SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 22, 1999
------------------------------------------------------------------
FLEET BOSTON CORPORATION
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
RHODE ISLAND
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(State or other jurisdiction of incorporation)
1-6366 05-0341324
-------------------------------- ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
One Federal Street, Boston, MA 02110
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-346-4000
------------
<PAGE>
Item 5. Other Events
On October 1, 1999, BankBoston Corporation ("BankBoston") merged
with and into Fleet Financial Group, Inc. ("Fleet"). Following the
merger, Fleet was renamed Fleet Boston Corporation ("Fleet Boston").
Each BankBoston stockholder received for each share of BankBoston
common stock held by such stockholder, except for shares held by
dissenting shareholders or shares held by Fleet or its subsidiaries
or by BankBoston or its subsidiaries (other than in both cases
shares held in a fiduciary capacity or as a result of debts
previously contracted), 1.1844 shares of the Common Stock, $0.01 par
value (including the associated preferred share purchase rights), of
Fleet.
The merger was accounted for as a pooling of interests. Accordingly,
Fleet Boston hereby files supplemental consolidated financial
statements for the years ended December 31, 1998, 1997, and 1996
that reflect the merger as if Fleet and BankBoston had been combined
for all periods presented.
Item 7. Financial Statements and Exhibits
(a) Not applicable.
(b) Not applicable.
(c) Exhibits
The following exhibits are filed as part of this report.
12(a) Computation of the Corporation's Supplemental Consolidated Ratio of
Earnings to Fixed Charges (including preferred dividends)
12(b) Computation of the Corporation's Supplemental Consolidated Ratio of
Earnings to Fixed Charges (excluding preferred dividends)
23(a) Report of Independent Accountants
23(b) Consent of Independent Accountants
27(a) Restated Financial Data Schedule for the year ended December 31,
1998
27(b) Restated Financial Data Schedule for the year ended December 31,
1997
27(c) Restated Financial Data Schedule for the year ended December 31,
1996
99(a) Supplemental Selected Financial Highlights; Supplemental
Management's Discussion and Analysis; Supplemental Consolidated
Balance Sheets of Fleet Boston as of December 31, 1998 and 1997;
Supplemental Consolidated Statements of Income of Fleet Boston for
the years ended December 31, 1998, 1997, and 1996; Supplemental
Consolidated Statements of Changes in Stockholders' Equity and
Supplemental Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996; Footnotes to Supplemental
Consolidated Financial Statements; Supplemental Statistical
Disclosure by Bank Holding Companies.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed in its behalf
by the undersigned hereunto duly authorized.
FLEET BOSTON CORPORATION
Registrant
By: /s/ Eugene M. McQuade
---------------------
Eugene M. McQuade
Vice Chairman and
Chief Financial Officer
/s/ Robert C. Lamb, Jr.
-----------------------
Robert C. Lamb, Jr.
Controller
Dated: November 22, 1999
EXHIBIT 12(a)
FLEET BOSTON CORPORATION
COMPUTATION OF SUPPLEMENTAL CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED DIVIDENDS
EXCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
September 30, September 30, Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $3,352 $2,778 $3,776 $3,762 $3,185 $2,354 $2,431
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 1,990 1,669 2,240 1,788 1,686 2,492 2,112
(2) 1/3 of rent 79 71 96 92 95 90 88
(b) Preferred dividends 61 77 97 157 183 129 118
====== ====== ====== ====== ====== ====== ======
(c) Adjusted earnings $5,482 $4,595 $6,209 $5,799 $5,149 $5,065 $4,749
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $2,130 $1,817 $2,433 $2,037 $1,964 $2,711 $2,318
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 2.57x 2.53x 2.55x 2.85x 2.62x 1.87x 2.05x
====== ====== ====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
September 30, September 30, Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $3,352 $2,778 $3,776 $3,762 $3,185 $2,354 $2,431
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 1,990 1,669 2,240 1,788 1,686 2,492 2,112
(2) 1/3 of rent 79 71 96 92 95 90 88
(3) Interest on deposits 2,618 2,769 3,706 3,339 3,433 3,517 2,471
(b) Preferred dividends 61 77 97 157 183 129 118
====== ====== ====== ====== ====== ====== ======
(c) Adjusted earnings $8,100 $7,364 $9,915 $9,138 $8,582 $8,582 $7,220
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $4,748 $4,586 $6,139 $5,376 $5,397 $6,228 $4,789
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.71x 1.61x 1.62x 1.70x 1.59x 1.38x 1.51x
====== ====== ====== ====== ====== ====== ======
</TABLE>
EXHIBIT 12(b)
FLEET BOSTON CORPORATION
COMPUTATION OF SUPPLEMENTAL CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES
EXCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
September 30, September 30, Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $3,352 $2,778 $3,776 $3,762 $3,185 $2,354 $2,431
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 1,990 1,669 2,240 1,788 1,686 2,492 2,112
(2) 1/3 of rent 79 71 96 92 95 90 88
====== ====== ------ ------ ------ ------ ------
(b) Adjusted earnings $5,421 $4,518 $6,112 $5,642 $4,966 $4,936 $4,631
====== ====== ====== ====== ====== ====== ======
Fixed charges $2,069 $1,740 $2,336 $1,880 $1,781 $2,582 $2,200
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 2.62x 2.60x 2.62x 3.00x 2.79x 1.91x 2.11x
====== ====== ====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
September 30, September 30, Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $3,352 $2,778 $3,776 $3,762 $3,185 $2,354 $2,431
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 1,990 1,669 2,240 1,788 1,686 2,492 2,112
(2) 1/3 of rent 79 71 96 92 95 90 88
(3) Interest on deposits 2,618 2,769 3,706 3,339 3,433 3,517 2,471
====== ====== ====== ====== ====== ====== ======
(b) Adjusted earnings $8,039 $7,287 $9,818 $8,981 $8,399 $8,453 $7,102
====== ====== ====== ====== ====== ====== ======
Fixed charges $4,687 $4,509 $6,042 $5,219 $5,214 $6,099 $4,671
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.72x 1.62x 1.62x 1.72x 1.61x 1.39x 1.52x
====== ====== ====== ====== ====== ====== ======
</TABLE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Fleet Boston Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Fleet Boston Corporation and subsidiaries (the "Corporation") as of December 31,
1998 and 1997, and the related supplemental consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Fleet Financial Group, Inc. and BankBoston Corporation on October
1, 1999, which has been accounted for as a pooling of interests as described in
notes 1 and 2 to the supplemental consolidated financial statements. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Fleet Boston
Corporation and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Fleet Boston Corporation and its subsidiaries at December 31, 1998
and 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 22, 1999
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Fleet Boston Corporation:
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-37231, 333-43625, 33-36707, 333-48043,
333-62905, 333-86829), Form S-8 (Nos. 33-19425, 33-25872, 33-65230, 33-48818,
33-56061, 33-62367, 33-58933, 33-64635, 33-59139, 333-16037, 333-44517,
333-68153, 333-83365), and Form S-4 (Nos. 33-58573, 33-58933, 333-82433) of
Fleet Boston Corporation of our report dated November 22, 1999 appearing in this
Form 8-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 22, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains restated summary financial information extracted from the
December 31, 1998 supplemental consolidated financial statements and
supplemental management's discussion and analysis of financial condition and
results of operations contained in the Current Report on Form 8-K dated November
22, 1999 and is qualified in its entirety by reference to such supplemental
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,964
<INT-BEARING-DEPOSITS> 1,977
<FED-FUNDS-SOLD> 2,566
<TRADING-ASSETS> 4,364
<INVESTMENTS-HELD-FOR-SALE> 21,842
<INVESTMENTS-CARRYING> 1,527
<INVESTMENTS-MARKET> 1,537
<LOANS> 112,094
<ALLOWANCE> 2,306
<TOTAL-ASSETS> 177,894
<DEPOSITS> 118,178
<SHORT-TERM> 19,176
<LIABILITIES-OTHER> 11,925
<LONG-TERM> 14,411
0
691
<COMMON> 9
<OTHER-SE> 13,504
<TOTAL-LIABILITIES-AND-EQUITY> 177,894
<INTEREST-LOAN> 10,136
<INTEREST-INVEST> 1,565
<INTEREST-OTHER> 640
<INTEREST-TOTAL> 12,341
<INTEREST-DEPOSIT> 3,706
<INTEREST-EXPENSE> 5,946
<INTEREST-INCOME-NET> 6,395
<LOAN-LOSSES> 850
<SECURITIES-GAINS> 115
<EXPENSE-OTHER> 7,050
<INCOME-PRETAX> 3,776
<INCOME-PRE-EXTRAORDINARY> 3,776
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,324
<EPS-BASIC> 2.47
<EPS-DILUTED> 2.41
<YIELD-ACTUAL> 4.40
<LOANS-NON> 640
<LOANS-PAST> 275
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,144
<CHARGE-OFFS> 1,050
<RECOVERIES> 216
<ALLOWANCE-CLOSE> 2,306
<ALLOWANCE-DOMESTIC> 1,831
<ALLOWANCE-FOREIGN> 242
<ALLOWANCE-UNALLOCATED> 233
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains restated summary financial information extracted from the
December 31, 1998 supplemental consolidated financial statements and
supplemental management's discussion and analysis of financial condition and
results of operations contained in the Current Report on Form 8-K dated November
22, 1999 and is qualified in its entirety by reference to such supplemental
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,006
<INT-BEARING-DEPOSITS> 1,668
<FED-FUNDS-SOLD> 2,471
<TRADING-ASSETS> 3,348
<INVESTMENTS-HELD-FOR-SALE> 18,059
<INVESTMENTS-CARRYING> 1,786
<INVESTMENTS-MARKET> 1,794
<LOANS> 106,545
<ALLOWANCE> 2,144
<TOTAL-ASSETS> 160,314
<DEPOSITS> 109,497
<SHORT-TERM> 19,224
<LIABILITIES-OTHER> 10,361
<LONG-TERM> 8,191
0
969
<COMMON> 5
<OTHER-SE> 12,067
<TOTAL-LIABILITIES-AND-EQUITY> 160,314
<INTEREST-LOAN> 9,318
<INTEREST-INVEST> 1,379
<INTEREST-OTHER> 558
<INTEREST-TOTAL> 11,255
<INTEREST-DEPOSIT> 3,339
<INTEREST-EXPENSE> 5,127
<INTEREST-INCOME-NET> 6,128
<LOAN-LOSSES> 522
<SECURITIES-GAINS> 113
<EXPENSE-OTHER> 6,050
<INCOME-PRETAX> 3,762
<INCOME-PRE-EXTRAORDINARY> 3,762
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,246
<EPS-BASIC> 2.39
<EPS-DILUTED> 2.33
<YIELD-ACTUAL> 4.68
<LOANS-NON> 712
<LOANS-PAST> 233
<LOANS-TROUBLED> 12
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,371
<CHARGE-OFFS> 880
<RECOVERIES> 225
<ALLOWANCE-CLOSE> 2,144
<ALLOWANCE-DOMESTIC> 1,509
<ALLOWANCE-FOREIGN> 189
<ALLOWANCE-UNALLOCATED> 446
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains restated summary financial information extracted from the
December 31, 1998 supplemental consolidated financial statements and
supplemental management's discussion and analysis of financial condition and
results of operations contained in the Current Report on Form 8-K dated November
22, 1999 and is qualified in its entirety by reference to such supplemental
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,748
<INT-BEARING-DEPOSITS> 2,492
<FED-FUNDS-SOLD> 3,599
<TRADING-ASSETS> 2,061
<INVESTMENTS-HELD-FOR-SALE> 15,432
<INVESTMENTS-CARRYING> 1,732
<INVESTMENTS-MARKET> 1,722
<LOANS> 100,922
<ALLOWANCE> 2,371
<TOTAL-ASSETS> 151,955
<DEPOSITS> 109,902
<SHORT-TERM> 13,327
<LIABILITIES-OTHER> 7,564
<LONG-TERM> 8,460
0
1,461
<COMMON> 5
<OTHER-SE> 11,236
<TOTAL-LIABILITIES-AND-EQUITY> 151,955
<INTEREST-LOAN> 9,032
<INTEREST-INVEST> 1,447
<INTEREST-OTHER> 442
<INTEREST-TOTAL> 10,921
<INTEREST-DEPOSIT> 3,433
<INTEREST-EXPENSE> 5,119
<INTEREST-INCOME-NET> 5,802
<LOAN-LOSSES> 444
<SECURITIES-GAINS> 48
<EXPENSE-OTHER> 5,831
<INCOME-PRETAX> 3,185
<INCOME-PRE-EXTRAORDINARY> 3,185
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,860
<EPS-BASIC> 1.88
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 4.57
<LOANS-NON> 1,098
<LOANS-PAST> 288
<LOANS-TROUBLED> 17
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,211
<CHARGE-OFFS> 794
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 2,371
<ALLOWANCE-DOMESTIC> 1,810
<ALLOWANCE-FOREIGN> 217
<ALLOWANCE-UNALLOCATED> 344
</TABLE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL SELECTED FINANCIAL HIGHLIGHTS(a)
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts
Prepared on an FTE basis 1998 1997 1996 1995 1994
============================================================================================================
<S> <C> <C> <C> <C> <C>
For the Year
Net interest income $ 6,454 $ 6,192 $ 5,858 $ 5,389 $ 5,196
Noninterest income 5,281 4,206 3,658 3,237 2,683
Total revenue 11,735 10,398 9,516 8,626 7,879
Noninterest expense 7,050 6,050 5,831 5,831 5,168
Provision for credit losses 850 522 444 376 219
Net income 2,324 2,246 1,860 1,351 1,428
- ------------------------------------------------------------------------------------------------------------
Per Common Share
Basic earnings $ 2.47 $ 2.39 $ 1.88 $ 1.25 $ 1.54
Diluted earnings 2.41 2.33 1.84 1.19 1.45
Market price (year-end)(b) 44.69 37.56 24.94 20.38 16.19
Cash dividends declared(b) 1.00 .92 .87 .82 .70
Book value (year-end) 14.70 13.23 12.08 11.15 9.85
- ------------------------------------------------------------------------------------------------------------
At Year-End
Assets $177,894 $160,314 $151,955 $147,373 $139,019
Securities 23,369 19,845 17,164 27,578 28,641
Loans 112,094 106,545 100,922 91,436 84,395
Reserve for credit losses 2,306 2,144 2,371 2,211 2,323
Deposits 118,178 109,497 109,902 98,186 95,777
Short-term borrowings 19,176 19,224 13,327 22,818 20,249
Long-term debt 14,411 8,191 8,460 8,686 8,150
Total stockholders' equity 14,204 13,041 12,702 11,359 9,635
- ------------------------------------------------------------------------------------------------------------
Ratios
Return on average common equity 17.64% 19.71% 16.31% 13.16% 15.60%
Return on average assets 1.37 1.48 1.27 .95 1.05
Common dividend payout ratio 40.15 35.55 40.71 50.76 32.13
Net interest margin 4.40 4.68 4.57 4.24 4.26
Efficiency ratio(c) 58.8 57.2 59.9 60.4 63.1
Common equity-to-assets (year-end) 7.60 7.53 7.40 7.09 6.16
Average total equity-to-assets 8.03 8.02 8.31 7.69 7.22
============================================================================================================
</TABLE>
(a) All data has been restated to reflect the BankBoston Merger, accounted for
as a pooling of interests.
(b) Amounts represent the historical market value and cash dividends of the
corporation.
(c) The efficiency ratio excludes the impact of merger-related charges and
other special items.
1
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL OVERVIEW
On October 1, 1999, BankBoston Corporation (BankBoston) merged with and into
Fleet Financial Group, Inc. (Fleet). Following the merger, Fleet was renamed
Fleet Boston Corporation (Fleet Boston or the corporation). The merger was
accounted for as a pooling of interests and, as such, financial information
included in this discussion has been restated to present the combined financial
condition and results of operations of both companies as if the merger had been
in effect for all periods presented. Under the terms of the merger agreement,
each outstanding BankBoston common share was exchanged for 1.1844 common shares
of Fleet in a tax-free exchange. Refer to Note 2. Mergers, Acquisitions, and
Divestitures for further discussion of the merger. All common share amounts and
associated ratios were adjusted to reflect the corporation's two-for-one common
stock split which was effected during 1998.
Fleet Boston reported earnings of $2.3 billion, or $2.41 per diluted
share, for 1998, a 3.5% increase compared with $2.2 billion, or $2.33 per
diluted share, earned in 1997. Return on assets (ROA) and return on common
equity (ROE) were 1.37% and 17.64%, respectively, in 1998, compared to 1.48% and
19.71%, respectively, in 1997.
Increases in both net income and earnings per share during 1998 primarily
reflect improved results achieved from the corporation's franchise businesses,
as well as companies acquired in 1998 (The Quick & Reilly Group, Inc., the
domestic consumer credit card business of Advanta and Columbia Management
Company). These increases were offset by a higher provision for credit losses
which was due to acquisitions, mainly credit card, and growth in existing
portfolios, mainly Latin America.
Net interest income on a fully taxable equivalent (FTE) basis totaled $6.5
billion for 1998 compared to $6.2 billion for 1997. The increase was principally
attributable to a $14.4 billion increase in average earning assets, due largely
to an $8.7 billion increase in average loans, which resulted from strong growth
in both the domestic and international commercial loan portfolios, as well as
the acquisition of the domestic consumer credit card operations of Advanta and a
$3.4 billion increase in securities. The net interest margin for 1998 was 4.40%,
a decline from 4.68% reported in 1997. The decrease in net interest margin was
primarily attributable to narrowed margins due to growth in commercial loans,
the divestiture of certain national consumer finance businesses in 1997, the
acquisitions of lower rate spread activity at The Quick & Reilly Group, Inc.
(Quick & Reilly) and domestic consumer credit cards purchased from Advanta.
The provision for credit losses was $850 million in 1998, compared to $522
million in 1997. The increase in provision was due principally to increased
credit card charge offs as a result of higher levels of credit card receivables
resulting from the acquisitions of various credit card portfolios, expansion in
Latin America and the charge-off of loans in the International Private Bank.
Noninterest income increased over $1 billion to $5.3 billion in 1998.
Increases were noted in nearly all core revenue categories including banking
fees and commissions, investment services, capital markets and credit cards.
These increases reflect growth in core businesses, the impact of recent
acquisitions, and a strong domestic equity market.
Noninterest expense totaled $7.1 billion for 1998, compared with $6.1
billion in 1997, an increase of 17%, resulting primarily from the aforementioned
acquisitions, branch expansions in Argentina and Brazil and other initiatives in
the corporation's key businesses.
Total loans at December 31, 1998 were $112.1 billion, an increase of 5%,
compared with $106.5 billion at December 31, 1997. The increase was attributable
to strong loan growth in the domestic and international commercial loan and
lease financing portfolios, as well as higher levels of credit card receivables
as a result of various portfolio acquisitions, offset by a slight decline in the
commercial real estate portfolio, as well as the securitization of $3.0 billion
of commercial and home equity loans.
Total deposits increased $8.7 billion to $118.2 billion at December 31,
1998. The increase was due principally to a $10.5 billion increase in domestic
money market deposits as a result of rates aimed at attracting new sources of
funds, as well as increased international deposits. Partially offsetting these
increases were decreases in domestic regular savings and NOW deposits.
Long-term debt increased $6.2 billion to $14.4 billion as a result of
funding both acquisitions and balance sheet growth.
This Supplemental Management's Discussion and Analysis may contain
statements relating to future results of the corporation (including certain
projections and business trends) that are considered "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected as a result of certain
risks and uncertainties, including, but not limited to, changes in political and
economic conditions, either domestically or internationally, in the countries in
which the corporation conducts its business; interest rate and currency
fluctuations; competitive product and pricing pressures within the corporation's
markets; equity and bond market fluctuations; personal and corporate customers'
bankruptcies; inflation; lower than expected revenues following mergers,
acquisitions and integrations of acquired businesses, including the merger with
BankBoston; greater than expected negative impact of the divestitures required
to obtain regulatory approval of the merger with BankBoston; risks relating to
Year 2000 issues (particularly with respect to compliance by third parties on
which the corporation relies); adverse legislation or regulatory changes
affecting the businesses in which Fleet Boston is engaged; as well as other
risks and uncertainties detailed from time to time in the filings of the
corporation with the Securities and Exchange Commission.
2
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
ACQUISITIONS
Consistent with Fleet Boston's strategy to combine the strengths of a leading
regional and international bank with the national distribution capabilities of a
diversified financial services company, the corporation announced and/or
completed several key acquisitions and new initiatives during 1998.
The domestic acquisitions included the investment banking operations of
Robertson Stephens, completed in August of 1998, Quick & Reilly, as well as the
consumer credit card operations of Advanta, both completed in February of 1998.
The acquisition of Robertson Stephens, a premier equity investment banking and
research firm for growth and technology companies in the United States, allows
the corporation to offer full investment banking services, including equity
underwriting, strategic advisory services, trading, distribution and research
capabilities to U.S. and international clients. The acquisition of Quick &
Reilly, one of the country's largest discount brokerage firms with a nationwide
network of 118 investor centers, provides the corporation with four strong,
vertically integrated units, consisting of discount brokerage, including
securities trading over the Internet; correspondent clearing; New York Stock
Exchange (NYSE) specialist; and Nasdaq market-maker. The corporation also
purchased Merrill Lynch Specialists, Inc. (MLSI), a NYSE specialist firm, during
the fourth quarter of 1998. The acquisitions of Quick & Reilly and MLSI make the
corporation the leading specialist firm on the NYSE.
The acquisition of the domestic consumer credit card operations of
Advanta, along with the purchase of credit card receivables from Crestar
Financial (Crestar) and Household International, Inc. (Household), which closed
in the third and fourth quarters of 1998, respectively, place Fleet Boston as
the eighth largest issuer of credit cards in the U.S., with approximately 8
million credit card customers and $15 billion in managed credit card
receivables.
The corporation further expanded its presence and distribution capacity in
Latin America, primarily through branch expansion programs in Argentina and
Brazil; the first quarter 1998 acquisition of Deutsche Bank Argentina S.A.
(Deutsche Argentina), which included approximately $1 billion in loans and $1.5
billion in deposits; and the third quarter 1998 acquisition of the OCA Companies
(OCA), a credit card and consumer finance business in Uruguay with approximately
$65 million of loans at the date of acquisition.
Additionally, on February 1, 1999, the corporation acquired Sanwa Business
Credit (Sanwa), a leasing and asset-based lending company with approximately $6
billion in assets.
New initiatives in 1998 included the formation of the Global Lease Finance
unit, which complements Fleet Boston Capital Leasing's current capital markets
activities and expands its product capabilities in the market for large-lease
transactions.
These acquisitions and new initiatives strengthen Fleet Boston's
competitive position in higher-growth, higher-return businesses and advance
Fleet Boston's strategy of accelerating revenue growth and diversifying earnings
sources by both business line and geography while achieving a more equal balance
of fee-based versus spread revenues. Furthermore, these acquisitions enhance
Fleet Boston's capabilities in technology and information management, marketing
and new product development, and enable Fleet Boston to offer additional
products and services to both our U.S. and international customers.
INCOME STATEMENT ANALYSIS
Net Interest Income
Year ended December 31
FTE basis
In millions 1998 1997 1996
================================================================================
Interest income $12,341 $11,255 $10,921
Tax-equivalent adjustment 59 64 56
Interest expense 5,946 5,127 5,119
- --------------------------------------------------------------------------------
Net interest income $ 6,454 $ 6,192 $ 5,858
================================================================================
Net interest income on an FTE basis totaled $6.5 billion for the year ended
December 31, 1998, compared with $6.2 billion for 1997. The $262 million
increase was principally the result of strong commercial and consumer loan
growth in Argentina and Brazil, selected credit card portfolio purchases, and a
higher level of securities. The increase in net interest income was partially
offset by higher funding costs as well as the divestiture of certain national
consumer finance businesses in 1997.
Net Interest Margin and Interest-Rate Spread
Year ended December 31 1998 1997
FTE basis Average Average
Dollars in millions Balance Rate Balance Rate
================================================================================
Securities $ 21,727 6.81% $ 18,321 7.10%
Loans:
Domestic 96,806 8.51 91,340 8.67
International 14,233 12.11 11,029 11.34
Due from brokers/dealers 3,765 4.89 2,884 4.62
Mortgages held for resale 2,685 7.04 1,503 7.63
Other 7,478 7.89 7,228 8.27
- --------------------------------------------------------------------------------
Total interest-earning assets 146,694 8.45 132,305 8.56
- --------------------------------------------------------------------------------
Deposits 88,634 4.18 82,437 4.05
Short-term borrowings 21,669 5.81 17,127 6.14
Due to brokers/dealers 4,501 4.75 3,463 4.39
Long-term debt 10,962 7.00 7,993 7.30
- --------------------------------------------------------------------------------
Interest-bearing liabilities 125,766 4.73 111,020 4.62
- --------------------------------------------------------------------------------
Interest-rate spread 3.72 3.94
Interest-free sources of funds 20,928 21,285
- --------------------------------------------------------------------------------
Total sources of funds $ 146,694 4.05% $ 132,305 3.87%
- --------------------------------------------------------------------------------
Net interest margin 4.40% 4.68%
================================================================================
Net interest margin is a measurement of how effectively the corporation manages
the difference between the yield on earning assets and the rate paid on funds
used to support those assets, as well as the overall mix of interest-earning
assets and interest-bearing liabilities.
3
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Net interest margin is affected by several factors, including fluctuations
in the overall interest-rate environment, funding strategies of the corporation,
the mix of interest-earning assets, interest-bearing liabilities and
noninterest-bearing liabilities, as well as the use of interest-rate derivatives
that are used to manage interest-rate risk.
The net interest margin for 1998 declined 28 basis points to 4.40%. This
decrease was primarily attributable to narrowed margins due to the corporation's
growth in core commercial loans, the divestiture of certain national consumer
finance businesses in 1997, the acquisitions of lower rate spread activity at
Quick & Reilly and domestic consumer credit cards purchased from Advanta.
Average securities increased $3.4 billion in 1998, due to Fleet Boston's
efforts to maintain a relatively neutral interest-rate-sensitive position. The
yield on securities declined as a result of a lower interest-rate environment.
Average domestic loans increased $5.5 billion to $96.8 billion in 1998 due
primarily to the strong growth in commercial loans, principally in middle-market
lending and asset-based lending, leases, and selected credit card portfolio
purchases.
Average international loans increased $3.2 billion, or 29%, to $14.2
billion in 1998, due primarily to strong growth in the commercial and consumer
categories, as well as loans obtained through acquisitions.
Average due from brokers/dealers and due to brokers/dealers increased
$881 million and $1,038 million, respectively, as a result of increased
matched-book activity and funding of customers' margin accounts at Quick &
Reilly.
Average mortgages held for resale increased $1.2 billion, or 79%, while
the yield declined by 59 basis points throughout 1998 as a result of a lower
mortgage-rate environment, which resulted in increased loan production at Fleet
Mortgage.
Average interest-bearing deposits increased $6.2 billion to $88.6 billion
in 1998, primarily the result of increased domestic money market deposits. The
interest rate paid on interest-bearing deposits increased to 4.18% in 1998 from
4.05% in 1997. The increase in the cost of deposits reflects a shift in the mix
of deposits as a result of funding asset growth with higher-cost wholesale
deposits, as well as the corporation paying more competitive rates to attract
money market deposits.
The $4.5 billion increase in average short-term borrowings is attributable
to an increase in federal funds purchased and securities sold under agreements
to repurchase, as well as treasury, tax and loan borrowings as the corporation
utilized these lower priced funding sources to fund asset growth. The $3.0
billion increase in average long-term debt was due primarily to net increases in
senior and subordinated debt and the issuance of capital securities. The 30
basis point decrease in the funding rate was due to additional debt issued by
the corporation in order to secure longer-term funding at lower interest rates.
The contribution to the net interest margin from interest-free sources of
funds during 1998 was 68 basis points, slightly lower than 1997.
