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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for quarterly period ended June 30, 1999
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period _________ to _________
Commission File Number 1-6366
FLEET FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0341324
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Federal Street
Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
(617) 346-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
The number of shares of common stock of the Registrant outstanding as of July
31, 1999 was 569,498,608.
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<PAGE>
FLEET FINANCIAL GROUP, INC.
FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. ITEM 1. FINANCIAL INFORMATION
Consolidated Statements of Income
Three Months Ended June 30, 1999 and 1998 3
Six Months Ended June 30, 1999 and 1998 4
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 5
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 7
Condensed Notes to Consolidated Financial Statements 8
PART I. ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 23
SIGNATURES 25
EXHIBITS 26
2
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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For the three months ended June 30
Dollars in millions, except per share amounts 1999 1998
- --------------------------------------------------------------------------------
Interest and fees on loans $ 1,557 $ 1,481
Interest on securities 177 179
Other 49 56
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Total interest income 1,783 1,716
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Interest expense:
Deposits 404 474
Short-term borrowings 72 107
Long-term debt 236 104
Other 48 59
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Total interest expense 760 744
- --------------------------------------------------------------------------------
Net interest income 1,023 972
- --------------------------------------------------------------------------------
Provision for credit losses 146 118
- --------------------------------------------------------------------------------
Net interest income after provision for credit
losses 877 854
- --------------------------------------------------------------------------------
Noninterest income:
Investment services revenue 264 220
Banking fees and commissions 194 182
Capital markets revenue 184 107
Credit card revenue 164 98
Processing-related revenue 159 126
Other 71 76
- --------------------------------------------------------------------------------
Total noninterest income 1,036 809
- --------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 579 482
Equipment 81 74
Occupancy 75 75
Intangible asset amortization 71 59
Legal and other professional 47 34
Other 325 293
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Total noninterest expense 1,178 1,017
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Income before income taxes 735 646
Applicable income taxes 285 253
- --------------------------------------------------------------------------------
Net Income $ 450 $ 393
================================================================================
Net income applicable to common shares $ 435 $ 380
Basic earnings per share .76 .67
Diluted earnings per share .74 .65
Dividends declared .27 .245
Diluted weighted average common shares outstanding 589,633,527 588,760,186
================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
================================================================================
For the six months ended June 30
Dollars in millions, except per share amounts 1999 1998
- --------------------------------------------------------------------------------
Interest and fees on loans $ 3,116 $ 2,858
Interest on securities 350 342
Other 95 110
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Total interest income 3,561 3,310
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Interest expense:
Deposits 827 911
Short-term borrowings 152 191
Long-term debt 437 193
Other 88 114
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Total interest expense 1,504 1,409
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Net interest income 2,057 1,901
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Provision for credit losses 295 210
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Net interest income after provision for credit
losses 1,762 1,691
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Noninterest income:
Investment services revenue 511 421
Banking fees and commissions 387 358
Capital markets revenue 333 245
Processing-related revenue 312 186
Credit card revenue 305 154
Other 147 140
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Total noninterest income 1,995 1,504
- --------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,121 926
Equipment 166 154
Occupancy 150 149
Intangible asset amortization 142 110
Legal and other professional 91 65
Merger-related charges -- 73
Other 633 537
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Total noninterest expense 2,303 2,014
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Income before income taxes 1,454 1,181
Applicable income taxes 566 465
- --------------------------------------------------------------------------------
Net Income $ 888 $ 716
================================================================================
Net income applicable to common shares $ 857 $ 691
Basic earnings per share 1.51 1.22
Diluted earnings per share 1.45 1.18
Dividends declared .54 .49
Diluted weighted average common shares outstanding 589,290,740 587,999,286
================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
=============================================================================================================
June 30, December 31,
Dollars in millions, except share amounts 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,001 $ 5,738
Securities (market value: $10,464 and $10,797) 10,461 10,792
Loans 75,287 69,396
Reserve for credit losses (1,723) (1,552)
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Net loans 73,564 67,844
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Due from brokers/dealers 2,444 3,600
Mortgages held for resale 1,339 3,960
Premises and equipment 1,234 1,229
Mortgage servicing rights 2,630 1,405
Intangible assets 3,389 3,117
Other assets 6,886 6,697
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Total assets $ 106,948 $ 104,382
=============================================================================================================
Liabilities
Deposits:
Demand $ 11,807 $ 13,400
Regular savings, NOW, money market 34,609 34,696
Time 19,928 21,582
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Total deposits 66,344 69,678
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Federal funds purchased and securities sold under
agreements to repurchase 3,507 4,456
Other short-term borrowings 3,379 4,856
Due to brokers/dealers 3,775 3,975
Long-term debt 16,436 8,820
Accrued expenses and other liabilities 3,767 3,188
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Total liabilities 97,208 94,973
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Stockholders' equity
Preferred stock 691 691
Common stock (571,168,358 shares issued in 1999 and 1998) 6 6
Common surplus 3,346 3,284
Retained earnings 5,887 5,337
Accumulated other comprehensive (loss)/income (116) 128
Treasury stock, at cost (1,874,302 shares in 1999 and 1,593,005 shares in 1998) (74) (37)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,740 9,409
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Total liabilities and stockholders' equity $ 106,948 $ 104,382
=============================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
===================================================================================================================================
Common Accumulated
Stock at Other
Six months ended June 30 Preferred $.01 Common Retained Comprehensive Treasury
Dollars in millions, except share amounts Stock Par Surplus Earnings Income/(Loss) Stock Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Balance at December 31, 1997 $691 $ 3 $3,329 $4,437 $ 97 $(105) $8,452
Net income 716 716
Other comprehensive income, net of tax:
Adjustment to unrealized gain on
securities available for sale 8 8
--------
Comprehensive income 724
Cash dividends declared on common stock
($.49 per share) (275) (275)
Cash dividends declared on preferred stock (25) (25)
Common stock issued in connection with
employee benefit and stock option plans (30) (2) 50 18
Treasury stock purchased (33) (33)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $691 $ 3 $3,299 $4,851 $105 $ (88) $8,861
- -----------------------------------------------------------------------------------------------------------------------------------
1999
Balance at December 31, 1998 $691 $ 6 $3,284 $5,337 $128 $ (37) $9,409
Net income 888 888
Other comprehensive income, net of tax:
Adjustment to unrealized gain on
securities available for sale (244) (244)
--------
Comprehensive income 644
Cash dividends declared on common stock
($.54 per share) (307) (307)
Cash dividends declared on preferred stock (25) (25)
Common stock issued in connection with
employee benefit and stock option plans 60 (1) (11) 48
Treasury stock purchased (24) (24)
Other, net 2 (5) (2) (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $691 $ 6 $3,346 $5,887 $(116) $ (74) $9,740
===================================================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
======================================================================================================
Six months ended June 30
Dollars in millions 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 888 $ 716
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 131 121
Amortization and impairment of mortgage servicing rights 174 253
Amortization of other intangible assets 142 110
Provision for credit losses 295 210
Deferred income tax expense 252 142
Securities gains --- (51)
Merger-related charges --- 73
Originations and purchases of mortgages held for resale (18,195) (12,669)
Proceeds from sales of mortgages held for resale 20,816 11,320
Decrease/(increase) in due from brokers/dealers 1,156 (374)
Increase in accrued receivables, net (228) (88)
(Decrease)/increase in due to brokers/dealers (200) 666
(Decrease)/increase in accrued liabilities, net (105) 288
Other, net (627) (327)
- ------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 4,499 390
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (1,911) (3,665)
Proceeds from sales of securities available for sale 737 1,160
Proceeds from maturities of securities available for sale 986 489
Purchases of securities held to maturity (572) (577)
Proceeds from maturities of securities held to maturity 714 752
Net cash and cash equivalents (paid for)/received from businesses acquired (613) 380
Net increase in loans (574) (2,737)
Purchases of premises and equipment (90) (92)
Purchases of mortgage servicing rights (472) (182)
- ------------------------------------------------------------------------------------------------------
Net cash flow used in investing activities (1,795) (4,472)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net (decrease)/increase in deposits (3,334) 670
Net (decrease)/increase in short-term borrowings (2,784) 3,050
Proceeds from issuance of long-term debt 3,250 1,718
Repayments of long-term debt (264) (564)
Proceeds from the issuance of common stock 48 18
Repurchase of common stock (24) (33)
Cash dividends paid (333) (284)
- ------------------------------------------------------------------------------------------------------
Net cash flow (used in)/provided by financing activities (3,441) 4,575
- ------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (737) 493
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 5,738 5,574
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 5,001 $ 6,067
======================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
7
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein has been
prepared in conformity with the accounting principles and practices in Fleet
Financial Group, Inc.'s (Fleet or the corporation) consolidated financial
statements included in the Annual Report on Form 10-K filed with the Securities
and Exchange Commission (SEC) for the year ended December 31, 1998. The
accompanying interim consolidated financial statements contained herein are
unaudited. However, in the opinion of the corporation, all adjustments
consisting of normal recurring items necessary for a fair statement of the
operating results for the periods shown have been made. The results of
operations for the six months ended June 30, 1999 may not be indicative of
operating results for the year ended December 31, 1999. Certain prior period
amounts have been reclassified to conform to current classifications.
