-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UYaB3J84MS9406lVdzyJwEteeaMU1Vx6zjs6atM1L7TQjE6T2ESQ57wm2JJprP4R vHhBdlq8SgyAc/wh62tzOg== 0000950112-96-001430.txt : 19960514 0000950112-96-001430.hdr.sgml : 19960514 ACCESSION NUMBER: 0000950112-96-001430 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEET FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000050341 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 050341324 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06366 FILM NUMBER: 96560864 BUSINESS ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02211 BUSINESS PHONE: 6172922000 MAIL ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02211 FORMER COMPANY: FORMER CONFORMED NAME: FLEET FINANCIAL GROUP INC DATE OF NAME CHANGE: 19880110 FORMER COMPANY: FORMER CONFORMED NAME: INDUSTRIAL NATIONAL CORP DATE OF NAME CHANGE: 19820512 10-Q 1 FLEET FINANCIAL GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for quarterly period ended March 31, 1996 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period _________ to __________ Commission File Number 1-6366 FLEET FINANCIAL GROUP, INC. (Exact name of registrant as specified in its charter) RHODE ISLAND 05-0341324 - ---------------------------------------------------- ------------------------ (State or other jurisdiction of incorporation or (IRS Employer organization) Identification No.) ONE FEDERAL STREET BOSTON, MASSACHUSETTS 02110 - ---------------------------------------------------- ------------------------ (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (617) 292-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the Registrant was required to file reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---------------- ------------------ The number of shares of common stock of the Registrant outstanding as of April 30, 1996 was 263,054,161. FLEET FINANCIAL GROUP, INC. FORM 10-Q FOR QUARTER ENDED MARCH 31, 1996 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE PART I. ITEM 1. FINANCIAL INFORMATION ---- Consolidated Statements of Income Three Months Ended March 31, 1996 and 1995 3 Consolidated Balance Sheets March 31, 1996 and December 31, 1995 4 Consolidated Statements of Changes in Stockholders' Equity Three Months Ended March 31, 1996 and 1995 5 Consolidated Statements of Cash Flows Three Months Ended March 31, 1996 and 1995 6 Condensed Notes to Consolidated Financial Statements 7 PART I. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. 25 SIGNATURES 27 EXHIBITS 28 2 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------- For the three months ended March 31 Dollars in millions, except per share amounts 1996 1995 - ------------------------------------------------------------------------------------- Interest and fees on loans and leases $1,144 $1,103 Interest on taxable securities 185 336 Interest on tax-exempt securities 8 9 - ------------------------------------------------------------------------------------- Total interest income 1,337 1,448 - ------------------------------------------------------------------------------------- Interest expense: Deposits 402 391 Short-term borrowings 106 186 Long-term debt 105 115 - ------------------------------------------------------------------------------------- Total interest expense 613 692 - ------------------------------------------------------------------------------------- Net interest income 724 756 - ------------------------------------------------------------------------------------- Provision for credit losses 35 20 - ------------------------------------------------------------------------------------- Net interest income after provision for credit 689 736 losses - ------------------------------------------------------------------------------------- Noninterest income: Mortgage banking 124 103 Service charges, fees, and commissions 119 120 Investment services revenue 87 79 Student loan servicing fees 22 15 Securities available for sale gains 18 1 Gain from branch divestitures 60 --- Other 89 84 - ------------------------------------------------------------------------------------- Total noninterest income 519 402 - ------------------------------------------------------------------------------------- Noninterest expense: Employee compensation and benefits 348 361 Occupancy 61 63 Equipment 57 50 Mortgage servicing rights amortization 41 24 Intangible asset amortization 25 22 Legal and other professional 23 18 Marketing 22 21 Printing and mailing 16 15 Telephone 16 15 FDIC assessment 2 29 Merger-related charges --- 37 Other 147 109 - ------------------------------------------------------------------------------------- Total noninterest expense 758 764 - ------------------------------------------------------------------------------------- Income before income taxes 450 374 Applicable income taxes 186 148 - ------------------------------------------------------------------------------------- Net income $ 264 $ 226 - ------------------------------------------------------------------------------------- Net income applicable to common shares $ 251 $ 218 - ------------------------------------------------------------------------------------- Fully diluted weighted average common shares 268,376,014 263,780,319 outstanding $0.94 $0.82 Fully diluted earnings per share 0.43 0.40 Dividends declared - -------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 3 FLEET FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------- March 31, December 31, Dollars in millions, except share amounts 1996 1995 - --------------------------------------------------------------------------------------------------- Assets Cash, due from banks and interest-bearing deposits $ 3,305 $ 4,505 Federal funds sold and securities purchased under 1,808 61 agreements to resell Securities available for sale 9,243 18,533 Securities held to maturity (market value: $824 and $782) 848 798 Loans and leases 47,559 51,525 Reserve for credit losses (1,287 ) (1,321 ) - --------------------------------------------------------------------------------------------------- Net loans and leases 46,272 50,204 - --------------------------------------------------------------------------------------------------- Mortgages held for resale 2,398 2,005 Mortgage servicing rights 1,406 1,276 Intangible assets 1,071 1,116 Premises and equipment 974 991 Accrued interest receivable 416 503 Other assets 4,382 4,440 - --------------------------------------------------------------------------------------------------- Total assets $72,123 $84,432 - --------------------------------------------------------------------------------------------------- Liabilities Deposits: Demand $10,485 $12,305 Regular savings, NOW, money market 21,783 22,835 Time 17,853 21,982 - --------------------------------------------------------------------------------------------------- Total deposits 50,121 57,122 - --------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under 3,810 7,425 agreements to repurchase Other short-term borrowings 3,363 5,144 Accrued expenses and other liabilities 1,985 1,895 Long-term debt 6,000 6,481 - --------------------------------------------------------------------------------------------------- Total liabilities 65,279 78,067 - --------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock 824 399 Common stock (shares issued: 262,882,365 in 1996 and 262,864,257 in 1995; shares outstanding: 262,882,365 in 1996 and 262,721,926 in 1995) 3 3 Common surplus 3,122 3,149 Retained earnings 2,894 2,768 Net unrealized gain on securities 1 52 Less: Treasury stock, at cost, 142,331 shares in 1995 --- (6 ) - --------------------------------------------------------------------------------------------------- Total stockholders' equity 6,844 6,365 - --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $72,123 $84,432 - ---------------------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 4 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------ Common Net Stock Unrealized Three months ended March 31 Preferred $.01(a) Common Retained Gain(Loss) Treasury Dollars in millions, except share amounts Stock Par Surplus Earnings on Stock Total Securities ------------------------------------------------------------------------------------------------------------ 1995 - ---- Balance at December 31, 1994 $557 $244 $2,612 $2,719 $(411 ) $(250 ) $5,471 Net income 226 226 Cash dividends declared on common stock (59 ) (59 ) ($0.40 per share) Cash dividends declared on preferred stock (2 ) (2 ) Cash dividends declared by pooled company (33 ) (33 ) prior to merger Issuance of preferred stock 125 125 Common stock issued in connection with employee benefit and stock option plans 26 26 Treasury stock issued in connection with the acquisition of NBB (17 ) (21 ) 234 196 Adjustment of valuation reserve for securities available for sale 257 257 Other, net 2 (6 ) (35 ) (4 ) (43 ) - -------------------------------------------------------------------------------------------------------------- Balance at March 31, 1995 $682 $246 $2,615 $2,830 $(189 ) $(20 ) $6,164 - -------------------------------------------------------------------------------------------------------------- 1996 - ---- Balance at December 31, 1995 $399 $ 3 $3,149 $2,768 $ 52 $ (6 ) $6,365 Net income 264 264 Cash dividends declared on common stock (113 ) (113 ) ($0.43 per share) Cash dividends declared on preferred stock (13 ) (13 ) Issuance of preferred stock, net of issuance costs 425 (11) 414 Common stock issued in connection with: Employee benefit and stock option plans 8 (6 ) 15 17 Warrants 15 15 Adjustment of valuation reserve for securities available for sale (51 ) (51 ) Other-net (39 ) (6 ) (9 ) (54 ) - -------------------------------------------------------------------------------------------------------------- Balance at March 31, 1996 $824 $ 3 $3,122 $2,894 $ 1 $ --- $6,844 - --------------------------------------------------------------------------------------------------------------
(a) During the fourth quarter of 1995, the corporation changed the par value of its common stock from $1 per share to $.01 per share. See accompanying Condensed Notes to Consolidated Financial Statements. 5 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1996 1995 - -------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 264 $ 226 Adjustments for noncash items: Depreciation and amortization of premises and 41 40 equipment Amortization of mortgage servicing rights and 66 46 other intangible assets Provision for credit losses 35 20 Deferred income tax expense 62 32 Securities gains (18 ) (1 ) Gain from branch divestitures (60 ) --- Merger-related charges --- 37 Originations and purchases of mortgages held for (4,900 ) (1,317 ) resale Proceeds from sales of mortgages held for resale 4,507 1,289 Net (increase) decrease in trading account assets (34 ) 28 (Increase) decrease in accrued receivables, net 109 (58 ) Increase in accrued liabilities, net 71 133 Other, net 121 148 - -------------------------------------------------------------------------------------- Net cash flow provided by operating activities 264 623 - -------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchases of securities available for sale (3,331 ) (1,302 ) Proceeds from maturities of securities available for 2,891 514 sale Proceeds from sales of securities available for sale 10,171 2,085 Purchases of securities held to maturity (171 ) (223 ) Proceeds from maturities of securities held to 125 355 maturity Loans made to customers, nonbanking subsidiaries (274 ) (184 ) Principal collected on loans made to customers, 178 198 nonbanking subsidiaries Net cash and cash equivalents paid for businesses --- (2,849 ) acquired Loans purchased from third parties --- (272 ) Proceeds from sales of loans 281 80 Divestiture of loans 1,773 --- Net (increase) decrease in loans and leases, banking 1,308 (630 ) subsidiaries Acquisition of minority interest in subsidiary --- (158 ) Purchases of premises and equipment (43 ) (42 ) Purchases of mortgage servicing rights (79 ) (29 ) - -------------------------------------------------------------------------------------- Net cash flow (used) provided by investing 12,829 (2,457 ) activities - -------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net decrease in deposits (4,652 ) (4,395 ) Divestiture of deposits (2,349 ) --- Net increase (decrease) in short-term borrowings (5,395 ) 1,310 Proceeds from issuance of long-term debt 342 1,144 Repayments of long-term debt (823 ) (488 ) Proceeds from the issuance of common stock 31 27 Proceeds from the issuance of preferred stock 414 125 Cash dividends paid (114 ) (88 ) - -------------------------------------------------------------------------------------- Net cash flow (used) by financing activities (12,546 ) (2,365 ) - -------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 547 (4,199 ) - -------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of the period 4,566 8,570 - -------------------------------------------------------------------------------------- Cash and cash equivalents at end of the period $ 5,113 $ 4,371 - --------------------------------------------------------------------------------------