Noninterest Income
Year ended December 31
In millions 1998 1997 1996
================================================================================
Banking fees and commissions $1,339 $1,207 $1,054
Investment services revenue 1,212 990 885
Capital markets revenue 1,140 914 689
Credit card revenue 455 98 95
Processing-related revenue 452 469 438
Other noninterest income 429 285 252
- --------------------------------------------------------------------------------
Total operating noninterest income 5,027 3,963 3,413
Net gains on branch divestitures and
sales of business units 254 243 245
- --------------------------------------------------------------------------------
Total noninterest income $5,281 $4,206 $3,658
================================================================================
As a result of intensified competition and changing customer needs in the
banking industry, Fleet Boston has made strategic decisions directed at
bolstering future fee revenue-producing activities. Throughout the past several
years, the corporation has developed new products and service lines and
broadened existing lines via acquisitions to provide additional revenue streams
to complement Fleet Boston's traditional banking products and services. These
include domestic and international banking expansions, mutual fund and annuity
products, venture capital, internet banking, investment banking, brokerage,
investment management, and credit cards.
Operating noninterest income totaled $5.03 billion for 1998, up 27%,
compared to $3.96 billion for 1997. This increase reflects continued growth in
fee revenue businesses including the impact of the strategic acquisitions
described earlier.
Banking Fees and Commissions
Banking fees and commissions, which includes fees received for cash management,
deposit accounts, electronic banking and other service fees, increased $132
million, or 11%, to $1.3 billion. The increase was due principally to the
development of new product packaging and fee schedules, as well as targeted
marketing efforts.
Investment Services Revenue
Year ended December 31
In millions 1998 1997 1996
================================================================================
Investment management revenue $ 849 $ 680 $ 610
Brokerage fees and commissions 363 310 275
- --------------------------------------------------------------------------------
Total investment services revenue $1,212 $ 990 $ 885
================================================================================
Investment services revenue, which includes investment management revenue as
well as brokerage fees and commissions revenue, increased $222 million, or 22%,
in 1998 to $1,212 million.
4
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Investment Management Revenue
Year ended December 31
In millions 1998 1997 1996
================================================================================
Private Clients Group $367 $333 $305
Institutional Businesses 156 149 133
International 131 109 89
Columbia Management Company 98 -- --
Retail Investments 92 72 54
Other 5 17 29
- --------------------------------------------------------------------------------
Total $849 $680 $610
================================================================================
Investment management revenue rose $169 million, or 25%, in 1998 to $849
million. The improvement was due largely to the December 1997 acquisition of
Columbia Management Company (Columbia), and record sales of proprietary mutual
funds in 1998, including Fleet Boston's Galaxy and 1784 Mutual Funds, combined
with growth in the overall value of assets under management and administration
that was substantially aided by a strong domestic equity market. Assets under
management increased from $100 billion at December 31, 1997 to $116 billion at
December 31, 1998. Additionally, the corporation is the largest mutual fund
provider in Argentina and the fourth largest in Brazil.
Brokerage Fees and Commissions
Brokerage fees and commissions revenue increased $53 million, or 17%, due to the
acquisition of Robertson Stephens in August 1998, strong transactional activity
at the corporation's brokerage subsidiary, Quick & Reilly, and higher clearing
levels within U.S. Clearing as a result of the strong performance in the
domestic equity markets.
Capital Markets Revenue
Year ended December 31
In millions 1998 1997 1996
================================================================================
Venture capital revenue $ 381 $ 292 $ 315
Investment banking fees 239 189 82
Foreign exchange revenue 174 128 80
Brokerage market-making revenue 162 100 59
Securities gains 115 113 48
Trading profits and commissions 69 92 105
- --------------------------------------------------------------------------------
Total capital markets revenue $1,140 $ 914 $ 689
================================================================================
Capital markets revenue increased $226 million, or 25%, to $1.1 billion for the
year ended December 31, 1998. This increase was driven by significant gains
pertaining to venture capital investments, growth in investment banking fees,
robust foreign exchange revenue, and increased brokerage market-making
activities, offset in part by lower trading profits and commissions.
Venture capital revenue, generated by the corporation's private equity
business, increased by $89 million in 1998 when compared with 1997 as a result
of effective investment strategies, strength in the equity markets and higher
sales. The corporation's ability to continue to experience increases in the
value of these venture capital investments depends on a variety of factors,
including the condition of the economy and equity markets. Thus, the level of
such revenues in the future cannot be predicted.
Investment banking fees, which includes advisory, underwriting,
syndication and agent fees, as well as corporate finance and high yield income,
increased $50 million, or 26%, to $239 million in 1998 primarily as a result of
the acquisition of Robertson Stephens in August 1998.
Foreign exchange revenue increased $46 million, or 36%, to $174 million in
1998. Foreign exchange revenue increased as a result of higher customer demand
during a period of volatility in world financial markets.
Brokerage market-making revenue increased $62 million, or 62%, to $162
million in 1998 as a result of market volatility and increased volume reflecting
the corporation's purchase of Robertson Stephens in August 1998 and an
over-the-counter market-maker in March 1997.
The $23 million decline in trading profits and commissions was driven by
losses arising from the Boston-based emerging markets and high yield trading
portfolios which were impacted by the significant volatility in world financial
markets during 1998. The impact of the losses was partially offset by higher
trading profits from Brazilian and Argentine operations as well as a $20 million
increase in commissions from interest-rate products activities.
Credit Card Revenue
Credit card revenue increased $357 million to $455 million in 1998, primarily
the result of the acquisition of the domestic consumer credit card operations of
Advanta in February 1998, as well as fee growth from the credit card portfolios
in Argentina, Brazil and Uruguay. As part of the acquisition of the domestic
consumer credit card operations of Advanta, the corporation acquired nearly $10
billion of securitized credit card receivables that are currently serviced by
Fleet Boston. As a result of these securitizations, the corporation recognizes
securitization income, servicing revenue, interchange fees, and amortization of
deferred origination costs as the primary components of credit card revenue.
Processing-Related Revenue
Year ended December 31
In millions 1998 1997 1996
================================================================================
Mortgage banking revenue, net $253 $323 $307
Student loan servicing fees 121 101 99
Other 78 45 32
- --------------------------------------------------------------------------------
Total processing-related revenue $452 $469 $438
================================================================================
Processing-related revenue decreased $17 million to $452 million in 1998, from
$469 million in 1997. The decrease was a result of a $70 million decrease in net
mortgage banking revenue offset in part by increases in student loan servicing
fees and other processing-related fees. Student loan servicing fees increased
$20 million, or 20%, at AFSA Data Corporation (AFSA), the corporation's student
loan servicing subsidiary, as accounts serviced increased 18% to 6.5 million in
1998. Other processing-related revenue in-
5
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
creased $33 million, due principally to the addition of a healthcare processing
unit during 1998.
Mortgage Banking Revenue, Net
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Net loan servicing revenue $ 456 $ 450 $ 434
Mortgage production revenue 196 111 142
Gains on sales of mortgage servicing 34 10 47
Amortization/Impairment charge (433) (248) (316)
- --------------------------------------------------------------------------------
Total mortgage banking revenue, net $ 253 $ 323 $ 307
================================================================================
Net mortgage banking revenue of $253 million in 1998 decreased $70 million from
the $323 million recorded in 1997. The decrease in net mortgage banking revenue
was due principally to increased mortgage servicing rights (MSRs) amortization,
a $75 million impairment charge taken as a result of increased refinancings in a
lower mortgage-rate environment, as well as the sale of Option One in 1997,
which contributed $40 million of mortgage banking revenue, primarily mortgage
production revenue, in 1997. Excluding the impact of the impairment charge in
1998 and the Option One revenue contribution in 1997, mortgage banking revenue
increased 16%, driven by strong mortgage production revenue as a result of
record loan production volume of nearly $37 billion in 1998.
Mortgage servicing rights amortization increased $110 million to $358
million in 1998, due to an acceleration in prepayments resulting from a decline
in mortgage interest rates. Since mortgage servicing rights are an
interest-rate-sensitive asset, the value of the corporation's mortgage servicing
portfolio and related mortgage banking revenue may be adversely impacted if
mortgage interest rates decline and actual or expected loan prepayments
increase. For additional information regarding prepayment risk refer to the
Asset-Liability Management discussion in the Supplemental Management's
Discussion and Analysis.
Other noninterest income increased $144 million to $429 million in 1998,
due primarily to revenues resulting from acquisitions and increases in the
corporation's investment in bank-owned life insurance.
Net gains on branch divestitures and sales of business units included a
$165 million gain recorded in the first quarter of 1998 from the sale of the
corporation's 26% interest in HomeSide, Inc., an independent mortgage banking
company, and gains of $51 million and $38 million related to the sales of the
corporation's Berkshire County franchise and domestic institutional custody
business, respectively, in the fourth quarter of 1998. In 1997, the net gains on
sales of business units related to the sale of Option One Mortgage Corporation,
Fidelity Acceptance Corporation, the corporate trust division and a portion of
the indirect auto lending portfolio.
Noninterest Expense
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Employee compensation and benefits $3,556 $3,031 $2,913
Occupancy and equipment 1,003 961 934
Intangible asset amortization 274 206 175
Legal and other professional 254 172 187
Marketing and public relations 253 225 221
Telephone 167 141 141
Printing and mailing 152 128 129
Other 1,318 1,161 951
- --------------------------------------------------------------------------------
Total noninterest expense, excluding
merger-related charges 6,977 6,025 5,651
Merger-related charges 73 25 180
- --------------------------------------------------------------------------------
Total noninterest expense $7,050 $6,050 $5,831
================================================================================
Total noninterest expense was $7.05 billion in 1998 and $6.05 billion in 1997.
The $1 billion, or 17%, increase was due primarily to various acquisitions and
new initiatives, branch expansion in Argentina and Brazil as well as growth in
selected business areas.
Employee compensation and benefits increased $525 million during 1998, due
to increased levels of compensation expense attributable to acquisitions and the
newly formed business units, as well as increases in compensation expense
related to incentives at business units with strong volumes and revenue growth.
Compensation expense related to incentives included $94 million of bonus
payments in connection with the Robertson Stephens acquisition. As a result of
acquisitions and new business initiatives, full-time equivalent staff increased
from approximately 55,200 at December 31, 1997 to approximately 61,000 at
December 31, 1998.
Occupancy and equipment increased $42 million, or 4.4%, to $1 billion
primarily as a result of acquisitions and branch expansion programs in Latin
America.
Intangible asset amortization increased $68 million to $274 million in
1998 due mainly to the acquisitions of Columbia and the consumer credit card
operations of Advanta, as well as additional goodwill recorded in 1998
pertaining to the NatWest earnout agreement. Intangible asset amortization is
expected to increase in 1999 as a result of 1998 acquisition activity and
additional earnout payments.
Legal and other professional expense increased $82 million during 1998,
due to the aforementioned acquisitions and other initiatives. Marketing and
public relations, telephone, and printing and mailing expenses increased as a
result of promotional mailings and higher volume at the corporation's
processing-related businesses.
Impact of the Year 2000
The corporation's Year 2000 project has been directed by an Executive
Management Steering Committee consisting of its Vice Chairmen. The committee
provides direct oversight of the Year 2000 initiative and continues to be
updated monthly on the project's progress. The corporation's Board of Directors
continues to receive formal project updates on a quarterly basis.
The corporation has completed its assessment of Year 2000 issues,
developed a plan, and arranged for the required resources to complete the
necessary remediation efforts for both information technology and
non-information technology systems and processes worldwide. The corporation
continues to utilize both internal and external resources to ensure the
corporation is prepared for the Year 2000. The corporation will continue to
focus on the following key areas during the fourth quarter of 1999: testing,
vendor management, event planning and communication with customers.
6
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
The corporation has completed remediation and testing of its internal
systems, and considers itself "Y2K Ready" - meaning 100% of the corporation's
internal systems, both domestic and international, have been successfully
remediated, tested and placed back into production and are ready for the Year
2000. The corporation expects to conduct business as usual in the Year 2000 and
beyond. This activity continues to track in accordance with the original plan
and in accordance with Federal Financial Institutions Examination Council
(FFIEC) guidelines.
The corporation relies on several vendors and service providers for key
business processes. The corporation continues to work closely with these vendors
and service providers. Validation of the Year 2000 readiness of all the
corporation's vendors and service providers continues with a particular focus
on alternatives, where possible, for vendors or service providers that have been
identified as critical. The corporation's senior management has conducted
on-site visits and in many cases follow-up discussions with its most critical
service providers to further assess their Year 2000 readiness. All critical
vendors and service providers have represented themselves to the corporation as
Year 2000 compliant. In addition, the corporation has completed necessary
testing with the corporation's significant vendors, service providers, and
regulatory agencies. Furthermore, testing was conducted with selected customers
who electronically exchange data with the corporation.
Until and after the Year 2000 rollover takes place, there can be no
assurance that Year 2000-related problems will not occur, particularly problems
relative to the Year 2000 readiness of third parties on which the corporation
relies. Despite the corporation's efforts to identify and address Year 2000
issues, such issues present risks to the corporation, including business
disruptions, operational problems, financial losses, legal liability and similar
risks. The corporation's businesses, results of operations and financial
position could be materially adversely affected.
The corporation has previously established business resumption plans for
its lines of business and subsidiaries. These plans have been reviewed and where
appropriate have been enhanced to address potential Year 2000 failure scenarios.
This process was substantially complete worldwide as of June 30, 1999. In
addition, a worldwide Year 2000 Event Plan has been developed to govern the
corporation's activities prior to, during and after the calendar rollover to
2000. The Event Plan has been validated by conducting unit-specific structured
walkthroughs, employee notification tests and structured plan walk-throughs
between interdependent units. Event Plans will continue to be updated, as
appropriate, through the fourth quarter of 1999. In addition to the components
listed above, the corporation has validated its approach to Year 2000 Event
Planning by conducting an independent assessment of the strategy and process.
The corporation has also implemented a plan consisting of several components to
monitor fiduciary risk. For example, from an investment risk perspective, the
corporation continues to assess the level of preparedness of underlying equity
and fixed income positions executed on behalf of its customers. This activity
will continue through year-end 1999.
The corporation's credit risk associated with borrowers may increase to
the extent borrowers are not adequately prepared for the Year 2000. As a result,
there may be increases in the corporation's problem loans and credit losses
during and subsequent to Year 2000. However, to mitigate the risk, the
corporation has continued to assess the Year 2000 readiness of material business
relationships to which it extends credit. The assessment determines the
customers' level of Year 2000 preparedness and their level of dependency on
technology. Factored together with the overall credit rating of the customer,
the corporation identifies customers that present an unacceptable risk to the
corporation due to the Year 2000. Of the material relationships the corporation
has assessed, those identified as unacceptable in their level of Year 2000
preparedness that have been required to take action to mitigate their Year 2000
risk have been minimal. Therefore, the corporation does not expect to experience
any major loan loss due to the Year 2000 issue and, at this time, does not
expect to adjust its reserve for credit losses. The corporation will continue to
reassess the readiness of customers receiving the unacceptable rating through
year-end 1999 to ensure that the proper steps have been taken.
As an integral part of the corporation's risk assessment process, the
corporation has also assessed its material funds providers. The assessment
sought to determine the funds providers' level of Year 2000 preparedness and
their level of dependency on technology. Substantially all material funds
providers have been identified as acceptable in their level of Year 2000
preparedness. Utilizing the same process, the corporation also assessed its
material funds takers, which include financial institutions to which the
corporation provides short-term funds and its material counterparties that have
a capital markets relationship with the corporation. Substantially all material
funds takers and material counterparties have been identified as acceptable in
their level of Year 2000 preparedness. The corporation will continue to closely
monitor these funds providers, funds takers and counterparties through year-end
1999.
The corporation will continue communicating with employees and customers
through year-end 1999 to discuss its readiness through a variety of
communication vehicles: branch posters; displays; take-one brochures; statement
messages and inserts; ATM on-screen and receipt messages; direct mail
initiatives; direct discussions with customers; seminars; and through the
corporation's internet web sites.
Both Fleet and BankBoston had extensive Year 2000 programs in place prior
to the merger. Based on the timing of the merger in relation to the beginning of
2000, management concluded that each of the Year 2000 programs should continue
to be carried out separately. As such, the corporation's Year 2000 programs were
not significantly affected by the merger. Total costs for the Fleet program are
expected to be approximately $150 million, of which approximately 80% had been
incurred though the third quarter of 1999. The BankBoston program is expected
to incur incremental costs of $75 million. It is estimated that these
incremental costs represent over half of the BankBoston total program costs.
Approximately 85% of the BankBoston program costs have been incurred through
the third quarter of 1999. The corporation has not incurred and is not likely to
incur, project costs that are material to any reporting period.
Income Taxes
The corporation recorded income tax expense of $1.45 billion for 1998 compared
with $1.52 billion for 1997. The effective tax rate was 38.5% in 1998 compared
with 40.3% in 1997. The decrease in the effective tax rate was attributable, in
part, to a decrease in the statutory rates of certain states in which the
corporation conducts business.
Securitization Summary
The securitization of credit card receivables changes the corporation's status
from that of a lender to that of a loan servicer. Accordingly, there is a change
in the classification in which the revenue associated with the securitization is
reported in the income statement. The corporation's revenue over the terms of a
securitization transaction may vary depending upon the credit performance of the
securitized receivables because credit losses become a component of the cash
flows arising from the securitized transaction. However, the corporation's
exposure to credit losses on the securitized receivables is contractually
limited to these cash flows.
The following table depicts the consolidated financial statement impact as
if the securitized receivables had, in fact, been owned, as well as additional
financial information pertaining to credit card receivables.
7
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Credit Card Securitization Summary
Year ended December 31 Credit Card
Dollars in millions Reported Securitization Managed
================================================================================
Net interest income (FTE) $ 6,454 $ 743 $ 7,197
Provision for credit losses 850 518 1,368
Noninterest income 5,281 (225) 5,056
Noninterest expense 7,050 -- 7,050
Net income 2,324 -- 2,324
Assets-year-end $177,894 $ 8,808 $186,702
Assets-average 170,228 7,912 178,140
Net interest margin 4.40% 9.39% 4.65%
================================================================================
During 1998 and 1997, cash proceeds from the securitization of commercial and
industrial, home equity and other consumer-related loans totaled $3 billion and
$1.3 billion, respectively, with the recognition of gains of approximately $12
million substantially related to the securitizations of the home equity loans,
and $7 million, respectively. The corporation will receive annual servicing fees
approximating .1 percent (for commercial and industrial loans) and .5 percent
(for the home equity and consumer-related loans) of the outstanding balance, and
the rights to future cash flows in excess of amounts required to be paid to
investors under the terms of the respective transaction. The investors and the
securitization vehicles have no recourse to the corporation's assets for failure
of borrowers to pay when due. However, most of the corporation's retained
interests are generally restricted until investors have been fully paid, and
these interests are subordinate to investors' interests. The value of the
corporation's retained interests is subject to substantial credit, prepayment
and interest- rate risk related to the transferred assets.
LINES OF BUSINESS
Fleet Boston Corporation is organized and managed along three lines of business:
Commercial and Retail Banking, Global Banking and Financial Services, and the
National Consumer Group. The financial performance of the corporation is
monitored by an internal profitability measurement system, which provides line
of business results and key performance measures. The following table presents
selected line of business results which have been realigned to reflect the new
organization following the merger of Fleet and BankBoston. Results are reported
using the existing management accounting policies from both Fleet and
BankBoston. A uniform set of management accounting policies is being developed
and will be implemented in 2000. As required by Statement of Financial
Accounting Standards No. 131, three years of business line comparative financial
statements are presented in Footnote 14.
Line of Business Earnings Summary
<TABLE>
<CAPTION>
Year ended December 31 Net Income Total Revenue Return on Equity
Dollars in millions 1998 1997 1998 1997 1998 1997
===================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Commercial and Retail Banking $ 1,036 $ 1,011 $ 5,314 $ 5,277 23% 21%
Global Banking and Financial Services 889 743 4,383 3,476 18 20
National Consumer Group 153 40 1,426 867 7 4
All Other 246 452 612 778 n/m n/m
- ---------------------------------------------------------------------------------------------------
Total $ 2,324 $ 2,246 $11,735 $10,398 18% 20%
===================================================================================================
</TABLE>
During 1998 each of the three principal business units posted increased earnings
compared with 1997. Improved results were driven by core earnings growth as well
as increased investment in growth segments.
The following discussion by line of business focuses on the components of
each of the three major business lines, and explains those results in terms of
their underlying businesses.
Commercial and Retail Banking
Year ended December 31
Dollars in millions 1998 1997
================================================================================
Income Statement Data:
Net Interest Income (FTE) $ 3,957 $ 3,972
Noninterest Income 1,357 1,305
Provision for Credit Losses 331 375
Noninterest Expense 3,202 3,123
Taxes/FTE Adjustment 745 768
- --------------------------------------------------------------------------------
Net Income $ 1,036 $ 1,011
- --------------------------------------------------------------------------------
Balance Sheet Data:
Average Assets $60,646 $58,305
Average Loans and Leases 52,235 50,009
Average Deposits 78,448 78,400
- --------------------------------------------------------------------------------
Return on Equity 23% 21%
================================================================================
Commercial and Retail Banking includes domestic retail banking to consumer and
small business customers, as well as certain domestic commercial banking
operations which includes middle-market lending, asset-based lending, leasing,
cash management, trade finance, and government banking services. Operating
results reflect growth in commercial banking portfolios, as well as ongoing
changes to retail banking products and distribution channels. Earnings for this
unit increased by $25 million, as strong growth in commercial services were
offset by slightly lower earnings results in retail banking units. Lower retail
banking earnings were driven by the selective reconfiguration of distribution
channels and product mix. Results of the individual units are more fully
described in the following analysis.
8
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Commercial and Retail Banking
Year ended December 31 Net Income % Total Revenue %
Dollars in millions 1998 1997 Change 1998 1997 Change
================================================================================
Commercial Banking $ 204 $ 202 1% $1,023 $1,023 -%
Commercial Finance 267 209 28 791 684 16
Retail Distribution 277 291 (5) 2,285 2,344 (3)
Small Business 225 235 (4) 828 824 1
Consumer Lending 63 74 (15) 387 402 (4)
- --------------------------------------------------------------------------------
Total $1,036 $1,011 2% $5,314 $5,277 1%
================================================================================
Commercial Banking
Commercial Banking represents traditional middle-market commercial lending,
government banking services, trade services and cash management services.
Commercial banking customers generally range in size from $10 million to $500
million in annual sales. Commercial Banking provides a full range of credit and
banking services to corporate, middle-market and government banking customers.
The corporation provides its corporate customers with superior access to
financial solutions, and supports its customers with services such as corporate
finance, corporate trust, foreign exchange, international services,
interest-rate protection, and investment products. At year-end 1998, average
loans and deposits were $16 billion and $10 billion, respectively.
Commercial Banking earned $204 million in 1998, a slight increase over
1997 levels resulting from increased noninterest revenues from tax processing,
cash management, and trade services, as well as from improving credit quality.
Strong loan growth was offset by lower spreads as average loans outstanding
increased by $1 billion, or 7%.
Commercial Finance
Commercial Finance focuses on the asset financing needs of corporate customers,
and offers asset-based lending finance, commercial real estate loans, and
leasing products to corporate customers located throughout the nation. As in the
commercial banking unit, commercial finance customers have access to cash
management, trade services, corporate trust, foreign exchange, international
services, interest-rate protection, and investment products through the cross
selling efforts of account officers. Commercial Finance earned $267 million in
1998, compared to 1997 earnings of $209 million. Increased earnings of 28% were
driven by asset growth of $2 billion, or 12%, as well as increased banking fees,
trade services revenue, leasing fees and corporate finance fees, which resulted
from effective cross selling efforts. Attention to the full range of corporate
customer's needs, and the careful management of account relationships, provides
clear opportunities for Fleet Boston to differentiate itself, strengthen
business relationships and improve market position. Average loans were $20
billion for 1998, while average deposits were $1.5 billion for the same period.
Retail Distribution
Retail Distribution offers consumer retail services through various delivery
channels and includes consumer deposit products and direct banking services.
Fleet Boston distributes consumer retail products and services through a network
of over 1,500 branches, over 4,000 ATMs, convenient in-store branches, PC
banking products, and 24-hour customer call centers. These delivery channels
provide customers with the convenience to manage their finances in virtually any
manner suited to their needs. During 1998, Retail Distribution had average
deposit balances of $55 billion.
In 1998 Retail Distribution earned $277 million, down from 1997 earnings
of $291 million. Lower earnings reflect lower loan and deposit volumes which
resulted, in part, from various actions including the sale of outlying branches,
the strategic runoff of low earning loan portfolios and customer migration
towards higher yielding deposit products and mutual funds. This was partly
offset by the promotion of money market accounts in selected markets, increased
electronic banking fees, and various other product initiatives. While holding
operating costs relatively flat, 1998 reflects the continuing reconfiguration of
distribution channels. Growth in ATM distribution points, and increased PC
banking penetration helped the corporation successfully redeploy resources
towards those delivery channels consistent with customer preferences.
Small Business
The Small Business group provides a full range of financial services to
businesses with sales of up to $10 million. Services offered include commercial
lending, real estate lending, deposit products, and cash management services.
The corporation also offers an array of innovative solutions for small business
customers. These include Business Solution Centers, where customers can
conveniently access one stop shopping solutions for taxes, payroll cash
management and other services; Business Leasing where small business customers
can access a broad array of leasing alternatives; and [email protected],
where the corporation helps small businesses develop a retail presence on the
Internet. Fleet Boston is the leading small-business lender in New England and
ranks among the top 10 nationwide. Earnings for this unit were $225 million in
1998, slightly lower than 1997 earnings of $235 million. Lower earnings were
driven by a moderate increase in operating costs, while 1998 revenues kept pace
with 1997 revenues. Average loan balances were relatively unchanged at $4
billion for 1998, while average deposit balances increased by $1 billion
compared to 1997. Revenue from increased deposit volumes was offset by increased
processing costs and increased interest expense associated with customers
continued migration towards higher-rate interest-bearing products.
Consumer Lending
Consumer Lending offers a convenient and competitive mix of loan products to
consumers. Products and services are distributed through the retail distribution
footprint of over 1,500 branches located in the Northeast, as well as through
alternative direct banking channels. Products offered include home equity loans
and student loans, as well as direct and indirect consumer lending programs. The
Consumer
9
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Lending business has over $10 billion in consumer loan balances and excludes
credit card and residential mortgage products which are managed as part of the
National Consumer Group. The Consumer Lending business earned $63 million in
1998. Lower earnings compared to 1997 were influenced by lower spreads in a
competitive home equity lending market, as well as lower loan balances as a
result of the runoff of a portion of the indirect auto lending portfolio, as
well as the sale of loan balances associated with the aforementioned sale of
non-strategic outlying retail distribution centers.
Global Banking and Financial Services
Year ended December 31
Dollars in millions 1998 1997
================================================================================
Income Statement Data:
Net Interest Income (FTE) $ 1,737 $ 1,390
Noninterest Income 2,646 2,086
Provision for Credit Losses 245 204
Noninterest Expense 2,616 1,995
Taxes/FTE Adjustment 633 534
- --------------------------------------------------------------------------------
Net Income $ 889 $ 743
- --------------------------------------------------------------------------------
Balance Sheet Data:
Average Assets $63,807 $51,258
Average Loans and Leases 43,764 35,745
Average Deposits 18,541 16,592
- --------------------------------------------------------------------------------
Return on Equity 18% 20%
================================================================================
Global Banking and Financial Services includes Investment Services,
Institutional and Investment Banking, International Banking and Private Equity.
This unit earned $889 million in 1998, a 20% increase from 1997 earnings of $743
million. Return on equity declined, due primarily to increased equity associated
with the acquisitions in the international banking and investment services
units. Increased earnings for Global Banking and Financial Services were driven
by core business growth, largely from specialized lending portfolios, venture
capital gains, and increased sophistication of cross selling efforts, as well as
from strategic acquisitions in the international banking, and investment
services. A more detailed analysis of the supporting business units follows.