NOTE 2. ACQUISITIONS
On February 1, 1999, the corporation acquired Sanwa Business Credit
(Sanwa), a leasing and asset-based lending company from Sanwa Bank, Ltd. Sanwa
offers a wide variety of asset-based lending, equipment leasing and vendor
finance programs throughout the United States and had approximately $6 billion
in assets. Goodwill of approximately $385 million was recorded and is being
amortized on a straight-line basis over 25 years.
On March 14, 1999, the corporation entered into a definitive agreement to
merge with BankBoston Corporation (BankBoston). Under the terms of the
agreement, BankBoston shareholders will receive 1.1844 shares of Fleet common
stock for each share of BankBoston common stock.
A merger and restructuring-related charge of approximately $650 million
after-tax is anticipated to be recorded upon consummation of the merger or
shortly thereafter. This charge includes transaction costs, exit costs including
severance and facilities-related charges, and accelerated depreciation in excess
of normal scheduled depreciation on duplicate systems and excess facilities that
will be taken out of service. The corporation also expects to recognize an
approximate $60 million after-tax charge to earnings in subsequent periods,
related to costs of integrating the two companies.
In addition, Fleet and BankBoston anticipate that, in order to obtain
regulatory approval for the merger, the companies will be required to divest
approximately $13 billion of deposits, primarily in the Massachusetts,
Connecticut and Rhode Island markets. The corporation expects to complete the
merger, which was approved by the stockholders of both companies on August 11,
1999 but remains subject to regulatory approvals, late in the third quarter or
early in the fourth quarter of 1999. The transaction will be accounted for under
the pooling-of-interests method of accounting.
NOTE 3. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash Flow Disclosure
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Six months ended June 30
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Supplemental disclosure for cash paid
during the period for:
Interest expense $ 1,437 $ 1,396
Income taxes, net of refunds 456 297
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to foreclosed property
and repossessed equipment 4 6
Adjustment to unrealized gain on
securities available for sale (244) 8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assets acquired and liabilities assumed in
business combinations were as follows:
Assets acquired, net of cash and cash
equivalents received 6,074 2,845
Net cash and cash equivalents (paid)/ received (613) 380
Liabilities assumed 5,460 3,225
================================================================================
NOTE 4. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The corporation has adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting information by
operating segment. The corporation discloses interim segment reporting in the
"Lines of Business" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations (pages 13-15) of this Form 10-Q.
8
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
================================================================================
Three months Six months
Dollars in millions, ended June 30 ended June 30
except per share amounts 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Earnings
Net income $ 450 $ 393 $ 888 $ 716
Net interest income (FTE)(a) 1,031 981 2,073 1,919
- --------------------------------------------------------------------------------
Per Common Share
Basic earnings .76 .67 1.51 1.22
Diluted earnings .74 .65 1.45 1.18
Cash dividends declared .27 .245 .54 .49
Book value 15.90 14.39 15.90 14.39
- --------------------------------------------------------------------------------
Operating Ratios
Return on average assets 1.65% 1.59% 1.64% 1.51%
Return on common equity 19.38 18.97 19.33 17.51
Efficiency ratio 57.0 56.8 56.4 56.7
Equity to assets
(period-end) 9.11 8.80 9.11 8.80
- --------------------------------------------------------------------------------
At June 30
Total assets $ 106,948 $ 100,713 $ 106,948 $ 100,713
Stockholders' equity 9,740 8,861 9,740 8,861
Nonperforming assets(b) 318 337 318 337
================================================================================
(a) The FTE adjustment included in net interest income was $8 million and $9
million for the three months ended June 30, 1999 and 1998, respectively,
and $16 million and $18 million for the six months ended June 30, 1999 and
1998, respectively.
(b) Nonperforming assets and related ratios at June 30, 1999 and 1998 do not
include $170 million and $147 million, respectively, of nonperforming
assets classified as held for sale by accelerated disposition.
Fleet reported net income of $450 million, or $.74 per diluted share, in
the second quarter of 1999, compared to $393 million, or $.65 per diluted share,
in the second quarter of 1998. Return on average assets (ROA) and return on
common equity (ROE) were 1.65% and 19.38%, respectively, for the second quarter
of 1999, compared to 1.59% and 18.97%, respectively, for the second quarter of
1998. Net income for the first six months of 1999 was $888 million as compared
to $716 million for the first six months of 1998. Diluted earnings per share
rose 23% to $1.45 for the first six months of 1999 compared with $1.18 earned in
the first half of 1998. ROA and ROE for the first six months of 1999 were 1.64%
and 19.33%, respectively, compared with 1.51% and 17.51%, respectively, in 1998.
The six months ended June 30, 1998 included merger-related charges of $73
million ($44 million post-tax) pertaining to the acquisitions of Quick & Reilly
and the consumer credit card operations of Advanta. Excluding the impact of
these charges, the corporation's net income for the first six months of 1998 was
$760 million, or $1.25 per diluted share, while ROA and ROE were 1.60% and
18.62%, respectively.
The increases in net income for both the quarter and year-to-date were
largely due to strong growth in many of the corporation's businesses,
particularly brokerage and investment services, mortgage banking, investment
banking, and credit cards, as well as earnings from the recent acquisitions of
Sanwa and Merrill Lynch Specialists, Inc. (MLSI).
INCOME STATEMENT ANALYSIS
Net Interest Income
================================================================================
Three months Six months
FTE Basis ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Interest income $1,783 $1,716 $3,561 $3,310
Tax-equivalent adjustment 8 9 16 18
Interest expense 760 744 1,504 1,409
- --------------------------------------------------------------------------------
Net interest income $1,031 $ 981 $2,073 $1,919
================================================================================
Net interest income on a fully taxable equivalent basis (FTE) totaled
$1,031 million for the quarter ended June 30, 1999, compared to $981 million for
the same period in 1998. The increase was primarily attributable to the
inclusion of Sanwa and strong growth in the corporation's commercial loan
portfolio.
Net Interest Margin and Interest-Rate Spread
================================================================================
Three months ended June 30 1999 1998
FTE Basis Average Average
Dollars in millions Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Securities $10,816 6.48% $11,099 6.58%
Loans 74,528 8.11 66,329 8.68
Mortgages held for resale 2,673 6.99 2,513 7.26
Due from brokers/dealers 3,567 4.16 4,482 4.55
Other 1,847 5.40 1,018 3.82
- --------------------------------------------------------------------------------
Total interest-earning assets 93,431 7.68 85,441 8.09
- --------------------------------------------------------------------------------
Deposits 50,653 3.20 51,322 3.70
Short-term borrowings 7,335 3.94 9,005 4.77
Due to brokers/dealers 4,426 4.32 5,167 4.62
Long-term debt 15,931 5.93 5,572 7.48
- --------------------------------------------------------------------------------
Interest-bearing liabilities 78,345 3.89 71,066 4.20
- --------------------------------------------------------------------------------
Interest-rate spread 3.79 3.89
Interest-free
sources of funds 15,086 14,375
- --------------------------------------------------------------------------------
Total sources of funds $93,431 $85,441
- --------------------------------------------------------------------------------
Net interest margin 4.42% 4.60%
================================================================================
The corporation's net interest margin for the second quarter of 1999 was
4.42%. The 18 basis point decrease in net interest margin was primarily
attributable to declining yields in the commercial loan and credit card
portfolios, as well as a change in the mix of interest-earning assets as a
decrease in higher yielding consumer loans, particularly credit card balances,
were replaced with higher levels of leases and commercial loans. These items
were partially offset by declining rates paid on long-term debt and deposits.