6 See accompanying Condensed Notes to Consolidated Financial Statements FLEET FINANCIAL GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 NOTE 1. FINANCIAL STATEMENTS The unaudited consolidated financial information included herein has been prepared in conformity with the accounting principles and practices in Fleet Financial Group, Inc.'s ("Fleet, FFG or the corporation") consolidated financial statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 1995. The accompanying interim consolidated financial statements contained herein are unaudited. However, in the opinion of the corporation, all adjustments consisting of normal recurring items necessary for a fair statement of the operating results for the periods shown, have been made. The results of operations for the three months ended March 31, 1996 may not be indicative of operating results for the year ending December 31, 1996. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications. NOTE 2. ACQUISITIONS AND DIVESTITURES As previously disclosed in Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1995, the merger of Shawmut National Corporation (the "Shawmut Merger") with and into Fleet was completed on November 30, 1995, and was accounted for as a pooling of interests. The financial information for all prior periods presented has been restated to present the combined financial condition and results of operations of both companies as if the Shawmut Merger had been in effect for all periods presented. In connection with the Shawmut Merger during the first quarter of 1996, the corporation divested 64 branches consisting of $1.8 billion in loans and $2.3 billion in deposits. The corporation realized a $24 million (post-tax) gain relating to these divestitures. The corporation also expects to record between $10 million and $20 million in post-tax gains during the second quarter as these transactions are finalized. 7 FLEET FINANCIAL GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 On December 19, 1995, Fleet signed a definitive agreement to purchase NatWest Bank, N.A. ("NatWest") for $2.7 billion in cash and up to an additional $560 million in accordance with an earnout provision. The earnout provision calls for an annual payment based upon the level of earnings from the NatWest franchise with a cap of $560 million over an eight-year period. Following the NatWest merger, Fleet will have approximately $90 billion in assets, reflecting reductions of Fleet's and NatWest's assets. In connection with the NatWest acquisition, Fleet is in the process of substantially restructuring its balance sheet to replace lower-yielding assets, primarily securities, with higher-earning assets acquired from NatWest and to replace higher-cost purchased funding with lower-cost deposits acquired from NatWest. As part of the corporation's balance sheet restructuring, $9.6 billion of securities were sold during the first quarter of 1996 resulting in a gain of $17.6 million. The acquisition of NatWest will add approximately 300 branches in New York and New Jersey. On May 1, 1996, the corporation completed the acquisition of NatWest. The corporation completed the purchases of NBB Bancorp, Inc. ("NBB"), the Business Finance Division of Barclays Business Credit, Inc. ("Barclays"), Plaza Home Mortgage Corporation ("Plaza"), and the repurchase of the 19% publicly-held shares of Fleet Mortgage Group, Inc., ("FMG") during the first quarter of 1995, and Northeast Federal Corp. ("Northeast") in June 1995. All of these transactions were accounted for under the purchase method of accounting. 8 FLEET FINANCIAL GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 The information below presents, on a pro forma basis, certain historical financial information for the corporation, adjusted for each of the NBB, Barclays, Plaza, FMG and Northeast transactions as if such transactions had been consummated on January 1, 1995. Pro Forma Results - ------------------------------------------- Three months ended March 31, 1995 (Dollars in millions, except per share data) - ------------------------------------------- Pro Forma-Fleet, NBB, Barclays, Plaza, FMG and Northeast Net income $220 Net income applicable to common 211 stockholders Net income per common share 0.79 - ------------------------------------------- Corporation as Reported Net income $226 Net income applicable to common 218 stockholders Net income per common share 0.82 - ------------------------------------------- NOTE 3. PREFERRED STOCK During the first quarter, the corporation issued $425 million of its preferred stock, $150 million and $275 million at fixed rates of 6.75% and 7.25%, respectively. On April 1, the corporation also issued $175 million of fixed/adjustable rate preferred stock with an initial rate of 6.60% for the first 10 years, after which the rate will adjust based on U.S. Treasury securities. The corporation intends to use the proceeds from these transactions for the purchase of NatWest. NOTE 4. LONG-TERM DEBT On March 25, 1996, the corporation received approval from the SEC for a $1.0 billion universal shelf registration statement for the issuance of common and preferred stock, senior and subordinated debt securities, and other securities. The new shelf was combined with Fleet's existing shelf and had $1.488 billion of securities available for issuance at March 31, 1996. Subsequent to March 31, 1996, the corporation issued $175 million of 6.60% preferred stock, $300 million of 7.125% subordinated debt, and $85 million of medium-term notes with interest rates ranging from 7.30% to 7.50%. These issuances in April further reduced the amounts available under the universal shelf registration to $928.4 million. 9 FLEET FINANCIAL GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 5. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS Cash-Flow Disclosure - ---------------------------------------------------- Three months ended March 31 Dollars in millions 1996 1995 - ---------------------------------------------------- Supplemental disclosure for cash paid during the period for: Interest expense $670 $651 Income taxes, net of refunds 24 33 - ---------------------------------------------------- - ---------------------------------------------------- Supplemental disclosure of noncash investing and financing activities: Transfer of loans to foreclosed property and repossessed equipment 7 24 Securitization of residential loans 498 --- Adjustment to unrealized gain/(loss) on securities available for sale (51 ) 222 Retirement of common stock 34 --- - ---------------------------------------------------- - ---------------------------------------------------- Assets acquired and liabilities assumed in business combinations were as follows: Assets acquired, net of cash and cash equivalents paid --- 5,557 Net cash and cash equivalents paid for businesses acquired --- (2,849) Liabilities assumed --- 2,512 Treasury stock reissued in connection with businesses acquired --- 196 - ---------------------------------------------------- NOTE 6. SUBSIDIARY MERGERS Effective April 1, 1996, the five national bank subsidiaries of Fleet Financial Group, Inc. located in Connecticut, Massachusetts and Rhode Island were merged into one national bank. Specifically, Fleet Bank, National Association, Fleet Bank of Massachusetts, National Association, Fleet National Bank of Massachusetts and Fleet National Bank merged with and into Fleet National Bank of Connecticut under the surviving name of Fleet National Bank. The main office of the surviving bank is located in Springfield, Massachusetts. Effective May 1, 1996, Fleet Mortgage Group, which formerly was a direct subsidiary of the parent company, became a subsidiary of the aforementioned Fleet National Bank. 10 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERALL PERSPECTIVE ----------------------------------------- Three months ended March 31 Dollars in millions, 1996 1995 except per share data ----------------------------------------- Earnings Net income $ 264 $ 226 Net interest income (FTE) (a) 732 769 ----------------------------------------- Per Common Share Fully diluted earnings $ 0.94 $ 0.82 Cash dividends 0.43 0.40 declared Book Value 22.90 22.49 ----------------------------------------- Operating Ratios Return on average 1.41 % 1.14 % assets Return on common 16.96 16.24 equity Efficiency ratio 60.6 62.1 Equity to assets 9.49 7.53 (period-end) ----------------------------------------- At March 31 Total assets $72,123 $81,862 Stockholders' equity 6,844 6,164 Nonperforming assets(b) 553 819 ----------------------------------------- (a) Prepared on a fully taxable equivalent (FTE) basis. The FTE adjustment included in net interest income was $8 million and $13 million for the three months ended March 31, 1996 and 1995, respectively. (b) Nonperforming assets and related ratios at March 31, 1996, do not include $307 million of nonperforming assets classified as held for sale or accelerated disposition. Fleet reported net income of $264 million, or $0.94 per fully diluted share, for the quarter ended March 31, 1996, compared to $226 million, or $0.82 per fully diluted share, in the first quarter of 1995. Return on average assets and return on equity improved to 1.41% and 16.96%, respectively, for the first quarter of 1996, from 1.14% and 16.24%, respectively, for the first quarter of 1995. These improved results reflect a stronger net interest margin, an increase in mortgage banking revenue, continued expense control, as well as increased revenues from several acquisitions consummated in the first six months of 1995, partially offset by an increase in mortgage servicing rights amortization and provision for credit losses. Additionally, the corporation recognized $60 million ($24 million post-tax) of branch divestitures gains and $17.6 ($10.9 million post-tax) million of securities gains during the first quarter of 1996. During the first quarter of 1995, the corporation realized a merger-related charge of $37 million ($23 million post-tax). Excluding this charge, net income was $203 million, or $.91 per fully diluted share. 11 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME STATEMENT ANALYSIS Net Interest Income ------------------------------------------- Three months ended March 31 FTE Basis Dollars in millions 1996 1995 ------------------------------------------- Interest income $1,337 $1,448 Tax-equivalent adjustment 8 13 Interest expense 613 692 ------------------------------------------- Net interest income $ 732 $ 769 ------------------------------------------- Net interest income on a fully taxable equivalent basis totaled $732 million for the three month period ended March 31, 1996, compared to $769 million for the same period of 1995. The $37 million decrease was principally caused by required divestitures of core deposits and the related sale of loans as a result of the Shawmut Merger and the corporation's balance sheet restructuring program designed to reduce lower-yielding assets, primarily securities, and paydown higher-cost wholesale funds in anticipation of the NatWest acquisition. Net Interest Margin and Interest-Rate Spread - ----------------------------------------------------- Three months ended 1996 1995 March 31 - ----------------------------------------------------- Taxable equivalent Average Average rates Balance Rate Balance Rate Dollars in millions - ----------------------------------------------------- Money market $ 699 5.11% $1,035 6.17 % instruments Securities 12,130 6.24 21,770 6.23 Loans and leases 49,497 8.61 48,806 9.05 Mortgages held for 2,085 7.48 564 8.52 resale Other 1,851 10.70 112 --- - ----------------------------------------------------- Total 66,262 8.15 72,287 8.14 interest-earning assets - ----------------------------------------------------- Deposits 41,249 3.92 42,164 3.76 Short-term borrowings 8,059 5.30 13,170 5.74 Long-term debt 6,080 6.92 6,313 7.37 - ----------------------------------------------------- Interest-bearing 55,388 4.45 61,647 4.55 liabilities - ----------------------------------------------------- Interest-rate spread 3.70 3.59 Interest-free sources 10,874 10,640 of funds - ----------------------------------------------------- Total sources of funds $66,262 3.72 %$72,287 3.87 % ===================================================== Net interest margin 4.43 % 4.27 % ===================================================== The net interest margin for the first quarter of 1996 increased 16 basis points to 4.43% from the first quarter of 1995. The increase in net interest margin is primarily attributable to a more favorable mix of interest-earning assets and interest-bearing liabilities as