Year ended December 31 Net Income % Total Revenue %
Dollars in millions 1998 1997 Change 1998 1997 Change
================================================================================
Investment Services $291 $225 29% $1,478 $1,232 20%
Institutional and Investment
Banking 210 222 (5) 1,172 1,006 17
International Banking 207 157 32 1,374 969 42
Private Equity 181 139 30 359 269 33
- --------------------------------------------------------------------------------
Total $889 $743 20% $4,383 $3,476 26%
================================================================================
Investment Services
The Investment Services business line is comprised of several businesses, all
targeting the growing customer need for investment products and services. These
businesses include Quick & Reilly, which offers brokerage, market-making and
securities trading services; the Private Clients Group which offers specialized
asset management, estate settlement and deposit and credit products to
high-net-worth customers; Columbia asset management which sells proprietary
mutual funds and manages personal and institutional business lines and the
retail investments group, which markets the corporation's proprietary mutual
fund families, as well as third party mutual funds and annuity products. In
addition, this unit includes several other businesses which offer retirement
plan, large institutional asset management and not-for-profit investment
services.
The Investment Services unit earned $291 million in 1998, an increase of
$66 million, or 29%, compared to 1997. Strong growth in assets under management,
as well as increased brokerage and market-making revenues, continued to drive
increased earnings. Investment management revenue increased by $169 million, or
25%. This increase was driven by increased sales of mutual funds and annuity
products, related growth in assets under management, as well as the acquisition
of Columbia late in 1997. In 1998 growth in assets under management was strong,
despite a market correction in the latter half of the year. Assets under
management grew to over $107 billion in 1998. Increased revenue was also
attributable to higher brokerage and market-making activity, as related revenues
increased by $115 million, or 28%, compared to 1997.
Institutional and Investment Banking
Focusing on high yield and high growth corporate finance functions this unit
includes specialized industry lending, institutional banking, investment banking
and capital markets activities. As a result of its focus on the needs of large
corporate customers and specialized industries, this business represents a
diverse mix of corporate customers both by geographic region and by industry.
Investment Banking includes Robertson Stephens which was acquired in 1998, as
well as the combined Fleet Boston corporate finance units. These units provide
business customers with capital formation, acquisition finance, and long-term
financial strategies. The specialized industry and institutional lending units
provide financial services to corporate customers across the nation in high
growth industries such as media, communications, high tech, energy, financial
institutions and healthcare. This unit also services multinational clients
through the multinational and European units, and offers sophisticated foreign
exchange and other services through its capital markets unit.
Institutional and Investment Banking earnings declined by $12 million,
compared to 1997 primarily due to trading losses in connection with
international market volatility. These losses totaled $105 million pre-tax.
Excluding these losses revenues increased $271 million, or 27%, reflecting loan
growth in specialized lending, increased corporate finance activity and
acquisitions, and increased sales of foreign exchange and interest-rate
protection products, due largely to increased cross selling efforts to existing
customers.
International Banking
The International Banking unit includes the corporation's international
operations, predominantly in Brazil, where the corporation has had experience
since 1947, and Argentina, where the corporation has done business since 1917.
In both
10
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
countries the corporation is a recognized leader among financial institutions.
Further leveraging the expertise which is enjoyed in these markets, the company
has been able to develop unique strategies for managing businesses in Argentina
and Brazil. This business unit also includes the international operations in
other Latin American countries, as well as operations in Asia. This business
line excludes operations in Europe, as well as international operations related
to large corporate and multinational units which are part of the Institutional
and Investment Banking business line.
During the 1990s Argentina has experienced a period of economic stability
and low inflation, with the Peso exchange rate tied one-for-one with the US
dollar. While the economy is expected to contract somewhat in 1999, economic
stability and growth has helped foster expansion and acquisitions in the
Argentine markets where the corporation now operates 139 branches, including 64
new branches, and the acquired operations of Deutsche Argentina. The corporation
operates a diverse book of business in this market including retail banking,
corporate banking, and mutual fund businesses, where the corporation is the
largest provider of mutual funds.
Like Argentina, Brazil has enjoyed relative economic stability with a
transition from a sustained period of "hyperinflation", which lasted through the
mid 1990s, to a period of low inflation over the past few years. The corporation
offers a diverse product mix in the Brazilian market, and targets top-tier
consumer markets and large corporate multinational lending. Of the large
corporate lending activity, 90% is related to import and export activity. As in
Argentina, the company has expanded branch banking in Brazil to approximately 65
well targeted locations, and includes a strong mutual fund business which
accounted for 15% of Brazilian revenues.
Compared to 1997, International Banking earnings increased by $50 million,
or 32%, driven primarily by increased revenues in Argentina and Brazil.
Increased revenues resulted from increased net interest revenues, as well as
increased banking fees, credit card revenue, mutual fund revenues, and foreign
exchange in both Brazil and Argentina. Increased revenues were partly offset by
costs associated with the significant branch expansions in both Argentina and
Brazil. This expansion reflects a significant diversification of international
earnings which increasingly emphasizes deposit gathering, top tier consumer
lending opportunities, and mutual fund fee generation. At December 31, 1998
international mutual fund assets under management grew to $9 billion, while
loans and deposits grew by $3 billion, and $2 billion, respectively. Additional
information relating to international cross-border outstandings and currency
positions are presented on pages 13 and 14.
Private Equity
This business line provides startup capital and debt financing to new ventures
and selected, small business ventures which are predominantly privately or
closely held companies. The Private Equity business line has assets with a total
carrying value of $1.6 billion at year-end 1998. In 1998 earnings increased to
$181 million from $139 million in the previous year. Increased earnings were
driven by increases in the market value of investments, as well as the timing of
sales. Private Equity earnings are effected by the condition of equity markets,
the general state of the economy, and the timing of sales. Accordingly, earnings
for this unit can fluctuate significantly.
National Consumer Group
Year ended December 31
Dollars in millions 1998 1997
================================================================================
Income Statement Data:
Net Interest Income (FTE) $ 549 $ 382
Noninterest Income 877 485
Provision for Credit Losses 335 294
Noninterest Expense 841 505
Taxes/FTE Adjustment 97 28
- --------------------------------------------------------------------------------
Net Income $ 153 $ 40
- --------------------------------------------------------------------------------
Balance Sheet Data:
Average Assets $13,149 $ 9,602
Average Loans and Leases 5,141 4,454
Average Deposits 2,650 1,901
- --------------------------------------------------------------------------------
Return on Equity 7% 4%
================================================================================
The National Consumer Group includes mortgage banking, credit card services, and
student loan processing. A more detailed analysis of these business lines
follows.
Year ended December 31 Net Income % Total Revenue %
Dollars in millions 1998 1997 Change 1998 1997 Change
================================================================================
Credit Card $ 85 $ (32) 366% $ 922 $ 397 132%
Mortgage Banking 43 51 (16) 356 366 (3)
Student Loan 25 21 19 148 104 42
- --------------------------------------------------------------------------------
Total $ 153 $ 40 283% $1,426 $ 867 65%
================================================================================
The credit card business includes portfolios acquired from Advanta early in
1998, and Household Finance and Crestar, acquired in the fourth and third
quarters of 1998, respectively, as well as the BankBoston credit card portfolio,
formerly managed as part of the Retail Banking group. The 1998 acquisitions of
the consumer credit card operations of Advanta and the acquisition of the
Crestar and Household credit card portfolios make the corporation the eighth
largest credit card company in the nation. With offices located in 15 states,
Fleet Mortgage originated approximately $37 billion of loans in 1998. This
business services a mortgage portfolio of $119 billion and 1.4 million loans.
Student loan processing, through the AFSA subsidiary, services 6.5 million
accounts nationwide and is the largest student loan service provider in the
nation, with $48.7 billion of student loans serviced.
National Consumer Group earnings increased by $113 million compared to
1997, due primarily to the acquisition of the Advanta consumer credit card
business. With the purchase of the Advanta domestic consumer credit card
business, the corporation has increased its national reach, and the percentage
of earnings derived from, noninterest income generating businesses. In 1998
mortgage banking recorded a $75 million MSR impairment adjustment, partly offset
by $25 million of gains on the sale of servicing rights. Excluding these charges
and related gains, mortgage banking earnings were $73 million, representing a
43% increase over 1997. Increased earnings resulted primarily from increased
loan production volumes as refinancing activity was strong in a low
11
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
mortgage rate environment. The National Consumer Group also had increased
earnings from AFSA student loan processing, due to increased student loan
account volumes.
All Other
All Other includes certain transactions not allocable to specific business
units, the residual impact of methodology allocations such as provision for
credit losses, credit loss reserves and equity allocations, combined with
transfer pricing offsets. The related activities of the Treasury unit are also
included in All Other. The Treasury unit is responsible for managing the
corporation's securities and residential mortgage portfolios, the
asset-liability management function and wholesale funding needs. For comparative
purposes, certain businesses sold are included in All Other. Earnings in All
Other fluctuate with changes affecting total company provision for credit
losses, one-time charges, gains and other actions not driven by specific
business units. All Other includes several such transactions. The corporation
recorded net gains on the sales of business units of $254 million in 1998 and
$243 million in 1997. Both years' gains were partly offset by merger charges and
other expenses, which mitigate the year over year impact of these transactions.
All Other had net income of $246 million in 1998 compared to $452 million
in 1997. The decrease in earnings is primarily attributable to increased
provision for credit losses in excess of that required by the business lines on
an economic basis, as well as foregone revenues on business units sold in 1997
and during 1998.
BALANCE SHEET ANALYSIS
Total assets increased $17.6 billion to $177.9 billion as of December 31, 1998,
as a result of strong loan growth, increases in mortgages held for resale and
securities, and the acquisition of three domestic credit card portfolios during
the year.
Fleet Boston's investment securities portfolio plays a significant role in
the management of the corporation's balance sheet as the liquid nature of the
securities portfolio enhances the efficiency of the balance sheet. The amortized
cost of securities available for sale increased $3.9 billion to $21.7 billion at
December 31, 1998, compared to $17.8 billion at December 31, 1997. The valuation
of securities available for sale decreased $67 million to an unrealized gain
position of $178 million at December 31, 1998, due to changes in the
interest-rate environment as well as transactions during the year in the
securities portfolio.
Securities
<TABLE>
<CAPTION>
1998 1997 1996
December 31 Amortized Market Amortized Market Amortized Market
In millions Cost Value Cost Value Cost Value
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government agencies $ 1,821 $ 1,845 $ 3,435 $ 3,466 $ 4,305 $ 4,332
Mortgage-backed securities 14,166 14,380 10,602 10,769 8,217 8,233
Other debt securities 4,188 4,135 2,521 2,513 1,517 1,562
- -------------------------------------------------------------------------------------------------------------
Total debt securities 20,175 20,360 16,558 16,748 14,039 14,127
- -------------------------------------------------------------------------------------------------------------
Marketable equity securities 446 439 392 447 299 386
Other securities 1,043 1,043 864 864 919 919
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale 21,664 21,842 17,814 18,059 15,257 15,432
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,527 1,537 1,786 1,794 1,732 1,722
- -------------------------------------------------------------------------------------------------------------
Total securities $23,191 $23,379 $19,600 $19,853 $16,989 $17,154
=============================================================================================================
</TABLE>
Loans and Leases
The loan and lease portfolio inherently includes credit risk. Fleet Boston
attempts to control such risk through review processes that include analysis of
credit applications, portfolio diversification and ongoing examinations of
outstandings and delinquencies. Fleet Boston strives to identify potential
classified assets as early as possible, to take charge offs promptly based on
realistic assessments of probable losses and to maintain adequate reserves for
credit losses. The corporation's portfolio is well diversified by borrower,
industry, product and geographic location, thereby reducing the concentration of
credit risk.
Loans and Leases
December 31
In millions 1998 1997
================================================================================
Domestic:
Commercial and industrial $ 54,447 $ 48,239
Commercial real estate 8,176 8,902
Lease financing 5,750 5,013
Consumer 29,789 31,616
- --------------------------------------------------------------------------------
Total domestic loans and leases 98,162 93,770
- --------------------------------------------------------------------------------
International:
Commercial 11,126 10,817
Consumer 2,806 1,958
- --------------------------------------------------------------------------------
Total international loans and leases 13,932 12,775
- --------------------------------------------------------------------------------
Total loans and leases $112,094 $106,545
================================================================================
12
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Total loans and leases increased $5.5 billion, or 5%, over December 31, 1997.
Domestic loans and leases increased $4.4 billion, or 5%, while international
loans and leases increased $1.2 billion, or 9%. The increase in domestic loans
and leases was due primarily to growth in the commercial and industrial (C&I)
and lease financing portfolios which was offset, in part, by a $3.0 billion
securitization of C&I and home equity loans and a slight decrease in consumer
loans. Growth in the corporation's international loan portfolio was driven
primarily by growth in the Argentine portfolio, including the acquisition of
Deutsche Argentina.
Commercial and Industrial Loans
Domestic C&I borrowers consist primarily of middle-market and large corporate
customers and are well-diversified as to industry and companies within each
industry. International C&I borrower industry concentrations consist primarily
of banking and insurance, transportation, communications and energy production
and distribution.
Although the corporation is engaged in business globally, the lending done
by its domestic banking subsidiaries is primarily concentrated in New England,
New York and New Jersey. International borrowers are concentrated in Latin
America, particularly Argentina, Brazil and Chile.
The corporation is engaged in lease financing on both a domestic and
international basis. Domestic lease financing totaled $5.8 billion at December
31, 1998, compared with $5.0 billion at December 31, 1997. This 15% increase was
primarily attributable to increased lease originations from both the direct
leasing group and the newly formed Global Lease Finance unit. The corporation
provides a wide variety of leasing products to the middle and large ticket
marketplaces. Additionally, the acquisition of Sanwa Business Credit which
closed on February 1, 1999, added approximately $6 billion of assets, of which
approximately $4 billion are lease financings. This acquisition significantly
expands Fleet Boston's geographic presence, existing product line, and client
base to include lease financing to manufacturers of capital equipment and
leasing programs for small businesses. As a result of this acquisition, Fleet
Boston Capital Leasing has become the third ranked bank lessor and one of the
top ten leasing companies in the United States.
Commercial Real Estate Loans
Commercial real estate (CRE) loans decreased by $726 million, or 8%, from
December 31, 1997 to December 31, 1998, as the corporation has strategically
sought to reduce this loan portfolio.
Consumer Loans
December 31
In millions 1998 1997
================================================================================
Domestic:
Residential real estate $11,243 $12,589
Home equity 6,550 7,674
Credit card 6,077 4,497
Student loans 1,447 1,597
Installment/other 4,472 5,259
- --------------------------------------------------------------------------------
Total domestic loans 29,789 31,616
- --------------------------------------------------------------------------------
International 2,806 1,958
- --------------------------------------------------------------------------------
Total consumer loans $32,595 $33,574
================================================================================
Approximately 60% of the domestic consumer loan portfolio at December 31, 1998
represented loans secured by residential real estate, including second
mortgages, home equity loans and lines of credit. The corporation manages the
risk associated with most types of consumer loans by utilizing uniform credit
standards when extending credit, together with systems that streamline the
process of monitoring delinquencies.
Residential real estate loans on a domestic basis, secured by one- to
four-family residences, decreased $1.3 billion to $11.2 billion at December 31,
1998. This decline was primarily the result of the sale of $750 million of
Community Reinvestment Act (CRA) residential mortgage loans at book value. The
loans were sold to provide balance sheet capacity for further CRA lending. The
$1.1 billion decrease in domestic home equity loans was primarily the result of
the securitization of approximately $800 million of home equity loans during
1998.
Credit card loans on a domestic basis increased $1.6 billion to $6.1
billion at December 31, 1998 primarily attributable to the acquisition of the
consumer credit card operations of Advanta and purchases of credit card
receivables from Crestar and Household, and partially offset by the 1998
contribution of selected credit cards into a joint venture. The interest in the
joint venture was sold in the second quarter of 1999. The $848 million increase
in international consumer loans is primarily the result of increases in
residential mortgages and automobile loans in Argentina as a result of expansion
in that country.
Cross-Border Outstandings
In accordance with bank regulatory rules, cross-border outstandings are amounts
payable to the corporation by residents of foreign countries, regardless of the
currency in which the claim is denominated, and local country claims in excess
of local country obligations. At December 31, 1998, total cross-border
outstandings were $10.6 billion, compared with $9.8 billion at December 31,1997,
which included $6.4 billion and $7.0 billion, respectively, of cross-border
outstandings to emerging markets countries. Excluded from cross-border
outstandings are the following:
o Local country claims that are funded by local country obligations payable
only in the country where issued regardless of the currency in which the
claim or obligation is denominated.
13
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
o Local country claims funded by non-local country obligations (typically
denominated in U.S. dollars or other non-local currency) where the
providers of funds agree that, in the event their claims cannot be repaid
in the designated currency due to currency exchange restrictions in a
given country, they may either accept payment in local currency or wait to
receive the non-local currency until such time as it becomes available in
the local market. At December 31, 1998, such outstandings related to
emerging markets countries totaled $2.2 billion, compared with $2.8
billion at December 31, 1997.
o Claims reallocated as a result of external guarantees, cash collateral, or
insurance contracts issued primarily by U.S. government agencies.
Cross-border outstandings include deposits in other banks, resale
agreements, trading securities, securities available for sale, securities held
to maturity, loans and lease financing, amounts due from customers on
acceptances, accrued interest receivable and revaluation gains on trading
derivatives.
In addition to credit risk, cross-border outstandings have the risk that,
as a result of political or economic conditions in a country, borrowers may be
unable to meet their contractual repayment obligations of principal and/or
interest when due because of the unavailability of, or restrictions on, foreign
exchange needed by borrowers to repay their obligations. The corporation manages
its cross-border outstandings using country exposure limits established by the
Country Exposure Committee.
The following table details by country the corporation's approximate
cross-border outstandings that individually amounted to 1% or more of its
consolidated total assets at December 31, 1998, 1997, and 1996.
Significant Cross-Border Outstandings
December 31
Dollars in millions 1998(a) 1997(a) 1996(a)
================================================================================
Argentina:
Banks $ 125 $ 52 $ 79
Government entities and
agencies 775 740 605
Other 1,155 1,035 945
- --------------------------------------------------------------------------------
Total $2,055 $1,827 $1,629
- --------------------------------------------------------------------------------
Percentage of Total Assets 1.2% 1.1% 1.1%
- --------------------------------------------------------------------------------
Commitments(b) $ 11 $ 35 $ 55
================================================================================
(a) Cross-border outstandings in countries which totaled between .75% and 1%
of consolidated total assets at December 31, 1998, 1997 and 1996 were
approximately as follows: 1998-none; 1997-Brazil $1,441 million;
1996-none.
(b) Included within commitments are letters of credit, guarantees and the
undisbursed portions of loan commitments.
Total cross-border outstandings to Latin America were $5.6 billion at December
31, 1998. For additional information on Argentina and Brazil, see the "Lines of
Business" section of the Supplemental Management's Discussion and Analysis.
During 1998, world financial markets experienced significant volatility
due to the Asian and Russian crises and these crises also impacted the economies
of Latin America. The corporation has not experienced collection problems as a
result of world economic volatility, currency restrictions or foreign exchange
liquidity problems in its current portfolio of cross-border outstandings to
Latin America. However, if actions implemented by the various Latin American
governments are not effective over time, the corporation's operations could
experience adverse effects. It is expected that the economic situation in Latin
America, including the effect of world financial markets on these economies,
will continue to be unsettled. The impact that these events will ultimately have
on Latin American economies and, therefore, the corporation's operations in that
region, is uncertain. The corporation will continue to monitor the economies of
the Latin American countries in which it has local operations and cross-border
outstandings, as well as the economies of other emerging markets which could
impact the performance of the corporation, and will take appropriate actions as
it deems appropriate.
Nonperforming Assets
Nonperforming Assets(a)(b)
================================================================================
In millions C&I CRE Consumer Total
- --------------------------------------------------------------------------------
Nonperforming loans and leases:
Current or less than 90 days past due
Domestic $179 $ 26 $ 2 $207
International 13 -- -- 13
Noncurrent
Domestic 78 48 118 244
International 73 -- 103 176
Other real estate
owned (OREO)
Domestic 2 21 14 37
International -- 1 6 7
- --------------------------------------------------------------------------------
Total NPAs-Domestic $259 $ 95 $134 $488
Total NPAs-International 86 1 109 196
- --------------------------------------------------------------------------------
Total NPAs December 31, 1998 $345 $ 96 $243 $684
- --------------------------------------------------------------------------------
1997:
Total NPAs-Domestic $316 $154 $192 $662
Total NPAs-International 64 1 45 110
- --------------------------------------------------------------------------------
Total NPAs December 31, 1997 $380 $155 $237 $772
================================================================================
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($275 million
and $233 million at December 31, 1998 and 1997, respectively). Included in
the 90 days past due and still accruing interest were $248 million and
$202 million of consumer loans at December 31, 1998 and 1997,
respectively.
(b) Nonperforming assets and related ratios at December 31, 1998 and 1997 do
not include $46 million and $214 million, respectively, of nonperforming
assets classified as held for sale by accelerated disposition.
Nonperforming assets (NPAs) are assets on which income recognition has either
ceased or is limited. NPAs negatively affect the corporation's earnings by
reducing interest income. In addition to NPAs, asset quality is measured by
provision for credit losses, charge offs and certain credit quality related
ratios as disclosed in the Reserve for Credit Losses Activity table.
NPAs decreased $88 million, or 11%, over the prior year. NPAs at December
31, 1998, as a percentage of total loans, leases and OREO and as a percentage of
total assets were .61% and .38%, respectively, compared to .72% and .48%,
respectively, at December 31, 1997. This improvement was due to a decrease in
domestic NPAs of $174 million, offset, in part, by a $86 million increase in
international NPAs.
14
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Activity in Nonperforming Assets
Year ended December 31
In millions 1998 1997
================================================================================
Balance at beginning of year $ 772 $ 1,175
Additions 1,165 1,196
Reductions:
Payments/interest applied (482) (625)
Returned to accrual (50) (73)
Charge-offs/write-downs (609) (545)
Sales/other (79) (125)
- --------------------------------------------------------------------------------
Total reductions (1,220) (1,368)
- --------------------------------------------------------------------------------
Subtotal 717 1,003
- --------------------------------------------------------------------------------
Assets reclassified as held for sale
by accelerated disposition (33) (231)
- --------------------------------------------------------------------------------
Balance at end of year $ 684 $ 772
================================================================================
Reserve For Credit Losses
The reserve for credit losses represents the amount available for credit losses
inherent in the corporation's portfolio. It reflects management's ongoing
detailed review of certain individual loans, supplemented by an analysis of the
historical net charge-off experience of the portfolio, an evaluation of
prevailing economic and business conditions, a review of industry
concentrations, including emerging markets risk and cross-border outstandings,
and changes in the size and characteristics of the portfolio, as well as other
pertinent factors. Assumptions utilized in the reserve calculation methodology
have been relatively consistent with actual results. Based on these analyses,
and the assumptions contained therein, the corporation believes that its
year-end reserve for credit losses is adequate.
Fleet Boston's reserve for credit losses increased $162 million from
December 31, 1997, to $2.306 billion at December 31, 1998, primarily due to the
addition of reserves from the acquisition of the consumer credit card operations
of Advanta. The 1998 provision for credit losses was $850 million, $328 million
higher than the prior year level of $522 million. The increase in the provision
for credit losses was due primarily to a 20% increase in net charge-offs in the
credit card portfolio as well as an increase in net charge-offs in the
international portfolio. The provision for credit losses is expected to increase
in 1999 due to the Sanwa and Household portfolio acquisitions. Total assets from
these acquisitions were $7.3 billion.
As a result of core loan growth and the acquisition of various credit card
portfolios, the risk characteristics of the corporation's loan portfolio have
been altered. Specifically, the growth in domestic credit card receivables of
$1.6 billion required that additional reserves be allocated to the consumer
portfolio. Therefore, the allocated reserve pertaining to the consumer portfolio
has increased from 21% of the total reserve for credit losses in 1997 to 30% in
1998.
The increase in the provision for credit losses attributable to
international operations for 1998 was principally a result of increases in
international credit losses, including Asian credit losses resulting from the
sustained economic crisis in that region; the charge-off of a series of loans to
related borrowers made by a former officer of the International Private Bank;
and increased credit losses from Argentina, primarily a reflection of growth in
the consumer-related portfolio and the acquisition of Deutsche Argentina.
An integral component of the corporation's risk management process is to
ensure the proper allocation of the reserve for credit losses based upon an
analysis of risk characteristics, demonstrated losses, loan segmentations, and
other factors. The unallocated component of the reserve for credit losses
represents management's evaluation, utilizing an internally developed
methodology, of the loan portfolio, including its size and complexity, and the
realization that there are estimable losses that have been incurred within the
portfolio but not yet specifically identified. This methodology may be altered
periodically after evaluating factors impacting assumptions utilized in the
unallocated reserve calculation. At December 31, 1998, the corporation's
unallocated reserve had declined 48% from 1997 as the portfolio's risk
characteristics have been altered resulting primarily from the additional credit
card receivables acquired throughout 1998.
Reserve for Credit Losses Allocation
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
====================================================================================================================================
Percent of Percent of Percent of Percent of Percent of
December 31 Loan Type to Loan Type to Loan Type to Loan Type to Loan Type to
Dollars in millions Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 991 47.41% $ 854 44.08% $ 898 41.54% $ 827 39.12% $ 904 38.68%
Consumer 682 16.55 444 17.86 558 23.20 340 20.63 330 19.27
Commercial real estate:
Construction 12 1.16 15 1.09 26 1.35 23 1.30 17 1.25
Interim/permanent 85 7.29 118 8.46 212 8.55 296 8.22 384 10.49
Residential real estate 30 10.03 50 11.82 80 11.13 126 17.22 81 18.49
Lease financing 31 5.13 28 4.70 36 4.10 41 3.89 39 3.23
International 242 12.43 189 11.99 217 10.13 171 9.62 99 8.59
Unallocated 233 -- 446 -- 344 -- 387 -- 469 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,306 100.0% $2,144 100.0% $2,371 100.0% $2,211 100.0% $2,323 100.0%
====================================================================================================================================
</TABLE>
15
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Reserve for Credit Losses Activity
Year ended December 31
In millions 1998 1997 1996 1995 1994
================================================================================
Balance at beginning of year $2,144 $2,371 $2,211 $2,323 $2,610
Gross charge-offs:
Domestic:
Consumer 164 253 246 168 180
Credit card 369 300 161 70 30
Commercial and industrial 240 174 181 156 129
Commercial real estate 23 46 105 155 167
Residential real estate 21 29 45 88 74
Lease financing 1 2 4 4 9
International:
Consumer 91 38 32 35 20
Commercial 141 38 20 24 28
- --------------------------------------------------------------------------------
Total gross charge-offs 1,050 880 794 700 637
- --------------------------------------------------------------------------------
Recoveries:
Domestic:
Consumer 42 60 54 56 56
Credit card 32 19 10 7 3
Commercial and industrial 73 73 72 65 82
Commercial real estate 28 39 33 46 45
Residential real estate 4 7 6 8 15
Lease financing 2 2 4 5 5
International:
Consumer 23 13 11 8 5
Commercial 12 12 4 7 13
- --------------------------------------------------------------------------------
Total recoveries 216 225 194 202 224
- --------------------------------------------------------------------------------
Net charge-offs 834 655 600 498 413
Provision 850 522 444 376 219
Acquired/divestitures/other 146 (94) 316 10 (93)
- --------------------------------------------------------------------------------
Balance at end of year $2,306 $2,144 $2,371 $2,211 $2,323
================================================================================
Net charge-offs increased $179 million to $834 million in 1998 primarily a
result of an increase in international charge-offs driven by an increase in
Argentine net credit losses of $34 million, a $27 million increase in net credit
losses in Asia primarily from Indonesian credits that had been adversely
affected by the sustained economic crisis in that region, and a charge-off of
approximately $66 million related to a series of loans to related borrowers that
were initiated by a former officer in the corporation's International Private
Bank. During 1999, the corporation received a partial insurance recovery related
to the aforementioned private bank loans. Net charge-offs from the domestic
credit card portfolio increased $56 million to $337 million, due to a $745
million increase in average credit card loans, year-to-year, from the
acquisition of Advanta's consumer credit card portfolio. The ratio of net
charge-offs to average loans increased to .75% as compared to .64% at December
31, 1997. Net charge-offs are expected to increase in 1999 due to the
acquisition of the Sanwa and Household portfolios.