Average loans increased $8.2 billion to $74.5 billion while the yield
declined 57 basis points. The growth in average loans resulted primarily from
increases in the commercial and lease financing portfolios as the second quarter
of 1999 was positively impacted by the Sanwa acquisition which added
approximately $6 billion of average loans and leases. The decline in the yield
was principally attributable to the 75 basis point average decrease in the prime
rate
9
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
over the period.
Average mortgages held for resale increased $160 million, or over 6%,
while the yield declined 27 basis points over the second quarter of 1998. The
increase in mortgages held for resale was due to continued high loan production
volume at Fleet Mortgage and the decline in yield was directly related to
changes in the mortgage-rate environment throughout the year.
The $669 million decrease in average interest-bearing deposits compared to
the second quarter of 1998 was primarily attributable to a decrease in average
wholesale time deposits as a result of the corporation utilizing longer-term
funding vehicles and runoff of wholesale funding acquired as part of the
corporation's recent mergers and acquisitions.
The $1.7 billion decrease in average short-term borrowings was
attributable to the corporation adding long-term debt to fund balance sheet
growth.
The $10.4 billion increase in average long-term debt was due primarily to
net increases in senior and subordinated debt and capital securities issued
during the latter half of 1998 and during 1999 to fund acquisitions and overall
asset growth. The 155 basis point decrease in the funding rate was due to the
aforementioned debt issued at lower floating rates.
Noninterest Income
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Investment services revenue $ 264 $220 $ 511 $ 421
Banking fees and commissions 194 182 387 358
Capital markets revenue 184 107 333 245
Credit card revenue 164 98 305 154
Processing-related revenue 159 126 312 186
Other noninterest income 71 76 147 140
- --------------------------------------------------------------------------------
Total noninterest income $1,036 $809 $1,995 $1,504
================================================================================
Noninterest income for the second quarter of 1999 increased $227 million
to $1,036 million compared to $809 million for the same period of 1998, an
increase of 28%, reflecting the corporation's continued focus on developing,
acquiring and growing fee-based businesses. Increases were noted in all core
revenue categories and reflect revenues achieved from the acquisitions of Sanwa,
MLSI, as well as strong growth and volume at Fleet Credit Card Services, Fleet
Mortgage, AFSA Data Corporation (AFSA) and Quick & Reilly.
Investment Services Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Investment management revenue $143 $136 $283 $261
Brokerage fees and commissions 121 84 228 160
- --------------------------------------------------------------------------------
Total investment services revenue $264 $220 $511 $421
================================================================================
Investment services revenue, which includes investment management revenues
as well as brokerage fees and commissions, increased $44 million, or 20%, over
the second quarter of 1998. Brokerage fees and commissions increased $37
million, or 44%, over the second quarter of 1998, driven by a strong equity
market and trading volumes which benefited the brokerage and clearing units of
Quick & Reilly. The major components of investment management revenue are as
follows:
Investment Management Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Private clients group $ 58 $ 57 $116 $111
Retail investments 28 20 54 37
Columbia Management Company 25 27 49 50
Retirement plan services 18 17 36 33
Not-for-profit institutional services 12 13 25 25
Other 2 2 3 5
- --------------------------------------------------------------------------------
Total $143 $136 $283 $261
================================================================================
Investment management revenue increased 5% in the second quarter of 1999
to $143 million compared to $136 million in the second quarter of 1998. This
improvement was largely driven by growth in overall assets under management as
well as a 10% increase in the sales of mutual funds and annuities. Assets under
management grew 9% to $87 billion at June 30, 1999 from $80 billion at June 30,
1998.
Banking fees and commissions, which includes fees received for cash
management, deposit accounts, electronic banking fees and other fees, increased
$12 million, or 7%, to $194 million. The increase was due principally to the
development of new product packaging and fee schedules, higher levels of ATM and
debit card transactions, as well as targeted marketing efforts throughout 1999.
Capital Markets Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Brokerage market-making revenue $ 81 $ 31 $146 $ 62
Venture capital revenue 45 39 86 69
Investment banking fees 30 12 44 18
Foreign exchange/interest-rate products 19 19 40 33
Securities trading gains 9 6 17 12
Securities gains -- -- -- 51
- --------------------------------------------------------------------------------
Total capital markets revenue $184 $107 $333 $245
================================================================================
10
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital markets revenue increased $77 million, or 72%, to $184 million for
the quarter ended June 30, 1999, when compared to the same quarter of 1998
primarily driven by increases in brokerage market-making, venture capital and
investment banking fees.
The $50 million rise in brokerage market-making revenue from Fleet's
specialists subsidiaries was a result of increased trading volumes and market
volatility as well as the acquisition of MLSI during December 1998.
Venture capital revenue at Fleet Private Equity, the corporation's venture
capital business, increased by $6 million when compared to the second quarter of
1998 as the corporation continued to experience gains in this business as a
result of the strength of the equity markets. 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 likelihood of such gains in the future
cannot be predicted.
The $18 million, or 150%, increase in investment banking fees when
compared to the second quarter of 1998 was primarily attributable to higher loan
syndication activity from increased market penetration as well as increased high
yield underwriting activities.
Credit card revenue rose $66 million, or 67%, over the second quarter of
1998 primarily attributable to acquisitions of various credit card portfolios
during the latter half of 1998, a decline in charge-offs within the securitized
credit card portfolio, as well as the transfer of credit card loans from the
corporation's owned portfolio to the securitized pool.
Processing-Related Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Mortgage banking revenue, net $ 95 $ 78 $186 $ 96
Student loan servicing fees 36 30 69 58
Other 28 18 57 32
- --------------------------------------------------------------------------------
Total processing-related revenue $159 $126 $312 $186
================================================================================
Processing-related revenue increased $33 million, or 26%, when compared to
the second quarter of 1998 reflecting increases in all components. Student loan
servicing fees increased $6 million, or 20%, at AFSA, the corporation's student
loan servicing subsidiary. AFSA services 6.6 million accounts nationwide, an
increase of 14% from accounts serviced as of June 30, 1998, and is the largest
student loan servicer in the United States, with over $55 billion in loans
serviced. Other processing-related revenue increased $10 million over the second
quarter of 1998, due to strong tax and health care processing revenue.
Mortgage Banking Revenue, Net
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net loan servicing revenue $ 133 $ 113 $ 253 $ 230
Mortgage production revenue 54 58 107 85
Gains on sales of mortgage servicing -- 8 -- 34
Mortgage servicing rights amortization (92) (101) (174) (178)
Impairment charge -- -- -- (75)
- --------------------------------------------------------------------------------
Total mortgage banking revenue, net $ 95 $ 78 $ 186 $ 96
================================================================================
Net mortgage banking revenue was $95 million in the second quarter of
1999, an increase of $17 million, or 22%, as compared to the second quarter of
1998.
Loan servicing revenue represents fees received for servicing residential
mortgage loans. The $20 million increase in loan servicing revenue was
attributable to the corporation receiving a higher servicing spread on mortgage
servicing acquired, as well as an increase in the size of the corporation's
servicing portfolio. The mortgage servicing portfolio increased $11.4 billion,
or 10%, to $127.8 billion at June 30, 1999 compared to $116.4 billion at June
30, 1998.
Mortgage production revenue, which includes income derived from the loan
origination process and net gains on sales of mortgage loans, decreased $4
million over the second quarter of 1998 as a result of a lower level of gains on
sales of loans during the quarter. Loan production volume reached $9.7 billion
in the second quarter of 1999 as compared to $9.0 billion in the same period a
year ago. In addition, the corporation recorded $8 million of gains on the sales
of mortgage servicing rights in the second quarter of 1998, while no such gains
were recorded in the second quarter of 1999.
