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SECURITIES AND EXCHANGE COMMISSION FORM 10-K
WASHINGTON, D.C. 20549
(MARK ONE)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1994
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 1-9839
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FIRST FIDELITY BANCORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2826775
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification
No.)
550 BROAD STREET 123 SOUTH BROAD STREET
NEWARK, NEW JERSEY 07102 PHILADELPHIA, PENNSYLVANIA 19109
(201)565-3200
(Address and telephone number, including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
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Common Stock, par value $1.00 per share New York Stock Exchange, Inc.
Series B Convertible Preferred Stock,
par value $1.00 per share New York Stock Exchange, Inc.
Series D Adjustable Rate Cumulative Preferred Stock,
par value $1.00 per share New York Stock Exchange, Inc.
Depositary Shares, each representing a 1/40th interest in a
share of
Series F 10.64% Preferred Stock, par value $1.00 per share New York Stock Exchange, Inc.
Preferred Share Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates as of January 31,
1995 was approximately $2.8 billion.
Number of shares of Common Stock outstanding as of January 31, 1995: 80,793,938.
Documents incorporated by reference:
Portions of the definitive proxy statement for the 1995 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part III.
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FIRST FIDELITY BANCORPORATION
Table of Contents
PAGE
PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 10
Item 3. Legal Proceedings............................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
Item 4A. Executive Officers of the Registrant......................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder
Matters...................................................... 13
Item 6. Selected Financial Data...................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations........................................ 15
Item 8. Financial Statements and Supplementary Data.................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 76
PART III
Item 10. Directors of the Registrant.................................. 76
Item 11. Executive Compensation....................................... 76
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 76
Item 13. Certain Relationships and Related Transactions............... 76
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..................................................... 76
SIGNATURES................................................................ 78
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PART I
ITEM 1. BUSINESS
GENERAL
First Fidelity Bancorporation (the "Company" or "First Fidelity") is a bank
holding company which was organized as a corporation under New Jersey law in
1987. On February 29, 1988, the Company became the successor to and the holder
of all of the capital stock of First Fidelity Incorporated ("FFI"), a New Jersey
bank holding company, and Fidelcor, Inc., a Pennsylvania bank holding company.
The Company has a centralized organizational structure, with uniform
policies and procedures. Functions such as asset and liability management,
corporate operations and systems, credit policy, audit, legal services, employee
hiring and benefits and financial planning are conducted at the holding company
level, while day-to-day banking activities are managed by the Company's two bank
subsidiaries (collectively, the "Subsidiary Banks"). Important management
decisions are addressed at bi-weekly meetings of the Office of the Chairman of
the Company, chaired by Anthony P. Terracciano, Chairman of the Board of
Directors, Chief Executive Officer and President of the Company, and including
Wolfgang Schoellkopf, Vice Chairman and Chief Financial Officer of the Company,
Peter C. Palmieri, Vice Chairman and Chief Credit Officer of the Company, Leslie
E. Goodman, Senior Executive Vice President of the Company, Roland K. Bullard
II, Senior Executive Vice President of the Company and Donald C. Parcells,
Senior Executive Vice President of the Company.
As of December 31, 1994, the Subsidiary Banks operated a general banking
business from 701 full-service offices located in New Jersey, eastern
Pennsylvania, Connecticut, Maryland and southern New York State. The Subsidiary
Banks also have offices in London, the Cayman Islands and New York City. As of
December 31, 1994, the Company and its subsidiaries employed approximately
12,000 persons on a full-time basis. For information with respect to
contemplated branch consolidations and personnel reductions, see
"Business -- 1995 Cost Reduction Program".
RECENT TRANSACTIONS
During 1994, the Company entered into a variety of transactions which, in
the aggregate, were significant to its business, operations and structure,
including the following:
(i) ACQUISITIONS. During 1994, the Company expanded its branch
network into Maryland, significantly strengthened its presence in New York,
and filled in gaps in its branch network in Pennsylvania and Connecticut.
In addition, the Company announced that it had entered into agreements to
acquire a banking institution in Wilmington, Delaware. This acquisition is
expected to be consummated in the first quarter of 1995. The transactions
are summarized below:
COMPLETED ACQUISITIONS
a. On January 31, 1994, the Company completed its acquisition for
$41.9 million in cash of Greenwich Financial Corporation and its
subsidiary, Greenwich Federal Savings and Loan Association ("Greenwich
Federal"), which had $410 million in assets and seven branches. Greenwich
Federal operated in the Greenwich/Stamford area of Fairfield County,
Connecticut.
b. On March 25, 1994, the Company acquired BankVest Inc. and its two
branch and $99 million in assets subsidiary First Peoples National Bank
of Edwardsville, Pennsylvania, for $19.7 million in cash.
c. On May 12, 1994, the Company completed the acquisition of The
Savings Bank of Rockland County, of Spring Valley, New York, an
organization with $184 million in assets, for $5.9 million in cash.
d. On June 10, 1994, the Company acquired four branches ($62 million
in deposits) of the John Hanson Federal Savings Bank from the Resolution
Trust Corporation. These branches were acquired by First Fidelity Bank,
FSB, a newly formed thrift subsidiary of the Company having its
headquarters in Beltsville, Maryland.
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e. On August 20, 1994, the Company completed the acquisition of
First Inter-Bancorp Inc., Fishkill, New York, for $56 million in cash.
First Inter-Bancorp's subsidiary, Mid-Hudson Savings Bank, with $504
million in assets and sixteen branches, was merged into First Fidelity
Bank, N.A., New York.
f. On November 18, 1994, First Fidelity Bank, N.A. acquired two
branches, located in Brodheadsville and Effort, in Monroe County
Pennsylvania, from PNC Bank, N.A.
g. On November 29, 1994, First Fidelity completed the acquisition of
Baltimore Bancorp. Baltimore Bancorp had assets of $2.1 billion and
deposits of $1.7 billion at closing. Baltimore Bancorp's forty one branch
banking subsidiary, The Bank of Baltimore, was merged into First Fidelity
Bank, N.A.
h. On January 20, 1995, First Fidelity Bank, N.A. acquired the
deposits and deposit-related loans of the Katonah branch (Westchester
County, New York) of Emigrant Savings Bank.
PENDING ACQUISITIONS
a. On July 22, 1994, First Fidelity entered into a definitive
agreement to acquire First State Bank, a state-chartered commercial bank
with assets of $32.2 million and two offices located in Wilmington,
Delaware. Subject to receipt of all applicable regulatory approvals, the
acquisition is expected to close by the end of the first quarter of 1995.
b. On February 7, 1995, the Company announced that First Fidelity
Bank, N.A. had entered into an agreement to acquire the 24 branches and
$1.1 billion in deposits in Maryland of Household Bank, FSB for a premium
of $76.1 million.
(ii) INTERNAL CONSOLIDATION. In 1994, the Company, through a series
of mergers and head office relocations, combined its New Jersey,
Pennsylvania, New York and Maryland banking operations under a single
national bank headquartered in Elkton, Maryland and now known as First
Fidelity Bank, N.A. In addition, on January 20, 1995, Union Trust Company,
which conducts the Company's Connecticut banking business, changed its name
to First Fidelity Bank.
(iii) CAPITAL MARKETS ACTIVITIES. On February 2, 1994, the Company
issued $200 million of floating rate senior notes due August 2, 1996.
(iv) COMMON STOCK REPURCHASE PROGRAM. On October 21, 1993, the
Company's Board of Directors (the "Board") authorized the acquisition of up
to 2% of First Fidelity's outstanding Common Stock in any calendar year,
through open market or privately-negotiated transactions. On March 7, 1994,
the Board authorized the acquisition of up to an additional 1,300,000
shares of Common Stock in 1994, and on October 20, 1994, the Board
authorized the acquisition of an additional 2,000,000 shares of Common
Stock. During 1994, the Company repurchased 3,795,700 shares of its Common
Stock, at an average price of $44.77 per share. Pursuant to such Board
authorizations, entering 1995, the Company had remaining authority to
repurchase approximately 2.7 million shares of its Common Stock during
1995. The Company is entering the market from time to time to repurchase
these shares. Banco Santander, S.A. (together with its wholly-owned
subsidiary, FFB Participacoes e Servieos, S.A., Funchal, Portugal, the
current owner of the shares, "Santander"), which at the end of 1994 owned
24.8% of First Fidelity's outstanding voting stock, has received regulatory
approval to increase such ownership to 30%. It will purchase stock in the
open market. In 1994, the Company also continued its program of purchasing
its Common Stock, through an independent agent, for issuances under its
dividend reinvestment plan and stock option plans. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Capital".
(v) DIVIDEND INCREASES. The Board increased the regular dividend on
the Company's Common Stock on January 20, 1994 from $.37 to $.42 per share.
On October 17, 1994, the Board further increased the regular dividend from
$.42 to $.50 per share.
RELATIONSHIP WITH BANCO SANTANDER
During 1994, the Company issued 4,752,500 shares of its Common Stock to
Santander, pursuant to the terms of the Investment Agreement (the "Investment
Agreement"), dated as of March 18, 1991, between Santander and the Company. Of
such shares, 2,376,250 were issued on March 29, 1994 and 2,376,250 were issued
on June 14, 1994 pursuant to Santander's exercise of all of its remaining
Warrants to purchase up to 9,505,000 shares of Common Stock at $25.50 per share.
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At December 31, 1994, Santander held certain acquisition gross up rights to
acquire $45.9 million (remaining from the original $100 million amount under the
Investment Agreement) in value of Common Stock (or other equity securities of
First Fidelity). By its terms, the Investment Agreement and Santander's rights
to exercise its acquisition gross up rights terminate on December 27, 1995.
The Investment Agreement also provides Santander with gross up rights in
the event that First Fidelity issues equity (other than pursuant to an employee
benefit plan or upon conversion of convertible securities) in order to insure
that Santander maintains the same proportional interest in any class of
outstanding equity. These gross up rights give Santander the right to acquire
such equity securities on the same terms (including price) as the terms on which
the equity being issued by the Company is issued to third parties. Such rights
also terminate December 27, 1995.
Santander has received regulatory approval to increase its holdings of the
Company's stock to 30% by open market purchases of the stock.
1995 COST REDUCTION PROGRAM
The Company is implementing a 1995 cost reduction program which involves
the accelerated integration of recent acquisitions, consolidation of the branch
system from 710 offices to 670 offices, reduction of internal paper work
requirements, rationalization of work flow and processes, and reductions in
staff.
Full-time equivalent employment, which totaled about 13,100 at December 31,
1994, will be reduced by about 7.7% during the course of 1995 through this
program and as a result of the integration of The Bank of Baltimore. While a
significant part of the staff reduction will be accomplished through attrition,
the program will require approximately $5 million in related charges in 1995.
The goal of the program is to offset virtually all of the former Bank of
Baltimore's expense base.
BUSINESS OF FIRST FIDELITY'S SUBSIDIARIES
BANK SUBSIDIARIES
First Fidelity's Subsidiary Banks consist of First Fidelity Bank, N.A.
("FFB-NA") and First Fidelity Bank ("FFB-CT") (a Connecticut-chartered
commercial bank). First Fidelity's Subsidiary Banks operate primarily in New
Jersey, eastern Pennsylvania, southern New York, Maryland and Connecticut. This
marketplace is characterized by a diversified industry base (including a number
of well-known, large companies as well as many successful smaller and mid-sized
businesses), four key ports on the East Coast (Baltimore, Philadelphia, New
York/Newark and New Haven/New London) and a well-educated work force.
First Fidelity, through its Subsidiary Banks, offers a broad range of
lending, depository and related financial services to individual consumers,
businesses and governmental units. Commercial lending services provided by the
Subsidiary Banks include short and medium term loans, revolving credit
arrangements, lines of credit, asset-based lending, equipment leasing, real
estate construction loans and mortgage loans. Consumer banking services include
various types of deposit accounts, secured and unsecured loans, consumer
installment loans, mortgage banking services, mortgage loans, automobile leasing
and other consumer-oriented services.
The Subsidiary Banks offer a wide range of money-market services. They
underwrite and distribute general obligations of municipal, county and state
governments and agencies. In their respective money-center activities, the
Subsidiary Banks deal in U.S. Treasury and U.S. Government agency securities,
certificates of deposit, foreign exchange, commercial paper, bankers'
acceptances, Federal funds and repurchase agreements.
Fiduciary services are available through the Subsidiary Banks and include
trustee services for corporate and municipal securities issuers and investment
management and advisory services to individuals, corporations, organizations and
other institutional investors. The Subsidiary Banks act as investment adviser to
and provide management services for a number of mutual funds, including several
proprietary funds of First Fidelity designed primarily for trust customers and
corporate and retail banking customers of the Subsidiary Banks. The Subsidiary
Banks administer, in a fiduciary capacity, pensions, personal trusts and
estates. They also act as transfer agent, registrar, paying agent and in other
corporate agency capacities.
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The Subsidiary Banks offer international banking services through their
domestic offices, correspondent banks, and foreign offices. The Subsidiary
Banks' foreign banking and international activities presently consist primarily
of short-term trade-related financing and the extension of credit to foreign
banks and governments and foreign and multinational companies.
First Fidelity Bank, N.A. and Bankers Trust Company of New York, each own
fifty percent of Global Processing Alliance, Inc., which provides
check-processing and related services to depository institutions including its
owners.
NONBANK SUBSIDIARIES
The Company has several nonbank subsidiaries, including entities which
provide insurance brokerage services, community development assistance,
securities brokerage services, mortgage banking and consumer leasing.
COMMITMENTS AND LINES OF CREDIT
The Subsidiary Banks are obligated under standby and commercial letters of
credit on behalf of customers. In addition, the Subsidiary Banks issue lines of
credit to customers, generally for periods of up to one year and usually in
connection with the provision of working capital for borrowers. For further
information regarding such obligations, see Part II, Item 8, "Financial
Statements and Supplementary Data -- Note 16 of the Notes to Consolidated
Financial Statements".
COMPETITION
The Company and its subsidiaries face vigorous competition from a number of
sources, including other bank holding companies and commercial banks, consumer
finance companies, thrift institutions, other financial institutions and
financial intermediaries. In addition to commercial banks, federal and state
savings and loan associations, savings banks, credit unions and industrial
savings banks actively compete to provide a wide variety of banking services.
Mortgage banking firms, real estate investment trusts, finance companies,
insurance companies, leasing companies, brokerage and factoring companies,
financial affiliates of industrial companies and government agencies provide
additional competition for loans and for many other financial services. The
Subsidiary Banks also currently compete for interest-bearing funds with a number
of other financial intermediaries, including brokerage firms and mutual funds,
which offer a diverse range of investment alternatives.
First Fidelity's competition is not limited to financial institutions based
in New Jersey, Pennsylvania, Connecticut, Maryland and New York. A number of
large out-of-state and foreign banks, bank holding companies, consumer finance
companies and other financial institutions have an established market presence
in New Jersey, Pennsylvania, Connecticut, Maryland and southern New York State.
Many of the financial institutions operating in First Fidelity's market area
engage in local, regional, national and international operations and some of
such institutions are larger than the Company.
SUPERVISION AND REGULATION
GENERAL
The Company, Northeast Bancorp Inc. ("Northeast") and FFI are bank holding
companies within the meaning of the Bank Holding Company Act of 1956, as amended
(the "Act"), and are registered as such with the Federal Reserve Board. As bank
holding companies, the Company and FFI also are subject to regulation by the New
Jersey Department of Banking (the "New Jersey Department"), and the Company and
Northeast are subject to regulation by the Connecticut Department of Banking
(the "Connecticut Department").
FFB-NA is a national bank subject to the regulation and supervision of, and
regular examination by, the Office of the Comptroller of the Currency (the
"OCC"), as well as regulation by the Federal Deposit Insurance Corporation (the
"FDIC") and the Federal Reserve Board. FFB-CT is subject to the regulation and
supervision of, and regular examination by, the FDIC and the Connecticut
Department.
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Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. A change in
applicable law or regulation could have a material effect on the business and
prospects of the Subsidiary Banks and the Company.
GOVERNMENT REGULATION
Each of First Fidelity, FFI and Northeast is required to file with the
Federal Reserve Board an annual report and such additional information as the
Federal Reserve Board may require pursuant to the Act. Annual and other periodic
reports also are required to be filed with the New Jersey Department and the
Connecticut Department. In addition, the Federal Reserve Board makes
examinations of bank holding companies and their subsidiaries. The Act requires
each bank holding company to obtain the prior approval of the Federal Reserve
Board before it may acquire substantially all of the assets of any bank, or
before it may acquire, directly or indirectly, ownership or control of any
voting shares of any company, including a bank, if, after such acquisition, it
would own or control, directly or indirectly, more than 5% of the voting shares
of such company. See "Acquisitions -- Interstate Banking".
Capital adequacy guidelines may impede a bank holding company's ability to
consummate acquisitions involving consideration with a cash component. For a
description of certain applicable guidelines, see "Capital", "FDICIA" and Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Asset and Liability Management"
and "-- Capital".
Under Federal Reserve Board policy, the Company is expected to act as a
source of strength to each Subsidiary Bank and to commit resources to support
each Subsidiary Bank. Such support may be required at times when, absent such
Federal Reserve Board policy, the Company would not otherwise provide it. In
addition, any capital loans by the Company or any subsidiary to any of the
Subsidiary Banks would be subordinate in right of payment to deposits and to
certain other indebtedness of such Subsidiary Bank.
The Act also restricts the types of businesses and operations in which a
bank holding company and its subsidiaries may engage. Generally, permissible
activities are limited to banking and activities found by the Federal Reserve
Board to be so closely related to banking as to be a proper incident thereto.
The operations of the Subsidiary Banks are subject to requirements and
restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that
may be made and the types of services which may be offered and restrictions on
the ability to acquire deposits under certain circumstances. Various consumer
laws and regulations also affect the operations of the Subsidiary Banks.
Approval of the OCC is required for branching by FFB-NA and for bank
mergers in which the continuing bank is a national bank. Approval of the Office
of Thrift Supervision is required in connection with certain acquisitions of
thrift institutions as well as for establishment of a de novo federal savings
bank. In addition, approval of the relevant state banking authorities and the
FDIC is required in connection with certain fundamental corporate changes
involving state-chartered banks (such as FFB-CT) or other banking entities.
Federal law provides for the enforcement of any pro rata assessment of
stockholders of a national bank to cover impairment of capital stock by sale, to
the extent necessary, of the stock of any assessed stockholder failing to pay
the assessment. FFI, as stockholder of FFB-NA, is subject to such provisions.
ACQUISITIONS -- INTERSTATE BANKING
First Fidelity is continually evaluating acquisition opportunities and
frequently conducts due diligence activities in connection with possible
acquisitions. Acquisitions that may be under consideration at any time include,
without limitation, acquisitions of banking organizations and thrift or savings
type associations or their assets or liabilities or acquisitions of other
financial services companies or their assets or liabilities. Depository
organizations targeted by First Fidelity for acquisition would generally be
based in markets in which the Company presently operates or in markets in
proximity to one of the Company's then existing markets. First Fidelity
contemplates that any such acquisitions would be financed through a combination
of working capital and issuances of equity and debt securities.
Federal law currently precludes the Federal Reserve Board from approving
the acquisition by a bank holding company of the voting shares of, or
substantially all the assets of, any bank (or its holding company) located in a
state
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other than that in which the acquiring bank holding company's banking
subsidiaries conducted their principal operations on the date such company
became a bank holding company unless such acquisition is specifically authorized
by the laws of the state in which the bank to be acquired is located. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") authorizes bank holding companies to engage in interstate
acquisitions of banks, without geographic limitations, beginning September 29,
1995.
The Interstate Act permits (i) adequately managed bank holding companies to
engage in interstate acquisitions of banks beginning September 29, 1995, (ii)
interstate branching through interstate bank mergers and acquisitions beginning
June 1, 1997 (subject to the ability of states to permit such mergers and
acquisitions earlier or to prohibit them) and (iii) other interstate branching
through the establishment of de novo branches if authorized by state law.
DIVIDEND RESTRICTIONS
The Company is a legal entity separate and distinct from the Subsidiary
Banks and its nonbank subsidiaries. Virtually all of the revenue of the Company
available for payment of dividends on its capital stock will result from amounts
paid to the Company by FFI and Northeast from dividends received from their
respective Subsidiary Bank. All such dividends are subject to various
limitations imposed by federal and state laws and by regulations and policies
adopted by federal and state regulatory agencies.
FFB-NA as a national bank is required by federal law to obtain the approval
of the OCC for the payment of dividends if the total of all dividends declared
by the Board of Directors of such bank in any year will exceed the total of such
bank's net profits (as defined and interpreted by regulation) for that year and
the retained net profits (as defined) for the preceding two years, less any
required transfers to surplus. National banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined).
In addition, payment of dividends by a Subsidiary Bank will be prohibited
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") in the event such Subsidiary Bank would become "undercapitalized"
under the guidelines described below as a result of such distribution.
Connecticut banking statutes provide that Connecticut-chartered banks may pay
dividends only out of "net profits", defined as the remainder of earnings from
current operations, and limited in amount per year to the total of net profits
for that year combined with retained net profits of the preceding two years.
Under the above-mentioned restrictions, in 1995 the Subsidiary Banks,
without affirmative governmental approvals, could declare aggregate dividends of
approximately $131 million plus an amount approximately equal to the net profits
(as measured under current regulations), if any, earned by the Subsidiary Banks
for the period from January 1, 1995 through the date of declaration less
dividends previously paid in 1995, subject to the limitations described
elsewhere herein. See Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Asset
and Liability Management" and "-- Capital".
If, in the opinion of the applicable regulatory authority, a bank or bank
holding company under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
bank or bank holding company, could include the payment of dividends), such
authority may require that such bank or bank holding company cease and desist
from such practice, or require the bank or bank holding company to limit
dividends in the future. In addition, the Federal Reserve Board, the OCC and the
FDIC have issued policy statements which provide that insured banks and bank
holding companies should generally only pay dividends out of current operating
earnings. Finally, as described elsewhere herein, the regulatory authorities
have established guidelines and under FDICIA have adopted regulations (and may
in the future adopt additional regulations) with respect to the maintenance of
appropriate levels of capital by a bank or bank holding company under their
jurisdiction. Compliance with the standards set forth in such policy statements,
guidelines and regulations could limit the amount of dividends which the Company
and its bank and bank holding company affiliates may pay. In addition, the
Company and its Subsidiary Banks discuss overall capital adequacy, including the
payment of dividends, on at least a quarterly basis with their respective
appropriate Federal regulatory authorities.
BORROWINGS BY THE COMPANY
Federal law prevents the Company and certain of its affiliates (with
certain exceptions), including FFI and Northeast, from borrowing from the
Subsidiary Banks, unless such borrowings are secured by specified amounts and
types of collateral. Additionally, such secured loans to any one affiliate are
generally limited to 10% of each such
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Subsidiary Bank's capital and surplus and, in the aggregate with respect to the
Company and all of such affiliates, to 20% of each such Subsidiary Bank's
capital and surplus. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
CAPITAL
The Federal Reserve Board measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage ratio.
The minimum ratio of total risk-based capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is 8%. At
least half of the total capital must be common equity and qualifying perpetual
preferred stock, less goodwill ("Tier I capital"). The remainder ("Tier II
capital") may consist of mandatory convertible debt securities, a designated
amount of qualifying subordinated debt, other preferred stock and a portion of
the reserve for possible credit losses.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines currently provide
for a minimum leverage ratio (Tier I capital to quarterly average total assets
less goodwill and certain intangibles) of 3% for bank holding companies that
meet certain criteria, including that they maintain the highest regulatory
rating. All other bank holding companies are required to maintain a leverage
ratio of 3% plus an additional cushion of at least 1 to 2 percentage points. The
Federal Reserve Board has not advised First Fidelity of any specific minimum
leverage ratio under these guidelines which would be applicable to First
Fidelity. The guidelines also indicate that, when appropriate, including when a
bank holding company is undertaking expansion, engaging in new activities or
otherwise facing unusual or abnormal risk, the Federal Reserve Board will
consider a "tangible Tier I leverage ratio" (deducting all intangibles) in
making an overall assessment of capital adequacy. Failure to satisfy regulators
that a bank holding company will comply fully with capital adequacy guidelines
upon consummation of an acquisition may impede the ability of a bank holding
company to consummate such acquisition, particularly if the acquisition involves
payment of consideration other than common stock. In many cases, the regulatory
agencies will not approve acquisitions by bank holding companies and banks
unless their capital ratios are well above regulatory minimums.
In 1993, the Federal Reserve Board adopted changes to the risk-based
capital and leverage ratio calculations which require that most intangibles,
including core deposit intangibles and goodwill (but excluding qualifying
purchased credit card relationships and purchased mortgage servicing rights), be
deducted for the purpose of calculating Tier I and total capital. Under the
rule, bank holding companies are permitted to include certain identifiable
intangible assets, such as core deposit intangibles, in calculating capital to
the extent that such intangibles were acquired prior to February 19, 1992. See
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Asset and Liability
Management" and "-- Capital".
The Company's Subsidiary Banks are subject to capital requirements which
generally are similar to those affecting the Company. As described below under
"FDICIA", the federal banking agencies have established certain minimum levels
of capital which are consistent with statutory requirements. As of December 31,
1994, 1993 and 1992, the Company and the Subsidiary Banks had capital in excess
of all regulatory minimums.
The Federal Reserve Board, the FDIC and the OCC have adopted a rule to
implement the requirement under FDICIA that risk-based capital standards take
account of interest rate risk. The rule focuses on institutions having
relatively high levels of measured interest rate risk, and considers the effect
that changing interest rates would have upon the value of an institution's
assets, liabilities, and off balance-sheet positions. First Fidelity's risk
profile (as defined) is such that the rule has no impact on the capital ratios
or operations of the Company and its Subsidiary Banks.
FDICIA
Upon its enactment in December 1991, FDICIA substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes.
Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements in order to minimize losses to the FDIC.
FDICIA establishes five capital classifications: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized" and
"critically undercapitalized" and imposes significant restrictions on the
operations
7
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of a bank that is not at least adequately capitalized. A depository
institution's capital classification depends upon its capital levels in relation
to various relevant capital measures, which include a risk-based capital
measure, a leverage ratio capital measure and certain other factors.
A depository institution is considered well capitalized if it significantly
exceeds the minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets each such measure, undercapitalized
if it fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure and critically undercapitalized if it fails
to meet any critical capital level set forth in the regulations. The critical
capital level is a level of tangible equity equal to not less than 2% of total
assets and not more than 65% of the minimum leverage ratio at levels prescribed
by regulation (except to the extent that 2% would be higher than such 65%
level). An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if, among other things,
it receives an unsatisfactory examination rating or is deemed to be in an unsafe
or unsound condition or to be engaging in unsafe or unsound practices. Under
applicable regulations, for an institution to be well capitalized it must have a
total risk-based capital ratio of at least 10%, a Tier I risk-based capital
ratio of at least 6% and a Tier I leverage ratio of at least 5% and not be
subject to any specific capital order or directive. As of December 31, 1994,
both of the Company's Subsidiary Banks were "well capitalized" as defined under
FDICIA. See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Asset and
Liability Management" and "-- Capital".
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and prohibitions on the payment of interest rates on deposits in
excess of 75 basis points above the average market yields for comparable
deposits. In addition, such institutions must submit a capital restoration plan
which is acceptable to applicable federal banking agencies and which must
include a guarantee from the parent holding company that the institution will
comply with such plan.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets or to cease accepting deposits from correspondent banks and restrictions
on senior executive compensation and on inter-affiliate transactions. Critically
undercapitalized institutions are subject to a number of additional
restrictions, including the appointment of a receiver or conservator.
Regulations promulgated under FDICIA also require that an institution
monitor its capital levels closely and notify its appropriate federal banking
regulators within 15 days of any material events that affect the capital
position of the institution. FDICIA also contains a variety of other provisions
that affect the operations of the Company, including certain reporting
requirements, regulatory standards and guidelines for real estate lending,
"truth in savings" provisions, the requirement that a depository institution
give 90 days prior notice to customers and regulatory authorities before closing
any branch, certain restrictions on investments and activities of
state-chartered insured banks and their subsidiaries, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations and a prohibition on the acceptance or renewal
of brokered deposits by depository institutions that are not well capitalized or
are adequately capitalized and have not received a waiver from the FDIC.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
quality, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares (if feasible) and such other standards as the agency
deems appropriate.
Finally, FDICIA limits the discretion of the FDIC with respect to deposit
insurance coverage by requiring that, except in very limited circumstances, the
FDIC's course of action in resolving a problem bank must constitute the "least
costly resolution" for the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), as the case may be. The FDIC has
interpreted this standard as requiring it not to protect deposits exceeding the
$100,000 insurance limit in more situations than was previously the case. In
addition, FDICIA prohibits payments by the FDIC on uninsured deposits in foreign
branches of U.S. banks, and severely limits the "too
8
11
big to fail" doctrine under which the FDIC formerly protected deposits exceeding
the $100,000 insurance limit in certain failed banking institutions.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC
after August 9, 1989 in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the FDIC
to a commonly controlled FDIC-insured depository institution in danger of
default. "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the absence
of regulatory assistance. FIRREA and the Crime Control Act of 1990 expand the
enforcement powers available to federal banking regulators, including providing
greater flexibility to impose enforcement action, expanding the category of
persons dealing with a bank who are subject to enforcement action, and
increasing the potential civil and criminal penalties. In addition, in the event
of a holding company insolvency, the Crime Control Act of 1990 affords a
priority in respect of capital commitments made by the holding company on behalf
of its Subsidiary Banks. The consummation of the Investment Agreement with
Santander caused the FDIC-insured depository institutions controlled by
Santander and the FDIC-insured depository institutions controlled by the Company
to become commonly controlled for FIRREA purposes, and would have subjected
these institutions to the foregoing provisions were it not for the grant of an
exemption from liability by the FDIC which was granted effective December 27,
1991. A condition to effectiveness of such exemption is a requirement that
Santander not control 25% or more of the voting securities of the Company.
