in 1993, and is
included in total risk-based capital.
The $200 million of 5.625%, $100 million of 7.65%, and $400 million of
7.25% notes provide for single principal payments and are not redeemable prior
to maturity. The fixed-rate subordinated notes all provide for single principal
payments at maturity.
27
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term senior borrowings of affiliates include $285 million of
medium-term notes (MTNs), $150 million of 6.125% notes and $150 million of 6.50%
notes issued by FMG, and $250 million of 9.80% and $70 million of 9.98% notes
issued by Fleet Financial Corp. The $400 million of floating-rate notes due 1995
were issued by subsidiary banks. The rate floats with the London Interbank
Offered Rate (LIBOR), and the notes are secured by the banks' qualifying student
loan portfolios or collateralized by mortgage-backed securities (MBS). The $250
million of floating-rate bank notes due 1995 were issued by subsidiary banks.
The rate floats with the federal funds rate.
All the floating-rate subordinated notes due 1998 are redeemable at the
option of the corporation, in whole or in part, at their principal amount plus
accrued interest. These notes pay interest based on the three-month LIBOR, reset
quarterly.
The aggregate payments required to retire long-term debt are: 1995, $1,252
million; 1996, $170 million; 1997, $502 million; 1998, $139 million; 1999, $500
million; 2000 and thereafter, $894 million.
NOTE 11. PREFERRED STOCK
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
---- ----
(DOLLARS IN
MILLIONS, EXCEPT
PER SHARE DATA)
-------------------
<S> <C> <C>
10.12% Series III perpetual preferred stock, $1 par, 519,758 shares
issued and outstanding at December 31, 1994 and 1993.................. $ 50 $ 50
9.375% Series IV perpetual preferred stock, $1 par, 478,838 shares
issued and outstanding at December 31, 1994 and 1993.................. 46 46
Preferred stock with cumulative and adjustable dividends, $1 par,
1,000,000 shares issued and outstanding at December 31, 1993.......... -- 49
Preferred stock with cumulative and adjustable dividends, $20 par,
1,500,000 shares issued and outstanding at December 31, 1993.......... -- 73
Dual convertible preferred stock $200 stated value, 1,415,000 shares
issued and outstanding at December 31, 1994 and 1993.................. 283 283
---- ----
Total......................................................... $379 $501
==== ====
</TABLE>
During 1994, the corporation called for redemption all of its $1 par and
$20 par adjustable-rate preferred stock. The redemption price was $50 for each
share of $1 par and $20 par adjustable-rate preferred stock plus accrued
dividends.
The Series III perpetual preferred stock is redeemable at the option of
Fleet on or after June 1, 1996, at $105.06 per share ($26.265 per depositary
share), declining each year to $100 per share ($25 per depositary share) on or
after June 1, 2001, plus accrued and unpaid dividends, thereon. The Series IV
perpetual preferred stock is redeemable at the option of Fleet on or after
December 1, 1996, at $100 per share ($25 per depositary share), plus accrued and
unpaid dividends thereon. Except in certain circumstances, the holders of the
preferred stock have no voting rights.
In connection with the acquisition of BNE in 1991, the corporation issued
to limited partnerships managed by affiliates of Kohlberg, Kravis, Roberts & Co.
$283 million of DCP stock, $200 stated value, convertible into approximately 16
million shares of Fleet common stock at a conversion price of $17.65 per common
share. Shares of DCP stock carry limited voting rights until conversion and will
pay dividends equal to 50% of the common dividends paid (if any, in excess of
$15 million) by Fleet Banking Group, a wholly-owned subsidiary of the
corporation, which owns all of the common stock of Fleet Bank of Massachusetts
and Fleet Bank, N.A. (Conn.). No such dividends have been declared to date nor
are any anticipated to be declared in 1995.
In certain instances, no sooner than six years after issuance (four years
with regulatory approval, or earlier if certain capital ratios of Fleet are not
met), DCP stockholders can convert their stock into a 50% interest of Fleet
Banking Group. However, Fleet will have the option to redeem DCP stock at a
redemption price equal to 50% of the appraised value of Fleet Banking Group less
the sum of (1) the market value of the shares of
28
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fleet common stock into which the DCP stock is then convertible (and such shares
of common stock will be distributed to the holders of the DCP stock), and (2)
the value of the rights referred to below. Fleet has the option to pay such
redemption price in cash or in any combination of Fleet securities having a
realizable market value equal to such redemption price. It is the corporation's
intent to exercise its unilateral right to issue shares of its own common stock
in connection with such a conversion, and the corporation has reserved shares of
its common stock for this purpose.
In addition, Fleet issued to the holders of the DCP stock nontransferable
rights to purchase 6,500,000 shares of common stock at an exercise price of
$17.65 per share (the rights). The rights, which are exercisable immediately,
will expire on July 12, 2001, and are not transferable. Fleet has the option to
pay appreciation on the rights in lieu of delivering the shares upon exercise.
NOTE 12. COMMON STOCK
At December 31, 1994, Fleet had 300 million shares of $1 par value common
stock authorized and 135 million shares outstanding. Shares reserved for future
issuance in connection with the corporation's stock plans, the DCP stock, the
rights, and stock options totaled 45 million.
During 1994, the corporation purchased a total of 6.5 million shares of
Fleet common stock in the public market at a total cost of $250 million, of
which 6.2 million shares were issued to NBB stockholders in January 1995 when
the acquisition was completed. Refer to Note 2 for more information on the NBB
acquisition.
Fleet's Board of Directors declared a dividend of one preferred share
purchase right for each outstanding share of Fleet common stock in 1990. Under
certain conditions, a right may be exercised to purchase 1/100 of the
corporation's cumulative participating preferred stock at a price of $50,
subject to adjustment. The rights become exercisable if a party acquires 10% or
more (in the case of certain qualified investors, 15% or more) of the issued and
outstanding shares of Fleet common stock, or after the commencement of a tender
or exchange offer for 10% or more of the issued and outstanding shares. When
exercisable under certain conditions, each right would entitle the holder to
receive upon exercise of a right that number of shares of common stock having a
market value of two times the exercise price of the right. The rights will
expire in the year 2000 and may be redeemed in whole, but not in part, at a
price of $0.01 per share at any time prior to expiration or the acquisition of
10% of Fleet common stock.
NOTE 13. EMPLOYEE BENEFITS
Stock Option Plan. The corporation has a stock option plan under which key
employees may be granted options and stock appreciation rights (SARs) at not
less than fair market value at the date of grant. In most cases, options granted
under the plan vest in five equal installments and expire at the end of ten
years. Option plans resulted in charges to expense of $5 million in 1994, $2
million in 1993, and $7 million in 1992. At December 31, 1994, 1993, and 1992,
exercisable options totaled 2,191,502, 1,832,072, and 1,516,846, respectively.
The following table shows the activity for the plans.
STOCK OPTIONS
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1.............................. 5,378,562 4,249,946 3,358,596
Granted........................................... 2,061,796 1,747,200 1,588,550
Exercised......................................... 562,078 474,584 637,100
Expired or canceled............................... 287,260 144,000 60,100
--------- --------- ---------
Balance at December 31(a)......................... 6,591,020 5,378,562 4,249,946
======== ======== ========
</TABLE>
29
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Price range -- high
Balance at January 1..................................... $37.31 $30.31 $29.19
Granted.................................................. 36.94 37.31 30.31
Exercised................................................ 32.75 28.44 26.63
Expired or canceled...................................... 36.94 32.75 26.63
------ ------ ------
Balance at December 31................................... $37.31 $37.31 $30.31
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Price range -- low
Balance at January 1..................................... $11.00 $11.00 $ 5.69
Granted.................................................. 20.76 29.19 27.56
Exercised................................................ 11.13 11.69 5.69
Expired or canceled...................................... 11.69 11.69 11.69
------ ------ ------
Balance at December 31................................... $11.00 $11.00 $11.00
====== ====== ======
</TABLE>
- ---------------
(a) At December 31, 1994, 1,359,994 options were issued in tandem with SARs that
entitle the holder to tender an option for cancelation and receive the
appreciation in value in cash and common stock of the corporation.
Restricted Stock Plan. The corporation has a restricted stock plan under
which key employees are awarded shares of the corporation's common stock subject
to certain vesting requirements. With respect to stock granted in 1994,
restrictions lapse, in whole or in part, on the third anniversary of the date of
the agreement awarding such restricted stock only if certain preestablished
performance goals related to earnings per share are attained. With respect to
stock granted prior to 1994, restrictions lapse on the fifth anniversary of the
date of the agreement awarding such restricted stock (or sooner if the price of
Fleet common stock attains certain levels). In accordance with the terms of the
award, the restrictions lapsed as of January 1, 1995, with respect to 50% of the
105,000 shares awarded in 1991. As of December 31, 1994 and 1993, 231,250 grants
and 140,000 grants were outstanding, respectively, with an average grant price
of $29.17 and $24.11, respectively.
Pension Plans. The corporation maintains a noncontributory,
defined-benefit retirement and pension plan covering substantially all
employees. The corporation maintains a supplemental plan to provide benefits to
certain employees whose calculated benefits under the qualified plan exceeds the
Internal Revenue Service (IRS) limitation. Benefit payments to retired employees
are based upon years of service and a percentage of qualifying compensation
during the final years of employment. The amounts contributed to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act (ERISA) funding standards. Assets of the plans
are primarily invested in listed stocks, corporate obligations, and U.S.
Treasury and government agency obligations.
30
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUNDED STATUS OF PLANS
<TABLE>
<CAPTION>
QUALIFIED NONQUALIFIED
PLANS PLANS
------------- -------------
DECEMBER 31, DECEMBER 31,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested benefits..................................... $109 $ 86 $ 13 $ 11
Nonvested benefits.................................. 17 13 1 1
---- ---- ---- ----
Accumulated benefit obligations....................... 126 99 14 12
Additional benefits related to future compensation
levels.............................................. 67 84 11 4
---- ---- ---- ----
Projected benefits obligation rendered to date........ 193 183 25 16
Plan assets at fair value............................. 171 178 -- --
---- ---- ---- ----
Plan assets in excess of (less than) projected benefit
obligations......................................... (22) (5) (25) (16)
Unrecognized net transition (asset) obligation being
amortized........................................... (6) (6) 2 2
Unrecognized prior service cost being amortized....... 19 13 9 1
Unrecognized net loss from past experience different
from that assumed................................... 18 33 5 6
Additional amounts recognized due to minimum
level funding....................................... -- -- (5) (5)
---- ---- ---- ----
Prepaid (accrued) pension cost........................ $ 9 $ 35 $(14) $(12)
==== ==== ==== ====
</TABLE>
COMPONENTS OF PENSION EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost for benefits earned during the period............ $ 24 $ 20 $ 17
Interest cost on projected benefit obligation................. 17 14 11
Actual return on plan assets.................................. 1 (14) (10)
Net amortization and deferral................................. (13) 2 (2)
---- ---- ----
Net pension expense................................. $ 29 $ 22 $ 16
==== ==== ====
</TABLE>
For December 31, 1994, 1993, and 1992, the assumed discount rates were
8.50%, 7.25%, and 7.85%, respectively, while the rate of increase in
compensation levels used to measure the projected benefit obligation was 5.00%
in 1994, 1993, and 1992. The expected long-term rate-of-return on plan assets
was 8.85% for 1994 and 1993 and 9.00% for 1992. During 1994, the mortality table
was revised to the 1983 Group Annuity Mortality Table. The assumed discount rate
change reflects the substantial increase in the level of interest rates during
1994, while the revised mortality table reflects the improvement in life
expectancy.
Postretirement Healthcare Benefits. In addition to providing pension
benefits, the corporation provides healthcare cost assistance and life insurance
benefits for retired employees. The cost of providing these benefits was $7
million, $10 million, and $8 million in 1994, 1993, and 1992, respectively.
The following table presents the plan's funded status reconciled with
amounts recognized on the corporation's balance sheet.
31
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUNDED STATUS OF POSTRETIREMENT PLAN
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
---- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................................ $ 53 $ 61
Fully eligible active plan participants......................... 5 11
Other active plan participants.................................. 3 3
---- ----
Total accumulated postretirement benefit obligation..... 61 75
Plan assets....................................................... -- --
---- ----
Plan assets in excess of (less than) projected benefit
obligation...................................................... (61) (75)
Unrecognized net gain............................................. (11) --
Unrecognized transition obligation................................ 69 72
---- ----
Accrued postretirement benefit cost............................... $ (3) $ (3)
==== ====
</TABLE>
The components of the net periodic postretirement benefit cost of $7
million and $10 million for the years ended December 31, 1994 and 1993,
respectively, include interest, amortization of the transition obligation, and
amortization of gains (losses) of $4 million, $4 million, and $(1) million,
respectively, for 1994 compared to $6 million, $4 million, and $0, respectively
for 1993. The transition obligation, which represents the unfunded accumulated
benefit obligation as of January 1, 1993, is being amortized on a straight-line
basis over 20 years. Discount rates of 8.50% and 7.25% were used in determining
the accumulated postretirement benefit obligation for the years ended December
31, 1994 and 1993, respectively. During 1994, the mortality table was revised to
the 1983 Group Annuity Mortality Table. The assumed discount rate change
reflects the substantial increase in the level of interest rates during 1994,
while the revised mortality table reflects the improvement in the life
expectancy. The healthcare cost-trend rate is 10.50% for 1995, decreasing
gradually to 4.50% through the year 2001, and level thereafter. The healthcare
cost-trend rate assumption has a minimal effect on the amounts reported. For
example, increasing the assumed healthcare cost-trend rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1994, by $1.1 million, and the aggregate of the
service cost and interest cost components of the net periodic postretirement
benefit cost for 1994 by approximately $83,000.
Postemployment benefits. In 1994, the corporation adopted the provisions
of FASB Statement No. 112 "Employers' Accounting for Postemployment Benefits."
The initial impact of adopting this statement was immaterial.
Other Plans. Fleet and its subsidiaries have various savings and thrift
plans covering substantially all employees. The corporation's savings and thrift
plan expense was $21 million, $15 million, and $14 million for 1994, 1993, and
1992, respectively.
NOTE 14. INCOME TAXES
The corporation changed its method of accounting for income taxes from the
deferred method to the liability method as required by FASB Statement No. 109,
"Accounting for Income Taxes," effective January 1, 1993. Due to immateriality,
the effect of this accounting change was not separately disclosed in the prior
year's financial statements.
The effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994 and
1993, are as follows.
32
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET DEFERRED TAX ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
---- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Deferred tax assets:
Reserve for credit losses....................................... $358 $341
Reserve for unrealized gains (losses) on securities available
for sale..................................................... 214 --
Core deposit intangibles........................................ 66 69
Expenses not currently deductible............................... 50 93
Mortgage banking................................................ -- 92
Other........................................................... 163 118
---- ----
Total gross deferred tax assets......................... 851 713
Less: valuation reserve................................. 6 5
---- ----
Deferred tax assets..................................... 845 708
---- ----
Deferred tax liabilities:
Lease financing................................................. 154 138
Mortgage banking................................................ 84 --
Purchase accounting adjustments, net............................ 66 78
Subsidiary stock transaction.................................... 49 50
Depreciation.................................................... 29 29
Other........................................................... 111 53
---- ----
Total gross deferred tax liabilities.................... 493 348
---- ----
Net deferred tax assets........................................... $352 $360
==== ====
</TABLE>
Deferred tax assets, net of the valuation reserve, are expected to be
realized through carryback of taxable income in prior years, the reversal of
existing deferred tax liabilities and from the recognition of future taxable
income. The valuation reserve of $6 million and $5 million at December 31, 1994
and 1993, respectively, was established to reflect that portion of deferred tax
assets that more likely than not will not be realized for state income tax
purposes. The deferred tax accounts have been adjusted for differences in prior
year tax return filings and the IRS settlements.
The deferred tax expense (benefit) of $62 million and $(114) million in
1994 and 1993, respectively, includes an expense (benefit) of $1 million and
$(3) million, respectively, due to a change from the beginning of the year in
the deferred tax asset valuation reserve.
33
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current income taxes:
Federal............................................. $267 $336 $165
State and local..................................... 69 105 61
---- ---- ----
336 441 226
==== ==== ====
Deferred income tax expense (benefit):
Federal............................................. 49 (85) (1)
State and local..................................... 13 (29) 3
---- ---- ----
62 (114) 2
==== ==== ====
Total:
Federal............................................. 316 251 164
State and local..................................... 82 76 64
---- ---- ----
$398 $327 $228
==== ==== ====
</TABLE>
The tax effects of timing differences that give rise to a significant
portion of deferred tax expense (benefit) for the year ended December 31, 1992,
are as follows.
COMPONENTS OF DEFERRED INCOME TAX EXPENSE
<TABLE>
<CAPTION>
DECEMBER 31,
1992
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Gain on partial sale of FMG................................ $ 49
Provision for credit losses................................ 16
Pension funding............................................ (6)
Lease financing transactions............................... (9)
Expenses not currently deductible.......................... (14)
Purchase accounting adjustments............................ (17)
Other, net................................................. (17)
------
Total deferred income tax expense................ $ 2
===============
</TABLE>
34
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax expense for the years ended December 31, 1994, 1993, and
1992, varied from the amount computed by applying the statutory income tax rate
to income before taxes. The reasons for the differences are as follows.
STATUTORY RATE ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate.................................. 35.0% 35.0% 34.0%
Increases (decreases) in taxes resulting from:
Tax-exempt income.................................... (1.6) (2.0) (3.0)
Alternative minimum tax.............................. -- -- (1.4)
State and local income taxes, net of federal income
tax benefit....................................... 5.2 6.0 8.2
Other, net........................................... 0.3 0.9 6.4
---- ---- ----
Effective tax rate..................................... 38.9% 39.9% 44.2%
==== ==== ====
</TABLE>
NOTE 15. TRADING ACTIVITIES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS, AND
OFF-BALANCE-SHEET ITEMS
Trading Activities. All of the corporation's trading positions are
currently stated at market value with realized and unrealized gains and losses
reflected in other noninterest income. The corporation recognized trading income
of $20 million, $28 million, and $21 million for 1994, 1993, and 1992,
respectively. Trading income comprises gains and losses recorded on the
corporation's trading debt securities, foreign exchange contracts, and
interest-rate contracts.
Trading positions in debt securities consist of U.S. federal and state
government and agency securities. The types of interest-rate contracts traded
include interest-rate swaps, caps, floors, and collars as well as futures and
option contracts. Foreign exchange contracts consist primarily of foreign
exchange forwards and foreign currency options and futures contracts.
The following table represents the notional or contractual amount of
Fleet's off-balance-sheet trading instruments and related credit exposure.
Notional principal amounts are a measure of the volume of agreements transacted,
but the level of credit risk is significantly less. The amount of credit risk
can be estimated by calculating the cost to replace, on a present value basis
and at current market rates, all profitable contracts outstanding at year-end.
The counterparties with which Fleet has the largest credit exposure are highly
rated commercial banks, investment banks, or their subsidiaries.
TRADING INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL CREDIT
AMOUNT EXPOSURE
----------------- -------------
DECEMBER 31,
-----------------------------------
1994 1993 1994 1993
------ ------ ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest-rate contracts..................................... $4,837 $2,971 $49 $31
Foreign exchange contracts.................................. 1,216 1,323 18 40
</TABLE>
The amounts disclosed below represent the end-of-period fair value of
derivative financial instruments held or issued for trading purposes and the
average aggregate fair values during the year for those instruments.
35
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRADING INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------
FAIR VALUE AVERAGE
(CARRYING FAIR
AMOUNT) VALUE
---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest-rate contracts:
Assets................................................................. $ 41 $ 30
Liabilities............................................................ (34) (19)
Foreign exchange contracts:
Assets................................................................. 18 29
Liabilities............................................................ (16) (23)
</TABLE>
Interest-Rate Risk-Management Activities. The corporation's principal
objective in holding or issuing derivatives for purposes other than trading is
interest-rate risk management. The operations of Fleet are subject to a risk of
interest-rate fluctuations to the extent that there is a difference between the
amount of the corporation's interest-earning assets and the amount of
interest-bearing liabilities that mature or reprice in specified periods. The
principal objective of Fleet's asset/liability management activities is the
management of interest-rate risk and liquidity within parameters established by
various boards of directors. The corporation enters into various interest-rate
swap agreements to achieve this objective.
The following table presents the notional amount and fair value of
interest-rate risk-management swaps at December 31, 1994 and 1993.
INTEREST-RATE RISK-MANAGEMENT INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1994 1993
------------------ ------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest-rate swaps:
Receive-fixed/pay-variable............................. $2,388 $ (35) $2,249 $ 71
Pay-fixed/receive-variable............................. -- -- 985 (10)
Basis swaps............................................ 3,000 (1) -- --
Index-amortizing swaps................................. 2,770 (134) 2,770 9
-------- ----- -------- -----
Total.......................................... $8,158 $(170) $6,004 $ 70
====== ===== ====== ====
</TABLE>
The corporation's interest-rate risk-management swaps had an exposure to
credit risk of $25 million at December 31, 1994, versus $125 million at December
31, 1993. The credit exposure represents the cost to replace, on a present value
basis and at current market rates, all profitable contracts outstanding at
year-end. The decrease in the credit exposure from year to year reflects the
receipt of payments upon termination of swaps and the decrease in market value
of the remaining swaps.
During 1994, Fleet terminated its entire portfolio of pay-fixed swaps
resulting in a net deferred gain of $61 million to be amortized over the
remaining contract life of the interest-rate swaps, approximately four years.
36
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
-------------------
DECEMBER 31,
-------------------
1994 1993
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Other financial instruments whose notional or contractual amounts exceed
the amount of potential credit risk:
Commitments to sell loans.............................................. $ 1,884 $ 3,106
Commitments to originate or purchase loans............................. 355 1,918
Assets sold with recourse.............................................. 225 291
Financial instruments whose notional or contractual amounts represent
potential credit risk:
Commitments to extend credit........................................... 15,242 14,136
Letters of credit, financial guarantees, and foreign office guarantees
(net of participations)............................................. 1,272 1,303
</TABLE>
Commitments to sell loans have off-balance-sheet market risk to the extent
that the corporation does not have available loans to fill those commitments,
which would require the corporation to purchase loans in the open market.
Commitments to originate or purchase loans have off-balance-sheet market risk to
the extent the corporation does not have matching commitments to sell loans
obtained under such commitments, which could expose the corporation to
lower-of-cost or market-valuation adjustments in a rising interest-rate
environment.
Commitments to extend credit are agreements to lend to customers in
accordance with contractual provisions. These commitments usually are for
specific periods or contain termination clauses and may require the payment of a
fee. The total amounts of unused commitments do not necessarily represent future
cash requirements in that commitments often expire without being drawn upon.
COMMITMENTS TO EXTEND CREDIT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Commercial and industrial loans.................................. $ 7,851 $ 5,966
Revolving, open-end loans secured by residential properties
(e.g., home equity lines)...................................... 2,460 2,550
Credit card lines................................................ 2,998 1,828
Commercial real estate........................................... 873 600
Other unused commitments......................................... 1,060 3,192
------- -------
Total............................................................ $15,242 $14,136
======= =======
</TABLE>
Letters of credit and financial guarantees are agreements whereby the
corporation guarantees the performance of a customer to a third party.
Collateral is required to support letters of credit in accordance with
management's evaluation of the creditworthiness of each customer. The credit
risk assumed in issuing letters of credit is essentially equal to that in other
lending activities. Management does not anticipate any material losses as a
result of these transactions.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation techniques. These
techniques involve
37
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
uncertainties and are significantly affected by the assumptions used and
judgments made regarding risk characteristics of various financial instruments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates and the resulting fair values. Derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in an immediate sale of the instrument. Also, because of differences
in methodologies and assumptions used to estimate fair values, Fleet's fair
values should not be compared to those of other financial institutions.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the corporation.
The following describes the methods and assumptions used by Fleet in
estimating the fair values.
Cash and Cash Equivalents. The carrying amounts reported in the balance
sheet approximate fair values because maturities are less than 90 days.
Securities. Fair values are primarily based on quoted market prices.
Loans. The fair values of commercial, CRE, and certain consumer loans are
estimated by discounting the contractual cash flows using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. For certain variable-rate consumer loans, including home equity
lines of credit and credit card receivables, the carrying amounts approximate
fair value. This method of estimating the fair value of the credit card
portfolio excludes the value of the ongoing customer relationships, a factor
that can represent a significant premium over book value. For residential real
estate loans, fair value is estimated by reference to quoted market prices for
securities backed by similar types of loans adjusted for servicing costs. For
nonperforming loans and certain loans where the credit quality of the borrower
has deteriorated significantly, fair values are estimated by discounting
expected cash flows at a rate commensurate with the risk associated with the
estimated cash flows, based on recent appraisals of the underlying collateral or
by reference to recent loan sales.
Mortgages Held for Resale. Fair value is estimated using the quoted market
prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained (as is the corporation's ordinary course of business).
Deposits. The fair value of deposits with no stated maturity or a maturity
of less than 90 days is considered to be equal to the carrying amount. The fair
value of time deposits is estimated by discounting contractual cash flows using
interest rates currently offered on the deposit products. While the fair value
indicated that time deposits could be settled for an amount less than their
carrying value, depositors have the right to withdraw funds at carrying value
less a penalty, prior to contractual maturity. The fair value estimates for
deposits do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of alternative forms of
funding (core base intangibles).
Short-Term Borrowings. Short-term borrowings generally mature in 90 days
or less; therefore, the carrying amount reported in the balance sheet
approximates fair value.
Long-Term Debt. The fair value of Fleet's long-term debt, including the
short-term portion, is estimated based on quoted market prices for the issues
for which there is a market or by discounting cash flows based on current rates
available to Fleet for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet
instruments are based on quoted market prices, current settlement values, or
established pricing models using current assumptions.
38
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ON-BALANCE-SHEET FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1994 1993
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets:
Financial assets for which carrying value
approximates fair value........................ $ 6,199 $ 6,199 $ 2,560 $ 2,560
Securities........................................ 11,244 11,243 14,123 14,511
Loans(a).......................................... 25,492 25,610 24,302 25,136
Mortgages held for resale......................... 489 489 2,622 2,630
Trading account securities........................ 92 92 91 91
Trading instruments............................... 59 59 64 64
Other............................................. 81 115 123 172
Financial liabilities:
Deposits with no stated maturity.................. 22,110 22,110 22,910 22,910
Time deposits..................................... 12,696 12,571 8,175 8,271
Short-term borrowings............................. 5,951 5,951 8,107 8,107
Long-term debt.................................... 3,457 3,388 3,444 3,620
Trading instruments............................... 50 50 30 30
Other............................................. 152 152 94 94
</TABLE>
- ---------------
(a) Excludes net book value of lease financing of $1,096 million and $1,008
million at December 31, 1994 and 1993, respectively.
At December 31, 1994, the hedge-related interest-rate swaps had an
unrealized loss of $170 million compared to a net unrealized gain of $70 million
at December 31, 1993. Certain assets, which are not financial instruments and,
accordingly, are not included in the above fair values, contribute substantial
value to the corporation in excess of the related amounts recognized in the
balance sheet. These include the core deposit intangibles and the related retail
banking network, the value of customer relationships associated with certain
types of consumer loans (particularly the credit card portfolio), lease
financing business, and mortgage servicing rights.
NOTE 17. COMMITMENTS, CONTINGENCIES, AND OTHER DISCLOSURES
The corporation's subsidiary, Fleet Finance, has been a defendant in
several class-action lawsuits filed in federal and state courts in Georgia and
Alabama, including the Alexander class-action lawsuit and the Starr class-action
lawsuit. The court gave its final approval of these two lawsuits on July 18,
1994 and November 9, 1994, respectively. Pursuant to these settlement
agreements, Fleet Finance will provide benefits that include cash payments to
certain borrowers. At December 31, 1994, Fleet Finance had accrued approximately
$15 million related to these settlements, and the corporation believes that such
accruals are sufficient to cover costs.
The corporation and its subsidiaries are involved in various other legal
proceedings arising out of, and incidental to, their respective businesses.
Management of the corporation, based on its review with counsel of the
development of these matters to date, does not anticipate that any losses
incurred as a result of these legal proceedings would have a materially adverse
effect on the corporation's financial position.