Mortgage servicing rights (MSRs) amortization declined $9 million to $92
million for the second quarter of 1999 when compared to $101 million for the
second quarter of 1998. This decline was the result of a lower level of
prepayments in the second quarter of 1999 which had the effect of extending the
estimated duration of the MSRs, thereby decreasing amortization expense.
11
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Employee compensation and benefits $ 579 $ 482 $1,121 $ 926
Equipment 81 74 166 154
Occupancy 75 75 150 149
Intangible asset amortization 71 59 142 110
Legal and other professional 47 34 91 65
Marketing 33 35 68 62
Printing and mailing 27 24 53 46
Telephone 24 25 46 46
Other 241 209 459 383
- --------------------------------------------------------------------------------
Total noninterest expense excluding
merger-related charges 1,178 1,017 2,296 1,941
Merger-related charges -- -- 7 73
- --------------------------------------------------------------------------------
Total noninterest expense $1,178 $1,017 $2,303 $2,014
================================================================================
Noninterest expense for the second quarter of 1999 totaled $1.18 billion
compared to $1.02 billion for the same period of 1998. The $161 million increase
over the second quarter of 1998 was primarily the result of various
acquisitions, as well as higher expenses in volume and processing-related
businesses, primarily Fleet Mortgage and Quick & Reilly. The corporation's
efficiency ratio increased slightly from 56.8% to 57.0% from the second quarter
of 1998 to the second quarter of 1999.
Employee compensation and benefits increased $97 million, or 20%, compared
with the second quarter of 1998 due primarily to incentive and volume-related
increases in compensation at many of the corporation's businesses, particularly
Fleet Mortgage and Quick & Reilly.
Intangible asset amortization increased $12 million to $71 million when
compared to the same period a year ago as a result of goodwill added from
acquisitions in 1998 and 1999 as well as the ongoing earnout payment relating to
the 1996 NatWest Bancorp acquisition.
Legal and other professional increased $13 million to $47 million when
compared to the second quarter of 1998 as a result of professional fees
pertaining to acquisitions.
Other noninterest expense increased $32 million to $241 million in the
second quarter of 1999 primarily attributable to increased volume at the
corporation's brokerage and processing-related businesses, and expenses from
acquired companies, as well as write-downs relating to equity investments.
Impact of the Year 2000 Issue
The corporation's Year 2000 project continues to be directed by a Year
2000 Executive Management Steering Committee consisting of its President and
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. The corporation continues to
utilize both internal and external resources to appropriately prepare Fleet for
the Year 2000. The corporation will continue to focus on the following key areas
throughout 1999: testing, vendor management, event planning and communication
with customers. Additionally, the corporation continues to work on high priority
new business technological initiatives that it deems critical to its ongoing
business success.
The corporation has completed the remediation and testing of its internal
systems. The corporation considers itself "Y2K Ready" - meaning 100% of the
corporation's internal systems 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 Counsel (FFIEC) guidelines. The
corporation has established a separate test environment to accommodate its Year
2000 testing activity.
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 Year 2000 readiness of all the
corporation's vendors and service providers continues with a particular focus on
alternatives, where possible, for those groups 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. In addition, the corporation continues
to receive written and verbal verification from its critical vendors and service
providers as to their Year 2000 readiness. A majority of its 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. Testing with those customers that exchange data electronically with
the corporation is underway as necessary.
12
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Until and after the Year 2000 rollover takes place, there can be no
assurance that Year 2000 related problems will not occur. The Year 2000 is an
unprecedented event. Despite the corporation's efforts to identify and address
Year 2000 issues, such issues present risks to the corporation. Such risks
include business disruptions, operational problems, financial losses, legal
liability, and other similar risks. The corporation's businesses, results of
operations, and financial position could be materially adversely affected.
The corporation had 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.
In addition, a corporate-wide 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
walk-throughs, employee notification tests and structured plan walk-through
between interdependent units. Event Plans will continue to be updated, as
appropriate, into 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 is assessing the level of preparedness of
corporations in which investments are made on behalf of its customers. This
activity will continue throughout 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
subsequent to Year 2000. However, to mitigate the risk, the corporation assesses
quarterly 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 those
customers that present an unacceptable risk to the corporation due to Year 2000.
Of the material relationships the corporation has assessed, four-tenths of one
percent have presently been identified as unacceptable in their level of Year
2000 preparedness and will be required to take action to mitigate their Year
2000 risk. Therefore, we do not expect to experience any major loan loss due to
the Year 2000 issue and, at this time, do not expect to adjust the corporation's
current loan loss reserves. The corporation will continue to reassess the
readiness of customers receiving the unacceptable rating on a quarterly basis
throughout 1999 to ensure that the proper steps are being 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. Ninety-five percent of 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. One hundred percent of
material funds takers and ninety-six percent of 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 throughout 1999.
The corporation will continue communicating with employees and customers
throughout 1999 to discuss its readiness through a variety of communication
vehicles: statement messages and inserts; ATM on screen and receipt messages;
brochures; direct mail initiatives; direct discussions with customers; seminars;
and through the corporation's internet web site (www.fleet.com).
The corporation continues to approximate that the cost of the Year 2000
project will be $150 million. The corporation incurred $8 million during the
second quarter of 1999 and $109 million of expenses since the inception of this
project.
Income Taxes
The corporation recorded income tax expense in the amount of $285 million
for the second quarter of 1999 compared with $253 million for the same period a
year ago. The effective tax rate was 38.8% and 39.2% for the second quarter of
1999 and 1998, respectively.
Lines of Business
The corporation is managed along five lines of business: Commercial
Financial Services, Retail Banking, Fleet Investment Group, National Financial
Services, and Treasury. Management accounting concepts are periodically refined
and results are restated to reflect
13
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
changes in methodology and organizational structure. Prior periods have also
been restated to reflect such changes. Net income by business line is shown in
the following table.
Net Income by Lines of Business
================================================================================
Three months Six months
ended June 30 ended June 30
Dollars in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Commercial Financial Services $150 $110 $297 $215
Retail Banking 87 112 180 204
Fleet Investment Group 86 59 169 83
National Financial Services 82 74 165 114
Treasury 23 25 47 61
All Other 22 13 30 39
- --------------------------------------------------------------------------------
Total $450 $393 $888 $716
================================================================================
Commercial Financial Services
================================================================================
Three months ended June 30,
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 419 $ 321
Noninterest income 146 100
------- -------
Total revenue 565 421
Provision 67 44
Noninterest expense 251 194
- --------------------------------------------------------------------------------
Net income $ 150 $ 110
- --------------------------------------------------------------------------------
Balance sheet data:
Average total assets 56,437 43,292
Average loans 49,233 38,991
Average deposits 12,193 11,508
- --------------------------------------------------------------------------------
Return on equity 18% 21%
================================================================================
Commercial Financial Services includes traditional commercial banking,
national, specialized and asset-based lending, as well as investment banking,
government banking, trade finance and cash management services. Included in
these results is the acquisition of Sanwa Business Credit in the first quarter
of 1999 which added $6.5 billion to second quarter of 1999 average assets.
Commercial Financial Services earned $150 million in the second quarter of 1999.
Compared to the second quarter of 1998, earnings increased $40 million, or 36%.
Loans increased $10.2 billion, or 26%, influenced by the first quarter of 1999
acquisition of Sanwa, reflecting strong growth within the commercial banking,
leasing, asset-based lending, and specialty units. Excluding the Sanwa
acquisition, loans grew by 11%, or $4.2 billion. Additionally, a 46% increase in
noninterest revenue contributed to earnings growth. Excluding Sanwa, total
revenue increased by $74 million due to strong loan growth and increased
leasing, corporate finance, trade services and tax processing activities.
Retail Banking
================================================================================
Three months ended June 30,
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 437 $ 457
Noninterest income 152 161
------- -------
Total revenue 589 618
Provision 26 29
Noninterest expense 403 385
- --------------------------------------------------------------------------------
Net income $ 87 $ 112
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 9,093 10,093
Average deposits 42,332 42,533
- --------------------------------------------------------------------------------
Return on equity 20% 26%
================================================================================
Retail Banking includes businesses engaged in consumer retail services
through branch banking and direct banking units, as well as small business
lending and deposit services. The Retail Banking unit earned $87 million in the
second quarter of 1999, down from $112 million in the second quarter of 1998.