Santander currently owns more than 25% of the Company's voting securities and,
therefore, the exemption has lapsed. See also "FDICIA".
ANNUAL INSURANCE ASSESSMENTS
Under FIRREA, the Federal Savings and Loan Insurance Corporation, which
insured savings and loan associations and federal savings banks, was replaced by
the SAIF, which is administered by the FDIC. A separate fund, the BIF, which was
essentially a continuation of the FDIC's then existing fund, was established for
banks and state savings banks. The Subsidiary Banks generally are subject to
deposit insurance assessments by BIF. As a result, however, of the Company's
acquisition of various branches and deposits of SAIF-insured depository
institutions, a portion of the Company's deposit base is subject to deposit
insurance assessment by SAIF.
The FDIC has developed a risk-based assessment system, under which the
assessment rate for an insured depository institution varies according to its
level of risk. An institution's risk category is based upon whether the
institution is well capitalized, adequately capitalized or less than adequately
capitalized and the institution's "supervisory subgroups": Subgroup A, B or C.
Subgroup A institutions are financially sound institutions with a few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. Based on its capital
and supervisory subgroups, each BIF or SAIF member institution is assigned an
annual FDIC assessment rate per $100 of insured deposits varying between 0.23%
per annum (for well capitalized Subgroup A institutions) and 0.31% per annum
(for undercapitalized Subgroup C institutions). Well capitalized Subgroup B and
Subgroup C institutions will be assigned assessment rates per $100 of insured
deposits of 0.26% per annum and 0.29% per annum, respectively. As of December
31, 1994, the Subsidiary Banks were well capitalized.
The FDIC has proposed a reduction in the BIF insurance assessment for well
capitalized Subgroup A banks to 0.04% per annum. A significant decrease in the
assessment could have a positive impact on the Company's results of operations.
DEPOSITOR PREFERENCE STATUTE
Legislation has been enacted providing that deposits and certain claims for
administrative expenses and employee compensation against an insured depository
institution would be afforded priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, in
the "liquidation or other resolution" of such an institution by any receiver.
9
12
OTHER MATTERS
First Fidelity's Common Stock, preferred stock, par value $1.00 per share
(the "Preferred Stock"), and Preferred Share Purchase Rights are registered
under the Securities Exchange Act of 1934. As a result, the Company and such
securities are subject to the Securities and Exchange Commission's rules
regarding, among other things, the filing of public reports, the solicitation of
proxies, the disclosure of beneficial ownership of certain securities, short
swing profits and the conduct of tender offers.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of the Subsidiary Banks and, therefore, of the Company are
affected not only by domestic and foreign economic conditions, but also by the
monetary and fiscal policies of the United States and its agencies (particularly
the Federal Reserve Board), foreign governments and other official agencies. The
Federal Reserve Board can and does implement national monetary policy, such as
the curbing of inflation and combating of recession, by its open market
operations in United States Government securities, control of the discount rate
applicable to borrowings and the establishment of reserve requirements against
deposits and certain liabilities of depository institutions. The actions of the
Federal Reserve Board influence the level of loans, investments and deposits and
also affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary and fiscal policies are not predictable.
From time to time, various proposals are made in the United States Congress
and the New Jersey, Pennsylvania, New York, Maryland and Connecticut
legislatures and before various regulatory authorities which would alter the
powers of different types of banking organizations or remove restrictions on
such organizations and which would change the existing regulatory framework for
banks, bank holding companies and other financial institutions. It is impossible
to predict whether any of such proposals will be adopted and the impact, if any,
of such adoption on the business of the Company.
ITEM 2. PROPERTIES
As of December 31, 1994, the Company had 852 properties, of which 415 were
owned (including 35 on leased land) and 437 were leased. The owned properties
aggregate approximately 4.7 million square feet. The leased properties aggregate
approximately 2.8 million square feet and, in 1994, required (with the 35 land
leases) approximately $28.3 million in rental payments.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party (as plaintiff or defendant) to a number of lawsuits.
While any litigation carries an element of uncertainty, management is of the
opinion that the liability, if any, resulting from these actions will not have a
material effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and age (as of December 31, 1994)
of each current executive officer of the Company, the positions and offices with
the Company and its subsidiaries presently held by each such officer and a brief
account of the business experience of each such officer for the past five years.
Each officer is appointed by the Company's Board of Directors to serve for a
term of one year. Unless otherwise noted, each officer has held the position
indicated for at least five years.
EXECUTIVE
OFFICER POSITION WITH FIRST FIDELITY AND ITS
NAME AND AGE SINCE SUBSIDIARIES; BUSINESS EXPERIENCE
- --------------------------- --------- -----------------------------------------------------
Jay A. Anglada, 55 1988 Executive Vice President (1989 to date) and Head of
Trust Activities (1989 to 1995) of the Company;
Executive Vice President (1989 to date) and Senior
Trust Officer (1989 to 1995) of FFB-NA
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13
EXECUTIVE
OFFICER POSITION WITH FIRST FIDELITY AND ITS
NAME AND AGE SINCE SUBSIDIARIES; BUSINESS EXPERIENCE
- --------------------------- --------- -----------------------------------------------------
Roland K. Bullard II, 50 1991 Senior Executive Vice President (May 1991 to date) of
the Company; held various executive positions with
CoreStates Financial Corp and its Subsidiaries
(prior years to April 1991)
Anthony R. Burriesci, 47 1990 Executive Vice President and Corporate Controller
(April 1990 to date) of the Company; Executive Vice
President (1989 to April 1990) of The Bank of New
York
Joseph A. Cicero, 50 1995 Vice Chairman and Chief Operating Officer
(December 1994 to date) of FFB-NA-Maryland
Division; Executive Vice President and Chief
Financial Officer (January 1992 to December 1994)
of Baltimore Bancorp; Executive Vice President and
Chief Financial Officer (prior years to 1992) of
Perpetual Savings Bank, FSB, Virginia
Michael A. Gallagher, 47 1993 Executive Vice President, Corporate Operations and
Systems (June 1993 to date) of the Company; Senior
Vice President, Staff Services (June 1990 to May
1993) of the Company; Vice President (prior years
to May 1990) of Chase Manhattan Bank, N.A.
Leslie E. Goodman, 51 1988 Senior Executive Vice President (February 1990 to
date) of the Company; held various executive
positions with the Company and its subsidiaries
(prior years to February 1990)
William A. Karmen, 53 1988 Executive Vice President, Human Resources (1989 to
date) of the Company
Michael L. LaRusso, 49 1990 Executive Vice President (December 1990 to date),
Director of Audit and Policy Development (February
1990 to date) and Senior Vice President (February
1990 to December 1990) of the Company; Senior
National Bank Examiner (prior years to February
1990) of the OCC
James L. Mitchell, 57 1990 General Counsel (May 1990 to date) and Executive Vice
President and Secretary (July 1990 to date) of the
Company; Deputy General Counsel (prior years to May
1990) of Citicorp and Citibank, N.A.
Thomas H. O'Brien, Jr., 51 1993 Executive Vice President (January 1992 to date) of
the Company; President and Chief Operating Officer
(June 1993 to date) of FFB-CT; Senior Vice
President (March 1990 to December 1992) of the
Company; Executive Vice President/Chief Credit
Policy Officer and various other positions (prior
years to March 1990) of Chemical New Jersey
Holdings, Inc. and Senior Vice President of
Chemical Banking Corp.
11
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EXECUTIVE
OFFICER POSITION WITH FIRST FIDELITY AND ITS
NAME AND AGE SINCE SUBSIDIARIES; BUSINESS EXPERIENCE
- --------------------------- --------- -----------------------------------------------------
Peter C. Palmieri, 60 1990 Vice Chairman and Chief Credit Officer (February 1990
to date) of the Company; Senior Executive Vice
President (prior years to February 1990) of The
Bank of New York
Donald C. Parcells, 51 1990 Senior Executive Vice President (June 1994 to date)
of the Company; held various executive positions
with the Company (February 1990 to June 1994);
Managing Director, Institutional Product Group
(prior years to February 1990) of Marine Midland
Bank, N.A.
Frederick H. Pennekamp, 46 1988 Executive Vice President (1989 to date) and Treasurer
(1988 to date) of the Company
Wolfgang Schoellkopf, 62 1990 Vice Chairman and Chief Financial Officer (March 1990
to date) of the Company; Executive Vice President
(prior years to March 1990) of Shearson Lehman
Hutton Inc.
Anthony P. Terracciano, 56 1990 Chairman of the Board, President and Chief Executive
Officer (February 1990 to date) of the Company;
President and Chief Operating Officer (prior years
to February 1990) of Mellon Bank Corporation and
Mellon Bank
Kenneth H. Thorn, 46 1991 Executive Vice President (May 1991 to date) of the
Company; President and Chief Operating Officer,
FFB-NY (August 1993 to October 1994); President,
Chief Operating Officer and Director (July 1989
through December 1990) of United Savings
Association of Texas F.S.B. and United Savings
Association of the Southwest F.S.B.
12
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
First Fidelity's Common Stock is listed on the New York Stock Exchange. The
following table sets forth the high and low sales prices of the Common Stock, as
reported in the consolidated transaction reporting system, and the dividends
declared thereon, for the periods indicated below:
HIGH LOW DIVIDEND
---- ---- --------
1994
-----------------------------------------------------------------------
Quarter ended December 31, 1994...................................... $46 1/8 $ 41 $.50
Quarter ended September 30, 1994..................................... 47 3/8 42 .42
Quarter ended June 30, 1994.......................................... 48 1/4 43 1/4 .42
Quarter ended March 31, 1994......................................... 45 7/8 42 1/2 .42
1993
-----------------------------------------------------------------------
Quarter ended December 31, 1993...................................... 47 40 1/8 .37
Quarter ended September 30, 1993..................................... 49 1/2 45 3/8 .37
Quarter ended June 30, 1993.......................................... 51 42 3/8 .37
Quarter ended March 31, 1993......................................... 52 3/8 42 7/8 .33
Federal and state laws and regulations contain restrictions on the ability
of the Company, the Subsidiary Banks and the Company's intermediate bank holding
companies to pay dividends. For information regarding restrictions on dividends,
see Part I, Item 1, "Business -- Supervision and Regulation -- Dividend
Restrictions" and Part II, Item 8, "Financial Statements and Supplementary
Data -- Note 12 of the Notes to Consolidated Financial Statements".
As of December 31, 1994 the Company had approximately 29,900 holders of
record of its Common Stock.
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16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
First Fidelity's Consolidated Financial Statements and the accompanying notes
presented elsewhere herein.
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF OPERATIONS:
Interest income (taxable equivalent).................... $ 2,164,619 $ 2,078,936 $ 2,168,744 $ 2,431,462 $ 2,773,458
Interest expense........................................ 732,036 691,513 920,712 1,327,889 1,712,137
----------- ----------- ----------- ----------- -----------
Net interest income (taxable equivalent)................ 1,432,583 1,387,423 1,248,032 1,103,573 1,061,321
Less: tax equivalent adjustment......................... 28,467 33,740 39,463 47,502 53,890
----------- ----------- ----------- ----------- -----------
Net Interest Income................................... 1,404,116 1,353,683 1,208,569 1,056,071 1,007,431
Provision for possible credit losses.................... 79,000 148,000 228,000 298,000 498,000
----------- ----------- ----------- ----------- -----------
Net Interest Income after Provision for Possible
Credit Losses....................................... 1,325,116 1,205,683 980,569 758,071 509,431
Net securities transactions............................. 17,720 7,017 4,825 53,566 24,387
Other non-interest income............................... 399,224 376,483 327,551 340,124 338,083
Non-interest expense.................................... 1,069,629 1,014,699 916,846 871,747 883,151
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and cumulative effect
of changes in
accounting principles................................. 672,431 574,484 396,099 280,014 (11,250)
Income taxes (benefit).................................. 221,368 178,025 82,362 58,773 (5,125)
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of changes in
accounting principles................................. 451,063 396,459 313,737 221,241 (6,125)
Cumulative effect of changes in accounting principles,
net of tax............................................ -- 2,373 -- -- --
----------- ----------- ----------- ----------- -----------
Net Income (Loss)..................................... 451,063 398,832 313,737 221,241 (6,125)
Dividends on Preferred Stock............................ 20,667 20,653 21,061 17,176 13,283
----------- ----------- ----------- ----------- -----------
Net Income (Loss) Applicable to Common Stock.......... $ 430,396 $ 378,179 $ 292,676 $ 204,065 $ (19,408)
=========== =========== =========== =========== ===========
PER COMMON SHARE:
Primary:
Income (loss) before cumulative effect of changes in
accounting principles............................... $ 5.21 $ 4.63 $ 3.89 $ 3.37 $ (.33)
Cumulative effect of changes in accounting principles,
net of tax.......................................... -- .03 -- -- --
Net income (loss) -- primary.......................... 5.21 4.66 3.89 3.37 (.33)
Fully diluted(1):
Income (loss) before cumulative effect of changes in
accounting principles............................... 5.11 4.55 3.77 3.31 --
Cumulative effect of changes in accounting principles,
net of tax.......................................... -- .03 -- -- --
Net income (loss) -- fully diluted.................... 5.11 4.58 3.77 3.31 --
Dividends(2)............................................ 1.76 1.44 1.23 1.20 1.10
Book value.............................................. 32.69 31.39 27.33 24.35 22.22
Average shares outstanding:
Primary............................................... 82,558,372 81,207,162 75,219,642 60,562,567 59,189,692
Fully diluted......................................... 86,311,333 84,980,978 80,523,116 64,785,955 63,005,045
RATIOS:
Return on average assets(3)............................. 1.34% 1.27% 1.06% .77% (.02)%
Return on average stockholders' equity(3)............... 16.08 16.19 15.18 13.69 (.40)
Return on average common stockholders' equity(4)........ 16.71 16.94 15.96 14.35 (1.42)
Average stockholders' equity to average assets.......... 8.32 7.82 7.01 5.63 5.10
Common dividend payout(5)............................... 34 31 30 35 --
FINANCIAL CONDITION AT YEAR-END:
Assets.................................................. $36,215,696 $33,762,585 $31,480,297 $30,215,229 $29,110,344
Loans................................................... 23,801,241 21,386,911 18,377,695 17,341,517 18,530,304
Deposits................................................ 28,906,852 28,143,022 27,004,835 25,218,550 23,080,110
Long-term debt.......................................... 813,623 613,058 581,508 918,885 1,116,987
Preferred Stock......................................... 229,707 230,422 232,172 232,236 157,271
Common stockholders' equity............................. 2,647,268 2,508,006 2,025,478 1,712,546 1,325,182
- ---------------
(1) Anti-dilutive in 1990.
(2) As a result of a change in the schedule of Common Stock dividend declaration
dates in 1990, the fourth quarter of 1990 regular common dividend was
declared on January 17, 1991, payable on February 8, 1991, to stockholders
of record on January 28, 1991.
(3) Net income (loss).
(4) Net income (loss) applicable to Common Stock.
(5) Not statistically meaningful in 1990.
14
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and accompanying notes appearing later in this document. When
necessary, reclassifications have been made to prior years' data throughout the
following discussion and analysis for purposes of comparability with 1994 data.
SUMMARY
First Fidelity's net income for the year ended December 31, 1994 was $451.1
million, or $5.21 per common share on a primary basis and $5.11 per common share
on a fully-diluted basis. These results compare to net income of $398.8 million,
or $4.66 per common share on a primary basis and $4.58 per common share on a
fully-diluted basis for 1993. The Company's 1993 net income reflects the
cumulative effect of changes in accounting principles, which increased net
income $2.4 million, or $.03 per common share on both a primary and
fully-diluted basis. The Company's net income in 1992 was $313.7 million, or
$3.89 per common share on a primary basis and $3.77 per common share on a
fully-diluted basis. The 13.1% improvement in 1994 net income over 1993 reflects
a lower provision for possible credit losses, increased net interest income, and
higher non-interest income, partially offset by higher non-interest expense, and
an increased provision for income taxes.
Return on average stockholders' equity was 16.08% in 1994, compared to
16.19% in 1993 and 15.18% in 1992. Return on average assets was 1.34% in 1994
compared to 1.27% in 1993 and 1.06% in 1992.
Total non-performing assets decreased 34% to $328.9 million at December 31,
1994, from $494.7 million at December 31, 1993, due to continuing workout and
collection efforts, including payments and charge-offs, a strengthening economy,
and a reduced volume of loans migrating to non-performing status. The ratio of
non-performing loans to total loans declined from 1.77% at December 31, 1993 to
.99% at December 31, 1994. The significant decline in non-performing loans was
primarily responsible for the ratio of the reserve to non-performing loans
increasing to 253% at December 31, 1994 from 159% at December 31, 1993.
The Company continued to pursue its strategy of acquiring banks and bank
branches located in its market area and in contiguous markets. During 1994, the
Company expanded its branch network in Connecticut with the acquisition of
Greenwich Financial Corporation and enhanced its New York and Pennsylvania
presence through the acquisitions of First Inter-Bancorp, The Savings Bank of
Rockland County, and BankVest, Inc. The Company acquired Baltimore Bancorp
("Baltimore"), with assets of $2.1 billion and deposits of $1.7 billion, on
November 29, 1994 for $347.6 million. The acquisition was accounted for as a
purchase, and is reflected in the Company's Consolidated Statement of Condition
at December 31, 1994, but had no significant impact on the Company's 1994
earnings.
During 1994, the Company also entered into an agreement to acquire the two
branch First State Bank in Wilmington, Delaware, for approximately $7 million in
cash. Subject to the receipt of regulatory and shareholder approval, the
acquisition is expected to close in the first quarter of 1995. At December 31,
1994, this bank reported $26.7 million in deposits and $32.2 million of total
assets.
In February, 1995, First Fidelity entered into an agreement to acquire the
24 Maryland branches of Household Bank, FSB, including $1.1 billion in deposits
at December 31, 1994, for approximately $76 million in cash. Subject to
regulatory approval, the acquisition is expected to close in the second quarter
of 1995.
Each of the recent and pending acquisitions described above is expected to
have an additive effect on earnings per share within 18 months of its
consummation, assuming the absence of significant adverse economic conditions.
These acquisitions are not expected to have a material adverse impact on
liquidity. See Part I, Item 1, "Business -- Recent Transactions --
Acquisitions".
15
18
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the largest component of First Fidelity's operating
income, was $1,433 million in 1994 and $1,387 million in 1993, on a taxable
equivalent basis. The 1994 increase was primarily due to a higher level of
average earning assets, partially offset by the decline in the Company's net
interest margin from 4.86% in 1993 to 4.70% in 1994. The increase in average
earning assets was largely due to acquisitions and increases in the adjustable
rate mortgage and auto lease portfolios. The decline in the net interest margin
was primarily due to refinancings of higher rate loans at lower rates, maturing
higher yielding assets being replaced by lower yielding assets, an increase in
short-term borrowings, cash outlays for acquisitions and for the purchase of
First Fidelity's Common Stock, and deposit run-off, partially offset by a
decrease in average rates associated with core deposits.
Earning assets averaged $30.3 billion in 1994, which was $1.9 billion, or
7%, above the 1993 level. The increase primarily resulted from a $1.9 billion or
26% increase in average mortgage loans, a $1.1 billion or 16% increase in
average securities, and a $488.1 million or 9% increase in average installment
loans, partially offset by a $971.6 million or 65% decrease in average time
deposits with banks, a $483.8 million or 95% decrease in average federal funds
sold and securities purchased under agreements to resell and a $42.7 million or
1% decrease in average commercial loans. The increase in average mortgage and
installment loans was largely the result of 1994 acquisitions and the growth of
the mortgage and auto leasing portfolios.
For 1994, average core deposits, comprised of demand deposits, savings and
NOW accounts, money market deposits and consumer certificates of deposit,
increased 3% over the prior year level (as a result of 1994 acquisitions, as
well as the full year effect of acquisitions completed in 1993) to $26.8
billion, and funded 88% of average earning assets. In comparison, average core
deposits were $25.9 billion and funded 91% of average earning assets during
1993. The 1994 increase consisted of higher levels of savings and NOW account
deposits, demand deposits, and money market deposits, partially offset by lower
levels of consumer certificates of deposit. The higher average deposit balances
reflect the impact of acquisitions, partially offset by deposit run-off, which,
the Company believes, resulted primarily from a shift by consumers to
alternative market instruments and deposit attrition associated with
acquisitions.
The Company relied primarily on the increase in core deposits and
short-term borrowings to fund its increased asset base. Short-term borrowings,
primarily federal funds purchased, securities sold under repurchase agreements
and commercial paper, averaged $1.8 billion in 1994 compared to $1.2 billion in
1993. The Company also increased its average long-term debt from $591.4 million
in 1993 to $795.5 million in 1994, primarily through the issuance of $200
million of floating rate senior notes in February, 1994. During 1994, average
deposits in overseas offices increased by $121.9 million, while average
corporate certificates of deposits decreased by $72.1 million.
Interest income also benefited from the decline in non-performing assets
during 1994. Total non-performing assets declined 34%, or $165.8 million to
$328.9 million at December 31, 1994, compared to $494.7 million at December 31,
1993. Non-accruing and restructured loans were $219.6 million and $17.3 million,
respectively, at December 31, 1994 as compared to $365.0 million and $13.9
million, respectively, at December 31, 1993.
First Fidelity's net interest margin percentage may decline moderately in
1995, largely due to: recent acquisitions, which historically have reduced the
margin while adding to net interest income; the use of investable funds for
anticipated Common Stock buybacks; projected loan growth funded by short-term
borrowings; an expected higher interest rate environment; and the full year
effect of an investment in corporate owned life insurance and the outsourcing of
official checks, both of which reduce investable funds while increasing
non-interest income.
16
19
The following table reflects the components of net interest income, setting
forth, for each of the three years in the period ended December 31, 1994, (i)
average assets, liabilities and stockholders' equity, (ii) interest income
earned on earning assets and interest expense paid on interest-bearing
liabilities, (iii) average rates earned on earning assets and average rates paid
on interest-bearing liabilities, (iv) the Company's net interest income/spread
(i.e., the difference between the average rate earned on earning assets and the
average rate paid on interest-bearing liabilities) and (v) the net interest
margin.
NET INTEREST INCOME SUMMARY
1994 1993 1992
-------------------------------- -------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS -- TAXABLE EQUIVALENT BASIS)(1)
ASSETS
Earning Assets(2)
Loans in domestic
offices
Commercial........ $ 6,567,255 $ 464,322 6.97% $ 6,609,912 $ 486,812 7.26% $ 6,825,594 $ 553,667 7.98%
Installment....... 6,009,588 498,214 8.29 5,521,449 460,482 8.34 4,956,929 467,527 9.43
Mortgage.......... 8,974,897 690,491 7.69 7,112,717 590,303 8.30 5,522,811 497,834 9.01
Loans in overseas
offices........... 118,951 7,085 5.96 120,890 5,724 4.73 123,986 7,976 6.43
----------- ---------- ----------- ---------- ----------- ----------
Total Loans....... 21,670,691 1,660,112 7.63 19,364,968 1,543,321 7.94 17,429,320 1,527,004 8.71
Taxable
mortgage-backed
securities(3)..... 4,543,350 250,975 5.52 3,888,499 248,667 6.39 4,053,684 310,005 7.65
Other taxable
securities........ 2,889,116 162,343 5.62 2,356,125 127,302 5.40 1,545,303 103,885 6.72
Tax-exempt
securities........ 552,005 57,385 10.40 638,858 70,425 11.02 788,352 82,831 10.51
Time deposits with
banks............. 515,493 25,494 4.88 1,487,121 66,308 4.40 2,088,964 104,524 4.92
Federal funds sold
and securities
purchased under
agreements to
resell............ 24,639 1,158 4.64 508,408 16,176 3.14 928,574 33,578 3.56
Trading account..... 133,106 7,152 5.37 160,997 6,737 4.18 134,634 6,917 5.14
----------- ---------- ----------- ---------- ----------- ----------
Total Earning
Assets.......... 30,328,400 2,164,619 7.11 28,404,976 2,078,936 7.29 26,968,831 2,168,744 8.00
Reserve for possible
credit losses....... (605,305) (646,137) (633,361)
Cash and due from
banks............... 1,816,322 1,751,760 1,645,225
Other assets.......... 2,202,992 1,998,617 1,494,174
----------- ----------- -----------
Total Assets...... $33,742,409 $31,509,216 $29,474,869
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Demand deposits....... $ 5,190,696 $ 4,847,958 $ 4,355,861
----------- ----------- -----------
Interest-bearing
liabilities
Savings/NOW
deposits.......... 9,333,853 178,719 1.91 8,290,859 175,348 2.11 6,689,758 216,292 3.23
Money market deposit
accounts.......... 4,043,891 97,080 2.40 3,943,278 95,765 2.43 3,983,421 129,133 3.24
Other consumer time
deposits.......... 8,247,759 299,852 3.64 8,850,184 329,486 3.72 9,090,882 449,186 4.94
Corporate
certificates of
deposit........... 355,748 14,245 4.00 427,825 13,247 3.10 436,357 20,708 4.75
Deposits in overseas
offices........... 343,385 14,900 4.28 221,437 6,884 3.07 216,714 9,134 4.15
Short-term
borrowings........ 1,829,837 75,014 4.04 1,165,307 32,199 2.73 1,314,087 43,469 3.25
Long-term debt...... 795,521 52,226 6.57 591,397 38,584 6.52 738,200 52,790 7.15
----------- ---------- ----------- ---------- ----------- ----------
Total
Interest-Bearing
Liabilities..... 24,949,994 732,036 2.93 23,490,287 691,513 2.94 22,469,419 920,712 4.09
Other liabilities..... 795,852 708,216 583,078
Preferred
stockholders'
equity.............. 230,271 230,940 232,235
Common stockholders'
equity.............. 2,575,596 2,231,815 1,834,276
----------- ----------- -----------
Total Liabilities
and
Stockholders'
Equity.......... $33,742,409 $31,509,216 $29,474,869
=========== =========== ===========
---------- ---------- ----------
Net interest
income/spread....... $1,432,583 4.18 $1,387,423 4.35 $1,248,032 3.91
========= ========= =========
Net interest margin... 4.70 4.86 4.59
Tax equivalent
adjustments:
Loans............... $ 9,233 $ 11,421 $ 13,559
Tax-exempt
securities........ 18,544 22,087 25,904
Trading account
assets............ 690 232 --
---------- ---------- ----------
Total............. $ 28,467 $ 33,740 $ 39,463
========= ========= =========
- ---------------
(1) In this table and in other data presented herein on a taxable equivalent
basis, income that is exempt from federal income taxes or taxed at a
preferential rate, such as interest on state and municipal securities, has
been adjusted to a taxable equivalent basis using a federal income tax rate
of 35% for 1994 and 1993 and 34% for 1992.
(2) Includes non-performing loans. The effect of including such loans is to
reduce the average rate earned on the Company's loans.
(3) Includes Collateralized Mortgage Obligations.
17
20
The following table demonstrates the relative impact on net interest income
of changes in the volume of earning assets and interest-bearing liabilities and
changes in rates earned and paid by the Company on such assets and liabilities.
For purposes of constructing this table, earning asset averages include
non-performing loans.
NET INTEREST INCOME
CHANGES DUE TO VOLUME AND RATE(1)
1994 VS. 1993 1993 VS. 1992
------------------------------------- -------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------- -----------------------
TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
---------- --------- ---------- ---------- --------- ----------
(THOUSANDS -- TAXABLE EQUIVALENT BASIS)
Interest Income
Loans -- Domestic offices......... $ 115,430 $ 180,284 $ (64,854) $ 18,569 $ 160,478 $ (141,909)
-- Overseas offices......... 1,361 (109) 1,470 (2,252) (171) (2,081)
Taxable mortgage-backed
securities..................... 2,308 38,991 (36,683) (61,338) (11,449) (49,889)
Other taxable securities.......... 35,041 29,320 5,721 23,417 49,151 (25,734)
Tax-exempt securities............. (13,040) (9,325) (3,715) (12,406) (16,070) 3,664
Time deposits with banks.......... (40,814) (45,352) 4,538 (38,216) (28,482) (9,734)
Federal funds sold and securities
purchased under agreements to
resell......................... (15,018) (18,917) 3,899 (17,402) (14,230) (3,172)
Trading account................... 415 (1,334) 1,749 (180) 1,233 (1,413)
---------- --------- ---------- ---------- --------- ----------
Total Interest Income.......... 85,683 173,558 (87,875) (89,808) 140,460 (230,268)
---------- --------- ---------- ---------- --------- ----------
Interest Expense
Savings/Time deposits............. (24,948) 15,268 (40,216) (194,012) 45,151 (239,163)
Purchased funds:
-- Domestic offices....... 43,813 20,729 23,084 (18,731) (5,214) (13,517)
-- Overseas offices....... 8,016 4,541 3,475 (2,250) 143 (2,393)
Long-term debt.................... 13,642 13,328 314 (14,206) (10,025) (4,181)
---------- --------- ---------- ---------- --------- ----------
Total Interest Expense......... 40,523 53,866 (13,343) (229,199) 30,055 (259,254)
---------- --------- ---------- ---------- --------- ----------
Net Interest Income................. $ 45,160 $ 119,692 $ (74,532) $ 139,391 $ 110,405 $ 28,986
========= ======== ========= ========= ======== =========
- ---------------
(1) Changes in interest income and interest expense attributable to changes in
both volume and rate have been allocated equally to changes due to volume
and changes due to rate.
1994 VS. 1993: The table above indicates an increase in taxable equivalent
net interest income of $45.2 million, reflecting an increase due to volume
changes of $119.7 million and a decrease due to rate changes of $74.5 million.