39
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Commitments. The corporation has entered into a number of
noncancelable operating lease agreements for premises and equipment. The minimum
annual rental commitments under these leases at December 31, 1994, exclusive of
taxes and other charges, were $84 million in 1995; $67 million, 1996; $51
million, 1997; $43 million, 1998; $34 million, 1999; and $174 million, 2000 and
subsequent years. Total rental expense for 1994, 1993, and 1992, including
cancelable and noncancelable leases, amounted to $101 million, $103 million, and
$89 million, respectively.
Certain leases contain escalation clauses, which correspond with increased
real estate taxes and other operating expenses, and renewal options calling for
increased rents as the leases are renewed. No restrictions are imposed by any
lease agreement regarding the payment of dividends, additional debt financing,
or entering into further lease agreements.
Regulatory Matters. As a bank holding company, Fleet is subject to
regulation by the Federal Reserve Board (the Federal Reserve). Banking
subsidiaries are subject to regulation by the Federal Reserve and the Office of
the Comptroller of the Currency (OCC) as well as state regulators. Each
subsidiary bank's deposits are insured by the FDIC.
In addition to Fleet's own monitoring of activities, the credit quality of
the assets held by certain Fleet subsidiaries is subject to periodic review by
the state and federal bank regulatory agencies noted above. While Fleet believes
its current reserves for credit losses are adequate in light of prevailing
economic conditions and the current regulatory environment, there can be no
assurance that Fleet's subsidiaries will not be required to make certain
adjustments to the reserve for credit losses and charge-off policies in response
to changing economic conditions or regulatory examinations. Neither Fleet nor
any of its subsidiaries has entered into formal written agreements with state
and federal regulators.
Transaction and Dividend Restrictions. Fleet's banking subsidiaries are
subject to restrictions under federal law that limit the transfer of funds by
the subsidiary banks to Fleet and its nonbanking subsidiaries. Such transfers by
any subsidiary bank to Fleet or any nonbanking subsidiary are limited in amount
to 10% of the bank's capital and surplus.
Various federal and state banking statutes limit the amount of dividends
the subsidiary banks can pay to Fleet without regulatory approval. The payment
of dividends by any subsidiary bank may also be affected by other factors such
as the maintenance of adequate capital for such subsidiary bank. Various
regulators and the boards of directors of the affected institutions continue to
review dividend declarations and capital requirements of Fleet and its
subsidiaries consistent with current earnings, future earnings prospects, and
other factors.
Restrictions on Cash and Due from Banks. The corporation's banking
subsidiaries are subject to requirements of the Federal Reserve to maintain
certain reserve balances. At December 31, 1994 and 1993, these reserve balances
were $901 million and $936 million, respectively.
NOTE 18. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes, net of refunds, totaled $1,251
million and $341 million in 1994; $1,339 million and $428 million in 1993; and
$1,559 million and $260 million in 1992. Loans transferred to foreclosed
property and repossessed equipment totaled $66 million, $149 million, and $378
million in 1994, 1993, and 1992, respectively. Additional supplemental
disclosures include an unrealized loss on securities available for sale of $588
million in 1994, the conversion of $33 million of subordinated notes to common
stock in 1992, and the acquisition of $1,966 million of assets, net of $401
million of cash and cash equivalents received, and $2,367 million of liabilities
in 1992.
40
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
---- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Dividends from subsidiaries:
Banking subsidiaries............................................. $300 $ 205 $ 132
Other subsidiaries............................................... 37 24 88
Interest........................................................... 116 118 123
Gain on partial sale of FMG........................................ -- -- 121
Other.............................................................. 106 89 57
---- ------ ------
Total income............................................. 559 436 521
---- ------ ------
Interest........................................................... 161 163 183
Noninterest expense................................................ 56 185 118
---- ------ ------
Total expenses........................................... 217 348 301
---- ------ ------
Income before income taxes and equity in undistributed income of
subsidiaries..................................................... 342 88 220
Applicable income taxes (benefit).................................. 43 (45) 27
---- ------ ------
Income before equity in undistributed income of subsidiaries....... 299 133 193
Equity in undistributed income of subsidiaries..................... 314 355 87
---- ------ ------
Net income......................................................... $613 $ 488 $ 280
==== ====== ======
</TABLE>
41
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Money market instruments................................................. $ 148 $ 265
Securities............................................................... 297 189
Loans receivable from:
Banking subsidiaries................................................... 116 167
Other subsidiaries..................................................... 1,768 1,603
------ ------
1,884 1,770
Investment in subsidiaries:
Banking subsidiaries................................................... 3,112 3,068
Other subsidiaries..................................................... 746 759
------ ------
3,858 3,827
Other.................................................................... 307 329
------ ------
Total assets............................................................. $6,494 $6,380
====== ======
Short-term borrowings.................................................... $ 827 $ 591
Accrued liabilities...................................................... 422 368
Long-term debt........................................................... 1,865 1,782
------ ------
Total liabilities.............................................. 3,114 2,741
------ ------
Stockholders' equity................................................... 3,380 3,639
------ ------
Total liabilities and stockholders' equity............................... $6,494 $6,380
====== ======
</TABLE>
42
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 613 $ 488 $ 280
Adjustments for noncash items:
Equity in undistributed income of subsidiaries................... (314) (355) (87)
Depreciation and amortization.................................... 16 17 13
Net securities gains............................................. (13) (47) (4)
Gain on partial sale of FMG...................................... -- -- (121)
Increase in accrued liabilities, net............................... 38 102 130
Other, net......................................................... 166 38 20
----- ----- -----
Net cash flow provided by operating activities........... 506 243 231
----- ----- -----
Cash flows from investing activities
Purchases of securities.......................................... (167) (132) (27)
Proceeds from sales and maturities of securities................... 41 137 18
Net increase in loans made to affiliates........................... (114) (133) (49)
Capital contributions to subsidiaries.............................. (149) (171) (310)
----- ----- -----
Net cash flow used by investing activities............... (389) (299) (368)
----- ----- -----
Cash flows from financing activities
Net increase (decrease) in short-term borrowings................. 236 45 (383)
Proceeds from issuance of long-term debt........................... 400 300 868
Repayments of long-term debt....................................... (317) (603) (63)
Proceeds from issuance of common stock............................. 14 432 27
Redemption and repurchase of common and preferred stock............ (372) (126) --
Cash dividends paid................................................ (195) (149) (125)
----- ----- -----
Net cash flow (used) provided by financing activities.... (234) (101) 324
----- ----- -----
Net (decrease) increase in cash and cash equivalents............... (117) (157) 187
----- ----- -----
Cash and cash equivalents at beginning of year..................... 265 422 235
----- ----- -----
Cash and cash equivalents at end of year........................... $ 148 $ 265 $ 422
===== ===== =====
</TABLE>
43
<PAGE> 1
EXHIBIT 99.2
44
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Northeast Federal Corp.:
We have audited the accompanying consolidated statements of financial
condition of Northeast Federal Corp. and subsidiaries (the Company) as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the consolidated financial position
of Northeast Federal Corp. and subsidiaries at December 31, 1994 and 1993 and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
As described in Note 1, the Company changed its method of accounting for
securities as of December 31, 1993.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
January 20, 1995
45
<PAGE> 3
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------- DECEMBER 31,
1994 1993 1992
-------- -------- ------------
<S> <C> <C> <C>
Interest income:
Loans.................................................. $ 77,617 $145,127 $129,038
Mortgage-backed securities............................. 89,946 54,205 37,924
Investment securities.................................. 16,176 10,970 15,313
Rhode Island covered assets............................ 6,594 8,989 9,932
Other.................................................. 2,378 1,085 4,138
-------- -------- ------------
Total interest income.......................... 192,711 220,376 196,345
-------- -------- ------------
Interest expense:
Deposits............................................... 101,886 121,163 123,924
Federal Home Loan Bank advances........................ 10,956 13,230 3,056
Other borrowings....................................... 21,117 13,575 5,930
-------- -------- ------------
Total interest expense......................... 133,959 147,968 132,910
-------- -------- ------------
Net interest income............................ 58,752 72,408 63,435
Provision for loan losses................................ 4,900 23,300 16,300
-------- -------- ------------
Net interest income after provision for loan
losses....................................... 53,852 49,108 47,135
-------- -------- ------------
Non-interest income:
Fees for services...................................... 9,040 10,181 7,112
Gain on sale of securities, net........................ 7,283 5,625 4,100
Gain on sale of loans, net............................. 13,813 1,939 1,870
Other non-interest income (loss)....................... 9,537 (6) (41)
-------- -------- ------------
Total non-interest income...................... 39,673 17,739 13,041
-------- -------- ------------
Non-interest expenses:
Compensation and benefits.............................. 27,459 32,324 23,126
Occupancy and equipment, net........................... 16,168 15,399 11,057
Other general and administrative....................... 17,412 19,436 15,872
Amortization of supervisory goodwill................... -- -- 2,002
Supervisory goodwill valuation adjustment.............. -- -- 56,568
SAIF insurance fund and OTS assessments................ 8,759 8,414 6,222
Real estate and other assets acquired in settlement of
loans............................................... 13,203 17,606 9,652
-------- -------- ------------
Total non-interest expenses.................... 83,001 93,179 124,499
-------- -------- ------------
Income (loss) before income taxes.............. 10,524 (26,332) (64,323)
Income tax benefit....................................... (442) (12,193) (5,089)
-------- -------- ------------
Net income (loss).............................. $ 10,966 $(14,139) $(59,234)
======== ======== ==========
Preferred stock dividend requirements.................... $ 3,532 $ 4,501 $ 4,652
Net income (loss) applicable to common stockholders...... $ 7,434 $(18,640) $(63,886)
Net income (loss) per common share, primary and fully
diluted................................................ $ .52 $ (1.75) $ (11.16)
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
46
<PAGE> 4
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks............................................. $ 34,145 $ 51,705
Federal funds sold.................................................. 22,725 23,510
Securities purchased under agreements to resell..................... -- 60,000
Investment securities, net (market value of $190,269 and $42,502)... 202,376 42,589
Investment securities, available-for-sale, net...................... 142,735 162,877
Mortgage-backed securities, net (market value of $1,686,417
and $1,336,970)................................................... 1,758,179 1,330,886
Mortgage-backed securities, available-for-sale, net................. 21,358 12,886
Loans, net.......................................................... 947,902 1,876,181
Loans available-for-sale, net....................................... 4,812 46,076
Rhode Island covered assets......................................... 82,236 105,625
Interest and dividends receivable................................... 17,828 17,540
Real estate and other assets acquired in settlement of loans........ 13,192 74,962
Premises and equipment, net......................................... 27,401 32,368
Prepaid expenses and other assets................................... 70,683 82,822
---------- ----------
Total assets.............................................. $3,345,572 $3,920,027
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits..................................................... $2,393,084 $2,952,082
Brokered deposits................................................... -- 25,135
Federal Home Loan Bank advances..................................... 203,527 373,000
Securities sold under agreements to repurchase...................... 504,245 294,809
Uncertificated debentures........................................... 42,243 38,442
Advance payments by borrowers for taxes and insurance............... 22,586 28,337
Other liabilities................................................... 40,987 75,709
---------- ----------
Total liabilities......................................... 3,206,672 3,787,514
---------- ----------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value, 15,000,000 shares
authorized: $8.50 Cumulative Preferred Stock, Series B, 428,791
shares at December 31, 1994 and 394,199 shares at December 31,
1993 issued and outstanding.................................... 4 4
Common stock, $.01 par value, 25,000,000 shares authorized:
14,353,996 shares at December 31, 1994 and 13,499,078 shares at
December 31, 1993 issued and outstanding....................... 144 135
Additional paid-in capital.......................................... 191,756 185,960
Net unrealized gains on debt and equity securities
available-for-sale................................................ 1,888 9,462
Accumulated deficit................................................. (52,123) (59,557)
Stock dividend distributable........................................ 911 838
Unallocated employee stock ownership plan shares.................... (3,680) (4,329)
---------- ----------
Total stockholders' equity................................ 138,900 132,513
---------- ----------
$3,345,572 $3,920,027
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
47
<PAGE> 5
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED UNALLOCATED
NET EARNINGS EMPLOYEE
UNREALIZED (ACCUMULATED STOCK
SERIAL ADDITIONAL GAIN DEFICIT) STOCK OWNERSHIP
PREFERRED COMMON PAID-IN (LOSS) ON SUBSTANTIALLY DIVIDEND PLAN
STOCK STOCK CAPITAL SECURITIES* RESTRICTED DISTRIBUTABLE SHARES TOTAL
--------- ------ ---------- ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1992.... $28 $ 57 $181,160 -- $ 18,904 -- $(9,125) $191,024
Net loss................... -- -- -- -- (59,234) -- -- (59,234)
Issuance of 351,700 shares
of $8.50 Cumulative
Preferred Stock, Series
B........................ 4 -- 35,166 -- -- -- -- 35,170
Repurchase of 1,202,916
shares of Adjustable Rate
Cumulative Preferred
Stock, Series A.......... (12) -- (33,538) -- -- -- -- (33,550)
Proceeds from exercise of
stock options............ -- -- 16 -- -- -- -- 16
Unallocated employee stock
ownership plan shares.... -- -- -- -- -- -- 4,147 4,147
--- ------ ---------- ---------- ------------ ------------- --------- --------
Balance at December 31,
1992....................... 20 57 182,804 -- (40,330) -- (4,978) 137,573
Net loss................... -- -- -- -- (14,139) -- -- (14,139)
Proceeds from issuance of
shares to 401-K plan..... -- -- 223 -- -- -- -- 223
Proceeds from exercise of
stock options............ -- 1 146 -- -- -- -- 147
Conversion of 1,610,000
shares of $2.25
Cumulative Convertible
Preferred Stock, Series A
into 7,647,500 shares of
common stock............. (16) 77 (1,463) -- -- -- -- (1,402)
Stock dividend
distributable, 50,876
shares of $8.50
Cumulative Preferred
Stock, Series B.......... -- -- -- -- (5,088) 5,088 -- --
Preferred stock dividend
payment in kind.......... -- -- 4,250 -- -- (4,250) -- --
Unallocated employee stock
ownership plan shares.... -- -- -- -- -- -- 649 649
Net unrealized gains on
debt and equity
securities
available-for-sale....... -- -- -- 9,462 -- -- -- 9,462
--- ------ ---------- ---------- ------------ ------------- --------- --------
Balance at December 31,
1993....................... 4 135 185,960 9,462 (59,557) 838 (4,329) 132,513
Net income................. -- -- -- -- 10,966 -- -- 10,966
Purchase of shares by 401-K
plan..................... -- -- 115 -- -- -- -- 115
Proceeds from exercise of
stock options............ -- 1 134 -- -- -- -- 135
Proceeds from exercise of
stock warrants........... -- 8 2,342 -- -- -- -- 2,350
Stock dividend
distributable, 35,327
shares of $8.50
Cumulative Preferred
Stock, Series B.......... -- -- -- -- (3,532) 3,532 -- --
Preferred stock dividend
payment in kind.......... -- -- 3,459 -- -- (3,459) -- --
Unallocated employee stock
ownership plan shares.... -- -- -- -- -- -- 649 649
Difference between fair
value and cost of
released ESOP shares..... -- -- (254) -- -- -- -- (254)
Change in unrealized gains
on debt and equity
securities
available-for-sale....... -- -- -- (7,574) -- -- -- (7,574)
--- ------ ---------- ---------- ------------ ------------- --------- --------
Balance at December 31,
1994....................... $ 4 $144 $191,756 $ 1,888 $(52,123) $ 911 $(3,680) $138,900
======== ======== ========= ========== ============ ============ ========= ========
</TABLE>
- ---------------
* Changes during the year ended December 31, 1993 reflect the Company's
implementation of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities."
See accompanying Notes to the Consolidated Financial Statements
48
<PAGE> 6
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
---------------------- DECEMBER 31,
1994 1993 1992
--------- --------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ 10,966 $ (14,139) $ (59,234)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.......................................... 5,394 4,860 3,361
Amortization of fees, discounts, and premiums, net..................... 7,915 1,697 (6,820)
Amortization of and other adjustments to supervisory goodwill.......... -- -- 59,553
Provision for loan losses.............................................. 4,900 23,300 16,300
Provision for losses on REO............................................ 9,673 9,493 3,823
Gain on sale of securities............................................. (7,283) (5,651) (4,100)
Gain on sale of loans.................................................. (13,813) (1,939) (1,870)
(Gain) loss on sale of other assets.................................... 44 466 (253)
Gain on sale of branches............................................... (9,695) -- --
Decrease (increase) in interest and dividends receivable............... (288) 3,802 2,792
Loans available-for-sale originated and purchased...................... (70,204) (244,950) (148,397)
Proceeds from sales of loans available-for-sale........................ 108,154 231,153 184,325
Decrease in accrued interest payable on deposits....................... (1,041) (1,078) (3,185)
Decrease (increase) in prepaid expenses and other assets............... 12,329 (8,099) (14,347)
Increase (decrease) in other liabilities............................... (25,258) 19,125 (10,259)
--------- --------- -----------------
Total adjustments.................................................... 20,827 32,179 80,923
--------- --------- -----------------
Net cash provided by operating activities........................ 31,793 18,040 21,689
--------- --------- -----------------
Cash flows from investing activities:
Loans originated and purchased......................................... (155,062) (513,239) (461,063)
Net decrease in loans due to sale of branches.......................... 1,805 -- --
Proceeds from sales of loans........................................... 843,669 48,541 8,116
Principal collected on loans........................................... 220,143 412,166 398,469
Net decrease in Rhode Island covered assets............................ 23,389 46,203 26,308
Purchases of mortgage-backed securities................................ (798,212) (361,464) (383,401)
Purchases of mortgage-backed securities available-for-sale............. (14,131) -- --
Proceeds from sales of mortgage-backed securities available-for-sale... -- 39,831 44,727
Principal collected on mortgage-backed securities...................... 386,783 237,339 136,995
Purchases of investment securities..................................... (167,611) -- (64,667)
Proceeds from sales of investment securities........................... -- 16,347 506
Proceeds from redemption of FHLB stock................................. (487) 554 8,283
Proceeds from maturities of investment securities...................... 8,149 12,580 19,404
Purchases of investment securities available-for-sale.................. (350,636) (239,426) (204,458)
Proceeds from sales of investment securities available-for-sale........ 294,819 142,592 158,033
Proceeds from maturities of investment securities available-for-sale... 71,220 121,347 71,622
Proceeds from sales of real estate and other assets acquired in
settlement of
loans................................................................ 63,044 76,549 23,563
Net purchases of premises and equipment................................ (829) (3,294) (7,086)
--------- --------- -----------------
Net cash provided by (used in) investing activities.............. 426,053 36,626 (224,649)
--------- --------- -----------------
Cash flows from financing activities:
Net decrease in retail deposits........................................ (45,471) (252,494) (568,741)
Acquisition of Rhode Island deposits................................... -- -- 136,319
Sale of deposits....................................................... (503,113) -- --
Net decrease in brokered deposits...................................... (24,813) -- --
Increase (decrease) in advance payments by borrowers for taxes
and insurance........................................................ (5,751) 6,603 1,461
Increase in securities sold under agreements to repurchase............. 209,436 3,795 278,267
Net increase (decrease) in short-term FHLB advances.................... (24,273) 40,000 99,250
Proceeds from long-term FHLB advances.................................. 7,800 228,000 --
Repayments of long-term FHLB advances.................................. (153,000) (35,000) (2,500)
Proceeds from issuance of uncertificated sinking fund debentures....... -- -- 33,450
Retirement of convertible subordinated debentures...................... -- (560) --
Reduction of ESOP debt guarantee....................................... 394 649 4,147
Preferred stock conversion costs....................................... -- (1,402) --
Retirement of series A adjustable preferred stock...................... -- -- (33,550)
Proceeds from issuance of Series B preferred stock..................... -- -- 35,170
Exercise of warrants................................................... 2,350 -- --
Issuance of 401K stock shares.......................................... 115 223 --
Proceeds from exercise of stock options................................ 135 147 16
--------- --------- -----------------
Net cash used in financing activities............................ (536,191) (10,039) (16,711)
--------- --------- -----------------
Net increase (decrease) in cash and cash equivalents..................... (78,345) 44,627 (219,671)
Cash and cash equivalents at beginning of period......................... 135,215 90,588 310,259
--------- --------- -----------------
Cash and cash equivalents at end of period............................... $ 56,870 $ 135,215 $ 90,588
========= ========= ==================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
49
<PAGE> 7
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Northeast Federal Corp. and its wholly-owned subsidiary, Northeast Savings, F.A.
(the Association). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain reclassifications have been made to
prior years' financial statements to conform to the 1994 presentation.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, cash and due from
banks, interest-bearing deposits with original maturities of ninety days or
less, and federal funds sold are considered as cash and cash equivalents.
Federal Reserve Board regulations require the Association to maintain
non-interest-bearing reserves against certain of its transaction accounts. For
total transaction account deposits of $54.0 million or less, regulations require
a reserve of 3%. For total transaction account deposits in excess of $54.0
million, a 10% reserve is required.
Securities Purchased Under Agreements to Resell
The Association invests in securities purchased under agreements to resell
(repurchase agreements) for short-term cash management. The Association takes
physical possession of the collateral for these agreements, which normally
consists of U.S. Treasury securities, collateralized mortgage obligations, or
mortgage-backed securities guaranteed by agencies of the U.S. government.
Investment Securities
Investment securities include U.S. Government, agency, and corporate bonds,
collateralized mortgage obligations, and asset-backed securities. Those
securities which management has the positive intent and ability to hold until
maturity are classified as held-to-maturity and are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts into interest
income using the level-yield method. Premiums are amortized to the earlier of
the call or maturity date and discounts are accreted to the maturity date.
Investment securities which have been identified as assets for which there is
not a positive intent to hold to maturity, including all marketable equity
securities, are classified as available-for-sale. SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that
available-for-sale securities be reported at fair value with unrealized gains
and losses excluded from earnings and reported in a separate component of
stockholders' equity. The Company implemented SFAS 115 as of December 31, 1993.
SFAS 115 may not be applied retroactively.
Gains and losses on sales of investment securities are computed on a
specific identification cost basis. Investment securities which have experienced
an other than temporary decline are written down to fair value as a new cost
basis with the amount of the writedown included in earnings as a realized loss.
The new cost basis is not changed for subsequent recoveries in fair value.
Factors which management considers in determining whether an impairment in value
of an investment is other than temporary include the issuer's financial
performance and near term prospects, the financial conditions and prospects of
the issuer's geographic region and industry, and recoveries in market value
subsequent to the balance sheet date.
Mortgage-Backed Securities
Mortgage-backed securities which management has the positive intent and
ability to hold until maturity are classified as held-to-maturity, and are
carried at amortized cost, adjusted for premiums and discounts which are
amortized or accreted into interest income using the level-yield method over the
remaining contractual life of the securities, adjusted for actual prepayments.
Mortgage-backed securities for which there
50
<PAGE> 8
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is not a positive intent to hold to maturity are classified as
available-for-sale. As indicated above, SFAS 115, implemented by the Company as
of the end of the year ended December 31, 1993, requires that available-for-sale
securities be reported at fair value with unrealized gains and losses excluded
from earnings and reported in a separate component of stockholders' equity.
Gains and losses on sales of mortgage-backed securities are computed on a
specific identification cost basis.
Loans
Loans are generally recorded at the contractual amounts owed by borrowers,
less unearned discounts, deferred origination fees, the undisbursed portion of
any loans in process, and the allowance for loan losses. Interest on loans is
credited to income as earned to the extent it is deemed collectible. Discounts
on loans purchased are accreted into interest income using the level-yield
method over the contractual lives of the loans, adjusted for actual prepayments.
Single-family residential real estate loans that were originated with the
intent to sell in the secondary mortgage market or those loans which have been
identified as assets for which there is not a positive intent to hold to
maturity are classified as available-for-sale and carried at the lower of cost
or fair value. The amount by which the aggregate cost of loans
available-for-sale exceeds market value is charged to gain (loss) on sale of
loans, net.
The Company adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan," as of January 1, 1993. Loans which are identified for evaluation and
which are deemed to be impaired under the guidance of SFAS 114 are measured at
the fair value of the collateral. Substantially all of the Association's loans
are collateral dependent. If the fair value of the collateral is less than the
recorded investment in the loan, the allowance for loan losses is adjusted with
a corresponding charge to the provision for loan losses. The fair value of the
collateral, based on a current appraisal, often changes from one reporting
period to the next. If the fair value of the collateral decreases, such decrease
is reported as a charge to the provision for loan losses. If the fair value
increases, the provision for loan losses is reduced. Impaired loans are included
in nonperforming assets as non-accrual loans or troubled debt restructurings, as
appropriate. The Company had previously measured loan impairment pursuant to the
methods prescribed in SFAS 114. As a result, no additional reserves were
required by early adoption of the pronouncement.
Loan Fees
Loan origination fees, commitment fees, and certain direct loan origination
costs are deferred and recognized over the lives of the related loans as an
adjustment of the loans' yields using the level-yield method. Calculation of the
level-yield is based upon weighted average contractual payment terms which are
adjusted for actual prepayments. Amortization of deferred fees is discontinued
for non-accrual loans.
Loans Serviced for Others
Northeast Savings services real estate and consumer loans for others which
are not included in the accompanying consolidated financial statements. Fees
earned for servicing loans owned by others are reported as income when the
related mortgage loan payments are collected. Loan servicing costs are charged
to expense as incurred. Costs associated with acquiring the right to service
certain loans are capitalized and amortized in proportion to and deducted from
the estimated future net servicing income.
Prior to 1986, the Association sold certain loans with limited recourse
requirements. In addition, in the normal course of business, loans are sold to
various agencies which have recourse on standard documentation representations
and warranties. Such loans are included in loans serviced for others. Estimated
probable loan losses and related costs of collection and repossession are
provided for at the time of such sales and are
51
<PAGE> 9
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
periodically reevaluated. The Company evaluates the credit risk of loans sold
with recourse in conjunction with its evaluation of the adequacy of allowance
for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established and maintained through a
periodic review and evaluation of various factors which affect the loans'
collectibility and results in provisions for loan losses which are charged to
expense. Numerous factors are considered in the evaluation, including a review
of certain borrowers' current financial status, credit standing, available
collateral, management's judgment regarding economic conditions, the impact of
those conditions on property values, historical loan loss experience in relation
to outstanding loans, the diversification and size of the loan portfolio, the
results of the most recent regulatory examinations available to the Association,
the overall loan portfolio quality, and other relevant factors.
Non-Accrual Loans
Interest accruals on loans are normally discontinued and previously accrued
interest is reversed whenever the payment of interest or principal is more than
90 days past due, or earlier when conditions warrant it. Interest received on
non-accrual loans generally is either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal. A non-accrual loan may be restored to an accrual basis when principal
and interest payments are current and full payment of principal and interest is
expected.
Real Estate and Other Assets Acquired in Settlement of Loans
Real estate and other assets acquired in settlement of loans is recorded at
the lower of the recorded investment in the loan or fair value minus estimated
costs to sell. The lower of the recorded investment in the loan or fair value
less estimated costs to sell becomes the new cost basis for REO. Any excess of
the recorded investment over the fair value less estimated costs to sell is
charged off. Subsequent valuations of REO are at the lower of the new cost basis
or fair value less estimated costs to sell.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the respective lease terms or the estimated useful life, whichever is
shorter.
Interest Rate Swap Agreements
Northeast Savings is a party to interest rate swap agreements in managing
its interest rate exposure. The net amounts received or paid in accordance with
the interest rate swap agreements are charged or credited to interest expense on
other borrowings. Generally, gains and losses on terminated interest rate swap
agreements are amortized over the lesser of the remaining terms of the
agreements or the remaining lives of the assets or liabilities hedged.
Pension Plan
Pension costs are funded on a current basis in compliance with the
requirements of the Employee Retirement Income Security Act and are accounted
for in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
52
<PAGE> 10
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Retirement Benefits Other Than Pensions
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," focuses principally on postretirement health care benefits and
significantly changed the practice of accounting for postretirement benefits on
a pay-as-you-go (cash) basis by requiring accrual of the expected cost of
providing those benefits to an employee and the employee's beneficiaries and
covered dependents during the years that the employee renders the necessary
service. SFAS 106 became effective for the Association in 1993. The Company
implemented SFAS 106 during the quarter ended March 31, 1993 and is amortizing
the estimated $444,000 expense over the twelve year life expectancy of the
participants.