Lower earnings reflect a $7 million post-tax write-down related to an equity
investment. In addition, the prior year included a $9 million post-tax gain on
the sale of branches. Excluding these items, Retail Banking's second quarter
1999 earnings were $9 million below the prior year, driven primarily by
declining loan balances which were partly offset by deposit product enhancements
in the second quarter of 1998. Lower levels of deposits reflect a continued
migration of customers to alternative higher-rate investment products, partly
offset by higher levels of money market accounts due to aggressive pricing
strategies. Excluding one-time charges, operating expenses increased by less
than 2%, as the retail bank continues to reconfigure distribution channels in a
manner consistent with consumer preferences.
Fleet Investment Group
================================================================================
Three months ended June 30,
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 52 $ 46
Noninterest income 357 262
------- -------
Total revenue 409 308
Provision 1 1
Noninterest expense 263 206
- --------------------------------------------------------------------------------
Net income $ 86 $ 59
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 4,958 3,898
Average deposits 1,946 2,117
- --------------------------------------------------------------------------------
Return on equity 24% 22%
- --------------------------------------------------------------------------------
Assets Under Management $87,148 $80,007
================================================================================
14
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fleet Investment Group provides asset management services to institutional
and wealthy market clients, retail mutual fund and annuity sales, as well as
securities brokerage services. Fleet Investment Group earnings increased $27
million compared to the second quarter of 1998. Higher earnings were driven by
strong growth in brokerage and market-making revenues which increased by $87
million at Quick & Reilly. Investment management revenues, which include fees on
assets under management and sales of retail investment products and services,
grew by $7 million, or 5%, compared to the second quarter of 1998. Increased
revenues were partly attributable to the December 1998 acquisition of MLSI as
well as increased trading volumes and market volatility. Higher investment
management revenues were driven by strong sales of mutual funds and annuity
products which increased by 10%, as well as growth in assets under management
which climbed to $87 billion in the second quarter of 1999.
National Financial Services
================================================================================
Three months ended June 30,
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 94 $ 128
Noninterest income 362 280
------ ------
Total revenue 456 408
Provision 87 75
Noninterest expense 237 213
- --------------------------------------------------------------------------------
Net income $ 82 $ 74
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 3,648 4,976
Average deposits 2,462 2,651
- --------------------------------------------------------------------------------
Return on equity 14% 13%
================================================================================
National Financial Services includes credit card services, private equity
financing, mortgage banking, and student loan processing. The following table
presents comparative data for the four principal businesses which comprise this
group.
National Financial Services
================================================================================
Three months ended June 30,
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Credit card $29 $20
Private equity 25 26
Mortgage banking 21 23
Student loan processing 7 5
- --------------------------------------------------------------------------------
Total $82 $74
================================================================================
Second quarter 1999 earnings increased $8 million compared to the same
quarter of 1998. Higher earnings were predominantly driven by credit card
acquisitions and increased student loan processing. Mortgage banking earnings
declined $2 million from the second quarter of 1998 to $21 million for the three
months ended June 30, 1999, due primarily to gains on the sale of an investment
recorded in the second quarter of 1998. Excluding these gains, mortgage banking
earnings increased by $4 million from the prior year, as higher revenue from
increased originations and production volumes were partly offset by an increase
in associated expenses. Private equity's earnings were relatively consistent
with the prior year. Private equity earnings will normally fluctuate with the
performance of equity markets, as well as with general economic conditions.
Treasury
================================================================================
Three months ended June 30,
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 35 $ 31
Noninterest income 16 19
------ ------
Total revenue 51 50
Provision 3 4
Noninterest expense 19 16
- --------------------------------------------------------------------------------
Net income $ 23 $ 25
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 7,040 7,312
Average securities 9,668 9,993
Average deposits 8,024 6,953
- --------------------------------------------------------------------------------
Return on equity 33% 33%
================================================================================
Treasury is responsible for managing the corporation's securities and
residential mortgage portfolios, trading operations, asset-liability management
function and wholesale funding needs. The Treasury unit earned $23 million in
the current quarter of 1999, down $2 million due primarily to transactional
gains recorded in the second quarter of 1998. Excluding these gains, net income
was unchanged.
All Other
This unit includes certain unallocated support unit costs, the management
accounting control units, and other transactions or events not driven by
specific business lines. Accordingly, earnings in this unit can fluctuate with
changes affecting consolidated provision for credit losses, one-time charges,
gains and other actions not driven by specific business units.
15
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securities
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 1999 March 31, 1999 December 31, 1998
------------- -------------- -----------------
Amortized Market Amortized Market Amortized Market
Dollars 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 $ 232 $ 231 $ 268 $ 269 $ 434 $ 437
Mortgage-backed securities 8,342 8,172 8,452 8,546 7,784 7,982
Other debt securities 552 541 503 504 792 802
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 9,126 8,944 9,223 9,319 9,010 9,221
- ---------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 357 357 331 330 292 292
Other securities 235 235 235 235 211 211
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 9,718 9,536 9,789 9,884 9,513 9,724
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 925 928 1,084 1,088 1,068 1,073
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities $10,643 $10,464 $10,873 $10,972 $10,581 $10,797
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost of securities available for sale increased $205 million
to $9.7 billion at June 30, 1999 compared to December 31, 1998. The valuation
adjustment on securities available for sale decreased $393 million to an
unrealized loss position of $182 million at June 30, 1999, due to an increase in
interest rates during the first half of 1999.
Loans
================================================================================
June 30, March 31, Dec. 31,
Dollars in millions 1999 1999 1998
- --------------------------------------------------------------------------------
Commercial and industrial $39,089 $38,309 $37,167
Lease financing 8,566 8,625 4,225
Commercial real estate 6,079 5,641 5,374
Consumer 21,553 21,108 22,630
- --------------------------------------------------------------------------------
Total loans $75,287 $73,683 $69,396
================================================================================
Total loans of $75.3 billion at June 30, 1999 increased $5.9 billion from
December 31, 1998. The increase was the result of loan growth in the commercial
and industrial and lease financing portfolios. This increase was largely due to
the acquisition of Sanwa and was partially offset by a decline in the credit
card portfolio.
Commercial and industrial (C&I) loans increased $1.9 billion and lease
financings increased $4.3 billion from December 31, 1998 to June 30, 1999 due
primarily to the addition of Sanwa loans and leases in the first quarter of
1999.
Consumer Loans
================================================================================
June 30, March 31, Dec. 31,
Dollars in millions 1999 1999 1998
- --------------------------------------------------------------------------------
Residential real estate $ 9,141 $ 9,151 $ 9,314
Home equity 4,292 4,134 4,257
Credit card 3,782 3,855 5,673
Student loans 679 800 812
Installment/other 3,659 3,168 2,574
- --------------------------------------------------------------------------------
Total $21,553 $21,108 $22,630
================================================================================
Consumer loans decreased $1.1 billion from December 31, 1998. The decrease
was primarily the result of a $1.9 billion decrease in credit card loans as $2.7
billion of credit card receivables were transferred to the securitized portfolio
during the first half of 1999 in order to replenish the off-balance sheet
securitized credit card pools. In addition, during the first half of 1999, the
corporation's credit card subsidiary, Fleet Credit Card Services, continued its
strategy of transitioning from primarily a one product portfolio to a
multi-product portfolio by replacing promotional rate products with a stable
fixed-rate offering, with strong credit quality and lower expected charge-offs
and attrition rates. The $1.1 billion increase in installment/other when
compared to December 31, 1998 was due to an increase in consumer margin loans as
a result of the strong equity markets.
Nonperforming Assets(a) (b)
================================================================================
Dollars in millions C&I CRE Consumer Total
- --------------------------------------------------------------------------------
Nonperforming loans:
Current or less than 90 days
past due $165 $12 $ 4 $181
Noncurrent 58 16 53 127
Other real estate owned (OREO) 2 2 6 10
- --------------------------------------------------------------------------------
Total NPAs June 30, 1999 $225 $30 $63 $318
- --------------------------------------------------------------------------------
Total NPAs March 31, 1999 $195 $31 $54 $280
- --------------------------------------------------------------------------------
Total NPAs December 31, 1998 $173 $57 $52 $282
================================================================================
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($216 million,
$252 million and $234 million at June 30, 1999, March 31, 1999 and
December 31, 1998, respectively). Included in the 90 days past due and
still accruing interest were $174 million, $196 million and $209 million
of consumer and residential loans at June 30, 1999, March 31, 1999 and
December 31, 1998, respectively.