Funding Sources
Components of Funding Sources
December 31
In millions 1998 1997
================================================================================
Deposits:
Domestic:
Demand $ 19,948 $ 21,645
Regular savings and NOW 11,816 15,361
Money market 40,414 29,923
Time 28,607 26,574
International 17,393 15,994
- --------------------------------------------------------------------------------
Total deposits 118,178 109,497
- --------------------------------------------------------------------------------
Short-term borrowed funds:
Federal funds purchased 3,953 4,537
Securities sold under agreements to
repurchase 5,744 4,419
Commercial paper 1,037 811
Other 8,442 9,457
- --------------------------------------------------------------------------------
Total short-term borrowed funds 19,176 19,224
- --------------------------------------------------------------------------------
Due to brokers/dealers 3,975 4,316
Long-term debt 14,411 8,191
- --------------------------------------------------------------------------------
Total $155,740 $141,228
================================================================================
Total deposits increased $8.7 billion to $118.2 billion at December 31, 1998.
The increase was due primarily to a $10.5 billion increase in domestic money
market deposits as a result of establishing interest rates aimed at attracting
new sources of funds. In addition, domestic time deposits increased $2.0 billion
due primarily to the corporation issuing jumbo time deposits to fund earning
asset growth during 1998.
Certificates of deposit and other time deposits issued by domestic offices
in amounts of $100,000 or more as of December 31, 1998 will mature as presented
in the following table.
Maturity of Time Deposits - Domestic
December 31, 1998 Other
In millions Certificates Time
Remaining maturity of Deposit Deposits
================================================================================
3 months or less $ 6,445 $ 26
3 to 6 months 1,360 24
6 to 12 months 2,085 59
Over 12 months 1,154 76
- --------------------------------------------------------------------------------
Total $ 11,044 $ 185
================================================================================
The majority of foreign office deposits are in denominations of $100,000 or
more.
Total short-term borrowed funds remained consistent with December 31,
1997. Long-term debt increased by $6.2 billion to $14.4 billion at December 31,
1998 and increased an additional $7.6 billion to $22.0 billion at June 30, 1999
due to the issuance of new debt and capital securities to fund acquisitions and
balance sheet growth.
Management believes Fleet Boston has sufficient liquidity to meet its
liabilities to customers and debt holders. The effect of maturing liabilities is
discussed in the Asset-Liability Management section that follows.
16
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity, and capital. Asset-liability management is governed by policies
reviewed and approved annually by the corporation's Board of Directors (the
Board). The Board delegates responsibility for asset-liability management to the
corporate Asset-Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset-liability management activities of
the corporation. ALCO also reviews and approves all major market risk,
liquidity, and capital management programs.
Market Risk
Market risk is the sensitivity of income to variations in interest rates,
foreign exchange rates, equity prices, commodity prices, and other market-driven
rates or prices. As discussed below, the corporation is exposed to market risk
in both its non-trading and trading operations.
Non-trading Market Risk
U.S. Dollar Denominated Risk
At December 31, 1998, U.S. dollar denominated assets comprised the majority of
the corporation's balance sheet. Interest-rate risk, including mortgage
prepayment risk, is by far the most significant non-trading market risk to which
the U.S. dollar denominated positions are exposed. Interest-rate risk is the
sensitivity of income to variations in interest rates. This risk arises directly
from the corporation's core banking activities - lending, deposit gathering, and
loan servicing.
The primary goal of interest-rate risk-management is to control the
exposure to interest-rate risk both within limits approved by the Board and
within narrower guidelines approved by ALCO. These limits and guidelines reflect
the corporation's tolerance for interest-rate risk over both short-term and
long-term time horizons.
The corporation controls interest-rate risk by identifying, quantifying,
and hedging its exposures. The corporation identifies and quantifies its
interest-rate exposures using sophisticated simulation and valuation models, as
well as simpler gap analyses, reflecting the known or assumed maturity,
repricing, and other cash flow characteristics of the corporation's assets and
liabilities.
The corporation manages the interest-rate risk inherent in its core
banking operations using both on-balance sheet instruments, mainly fixed-rate
portfolio securities, and a variety of off-balance sheet instruments. The most
frequently used off-balance sheet instruments are interest-rate swaps and
options (e.g., interest-rate caps and floors). When appropriate, forward-rate
agreements, options on swaps, and exchange-traded futures and options are also
used.
The major source of the corporation's non-trading interest-rate risk is
the difference in the maturity and repricing characteristics between the
corporation's core banking assets and liabilities - loans and deposits. This
difference or mismatch is a risk to net interest income.
Most significantly, the corporation's core banking assets and liabilities
are mismatched with respect to repricing frequency, maturity and/or index. Most
of the corporation's commercial loans, for example, reprice rapidly in response
to changes in short-term interest rates (e.g., London Interbank Offered Rate
(LIBOR) and prime rate). In contrast, many of its consumer deposits reprice
slowly, if at all, in response to changes in market interest rates. As a result,
the core bank is asset-sensitive.
In managing net interest income, the corporation uses fixed-rate portfolio
securities and interest-rate swaps to offset the general asset-sensitivity of
the core bank. Additionally, the corporation uses interest-rate swaps to offset
basis risk, including the specific exposure to changes in the prime rate. At
December 31, 1998 and 1997, interest-rate swaps totaling $23.2 billion and $23.4
billion (notional amount), respectively, were being used to manage risk to net
interest income.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its mortgage servicing rights (MSRs) to prepayments. The
mortgage borrower has the option to prepay the mortgage loan at any time. When
mortgage interest rates decline, the borrower has a greater incentive to prepay
a mortgage loan through a refinancing; when mortgage interest rates rise, this
incentive is reduced or eliminated. Since MSRs represent the right to service
mortgage loans, a decline in interest rates and an actual (or probable) increase
in mortgage prepayments shorten the expected life of the MSR asset and reduce
its economic value. Correspondingly, an increase in interest rates and an actual
(or probable) decline in mortgage prepayments lengthen the expected life of the
MSR asset and enhance its economic value. The expected income from and,
therefore, economic value of MSRs is sensitive to movements in interest rates
due to this sensitivity to mortgage prepayments.
To mitigate the risk of declining long-term interest rates, increased
mortgage prepayments, and the potential impairment of the MSRs, the corporation
uses a variety of risk-management instruments, including interest-rate swaps,
caps and floors tied to "constant maturity" yields on long-term (e.g., 10-year)
Treasury notes and swaps, options on swaps, exchange-traded options on Treasury
bond and note futures contracts, and swaps linked to mortgage assets such as
"principal only" (P.O.) securities. These instruments gain value as interest
rates decline, mitigating the impairment of MSRs. At December 31, 1998 and 1997,
the corporation had approximately $65.2 billion and $30.7 billion (notional
amount), respectively, of outstanding derivatives being used to manage risk to
the MSRs' valuation.
Complicating management's efforts to control non-trading exposure to
interest-rate risk is the fundamental uncertainty of the maturity, repricing,
and/or runoff characteristics of some of the corporation's core banking assets
and liabilities. This uncertainty often reflects optional features contained in
these financial instruments. The most impor-
17
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
tant optional features are contained in consumer deposits and loans.
For example, many of the corporation's interest-bearing retail deposit
products (e.g., interest checking, savings and money market deposits) have no
contractual maturity. Customers have the right to withdraw funds from these
deposit accounts freely. Deposit balances may therefore run off unexpectedly due
to changes in competitive or market conditions. To forestall such runoff, rates
on interest-bearing deposits may have to be increased more (or reduced less)
than expected. Such repricing may not be highly correlated with the repricing of
prime rate-based or LIBOR-based loans. Finally, balances that leave the banking
franchise may have to be replaced with other more expensive retail or wholesale
deposits. Given the uncertainties surrounding deposit runoff and repricing, the
interest-rate sensitivity of core bank liabilities cannot be determined
precisely.
Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, without penalty. As a result, the corporation's
mortgage-based assets (including mortgage loans and securities as well as
mortgage servicing rights) are subject to prepayment risk. This risk tends to
increase when interest rates fall due to the benefits of refinancing. Since the
future prepayment behavior of the corporation's customers is uncertain, the
interest-rate sensitivity of mortgage assets cannot be determined exactly.
To cope with such uncertainties, management gives careful attention to its
assumptions. Depending on the product or behavior in question, each assumption
will reflect some combination of market data, research analysis, and business
judgment. For example, assumptions for mortgage prepayments are derived from
third party prepayment estimates for comparable mortgage loans. Assumptions for
noncontractual deposits are based on a historical analysis of repricing and
runoff trends, heavily weighted to the recent past, modified by business
judgment concerning prospective competitive market influences.
To measure the sensitivity of its income to changes in interest rates, the
corporation uses a variety of methods, including simulation, gap, and valuation
analyses.
Simulation analysis involves dynamically modeling interest income and
expense from the corporation's balance sheet and off-balance sheet positions
over a specified time period under various interest-rate scenarios and balance
sheet structures. The corporation uses simulation analysis to measure the
sensitivity of net interest income over relatively short (e.g. 1-2 year) time
horizons.
Key assumptions in these simulation analyses (and in the gap and valuation
analyses discussed below) relate to the behavior of interest rates and spreads,
the growth or shrinkage of product balances and the behavior of the
corporation's deposit and loan customers. As indicated above, the most material
assumptions relate to the prepayment of mortgage assets, as well as the
repricing and/or runoff of noncontractual deposits.
As the future path of interest rates cannot be known in advance,
management uses simulation analysis to project earnings under various
interest-rate scenarios. Some scenarios reflect reasonable or "most likely"
economic forecasts. Other scenarios are deliberately extreme, including
immediate interest-rate "shocks," gradual interest-rate "ramps," spread
narrowings/widenings, and yield curve "twists."
Usually, each analysis incorporates what management believes to be the
most appropriate assumptions about customer and competitor behavior in the
specified interest-rate scenario. But in some analyses, assumptions are
deliberately manipulated to test the corporation's exposure to "assumption
risk."
The following table reflects the estimated exposure of the corporation's
net interest income for the next 12 months, assuming an immediate shift in
interest rates.
Estimated Exposure to
Rate Change Net Interest Income
(Basis Points) (In millions)
=======================================================
1998 1997
- -------------------------------------------------------
+200 $ 7 $ 41
-200 (156) (130)
=======================================================
Management believes that these estimates reflect a complete and accurate
representation of the corporate balance sheet. It should be emphasized, however,
that the results are dependent on material assumptions such as those previously
discussed.
Management believes that the exposure of the corporation's net interest
income to gradual and/or modest changes in interest rates is relatively small.
As indicated by the results of the simulation analyses, however, a sharp decline
in interest rates will tend to reduce net interest income, but by amounts that
are within corporate limits. This exposure is primarily related to two major
risk factors discussed earlier - the anticipated slow repricing of
noncontractual deposits and the assumed rapid prepayment of mortgage loans and
securities.
Valuation analysis involves projecting future cash flows from the
corporation's assets, liabilities, and off-balance sheet positions over a very
long-term horizon, discounting those cash flows at appropriate interest rates,
and then aggregating the discounted cash flows. The corporation's "economic
value of equity" (EVE) is the estimated net present value of the discounted cash
flows. The interest-rate sensitivity of EVE is a measure of the sensitivity of
long-term earnings to changes in interest rates. The corporation uses valuation
analysis (specifically, the sensitivity of EVE) to measure the exposure of
earnings and equity to changes in interest rates over a relatively long (e.g.,
>2-year) time horizon. Valuation analysis provides a more comprehensive measure
of the corporation's exposure to interest-rate risk than simulation analysis.
Valuation analysis incorporates a longer time horizon, and also includes certain
interest-rate-sensitive components of noninterest income and expense,
specifically fee income and amortization from mortgage servicing rights.
The following table reflects the corporation's estimated exposure to
economic value assuming an immediate shift in interest rates. Exposures are
reported for shifts of +/- 100 basis points, as well as +/- 200 basis points
because the sen-
18
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
sitivity of EVE, in particular the sensitivity of the hedged MSRs, to changes in
interest rates can be nonlinear.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (In millions)
=======================================================
1998 1997
- -------------------------------------------------------
+200 $(328) $(442)
+100 (22) (133)
-100 (536) (286)
-200 (941) (679)
=======================================================
During 1998, management continued to add fixed-rate portfolio securities and
interest-rate swaps to control the asset-sensitivity inherent in the maturity
and repricing mismatch of core bank assets and liabilities. The impact of these
programs was partly offset by a reduction in the assumed repricing sensitivity
of interest-bearing retail deposits. These assumptions, which are subject to
frequent and careful management review, are revised as necessary to reflect
current market conditions, business trends and product manager expectations.
In the fourth quarter of 1998, the corporation entered into a definitive
agreement to acquire Sanwa Business Credit. This transaction, which closed on
February 1, 1999, will reduce the corporation's estimated exposure to falling
interest rates. The year-end balance sheet position reflects management's
anticipation of this impact.
It should be emphasized that valuation analysis focuses on the long-term
economic value of the corporation's future cash flows. For some financial
instruments, the adverse impact of current movements in interest rates on
expected future cash flows must be recognized immediately. For example, if
interest rates decline and the hedge is not effective, thereby reducing
estimated future fee income from MSRs such that the estimated economic value of
the MSRs falls below book value, an immediate impairment charge is required. In
contrast, for other financial instruments, such as fixed-rate investment
securities, the beneficial impact of a decline in interest rates on future
income is unrecognized unless the instruments are sold.
As a result of such accounting requirements, a portion of the EVE exposure
attributable to mortgage servicing rights could materially impact earnings
within the next 12 months under certain extreme scenarios involving changes in
market spreads, a decline in implied option volatilities, and/or a greater than
anticipated increase in prepayments.
Off-balance sheet interest-rate instruments used to manage net interest
income are designated as hedges of specific assets and liabilities. Accrual
accounting is applied to these hedges, and the income or expense is recorded in
the same category as that of the related balance sheet item. The periodic net
settlement of the interest-rate risk-management instruments is recorded as an
adjustment to net interest income. As of December 31, 1998, the corporation had
net deferred income of $16 million relating to terminated interest-rate swap
contracts, which will be amortized over the remaining life of the underlying
terminated interest-rate contracts of approximately 7 years.
The interest-rate instruments used to manage potential impairment of MSRs
are designated as hedges of the MSRs. Changes in fair value of the hedges are
recorded as adjustments to the carrying value of the MSRs and related hedges.
During 1998, net hedge gains of $667 million were deferred and recorded as
adjustments to the carrying value of the MSRs and related hedges. At December
31, 1998, the carrying value and fair value of the corporation's MSRs were $1.4
billion and $1.8 billion, respectively.
In connection with the corporation's management of its MSR hedge program,
the corporation terminated (in notional amounts) $28 billion of interest-rate
floor agreements and $12 billion of call options and added $44 billion and $16
billion of interest-rate floor agreement and call options, respectively, during
1998. Additionally, the corporation added $10 billion of interest-rate cap
corridors and $6 billion of interest-rate swap contracts in its management of
the MSR hedge program.
These risk-management activities do not completely eliminate interest-rate
risk in the MSRs. The MSR hedges utilized were indexed to Treasury rates, swap
rates, and mortgage rates. At December 31, 1998, approximately 30%, 54%, and
16%, were indexed to Treasury, swap, and mortgage-related rates, respectively.
Treasury rates and swap rates may not move in tandem with mortgage interest
rates. In addition, as mortgage interest rates change, actual prepayments may
not respond exactly as anticipated. Other pricing factors, such as the implied
volatility of market yields, may affect the value of the option hedges without
similarly impacting the MSRs. Therefore, the corporation's hedging activity may
not be sufficient to eliminate prepayment and other market risk completely in
all interest-rate scenarios.
Non-U.S. Dollar Denominated Risk
The corporation's non-U.S. dollar denominated assets and liabilities are exposed
to interest-rate and foreign exchange rate risks. The majority of the
corporation's non-U.S. dollar denominated interest-rate and foreign exchange
rate risk exposure stems from its operations in Latin America, primarily
Argentina and Brazil.
The Argentine interest-rate risk position reflects repricing and/or
maturity mismatches arising primarily from the corporation's corporate lending
and retail businesses. The interest-rate risk related to these positions is
managed using simulation and valuation analyses much like those used to manage
the domestic interest-rate risk position. At December 31, 1998, the net interest
income and economic value exposures of the corporation's Argentine non-U.S.
dollar interest-rate risk positions were approximately $5 million and $6
million, respectively, versus limits of $22 million and $18 million,
respectively.
The corporation's Brazilian interest-rate risk position, which is mostly
short-term in nature, reflects repricing and/or maturity mismatches arising
primarily from corporate lending, trade financing and treasury activities. Given
the short-term nature of those positions and the volatility of the markets, the
interest-rate risk related to these positions is
19
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
managed using a "value at risk" (VAR) methodology, which is discussed below in
the "Trading Market Risk" section. The VAR exposure for the corporation's
Brazilian non-U.S. dollar denominated interest-rate risk positions was
approximately $7 million at December 31, 1998, versus a limit of $8 million.
When deemed appropriate, the corporation will take positions in certain
currencies with the intention of taking advantage of movements in currency and
interest rates. The corporation takes currency positions by funding local
currency assets with dollars or by funding dollar assets with local currency
liabilities. Currency positions expose the corporation to gains or losses that
depend on the relationship between currency price movements and interest-rate
differentials. These positions are subject to limits established by ALCO. The
majority of the corporation's non-trading foreign exchange risk is generated by
its operations in Argentina and Brazil. The following table represents the
corporation's currency positions in Argentina and Brazil for 1998 and 1997.
Currency Positions
December 31 1998 1997
In millions Year-end Average Year-end Average
================================================================================
Argentina(a) $421 $230 $368 $116
Brazil(b) 13 2 132 113
================================================================================
(a) Positions represent local currency assets funded by U.S. dollars in both
periods presented.
(b) Positions represent dollar assets funded by local currency liabilities in
1998 and local currency assets funded by U.S. dollars in 1997.
To date, the corporation's currency positions have been liquid in nature and
management has been able to close and re-open these positions as necessary.
Risk-Management Instrument Analysis
<TABLE>
<CAPTION>
Weighted Weighted Average
Assets- Average Rate
December 31, 1998 Notional Liabilities Maturity Fair ----------------
Dollars in millions Value Hedged (Years) Value Receive Pay
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Domestic interest-rate risk-management
instruments
Interest-rate swaps:
Receive-fixed/pay-variable $11,215 Variable-rate loans
651 Fixed-rate deposits
1,005 Short-term debt
3,897 Long-term debt
------
16,768 2.8 $ 354 6.56% 5.86%
------
Pay-fixed/receive-variable 53 Fixed-rate loans
170 Short-term debt
80 Long-term debt
------
303 1.6 -- 7.35 5.58
------
Basis swaps 108 Securities
2,779 Deposits
200 Short-term debt
50 Long-term debt
------
3,137 .6 (29) 5.29 5.60
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic interest-rate risk-
management instruments 20,208 2.44 325 6.37 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
International interest-rate risk-management
instruments
Interest-rate swaps 2,985 Short-term assets and liabilities .9 (22) -- (a) -- (a)
Futures and forwards 734 Short-term assets and liabilities .1 -- -- --
Interest-rate options purchased 2,411 Deposits 1.4 89 -- --
Interest-rate options written 1,911 Deposits .8 (66) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total international interest-rate risk-
management instruments 8,041 1.0 1 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income 28,249 2.02 326 6.37 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage banking risk-management instruments
Interest-rate swaps:
Receive-fixed/pay-variable, PO swaps 7,011 Mortgage servicing rights 3.0 83 5.88 5.59
Options:
Interest-rate floors and options on swaps 39,560 Mortgage servicing rights 4.3 517 -- (b) -- (b)
Interest-rate caps and cap corridors 14,759 Mortgage servicing rights 3.8 68 -- (b) -- (b)
Call options purchased 3,150 Mortgage servicing rights .1 27 -- --
Call options sold 730 Mortgage servicing rights .1 (5) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total options 58,199 3.9 607 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights 65,210 3.8 690 5.88 5.59
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign exchange risk-management instruments
Spot and forward contracts 3,469 Foreign currency denominated assets
and liabilities .3 13 -- --
Options purchased 68 Foreign currency denominated assets
and liabilities .2 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total hedges of foreign exchange 3,537 .3 13 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $96,996 3.2 $1,029 6.25% 5.76%
====================================================================================================================================
</TABLE>
(a) These interest-rate swaps typically include the exchange of floating rate
indices that are indigenous to the Brazilian market and have been excluded
from weighted average rate.
(b) The mortgage banking risk-management interest-rate floors and options on
swaps, and interest-rate caps and cap corridors have weighted average
strike rates of 5.28% and 6.50%, respectively.
20
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Trading Market Risk
The corporation's trading portfolios are exposed to market risk due to
variations in interest rates, currency exchange rates, equity prices, precious
metals prices, and related market volatilities.
This exposure mainly arises in the normal course of the corporation's
business as a financial intermediary. Interest-rate, foreign exchange, and
precious metals contracts are primarily entered into to satisfy the investment
and risk-management needs of our customers. Equity positions result mainly from
the corporation's market-making and underwriting activities.
In addition, the corporation takes certain proprietary trading positions,
including positions in high yield and emerging markets fixed income securities,
local currency debt and equity securities, and related derivatives. Domestic
fixed income trading activities also include trading of U.S. Treasury and U.S.
government agency securities.
The corporation uses a VAR methodology, based on industry-standard risk
measurement methodologies, to measure the overall market risk inherent in its
trading activities. The system, using historical and current data to estimate
market volatility, measures the risk to earnings at a 99% confidence level. The
VAR methodology requires a number of key assumptions, including those relating
to the time to liquidate positions, the confidence level for losses, the number
of days of price and rate history to be used, the impact of credit spread risk,
and the treatment of event risk.
Management recognizes that this methodology, while standard, can
underestimate risk. Since the actual probability of an extreme market move is
generally greater than VAR measures suggest, the corporation employs other
market risk-management tools to evaluate and manage market risk. These
risk-management tools include stress tests and scenario analysis, overall
portfolio size limits, as well as stop loss guidelines. The average daily
exposure was $44 million during 1998.
Liquidity Risk
Liquidity risk-management's objective is to assure the ability of the
corporation and its subsidiaries to meet their financial obligations. These
obligations are the payment of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and the ability to take advantage of new business
opportunities. Liquidity is achieved by the maintenance of a strong base of core
customer funds, maturing short-term assets, the ability to sell marketable
securities, committed lines of credit and access to capital markets. Liquidity
may also be enhanced through the securitization of commercial and consumer asset
receivables. Liquidity at Fleet Boston is measured and monitored daily, allowing
management to better understand and react to balance sheet trends. ALCO is
responsible for implementing the Board's policies and guidelines governing
liquidity. U.S. dollar liquidity management is centralized in Boston, with
overseas operations managing their own liquidity requirements.
Liquidity at the bank level is managed through the monitoring of
anticipated changes in loans, core deposits, and wholesale funds.
Diversification of liquidity sources by maturity, market, product and
counterparty are mandated through ALCO guidelines. The corporation's banking
subsidiaries routinely model liquidity under three economic scenarios, two of
which involve increasing levels of economic difficulty and financial market
strain. Management also maintains a detailed contingency liquidity plan designed
to respond either to an overall decline in the condition of the banking industry
or a problem specific to Fleet Boston. The strength of Fleet Boston's liquidity
position is a result of its base of core customer deposits. These core deposits
are supplemented by wholesale funding sources in the capital markets, as well as
from direct customer contacts. Wholesale funding sources include large
certificates of deposit, foreign branch deposits, federal funds, collateralized
borrowings, and a $16 billion bank-note program. Another source of medium-term
funding is the securitization market, which provides the corporation with the
ability to securitize its loans and leases.
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries, committed lines of credit and access to the money
and capital markets. Dividends from banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and retained earnings. The
corporation's subsidiaries rely on cash flows from operations, core deposits,
borrowings, short-term high-quality liquid assets, and, in the case of
non-banking subsidiaries, funds from the parent company.
At December 31, 1998, the corporation had commercial paper outstanding of
$1,037 million, all of which was placed directly by Fleet Boston in its local
markets, compared with $811 million at December 31, 1997. The corporation has
backup lines of credit totaling $1.3 billion to ensure that funding is not
interrupted if commercial paper is not available. At December 31, 1998 and 1997,
Fleet Boston had no outstanding balance under these lines of credit. The banking
subsidiaries also had availability under a line of credit of approximately $600
million, with no outstanding balance at December 31, 1998 and 1997.
The parent company had $3.8 billion available for the issuance of common
stock, preferred stock or preferred securities, and senior or subordinated
securities at December 31, 1998 under existing shelf registrations filed with
the Securities and Exchange Commission (SEC). At September 30, 1999, the
corporation had availability of $852 million.
As shown in the consolidated statements of cash flows, cash and cash
equivalents increased by $267 million during 1998. The increase was due to cash
provided by financing activities of $9.1 billion, offset in part by cash used in
operating activities of $1.0 billion and cash used in investing activities of
$7.8 billion. Net cash provided by financing activities was the result of net
increases in deposits and long-term debt, offset in part by a net decrease in
short-term borrowings and the payment of cash dividends. Net cash used in
operating activities was due to a net increase in
21
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
mortgages held for resale. Net cash used in investing activities was
attributable to a net increase in loans, resulting primarily from loan growth in
the commercial and industrial and leases financing portfolios and purchases of
credit card loan portfolios, as well as a net increase in securities and
investments in bank-owned life insurance.
CAPITAL
A financial institution's capital serves to support asset growth and provide
protection against loss to depositors and creditors. Common equity represents
the stockholders' investment in the corporation. In addition to common equity,
regulatory capital includes, within certain limits, preferred stock,
subordinated debt and credit loss reserves.
The corporation strives to maintain an optimal level of capital,
commensurate with its risk profile, on which an attractive return to
stockholders will be realized over both the short and long term, while serving
depositors', creditors' and regulatory needs. In determining optimal capital
levels, the corporation also considers the capital levels of its peers and the
evaluations of the major rating agencies that assign ratings to the
corporation's public debt.
In blending the requirements of each of these constituencies, the
corporation has established target capital ranges that it believes will provide
for management flexibility and the deployment of capital in an optimally
efficient and profitable manner. These targets are reviewed periodically
relative to the corporation's risk profile and prevailing economic conditions.
The corporation strives to maintain regulatory capital at approximately
.75%-1.25% above the minimum regulatory requirements for a well-capitalized
institution, as defined in the FDIC Improvement Act. To be categorized as
well-capitalized, Fleet Boston's banking subsidiaries must maintain a risk-based
Total Capital ratio of at least 10%, a risk-based Tier 1 Capital ratio of at
least 5%, and Tier 1 Leverage ratio of at least 5%, and not be subject to a
written agreement, order or capital directive with regulators. Neither Fleet
Boston nor any of its subsidiaries is subject to any formal written agreements
with state and federal regulators or to any orders or capital directives. In
addition, the corporation currently has a tangible common equity-to-assets ratio
target range of 5.50%-6.00% and a total equity-to-assets target range of
7.25%-7.75%.