a result of the sale of approximately $9.6 billion of securities and the resultant paydown of higher-cost short- 12 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS term borrowings and wholesale deposits in anticipation of the NatWest acquisition. The margin also improved due to both acquisitions and loan growth during 1995 which also enabled the corporation to reduce its reliance on lower-yielding securities. Securities Portfolio - ---------------------------------------------- March Dec. 31, March 31, Dollars in 31, 1996 1995 1995 millions - ---------------------------------------------- Carrying value $10,091 $19,331 $21,009 Average maturity(a) 2.8 years 1.3 years 2.6 years Yield(b) 6.52% 6.10% 6.14% - ---------------------------------------------- (a) Average maturity relates to debt securities only and is calculated using repricing dates rather than contract maturities. (b) Relates to debt securities only. The average balance of securities decreased from $21.8 billion, or 30.2% of average interest earning assets, for the first quarter of 1995 to $12.1 billion or 18.2% of average interest earning assets for the same period of 1996. This $9.7 billion decrease reflects the corporation's balance sheet restructuring program in anticipation of the NatWest acquisition. Average loans and leases increased $691 million to $49.5 billion for the first quarter of 1996 due to acquisitions during the first half of 1995, as well as loan growth. Offsetting these items were $1.8 billion of loans divested, primarily residential loans, during the quarter as a result of the Shawmut Merger, which reduced average loans by $700 million, as well as the reclassification of $1.7 billion of loans, primarily consumer loans, to assets held for sale or accelerated disposition during the fourth quarter of 1995. The decrease in the yield on loans and leases from 9.05% for the first quarter of 1995 to 8.61% for the first quarter of 1996 corresponds to the approximate 50 basis point decline in the average prime rate for the first quarter of 1995 compared to the same period in 1996. The corporation expects average loans and leases to increase significantly as a result of the NatWest acquisition. Average deposits decreased $915 million to $41.2 billion for the first quarter of 1996 due to several factors including: the divestiture of $2.3 billion of deposits in connection with the Shawmut Merger, which reduced average deposits by $1.0 billion; proceeds generated from securities sold as part of the balance sheet restructuring program which were used to reduce higher-cost wholesale time deposits; and expected deposit runoff as a result of the acquisitions completed during 1995. These items were offset by deposits acquired through acquisitions. The net interest rate paid on average deposits rose to 3.92% for the first quarter of 1996 compared to 3.76% for the same period of 1995. The increase in cost of deposits reflects several factors including a more competitive environment for customer deposits and a shift in mix of deposits as customers have migrated to higher-yielding time deposits. The corporation expects core deposit funding to increase significantly as a result of the NatWest acquisition. The $5.1 billion decrease in average short-term borrowings is attributable to the partial use of proceeds from the sales of securities to pay down short-term borrowings, offset by the funding required to support the growth of the corporation's mortgages held for resale portfolio. Average long-term debt decreased $233 million from the first quarter of 1995 with a decrease in the average interest rate paid on long-term debt of 45 basis points as maturing higher-rate long-term debt was replaced by new issuances of lower-rate debt. The contribution to the net interest margin of interest-free sources during the first quarter of 1996 was 73 basis points compared to 68 basis points for the first quarter of 1995. This increase is primarily due to the issuance of preferred stock, the proceeds of which will be used to fund the NatWest acquisition which resulted in a higher percentage of interest-free sources of funds as a percentage of total sources of funds. However, dividends paid relating to the issuance of preferred stock reduces net income available to common shareholders. Noninterest Income - --------------------------------------------- Three months ended March 31 Dollars in millions 1996 1995 - --------------------------------------------- Mortgage banking revenue $124 $103 Service charges, fees and 119 120 commissions Investment services revenue 87 79 Student loan servicing fees 22 15 Trading revenue 8 9 Brokerage fees and 6 4 commissions Insurance 4 3 Securities available for 18 1 sale gains Gain from branch divestitures 60 --- Other noninterest income 71 68 - --------------------------------------------- Total noninterest income $519 $402 - --------------------------------------------- 13 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest income totaled $519 million for the first quarter of 1996 compared to $402 million for the same period in 1995, an increase of $117 million. The increase was due primarily to increases in mortgage banking revenue, student loan servicing fees, investment services revenue, gains from branch divestitures, and securities sales. Mortgage Banking Revenue - --------------------------------------------- Three months ended March 31 Dollars in millions 1996 1995 - --------------------------------------------- Net loan servicing revenue $ 93 $ 79 Mortgage production revenue 25 1 Gains on sales of mortgage 6 23 servicing ============================================= Total mortgage banking $124 $103 revenue ============================================= Mortgage banking revenue of $124 million in the first quarter of 1996 increased $21 million over the $103 million recorded in the same period of 1995, reflecting a $24 million increase in mortgage production revenue coupled with an 18% increase in loan servicing revenue from $79 million in the first quarter of 1995 to $93 million in the first quarter of 1996, offset by a $17 million decrease in gains on sales of servicing. Mortgage production revenue, which includes income derived from the loan origination process and net gains on sales of mortgage loans, has been positively impacted by a more favorable interest-rate environment in the first quarter of 1996. The first quarter of 1996 mortgage production revenue of $25 million includes $23 million of income from the adoption of Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights", which was adopted as of April 1, 1995. Loan servicing revenue represents fees received for servicing residential mortgage loans. The 18% increase in loan servicing revenue is attributable to the $18 billion increase in the corporation's servicing portfolio from $98 billion at March 31, 1995 to $116 billion at March 31, 1996. The increase in the servicing portfolio is primarily due to net acquisitions of $17.3 billion in 1995. The corporation sold mortgage servicing of approximately $1.0 billion and $3.3 billion in the first quarter of 1996 and 1995, respectively, resulting in pre-tax gains of $6 million and $23 million, respectively. The corporation's decision to sell any mortgage servicing rights depends on a variety of factors, including the available markets and current market prices for such servicing rights and the working capital requirements of the corporation. Thus, the likelihood or profitability of any such sales in the future cannot be predicted. 14 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Service charges, fees and commissions remained relatively consistent at $119 million for the first quarter of 1996 compared to $120 million for the first quarter of 1995 despite divesting $1.8 billion in loans and $2.3 billion in deposits during the quarter. Investment services revenue increased $8 million, or 10%, from the first quarter of 1995, due to a strong stock market during 1995 and 1996, which resulted in an increase in the overall value of assets managed. In connection with the Shawmut Merger, the corporation divested certain branches, loans and deposits. The corporation realized $60 million of gains ($24 million post-tax) from these divestitures. The corporation expects to recognize between $10 and $20 million in post-tax gains during the second quarter as these transactions are finalized. Securities gains increased $17 million for the first quarter of 1996 over the same period of 1995 as the corporation realized gains on sales of securities in conjunction with its balance sheet restructuring program. The likelihood of profitability of any such sales in the future cannot be predicted. The $7 million increase in student loan servicing fees from 1995 to 1996 is attributable to increased levels of servicing and originations over the prior year period at AFSA Data Corp., the corporation's student loan servicing subsidiary. Other noninterest income increased $3 million, due primarily to gains in equity capital investments at Fleet Private Equity of $26 million, compared to $8 million in gains for the same period in 1995. Offsetting this increase was lower income at the parent company in the first quarter of 1996 compared to the first quarter of 1995 due primarily to $10 million of interest received on a tax refund received in conjunction with a settlement with the Internal Revenue Service during the first quarter of 1995. 15 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest Expense - -------------------------------------------- Three months ended March 31 Dollars in millions 1996 1995 - -------------------------------------------- Employee compensation and $348 $361 benefits Occupancy 61 63 Equipment 57 50 Mortgage servicing rights 41 24 amortization Intangible asset amortization 25 22 Legal and other professional 23 18 Marketing 22 21 Printing and mailing 16 15 Telephone 16 15 Office supplies 14 12 Travel and entertainment 9 9 Credit card 6 4 OREO expense 3 5 FDIC assessment 2 29 Other 115 79 - -------------------------------------------- Total noninterest expense, before 758 727 merger-related charges Merger-related charges --- 37 - -------------------------------------------- ============================================ Total noninterest expense $758 $764 ============================================ Noninterest expense, before merger-related charges, for the first quarter of 1996 totaled $758 million compared to $727 million for the first quarter of 1995. The increase is primarily attributable to increased mortgage servicing rights amortization and implementation costs related to the Shawmut Merger as well as the impact of several purchase acquisitions completed late in the first quarter of 1995 and the second quarter of 1995, offset by cost savings achieved through ongoing successful merger integration and reductions in FDIC assessments. Employee compensation and benefits decreased $13 million, or 4%, primarily due to a reduction of 1,700 full time equivalent employees from 31,000 at March 31, 1995 to 29,300 at March 31, 1996. This reduction is a result of the continuing successful integration of the acquisitions completed during 1995 and branch divestitures in 1996. Mortgage servicing rights (MSR) amortization increased $17 million to $41 million for the first quarter of 1996 compared to $24 million for the first quarter of 1995. The increased level of MSR amortization reflects the impact of the repurchase of FMG, several large purchases in 1995, and the amortization of the investment in interest-rate contracts purchased to hedge the prepayment risk associated with the mortgage servicing portfolio (see page 22 for discussion of mortgage servicing rights prepayment risk-management), offset by a recovery of the mortgage servicing rights valuation reserve that was established at December 31, 1995. At March 31, 1996 the aggregate carrying value and fair value of the corporation's mortgage servicing rights (MSRs) was $1.4 billion and $1.7 billion, respectively. Intangible asset amortization expense increased $3 million on a year to year comparison over the first quarter of 1995 due to the completion of the NBB, Barclays, Plaza, FMG and Northeast transactions during the first half of 1995. Other expenses increased as a result of implementation costs associated with the Shawmut Merger and as a result of several acquisitions completed during 1995. FDIC assessment decreased $27 million as the assessment was virtually eliminated on all deposits except for thrift deposits insured by the Savings Association Insurance Fund ("SAIF"). The following table presents a summary of activity with respect to the corporation's merger-related charges for the three months ended March 31, 1996. The merger accrual was established in the fourth quarter of 1995 in connection with the Shawmut Merger. Merger Accrual - ---------------------------------------- Three months ended March 31, 1996 Dollars in millions - ---------------------------------------- Balance at beginning of year $335 Provision charged against --- income Cash outlays 55 Non-cash writedowns 3 ======================================== Balance at end of period $277 ======================================== 16 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The cash outlays made during the first three months of 1996 relate primarily to severance costs. The corporation's liquidity has not been significantly affected by these cash outlays. During the first three months of 1996, $12.8 million of incremental costs have been incurred relating to the Shawmut Merger and have not been charged against the merger accrual. It is anticipated that approximately $22 million of additional incremental costs will be incurred in 1996. The corporation expects that the remaining accrual balance of $277 million at March 31, 1996 will be sufficient to absorb the remaining merger-related costs. During the first quarter of 1995 the corporation incurred a merger-related charge of $37 million relating to the Shawmut Merger. 