Income Taxes
Northeast Federal Corp. and subsidiaries file a federal consolidated income
tax return. In February 1992, SFAS 109, "Accounting For Income Taxes" was
issued, which requires an asset and liability approach for financial accounting
and reporting for income taxes. One requirement of SFAS 109 is that the tax
benefit related to acquired deductible temporary differences and pre-acquisition
net operating loss carryforwards shall first be applied to reduce to zero
goodwill related to that acquisition. Accordingly, goodwill has been reduced as
a result of the tax benefits related to these items.
The Company elected to adopt SFAS 109 effective April 1, 1991. The effect
of initially applying the new standard was reported as the effect of a change in
accounting principle. The cumulative effect of this change is reported
separately in the Consolidated Statement of Operations for the year ended March
31, 1992.
Income (Loss) Per Common Share
Income (loss) per common share is based on the weighted average number of
common shares outstanding and (if dilutive) common stock equivalents (i.e.,
stock options and warrants) outstanding in each year. Net income (loss)
applicable to common stockholders and income (loss) per common share are
calculated after deducting preferred stock dividend requirements which include
$4,652,000 of accumulated and unpaid preferred dividends for the nine-month
period ended December 31, 1992. There were no accumulated and unpaid preferred
dividends at December 31, 1994 or December 31, 1993. Accumulated and unpaid
dividends totaled $12,802,000 at December 31, 1992. On May 8, 1992, $11.2
million of accumulated and unpaid dividends were eliminated as a result of the
Company's repurchase of its adjustable rate preferred stock plus accumulated
dividends from the FSLIC Resolution Fund (FRF) administered by the FDIC. On May
14, 1993, $12.2 million of accumulated and unpaid dividends were eliminated as a
result of the conversion of 1,610,000 of $2.25 Cumulative Convertible Preferred
Stock, Series A into 7,647,500 shares of common stock.
NOTE 2: CHANGE IN FISCAL YEAR
In July 1992, the Company changed its reporting period from a fiscal year
ended March 31 to a calendar year. Accordingly, results of operations for the
transition period ended December 31, 1992 cover a nine-month period. The
following statements of operations present financial data for the nine months
ended December 31, 1994, 1993 and 1992. These statements are for comparative
purposes only.
53
<PAGE> 11
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
----------------------------------------
1994 1992
----------- --------
(UNAUDITED) 1993
-----------
(UNAUDITED)
<S> <C> <C> <C>
Interest income:
Loans................................................... $ 50,234 $ 106,574 $129,038
Mortgage-backed securities.............................. 73,121 41,357 37,924
Investment securities................................... 13,960 7,494 15,313
Rhode Island covered assets............................. 4,870 6,743 9,932
Other................................................... 1,836 886 4,138
----------- ----------- --------
Total interest income........................... 144,021 163,054 196,345
----------- ----------- --------
Interest expense:
Deposits................................................ 75,023 88,812 123,924
Federal Home Loan Bank advances......................... 7,847 11,127 3,056
Other borrowings........................................ 17,611 10,334 5,930
----------- ----------- --------
Total interest expense.......................... 100,481 110,273 132,910
----------- ----------- --------
Net interest income........................ 43,540 52,781 63,435
Provision for loan losses................................. 2,700 18,450 16,300
----------- ----------- --------
Net interest income after provision for
loan losses.............................. 40,840 34,331 47,135
----------- ----------- --------
Non-interest income:
Fees for services....................................... 9,531 7,346 7,112
Gain on sale of securities, net......................... 2,919 1,764 4,100
Gain on sale of loans, net.............................. 264 1,617 1,870
Other non-interest income (loss)........................ 9,680 (23) (41)
----------- ----------- --------
Total non-interest income....................... 22,394 10,704 13,041
----------- ----------- --------
Non-interest expenses:
Compensation and benefits............................... 19,776 24,124 23,126
Occupancy and equipment, net............................ 9,990 11,370 11,057
Other general and administrative........................ 12,828 14,519 15,872
Amortization of supervisory goodwill.................... -- -- 2,002
Supervisory goodwill valuation adjustment............... -- -- 56,568
SAIF insurance fund and OTS assessments................. 6,403 6,631 6,222
Real estate and other assets acquired in settlement of
loans................................................ 2,863 14,979 9,652
----------- ----------- --------
Total non-interest expenses..................... 51,860 71,623 124,499
----------- ----------- --------
Income (loss) before income taxes.......... 11,374 (26,588) (64,323)
Income tax expense (benefit).............................. 1,415 (12,308) (5,089)
----------- ----------- --------
Net income (loss).......................... $ 9,959 $ (14,280) $(59,234)
========= ========= ========
Preferred stock dividend requirements..................... $ 2,677 $ 2,848 $ 4,652
Net income (loss) applicable to common stockholders....... $ 7,282 $ (17,128) $(63,886)
Net income (loss) per common share:
Primary and fully diluted............................... $ 0.51 $ (1.40) $ (11.16)
</TABLE>
54
<PAGE> 12
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of the Consolidated Statement of Cash Flows, cash and due from
banks, interest-bearing deposits with original maturities of ninety days or
less, and federal funds sold are considered as cash and cash equivalents.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, FOR THE NINE MONTHS
--------------------- ENDED
1994 1993 DECEMBER 31, 1992
-------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH PAID DURING THE PERIODS FOR:
Interest on retail deposits....................... $101,746 $119,822 $ 124,720
Interest on brokered deposits..................... 1,182 2,419 2,389
Interest on borrowings............................ 28,864 23,695 6,704
Income taxes...................................... 551 2,180 1,352
CASH RECEIVED DURING THE PERIODS FOR:
Interest and dividends............................ 192,422 224,178 178,862
NON-CASH ITEMS:
Loans securitized into mortgage-backed
securities..................................... 20,402 376,551 --
Loans securitized into mortgage-backed securities
available-for-sale............................. -- -- 2,564
Transfers of loans to (from) available-for-sale... (1,839) (964) 6,106
Transfers of mortgage-backed securities to
available-for-sale............................. -- 81 97,697
Transfers of investment securities to
available-for-sale............................. 121 40,832 112,045
Real estate and other assets acquired in
settlement of loans............................ 10,800 62,086 65,245
Payment in kind on uncertificated debentures...... 3,769 3,452 1,540
Payment in kind on Series B preferred stock....... 3,459 4,250 --
Loans and deposits acquired from Rhode Island
transaction.................................... -- -- 178,349
Conversion of $2.25 cumulative convertible
preferred stock................................ -- 38,339 --
Net unrealized gains on debt and equity securities
available-for-sale............................. (13,057) 16,312 --
</TABLE>
55
<PAGE> 13
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
There were no securities purchased under agreements to resell at December
31, 1994. The securities purchased under agreements to resell at December 31,
1993 were collateralized by federal agency mortgage-backed securities. The
following table provides additional information on the agreements.
<TABLE>
<CAPTION>
DECEMBER
DECEMBER 31, 31,
1994 1993
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Carrying value of agreements to resell............................. $ -- $60,000
Par value of collateral............................................ -- 61,023
Market value of collateral......................................... -- 66,539
Maximum amounts of outstanding agreements at any month-end......... -- 60,000
Average amounts of outstanding agreements.......................... 1,411 644
Weighted average interest rate for the year........................ 3.26% 3.22%
Weighted average interest on year-end balances..................... --% 3.39%
Weighted average maturity of outstanding agreements (days)......... -- 6
</TABLE>
At December 31, 1993, the Association held only securities purchased under
agreements to resell identical securities. The securities underlying the
agreements were physically held by the Association until the maturity of the
agreements.
NOTE 5: INVESTMENT SECURITIES
Investment securities consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
--------------------------------------- ---------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ---------------- FAIR AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ------ ------- -------- --------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of states and political
subdivisions............................ $ 398 $ -- $ 15 $ 383 $ 432 $ -- $ 4 $ 428
Corporate securities:
Fixed................................... 3,703 -- 279 3,424 4,254 56 -- 4,310
Available-for-sale...................... -- -- -- -- 60 2 -- 62
Asset-backed securities:
Available-for-sale...................... 15,443 -- 50 15,393 38,299 -- 100 38,199
Collateralized mortgage obligations:
Fixed................................... 165,167 -- 11,777 153,390 4,784 -- 155 4,629
Variable................................ 821 -- 36 785 1,319 16 -- 1,335
Available-for-sale...................... 73,640 -- 2,881 70,759 66,915 217 249 66,883
Federal Home Loan Bank stock.............. 32,287 -- -- 32,287 31,800 -- -- 31,800
Marketable equity securities:
Available-for-sale...................... 49,717 6,866 -- 56,583 42,125 15,608 -- 57,733
--------- ------ ------- -------- --------- ------- ------ --------
Total investment securities............... $341,176 $6,866 $15,038 $333,004 $189,988 $15,899 $508 $205,379
========= ====== ======= ======== ========= ======= ====== ========
</TABLE>
56
<PAGE> 14
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994 and 1993, the net unrealized holding gain, net of tax
effect, on available-for-sale securities that was included in the separate
component of stockholders' equity was $2,282,000 and $8,978,000, respectively,
exclusive of mortgage-backed securities available-for-sale. Proceeds, gains, and
losses from sales of investment securities were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------------------
FOR THE NINE MONTHS
1994 1993 ENDED MARCH 31, 1992
---------------------------- ---------------------------- ----------------------------
GROSS REALIZED GROSS REALIZED GROSS REALIZED
---------------- ---------------- ----------------
PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES
-------- ------ ------ -------- ------ ------ -------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities........... $ -- $ -- $ -- $16,347 * $1,629 $146 $ 506 * $1,517 $633
Investment securities
available-for-sale............ 294,819 7,360 77 142,592 2,138 42 158,033 1,395 337
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total........................... $294,819 $7,360 $ 77 $158,939 $3,767 $188 $158,539 $2,912 $970
======== ====== ====== ======== ====== ====== ======== ====== ======
</TABLE>
- ---------------
* Sales were due to credit concerns.
For the periods ended December 31, 1994, 1993, and 1992, gains and losses
on investment securities resulted primarily from the recognition of realized
capital gains and losses allocated to the Association by two limited
partnerships in which the Association has invested.
The weighted average interest yields on investment securities were 5.84%
and 5.13% at December 31, 1994 and 1993, respectively. Accrued interest and
dividends receivable related to investment securities outstanding at December
31, 1994 and 1993 were $1,660,000 and $1,680,000, respectively.
The contractual maturities of Northeast Savings' held-to-maturity
investment securities are summarized in the following table. Actual maturities
may differ from contractual maturities because certain issuers have the right to
call or prepay obligations with or without call premiums.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
TOTAL ESTIMATED TOTAL ESTIMATED
AMORTIZED AMORTIZED MARKET AMORTIZED AMORTIZED MARKET
COST COST VALUE COST COST VALUE
--------- ------------ --------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Bonds and collateralized mortgage
obligations:
1-5 years.......................... $ 2,205 1.09% $ 2,122 $ 2,506 5.88% $ 2,530
5-10 years......................... 18 .01 18 271 .64 274
10-20 years........................ 36,267 17.92 33,812 1,909 4.48 1,934
Over 20 years...................... 131,599 65.03 122,030 6,103 14.33 5,964
Federal Home Loan Bank stock......... 32,287 15.95 32,287 31,800 74.67 31,800
--------- ------------ --------- --------- ------------ ---------
Total held-to-maturity investment
securities......................... $202,376 100.00% $190,269 $42,589 100.00% $42,502
========= =========== ========= ========= =========== =========
</TABLE>
57
<PAGE> 15
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contractual maturities of the Association's available-for-sale
investment securities are summarized below. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or prepay
obligations with or without call premiums.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
TOTAL ESTIMATED TOTAL ESTIMATED
AMORTIZED AMORTIZED MARKET AMORTIZED AMORTIZED MARKET
COST COST VALUE COST COST VALUE
--------- ------------ --------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Bonds and collateralized mortgage
obligations:
0-1 year........................... $ 753 .54% $ 753 $ 18,038 12.24% $ 18,035
1-5 years.......................... 88,330 63.64 85,399 87,236 59.18 87,109
5-10 years......................... -- -- -- -- -- --
10-20 years........................ -- -- -- -- -- --
Over 20 years...................... -- -- -- -- -- --
Marketable equity securities......... 49,717 35.82% 56,583 42,125 28.58 57,733
--------- ------------ --------- --------- ------------ ---------
Total available-for-sale investment
securities......................... $138,800 100.00% $142,735 $147,399 100.00% $162,877
========= =========== ========= ========= =========== =========
</TABLE>
NOTE 6: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------- ---------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ---------------- FAIR AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ----- ------- ---------- ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government National Mortgage
Association (GNMA):
Adjustable.................... $ 29,880 $ -- $ 1,778 $ 28,102 $ 33,583 $ 46 $ 188 $ 33,441
Available-for-sale............ 7,317 270 468 7,119 9,855 744 34 10,565
Federal Home Loan Mortgage
Corporation (FHLMC):
Fixed......................... 253,293 17 21,181 232,129 3,184 154 -- 3,338
Adjustable.................... 241,109 2 5,438 235,673 171,675 2,142 602 173,215
Available-for-sale............ 1,320 53 44 1,329 2,197 129 5 2,321
Federal National Mortgage
Association (FNMA):
Fixed......................... 174,941 87 12,609 162,419 29,650 546 -- 30,196
Adjustable.................... 210,439 247 6,046 204,640 142,904 2,542 1,529 143,917
Available-for-sale............ 13,400 -- 490 12,910 -- -- -- --
Private Issuers:
Fixed......................... 4,957 10 8 4,959 8,323 191 -- 8,514
Adjustable.................... 843,560 28 25,093 818,495 941,567 5,547 2,765 944,349
---------- ----- ------- ---------- ---------- ------- ------ ----------
Total mortgage-backed
securities.................... $1,780,216 $714 $73,155 $1,707,775 $1,342,938 $12,041 $5,123 $1,349,856
========= ===== ======= ========= ========= ======= ====== =========
</TABLE>
58
<PAGE> 16
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, the net unrealized holding loss on available-for-sale
mortgage-backed securities that was included in the separate section of
stockholders' equity was $394,000, net of tax effect, exclusive of investment
securities available-for-sale compared to a net unrealized holding gain of
$484,000 at December 31, 1993. Proceeds, gains, and losses from sales of
mortgage-backed securities were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER FOR THE YEAR ENDED DECEMBER FOR THE NINE MONTHS ENDED
31, 1994 31, 1993 DECEMBER 31, 1992
---------------------------- ---------------------------- ----------------------------
GROSS REALIZED GROSS REALIZED GROSS REALIZED
---------------- ---------------- ----------------
PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
available-for-sale............. $ -- $ -- $ -- $39,831 $2,046 $ -- $44,727 $2,158 $ --
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total proceeds................... $ -- $ -- $ -- $39,831 $2,046 $ -- $44,727 $2,158 $ --
======== ====== ====== ======== ====== ====== ======== ====== ======
</TABLE>
The weighted average yields on mortgage-backed securities were 6.27% and
5.30% at December 31, 1994 and 1993, respectively. Accrued interest receivable
related to mortgage-backed securities outstanding at December 31, 1994 and 1993
was $10,541,000, and $6,783,000, respectively.
At December 31, 1994, mortgage-backed securities having a carrying value of
$799,109,000 and a market value of $759,115,000 were pledged to collateralize
securities sold under agreements to repurchase and other items.
NOTE 7: LOANS
The Association's primary lending business is the origination of
single-family residential mortgage loans in the northeastern United States.
These loans are collateralized by residential properties and are made with
strict adherence to Association policy which limits the loan-to-value ratio on
residential mortgage loans to 80%, or 95% (97% on certain community lending
products) with private mortgage insurance. In certain geographic areas of the
country, the Association has limited the loan-to-value ratio to even less than
80%.
59
<PAGE> 17
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Single-family residential real estate loans:
Adjustable rate.................................................... $736,603 $1,695,527
Fixed rate......................................................... 102,062 104,187
Available-for-sale................................................. 4,812 46,076
-------- ----------
Total single-family residential real estate loans.......... 843,477 1,845,790
-------- ----------
Consumer loans:
Equity loans....................................................... 14,122 15,507
Collateralized by deposits......................................... 5,553 8,709
Equity lines of credit............................................. 15,753 5,886
Overdraft protection............................................... 1,786 2,110
Education.......................................................... 34 43
Other personal..................................................... 1,254 2,424
-------- ----------
Total consumer loans....................................... 38,502 34,679
-------- ----------
Residential construction loans....................................... 20,805 10,138
-------- ----------
Income property loans................................................ 75,835 69,146
-------- ----------
Total loans, gross......................................... 978,619 1,959,830
-------- ----------
Less:
Allowance for loan losses.......................................... 11,746 28,271
Undisbursed portion of loans in process............................ 11,990 6,097
Unearned discounts................................................. 2,191 2,822
Deferred origination (costs), fees net............................. (22) 383
-------- ----------
25,905 37,573
-------- ----------
Total loans, net................................................ $952,714 $1,922,257
======== =========
</TABLE>
Accrued interest receivable related to loans outstanding at December 31,
1994 and 1993 was $5,627,000 and $9,076,000, respectively. For the years ended
December 31, 1994, and 1993 and the nine months ended December 31, 1992, the
Association recognized net gains on sales of loans of $13,813,000, $1,939,000
and $1,870,000, respectively.
At December 31, 1994, there was no recorded investment in loans for which
impairment has been recognized under the guidance of SFAS 114 compared to $1.6
million at December 31, 1993. There was no specific reserve on these loans at
December 31, 1993. However, their impairment was considered in the allowance for
loan losses at December 31, 1993. Such loans are included in non-accrual loans
(see below) or troubled debt restructurings, as appropriate. The average
recorded investment in impaired loans during the year ended December 31, 1993
was approximately $1.6 million. For the year ended December 31, 1993, the
Association recognized interest income on those impaired loans of $41,000 (there
was no interest income recognized using the cash basis method of income
recognition). At December 31, 1994 and 1993, loans totaling $29,331,000 and
$67,462,000, respectively, were contractually delinquent ninety days or more.
Interest accruals on loans are discontinued whenever the payment of interest or
principal is more than 90 days past due or earlier when conditions warrant it
and any previously accrued interest is reversed. The total interest income that
would have been recorded, had these loans been current in accordance with their
original terms, or since
60
<PAGE> 18
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the date of origination if outstanding for only part of the year, and the amount
of interest income which was included in interest income on those loans for the
indicated periods are summarized below:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER
----------------- 31,
1994 1993 1992
------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross amount of interest that would have been
recorded during the period at the original rate... $2,296 $4,869 $ 5,752
Interest recorded in income......................... 379 1,382 1,365
------ ------ -----------
Interest income not recognized...................... $1,917 $3,487 $ 4,387
====== ====== =========
</TABLE>
The following table summarizes the Association's gross loan portfolio and
non-accrual loans as a percentage of gross loans by state and property type at
December 31, 1994:
<TABLE>
<CAPTION>
SINGLE-FAMILY
RESIDENTIAL RESIDENTIAL
REAL ESTATE CONSUMER CONSTRUCTION INCOME PROPERTY TOTAL
------------------- ------------------ ------------------ ------------------ -------------------
NON- NON- NON- NON- NON-
ACCRUAL ACCRUAL ACCRUAL ACCRUAL ACCRUAL
GROSS LOAN GROSS LOAN GROSS LOAN GROSS LOAN GROSS LOAN
LOANS RATIO LOANS RATIO LOANS RATIO LOANS RATIO LOANS RATIO
--------- ------- -------- ------- -------- ------- -------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Connecticut........ $ 239,379 2.46% $ 6,522 1.48% $ 13,661 --% $ 19,723 1.35% $ 279,286 2.24%
New York........... 203,283 5.34 22,310 2.62 6,096 -- 18,309 -- 249,998 4.58
Massachusetts...... 149,862 2.36 6,731 2.33 105 -- 12,558 7.19 169,256 2.72
California......... 40,854 6.47 726 -- -- -- 15,792 -- 57,371 4.61
Florida............ 36,613 1.18 244 .97 -- -- -- -- 36,857 1.18
New Jersey......... 16,338 14.41 169 -- -- -- -- -- 16,507 4.26
New Hampshire...... 3,315 -- 253 -- -- -- 3,033 -- 6,601 --
Other.............. 153,833 .99 1,547 4.08 943 -- 6,420 -- 162,743 .98
--------- -------- -------- -------- ---------
Total...... $ 843,477 3.23% $ 38,502 2.34% $ 20,805 --% $ 75,835 1.54% $ 978,619 3.00%
======== ======= ======= ======= ========
</TABLE>
Loans serviced for others by Northeast Savings totaled approximately
$1,489,037,000 and $1,888,863,000 at December 31, 1994 and 1993, respectively,
which includes loans serviced with recourse to Northeast Savings of $51,399,000
and $69,124,000 at the same respective dates. In connection with loans serviced
for others, at December 31, 1994 and 1993, respectively, Northeast Savings had
$3,028,000 and $3,623,000 in excess servicing assets and $1,686,000 and
$5,794,000 in capitalized purchased mortgage servicing. Loan servicing fees
totaled $2,972,000, $2,627,000, and $793,000 for the years ended December 31,
1994, 1993, and the nine months ended December 31, 1992, respectively.
61
<PAGE> 19
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes activity in the allowance for loan losses.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED DECEMBER
DECEMBER 31, 31,
------------------- -------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................................ $28,271 $21,020 $17,084
Provision for loan losses................................... 4,900 23,300 16,300
Charge-offs:
Single-family residential real estate loans............... (5,514) (14,835) (12,305)
Consumer loans............................................ (328) (393) (373)
Income property loans..................................... (105) (1,395) --
------- ------- -------
Total charge-offs................................. (5,947) (16,623) (12,678)
------- ------- -------
Recoveries:
Single-family residential real estate loans............... 210 176 8
Consumer loans............................................ 309 398 306
Income property loans..................................... 3 -- --
------- ------- -------
Total recoveries.................................. 522 574 314
------- ------- -------
Net charge-offs............................................. (5,425) (16,049) (12,364)
------- ------- -------
Other*...................................................... (16,000) -- --
------- ------- -------
Balance, end of period...................................... $11,746 $28,271 $21,020
======= ======= =======
</TABLE>
- ---------------
* Represents reduction of allowance allocated to loans sold in March 1994.
62
<PAGE> 20
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8: RHODE ISLAND COVERED ASSETS
As discussed in Note 23: Acquisitions, on May 8, 1992, the Association
acquired certain assets of four Rhode Island financial institutions which were
in receivership proceedings. The Association is protected against losses
relative to all loans acquired from the institutions, including loans foreclosed
upon by the Association subsequent to acquisition. Accordingly, as discussed
below, these covered assets have been segregated from the Association's
remaining portfolios of loans and REO. At December 31, 1994 and 1993, total
Rhode Island covered assets and non-accrual Rhode Island covered assets as a
percentage of gross covered assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1994 1993
----------------------- ------------------------
NON-ACCRUAL NON-ACCRUAL
ASSETS ASSET RATIO ASSETS ASSET RATIO
------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residential real estate loans:
Adjustable rate.............................. $10,515 5.21% $ 12,607 8.00%
Fixed rate................................... 15,878 8.26 22,112 7.73
------- --------
Total single-family residential real
estate loans....................... 26,393 7.04 34,719 7.83
------- --------
Consumer loans:
Equity lines of credit....................... 10,474 2.18 12,805 4.36
Equity loans................................. 4,782 9.45 7,025 6.23
Collateralized by deposits................... 22 -- 36 --
Overdraft protection......................... 134 -- 168 --
Education.................................... 7 -- 8 --
Other personal............................... 697 .29 1,534 3.19
------- --------
Total consumer loans................. 16,116 4.23 21,576 4.84
------- --------
Income property loans.......................... 29,141 9.86 39,135 10.59
------- --------
Commercial..................................... 577 .17 893 3.25
------- --------
Total loans, gross................... 72,227 7.50% 96,323 8.24%
------- --------
Adjustments:
Contra accounts.............................. 590 340
Interest rate adjustment..................... 833 1,060
Credit adjustment............................ 5,772 1,082
------- --------
Total loans, net..................... 79,422 98,805
------- --------
Real estate owned.............................. 2,814 6,820
------- --------
Total Rhode Island covered assets.... $82,236 $105,625
======= ========
</TABLE>
In the above table, the principal balance of individual loans for which a
specific credit adjustment has been determined by independent valuators has been
reduced by the amount of that credit adjustment. The unallocated credit
adjustment represents amounts applied to pools of loans.
In connection with the acquisition of the Rhode Island assets, the
Association entered into an Acquisition Agreement with the receivers of the
Rhode Island financial institutions. Pursuant to this agreement, the Rhode
Island Depositors Economic Protection Corporation (DEPCO) was required to pay a
balancing
63
<PAGE> 21
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consideration to the Association. The balancing consideration was the amount by
which the deposits issued by the Association plus other assumed liabilities
exceeded the fair value of the acquired assets.
The estimate of the fair value of the acquired assets (the valuation) was
determined by independent valuators in accordance with a detailed methodology
outlined in the Acquisition Agreement. The balancing consideration of $59.0
million was paid to the Association in the quarter ended December 31, 1992.
As part of the valuation process in determining the balancing
consideration, a credit adjustment was made which was specifically related to
the Rhode Island covered assets and which was intended to establish the amount
by which the value of the loans must be adjusted in determining their fair value
for reasons of collectibility. This initial credit adjustment was determined by
the valuators pursuant to the methodology for credit adjustments set forth in
the Acquisition Agreement. The methodology required the reappraisal of
underlying collateral and/or an individual evaluation of loans meeting specific
delinquency and/or size criteria as well as the application of credit adjustment
percentages to loans which were not individually reviewed. In general, for
purposes of loan valuation, residential and consumer loans were valued in pools
and commercial loans were valued individually. With the exception of certain
adjustable rate consumer, commercial, and delinquent loans, all acquired loans
were also subject to an interest rate adjustment in order to adjust the yield on
those loans to a market rate of interest as of the closing date.
Subsequent to the initial valuation and payment of the balancing
consideration, the credit adjustment account will be adjusted for all
charge-offs and recoveries on acquired loans and gains and losses from the
disposition of assets received in lieu of repayment which occur prior to the
seventh anniversary of the closing date, at which time the remaining balance in
the credit adjustment account will be reevaluated for adequacy and adjusted
accordingly, utilizing the same criteria as the initial valuation methodology.
On the seventh anniversary, if there is a negative balance in the credit
adjustment account, the Association can claim the amount of such balance from an
escrow established by DEPCO. To the extent escrow funds are not available, DEPCO
is required to pay the amount of any negative remaining balance to the Company.
Conversely, if there is a positive balance in the credit adjustment account,
Northeast Savings will be required to pay that balance to DEPCO.
The terms of the Acquisition Agreement also provide the Association with
the right to put back loans to DEPCO for a period of one year from the date of
acquisition if the Association determines that the property securing any loan
has an environmentally hazardous condition. In addition, for a period of seven
years, Northeast Savings is indemnified against losses resulting from
environmentally hazardous materials deposited on the security property prior to
the closing date, as well as against losses suffered on account of breaches in
the representations and warranties provided by the receivers and DEPCO with
regard to the acquired assets. Northeast Savings is also indemnified against
claims, damages, losses, costs, and expenses that may arise from a variety of
conditions related to the acquisition including claims against the former
institutions, their officers, agents, or employees. As security for the
obligations of DEPCO to pay the balancing consideration, to repurchase certain
loans, and to indemnify the Association for certain matters, DEPCO placed $59
million in treasury securities in escrow and granted to the Association a first
priority security interest in such funds. Of such $59 million, $49 million was
essentially placed in escrow for a one-year period to cover the balancing
consideration and the repurchase of loans based on environmentally hazardous
conditions. The remaining $10 million is in a seven-year escrow to cover the
general indemnification obligations and the credit adjustment obligation. As of
December 31, 1992, the $49 million in the one-year escrow account had been used
totally in connection with payment of the $59 million balancing consideration.
The seven-year escrow retains its $10 million.