The increase in net interest income for 1994 was primarily due to the higher
levels of earning assets as a result of acquisitions. Earning assets averaged
$30.3 billion in 1994, $1.9 billion or 7% above the 1993 level. The volume-
related change resulted from increased average balances for consumer loans,
primarily mortgage and installment loans. An increase in taxable securities was
partially offset by reductions in time deposits with banks, money market
instruments and tax-exempt securities. Average total loans increased, resulting
in an increase to net interest income, which was offset, in part, by the costs
associated with the higher level of deposits and short-term borrowings used to
fund such loans. Average core deposits increased 3% over the 1993 level (as a
result of acquisitions) to $26.8 billion, and funded 88% of average earning
assets. The increase consisted of $1.0 billion in savings and NOW accounts,
$342.7 million in demand deposits, and $100.6 million in money market deposits,
partly offset by a $602.4 million decrease in consumer certificates of deposit.
The rate-related change was primarily attributable to a decline in the spread
between rates earned on assets and the average cost of interest-bearing
liabilities, as rates earned on assets declined, while rates on interest-bearing
liabilities remained relatively unchanged.
1993 VS. 1992: Net interest income on a taxable equivalent basis totalled
$1,387 million and $1,248 million in 1993 and 1992, respectively. The increase
in net interest income for 1993 was primarily due to higher levels of earning
assets as a result of acquisitions, along with a wider spread between the rates
earned on assets and the average cost of interest-bearing liabilities, which
reflected the declining rate environment that prevailed early in 1993. Earning
assets averaged $28.4 billion in 1993, $1.4 billion or 5% above the 1992 level.
The volume-related change resulted from increased average balances for consumer
loans, primarily mortgage loans. An increase in taxable securities was more than
offset by reductions in time deposits with banks, other types of securities and
money market instruments. Average total loans increased, resulting in an
increase to net interest income, which was offset, in part, by the costs
18
21
associated with the higher level of deposits used to fund such loans. Average
core deposits increased nearly 8% over the 1992 level (as a result of
acquisitions) to $25.9 billion and funded 91% of average earning assets. The
increase consisted of $1.6 billion in savings and NOW accounts and $.5 billion
in demand deposits, partly offset by a $.2 billion decrease in consumer
certificates of deposit.
NON-INTEREST INCOME
MAJOR COMPONENTS OF NON-INTEREST INCOME
YEAR ENDED DECEMBER 31
-----------------------------------
1994 1993 1992
--------- --------- ---------
(THOUSANDS)
Trust income.................................... $ 105,891 $ 104,517 $ 86,396
Service charges on deposit accounts............. 145,059 152,340 139,310
Other service charges, commissions and fees..... 105,673 85,741 76,374
Trading revenue................................. 10,089 16,932 16,685
Net securities transactions..................... 17,720 7,017 4,825
Other income.................................... 32,512 16,953 8,786
--------- --------- ---------
Total......................................... $ 416,944 $ 383,500 $ 332,376
========= ========= =========
The Company's core business operations generate various types of
non-interest income, such as service charges on deposit accounts, trust income,
and other service charges, commissions and fees. In addition, non-interest
income is derived from other sources, such as gains on the sale of assets, which
may vary significantly in type and amount from period to period. For 1994, total
non-interest income increased $33.4 million, or 9%, to $416.9 million from
$383.5 million in 1993.
Trust income increased from $104.5 million in 1993 to $105.9 million for
1994. Trust income associated with employee benefit plan administration
increased primarily as a result of a successful marketing campaign. This was
partially offset by a decline in personal and corporate trust income,
attributable to the bond market decline, which adversely affected performance
fees, as well as a reduced volume of new securities issues in the increasing
interest rate environment.
Service charges on deposit accounts and other service charges, commissions
and fees accounted for 60% of total non-interest income in 1994. Service charges
on deposit accounts decreased 5% in 1994, from $152.3 million in 1993 to $145.1
million. An increase in customers' average deposit balances and an increase in
commercial customers' compensating balances, as well as larger earnings credits
associated with such balances in the higher interest rate environment,
contributed to the decrease.
Other service charges, commissions and fees of $105.7 million were 23%
higher than in the prior year, primarily as a result of commission income earned
on branch-based annuity and mutual fund sales, increased revenue from credit
card merchant services and various other business-related fees.
Net securities transactions were $17.7 million in 1994, compared to $7.0
million in 1993. Other income amounted to $32.5 million in 1994, compared to
$17.0 million in 1993. The increase in other income resulted primarily from net
gains on the sale of various assets and income related to venture capital
investments.
PRIOR YEARS: Non-interest income of $383.5 million in 1993 increased $51.1
million, or 15%, from 1992. Trust income increased from $86.4 million in 1992 to
$104.5 million in 1993, primarily as a result of the Northeast acquisition and
trust marketing campaigns. Primarily as a result of additional deposit accounts
attributable to acquisitions, as well as changes in the service fee structure,
service charges on deposits increased 9% in 1993, to $152.3 million, from $139.3
million in 1992. Other service charges, commissions and fees increased by 12% to
$85.7 million from 1992 to 1993, primarily due to increased customer
relationships resulting from acquisitions. Net securities transactions increased
from $4.8 million in 1992 to $7.0 million in 1993. Other income increased from
$8.8 million in 1992 to $17.0 million in 1993, primarily due to the inclusion in
1993 income of $7.8 million in gains on the sale of various assets.
19
22
NON-INTEREST EXPENSE
MAJOR COMPONENTS OF NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
---------- ---------- ---------
(THOUSANDS)
Salary expense............................... $ 396,003 $ 383,007 $ 331,910
Employee benefit expense..................... 89,473 85,043 76,931
Occupancy expense............................ 114,593 112,729 107,269
Equipment expense............................ 41,785 43,983 41,418
FDIC premium expense......................... 63,872 63,164 56,231
External data processing expense............. 47,639 48,200 46,959
External check-processing expense............ 60,934 -- --
Communication expense........................ 24,741 33,450 33,139
Amortization of intangibles.................. 41,526 30,824 22,828
Other real estate owned expenses............. 12,250 28,417 29,854
Other operating expenses..................... 176,813 185,882 170,307
---------- ---------- ---------
Total...................................... $1,069,629 $1,014,699 $ 916,846
========== ========== =========
Non-interest expense was $1,069.6 million for the year, $54.9 million, or
5%, above the 1993 level. The increase resulted primarily from the incremental
operating expenses associated with acquisitions completed in 1993 and 1994.
Productivity continued to benefit from the progressing integration of banks
acquired in 1993 and 1994. In addition, First Fidelity has undertaken a
Company-wide effort to reduce expenses. The Company is also reviewing its branch
network, with the goal of optimizing customer convenience while maximizing the
network's cost-effectiveness. Management intends to continue its productivity
and expense reduction programs in 1995 and subsequent years. See Part I, Item 1,
"Business -- 1995 Cost Reduction Program."
In July, 1993, First Fidelity and Bankers Trust Company formed a bank
service corporation, Global Processing Alliance, Inc. ("GPA") which provides
check-processing and related services, and is 50%-owned by each company. In
January, 1994, GPA became operational and as a result, First Fidelity's
check-processing expenses, which were previously reflected in several expense
categories, are now reported in "other expenses" in the Consolidated Statement
of Income.
Salaries and benefits expense totaled $485.5 million in 1994 compared with
$468.1 million in 1993. The $17.4 million, or 4% increase from the prior year,
primarily reflects the additional personnel expenses associated with
acquisitions completed in 1994 and the full year impact of acquisitions
completed in 1993, partially offset by the GPA reclassification noted above. At
December 31, 1994 and 1993, the Company had approximately 12,000 full-time
employees, compared to approximately 10,600 at the end of 1992. Although the
Company added staff in connection with acquisitions, such additions were offset
by staff reductions arising from the consolidations of certain support and
operating departments and branches, as well as staff transfers related to the
GPA reclassification noted above.
Occupancy expense, which includes the costs of leasing office space and
branches and the expenses associated with owning and maintaining such
facilities, increased $1.9 million, or 2% in 1994, due primarily to acquisitions
in 1994 and 1993 and severe weather conditions early in 1994, partially offset
by the effect of branch consolidations and the GPA reclassification mentioned
above. Equipment expense decreased $2.2 million, or 5%, primarily due to
operating efficiencies, branch consolidations and the effect of the GPA
reclassification, partially offset by acquisitions.
FDIC premium expense was $63.9 million in 1994 compared to $63.2 million in
1993. The increase reflects the impact of a higher level of deposits resulting
from 1994 and 1993 acquisitions. Deposit insurance assessment rates are expected
to decline in 1995. See Part I, Item 1, "Business -- Supervision and
Regulation -- FDICIA" and "-- Annual Insurance Assessments".
Communication expense decreased 26%, from $33.5 million in 1993 to $24.7
million for 1994. The decrease was primarily due to cost control measures which
reduced postage and telephone expenses. Communication expense is expected to
rise in 1995, reflecting the increase in U.S. postal rates.
20
23
The amortization expense related to intangibles increased $10.7 million, or
35%, to $41.5 million for 1994. The increase was related to intangibles
generated in conjunction with recent acquisitions, but reflects only one month
of amortization associated with the Baltimore acquisition, which occurred on
November 29, 1994.
Expenses incurred in connection with other real estate owned ("OREO") were
$12.3 million in 1994 compared to $28.4 million in 1993. Such expenses relate
primarily to OREO provisions necessitated by property write-downs resulting from
declines in OREO property appraisal values, as well as expenses associated with
the operation of such properties. The $16.1 million decrease during 1994
resulted primarily from a lower OREO provision, which was attributable to a
lower level of charge-offs, reflecting an improvement in the real estate market.
Other expenses decreased $9.1 million, or 5%, from $185.9 million in 1993
to $176.8 million in 1994. The reduction in other expenses reflects the impact
of the ongoing productivity program, partially offset by expenses associated
with acquisitions.
PRIOR YEARS: Non-interest expense totaled $1,014.7 million for 1993, which
was $97.9 million, or 11%, above the 1992 level. This increase resulted
primarily from the incremental operating expenses associated with acquisitions
completed in 1992 and 1993 and higher FDIC expense. In addition, during 1993,
Statement of Financial Accounting Standards ("SFAS") 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" was adopted, resulting in
higher ongoing expenses, and a one-time cumulative effect adjustment of $53.3
million.
Salaries and benefits expense totaled $468.1 million in 1993 compared with
$408.8 million in 1992. The $59.2 million, or 15%, increase from the prior
year's level reflected additional staff expenses associated with acquisitions
completed in 1992 and 1993. Occupancy expense increased $5.5 million, or 5%, in
1993, due primarily to acquisitions in 1992 and 1993, partially offset by the
effect of branch consolidations. Equipment expense increased $2.6 million, or
6%, primarily due to acquisitions. FDIC premium expense totaled $63.2 million in
1993 compared to $56.2 million in 1992; a higher level of deposits due to
acquisitions resulted in the increase. Amortization of intangibles increased
$8.0 million or 35%, to $30.8 million in 1993. The increase was related to
intangibles generated in conjunction with several acquisitions, primarily The
Howard Savings Bank in late 1992. Total OREO expenses were $28.4 million in 1993
compared to $29.9 million in 1992, reflecting property write-downs related to
valuation adjustments resulting from declines in OREO property appraisal values
and write-downs due to transfers of OREO to the "assets held for sale"
classification. Other expenses increased $15.6 million, to $185.9 million in
1993. The overall increase was primarily due to acquisitions.
INCOME TAX EXPENSE
Income tax expense was $221.4 million for the year, a $43.4 million
increase from the $178.0 million reported in 1993, reflecting a higher level of
pretax income, combined with a lower level of tax-exempt income. The effective
tax rates for the years ended December 31, 1994 and 1993 were 33% and 31%,
respectively. For information regarding alternative minimum tax credit
carryforwards, see Item 8, "Financial Statements and Supplementary Data -- Note
15 of the Notes to Consolidated Financial Statements".
PRIOR YEARS: Income tax expense for 1993 was $178.0 million, compared to
$82.4 million for 1992, primarily reflecting the increase in the effective tax
rate from 21% in 1992 to 31% in 1993, and a higher level of pretax earnings.
During the first quarter of 1993, the Company recognized a one-time cumulative
effect benefit and a related deferred tax asset of $63.1 million due to the
adoption of SFAS 109, "Accounting for Income Taxes". SFAS 109 required
realizable future tax benefits (primarily related to the reserve for possible
credit losses, alternative minimum tax credit carryforwards, and accrued
postretirement benefits) to be recorded as the cumulative effect of a change in
accounting principle at the adoption date.
21
24
FINANCIAL CONDITION
ASSET AND LIABILITY MANAGEMENT
The major objectives of the Company's asset and liability management
process are to (i) manage exposure to changes in the interest rate environment
to achieve an interest rate sensitivity position within reasonable ranges, (ii)
ensure adequate liquidity and funding, (iii) maintain a strong capital base, and
(iv) maximize net interest income opportunities. Members of the Asset and
Liability Management Committee meet weekly to develop balance sheet and product
pricing strategies affecting the future level of net interest income, liquidity
and capital. Factors that are considered in asset and liability management
include forecasts of the balance sheet mix, the economic environment and
anticipated direction of interest rates, and the Company's earnings sensitivity
to changes in these rates.
INTEREST RATE SENSITIVITY
The Company analyzes its interest sensitivity position to manage the risk
associated with interest rate movements through the use of "gap analysis" and
"income simulation". Interest rate risk arises from mismatches in the repricing
of assets and liabilities within a given time period. Gap analysis is an
approach used to quantify these differences. A "positive" gap results when the
amount of assets maturing or repricing within a given time period exceeds that
of liabilities maturing or repricing. A "negative" gap results when liabilities
maturing or repricing exceed such assets.
While gap analysis is a general indicator of the potential effect that
changing interest rates may have on net interest income, the gap itself does not
present a comprehensive view of interest rate sensitivity. First, changes in the
general level of interest rates do not affect all categories of assets and
liabilities equally or simultaneously. Second, assumptions must be made to
construct a gap table. One quarter of money market deposits, for example, which
have no contractual maturity, are assigned a repricing interval of 180-365 days
with the remainder in the 91-180 day interval. Management can influence the
actual repricing of these deposits independent of the gap assumption. Third, the
gap table represents a one-day position and cannot incorporate a changing mix of
assets and liabilities over time as interest rates change.
For these reasons, the Company primarily uses "simulation" techniques to
project future net interest income streams, incorporating the current "gap"
position, the forecasted balance sheet mix, and the anticipated spread
relationships between market rates and bank products, under a variety of
interest rate scenarios. As of December 31, 1994, the Company's interest
sensitivity was modestly liability sensitive, but interest rate increases or
decreases of 200 basis points would not be expected to have a significant impact
on the Company's net interest income.
22
25
INTEREST RATE GAP
The following table illustrates First Fidelity's interest rate gap position
as of December 31, 1994. At that date, the Company had a cumulative negative gap
on a one-year basis of $2,380 million, or 6.6% of total assets. This was
slightly smaller than on December 31, 1993, when the cumulative negative gap was
$2,392 million, or 7.1% of total assets.
INTEREST RATE GAPS AS OF DECEMBER 31, 1994
INTEREST SENSITIVITY PERIODS
---------------------------------------------------------------------------------
1 TO 90 91 TO 180 181 TO 365 >1 TO 3 >3 TO 5 NONSENSITIVE
DAYS DAYS DAYS YEARS YEARS & >5 YEARS TOTAL
----------- ----------- ----------- ----------- ---------- ------------ -----------
(THOUSANDS)
Loans........................... $ 9,663,510 $ 1,572,373 $ 2,266,429 $ 3,739,093 $2,248,632 $ 4,311,204 $23,801,241
Interest-bearing time
deposits...................... 35,567 -- -- -- -- -- 35,567
Money market assets(1).......... 161,169 -- -- -- -- -- 161,169
Mortgage-backed securities(2)... 1,006,091 636,793 970,233 979,075 595,358 247,236 4,434,786
Other securities................ 98,756 96,829 214,580 2,061,797 687,922 373,353 3,533,237
Cash, premises and other........ 606,284 49,283 98,566 178,937 158,757 3,157,869 4,249,696
----------- ----------- ----------- ----------- ---------- ------------ -----------
Total Assets................ $11,571,377 $ 2,355,278 $ 3,549,808 $ 6,958,902 $3,690,669 $ 8,089,662 $36,215,696
=========== =========== =========== =========== ========== ========== ===========
Demand deposits(3).............. $ 768,749 $ -- $ -- $ -- $ -- $ 4,625,000 $ 5,393,749
Savings/time deposits........... 2,982,005 3,571,702 4,497,431 10,314,782 728,279 292,714 22,386,913
Purchased funds:
-- Domestic offices........... 3,044,314 28,986 17,477 6,153 978 12,072 3,109,980
-- Overseas offices........... 708,270 21,880 1,582 1,400 -- -- 733,132
Long-term debt.................. 225,634 136,750 -- 1,220 300,019 150,000 813,623
Other liabilities............... (40,510) -- -- -- -- 941,834 901,324
Stockholders' equity............ (75,232) -- -- -- -- 2,952,207 2,876,975
----------- ----------- ----------- ----------- ---------- ------------ -----------
Total Liabilities and
Stockholders' Equity...... $ 7,613,230 $ 3,759,318 $ 4,516,490 $10,323,555 $1,029,276 $ 8,973,827 $36,215,696
=========== =========== =========== =========== ========== ========== ===========
Interest Rate Sensitivity
Gap....................... $ 3,958,147 $(1,404,040) $ (966,682) $(3,364,653) $2,661,393 $ (884,165)
==========
----------- ----------- ----------- ----------- ----------
Cumulative Gap.............. $ 3,958,147 $ 2,554,107 $ 1,587,425 $(1,777,228) $ 884,165
=========== =========== =========== =========== ==========
Derivatives affecting interest
rate sensitivity
Swaps......................... $(4,956,100) $ 2,000 $ 987,100 $ 3,463,000 $ 354,000 $ 150,000 $ --
Futures....................... (400,000) 200,000 200,000 -- -- -- --
----------- ----------- ----------- ----------- ---------- ------------ -----------
Total Derivatives Gap....... $(5,356,100) $ 202,000 $ 1,187,100 $ 3,463,000 $ 354,000 $ 150,000 $ --
===========
----------- ----------- ----------- ----------- ---------- ------------
Cumulative Derivatives
Gap....................... $(5,356,100) $(5,154,100) $(3,967,000) $ (504,000) $ (150,000) $ --
=========== =========== =========== =========== ========== ==========
Total Cumulative Gap........ $(1,397,953) $(2,599,993) $(2,379,575) $(2,281,228) $ 734,165
=========== =========== =========== =========== ==========
- ---------------
(1) Trading account securities and federal funds sold and securities purchased
under agreements to resell.
(2) The interest rate sensitivity of mortgage-backed securities is presented
based upon estimated cash flows, maturities and/or repricings, and includes
Collateralized Mortgage Obligations.
(3) The amount shown as "Nonsensitive" is that portion which, based upon average
balances, is considered stable and not sensitive to changes in interest
rates. The Company's historical experience has been that total demand
deposit account balances exhibit minimal movement with changes in interest
rates. Accordingly, a large percentage of the Company's demand deposit
account balances are considered "Nonsensitive", with the remainder
classified as "1 to 90" days.
DERIVATIVES
First Fidelity uses certain off balance-sheet instruments to assist in
managing its interest rate sensitivity. Such instruments, known generically as
"derivatives", may be purchased through over-the-counter markets, on standard
exchanges, or through privately structured transactions. Derivatives take many
forms, including swaps, futures, forward contracts and cap agreements. The
Company enters into these instruments for the purpose of asset and liability
management, to accommodate customer needs and, to a limited extent, in
connection with its trading activities.
An interest rate "swap" is an agreement whereby two parties exchange, at
specified intervals, interest payment streams calculated on an agreed-upon
"notional amount", over a specified period of time. Typically, one of the
payment streams is based upon a fixed interest rate, and the other payment
stream is based upon a floating interest rate. Almost all of First Fidelity's
swap agreements are structured so that it receives a fixed interest rate and
pays a floating interest rate (a "fixed interest rate swap"). As a practical
matter, such payments are made "net", usually on a quarterly or semiannual
basis.
23
26
"Futures" contracts may take many forms, but for First Fidelity, they
generally are used to ensure that the Company will be able to invest a
"notional" amount of funds at an agreed-upon interest rate for a specified
period of time into the future.
Foreign exchange contracts are used to ensure that a certain exchange rate
between two currencies will be available at some future point, or over an
agreed-upon time period. The Company is party to foreign exchange forward and
futures contracts. First Fidelity's foreign exchange contracts are used
primarily to accommodate its commercial customers, who could be adversely
affected by changes in exchange rates. It enables customers to "lock in" their
foreign currency-denominated transactions in U.S. dollars. First Fidelity also
holds some such contracts in its trading account.
"Forwards", or forward delivery contracts, are agreements to buy or sell a
financial instrument at a specified future date for an agreed-upon price. First
Fidelity makes limited use of such contracts. At December 31, 1994, the
Company's outstanding contracts involved the future delivery of investment
securities (which it already holds) at specified prices, to accommodate customer
needs.
Interest rate caps are used to guarantee to a customer a specified maximum
interest rate "cap" on an agreed-upon notional value, in exchange for a premium
payment. If market interest rates exceed the specified cap rate, the interest
differential, applied to the notional value, will be paid to the "cap" customer.
First Fidelity generally enters into these agreements to meet customer needs, in
connection with variable rate loans.
The Company uses a majority of its derivatives portfolio to help manage
interest rate risk by "hedging" on balance sheet positions. When a derivative is
used in connection with an on-balance sheet position, the interest income or
expense associated with the balance sheet position is combined with the effects
of the related derivative instrument. To a much lesser extent, the Company also
uses derivatives as trading instruments, which are carried in the trading
account. Such instruments are marked to market on a daily basis, with the effect
flowing directly to trading account revenue.
The Company's aggregate derivative positions used for asset/liability
management purposes are shown in the following table.
DERIVATIVES USED FOR ASSET-LIABILITY MANAGEMENT PURPOSES AS OF DECEMBER 31, 1994
RATE SENSITIVE
---------------------------------------------------------------------------------------------
1 TO 90 91 TO 180 181 TO 365 >1 TO 3 >3 TO 5 BEYOND
DAYS DAYS DAYS YEARS YEARS 5 YEARS TOTAL
-------- --------- ---------- ---------- -------- -------- ----------
(THOUSANDS)
Swaps (Receive Fixed Rates)
Loans....................... $ -- $ -- $430,100 $2,870,000 $ -- $ -- $3,300,100
Consumer time deposits...... -- 2,000 557,000 593,000 354,000 -- 1,506,000
Long-term debt.............. -- -- -- -- -- 150,000 150,000
-------- --------- ---------- ---------- -------- -------- ----------
Total Swaps......... $ -- $ 2,000 $987,100 $3,463,000 $354,000 $150,000 $4,956,100
======== ========== =========== ========== ======== ======== ==========
Futures
Mortgage-backed
securities................ $400,000 $200,000 $200,000 $ -- $ -- $ -- $ 800,000
======== ========== =========== ========== ======== ======== ==========
As of December 31, 1994, the Company employed a total of $5.0 billion
(notional value) of swaps (including $2.3 billion of indexed amortizing swaps),
with an average remaining life of approximately two years, to help manage its
interest rate sensitivity. At December 31, 1994, approximately $3.3 billion of
fixed interest rate swaps were used to adjust the Company's sensitivity to
floating rate loans, and an additional $1.7 billion of fixed interest rate swaps
were used to transform consumer certificates of deposit and long-term debt into
floating rate instruments having equivalent maturities. These positions compare
with a total of $4.3 billion (notional value) of swaps used for similar purposes
as of December 31, 1993.
At December 31, 1994, the Company also employed a series of sequential 90
day futures contracts with an aggregate notional value of $800 million to help
manage its interest rate risk. Such contracts are used to "lock in" future
interest rates as a means of hedging a portion of the Company's variable rate
securities portfolio. As of December 31, 1993, the Company held similar
contracts with an aggregate notional value of $750 million.
24
27
The following table sets forth information, based on notional values,
regarding First Fidelity's asset-liability management-related derivatives
activity:
1994 1993
-------------------- --------------------
SWAPS(1) FUTURES SWAPS(1) FUTURES
-------- ------- -------- -------
(MILLIONS)
Balance at beginning of period................................. $ 4,272 $ 750 $ 3,692 $ 3,800
Additions...................................................... 2,375 2,350 1,552 600
Terminations................................................... (680) (2,300) -- (3,650)
Expirations.................................................... (1,011) -- (972) --
-------- ------- -------- -------
Balance at end of period....................................... $ 4,956 $ 800 $ 4,272 $ 750
======== ======= ======= =======
- ---------------
(1) Receive fixed interest rates and pay floating interest rates.
Interest rate swaps and futures positions contributed $82.0 million to net
interest income in 1994, down $60.0 million from 1993, and compared to total net
interest income on a tax-equivalent basis of $1,432.6 million in 1994. The
decline in such income reflects the effect of rising interest rates on fixed
rate swaps and futures contracts. Should interest rates remain the same or
continue to increase, net interest income from interest rate swaps and futures
positions will continue to decline, and will have a net negative impact on net
interest income and net interest margin in 1995. However, the net interest
income associated with the on-balance sheet assets and liabilities hedged by
such contracts should continue to increase. This is the converse of what
occurred in 1992 and 1993, as interest rates declined.
The "market value" of a derivative contract is the amount which the Company
would pay or receive in exchange for termination of that contract. At December
31, 1994, First Fidelity would have had to pay $205.2 million to terminate all
of its interest rate swaps. Of that amount, $146.4 million is associated with
indexed amortizing swaps, which have extended from their original maturity of
one year to their maximum maturity of three years, and have a remaining average
maturity of 2.1 years. At December 31, 1994, First Fidelity's futures contracts,
if terminated, would have reflected a loss of $2.4 million.
The Company may terminate derivative contracts which were used to "hedge"
the cash flows associated with on-balance sheet assets or liabilities. Realized
gains and losses on terminated hedge contracts are deferred and amortized to
interest income or expense over the interest rate risk period of the related
hedged asset or liability. The Company terminated $2.3 billion of futures
contracts and $680 million of swap contracts (notional amounts) during 1994. As
a practical matter, futures contracts are generally terminated within a month of
their maturity date. The swap contracts terminated during 1994 would have had
remaining contractual lives ranging from three weeks to five months at December
31, 1994. During 1994, $4.7 million of net deferred gains were recognized as
income, of which $4.6 million was attributable to terminated futures contracts
and $.1 million was associated with terminated swaps. At December 31, 1994,
First Fidelity had $.7 million of net unamortized deferred gains from terminated
hedge contracts, which will be amortized into interest income during 1995.
The Company from time to time also enters into derivative contracts,
including interest rate swaps and interest rate cap agreements, to accommodate
customer needs. As of December 31, 1994, the Company had sold $83.5 million
(notional amount) of interest rate swap contracts and $42.0 million (notional
amount) of interest rate caps to its customers. Because offsetting interest rate
swaps and caps having identical notional amounts were purchased almost
simultaneously, such positions present no market value risk and are not
reflected in the derivatives table above.
To a much lesser extent, the Company also uses derivatives as part of its
trading activity. All such positions are marked to market regularly and carried
in the Company's trading account, and such activity is strictly monitored by
management through the use of trading limits. At December 31, 1994, derivatives
held for trading purposes included $375.4 million of foreign exchange contracts
and $176.2 million of futures contracts. First Fidelity's foreign exchange
contracts consisted of forward contracts of $329.1 million and $46.3 million of
spot and futures contracts. Of the $176.2 million of futures contracts held at
December 31, 1994, $175.0 million were eurodollar futures contracts, and the
remaining $1.2 million were treasury and municipal futures contracts.
25
28
Derivative instruments are subject to the same type of credit and market
risk as other financial instruments, and are monitored and controlled in
accordance with the Company's credit and risk management policies. The Company
has not experienced a credit loss associated with any derivative instruments.
For additional information regarding derivatives, see Notes 16 and 17 to
the Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data".
LIQUIDITY AND FUNDING
First Fidelity manages its liquidity in order to maximize earnings
opportunities and to ensure that the cash flow needs of the Company are met in a
cost-efficient manner. First Fidelity's Asset and Liability Management Committee
is responsible for formulating investment policies and monitoring liquidity.
During 1994, the Company's total assets increased by $2.5 billion,
primarily through acquisitions and increases in its mortgage and auto lease
portfolios. This growth was funded mainly by increases in short-term borrowings
of $1.1 billion, deposits of $.8 billion, and long-term debt of $.2 billion.
Deposits and other funding sources acquired through bank acquisitions have
enhanced the Company's overall liquidity by funding loans and investments and
offsetting deposit outflows. The core deposits to total loans ratio was a
favorable 117% at December 31, 1994.
The Company has other potential sources of liquidity, such as its
securities available for sale portfolio, which increased significantly during
1994. First Fidelity's ability to enter into repurchase agreements, using
investment securities as collateral, provides an additional source of liquidity.
In managing liquidity, the Company takes into account the various legal
limitations affecting the extent to which banks may pay dividends to their
parent companies or otherwise supply funds to certain affiliates (See Item 1,
"Supervision and Regulation-Dividend Restrictions" for further information).
During 1994, the Company paid dividends of $163.0 million to shareholders.
Management believes that First Fidelity's liquidity position continues to
be more than adequate, based upon its levels of cash, cash equivalents and core
deposits, the stability of its other funding sources and the support provided by
its capital base.
CASH FLOWS
Cash and cash equivalents (cash and due from banks, interest-bearing time
deposits, federal funds sold and securities purchased under agreements to
resell) are the Company's most liquid assets. At December 31, 1994, cash and
cash equivalents totaled $2.2 billion, a decrease of $657.8 million from
December 31, 1993. Financing activities absorbed $887.8 million in cash and cash
equivalents. This was primarily due to: a decline in core deposits; the purchase
of treasury stock; and the payment of dividends, partially offset by an increase
in short-term borrowings as well as an increase in deposits in overseas offices.
The Company believes that the decrease in deposits reflects the industrywide
shift by consumers to alternative market instruments. During 1994, long-term
debt increased by $200.0 million. Cash and cash equivalents of $544.1 million
were used in investing activities, including net disbursements of $678.0 million
for lending activities and $307.1 million associated with acquisitions,
partially offset by net cash proceeds of $490.6 million received from
securities. Operating activities provided $774.1 million of cash and cash
equivalents for the year.