17 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income Taxes For the first quarter of 1996, the corporation recognized income tax expense of $186 million, an effective tax rate of 41.4%. Tax expense for the same period of 1995 was $148 million, an effective tax rate of 39.6%. The increase in the effective tax rate is attributable to a higher proportion of income being realized in higher tax rate jurisdictions as well as the nondeductibility of goodwill written off in conjunction with branch divestitures. Earnings by Subsidiary --------------------------------------------- Three months ended March 31 1996 1995 Dollars in millions --------------------------------------------- Banking Group New England $217 $173 New York 32 45 --------------------------------------------- Total Banking Group 249 218 --------------------------------------------- Financial Services Group Fleet Mortgage 17 16 Fleet Private Equity 15 4 Fleet Credit 7 5 AFSA 4 2 Fleet Capital 4 2 Other Financial Services 2 3 --------------------------------------------- Total Financial 49 32 Services Group --------------------------------------------- Parent (34 ) (24 ) --------------------------------------------- Total $264 $226 --------------------------------------------- The Banking Group generated $249 million and $218 million of income for the first quarter of 1996 and 1995, respectively. The results for the first quarter of 1996 were negatively impacted by a $27 million increase in provision for credit losses. However, the Banking Group benefited from an increase in noninterest income which was attributable to branch divestiture gains of $60 million ($24 million post-tax) and increased security gains of $17 million related to the balance sheet restructuring program. The Banking Group also benefited from lower noninterest expense of $65 million primarily due to a $37 million merger-related charge taken in the first quarter of 1995, lower FDIC assessments of $27 million, and other expense reductions, as the Banking Group generated cost savings from successful merger integration. Offsetting these benefits was lower net interest income of $45 million primarily due to deposit and loan divestitures and the balance sheet restructuring program. This group's nonperforming assets increased $41 million, or 9%, from December 31, 1995 to $481 million. The Financial Services Group's net income increased $17 million to $49 million in the first quarter of 1996. Fleet Mortgage, the corporation's mortgage banking subsidiary, contributed $17 million to Fleet's earnings for the quarter compared to earnings of $16 million in the first quarter of 1995, as increases in mortgage banking revenue were offset by higher levels of mortgage servicing rights amortization. Fleet Private Equity had net income of $15 million for the first quarter of 1996, compared to $4 million for the first quarter of 1995. Results for the first quarter of 1996 included $26 million of gains on equity capital investments compared to $8 million for the same period in 1995. Fleet Credit reported net income of $7 million for the first quarter of 1996, a $2 million increase over the $5 million of net income reported in the first quarter of 1995, reflecting the $810 million increase in lease volume over the prior year. AFSA Data Corp. contributed net income of $4 million for the first quarter of 1996 compared to $2 million for the same period in 1995. This increase reflects the additional volume of loans serviced. Fleet Capital earned $15 million in the first quarter of 1996, compared to $9 million in the first quarter of 1995. The increase in earnings is attributable to strong loan growth and expense control. After the application of goodwill and loan premium amortization relating to the purchase of Fleet Capital by the corporation on January 31, 1995, Fleet Capital recorded net income of $4 million for the first quarter of 1996 compared to $2 million for the first quarter of 1995. 18 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lines of Business The financial performance of the corporation is monitored by an internal profitability measurement system, which provides line of business results and key performance measures. The corporation is managed along the following business lines: Financial Services and National Consumer, Commercial Financial Services, Consumer Banking, Investment Services, Treasury, Equity Capital/Asset Collection, and All Other Banking. A comprehensive set of management accounting policies has been developed and implemented to ensure that reported results reflect the underlying economics of the businesses, and provide management with consistent reporting that facilitates evaluating business line performance on a risk-adjusted basis. Guidelines are in place for assigning expenses that are not directly incurred by businesses, such as overhead, operations and technology expense. Additionally, equity, loan loss provision and loan loss reserves are assigned on an economic basis. The corporation has developed a risk-adjusted methodology that quantifies risk types (i.e. credit, operating, market, fiduciary, etc.) within business units and assigns capital accordingly. Credit risk is quantified using a risk grading system, which is applied consistently across the company. Within each unit, assets and liabilities are match-funded utilizing similar maturity, liquidity and repricing information. All businesses are evaluated on a fully taxed basis. Management accounting concepts are periodically refined and results may be restated from time to time to reflect methodological enhancements and/or management organization changes. Although valuable in managing the enterprise, no authoritative guidance exists for management accounting, therefore, Fleet's reported results may not be comparable with results of other companies.
Selected Financial Highlights by Line of Business - --------------------------------------------------------------------------------------------------- Average Three months ended March 31, 1996 Net Average Loans Dollars in millions Revenues(a) Income ROE ROA Assets and Leases - --------------------------------------------------------------------------------------------------- Financial Services and National $ 224 $ 31 16.25 % 1.73 % $ $ 1,000 Consumer 7,307 Commercial Financial Services 247 52 15.36 0.80 25,925 24,375 Consumer Banking 487 63 17.44 1.70 14,923 12,445 Investment Services 110 20 49.26 4.93 1,655 1,413 Treasury 87 35 32.09 0.62 23,143 10,141 Equity Capital/Asset Collection 27 16 81.54 30.80 208 --- All Other 69 47 8.73 --- 1,866 123 - --------------------------------------------------------------------------------------------------- Total $1,251 $264 16.96 % 1.41 % $75,026 $49,497 - ---------------------------------------------------------------------------------------------------
(a) Includes net interest income (calculated on an FTE basis) and noninterest income. Financial Services and National Consumer The Financial Services and National Consumer business line earned $31.4 million in the first quarter of 1996. For the first quarter, Financial Services and National Consumer had a ROE of 16.25% and a ROA of 1.73%. This business group includes government banking, financial institutions, mortgage banking and student loan servicing. This business line holds a market leadership position in government banking deposits and cash management services provided in New England. In addition, Financial Services and National Consumer is the fourth largest mortgage servicer (loan portfolio in excess of $115 billion with 1.5 million households served), and is the largest third party student loan servicer in the country. 19 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Commercial Financial Services Commercial Financial Services earned $51.7 million in the first quarter. For the first quarter, ROE was 15.36% and ROA was 0.80%. This business line has a loan and lease portfolio in excess of $24 billion. Commercial Financial Services provides a full range of products and services to national, middle-market and commercial real estate customers as well as certain specialty businesses, including leasing, media and precious metals. This business group also includes Fleet Capital, a national asset-based lending business that was acquired in January, 1995. For the first quarter, Commercial Financial Services earned $62.7 million and had a ROE of 18.75%, excluding the impact of purchase premiums . Consumer Banking Consumer Banking earned $63.1 million in the first quarter. For the quarter, Consumer Banking had a ROE of 17.44% and a ROA of 1.70%. This business line includes retail banking, small business banking, and credit card products. This business serves as the major provider of funding for the corporation with total deposits in excess of $35 billion. These deposits are serviced through a network of more than 900 branches across Connecticut, Maine, Massachusetts, New Hampshire, New York and Rhode Island. For the first quarter, Consumer Banking earned $76.2 million and had a ROE of 21.25%, excluding the impact of purchase premiums. Investment Services Investment Services earned $20.3 million in the first quarter. For the quarter, Investment Services had a ROE of 49.26% and a ROA of 4.93%. This business line includes Fleet's investment management, personal financial services and discount brokerage businesses. The investment management business includes endowment and custody services, employee benefit management and mutual funds, led by the corporation's proprietary Galaxy fund family. Currently, Investment Services has in excess of $46 billion in assets under management. For the first quarter, Investment Services earned $21.6 million and had a ROE of 52.39%, excluding the impact of purchase premiums. Treasury The Treasury unit earned $35.4 million in the first quarter, had a ROE of 32.09% and a ROA of 0.62%. This business is responsible for managing the corporation's securities and residential mortgage portfolios, trading operations, asset/liability management (interest-rate risk) and wholesale funding needs of the corporation. During the quarter, Treasury sold $9.6 billion of securities with a resultant pretax gain of approximately $18 million. These transactions were initiated as an element of the corporation's balance sheet downsizing program in preparation for the second quarter acquisition of NatWest. Equity Capital/Asset Collection The Equity Capital/Asset Collection businesses earned $15.9 million in the first quarter. For the first quarter, this unit had a ROE of 81.54% and a ROA of 30.80%. Strong quarterly earnings resulted from rising values in the equity capital units' investments. RECOLL, the principal asset collection business, recorded earnings of $0.9 million, for the quarter. This business fulfilled its contract with its sole customer (the FDIC) in January, 1996 and ceased operations by quarter-end. All Other All Other includes the parent company and certain executive functions, as well as the differences between financial and economic allocation of loan loss provision, credit reserve and equity, and the mismatch unit which is used to shield the business units from interest-rate risk. During the first quarter of 1996, All Other had net income of $47 million which included $23 million (post-tax) related to branch divestiture gains. 20 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BALANCE SHEET ANALYSIS Total assets decreased from $84.4 billion at December 31, 1995 to $72.1 billion at March 31, 1996 as the aforementioned balance sheet restructuring, which was implemented in anticipation of the NatWest acquisition, reduced securities as well as wholesale time deposits and short-term debt. Additionally, the divestitures of both deposits and loans also contracted the balance sheet.
