Annual Report (Form 10-K), fiscal year 1994

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.
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.
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.
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.
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
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
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
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
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.
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.



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.

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.

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.
PART II
ITEM 5.

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:
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.
ITEM 6.

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.
- --------------- (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.
ITEM 7.

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".
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.
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
- ---------------
(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.
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)
- --------------- (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
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
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.
NON-INTEREST EXPENSE
MAJOR COMPONENTS OF NON-INTEREST EXPENSE
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.
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.
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.
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
- --------------- (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.
"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
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.
The following table sets forth information, based on notional values, regarding First Fidelity's asset-liability management-related derivatives activity:
- --------------- (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.
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.
The following table presents certain information regarding the major components of short-term borrowings for each of the years presented:
SHORT-TERM BORROWINGS
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
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.
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
CAPITAL RATIOS
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".
Changes in stockholders' equity during the twelve months ended December 31, 1994 and 1993 were comprised of the following:
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.
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:
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
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:
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)
- ---------------
(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.
SECURITIES AVAILABLE FOR SALE -- FAIR VALUE AND MATURITY DISTRIBUTION
- ---------------
(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
LOANS OUTSTANDING -- MATURITY DISTRIBUTION(1)
- ---------------
(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
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
- --------------- (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.
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
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
- --------------- (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
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
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.
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
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(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
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:
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.
ITEM 8.


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:
(b) The following supplementary data is set forth in this Annual Report on Form 10-K on the following pages:
[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
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CONDITION
See accompanying notes to consolidated financial statements.
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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
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
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".
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:
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
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)
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.
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:
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.
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:
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:
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES AVAILABLE FOR SALE:
NOTE 6. LOANS
Loans at December 31, 1994 and 1993 consisted of the following:
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.
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:
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1994 and 1993 consisted of the following:
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.
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:
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.
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:
NOTE 11. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 consisted of the following:
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
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:
NOTE 12. STOCKHOLDERS' EQUITY
Preferred Stock at December 31, 1994 and 1993 consisted of the following:
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%.
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:
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.
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.
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:
Net pension expense (benefit) for 1994, 1993 and 1992 included the following components:
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
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:
The net periodic postretirement benefit cost for 1994 and 1993 includes the following:
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.
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:
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. INCOME TAXES
Income tax expense was comprised of the following:
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:
The components of deferred income tax for the year ended December 31, 1992, under accounting rules then in effect, were as follows:
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:
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:
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.
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:
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
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.
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.
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:
- --------------- (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".
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:
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.
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)
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY)
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
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.
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
SUPPLEMENTARY DATA
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ---------------
(A) Non-interest income less net securities transactions.
(B) Net income.
(C) Net income applicable to Common Stock.
FIRST FIDELITY BANCORPORATION (AND SUBSIDIARIES)
SUPPLEMENTARY DATA
COMPUTATION OF EARNINGS PER SHARE
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.



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.

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.

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.

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.

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:
(c) Current Reports on Form 8-K during the quarter ended December 31, 1994.
None.
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.
EXHIBIT INDEX