26
29
The following table presents certain information regarding the major
components of short-term borrowings for each of the years presented:
SHORT-TERM BORROWINGS
AVERAGE MAXIMUM
INTEREST OUTSTANDING
AVERAGE AVERAGE BALANCE RATE AT AT ANY
BALANCE INTEREST AT END END OF MONTH-END
OUTSTANDING RATE OF PERIOD PERIOD DURING YEAR
----------- ------- ---------- ------- -----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1994
Federal funds purchased and
securities sold under
repurchase agreements.......... $ 1,597,891 4.01% $2,470,794 5.40% $ 2,470,794
Commercial paper and master
notes.......................... 188,261 3.73 229,781 4.96 534,277
DECEMBER 31, 1993
Federal funds purchased and
securities sold under
repurchase agreements.......... 991,587 2.71 1,405,766 2.77 1,602,289
Commercial paper and master
notes.......................... 162,764 2.68 211,785 2.67 224,154
DECEMBER 31, 1992
Federal funds purchased and
securities sold under
repurchase agreements.......... 1,078,540 3.23 947,668 2.99 1,601,263
Commercial paper and master
notes.......................... 145,498 3.16 136,060 2.72 165,005
Student Loan Marketing Association
borrowings..................... 83,607 3.43 -- -- 255,000
At December 31, 1994, corporate certificates of deposit and other time
deposits in amounts of $100,000 and over issued by domestic offices matured as
follows:
DOMESTIC TIME DEPOSITS $100,000 AND OVER
DECEMBER 31, 1994
----------------------------
CORPORATE
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS
------------ ----------
(THOUSANDS)
Within three months.............................. $ 333,033 $ 202,435
Three to six months.............................. 23,273 80,391
Six to twelve months............................. 19,311 98,541
More than twelve months.......................... 5,900 195,732
------------ ----------
Total.......................................... $ 381,517 $ 577,099
=========== ==========
Substantially all of the Company's deposits in overseas offices of $733.1
million were interest-bearing time deposits in denominations of $100,000 and
over.
CAPITAL
The maintenance of appropriate levels of capital is a management priority.
Overall capital adequacy and dividend policy are monitored on an ongoing basis
by management and reviewed quarterly by the Company's Board of Directors.
Management discusses the Company's capital plans with the Board of Directors
frequently. First Fidelity's principal capital planning goals are to provide an
attractive return to stockholders while maintaining the capital levels of the
Company and the Subsidiary Banks above the bank regulatory agencies' "well
capitalized" level (as defined below), thus providing a sufficient base for
future growth.
27
30
The following tables present information regarding the Company's risk-based
capital at December 31, 1994, 1993 and 1992, and selected overall capital
ratios.
CAPITAL ANALYSIS
DECEMBER 31
---------------------------------------------
1994 1993 1992
----------- ----------- -----------
(THOUSANDS)
Tier I:
Common stockholders' equity....................... $ 2,647,268 $ 2,508,006 $ 2,025,478
Net unrealized (gains) losses -- securities
available for sale............................. 75,232 (27,295) --
Qualifying perpetual preferred stock.............. 229,707 230,422 232,172
Less: goodwill and other intangibles.............. (709,054) (412,534) (276,823)
----------- ----------- -----------
Total Tier I capital...................... 2,243,153 2,298,599 1,980,827
----------- ----------- -----------
Tier II:
Allowable portion of the reserve for possible
credit losses.................................. 322,604 291,878 253,851
Includable subordinated debt...................... 270,695 327,350 253,950
Mandatory convertible debt securities............. 174,150 174,150 174,150
----------- ----------- -----------
Total Tier II capital..................... 767,449 793,378 681,951
----------- ----------- -----------
Total risk-based capital.................. $ 3,010,602 $ 3,091,977 $ 2,662,778
=========== =========== ===========
Risk-adjusted assets................................ $25,608,116 $23,033,788 $19,945,252
=========== =========== ===========
CAPITAL RATIOS
DECEMBER 31
REGULATORY ------------------------------------------------
MINIMUMS 1994 1993 1992
------------- ------------ ------------ ------------
Tier I capital/risk-adjusted assets...................... 4.0% 8.76% 9.98% 9.93%
Total risk-based capital/risk-adjusted assets............ 8.0% 11.76 13.42 13.35
Tier I capital/quarterly average total assets less
deductible intangibles (leverage ratio)................ 3.0 to 5.0% 6.58 7.22 6.47
Equity/loans............................................. N/A 12.09 12.80 12.28
Equity/assets............................................ N/A 7.94 8.11 7.17
Equity and reserve/loans................................. N/A 14.61 15.62 15.61
Equity and reserve/assets................................ N/A 9.60 9.89 9.11
The Federal Reserve Board measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage ratio.
FDICIA established a capital-based supervisory system of prompt corrective
action for all depository institutions. The bank regulatory agencies'
"implementing rule" under FDICIA defines "well capitalized" institutions (the
highest possible rating) as those whose capital ratios equal or exceed all of
the following: Tier I Risk-Based Ratio, 6.0%; Total Risk-Based Ratio, 10.0%; and
Tier I Leverage Ratio, 5.0%. At December 31, 1994, the Company and all of its
Subsidiary Banks reported capital ratios in excess of these "well capitalized"
standards.
The decline in the Company's Tier I and Total Risk-Based Capital Ratios in
1994 was primarily attributable to the Baltimore acquisition, including the
effect of the associated goodwill. The Company's Tier I Leverage Ratio declined
compared to 1993, primarily as a result of the increase in quarterly total
average assets and higher goodwill related to acquisitions.
For a discussion of regulatory capital requirements affecting the Company
and its Subsidiary Banks, see Part I, Item 1, "Business -- Supervision and
Regulation -- Capital" and "-- FDICIA".
28
31
Changes in stockholders' equity during the twelve months ended December 31,
1994 and 1993 were comprised of the following:
1994 1993
-------- --------
(MILLIONS)
Balance, January 1........................................................... $2,738.4 $2,257.6
Net income................................................................. 451.1 398.8
Common Stock issued:
Acquisitions............................................................ -- 219.9
Private placement -- Santander exercise of warrants..................... 121.2 60.6
Stock options and dividend reinvestment plan............................ 24.8 21.7
Other................................................................... 1.6 --
Purchases of treasury stock................................................ (197.7) (116.9)
Dividends on Common Stock.................................................. (142.4) (110.3)
Dividends on Preferred Stock............................................... (20.7) (20.7)
Net unrealized gains (losses)--securities available for sale............... (102.5) 27.3
Other...................................................................... 3.2 .4
-------- --------
Balance, December 31......................................................... $2,877.0 $2,738.4
======== ========
During 1993, the Board authorized the Company to acquire 2% of its Common
Stock in each calendar year, to be used for general corporate purposes. On March
7, 1994, the Board authorized the acquisition by the Company of up to an
additional 1.3 million shares of its outstanding Common Stock during 1994, and
on October 20, 1994, the Board authorized the purchase of an additional 2.0
million shares of Common Stock during the remainder of 1994 and/or in subsequent
periods. Pursuant to the foregoing, the Company repurchased 3.8 million shares
(of the 4.9 million shares authorized) of its Common Stock during 1994, at an
average price of $44.77 per share. First Fidelity repurchased 250 thousand of
such shares from Santander during 1994 at market prices. Under the October 20,
1994 Board authorization, 1.1 million additional shares may be repurchased in
1995 or subsequent years, for general corporate purposes. In addition, the
Company made open market purchases of its Common Stock during 1994, through an
independent agent, for issuance under its dividend reinvestment plan and stock
option plans. At December 31, 1994, the Company held 1,020,282 shares of its
Common Stock, both to fund such plans and for general corporate purposes.
Pursuant to its Investment Agreement with the Company, Santander applied
for and received, early in 1995, regulatory approval to acquire up to 30% of
First Fidelity's voting stock. Santander held 24.8% of the Company's voting
stock at December 31, 1994.
SECURITIES
GENERAL
The Company's securities portfolios are comprised of U.S. government and
federal agency securities, tax-exempt issues of states and municipalities, and
equity and other securities. The portfolios generate substantial interest income
and provide liquidity. The decline in the market value of the investment
portfolio is generally attributable to the increase in the overall interest rate
environment during 1994.
Debt and equity securities are classified as: (a) securities held to
maturity based on management's intent and the Company's ability to hold them to
maturity, (b) trading securities that are bought and held principally for the
purpose of selling them in the near term, and (c) securities available for sale.
Management determines the appropriate classification of securities at the
time of purchase. Securities classified as available for sale include securities
that may be sold in response to changes in interest rates, changes in prepayment
risks, the need to increase regulatory capital or other similar requirements.
Such securities generally are of high quality (treasuries, government agencies,
etc.), with relatively short maturities (weighted average time to maturity of
1.4 years at December 31, 1994, based on projected cash flows or time to
repricing for variable rate securities). The Company does not necessarily intend
to sell such securities, but has classified them as "available for sale" to
provide it with flexibility to respond to unforeseen changes in the economic
environment. Given the relatively short-term nature of the portfolio and its
generally high credit quality, management expects to realize all of its
investment upon the maturity of such instruments, and thus believes that any
market value impairment is temporary in nature.
29
32
Mortgage-backed securities are generally high-quality securities issued by
a governmental agency or corporation, or by private issuers. Such securities
generally consist of pools of residential mortgages with similar interest rates
and similar maturities. Payments to investors include both interest and return
of principal.
At December 31, 1994, the Company held a total of $4.4 billion of
mortgage-backed securities, including $2.8 billion in its securities held to
maturity portfolio and $1.6 billion classified as securities available for sale.
The mortgage-backed portfolio consisted of fixed interest rate securities of
$2.8 billion, and floating rate securities of $1.6 billion ($1.1 billion of the
floating rate securities were one-year adjustable rate mortgages and $.5 billion
were collateralized mortgage obligations). The weighted average life of the
Company's mortgage-backed securities was 1.8 years, based on projected cash
flows or time to repricing for variable rate securities. Such securities are
generally made up of well-protected, highly predictable "planned amortization
classes" or well-seasoned "mortgage participation certificates", having limited
maturity variability. To illustrate, as of December 31, 1994, an interest rate
increase of 300 basis points would be expected to extend the weighted average
life of the mortgage-backed securities portfolio from 1.8 years to approximately
2.5 years, while a decline in interest rates of 300 basis points would reduce
such weighted average life to approximately 1.2 years.
Structured notes of various types comprise a small portion of the Company's
securities portfolios. At December 31, 1994, the Company held $93.7 million
(book value) of structured notes, compared to $2.0 million at December 31, 1993.
The increase was attributable to 1994 acquisitions. Most of the Company's
structured notes are held in its "securities available for sale" portfolio.
First Fidelity's structured notes at December 31, 1994 were comprised of step-up
bonds ($35.9 million), dual index notes ($32.0 million), deleveraged bonds
($13.5 million), indexed amortizing notes ($9.4 million), and single index notes
($2.9 million). At December 31, 1994, a net unrealized loss of $2.3 million was
associated with the Company's structured notes.
The adoption of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities", had no effect on the Company's net income or liquidity for
1994 or 1993. Total stockholders' equity was reduced by $75.2 million, net of
taxes, at December 31, 1994 as a result of net unrealized losses on securities
available for sale. At December 31, 1993, total stockholders' equity was
increased by $27.3 million, net of taxes, as a result of net unrealized gains on
securities available for sale.
SECURITIES HELD TO MATURITY
At December 31, 1994, securities held to maturity are comprised of debt
obligations with a weighted average yield of 6.45% and a remaining weighted
average life of 2.9 years, based on projected cash flows or time to repricing
for variable rate securities. Gross unrealized gains and losses in the
securities held to maturity portfolio at December 31, 1994 were as follows:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED GAINS
GAINS LOSSES (LOSSES)
---------- ---------- ----------
(THOUSANDS)
U.S. Treasury.......................... $ 94 $ (14,788) $ (14,694)
Federal agencies....................... 5,148 (96,420) (91,272)
State and municipal.................... 16,815 (4,192) 12,623
Other securities....................... 4,754 (48,814) (44,060)
---------- ---------- ----------
$ 26,811 $ (164,214) $ (137,403)
======== ========== ==========
At December 31, 1994, the securities held to maturity portfolio totaled
$4.2 billion, a decrease of $1.1 billion from December 31, 1993.
SECURITIES AVAILABLE FOR SALE
At December 31, 1994, securities available for sale were primarily U.S.
Treasury and federal agency securities having a weighted average yield of 5.94%
and a remaining weighted average life of 1.4 years, based on projected cash
30
33
flows or repricing for variable rate securities. Gross unrealized gains and
losses in the securities available for sale portfolio at December 31, 1994 were
as follows:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED GAINS
GAINS LOSSES (LOSSES)
---------- ---------- ----------
(THOUSANDS)
U.S. Treasury............................ $ 9 $ (72,045) $ (72,036)
Federal agencies......................... 9,400 (27,617) (18,217)
State and municipal...................... 24 (417) (393)
Equity securities........................ 5,190 (755) 4,435
Other securities......................... 208 (7,933) (7,725)
---------- ---------- ----------
$ 14,831 $ (108,767) $ (93,936)
========= ========== =========
The net unrealized losses were reported as a separate component of
stockholders' equity, net of tax effect, at December 31, 1994. Bank regulatory
authorities have determined that such net gains and losses should be ignored for
purposes of determining regulatory capital. Securities available for sale
totaled $3.8 billion at December 31, 1994 and $2.7 billion at December 31, 1993.
Proceeds from sales of securities available for sale during 1994 were
$969.8 million. Gains of $19.5 million and losses of $1.8 million were realized
on these sales. In 1993, the sale of debt securities available for sale resulted
in realized gains of $7.5 million and realized losses of $642 thousand. Proceeds
from these sales were $458.3 million.
MATURITIES
The following tables set forth certain information regarding First
Fidelity's securities held to maturity and securities available for sale.
SECURITIES HELD TO MATURITY --
BOOK VALUE AND MATURITY DISTRIBUTION(1)
FEDERAL AGENCIES OTHER SECURITIES
----------------------- ---------------------- TAX
U.S. MORTGAGE- STATE AND MORTGAGE- EQUIV.
DECEMBER 31, 1994 TREASURY BACKED OTHER MUNICIPAL BACKED OTHER TOTAL YIELD
----------------- --------- ---------- --------- --------- --------- --------- ---------- ------
(DOLLARS IN THOUSANDS)
Stated Maturity --
Book Value(2):
Within one year....... $ 56,236 $ 834,734 $ 2,734 $ 159,666 $ 149,476 $ 133,127 $1,335,973 5.63%
One to five years..... 255,455 1,212,473 83,550 181,965 369,670 183,551 2,286,664 6.14
Five to ten years..... 3,986 195,175 12,993 74,435 53,436 14,649 354,674 7.68
Over ten years........ 3,481 -- 1,935 104,949 5,346 25,349 141,060 9.12
No stated maturity.... -- -- -- -- -- 68,489 68,489 N/A
--------- ---------- --------- --------- --------- --------- ----------
December 31, 1994....... $ 319,158 $2,242,382 $ 101,212 $ 521,015 $ 577,928 $ 425,165 $4,186,860
========= ========== ========= ========= ========= ========= ==========
December 31, 1993....... $ 394,791 $3,118,732 $ 81,269 $ 564,156 $ 442,794 $ 640,245 $5,241,987
========= ========== ========= ========= ========= ========= ==========
December 31, 1992....... $ 676,943 $3,711,446 $ 43,012 $ 718,728 $ 189,228 $ 238,473 $5,577,830
========= ========== ========= ========= ========= ========= ==========
- ---------------
(1) For 1992, these securities were classified as securities at amortized cost.
(2) Maturities of mortgage-backed securities are estimated based on projected
cash flows, assuming no change in the current interest rate environment.
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34
SECURITIES AVAILABLE FOR SALE --
FAIR VALUE AND MATURITY DISTRIBUTION
FEDERAL AGENCIES OTHER SECURITIES
----------------------- STATE ---------------------- TAX
U.S. MORTGAGE- AND MORTGAGE- EQUIV.
DECEMBER 31, 1994 TREASURY BACKED OTHER MUNICIPAL BACKED OTHER TOTAL YIELD
---------- ---------- --------- --------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Stated Maturity --
Fair Value(1):
Within one year....... $ 57,487 $ 212,558 $ 4,229 -- $ 17,090 $ 576 $ 291,940 6.51%
One to five years..... 1,917,548 639,636 86,650 $ 1,750 74,234 12,629 2,732,447 5.95
Five to ten years..... 2,970 505,713 11,979 1,348 16,883 46 538,939 5.84
Over ten years........ -- 126,225 -- 10,122 21,928 -- 158,275 7.09
No stated
maturity(2)......... -- -- -- -- -- 59,562 59,562 N/A
---------- ---------- --------- --------- --------- --------- ----------
December 31, 1994....... $1,978,005 $1,484,132 $ 102,858 $ 13,220 $ 130,135 $ 72,813 $3,781,163
=========== =========== ========= ======== ========= ======== ===========
December 31, 1993....... $1,276,612 $1,092,350 $ 28,689 $ 14,203 $ 162,045 $ 82,822 $2,656,721
=========== =========== ========= ======== ========= ======== ===========
December 31, 1992....... $ 734,018 $ -- $ 10,235 $ 7,049 $ -- $ 3,826 $ 755,128
=========== =========== ========= ======== ========= ======== ===========
- ---------------
(1) Maturities of mortgaged-backed securities are estimated based on projected
cash flows, assuming no change in the current interest rate environment.
(2) Consists entirely of equity securities.
LOAN PORTFOLIO
Details regarding the Company's loan portfolio are presented below:
LOANS OUTSTANDING
DECEMBER 31
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(THOUSANDS)
Domestic Borrowers
Commercial and financial............ $ 6,145,741 $ 6,457,343 $ 5,478,982 $ 6,418,895 $ 7,671,385
Real estate -- construction......... 317,959 473,434 603,132 714,411 930,044
Mortgage -- commercial.............. 4,035,199 3,447,554 2,916,375 2,336,217 2,114,938
Mortgage -- residential (1 to 4
family)............................. 6,046,674 4,888,542 3,547,614 2,467,354 2,038,937
Installment......................... 5,405,148 4,825,416 4,760,947 4,510,110 4,891,238
Leasing............................. 2,050,486 1,419,526 1,206,678 1,060,543 1,116,690
----------- ----------- ----------- ----------- -----------
Total............................ 24,001,207 21,511,815 18,513,728 17,507,530 18,763,232
Foreign Borrowers..................... 110,468 112,397 116,991 134,686 165,569
Unearned income....................... (310,434) (237,301) (253,024) (300,699) (398,497)
----------- ----------- ----------- ----------- -----------
Total............................ $23,801,241 $21,386,911 $18,377,695 $17,341,517 $18,530,304
=========== =========== =========== =========== ===========
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35
LOANS OUTSTANDING -- MATURITY DISTRIBUTION(1)
DECEMBER 31, 1994
-------------------------------------------------------
WITHIN ONE TO OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(THOUSANDS)
Commercial and financial............ $3,839,144 $1,823,050 $ 483,547 $6,145,741
Real estate -- construction......... 179,636 123,250 15,073 317,959
Foreign............................. 73,306 2,430 34,732 110,468
---------- ---------- ---------- ----------
Total............................. $4,092,086 $1,948,730 $ 533,352 $6,574,168
========== ========== ======== ==========
Loans with predetermined
interest rates.................... $ 958,741 $ 299,127
Loans with floating rates........... 989,989 234,225
---------- ----------
Total............................. $1,948,730 $ 533,352
========== ========
- ---------------
(1) Excludes mortgage, installment and leasing loans.
The economy in First Fidelity's primary marketplace (New Jersey, eastern
Pennsylvania, Connecticut, southern New York and Maryland) is broad-based and
diverse. The Company's loan portfolio reflects this diversity. Consumer loans
constituted 55%, 50% and 49% of total loans at December 31, 1994, 1993 and 1992,
respectively. The remainder of the portfolio is predominantly domestic
commercial loans and commercial real estate loans. Commercial lending activities
are focused primarily on lending to middle market and small business corporate
borrowers engaged in a variety of industries. Foreign loans are an insignificant
portion of total loans.
The Company's total loans grew in 1994 by $2.4 billion, to $23.8 billion,
primarily as a result of acquisitions. In addition, demand for certain types of
consumer loans in the Company's primary market area increased slightly during
1994. The Company's commercial and financial loans decreased $311.6 million
during the year, primarily as a result of a significant decrease in commercial
and financial loans with lower than average interest rate spreads. Commercial
mortgages increased by $587.6 million, or 17%.
Continued expansion of the consumer loan portfolio is an important
objective for First Fidelity. Residential mortgage loans increased 24% to $6.0
billion at December 31, 1994, primarily as a result of acquisitions and growth
in adjustable rate mortgage originations. Installment loans increased $579.7
million, or 12%. Home equity loans rose 7% to $1.6 billion at December 31, 1994.
Automobile leases increased by 59% to $1.7 billion at December 31, 1994. The
growth in consumer loans reflects the Company's marketing efforts.
FOREIGN ASSETS
First Fidelity's foreign loan portfolio was $110.5 million, $112.4 million
and $117.0 million at December 31, 1994, 1993 and 1992, respectively. At
December 31, 1994, the Company had no outstandings to any single foreign country
in excess of .75% of total assets. At December 31, 1993, the Company had such
outstandings of $333 million, or 1% of total assets, with United Kingdom banks.
At December 31, 1992, the Company had such outstandings of $509 million, or 2%
of total assets, with French banks and $476 million, or 2% of total assets, with
United Kingdom banks.
ASSET QUALITY
The Company seeks to manage credit risk through diversification of the loan
portfolio and the application of policies and procedures designed to foster
sound underwriting and credit monitoring practices. However, as in any banking
organization, the level of credit risk is dependent in part upon local and
national economic conditions that are beyond the Company's control. The chief
credit officer is charged with monitoring asset quality, establishing credit
policies and procedures, seeking the consistent application of these policies
and procedures across the organization, and adjusting policies as appropriate
for changes in market conditions.
First Fidelity's loan portfolio is diversified by industry of borrower and
type of loan, with limits on the size of loan to any single borrower. At
December 31, 1994 and 1993, domestic commercial and financial loans represented
25% and 30% of the loan portfolio, respectively; residential mortgages
represented 25% and 23%, respectively; installment loans were 22% in both years;
commercial mortgages represented 17% and 16%, respectively; the leasing
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36
portfolio (consisting of equipment and automobile leases) represented 9% and 6%,
respectively; construction loans were 1% and 2%, respectively; and foreign loans
represented 1% in both years.
The risk profile of the loan portfolio is impacted by many external trends
and conditions. Among the more important economic factors which tend to reduce
or increase the risk profile of the loan portfolio are changes in regional or
local real estate values, employment levels and personal income levels. Changes
in property and income tax rates, interest rates, governmental actions such as
spending cutbacks, and real estate market conditions are also important
determinants of the risk inherent in lending by the Company.
The lending risk associated with commercial mortgage, real
estate/construction, commercial and financial loans, and equipment leasing is
also influenced by factors such as the specific borrower's financial condition,
the demand for office space, and the long-term success of companies which
operate in the Company's primary marketplace.
Certain of the Company's asset quality ratios are set forth below:
ASSET QUALITY RATIOS
DECEMBER 31
-----------------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
Non-performing loans/loans(a)...................................... .99% 1.77% 2.76% 4.13% 3.97%
Non-performing assets/loans and other real estate owned(a)......... 1.38 2.30 3.75 5.29 4.87
Net loan charge-offs/average loans................................. .55 1.23 1.42 1.62 1.74
Present period recoveries/prior period charge-offs................. 14.40 15.49 14.77 10.04 18.93
Reserve/loans...................................................... 2.52 2.82 3.32 3.52 3.00
Reserve/non-performing loans(a).................................... 253 159 121 85 76
Reserve/non-performing assets(a)................................... 182 122 88 66 61
- ---------------
(a) Non-performing loans and non-performing assets and ratios exclude loans
classified as contractually past due 90 days or more but still accruing,
assets subject to FDIC loss-sharing provisions, and assets classified as
held for sale, which are included in other assets.
The ratios for "Non-performing loans/loans" and "Non-performing
assets/loans and other real estate owned" continued to improve during 1994,
reflecting the Company's continuing workout and collection efforts, which result
in payments and charge-offs. In addition, the Company experienced a decreased
volume of loans migrating to non-performing status during 1994 and 1993,
compared with 1990 through 1992.
The commercial loan portfolio is monitored continuously, primarily by the
review of risk ratings assigned to each commercial loan, which take into
consideration both the borrower's fundamental condition and the specifics of
each loan. These risk ratings provide the principal basis for managerial and
accounting actions. It is the responsibility of lending groups to monitor these
loans and to make adjustments as appropriate to the risk ratings. In addition,
such loans are periodically examined by the Company's credit audit department,
which is structured to be independent of both the lending and the credit policy
and administration functions. The status of individual loans, portfolio
segments, and the entire portfolio are monitored by credit policy officers and
senior management on a continuous basis. This process is designed to assist the
Company in taking appropriate corrective actions as early as possible.
A quarterly reporting and review process is in place to monitor those
credits that have been identified as problematic or vulnerable in order to
develop a corrective action program, to assess the Company's progress in working
toward a solution, and to assist in determining an appropriate reserve for
possible credit losses. A separate loan workout unit becomes involved in credits
that have been identified as problematic. The Company's loan review procedures
are designed to reduce both non-performing assets and loan losses; however, such
assets and losses are an inevitable consequence of a banking organization's
provision of credit to its customers. The levels of such assets and losses are
dependent in part on economic, legislative and regulatory factors that are
beyond the Company's control.
For commercial loans, mortgage loans and leases, the necessity for
charge-offs is determined on a case-by-case basis. Installment loans and credit
card receivables are generally charged-off when principal or interest payments
are in arrears for more than 120 and 180 days, respectively, except where the
loan is well-secured and in the process of collection.
34
37
Commercial real estate lending is an integral part of the Company's middle
market lending business, and continues to be an important commercial credit
product for First Fidelity. Commercial real estate loans (commercial mortgages
and construction loans) comprised 18% of total loans at December 31, 1994 and
1993. First Fidelity's real estate lending policies are designed to take into
consideration the cyclical nature of the real estate business and to define
acceptable transactions specifically in terms of the borrower, collateral,
documentation, loan structure and product.
In addition to internal processes, lending procedures and the loan
portfolio are examined by bank regulatory agencies as part of their supervisory
activities. For First Fidelity, the most comprehensive of these is the
examination by the OCC. Examinations by regulators are performed periodically.
The Company's independent auditors also review the loan portfolio and lending
procedures during their annual audit of the Company's financial statements.
SEGREGATED ASSETS
On October 2, 1992, in accordance with the agreement to acquire selected
assets and liabilities of The Howard Savings Bank ("Howard"), the Company
entered into a loss-sharing arrangement with the FDIC. The Howard non-performing
commercial mortgages, commercial real estate/construction loans and commercial
and financial loans ("shared-loss loans"), and any such Howard performing
shared-loss loans that become non-performing through October 2, 1997, are
considered "segregated assets", and are included in the "other assets" caption
of the Consolidated Statements of Condition. Such segregated assets include
non-accrual loans, foreclosed properties and in-substance foreclosures, net of a
reserve for segregated assets, but exclude acquired consumer loans. Under the
terms of the loss-sharing arrangement, the FDIC reimburses the Company for 80%
of net charge-offs and reimbursable expenses associated with such shared-loss
loans for a five year period. Under the terms of the loss-sharing arrangement,
First Fidelity is obligated to pay the FDIC 80% of net recoveries on such assets
during years six and seven after the acquisition. At the end of the seven year
period, the FDIC is obligated to provide additional reimbursement to First
Fidelity for losses so that, subject to certain conditions, First Fidelity bears
only 5% of total losses with respect to such segregated assets over $130 million
of net losses and associated expenses.
In addition to non-performing shared-loss loans reported as segregated
assets, performing loans potentially subject to the loss-sharing arrangement
with the FDIC at December 31, 1994 and 1993, totaled $274.4 million and $351.3
million, respectively.
At December 31, 1994, segregated assets were $68.3 million, net of a $4.3
million reserve, compared to $247.9 million, net of a $6.5 million reserve at
December 31, 1993. The reserve established by First Fidelity in 1992 with
respect to its 20% loss exposure on the segregated assets was $25.0 million.
First Fidelity's share of charge-offs on segregated assets was $2.5 million in
1994, $10.6 million in 1993 and $8.8 million in 1992. Related recoveries in 1994
and 1993 were $1.3 million and $855 thousand, respectively.
ASSETS HELD FOR SALE
Assets held for sale declined to $69.3 million at December 31, 1994, from
$88.4 million at December 31, 1993, despite $58.3 million of gross additions
related to 1994 acquisitions, including $34.3 million related to the Baltimore
acquisition. In 1993, First Fidelity determined that it would pursue an
accelerated disposition approach on certain non-performing assets. Accordingly,
the Company classified $91.0 million of assets as "held for sale", net of $48.8
million in write-downs taken to record such assets at their estimated near-term
disposition values. Late in 1993, the Company classified an additional $44.7
million of assets as "held for sale", related primarily to the Peoples
acquisition. The Company anticipates that substantially all such assets will be
sold within 18 months of their reclassification.
PROVISION AND RESERVE FOR POSSIBLE CREDIT LOSSES
The levels of the provision and reserve for possible credit losses are
based on management's ongoing assessment of the Company's credit exposure and
consideration of a number of relevant variables. These variables include
prevailing and anticipated domestic and international economic conditions,
assigned risk ratings on credit exposures, the diversification and size of the
loan portfolio, the results of the most recent regulatory examinations available
to the Company, the current and projected financial status and creditworthiness
of borrowers, certain off balance sheet credit risks, the nature and level of
non-performing assets and loans that have been identified as potential problems,
the
35
38
adequacy of collateral, past and expected loss experience, and other factors
deemed relevant by management. The Company's risk rating system and the
quarterly reporting process for problem and vulnerable credits are utilized by
management in determining the adequacy of the Company's reserve for possible
credit losses.