Securities - ---------------------------------------------------------------------------------------------------- March 31, 1996 December 31, 1995 March 31, 1995 -------------- ----------------- -------------- Amortized Market Amortized Market Amortized Market Dollars in millions Cost Value Cost Value Cost Value - ---------------------------------------------------------------------------------------------------- Securities available for sale: US Treasury and government $ 1,722 $ 1,703 $ 7,891 $ 7,889 $ 4,481 $ 4,355 agencies Mortgage-backed securities 7,011 7,005 8,457 8,470 7,067 6,882 Other debt securities 1 1 1,621 1,662 408 407 - ---------------------------------------------------------------------------------------------------- Total debt securities 8,734 8,709 17,969 18,021 11,956 11,644 - ---------------------------------------------------------------------------------------------------- Marketable equity securities 359 389 359 393 450 460 Other securities 145 145 119 119 155 155 - ---------------------------------------------------------------------------------------------------- Total securities available for $ 9,238 $ 9,243 $18,447 $18,533 $12,561 $12,259 sale - ---------------------------------------------------------------------------------------------------- Securities held to maturity: US Treasury and government $ $ $ $ $ 1,971 $ 1,901 agencies --- --- --- --- Mortgage-backed securities --- --- --- --- 4,097 3,995 State and municipal 736 741 687 695 902 905 Other debt securities 112 83 111 87 1,780 1,704 - ---------------------------------------------------------------------------------------------------- Total securities held to $ 848 $ 824 $ 798 $ 782 $ 8,750 $ 8,505 maturity - ---------------------------------------------------------------------------------------------------- Total securities $10,086 $10,067 $19,245 $19,315 $21,311 $20,764 - ----------------------------------------------------------------------------------------------------
The amortized cost of securities available for sale decreased significantly from $18.4 billion at December 31, 1995 to $9.2 billion at March 31, 1996, as the corporation executed its balance sheet restructuring program designed to sell lower-yielding securities and use the proceeds to pay down higher-cost wholesale funds in anticipation of the NatWest acquisition. During the first quarter of 1996, the corporation sold approximately $5.8 billion of U.S. Agency securities, $1.4 billion of mortgage-backed securities, and approximately $2.4 billion of other securities. The corporation recognized $17.6 million of gains as a result of these transactions. As a result of these actions, the corporation has substantially completed the downsizing of its securities portfolio in anticipation of the NatWest acquisition. The valuation reserve on securities available for sale declined to an unrealized appreciation level of $5 million at March 31, 1996 from an unrealized appreciation level of $86 million at December 31, 1995, due to unfavorable bond markets conditions at the end of the first quarter of 1996 and gains realized during the quarter. 21 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Loans and Leases -------------------------------------------- March Dec. 31, March Dollars in 31, 1995 31, millions 1996 1995 -------------------------------------------- Commercial and $21,931 $23,251 $22,771 industrial Lease financing 2,282 2,223 1,472 Commercial real estate: Construction 645 606 698 Interim/permanent 4,007 4,414 4,817 Residential real 9,370 11,475 9,708 estate Consumer 9,324 9,556 11,009 -------------------------------------------- Total loans and $47,559 $51,525 $50,475 leases ============================================ Total loans and leases decreased $3.9 billion from $51.5 billion at December 31, 1995 to $47.6 billion at March 31, 1996, primarily due to $1.8 billion of divestitures as a result of the Shawmut Merger and the impact of several other programs to reduce industry and product concentrations as a result of both the Shawmut and NatWest transactions, as well as portfolio runoff. Commercial and industrial (C&I) loans decreased $1.3 billion, due primarily to $450 million of divestitures and several large paydowns during the quarter. Lease financing increased $59 million from December 31, 1995 to March 31, 1996, as a result of new lease originations. Commercial real estate (CRE) loans decreased $368 million from December 31, 1995 to March 31, 1996. Outstanding residential real estate loans secured by one-to four-family residences decreased $2.1 billion to $9.4 billion at March 31, 1996, compared to $11.5 billion at December 31, 1995. The decrease was primarily due to $1.1 billion of divestitures and the impact of other programs designed to decrease the corporation's level of residential mortgages in anticipation of the NatWest acquisition. Consumer Loans - ----------------------------------------- March Dec. March Dollars in 31, 31, 31, millions 1996 1995 1995 - ----------------------------------------- Home equity $4,467 $4,791 $ 5,952 Credit card 1,674 1,588 1,515 Student loans 1,226 1,179 1,252 Installment/Other 1,957 1,998 2,290 - ----------------------------------------- Total $9,324 $9,556 $11,009 - ----------------------------------------- Consumer loans of $9,324 million at March 31, 1996 decreased $232 million when compared to the $9,556 million at December 31, 1995. Home equity loans decreased $324 million from December 31, 1995 to March 31, 1996 primarily due to $128 million of divestitures. Partially offsetting the decrease in consumer loans was an increase of $86 million in credit card loans from December 31, 1995, to March 31, 1996, as this portfolio continues to show strong growth, and a $47 million increase in student loans from December 31, 1995 to March 31, 1996 as a result of seasonal volume. 22 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nonperforming Assets(a) - -------------------------------------------------- Dollars in millions C & I CRE ConsumerTotal - -------------------------------------------------- Nonperforming loans and leases: Current or less than 90 days past due $128 $ 32 $ 9 $169 Noncurrent 135 59 136 330 OREO 4 35 15 54 - -------------------------------------------------- Total NPAs March 31, 1996 $267 $126 $160 $553 - -------------------------------------------------- Total NPAs December 31, 1995 $244 $112 $143 $499 ================================================== Total NPAs March 31, 1995 $254 $279 $286 $819 ================================================== (a) Throughout this document, NPAs and related ratios do not include loans greater than 90 days past due and still accruing interest ($180 million, $168 million and $170 million at March 31, 1996, December 31, 1995, and March 31, 1995, respectively), or assets subject to federal financial assistance ($16 million, $28 million and $55 million at March 31, 1996, December 31, 1995, and March 31, 1995, respectively). NPAs and related ratios at March 31, 1996 and December 31, 1995 do not include $307 million and $317 million of NPAs classified as held for sale or accelerated disposition. Nonperforming assets (NPAs) increased $54 million from December 31, 1995 to March 31, 1996, primarily due to increases in the commercial and industrial, and residential mortgage portfolios, as well as the expiration of a portion of loans subject to federal financial assistance. NPAs at March 31, 1996, as a percentage of total loans, leases and OREO, and as a percentage of total assets were 1.16% and 0.77%, respectively, compared to 0.97% and 0.59%, respectively, at December 31, 1995. The increase in Commercial and Industrial nonperforming assets was the result of a slight softening in the portfolio. The corporation's current view of this development is that it is transitory and does not represent a decline in overall portfolio quality. Residential mortgage nonperforming assets also increased as inflows remained consistent, but were not offset by a bulk sale as has been the case in four of the most recent twelve quarters. Additionally, the expiration of Fleet's federal financial assistance agreement that specifically related to the purchase of Eastland Bank in 1992 contributed to the increase in nonperforming assets. 