64
<PAGE> 22
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: REAL ESTATE AND OTHER ASSETS ACQUIRED IN SETTLEMENT OF LOANS
The following table presents Northeast Savings' REO by property type at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Single-family residential................................ $11,196 $57,165
Hotels................................................... -- 6,453
Apartment buildings...................................... -- 5,270
Office, retail, industrial complexes, land............... 1,376 3,357
Real estate brokerage operations......................... -- 1,744
Residential subdivisions................................. 620 973
------- -------
REO, net............................................... $13,192 $74,962
------- -------
Percent of total assets.................................. .39% 1.91%
======= =======
</TABLE>
The activity in the Association's REO is presented in the following table:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Beginning balance...................................... $ 74,962 $ 99,376
Foreclosures, net...................................... 12,075 61,228
Capitalized expenses................................... 1,389 2,226
Less:
Sales................................................ (63,896)* (77,120)**
Valuation adjustments................................ (9,581) (10,082)
Mortgage insurance receipts.......................... (303) (558)
Other................................................ (1,454) (108)
-------- --------
Ending balance......................................... $ 13,192 $ 74,962
======== ========
</TABLE>
- ---------------
* During the quarter ended June 30, 1994, $27.2 million of REO was sold in a
series of three transactions. The total loss on the sale was $6.5 million.
Excluding this sale, sales of REO in the normal course of business for the
year ended December 31, 1994 totaled $43.2 million.
** During the quarter ended September 30, 1993, $30.3 million of REO was sold in
a single transaction. The total loss on the sale was $6.8 million. Excluding
this sale, sales of REO in the normal course of business for the year ended
December 31, 1993 totaled $52.8 million.
65
<PAGE> 23
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
(IN THOUSANDS)
Land..................................................... $ 2,882 $ 3,371
Office building and leasehold improvements............... 34,759 37,522
Furniture, fixtures, and equipment....................... 19,272 22,728
------- -------
56,913 63,621
Less accumulated depreciation and amortization........... 29,512 31,253
------- -------
$27,401 $32,368
======= =======
</TABLE>
At December 31, 1994, Northeast Savings was obligated under various
non-cancelable leases for premises and equipment. The leases generally contain
renewal options and escalation clauses providing for increased rent expense in
future periods. Rent expense for the years ended December 31, 1994 and 1993, and
the nine months ended December 31, 1992 was $7,498,000, $7,717,000 and
$5,440,000, respectively.
Northeast Savings leases certain office space for its headquarters and
three of its branch banking offices from corporations or partnerships in which
Directors of the Company or their immediate families are the principal
beneficial owners. The leases were entered into either prior to the nomination
and election to the position of director or with the written approval of the
Association's OTS District Director. Virtually all lease terms end by 1996 and
rents paid for such leases were $3,199,000 and $3,319,000 for the years ended
December 31, 1994 and 1993, respectively, and $2,555,000 for the nine months
ended December 31, 1992. All future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
AMOUNT
YEARS ENDING DECEMBER 31: --------------
----------------------------------------------- (IN THOUSANDS)
<S> <C>
1995........................................... 3,814
1996........................................... 2,620
1997........................................... 1,841
1998........................................... 1,662
1999........................................... 1,250
Thereafter..................................... 1,028
--------------
Total................................ $ 12,215
===========
</TABLE>
In February 1992, the Association purchased an office building in
Farmington, Connecticut for $9.6 million and leased it back to the previous
owners until 1994. Management anticipates moving a significant portion of the
Association's operations to that facility in 1995.
66
<PAGE> 24
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1994 1993
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposits........................... $ 28,407 --% $ 35,865 --%
NOW accounts.............................. 115,930 1.25 145,655 1.22
Super NOWs................................ 40,074 1.49 51,040 1.47
Regular savings........................... 353,012 2.33 583,209 2.20
Money market savings...................... 275,489 3.02 401,135 2.67
---------- ----------
Total non-certificate
accounts...................... 812,912 2.29 1,216,904 2.14
---------- ----------
Certificates maturing in the year ending:
1994.................................... -- -- 1,218,031 4.37
1995.................................... 1,012,378 5.11 193,092 5.00
1996.................................... 265,987 5.76 46,249 5.85
1997.................................... 67,300 5.57 56,834 5.80
1998.................................... 42,496 6.10 51,438 6.10
Thereafter.............................. 192,011 6.61 194,669 6.85
---------- ----------
Total certificates.............. 1,580,172 5.45 1,760,313 4.85
---------- ----------
Total deposits.................. $2,393,084 4.37% $2,977,217 3.74%
========= =========
</TABLE>
There were no brokered deposits at December 31, 1994. At December 31, 1993,
certificates include brokered deposits of approximately $25,135,000. Included in
deposits is accrued interest payable of $923,000 and $1,965,000 at December 31,
1994 and 1993, respectively. Interest expense on deposits consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Brokered deposits........................ $ 860 $ 2,419 $ 1,816
Retail deposits:
Regular savings........................ 10,030 15,146 18,694
NOWs, Super NOWs and money market
savings............................. 11,539 15,399 15,356
Certificates........................... 79,457 88,199 88,058
------------ ------------ -----------------
Total interest expense on
deposits..................... $101,886 $121,163 $ 123,924
========== ========== ==============
</TABLE>
67
<PAGE> 25
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
FHLB advances.......................................... $203,527 $373,000
Securities sold under agreements to repurchase......... 504,245 294,809
Uncertificated debentures.............................. 42,243 38,442
-------- --------
Total FHLB advances and other borrowings..... $750,015 $706,251
======== ========
</TABLE>
Federal Home Loan Bank Advances
FHLB advances consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1994 1993
-------------------------- --------------------------
WEIGHTED WEIGHTED
DUE IN YEARS ENDING AVERAGE AVERAGE
DECEMBER 31: AMOUNT INTEREST RATE AMOUNT INTEREST RATE
------------------------------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994................................. $ -- --% $165,000 3.43%
1995................................. 140,727 6.05 55,000 3.63
1996................................. 6,400 6.38 98,000 3.53
1997................................. 15,000 5.73 15,000 3.38
1998................................. 40,000 6.05 40,000 6.05
Thereafter........................... 1,400 8.55 -- --
-------- --------
$203,527 6.05% $373,000 3.76%
======== ========
</TABLE>
At December 31, 1994, $36,400,000 of the outstanding advances were variable
rate advances. Accrued interest payable on advances outstanding at December 31,
1994 and 1993 was $944,000 and $1,135,000, respectively. At December 31, 1994,
Northeast Savings' ability to borrow from the Federal Home Loan Bank of Boston
under its Advances Program was limited to the value of qualified collateral that
had not been pledged to outside sources. At December 31, 1994, mortgage-backed
securities having a carrying value of $209,881,000 and a market value of
$203,736,000 and mortgage loans having a carrying value of $212,524,000 and a
collateral value of $159,393,000 were pledged to collateralize the above
advances. Based on the Federal Home Loan Bank of Boston's Credit Policy,
mortgage loans are assigned a collateral value equal to 75% of the current
unpaid principal balance. At December 31, 1994, the Association's remaining
borrowing capacity from the FHLB totaled $1.8 billion.
68
<PAGE> 26
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase were wholesale repurchase
agreements and consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------- --------------------------------------------
WEIGHTED COLLATERAL WEIGHTED COLLATERAL
AVERAGE ------------------- AVERAGE -------------------
REPURCHASE BORROWING BOOK MARKET REPURCHASE BORROWING BOOK MARKET
LIABILITY RATE VALUE* VALUE LIABILITY RATE VALUE* VALUE
---------- --------- -------- -------- ---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale....... $489,541 5.56% $545,975 $509,985 $294,809 3.43% $308,471 $308,839
Dollar.......... 14,704 3.41 15,384 14,695 -- -- -- --
---------- --------- -------- -------- ---------- --------- -------- --------
$504,245 5.50% $561,359 $524,680 $294,809 3.43% $308,471 $308,839
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>
- ---------------
* Book value includes accrued interest of $3,650,000 and $2,126,000 at December
31, 1994 and 1993, respectively.
Wholesale repurchase agreements mature or reprice on average every 44 days
and were collateralized at December 31, 1994 and 1993 by mortgage-backed
securities. Dollar repurchase agreements mature in 18 days and were secured by
mortgage-backed securities at December 31, 1994. All wholesale repurchase
agreements were to repurchase the same securities and all dollar repurchase
agreements were to repurchase substantially the same securities. The maturities
of securities sold under agreements to repurchase are summarized in the
following table.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1994 1993
---------------------------------- ---------------------------------
WHOLESALE DOLLAR TOTAL WHOLESALE DOLLAR TOTAL
--------- ------- -------- --------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Within 30 days....... $ 129,708 $14,704 $144,412 $ 197,541 $ -- $197,541
31-90 days........... 338,400 -- 338,400 97,268 -- 97,268
91-182 days.......... 21,433 -- 21,433 -- -- --
--------- ------- -------- --------- ------ --------
$ 489,541 $14,704 $504,245 $ 294,809 $ -- $294,809
======== ======= ======== ======== ===== ========
</TABLE>
Securities sold under agreements to repurchase are considered short-term
borrowings. The average balance of repurchase agreements outstanding during the
years ended December 31, 1994 and 1993 was $362,864,000 and $290,112,000,
respectively. The maximum amount outstanding at any month-end was $504,479,000
for the year ended December 31, 1994 and $311,385,000 for the year ended
December 31, 1993. Interest expense on repurchase agreements totaled $16,949,000
for the year ended December 31, 1994, and $9,866,000 and $4,111,000 for the year
ended December 31, 1993 and the nine months ended December 31, 1992,
respectively. Accrued interest payable on repurchase agreements outstanding at
December 31, 1994 and 1993 was $7,060,000 and $3,693,000, respectively. The
weighted average interest rates during the year ended December 31, 1994 and 1993
were 4.67% and 3.40%, respectively.
Uncertificated Debentures
In conjunction with the Association's acquisition of $315.0 million in
assets from four Rhode Island financial institutions and the issuance of deposit
accounts in the Association to depositors in those institutions, the Company
issued and sold $28.95 million of 9% Sinking Fund Uncertificated Debentures, due
in 2012 to the receivers for the four institutions. These debentures have been
transferred from the receivers to certain of the depositors in the Rhode Island
institutions in consideration of a portion of their deposit claims against the
69
<PAGE> 27
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receiverships. The Company has the right to pay the first five years of interest
on the 9% Debentures by the issuance of additional 9% Debentures (a payment in
kind). These debentures are also subject to mandatory redemption in part through
a sinking fund which requires that the Company redeem on May 1, 1998, and on
each May 1 thereafter to and including the maturity date, the outstanding
principal amount of the 9% Debentures equal to 1/15 of the principal amount of
such debentures on March 1, 1988. For further information on the Association's
acquisition of the Rhode Island institutions, see Note 23: Acquisitions.
In addition, in connection with the repurchase of its adjustable rate
preferred stock, the Company issued $7.0 million in 9% Debentures to the FRF.
The debentures issued to the FRF have a market value of $4.5 million, based on
the value attributable to the debentures by the FRF, as determined by its
investment bankers. Implicit in the $4.5 million valuation is a discount rate of
14.4%, which was consistent with market yields on high-yield securities at the
time. These debentures have the same terms as those transferred to the
depositors in the Rhode Island institutions. In meeting its interest obligation
on all of the 9% Debentures, the Company has issued an additional $8.8 million
and $5.0 million of 9% Debentures for the years ended December 31, 1994 and
1993, respectively, which are included in the debentures outstanding at December
31, 1994. For additional information on the Company's repurchase of its
adjustable rate preferred stock, and the conversion of its convertible preferred
stock into common stock, see Note 13: Stockholders' Equity.
Other Borrowings
Other borrowings, when outstanding, consist of Tax Advantaged Variable Rate
ESOP Notes, Series 1987, which were issued by the Association's ESOP and
guaranteed by Northeast Savings. Initially, the notes were subject to mandatory
redemption through the operation of a sinking fund commencing on the interest
payment date originally beginning September 1988 and on each September
thereafter to 1997. Effective August 31, 1992, the mandatory redemption of the
notes was extended an additional three years. The notes may be redeemed earlier
under certain circumstances. The interest rate on the notes at December 31, 1994
and 1993 was 5.37% and 3.40%, respectively. The proceeds of this issue were used
by the Association's ESOP to purchase 1,010,326 outstanding shares of the
Company's common stock, adjusted for stock dividends. As of December 31, 1994
and 1993, Northeast Savings had invested in the ESOP notes at an amount equal to
the principal outstanding, thus acquiring all outstanding notes.
Correspondingly, the notes were not reported as other borrowings at either
December 31, 1994 or 1993. Mandatory redemptions of the ESOP notes in the
amounts of $1,110,000 are due each fiscal year from 1995 through 2000. See Note
14: Employee Benefit Plans.
At December 31, 1994, mortgage-backed securities having a carrying value of
$14,053,000 and a market value of $13,399,000 were pledged to collateralize a
Letter of Credit supporting the ESOP notes, which honors demands for payment by
the Note Trustee presented in accordance with the terms of the Letter of Credit.
Also, the Association had an available, but unused, line of credit in the amount
of $25,000,000 at December 31, 1994.
NOTE 13: STOCKHOLDERS' EQUITY
Regulatory Matters
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA), which was signed into law on August 9, 1989, provided for a
comprehensive reorganization of the regulatory structure of the thrift industry.
Northeast Savings is required to maintain certain levels of capital in
accordance with FIRREA and OTS regulations. In addition, on November 7, 1991,
the United States Congress passed the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which became effective on December 19, 1991.
While the primary focus of the legislation is to recapitalize the Bank Insurance
Fund, FDICIA also adopted numerous mandatory measures which affect all
depository institutions, including
70
<PAGE> 28
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
savings associations such as Northeast Savings, and which are designed to reduce
the cost to the deposit funds of resolving problems presented by
undercapitalized institutions.
The OTS regulations implementing the FIRREA capital standards established
three measures of capital compliance: tangible core capital, core capital, and
risk-based capital. Associations which failed to meet any of the three capital
standards on December 7, 1989, were subject to certain restrictions which
included growth restrictions and a limitation on capital distributions. These
thrifts were also required to develop and submit to the OTS by January 8, 1990,
acceptable capital restoration plans which demonstrate the strategies to be
utilized to meet the capital standards. At December 7, 1989, Northeast Savings
did not meet the capital standards set forth in FIRREA and the OTS regulations
implementing the FIRREA capital standards. Northeast Savings filed its capital
restoration plan with the OTS, as required by FIRREA, which was approved and
accepted by the OTS on March 9, 1990. On March 23, 1990, the Association
accepted the conditions imposed upon it by the OTS approval of its capital plan.
Northeast Savings also filed an application to form a holding company, Northeast
Federal Corp., which was approved by the OTS on April 16, 1990. The holding
company reorganization was completed in July 1990, upon approval of the holders
of voting stock of Northeast Savings. Under this reorganization Northeast
Savings' capital stock was exchanged for capital stock of Northeast Federal
Corp. and the capital of Northeast Federal Corp. was downstreamed to Northeast
Savings in the form of common stock which qualified as regulatory capital. At
such time, the Association came into compliance with all then-applicable
regulatory capital requirements. The Association subsequently met all of the
conditions of the capital plan and has been released from it by the OTS.
Although Northeast Savings is in compliance with all fully phased-in
regulatory capital requirements, the ability of the Company to make capital
distributions is restricted by the limited cash resources of the Company and the
ability of the Company to receive a dividend from the Association. The
Association's payment of dividends is subject to regulatory limitations,
particularly the prompt corrective action regulation which prohibits the payment
of a dividend if such payment would cause the Association to become
undercapitalized. In addition, the Company and the OTS entered into a Dividend
Limitation Agreement as part of the holding company approval process which
prohibits the payment of dividends to the holding company without prior written
OTS approval if the Association's capital is below its fully phased-in capital
requirement or if the payment of such dividends would cause its capital to fall
below its fully phased-in capital requirement. The OTS Capital Distribution
Regulation also restricts the amount of capital distributions that an
association may make without obtaining prior OTS approval.
The following table reflects the regulatory capital requirements and the
Association's regulatory capital.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------------- ---------------------------------------
FULLY PHASED-IN FULLY PHASED-IN
REGULATORY CAPITAL ACTUAL REGULATORY ACTUAL REGULATORY
REQUIREMENT REGULATORY CAPITAL CAPITAL REQUIRED REGULATORY CAPITAL CAPITAL REQUIRED
- ---------------------------- ------------------ ---------------- ------------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tangible core capital....... $177,291 $ 50,120 $167,244 $ 58,750
Percent................... 5.31% 1.50% 4.27% 1.50%
Core capital................ $177,419 $133,659 $167,795 $156,688
Percent................... 5.31% 4.00% 4.28% 4.00%
Risk-based capital.......... $189,165 $ 96,425 $189,330 $137,287
Percent................... 15.69% 8.00% 11.03% 8.00%
</TABLE>
Conversion to Stock Association
On September 22, 1983, Northeast Savings converted from a mutual to a stock
association. At the time of the conversion, eligible deposit account holders
were granted priority in the event of future liquidation by the establishment of
a "liquidation account" equal to net worth at June 30, 1983. No dividends may be
paid to
71
<PAGE> 29
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders if such dividends reduce stockholders' equity below the amount
required for the liquidation account, which was approximately $13.0 million at
December 31, 1994.
$2.25 Cumulative Convertible Preferred Stock, Series A
In October 1985, Northeast Savings issued 1,610,000 shares of $2.25
Cumulative Convertible Preferred Stock, Series A (the convertible preferred
stock) at $25 per share, par value $.01 per share which generated net proceeds
of $38,341,000. Dividends on the convertible preferred stock were payable
quarterly and were cumulative from the date of issue.
Each share of the convertible preferred stock was convertible into 1.473
shares of common stock at any time at the conversion price of $16.97. The
convertible preferred stock was redeemable at any time, at the option of the
Company, at $26.35 per share prior to October 1, 1990 and at prices declining
annually thereafter to $25.00 per share on and after October 1, 1995. In
February 1990, the Board of Directors suspended the quarterly cash dividend on
the convertible preferred stock. At January 1, 1993, accumulated and unpaid
quarterly dividends on the convertible preferred stock were $.56 per share or
$906,000, while total dividends were $6.75 per share or $10.9 million in the
aggregate.
On May 7, 1993, at a Special Meeting of Stockholders, the Company's
stockholders approved a reclassification of the convertible preferred stock into
common stock at a ratio of 4.75 shares of common stock for each share of
convertible preferred stock. Effective May 14, 1993, the 1,610,000 shares of
convertible preferred stock were converted into 7,647,500 shares of common
stock. As a result, all of the powers, privileges and special and relative
rights of the convertible preferred stock were eliminated including the then
accumulated and unpaid dividends, the liquidation priority, the right, at the
option of the holder, to convert each share of convertible preferred stock into
1.473 shares of common stock (and retain the right to receive, when as, and if,
declared and paid by the Company, the accumulated and unpaid dividends at the
time of such conversion on each such share of convertible preferred stock) and
the right to elect two directors to the Company's Board so long as six full
quarterly dividends are in arrears.
$8.50 Cumulative Preferred Stock, Series B
In connection with the Association's acquisition of assets of four Rhode
Island financial institutions, and the issuance of deposit accounts in the
Association to depositors in those institutions, the Company issued and sold to
the Rhode Island Depositors Economic Protection Corporation, 351,700 shares of a
new class of preferred stock, the $8.50 Cumulative Preferred Stock, Series B.
Accordingly, the Certificate of Incorporation of the Company was amended by
adding a new Certificate of Designation for the Series B preferred stock. The
Certificate of Designation authorizes the issuance of a total of 540,000 shares
of the Series B preferred stock.
Under the Stock and Warrant Purchase Agreement (the Stock Purchase
Agreement) entered into with DEPCO in connection with the acquisition, DEPCO has
the right to transfer its interest in the Series B preferred stock to another
instrumentality or agency of the State of Rhode Island and such entity would be
a "Nominee" within the meaning of the Stock Purchase Agreement. On June 24,
1992, the Company was advised by DEPCO that it had transferred its interest in
the Series B preferred stock to the Rhode Island State Investment Commission
(RISIC). On September 28, 1993, RISIC transferred its interest in the Series B
preferred stock to DEPCO.
The Certificate of Designation for the Series B preferred stock increases
the Company's Board of Directors by two and gives DEPCO or any Nominee as
defined in the Stock Purchase Agreement the right to elect two directors so long
as DEPCO or a Nominee holds at least 211,020 shares of the Series B preferred
stock (one director if DEPCO or the Nominee holds less than that number but at
least 105,510 of the Series B preferred stock). Two directors were nominated by
the RISIC and elected by the directors on July 24, 1992. There is one director
currently seated.
72
<PAGE> 30
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
So long as DEPCO or its Nominee beneficially owns the requisite number of
shares such that, pursuant to the Series B preferred stock Certificate of
Designation, DEPCO or such Nominee is entitled to elect one director of the
Company, then, in the event of a change in control of the Company, the Company
agrees to and shall, not less than forty-five days after such change in control,
make an offer to redeem or repurchase all of the shares of the Series B
preferred stock then outstanding at the Redemption Price plus accumulated and
unpaid dividends thereon (whether or not declared) through the date fixed for
such repurchase. Such repurchase obligation of the Company is limited to the
extent the Company has available funds which, in general, are funds of the
Company which can be obtained by a permissible dividend from the Association and
which are not required for the payment of debt or senior obligations and the
payment of which would not violate Delaware law or any regulatory obligation. A
Change in Control shall be deemed to have occurred under the terms of the Stock
Purchase Agreement in the event that any person acquires the right to vote or
dispose of 25% or greater of the Company's then-outstanding common stock or such
amount of securities of the Company as shall enable such person to exercise, or
acquire securities and thereupon exercise rights to vote 25% or greater of the
total outstanding voting rights in the Company or to elect more than 25% of the
directors of the Company.
Dividends on the Series B preferred stock payable on or prior to July 1,
1997, whether or not paid on or prior to that date shall be paid at the election
of the Company in cash or in shares of Series B preferred stock. No dividends or
other distribution shall be paid or declared or set aside for the common stock
of the Company nor may any shares of common stock be purchased or redeemed by
the Company or any subsidiary thereof unless all cumulative dividends on all
outstanding shares of the Series B preferred stock have been paid in full to the
holders of the shares of Series B preferred stock.
The Company has declared and paid dividends on its $8.50 Cumulative
Preferred Stock, Series B in the sum of one share of Series B preferred stock
for each $100 of the amount of dividends payable. The amount of dividend payable
for the second quarter of 1993 included accumulated and unpaid dividends from
the date of issuance (May 8, 1992) through June 30, 1993. The stock dividends
declared were as follows:
<TABLE>
<CAPTION>
1994 1993
---------------- -------------------
SHARES AMOUNT SHARES AMOUNT
----- -------- ------ ----------
<S> <C> <C> <C> <C>
First quarter.................................. 8,555 $855,000 -- $ --
Second quarter................................. 8,737 874,000 34,296 3,429,700
Third quarter.................................. 8,923 892,000 8,203 820,000
Fourth quarter................................. 9,112 911,200 8,377 838,000
</TABLE>
The Company also issued to DEPCO a warrant to purchase 600,000 shares of
the Company's common stock exercisable at $2.50 per share and a warrant to
purchase 200,000 shares of the Company's common stock exercisable at $4.25 per
share. On December 9, 1994, DEPCO exercised the warrants, which increased
stockholders' equity by $2,350,000. The common stock received by DEPCO is
restricted as to its sale. During each twelve month period beginning upon the
exercise of the warrants and expiring on May 8, 1997, DEPCO is entitled to sell
120,000 shares of common stock acquired from the exercise of the warrants.
Adjustable Rate Cumulative Preferred Stock, Series A
In March 1987, Northeast Savings issued 1,202,916 shares of Adjustable Rate
Cumulative Preferred Stock, Series A, at a stated value of $50 per share, par
value $.01 per share, to the FSLIC in exchange for the FSLIC's cancellation of a
$50,000,000 income capital certificate and a portion of the related accumulated
income payments, the sum of which totaled $60,145,000. When the FSLIC was
terminated, the adjustable rate preferred stock was transferred to the FSLIC
Resolution Fund which is administered by the FDIC. Dividends on the adjustable
rate preferred stock were cumulative and payable quarterly based on the highest
of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Thirty
Year Constant Maturity Rate.
73
<PAGE> 31
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The dividend rate at March 31, 1992 was 7.75%. In February 1990, the Board of
Directors suspended the quarterly cash dividend on the adjustable rate preferred
stock. Thus, the quarterly dividend of $1.2 million or $.97 per share which
normally would have been payable April 1, 1992, was not declared by the Board of
Directors of the Company and was in arrears at March 31, 1992. At March 31,
1992, total accumulated dividends on the adjustable rate preferred stock were
$9.32 per share or $11.2 million. On May 8, 1992, also in conjunction with the
aforementioned acquisition of assets of the Rhode Island financial institutions,
the Company repurchased the adjustable rate preferred stock plus accumulated
dividends from the FSLIC Resolution Fund for $28.0 million in cash and $7.0
million in 9% Sinking Fund Uncertificated Debentures, due 2012 for a total fair
value of $32.5 million. The 9% Debentures issued to the FRF had a market value
of $4.5 million based on the value attributable to those debentures by the FRF,
as determined by its investment banker.
Unallocated Employee Stock Ownership Plan Shares
In connection with the funding of the ESOP, stockholders' equity has been
reduced net of tax to reflect the guarantee of Northeast Savings. See Note 12:
Federal Home Loan Bank Advances and Other Borrowings.
NOTE 14: EMPLOYEE BENEFIT PLANS
Retirement Plan
The Retirement Plan for Employees of Northeast Savings, F.A. and
Subsidiaries (the Plan) is a defined benefit plan which covers substantially all
employees of Northeast Savings. Employees are vested in the Plan after seven
years of service and benefits are based on a percentage of each year's
compensation. Plan assets are under the control of a trustee and invested in
pooled funds.
Net pension expense consisted of the following:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------- DECEMBER 31,
1994 1993 1992
----- ----- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the period)...... $ 447 $ 431 $ 235
Interest cost on projected benefit obligation......... 361 380 249
Actual return on Plan assets.......................... 6 (297) (345)
Net amortization and deferrals........................ (383) (80) 88
Adjustment due to curtailment......................... 143 -- --
----- ----- ------------
$ 574 $ 434 $ 227
===== ===== ==========
</TABLE>
74
<PAGE> 32
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
According to the Association's actuary, the following table sets forth the
Plan's funded status at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.......................................... $4,697 $4,680
Nonvested benefits....................................... 277 287
------------ ------------
Accumulated benefit obligation............................. 4,974 4,967
Effect of future compensation increases.................... 33 94
------------ ------------
Projected benefit obligation............................... 5,007 5,061
Plan assets at fair value.................................. 5,157 5,215
------------ ------------
Projected benefit obligation in excess of (less than) Plan
assets................................................... (150) (154)
Unrecognized net transition asset.......................... 198 214
Unrecognized prior service cost............................ (84) (130)
Unrecognized net loss...................................... (783) (592)
------------ ------------
Prepaid pension costs............................ $ (819) $ (662)
========== ==========
</TABLE>
Assumptions used in actuarial computations were:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Discount rate.............................................. 7.75% 7.00%
Rate of increase in future compensation levels............. 6.06 5.00
</TABLE>
401(k) Thrift and Profit Sharing Plan
Northeast Savings maintains a 401(k) thrift and profit sharing plan to
encourage systematic savings by employees. Substantially all employees are
eligible and can contribute up to 6% of their base salary, on a tax-deferred
basis, 50% of which is matched by Northeast Savings. Employees are vested in
this plan after five years of service. Thrift plan expense amounted to $463,000,
$524,000 and $318,000 for the years ended December 31, 1994 and 1993, and the
nine months ended December 31, 1992, respectively.
Employee Stock Ownership Plan
Northeast Savings also maintains an employee stock ownership plan to
provide the opportunity for substantially all employees of Northeast Savings to
also become stockholders. The ESOP was funded through the issuance of Tax
Advantaged Variable Rate ESOP Notes, Series 1987. The proceeds of the notes were
used to purchase outstanding shares of Northeast Savings' common stock and the
notes are guaranteed by Northeast Savings. When Northeast Savings was
reorganized into the holding company, Northeast Federal Corp., the common stock
of the Association was exchanged for the common stock of the holding company.