The following table sets forth information regarding the Company's
provision and reserve for possible credit losses and charge-off experience:
RECONCILIATION OF RESERVE FOR POSSIBLE CREDIT LOSSES
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(THOUSANDS)
Balance at Beginning of Period:
Domestic............................ $ 593,565 $ 600,406 $ 594,074 $ 532,962 $ 310,805
Foreign............................. 8,618 9,947 15,525 23,210 77,979
--------- --------- --------- --------- ---------
602,183 610,353 609,599 556,172 388,784
Provisions:
Domestic............................ 60,655 149,853 229,537 309,304 529,474
Foreign(1).......................... 18,345 (1,853) (1,537) (11,304) (31,474)
--------- --------- --------- --------- ---------
79,000 148,000 228,000 298,000 498,000
Charge-Offs:
Domestic
Commercial and financial......... 73,263 100,818 123,128 168,976 161,414
Real estate -- construction...... 7,004 49,932 55,993 45,647 108,276
Real estate -- mortgage.......... 25,633 68,417 27,844 11,839 6,941
Installment...................... 38,957 47,659 68,753 77,761 43,147
Leasing.......................... 7,292 16,319 14,844 14,952 8,920
Foreign............................. 7,616 471 4,734 1,224 42,077
--------- --------- --------- --------- ---------
Total.......................... 159,765 283,616 295,296 320,399 370,775
Recoveries:
Domestic
Commercial and financial......... 18,434 15,769 18,580 12,342 11,033
Real estate -- construction...... 740 3,203 849 2,112 1,596
Real estate -- mortgage.......... 3,587 3,130 1,256 655 677
Installment...................... 13,883 17,759 22,535 15,135 6,729
Leasing.......................... 3,632 4,874 3,417 2,139 1,346
Foreign............................. 553 995 693 4,843 18,782
--------- --------- --------- --------- ---------
Total.......................... 40,829 45,730 47,330 37,226 40,163
--------- --------- --------- --------- ---------
Net Charge-Offs................ 118,936 237,886 247,966 283,173 330,612
Balance related to sale of
subsidiary.......................... -- -- -- (10,800) --
Acquired reserves..................... 37,086 81,716 20,720 49,400 --
--------- --------- --------- --------- ---------
Balance at End of Period:
Domestic............................ 579,433 593,565 600,406 594,074 532,962
Foreign............................. 19,900 8,618 9,947 15,525 23,210
--------- --------- --------- --------- ---------
$ 599,333 $ 602,183 $ 610,353 $ 609,599 $ 556,172
======== ======== ======== ======== ========
- ---------------
(1) As a result of a significant decrease in the level of foreign assets and
substantial recoveries in its foreign portfolio, management made the
indicated reallocations from the reserve for foreign loans to the general
reserve, in years prior to 1994. In 1994, charge-offs and management's
assessment of a small number of foreign loans resulted in an increase in the
foreign provision.
The continued decline in the provision for possible credit losses from 1991
through 1994 reflects management's evaluation of the adequacy of the level of
the reserve for possible credit losses in light of, among other factors,
improved asset quality trends, generally improving economic conditions, the
continued decline in non-performing loans and lower levels of charge-offs. The
reduction of the provision for possible credit losses contributed to the
improvement in the Company's net income in each of the last three years.
Key asset quality reserve ratios increased steadily over the three years
ended December 31, 1994. The ratio of the reserve for possible credit losses to
non-performing loans was 121% for 1992, 159% for 1993 and 253% for 1994. The
reserve for possible credit losses to non-performing assets ratio was 88% for
1992, 122% for 1993 and
36
39
182% for 1994. These ratios exclude loans classified as contractually past due
90 days or more but still accruing, assets subject to FDIC loss-sharing
provisions, and assets classified as held for sale.
The reserve for possible credit losses was $599.3 million at December 31,
1994, and represented 2.52% of total loans, compared to $602.2 million and 2.82%
of total loans at December 31, 1993. The Company believes that it has maintained
the reserve for possible credit losses at an adequate level, although
ultimately, the level of credit losses is dependent in part upon factors outside
of management's control which may not be presently foreseeable. Management
believes that it has remained sensitive to the evolving economic situation and
its potential impact on asset quality and the reserve for possible credit
losses. If the economic environment deteriorates, management may find it
appropriate to increase the reserve for possible credit losses. In addition,
regulatory agencies periodically review the level of the Company's reserve for
possible credit losses. Such agencies could require the Company to increase or
decrease the level of the reserve based on their interpretation of data
available to them at the time of their examination.
The Company regards the reserve as a general reserve which is available to
absorb losses from all loans. However, for the purpose of complying with
disclosure requirements of the Securities and Exchange Commission, the table
below presents an allocation of the reserve among various loan categories and
sets forth the percentage of loans in each category to total loans. The
allocation of the reserve as shown in the table should neither be interpreted as
an indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions.
ALLOCATION OF RESERVE FOR POSSIBLE CREDIT LOSSES
DECEMBER 31
--------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------ ------------------ ------------------ ------------------ ------------------
% OF % OF % OF % OF % OF
LOANS LOANS LOANS LOANS LOANS
TO TO TO TO TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
Commercial and
financial....... $ 280,200 25.5% $ 225,311 29.9% $ 257,341 29.4% $ 310,580 36.4% $ 252,960 40.5%
Real estate --
construction.... 35,300 1.3 98,131 2.2 115,733 3.2 86,260 4.0 134,603 4.9
Real estate --
mortgage........ 117,233 41.8 169,751 38.5 65,444 34.7 33,440 27.2 45,070 22.0
Installment....... 124,400 22.4 71,760 22.3 123,761 25.6 128,475 25.6 77,823 25.8
Leasing........... 22,300 8.5 28,612 6.6 38,127 6.5 35,319 6.0 22,506 5.9
Foreign........... 19,900 0.5 8,618 0.5 9,947 0.6 15,525 0.8 23,210 0.9
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total........... $ 599,333 100.0% $ 602,183 100.0% $ 610,353 100.0% $ 609,599 100.0% $ 556,172 100.0%
========= ====== ========= ====== ========= ====== ========= ====== ========= ======
CHARGE-OFFS
First Fidelity's gross charge-offs in 1994 totaled $159.8 million, a
decline of 44% from $283.6 million in 1993. The 1993 charge-offs included $42.8
million in connection with transfers to "assets held for sale". Charge-offs in
1993 were down 4% from $295.3 million in 1992. The current charge-off level
reflects improvement in the business climate, which affects both business and
consumers, and greater stability in the regional real estate market.
Real estate-related charge-offs were $32.6 million in 1994, compared to
$118.3 million in 1993. The decrease in 1994 was primarily the result of a
reduced amount of charge-offs in connection with transfers to "assets held for
sale", compared to 1993.
Charge-offs of commercial and financial loans, excluding those related to
commercial real estate loans, were $73.3 million, representing a $27.5 million
decrease from 1993. Charge-offs unrelated to real estate were not concentrated
in any industry, type of loan or type of borrower.
Installment loan charge-offs of $39.0 million were down $8.7 million from
1993, reflecting lower charge-offs in credit cards and other types of
installment loans. Leasing charge-offs were $7.3 million in 1994, compared to
$16.3 million in 1993. Foreign charge-offs were $7.6 million and $.5 million in
1994 and 1993, respectively.
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40
RECOVERIES
Recoveries on charged-off commercial and financial loans were $18.4 million
in 1994, compared to $15.8 million in the prior year. Real estate-related
recoveries were $4.3 million in 1994 and $6.3 million in 1993. Installment loan
recoveries were $13.9 million in 1994, compared to $17.8 million a year earlier.
Recoveries on leasing and foreign loans were $3.6 million and $.6 million,
respectively, in 1994, compared to $4.9 million and $1.0 million, respectively,
in 1993.
NON-PERFORMING ASSETS
Non-performing assets include those loans that are not accruing interest
(non-accruing loans), loans that have been renegotiated due to a weakening in
the financial position of the borrower (restructured loans) and OREO, which
consists of real estate acquired upon foreclosure and in-substance foreclosures.
The following table sets forth information regarding non-performing assets
and accruing contractually past due loans.
NON-PERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
DECEMBER 31
-------------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(THOUSANDS)
Non-performing assets(a):
Non-accruing loans:
Domestic:
Real estate............................... $ 94,910 $ 184,610 $ 236,659 $ 324,318 $ 307,675
Other..................................... 109,155 168,487 230,894 321,190 422,593
Foreign:
Less developed countries.................. 176 176 414 414 460
Other..................................... 15,326 11,737 2,754 9,798 4,200
--------- --------- --------- --------- ---------
Total................................... 219,567 365,010 470,721 655,720 734,928
Restructured loans............................. 17,253 13,871 35,604 60,786 1,130
Other real estate owned:
Foreclosed property.......................... 94,879 103,344 155,050 79,384 47,473
In-substance foreclosures.................... 3,907 19,145 40,084 140,339 137,835
--------- --------- --------- --------- ---------
Total................................... 98,786 122,489 195,134 219,723 185,308
Less OREO reserve............................ (6,752) (6,622) (5,765) (7,306) (10,120)
--------- --------- --------- --------- ---------
Net..................................... 92,034 115,867 189,369 212,417 175,188
--------- --------- --------- --------- ---------
Total Non-Performing Assets.......... $ 328,854 $ 494,748 $ 695,694 $ 928,923 $ 911,246
======== ======== ======== ======== ========
Contractually past due loans(b):
Consumer....................................... $ 128,284 $ 133,112 $ 142,077 $ 134,720 $ 71,101
Other.......................................... 3,242 8,373 12,422 10,686 25,447
--------- --------- --------- --------- ---------
Total.......................................... $ 131,526 $ 141,485 $ 154,499 $ 145,406 $ 96,548
======== ======== ======== ======== ========
- ---------------
(a) Non-performing assets exclude loans classified as contractually past due 90
days or more and still accruing, segregated shared-loss assets of $72.6
million in 1994, $254.4 million in 1993 and $310.0 million in 1992, and
assets held for sale of $69.3 million in 1994 and $88.4 million in 1993.
(b) Accruing loans past due 90 days or more.
Interest income is not accrued on loans where interest or principal is 90
days or more past due, unless the loans are adequately secured and in the
process of collection. Additionally, interest is not accrued on loans where
management has determined that the borrowers may be unable to meet future
contractual principal and/or interest obligations, even though interest and
principal payments may be current. When a loan is placed on non-accrual status,
interest accruals cease and past due interest is reversed and charged against
current income. Any interest payments subsequently received are credited to
either principal or interest income, depending upon the financial condition of
the borrower. Interest income is not accrued until the financial condition and
payment record of the borrower once again
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41
warrant it. Interest on loans that have been restructured is accrued according
to the restructured terms once regularity of payment is established and
management has determined that the borrower is able to meet all recorded
obligations.
Non-performing assets were $328.9 million at December 31, 1994, compared to
$494.7 million at December 31, 1993. The decline reflects the Company's
continuing workout and collection efforts and a lower volume of loans migrating
to non-performing status. Non-performing real estate loans declined $89.7
million. The level of non-accruing domestic commercial loans decreased $59.3
million from December 31, 1993 to December 31, 1994. Restructured loans were
$17.2 million at December 31, 1994, compared to $13.9 million at December 31,
1993.
Payments recognized as interest income on loans that were classified as
non-accruing and restructured as of year-end totaled $3.3 million in 1994. Had
payments on year-end non-accruing and restructured loans been made at the
original contracted amounts and due dates, the Company would have recorded
additional interest income of approximately $19.2 million in 1994.
Prior to transferring a real estate loan to OREO, it is written-down to the
lower of cost or fair value. This write-down is charged to the reserve for
possible credit losses. Subsequently, OREO is carried at the lower of fair value
less estimated cost to sell or carrying value. An OREO reserve is maintained at
a level sufficient to absorb unidentified declines in the fair value of all OREO
properties between periodic appraisals, and for estimated selling costs. The
following table sets forth information regarding the Company's reserve for OREO:
1994 1993 1992
--------- --------- ---------
(THOUSANDS)
Balance at beginning of period.................... $ 6,622 $ 5,765 $ 7,306
Provision......................................... 9,250 22,800 21,155
Acquired reserves................................. 456 6,649 --
Charge-offs and write-downs....................... (9,576) (28,592) (22,696)
--------- --------- ---------
Balance at end of period.......................... $ 6,752 $ 6,622 $ 5,765
======== ======== ========
At December 31, 1994, loans that were 90 days or more past due but still
accruing interest totaled $131.5 million (including $128.3 million of consumer
loans), compared to $141.5 million at December 31, 1993, a decrease of $10.0
million, or 7%. The decrease was primarily the result of continuing workout and
collection efforts, as well as an improving economy. Management's determination
regarding the accrual of interest on these loans is based on the availability
and sufficiency of collateral and the status of collection efforts. In the
present environment, certain of such loans could become non-performing assets
and/or result in charge-offs in the future.
During 1994, SFAS 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures", were issued. Under SFAS 114 and SFAS 118,
"impaired" loans must be measured based on the present value of expected future
cash flows, discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral-dependent. Management is continuing to
develop First Fidelity's approach to implementing SFAS 114 and SFAS 118, and
does not expect that the adoption of these standards, which is required
beginning in 1995, will have a material effect on the Company's financial
statements.
39
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
PAGE
Report of Independent Auditors.................................................... 41
First Fidelity Bancorporation (and Subsidiaries):
Consolidated Statements of Income............................................ 42
Consolidated Statements of Condition......................................... 43
Consolidated Statements of Changes in Stockholders' Equity................... 44
Consolidated Statements of Cash Flows........................................ 45
Notes to Consolidated Financial Statements................................... 46
(b) The following supplementary data is set forth in this Annual Report on
Form 10-K on the following pages:
Summary of Quarterly Financial Information........................................ 74
Computation of Earnings Per Share................................................. 75
40
43
[KPMG Peat Marwick LLP LOGO]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
First Fidelity Bancorporation
We have audited the accompanying consolidated statements of condition of
First Fidelity Bancorporation and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of First Fidelity Bancorporation's management. Our responsibility
is to express an opinion on the consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Fidelity Bancorporation and subsidiaries as of December 31, 1994 and 1993
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, First
Fidelity Bancorporation changed its methods of accounting for income taxes,
postretirement benefits other than pensions, postemployment benefits, and
certain investments in debt and equity securities in 1993.
/s/ KPMG Peat Marwick LLP
January 18, 1995,
New York, New York
Member Firm of
/ / / / / Klynveld Peat Marwick Goerdeler
41
44
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------------------
1994 1993 1992
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest Income
Interest and fees on loans.......................................... $1,650,879 $1,531,900 $1,513,445
Interest on federal funds sold and securities purchased under
agreements to resell.............................................. 1,158 16,176 33,578
Interest and dividends on securities:
Taxable interest income........................................... 407,516 370,731 409,104
Tax-exempt interest income........................................ 39,310 49,017 57,675
Dividends......................................................... 5,333 4,559 4,037
Interest on bank deposits........................................... 25,494 66,308 104,524
Interest on trading account securities.............................. 6,462 6,505 6,918
---------- ---------- ----------
Total Interest Income........................................... 2,136,152 2,045,196 2,129,281
---------- ---------- ----------
Interest Expense
Interest on:
Deposits.......................................................... 604,796 620,730 824,453
Short-term borrowings............................................. 75,014 32,199 43,469
Long-term debt.................................................... 52,226 38,584 52,790
---------- ---------- ----------
Total Interest Expense.......................................... 732,036 691,513 920,712
---------- ---------- ----------
Net Interest Income............................................. 1,404,116 1,353,683 1,208,569
Provision for possible credit losses.................................. 79,000 148,000 228,000
---------- ---------- ----------
Net Interest Income after Provision for Possible Credit
Losses....................................................... 1,325,116 1,205,683 980,569
---------- ---------- ----------
Non-Interest Income
Trust income........................................................ 105,891 104,517 86,396
Service charges on deposit accounts................................. 145,059 152,340 139,310
Other service charges, commissions and fees......................... 105,673 85,741 76,374
Trading revenue..................................................... 10,089 16,932 16,685
Net securities transactions......................................... 17,720 7,017 4,825
Other income........................................................ 32,512 16,953 8,786
---------- ---------- ----------
Total Non-Interest Income....................................... 416,944 383,500 332,376
---------- ---------- ----------
Non-Interest Expense
Salaries and benefits expense....................................... 485,476 468,050 408,841
Occupancy expense................................................... 114,593 112,729 107,269
Equipment expense................................................... 41,785 43,983 41,418
Other expenses...................................................... 427,775 389,937 359,318
---------- ---------- ----------
Total Non-Interest Expense...................................... 1,069,629 1,014,699 916,846
---------- ---------- ----------
Income before income taxes and cumulative effect of changes in
accounting principles............................................... 672,431 574,484 396,099
Income taxes.......................................................... 221,368 178,025 82,362
---------- ---------- ----------
Income before cumulative effect of changes in accounting principles... 451,063 396,459 313,737
Cumulative effect of changes in accounting principles, net of tax..... -- 2,373 --
---------- ---------- ----------
Net Income...................................................... 451,063 398,832 313,737
Dividends on Preferred Stock.......................................... 20,667 20,653 21,061
---------- ---------- ----------
Net Income Applicable to Common Stock........................... $ 430,396 $ 378,179 $ 292,676
=========== =========== ===========
Per Common Share:
Primary:
Income before cumulative effect of changes in accounting
principles...................................................... $5.21 $4.63 $3.89
Cumulative effect of changes in accounting principles, net of
tax............................................................. -- .03 --
Net income -- primary............................................. 5.21 4.66 3.89
Fully diluted:
Income before cumulative effect of changes in accounting
principles...................................................... 5.11 4.55 3.77
Cumulative effect of changes in accounting principles, net of
tax............................................................. -- .03 --
Net income -- fully diluted....................................... 5.11 4.58 3.77
See accompanying notes to consolidated financial statements.
42
45
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31
--------------------------
1994 1993
----------- -----------
(THOUSANDS)
Assets
Cash and due from banks................................................................ $ 2,082,002 $ 1,831,270
Interest-bearing time deposits......................................................... 35,567 979,769
Securities held to maturity (market value of $4,049,457 in 1994 and $5,321,239 in
1993)................................................................................ 4,186,860 5,241,987
Securities available for sale, at market value......................................... 3,781,163 2,656,721
Trading account securities, at market value............................................ 110,494 149,887
Federal funds sold and securities purchased under agreements to resell................. 50,675 15,000
Loans, net of unearned income.......................................................... 23,801,241 21,386,911
Less: Reserve for possible credit losses............................................. (599,333) (602,183)
----------- -----------
Net Loans.......................................................................... 23,201,908 20,784,728
Premises and equipment................................................................. 437,677 404,208
Customers' acceptance liability........................................................ 215,556 187,903
Other assets........................................................................... 2,113,794 1,511,112
----------- -----------
Total Assets....................................................................... $36,215,696 $33,762,585
============ ============
Liabilities
Deposits in domestic offices:
Demand deposits...................................................................... $ 5,393,749 $ 5,347,007
Savings/NOW deposits................................................................. 9,271,335 9,650,774
Money market deposit accounts........................................................ 4,257,135 3,893,130
Other consumer time deposits......................................................... 8,858,443 8,637,296
Corporate certificates of deposit.................................................... 393,058 398,435
Deposits in overseas offices........................................................... 733,132 216,380
----------- -----------
Total Deposits..................................................................... 28,906,852 28,143,022
Short-term borrowings.................................................................. 2,716,922 1,620,125
Acceptances outstanding................................................................ 218,625 196,117
Other liabilities...................................................................... 682,699 451,835
Long-term debt......................................................................... 813,623 613,058
----------- -----------
Total Liabilities.................................................................. 33,338,721 31,024,157
Commitments and contingencies (see Notes 16 and 18)
Stockholders' Equity
Preferred stock........................................................................ 229,707 230,422
Common stock ($1.00 par)
Authorized: 150,000,000 shares
Issued: 82,003,121 shares in 1994 and 79,937,719 shares in 1993...................... 82,003 79,938
Surplus................................................................................ 1,256,020 1,202,373
Retained earnings...................................................................... 1,430,149 1,200,073
Net unrealized gains (losses) -- securities available for sale......................... (75,232) 27,295
Less treasury stock, at cost: 1,020,282 shares in 1994 and 36,714 shares in 1993....... (45,672) (1,673)
----------- -----------
Total Common Stockholders' Equity.................................................. 2,647,268 2,508,006
----------- -----------
Total Stockholders' Equity......................................................... 2,876,975 2,738,428
----------- -----------
Total Liabilities and Stockholders' Equity......................................... $36,215,696 $33,762,585
============ ============
See accompanying notes to consolidated financial statements.
43
46
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
TOTAL
PREFERRED COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK SURPLUS EARNINGS STOCK EQUITY
-------- ------- ---------- ---------- --------- -------------
(THOUSANDS)
Balance, December 31, 1991........................ $232,236 $70,339 $ 918,396 $ 723,811 -- $ 1,944,782
Net income...................................... -- -- -- 313,737 -- 313,737
Shares Issued:
Preferred stock conversions................... (64) 2 62 -- -- --
Dividend reinvestment plan.................... -- 531 17,060 -- -- 17,591
Stock options................................. -- 860 21,169 -- -- 22,029
Private placement............................. -- 2,376 58,218 -- -- 60,594
Dividends on Common stock....................... -- -- -- (88,036) -- (88,036)
Dividends on Preferred stock.................... -- -- -- (21,061) -- (21,061)
Equity portfolio valuation...................... -- -- -- 8,014 -- 8,014
-------- ------- ---------- ---------- --------- -------------
Balance, December 31, 1992........................ 232,172 74,108 1,014,905 936,465 -- 2,257,650
Net income...................................... -- -- -- 398,832 -- 398,832
Shares Issued:
Preferred stock conversions................... (1,750) 55 1,695 -- -- --
Dividend reinvestment plan.................... -- 98 4,305 (230) $ 3,598 7,771
Stock options................................. -- 276 6,982 (4,366) 11,047 13,939
Private placement............................. -- 2,376 58,218 -- -- 60,594
Acquisitions.................................. -- 3,025 116,268 -- 100,636 219,929
Purchases of treasury stock..................... -- -- -- -- (116,954) (116,954)
Dividends on Common stock....................... -- -- -- (110,336) -- (110,336)
Dividends on Preferred stock.................... -- -- -- (20,653) -- (20,653)
Net unrealized gains -- securities available for
sale.......................................... -- -- -- 27,295 -- 27,295
Other........................................... -- -- -- 361 -- 361
-------- ------- ---------- ---------- --------- -------------
Balance, December 31, 1993........................ 230,422 79,938 1,202,373 1,227,368 (1,673) 2,738,428
Net income...................................... -- -- -- 451,063 -- 451,063
Shares Issued:
Preferred stock conversions................... (715) 22 693 -- -- --
Dividend reinvestment plan.................... -- 7 157 (231) 15,824 15,757
Stock options................................. -- 18 (300) (4,760) 14,064 9,022
Private placement............................. -- 1,984 48,603 (53,165) 123,767 121,189
Other......................................... -- 34 1,533 -- -- 1,567
Purchases of treasury stock..................... -- -- -- -- (197,654) (197,654)
Dividends on Common stock....................... -- -- -- (142,403) -- (142,403)
Dividends on Preferred stock.................... -- -- -- (20,667) -- (20,667)
Net unrealized (losses) -- securities available
for sale...................................... -- -- -- (102,527) -- (102,527)
Other........................................... -- -- 2,961 239 -- 3,200
-------- ------- ---------- ---------- --------- -------------
Balance, December 31, 1994........................ $229,707 $82,003 $1,256,020 $1,354,917 $ (45,672) $ 2,876,975
========= ======== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
44
47
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------------
1994 1993 1992
----------- ----------- ------------
(THOUSANDS)
Cash flows from operating activities:
Net income......................................................... $ 451,063 $ 398,832 $ 313,737
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible credit losses............................... 79,000 148,000 228,000
Depreciation, amortization and accretion........................... 90,283 53,354 39,201
Deferred income tax provision...................................... 131,305 86,453 1,034
Gain on sale of assets............................................. (8,587) (12,288) (13,491)
Net securities transactions (gains)................................ (17,720) (7,017) (4,825)
Proceeds from sales of trading account securities.................. 9,983,786 8,951,741 10,324,738
Purchases of trading account securities............................ (9,937,083) (8,860,508) (10,388,715)
Decrease (increase) in accrued interest receivable................. (60,579) 39,674 (19,671)
Increase (decrease) in accrued interest payable.................... 72,897 (32,067) (78,764)
Change in current taxes payable.................................... 51,196 24,332 (7,334)
Other, net......................................................... (61,453) 175,572 (202,118)
Cumulative effect of changes in accounting principles, net of
tax.............................................................. -- (2,373) --
----------- ----------- ------------
Net cash provided by operating activities........................ 774,108 963,705 191,792
Cash flows from investing activities:
Proceeds from maturities of securities held to maturity............ 2,478,876 5,267,960 2,894,934
Purchases of securities held to maturity........................... (715,907) (5,822,987) (2,923,516)
Proceeds from maturities of securities available for sale.......... 928,702 -- --
Proceeds from sales of securities available for sale............... 969,775 461,596 175,820
Purchases of securities available for sale......................... (3,170,853) -- --
Net (disbursements) receipts from lending activities............... (677,987) (574,609) 538,862
Purchases of premises and equipment................................ (54,850) (55,248) (93,479)
Proceeds from sales of premises and equipment...................... 10,436 10,843 14,668
Net change in acceptances.......................................... (5,145) 758 4,308
Net cash (paid) received on acquisitions........................... (307,154) 641,386 723,111
----------- ----------- ------------
Net cash provided by (used in) investing activities.............. (544,107) (70,301) 1,334,708
Cash flows from financing activities:
Change in demand, savings/NOW, and money market deposits........... (1,451,430) (1,428,337) 1,171,050
Change in corporate certificates of deposit and deposits in
overseas offices................................................. 511,375 (90,971) (73,097)
Change in other consumer time deposits............................. (816,917) (1,988,007) (2,321,038)
Change in short-term borrowings.................................... 884,158 228,579 (208,692)
Issuances of long-term debt........................................ 200,000 150,000 1,069
Payments on long-term debt......................................... (303) (118,450) (338,826)
Purchases of treasury stock........................................ (197,654) (116,954) --
Issuance of Common and Preferred stock............................. 145,968 140,740 100,214
Dividends paid..................................................... (162,993) (131,080) (109,174)
----------- ----------- ------------
Net cash (used in) financing activities.......................... (887,796) (3,354,480) (1,778,494)
----------- ----------- ------------
Net change in cash and cash equivalents.......................... (657,795) (2,461,076) (251,994)
Cash and cash equivalents at beginning of period(A).............. 2,826,039 5,287,115 5,539,109
----------- ----------- ------------
Cash and cash equivalents at end of period(A).................... $ 2,168,244 $ 2,826,039 $ 5,287,115
============ ============ ==============
Supplemental disclosures:
Total amount of interest paid for the period....................... $ 659,139 $ 723,580 $ 999,476
============ ============ ==============
Total amount of income taxes paid for the period................... $ 100,942 $ 108,274 $ 89,888
============ ============ ==============
Total amount of loans transferred to OREO.......................... $ 46,490 $ 115,190 $ 100,553
============ ============ ==============
Total amount of loans transferred to assets held for sale.......... $ -- $ 51,457 $ --
============ ============ ==============
DECEMBER 31
-------------------------------------------------------------
(A) Reconciliation: 1994 1993 1992 1991
----------- ---------- ---------- ----------
(THOUSANDS)
Cash and due from banks........................................... $2,082,002 $1,831,270 $1,913,177 $2,115,508
Interest-bearing time deposits.................................... 35,567 979,769 2,635,938 2,645,601
Federal funds sold and securities purchased under agreements to
resell.......................................................... 50,675 15,000 738,000 778,000
---------- ---------- ---------- ----------
Total cash and cash equivalents................................... $2,168,244 $2,826,039 $5,287,115 $5,539,109
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
45
48
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
The Consolidated Financial Statements of First Fidelity Bancorporation and
Subsidiaries (collectively, the "Company" or "First Fidelity") have been
prepared in conformity with generally accepted accounting principles and
reporting practices applied in the banking industry. The consolidated financial
statements include the accounts of First
Fidelity Bancorporation and its subsidiaries, all of which are directly or
indirectly wholly-owned. Significant intercompany balances and transactions have
been eliminated in consolidation. The Company also presents herein condensed
parent company only financial information regarding First Fidelity
Bancorporation (the "Parent Company"). Prior period amounts are reclassified
when necessary to conform with the current year's presentation. The following is
a summary of significant accounting policies:
SECURITIES HELD TO MATURITY: Securities are classified as securities
held to maturity based on management's intent and the Company's ability to
hold them to maturity. Such securities are stated at cost, adjusted for
unamortized purchase premiums and discounts. Purchase premiums and
discounts are amortized over the life of the related security using a
method which approximates the effective interest method.
TRADING ACCOUNT SECURITIES: Securities that are bought and held
principally for the purpose of selling them in the near term are classified
as trading account securities, which are carried at market value. Realized
gains and losses and gains and losses from marking the portfolio to market
value are included in trading revenue.
SECURITIES AVAILABLE FOR SALE: Securities not classified as
securities held to maturity or trading account securities are classified as
securities available for sale, and are stated at fair value. Unrealized
gains and losses are excluded from earnings, and are reported as a separate
component of stockholders' equity, net of taxes. Such securities include
those that may be sold in response to changes in interest rates, changes in
prepayment risk or other factors.
Net securities transactions included in non-interest income consist of
realized gains and losses on the sale of securities. Gains or losses on
sale are recorded on the completed transaction basis and are computed under
the identified certificate method.