23 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At March 31, 1996, the recorded investment in impaired loans was $323 million, substantially all of which were on nonaccrual status, compared to $295 million at December 31, 1995. Included in this quarter's amount is $285 million of impaired loans for which the related impairment reserve is $84 million, and $38 million of impaired loans that, due primarily to charge-offs, do not have an impairment reserve. The average recorded investment in impaired loans during the quarter was $317 million. Activity in Nonperforming Assets - --------------------------------------------- 1st 4th 1st Quarter Quarter Quarter Dollars in 1996 1995 1995 millions - --------------------------------------------- Balance at beginning $499 $771 $761 of period Additions 221 296 199 Acquisitions --- --- 46 Reductions: Payments/interest (88 ) (138 ) (101 ) applied Returned to (17 ) (11 ) (15 ) accrual Charge-offs/ writedowns (37 ) (84 ) (58 ) Sales/other (25 ) (18 ) (13 ) - --------------------------------------------- Total (167 ) (251 ) (187 ) reductions - --------------------------------------------- Subtotal 553 816 819 Assets held for sale or accelerated --- (317 ) --- disposition - --------------------------------------------- Balance at end of period $553 $499 $819 - --------------------------------------------- NPA totals and related ratios do not include nonperforming assets classified as held for sale or accelerated disposition. At March 31, 1996, NPAs classified as held for sale or accelerated disposition totaled $307 million as follows: Nonperforming Assets Held for Sale or Accelerated Disposition(a) - ---------------- -------- -------- ------ ----- Commer- Commer- cial cial Con- Dollars in and Real sumer Total millions IndustrialEstate - ---------------- -------- -------- ------ ----- Nonaccrual loans $46 $63 $176 $285 and leases OREO --- --- 22 22 - ---------------- -------- -------- ------ ----- Total March 31, 1996 $46 $63 $198 $307 - ---------------- -------- -------- ------ ----- Total December 31, 1995 $46 $77 $194 $317 - ---------------- -------- -------- ------ ----- (a) Nonperforming assets held for sale or accelerated disposition do not include loans greater than 90 days past due and still accruing interest ($19 million and $30 million at March 31, 1996 and December 31, 1995, respectively). Nonperforming assets held for sale or accelerated disposition decreased from $317 million at December 31, 1995 to $307 million at March 31, 1996. The decrease of $10 million is due to loan sales and payoffs in the commercial real estate area offset by the migration of consumer loans from the ninety day past due and still accruing interest category to nonaccrual. The commercial and industrial, and commercial real estate loans included as nonperforming assets held for sale or accelerated disposition are primarily loans originated by the corporation's banking franchise, while consumer loans were predominantly loans originated by Fleet Finance, the corporation's consumer finance subsidiary, that is currently held for sale as it no longer fits the core strategic business plan of the corporation. 24 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reserve for Credit Loss Activity - --------------------------------------------- Three months ended March 31, 1996 1995 Dollars in millions - --------------------------------------------- Balance at beginning of $1,321 $1,496 year Provision charged to 35 20 income Loans and leases charged off (83 ) (83 ) Recoveries of loans and leases charged off 23 24 Acquisition/other (9 ) 68 - --------------------------------------------- Balance at end of period $1,287 $1,525 - --------------------------------------------- Ratios of net charge-offs to 0.49 % 0.49 % average loans and leases - --------------------------------------------- Ratios of reserve for credit losses to period-end 2.71 3.02 loans and leases - --------------------------------------------- Ratio of reserve for credit losses to period-end 233 186 NPAs - --------------------------------------------- Ratio of reserve for credit losses to period-end 258 212 nonper-forming loans and leases - --------------------------------------------- Fleet's reserve for credit losses decreased $238 million from March 31, 1995, to $1,287 million at March 31, 1996. The first quarter 1996 provision for credit losses was $35 million, $15 million higher than the prior year's first quarter. Net charge-offs of $60 million remained relatively unchanged for the first quarter of 1996 when compared to the same period in 1995. Slight improvement of Fleet's credit quality ratios was noted when comparing the first quarter of 1996 results to the same period of 1995 as nonperforming asset levels have decreased over that period, primarily as a result of the reclassification of certain nonperforming assets to held for sale or accelerated disposition. Funding Sources - -------------------- --------- -------- --------- Dollars in March Dec. March millions 31, 1996 31, 1995 31, 1995 - ----------------- --------- -------- --------- Deposits: Demand $10,485 $12,305 $10,045 Regular savings, NOW, money market 21,783 22,835 23,077 Time: Domestic 16,163 17,554 16,896 Foreign 1,690 4,428 3,417 - ----------------- --------- -------- --------- Total deposits 50,121 57,122 53,435 - ----------------- --------- -------- --------- Short-term borrowed funds: Federal funds purchased 552 4,461 3,631 Securities sold under agreements to repurchase 3,258 2,964 6,584 Commercial paper 1,399 2,138 1,215 Other 1,964 3,006 2,533 - ----------------- --------- -------- --------- Total short- term borrowed 7,173 12,569 13,963 funds - ----------------- --------- -------- --------- Long-term debt 6,000 6,481 6,587 - ----------------- --------- -------- --------- Total $63,294 $76,172 $73,985 - ----------------- --------- -------- --------- Total deposits decreased $7.0 billion at March 31, 1996, when compared to December 31, 1995 primarily due to a reduction of $3.2 billion of higher-cost wholesale time deposits related to the balance sheet restructuring program and $2.3 billion of deposits divested as a condition to regulatory approval of the Shawmut Merger. Deposits were divested across all deposit categories and included $300 million of demand deposits, $1.1 billion of savings deposits, and $900 million of time deposits. Demand deposits also declined from year end due to seasonally high balances at December 31, 1995. 25 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total short-term borrowed funds decreased $5.4 billion at March 31, 1996, compared to December 31, 1995, primarily due to utilizing the proceeds from the sales of securities to pay down borrowed funds. Long-term debt decreased $481 million from year end due to scheduled maturities and early retirements. ASSET AND LIABILITY MANAGEMENT The Asset/Liability Management process at Fleet ensures that the risk to earnings from changes in interest rates is prudently managed. The corporation analyzes interest-rate sensitivity through sophisticated asset/liability simulation models. Simulation analysis provides a dynamic and detailed analysis of the earnings sensitivity of the balance sheet. Simulation analyses are used to examine the earnings impact of immediate interest-rate "shocks", gradual interest rate "ramps", yield curve "twists", as well as numerous other forecasted or planned scenarios. Within each scenario, the analysis incorporates what management believes to be the most reasonable assumptions about such variables as the prepayment rates on mortgages and the repricing of noncontractual deposits. Utilizing a 200 basis point immediate rate shock, the most recent earnings simulation projects net interest income for the next twelve months would decrease by less than 1% if rates changed by plus or minus 200 basis points. The projection is within the corporation's policy limit of 7.5%. Interest-rate gap analysis provides a static analysis of the repricing characteristics of the entire balance sheet. The following table represents the corporation's interest-rate gap position on March 31, 1996.
Interest-Rate Gap Analysis - --------------------------------------------------------------------------------------------- Cumulatively Repriced Within - --------------------------------------------------------------------------------------------- March 31, 1996 Dollars in millions 3 months 4 to 12 12 to 24 2 to 5 After 5 by repricing date or less months months years years Total - --------------------------------------------------------------------------------------------- Total Assets $35,970 $10,265 $4,620 $11,291 $9,977 $72,123 Total Liabilities 29,056 12,509 6,737 6,787 17,034 72,123 Net Off Balance Sheet (6,477 ) 1,188 1,794 3,981 (486 ) --- - --------------------------------------------------------------------------------------------- Periodic Gap 437 (1,056 ) (323 ) 8,485 (7,543 ) --- Cumulative Gap 437 (619 ) (942 ) 7,543 --- --- Cumulative Gap as a percent of 0.6 % (0.9 )% (1.3 )% 10.5 % Total Assets - --------------------------------------------------------------------------------------------- Cumulative Gap as a percent of Total Assets at December 31, 2.4 % 2.1 % 1.4 % 9.6 % 1995 - ---------------------------------------------------------------------------------------------
At March 31, 1996, the corporation's one year cumulative gap was 0.9% liability sensitive. This relatively neutral position represents a decline from the 2.1% asset sensitive position reported on December 31, 1995. Fleet's one year cumulative gap guideline is plus or minus 10% of total assets. The most significant factors which affected the interest-rate risk position in the first quarter included the divestiture of loans and deposits related to the Shawmut Merger, investment portfolio programs to reduce and restructure the investment portfolio prior to the NatWest acquisition, and the execution of interest-rate swaps to offset the change in interest-rate risk resulting from these divestitures and portfolio sales. In its management of these and other factors influencing the current environment, the corporation has targeted a strategy to maintain a relatively neutral interest-rate risk position. 26 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The corporation uses interest-rate instruments to manage interest-rate risk within management guidelines limiting risk to earnings. Since interest-rate instruments are used to manage the interest-rate risk of specific assets and liabilities, the analysis considers the interest-rate sensitivity of specific portfolios, as well as the sensitivity of the entire balance sheet. Derivative instruments totaling $16.7 billion (notional amount) are being used for interest-rate risk-management purposes. These derivative instruments consist primarily of interest-rate swaps.