The ESOP requires Northeast Savings to contribute the amount necessary for the
ESOP to discharge its current obligations which include principal and interest
payments on the notes. For the years ended December 31, 1994 and 1993,
respectively, Northeast Savings' contribution to the ESOP amounted to $1,222,000
and $1,512,000, of which $289,000 and $267,000 was interest expense on the ESOP
notes. For the nine months ended December 31, 1992, the contribution totaled
$383,000 of which $260,000 was interest expense. As the debt is repaid, shares
are released from collateral and allocated to active employees, based on the
proportion of debt and interest paid in the year. Further information regarding
these notes may be found in Note 12: Federal Home Loan Bank Advances and Other
Borrowings.
75
<PAGE> 33
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company adopted SOP 93-6, "Employees' Accounting for Stock Ownership
Plans" on January 1, 1994. Accordingly, the shares pledged as collateral are
reported as unallocated ESOP shares in the stockholders' equity. As shares are
released from collateral, the Company reports compensation expense equal to the
current market price of the shares, and the shares become outstanding for
earnings per share computations. The ESOP shares as of December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
1994
------------------
<S> <C>
Allocated shares........................... 310,011
Shares released for allocation............. 96,892
Unallocated shares......................... 497,196
------------------
904,099
===============
Market value of unallocated shares at
December 31, 1994........................ $4,164,000
===============
</TABLE>
Stock Option Plans
The stock option plans provide for the granting of options to directors,
officers, and other key employees to purchase common stock of Northeast Federal
Corp. at a price not less than the fair market value of the Company's stock on
the date of grant. The stock option plans provide for the option and sale in the
aggregate of 2,250,000 shares of the Company's common stock. The maximum option
term is 10 years. At December 31, 1994 and 1993, respectively, there were
1,462,292 and 571,613 shares which were fully vested and exercisable.
Changes in the status of stock options are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31,
1994 1993
-------------------------- --------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF SHARES OPTION PRICE OF SHARES OPTION PRICE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of year.................. 1,372,292 $ 4.08 453,317 $ 1.91
Issued.................................... 155,000 6.59 1,006,676 4.86
Exercised................................. (35,000) (4.33) (81,701) (1.80)
Canceled.................................. (10,000) (3.84) (6,000) 1.69
--------- ---------
Balance, end of year........................ 1,482,292 $ 4.35 1,372,292 $ 4.08
======== ========
</TABLE>
Deferred Compensation Plan
The Deferred Compensation Plan allows key executives to defer receipt of
compensation otherwise currently payable to them by the Association or any
subsidiary of the Association for a period of two to ten years. The Association
will match 60% of the first 5% an executive elects to defer. The deferred funds
will be invested during the deferral period in either a Guaranteed Rate
Investment Account or in common stock of Northeast Federal Corp. at a price not
less than the monthly average fair market value of the Company's stock for the
last ten days of each month. The plan includes a change in control provision and
at December 31, 1994, this provision applied. Therefore, the plan was terminated
and the participants were paid their vested account balance.
76
<PAGE> 34
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Directors' Deferred Fee Plan
The Deferred Fee Plan provides the members of the Board of Directors of the
Association the opportunity to defer receipt of fees otherwise currently payable
to them by the Association for a period up to ten years. The deferred fees will
be invested during the deferral period in either the Guaranteed Rate Investment
Account or in common stock of Northeast Federal Corp. at a price not less than
the monthly average market value of the Company's stock. The plan includes a
change in control provision and at December 31, 1994, this provision applied.
Therefore, the plan was terminated and the participants' account balances were
paid in 1995.
The Deferred Compensation Plan and the Deferred Fee Plan provided for a
total of 250,000 common shares of Company stock to be purchased.
Curtailment of Employees' Benefit Plans
During 1994, the Company's Retirement, 401(K) Thrift and Profit Sharing and
Employee Stock Ownership plans incurred a significant reduction in the number of
active participants. The Board of Directors, upon the advice of legal counsel,
has determined that there has been a Partial Termination of each employee
benefit plan. The Company estimates the cost of the Partial Termination to be
approximately $150,000 and the Company has fully provided for the anticipated
additional cost at December 31, 1994.
NOTE 15: INCOME TAXES
As discussed in Note 1, the Company adopted SFAS 109 as of April 1, 1991.
SFAS 109 establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes. In accordance with this
implementation, the Company recorded an additional $1.0 million in income as the
cumulative effect of a change in accounting principle for the year ended March
31, 1992. In addition, a valuation allowance of $3.7 million was established
which reduced the deferred tax assets as of April 1, 1991. Due to the Company's
utilization of all net operating loss carryforwards, the valuation reserve,
which was related to those carryforwards, was eliminated as of December 31,
1992. Also in accordance with the implementation of SFAS 109, the Company
applied $20.9 million at April 1, 1991 and another $1.0 million at December 31,
1992 to reduce the balance of its supervisory goodwill. The cumulative effect of
this change is reported separately in the March 31, 1992 Consolidated Statement
of Income and prior years' financial statements have not been restated.
In accordance with SFAS 109, deferred income tax assets and liabilities at
December 31, 1994 and 1993 reflect the impact of temporary differences between
values recorded as assets and liabilities for financial reporting purposes and
values utilized for remeasurement in accordance with tax laws.
77
<PAGE> 35
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate as well as a reconciliation of the recorded income tax
expense (benefit) and the amount of income tax expense (benefit) computed by
applying the statutory federal corporate tax rate to income (loss) before income
taxes and extraordinary items follow:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------------
1994 1993 1992
------------------ ------------------- -------------------
(DOLLARS IN THOUSANDS)
Federal income tax expense
(benefit)
at statutory rate............. $ 3,578 34.00% $ (8,953) (34.00)% $(21,870) (34.00)%
Increase (decrease) resulting
from:
Supervisory goodwill.......... -- -- -- -- 19,994 31.08
State taxes, net of federal
tax benefit................ (20) (.19) (3,290) (12.49) (461) (.72)
Changes to the valuation
allowance.................. (4,000) (38.01) 4,000 15.19 (2,752) (4.27)
Other, net.................... -- -- (3,950) (15.00) -- --
------- ------ -------- ------ -------- ------
Income tax benefit per financial
statements.................... $ (442) (4.20)% $(12,193) (46.30)% $ (5,089) (7.91)%
======= ====== ======== ====== ======== ======
</TABLE>
The components of the income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE
ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------------- DECEMBER 31,
1994 1993 1992
------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current provision:
State........................................... $ (862) $ 184 $ 2,454
Net change in valuation allowance............... (4,000) 4,000 (2,752)
Net change in temporary differences............... 4,420 (16,377) (4,791)
------- -------- ------------
Total income tax benefit................ $ (442) $(12,193) $ (5,089)
======= ======== ==========
</TABLE>
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1994 1993
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for loan losses.................... $26,241 $ -- $36,075 $ --
Reserve for uncollected interest............. 1,609 -- 2,305 --
Purchase accounting discount................. 949 -- 1,339 --
Net operating loss carryforward.............. 5,443 -- -- --
Deferred service fee......................... -- 1,271 -- 1,522
Other........................................ 6,567 770 2,006 1,670
------- --------- ------- ---------
Total deferred income taxes........ $40,809 $ 2,041 $41,725 $ 3,192
======= ====== ======= ======
</TABLE>
78
<PAGE> 36
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, a valuation allowance of $4.0 million was established
which reduced the deferred tax assets, since it is more likely than not that a
portion of these assets will not be realized. At December 31, 1994, the
valuation allowance of $4.0 million was eliminated due to current evidence
supporting the realization of the entire deferral tax asset. Also, the Company
has recorded deferred tax assets at December 31, 1994 related to alternative
minimum tax credit carryforwards and the ESOP guarantee of $3.4 million and $2.6
million, respectively. At December 31, 1994, Northeast Federal had a $13.0
million net operating loss carryforward, which expires at December 31, 2002.
For federal tax return purposes, Northeast Federal Corp. files a
consolidated tax return with its subsidiaries on a calendar year-end basis.
Northeast Savings, a subsidiary of Northeast Federal Corp., has been audited by
the Internal Revenue Service with respect to tax returns through 1979.
Under the Internal Revenue Code (the Code), Northeast Savings is allowed a
special bad debt deduction based on a percentage of taxable income (8%) before
such deduction, or based on specified experience formulas. Through 1979,
Northeast Savings consistently computed its annual addition to the tax bad debt
reserve using the percentage of taxable income method. Subsequent to 1979, such
annual addition has been computed under an experience formula because of
operating losses incurred for federal income tax purposes.
At December 31, 1994, Northeast Savings' base year tax bad debt reserve
equaled zero. If in the future, earnings allocated to this bad debt reserve and
deducted for federal income tax purposes are used for payment of cash dividends
or other distributions to stockholders, including distributions in redemption or
in dissolution or liquidation, an amount up to approximately 1 3/4 times the
amount actually distributed to the stockholders will be includable in Northeast
Federal Corp.'s taxable income and be subject to tax.
Earnings and profits include taxable income net of federal income taxes and
adjustments for items of income which are not taxable and expenses which are not
deductible. For the tax year ended December 31, 1994, Northeast Federal Corp.
and subsidiaries did not have current earnings and profits. Any dividends paid
with respect to Northeast Savings, F.A.'s stock in excess of current or
accumulated earnings and profits at year-end for federal tax purposes or any
other stockholder distribution will be treated as paid out of the tax bad debt
reserves and will increase taxable income as noted in the preceding paragraph.
NOTE 16: GAIN ON SALE OF INTEREST-EARNING ASSETS, NET
Gains (losses) are summarized in the following table. For the years ended
December 31, 1994 and 1993, virtually all sales of investments and
mortgage-backed securities were either from the available-for-sale portfolios or
were due to credit concerns.
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31, FOR THE NINE MONTHS
ENDED
------------------ DECEMBER 31,
1994 1993 1992
------- ------ -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net gain on sales of:
Investment securities................. $ 7,283 $3,579 $ 1,942
Mortgage-backed securities............ -- 2,046 2,158
Loans................................. 13,813 1,939 1,870
------- ------ -------
Total......................... $21,096 $7,564 $ 5,970
======= ====== ===============
</TABLE>
79
<PAGE> 37
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17: SUPPLEMENTARY EARNINGS PER SHARE
As required by Accounting Principles Board Opinion No. 15, "Earnings Per
Share," supplementary earnings per share information is presented as if the
conversion of the Company's $2.25 Convertible Cumulative Preferred Stock, Series
A, into common stock, which occurred on May 14, 1993, had taken place at the
beginning of the period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Net loss.................................................. $ (14,139) $ (59,037)
Preferred stock dividend requirements..................... (3,153) (3,100)
----------- -----------
Net loss applicable to common stockholders................ $ (17,292) $ (62,137)
========== ==========
Average shares outstanding................................ 13,464,163 13,371,372
Net loss per common share................................. $ (1.28) $ (4.65)
========== ==========
</TABLE>
The following table shows the computation of the weighted average shares
used in the calculation of supplementary earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1992
---------- ----------
<S> <C> <C>
Actual weighted average shares outstanding excluding
conversion shares......................................... 5,816,663 5,723,872
Conversion shares (assumed converted at the beginning
of the period)............................................ 7,647,500 7,647,500
---------- ----------
13,464,163 13,371,372
========= =========
</TABLE>
NOTE 18: COMMITMENTS AND CONTINGENCIES
Outstanding commitments to originate adjustable rate and fixed rate
mortgage loans amounted to $10,740,000 and $4,368,000, respectively, at December
31, 1994. With respect to residential mortgage loans, commitments generally
expire within 10 to 180 days, depending upon the type and purpose of the loan.
Also at December 31, 1994, commitments to originate $2,607,000 and $11,997,000
were outstanding on home equity loans and residential construction loans,
respectively. In addition, at December 31, 1994, the Association had outstanding
commitments to fund $18,568,000 in unused consumer credit lines and $11,990,000
in undisbursed residential construction loans. At December 31, 1994, the
Association had entered into firm commitments to sell $1,459,000 of mortgage
loans from the available-for-sale portfolio. Finally, at December 31, 1994, the
Association had entered into firm commitments to purchase $13,530,000 of
mortgage-backed securities.
On December 9, 1989, Northeast Savings filed suit in the United States
District Court for the District of Columbia claiming that the government has
breached its contract with Northeast Savings as well as violated Northeast
Savings' constitutional rights as a result of the denial of core capital
treatment to supervisory goodwill acquired by Northeast Savings as a result of
its 1982 acquisitions from the Federal Savings and Loan Insurance Corporation
(FSLIC) of three insolvent thrifts. The district court dismissed this action on
July 16, 1991 for lack of jurisdiction and indicated that proper jurisdiction
lay in an action for money damages in the United States Claims Court. (The name
of the United States Claims Court subsequently was changed to the United States
Court of Federal Claims, such court hereinafter is referred to as the Claims
Court). Northeast Savings appealed this ruling to the United States Court of
Appeals for the District of Columbia Circuit (the
80
<PAGE> 38
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Court of Appeals for D.C.), and then on July 8, 1992, filed a motion to
voluntarily dismiss its appeal. On July 9, 1992, the Court of Appeals for D.C.
granted this motion to dismiss. Northeast Savings then filed its claim for
damages in the Claims Court on August 12, 1992. This action is still pending.
The Claims Court has indicated that it is deferring action on the Northeast
Savings case, as well as on over 30 other supervisory goodwill cases pending
before the Claims Court, until three cases (the Test Cases), currently on appeal
to the United States Court of Appeals for the Federal Circuit (Federal Circuit
Court of Appeals), are finally ruled upon. In the Test Cases, including Winstar
v. United States, the government has vigorously defended itself. Among other
things, the government has contended that the "supervisory goodwill" that was
created in connection with the resolution by the Federal Home Loan Bank Board
(the Bank Board), which was the predecessor agency to the OTS, of supervisory
problems existed "under the Bank Board's regulatory function and represents a
statement of compliance with then-existing statutory and regulatory requirements
which requirements, however, were subject to change." Thus, the government
contends that Congress was entitled to override the existing regulatory
requirements which recognized supervisory goodwill by new legislation directed
at the general public welfare. The government then contends that it cannot be
obligated to measure regulatory capital in a manner inconsistent with what
Congress has mandated under FIRREA, and therefore, it is absolved of any and all
contract liability based on the elimination of supervisory goodwill under the
"Sovereign Acts Doctrine." In support of its arguments, the government cites,
among other things, the 1992 holding of the Court of Appeals for D.C. in
Transohio Savings Bank v. Director (Transohio) in which that court rejected the
attempt of a savings institution to obtain injunctive relief against the
application of the FIRREA capital standards.
In each of the Test Cases, the Claims Court determined that plaintiffs had
contracts with the United States governing long-term regulatory treatment of
goodwill, and that those contracts had been breached by FIRREA's new
restrictions on use of goodwill to meet statutory capital mandates. The Claims
Court consolidated its rulings in the Test Cases for immediate interlocutory
appeal. On May 25, 1993, a divided panel of the Federal Circuit Court of Appeals
reversed the Claims Court's finding that the government was liable for breach of
contract in the Test Cases. The Federal Circuit Court of Appeals, among other
things, based its decision on its conclusion that ". . . the plaintiffs had no
contract right to have the goodwill generated by their acquisitions treated as
regulatory capital." According to the Federal Circuit Court of Appeals, "all of
the subject contracts left the Bank Board (and OTS) free to regulate in
accordance with subsequent acts of Congress, specifically FIRREA. Thus, there
was no contractual promise by the government which could be breached."
Approximately one and one-half months later, on July 7, 1993, in Hughes
Communications Galaxy, Inc. v. United States (Hughes) a different panel of the
Federal Circuit Court of Appeals issued what has generally been interpreted as
an opposite ruling from that given in the Test Cases on another government
breach of contract dispute. In Hughes, which was not a case involving depository
institutions, the Federal Circuit Court of Appeals determined that there was a
breach of contract by the government, and in doing so, apparently rejected some
of the same arguments advanced by the government and accepted by the Federal
Circuit Court of Appeals in the Test Cases. Although the government in Hughes
petitioned the Federal Circuit Court of Appeals for a rehearing and an en banc
hearing, on October 26, 1993, both were denied. The Federal Circuit Court of
Appeals, however, did vacate the panel decision in the Test Cases, which
decision was in favor of the government's position, and ordered an en banc
hearing. Briefing for that hearing has been completed and oral arguments took
place in February 1994. No decision on such rehearing has been rendered by the
Federal Circuit Court of Appeals at this time. Recently, a panel of the Court of
Appeals for D.C. issued a clarification of its Transohio decision indicating
that its analysis in that decision was solely directed at an action for
injunctive relief and did not address the merits of a claim for money damages in
the Claims Court.
Another supervisory goodwill case, Resolution Trust Corporation v. FSLIC
(the Resolution Trust Corporation), was recently decided by the Court of Appeals
of the 10th Circuit (the 10th Circuit Court of Appeals) in favor of the
purchasers of Security Federal from the FSLIC, which purchase was made prior to
81
<PAGE> 39
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRREA. Pursuant to an arrangement with the FSLIC, the purchasers infused $6
million in Security Federal, an insolvent institution, and thereby saved the
FSLIC the cost of liquidating Security Federal. Even with such capital infusion,
were it not for the treatment of supervisory goodwill as capital, Security
Federal would have remained significantly under-capitalized at the time, and
thereby would have had to have been liquidated by the FSLIC.
As a result of the restriction on the use of supervisory goodwill as
capital pursuant to FIRREA and resulting OTS regulations, the OTS determined
that Security Federal was insolvent and in February 1990 ordered the purchasers
to infuse additional capital into it. In March of 1990, the purchasers notified
the OTS that they were rescinding the agreement to acquire the institution,
tendered their stock to the OTS, and requested the return of their capital
contribution. The OTS refused the tender, and the purchasers filed suit seeking
rescission and restitution for breach of contract. In Resolution Trust
Corporation, the FDIC and the OTS appealed a district court's summary judgment
ruling in favor of the purchasers for breach of contract, which held that the
treatment of goodwill as regulatory capital was an express term of the overall
contractual agreement. The 10th Circuit Court of Appeals affirmed the lower
court's ruling and stated that "because the Agencies breached their agreement to
treat supervisory goodwill . . . as assets for regulatory purposes, we [the
Court] agree that the investors [i.e., purchasers] properly rescinded the
agreement and thus are entitled to restitution." The Government has decided not
to seek Supreme Court review of the decision of the 10th Circuit Court of
Appeals.
Northeast cannot predict when the Federal Circuit Court of Appeals will
render any decision on the Test Cases, or the nature of any such decision and
its effect on Northeast Savings' pending goodwill litigation in the Claims
Court. In addition, the Claims Court's initial decision in the Test Cases did
not address the amount of damages, if any; therefore, questions regarding the
amount of damages are not subject to the current appeal pending in the Federal
Circuit Court of Appeals. Northeast anticipates that even if the Federal Circuit
Court of Appeals renders a decision in the Test Cases that is favorable to the
claims made by Northeast Savings in its goodwill litigation, a final judicial
determination, if any, as to Northeast Savings' pending goodwill litigation,
after addressing the issue of damages and the resolution of all appeals,
including likely appeals to the Supreme Court, will not occur for an extended
period of time; and even if Northeast Savings attains a final money judgment in
its goodwill litigation, as to which no prediction can be made, the amount of
any such judgment is highly uncertain. No amount has been recorded on
Northeast's financial statements based on any possible recovery by Northeast
under the litigation.
The Association is also involved in litigation arising in the normal course
of business. Although the legal responsibility and financial impact with respect
to such litigation cannot presently be ascertained, the Association does not
anticipate that any of these matters will result in the payment by the
Association of damages that, in the aggregate, would be material in relation to
the consolidated results of operations or financial position of the Company.
NOTE 19: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK
In the normal course of business, Northeast Savings is a party to various
financial instruments with off-balance-sheet risk which are held or issued for
purposes other than trading. These financial instruments include commitments to
extend credit to meet the financing needs of customers, as well as interest rate
swaps entered into as a means of reducing the Association's exposure to changes
in interest rates.
82
<PAGE> 40
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To varying degrees, these instruments involve elements of credit and
interest rate risk in excess of the amount recognized in the Consolidated
Statement of Financial Condition. The following table shows the contract or
notional amount of these instruments held by the Association.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit:
Single-family residential real estate loans....... $ 15,108 $ 49,078
Consumer loans.................................... 21,175 10,125
Residential construction loans.................... 23,987 3,497
Loans serviced for others with recourse.............. 51,400 69,124
-------- --------
Total commitments to extend credit........... $111,670 $131,824
======== ========
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Interest rate swap agreements........................ $ 12,305 $ 15,739
======== ========
</TABLE>
Commitments to extend credit are agreements to lend to a customer and are
entered into in accordance with written, nondiscriminatory, underwriting
guidelines established by the Board of Directors. Prior to extending credit, the
Association appraises any property which will collateralize the loan and
determines the borrower's ability to repay through review of detailed loan
applications and credit reports. These commitments have fixed expiration dates
or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements since
some commitments may expire without being drawn upon.
At December 31, 1994, the Association's interest rate swap agreements on a
market value basis were in a net loss position of $399,000. Interest rate swaps
involve the exchange of rates on interest payment obligations without the
exchange of the underlying principal amounts. The primary risk associated with
interest rate swaps is not credit risk but risk associated with movements in
interest rates. While notional principal amounts express the volume of the
interest rate swaps, the amounts potentially subject to credit risk are much
smaller.
At December 31, 1994 and 1993, outstanding interest rate swaps totaled
$12,305,000 and $15,739,000, respectively. Interest payments related to interest
rate swaps are charged or credited to interest expense on other borrowings.
Accrued interest receivable on swaps outstanding at December 31, 1994 and 1993,
respectively, was $31,000 and $70,000.
The Association grants residential loans to customers primarily in the
Northeast. In early 1994, the Association closed its loan origination offices in
California and Colorado. Although the Association has a diversified portfolio,
the ability of its borrowers to repay their loans is substantially dependent
upon the general economic conditions of the region.
83
<PAGE> 41
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Such techniques and assumptions, as they apply
to individual categories of the Company's financial instruments, are as follows:
- Cash and short-term investments: The carrying amounts for cash and
short-term investments is a reasonable estimate of those assets' fair
value.
- Investment securities, including mortgage-backed securities: Fair values
for these securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
- Loans receivable: For adjustable rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on the
market prices for securities collateralized by similar loans. For certain
homogeneous categories of loans, such as some residential fixed rate
mortgages, fair value is estimated using the quoted market price for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. For the residential construction and
income property loan portfolios, due to the immateriality, i.e.
approximately 2.9% of total assets, management concluded that it was not
practicable to estimate its fair value and, accordingly, has valued it at
its carrying amount.
- Rhode Island covered assets: Since, relative to these assets, the
Association is protected against credit losses, their carrying value is a
reasonable estimate of their fair value.
- Accrued interest receivable: The carrying amount of accrued interest
approximates its fair value.
- Deposit liabilities: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date, that is, the carrying value. Fair values for fixed rate
certificates of deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered for
deposits of similar remaining maturities. SFAS 107 defines the fair value
of demand deposits as the amount payable on demand, and prohibits
adjusting fair value for any value derived from retaining those deposits
for an expected future period of time. That component, commonly referred
to as a deposit base intangible, is estimated to be between zero and 4.0%
of total demand deposits at December 31, 1993 and is neither considered
in the following fair value amounts nor recorded as an intangible asset
in the balance sheet.
- Federal Home Loan Bank advances: The fair value of these liabilities is
estimated using the rates currently offered for liabilities of similar
remaining maturities or, when available, quoted market prices.
- Securities sold under agreements to repurchase: Securities sold under
agreements to repurchase generally have an original term to maturity of
less than thirty days and thus are considered short-term borrowings.
Consequently, their carrying value is a reasonable estimate of fair
value.
- Long-term borrowings: The fair values of the Company's long-term
borrowings are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
84
<PAGE> 42
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Interest rate swap agreements: The fair value of the interest rate swaps
is the estimated amount that would be received or paid to terminate the
swap agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap
counterparties.
- Commitments to extend credit consist primarily of commitments to
originate adjustable rate mortgage loans, fixed rate loans, home equity
loans and residential construction loans and generally expire within 10
to 180 days, depending upon the type and purpose of the loan. Due to the
current nature of the commitments, management concluded that the
contractual amount of the commitments is a reasonable estimate of their
fair value.
85
<PAGE> 43
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents certain of the Company's assets, liabilities,
and unrecognized financial instruments at both their respective carrying amounts
and fair value.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1994 1993
------------------------------ ------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks........... $ 34,145 $ 34,145 $ 51,705 $ 51,705
Federal funds sold................ 22,725 22,725 23,510 23,510
Securities purchased under
agreements to resell........... -- -- 60,000 60,000
Investment securities, net........ 202,376 190,269 42,589 42,502
Investment securities,
available-for-sale, net........ 142,735 142,735 162,877 162,877
Mortgage-backed securities, net... 1,758,179 1,686,417 1,330,886 1,336,970
Mortgage-backed securities,
available-for-sale, net........ 21,358 21,358 12,886 12,886
Loans, net........................ 947,902 943,464 1,876,181 1,908,259
Loans available-for-sale, net..... 4,812 4,801 46,076 46,119
Rhode Island covered assets....... 82,236 82,236 105,625 105,625
Interest and dividends
receivable(1).................. 17,797 17,797 17,470 17,540
Financial liabilities:
Retail deposits................... 2,393,084 2,351,748 2,952,082 2,985,050
Brokered deposits................. -- -- 25,135 25,414
Federal Home Loan Bank advances... 203,527 201,046 373,000 374,340
Securities sold under agreements
to repurchase.................. 504,245 504,245 294,809 294,809
Uncertificated debentures......... 42,243 28,781 38,442 29,942
Unrecognized financial instruments:
Interest rate swaps (notional
amount of $12.3 million):
In a net receivable (payable)
position....................... 31 (399) 70 (231)
Commitments to extend credit...... 60,270 60,270 62,400 62,400
Loan servicing rights(2).......... -- 5,551 -- 4,980
</TABLE>
- ---------------
(1) Excludes $31,000 and $70,000 at December 31, 1994 and 1993, respectively, of
accrued interest receivable on interest rate swaps.
(2) Represents the fair value of uncapitalized servicing rights on loans
serviced for others by Northeast Savings.
As discussed earlier, the fair value estimate of financial instruments for
which quoted market prices are unavailable is dependent upon the assumptions
used. Consequently, those estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments.
86
<PAGE> 44
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21: RECONCILIATION OF REGULATORY REPORTS TO ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS
The following is a reconciliation of stockholders' equity and net income
(loss) from regulatory reports furnished to the OTS to the accompanying
consolidated financial statements:
<TABLE>
<CAPTION>
NET INCOME (LOSS)
STOCKHOLDERS' EQUITY ---------------------
---------------------
FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1994 1993 1994 1993
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance reported to the OTS for Northeast
Savings....................................... $177,754 $169,670 $ 13,113 $(11,980)
Holding company net income (loss)............... 10,966 (14,139) 10,966 (14,139)
Equity in undistributed income of Northeast
Savings....................................... (13,113) 11,980 (13,113) 11,980
Additional investment in Northeast Savings...... (36,950) (34,800) -- --
Exercise of warrants............................ 2,350 -- -- --
Preferred stock conversion costs................ (1,402) (1,402) -- --
Holding company paid-in capital and retained
earnings...................................... (955) 834 -- --
Exercised stock options......................... 135 147 -- --
401K shares issued.............................. 115 223 -- --
-------- -------- -------- --------
Balance per accompanying consolidated financial
statements.................................... $138,900 $132,513 $ 10,966 $(14,139)
======== ======== ======== ========
</TABLE>
NOTE 22: ACQUISITIONS
During fiscal 1982 and fiscal 1983, Northeast Savings acquired three
savings and loan associations in FSLIC-assisted supervisory mergers accounted
for using the purchase method of accounting. Supervisory goodwill, the excess of
cost over net assets acquired, related to these acquisitions totaled $290
million.
In fiscal 1990, as a result of an analysis of the value of its remaining
supervisory goodwill, Northeast Savings reduced supervisory goodwill by $109.4
million. This reduction was precipitated by several factors that had diminished
the value of the Association's Connecticut and Massachusetts franchises.
Accordingly, Northeast Savings hired Kaplan, Smith & Associates, then a
subsidiary of The First Boston Corporation, to perform an independent valuation
of the Association's franchise rights in Connecticut and Massachusetts. This
study was completed in May 1990 and supported the value of Northeast Savings'
remaining goodwill at March 31, 1990. The reduction in supervisory goodwill had
no effect on Northeast Savings' regulatory capital or the treatment of the
goodwill for regulatory accounting purposes.