LOANS: Loans are stated net of unearned income. Unearned income is
recognized over the lives of the respective loans, principally on the
effective interest method.
Income from direct financing leases is recorded over the life of the
lease under the financing method of accounting, except for leveraged lease
transactions. Income from leveraged lease transactions is recognized using
a method which yields a level rate of return in relation to the Company's
net investment in the lease. The investment includes the sum of aggregate
rentals receivable and the estimated residual value of leased equipment,
less deferred income and third party debt on leveraged leases.
Interest income is not accrued on loans where interest or principal is
90 days or more past due, unless the loans are adequately secured and in
the process of collection, or on loans where management has determined that
the borrowers may be unable to meet contractual principal and/or interest
obligations. When a loan is placed on non-accrual, interest accruals cease
and uncollected accrued interest is reversed and charged against current
income. Non-accrual loans are generally not returned to accruing status
until principal and interest payments have been brought current and full
collectibility is reasonably assured. Interest on loans that have been
restructured is recognized according to the revised terms.
Loan origination and commitment fees and certain related costs are
deferred and amortized as an adjustment of loan yield in a manner which
approximates the effective interest method.
RESERVE FOR POSSIBLE CREDIT LOSSES: The level of the reserve for
possible credit losses is based on management's ongoing assessment of the
Company's credit exposure, in consideration of a number of relevant
variables. These variables include prevailing and anticipated domestic and
international economic conditions, assigned risk ratings, the
diversification and size of the loan portfolio, the results of the most
recent regulatory examinations available to the Company, the current and
projected financial status and creditworthiness of borrowers, various off
balance-sheet credit risks, the nature and level of non-performing assets
and loans that
46
49
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
have been identified as potential problems, the adequacy of collateral,
past and expected loss experience and other factors deemed relevant by
management.
MORTGAGE BANKING ACTIVITIES: Mortgage loans held for sale are valued at
the lower of aggregate cost or market, as determined by outstanding
commitments from investors or current investor yield requirements. Gains or
losses resulting from sales are recognized on a settlement date basis.
Purchased mortgage servicing rights ("PMSRs") are capitalized at their
initial purchase price, not to exceed net future servicing income at the
time of acquisition. Excess mortgage servicing rights ("EMSRs") occur when
mortgage loans are sold with servicing retained and the net servicing fee
rate exceeds the normal servicing fee. Servicing fee income is recognized as
received. The costs of acquiring rights to service loans is capitalized and
amortized in relation to the estimated period of net servicing revenues. The
carrying value of PMSRs and EMSRs is periodically evaluated on a
disaggregated basis. Write-downs are recorded when and to the extent that
the carrying amount exceeds estimated future net servicing income. Mortgage
loans held for sale, PMSRs and EMSRs are included in other assets.
FINANCIAL INSTRUMENTS: A financial instrument is defined as cash,
evidence of ownership in an entity, or a contract that imposes an obligation
on one entity and conveys a right to another for the exchange of cash or
other financial instruments. In addition to the financial instruments shown
in the Consolidated Statement of Condition, the Company enters into interest
rate swaps, futures, caps and floors, primarily to manage interest rate
exposure, and also enters into firm commitments to extend credit.
HEDGES: In order to qualify for hedge accounting treatment, the item
being hedged must expose the Company to interest rate risk. Interest rate
swaps, futures, caps and floors which reduce the Company's exposure to
interest rate risk associated with identifiable assets, liabilities, firm
commitments or anticipated transactions are designated as hedges. Gains
or losses on contracts designated as hedges are deferred and amortized to
interest income or expense over the interest rate risk period of the
related hedged asset, liability, firm commitment or anticipated
transaction. The net settlement amount to be received or paid on
contracts designated as hedges is accrued over the life of the contract
and recognized as interest income or expense, respectively.
TRADING POSITIONS: Financial instruments not qualifying for hedge
accounting treatment and those used for trading purposes are carried at
market value, and realized and unrealized gains and losses are included
in trading revenue.
FOREIGN CURRENCY TRANSLATION AND EXCHANGE CONTRACTS: Assets and
liabilities of overseas offices are translated at current rates of exchange.
Related income and expenses are translated at average rates of exchange in
effect during the year. All foreign exchange positions are valued daily at
prevailing market rates. Exchange adjustments, including unrealized gains or
losses on unsettled forward contracts, are included in trading revenue.
OTHER REAL ESTATE OWNED: Real estate acquired in partial or full
satisfaction of loans and loans meeting the criteria of "in-substance
foreclosures" are classified as Other Real Estate Owned ("OREO"). Prior to
transferring a real estate loan to OREO (due to actual or in-substance
foreclosure) it is written down to the lower of cost or fair value. This
write down is charged to the reserve for possible credit losses.
Subsequently, OREO is carried at the lower of fair value less estimated
costs to sell or carrying value.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method. Buildings and equipment are
depreciated over their estimated useful lives. Leasehold improvements are
amortized over the lesser of the term of the respective lease or the
estimated useful life of the improvement.
INCOME TAXES: The Company adopted Statement of Financial Accounting
Standards ("SFAS") 109, "Accounting for Income Taxes", in 1993. Deferred tax
assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases, as well
as operating loss and tax credit carryforwards. Deferred tax
47
50
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets are recognized for future deductible temporary differences and tax
loss and credit carryforwards if their realization is "more likely than
not". Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Under Accounting Principles Board Opinion No. 11, which was applied by
the Company in 1992 and prior years, deferred income taxes were recognized
for income and expense items that were reported in different years for
financial reporting purposes and income tax purposes, using the tax rate
applicable in the year of the calculation. Under that method, deferred
taxes were not adjusted for subsequent changes in tax rates.
The Parent Company's income taxes, as reflected in the Parent
Company's Statement of Income, represent the taxes allocated to the Parent
Company on the basis of its contribution to consolidated income.
RETIREMENT BENEFITS: The Company maintains self-administered,
non-contributory defined benefit pension plans covering all employees who
qualify as to age and length of service. Plan expense is based on actuarial
computations of current and future benefits for employees and is included
in salaries and benefits expense. In addition, the Company provides health
care and life insurance benefits for qualifying employees. The related
expense is based upon actuarial calculations and is recognized during the
period over which such benefits are earned. Prior to 1993, the Company
recognized health care and life insurance expenses on an "as paid" basis.
EARNINGS PER SHARE: Primary earnings per share is based on the
weighted average number of common shares outstanding during each period,
including the assumed exercise of dilutive stock options and warrants,
using the treasury stock method. Primary earnings per share also reflects
provisions for dividend requirements on all outstanding shares of the
Company's Preferred Stock.
Fully diluted earnings per share is based on the weighted average
number of common shares outstanding during each period, including the
assumed conversion of convertible preferred stock into common stock and the
assumed exercise of dilutive stock options and warrants, using the treasury
stock method. Fully diluted earnings per share also reflects provisions for
dividend requirements on non-convertible preferred stock.
STATEMENT OF CASH FLOWS: For purposes of reporting cash flows, cash
and cash equivalents include cash and due from banks, interest-bearing time
deposits, federal funds sold and securities purchased under agreements to
resell, none having an original maturity of more than three months.
EXCESS OF COST OVER NET ASSETS ACQUIRED: The excess of cost over the
fair value of acquired net assets is included in other assets and is being
amortized using the straight-line method over the estimated period of
benefit.
NOTE 2. CHANGES IN ACCOUNTING PRINCIPLES
During 1993, First Fidelity changed its method of accounting for: (a)
postretirement benefits other than pensions, as required by SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions", (b)
income taxes, as required by SFAS 109, "Accounting for Income Taxes", (c)
postemployment benefits, as prescribed in SFAS 112, "Employers' Accounting for
Postemployment Benefits" and (d) securities, as prescribed in SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities".
48
51
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cumulative effect of changes in accounting principles, net of tax
effect, in the Company's 1993 Consolidated Statement of Income consists of the
following:
INCREASE (DECREASE)
-------------------
(MILLIONS)
Income taxes -- net deferred tax assets.............................................. $ 63.1
Postretirement benefits other than pensions.......................................... (53.3)
Postemployment benefits.............................................................. (7.4)
Investments in debt and equity securities............................................ --
--------
Total cumulative effect of changes in accounting principles........................ $ 2.4
=========
The major components of the deferred tax asset that resulted from the
adoption of SFAS 109 related to temporary differences created by the reserve for
possible credit losses, alternative minimum tax credit carryforwards, and
accrued postretirement benefits.
SFAS 106 requires accrual, during an employee's active years of service, of
the expected costs of providing postretirement benefits (principally health
care) to employees and their beneficiaries and dependents. Through 1992, First
Fidelity, like most other companies, recognized this expense on an "as paid"
basis.
SFAS 112 requires employers to recognize any obligation to provide
postemployment (as differentiated from postretirement) benefits (salary
continuation, outplacement services, etc.) by accruing the estimated liability
through a charge to expense.
The adoption of SFAS 115 had no effect on the Company's net income. The
unrealized gain or loss on securities available for sale is reported as a
separate component of stockholders' equity, net of tax effect.
NOTE 3. PRINCIPAL ACQUISITIONS
On November 29, 1994, First Fidelity acquired Baltimore Bancorp
("Baltimore") and its affiliates for $348 million in cash. Baltimore had $2.1
billion in assets and $1.7 billion in deposits at closing. This acquisition
generated $225.8 million of goodwill, which is being amortized over the period
of expected benefit.
On August 20, 1994, the Company acquired $504 million in assets and assumed
$450 million in deposits of First Inter-Bancorp, Inc. ("Mid-Hudson") and its
subsidiary for $56 million in cash. On May 12, 1994, First Fidelity acquired
$184 million in assets and assumed $174 million in deposits of The Savings Bank
of Rockland County ("Rockland") for $5.9 million in cash.
On March 25, 1994, the Company acquired BankVest, Inc. ("BankVest") and its
subsidiary for $19.7 million in cash. BankVest had $99 million in assets and $84
million in deposits at closing. On January 31, 1994, First Fidelity acquired
$410 million in assets and assumed $251 million in deposits of Greenwich
Financial Corporation ("Greenwich") and its subsidiary for $41.9 million in
cash.
On December 30, 1993, the Company acquired Peoples Westchester Savings Bank
("Peoples"), for a combination of cash and Common Stock with an aggregate value
of $234.9 million. At closing, Peoples had approximately $1.7 billion in assets
and $1.5 billion in deposits. Substantially all of the 2,442,083 shares of
Common Stock issued to Peoples stockholders in the acquisition came from
Treasury Stock, all of which was acquired by First Fidelity late in 1993 through
open market purchases.
On August 11, 1993, First Fidelity acquired Village Financial Services,
Ltd. ("Village") and its subsidiary, Village Bank, for $40.0 million in cash and
$26.8 million of First Fidelity Common Stock. Village had $736 million in assets
and $489 million in deposits at closing. In connection with the acquisition, the
Company issued 893,956 shares of First Fidelity Common Stock to Banco Santander,
S.A. ("Santander") representing the exercise by
49
52
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Santander of gross up rights ("the Acquisition Gross Up Rights") pursuant to the
Investment Agreement, dated as of March 18, 1991 (the "Investment Agreement")
between the Company and Santander.
In May 1993, the Company acquired Northeast Bancorp. Inc. ("Northeast") and
its subsidiaries, which had $2.5 billion in assets and $2.5 billion in
liabilities, for $27.2 million in an exchange of common stock. In connection
with the acquisition, the Company also issued 3,284,207 shares of its Common
Stock to Santander, representing the exercise by Santander of warrants
("Warrants") to purchase 2,376,250 shares and Acquisition Gross Up Rights to
purchase an additional 907,957 shares, under the Investment Agreement.
All 1994 and 1993 acquisitions were accounted for as purchases and,
accordingly, the results of operations of such acquisitions have been included
in the Company's consolidated financial statements from their respective closing
dates.
The following required unaudited pro forma financial information presents
the combined historical results of operations of First Fidelity, Northeast,
Village, Peoples, Greenwich, BankVest, Rockland, Mid-Hudson and Baltimore (the
"companies") as if the acquisitions had all occurred as of January 1, 1993. The
results reflect purchase accounting adjustments, but do not include certain
non-recurring charges and credits directly attributable to such acquisitions.
The pro forma financial information does not necessarily reflect the results of
operations that would have been achieved had the companies actually combined at
such dates.
COMBINED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(UNAUDITED)
YEAR ENDED
DECEMBER 31,
-------------------
1994 1993
------ ------
(MILLIONS, EXCEPT
PER
SHARE AMOUNTS)
Interest income............................................................. $2,316 $2,491
Interest expense............................................................ 803 888
------ ------
Net interest income......................................................... 1,513 1,603
Provision for possible credit losses........................................ 89 206
Non-interest income......................................................... 446 470
Non-interest expense........................................................ 1,182 1,301
Income taxes and effect of accounting changes............................... 225 164
------ ------
Net income.................................................................. $ 463 $ 402
====== ======
Earnings per share:
Primary................................................................... $ 5.36 $ 4.57
Fully diluted............................................................. 5.24 4.49
NOTE 4. CASH AND DUE FROM BANKS
The Company's banking subsidiaries are required to maintain reserve
balances with Federal Reserve Banks. These balances totaled $458 million at
December 31, 1994 and averaged $348 million for the year then ended.
NOTE 5. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The Company's investment securities are classified as either "held to
maturity" or "available for sale". Securities are classified as securities held
to maturity based on management's intent and the Company's ability to hold them
to maturity. Securities not classified as securities held to maturity or trading
account securities are classified as securities available for sale.
50
53
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment securities aggregating approximately $2.5 billion at December
31, 1994 and $2.6 billion at December 31, 1993 were pledged, either under
repurchase agreements or to secure public deposits.
SECURITIES HELD TO MATURITY
Securities held to maturity, stated at amortized cost, the related fair
value, and the unrealized gains and losses for the portfolio were as follows at
December 31, 1994 and 1993:
NET
GROSS GROSS UNREALIZED
AMORTIZED FAIR UNREALIZED UNREALIZED GAINS
COST VALUE GAINS LOSSES (LOSSES)
----------- ---------- ---------- ---------- ----------
(THOUSANDS)
1994:
U.S. Treasury................ $ 319,158 $ 304,464 $ 94 $ (14,788) $ (14,694)
Federal agencies............. 2,343,594 2,252,322 5,148 (96,420) (91,272)
State and municipal.......... 521,015 533,638 16,815 (4,192) 12,623
Other securities............. 1,003,093 959,033 4,754 (48,814) (44,060)
---------- ---------- --------- ---------- ----------
$4,186,860 $4,049,457 $ 26,811 $ (164,214) $ (137,403)
========== ========== ========= ========== ==========
1993:
U.S. Treasury................ $ 394,791 $ 395,213 $ 460 $ (38) $ 422
Federal agencies............. 3,200,001 3,233,567 37,686 (4,120) 33,566
State and municipal.......... 564,156 607,673 43,948 (431) 43,517
Other securities............. 1,083,039 1,084,786 2,976 (1,229) 1,747
---------- ---------- ----------- ---------- ----------
$5,241,987 $5,321,239 $ 85,070 $ (5,818) $ 79,252
========== ========== ========= ========== ==========
Federal agency securities consisted almost entirely of mortgage-backed
securities (which included collateralized mortgage obligations and pass-through
certificates) at December 31, 1994 and 1993. Other securities also included
mortgage-backed securities, with book values of $577.9 million and $442.8
million and market values of $541.6 million and $443.1 million at December 31,
1994 and 1993, respectively.
Proceeds from sales of debt securities held as investments in 1992 were
$134.5 million. Gains of $7.7 million and losses of $67 thousand were realized
on such sales in 1992.
51
54
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES AVAILABLE FOR SALE
Securities available for sale, stated at fair value, and the unrealized
gains and losses for the portfolio were as follows at December 31, 1994 and
1993:
NET
GROSS GROSS UNREALIZED
AMORTIZED FAIR UNREALIZED UNREALIZED GAINS
COST VALUE GAINS LOSSES (LOSSES)
---------- ---------- ----------- ---------- ----------
(THOUSANDS)
1994:
U.S. Treasury........................ $2,050,041 $1,978,005 $ 9 $ (72,045) $ (72,036)
Federal agencies..................... 1,605,207 1,586,990 9,400 (27,617) (18,217)
State and municipal.................. 13,613 13,220 24 (417) (393)
Equity securities.................... 55,127 59,562 5,190 (755) 4,435
Other securities..................... 151,111 143,386 208 (7,933) (7,725)
---------- ---------- --------- ---------- ----------
$3,875,099 $3,781,163 $ 14,831 $ (108,767) $ (93,936)
========== ========== ========= ========== ==========
1993:
U.S. Treasury........................ $1,234,593 $1,276,612 $ 42,019 -- $ 42,019
Federal agencies..................... 1,115,504 1,121,039 6,133 $ (598) 5,535
State and municipal.................. 14,644 14,203 -- (441) (441)
Equity securities.................... 58,991 63,052 6,475 (2,414) 4,061
Other securities..................... 183,834 181,815 350 (2,369) (2,019)
---------- ---------- --------- ---------- ----------
$2,607,566 $2,656,721 $ 54,977 $ (5,822) $ 49,155
========== ========== ========= ========== ==========
Proceeds from the sale of securities available for sale during 1994 were
$969.8 million. Gains of $19.5 million and losses of $1.8 million were realized
on these sales. In 1993, proceeds from such sales were $458.3 million, resulting
in realized gains of $7.5 million and realized losses of $642 thousand.
MATURITIES
Expected maturities of debt securities were as follows at December 31, 1994
(maturities of mortgage-backed securities and collateralized mortgage
obligations are based upon estimated cash flows, assuming no change in the
current interest rate environment):
SECURITIES HELD TO MATURITY:
AMORTIZED FAIR
COST VALUE
---------- ----------
(THOUSANDS)
Due in one year or less................................................. $1,335,973 $1,290,552
Due after one year through five years................................... 2,286,664 2,203,890
Due after five years through ten years.................................. 354,674 345,912
Due after ten years..................................................... 141,060 140,439
---------- ----------
$4,118,371 $3,980,793
========== ==========
52
55
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES AVAILABLE FOR SALE:
AMORTIZED FAIR
COST VALUE
---------- ----------
(THOUSANDS)
Due in one year or less............................................. $ 301,943 $ 291,940
Due after one year through five years............................... 2,822,500 2,732,447
Due after five years through ten years.............................. 544,754 538,939
Due after ten years................................................. 150,775 158,275
---------- ----------
$3,819,972 $3,721,601
========== ==========
NOTE 6. LOANS
Loans at December 31, 1994 and 1993 consisted of the following:
1994 1993
----------- -----------
(THOUSANDS)
Commercial and financial............................................ $ 6,145,741 $ 6,457,343
Real Estate -- construction......................................... 317,959 473,434
Mortgage -- commercial.............................................. 4,035,199 3,447,554
Mortgage -- residential (1 to 4 family)............................. 6,046,674 4,888,542
Installment......................................................... 5,405,148 4,825,416
Leasing............................................................. 2,050,486 1,419,526
Foreign............................................................. 110,468 112,397
Unearned income..................................................... (310,434) (237,301)
----------- -----------
$23,801,241 $21,386,911
=========== ===========
Included in loans at December 31, 1994 and 1993 were $274.4 million and
$351.3 million, respectively, of shared-loss loans acquired from The Howard
Savings Bank ("Howard") in a 1992 Federal Deposit Insurance Corporation ("FDIC")
- -assisted transaction. Under the terms of the agreement with the FDIC, such
loans are subject to FDIC reimbursement for certain losses if they become
non-performing before October 2, 1997. When such assets become non-performing,
they are reclassified as "segregated assets" (see Note 9).
Non-accruing loans at December 31, 1994 and 1993 totaled $219.6 million and
$365.0 million, respectively. Restructured loans totaled $17.2 million and $13.9
million at December 31, 1994 and 1993, respectively. Interest recognized as
income on loans that were classified as non-accruing and restructured as of
year-end totaled $3.3 million in 1994, $3.1 million in 1993 and $2.4 million in
1992. Had payments on year-end non-accruing and restructured loans been made at
the original contracted amounts and due dates, the Company would have recorded
additional interest income of approximately $19.2 million in 1994, $30.1 million
in 1993 and $47.8 million in 1992.
During 1993, $78.5 million of non-accruing loans were transferred to the
"Assets Held for Sale" portfolio (see Note 9).
During 1994, SFAS 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures", were issued. Under SFAS 114 and SFAS 118,
"impaired" loans must be measured based on the present value of expected future
cash flows, discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent. Management is continuing to
develop First Fidelity's approach to implementing SFAS 114 and SFAS 118, and
does not expect that the adoption of these standards, which is required
beginning in 1995, will have a material effect on the Company's financial
statements.
53
56
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. RESERVE FOR POSSIBLE CREDIT LOSSES
Changes in the reserve for possible credit losses for 1994, 1993 and 1992
are shown below:
1994 1993 1992
-------- -------- --------
(THOUSANDS)
Balance, January 1.............................................. $602,183 $610,353 $609,599
Provision....................................................... 79,000 148,000 228,000
-------- -------- --------
Total...................................................... 681,183 758,353 837,599
-------- -------- --------
Charge-offs..................................................... 159,765 283,616 295,296
Recoveries...................................................... 40,829 45,730 47,330
-------- -------- --------
Net Charge-offs............................................ 118,936 237,886 247,966
Acquired reserves............................................... 37,086 81,716 20,720
-------- -------- --------
Balance, December 31............................................ $599,333 $602,183 $610,353
======== ======== ========
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1994 and 1993 consisted of the
following:
1994 1993
--------- ---------
(THOUSANDS)
Land...................................................................... $ 82,599 $ 75,666
Buildings................................................................. 395,496 361,182
Leasehold improvements.................................................... 122,358 107,734
Equipment................................................................. 287,655 242,925
--------- ---------
Total................................................................ 888,108 787,507
Accumulated depreciation and amortization................................. (450,431) (383,299)
--------- ---------
Net.................................................................. $ 437,677 $ 404,208
========= =========
Depreciation and amortization expenses for 1994, 1993 and 1992 were $44.6
million, $46.6 million and $47.9 million, respectively.
NOTE 9. OTHER ASSETS
SEGREGATED ASSETS
Segregated assets consist of Howard shared-loss loans acquired October 2,
1992 ("Bank Closing") that were or have since become classified as restructured,
non-accrual or OREO. Such assets at December 31, 1994 were $68.3 million, net of
a $4.3 million reserve. The Company's share of charge-offs on such assets was
$2.5 million in 1994, while recoveries were $1.3 million. Segregated assets at
December 31, 1993 were $247.9 million, net of a $6.5 million reserve. The
Company's share of charge-offs was $10.6 million in 1993, and recoveries were
$855 thousand.
The FDIC pays the Company 80 percent of all net charge-offs on acquired
shared-loss loans, during the five-year period that commenced with Bank Closing.
Charge-offs eligible for FDIC reimbursement include accrued interest as of
October 2, 1992 and up to 90 days of additional accrued interest. Subsequent to
the charge-off of a shared-loss loan, the FDIC also reimburses First Fidelity
for 80 percent of the aggregate amount of certain actual direct expenses
incurred on such loans, on a prospective basis.
At the end of the seven year period after Bank Closing, the FDIC is
obligated to provide additional reimbursement to First Fidelity for losses so
that, subject to certain conditions, First Fidelity bears only 5% of total
losses over $130 million with respect to such segregated assets.
54
57
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS
Unamortized goodwill and identified intangibles were $787.5 million and
$458.3 million at December 31, 1994 and 1993, respectively. These amounts relate
primarily to intangible assets having original terms of up to 20 years, and are
being amortized over the remaining term of expected benefit, which approximates
17 years on a weighted-average basis. The amortization expense related to
goodwill and identified intangibles was $43.2 million, $31.7 million and $23.0
million for 1994, 1993 and 1992, respectively.
OTHER REAL ESTATE OWNED
OREO consisted of foreclosed property of $94.9 million and "in-substance
foreclosures" of $3.9 million, less a $6.8 million reserve, as of December 31,
1994. At December 31, 1993, OREO consisted of foreclosed property of $103.3
million and "in-substance foreclosures" of $19.2 million, less a $6.6 million
reserve. During 1993, $46.9 million of OREO (net of market value adjustments of
$6.6 million taken against the OREO reserve) was transferred to the "Assets Held
for Sale" portfolio (see below).
Changes in the OREO reserve for 1994, 1993 and 1992 are shown below:
1994 1993 1992
------- ------- -------
(THOUSANDS)
Balance, January 1....................................... $ 6,622 $ 5,765 $ 7,306
Provision................................................ 9,250 22,800 21,155
Acquired reserves........................................ 456 6,649 --
Charge-offs and writedowns............................... (9,576) (28,592) (22,696)
------- ------- -------
Balance, December 31..................................... $ 6,752 $ 6,622 $ 5,765
======= ======= =======
MORTGAGE BANKING ACTIVITIES
At December 31, 1994, mortgage loans held for sale and outstanding
commitments to sell mortgage loans were $39.9 million and $26.7 million,
respectively. Aggregate net gains on the sale of mortgage loans held for sale
were $264 thousand for 1994. The Company did not capitalize any purchased
mortgage servicing rights ("PMSRs") during 1994. The Company capitalized excess
mortgage servicing rights ("EMSRs") of $174 thousand during 1994. Total PMSRs
and EMSRs as of December 31, 1994, virtually all of which were acquired in the
Baltimore transaction, were $49.5 million and $2.0 million, respectively.
Amortization of PMSRs and EMSRs was $1.2 million and $42 thousand, respectively,
for 1994. Mortgage loans serviced for others totaled $4.7 billion at December
31, 1994.
ASSETS HELD FOR SALE
Assets held for sale, excluding those related to mortgage banking
activities, totaled $69.3 million and $88.4 million at December 31, 1994 and
1993, respectively. Such assets consisted of $29.2 million and $64.6 million,
respectively, of non-performing loans and $40.1 million and $23.8 million,
respectively, of OREO. At December 31, 1994, assets held for sale consisted
primarily of loans and OREO related to recent acquisitions. Such assets are
carried at the lower of adjusted cost or fair value.
55
58
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1994 and 1993 consisted of the
following:
1994 1993
---------- ----------
(THOUSANDS)
Federal funds purchased............................................ $1,042,160 $ 611,634
Securities sold under repurchase agreements........................ 1,428,634 794,132
Commercial paper and master notes.................................. 229,781 211,785
Other.............................................................. 16,347 2,574
---------- ----------
$2,716,922 $1,620,125
========== ==========
NOTE 11. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 consisted of the following:
1994 1993
-------- --------
(THOUSANDS)
Floating rate senior notes due 1996...................................... $200,000 --
6.80% subordinated notes due 2003........................................ 150,000 $150,000
9 5/8% subordinated notes due 1999....................................... 150,000 150,000
9 3/4% subordinated notes due 1995....................................... 136,750 136,750
8 1/2% subordinated capital notes due 1998............................... 149,150 149,150
Floating rate subordinated note due 1997................................. 25,000 25,000
Other long-term debt..................................................... 2,723 2,158
-------- --------
$813,623 $613,058
======== ========
The floating rate senior notes bear interest at .10% per annum above the
London Interbank Offered Rate ("LIBOR") for three-month eurodollar deposits
(5.74% at December 31, 1994). Such notes are direct, unsecured, senior
obligations of First Fidelity Bancorporation and may not be redeemed prior to
maturity.
The 6.80% and 9 5/8% subordinated notes, the 8 1/2% subordinated capital
notes and the floating rate subordinated notes due 1997 qualify as Tier II
capital for regulatory purposes, subject to certain limitations.
The 6.80%, 9 5/8% and 9 3/4% subordinated notes are not redeemable prior to
maturity and are subordinated in right of payment to all senior indebtedness of
the Parent Company. Interest on the notes is payable semi-annually on various
dates each year.
The 8 1/2% subordinated capital notes are not redeemable prior to maturity
and are subordinated to all indebtedness for borrowed money. At maturity, these
notes are payable either in whole or in part in cash from the proceeds of the
sale of Common Stock, perpetual preferred stock or other securities qualifying
as primary capital securities designated for such purpose, or in whole or in
part by the exchange of such securities having a market value equal to the
principal amount of the notes to be so exchanged. If the Company determines that
the notes do not constitute "primary capital" or if the notes cease being
treated as "primary capital" by the Federal Reserve Board, the Company will not
exchange the notes for securities at maturity but instead will pay cash at 100%
of the principal amount, plus accrued interest.
The floating rate subordinated note is a capital note bearing interest at
1/4 of 1% per annum above LIBOR for three-month eurodollar deposits. It is
repayable using any combination of cash and certain nonvoting securities. Under
certain circumstances, the Company may be obligated to repurchase the note prior
to maturity using proceeds of a
56
59
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
secondary offering of certain nonvoting securities. The note is redeemable prior
to maturity at 100% of principal plus accrued interest if the Federal Reserve
Board determines that the note will not be treated as "primary capital" and in
certain other limited circumstances.
The aggregate amounts of maturities for long-term debt as of December 31,
1994 are as follows:
(THOUSANDS)
--------
1995.......................................................................... $136,979
1996.......................................................................... 200,249
1997.......................................................................... 26,377
1998.......................................................................... 149,150
1999.......................................................................... 150,868
Later years................................................................... 150,000
--------
$813,623
========
NOTE 12. STOCKHOLDERS' EQUITY
Preferred Stock at December 31, 1994 and 1993 consisted of the following:
1994 1993
-------- --------
(THOUSANDS)
Authorized: 10,000,000 shares, par value $1.00 per share
Issued and outstanding at stated values:
Series B $2.15 cumulative convertible voting preferred stock: 4,788,272
shares and 4,816,887 shares at December 31, 1994 and 1993,
respectively........................................................ $119,707 $120,422
Series D adjustable rate cumulative preferred stock:
350,000 shares at December 31, 1994 and 1993........................ 35,000 35,000
Series F 10.64% cumulative preferred stock:
75,000 shares at December 31, 1994 and 1993......................... 75,000 75,000
-------- --------
$229,707 $230,422
======== ========
The Series B Convertible Preferred Stock bears a cumulative annual dividend
of $2.15 per share, votes as a single class with the Common Stock (each share of
Series B Convertible Preferred Stock being entitled to .39 votes, subject to
adjustment in certain events), has a liquidation preference of $25 per share, is
redeemable in whole or in part at the Company's option at $25 per share plus
accrued but unpaid dividends to the redemption date, and is convertible at any
time at the option of the holder into .7801 of a share of Common Stock, subject
to adjustment in the event of a merger, stock split, etc. Holders of Series B
Convertible Preferred Stock are also entitled to vote as a class in certain
limited circumstances.