Interest-Rate Risk-Management Instrument Analysis - -------------------------------------------------------------------------------------------------------------- Weighted Assets/ Average Weighted Average March 31, 1996 Notional Liabilities Maturity Fair Rate Dollars in millions Value Hedged (Years) Value Receive Pay - -------------------------------------------------------------------------------------------------------------- Interest-rate risk management swaps: Receive fixed/pay variable $ 3,932 Variable rate loans Fixed rate 2,462 deposits Short-term 635 borrowings 1,149 Long-term debt --------- 8,178 2.4 $(15 ) 6.68 % 6.10 % - ------------------------------------------------------------------------------------------------------------- Pay fixed/receive variable 1,785 Short-term 2.0 (27 ) 5.15 5.47 borrowings - ------------------------------------------------------------------------------------------------------------- Basis swaps 85 Deposits 1,115 Long-term debt 3,092 Securities --------- 4,292 2.1 (8 ) 5.58 5.57 - ------------------------------------------------------------------------------------------------------------- Index-amortizing swaps receive 1,467 Variable rate 1.0 (1 ) 5.15 5.47 fixed/pay variable loans - ------------------------------------------------------------------------------------------------------------- Total interest-rate swaps $15,722 $(51 ) 6.06 % 5.83 % - ------------------------------------------------------------------------------------------------------------- Total other instruments(a) 962 Short-term 0.8 6 --- (b) --- (b) borrowings - ------------------------------------------------------------------------------------------------------------- Total interest-rate instruments $16,684 2.0 $(45 ) 6.06 % 5.83 % =============================================================================================================
(a) Other instruments include interest rate caps and floors. (b) Average rates are not meaningful for interest rate caps and floors. At March 31, 1996, the corporation had approximately $15.7 billion of interest-rate swaps outstanding for interest-rate risk-management purposes. In addition to interest-rate swap agreements, the corporation utilizes interest-rate cap and floor agreements to manage the interest-rate risk. Interest-rate cap and floor agreements are similar to interest-rate swap agreements except that interest payments are only made or received if current interest rates rise above/below a predetermined interest rate. At March 31, 1996, the corporation has approximately $962 million in notional amounts of purchased interest-rate cap and floor agreements. The periodic net settlement of interest-rate risk-management instruments is recorded as an adjustment to net interest income. As of March 31, 1996, the corporation has net deferred income of $30.2 million relating to terminated interest-rate contracts, which will be amortized over the remaining life of the underlying interest-rate contracts of approximately 3 years. 27 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The interest-rate risk-management instrument activity for the three months ended March 31, 1996 is summarized in the following table (all amounts are notional amounts):
====================================================================================== Interest-Rate Risk-Management Instrument Activity ====================================================================================== Interest-Rate Swaps ------------------------------------- Receive Pay- Index- Other Dollars in millions Fixed Fixed Basis Amortizing Instruments Total - -------------------------------------------------------------------------------------- Balance at December 31, 1995 $5,776 $1,885 $2,742 $2,038 $766 $13,207 Additions 2,772 --- 1,550 --- 196 4,518 Maturities (370 ) (100 ) --- (571 ) --- (1,041) Terminations --- --- --- --- --- --- - -------------------------------------------------------------------------------------- Balance at March 31, 1996 $8,178 $1,785 $4,292 $1,467 $962 $16,684 - --------------------------------------------------------------------------------------
The maturities of the interest-rate risk-management instruments are shown in the following table: Maturities of the Interest-Rate Risk-Management Instruments
- -------------------------------------------------------------------------------------- March 31, 1996 Within 1 to 2 2 to 3 3 to 4 4 to 5 After 5 Dollars in millions 1 year Years Years Years Years Years Total - -------------------------------------------------------------------------------------- Notional amounts: Interest-rate swaps Receive-fixed $ 726 $2,404 $3,612 $ 457 $699 $280 $8,178 Pay-fixed 455 660 --- 650 --- 20 1,785 Basis 735 1,045 2,512 --- --- --- 4,292 Index-amortizing 1,267 --- 200 --- --- --- 1,467 - -------------------------------------------------------------------------------------- Total interest-rate swaps $3,183 $4,109 $6,324 $1,107 $699 $300 $15,722 - -------------------------------------------------------------------------------------- Other interest-rate instruments 300 512 150 --- --- --- 962 - -------------------------------------------------------------------------------------- Total interest-rate instruments $3,483 $4,621 $6,474 $1,107 $699 $300 $16,684 - --------------------------------------------------------------------------------------
Mortgage Servicing Rights Prepayment Risk-Management. The corporation also uses interest-rate contracts to manage the prepayment risk associated with the corporation's mortgage servicing portfolio. The value of the corporation's mortgage servicing portfolio may be adversely impacted if mortgage interest rates decline and actual or estimated loan prepayments increase. As a result, the carrying value of the corporation's mortgage servicing rights are subject to a great degree of volatility in the event of unanticipated prepayments or defaults. To mitigate the risk related to adverse changes in interest rates and the potential resultant impairment to MSRs, the corporation holds interest-rate contracts (primarily purchased interest-rate floor contracts and purchased-call option contracts on US Treasury securities). During the first quarter of 1996, such contracts were designated as hedges, and changes in the value, net of amortization, were recorded as adjustments to the carrying value of the underlying assets. At March 31, 1996, unrecognized losses of $45 million had been recorded as adjustments to the carrying value of the underlying assets. Investments in interest-rate contracts are amortized over the life of the contracts and are included as a component of mortgage servicing rights amortization. 28 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mortgage Servicing Rights Prepayment Risk- Management Instruments - ----------------------------------------------- InteresInterest-Purchased March 31, Rate Rate Call 1996 Floors Caps Options Total Dollars in millions - ----------------------------------------------- Balance at Decem- $5,885 $ 200 $ 825 $6,910 ber 31, 1995 Additions 1,075 --- 1,255 2,330 --- --- (300 ) (300 ) Maturities --- --- (900 ) (900 ) Terminations - ----------------------------------------------- Total $6,960 $ 200 $ 880 $8,040 - ----------------------------------------------- Fair value $ 28.7 $ (0.6 ) $ 0.2 $ 28.3 - ----------------------------------------------- Average maturity 4.18 4.27 0.25 3.75 (years) - ----------------------------------------------- The above instruments are used in an effort to protect the economic value of the corporation's mortgage servicing rights. Interest-rate caps and floors have a strike price that are indexed to the 5 to 10 year constant maturity treasury rate. Purchased-call options consist of option contracts on long-term US Treasury securities. The following table presents the maturity of the mortgage servicing rights prepayment risk-management instruments. Maturities of the Mortgage Servicing Rights Prepayment Risk-Management Instruments - --------------- -------- ----- ------ ------- March 31, 1996 Within 3 to 4 4 to 5 Dollars in 1 Year Years Years Total millions - --------------- -------- ----- ------ ------- Interest-rate $ --- $700 $6,260 $6,960 floors Interest-rate --- --- 200 200 caps Purchased call options 880 --- --- 880 - --------------- -------- ----- ------ ------- Total $880 $700 $6,460 $8,040 - --------------- -------- ----- ------ ------- LIQUIDITY The primary sources of liquidity at the parent level are interest and dividends from subsidiaries and access to the capital and money markets. The corporation's subsidiaries rely on cash flows from operations, core deposits, borrowings, short-term high-quality liquid assets, and in the case of nonbanking subsidiaries, excluding Fleet Mortgage, funds from the parent for liquidity. During the first quarter of 1996, the parent received $249 million in interest and dividends from subsidiaries and paid $175 million in interest and dividends to third parties. Dividends paid by the corporation's banking subsidiaries are limited by various regulatory requirements related to capital adequacy and historical earnings. As shown in the consolidated statement of cash flows, cash and cash equivalents increased by $547 million during the three month period ended March 31, 1996. This increase was due to cash provided by investing activities of $12.8 billion and cash provided by operating activities of $253 million, offset by cash used in financing activities of $12.5 billion. Net cash provided by investing activities was attributable to a net decrease in securities primarily due to balance sheet restructuring in preparation for the NatWest acquisition and a net decrease in loans. Net cash used in financing activities was due to a decrease in deposits of $7.0 billion relating primarily to balance sheet restructuring and divestitures and a $5.4 billion paydown of short-term borrowings from cash generated from the balance sheet restructuring, offset by the corporation issuing $425 million in preferred stock. FMG had a separate funding program that included a revolving-warehouse credit agreement of $1.8 billion at March 31, 1996. FMG had $1.0 billion outstanding under the credit agreement at March 31, 1996, compared to $425 million at December 31, 1995. FMG also had a shelf registration that provided for the issuance of debt securities and at March 31, 1996, $100 million of debt securities were available for future issuance. FMG sold commercial paper to fund short-term needs. At March 31, 1996, FMG had commercial paper outstanding of $784 million compared to $1.4 billion at December 31, 1995. On May 1, 1996, FMG became a subsidiary of a Fleet bank affiliate and as a result, it is anticipated that substantially all future funding will be provided by such bank. FMG's revolving credit agreement will be paid off and canceled, and all other debt is expected to be paid as it matures. 29 At March 31, 1996 and December 31, 1995, the parent company had commercial paper outstanding of $615 million and $772 million, respectively. The corporation has backup lines of credit to ensure that funding is not interrupted if commercial paper is not available. The total amount of funds available under these agreements was $1.0 billion at both March 31, 1996 and December 31, 1995, with no outstanding balance under these lines of credit. Fleet has a universal shelf registration that provides for the issuance of common and preferred stock, senior or subordinated debt securities, and other securities with total amount of funds available of approximately $1,488 million at March 31, 1996. Subsequent to March 31, 1996, the corporation issued $175 million of 6.60% preferred stock, $300 million of 7.125% subordinated debt, and $85 million of medium-term notes with interest rates ranging from 7.30% to 7.50%. These issuances further reduced the amounts available under the universal shelf registration to $928.4 million. CAPITAL - ----------------------------------------------- March Dec. March 31, 31, 31, 1996 1995 1995 - ----------------------------------------------- Risk-adjusted assets $63,676 $69,384 $63,987 Tier 1 risk-based capital (4% 9.18 % 7.62 % 8.45 % mini- mum) Total risk-based capital 13.02 11.29 12.47 (8% minimum) Leverage ratio 7.90 6.41 6.83 Common equity- 8.35 7.07 6.70 to- assets Total equity-to- 9.49 7.54 7.53 assets Tangible total equity- 8.13 6.30 6.44 to-assets Capital in excess of minimum reuire- ments: Tier 1 risk- $3,298 $2,507 $2,849 based Total 3,198 2,280 2,862 risk-based Leverage 2,886 1,983 2,241 - ----------------------------------------------- At March 31, 1996, the corporation exceeded all regulatory required minimum capital ratios. The corporation's ratios exceeded December 31, 1995 due to the issuance of additional preferred stock. Decreased risk-adjusted assets reflects the divestiture of assets related to the Shawmut Merger. The corporation anticipates that the capital ratios will decrease from March 31, 1996 levels as a result of the consummation of the NatWest acquisition on May 1, 1996; however, such ratios are still expected to exceed minimum regulatory required levels. RECENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the corporation adopted on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles to be held, be reviewed for impairment whenever management becomes aware of events or changes in circumstances indicating that the carrying amount of an asset may not be recoverable. An impairment loss based on the fair value of the asset is recognized if the expected cash flows from the use and eventual disposition of the asset, on an undiscounted basis and without interest charges, are less than the carrying amount of the asset. Long-lived assets and certain identifiable intangibles to be disposed of are required to be reported at the lower of the carrying amount or fair value less cost to sell, except for assets being disposed of in connection with the disposal of a segment of a business, which will continue to be reported at the lower of the carrying amount or net realizable value. Adoption of this statement did not have a material impact on the corporation or its results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for employee stock options and similar equity instruments. This statement also permits companies to continue to measure compensation costs for these plans using the current accounting method which is intrinsic value based. Companies that elect to continue to use the intrinsic value method must provide pro forma disclosure of net income and earnings per share as if the fair value method of accounting had been applied. This standard is effective for the year ended December 31, 1996. The corporation continues to use the intrinsic value based method of accounting and will provide the additional disclosure on the pro forma impact of the fair value based method under SFAS No. 123 in the 1996 annual report for awards granted in both 1995 and 1996. 