Capital Ratios
December 31 1998 1997
================================================================================
Risk-adjusted assets (in millions) $ 174,599 $ 152,258
Tier 1 risk-based capital ratio
(4% minimum) 7.11% 7.55%
Total risk-based capital ratio
(8% minimum) 11.51 11.31
Leverage ratio (4% minimum) 7.17 7.52
Common equity-to-assets 7.60 7.53
Total equity-to-assets 7.98 8.13
Tangible common equity-to-assets 5.52 6.05
Tangible total equity-to-assets 5.92 6.56
================================================================================
At December 31, 1998, the corporation and all of its banking subsidiaries
exceeded all regulatory required minimum capital ratios and were categorized as
well-capitalized. The corporation's risk-based Tier 1 capital ratio decreased
compared with December 31, 1997, reflecting the impact of various acquisitions
completed during 1998. However, total risk-based capital increased as the
corporation issued $2 billion of subordinated debt during the year. Excess
capital, defined as common equity above the capital target, is available for
core business investments and acquisitions.
As registered brokers-dealers and member firms of the NYSE, certain
subsidiaries are subject to rules of both the SEC and the NYSE. These rules
require registrants to maintain minimum levels of net capital, as defined, and
may restrict a member from expanding its business and declaring dividends as its
net capital approaches specified levels. At December 31, 1998, these
subsidiaries had net capital, in the aggregate, of approximately $349 million
which exceeded aggregate minimum net capital requirements by approximately $304
million.
During 1998, the corporation announced its intention to repurchase up to
$1.5 billion of its common stock from time-to-time as market conditions permit.
The corporation also effected a two-for-one stock split of the corporation's
common stock during 1998. On September 30, 1999, the corporation rescinded its
stock repurchase program as a result of the merger with BankBoston.
Comparison of 1997 and 1996
Fleet Boston reported net income for 1997 of $2.3 billion, or $2.33 per diluted
share, compared with $1.9 billion, or $1.84 per diluted share in 1996. ROA and
ROE were 1.48% and 19.71%, respectively, for 1997 compared with 1.27% and
16.31%, respectively, for 1996. All common share amounts and associated ratios
were adjusted to reflect the corporation's two-for-one common stock split
effected during 1998.
Net interest income on an FTE basis totaled $6.2 billion in 1997, compared
with $5.9 billion in 1996. The net interest margin for 1997 was 4.68%, compared
with 4.57% in 1996. The increase of 11 basis points was due principally to
increased loan fee revenue as well as a complete year's impact of a balance
sheet restructuring program undertaken during 1996 in connection with the
NatWest acquisition. This restructuring allowed the corporation to replace
lower-yielding assets and higher-cost sources of funds with a more favorable mix
of loans and core deposits.
The provision for credit losses was $522 million in 1997 compared with
$444 million in 1996, with the increase due principally to a higher level of
bankruptcies and delinquencies in the consumer loan portfolio.
Noninterest income increased $548 million to $4.2 billion in 1997. The
increase was due primarily to the inclusion of NatWest for four additional
months in 1997 as well as strong investment services and capital markets
revenue. Strong investment services revenue is primarily the result of strong
sales of mutual fund and annuity products as well as an increase in the overall
value of assets under management.
22
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Capital markets revenue increased due to strong investment banking, foreign
exchange and brokerage market-making revenue.
Noninterest expense totaled $6.05 billion for 1997, compared with $5.83
billion in 1996, an increase of $219 million, or 4%. This increase was driven by
investment spending in Argentina and Brazil as well as certain charges taken
during the year relating to the impairment of an asset. Expenses only increased
slightly in 1997, as a result of the successful integrations of NatWest and
Shawmut National Corporation in combination with the corporation's continuing
cost containment efforts.
Total loans at December 31, 1997 were $106.5 billion, compared with $100.9
billion at December 31, 1996. The increase is attributable to strong loan growth
in the domestic commercial and industrial, lease financing and residential real
estate portfolios, which was partially offset by the sale of $2.2 billion of
indirect auto loans and $1.1 billion of consumer finance loans from the sale of
FAC. Total deposits remained relatively consistent at $109.5 billion at December
31, 1997.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes comprehensive
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
standard requires that all derivative instruments be recorded in the balance
sheet at fair value. However, the accounting for changes in fair value of the
derivative instrument depends on whether the derivative instrument qualifies as
a hedge. If the derivative instrument does not qualify as a hedge, changes in
fair value are reported in earnings when they occur. If the derivative
instrument qualifies as a hedge, the accounting treatment varies based on the
type of risk being hedged.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of FASB
Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The corporation intends to adopt
SFAS No. 133 as of January 1, 2001. The adoption of this standard may cause
volatility in both the income statement as well as the equity section of the
balance sheet. The impact of this Statement cannot be currently estimated and
will be dependent upon the fair value, nature and purpose of the derivative
instruments held by the corporation as of January 1, 2001.
23
<PAGE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions, except per share amounts 1998 1997 1996
=======================================================================================================
<S> <C> <C> <C>
Interest and fees on loans and leases $10,136 $ 9,318 $ 9,032
Interest on securities and trading assets 1,565 1,379 1,447
Other 640 558 442
- -------------------------------------------------------------------------------------------------------
Total interest income 12,341 11,255 10,921
- -------------------------------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 2,601 2,439 2,575
Deposits of international offices 1,105 900 858
Short-term borrowings 1,259 1,052 991
Long-term debt 767 584 584
Other 214 152 111
- -------------------------------------------------------------------------------------------------------
Total interest expense 5,946 5,127 5,119
- -------------------------------------------------------------------------------------------------------
Net interest income 6,395 6,128 5,802
- -------------------------------------------------------------------------------------------------------
Provision for credit losses 850 522 444
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 5,545 5,606 5,358
- -------------------------------------------------------------------------------------------------------
Noninterest income:
Banking fees and commissions 1,339 1,207 1,054
Investment services revenue 1,212 990 885
Capital markets revenue 1,140 914 689
Credit card revenue 455 98 95
Processing-related revenue 452 469 438
Net gains on branch divestitures and sales of business units 254 243 245
Other 429 285 252
- -------------------------------------------------------------------------------------------------------
Total noninterest income 5,281 4,206 3,658
- -------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 3,556 3,031 2,913
Occupancy 529 498 496
Equipment 474 463 438
Intangible asset amortization 274 206 175
Legal and other professional 254 172 187
Marketing and public relations 253 225 221
Merger-related charges 73 25 180
Other 1,637 1,430 1,221
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 7,050 6,050 5,831
- -------------------------------------------------------------------------------------------------------
Income before income taxes 3,776 3,762 3,185
Applicable income taxes 1,452 1,516 1,325
- -------------------------------------------------------------------------------------------------------
Net income $ 2,324 $ 2,246 $ 1,860
=======================================================================================================
Diluted weighted average common shares outstanding (in millions) 939.1 924.0 949.8
Net income applicable to common shares $ 2,264 $ 2,153 $ 1,751
Basic earnings per share 2.47 2.39 1.88
Diluted earnings per share 2.41 2.33 1.84
=======================================================================================================
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
24
<PAGE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
Dollars in millions, except share amounts 1998 1997
================================================================================================================
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 10,941 $ 10,674
Federal funds sold and securities purchased under agreements to resell 2,566 2,471
Trading assets 4,364 3,348
Securities (market value: $23,379 and $19,853) 23,369 19,845
Loans and leases 112,094 106,545
Reserve for credit losses (2,306) (2,144)
- ----------------------------------------------------------------------------------------------------------------
Net loans and leases 109,788 104,401
- ----------------------------------------------------------------------------------------------------------------
Due from brokers/dealers 3,600 3,510
Mortgages held for resale 4,068 1,571
Premises and equipment 2,549 2,247
Mortgage servicing rights 1,405 1,768
Intangible assets 3,906 2,526
Other assets 11,338 7,953
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 177,894 $ 160,314
================================================================================================================
Liabilities
Deposits:
Domestic:
Noninterest bearing $ 25,200 $ 25,248
Interest bearing 75,585 68,255
International:
Noninterest bearing 1,144 1,085
Interest bearing 16,249 14,909
- ----------------------------------------------------------------------------------------------------------------
Total deposits 118,178 109,497
- ----------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 9,697 8,956
Other short-term borrowings 9,479 10,268
Trading liabilities 2,326 1,232
Due to brokers/dealers 3,975 4,316
Long-term debt 14,411 8,191
Accrued expenses and other liabilities 5,624 4,813
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 163,690 147,273
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock 691 969
Common stock (935,155,537 shares issued in 1998 and 468,002,552 shares
issued in 1997) 9 5
Common surplus 4,706 4,777
Retained earnings 9,210 7,887
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale 109 151
Cumulative translation adjustments (14) (11)
Treasury stock, at cost (16,215,465 shares in 1998 and 11,764,844 shares in 1997) (507) (737)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,204 13,041
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 177,894 $ 160,314
================================================================================================================
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
25
<PAGE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Other
Preferred Stock at Common Retained Comprehensive Treasury
Dollars in millions, except per share amounts Stock $.01 Par Surplus Earnings Income Stock Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 907 $ 5 $4,814 $5,532 $130 $ (29) $11,359
Net income -- -- -- 1,860 -- -- 1,860
Other comprehensive income:
Net unrealized securities gains arising
during the period, net of taxes of $1 -- -- -- -- 1 -- --
Less: reclassification adjustment for net gains
included in net income, net of taxes of $20 -- -- -- -- 28 -- --
Change in translation adjustment,
net of taxes of $2 -- -- -- -- (3) -- --
----
Other comprehensive income -- -- -- -- (30) -- (30)
-------
Total comprehensive income -- -- -- -- -- -- 1,830
Cash dividends declared on common stock
($.87 per share) -- -- -- (457) -- -- (457)
Cash dividends declared on preferred stock -- -- -- (69) -- -- (69)
Cash dividends declared by pooled company
prior to merger -- -- -- (294) -- -- (294)
Issuance of preferred stock 650 -- (15) -- -- -- 635
Redemption of preferred stock (96) -- -- (3) -- -- (99)
Common stock issued in connection with:
Dividend reinvestment and employee
benefit plans -- -- 56 (20) -- 156 192
Warrants -- -- 15 -- -- -- 15
Business combinations, net of treasury
stock retired -- -- (184) -- -- 420 236
Treasury stock purchased -- -- -- -- -- (595) (595)
Other items, net -- -- (33) (6) -- (12) (51)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $1,461 $ 5 $4,653 $6,543 $100 $ (60) $12,702
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 2,246 -- -- 2,246
Other comprehensive income:
Net unrealized securities gains arising
during the period, net of taxes of $72 -- -- -- -- 112 -- --
Less: reclassification adjustment for net gains
included in net income, net of taxes of $45 -- -- -- -- 68 -- --
Change in translation adjustment,
net of taxes of $3 -- -- -- -- (4) -- --
----
Other comprehensive income -- -- -- -- 40 -- 40
-------
Total comprehensive income -- -- -- -- -- -- 2,286
Cash dividends declared on common stock
($.92 per share) -- -- -- (467) -- -- (467)
Cash dividends declared on preferred stock -- -- -- (62) -- -- (62)
Cash dividends declared by pooled company
prior to merger -- -- -- (329) -- -- (329)
Redemption of preferred stock (408) -- -- -- -- -- (408)
Common stock issued in connection with:
Dividend reinvestment and employee
benefit plans -- -- (41) (21) -- 293 231
Reissuance of treasury stock -- -- 161 -- -- 595 756
Business combinations -- -- 24 -- -- 21 45
Treasury stock purchased -- -- -- -- -- (1,587) (1,587)
Adjustment to retained earnings reflecting
pooled entity different year-end -- -- -- (23) -- -- (23)
Exchange of Series V preferred stock
for trust preferred securities (84) -- -- -- -- -- (84)
Other items, net -- -- (20) -- -- 1 (19)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 969 $ 5 $4,777 $7,887 $140 $ (737) $13,041
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 2,324 -- -- 2,324
Other comprehensive income:
Net unrealized securities gains arising
during the period, net of taxes of $22 -- -- -- -- 29 -- --
Less: reclassification adjustment for net gains
included in net income, net of taxes of $44 -- -- -- -- 71 -- --
Change in translation adjustment, net of taxes of $2 -- -- -- -- (3) -- --
----
Other comprehensive income -- -- -- -- (45) -- (45)
-------
Total comprehensive income -- -- -- -- -- -- 2,279
Cash dividends declared on common stock
($1.00 per share) -- -- -- (568) -- -- (568)
Cash dividends declared on preferred stock -- -- -- (51) -- -- (51)
Cash dividends declared by pooled company
prior to merger -- -- -- (350) -- -- (350)
Redemption of preferred stock (278) -- -- -- -- -- (278)
Common stock issued in connection with:
Dividend reinvestment and employee
benefit plans -- -- (65) (34) -- 281 182
Treasury stock purchased -- -- -- -- -- (51) (51)
Two-for-one common stock split -- 4 (4) -- -- -- --
Other items, net -- -- (2) 2 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 691 $ 9 $4,706 $9,210 $ 95 $ (507) $14,204
====================================================================================================================================
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
26
<PAGE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
In millions 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,324 $ 2,246 $ 1,860
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 404 340 317
Amortization and impairment of mortgage servicing rights 433 248 188
Amortization of other intangible assets 274 206 175
Provision for credit losses 850 522 444
Deferred income tax expense 210 596 445
Securities gains (115) (113) (48)
Net gains on branch divestitures and sales of business units (254) (243) (245)
Merger-related charges 73 25 180
Originations and purchases of mortgages held for resale (30,336) (15,400) (18,760)
Proceeds from sales of mortgages held for resale 27,839 14,982 20,264
Decrease (increase) in trading assets 134 (647) (96)
Increase in due from brokers/dealers (90) (892) (692)
Increase in accrued receivables, net (136) (138) (421)
(Decrease) increase in due to brokers/dealers (341) 1,237 739
Increase in accrued liabilities, net 214 456 684
Other, net (2,523) 1,138 (1,772)
- ------------------------------------------------------------------------------------------------------------------
Net cash flow (used in) provided by operating activities (1,040) 4,563 3,262
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of securities available for sale (22,274) (14,311) (15,306)
Proceeds from sales of securities available for sale 14,867 8,125 22,140
Proceeds from maturities of securities available for sale 3,807 3,786 8,449
Purchases of securities held to maturity (1,292) (1,492) (1,201)
Proceeds from maturities of securities held to maturity 1,557 1,437 846
Net cash and cash equivalents (paid) received for businesses acquired (226) (525) 2,386
Purchases of credit card loan portfolios (1,870) -- --
Proceeds from sale of loan portfolios by banking subsidiary 4,981 1,295 --
Net increase in loans and leases (5,494) (11,274) (1,052)
Net cash and cash equivalents received from divestitures and sales
of business units 213 3,887 805
Purchase of investment in bank-owned life insurance (900) (650) --
Purchases of mortgage servicing rights (485) (271) (293)
Purchases of premises and equipment (691) (476) (401)
- ------------------------------------------------------------------------------------------------------------------
Net cash flow (used in) provided by investing activities (7,807) (10,469) 16,373
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits 4,925 (405) (4,370)
Net (decrease) increase in short-term borrowings (918) 5,897 (10,654)
Proceeds from issuance of long-term debt 7,585 1,992 2,127
Repayments of long-term debt (1,365) (2,261) (2,397)
Proceeds from issuance of common stock 182 987 207
Proceeds from issuance of preferred stock -- -- 635
Redemption and repurchase of common and preferred stock (329) (1,995) (691)
Cash dividends paid (937) (858) (793)
- ------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) financing activities 9,143 3,357 (15,936)
- ------------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash (29) (17) (15)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 267 (2,566) 3,684
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 10,674 13,240 9,556
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,941 $ 10,674 $ 13,240
==================================================================================================================
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
27
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Fleet Boston Corporation (Fleet Boston
or the corporation) conform to generally accepted accounting principles and
prevailing practices within the financial services industry. The corporation is
a diversified financial services company headquartered in Boston, Massachusetts,
and is organized along functional lines of business, which include: Commercial
and Retail Banking, Global Banking and Financial Services and the National
Consumer Group.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
The following is a summary of the significant accounting policies.
Fleet-BankBoston Merger. On October 1, 1999, BankBoston Corporation (BankBoston)
merged with and into Fleet Financial Group, Inc. (Fleet) (the Merger). Following
the Merger, Fleet was renamed Fleet Boston Corporation. The Merger was accounted
for as a pooling of interests and, accordingly, the financial information
included in the accompanying supplemental consolidated financial statements and
notes has been restated to present the combined financial condition and results
of operations of both companies as if the Merger had been in effect for all
periods presented. Further details pertaining to the Merger are presented in
Note 2. Mergers, Acquisitions and Divestitures.
Basis of Presentation. The supplemental consolidated financial statements of
Fleet Boston include the accounts of the corporation and its subsidiaries. All
material intercompany transactions and balances have been eliminated. Certain
prior year amounts have been reclassified to conform to current year
classifications. All common share amounts and associated ratios were adjusted to
reflect the corporation's two-for-one common stock split which was effected
during 1998.
The supplemental consolidated financial statements of the corporation have
been prepared to give retroactive effect to the Merger with BankBoston on
October 1, 1999 as required by generally accepted accounting principles
pertaining to a business combination accounted for by the pooling of interests
method. Although these financial statements do not extend through the date of
consummation, they will become the historical consolidated financial statements
of the corporation after financial statements covering the date of consummation
of the business combination are issued.
Cash and Cash Equivalents. For purposes of the Supplemental Consolidated
Statements of Cash Flows, the corporation defines cash and cash equivalents to
include cash, due from banks and interest-bearing deposits.
Securities Available for Sale and Held to Maturity. Debt and equity securities
that are not purchased in connection with the corporation's trading activities
are classified at the time of purchase, based on management's intentions, as
held to maturity or available for sale.
Securities held to maturity are debt securities that management has the
positive intent and ability to hold to maturity. Securities held to maturity are
stated at cost, net of the amortization of any premium and the accretion of any
discount. Securities available for sale are those that management intends to
hold for an indefinite period of time, including securities used as part of the
asset-liability management strategy, that may be sold in response to changes in
interest rates, prepayment risk, liquidity needs or other similar factors.
Within the available for sale category, equity securities that have a readily
determinable fair value and debt securities are reported at fair value, with
unrealized gains and losses recorded, net of tax, as a separate component of
stockholders' equity. Equity securities that do not have a readily determinable
fair value are reported at cost. Realized gains and losses, which are computed
using the specific identification method, and unrealized losses on individual
securities that are deemed to be other than temporary are recorded in capital
markets revenue.
Trading Assets and Liabilities. Trading assets include securities held in
anticipation of short-term market movements and for resale to customers.
Trading liabilities include obligations to deliver securities not yet purchased.
Trading assets and liabilities also include derivative financial instruments,
primarily interest-rate derivatives, including futures and forwards,
interest-rate swaps and interest-rate options, as well as foreign exchange
products.
The corporation values trading instruments at fair value. Trading
securities and derivative trading positions are valued using quoted market
prices, when available. If quoted market prices are not available, the fair
value is estimated by using pricing models, quoted prices of instruments with
similar characteristics or discounted cash flows. Realized and unrealized gains
and losses are recorded in trading profits and commissions, a component of
capital markets revenue. Foreign exchange positions are valued at prevailing
market rates on a present value basis, and the resulting realized and unrealized
gains and losses are recorded in foreign exchange revenue, a component of
capital markets revenue. Interest on trading instruments, including off-balance
sheet instruments, is included in interest income.
Loans and Lease Financing. Loans are stated at the principal amounts
outstanding, net of charge-offs and unearned income, if any. Lease financing
receivables, including leveraged leases, are reported at the aggregate of lease
payments receivable and estimated residual values, net of unearned and deferred
income, including unamortized investment credits. Leveraged leases are reported
net of non-recourse debt. Unearned income is recognized to yield a level rate of
return on the net investment in the leases.
28
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Loans and lease financing receivables are placed on nonaccrual status as a
result of past-due status or a judgment by management that, although payments
are current, such action is prudent. Commercial loans and leases on which
payments are past due 90 days or more are placed on nonaccrual status, unless
they are well-secured and in the process of collection or renewal. Certain
consumer loans, including residential mortgage and installment loans, are placed
on nonaccrual status at 120 days past due and other consumer loans, including
credit card accounts and lines of credit, are placed on nonaccrual status at 180
days past due. When a loan or lease is placed on nonaccrual status, interest
accrued, but uncollected, is generally reversed against interest income. Cash
receipts on nonaccruing commercial loans and leases are generally applied to
reduce the unpaid principal balance, and cash receipts on nonaccruing consumer
loans are recognized in income on a cash basis.
Loans and leases can be returned to accrual status when they become
current as to principal and interest or demonstrate a period of performance
under the contractual terms and, in management's opinion, are fully collectible.
Reserve for Credit Losses. The corporation continually evaluates the reserve for
credit losses by performing detailed reviews of certain individual loans and
leases, reviewing historical net charge-off experience of the portfolio as a
whole, evaluating prevailing economic and business conditions, including
emerging markets risk, reviewing industry concentrations, and changes in the
size and characteristics of the portfolio, as well as other pertinent factors.
The reserve for credit losses related to loans that are identified as impaired,
which are primarily commercial and commercial real estate loans on nonaccrual
status, is based on discounted cash flows using the loan's effective interest
rate, or the fair value of the collateral for collateral-dependent loans, or the
observable market price of the impaired loan. Based on these analyses, the
reserve for credit losses is maintained at levels considered adequate by
management to provide for credit losses inherent in these portfolios.
Loans and leases, or portions thereof, deemed uncollectible are charged
off against the reserve, while recoveries of amounts previously charged off are
credited to the reserve. Amounts are charged off once the probability of loss
has been established, giving consideration to such factors as the customer's
financial condition, underlying collateral and guarantees, and general and
industry economic conditions.
Mortgages Held for Resale. Mortgages held for resale are recorded at the lower
of aggregate cost or market value. Market value is determined by outstanding
commitments from investors or by current investor yield requirements.
Mortgage Servicing Rights (MSRs). The corporation recognizes rights to service
mortgage loans as separate assets. The total cost of mortgage loans sold or
securitized is allocated between loans and servicing rights based upon the
relative fair values of each. Purchased MSRs are initially recorded at fair
value. All MSRs are subsequently carried at the lower of the initial carrying
value or fair value. Fair values are estimated based on market prices for
similar MSRs and on the discounted anticipated future net cash flows considering
market loan prepayment predictions, interest rates, servicing costs and other
economic factors. For purposes of impairment evaluation and measurement, the
corporation stratifies MSRs based on predominant risk characteristics of the
underlying loans, including loan type, amortization type (fixed or adjustable)
and note rate. To the extent that the carrying value of MSRs exceeds fair value
by individual strata, a valuation reserve is established, which is adjusted in
the future as the value of MSRs increases or decreases. The cost of MSRs is
amortized in proportion to and over the period of estimated net servicing
income.
Due to/Due from Brokers/Dealers. Receivables from brokers/dealers and clearing
organizations include amounts receivable for securities failed to deliver,
certain deposits for securities borrowed, amounts receivable from clearing
organizations relating to open transactions, good-faith and margin deposits, and
commissions and floor-brokerage receivables. Payables to brokers/dealers and
clearing organizations include amounts payable for securities failed to receive,
certain deposits received for securities loaned, amounts payable to clearing
organizations on open transactions, and floor-brokerage payables. In addition,
the net receivable or payable arising from unsettled trades is reflected in
these classifications.
Intangible Assets. Intangible assets are generally amortized on a straight-line
basis over the estimated period benefited. The excess of cost over the fair
value of net assets acquired in business combinations (goodwill) is amortized
over appropriate periods given the characteristics of the assets acquired. In
certain acquisitions, a core deposit intangible asset is recorded and amortized
over a period not to exceed ten years. Purchased credit card intangibles are
amortized over a period not to exceed six years. The corporation periodically
reviews its intangible assets for events or changes in circumstances that may
indicate that the carrying amount of the assets may not be recoverable, in which
case an impairment charge is recorded.
Income Taxes. The corporation records current tax liabilities or assets through
charges or credits to the current tax provision for the estimated taxes payable
or refundable for the current year. The corporation records deferred tax assets
and liabilities for future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A deferred
tax valuation allowance is established if it is more likely than not that all or
a portion of the corporation's deferred tax assets will not be realized.
29
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Risk-Management Activities. The corporation enters into certain interest-rate
instruments, including interest-rate swaps, cap and floor agreements, and
futures contracts to manage exposure to interest-rate risk associated with
interest-earning assets and interest-bearing liabilities. For those
interest-rate instruments that alter the repricing characteristics of assets or
liabilities, the net differential to be paid or received on the instruments is
treated as an adjustment to the yield on the underlying assets or liabilities
(the accrual method).
To qualify for accrual accounting, the interest-rate instrument must be
designated to specific assets or liabilities or pools of similar assets or
liabilities and must effectively alter the interest-rate characteristics of the
related assets or liabilities. For instruments that are designated to
floating-rate assets or liabilities to be effective, there must be high
correlation between the floating interest-rate index on the underlying asset or
liability and the offsetting rate on the derivative. The corporation measures
initial and ongoing correlation by statistical analysis of the relative
movements of the interest-rate indices over time.
If correlation were to cease on any interest-rate instrument hedging net
interest income, it would then be accounted for as a trading instrument. If an
interest-rate instrument hedging net interest income is terminated, the gain or
loss is deferred and amortized over the shorter of the remaining contractual
life of the terminated risk-management instrument or the maturity of the
designated asset or liability. If the designated asset or liability matures, is
sold, is settled or its balance falls below the notional amount of the
instrument, the hedge is usually terminated; if not, accrual accounting is
discontinued to the extent that the notional amount exceeds the balance, and
accounting for trading instruments is applied on the excess amount.
The corporation also uses interest-rate instruments and combinations of
interest-rate instruments to hedge the value of the corporation's mortgage
servicing portfolio. Such instruments are designated as hedges of specific
strata of MSRs. To qualify for hedge accounting, net changes in value of the
hedges are expected to be highly correlated with changes in the value of the
hedged MSRs, and combinations of options purchased and sold must be entered into
simultaneously and result in a net purchased option position. Changes in the
value of risk-management instruments are treated as adjustments to the carrying
value of the hedged MSRs.
If correlation were to cease on the interest-rate instrument hedging MSRs,
they would then be accounted for as trading instruments. If an interest-rate
instrument hedging MSRs is terminated, the gain or loss is treated as an
adjustment to the carrying value of hedged MSRs and amortized over its
remaining life.
The corporation also enters into foreign exchange contracts to hedge a
portion of its own foreign exchange exposure, including foreign currency
positions. Such contracts are revalued at the spot rate, with any forward
premium or discount amortized over the life of the contract in net interest
income.
Foreign Currency Translation. The corporation translates the financial
statements of its foreign operations. A functional currency is designated for
each foreign unit, generally the currency of the primary economic environment in
which it operates. Where the functional currency is not the U.S. dollar, assets
and liabilities are translated into U.S. dollars at period-end exchange rates,
while income and expenses are translated using average rates for the period. The
resulting translation adjustments and any related hedge gains and losses are
recorded, net of tax, as a separate component of stockholders' equity.
For foreign units where the functional currency is the U.S. dollar,
including units that operate in a hyperinflationary environment, the financial
statements are translated into U.S. dollars using period-end exchange rates for
monetary assets and liabilities, exchange rates in effect on the date of
acquisition for premises and equipment (and related depreciation), and the
average exchange rate during the period for income and expenses. The resulting
translation adjustments and related hedge gains and losses for these units are
recorded in current period income.
The corporation hedges a portion of its exposure to translation gains and
losses in overseas branches and foreign subsidiaries through the purchase of
foreign exchange rate contracts and through investments in fixed assets and
securities.
Note 2.
Mergers, Acquisitions and Divestitures
Fleet-BankBoston Merger. As previously disclosed, BankBoston merged with and
into Fleet on October 1, 1999. The Merger was accounted for as a pooling of
interests and under the terms of the merger agreement, Fleet common shares were
exchanged for substantially all of the outstanding common shares of BankBoston
(based on an exchange ratio of 1.1844 Fleet shares for each share of
BankBoston). The financial information included in these supplemental
consolidated financial statements has been restated to present the combined
results of operations, financial postion and changes in cash flows of both
companies as if the Merger had been in effect for all periods presented.