The Series D Adjustable Rate Cumulative Preferred Stock is non-voting,
subject to certain limited exceptions, has a liquidation preference of $100 per
share, is redeemable in whole or in part at the option of the Company at a
redemption price of $100 per share plus accrued but unpaid dividends to the
redemption date, and cannot be converted into any other class of capital stock.
It bears cumulative dividends at a rate (the "applicable rate") equal to .75%
less than the highest of the three month U.S. Treasury Bill rate, the U.S.
Treasury ten year constant maturity rate or the U.S. Treasury twenty year
constant maturity rate (as defined), adjusted quarterly; however, in no event
will the applicable rate be less than 6 1/4% or more than 12 3/4% per annum. For
the quarter beginning January 1, 1995, the rate is 7.40%.
57
60
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Series F 10.64% Cumulative Preferred Stock (the "Series F Preferred
Stock") is non-voting, subject to certain limitations, and is not convertible
into any other class of capital stock. The 75,000 outstanding shares of Series F
Preferred Stock were issued in the form of 3,000,000 depositary shares, each of
which represents a one-fortieth interest in a share of Series F Preferred Stock.
Each depositary share bears a cumulative annual dividend of $2.66, has a
liquidation preference of $25.00 and is redeemable in whole or part at the
Company's option on or after July 1, 1996 at $25.00.
CHANGES IN NUMBER OF SHARES OUTSTANDING
Changes in the number of shares of Common Stock outstanding during 1993 and
1994 were comprised of the following:
SHARES
-----------
Balance, December 31, 1992......................................................... 74,107,949
Common Stock issued:
Private placement -- Santander exercise of warrants........................... 2,376,250
Acquisition gross up rights................................................. 1,801,913
Issued to former shareholders of Northeast, Village and Peoples............... 3,605,606
Stock options and dividend reinvestment plan.................................. 708,548
Series B Preferred Stock conversions.......................................... 54,584
Purchases of treasury stock...................................................... (2,753,845)
-----------
Balance, December 31, 1993......................................................... 79,901,005
Common Stock issued:
Private placement -- Santander exercise of warrants........................... 4,752,500
Stock options and dividend reinvestment plan.................................. 689,430
Series B Preferred Stock conversions.......................................... 22,319
Other......................................................................... 34,149
Purchases of treasury stock...................................................... (4,416,564)
-----------
Balance, December 31, 1994......................................................... 80,982,839
===========
Pursuant to its Investment Agreement with the Company, Santander applied
for and received, early in 1995, regulatory approval to acquire up to 30% of
First Fidelity's voting stock. Santander held 24.8% of the Company's voting
stock at December 31, 1994. During 1994, Santander exercised the final two
tranches of its Warrants, pursuant to the Investment Agreement.
As of December 31, 1994, Santander retained Acquisition Gross Up Rights to
acquire $45.9 million (remaining from the original $100 million amount under the
Investment Agreement) in value of Common Stock (or other equity securities of
First Fidelity). By its terms, the Investment Agreement and Santander's rights
to exercise its Acquisition Gross Up Rights terminate on December 27, 1995.
TREASURY STOCK
Under various programs, the Company's Board of Directors authorized the
purchase of up to 4.9 million and 2.4 million shares of First Fidelity's
outstanding Common Stock in 1994 and 1993, respectively, to be used for general
corporate purposes, including acquisitions. The Company acquired 3.8 million and
2.4 million shares of such stock in 1994 and 1993, respectively.
58
61
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1994, the Company held 1,020,282 shares of Treasury Stock
to be used for general corporate purposes, including acquisitions, and to fund
certain benefit plans. At December 31, 1993, the Company held 36,714 shares of
Treasury Stock to be issued under the dividend reinvestment and stock option
plans.
SHARE PURCHASE RIGHTS PLAN
The Company has in effect a preferred share purchase rights plan. The
rights plan provides that each share of Common Stock has attached to it a right
(each, a "Right", together, the "Rights") to purchase one one-hundredth of a
share of Series E Junior Participating Preferred Stock, par value $1.00 per
share (the "Series E Preferred Stock") at a price of $185 per one one-hundredth
of a share of Series E Preferred Stock, subject to adjustment. In general, if a
person or group (other than the Company, its subsidiaries, certain affiliates or
any of the Company's employee benefit plans) acquires 10% or more of the
Company's Common Stock (a "10% Holder"), stockholders (other than such 10%
Holder) may exercise their Rights to purchase Common Stock having a market value
equal to twice the exercise price of the Rights. If the Company is acquired in a
merger, the Rights may be exercised to purchase common shares of the acquiring
company at a similar discount. At any time after a person or group becomes a 10%
Holder but prior to the acquisition by such 10% Holder of 50% or more of the
outstanding Common Stock, First Fidelity's Board may elect to exchange the
Rights (other than Rights owned by such 10% Holder which become void) for Common
Stock or Series E Preferred Stock, at an exchange ratio of one share of Common
Stock or one one-hundredth of a share of Series E Preferred Stock, per Right,
subject to adjustment. The rights plan is designed to protect stockholders in
the event of unsolicited offers or attempts to acquire the Company.
CAPITAL
The Parent Company and the Subsidiary Banks are required by various
regulatory agencies to maintain minimum levels of capital. At December 31, 1994,
the Company and its Subsidiary Banks exceeded all such minimum capital
requirements.
DIVIDENDS DECLARED
During 1994, dividends declared with respect to the Company's Common Stock,
Series B Convertible Preferred Stock, Series D Adjustable Rate Cumulative
Preferred Stock and per depositary share with respect to the Series F Preferred
Stock were $1.76, $2.15, $6.70, and $2.66, respectively.
DIVIDEND REINVESTMENT PLAN
At December 31, 1994, the Company had reserved 461,693 shares of its Common
Stock for issuance under the Company's dividend reinvestment plan.
DIVIDEND RESTRICTIONS
Dividends payable by the Company, its bank holding company subsidiaries and
its banking subsidiaries are subject to various limitations imposed by statutes,
regulations and policies adopted by bank regulatory agencies. Under current
regulations regarding dividend availability, the Company's bank subsidiaries,
without prior approval of bank regulators, may declare dividends to the
respective holding companies totaling approximately $131 million plus additional
amounts equal to the net profits earned by the Company's bank subsidiaries for
the period from January 1, 1995 through the date of declaration, less dividends
declared during that period.
NOTE 13. BENEFIT PLANS
PENSION PLANS
The Company maintains self-administered, non-contributory defined benefit
pension plans covering all employees who qualify as to age and length of
service. Benefits are based on years of credited service and highest average
compensation (as defined). Qualified plans are funded in accordance with
statutory and regulatory guidelines.
59
62
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pension expense (benefit) for the years ended December 31, 1994, 1993 and 1992,
for all qualified and unqualified plans, aggregated $3,414,000, $(130,000) and
$(937,000), respectively.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated financial statements at December 31,
1994 and 1993:
FUNDED PLANS UNFUNDED PLANS
----------------------- ---------------------
1994 1993 1994 1993
--------- --------- -------- --------
(THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including
vested benefits of $156,955, $139,363,
$27,004 and $25,960, respectively........... $ 169,859 $ 152,817 $ 27,776 $ 26,613
========= ========= ======== ========
Projected benefit obligation for service
rendered to date............................ $(201,876) $(203,334) $(31,241) $(28,340)
Plan assets at fair value, primarily listed
stocks and bonds, and commingled funds...... 283,739 289,357 -- --
--------- --------- -------- --------
Plan assets in excess of (less than) projected
benefit obligation.......................... 81,863 86,023 (31,241) (28,340)
Unrecognized prior service cost............... 8,034 11,150 4,221 1,775
Unrecognized net loss......................... 32,825 26,343 414 3,338
Additional minimum liability.................. -- -- (5,216) (8,226)
Unrecognized net (asset) obligation........... (4,359) (5,264) 4,046 4,840
--------- --------- -------- --------
Prepaid pension (liability)................... $ 118,363 $ 118,252 $(27,776) $(26,613)
========= ========= ======== ========
Net pension expense (benefit) for 1994, 1993 and 1992 included the
following components:
FUNDED PLANS
-----------------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
Service cost of benefits earned during the period......... $ 10,356 $ 6,808 $ 6,542
Interest cost on projected benefit obligation............. 14,913 9,370 8,511
Actual return on plan assets.............................. 1,414 (18,134) (10,673)
Net amortization and deferral............................. (27,773) (1,570) (8,335)
-------- -------- --------
Net periodic pension (benefit)............................ $ (1,090) $ (3,526) $ (3,955)
======== ======== ========
UNFUNDED PLANS
-----------------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
Service cost of benefits earned during the period......... $ 442 $ 124 $ 173
Interest cost on projected benefit obligation............. 2,413 1,636 1,597
Net amortization and deferral............................. 1,649 1,636 1,248
-------- -------- --------
Net periodic pension expense.............................. $ 4,504 $ 3,396 $ 3,018
======== ======== ========
The weighted average discount rate assumed in determining the actuarial
present value of the projected benefit obligation was 8.75% at December 31, 1994
and 7.5% at December 31, 1993. The assumed rate of increase in future
compensation levels was 4.0% at December 31, 1994 and 1993. The long-term
expected rate of return on
60
63
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets was 9.75% in 1994 and 1993. The change in the weighted average discount
rate to 8.75% resulted in a decrease in the actuarial present value of the
projected benefit obligation of approximately $40.4 million.
POSTRETIREMENT BENEFITS
The Company sponsors postretirement benefit plans which provide medical and
life insurance coverage to employees, depending upon the employee's status
(currently retired or still employed), length of service, age at retirement and
other factors.
The plans have no assets. The following table sets forth the plans'
accumulated postretirement benefit obligation as of December 31, 1994 and 1993,
which represents the liability for accrued postretirement benefit cost:
1994 1993
-------- --------
(THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees and beneficiaries eligible for benefits........ $ 94,865 $ 93,953
Active employees fully eligible for benefits............ 5,938 9,978
Active employees not fully eligible for benefits........ 9,665 11,723
-------- --------
Accumulated postretirement benefit obligation........ 110,468 115,654
Unrecognized net loss from differences between expected
and actual experience and effects of changes in
assumptions............................................. (14,749) (20,533)
-------- --------
Accrued postretirement benefit cost..................... $ 95,719 $ 95,121
======== ========
The net periodic postretirement benefit cost for 1994 and 1993 includes the
following:
1994 1993
------ ------
(THOUSANDS)
Service cost-benefits attributed to service during the
period...................................................... $1,111 $ 869
Interest cost on accumulated postretirement benefit
obligation.................................................. 8,632 7,392
Net amortization.............................................. 962 --
Other adjustments............................................. (831) --
------ ------
Net periodic postretirement benefit cost................. $9,874 $8,261
====== ======
For 1994, the future health care cost trend rate is projected to be 12.5%
for participants under 65 and 10% for participants over 65. These rates are
assumed to trend downward to 5.5% for participants under 65 and 5% for
participants over 65 by the year 2008, and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1% in each year would increase the accumulated postretirement benefit obligation
as of January 1, 1994 by $8.5 million (8%) and the aggregate of the service and
interest cost components of net periodic retirement benefit cost for the year
1994 by $.7 million (9%). The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 8.75% for 1994 and 7.5%
for 1993. The change in the weighted average discount rate from 7.5% resulted in
a decrease in the actuarial present value of the postretirement benefit
obligation of approximately $11.6 million.
The Company's accumulated postretirement benefit obligation under SFAS 106
of approximately $81 million was recognized in the first quarter of 1993 by a
one-time cumulative effect adjustment of $53.3 million, net of tax effect. In
1992, the cost of providing postretirement benefits was recognized as such
benefits were paid, and totaled $5.8 million.
61
64
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POSTEMPLOYMENT BENEFITS
The Company's accumulated postemployment benefit obligation under SFAS 112
of $11.3 million was recognized in the first quarter of 1993 by a one-time
cumulative effect adjustment of $7.4 million, net of tax effect. Annual
postemployment benefit expense on an accrual basis was approximately $2.6
million for 1994 and $900 thousand for 1993, exclusive of the one-time
adjustment, as compared to approximately $2 million in 1992 under the previous
method.
SAVINGS PLANS
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code, which covers substantially all full-time employees after one year
of continuous employment. Under the plan, employee contributions are partially
matched by the Company. Such matching becomes vested when the employee reaches
three years of credited service. Total savings plan expense was $13.2 million,
$12.0 million and $10.7 million for 1994, 1993 and 1992, respectively.
STOCK OPTION PLANS
The Company maintains stock option plans, pursuant to which an aggregate of
9,775,454 shares of Common Stock have been authorized for issuance to certain
key employees of the Company and its subsidiaries. The options granted under
these plans are, in general, exercisable not earlier than one year after the
date of grant, at a price equal to the fair market value of the Common Stock on
the date of grant, and expire not more than ten years after the date of grant.
There are also options outstanding under other plans, pursuant to which no
further options may be granted. Vesting with respect to certain options granted
to certain senior executive officers may be accelerated. In addition, the
Company assumed certain stock options related to acquisitions during 1993.
The Company also maintains an employee stock purchase plan, under the terms
of which 1,760,000 shares of Common Stock have been authorized for issuance. The
plan's purchase period begins on July 1 and ends June 30 of the following year,
during which options to purchase stock are offered to employees once a year. No
individual employee may exercise options under the employee stock purchase plan
to acquire stock in any one year in excess of 10% of base compensation, or
$20,000, whichever is less. The option price equals 90% of the market price of
the Common Stock on the last day of the purchase period. The aggregate number of
shares to be purchased in any given offering, which cannot be greater than
250,000, is determined by the amount contributed by the employees and the market
price as of the last day of the purchase period.
Changes in total options outstanding during 1994, 1993 and 1992 are as
follows:
1994
----------------------------------
SHARES OPTION PRICE
UNDER OPTION PER SHARE
------------ ----------------
Outstanding at beginning of year...................................... 4,397,340 $12.31 to $50.00
Granted during year................................................... 919,854 $42.81 to $47.88
Exercised during year................................................. (343,407) $12.31 to $45.38
Forfeited during year................................................. (133,422) $16.65 to $46.31
--------- ----------------
Outstanding at end of year............................................ 4,840,365 $12.31 to $50.00
========= ================
Options exercisable at end of year under stock option plans........... 2,317,279 $12.31 to $50.00
========= ================
62
65
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1993
----------------------------------
SHARES OPTION PRICE
UNDER OPTION PER SHARE
------------ ----------------
Outstanding at beginning of year...................................... 3,094,929 $12.31 to $41.38
Granted during year................................................... 1,654,395 $40.81 to $50.00
Assumed during year................................................... 312,385 $16.65 to $25.86
Exercised during year................................................. (568,869) $12.31 to $47.13
Forfeited during year................................................. (95,500) $16.65 to $47.31
---------- ----------------
Outstanding at end of year............................................ 4,397,340 $12.31 to $50.00
========== ================
Options exercisable at end of year under stock option plans........... 1,993,001 $12.31 to $47.13
========== ================
1992
----------------------------------
SHARES OPTION PRICE
UNDER OPTION PER SHARE
------------ ----------------
Outstanding at beginning of year...................................... 3,381,137 $12.31 to $36.25
Granted during year................................................... 667,483 $31.25 to $41.38
Exercised during year................................................. (890,348) $13.62 to $36.69
Forfeited during year................................................. (63,343) $21.38 to $36.25
---------- ----------------
Outstanding at end of year............................................ 3,094,929 $12.31 to $41.38
========== ================
Options exercisable at end of year under stock option plans........... 1,823,592 $12.31 to $36.69
========== ================
Certain of the options assumed in the course of 1993 acquisitions (55,368
shares at the end of 1994 and 64,831 shares at December 31, 1993), when
translated at the applicable exchange rate for First Fidelity Common Stock,
resulted in an option price as high as $797. In order to provide more meaningful
disclosure, such prices and shares have been omitted from the tabular
presentation above.
NOTE 14. OTHER EXPENSE
The components of other expense were as follows:
1994 1993 1992
-------- -------- --------
(THOUSANDS)
FDIC premium expense.............................................. $ 63,872 $ 63,164 $ 56,231
External data processing expense.................................. 47,639 48,200 46,959
External check-processing expense................................. 60,934 -- --
Communication expense............................................. 24,741 33,450 33,139
Amortization of intangibles....................................... 41,526 30,824 22,828
Other real estate owned expenses.................................. 12,250 28,417 29,854
Other operating expenses.......................................... 176,813 185,882 170,307
-------- -------- --------
$427,775 $389,937 $359,318
======== ======== ========
63
66
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. INCOME TAXES
Income tax expense was comprised of the following:
1994 1993 1992
-------- -------- -------
(THOUSANDS)
Current:
Federal...................................................... $ 74,899 $ 90,314 $81,099
State and local.............................................. 15,164 1,258 229
-------- -------- -------
Total current tax expense............................ 90,063 91,572 81,328
-------- -------- -------
Deferred:
Federal...................................................... 140,327 86,453 1,034
State and local.............................................. (9,022) -- --
-------- -------- -------
Total deferred tax expense........................... 131,305 86,453 1,034
-------- -------- -------
Total tax expense............................................ $221,368 $178,025 $82,362
======== ======== =======
The components of deferred income tax expense attributable to income from
continuing operations for the years ended December 31, 1994 and 1993 were as
follows:
1994 1993
-------- -------
(THOUSANDS)
Deferred income tax (exclusive of the effects of component listed
below)............................................................. $131,305 $89,166
Adjustments to deferred tax assets and liabilities for enacted
changes in tax
laws and rates..................................................... -- (2,713)
-------- -------
$131,305 $86,453
======== =======
The components of deferred income tax for the year ended December 31, 1992,
under accounting rules then in effect, were as follows:
1992
-----------
(THOUSANDS)
Credit loss deduction...................................................................... $(2,206)
Lease financing deduction.................................................................. 11,669
Book over tax depreciation................................................................. (1,149)
Pension settlement/expense................................................................. 799
Difference between book and tax accruals................................................... (818)
Other, net................................................................................. (7,261)
-------
$ 1,034
=======
64
67
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1994 and
1993 were as follows:
1994 1993
--------- ---------
(THOUSANDS)
Deferred tax assets:
Loss Reserves.................................................................. $ 220,173 $ 185,563
Difference between book and tax accruals....................................... -- 24,268
Basis differences of business combinations accounted for under the purchase
method...................................................................... 54,941 33,765
Accrued postretirement and postemployment benefits............................. 37,808 32,200
Alternative minimum tax credit carryforwards................................... 12,507 9,175
Unrealized loss on accounting for certain investments in debt and equity
securities.................................................................. 40,510 --
Other deferred tax assets...................................................... 199 12,065
--------- ---------
Total deferred tax assets.............................................. 366,138 297,036
--------- ---------
Deferred tax liabilities:
Lease financing deduction...................................................... (206,187) (120,533)
Pension settlement/expense..................................................... (27,446) (27,875)
Unrealized gain on accounting for certain investments in debt and equity
securities.................................................................. -- (14,698)
Difference between book and tax accruals....................................... (5,264) --
Amortization of intangible assets.............................................. (11,137) (11,343)
Other deferred tax liabilities................................................. (9,521) (17,418)
--------- ---------
Total deferred tax liabilities......................................... (259,555) (191,867)
--------- ---------
Net deferred tax asset................................................. $ 106,583 $ 105,169
========= =========
Management has determined that, based upon its assessment of recoverable
taxes and projected levels of pretax income, realization of the deferred tax
asset is more likely than not. Included in the table above is the effect of
certain temporary differences for which no deferred tax expense or benefit was
recognized. Such items consisted primarily of unrealized gains and losses on
certain investments in debt and equity securities accounted for under SFAS 115,
as well as book and tax basis differences relating to business combinations
accounted for under the purchase method of accounting.
The total tax expense for 1994, 1993 and 1992 resulted in effective tax
rates which differed from the applicable U.S. federal income tax rate. A
reconciliation follows:
1994 1993 1992
---- ---- ----
U.S. Federal income tax rate......................................... 35.0% 35.0% 34.0%
Increase (reduction) in tax rate resulting from:
Tax-exempt interest income......................................... (2.9) (4.0) (6.5)
Alternative minimum tax (benefit).................................. -- -- (8.8)
Other, net......................................................... .8 -- 2.1
---- ---- ----
32.9% 31.0% 20.8%
==== ==== ====
At December 31, 1994, for income tax purposes, the Company had alternative
minimum tax credit carryforwards of approximately $12.5 million available to
offset future income tax to the extent that it exceeds alternative minimum tax.
These credits have an unlimited life. The Company had capital loss carryforwards
at December 31, 1994 of $2.9 million, which are available to offset future
capital gains. Such carryforwards expire on December 31, 1997, if not utilized
by that date.
65
68
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS WITH OFF BALANCE-SHEET RISK
The Company is a party to various financial instruments acquired in the
normal course of business to manage its exposure to changes in interest and
foreign exchange rates and to meet the financing needs of its customers. Except
for foreign exchange contracts, the contract or notional amounts of such
instruments are not included in the Consolidated Statements of Condition at
December 31, 1994 and 1993. The Company's involvement in such financial
instruments at December 31, 1994 and 1993 is summarized as follows:
1994 1993
---------- ----------
(THOUSANDS)
Amounts representing credit risk:
Commitments to extend credit.......................................... $6,468,931 $6,047,959
Standby letters of credit and financial guarantees.................... 698,447 626,410
Other letters of credit............................................... 264,216 207,894
Notional or contract amounts of off balance-sheet financial instruments
not constituting credit risk:
Interest rate swap agreements (Receive fixed)......................... 4,956,100 4,272,100
Forward delivery contracts............................................ 99,651 149,235
Futures contracts..................................................... 976,225 750,000
Foreign exchange contracts............................................ 375,400 299,573
Customer contracts:
Interest rate swap agreements...................................... 167,036 30,000
Interest rate caps................................................. 84,000 60,800
The amounts above indicate gross positions and have not been reduced by
offsetting positions, but are reflected net of participations to other financial
institutions.
The Company uses the same credit policies in extending commitments, letters
of credit and financial guarantees as it does for financial instruments recorded
on the Consolidated Statements of Condition. First Fidelity seeks to control its
exposure to loss from these agreements through credit approval processes and
monitoring procedures. Letters of credit and commitments to extend credit are
generally issued for one year or less and may involve a commitment fee. The
total commitment amounts do not necessarily represent future cash disbursements,
as many commitments expire without being drawn upon. In connection with
extending such commitments, the Company may require collateral, which may
include cash, accounts receivable, securities, real or personal property, or
other assets, in circumstances where it would not generally make an unsecured
loan. For those commitments which require collateral, the value of the
collateral generally equals or exceeds the amount of the commitment. Total
standby letters of credit are shown net of $39.8 million and $22.4 million
participated to other financial institutions at December 31, 1994 and 1993,
respectively.
The Company enters into derivative instruments primarily to hedge the
interest rate risk associated with its various assets and liabilities and to
meet the needs of its customers. Such hedge instruments generally take the form
of interest rate swaps and futures contracts. In part through the use of these
instruments, the Company strives to be essentially insensitive to changes in
interest rates within reasonable ranges (i.e., plus or minus 200 basis points).
Such instruments are subject to the same type of credit and market risk as other
financial instruments, and are monitored and controlled in accordance with the
Company's credit and risk management policies. To a much lesser extent, First
Fidelity utilizes foreign exchange and futures contracts for trading purposes;
such contracts are carried at market value in the trading account.
As of December 31, 1994, the Company had $5.0 billion (notional amount) of
interest rate swap contracts, which were structured such that the Company
receives a fixed rate and pays a floating interest rate. Of the $5.0 billion
swap agreements (which includes $2.3 billion of indexed amortizing swaps), $3.3
billion were used to hedge variable
66
69
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rate loans and $1.7 billion were used to transform equivalent maturity fixed
rate certificates of deposit and long-term debt into floating rate instruments.
At December 31, 1994, the Company's interest rate swaps had an average remaining
time to maturity of approximately 2 years. Such swaps do not extend beyond 5
years (except for those swaps associated with the Company's long-term debt). The
Company's indexed amortizing swaps are "receive fixed" swaps, which have
extended from their original maturity of one year to their maximum maturity of
three years, such that they mature in early 1997. The risk of loss associated
with interest rate swaps is primarily attributable to counterparty default and
movements in interest rates. Credit risk is limited to any amounts receivable,
and generally does not constitute more than a small fraction of the notional
amounts presented above.
The Company had $976.2 million (notional amount) of interest rate futures
contracts as of December 31, 1994. Of this total, $800 million are used to hedge
variable rate securities, and are structured sequentially over the first nine
months of 1995. The remaining $176.2 million of futures contracts are held for
trading purposes, and consist of $175.0 million of eurodollar futures and $1.2
million of treasury and municipal futures contracts. The eurodollar futures are
marked to market and settled daily, and have a maximum duration of 90 days.
During 1994, such eurodollar futures contracts averaged $58 million, with the
Company's outstandings fluctuating between zero and $250 million. Realized gains
associated with futures contracts held for trading purposes totalled $275
thousand for 1994. The risk associated with such futures positions arises
primarily from movements in interest rates.
The Company accounts for its derivative contracts qualifying for "hedge"
accounting treatment in a manner consistent with the related on-balance sheet
asset or liability. Cash flows associated with such instruments are included in
net interest income over the lives of the associated assets or liabilities (on
an accrual basis). In the event of termination of a contract qualifying for
"hedge" accounting treatment, the resulting gain or loss is deferred and
amortized over the interest rate risk period of the associated financial
instrument.
During 1994, $4.7 million of net deferred gains associated with terminated
contracts qualifying for "hedge" accounting treatment were recognized in income,
of which $4.6 million was attributable to futures contracts and $.1 million was
associated with $680 million (notional amount) of terminated interest rate swap
contracts. The remaining $1.7 million of net deferred gains associated with the
1994 swap terminations and the $980 thousand of net deferred losses on futures
contracts will be amortized into net interest income early in 1995.
The Company's forward contracts of $99.7 million at December 31, 1994, were
comprised of commitments to sell treasury securities at future dates for
specified prices. Such contracts have an average remaining maturity of
approximately 2 years at December 31, 1994.
The interest rate swap and cap agreements designated in the table above as
"customer contracts" are used solely to accommodate customer needs. At December
31, 1994, the Company had outstanding $83.5 million (notional amount) of
interest rate swap contracts and $42.0 million (notional amount) of interest
rate caps to its customers. Offsetting positions with identical maturities and
notional amounts were purchased almost simultaneously, such that mark-to-market
gains offset losses on such contracts.
At December 31, 1994, the Company's foreign exchange portfolio consisted of
$329.1 million of foreign exchange forward contracts, as well as foreign
exchange spot and futures contracts which totaled $46.3 million. The average
balance of such contracts were approximately $302 million and $250 million,
respectively, for 1994. The Company's foreign exchange forward contracts have an
average maturity of approximately 6 months; however, some contracts extend for
up to two years. Foreign exchange spot contracts require settlement to occur
within two business days of the contract date. The Company's foreign exchange
futures contracts have an average maturity of approximately 3 months at December
31, 1994. The Company's foreign exchange portfolio is marked to market on a
daily basis. These contracts are reflected in the table above at their December
31, 1994 market value. All realized and unrealized gains and losses were
included in trading revenue. Net trading gains on foreign exchange forward,
futures and spot contracts were $3.7 million for 1994.
67
70
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK OF FINANCIAL INSTRUMENTS
The Company extends credit in the normal course of business to its
customers, the majority of whom operate or reside within the New Jersey, eastern
Pennsylvania,Connecticut, Maryland and the southern New York business areas. The
ability of its customers to meet contractual obligations is, to some extent,
dependent upon the economic conditions existing in this region.
In addition, the Company had credit extensions (on and off balance-sheet)
to certain groups which represented 5% or more of total credit extensions, at
December 31, 1994 and 1993, respectively, as follows: consumers (including
residential mortgages), 40% and 38%; U.S. government and agencies, 16% in both
years; commercial mortgages and commercial real estate, 11% in both years; and
depository institutions, 5% and 10%.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose certain information about so-called
"fair values" of financial instruments, as defined in SFAS 107.
LIMITATIONS: Estimates of "fair value" are made at a specific point
in time, based upon, where available, relevant market prices and
information about the financial instrument. Such estimates do not include
any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument.
For a substantial portion of the Company's financial instruments, no quoted
market exists. Therefore, estimates of "fair value" are necessarily based
on a number of significant assumptions (many of which involve events
outside the control of management). Such assumptions include assessments of
current economic conditions, perceived risks associated with these
financial instruments and their counterparties, future expected loss
experience and other factors. Given the uncertainties surrounding these
assumptions, the reported "fair values" represent estimates only and,
therefore, cannot be compared to the historical accounting model. Use of
different assumptions or methodologies are likely to result in
significantly different "fair value" estimates.
The estimated "fair values" presented neither include nor give effect
to the values associated with the Company's banking, trust or other
businesses, existing customer relationships, extensive branch banking
network, property, equipment, goodwill or certain tax implications related
to unrealized gains or losses. Also, the "fair value" of non-interest
bearing demand deposits, savings and NOW accounts and money market deposit
accounts is required to be reported as equal to the carrying amount because
these deposits have no stated maturity. Obviously, this approach to
estimating "fair value" excludes the significant benefit that results from
the low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding.