30 PART II. ITEM 6. (a) Exhibit Index Page of Exhibit this Number Report ------- ------- 4 Instruments defining the right of security holders, including * debentures 11 Statement re-computation of per share earnings 28 12 Statement re-computation of ratios 29 27 Financial data schedule 31 * Registrant has no instruments defining the rights of holders of equity or debt securities where the amount of securities authorized thereunder exceeds 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. (b) Twelve Form 8-K's were filed during the period from January 1, 1996 to the date of the filing of this report. - Current Report on Form 8-K dated January 17, 1996 announcing 1995 and fourth quarter earnings. - Current Report on Form 8-K dated January 19, 1996 filing its Supplemental Consolidated Financial Statements. - Current Report on Form 8-K dated February 8, 1996 filing the Unaudited Pro Forma Combined Financial Statements and NatWest historical financial statements, both as of September 30, 1995, and notes thereto, in connection with the NatWest Merger. - Current Report on Form 8-K dated February 21, 1996, reporting the issuance and sale of (a) 11,000,000 Depositary Shares, each representing a one-tenth interest in a share of Registrant's Series V 7.25% Perpetual Preferred Stock at a purchase price of $25 per Depositary Share and (b) 3,000,000 Depositary Shares, each representing a one-fifth interest in a share of Registrant's Series VI 6.75% Perpetual Preferred Stock at a purchase price of $50 per Depositary Share. - Current Report on Form 8-K dated March 15, 1996, filing the Unaudited Pro Forma Combined Financial Statements as of December 31, 1995, and notes thereto, in connection with the NatWest Merger, and the Registrant's 1995 historical financial statements and notes thereto, management's discussion and analysis, and selected financial highlights, as amended by a Form 8-K/A dated April 5, 1996. - Current Report on Form 8-K dated March 25, 1996, filing the Consolidated Financial Statements of NatWest as of December 31, 1995. - Current Report on Form 8-K dated March 26, 1996, reporting the issuance and sale of 3,500,000 Depositary Shares, each representing a one-fifth interest in a share of Series VII Fixed/Adjustable Rate Cumulative Preferred stock at a purchase price of $50 per Depositary Share. 31 PART II. ITEM 6. (continued) - Current Report on Form 8-K dated March 27, 1996, reporting the closing of Fleet's medium-term note programs, Series J and K. - Current Report on Form 8-K dated April 1, 1996, reporting the merger of the southern New England national banks and litigation relating thereto. - Current Report on Form 8-K dated April 15, 1996, reporting the issuance and sale of $300 million 7 1/8% Subordinated Notes due April 15, 2006. - Current Report on Form 8-K dated April 17, 1996, announcing 1996 first quarter earnings. - Current Report on Form 8-K dated May 1, 1996, the closing of the NatWest acquisition. 32 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fleet Financial Group, Inc. ---------------------------- (Registrant) /s/ Eugene M. McQuade ---------------------------- Eugene M. McQuade Executive Vice President Chief Financial Officer /s/ Robert C. Lamb, Jr. ---------------------------- Robert C. Lamb, Jr. Chief Accounting Officer Controller DATE: May 10, 1996 EX-11 2 EXHIBIT 11 FLEET FINANCIAL GROUP, INC. COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS ($ in thousands, except per share data)
For the Three Months Ended March 31 ----------------------------------------------------------------------- 1996 1995 -------------------------------- ---------------------------------- FULLY FULLY PRIMARY DILUTED PRIMARY DILUTED ---------------- ---------------- ------------- ---------------- Equivalent shares: Average shares outstanding 262,525,888 262,525,888 242,678,428 242,678,428 Additional shares due to: Stock options 2,163,012 2,178,472 1,661,789 1,690,109 Warrants 3,663,854 3,671,654 3,346,635 3,377,788 Dual convertible preferred --- --- 16,033,994 16,033,994 stock(a) ---------------- ---------------- --------------- ---------------- Total equivalent shares 268,352,754 268,376,014 263,720,846 263,780,319 ---------------- ---------------- --------------- ---------------- Earnings per share Net income $263,802 $263,802 $225,993 $225,993 Less: Preferred stock dividends (12,538 ) (12,538 ) (8,432 ) (8,432 ) ---------------- ---------------- --------------- ---------------- Adjusted net income $251,264 $251,264 $217,561 $217,561 ---------------- ---------------- --------------- ---------------- Total equivalent shares 268,352,754 268,376,014 263,720,846 263,780,319 ---------------- ---------------- --------------- ---------------- Earnings per share on adjusted net income $0.94 $0.94 $0.83 $0.82 ---------------- ---------------- --------------- ----------------
(a) The dual convertible preferred stock was converted into common stock on December 31, 1995. EX-12 3 EXHIBIT 12 FLEET FINANCIAL GROUP, INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS EXCLUDING INTEREST ON DEPOSITS (thousands)
Three months ended March 31 Year ended December 31 - ------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------- Earnings: Income (loss) before income taxes, extra-ordinary credit and cumulative effect of change in method of accounting $450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $(16,375) Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 210,925 1,278,598 990,395 751,754 638,430 728,337 (2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524 (b) Preferred dividends 21,396 62,064 48,859 60,365 65,658 24,220 - ------------------------------------------------------------------------------------------------------- (c) Adjusted earnings $ 694,355 $2,424,339 $2,469,490 $1,958,829 $1,370,654 $778,706 - -------------------------------------------------------------------------------------------------------- Fixed charges and preferred dividends $ 244,217 $1,390,583 $1,089,851 $ 864,373 $ 753,285 $795,081 - -------------------------------------------------------------------------------------------------------- Adjusted earnings/fixed charges 2.84x 1.74x 2.27x 2.27x 1.82x 0.98x* - -------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Three months ended Year ended December 31 March 31 - ---------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------- Earnings: Income (loss) before income taxes, extraordinary credit and cumulative effect of change in method of accounting $ 450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $ (16,375) Adjustments: (a) Fixed charges: (1) Interest on 210,925 1,278,598 990,395 751,754 638,430 728,337 borrowed funds (2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524 (3) Interest on deposits 402,316 1,726,403 1,170,532 1,165,046 1,698,804 2,414,060 (b) Preferred dividends 21,396 62,064 48,859 60,365 65,658 24,220 - ---------------------------------------------------------------------------------------------------- (c) Adjusted earnings $1,096,671 $4,150,742 $3,640,022 $3,123,875 $3,069,458 $3,192,766 - ---------------------------------------------------------------------------------------------------- Fixed charges and preferred $ 646,533 $3,116,986 $2,260,383 $2,029,419 $2,452,089 $3,209,141 dividends - ---------------------------------------------------------------------------------------------------- Adjusted earnings/fixed charges 1.70x 1.33x 1.61x 1.54x 1.25x 0.99x * - ----------------------------------------------------------------------------------------------------
* Note that adjusted earnings are inadequate to cover fixed charges, the deficiency being $16,375 for both the ratio excluding and including interest on deposits. 33 EXHIBIT 12 FLEET FINANCIAL GROUP, INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS (thousands)
Three months ended March 31 Year ended December 31 - ---------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------- Earnings: Income (loss) before income taxes, extra- ordinary credit and cumulative effect of change in method of accounting $450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $(16,375) Adjustments: (a) Fixed charges: (1) Interest on 210,925 1,278,598 990,395 751,754 638,430 728,337 borrowed funds (2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524 - ---------------------------------------------------------------------------------------------------- (b) Adjusted earnings $672,959 $2,362,275 $2,420,631 $1,898,464 $1,304,996 $754,486 - ---------------------------------------------------------------------------------------------------- Fixed charges and preferred dividends $222,821 $1,328,519 $1,040,992 $ 804,008 $ 687,627 $770,861 - ---------------------------------------------------------------------------------------------------- Adjusted earnings/fixed charges 3.02x 1.78x 2.33x 2.36x 1.90x 0.98x * - ---------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Three months ended Year ended December 31 March 31 - ---------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------- Earnings: Income (loss) before income taxes, extra- ordinary credit and cumulative effect of change in method of accounting $ 450,138 $1,033,756 $1,379,639 $1,094,456 $ 617,369 $ (16,375) Adjustments: (a) Fixed charges: (1) Interest on 210,925 1,278,598 990,395 751,754 638,430 728,337 borrowed funds (2) 1/3 of Rent 11,896 49,921 50,597 52,254 49,197 42,524 (3) Interest 402,316 1,726,403 1,170,532 1,165,046 1,698,804 2,414,060 on deposits - ---------------------------------------------------------------------------------------------------- (b) Adjusted earnings $1,075,275 $4,088,678 $3,591,163 $3,063,510 $3,003,800 $3,168,546 - ---------------------------------------------------------------------------------------------------- Fixed charges and preferred dividends $ 625,137 $3,054,922 $2,211,524 $1,969,054 $2,386,431 $3,184,921 - ---------------------------------------------------------------------------------------------------- Adjusted earnings/fixed charges 1.72x 1.34x 1.62x 1.56x 1.26x 0.99x * - ----------------------------------------------------------------------------------------------------
* Note that adjusted earnings are inadequate to cover fixed charges, the deficiency being $16,375 for both the ratio excluding and including interest on deposits. 34 EX-27 4
9 This schedule contains restated summary financial information for the March 31, 1995 quarter giving effect to the merger of Shawmut National Corporation with and into Fleet, accounted for as a pooling of interests and consummated on November 30, 1995. 1,000,000 3-MOS DEC-31-1995 MAR-31-1995 3,495 352 524 92 12,259 8,750 8,505 50,475 1,525 81,862 53,435 13,963 1,712 6,587 0 682 2,861 2,621 81,862 1,103 345 0 1,448 391 692 756 20 1 764 374 374 0 0 226 0.83 0.82 4.27 718 170 0 0 1,496 83 24 1,525 1,525 0 0
EX-27 5
9 This schedule contains summary financial information extracted from the March 31, 1996 consolidated financial statements and management's discussion and analysis of financial condition and results of operations contained in the Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1996 MAR-31-1996 3,287 18 1,808 98 9,243 848 824 47,559 1,287 72,123 50,121 7,173 1,985 6,000 0 824 3,125 2,895 72,123 1,144 193 0 1,337 402 613 724 35 18 758 450 450 0 0 264 0.94 0.94 4.43 499 180 0 0 1,321 83 23 1,287 1,287 0 0
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