(b) Nonperforming assets and related ratios at June 30, 1999, March 31, 1999
and December 31, 1998 do not include $170 million, $187 million and $46
million, respectively, of nonperforming assets classified as held for sale
by accelerated disposition.
Nonperforming assets (NPAs) increased $36 million to $318 million when
compared with December 31, 1998, as a $52 million increase in commercial and
industrial nonperforming loans (NPLs) and a $16 million increase in consumer
NPLs was partially offset by a $25 million decline in commercial real
16
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
estate NPLs. NPAs at June 30, 1999, as a percentage of total loans and OREO and
as a percentage of total assets were .42% and .30%, respectively, compared to
.41% and .27%, respectively, at December 31, 1998.
During the quarter the corporation changed its nonaccrual policy in
certain segments of the consumer loan portfolio to comply with recently
published regulatory guidelines. These loans, which previously had been placed
on nonaccrual status at 180 days, are now placed on nonaccrual status at 120
days, thereby resulting in an approximate $12 million increase in consumer NPLs
during the quarter.
During the first half of 1999 the corporation transferred $84 million of
loans, primarily C&I loans, to the assets held for sale by accelerated
disposition pool which is contained in other assets. Additionally, $62 million
of nonperforming leases and asset-backed loans pertaining to the Sanwa
acquisition were also transferred to assets held for sale by accelerated
disposition in the first quarter. The transfer of these nonperforming loans and
leases was in accordance with management's intention to focus appropriate
resources on the accelerated disposition of these assets.
Reserve for Credit Loss Activity
================================================================================
Six months ended June 30
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of year $ 1,552 $ 1,432
Loans charged off (367) (274)
Recoveries of loans charged off 72 64
- --------------------------------------------------------------------------------
Net charge-offs (295) (210)
Provision charged against income 295 210
Acquisitions/Other 171 119
- --------------------------------------------------------------------------------
Balance at end of period $ 1,723 $ 1,551
- --------------------------------------------------------------------------------
Ratio of net charge-offs to average loans .81% .66%
- --------------------------------------------------------------------------------
Ratio of reserve for credit losses to period-
end loans 2.29 2.32
- --------------------------------------------------------------------------------
Ratio of reserve for credit losses to period-end
nonperforming loans 559 491
================================================================================
Fleet's reserve for credit losses increased from $1,552 million at
December 31, 1998 to $1,723 million at June 30, 1999. The overall increase in
the reserve for credit losses was a result of reserves acquired as part of the
Sanwa acquisition. The provision for credit losses for the first six months of
1999 was $295 million, $85 million higher than the first half of 1998. The
increase in provision was primarily the result of increased charge-offs in the
credit card and lease financing portfolios as well as C&I charge-offs returning
to more normalized levels in the second quarter of 1999.
Funding Sources
================================================================================
June 30, March 31, Dec. 31,
Dollars in millions 1999 1999 1998
- --------------------------------------------------------------------------------
Deposits:
Demand $11,807 $11,150 $13,400
Regular savings and NOW 5,259 5,226 5,399
Money market 29,350 29,672 29,297
Time:
Domestic 16,659 18,300 17,764
Foreign 3,269 3,285 3,818
- --------------------------------------------------------------------------------
Total deposits 66,344 67,633 69,678
- --------------------------------------------------------------------------------
Short-term borrowed funds:
Federal funds purchased 960 644 1,857
Securities sold under agree-
ments to repurchase 2,547 2,383 2,599
Commercial paper 819 901 943
Other 2,560 1,943 3,913
- --------------------------------------------------------------------------------
Total short-term borrowed funds 6,886 5,871 9,312
- --------------------------------------------------------------------------------
Due to brokers/dealers 3,775 3,823 3,975
Long-term debt 16,436 15,586 8,820
- --------------------------------------------------------------------------------
Total $93,441 $92,913 $91,785
================================================================================
Total deposits decreased $3.3 billion to $66.3 billion at June 30, 1999
when compared to December 31, 1998 due principally to a $1.6 billion decrease in
demand deposits as a result of higher seasonal business deposits in December.
Additionally, domestic time deposits decreased $1.1 billion due principally to a
$705 million decrease in retail CD's resulting from the maturity of promotional
CD's with higher rates as well as a $769 million decline in brokered CD's, which
matured during the first half of 1999. These brokered CD's had been acquired as
a part of the corporation's recent mergers and acquisitions. Foreign time
deposits declined $549 million since December 31, 1998 due to seasonal patterns.
The $2.4 billion decrease in short-term borrowings since December 31, 1998 was
primarily attributable to a $897 million decrease in federal funds purchased, a
$501 million decrease in short-term bank notes, and a $461 million decrease in
treasury, tax, and loan borrowings.
Long-term debt increased $7.6 billion to $16.4 billion at June 30, 1999
when compared to December 31, 1998 due to the issuance of debt to fund
acquisitions and balance sheet growth.
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market
risk, liquidity, and capital.
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.
17
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-trading Market Risk
Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-trading market risk to which the corporation is exposed.
Interest-rate risk is the sensitivity of income to variations in interest rates.
The major source of the corporation's non-trading 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.
The corporation's Board limits on interest-rate risk specify that if
interest rates were to shift immediately up or down 200 basis points, estimated
net interest income for the subsequent 12 months should decline by less than
7.5%. The corporation was in compliance with this limit at June 30, 1999. 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) (Dollars in millions)
- ----------------------------------------------------------
June 30 1999
- ----------------------------------------------------------
+200 $ (33)
-200 (99)
==========================================================
Net interest income sensitivity to changes in interest rates remained low.
Swap transactions executed during the quarter reduced exposure to declining
interest rates.
Gap analysis provides a static view of the maturity and repricing
characteristics of the on- and off-balance sheet positions. The interest-rate
gap is prepared by scheduling all assets, liabilities and off-balance sheet
positions according to scheduled or anticipated repricing or maturity.
Interest-rate gap analysis can be viewed as a complement to simulation analysis.
The corporation's Board limits on interest-rate risk specify that the
cumulative one-year gap should be less than 10% of total assets. As of June 30,
1999, the estimated exposure was .3% liability-sensitive (see the following
table):
Interest-Rate Gap Analysis
<TABLE>
<CAPTION>
=============================================================================================================================
Cumulatively Repriced Within
June 30, 1999 3 months 4 to 12 12 to 24 2 to 5 After 5
Dollars in millions, by repricing date or less months months years years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 61,852 $ 7,882 $ 6,294 $ 11,334 $ 19,586 $106,948
Total liabilities and stockholders' equity (51,283) (8,465) (4,715) (2,966) (39,519) (106,948)
Net off-balance sheet (14,494) 4,167 4,753 3,758 1,816 --
- -----------------------------------------------------------------------------------------------------------------------------
Periodic gap (3,925) 3,584 6,332 12,126 (18,117)
Cumulative gap (3,925) (341) 5,991 18,117 --
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total
assets-June 30, 1999 (3.7)% (0.3)% 5.6% 16.9%
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total
assets-March 31, 1999 (0.6) 1.8 6.6 17.5
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risk-Management Instrument Analysis
<TABLE>
<CAPTION>
============================================================================================================================
Weighted
Weighted Average
Assets- Average Rate
Notional Liabilities Maturity Fair ----------------
Dollars in millions Value Hedged (Years) Value Receive Pay
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest-rate risk-management instruments
Interest-rate swaps:
Receive-fixed/pay-variable $12,130 Variable-rate loans
331 Fixed-rate deposits
2,407 Long-term debt
--------
14,868 2.3 $(122) 6.63 5.83%
- ----------------------------------------------------------------------------------------------------------------------------
Basis swaps 3,050 Long-term debt .7 6 5.09 5.13
- ----------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income 17,918 2.0 (116) 6.37 5.71
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage banking risk-management instruments
Interest-rate swaps:
Receive-fixed/pay-variable, PO swaps 9,136 Mortgage servicing rights 2.7 (102) 6.48 5.59
Futures contracts:
Futures 240 Mortgage servicing rights .2 (1) -- --
Options:
Interest-rate floors and options on swaps 34,560 Mortgage servicing rights 4.2 140 --(a) -- (a)
Interest-rate caps and cap corridors 13,975 Mortgage servicing rights 4.0 229 --(a) -- (a)
Call options 1,620 Mortgage servicing rights .2 3 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total options 50,155 4.0 372 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights 59,531 3.8 269 6.48 5.59
- ----------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $77,449 3.4 $153 6.41% 5.67%
============================================================================================================================
</TABLE>
(a) 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 4.84% and 6.45%, respectively.