A further analysis of the value of the Company's remaining supervisory
goodwill completed in September 1992, resulted in an additional $56.6 million
reduction of supervisory goodwill. This reduction was also brought about by
factors which had diminished the value of the Association's Connecticut and
Massachusetts franchises. The principal factor was the adverse effect on the
value of the Association's Connecticut and Massachusetts franchise rights of OTS
regulations promulgated pursuant to FIRREA and the FDICIA as well as other
positions taken by the OTS regarding regulatory capital requirements. For
example, the prompt corrective action regulation issued by the federal banking
agencies on September 29, 1992 finalized the 4% core capital requirement for
institutions that are not rated MACRO 1, which thereby reduced prospective
earnings which the Association could expect to realize from its Connecticut and
Massachusetts franchise rights. Moreover, the OTS has verbally informed
Northeast Savings that, inasmuch as Northeast Savings had recently achieved
compliance with its fully phased-in capital standards, under OTS Regulatory
Bulletin 3a-1, "Policy Statement on Growth for Savings Associations" (RB 3a-1),
Northeast Savings may not grow its assets if such growth would cause it to fall
below its fully phased-in capital requirements, even if the Company
87
<PAGE> 45
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continued to exceed the applicable minimum capital standards previously
established for the duration of the FIRREA phase-in period. This OTS position
regarding the effect of RB 3a-1 further decreased the prospective earnings that
Northeast had expected to realize from its Connecticut and Massachusetts
franchise rights. Another significant factor included the implementation of the
final rule issued by the OTS which permits federal savings associations to
branch interstate to the full extent permitted by federal statute and which
greatly increased opportunities for out-of-state institutions to enter these
states. Thus, the Company again hired Kaplan Associates, Inc. to perform an
independent valuation of the Association's franchise rights in Connecticut and
Massachusetts. This study was completed during the quarter ended September 30,
1992 and supported the value of the Company's remaining supervisory goodwill at
September 30, 1992. The reduction in supervisory goodwill had no effect on
Northeast Savings' fully phased-in regulatory tangible, core, or risk-based
capital.
The following summarizes transactions relating to the supervisory goodwill.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
1992
-------------------
(IN THOUSANDS)
<S> <C>
Balance, beginning of period....................... $ 59,553
Amortization..................................... (2,002)
Reduction for acquired net operating loss
carryforward.................................. (983)
Valuation adjustment............................. (56,568)
-------------------
Balance, end of period............................. $ --
===============
</TABLE>
Rhode Island Acquisition
On May 8, 1992, the Association acquired $315.0 million in assets of four
Rhode Island financial institutions which were in receivership proceedings under
the jurisdiction of the Superior Court of Providence County, Rhode Island. The
following transactions were completed in conjunction with the acquisition of the
assets of the Rhode Island institutions.
- The Association issued $315.0 million of insured deposit accounts in the
Association to depositors in the Rhode Island institutions.
- The Company issued and sold to the Rhode Island Depositors Economic
Protection Corporation approximately $35.2 million of a new class of
preferred stock, the $8.50 Cumulative Preferred Stock, Series B as well
as warrants to purchase 600,000 shares of common stock of the Company at
$2.50 per share and 200,000 shares of common stock of the Company at
$4.25 per share. On December 9, 1994, DEPCO exercised its warrants, which
generated net proceeds of $2.4 million. The Company contributed the net
proceeds from this issuance to the Association. The Company has the right
to pay the first five years of dividends on the new preferred stock by
the issuance of additional new preferred stock (a payment in kind).
- The Company issued and sold $28.95 million of 9% Debentures to the
receivers for the four institutions. These debentures have been
distributed to certain of the depositors in the Rhode Island institutions
in consideration of a portion of their deposit claims against the
receiverships for the Rhode Island institutions. The Company has the
right to pay the first five years of interest on the 9% Debentures by the
issuance of additional 9% Debentures (a payment in kind).
- The Company repurchased its adjustable rate preferred stock plus
accumulated dividends from the FRF for $28.0 million in cash and $7.0
million in 9% Debentures, for a total fair value of $32.5 million. The 9%
Debentures had a fair value of $4.5 million, which was based on the value
attributed to those debentures by the FRF, as determined by its
investment banker.
88
<PAGE> 46
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23: PARENT COMPANY FINANCIAL INFORMATION
The condensed parent company Statement of Operations, Statement of
Financial Condition, and Statement of Cash Flows are as follows:
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
-------------------- DECEMBER 31,
1994 1993 1992
------- -------- -----------------
<S> <C> <C> <C>
Interest income........................................ $ 156 $ 57 $ 43
Interest expense....................................... (3,858) (3,503) (2,103)
Equity in undistributed income (loss) of
Northeast Savings.................................... 13,113 (11,980) (57,858)
------- -------- -----------------
Total income (loss).......................... 9,411 (15,426) (59,918)
Operating expenses..................................... -- 276 314
------- -------- -----------------
Income (loss) before income taxes and
extraordinary items.................................. 9,411 (15,702) (60,232)
Income tax benefit..................................... (1,555) (1,563) (998)
------- -------- -----------------
Net income (loss)............................ $10,966 $(14,139) $ (59,234)
======= ======== ==============
</TABLE>
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits..................................... $ 4,925 $ 2,210
Investment in Northeast Savings........................................ 177,754 169,670
Other assets........................................................... 131 685
-------- --------
Total assets................................................. $182,810 $172,565
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Uncertificated debentures.............................................. $ 42,243 $ 38,442
Other liabilities...................................................... 1,667 1,610
Stockholders' equity................................................... 138,900 132,513
-------- --------
Total liabilities and stockholders' equity................... $182,810 $172,565
======== ========
</TABLE>
89
<PAGE> 47
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
--------------------- DECEMBER 31,
1994 1993 1992
-------- -------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 10,966 $(14,139) $ (59,234)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization of discount on uncertificated
debentures.................................... 32 -- --
Interest accrued and paid in kind on
debentures.................................... 3,769 3,452 2,103
Equity in undistributed (income) loss of
Northeast Savings............................. (13,113) 11,980 57,858
(Increase) decrease in other assets............. 554 (685) 135
Increase (decrease) in other liabilities........ 57 218 802
-------- -------- -----------------
Net cash provided by operating
activities............................... 2,265 826 1,664
-------- -------- -----------------
Cash flows used in investing activities -- increase
in investment in Northeast Savings................. (2,150) -- (34,800)
-------- -------- -----------------
Cash flows from financing activities:
Proceeds from exercise of stock options............ 135 147 16
Proceeds from issuance of 401K stock............... 115 223 --
Exercise of warrants............................... 2,350 -- --
Preferred stock conversion costs................... -- (1,402) --
Retirement of Series A adjustable preferred
stock........................................... -- -- (33,550)
Proceeds from issuance of Series B preferred
stock........................................... -- -- 35,170
Proceeds from issuance of uncertificated
debentures...................................... -- -- 33,450
-------- -------- -----------------
Net cash provided by (used in) financing
activities............................... 2,600 (1,032) 35,086
-------- -------- -----------------
Net increase (decrease) in cash and cash
equivalents........................................ 2,715 (206) 1,950
Cash and cash equivalents at beginning of period..... 2,210 2,416 466
-------- -------- -----------------
Cash and cash equivalents at end of period........... $ 4,925 $ 2,210 $ 2,416
======== ======== ==============
</TABLE>
This information should be read in conjunction with other Notes to the
Consolidated Financial Statements.
90
<PAGE> 48
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 24: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994 AND FOR THE YEAR THEN ENDED
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total assets.................................... $3,628,442 $3,311,016 $3,349,705 $3,345,572
Interest income................................. 48,690 44,571 47,993 51,457
Net interest income............................. 15,212 13,660 14,903 14,977
Provision for loan losses....................... 2,200 600 1,000 1,100
Gain on sale of securities, net................. 4,364 (77) 2,362 634
Gain on sale of loans, net...................... 13,549 356 (56) (36)
Non-interest income............................. (634) 12,555 3,217 3,439
Non-interest expenses........................... 31,141 18,950 16,698 16,212
Net income...................................... 1,007 5,528 2,582 1,849
Preferred stock dividend requirements........... 855 874 892 911
Net income applicable to common shareholders.... 152 4,654 1,690 938
Net income per common share:
Primary and fully diluted..................... .01 .33 .12 .06
Market prices of common stock:
High.......................................... 7 1/2 10 1/2 10 1/8 10 1/8
Low........................................... 4 3/8 6 3/4 9 3/8 7 5/8
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993 AND FOR THE YEAR THEN ENDED
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total assets.................................... $3,979,720 $4,006,969 $3,942,721 $3,920,027
Interest income................................. 57,322 56,676 55,016 51,362
Net interest income............................. 19,627 19,312 17,741 15,728
Provision for loan losses....................... 4,850 12,000 3,450 3,000
Gain on sale of securities, net................. 3,861 590 254 920
Gain on sale of loans, net...................... 322 376 866 375
Non-interest income............................. 2,852 2,321 2,612 2,390
Non-interest expenses........................... 21,556 27,747 22,453 21,423
Net income (loss)............................... 141 (9,432) (1,904) (2,944)
Preferred stock dividend requirements........... 1,653 1,190 820 838
Net loss applicable to common shareholders...... (1,512) (10,622) (2,724) (3,782)
Net loss per common share:
Primary and fully diluted..................... (0.26) (1.08) (0.20) (0.28)
Market prices of common stock:
High.......................................... 7 1/2 6 3/8 5 5/8 5 7/8
Low........................................... 6 4 1/2 3 3/4 4
</TABLE>
91
<PAGE> 1
EXHIBIT 99.3
92
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Shawmut Capital Corporation
(successor to the Business Finance Division
of Barclays Business Credit, Inc.)
In our opinion, the accompanying balance sheets and the related statements
of income and of cash flows present fairly, in all material respects, the
financial position of the Business Finance Division of Barclays Business Credit,
Inc. at December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company'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
audits 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, during 1993 the Company changed its method of
accounting for income taxes and postretirement benefits other than pensions.
PRICE WATERHOUSE LLP
Hartford, Connecticut
April 7, 1995
93
<PAGE> 3
BUSINESS FINANCE DIVISION OF
BARCLAYS BUSINESS CREDIT, INC.
BALANCE SHEET (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash................................................................ $ 977
Loans, less allowance for credit losses of $41,215 and $40,657...... 2,268,521 $1,944,068
Investment.......................................................... 2,654 3,099
Premises and equipment, net......................................... 2,729 3,309
Deferred income taxes............................................... 24,206
Other assets........................................................ 2,410 1,967
---------- ----------
Total assets.............................................. $2,301,497 $1,952,443
========= =========
LIABILITIES AND INVESTMENT OF PARENT COMPANY
Affiliate advances.................................................. $2,000,052 $1,675,296
Cash overdraft...................................................... 1,317
Customer deposits................................................... 3,124 11,064
Accounts payable and accrued liabilities............................ 21,277 17,832
Interdivision and parent company payables........................... 16,003 28,041
Deferred income taxes............................................... 10,688
---------- ----------
Total liabilities......................................... 2,040,456 1,744,238
---------- ----------
Investment of parent company........................................ 261,041 208,205
---------- ----------
Total liabilities and investment of parent company........ $2,301,497 $1,952,443
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
94
<PAGE> 4
BUSINESS FINANCE DIVISION OF
BARCLAYS BUSINESS CREDIT, INC.
STATEMENT OF INCOME (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Interest and loan origination fee income............................... $200,204 $160,111
Interest expense....................................................... 86,189 60,303
-------- --------
Net interest income.................................................... 114,015 99,808
Provision for credit losses............................................ 6,070 5,118
-------- --------
Net interest income after provision for credit losses.................. 107,945 94,690
Other income:
Fee income........................................................... 13,013 10,286
Other................................................................ 9,703 11,731
-------- --------
22,716 22,017
-------- --------
Other expenses:
Compensation and benefits............................................ 28,755 27,358
Occupancy............................................................ 6,704 6,793
Other................................................................ 5,494 6,423
-------- --------
40,953 40,574
-------- --------
Income before income tax provision and cumulative effect of accounting
change............................................................... 89,708 76,133
Income tax provision................................................... 36,872 29,416
-------- --------
Income before cumulative effect of accounting change................... 52,836 46,717
Cumulative effect of accounting change................................. 4,299
-------- --------
Net income............................................................. $ 52,836 $ 42,418
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
95
<PAGE> 5
BUSINESS FINANCE DIVISION OF
BARCLAYS BUSINESS CREDIT, INC.
STATEMENT OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 52,836 $ 42,418
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses..................................... 6,070 5,118
Depreciation and amortization................................... 381 316
Loss on disposal of premises and equipment...................... 326 579
Deferred income taxes........................................... (34,894) (7,101)
Loan origination fees received.................................. 12,923 11,505
Amortization of loan origination fees........................... (8,322) (8,400)
(Decrease) increase in customer deposits........................ (7,940) 7,180
Increase (decrease) in accounts payable and accrued
liabilities.................................................... 3,445 (3,032)
(Decrease) increase in interdivision and parent company
payables....................................................... (12,038) 8,047
Other........................................................... (2) (201)
--------- ---------
Net cash provided by operating activities....................... 12,785 56,429
--------- ---------
INVESTING ACTIVITIES
Loans originated..................................................... (631,055) (561,985)
Loans repaid....................................................... 295,931 329,587
Purchases of premises and equipment................................ (123) (946)
Proceeds from sale of premises and equipment....................... 1,364
--------- ---------
Net cash used in investing activities........................... (335,247) (231,980)
--------- ---------
FINANCING ACTIVITIES
Increase in affiliate advances..................................... 324,756 169,781
Change in cash overdraft........................................... (1,317) 1,317
--------- ---------
Net cash provided by financing activities....................... 323,439 171,098
--------- ---------
Increase (decrease) in cash and cash equivalents..................... 977 (4,453)
Cash and cash equivalents, beginning of year......................... 0 4,453
--------- ---------
Cash and cash equivalents, end of year............................... $ 977 0
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
96
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On November 12, 1994, Shawmut National Corporation signed a definitive
agreement to acquire certain business operations and related assets and
liabilities of Barclays Bank PLC. The acquisition was completed on January 31,
1995. The assets acquired and liabilities assumed include substantially all
assets and certain of the liabilities of the Business Finance Division of
Barclays Business Credit, Inc. (BCI), a wholly-owned indirect subsidiary of
Barclays Bank PLC, certain accounts related to the vehicle and equipment leasing
portfolio of the Barclays Credit Services Division of BCI and certain accounts
related to the International Services Group of Barclays Bank PLC.
On February 20, 1995, Shawmut National Corporation and Fleet Financial
Group, Inc., a corporation organized and existing under the laws of the State of
Rhode Island, entered into an Agreement and Plan of Merger, pursuant to which
Shawmut National Corporation will merge with and into Fleet Financial Group,
Inc.
These financial statements include the historical financial position at
December 31, 1994 and 1993 and the results of operations for each of the two
years in the period ended December 31, 1994 of the various divisions of BCI and
Barclays Bank PLC acquired by Shawmut National Corporation. Collectively, the
divisions acquired by Shawmut National Corporation and included in these
financial statements are hereinafter referred to as the Business Finance
Division of Barclays Business Credit, Inc. or "BFD" since the actual Business
Finance Division of BCI represents approximately 99% of BFD's total assets at
December 31, 1994 and 96% of net income for the year then ended. BFD is engaged
principally in the commercial finance business, providing asset-based loans
which are primarily secured by accounts receivable, inventory and fixed assets.
These financial statements have been prepared in conformity with generally
accepted accounting principles. Certain amounts for the prior year have been
reclassified to conform to current year presentation. The following summarizes
the significant accounting policies followed by BFD.
LOANS AND RELATED INTEREST AND FEE INCOME
Loans are stated at the principal amounts outstanding.
Interest income from loans is recognized as earned using the interest
method. When a term loan is contractually delinquent 90 days or more or the
ability of the borrower to repay principal or interest is in doubt, BFD
discontinues the accrual of interest. Interest received on nonaccrual loans is
recorded as a reduction of principal. Recognition of income is generally resumed
when the term loan becomes current, the borrower has demonstrated the ability to
make payments of principal and interest and doubt as to the collectibility of
the loan is not present.
Fees received for the origination of loans are deferred and amortized to
interest income over the contractual lives of the loans using the interest
method. Unamortized amounts are recognized as income at the time that loans are
paid in full.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level determined by
management to be adequate to provide for probable losses inherent in the
existing loan portfolio. The adequacy of the allowance is determined based on,
among other factors, the adequacy of collateral supporting the loans, past loss
experience, management's determination of the risk elements in the loan
portfolio and off-balance sheet commitments, factors affecting the credit
quality of the borrowers and factors impacting the overall economic environment
in which BFD operates. By its nature, the determination of the adequacy of this
allowance is based on estimates and other judgments made by management which may
change quickly because of changing economic conditions and management's
perception as to how these factors may affect the financial condition of
debtors.
97
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The allowance for credit losses is maintained through provisions charged to
income. When a loan, or a portion of a loan, is considered to be uncollectible,
the loss is charged to the allowance. Subsequent recoveries of loans previously
charged-off are credited to the allowance.
INVESTMENT
Investment consists of a limited partnership interest and is carried at
cost, which approximates the net realizable value of this investment. The
general partner of this limited partnership values the partnership assets,
principally non-marketable equity securities, at cost less an adjustment for
permanent declines in value and does not disclose the fair market value of the
limited partnership assets.
PREMISES AND EQUIPMENT
Premises, leasehold improvements and equipment are carried at historical
cost less accumulated depreciation and amortization computed primarily on the
straight-line method. Depreciation of premises and equipment is calculated based
on the estimated useful lives of the related assets (generally 3 to 5 years).
Leasehold improvements are amortized over the terms of the respective leases or
the estimated useful lives of the improvements, whichever is shorter.
Maintenance, repair and minor improvements are charged to other expenses as
incurred, while major improvements are capitalized.
REPOSSESSED ASSETS
Repossessed assets are included in the financial statements at the lower of
cost or fair value. Estimated fair values are based on management's evaluation
of numerous factors, including estimated holding costs and time to disposition,
appraisals, sales of comparable assets and estimated market conditions. The
excess at the time of repossession, if any, of the loan value over the estimated
fair value of the repossessed property is charged to the allowance for credit
losses. Additional decreases in the carrying value subsequent to repossession
are recognized through provisions charged to operations and are included in
other expenses.
PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Substantially all of BFD's full and part-time employees meeting certain
eligibility criteria are covered under the retirement and other employee benefit
plans of Barclays Bank PLC. Costs of the plans, which are based on actuarial
computations of current and future benefits for employees, are allocated by
Barclays Bank PLC to BFD and are charged to other expenses. Barclays Bank PLC
funds the plans annually in an amount necessary to satisfy the Internal Revenue
Service's funding standards and BFD makes payments as directed.
BFD adopted Financial Accounting Standards (FAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective January
1, 1993. Substantially all of BFD's full-time employees participate in
postretirement health care benefit plans sponsored by Barclays Bank PLC.
Postretirement health care benefits expense is based on an actuarial computation
of current and future benefits for employees and retirees. See Note 5 "Pension
and Other Employee Benefit Plans."
BFD adopted FAS No. 112, "Employer's Accounting for Postemployment
Benefits," effective January 1, 1994. Substantially all of BFD's full-time
employees participate in postemployment benefits sponsored by Barclays Bank PLC.
Postemployment benefits expense is determined based upon various criteria
depending on the type of benefit.
INCOME TAXES
BFD is included in the consolidated federal income tax returns of Barclays
USA, Inc. The Business Finance Division of BCI and the vehicle and equipment
leasing portfolio of the Barclays Credit Services Division of BCI are included
in the state income tax returns of BCI.
98
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BFD computes its federal and state income tax provisions for financial
statement purposes on a separate entity basis.
BFD 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 BFD'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. See Note 6 "Income Taxes."
STATEMENT OF CASH FLOWS
For the purpose of reporting cash flows, BFD has defined cash equivalents
as those amounts included in the caption "Cash". Changes in cash overdrafts are
reported as a financing activity for the purpose of reporting cash flows.
Certain information presented in the Statement of Cash Flows is dependent on
management's estimates and assumptions concerning the portion of the total cash
flows of BCI and Barclays Bank PLC allocable to BFD.
OTHER INCOME
Other income for the year ended December 31, 1993 includes $6.3 million
related to the reversal of a litigation reserve established prior to January 1,
1993. This reserve was established to provide for management's estimate of
losses to be incurred by BFD in connection with certain litigation. This legal
matter was settled during 1993 for an amount less than the reserve established.
Accordingly, management reversed the portion of the reserve in excess of the
settlement amount during 1993.
2. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Substantially all of BFD's loans are secured by accounts receivable,
inventory, fixed assets and other collateral. At December 31, 1994 and 1993,
loans, net of unearned income of $17,838,900 and $50,457,800, respectively,
consisted of the following lending categories (in thousands):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Accounts receivable......................................... $1,183,500 $ 781,105
Inventory................................................... 435,996 410,244
Equipment and real estate................................... 643,299 550,328
Vehicle and equipment leases................................ 8,185 158,975
Other secured............................................... 38,756 84,073
---------- ----------
Total..................................................... 2,309,736 1,984,725
Less allowance for credit losses............................ 41,215 40,657
---------- ----------
Loans, net................................................ $2,268,521 $1,944,068
========= =========
</TABLE>
At December 31, 1994 and 1993, the accrual of interest income was suspended
on loans having an outstanding balance of $28,081,800 and $32,402,700,
respectively. Interest income related to nonaccruing loans would have been
increased by approximately $2.3 million in 1994 and $2.1 million in 1993 had
these loans been current.
99
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, the approximate contractual maturities of loans were
as follows (in thousands):
<TABLE>
<S> <C>
1995..................................................... $1,893,661
1996..................................................... 168,984
1997..................................................... 117,559
1998..................................................... 85,428
1999..................................................... 42,524
Thereafter............................................... 1,580
----------
Total............................................... $2,309,736
=========
</TABLE>
Changes in the allowance for credit losses during the years ended December
31, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Balance at beginning of year............................. $40,657 $39,021
Provision for credit losses.............................. 6,070 5,118
Loans charged-off........................................ (7,654) (3,796)
Recoveries............................................... 2,142 314
------- -------
Balance at end of year................................... $41,215 $40,657
======= =======
</TABLE>
In May 1993, the Financial Accounting Standards Board issued FAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This statement addresses the
accounting by creditors for impairment of certain loans. It requires that values
for impaired loans generally be measured based on the present value of expected
future cash flows discounted at the loan's effective rate or the fair value of
the collateral that supports the loan. This statement is effective for fiscal
years beginning after December 15, 1994. Management does not expect that the
adoption of this statement will have a material impact on the financial position
or results of operations of BFD.
During July 1994, BFD completed a sale of $115.6 million of vehicle and
equipment leases resulting in a gain of $7.4 million which is included in other
income.
3. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 1994 and 1993
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Leasehold improvements..................................... $1,100 $1,063
Furniture and fixtures..................................... 2,772 2,645
Equipment.................................................. 3,004 3,162
------ ------
Total.................................................... 6,876 6,870
Less accumulated depreciation and amortization............. 4,147 3,561
------ ------
Total.................................................... $2,729 $3,309
====== ======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1994
and 1993 totaled $381,000 and $316,000, respectively, and is included in other
expenses.
BFD occupies certain premises and rents equipment under leases that are
accounted for as operating leases. Operating lease rentals aggregated
approximated $2,186,000 and $2,387,000 for the years ended December 31, 1994 and
1993, respectively.
100
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule presents, by year, future minimum rental payments
required under the terms of operating leases in excess of one year (in
thousands):
<TABLE>
<S> <C>
1995........................................................ $2,269
1996........................................................ 1,640
1997........................................................ 1,259
1998........................................................ 1,091
1999........................................................ 1,083
Thereafter.................................................. 2,140
------
$9,482
======
</TABLE>
4. AFFILIATE ADVANCES AND TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
BFD finances substantially all of its lending and other services through
short-term borrowings obtained from an affiliated company. BFD is also allocated
long-term financing from an affiliated company as an additional source of
funding. At December 31, 1994 and 1993, BFD had outstanding affiliate advances
as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Short-term affiliate advances....................... $1,924,349 $1,606,663
Senior-term debentures.............................. 35,587 34,543
Senior subordinated debentures...................... 40,116 34,090
---------- ----------
$2,000,052 $1,675,296
========= =========
</TABLE>
Interest expense incurred by BFD for affiliate advances during the years
ended December 31, 1994 and 1993 totaled $86.2 million and $60.3 million,
respectively.
Short-term affiliate advances represent funding obtained by BFD from an
affiliated company. The amount of short-term affiliate advances outstanding
fluctuates on a daily basis based on BFD's funding needs. On a daily basis, BFD
borrows additional funds or remits payment to the affiliate, including interest
charges, as considered necessary based on its funding needs. Interest charges
are generally computed based on 90-day LIBOR (6.38% at December 31, 1994).
Long-term affiliate advances represent senior-term debentures and senior
subordinated debentures issued by an affiliated company and allocated to BFD at
the time the issues were placed. Senior-term debentures are allocated to BFD by
the affiliate in order to match-fund fixed-rate loans issued by BFD. The
senior-term debentures are multiple advances and bear interest at fixed rates
ranging between 4.11% and 6.62%. The interest rate on each senior-term debenture
represents the market rates obtained by the affiliate at the time the issue was
placed. The senior subordinated debentures are priced at the prime rate minus
0.1% and mature on August 15, 1998.
At December 31, 1994, maturities of BFD's affiliate advances were as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997 1998 TOTAL
---------- ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Short-term affiliate advances................. $1,924,349 $1,924,349
Senior-term debentures........................ 15,993 $ 3,000 $9,598 $ 6,996 35,587
Senior subordinated debentures................ 40,116 40,116
---------- ------- ------ ------- ----------
Total............................... $1,940,342 $ 3,000 $9,598 $47,112 $2,000,052
========= ====== ====== ======= =========
</TABLE>
An affiliated company provides BFD certain services including legal,
treasury, tax, human resources, payroll and pension administration. The costs
relating to these services are determined annually based on the estimated
charges expected to be incurred by the affiliate on BFD's behalf and are agreed
to between BFD and the affiliate. These costs are allocated to BCI based on
various methods depending on the nature of the cost.
101
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These costs are further allocated by BCI to BFD based on BFD's budgeted average
loans in relation to total budgeted average loans of BCI. Management believes
that the allocation methods used are reasonable. Such costs allocated to BFD for
the year ended December 31, 1994 and 1993 were $270,600 and $982,000,
respectively, and are included in the appropriate other expenses caption.
BCI provides BFD certain services including accounting and other
administrative support and rent. These costs are charged to BFD on a pro rata
allocation based on methods appropriate to the nature of the costs including
headcount, budgeted average loans of BFD in relation to total budgeted average
loans of BCI or square footage. Management believes that the allocation methods
used are reasonable. Such costs allocated to BFD for the year ended December 31,
1994 and 1993 were $5,439,500 and $6,666,000, respectively, and are included in
the appropriate other expenses caption.
At December 31, 1994 and 1993, BFD had payables to affiliated companies and
BCI of $16,003,000 and $28,041,000, respectively.
5. PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Substantially all full and part-time employees of BFD meeting certain
eligibility criteria participate in a noncontributory, qualified defined benefit
pension plan sponsored by an affiliated company. For those vested, the Plan
provides a monthly benefit upon retirement based on compensation during the five
consecutive highest paid years of the last ten years of employment prior to
retirement. It is the affiliate'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.
BFD also participates in supplemental retirement plans sponsored by an
affiliated company that cover certain employees and pay benefits that supplement
any benefits paid under the qualified plan. Benefits under the supplemental plan
are generally based on compensation not included in the calculation of benefits
to be paid under the qualified plan.