In connection with regulatory approval of the Merger, the corporation has
signed definitive agreements to divest approximately $13 billion in deposits and
$9 billion in loans.
30
<PAGE>
Notes To Supplemental Consolidated Financial Statements
The following table presents net interest income, net income and diluted
earnings per common share reported by each of the companies and on a combined
basis.
Year ended December 31
In millions,
except per share amounts 1998 1997 1996
- --------------------------------------------------------------------------------
Net interest income:
Fleet $3,869 $3,700 $3,462
BankBoston 2,526 2,428 2,340
- --------------------------------------------------------------------------------
Combined $6,395 $6,128 $5,802
- --------------------------------------------------------------------------------
Net income:
Fleet $1,532 $1,367 $1,210
BankBoston 792 879 650
- --------------------------------------------------------------------------------
Combined $2,324 $2,246 $1,860
- --------------------------------------------------------------------------------
Diluted earnings per share:
Fleet $ 2.52 $ 2.30 $ 1.96
BankBoston 2.64 2.82 1.96
Combined 2.41 2.33 1.84
================================================================================
On August 31, 1998, the corporation completed its acquisition of the investment
banking operations of Robertson Stephens from BankAmerica Corporation for $400
million in cash. The acquired operations were merged into one of the
corporation's Section 20 subsidiaries. In connection with the acquisition and in
addition to the purchase price, the corporation agreed to pay $400 million,
composed of stock options with an estimated value of approximately $100 million
and approximately $300 million in cash compensation, to employees of the
acquired operations over the next three and one-half years. In connection with
this agreement, compensation expense of $94 million was recorded in 1998. Since
this acquisition was accounted for under the purchase method of accounting, the
results of the acquisition are included in the accompanying supplemental
consolidated financial statements for the periods subsequent to the acquisition
date. Goodwill of approximately $300 million is being amortized on a
straight-line basis over 25 years.
On February 1, 1998, the corporation consummated its acquisition of The
Quick & Reilly Group, Inc. (Quick & Reilly), one of the country's largest
discount brokerage firms. The acquisition was accounted for as a pooling of
interests and, therefore, these supplemental consolidated financial statements
have been restated for all periods presented to include the results of
operations, financial position and changes in cash flows of Quick & Reilly.
Under the terms of the Quick & Reilly merger, approximately 44 million Fleet
Boston common shares were exchanged for substantially all of the outstanding
Quick & Reilly common shares at an exchange ratio of 1.156 shares of Fleet
Boston for each share of Quick & Reilly.
On February 20, 1998, the corporation consummated its acquisition of the
domestic consumer credit card operations of Advanta Corporation. Since this
acquisition was accounted for under the purchase method of accounting, the
results of the acquisition are included in the accompanying supplemental
consolidated financial statements for the periods subsequent to the acquisition
date. The acquisition provided approximately $11.5 billion of managed credit
card receivables, of which approximately $2 billion reside on the balance sheet
in consumer loans. A purchased credit card intangible asset of approximately
$150 million was recorded and is being amortized over 6 years. Additionally,
goodwill of approximately $500 million was recorded and is being amortized on a
straight-line basis over 15 years. Subject to the level of earnings from these
operations, Fleet Boston may be required to make additional payments of up to
$100 million over 5 years, which if paid, will be recorded as goodwill.
On February 10, 1998, the corporation completed the sale of its 26 percent
minority interest in HomeSide, Inc. (HomeSide). The sale of the minority
interest in HomeSide, an independent mortgage banking company formed in 1996 in
connection with the corporation's sale of one of its mortgage banking
subsidiaries, resulted in a pretax gain of approximately $165 million.
On December 18, 1998, the corporation acquired Merrill Lynch Specialists,
Inc. (MLSI), a New York Stock Exchange (NYSE) specialist firm, from Merrill
Lynch & Co., Inc. The management staff and listings of MLSI merged with JJC
Specialist, a division of Fleet Securities, Inc. Goodwill of approximately $106
million was recorded and is being amortized on a straight-line basis over 15
years.
During the fourth quarter of 1998, the corporation entered into a
definitive agreement with Sanwa Bank, Ltd. to purchase its subsidiary, Sanwa
Business Credit (Sanwa), a leasing and asset-based lending company. Sanwa offers
a wide variety of asset-based lending, equipment leasing and vendor finance
programs throughout the United States and has approximately $6 billion in
assets. This acquisition closed on February 1, 1999. Goodwill of approximately
$385 million was recorded and is being amortized on a straight-line basis over
25 years.
On December 10, 1997, Fleet Boston consummated its acquisition of Columbia
Management Company (Columbia), a Portland, Oregon-based asset management company
with approximately $21 billion of assets under management. Goodwill of
approximately $466 million was initially recorded in connection with this
transaction and is being amortized on a straight-line basis over 30 years.
Fleet Boston may be required to make additional payments of up to $110 million
in accordance with an earnout calculation which, if paid, will be recorded as
goodwill. Fleet Boston accounted for this acquisition under the purchase method
of accounting. Accordingly, the corporation's financial statements include the
effect of Columbia for the periods subsequent to the December 10, 1997
acquisition date.
During 1997, the corporation sold Option One, a mortgage banking
subsidiary; its corporate trust division; its indirect auto lending portfolio;
and Fidelity Acceptance Corporation (FAC), a consumer finance subsidiary. The
pretax net gains recorded on these sales totaled $243 million.
On May 1, 1996, the corporation acquired from National Westminster Bank
Plc substantially all of the net assets of certain subsidiaries of NatWest
Bancorp (NatWest). The acquisition of NatWest contributed approximately $13
billion and $18 billion of loans and deposits, respectively, and approximately
300 branches in New York and New Jersey. In
31
<PAGE>
Notes To Supplemental Consolidated Financial Statements
accordance with the NatWest merger agreement Fleet Boston paid a purchase price
at closing of $2.7 billion. Goodwill of approximately $660 million was initially
recorded in connection with this transaction and is being amortized on a
straight-line basis over 15 years. Subject to the level of earnings of NatWest,
Fleet Boston may be required to make additional earnout payments of up to $560
million over eight years to be recorded as goodwill, if paid, of which $142
million was paid in 1998 and $270 million from inception until December 31,
1998. The transaction was accounted for under the purchase method of accounting.
Accordingly, the corporation's financial statements include the effect of
NatWest for the period subsequent to the May 1, 1996 acquisition date.
On July 29, 1996, the merger with BayBanks, Inc. (BayBanks Merger) was
completed. Under the terms of the BayBanks Merger, which was accounted for as a
pooling of interests, approximately 103 million Fleet Boston common shares were
exchanged for substantially all of the outstanding shares of BayBanks, Inc. at
an exchange ratio of 5.21 shares of Fleet Boston for each share of BayBanks,
Inc. The financial information included in these supplemental consolidated
financial statements has been restated to present the combined financial
condition and results of operations of both companies as if the BayBanks Merger
had been in effect for all periods presented. In connection with the BayBanks
Merger, the corporation recorded merger-related charges of $180 million. In
addition, in connection with regulatory approval of the transaction, in 1996,
the corporation sold 20 branches of the resulting combined entity, comprising a
total of approximately $500 million of loans and $700 million of deposits, and
recorded a pretax gain of approximately $47 million.
Note 3.
Securities
<TABLE>
<CAPTION>
1998 1997
Gross Gross Gross Gross
December 31 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
In millions Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government
agencies $ 1,821 $ 24 $ -- $ 1,845 $ 3,435 $ 33 $ 2 $ 3,466
Mortgage-backed securities 14,166 252 38 14,380 10,602 170 3 10,769
Other debt securities 4,188 36 89 4,135 2,521 16 24 2,513
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 20,175 312 127 20,360 16,558 219 29 16,748
- ---------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 446 7 14 439 392 62 7 447
Other securities 1,043 -- -- 1,043 864 -- -- 864
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale 21,664 319 141 21,842 17,814 281 36 18,059
- ---------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
State and municipal 1,056 5 -- 1,061 1,238 5 -- 1,243
U.S. Treasury and government
agencies 307 4 -- 311 353 4 1 356
Mortgage-backed securities 139 1 -- 140 173 -- -- 173
Other debt securities 25 -- -- 25 22 -- -- 22
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities held to
maturity 1,527 10 -- 1,537 1,786 9 1 1,794
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities $ 23,191 $ 329 $ 141 $ 23,379 $ 19,600 $ 290 $ 37 $ 19,853
=================================================================================================================================
</TABLE>
Proceeds from sales of available for sale securities during 1998, 1997 and 1996
were $15 billion, $8 billion and $22 billion, respectively. Gross gains of $165
million and gross losses of $28 million were realized on those sales in 1998,
gross gains of $139 million and gross losses of $26 million were realized on
those sales in 1997, and gross gains of $117 million and gross losses of $69
million were realized on those sales in 1996. In addition, the corporation
recognized a loss of $22 million in 1998 resulting from the write-down of
certain securities available for sale which experienced a decline in value that
was deemed other than temporary.
The carrying values, by contractual maturity, of debt securities held to
maturity and securities available for sale are shown in the following tables.
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
32
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Maturities of Securities Available for Sale
<TABLE>
<CAPTION>
December 31, 1998 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury and
government agencies $ 680 $ 487 $ 338 $ 340 $ 1,845
Mortgage-backed securities 2 88 2,193 12,097 14,380
Other debt securities 1,339 1,048 949 799 4,135
- ---------------------------------------------------------------------------------------
Total debt securities $ 2,021 $ 1,623 $ 3,480 $13,236 $20,360
- ---------------------------------------------------------------------------------------
Percent of total debt securities 9.93% 7.97% 17.09% 65.01% 100%
Weighted average yield(a) 8.67 8.71 6.04 6.53 6.83
- ---------------------------------------------------------------------------------------
Amortized cost $ 2,031 $ 1,611 $ 3,437 $13,096 $20,175
========================================================================================
</TABLE>
Maturities of Securities Held to Maturity
<TABLE>
<CAPTION>
December 31, 1998 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury and
government agencies $ 7 $ 110 $ 190 $ -- $ 307
Mortgage-backed securities -- -- 28 111 139
State and municipal 954 76 22 4 1,056
Other debt securities -- 16 8 1 25
- ---------------------------------------------------------------------------------------
Total debt securities $ 961 $ 202 $ 248 $ 116 $ 1,527
- ---------------------------------------------------------------------------------------
Percent of total debt securities 62.93% 13.23% 16.24% 7.60% 100%
Weighted average yield(a) 5.69 7.08 7.23 6.53 6.17
- ---------------------------------------------------------------------------------------
Market value $ 961 $ 203 $ 256 $ 117 $ 1,537
========================================================================================
</TABLE>
(a) A tax-equivalent adjustment has been included in the calculations of the
yields to reflect this income as if it had been fully taxable. The tax-
equivalent adjustment is based upon the applicable federal and state
income tax rates.
Note 4.
Loans and Leases
<TABLE>
<CAPTION>
December 31
In millions 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Loans and leases:
Commercial and industrial $ 54,447 $ 48,239 $ 42,247 $ 36,095 $ 32,967
Residential real estate 11,243 12,589 11,232 15,749 15,608
Consumer 18,546 19,027 23,413 18,862 16,259
Commercial real estate:
Construction 1,301 1,162 1,358 1,184 1,057
Interim/permanent 6,875 7,740 8,307 7,193 8,529
Lease financing 5,750 5,013 4,140 3,557 2,726
- --------------------------------------------------------------------------------------------------------
Total domestic loans and leases,
net of unearned income 98,162 93,770 90,697 82,640 77,146
- --------------------------------------------------------------------------------------------------------
International:
Loans and leases:
Commercial 11,126 10,817 8,920 7,799 6,385
Consumer 2,806 1,958 1,305 997 864
- --------------------------------------------------------------------------------------------------------
Total international loans and leases,
net of unearned income 13,932 12,775 10,225 8,796 7,249
- --------------------------------------------------------------------------------------------------------
Total loans and leases, net of unearned income(a) $112,094 $106,545 $100,922 $ 91,436 $ 84,395
========================================================================================================
</TABLE>
(a) Net of unearned income of $1.8 billion, $1.4 billion, $1.2 billion, $759
million and $809 million, at December 31, 1998, 1997, 1996, 1995, and
1994, respectively.
Concentrations of Credit Risk. Although the corporation is engaged in business
globally, the lending done by the domestic banking subsidiaries is primarily
concentrated in New England, New York and New Jersey. The lending done by the
international divisions is primarily concentrated in Latin America.
Note 5.
Reserve for Credit Losses
Year ended December 31
In millions 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 2,144 $ 2,371 $ 2,211
Provision charged to income 850 522 444
Loans and leases charged off (1,050) (880) (794)
Recoveries of loans and leases
charged off 216 225 194
Acquisitions/divestitures/other 146 (94) 316
- --------------------------------------------------------------------------------
Balance at end of year $ 2,306 $ 2,144 $ 2,371
================================================================================
"Acquisitions/Divestitures/Other" primarily related to the acquisitions of
credit card receivables and Deutsche Bank Argentina in 1998, the sale of FAC in
1997, and the acquisition of NatWest in 1996.
Note 6.
Nonperforming Assets (NPAs)
December 31
Dollars in millions 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Nonperforming loans
and leases:
Current or less than
90 days past due $ 220 $ 233 $ 280 $ 174 $ 289
Noncurrent 420 479 818 639 797
Other real estate
owned (OREO) 44 60 77 128 238
- --------------------------------------------------------------------------------
Total NPAs(a) $ 684 $ 772 $1,175 $ 941 $1,324
- --------------------------------------------------------------------------------
NPAs as a percent
of outstanding loans,
leases and OREO .61% .72% 1.16% 1.03% 1.56%
- --------------------------------------------------------------------------------
Accruing loans and
leases contractually
past due 90 days or
more $ 275 $ 233 $ 288 $ 214 $ 152
================================================================================
(a) Excludes $46 million, $214 million, and $265 million of NPAs classified as
held for sale by accelerated disposition at December 31, 1998, 1997 and
1996, respectively.
33
<PAGE>
Notes To Supplemental Consolidated Financial Statements
The gross interest income that would have been recorded if the nonperforming
loans and leases had been current in accordance with their original terms, and
had been outstanding throughout the period (or since origination if held for
part of the period), was $62 million, $83 million and $111 million in 1998, 1997
and 1996, respectively. The actual amount of interest income on those loans and
leases included in net income for the period was $20 million, $17 million and
$27 million in 1998, 1997 and 1996, respectively.
The following table displays the status of impaired loans and leases,
which are primarily commercial and commercial real estate loans on nonaccrual
status:
Impaired Loans and Leases
December 31
In millions 1998 1997
- --------------------------------------------------------------------------------
Impaired loans and leases with a reserve $297 $360
Impaired loans and leases without a reserve 114 129
- --------------------------------------------------------------------------------
Total impaired loans and leases $411 $489
- --------------------------------------------------------------------------------
Reserve for impaired loans and leases(a) $ 76 $103
- --------------------------------------------------------------------------------
Average balance of impaired loans and
leases during the year ended December 31 $439 $606
================================================================================
(a) The reserve for impaired loans and leases is part of Fleet Boston's
overall reserve for credit losses.
Substantially all of the impaired loans and leases were on nonaccrual status and
the amount of interest income recognized on impaired loans and leases was not
material. The corporation had no material outstanding commitments to lend
additional funds to customers whose loans and leases have been placed on
nonaccrual status or the terms of which have been modified.
Note 7.
Mortgage Servicing Rights
Year ended December 31
In millions 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 1,768 $ 1,566 $ 1,809
Additions 803 586 430
Sales (66) (20) (573)
Deferred hedge (gain)/loss (667) (116) 40
Amortization/Impairment charge (433) (248) (188)
Impairment reserve -- -- 48
- --------------------------------------------------------------------------------
Balance at end of year $ 1,405 $ 1,768 $ 1,566
================================================================================
Various interest-rate instruments, which are designated as hedges of the MSRs,
are used to manage potential impairment. Changes in fair value of the hedges are
recorded as adjustments to the carrying value of the MSRs and related hedges.
During 1998 and 1997, net hedge gains of $667 million and $116 million,
respectively, were deferred and recorded as adjustments to the carrying value of
the MSRs and the related hedges. The aggregate fair value of the corporation's
MSRs was approximately $1.8 billion as of December 31, 1998. The level of
amortization increased due to an increase in prepayments resulting from a
decline in mortgage interest rates. (See Footnote 17 for further discussion of
MSR risk-management).
Note 8.
Merger-Related Liabilities
During 1998 and 1997, the corporation incurred $73 million and $25 million,
respectively, of merger-related charges in connection with the acquisitions of
Quick & Reilly and the consumer credit operations of Advanta. At December 31,
1998, the remaining accrued liabilities relating to these charges were $33
million. These charges are direct incremental costs associated with the
acquisitions and are presented in the following table:
Components of Merger-Related Charges
Year ended December 31
In millions 1998 1997
- --------------------------------------------------------------------------------
Professional fees $ 8 $18
Personnel costs 30 7
Other expenses 35 --
- --------------------------------------------------------------------------------
Total $73 $25
================================================================================
Professional fees pertain to investment banking, attorneys, and accounting fees.
Personnel costs relate primarily to the costs of employee severance, retention
payments, and employee assistance for separated employees. Other merger expenses
consist primarily of facilities-related exit costs, conversion costs and the
write off of various assets.
34
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Note 9.
Short-Term Borrowings
<TABLE>
<CAPTION>
Securities
Federal Sold Under Other Total
Funds Agreements to Short-Term Short-Term
Dollars in millions Purchased Repurchase Borrowings Borrowings
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Balance at December 31 $ 3,953 $ 5,744 $ 9,479 $19,176
Highest balance at any month-end 5,649 7,642 16,034 29,325
Average balance for the year 5,043 5,380 11,246 21,669
Weighted average interest rate as of December 31 4.53% 4.31% 6.11% 5.25%
Weighted average interest rate paid for the year 5.48 4.65 6.51 5.81
- --------------------------------------------------------------------------------------------------------------
1997
Balance at December 31 $ 4,537 $ 4,419 $10,268 $19,224
Highest balance at any month-end 6,014 5,200 11,617 22,831
Average balance for the year 4,394 4,686 8,047 17,127
Weighted average interest rate as of December 31 5.88% 4.96% 6.59% 6.07%
Weighted average interest rate paid for the year 6.05 4.90 6.92 6.14
- --------------------------------------------------------------------------------------------------------------
1996
Balance at December 31 $ 2,457 $ 4,417 $ 6,453 $13,327
Highest balance at any month-end 4,266 5,670 11,204 21,140
Average balance for the year 3,599 4,578 6,920 15,097
Weighted average interest rate as of December 31 5.45% 4.88% 9.16% 7.04%
Weighted average interest rate paid for the year 6.10 4.89 7.90 6.56
==============================================================================================================
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
generally mature within thirty days of the transaction date. The corporation
generally maintains the control of the securities in repurchase transactions.
Other short-term borrowings generally mature within 90 days, although commercial
paper may have a term of up to 270 days. Total credit facilities available were
$1.9 billion with no amount outstanding at December 31, 1998 and 1997.
35
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Note 10.
Long-Term Debt
December 31 Maturity
Dollars in millions Date 1998 1997
- --------------------------------------------------------------------------------
Senior notes and debentures:
Parent company:
Floating-rate MTNs 1998-2005 $ 1,460 $ 545
6.36%-6.849% MTNs 1998-2005 95 195
6.00% notes 1998 -- 250
7.25% notes 1999 200 200
7.125% notes 2000 250 250
Floating-rate notes 2000 -- 50
Other 2013 1 1
- --------------------------------------------------------------------------------
Total parent company 2,006 1,491
- --------------------------------------------------------------------------------
Affiliates:
MTNs 6.24%-7.06% 1998-2003 130 192
6.50% notes 1999-2000 350 350
FHLB borrowings 1998-2018 238 244
Floating-rate bank notes 1999-2026 2,859 12
Floating-rate MTNs 1998-2004 128 161
Fixed-rate bank notes 2000-2012 307 5
MTNs 5.49%-15.13% 1998-2004 247 157
Other 1998-2026 67 72
- --------------------------------------------------------------------------------
Total affiliates 4,326 1,193
- --------------------------------------------------------------------------------
Total senior notes and debentures 6,332 2,684
- --------------------------------------------------------------------------------
Subordinated notes and debentures:
Parent company:
Floating-rate subordinated notes 1998 -- 206
7.625%-9.85% subordinated notes 1999 450 450
Floating-rate subordinated notes 2001 186 186
9.00%-9.90% subordinated notes 2001 325 325
6.875%-7.20% subordinated notes 2003 400 400
6.625%-8.125% subordinated notes 2004 549 549
6.625% subordinated notes 2005 349 349
7.125% subordinated notes 2006 300 300
8.625% subordinated notes 2007 107 107
6.375% subordinated notes 2008 500 --
7.00%-7.75% subordinated MTNs 2011-2013 320 295
6.70%-6.875% subordinated notes 2028 750 --
- --------------------------------------------------------------------------------
Total parent company 4,236 3,167
- --------------------------------------------------------------------------------
Affiliates:
8.375% subordinated notes 1998-2002 200 212
8.00% subordinated notes 2004 199 199
8.625% subordinated notes 2005 250 250
7.375% subordinated notes 2006 200 200
7.00% subordinated notes 2007 397 397
6.38% subordinated notes 2008 748 --
- --------------------------------------------------------------------------------
Total affiliates 1,994 1,258
- --------------------------------------------------------------------------------
Total subordinated notes and
debentures 6,230 4,425
- --------------------------------------------------------------------------------
Company-obligated mandatorily
redeemable capital securities of
Capital Trusts(a) 1,849 1,082
- --------------------------------------------------------------------------------
Total long-term debt $14,411 $ 8,191
================================================================================
(a) See Capital Trust Securities on the following page.
Fleet Boston had shelf registration statements with the Securities and Exchange
Commission (SEC), providing for the issuance of common and preferred stock,
senior or subordinated debt securities, and other debt securities with $3.8
billion of funds available at December 31, 1998. At September 30, 1999, the
corporation had availability of $852 million.
The subordinated notes all provide for single principal payments at
maturity with the exception of $186 million of floating-rate subordinated notes
due 2001, $150 million of 9.85% subordinated notes and $320 million of
subordinated medium-term notes (MTNs). The subordinated MTNs are callable as
follows: $100 million in 2000; $195 million in 2001, and $25 million in 2002.
The floating-rate subordinated notes due 2001 are currently callable on any
interest payment date. The 9.85% subordinated notes matured on June 1, 1999.
During 1998, the corporation issued $1.2 billion of senior floating- and
fixed-rate MTNs due in 1999 through 2005 and $1.3 billion of subordinated debt
with interest rates ranging from 6.375% to 7.00%. All of the parent company
fixed-rate senior notes pay interest semiannually, provide for single principal
payments and are not redeemable prior to maturity.
Long-term senior borrowings of affiliates include $350 million of 6.50%
notes and $130 million of MTNs with rates ranging from 6.24% to 7.06% issued by
Fleet Mortgage Group.
The banking subsidiaries issued $3.1 billion of fixed- and floating-rate
bank notes during 1998. The fixed rates range from 6.45% to 7.18%. The
floating-rate bank notes pay interest at rates tied to the one-month or
three-month London Interbank Offered Rate (LIBOR) reset monthly or quarterly.
During 1998, the banking subsidiaries also issued $750 million of 6.38%
subordinated notes due 2008. Additionally, $161 million of senior floating- and
fixed-rate medium-term notes were issued by the corporation's Brazilian banking
subsidiary.
As part of its interest-rate risk-management process, the corporation uses
interest-rate swaps to modify the repricing and maturity characteristics of
certain long-term debt. These interest-rate risk-management activities are
discussed in greater detail in Note 17 to the Supplemental Consolidated
Financial Statements.
The aggregate payments required to retire long-term debt are: $1.233
billion in 1999; $2.784 billion in 2000; $2.164 billion in 2001; $396 million in
2002; $850 million in 2003; $934 million in 2004; and $6.050 billion thereafter.
The corporation has nine statutory business trusts, of which the
corporation owns all of the common stock. These trusts exist for the sole
purpose of issuing trust securities and investing the proceeds thereof in an
equivalent amount of junior subordinated debt securities of Fleet Boston.
The junior subordinated debt securities are unsecured obligations of Fleet
Boston and are subordinate and junior in right of payment to all present and
future senior and subordinated indebtedness and certain other financial
obligations of Fleet Boston. The subordinated debentures and the related income
statement effects are eliminated in the corporation's supplemental consolidated
financial statements. Fleet Boston fully and unconditionally guarantees each
Trust's obligations under the preferred securities and capital securities. The
aggregate amount of such debentures outstanding totaled $1.849 billion and
$1.082 billion at December 31, 1998 and 1997, respectively. A summary of the
Capital Trust Securities issued and outstanding is as follows:
36
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Capital Trust Securities
<TABLE>
<CAPTION>
Earliest
Amount Outstanding Original Prepayment Distribution Liquidation
(in millions) Issue Option Stated Payment Preference
December 31 1998 1997 Date Rate Date Maturity Frequency per Trust
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BankBoston Capital
Trust I $ 250 $ 250 11/26/96 8.25% 12/15/2006 12/15/2026 semi-annually $1,000
BankBoston Capital
Trust II 250 250 12/10/96 7.75% 12/15/2006 12/15/2026 semi-annually 1,000
Fleet Capital Trust II 250 250 12/11/96 7.92% 12/15/2006 12/11/2026 semi-annually 1,000
Fleet Capital Trust I 84 84 2/4/97 8.00% 4/15/2001 2/15/2027 quarterly 25
BankBoston Capital
Trust III 248 248 6/4/97 LIBOR + .75% 6/15/2007 6/15/2027 quarterly 1,000
Fleet Capital Trust III 120 -- 1/29/98 7.05% 3/31/2003 3/31/2028 quarterly 25
Fleet Capital Trust IV 150 -- 4/28/98 7.17% 3/31/2003 3/31/2028 quarterly 25
BankBoston Capital
Trust IV 247 -- 6/8/98 LIBOR + .60% 6/08/2003 6/08/2028 quarterly 1,000
Fleet Capital Trust V 250 -- 12/18/98 LIBOR + 1.00% 12/18/2003 12/18/2028 quarterly 1,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital Trust
Securities $1,849 $1,082
===================================================================================================================================
</TABLE>
Note 11.
Preferred Stock
The following is a summary of the corporation's preferred stock outstanding at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31 Stated Earliest Redemption Interest
Dollars in millions, except per share Value Outstanding Outstanding Redemption Price Per
amounts Per Share Shares at 1998 at 1997 Date Per Share(a) Share(d)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
7.25% Series V perpetual preferred $ 250 765,010 $ 191 $ 191 04/15/2001 $ 250 10%
6.75% Series VI perpetual preferred 250 600,000 150 150 04/15/2006 250 20
6.60% Series VII cumulative preferred(b) 250 700,000 175 175 04/01/2006 250 20
6.59% Series VIII noncumulative preferred(c) 250 200,000 50 50 10/01/2001 250 20
9.35% cumulative preferred 250 500,000 125 125 01/15/2000 250 10
7.88% Series F cumulative preferred 250 280,000 -- 70 07/15/1998 250 10
Adjustable rate Series A cumulative preferred 50 1,044,843 -- 52 03/30/1989 50 n/a
Adjustable rate Series B cumulative preferred 50 1,574,315 -- 79 06/20/1990 50 n/a
Adjustable rate Series C cumulative preferred 100 774,783 -- 77 11/14/1990 100 n/a
- ------------------------------------------------------------------------------------------------------------------------------------
Total preferred stock $ 691 $ 969
====================================================================================================================================
</TABLE>
(a) Plus accrued but unpaid dividends.
(b) After April 1, 2006, the rate will adjust based on a U.S. Treasury
security rate.