The following methods and assumptions were used to estimate the "fair
value" of each major classification of financial instruments at December 31,
1994 and 1993:
CASH, SHORT-TERM INVESTMENTS, AND CUSTOMERS' ACCEPTANCE
LIABILITY: Current carrying amounts approximate estimated "fair value".
SECURITIES: Current quoted market prices were used to determine "fair
value".
LOANS: The "fair value" of residential mortgages was estimated based
upon recent market prices of securitized receivables, adjusted for
differences in loan characteristics. The "fair value" of certain
installment loans (e.g., bankcard receivables) was estimated based upon
recent market prices of sales of similar receivables. The "fair value" of
non-accruing and restructured loans which are secured by real estate was
estimated considering recent external appraisals of the underlying
collateral and other factors. The "fair value" of all other loans was
estimated using a method which approximates the effect of discounting the
estimated future cash flows over the expected repayment periods using rates
which consider credit risk, servicing costs and other relevant factors.
68
71
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEPOSITS WITH NO STATED MATURITY AND SHORT-TERM TIME DEPOSITS: Under
the terms of SFAS 107, such deposits must be reported as having a "fair
value" equal to their carrying amount. However, the economic value of a
low-cost deposit base which averaged $18.6 billion in 1994 is significant,
particularly in a high and rising interest rate environment, as occurred in
1994.
OTHER CONSUMER TIME DEPOSITS: "Fair value" was estimated by
discounting the contractual cash flows using current market rates offered
in the Company's market area for deposits with comparable terms and
maturities.
SHORT-TERM BORROWINGS AND ACCEPTANCES OUTSTANDING: Current carrying
amounts approximate estimated "fair value".
LONG-TERM DEBT: Current quoted market prices were used to estimate
"fair value".
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: The majority of
the Company's commitments to extend credit and letters of credit carry
current market interest rates if converted to loans. Because commitments to
extend credit and letters of credit are generally unassignable by either
the Company or the borrower, they only have value to the Company and the
borrower. The estimated "fair value" approximates the recorded deferred fee
amounts.
The carrying amounts and estimated "fair values" of the Company's financial
instruments were as follows at December 31, 1994 and 1993:
1994 1993
--------------------- ---------------------
CARRYING "FAIR CARRYING "FAIR
AMOUNT VALUE" AMOUNT VALUE"
-------- ------- -------- -------
(MILLIONS)
Financial Assets:
Cash and due from banks................................... $ 2,082 $ 2,082 $ 1,831 $ 1,831
Interest-bearing time deposits............................ 36 36 980 980
Securities held to maturity............................... 4,187 4,049 5,242 5,321
Securities available for sale............................. 3,781 3,781 2,657 2,657
Trading account securities................................ 110 110 150 150
Federal funds sold and securities purchased under
agreements to resell................................... 51 51 15 15
Net loans (A)............................................. 21,422 21,468 19,577 20,400
Customers' acceptance liability........................... 216 216 188 188
Segregated assets......................................... 68 68 248 248
Loans classified as assets held for sale.................. 29 29 65 65
Amounts receivable on swap contracts...................... 73 73 64 64
Financial Liabilities:
Deposits with no stated maturity.......................... 18,922 18,922 18,891 18,891
Deposits with stated maturities........................... 9,985 9,893 9,252 9,384
Short-term borrowings..................................... 2,717 2,717 1,620 1,620
Acceptances outstanding................................... 219 219 196 196
Long-term debt............................................ 813 804 613 665
Amounts payable on swap contracts......................... 66 66 21 21
- ---------------
(A) Disclosure of the "fair value" of lease receivables is not required and has
not been included above. The carrying amount of Net loans excludes $2.1
billion and $1.4 billion of lease receivables, $249 million and $183 million
of related unearned income and allocated reserves of $22 million and $29
million at December 31, 1994 and 1993, respectively. The reserve for lease
receivables has been allocated only to present the information above on a
comparable basis. Additionally, the Company continues to pursue its
contractual claims on loans which have been charged-off. The "fair value" of
such contractual claims was not included in the estimate of "fair value".
69
72
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER OFF BALANCE-SHEET INSTRUMENTS: The Company uses interest rate swaps
and futures contracts to help manage its interest rate sensitivity. Such
financial instruments are used in conjunction with on-balance sheet items
(loans, deposits and long-term debt) to help achieve targeted interest rate
spreads over specified time periods, and should be viewed in that context. Under
SFAS 107, certain of the "hedged" on-balance sheet categories (i.e., certain
deposits) may not be presented at their estimated "fair value", but must be
shown in the above table at their liquidation ("book") value. For SFAS 107
purposes, however, the "fair value" of derivative contracts used to hedge such
items must be disclosed without regard to the "fair value" of the hedged balance
sheet item. The estimated amounts that the Company would receive or pay, based
upon current market rates or prices, to terminate such agreements was used as an
approximation of "fair value". The "fair value" of customer contracts and the
related offsetting contracts equal their carrying value. The "fair value" of
interest rate swaps used for asset/liability management purposes was a "loss" of
$205 million at December 31, 1994 and a "gain" of $115 million at the end of
1993. The "fair value" of First Fidelity's futures contracts aggregated a $2
million "loss" at the end of 1994 and a $3 million "gain" as of December 31,
1993.
NOTE 18. OTHER COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is a party (as plaintiff or defendant) to a number of lawsuits.
While any litigation carries an element of uncertainty, management is of the
opinion that the liability, if any, resulting from these actions will not have a
material effect on the liquidity, financial condition or results of operations
of the Company.
OPERATING LEASES
At December 31, 1994, the Company was obligated under non-cancelable
operating leases for certain premises and equipment. Minimum future rental
expenses under these leases are as follows:
OPERATING LEASES
------------------------
BUILDINGS EQUIPMENT
--------- ---------
(THOUSANDS)
1995..................................................................... $ 29,244 $ 111
1996..................................................................... 24,194 23
1997..................................................................... 18,888 22
1998..................................................................... 15,446 14
1999..................................................................... 12,791 --
Later years.............................................................. 62,571 --
--------- ---------
Total minimum lease payments........................................... $ 163,134 $ 170
======== =========
Total rental expense under cancelable and non-cancelable operating leases
for 1994, 1993 and 1992 was $33.4 million, $36.4 million and $44.3 million,
respectively.
LONG-TERM SERVICE CONTRACT
In September, 1990, the Company entered into a service contract, under
which an outside servicer provides certain data processing services, manages the
Company's data center operations and is integrating various application systems
to produce unified Company-wide operating systems. The cost of the services is
determined by volume considerations and an inflation factor, in addition to an
agreed base rate.
NOTE 19. RELATED PARTY TRANSACTIONS
At December 31, 1994 and 1993, the Company had balances with Santander,
typical of and consistent with a correspondent banking relationship in the
normal course of business. In addition, First Fidelity repurchased 250 thousand
shares of its Common Stock from Santander during 1994, at market prices, which
averaged $44.43.
70
73
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also purchased from Santander 3,063,297 shares of the capital
stock of Banco Espanol de Credito, S.A. ("Banesto"), which represents
approximately 0.5% of Banesto's outstanding capital stock, for approximately
$18.1 million.
Loans to directors, executive officers and their associates, which are made
in the ordinary course of business and on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others, approximated $423 million at December 31,
1994 and $154 million at December 31, 1993. During 1994, there were increases of
approximately $310 million and loan repayments of approximately $41 million on
such loans.
NOTE 20. CONDENSED FINANCIAL INFORMATION OF FIRST FIDELITY BANCORPORATION
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31
------------------------
1994 1993
---------- ----------
(THOUSANDS)
ASSETS
Demand deposits with affiliates..................................................... $ 7,514 $ 2,391
Repurchase agreements............................................................... -- 15,000
Interest bearing time deposits...................................................... 152,000 --
Securities held to maturity......................................................... 2,500 2,500
Securities available for sale, at market value...................................... 23,833 469
Subordinated notes receivable from subsidiaries..................................... 165,357 160,000
Investment in subsidiaries:
First Fidelity Incorporated....................................................... 2,571,446 2,471,863
Baltimore Bancorp................................................................. 347,545 --
Northeast Bancorp, Inc. .......................................................... 268,712 199,102
First Fidelity Bank, NA, New York................................................. -- 356,624
BankVest, Inc..................................................................... 14,227 --
Other assets........................................................................ 70,052 65,210
---------- ----------
Total Assets...................................................................... $3,623,186 $3,273,159
========== ==========
LIABILITIES
Long-term debt...................................................................... $ 636,750 $ 436,750
Dividends payable................................................................... 5,208 5,131
Other liabilities................................................................... 104,253 92,850
---------- ----------
Total Liabilities................................................................. 746,211 534,731
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock..................................................................... 229,707 230,422
Common stockholders' equity
Common stock ($1.00 par)
Authorized: 150,000,000 shares
Issued: 82,003,121 shares in 1994 and 79,937,719 shares in 1993................. 82,003 79,938
Surplus........................................................................... 1,256,020 1,202,373
Retained earnings................................................................. 1,353,001 1,227,265
Net unrealized gains - securities available for sale.............................. 1,916 103
Less treasury stock, at cost: 1,020,282 shares in 1994 and 36,714 shares in
1993............................................................................. (45,672) (1,673)
---------- ----------
Total Common Stockholders' Equity............................................... 2,647,268 2,508,006
---------- ----------
Total Stockholders' Equity...................................................... 2,876,975 2,738,428
---------- ----------
Total Liabilities and Stockholders' Equity...................................... $3,623,186 $3,273,159
========== ==========
71
74
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(THOUSANDS)
INCOME
Dividends from subsidiaries:
First Fidelity Incorporated............................................. $ 376,767 $ 316,894 $ 77,800
Fidelcor, Inc........................................................... -- -- 68,470
BankVest, Inc........................................................... 1,580 -- --
Interest and other income from affiliates................................. 187,982 183,819 144,485
--------- --------- ---------
566,329 500,713 290,755
--------- --------- ---------
EXPENSE
Interest.................................................................. 37,767 21,459 19,493
Other expenses............................................................ 179,923 161,900 134,749
--------- --------- ---------
217,690 183,359 154,242
--------- --------- ---------
Income before income tax benefit and equity in
undistributed income of subsidiaries.................................. 348,639 317,354 136,513
Income tax benefit.......................................................... 10,433 4,754 2,864
--------- --------- ---------
Income before equity in subsidiaries and cumulative effect of changes in
accounting principles................................................. 359,072 322,108 139,377
Cumulative effect of changes in accounting principles, net of tax........... -- 7,899 --
Equity in undistributed income of subsidiaries.............................. 91,991 68,825 174,360
--------- --------- ---------
Net income.............................................................. 451,063 398,832 313,737
Dividends on Preferred stock................................................ 20,667 20,653 21,061
--------- --------- ---------
Net Income Applicable to Common Stock................................... $ 430,396 $ 378,179 $ 292,676
========= ======== ========
72
75
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31
----------------------------------------
1994 1993 1992
---------- ---------- ----------
(THOUSANDS)
Cash flows from operating activities:
Net income............................................................ $ 451,063 $ 398,832 $ 313,737
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed (income) of subsidiaries...................... (91,991) (68,825) (174,360)
Change in other assets................................................ 3,031 (8,585) (20,872)
Change in taxes payable............................................... 5,932 (3,148) 7,522
Change in other liabilities........................................... 18,371 35,217 27,827
Cumulative effect of changes in accounting principles................. -- (7,899) --
Other, net............................................................ (24) 4 (1,305)
---------- ---------- ----------
Net cash provided by operating activities......................... 386,382 345,596 152,549
---------- ---------- ----------
Cash flows from investing activities:
Additional investments in subsidiaries................................ (474,225) (447,667) (120,000)
Other................................................................. (11,355) 2,023 --
---------- ---------- ----------
Net cash used in investing activities............................. (485,580) (445,644) (120,000)
---------- ---------- ----------
Cash flows from financing activities:
Capital distributions from subsidiaries............................... 256,000 -- --
Issuance of long-term debt............................................ 200,000 150,000 --
Purchases of treasury stock........................................... (197,654) (116,954) --
Issuance of Common and Preferred stock................................ 145,968 140,740 100,214
Dividends paid........................................................ (162,993) (131,080) (109,174)
---------- ---------- ----------
Net cash provided by (used in) financing activities............... 241,321 42,706 (8,960)
---------- ---------- ----------
Net change in cash and cash equivalents........................... 142,123 (57,342) 23,589
Cash and cash equivalents at beginning of year (A)................ 17,391 74,733 51,144
---------- ---------- ----------
Cash and cash equivalents at end of year (A)...................... $ 159,514 $ 17,391 $ 74,733
========= ========= =========
Supplemental disclosure:
Total amount of interest paid for the period.......................... $ 29,447 $ 22,086 $ 19,720
========= ========= =========
Total amount of income taxes paid for the period...................... $ 87,100 $ 90,500 $ 83,560
========= ========= =========
DECEMBER 31
-------------------------------------
(A) Reconciliation: 1994 1993 1992
--------- --------- ---------
Demand deposits with affiliates............................................ $ 7,514 $ 2,391 $ 1,608
Repurchase agreements...................................................... 152,000 15,000 73,125
--------- --------- ---------
Total cash and cash equivalents........................................ $ 159,514 $ 17,391 $ 74,733
======== ======== ========
REGULATORY RESTRICTIONS
The Federal Reserve Act limits extensions of credit that can be made from
the Company's bank subsidiaries to any affiliate (with certain exceptions),
including the Parent Company. Loans to any one affiliate may not exceed 10% of a
bank subsidiary's capital and surplus, and loans to all affiliates may not
exceed 20% of such bank subsidiary's capital and surplus. Additionally, such
loans must be collateralized and must have terms comparable to those with
unaffiliated companies.
73
76
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
SUPPLEMENTARY DATA
SUMMARY OF QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------------- --------------------------------------------------
DECEMBER SEPTEMBER DECEMBER SEPTEMBER
31 30 JUNE 30 MARCH 31 31 30 JUNE 30 MARCH 31
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest
income.......... $ 562,603 $ 537,082 $ 521,850 $ 514,617 $ 506,158 $ 515,170 $ 513,397 $ 510,471
Interest
expense......... 213,183 184,020 170,413 164,420 162,406 170,850 173,487 184,770
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest
income.......... 349,420 353,062 351,437 350,197 343,752 344,320 339,910 325,701
Provision for
possible
credit
losses.......... 15,000 20,000 20,000 24,000 29,000 33,000 41,000 45,000
Net
securities
transactions.... 4,009 4,903 4,726 4,082 3,096 50 194 3,677
Other
non-interest
income (A)...... 106,385 97,336 96,376 99,127 99,055 97,452 94,640 85,336
Non-interest
expense......... 272,611 263,631 265,983 267,404 262,320 260,209 253,849 238,321
Income taxes..... 56,617 56,652 54,963 53,136 50,207 47,071 41,967 38,780
Cumulative effect
ofchanges in
accounting
principles,
net of tax...... -- -- -- -- -- -- -- 2,373
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....... 115,586 115,018 111,593 108,866 104,376 101,542 97,928 94,986
Dividends on
preferred
stock.......... 5,208 5,182 5,146 5,131 5,130 5,135 5,144 5,244
--------- --------- --------- --------- --------- --------- --------- ---------
Net income
applicable
to Common
Stock......... $ 110,378 $ 109,836 $ 106,447 $ 103,735 $ 99,246 $ 96,407 $ 92,784 $ 89,742
========= ========= ========= ========= ======== ======== ======== ========
Per common
share
Primary:
Income
before
cumulative
effect of
changes in
accounting
principles. $1.34 $1.33 $1.29 $1.26 $1.22 $1.17 $1.15 $1.11
Cumulative
effect of
changes in
principles,
net of tax -- -- -- -- -- -- -- .03
Net income --
primary.... 1.34 1.33 1.29 1.26 1.22 1.17 1.15 1.14
Fully
diluted:
Income
before
cumulative
effect of
changes in
accounting
principles 1.31 1.30 1.27 1.23 1.19 1.15 1.13 1.09
Cumulative
effect of
changes in
accounting
principles,
net of tax -- -- -- -- -- -- -- .03
Net income --
fully
diluted... 1.31 1.30 1.27 1.23 1.19 1.15 1.13 1.12
Book value..... 32.69 32.43 31.65 31.43 31.39 30.07 29.08 28.23
Net interest
margin........ 4.56% 4.74% 4.78% 4.75% 4.84% 4.82% 4.92% 4.87%
Return on
average
assets (B).... 1.32 1.36 1.35 1.32 1.28 1.24 1.26 1.28
Return on
average
stockholders'
equity (B).... 15.92 16.06 16.24 16.11 15.93 15.80 16.33 16.88
Return on
average
common
stockholders'
equity (C).... 16.52 16.68 16.90 16.75 16.61 16.50 17.11 17.75
- ---------------
(A) Non-interest income less net securities transactions.
(B) Net income.
(C) Net income applicable to Common Stock.
74
77
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
SUPPLEMENTARY DATA
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31
--------------------------------------------------
1994 1993 1992
------------ ------------ ------------
A. Income before cumulative effect of changes in accounting
principles............................................... $451,063,000 $396,459,000 $313,737,000
B. Cumulative effect of changes in accounting principles, net
of tax................................................... -- 2,373,000 --
------------ ------------ ------------
Net income................................................. 451,063,000 398,832,000 313,737,000
C. Less: Total preferred dividends........................... 20,667,000 20,653,000 21,061,000
------------ ------------ ------------
D. Net income applicable to Common Stock..................... $430,396,000 $378,179,000 $292,676,000
============ ============ ============
Net income................................................. $451,063,000 $398,832,000 $313,737,000
E. Less: Non-convertible preferred dividends................. 10,325,000 10,255,000 10,549,000
------------ ------------ ------------
F. Net income for Fully diluted earnings per share........... $440,738,000 $388,577,000 $303,188,000
============ ============ ============
PRIMARY EARNINGS PER SHARE:
Average shares outstanding................................. 80,829,000 77,590,000 71,630,325
Dilutive average shares outstanding under options and
warrants................................................. 4,244,605 9,106,883 12,268,030
Exercise prices............................................ $12.31 to $12.31 to $12.31 to
$44.75 $45.375 $36.25
Assumed proceeds on exercise............................... $113,334,365 $253,163,970 $316,924,037
Market value per share..................................... $45.06 $46.12 $36.52
Less: Treasury stock purchased with the assumed proceeds
from exercise of options and warrants................ 2,515,233 5,489,721 8,678,713
------------ ------------ ------------
G. Adjusted average shares -- Primary........................ 82,558,372 81,207,162 75,219,642
------------ ------------ ------------
Primary Earnings Per Share:
Income before cumulative effect of changes in
accounting principles (A-C/G).......................... $5.21 $4.63 $3.89
Cumulative effect of changes in accounting principles,
net of tax (B/G)....................................... -- .03 --
------------ ------------ ------------
Net income (D/G)......................................... $5.21 $4.66 $3.89
============ ============ ============
FULLY DILUTED EARNINGS PER SHARE:
Average shares outstanding................................. 80,829,000 77,590,000 71,630,325
Dilutive average shares outstanding under options and
warrants................................................. 4,244,605 9,106,883 12,349,899
Exercise prices............................................ $12.31 to $12.31 to $12.31 to
$44.75 $45.375 $41.38
Assumed proceeds on exercise............................... $113,334,365 $253,163,970 $319,939,515
Market value per share..................................... $45.06 $46.12 $44.00
Less: Treasury stock purchased with the assumed proceeds
from exercise of options and warrants................ 2,515,233 5,489,721 7,271,352
------------ ------------ ------------
Adjusted average shares.................................... 82,558,372 81,207,162 76,708,872
Common shares from the assumed conversion of
Convertible Preferred Stock.............................. 3,752,961 3,773,816 3,814,244
------------ ------------ ------------
H. Adjusted average shares -- Fully diluted.................. 86,311,333 84,980,978 80,523,116
------------ ------------ ------------
Fully Diluted Earnings Per Share:
Income before cumulative effect of changes in
accounting principles (A-E/H).......................... $5.11 $4.55 $3.77
Cumulative effect of changes in accounting principles,
net of tax (B/H)....................................... -- .03 --
------------ ------------ ------------
Net income (F/H)......................................... $5.11 $4.58 $3.77
============ ============ ============
75
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The Company responds to this item by incorporating by reference the
material responsive to such item in the Company's definitive proxy statement for
its 1995 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The Company responds to this item by incorporating by reference the
material responsive to such item in the Company's definitive proxy statement for
its 1995 Annual Meeting of Shareholders, provided, however, that such
incorporation by reference shall not be deemed to specifically incorporate by
reference the information referred to in Item 402(a)(8) of Securities and
Exchange Commission Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company responds to this item by incorporating by reference the
material responsive to such item in the Company's definitive proxy statement for
its 1995 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company responds to this item by incorporating by reference the
material responsive to such item in the Company's definitive proxy statement for
its 1995 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements listed on the index set forth in Item 8 of
this Annual Report on Form 10-K are filed as part of this Annual Report.
Financial statement schedules are not required under the related
instructions of the Securities and Exchange Commission or are inapplicable and,
therefore, have been omitted.
(b) The following exhibits are incorporated by reference herein or annexed
to this Annual Report:
3.1 -- Registrant's Restated Certificate of Incorporation, is incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-8, No. 33-45404, filed
with the Securities and Exchange Commission on January 31, 1992.
3.2 -- Registrant's By-laws, as amended through October 21, 1993, are incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.
4.1 -- Upon the request of the Securities and Exchange Commission, the Registrant will
furnish a copy of all instruments defining the rights of holders of long-term debt
of the Registrant.
4.2 -- Deposit Agreement, dated as of June 28, 1991, between the Company, First Fidelity
Bank, N.A., New Jersey and the holders from time to time of depository receipts
issued by the Depository thereunder, is incorporated by reference to Exhibit 4(ii)
of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
4.3 -- Rights Agreement, and Supplement No. 1 thereto are incorporated by reference to
Exhibit 1 of Registrant's Registration Statement on Form 8-A, dated August 25, 1989,
and Exhibit 4 of Registrant's Form 8 Amendment to such Form 8-A, dated March 12,
1990.
4.4 -- Supplements Nos. 2 and 3 to the Rights Agreement are incorporated herein by
reference to Exhibit 10.17 of Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.
76
79
10.1 -- Employment Agreements between the Registrant and each of Anthony P. Terracciano,
Peter C. Palmieri, Wolfgang Schoellkopf, Roland K. Bullard II, Leslie E. Goodman and
Donald C. Parcells.
10.2 -- First Fidelity Bancorporation Stock Option and Restricted Stock Plan, as amended.
10.3 -- Lease Agreement between 60 West Broad Street Realty Company and The Merchants
National Bank of Allentown, dated October 29, 1982, is incorporated herein by
reference to Exhibit 10.21 of Fidelcor's Annual Report on Form 10-K for the year
ended December 31, 1986.
10.4 -- Lease Agreement between 60 West Broad Street Realty Company and Merchants Bank,
N.A., dated June 24, 1987, is incorporated herein by reference to Exhibit 10.21(b)
of Fidelcor's Annual Report on Form 10-K for the year ended December 31, 1987.
10.5 -- Lease Agreement between Frank M. Henry Associates and Wyoming National Bank of
Wilkes-Barre, dated April 29, 1982, is incorporated herein by reference to Exhibit
10.22 of Fidelcor's Annual Report on Form 10-K for the year ended December 31, 1986.
10.6 -- Registrant's Deferred Compensation Plan for Non-Employee Directors, as amended.
10.7 -- Registrant's Annual Incentive Plan is incorporated herein by reference to Exhibit
10.23 of Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
10.8 -- Investment Agreement, dated as of March 18, 1991, between the Registrant and Banco
Santander, S.A. is incorporated by reference to Exhibit (a) of Registrant's Current
Report on Form 8-K filed with the Commission on March 21, 1991.
11.1 -- Statement regarding computation of per share earnings (included in Item 8 of this
Annual Report on Form 10-K).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
24.1 -- Power of Attorney.
(c) Current Reports on Form 8-K during the quarter ended December 31, 1994.
None.
77
80
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, THIS 16TH DAY OF
FEBRUARY, 1995.
FIRST FIDELITY BANCORPORATION
By: /s/ ANTHONY P. TERRACCIANO
--------------------------------------
Anthony P. Terracciano
Chairman, President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- -----------------
/s/ ANTHONY P. TERRACCIANO Chairman, President and
- --------------------------------------------- Chief Executive Officer
Anthony P. Terracciano
*LOUIS E. AZZATO Director
- ---------------------------------------------
Louis E. Azzato
*EDWARD E. BARR Director
- ---------------------------------------------
Edward E. Barr
*ROLAND K. BULLARD II Director
- ---------------------------------------------
Roland K. Bullard II
*LEE A. BUTZ Director
- ---------------------------------------------
Lee A. Butz
*LUTHER R. CAMPBELL, JR. Director
- ---------------------------------------------
Luther R. Campbell, Jr.
*JOHN GILRAY CHRISTY Director February 16, 1995
- ---------------------------------------------
John Gilray Christy
*JAMES G. CULLEN Director
- ---------------------------------------------
James G. Cullen
*GONZALO DE LAS HERAS Director
- ---------------------------------------------
Gonzalo de Las Heras
*E. JAMES FERLAND Director
- ---------------------------------------------
E. James Ferland
*ARTHUR M. GOLDBERG Director
- ---------------------------------------------
Arthur M. Goldberg
*LESLIE E. GOODMAN Director
- ---------------------------------------------
Leslie E. Goodman
*FRANK M. HENRY Director
- ---------------------------------------------
Frank M. Henry
78
81
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------------ -----------------
*JUAN RODRIGUEZ INCIARTE Director
- ----------------------------------------------
Juan Rodriguez Inciarte
*JOHN R.KENNEDY Director
- -----------------------------------------------
John R. Kennedy
*ROCCO J. MARANO Director
- -----------------------------------------------
Rocco J. Marano
*JAMES D. MORRISSEY, JR. Director
- -----------------------------------------------
James D. Morrissey, Jr.
*JOSEPH NEUBAUER Director
- -----------------------------------------------
Joseph Neubauer
*PETER C. PALMIERI Director
- -----------------------------------------------
Peter C. Palmieri
*DONALD C. PARCELLS Director
- -----------------------------------------------
Donald C. Parcells February 16, 1995
*ROBERT MONTGOMERY SCOTT Director
- -----------------------------------------------
Robert Montgomery Scott
*REBECCA STAFFORD Director
- -----------------------------------------------
Rebecca Stafford
*SEFTON STALLARD Director
- -----------------------------------------------
Sefton Stallard
*BERNARD C. WATSON Director
- -----------------------------------------------
Bernard C. Watson
*WOLFGANG SCHOELLKOPF Director and Principal
- ----------------------------------------------- Financial Officer
Wolfgang Schoellkopf
*ANTHONY R. BURRIESCI Principal Accounting
- ----------------------------------------------- Officer
Anthony R. Burriesci
*By: /s/ ANTHONY P. TERRACCIANO
- -----------------------------------------------
Anthony P. Terracciano
Attorney-in-Fact
79
82
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------ ------------- --------
3.1 -- Registrant's Restated Certificate of Incorporation, is incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-8, No. 33-45404, filed
with the Securities and Exchange Commission on January 31, 1992.
3.2 -- Registrant's By-laws, as amended through October 21, 1993, are incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.
4.1 -- Upon the request of the Securities and Exchange Commission, the Registrant will
furnish a copy of all instruments defining the rights of holders of long-term debt
of the Registrant.
4.2 -- Deposit Agreement, dated as of June 28, 1991, between the Company, First Fidelity
Bank, N.A., New Jersey and the holders from time to time of depository receipts
issued by the Depository thereunder, is incorporated by reference to Exhibit 4(ii)
of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
4.3 -- Rights Agreement, and Supplement No. 1 thereto are incorporated by reference to
Exhibit 1 of Registrant's Registration Statement on Form 8-A, dated August 25, 1989,
and Exhibit 4 of Registrant's Form 8 Amendment to such Form 8-A, dated March 12,
1990.
4.4 -- Supplements Nos. 2 and 3 to the Rights Agreement are incorporated herein by
reference to Exhibit 10.17 of Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.1 -- Employment Agreements between the Registrant and each of Anthony P. Terracciano,
Peter C. Palmieri, Wolfgang Schoellkopf, Roland K. Bullard II, Leslie E. Goodman and
Donald C. Parcells.
10.2 -- First Fidelity Bancorporation Stock Option and Restricted Stock Plan, as amended.
10.3 -- Lease Agreement between 60 West Broad Street Realty Company and The Merchants
National Bank of Allentown, dated October 29, 1982, is incorporated herein by
reference to Exhibit 10.21 of Fidelcor's Annual Report on Form 10-K for the year
ended December 31, 1986.
10.4 -- Lease Agreement between 60 West Broad Street Realty Company and Merchants Bank,
N.A., dated June 24, 1987, is incorporated herein by reference to Exhibit 10.21(b)
of Fidelcor's Annual Report on Form 10-K for the year ended December 31, 1987.
10.5 -- Lease Agreement between Frank M. Henry Associates and Wyoming National Bank of
Wilkes-Barre, dated April 29, 1982, is incorporated herein by reference to Exhibit
10.22 of Fidelcor's Annual Report on Form 10-K for the year ended December 31, 1986.
10.6 -- Registrant's Deferred Compensation Plan for Non-Employee Directors, as amended.
10.7 -- Registrant's Annual Incentive Plan is incorporated herein by reference to Exhibit
10.23 of Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
10.8 -- Investment Agreement, dated as of March 18, 1991, between the Registrant and Banco
Santander, S.A. is incorporated by reference to Exhibit (a) of Registrant's Current
Report on Form 8-K filed with the Commission on March 21, 1991.
11.1 -- Statement regarding computation of per share earnings (included in Item 8 of this
Annual Report on Form 10-K).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
24.1 -- Power of Attorney.
27.1 -- Financial Data Schedule.