Separate information regarding the funded status of the plan as it relates
to BFD's employees is not available. The following table sets forth the funded
status of the affiliated company's pension and supplemental benefit plans in
which BFD's employees participate at December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................ $(39,315) $(35,058)
======== ========
Accumulated benefit obligation....................... $(40,884) $(37,232)
======== ========
Projected benefit obligation for services to date...... $(47,298) $(49,316)
Plan assets at fair market value....................... 38,331 40,532
-------- --------
Projected benefit obligation in excess of plan
assets............................................... (8,967) (8,784)
Unrecognized transition asset.......................... (2,248) (2,549)
Unrecognized prior service cost........................ 447 657
Unrecognized losses.................................... 2,892 7,591
-------- --------
Accrued pension cost................................... $ (7,876) $ (3,085)
======== ========
</TABLE>
102
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of net pension cost for BFD's employees for the years ended
December 31, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------ ----
<S> <C> <C>
Service cost........................................ $ 915 $552
Other cost.......................................... 151 (59)
------ ----
Net periodic pension cost........................... $1,066 $493
====== ====
</TABLE>
The expense represents an allocation of costs by the affiliated company to
BCI and was determined based on the actuarial computation of current and future
benefits for employees of BCI. BCI has allocated such costs to BFD based on
headcount and management views this allocation method as reasonable. The major
categories of "other cost" for 1993 were interest cost of $585,000 and expected
return on assets of ($611,000). Such categories of "other cost" were not
available for 1994. This expense is included in compensation and benefits.
Significant rate assumptions as of December 31, 1994 and 1993 used in
determining net periodic pension cost and related pension obligations were as
follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Discount rate in determining projected benefit
obligation......................................... 8.5% 7.5%
Rate of increase in compensation levels.............. 4.5% 4.5%
Long-term rate of return on plan assets.............. 10.0% 10.0%
</TABLE>
An affiliated company also sponsors a postretirement benefit plan in which
the employees of BFD participate. This plan provides health care benefits for
retired employees that have met certain age and service requirements.
BFD 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 benefits to be
accrued and charged to operations during the years the employees render the
service. The transition obligation ($1,586,000 for the employees of BFD at
December 31, 1993) is being amortized on a straight-line basis over 20 years.
During 1994 and 1993, BFD charged $500,000 and $388,000, respectively, to other
expense for postretirement benefits. Previously, BFD's postretirement benefits
were expensed as claims were paid and were not significant.
At December 31, 1994 and 1993, the accumulated postretirement benefit
obligation for the employees of BFD was $2,659,000 and $2,331,000, respectively.
The components of postretirement benefit cost for the years ended December
31, 1994 and 1993 are summarized below (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Service cost.................................................. $249 $164
Other cost.................................................... 251 224
---- ----
Net periodic postretirement benefit cost...................... $500 $388
==== ====
</TABLE>
The expense represents an allocation of costs by the affiliated company to
BCI and was determined based on the actuarial computation of current and future
benefits for employees and retirees of BCI. BCI has allocated such costs to BFD
based on headcount and management views this allocation method as reasonable.
This expense is included in compensation and benefits.
103
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The significant rate assumptions as of December 31, 1994 and 1993 used in
determining postretirement benefit cost and related obligations were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Discount rate used in determining accumulated postretirement
benefit obligations.......................................... 8.5% 7.5%
Medical cost trend rate........................................ 13.0% 14.0%
</TABLE>
The assumptions for the medical cost trend decreases to 6.0% by the year
2001 and remains constant thereafter.
BFD adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1994. This 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. Adoption of this standard did not have a
significant effect on BFD's results of operations for the year ended December
31, 1994.
6. INCOME TAXES
BFD adopted FAS No. 109, "Accounting for Income Taxes" prospectively,
effective January 1, 1993. The cumulative effect of this change was an income
tax provision of $4.3 million.
The provision for income taxes consists of the following for the years
ended December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
FEDERAL
Current................................................ $57,928 $21,701
Deferred............................................... (28,779) 1,478
------- -------
29,149 23,179
------- -------
STATE
Current................................................ 15,363 5,845
Deferred............................................... (7,640) 392
------- -------
7,723 6,237
------- -------
Total income tax provision............................... $36,872 $29,416
======= =======
</TABLE>
Current taxes payable are settled based on the cash needs of the parent.
Unpaid amounts attributable to current taxes payable are included in the caption
"Interdivision and parent company payables."
104
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------------------------------ ------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX ASSETS TAX LIABILITIES TAX ASSETS TAX LIABILITIES
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Allowance for credit losses............... $ 14,844 $ 14,263
Loan origination fees..................... 6,850 5,506
Basis difference in leased assets......... $ 1,607 $36,449
Other..................................... 4,119 5,992
---------- ------- ---------- ---------------
Total deferred income taxes............... $ 25,813 $ 1,607 $ 25,761 $36,449
======== ========== ======== ==========
</TABLE>
There was no valuation allowance at December 31, 1994 and 1993 since
management views the recoverability of deferred tax assets to be more likely
than not.
The deferred tax liability attributable to the basis difference in leased
assets relates substantially to the vehicle and equipment leases sold during
July 1994. Refer to Note 2 "Loans and Allowance for Credit Losses."
A reconciliation of the difference between income tax expense and the
amount computed by applying the federal statutory rate of 35% for the years
ended December 31, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Tax expense at statutory rate............................ $31,398 $26,646
State income tax expense, net of federal tax benefit..... 5,020 4,055
Tax exempt interest...................................... (149) (261)
Other items.............................................. 603 (1,024)
------- -------
Total income tax provision............................. $36,872 $29,416
======= =======
</TABLE>
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As of December 31, 1994 and 1993, 17.6% and 20.3%, respectively, of BFD's
loans were concentrated among borrowers located in the State of California. The
largest industry concentration, as a percentage of loans, at December 31, 1994
and 1993 is metal products manufacturers (10.7% and 11.8%, respectively). There
were no other industry or geographic concentrations in excess of 10% of loans
outstanding at December 31, 1994 and 1993.
In the normal course of business, BFD continually extends unfunded loan
commitments associated with its lending activities. These unfunded commitments
vary on a daily basis and are based on the amount of the borrowers' eligible
collateral. At December 31, 1994 and 1993, BFD had unfunded commitments of
$670,667,000 and $406,511,000, respectively.
At December 31, 1994 and 1993, BFD had approved new loan commitments
totaling $197,500,000 and $94,500,000, respectively. However, funded amounts for
these loan commitments are expected to be less because actual advances will be
based on the borrowers' eligible collateral at the time of funding.
BFD provides trade services products consisting principally of standby
letters of credit. Standby letters of credit are obligations to make payments
under certain conditions to meet contingencies related to borrowers' contractual
agreements and are subject to the same risk, credit review and approval process
as a loan. At December 31, 1994 and 1993, total trade services products
outstanding were $190,758,000 and $217,083,000, respectively.
105
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate swap agreements are used by BFD to manage its interest rate
risk. As an alternative to match-funding fixed-rate loans, BFD occasionally
enters into interest rate swap agreements with an affiliated company, whereby
the two parties exchange fixed and floating interest rate payments on a notional
principal amount over an agreed upon term; no principal payments are exchanged.
At December 31, 1994, BFD had five interest rate swap agreements outstanding
with an affiliate on a total notional principal amount of $41.0 million. At
December 31, 1993, BFD had one interest rate swap agreement outstanding with an
affiliate on a total notional principal amount of $10.2 million. In all
instances, BFD makes fixed rate payments and, in turn, receives variable rate
payments. The periodic net settlements of interest rate swap agreements are
recorded as an adjustment to interest expense.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires 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. 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.
BFD estimated fair value based on discounting future cash flows or other
valuation techniques. Each of these valuation techniques involve utilizing
certain assumptions which are highly subjective and judgmental in nature.
Accordingly, the results may not be precise and modifying the assumptions may
significantly affect the values derived. In addition, fair values established
utilizing these 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 sale transaction or a forced liquidation. Additionally, fair values may be
different if the business operations or related assets and liabilities were
acquired by an independent party. Accordingly, the fair values disclosed should
not be interpreted as the aggregate current value of BFD.
The methodology and assumptions used to estimate the fair value of BFD's
financial instruments are described below.
CASH AND CASH OVERDRAFT
The carrying amount for cash and cash overdraft approximates fair value.
LOANS
The carrying amount of performing variable rate loans was assumed to
approximate fair value due to the short-term and frequent repricing
characteristics of these loans. The fair value of performing fixed rate loans
was estimated by discounting expected future cash flows utilizing risk-free
rates of return, adjusted for credit risk and servicing costs as determined by
management in pricing such loans. The fair value of nonperforming loans was
estimated by applying a discount factor considered to be appropriate by
management.
INVESTMENT
The carrying amount of BFD's investment is assumed to approximate fair
value.
AFFILIATE ADVANCES
The carrying amount of short-term affiliate advances and senior
subordinated debentures was assumed to approximate fair value due to the
short-term and frequent repricing characteristics of these advances. The fair
value amount of the senior-term debentures was estimated by discounting
scheduled cash flows through contractual maturity using estimated market
interest rates.
106
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and letters of credit was
determined based on the discounted value of fees currently charged for similar
agreements. The fair value of BFD's interest rate swap agreements was based on
the amount BFD would receive or pay to terminate the agreement as of the
reporting date based on the terms of the agreement, the credit worthiness of the
counterparties and current interest rates.
The estimated fair values of BFD's financial assets and liabilities and
related off-balance sheet financial instruments at December 31, 1994 and 1993
are summarized below (in thousands):
<TABLE>
<CAPTION>
1994 1993
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash (Cash overdraft)................... $ 977 $ 977 $ (1,317) $ (1,317)
---------- ---------- ---------- ----------
Loans, less allowance for credit
losses............................... $2,268,521 $2,264,000 $1,944,068 $1,954,000
---------- ---------- ---------- ----------
Investment................................ $ 2,654 $ 2,654 $ 3,099 $ 3,099
---------- ---------- ---------- ----------
FINANCIAL LIABILITIES
Affiliate advances...................... $2,000,052 $2,000,000 $1,675,296 $1,670,000
---------- ---------- ---------- ----------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit (Committed
amount at December 31, 1994 and 1993,
$670,667 and $406,511,
respectively)........................ $ 5,300 $ 3,100
---------- ----------
Standby letters of credit (Contract
amount at December 31, 1994 and 1993,
$190,758 and $217,083,
respectively)........................ $ 1,250 $ 1,300
---------- ----------
Interest rate swap agreements (Notional
amount at December 31, 1994 and 1993,
$41,000 and $10,250, respectively)... $ 725 $ (400)
---------- ----------
</TABLE>
107
<PAGE> 1
EXHIBIT 99.4
108
<PAGE> 2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1994 and the Unaudited Pro Forma Condensed Combined Statement of
Income for the year ended December 31, 1994, give effect to the Merger,
accounted for as a pooling of interests, and the Northeast Merger, the
consummation of the merger of NBB Bancorp, Inc. ("NBB") into Fleet (the "NBB
Merger") and the issuance of 6,165,912 shares of Fleet Common Stock in
connection therewith, the consummation of the merger of Plaza Home Mortgage
Corporation ("Plaza") into Fleet (the "Plaza Merger"), the consummation of the
Barclays Acquisition and the consummation of Fleet's repurchase (the "FMG
Repurchase") of the publicly-held shares of Fleet's majority owned subsidiary,
Fleet Mortgage Group, Inc. ("FMG"), each of which were or will be accounted for
by the purchase method of accounting, in each case as if such transactions had
occurred on January 1, 1994. The Unaudited Pro Forma Condensed Combined
Statements of Income for the years ended December 31, 1993 and December 31,
1992, give effect to the Merger as if the Merger had occurred on January 1 in
each such year and do not take into account the effect of the Northeast Merger,
the NBB Merger, the Plaza Merger, the Barclays Acquisition and the FMG
Repurchase because such transactions were or will be accounted for under the
purchase method of accounting.
The pro forma information is based on the historical consolidated financial
statements of Fleet, Shawmut, Northeast, NBB, Plaza, Business Finance and FMG
under the assumptions and adjustments set forth in the accompanying Notes to the
Unaudited Pro Forma Condensed Combined Financial Statements. The pro forma
condensed combined financial statements do not give effect to the anticipated
cost savings in connection with the Merger, the Northeast Merger, the NBB Merger
and the Plaza Merger or the effects of any required regulatory divestitures.
The unaudited pro forma condensed combined financial statements, including
the notes thereto, should be read in conjunction with the consolidated
historical financial statements of Fleet, Northeast and Business Finance,
including the respective notes thereto, which are included in this Current
Report on Form 8-K. The pro forma data is presented for comparative purposes
only and is not necessarily indicative of the combined financial position or
results of operations in the future or of the combined financial position or
results of operations which would have been realized had the acquisitions been
consummated during the periods or as of the dates for which the pro forma data
is presented.
Pro forma per share amounts for the combined Fleet and Shawmut entity are
based on the common exchange ratio of .8922 shares of Fleet Common Stock for
each share of Shawmut Common Stock. In addition, the pro forma data assumes the
issuance of 6,165,912 shares of Fleet Common Stock in the NBB Merger. The pro
forma data also assumes an exchange ratio of .415 shares of Shawmut Common Stock
for each outstanding share and stock option of Northeast, calculated as set
forth in the Northeast Merger Agreement, assuming for illustrative purposes
only, that the average closing price of Shawmut Common Stock used to determine
such exchange ratio is $26.75, the closing price of the Shawmut Common Stock on
April 7, 1995.
109
<PAGE> 3
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1994(A)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT SHAWMUT
FLEET PRO PRO FORMA PRO FORMA
PRO FORMA FORMA ----- ADJUSTMENTS COMBINED
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 5,109,009 $ 2,377,273 $ -- $ 7,486,282
Federal funds sold and securities purchased under
agreements to resell...................................... 648,681 331,425 -- 980,106
Securities available for sale, at market.................... 10,359,441 2,099,363 (95,169)(d) 12,363,635
Securities held to maturity................................. 891,076 9,877,281(b) -- 10,768,357(b)
Loans and leases............................................ 28,816,314 21,871,784 -- 50,688,098
Reserve for credit losses................................... (980,509) (595,605) -- (1,576,114)
Mortgages held for resale................................... 658,077 77,017 -- 735,094
Premises and equipment...................................... 852,171 353,851 -- 1,206,022
Purchased mortgage servicing rights......................... 1,066,670 47,851 -- 1,114,521
Excess cost over net assets of subsidiaries acquired........ 464,681 531,961 -- 996,642
Other intangibles........................................... 209,186 17,473 -- 226,659
Other assets................................................ 2,723,673 1,417,641 147,405(d)(e) 4,288,719
----------- ----------- ----------- -----------
Total assets................................................ $50,818,470 $38,407,315 $ 52,236 $89,278,021
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand.................................................... $ 6,974,389 $ 5,189,589 $ -- $12,163,978
Regular savings, NOW, money market........................ 16,191,444 9,434,493 -- 25,625,937
Time...................................................... 14,009,389 8,513,589 -- 22,522,978
----------- ----------- ----------- -----------
Total deposits............................................ 37,175,222 23,137,671 -- 60,312,893
----------- ----------- ----------- -----------
Federal funds purchased and securities sold under
agreements to repurchase.................................. 2,846,197 8,190,001 -- 11,036,198
Other short-term borrowings................................. 2,487,291 1,715,697 -- 4,202,988
Accrued expenses and other liabilities...................... 1,210,814 454,587 398,721(d)(e) 2,064,122
Long-term debt.............................................. 3,503,866 2,421,788 -- 5,925,654
----------- ----------- ----------- -----------
Total liabilities........................................... 47,223,390 35,919,744 398,721 83,541,855
----------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock........................................... 378,815 303,185 --(c) 682,000
Common stock.............................................. 141,574 1,274 107,156(c) 250,004
Common surplus............................................ 1,547,228 1,454,157 (230,615)(c) 2,770,770
Retained earnings......................................... 1,936,165 783,223 (240,000)(e) 2,479,388
Net unrealized gain/(loss) on securities available
for sale................................................ (374,200) (54,268)(b) 16,974(d) (411,494)(b)
Treasury stock, at cost................................... (34,502) -- -- (34,502)
----------- ----------- ----------- -----------
Total stockholders' equity.................................. 3,595,080 2,487,571 (346,485) 5,736,166
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity.................. $50,818,470 $38,407,315 $ 52,236 $89,278,021
========== ========== =========== ==========
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
110
<PAGE> 4
FLEET FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1994, CONTINUED(A)
<TABLE>
<CAPTION>
PRO FORMA FLEET
FLEET NBB PLAZA ADJUSTMENTS PRO FORMA
----------- ---------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............................. $ 5,208,938 $ 79,698 $ 31,188 $ (210,815 )(f) $ 5,109,009
Federal funds sold and securities purchased
under agreements to resell........................... 648,681 -- -- -- 648,681
Securities available for sale, at market............... 10,352,656 663,461 164,215 (820,891 )(g) 10,359,441
Securities held to maturity............................ 891,076 322,384 -- (322,384 )(g) 891,076
Loans and leases....................................... 27,540,644 1,325,990 5,832 (56,152 )(h) 28,816,314
Reserve for credit losses.............................. (953,449) (27,060) -- -- (980,509)
Mortgages held for resale.............................. 488,898 -- 405,253 (236,074 )(g)(h) 658,077
Premises and equipment................................. 823,822 22,104 15,087 (8,842 )(h) 852,171
Purchased mortgage servicing rights.................... 826,559 -- 53,701 186,410 (h)(m) 1,066,670
Excess cost over net assets of subsidiaries acquired... 180,257 9,222 -- 275,202 (i)(m) 464,681
Other intangibles...................................... 159,186 3,614 -- 46,386 (h) 209,186
Other assets........................................... 2,589,822 68,767 46,961 18,123 (h) 2,723,673
----------- ---------- -------- ----------- -----------
Total assets........................................... $48,757,090 $2,468,180 $722,237 $(1,129,037) $50,818,470
========== ========= ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand............................................... $ 6,889,763 $ 84,626 $ 4,472 $ (4,472 )(g) $ 6,974,389
Regular savings, NOW, money market................... 15,220,444 971,000 2,341 (2,341 )(g) 16,191,444
Time................................................. 12,695,896 1,134,948 189,132 (10,587 )(g)(h) 14,009,389
----------- ---------- -------- ----------- -----------
Total deposits....................................... 34,806,103 2,190,574 195,945 (17,400 ) 37,175,222
----------- ---------- -------- ----------- -----------
Federal funds purchased and securities sold
under agreements to repurchase....................... 2,846,197 -- -- -- 2,846,197
Other short-term borrowings............................ 3,105,188 -- 427,797 (1,045,694 )(g)(m) 2,487,291
Accrued expenses and other liabilities 1,162,256 23,032 18,846 6,680 (h)(m) 1,210,814
Long-term debt......................................... 3,457,266 -- 46,600 -- 3,503,866
----------- ---------- -------- ----------- -----------
Total liabilities...................................... 45,377,010 2,213,606 689,188 (1,056,414 ) 47,223,390
----------- ---------- -------- ----------- -----------
Stockholders' equity:
Preferred stock...................................... 378,815 -- -- -- (l) 378,815
Common stock......................................... 141,574 963 116 (1,079 )(l) 141,574
Common surplus....................................... 1,547,228 136,557 25,767 (162,324 )(l) 1,547,228
Retained earnings.................................... 1,936,165 140,337 7,166 (147,503 )(l) 1,936,165
Net unrealized gain/(loss) on securities available
for sale........................................... (374,200) (13,342) -- 13,342 (l) (374,200)
Treasury stock, at cost.............................. (249,502) (9,941) -- 224,941 (l) (34,502)
----------- ---------- -------- ----------- -----------
Total stockholders' equity............................. 3,380,080 254,574 33,049 (72,623 ) 3,595,080
----------- ---------- -------- ----------- -----------
Total liabilities and stockholders' equity............. $48,757,090 $2,468,180 $722,237 $(1,129,037) $50,818,470
========== ========= ======== =========== ==========
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
111
<PAGE> 5
SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1994, CONTINUED (A)
<TABLE>
<CAPTION>
BUSINESS PRO FORMA SHAWMUT
SHAWMUT NORTHEAST FINANCE ADJUSTMENTS PRO FORMA
----------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 2,426,118 $ 34,145 $ 4,614 $ (87,604 )(f) $ 2,377,273
Federal funds sold and securities purchased
under
agreements to resell.......................... 308,700 22,725 -- -- 331,425
Securities available for sale, at market........ 1,991,853 107,510 -- -- 2,099,363
Securities held to maturity..................... 8,000,382(b) 1,960,699(b) -- (83,800 )(g) 9,877,281(b)
Loans and leases................................ 18,487,143 959,648 2,388,293 36,700 (h) 21,871,784
Reserve for credit losses....................... (542,116) (11,746) (41,743) -- (595,605)
Mortgages held for resale....................... 72,205 4,812 -- -- 77,017
Premises and equipment.......................... 329,780 27,401 2,670 (6,000 )h) 353,851
Purchased mortgage servicing rights............. 13,851 1,686 -- 32,314 (h) 47,851
Excess cost over net assets of subsidiaries
acquired...................................... 137,143 -- -- 394,818 (i) 531,961
Other intangibles............................... 17,345 128 -- -- 17,473
Other assets.................................... 1,156,207 238,564 3,915 18,955 (h) 1,417,641
----------- ---------- ---------- ----------- -----------
Total assets.................................... $32,398,611 $3,345,572 $2,357,749 $ 305,383 $38,407,315
========== ========= ========= =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand........................................ $ 5,161,182 $ 28,407 $ -- $ -- $ 5,189,589
Regular savings, NOW, money market............ 8,649,988 784,505 -- -- 9,434,493
Time.......................................... 6,935,083 1,580,172 -- (1,666 ) (h) 8,513,589
----------- ---------- ---------- ----------- -----------
Total deposits.................................. 20,746,253 2,393,084 -- (1,666 ) 23,137,671
----------- ---------- ---------- ----------- -----------
Federal funds purchased and securities sold
under
agreements to repurchase...................... 6,076,808 -- -- 2,113,193 (j) 8,190,001
Other short-term borrowings..................... 1,009,771 707,772 -- (1,846 )(h) 1,715,697
Accrued expenses and other liabilities.......... 346,818 63,573 13,556 30,640 (h) 454,587
Long-term debt.................................. 2,021,788 42,243 -- 357,757 (j)(k) 2,421,788
----------- ---------- ---------- ----------- -----------
Total liabilities............................... 30,201,438 3,206,672 13,556 2,498,078 35,919,744
----------- ---------- ---------- ----------- -----------
Stockholders' equity:
Preferred stock............................... 178,185 4 -- 124,996 (j)(l) 303,185
Common stock.................................. 1,208 144 -- (78 )(l) 1,274
Common surplus................................ 1,288,825 191,756 -- (26,424 )(l) 1,454,157
Retained earnings............................. 783,223 (54,892) -- 54,892 (l) 783,223
Net unrealized gain/(loss) on securities
available
for sale.................................... (54,268) 1,888 -- (1,888 )(l) (54,268)(b)
Treasury stock, at cost....................... -- -- -- -- --
----------- ---------- ---------- ----------- -----------
Total stockholders' equity...................... 2,197,173 138,900 -- 151,498 2,487,571
----------- ---------- ---------- ----------- -----------
Total liabilities and stockholders' equity...... $32,398,611 $3,345,572 $ 13,556 $2,649,576 $38,407,315
========== ========= ========= =========== ==========
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
112
<PAGE> 6
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994(A)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
FLEET SHAWMUT PRO FORMA PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest and fees on loans and leases............................. $2,513,235 $1,576,256 $ -- $4,089,491
Interest on securities............................................ 907,065 733,853 (2,346)(d) 1,638,572
---------- ---------- ----------- ----------
Total interest income......................................... 3,420,300 2,310,109 (2,346) 5,728,063
---------- ---------- ----------- ----------
Interest expense:
Deposits........................................................ 847,475 509,065 -- 1,356,540
Short-term borrowings........................................... 263,997 476,815 -- 740,812
Long-term debt.................................................. 255,170 109,916 -- 365,086
---------- ---------- ----------- ----------
Total interest expense........................................ 1,366,642 1,095,796 -- 2,462,438
---------- ---------- ----------- ----------
Net interest income............................................... 2,053,658 1,214,313 (2,346) 3,265,625
Provision for credit losses....................................... 65,076 14,383 -- 79,459
---------- ---------- ----------- ----------
Net interest income after provision for credit losses............. 1,988,582 1,199,930 (2,346) 3,186,166
---------- ---------- ----------- ----------
Mortgage banking.................................................. 390,311 47,583 -- 437,894
Investment services revenue....................................... 174,764 117,501 -- 292,265
Service charges, fees and commissions............................. 326,807 201,842 -- 528,649
Securities available for sale gains (losses)...................... (2,779 ) 7,283 -- 4,504
Other noninterest income.......................................... 319,045 74,452 -- 393,497
---------- ---------- ----------- ----------
Total noninterest income...................................... 1,208,148 448,661 -- 1,656,809
---------- ---------- ----------- ----------
Employee compensation and benefits................................ 1,005,961 537,221 -- 1,543,182
Occupancy and equipment........................................... 324,721 177,020 -- 501,741
Purchased mortgage servicing rights amortization.................. 119,574 10,471 -- 130,045
FDIC assessment................................................... 74,962 52,470 -- 127,432
Marketing......................................................... 66,220 19,902 -- 86,122
Core deposit and goodwill amortization............................ 82,928 28,525 -- 111,453
OREO expense...................................................... 42,665 24,905 -- 67,570
Restructuring charges............................................. 44,000 39,800 -- 83,800
Merger-related charges............................................ -- 100,900 -- 100,900
Other noninterest expense......................................... 490,332 232,003 -- 722,335
---------- ---------- ----------- ----------
Total noninterest expense..................................... 2,251,363 1,223,217 -- 3,474,580
---------- ---------- ----------- ----------
Income before taxes............................................... 945,367 425,374 (2,346) 1,368,395
Applicable income taxes........................................... 373,210 155,637 (938) 527,909
---------- ---------- ----------- ----------
Net income before minority interest............................... 572,157 269,737 (1,408) 840,486
Minority interest................................................. -- -- -- --
---------- ---------- ----------- ----------
Net income........................................................ $ 572,157 $ 269,737 $ (1,408) $ 840,486
========== ========== =========== ==========
Net income applicable to common shares............................ $ 557,035 $ 242,615 $ 798,242 (o)
Weighted average common shares outstanding:
Primary....................................................... 165,648,933 125,549,233 272,478,583 (o)
Fully diluted................................................. 165,648,933 125,549,233 272,478,583 (o)
Income from continuing operations per common share:
Primary....................................................... $3.36 $1.93 $2.93
Fully diluted................................................. $3.36 $1.93 $2.93
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
113
<PAGE> 7
FLEET FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994, CONTINUED(A)
<TABLE>
<CAPTION>
PRO FORMA FLEET
FLEET NBB PLAZA ADJUSTMENTS PRO FORMA
---------- -------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest and fees on loans and leases...................... $2,366,923 $108,081 $ 42,838 $ (4,607)(g)(h) $2,513,235
Interest on securities..................................... 905,350 59,507 6,119 (63,911)(g) 907,065
---------- -------- -------- ----------- ----------
Total interest income.................................. 3,272,273 167,588 48,957 (68,518) 3,420,300
---------- -------- -------- ----------- ---------- ----
Interest expense:
Deposits............................................... 764,186 71,137 14,304 (2,152)(g)(h) 847,475
Short-term borrowings.................................. 294,186 -- 22,486 (52,675)(g)(m) 263,997
Long-term debt......................................... 232,211 -- 1,586 21,373(f) 255,170
---------- -------- -------- ----------- ----------
Total interest expense................................. 1,290,583 71,137 38,376 (33,454) 1,366,642
---------- -------- -------- ----------- ----------
Net interest income........................................ 1,981,690 96,451 10,581 (35,064) 2,053,658
Provision for credit losses................................ 62,130 500 2,446 -- 65,076
---------- -------- -------- ----------- ----------
Net interest income after provision for credit losses...... 1,919,560 95,951 8,135 (35,064) 1,988,582
---------- -------- -------- ----------- ----------
Mortgage banking........................................... 362,587 -- 27,724 -- 390,311
Investment services revenue................................ 174,764 -- -- -- 174,764
Service charges, fees and commissions...................... 321,170 5,637 -- -- 326,807