(c) After October 1, 2006, the rate will adjust based on a U.S. Treasury
security rate.
(d) Represents ownership interest in depositary shares.
Dividends on outstanding preferred stock issues are payable quarterly. All the
preferred stock outstanding has preference over the corporation's common stock
with respect to the payment of dividends and distribution of assets in the event
of a liquidation or dissolution of the corporation. Except in certain
circumstances, the holders of preferred stock have no voting rights.
Note 12.
Common Stock
At December 31, 1998, Fleet Boston had 918.9 million common shares outstanding.
Shares reserved for future issuance in connection with the corporation's stock
plans, outstanding rights and warrants, and stock options totaled 101 million.
In connection with the Merger, shareholders approved an increase in the
authorized shares of Fleet Boston common stock to 2 billion on August 11, 1999.
The following table presents the warrants that were outstanding as of
December 31, 1998:
Stock Warrants
December 31, 1998 Exercise Expiration
Shares in millions Shares Price Date
- --------------------------------------------------------------------------------
13.0 $ 8.83 7/21/01
4.9 21.94 1/27/01
================================================================================
During 1990, the corporation's Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of Fleet Boston common
stock (adjusted to one-half of a right per share upon the corporation's
two-for-one common stock split which was effective during 1998). Under certain
conditions, a right may be exercised to purchase 1/100 of the corporation's
cumulative participating preferred stock at a price of $50, subject to
adjustment. The rights become exercisable if a party acquires 10% or more (in
the case of certain qualified investors, 15% or more) of the issued and
outstanding shares of Fleet Boston common stock, or after the commencement of a
tender or exchange offer for 10% or more of the issued and outstanding shares.
When exercisable under certain conditions, each right would entitle the holder
to receive upon exercise of a right that number of shares of common stock having
a market value of two times the exercise price of the right. The rights will
expire in the year 2000 and may be redeemed in whole, but not in part, at a
price of $.005 per share at any time prior to expiration or the acquisition of
10% of Fleet Boston common stock.
37
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Note 13.
Earnings Per Share
The following table presents a reconciliation of earnings per share as of
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per
share amounts Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 916,122,733 916,122,733 902,441,828 902,441,828 932,575,032 932,575,032
Additional shares due to:
Stock options -- 10,648,590 -- 10,726,087 -- 9,317,213
Warrants -- 12,365,147 -- 10,852,678 -- 7,931,536
- ------------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 916,122,733 939,136,470 902,441,828 924,020,593 932,575,032 949,823,781
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Net income $ 2,324 $ 2,324 $ 2,246 $ 2,246 $ 1,860 $ 1,860
Less preferred stock dividends (60) (60) (93) (93) (109) (109)
- ------------------------------------------------------------------------------------------------------------------------------------
Income available to common
stockholders $ 2,264 $ 2,264 $ 2,153 $ 2,153 $ 1,751 $ 1,751
- ------------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 916,122,733 939,136,470 902,441,828 924,020,593 932,575,032 949,823,781
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share on net income $ 2.47 $ 2.41 $ 2.39 $ 2.33 $ 1.88 $ 1.84
====================================================================================================================================
</TABLE>
Options and warrants to purchase 1,322,285 shares of common stock at exercise
prices between $40.21 and $48.97; 8,237,060 shares of common stock at exercise
prices between $31.88 and $37.02; and 7,704,930 shares of common stock at
exercise prices between $22.22 and $27.50 at December 31, 1998, 1997, and 1996,
respectively, were outstanding but not included in the computation of diluted
earnings per share because the options and warrants were antidilutive.
Note 14.
Management Reporting
The corporation has adopted Statement of Financial Accounting Standards (SFAS)
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for reporting information by operating segment.
Fleet Boston Corporation is managed through three principal business
lines. These are Commercial and Retail Banking, Global Banking and Financial
Services, and the National Consumer Group. The following is a description of the
various products and services provided by each business line. Commercial and
Retail Banking includes domestic retail banking to consumer and small business
customers as well as certain domestic commercial banking operations including
middle-market lending, asset-based lending, leasing, cash management, trade
finance, and government tax processing services. Global Banking and Financial
Services includes International Banking, Investment Services, Institutional and
Investment Banking, and Capital Markets operations. The National Consumer Group
includes national consumer businesses for mortgage banking, credit card lending,
and student loan processing. All Other includes the corporation's Treasury
units, allocated support units, the management accounting control units, and
certain transactions or events not driven by specific business lines. The
treasury function is responsible for managing interest-rate risk, liquidity and
wholesale funding needs of the corporation. Management accounting control units
includes management accounting offsets to transfer pricing, equity, and
provision for credit losses. Special transactions not allocated to business
lines include net gains on the sales of business units of $254 million in 1998
and gains totaling $243 million in 1997. Both items were partially offset by
merger charges and other expenses, which mitigate the year over year impact of
these transactions. Noninterest expenses include unallocated goodwill
amortization, merger related charges, as well as retention payments in
connection with the acquisition of Robertson Stephens in 1998 and technology and
reengineering charges in 1997.
The financial performance of the corporation is monitored by an internal
profitability measurement system. Results are reported using the existing
management accounting policies from both Fleet and BankBoston. A uniform set of
management accounting policies is being developed and will be implemented in the
year 2000. Within business units, assets, liabilities, and equity are
match-funded utilizing similar maturity, liquidity and repricing information.
Additionally, equity, provision for credit losses and reserve for credit losses
are assigned on an economic basis. The corporation has developed a risk-adjusted
methodology that quantifies risk types (e.g., credit and operating risk) within
business units and assigns capital accordingly. Provision for credit losses, and
reserves for credit losses are allocated to each business line based on economic
modeling of long-term expected loss rates, and will differ from the provision
for loan loss of the corporation booked in accordance with generally accepted
accounting principles. Management accounting policies are in place for assigning
expenses that are not directly incurred by businesses, such as overhead,
operations and technology expense. Management accounting concepts are
periodically refined and results are periodically restated to reflect
methodological and/or management organization changes. Accordingly, the
following tables have been restated based on the recently announced organization
of the new Fleet Boston Corporation, following the Merger of Fleet and
BankBoston. During the
38
<PAGE>
Notes To Supplemental Consolidated Financial Statements
integration process, management accounting methodologies will continue to
evolve, with prior periods being restated in accordance with prudent financial
management as well as the requirements of SFAS 131. As a result of the
integration of Fleet and BankBoston current management reporting results rely on
the blended methodologies of both companies. While integration efforts continue,
it is likely that the future resolution of management reporting methodologies
will not adversely alter business unit earnings trends.
<TABLE>
<CAPTION>
Global Banking National
Year ended December 31, 1998 Commercial and and Financial Consumer Fleet Boston
In millions Retail Banking Services(c) Group All Other(a) Corporation
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income (FTE) $ 3,957 $ 1,737 $ 549 $ 211 $ 6,454
Noninterest income 1,357 2,646 877 401 5,281
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 5,314 4,383 1,426 612 11,735
Provision for credit losses 331 245 335 (61) 850
Noninterest expense 3,202 2,616 841 391 7,050
Income Taxes/FTE adjustment 745 633 97 36 1,511
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,036 $ 889 $ 153 $ 246 $ 2,324
- --------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average total assets(b) $ 60,646 $ 63,807 $ 13,149 $ 32,626 $170,228
- --------------------------------------------------------------------------------------------------------------------------
Other Financial Data (pre-tax):
Depreciation and amortization $ 240 $ 111 $ 540 $ 220 $ 1,111
Merger charges -- -- -- 73 73
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Global Banking National
Year ended December 31, 1997 Commercial and and Financial Consumer Fleet Boston
In millions Retail Banking Services(c) Group All Other(a) Corporation
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income (FTE) $ 3,972 $ 1,390 $ 382 $ 448 $ 6,192
Noninterest income 1,305 2,086 485 330 4,206
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 5,277 3,476 867 778 10,398
Provision for credit losses 375 204 294 (351) 522
Noninterest expense 3,123 1,995 505 427 6,050
Income Taxes/FTE adjustment 768 534 28 250 1,580
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,011 $ 743 $ 40 $ 452 $ 2,246
- --------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average total assets(b) $ 58,305 $ 51,258 $ 9,602 $ 32,721 $151,886
- --------------------------------------------------------------------------------------------------------------------------
Other Financial Data (pre-tax):
Depreciation and amortization $ 252 $ 69 $ 288 $ 185 $ 794
Merger charges -- -- -- 25 25
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Global Banking National
Year ended December 31, 1996 Commercial and and Financial Consumer Fleet Boston
In millions Retail Banking Services(c) Group All Other(a) Corporation
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income (FTE) $ 3,688 $ 1,247 $ 498 $ 425 $ 5,858
Noninterest income 1,075 1,824 527 232 3,658
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 4,763 3,071 1,025 657 9,516
Provision for credit losses 354 149 223 (282) 444
Noninterest expense 3,052 1,679 654 446 5,831
Income Taxes/FTE adjustment 604 521 58 198 1,381
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 753 $ 722 $ 90 $ 295 $ 1,860
- --------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average total assets(b) $ 56,752 $ 42,549 $ 11,879 $ 34,928 $146,108
- --------------------------------------------------------------------------------------------------------------------------
Other Financial Data (pre-tax):
Depreciation and amortization $ 228 $ 57 $ 223 $ 172 $ 680
Merger charges -- -- -- 180 180
==========================================================================================================================
</TABLE>
(a) All Other includes earnings of the Treasury unit of $219 million in 1998,
$140 million in 1997, and $113 million in 1996.
(b) Period end assets were $178 billion, $160 billion, and $152 billion at
December 31, 1998, 1997, and 1996, respectively.
(c) Includes revenues from foreign operations, principally in Argentina and
Brazil, of $1.3 billion in 1998, $1 billion in 1997, and $800 million in
1996. International investments in long lived assets, principally premises
and equipment were $431 million in 1998, $249 million in 1997, and $209
million in 1996, while average total assets were $19.5 billion, $15.2
billion and $12.9 billion in 1998, 1997 and 1996, respectively.
Note 15.
Employee Benefits
Stock Based Compensation. The corporation maintains stock incentive plans for
certain employees and for non-employee directors. The plans provide for the
grant of stock options, restricted stock, stock appreciation rights (SARs) and
other stock awards. There were 26,531 SARs at an average grant price of $12.08
outstanding on December 31, 1998.
39
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Options granted to purchase common stock at fair value on the grant date
generally vest over one- to five-year periods and expire at the end of ten
years. Options granted to directors vest on the date of grant. On October 1,
1999, all BankBoston options became fully vested and exercisable.
Stock Options
<TABLE>
<CAPTION>
December 31 1998 1997 1996
====================================================================================================================================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 37,819,263 $ 22.77 34,596,825 $ 17.42 34,746,010 $ 13.81
Granted 25,075,130 35.54 12,682,052 31.46 12,007,194 21.45
Exercised (5,638,404) 18.65 (7,668,017) 13.56 (11,080,627) 10.39
Forfeited (2,024,487) 29.43 (1,791,597) 20.43 (1,075,752) 18.51
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 55,231,502 $ 28.74 37,819,263 $ 22.77 34,596,825 $ 17.42
- -----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 19,494,885 $ 21.26 14,623,498 $ 16.77 14,613,529 $ 13.25
====================================================================================================================================
</TABLE>
Stock Options Outstanding and Exercisable
<TABLE>
<CAPTION>
December 31, 1998 Options Outstanding Options Exercisable
=====================================================================================================
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
=====================================================================================================
<S> <C> <C> <C> <C> <C>
$ 2 - $18 9,045,291 4.8 Years $ 14.92 8,338,525 $ 14.65
$19 - $24 11,263,780 7.0 Years 21.90 6,837,317 21.92
$25 - $50 34,922,431 9.1 Years 34.53 4,319,043 32.95
- -----------------------------------------------------------------------------------------------------
$ 2 - $50 55,231,502 8.0 Years $ 28.74 19,494,885 $ 21.26
=====================================================================================================
</TABLE>
In addition to the stock options listed in the table above, the corporation
granted stock options to substantially all of BankBoston's employees worldwide
in 1996 and 1998 under its Shared Opportunities programs. The options granted in
1996 became fully vested and exercisable in 1997 and will expire in 2002. The
options granted in 1998 became fully vested and exercisable in 1999 and will
expire in 2004.
Stock Options
Shared Opportunities
Weighted
Average
Exercise
Shares Price
================================================================================
Options granted in 1996 5,097,658 $ 24.48
Options outstanding, December 31, 1996 5,097,658 24.48
Exercised (1,815,730) 24.48
Canceled (644,965) 24.48
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1997 2,636,963 24.48
Options granted in 1998 8,695,102 30.23
Exercised (1,042,383) 24.48
Canceled (376,206) 26.37
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1998 9,913,476 29.36
================================================================================
Under the terms of the corporation's restricted stock awards, employees are
generally required to continue employment with the corporation for a stated
period after the award in order to become fully vested in the shares awarded.
For certain restricted stock awards, vesting is contingent upon or will be
accelerated if certain preestablished performance goals are attained.
Compensation expense recognized for restricted stock and SARs during 1998, 1997
and 1996 was $32 million, $20 million and $20 million, respectively. Restricted
stock grants issued to BankBoston employees vested on October 1, 1999.
Restricted Stock
<TABLE>
<CAPTION>
December 31 1998 1997 1996
=======================================================================================================================
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,884,925 $24.02 1,684,094 $14.95 2,837,546 $10.78
Granted 1,554,713 38.30 1,180,144 31.14 784,850 21.80
Forfeitures (178,892) 27.77 (108,544) 19.88 (66,059) 8.79
Released from forfeiture
restrictions (486,443) 17.86 (870,769) 14.71 (1,872,243) 11.47
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,774,303 $32.83 1,884,925 $24.02 1,684,094 $14.95
=======================================================================================================================
</TABLE>
40
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Restricted Stock Outstanding
December 31, 1998 Options Outstanding
================================================================================
Range of
Market Value of Weighted Average Weighted Average
Common Stock at Number Remaining Price at
Time of Grant Outstanding Contractual Life Time of Grant
- --------------------------------------------------------------------------------
$10 - $25 335,959 .5 Years $ 13.17
$26 - $34 822,708 1.9 Years 30.21
$35 - $42 1,588,987 3.0 Years 38.14
$43 - $47 26,649 3.3 Years 45.16
- --------------------------------------------------------------------------------
$10 - $47 2,774,303 2.4 Years $ 32.83
================================================================================
In 1998, the corporation implemented an employee stock purchase plan which
allowed eligible BankBoston employees to purchase the corporation's common
stock, up to certain limits, at the lesser of its fair market value at the
beginning of the specified offering period or 85% of its fair value at the end
of such period. In 1998, 211,535 shares of common stock were issued under the
plan at a price of $34.72.
Pro Forma Fair Value Information. The corporation has adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by that standard, the
corporation elected not to adopt the fair value accounting provisions of the
standard and to continue to apply the provisions of Accounting Principal Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
stock options and awards. Had compensation expense for the corporation's stock
options and awards been determined in accordance with the fair value accounting
provisions of SFAS No. 123, the corporation's net income and diluted earnings
per share would have been as follows:
Pro forma Information
1998 1997 1996
================================================================================
Net income (in millions) As reported $2,324 $2,246 $1,860
Pro forma 2,271 2,214 1,850
Diluted earnings As reported $ 2.41 $ 2.33 $ 1.84
per share Pro forma 2.36 2.30 1.84
================================================================================
Solely for purposes of providing the disclosures required by SFAS No. 123, the
fair value of each stock option and stock award was estimated on the date of
grant using the Black-Scholes option-pricing model, with the following weighted
average assumptions:
Weighted Average Assumptions
1998 1997 1996
================================================================================
Dividend yield 2.9% 2.9% 3.2%
Volatility 27 25 25
Risk-free interest rate 5 6 6
Expected option life 5 years 6 years 6 years
================================================================================
The estimated weighted average grant date fair values per share of stock options
granted and restricted stock granted were as follows:
Weighted Average Grant Date Fair Value
1998 1997 1996
================================================================================
Stock options $ 8.50 $ 8.18 $ 5.26
Restricted stock 38.30 31.14 21.80
================================================================================
Pension Plans. The corporation maintains qualified noncontributory, defined
benefit pension plans covering substantially all domestic employees, as well as
nonqualified non-contributory defined benefit plans for certain executives. The
qualified plans are funded in compliance with the Employee Retirement Income
Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986, as amended.
The corporation also provides certain postretirement health and life
insurance benefits for eligible retired domestic employees. Postretirement
benefits are accrued over the service lives of the employees.
The following tables summarize benefit obligation, asset activity, funded
status and expense for the plans:
Pension and Postretirement Benefit Plans
Other
Pension Postretirement
Benefits Benefits
December 31 -----------------------------------------
In millions 1998 1997 1998 1997
================================================================================
Change in benefit obligation
Benefit obligation at
beginning of year $ 1,549 $ 1,384 $ 208 $ 202
Service cost 65 61 2 1
Interest cost 109 104 12 16
Participant contributions -- -- 5 5
Divestitures -- (2) -- --
Special termination
benefits 1 5 -- --
Plan amendments 13 (69) -- 4
Benefits paid (152) (147) (24) (29)
Actuarial loss or (gain) 80 213 (10) 9
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 1,665 $ 1,549 $ 193 $ 208
- --------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets
at beginning of year $ 1,887 $ 1,675 $ 19 $ 16
Actual return on plan assets 266 349 4 3
Divestitures -- (3) -- --
Employer contributions 63 13 31 24
Participant contributions -- -- 8 8
Benefits paid (152) (147) (27) (32)
- --------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 2,064 $ 1,887 $ 35 $ 19
- --------------------------------------------------------------------------------
Reconciliation of funded status
Funded status $ 399 $ 338 (158) (189)
Unrealized actuarial gain (46) (36) (32) (23)
Unrecognized transition (asset)
or obligation (5) (7) 113 121
Unrecognized prior service cost (1) (8) 2 3
- --------------------------------------------------------------------------------
Net amount recognized at year-end $ 347 $ 287 $ (75) $ (88)
================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $223 million, $160 million and $14 million, respectively, as
of December 31, 1998 and $190 million, $140 million and $12 million,
respectively, as of December 31, 1997.
41
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Pension and Postretirement Benefit Expense
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
Year ended December 31 ------------------------------------------------------------------------
Dollars in millions 1998 1997 1996 1998 1997 1996
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit expense
Service cost $ 65 $ 61 $ 63 $ 2 $ 1 $ 2
Interest cost 109 104 84 12 16 14
Expected return on plan assets (171) (150) (118) (2) (2) (1)
Net amortization and recognized actuarial
loss or (gain) 5 (4) 8 7 5 6
- -------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense $ 8 $ 11 $ 37 $ 19 $ 20 $ 21
- -------------------------------------------------------------------------------------------------------------------------
Assumptions as of December 31
Discount rate 6.75% 7.25% 7.81% 6.75% 7.25% 7.81%
Expected rate of return on plan assets 9.56 9.56 9.55 10.00 10.00 10.00
Rate of compensation increase 4.81 4.81 4.81
Healthcare cost trend rate 7.08 7.68 8.72
=========================================================================================================================
</TABLE>
The healthcare cost trend rate is projected to decrease gradually over the next
several years to approximately 4.75%, and remain level thereafter. A 1% increase
or decrease in the healthcare cost trend rate assumption does not have a
significant effect on postretirement benefit obligation or expense.
In 1997, special termination benefits of $5 million were provided relating
to the corporation's 1996 acquisition of BayBanks, Inc. In 1996, certain
enhanced retirement benefits were offered to eligible employees as part of an
early retirement program in connection with the acquisition of BayBanks, Inc.,
composed of $26 million resulting from pension enhancements and $4 million
resulting from postretirement benefit enhancements. These 1996 benefits were
charged to merger-related charges.
The corporation maintains defined contribution savings plans covering
substantially all domestic employees. The corporation's expense for these plans
was $71 million, $69 million and $54 million for 1998, 1997 and 1996,
respectively.
Note 16.
Income Taxes
The components of income before income taxes and income tax expense are
summarized below:
Income Before Income Taxes
Year ended December 31
In millions 1998 1997 1996
================================================================================
Income before income taxes
Domestic $3,426 $3,293 $2,807
Foreign 350 469 378
- --------------------------------------------------------------------------------
Total income before income taxes $3,776 $3,762 $3,185
================================================================================
Income Tax Expense
Year ended December 31
In millions 1998 1997 1996
================================================================================
Current income taxes:
Federal $ 893 $ 676 $ 518
Foreign:
Based on income 106 67 130
Withheld on interest
and dividends 60 38 36
State and local 183 139 196
- --------------------------------------------------------------------------------
Total current income taxes $1,242 $ 920 $ 880
- --------------------------------------------------------------------------------
Deferred income taxes:
Federal $ 159 $ 469 $ 365
State and local 51 127 80
- --------------------------------------------------------------------------------
Total deferred income taxes $ 210 $ 596 $ 445
- --------------------------------------------------------------------------------
Total income tax expense:
Federal $1,052 $1,145 $ 883
Foreign 166 105 166
State and local 234 266 276
- --------------------------------------------------------------------------------
Applicable income taxes $1,452 $1,516 $1,325
================================================================================
The income tax expense for the years ended December 31, 1998, 1997 and 1996,
varied from the amount computed by applying the statutory income tax rate to
income before taxes. A reconciliation between the statutory and effective tax
rates follows:
Statutory Rate Analysis
December 31 1998 1997 1996
================================================================================
Tax at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in
taxes resulting from:
State and local income taxes,
net of federal income tax
benefit 4.0 4.6 6.2
Non creditable foreign taxes .5 .6 .5
Goodwill amortization 1.3 1.4 1.3
Tax-exempt income (.7) (.7) (.9)
Other, net (1.6) (.6) (.5)
- --------------------------------------------------------------------------------
Effective tax rate 38.5% 40.3% 41.6%
================================================================================
42
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Significant components of the corporation's deferred tax assets and deferred tax
liabilities as of December 31, 1998 and 1997, are presented in the following
table:
Net Deferred Tax Liability
December 31
In millions 1998 1997
================================================================================
Deferred tax assets:
Reserve for credit losses $ 840 $ 820
Expenses not currently deductible 179 293
Other 555 366
- --------------------------------------------------------------------------------
Total gross deferred tax assets 1,574 1,479
Less: valuation allowance 23 23
- --------------------------------------------------------------------------------
Total deferred tax assets $1,551 $1,456
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing $1,764 $1,358
Foreign operations 91 17
Mortgage banking 169 295
Other 400 429
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities $2,424 $2,099
- --------------------------------------------------------------------------------
Net deferred tax liability $ 873 $ 643
================================================================================
The corporation has evaluated the available evidence supporting the realization
of its gross tax assets of $1,551 million and $1,456 million at December 31,
1998 and 1997, respectively, including the amount and timing of future taxable
income, and has determined it is more likely than not that the assets will be
realized. Given the nature of state tax laws, the corporation believes that
uncertainty remains concerning the realization of tax benefits in various state
jurisdictions. The corporation recorded cumulative state tax benefits, net of
federal taxes, in the amount of $75 million and $64 million at December 31, 1998
and 1997, respectively. State valuation reserves in the amount of $23 million,
established at December 31, 1997, are still in effect at December 31, 1998.
These benefits may, however, be recorded in the future either as they are
realized or, as it becomes more likely than not, that such tax benefits or
portions thereof will be realized.
Note 17.
Trading Activities, Other Derivative Financial Instruments and Off-Balance Sheet
Items
Trading Activities. All of the corporation's trading positions are currently
stated at market value with realized and unrealized gains and losses reflected
in other noninterest income. The following table represents the notional, or
contractual, amount of Fleet Boston's off-balance sheet, interest-rate and
foreign exchange trading instruments and related credit exposure:
Trading Instruments with Off-Balance Sheet Risk
Contract or
Notional Credit
December 31 Amount Exposure
In millions 1998 1997 1998 1997
================================================================================
Interest-rate contracts $106,610 $108,199 $ 829 $260
Foreign exchange contracts 57,927 40,308 1,319 644
================================================================================
Notional principal amounts are a measure of the volume of agreements transacted,
but the level of credit exposure is significantly less. The amount of credit
exposure can be estimated by calculating the cost to replace, on a present value
basis and at current market rates, all profitable contracts outstanding at
year-end. Credit exposure disclosures relate to accounting losses that would be
recognized if the counterparties completely failed to perform their obligations.
To manage its level of credit exposure, the corporation deals with
counterparties of good credit standing, establishes counterparty credit limits,
in certain cases has the ability to require securities collateral, and enters
into netting agreements whenever possible.
The amounts disclosed below represent the end-of-period fair value of
derivative financial instruments held or issued for trading purposes and the
average aggregate fair values during the year for those instruments:
Trading Instruments
Fair Value Average
December 31, 1998 (Carrying Fair
In millions Amount) Value
================================================================================
Interest-rate contracts:
Assets $ 829 $ 519
Liabilities (806) (546)
Foreign exchange contracts:
Assets $ 1,319 $ 813
Liabilities (1,359) (799)
================================================================================
Risk-Management Activities. The corporation's principal objective in holding or
issuing derivatives for purposes other than trading, is the management of
interest-rate and currency risk.
The major source of the corporation's non-trading U.S. denominated
interest-rate risk is the difference in the repricing characteristics of the
corporation's core banking assets and liabilities - loans and deposits. This
difference or mismatch is a risk to net interest income. In managing net
interest income, the corporation uses interest-rate swaps to offset the general
asset-sensitivity of the core bank. Additionally, the corporation uses
interest-rate swaps to offset basis risk, including the specific exposure to
changes in prime rate.
A second major source of the corporation's non-trading U.S. dollar
denominated interest-rate risk is the sensitivity of its MSRs to prepayments.
The mortgage borrower has the option to prepay the mortgage loans at any time.
When mortgage interest rates decline, borrowers have a greater incentive to
prepay mortgage loans through a refinancing. To mitigate the risk of declining
long-term interest rates, increased mortgage prepayments, and the potential
impairment of the MSRs, the corporation uses a variety of risk-management
instruments, including interest-rate swaps, caps and floors, options on swaps,
and exchange-traded options on Treasury bond and note futures. These instruments
gain value as interest rates decline, mitigating the impairment of MSRs.
Increases in the value of these instruments and related cash flows aggregating
$667 million were recorded as adjustments to the carrying value of the MSRs
during 1998.
The corporation's non-U.S. dollar denominated assets and liabilities are
exposed to interest-rate and foreign ex-
43
<PAGE>
Notes To Supplemental Consolidated Financial Statements
change rate risks. The majority of the corporation's non-U.S. dollar denominated
interest-rate and foreign exchange rate risk exposure stems from its operations
in Latin America, primarily Argentina and Brazil. Interest-rate risk is managed
through the use of interest-rate swap instruments. Foreign exchange rate risk is
managed through the use of foreign currency spot, forward, futures, option and
swap contracts. The primary risks in these transactions arise from the exposure
to changes in foreign currency exchange rates and the ability of counterparties
to meet the terms of those contracts.
The following table presents the notional amount and fair value of
risk-management instruments at December 31, 1998 and 1997:
Risk-Management Instruments
<TABLE>
<CAPTION>
1998 1997
December 31 Notional Fair Notional Fair
In millions Amount Value Amount Value
========================================================================================
<S> <C> <C> <C> <C>
Interest-rate risk-management
instruments:
Domestic:
Receive-fixed/pay-variable $16,768 $ 354 $14,207 $ 123
Pay-fixed/receive-variable 303 -- 344 --
Basis swaps 3,137 (29) 3,454 (1)
International:
Interest-rate swaps 2,985 (22) 5,395 46
Futures and forwards 734 -- 3,947 21
Interest-rate options purchased 2,411 89 2,765 13
Interest-rate options written 1,911 (66) -- --
Foreign exchange risk-
management instruments:
Spot and forward contracts 3,469 13 2,430 (5)
Options purchased 68 -- -- --
Mortgage banking risk-
management instruments:
Receive-fixed/pay-variable,
PO swaps 7,011 83 2,502 --
Interest-rate floors and options
on swaps 39,560 517 23,870 138
Interest-rate caps and cap
corridors 14,759 68 4,309 (25)
Call options purchased 3,150 27 -- --
Call options sold 730 (5) -- --
- ----------------------------------------------------------------------------------------
Total risk-management instruments $96,996 $ 1,029 $63,223 $ 310
========================================================================================
</TABLE>
Interest-rate swap agreements involve the exchange of fixed- and variable-rate
interest payments based upon a notional principal amount and maturity date.