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 June 30, 1999, the corporation had net
deferred income of $9.2 million related to terminated interest-rate contracts,
which will be amortized over the remaining life of the underlying terminated
interest-rate contracts of approximately 5 years. During the second quarter of
1999, the corporation continued to alter its interest-rate risk-management
portfolio to limit an increase in asset-sensitivity resulting from balance sheet
changes and swap runoff. In particular, $2.6 billion of receive-fixed swaps were
added through new transactions, partially offset by maturities of $155 million.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its mortgage servicing rights (MSRs) to prepayments. 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.
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 the second quarter of 1999, net hedge losses of $321 million were
deferred and recorded as adjustments to the carrying value of the MSRs and
related hedges. At June 30, 1999, the carrying value and fair value of the
corporation's MSRs were $2.6 billion and $2.9 billion, respectively.
In connection with the corporation's management of its MSR hedge program,
the corporation terminated (in notional amounts) $2.1 billion of interest-rate
floor and options on swaps agreements and $28.6 billion of call options and
added $2.5 billion and $27.0 billion of interest-rate floor and options on swaps
agreements and call options, respectively, during the second quarter of 1999.
Additionally, the corporation terminated $11.8 billion of interest-rate cap
corridors and $3.5 billion of interest-rate swap contracts while it added $4.0
billion of interest-rate cap corridors and $2.8 billion of interest-rate swap
contracts in its management of the MSR hedge program.
The corporation also performs valuation analysis which involves projecting
future cash flows from the corporation's assets, liabilities and off-balance
sheet positions over a very long-term horizon, discounting
19
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
those cash flows at appropriate interest rates, and then summing the discounted
cash flows. The corporation's "economic value of equity" (EVE) is the estimated
net present value of the discounted cash flows.
The corporation's Board limits on interest-rate risk specify that if
interest rates were to shift immediately up or down 200 basis points, the
estimated economic value of equity should decline by less than 10%. The
corporation was in compliance with this limit at June 30, 1999. 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 sensitivity of
EVE, in particular, the sensitivity of the hedged MSRs, to changes in interest
rates can be nonlinear. The estimated exposures did not change significantly
from the first quarter, as the composition of the balance sheet remained
relatively stable, changes in specific exposures were largely offsetting, and
additions of new swaps and investment securities tended to offset the aging of
these portfolios. Given the assumption of an immediate interest rate movement
with no management intervention, the corporation would be adversely impacted by
extreme rate changes in either direction.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (Dollars in millions)
- ---------------------------------------------------
June 30 1999
- ---------------------------------------------------
+200 $ (553)
+100 (190)
-100 (255)
-200 (658)
- ---------------------------------------------------
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 arises in the
normal course of the corporation's business as a financial intermediary.
The corporation uses an "earnings at risk" (EAR) system, based on an
industry-standard risk measurement methodology, to measure the overall market
risk inherent in its trading activities. The average daily exposure to this
market risk was $19.9 million, and the maximum daily exposure was $39.7 million
during the second quarter of 1999, consistent with the first quarter of 1999.
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 withdrawal 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 consumer asset receivables.
Liquidity at Fleet is measured and monitored daily, allowing management to
better understand and react to balance sheet trends. The Asset-Liability
Management Committee (ALCO) is responsible for implementing the Board's policies
and guidelines governing liquidity.
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. The strength of Fleet'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 deposits, foreign branch deposits, federal funds, collateralized
borrowings, and a bank-note program.
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 earning trends. The
corporation's subsidiaries rely on cash flows from operations, core deposits,
borrowings, short-term high-quality liquid assets, and, in the case of
nonbanking subsidiaries, funds from the parent company.
20
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At June 30, 1999 and December 31, 1998, the corporation had commercial
paper outstanding of $819 million and $943 million, respectively. The
corporation has a backup line of credit to ensure that funding is not
interrupted if commercial paper is not available. The total amount of funds
available under this agreement was $1 billion at June 30, 1999, with no
outstanding balance under this line of credit.
Fleet has a shelf registration statement that provides for the issuance of
common and preferred stock, senior or subordinated debt securities, and other
securities with total amounts of funds available of approximately $1.5 billion
at June 30, 1999. Subsequent to June 30, 1999, the corporation issued $215
million of senior notes, bringing the availability of the shelf registration to
$1.3 billion.
As shown in the consolidated statements of cash flows, cash and cash
equivalents decreased by $737 million during the first half of 1999. The
decrease was due to cash used in investing activities of $1.8 billion and cash
used in financing activities of $3.4 billion, offset by cash provided by
operating activities of $4.5 billion. Net cash used in investing activities was
attributable to a net increase in loans, purchases of mortgage servicing rights
and net cash and cash equivalents paid for businesses acquired. Net cash used in
financing activities was principally due to a net decrease in deposits and
short-term borrowings, partially offset by proceeds from the issuance of
long-term debt. Net cash provided by operating activities was primarily the
result of net income, a net decrease in mortgages held for resale and a decrease
in due from brokers/dealers.
CAPITAL
================================================================================
June 30, March 31, Dec. 31,
Dollars in millions 1999 1999 1998
- --------------------------------------------------------------------------------
Risk-adjusted assets $ 110,690 $ 111,059 $ 104,372
Tier 1 risk-based capital
(4% minimum) 7.03% 6.60% 7.08%
Total risk-based capital
(8% minimum) 11.19 10.90 11.22
Leverage ratio (4% minimum) 7.25 7.07 7.48
Common equity-to-assets 8.46 8.40 8.35
Total equity-to-assets 9.11 9.05 9.01
Tangible common equity-to-assets 5.47 5.35 5.53
Tangible total equity-to-assets 6.13 6.02 6.21
================================================================================
At June 30, 1999, the corporation exceeded all regulatory required minimum
capital ratios as Fleet's Tier 1 and Total risk-based capital ratios were 7.03%
and 11.19%, respectively, compared with 6.60% and 10.90%, respectively, at March
31, 1999. The leverage ratio, a measure of Tier 1 capital to average quarterly
assets, was 7.25% at June 30, 1999 compared with 7.07% at March 31, 1999.
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains 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
nationally or in the states in which the corporation conducts its business;
interest rate fluctuations; competitive product and pricing pressures within the
corporation's market; equity and bond market fluctuations; personal and
corporate customers' bankruptcies; inflation; lower than expected savings
associated with mergers and acquisitions and integrations of acquired
businesses; lower than expected revenues following mergers and acquisitions;
greater than expected negative impact of the proposed divestiture; 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 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.
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. The adoption of this standard may cause
volatility in both the income
21
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
statement as well as the equity section of the balance sheet. This standard is
effective as of January 1, 2001. The impact of this Statement is not estimable
and will be dependent upon the fair value, nature and purpose of the derivative
instruments held by the corporation as of January 1, 2001.
22
<PAGE>
PART II. OTHER INFORMATION
PART II. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The corporation held a Special Meeting of Stockholders on August 11, 1999.
(b) Not applicable.
(c) A brief description of each matter voted upon at the meeting, and the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes, as to each such matter, follows.
Three matters were voted on at the Special Meeting.
1. Approve the Agreement and Plan of Merger between Fleet Financial Group,
Inc. and BankBoston Corporation
The first proposal voted on by the stockholders of the corporation was to
approve the Agreement and Plan of Merger between Fleet Financial Group,
Inc. and BankBoston Corporation. This proposal was approved with
453,606,921 votes cast for, 6,562,703 votes cast against, 2,108,412
abstentions and 44,578,347 broker non-votes.