Securities available for sale gains (losses)............... (620) 68 (2,227) -- (2,779)
Other noninterest income................................... 315,240 1,191 2,614 -- 319,045
---------- -------- -------- ----------- ----------
Total noninterest income............................... 1,173,141 6,896 28,111 -- 1,208,148
---------- -------- -------- ----------- ----------
Employee compensation and benefits......................... 949,251 21,823 34,887 -- 1,005,961
Occupancy and equipment.................................... 300,646 4,352 20,891 (1,168)(h) 324,721
Purchased mortgage servicing rights amortization........... 85,349 -- 7,361 26,864(h)(m) 119,574
FDIC assessment............................................ 69,965 4,997 -- -- 74,962
Marketing.................................................. 64,520 1,113 587 -- 66,220
Core deposit and goodwill amortization..................... 57,309 2,615 -- 23,004(h)(i)(m) 82,928
OREO expense............................................... 39,471 3,194 -- -- 42,665
Restructuring charges...................................... 44,000 -- -- -- 44,000
Merger-related charges..................................... -- -- -- -- --
Other noninterest expense.................................. 459,334 13,898 17,100 -- 490,332
---------- -------- -------- ----------- ----------
Total noninterest expense.............................. 2,069,845 51,992 80,826 48,700 2,251,363
---------- -------- -------- ----------- ----------
Income before taxes........................................ 1,022,856 50,855 (44,580) (83,764) 945,367
Applicable income taxes.................................... 397,708 20,445 (16,199) (28,744) 373,210
---------- -------- -------- ----------- ----------
Net income before minority interest........................ 625,148 30,410 (28,381) (55,020) 572,157
Minority interest.......................................... (12,217) -- -- 12,217(m) --
---------- -------- -------- ----------- ----------
Net income................................................. $ 612,931 $ 30,410 $(28,381) $ (42,803) $ 572,157
========= ======== ======== =========== ==========
Net income applicable to common shares..................... $ 597,809 $ 557,035 (n)
Weighted average common shares outstanding:
Primary................................................ 159,483,021 165,648,933 (n)
Fully diluted.......................................... 159,483,021 165,648,933 (n)
Income from continuing operations per common share:
Primary................................................ $3.75 $3.36
Fully diluted.......................................... $3.75 $3.36
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
114
<PAGE> 8
SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994, CONTINUED(A)
<TABLE>
<CAPTION>
BUSINESS PRO FORMA SHAWMUT
SHAWMUT NORTHEAST FINANCE ADJUSTMENTS PRO FORMA
---------- --------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest and fees on loans and leases.................. $1,326,542 $ 84,212 $180,782 $ (15,280)(h) $1,576,256
Interest on securities................................. 611,387 108,499 -- 13,967(g) 733,853
---------- --------- -------- ----------- ----------
Total interest income.............................. 1,937,929 192,711 180,782 (1,313) 2,310,109
---------- --------- -------- ----------- ---------- ----
Interest expense:
Deposits........................................... 406,346 101,886 -- 833(h) 509,065
Short-term borrowings.............................. 368,347 28,215 79,638 615(h) 476,815
Long-term debt..................................... 95,651 3,858 -- 10,407(j)(k) 109,916
---------- --------- -------- ----------- ----------
Total interest expense............................. 870,344 133,959 79,638 11,855 1,095,796
---------- --------- -------- ----------- ----------
Net interest income.................................... 1,067,585 58,752 101,144 (13,168) 1,214,313
Provision for credit losses............................ 3,000 4,900 6,483 -- 14,383
---------- --------- -------- ----------- ----------
Net interest income after provision for credit
losses............................................... 1,064,585 53,852 94,661 (13,168) 1,199,930
---------- --------- -------- ----------- ----------
Mortgage banking....................................... 28,852 18,731 -- -- 47,583
Investment services revenue............................ 117,501 -- -- -- 117,501
Service charges, fees and commissions.................. 195,774 6,068 -- -- 201,842
Securities available for sale gains (losses)........... -- 7,283 -- -- 7,283
Other noninterest income............................... 40,841 9,537 24,074 -- 74,452
---------- --------- -------- ----------- ----------
Total noninterest income........................... 382,968 41,619 24,074 -- 448,661
---------- --------- -------- ----------- ----------
Employee compensation and benefits..................... 478,142 27,459 31,620 -- 537,221
Occupancy and equipment................................ 154,511 16,168 6,941 (600)(h) 177,020
Purchased mortgage servicing rights amortization....... 4,486 1,946 -- 4,039(h) 10,471
FDIC assessment........................................ 43,711 8,759 -- -- 52,470
Marketing.............................................. 19,902 -- -- -- 19,902
Core deposit and goodwill amortization................. 8,068 136 -- 20,321(i) 28,525
OREO expense........................................... 11,702 13,203 -- -- 24,905
Restructuring charges.................................. 39,800 -- -- -- 39,800
Merger-related charges................................. 100,900 -- -- -- 100,900
Other noninterest expense.............................. 214,727 17,276 -- -- 232,003
---------- --------- -------- ----------- ----------
Total noninterest expense.......................... 1,075,949 84,947 38,561 23,760 1,223,217
---------- --------- -------- ----------- ----------
Income before taxes.................................... 371,604 10,524 80,174 (36,928) 425,374
Applicable income taxes................................ 134,252 (442 ) 32,070 (10,243)) 155,637
---------- --------- -------- ----------- ----------
Net income before minority interest.................... 237,352 10,966 48,104 (26,685) 269,737
Minority interest...................................... -- -- -- -- --
---------- --------- -------- ----------- ----------
Net income............................................. $ 237,352 $ 10,966 $ 48,104 $ (26,685) $ 269,737
========= ========= ======== =========== ==========
Net income applicable to common shares................. $ 221,917 $ 242,615 (n)
Weighted average common shares outstanding:
Primary............................................ 118,977,173 125,549,233 (n)
Fully diluted...................................... 118,977,173 125,549,233 (n)
Income from continuing operations per common share:
Primary............................................ $1.87 $1.93
Fully diluted...................................... $1.87 $1.93
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
115
<PAGE> 9
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993(A)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
PRO FORMA PRO FORMA
FLEET SHAWMUT ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and fees on loans and leases.................................. $2,339,609 $1,272,319 $ -- $3,611,928
Interest on securities................................................. 872,886 554,663 (80)(d) 1,427,469
--------- --------- ------- ---------
Total interest income.............................................. 3,212,495 1,826,982 (80) 5,039,397
--------- --------- ------- ---------
Interest expense:
Deposits............................................................. 744,080 420,966 -- 1,165,046
Short-term borrowings................................................ 180,507 262,413 -- 442,920
Long-term debt....................................................... 236,794 72,040 -- 308,834
--------- --------- ------- ---------
Total interest expense............................................. 1,161,381 755,419 -- 1,916,800
--------- --------- ------- ---------
Net interest income.................................................... 2,051,114 1,071,563 (80) 3,122,597
Provision for credit losses............................................ 270,724 55,944 -- 326,668
--------- --------- ------- ---------
Net interest income after provision for credit losses.................. 1,780,390 1,015,619 (80) 2,795,929
--------- --------- ------- ---------
Mortgage banking....................................................... 414,086 30,737 -- 444,823
Service charges, fees and commissions.................................. 310,095 186,452 -- 496,547
Investment services revenue............................................ 173,762 116,845 -- 290,607
Securities available for sale gains (losses)........................... 282,444 12,468 -- 294,912
Other noninterest income............................................... 284,888 71,690 -- 356,578
--------- --------- ------- ---------
Total noninterest income........................................... 1,465,275 418,192 -- 1,883,467
--------- --------- ------- ---------
Employee compensation and benefits..................................... 1,018,124 500,254 -- 1,518,378
Occupancy and equipment................................................ 303,953 163,792 -- 467,745
Purchased mortgage servicing rights amortization....................... 239,940 7,343 -- 247,283
FDIC assessment........................................................ 75,854 52,302 -- 128,156
Marketing.............................................................. 53,141 22,240 -- 75,381
Core deposit and goodwill amortization................................. 53,594 6,289 -- 59,883
OREO expense........................................................... 57,364 105,173 -- 162,537
Restructuring charges.................................................. 125,000 36,319 -- 161,319
Other noninterest expense.............................................. 497,256 250,623 -- 747,879
--------- --------- ------- ---------
Total noninterest expense.......................................... 2,424,226 1,144,335 -- 3,568,561
--------- --------- ------- ---------
Income before income taxes, cumulative effect of
changes in accounting principles and minority interest............... 821,439 289,476 (80) 1,110,835
Applicable income taxes................................................ 327,407 6,628 (32) 334,003
--------- --------- ------- ---------
Income before cumulative effect of changes in accounting
principles and minority interest..................................... 494,032 282,848 (48) 776,832
Minority interest...................................................... (5,983) (5,983)
--------- --------- ------- ---------
Income before cumulative effect of changes in
accounting principles.............................................. $ 488,049 $ 282,848 $ (48) $ 770,849
--------- --------- ------- ---------
--------- --------- ------- ---------
Income applicable to common shares..................................... $ 465,840 $ 267,379 $ (48) $ 733,171(o)
Weighted average common shares outstanding:
Primary.............................................................. 154,666,307 113,908,148 255,938,277(o)
Fully diluted........................................................ 154,899,995 113,908,148 256,171,965(o)
Income from continuing operations per share before cumulative
effect of changes in accounting principles:
Primary.............................................................. $3.01 $2.35 $2.86
Fully diluted........................................................ $3.01 $2.35 $2.86
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS".
116
<PAGE> 10
FLEET FINANCIAL GROUP, INC. AND SHAWMUT NATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992(A)
<TABLE>
<CAPTION>
FLEET &
SHAWMUT
PRO FORMA PRO FORMA
FLEET SHAWMUT ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and fees on loans and leases.................................. $2,513,587 $1,328,876 -- $3,842,463
Interest on securities................................................. 902,702 527,650 -- 1,430,352
--
---------- ---------- ----------
Total interest income.................................................. 3,416,289 1,856,526 -- 5,272,815
---------- ---------- ----------
Interest expense:
Deposits............................................................. 1,076,368 622,436 -- 1,698,804
Short-term borrowings................................................ 164,171 192,240 -- 356,411
Long-term debt....................................................... 222,104 59,321 -- 281,425
--
---------- ---------- ----------
Total interest expense............................................. 1,462,643 873,997 -- 2,336,640
--
---------- ---------- ----------
Net interest income.................................................... 1,953,646 982,529 -- 2,936,175
Provision for credit losses............................................ 485,823 242,128 -- 727,951
--
---------- ---------- ----------
Net interest income after provision for credit losses.................. 1,467,823 740,401 -- 2,208,224
--
---------- ---------- ----------
Mortgage banking....................................................... 364,011 29,071 -- 393,082
Service charges, fees and commissions.................................. 285,562 187,459 -- 473,021
Investment services revenue............................................ 160,083 115,103 -- 275,186
Securities available for sale gains (losses)........................... 206,713 94,103 -- 300,816
Gain on sale of FMG.................................................... 121,274 -- -- 121,274
Other noninterest income............................................... 230,147 103,327 -- 333,474
--
---------- ---------- ----------
Total noninterest income........................................... 1,367,790 529,063 -- 1,896,853
--
---------- ---------- ----------
Employee compensation and benefits..................................... 957,654 474,725 -- 1,432,379
Occupancy and equipment................................................ 283,191 179,507 -- 462,698
Purchased mortgage servicing rights amortization....................... 106,716 6,258 -- 112,974
FDIC assessment........................................................ 75,444 44,937 -- 120,381
Marketing.............................................................. 50,971 16,004 -- 66,975
Core deposit and goodwill amortization................................. 44,799 6,084 -- 50,883
OREO expense........................................................... 154,170 177,813 -- 331,983
Loss on sale of problem assets......................................... 115,000 -- -- 115,000
Other noninterest expense.............................................. 530,118 255,511 -- 785,629
--
---------- ---------- ----------
Total noninterest expense.......................................... 2,318,063 1,160,839 -- 3,478,902
--
---------- ---------- ----------
Income before income taxes, extraordinary tax credit and minority
interest............................................................. 517,550 108,625 -- 626,175
Applicable income taxes................................................ 228,526 40,898 -- 269,424
--
---------- ---------- ----------
Income before extraordinary tax credit and minority interest........... 289,024 67,727 -- 356,751
Minority interest...................................................... (9,181) (9,181)
--
---------- ---------- ----------
Income before extraordinary tax credit................................. $ 279,843 $ 67,727 -- $ 347,570
========= ========= =========== =========
Income applicable to common shares..................................... $ 252,801 $ 62,944 $ 315,745(o)
========= ========= =========== =========
Weighted average common shares outstanding:
Primary.............................................................. 141,469,658 104,379,621 234,597,156(o)
Fully diluted........................................................ 142,778,665 104,379,621 235,906,163(o)
Income from continuing operations per share before extraordinary tax
credit:
Primary.............................................................. $1.78 $0.60 $1.35
Fully diluted........................................................ $1.77 $0.60 $1.34
</TABLE>
See "NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
117
<PAGE> 11
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) The pro forma information presented is not necessarily indicative of
the results of operations or the combined financial position that would have
resulted had the Merger, the Northeast Merger, the NBB Merger, the Plaza Merger,
the Barclays Acquisition and the FMG Repurchase been consummated at the
beginning of the periods indicated, nor is it necessarily indicative of the
results of operations in future periods or the future financial position of the
combined entities. The NBB Merger was consummated on January 27, 1995, the
Barclays Acquisition was consummated on January 31, 1995, and the Plaza Merger
was consummated on March 3, 1995. It is anticipated that the Merger will be
consummated in the fourth quarter of 1995 and the Northeast Merger and the FMG
Repurchase will be consummated in the second quarter of 1995.
Under generally accepted accounting principles ("GAAP"), the assets and
liabilities of Shawmut will be combined with those of Fleet at book value. In
addition, the statements of income of Shawmut will be combined with the
statements of income of Fleet as of the earliest period presented. Certain
reclassifications have been included in the Unaudited Pro Forma Condensed
Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of
Income to conform to Fleet's presentation. Certain transactions conducted in the
ordinary course of business between Fleet, Shawmut, Northeast, NBB, Business
Finance, Plaza and FMG are immaterial and, accordingly, have not been
eliminated.
The unaudited pro forma condensed combined financial statements do not give
effect to the anticipated cost savings in connection with the Merger, the
Northeast Merger, the NBB Merger and the Plaza Merger or the effects of any
required regulatory divestitures. While no assurance can be given, Fleet and
Shawmut expect to achieve cost savings of approximately $400 million (pre-tax)
within fifteen months following the Merger. Such cost savings are expected to be
realized primarily through reductions in staff, elimination, consolidation or
divestiture of certain branches and the consolidation of certain offices, data
processing and other redundant back-office operations and staff functions. Cost
reductions and branch consolidations will come from both companies and will be
spread throughout the geographic region. Cost savings are also expected to be
achieved in connection with the Northeast Merger, the NBB Merger and the Plaza
Merger. These cost savings are expected to be approximately $25 million, $20
million and $15 million (pre-tax), respectively, and are expected to be achieved
within the first twelve months after the consummation of these respective
mergers. The extent to which cost savings will be achieved is dependent upon
various factors beyond the control of Fleet and Shawmut, including the
regulatory environment, economic conditions, unanticipated changes in business
conditions, inflation and the level of Federal Deposit Insurance Corporation
assessments. Therefore, no assurances can be given with respect to the ultimate
level of cost savings to be realized, or that such savings will be realized in
the time-frame currently anticipated. In addition, certain regulatory agencies
may require the divestiture of certain assets and liabilities of the combined
company following the Merger. Such divestitures may affect certain unaudited pro
forma combined financial statement amounts, merger and restructuring costs and
cost savings.
All dollar amounts included in these Notes to Unaudited Pro Forma Condensed
Combined Financial Statements are in thousands unless otherwise indicated.
(b) Fleet is currently reviewing the investment securities portfolios of
Shawmut and Northeast to determine the classification of such securities as
either available for sale or held to maturity in connection with Fleet's
existing interest-rate risk position. As a result of this review, certain
reclassifications of Shawmut and Northeast investment securities may result. No
adjustments have been made to either the available for sale or the held to
maturity portfolios in the accompanying Unaudited Pro Forma Condensed Combined
Balance Sheet to reflect any such reclassification as management has not made a
final determination with respect to such matters. Any such reclassification will
be accounted for in accordance with Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which requires that securities transferred from held to maturity to
available for sale be transferred at fair value with any unrealized gain or
loss, net of taxes, at the date of transfer recognized as a separate component
of stockholders' equity. At December 31, 1994, securities held to maturity at
Shawmut and Northeast had unrealized losses of $438,492 and $83,800,
respectively.
118
<PAGE> 12
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(c) Pro forma adjustments to common shares and capital surplus at December
31, 1994, reflect the Merger accounted for as a pooling of interests, through:
(a) the exchange of 108,429,899 shares of Fleet Common Stock (using the common
exchange ratio of .8922) for the 121,530,934 outstanding shares of Shawmut
Common Stock at December 31, 1994 (which includes the 6,572,060 shares of
Shawmut Common Stock issued to acquire all the outstanding shares of Northeast
common stock and stock options, and excludes the 5,811,900 shares of Shawmut
Common Stock held by Fleet as of such date, which are assumed to be retired for
combining purposes), and (b) the exchange of shares of Fleet New Preferred Stock
for all shares of Shawmut Preferred on a share-for-share basis.
(d) Pro forma adjustments to securities available for sale at December 31,
1994, and to dividend income on securities for the years ended December 31, 1994
and December 31, 1993 reflect the elimination of the 5,811,900 shares of Shawmut
Common Stock held by Fleet at December 31, 1994, and the corresponding dividend
income recorded on such shares during each of the years in the three-year period
ending December 31, 1994. Pro forma adjustments to other assets and accrued
expenses and other liabilities at December 31, 1994, include the elimination of
Fleet's dividend receivable related to such shares and the elimination of
Shawmut's corresponding dividend payable. The Unaudited Pro Forma Condensed
Combined Balance Sheet also eliminates the after-tax unrealized loss on these
securities recorded in stockholders' equity and the related deferred tax
benefit.
(e) A liability of $400,000 has been recorded in the Unaudited Pro Forma
Condensed Combined Balance Sheet to reflect management's best estimate of merger
and restructuring related charges in connection with the Merger. This liability
resulted in a $240,000 after-tax charge to retained earnings in the Unaudited
Pro Forma Condensed Combined Balance Sheet. It is anticipated that substantially
all of these charges will be recognized during 1995 upon consummation of the
Merger and paid during the first 15 months subsequent to the Merger. The
following table provides details of the estimated charges by type:
<TABLE>
<CAPTION>
ESTIMATED COSTS
TYPE OF COST ----------------------
----------------------------------------- (DOLLARS IN THOUSANDS)
<S> <C>
Personnel related........................ $255,000
Facilities and equipment................. 68,000
Branch related........................... 37,000
Other merger expenses.................... 40,000
-----------
Total.................................... $400,000
=================
</TABLE>
Personnel related costs consist primarily of charges related to employee
severance, termination of certain employee benefits plans and employee
assistance costs for separated employees. Facilities and equipment charges
consist of lease termination costs and other related exit costs resulting from
consolidation of duplicate headquarters and operational facilities, and computer
equipment and software write-offs due to duplication or incompatibility. Branch
related costs are primarily related to the cost of exiting branches anticipated
to be closed, including lease terminations and equipment write-offs. The effect
of the proposed charge has been reflected in the Unaudited Pro Forma Condensed
Combined Balance Sheet as of December 31, 1994; however, since the proposed
charge is nonrecurring, it has not been reflected in the unaudited pro forma
combined statements of income.
(f) The pro forma adjustments to cash include the redemption of the
Northeast $8.50 Cumulative Preferred Stock, Series B ("the Northeast Series B
Preferred Stock") based on the redemption value of such stock at December 31,
1994 ($42,879), and the redemption of all of the Northeast Uncertificated
Debentures ("the Northeast Debentures") based on the face value of the Northeast
Debentures at December 31, 1994 ($44,725), as if such redemptions had occurred
on January 1, 1994.
Also included in the pro forma adjustments to cash is the amount paid in
cash by Fleet in connection with the NBB Merger. The total consideration paid to
NBB shareholders in the NBB Merger was $425,815. Fleet
119
<PAGE> 13
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
paid $210,815 in cash and issued $215,000 of Fleet Common Stock to NBB
shareholders, which was repurchased by Fleet in the open market in the fourth
quarter of 1994 and held in treasury at December 31, 1994. Proceeds from Fleet's
senior debt issuances during the third and fourth quarters of 1994 were used to
fund both the cash payment made to NBB shareholders and such repurchase of
shares of Fleet Common Stock. The 1994 Unaudited Pro Forma Condensed Combined
Income Statement also includes an adjustment increasing interest expense for the
year ended December 31, 1994, by $21,373 to reflect the estimated interest
expense that would have been recorded on Fleet's senior indebtedness if such
indebtedness had been outstanding as of January 1, 1994.
(g) The pro forma adjustments also include fair value adjustments of
$(83,800) and $(11,373) to securities held to maturity of Northeast and NBB,
respectively. The pro forma adjustments also reflect Fleet's sale of NBB's
available for sale and held to maturity securities portfolios as if such sales
occurred on January 1, 1994, and includes adjustments to eliminate the
corresponding interest income for such period. The proceeds from the sale of
$974,472 were assumed to have reduced Fleet's short-term borrowings as of
January 1, 1994 and, accordingly, interest expense on short-term borrowings has
also been reduced by $47,307 for such period reflecting a weighted average
short-term borrowing rate of 4.75%.
The pro forma adjustments also reflect the sale of $157,430 of Plaza's
mortgage-backed securities, the sale of $230,000 of Plaza's adjustable rate
loans, and the sale of $18,445 of Plaza's retail consumer deposits, in each case
as if such sales had occurred on January 1, 1994, and includes adjustments to
eliminate the corresponding interest income and expense for such period. The net
proceeds from the sales of $368,985 were assumed to have reduced short-term
borrowings as of January 1, 1994 and, accordingly, interest expense on
short-term borrowings has also been reduced by $17,904 for such period
reflecting a weighted average short-term borrowings rate of 4.75%. The pro forma
adjustments also assume that Fleet funded the Plaza Merger by the issuance of
commercial paper on January 1, 1994, and accordingly reflect the corresponding
incremental interest expense of $4,358 for such period.
(h) These pro forma adjustments reflect the purchase accounting adjustments
related to the assets acquired and liabilities assumed for the Northeast Merger,
NBB Merger, Barclays Acquisition, Plaza Merger and the FMG Repurchase. These
adjustments are based on the best available information and may be different
from the actual adjustments to reflect the fair value of the net assets
purchased as of the date of the acquisition. The core deposit intangible is
being amortized over seven years.
(i) The 1994 pro forma statements include adjustments for the excess cost
over net assets of subsidiaries acquired for each of the material pending and/or
completed mergers and acquisitions calculated as follows:
<TABLE>
<CAPTION>
BUSINESS
NORTHEAST NBB FINANCE PLAZA FMG
-------- -------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchase price.............................. $171,398 $425,815 $2,634,193 $88,015 $194,241
Historical net tangible assets acquired... 95,893 241,738 2,344,193 33,049 93,604
Estimated fair value adjustments....... (94,313) (33,700) 65,000 17,491 71,465
-------- -------- ---------- ------- --------
Estimated fair value of net assets.......... 1,580 208,038 2,409,193 50,540 165,069
-------- -------- ---------- ------- --------
Excess cost over net assets of
subsidiaries acquired.................. $169,818 $217,777 $ 225,000 $37,475 $ 29,172
======== ======== ========= ======= ========
</TABLE>
Adjustments have been made to the Unaudited Pro Forma Condensed Combined
Balance Sheet to reflect the recording of these intangibles as calculated above
as well as to eliminate any intangible balances previously recorded at these
companies, in accordance with the purchase method of accounting. Reflected in
the 1994 Unaudited Pro Forma Condensed Combined Income Statement are adjustments
to reflect the amortization of Northeast's, NBB's and Plaza's excess cost over
net assets of subsidiaries acquired ("goodwill") over 15 years, the amortization
of Business Finance's goodwill over 25 years, and the amortization of FMG's
goodwill over 20 years.
120
<PAGE> 14
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(j) The pro forma adjustments to these items show the effects of the
funding of the Barclays Acquisition as if such funding transactions occurred on
January 1, 1994. Such funding transactions included short-term borrowings
(primarily federal funds purchased and repurchase agreements) of $2,113,193, the
issuance of $250,000 of subordinated notes, the issuance of $150,000 of senior
bank notes, and the issuance of $125,000 of Shawmut 9.35% Preferred Stock.
Adjustments to increase interest expense in the amount of $14,265 for the year
ended December 31, 1994 were made to reflect an estimate of the incremental
interest expense which would have been incurred as if such borrowings had
occurred on January 1, 1994.
(k) These pro forma adjustments include the redemption of all of the
Northeast Debentures based on the face value of the Northeast Debentures
($44,725), as if such redemption had occurred on January 1, 1994, and a related
adjustment to eliminate the interest expense recorded on such Northeast
Debentures ($3,858) for the year ended December 31, 1994.
(l) The pro forma stockholders' equity accounts of Northeast, NBB and Plaza
have been adjusted in the Unaudited Pro Forma Condensed Combined Balance Sheet
to reflect the elimination of the stockholders' equity accounts in accordance
with the purchase method of accounting. The Fleet Pro Forma adjustments reflect
the issuance of 6,165,912 shares of Fleet Common Stock in connection with the
NBB Merger. The Shawmut Pro Forma adjustments reflect the issuance of 6,572,060
shares of Shawmut Common Stock in exchange for all of the outstanding shares of
Northeast common stock and stock options, assuming that the exchange ratio in
connection with the Northeast Merger is .415 (which is based on the closing
sales price for Shawmut Common Stock on the New York Stock Exchange on April 7,
1995, the latest practicable trading day before the filing of this Current
Report on Form 8-K), and the redemption of the Northeast Series B Preferred
Stock. Also included in Shawmut's pro forma adjustments is the $125,000 of
Shawmut 9.35% Preferred Stock, proceeds from which were used to fund the
Barclays Acquisition. Shawmut's pro forma net income applicable to common shares
was decreased to include the effect of additional preferred stock dividends of
$11,688, as if such Shawmut 9.35% Preferred Stock had been issued on January 1,
1994.
(m) Pro forma adjustments reflect the payment of $194,241 for the 19.3%
publicly-held shares of FMG common stock in connection with the FMG Repurchase
as if such transaction had occurred on January 1, 1994. The excess of such
purchase price over the fair value of net assets acquired of $165,069 resulted
in $29,172 of excess cost over net assets acquired that will be amortized over
20 years. Pro forma adjustments for such period reflect the fair market value
adjustment of $118,867 to FMG's purchased mortgage servicing rights as well as
the related amortization expense of $14,264, the corresponding deferred tax
liability and the elimination of the minority interest in both the balance sheet
and income statement. The pro forma adjustments also assume that Fleet funded
the FMG Repurchase by the issuance of commercial paper on January 1, 1994, and
accordingly reflect the corresponding $8,178 incremental interest expense for
such period.
(n) The Fleet Pro Forma weighted average shares outstanding for the year
ended December 31, 1994 reflect Fleet's historical weighted average shares
outstanding plus the issuance of 6,165,912 shares of Fleet Common Stock in
connection with the NBB Merger.
The Shawmut Pro Forma weighted average shares outstanding for the year
ended December 31, 1994 reflect Shawmut's historical weighted average shares
outstanding plus the issuance of 6,572,060 shares of Shawmut Common Stock in
connection with the Northeast Merger. Shawmut's pro forma net income applicable
to common shares was decreased to include the effect of additional preferred
stock dividends of $11,688, as if such Shawmut 9.35% Preferred Stock had been
issued on January 1, 1994.
(o) The Fleet/Shawmut Pro Forma weighted average shares outstanding for the
year ended December 31, 1994 reflect the Fleet Pro Forma weighted average shares
plus the converted Shawmut Pro Forma weighted average shares outstanding (after
adjustment to eliminate the 5,811,900 shares of Shawmut Common Stock owned by
Fleet, which are assumed to be retired for combining purposes). Each share of
Shawmut Common Stock is converted into .8922 shares of Fleet Common Stock.
121
<PAGE> 15
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
The Fleet/Shawmut Pro Forma net income applicable to common shares reflects
the sum of the Fleet Pro Forma net income applicable to common shares and the
Shawmut Pro Forma net income applicable to common shares adjusted for any
Fleet/Shawmut Pro Forma adjustments.
122