Interest-rate basis swaps involve the exchange of floating-rate interest
payments based on various indices, such as U.S. Treasury bill and LIBOR. In a
purchased interest-rate floor agreement, cash interest payments are received
only if current interest rates fall below a predetermined interest rate.
Purchased or sold interest-rate cap agreements are similar to interest-rate
floor agreements except that cash interest payments are received or made only if
current interest rates rise above predetermined interest rates. Options on swap
agreements provide the holder the right to enter into an interest-rate swap at a
predetermined rate and time in the future.
The corporation's interest-rate risk-management instruments had credit
exposure of $566 million at December 31, 1998, versus $227 million at December
31, 1997. The corporation's foreign exchange rate risk-management instruments
had credit exposure of $35 million at December 31, 1998, versus $36 million at
December 31, 1997. The corporation's mortgage banking risk-management
instruments had credit exposure of $349 million at December 31, 1998, versus
$114 million at December 31, 1997. The periodic net settlement of interest-rate
risk-management instruments is recorded as an adjustment to net interest income.
As of December 31, 1998, the corporation had net deferred income of $16 million
related to terminated interest-rate swap contracts, which will be amortized over
the remaining life of the underlying terminated contracts of approximately 7
years.
Other Financial Instruments
Contract or
December 31 Notional Amount
In millions 1998 1997
================================================================================
Commitments to extend credit:
Commercial and industrial loans $ 64,825 $ 57,889
Credit card lines 55,203 9,187
Home equity lines 5,810 5,682
Other unused commitments 5,130 4,690
Residential mortgages 3,773 2,188
Commercial real estate 2,940 3,074
- --------------------------------------------------------------------------------
Total commitments to extend credit $137,681 $ 82,710
Letters of credit, financial guarantees and
foreign office guarantees (net of
participations) $ 12,238 $ 9,503
Commitments to sell loans 6,069 2,247
Recourse on assets sold 488 633
================================================================================
Commitments to extend credit are agreements to lend to customers in accordance
with contractual provisions. These commitments usually are for specific periods
or contain termination clauses and may require the payment of a fee. The total
amounts of unused commitments do not necessarily represent future cash
requirements in that commitments often expire without being drawn upon.
Letters of credit and financial guarantees are agreements whereby the
corporation guarantees the performance of a customer to a third party.
Collateral is required to support letters of credit in accordance with
management's evaluation of the creditworthiness of each customer. The credit
exposure assumed in issuing letters of credit is essentially equal to that in
other lending activities. Management does not anticipate any material losses as
a result of these transactions.
Commitments to sell loans have off-balance sheet market risk to the extent
that the corporation does not have available loans to fill those commitments,
which would require the corporation to purchase loans in the open market.
Note 18.
Fair Value of Financial Instruments
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valua-
44
<PAGE>
Notes To Supplemental Consolidated Financial Statements
tion techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and judgments made regarding risk
characteristics of various financial instruments, discount rates, estimates of
future cash flows, future expected loss experience, and other factors. Changes
in assumptions could significantly affect these estimates and the resulting fair
values. Derived fair value estimates cannot necessarily be substantiated by
comparison to independent markets and, in many cases, could not be realized in
an immediate sale of the instrument. Also, because of differences in
methodologies and assumptions used to estimate fair values, Fleet Boston's fair
values should not be compared to those of other financial institutions.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the corporation.
The following describes the method and assumptions used by Fleet Boston in
estimating the fair values of financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the balance sheet
approximate fair values because maturities are less than 90 days.
Securities. Fair values are based primarily on quoted, or other independent,
market prices. For certain debt and equity investments made in connection with
the corporation's Private Equity business that do not trade on established
exchanges, and for which markets do not exist, estimates of fair value are based
upon management's review of the investee's financial results, condition and
prospects.
Loans. The fair values of certain commercial and consumer loans are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. The
carrying value of certain other loans approximates fair value due to the
short-term and/or frequent repricing characteristics of these loans. The fair
value of the credit card portfolio excludes the value of the ongoing customer
relationships, a factor that can represent a significant premium over the
carrying value. For residential real estate loans, fair value is estimated by
reference to quoted market prices. For nonperforming loans and certain loans
where the credit quality of the borrower has deteriorated significantly, fair
values are estimated by discounting expected cash flows at a rate commensurate
with the risk associated with the estimated cash flows, based on recent
appraisals of the underlying collateral, or by reference to recent loan sales.
Mortgages Held for Resale. Fair value is estimated using the quoted market
prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained.
Trading Assets. Trading assets are carried at fair value in the balance sheet.
Values for trading securities are generally based on quoted, or other
independent, market prices. Values for interest-rate and foreign exchange
products are based on quoted, or other independent, market prices, or are
estimated using pricing models or discounted cash flows.
Deposits. The fair value of deposits with no stated maturity or a maturity of
less than 90 days is considered to be equal to the carrying amount. The fair
value of fixed-rate time deposits is estimated by discounting contractual cash
flows using interest rates currently offered on the deposit products. The fair
value for variable-rate time deposits approximate their carrying value. The fair
value estimates for deposits do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
alternative forms of funding (core deposit intangibles).
Short-Term Borrowings. Short-term borrowings generally mature in 90 days or less
and, accordingly, the carrying amount reported in the balance sheet approximates
fair value.
Long-Term Debt. The fair value of Fleet Boston's long-term debt, including the
short-term portion, is estimated based on quoted market prices for the issues
for which there is a market or by discounting cash flows based on current rates
available to Fleet Boston for similar types of borrowing arrangements.
Off-Balance Sheet Instruments. Fair values for off-balance sheet instruments are
estimated based on quoted market prices or dealer quotes and is the amount the
corporation would receive or pay to execute a new agreement with identical terms
considering current interest rates.
Interest-Rate and Foreign Exchange Financial Instruments. The fair values of
interest-rate and foreign exchange contracts used to manage interest-rate,
currency and market risks are estimated based on market information and other
relevant characteristics using pricing models, including option models.
45
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Fair Value of Financial Instruments
<TABLE>
<CAPTION>
1998 1997
December 31 Carrying Fair Carrying Fair
In millions Value Value Value Value
===============================================================================================
<S> <C> <C> <C> <C>
On-balance sheet financial assets:
Financial assets for which carry-
ing value approximates fair value $ 14,618 $ 14,618 $ 14,208 $ 14,208
Securities 23,369 23,595 19,845 20,007
Loans(a) 103,596 105,467 99,051 100,819
Mortgages held for resale 4,068 4,068 1,571 1,571
Trading assets 4,364 4,364 3,348 3,348
Other 2,176 2,268 1,362 1,429
On-balance sheet financial liabilities:
Deposits 118,178 118,760 109,497 109,896
Short-term borrowings 19,176 19,176 19,224 19,224
Long-term debt 14,411 14,732 8,191 8,380
Trading liabilities 2,326 2,326 1,232 1,232
Other 975 975 1,014 1,014
Off-balance sheet financial instruments:
Interest-rate risk-management
instruments 32 326 1 202
Foreign exchange contracts -- 13 -- (5)
Commitments to originate
or purchase loans -- (58) -- (55)
Commitments to sell loans 2 (1) 1 (5)
Standby and commercial letters of
credit, foreign office guarantees
and similar instruments -- (13) -- (11)
===============================================================================================
</TABLE>
(a) Excludes net book value of leases of $6,192 million and $5,350 million at
December 31, 1998 and 1997, respectively.
Certain assets which are not financial instruments and, accordingly, are not
included in the above fair values, contribute substantial value to the
corporation in excess of the related amounts recognized in the balance sheet.
These include the core deposit intangibles and the related retail banking
network, the value of customer relationships associated with certain types of
consumer loans (particularly the credit card portfolio), lease financing
business, and mortgage servicing rights.
Note 19.
Commitments, Contingencies, and Other Disclosures
The corporation and its subsidiaries are involved in various legal proceedings
arising out of, and incidental to, their respective businesses. Management of
the corporation, based on its review with counsel of the development of these
matters to date, does not anticipate that any losses incurred as a result of
these legal proceedings would have a materially adverse effect on the
corporation's financial position.
Lease Commitments. The corporation has entered into a number of noncancelable
operating lease agreements for premises and equipment. The minimum annual rental
commitments under these leases at December 31, 1998, exclusive of taxes and
other charges, were as follows: $260 million, 1999; $235 million, 2000; $208
million, 2001; $179 million, 2002; $139 million, 2003; and $552 million, 2004
and thereafter. Total rental expense for 1998, 1997 and 1996, including
cancelable and noncancelable leases, amounted to $264 million, $254 million and
$263 million, respectively.
Certain leases contain escalation clauses, which correspond with increased
real estate taxes and other operating expenses, and renewal options calling for
increased rents as the leases are renewed. No restrictions are imposed by any
lease agreement regarding the payment of dividends, additional debt financing,
or entering into further lease agreements.
Transaction and Dividend Restrictions. Fleet Boston's banking subsidiaries are
subject to restrictions under federal law that limit the transfer of funds by
the subsidiary banks to Fleet Boston and its nonbanking subsidiaries. Such
transfers by any subsidiary bank to Fleet Boston or any nonbanking subsidiary
are limited in amount to 10% of the bank's capital and surplus.
Various federal and state banking statutes limit the amount of dividends
the subsidiary banks can pay to Fleet Boston without regulatory approval. The
payment of dividends by any subsidiary bank may also be affected by other
factors such as the maintenance of adequate capital for such subsidiary bank.
Various regulators and the Boards of Directors of the affected institutions
continue to review dividend declarations and capital requirements of Fleet
Boston and its subsidiaries consistent with current earnings, future earning
prospects, and other factors. At December 31, 1998, the banking subsidiaries
could have declared an additional $1.7 billion of dividends without prior
regulatory approval.
Restrictions on Cash and Due from Banks. The corporation's banking subsidiaries
are subject to requirements of the Federal Reserve Board (the Federal Reserve)
to maintain certain reserve balances. At both December 31, 1998 and 1997, these
reserve balances were $2.6 billion.
Note 20.
Regulatory Matters
As a bank holding company, Fleet Boston is subject to regulation by the Federal
Reserve, the Office of the Comptroller of the Currency (OCC) and the Office of
Thrift Supervision (OTS), as well as state regulators. Under the regulatory
capital adequacy guidelines and FDIC Improvement Act (FDICIA), Fleet Boston and
its banking subsidiaries must meet specific capital requirements. These
requirements are expressed in terms of the following ratios: (1) Risk-based
Total Capital (Total Capital/risk-weighted on- and off-balance sheet assets);
(2) Risk-based Tier 1 Capital (Tier 1 Capital/risk-weighted on- and off-balance
sheet assets); and (3) Leverage (Tier 1 Capital/average quarterly assets). To
meet all minimum regulatory capital requirements, Fleet Boston and its banking
subsidiaries must maintain a minimum risk-based Total Capital ratio of at least
8%, risk-based Tier 1 Capital ratio of at least 4%, and Tier 1 Leverage ratio of
at least 4%. Failure to meet minimum capital
46
<PAGE>
Notes To Supplemental Consolidated Financial Statements
requirements can result in the initiation of certain actions that, if
undertaken, could have a material effect on the corporation's financial
statements. To be categorized as well-capitalized under the prompt corrective
action provision of FDICIA, Fleet Boston's banking subsidiaries must maintain a
risk-based Total Capital ratio of at least 10%, a risk-based Tier 1 Capital
ratio of at least 6%, and a Tier 1 Leverage ratio of at least 5%, and not be
subject to a written agreement, order or capital directive with regulators.
Neither Fleet Boston nor any of its subsidiaries is subject to any formal
written agreements with state and federal regulators or to any orders or capital
directives.
The following table presents capital information for the corporation as of
December 31, 1998 and 1997:
Regulatory Capital Ratios
<TABLE>
<CAPTION>
December 31
Dollars in millions 1998 1997
==========================================================================================
<S> <C> <C> <C> <C>
Actual:
Risk-Based Tier 1 Capital $12,417 7.11% $11,502 7.55%
Risk-Based Total Capital 20,092 11.51 17,224 11.31
Leverage 12,417 7.17 11,502 7.52
Minimum regulatory capital standards:
Risk-Based Tier 1 Capital 6,984 4.00 6,090 4.00
Risk-Based Total Capital 13,968 8.00 12,181 8.00
Leverage 6,930 4.00 6,122 4.00
==========================================================================================
</TABLE>
As of December 31, 1998, Fleet Boston's banking subsidiaries were all
categorized as well-capitalized. There are no conditions or events since that
date that management believes have changed the capital category of these
subsidiaries.
As registered broker-dealers and member firms of the NYSE, certain
subsidiaries of the corporation are subject to rules of both the SEC and the
NYSE. These rules require these subsidiaries to maintain minimum levels of net
capital, as defined, and may restrict them from expanding their business and
declaring dividends if their net capital falls below specified levels. At
December 31, 1998, these subsidiaries had net capital, in the aggregate, of
approximately $349 million, which exceeded aggregate minimum net capital
requirements by approximately $304 million.
Note 21.
Disclosure for Statements of Cash Flows
Cash Flow Disclosure
Year ended December 31
In millions 1998 1997 1996
================================================================================
Supplemental disclosure for cash paid
during the period for:
Interest expense $5,878 $5,150 $ 5,020
Income taxes, net of refund 823 786 757
- --------------------------------------------------------------------------------
Supplemental disclosure of non-cash
investing and financing activities:
Transfer of loans to foreclosed property
and repossessed equipment 22 34 27
Loan securitization -- -- 1,998
Retirement of common stock -- -- 34
Transfer of assets to held for sale by
accelerated disposition 33 231 110
Foreign currency translation (3) (4) (3)
Adjustment to unrealized gain on
securities available for sale (42) 44 (27)
- --------------------------------------------------------------------------------
Assets acquired and liabilities assumed in
business combinations were as follows:
Assets acquired, net of cash and cash
equivalents received 5,284 546 17,848
Net cash and cash equivalents
(paid)/received (226) (525) 2,386
Liabilities assumed 5,058 21 20,234
- --------------------------------------------------------------------------------
Divestitures:
Assets sold, net of cash received 239 3,668 4,102
Net cash received for divestitures 213 3,887 805
Liabilities sold 280 24 3,542
================================================================================
Note 22.
Parent Company Only Financial Statements
Statements of Income
Year ended December 31
In millions 1998 1997 1996
================================================================================
Dividends from subsidiaries:
Banking subsidiaries $1,229 $2,177 $1,264
Other subsidiaries 450 181 153
Interest income 418 310 296
Other 45 37 20
- --------------------------------------------------------------------------------
Total income 2,142 2,705 1,733
- --------------------------------------------------------------------------------
Interest expense 550 440 401
Noninterest expense 42 42 64
- --------------------------------------------------------------------------------
Total expenses 592 482 465
- --------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiaries 1,550 2,223 1,268
Applicable income taxes (benefit) (51) (71) (60)
- --------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 1,601 2,294 1,328
Equity in undistributed income of
subsidiaries 723 (48) 532
- --------------------------------------------------------------------------------
Net income $2,324 $2,246 $1,860
================================================================================
47
<PAGE>
Notes To Supplemental Consolidated Financial Statements
Balance Sheets
December 31
In millions 1998 1997
================================================================================
Assets:
Money market instruments $ 1,173 $ 1,149
Securities 5 78
Loans receivable from:
Banking subsidiaries 2,784 2,489
Other subsidiaries 2,984 1,940
- --------------------------------------------------------------------------------
5,768 4,429
Investment in subsidiaries:
Banking subsidiaries 14,657 12,866
Other subsidiaries 1,502 1,028
- --------------------------------------------------------------------------------
16,159 13,894
Other 934 631
- --------------------------------------------------------------------------------
Total assets $24,039 $20,181
================================================================================
Liabilities:
Short-term borrowings $ 988 $ 811
Accrued liabilities 696 553
Long-term debt 8,151 5,776
- --------------------------------------------------------------------------------
Total liabilities 9,835 7,140
- --------------------------------------------------------------------------------
Stockholders' equity 14,204 13,041
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $24,039 $20,181
================================================================================
Statements of Cash Flows
Year ended December 31
In millions 1998 1997 1996
================================================================================
Cash flows from operating activities:
Net income $ 2,324 $ 2,246 $ 1,860
Adjustments for noncash items:
Equity in undistributed income
of subsidiaries (723) 48 (532)
Depreciation and amortization 10 11 11
Net securities gains (33) (22) --
Increase (decrease) in accrued
liabilities, net 35 (11) (26)
Other, net (439) (1) (216)
- --------------------------------------------------------------------------------
Net cash flow provided by
operating activities 1,174 2,271 1,097
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities -- (15) (3)
Proceeds from sales and maturities
of securities 80 58 65
Net cash provided from (used for)
short-term investments in bank
subsidiary (302) 448 (600)
Net increase in loans made to affiliates (1,339) (668) (320)
Return of capital from subsidiaries 112 3 1,756
Repayment of subordinated note
receivable by bank subsidiary -- -- 250
Proceeds from liquidity of subsidiary 14 -- --
Capital contributions to subsidiaries (1,484) (436) (1,818)
- --------------------------------------------------------------------------------
Net cash flow used in investing
activities (2,919) (610) (670)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings 177 135 (144)
Proceeds from issuance of long-term
debt 3,281 989 1,565
Repayments of long-term debt (907) (859) (584)
Proceeds from issuance of common
stock 182 987 207
Proceeds from issuance of preferred
stock -- -- 635
Redemption and repurchase of
common and preferred stock (329) (1,995) (694)
Cash dividends paid (937) (858) (793)
- --------------------------------------------------------------------------------
Net cash flow provided by (used in)
financing activities 1,467 (1,601) 192
- --------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (278) 60 619
- --------------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 874 814 195
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 596 $ 874 $ 814
================================================================================
48
<PAGE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Consolidated Average Balances/Interest Earned-Paid/Rates 1996-1998 (Unaudited)
<TABLE>
<CAPTION>
1998 1997 1996
Interest Interest Interest
December 31 Average Earned/ Average Earned/ Average Earned/
Dollars in millions(a) Balance Paid(b) Rate Balance Paid(b) Rate Balance Paid(b) Rate
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 1,552 $ 131 8.46% $ 1,922 $ 151 7.88% $ 1,411 $ 106 7.52%
Federal funds sold and securities
purchased under agreements to resell 3,488 325 9.32 2,529 273 10.81 2,410 241 10.00
Trading account securities 2,223 132 5.93 1,955 127 6.48 1,677 169 10.07
Securities available for sale 19,658 1,353 6.88 16,143 1,171 7.25 17,342 1,195 6.89
Securities held to maturity 741 38 5.13 862 44 5.07 923 50 5.44
Nontaxable securities 1,328 87 6.55 1,316 87 6.58 1,112 75 6.77
Loans and leases - domestic(c) 96,806 8,236 8.51 91,340 7,922 8.67 88,358 7,605 8.61
Loans and leases - international(c) 14,233 1,723 12.11 11,029 1,250 11.34 9,240 1,153 12.48
Due from brokers/dealers 3,765 184 4.89 2,884 133 4.62 2,179 95 4.35
Mortgages held for resale 2,685 189 7.04 1,503 115 7.63 2,151 166 7.74
Assets held for disposition 161 2 1.12 747 46 6.18 1,253 122 9.77
Foreclosed property and repossessed
equipment 54 -- -- 75 -- -- 111 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 146,694 12,400 8.45 132,305 11,319 8.56 128,167 10,977 8.56
===================================================================================================================================
Accrued interest receivable 1,032 -- -- 1,022 -- -- 976 -- --
Reserve for credit losses (2,244) -- -- (2,253) -- -- (2,388) -- --
Other assets 24,746 -- -- 20,812 -- -- 19,353 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $170,228 $12,400 -- $151,886 $ 11,319 -- $146,108 $10,977 --
===================================================================================================================================
Liabilities and stockholders' equity:
Deposits
Savings $ 44,332 $ 1,078 2.43% $ 42,168 $ 1,016 2.41% $ 41,280 $ 1,015 2.46%
Time 28,348 1,523 5.37 26,645 1,423 5.34 28,188 1,560 5.53
International 15,954 1,105 6.92 13,624 900 6.61 12,356 858 6.95
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 88,634 3,706 4.18 82,437 3,339 4.05 81,824 3,433 4.20
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 21,669 1,259 5.81 17,127 1,052 6.14 15,099 991 6.56
Due to brokers/dealers 4,501 214 4.75 3,463 152 4.39 2,645 111 4.20
Long-term debt 10,962 767 7.00 7,993 584 7.30 8,158 584 7.16
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 125,766 5,946 4.73 111,020 5,127 4.62 107,726 5,119 4.75
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread -- 6,454 3.72 -- 6,192 3.94 -- 5,858 3.81
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits 24,042 -- -- 23,812 -- -- 22,155
Other liabilities 6,746 -- -- 4,866 -- -- 4,088
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 156,554 5,946 -- 139,698 5,127 -- 133,969 5,119
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity and dual convertible
preferred stock 13,674 -- -- 12,188 -- -- 12,139 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $170,228 $ 5,946 -- $151,886 $ 5,127 -- $146,108 $ 5,119 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.40% 4.68% 4.57%
===================================================================================================================================
</TABLE>
(a) The data in this table is presented on a fully taxable equivalent basis.
The tax-equivalent adjustment is based upon the applicable federal and
state income tax rates.
(b) Includes fee income of $340 million, $264 million and $216 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
(c) Nonperforming loans are included in average balances used to determine
rates.
Common Stock Price and Dividend Information(a) (Unaudited)
<TABLE>
<CAPTION>
1998 1997
By quarter 1 2 3 4 Year 1 2 3 4 Year
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Price
High $ 42.53 $ 45.00 $ 44.22 $ 44.69 $ 45.00 $ 31.38 $ 32.91 $ 35.38 $ 37.56 $ 37.56
Low 34.31 39.00 32.78 31.69 31.69 24.81 27.75 31.69 30.97 24.81
- -------------------------------------------------------------------------------------------------------------------------------
Dividends declared .245 .245 .245 .270 1.00 .225 .225 .225 .245 .92
Dividends paid .245 .245 .245 .245 .98 .225 .225 .225 .225 .90
===============================================================================================================================
</TABLE>
(a) Fleet Boston's common stock is listed on the New York Stock Exchange
(NYSE). The table above sets forth, for the periods indicated, the range
of high and low sale prices per share of Fleet Boston's common stock on
the composite tape and dividends declared and paid per share.
49
<PAGE>
FLEET BOSTON CORPORATION
SUPPLEMENTAL STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Rate/Volume Analysis (Unaudited)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to(a) Increase (Decrease) Due to(a)
- --------------------------------------------------------------------------------------------------------------------------------
In millions Volume Rate Net Volume Rate Net
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest earned on: (b)
Interest-bearing deposits $ (32) $ 12 $ (20) $ 40 $ 5 $ 45
Federal funds sold and securities purchased under
agreements to resell 82 (30) 52 12 20 32
Trading account securities 14 (9) 5 37 (79) (42)
Securities available for sale 238 (56) 182 (100) 76 (24)
Securities held to maturity (7) 1 (6) (3) (3) (6)
Nontaxable securities -- -- -- 13 (2) 11
Loans and leases - domestic 461 (147) 314 259 58 317
Loans and leases - international 384 89 473 183 (86) 97
Due from brokers/dealers 43 8 51 32 6 38
Mortgages held for resale 82 (8) 74 (49) (2) (51)
Assets held for disposition (21) (23) (44) (40) (35) (75)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,244 (163) 1,081 384 (42) 342
- --------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits-
Savings-domestic 53 9 62 11 (10) 1
Time-domestic 91 9 100 (83) (54) (137)
International 161 44 205 82 (40) 42
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 305 62 367 10 (104) (94)
- --------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 260 (53) 207 118 (57) 61
Due to brokers/dealers 48 14 62 36 5 41
Long-term debt 206 (23) 183 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 819 -- 819 164 (156) 8
- --------------------------------------------------------------------------------------------------------------------------------
Net interest differential(c) $ 425 $ (163) $ 262 $ 220 $ 114 $ 334
================================================================================================================================
</TABLE>
(a) The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
(b) Tax-equivalent adjustment has been included in the calculations to reflect
this income as if it had been fully taxable. The tax-equivalent adjustment
is based upon the applicable federal and state income tax rates. The FTE
adjustment included in interest income was $59 million in 1998, $64
million in 1997 and $56 million in 1996.
(c) Includes fee income of $340 million, $264 million and $216 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Quarterly Summarized Financial Information (Unaudited)
<TABLE>
<CAPTION>
By quarter,
Dollars in millions, 1998
except per share amounts 1 2 3 4 Year
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Interest income $ 2,930 $ 3,106 $ 3,140 $ 3,165 $ 12,341
Interest expense 1,399 1,495 1,544 1,508 5,946
- ---------------------------------------------------------------------------------------------------------------
Net interest income 1,531 1,611 1,596 1,657 6,395
- ---------------------------------------------------------------------------------------------------------------
Provision for credit losses 232 178 180 260 850
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 1,299 1,433 1,416 1,397 5,545
Securities gains (losses) 76 11 37 (9) 115
Other noninterest income 1,210 1,260 1,195 1,501 5,166
- ---------------------------------------------------------------------------------------------------------------
2,585 2,704 2,648 2,889 10,826
Noninterest expense 1,659 1,668 1,832 1,891 7,050
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 926 1,036 816 998 3,776
Applicable income taxes 365 401 310 376 1,452
- ---------------------------------------------------------------------------------------------------------------
Net income $ 561 $ 635 $ 506 $ 622 $ 2,324
- ---------------------------------------------------------------------------------------------------------------
Net income applicable to common
stock $ 545 $ 618 $ 492 $ 609 $ 2,264
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share .60 .67 .54 .66 2.47
Diluted earnings per share .58 .66 .52 .65 2.41
Average number of common shares:
(in thousands)
Basic 914,264 916,134 916,314 917,738 916,123
Diluted 938,760 942,038 938,098 939,517 939,136
===============================================================================================================
<CAPTION>
By quarter,
Dollars in millions, 1997
except per share amounts 1 2 3 4 Year
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Interest income $ 2,766 $ 2,787 $ 2,807 $ 2,895 $ 11,255
Interest expense 1,236 1,248 1,302 1,341 5,127
- ---------------------------------------------------------------------------------------------------------------
Net interest income 1,530 1,539 1,505 1,554 6,128
- ---------------------------------------------------------------------------------------------------------------
Provision for credit losses 124 143 125 130 522
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 1,406 1,396 1,380 1,424 5,606
Securities gains (losses) 22 36 15 40 113
Other noninterest income 923 1,120 1,055 995 4,093
- ---------------------------------------------------------------------------------------------------------------
2,351 2,552 2,450 2,459 9,812
Noninterest expense 1,452 1,606 1,477 1,515 6,050
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 899 946 973 944 3,762
Applicable income taxes 358 387 395 376 1,516
- ---------------------------------------------------------------------------------------------------------------
Net income $ 541 $ 559 $ 578 $ 568 $ 2,246
- ---------------------------------------------------------------------------------------------------------------
Net income applicable to common
stock $ 515 $ 534 $ 553 $ 551 $ 2,153
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share .56 .59 .62 .62 2.39
Diluted earnings per share .54 .58 .61 .60 2.33
Average number of common shares:
(in thousands)
Basic 925,094 901,800 889,214 894,140 902,442
Diluted 945,593 922,445 912,265 916,648 924,021
===============================================================================================================
</TABLE>
50