2. Approve an Increase in the Authorized Shares of Fleet Common Stock from
1.2 Billion to 2.0 Billion
The second proposal voted on by the stockholders of the corporation was
to approve an increase in the authorized shares of Fleet common stock from
1.2 billion to 2.0 billion. This proposal was approved with 448,410,177
votes cast for, 11,176,014 votes cast against, 2,691,845 abstentions, and
44,578,347 broker non-votes.
3. Approve the Amended and Restated 1994 Performance-Based Bonus Plan for the
Chief Executive Officer and Certain other Named Executive Officers
The third proposal voted on by the stockholders of the corporation was to
approve the Amended and Restated 1994 Performance-Based Bonus Plan for the
Chief Executive Officer and Certain other Named Executive Officers. This
proposal was approved with 476,801,678 votes cast for, 24,144,299 votes
cast against and 5,910,406 abstentions. There were no broker non-votes.
23
<PAGE>
PART II. ITEM 6.
(a) Exhibit Index
Exhibit
Number
------
4* Instruments defining the rights of security holders, including
Debentures
11 Statement re: computation of per share earnings
12 Statement re: computation of ratios
27 Financial data schedule
* Registrant has no instruments defining the rights of holders of equity or
debt securities where the amount of securities authorized thereunder
exceeds 10% of the total assets of the registrant and its subsidiaries on
a consolidated basis. Registrant hereby agrees to furnish a copy of any
such instrument to the Commission upon request.
(b) Four Form 8-K's were filed during the period from April 1, 1999 to the
date of the filing of this report.
- Current Report on Form 8-K dated April 2, 1999 filing the
unaudited pro forma condensed combined financial statements
and notes thereto for the period ended December 31, 1998 in
connection with the proposed merger with BankBoston
Corporation.
- Current Report on Form 8-K dated April 14, 1999 announcing
first quarter earnings.
- Current Report on Form 8-K dated May 14, 1999 filing the
unaudited pro forma condensed combined financial statements
and notes thereto for the period ended March 31, 1999 in
connection with the proposed merger with BankBoston
Corporation.
- Current Report on Form 8-K dated July 14, 1999 announcing
second quarter earnings.
24
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fleet Financial Group, Inc.
---------------------------
(Registrant)
/s/ Eugene M. McQuade
---------------------
Eugene M. McQuade
Vice Chairman
Chief Financial Officer
/s/ Robert C. Lamb, Jr.
-----------------------
Robert C. Lamb, Jr.
Controller
Chief Accounting Officer
August 12, 1999
25
EXHIBIT 11
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
($ in millions, except per share data)
<TABLE>
<CAPTION>
For the Three Months ended June 30,
-------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
BASIC DILUTED BASIC DILUTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 569,532,233 569,532,233 568,194,410 568,194,410
Additional shares due to:
Stock options -- 7,475,714 -- 7,933,914
Warrants -- 12,625,580 -- 12,631,862
------------- ------------- ------------- -------------
Total equivalent shares 569,532,233 589,633,527 568,194,410 588,760,186
============= ============= ============= =============
Earnings per share
Net income $ 450 $ 450 $ 393 $ 393
Less: Preferred stock dividends and other (15) (15) (13) (13)
============= ============= ============= =============
Adjusted net income $ 435 $ 435 $ 380 $ 380
============= ============= ============= =============
Total equivalent shares 569,532,233 589,633,527 568,194,410 588,760,186
============= ============= ============= =============
Earnings per share on net income $ .76 $ .74 $ .67 $ .65
============= ============= ============= =============
</TABLE>
26
<PAGE>
EXHIBIT 11
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
($ in millions, except per share data)
<TABLE>
<CAPTION>
For the Six Months ended June 30,
-------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
BASIC DILUTED BASIC DILUTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 569,041,844 569,041,844 567,987,418 567,987,418
Additional shares due to:
Stock options -- 7,604,400 -- 7,607,036
Warrants -- 12,644,496 -- 12,404,832
------------- ------------- ------------- -------------
Total equivalent shares 569,041,844 589,290,740 567,987,418 587,999,286
============= ============= ============= =============
Earnings per share
Net income $ 888 $ 888 $ 716 $ 716
Less: Preferred stock dividends and other (31) (31) (25) (25)
------------- ------------- ------------- -------------
Adjusted net income $ 857 $ 857 $ 691 $ 691
============= ============= ============= =============
Total equivalent shares 569,041,844 589,290,740 567,987,418 587,999,286
============= ============= ============= =============
Earnings per share on net income $ 1.51 $ 1.45 $ 1.22 $ 1.18
============= ============= ============= =============
</TABLE>
27
EXHIBIT 12
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED DIVIDENDS
EXCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
June 30, June 30, Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and cumulative effect
of accounting changes $1,454 $ 735 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 677 356 1,061 737 813 1,413 1,074
(2) 1/3 of rent 28 14 54 53 55 52 53
(b) Preferred dividends 41 21 83 104 117 62 51
------ ------ ------ ------ ------ ------ ------
(c) Adjusted earnings $2,200 $1,126 $3,705 $3,188 $3,055 $2,683 $2,638
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $ 746 $ 391 $1,198 $ 894 $ 985 $1,527 $1,178
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 2.95x 2.88x 3.09x 3.57x 3.10x 1.76x 2.24x
====== ====== ====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
June 30, June 30, Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and cumulative effect
of accounting changes $1,454 $ 735 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 677 356 1,061 737 813 1,413 1,074
(2) 1/3 of rent 28 14 54 53 55 52 53
(3) Interest on deposits 827 404 1,835 1,654 1,754 1,726 1,170
(b) Preferred dividends 41 21 83 104 117 62 51
------ ------ ------ ------ ------ ------ ------
(c) Adjusted earnings $3,027 $1,530 $5,540 $4,842 $4,809 $4,409 $3,808
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $1,573 $ 795 $3,033 $2,548 $2,739 $3,253 $2,348
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.92x 1.93x 1.83x 1.90x 1.76x 1.36x 1.62x
====== ====== ====== ====== ====== ====== ======
</TABLE>
28
<PAGE>
EXHIBIT 12 (continued)
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
June 30, June 30, Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and cumulative effect
of accounting changes $1,454 $ 735 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 677 356 1,061 737 813 1,413 1,074
(2) 1/3 of rent 28 14 54 53 55 52 53
------ ------ ------ ------ ------ ------ ------
(b) Adjusted earnings $2,159 $1,105 $3,622 $3,084 $2,938 $2,621 $2,587
====== ====== ====== ====== ====== ====== ======
Fixed charges $ 705 $ 370 $1,115 $ 790 $ 868 $1,465 $1,127
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 3.06x 2.99x 3.25x 3.90x 3.38x 1.79x 2.30x
====== ====== ====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
June 30, June 30, Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and cumulative effect
of accounting changes $1,454 $ 735 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 677 356 1,061 737 813 1,413 1,074
(2) 1/3 of rent 28 14 54 53 55 52 53
(3) Interest on deposits 827 404 1,835 1,654 1,754 1,726 1,170
------ ------ ------ ------ ------ ------ ------
(b) Adjusted earnings $2,986 $1,509 $5,457 $4,738 $4,692 $4,347 $3,757
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $1,532 $ 774 $2,950 $2,444 $2,622 $3,191 $2,297
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.95x 1.95x 1.85x 1.94x 1.79x 1.36x 1.64x
====== ====== ====== ====== ====== ====== ======
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the June 30,
1999 consolidated financial statements and managements discussion and analysis
of financial condition and results of operations contained in the Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,726
<INT-BEARING-DEPOSITS> 268
<FED-FUNDS-SOLD> 7
<TRADING-ASSETS> 575
<INVESTMENTS-HELD-FOR-SALE> 9,536
<INVESTMENTS-CARRYING> 925
<INVESTMENTS-MARKET> 928
<LOANS> 75,287
<ALLOWANCE> 1,723
<TOTAL-ASSETS> 106,948
<DEPOSITS> 66,344
<SHORT-TERM> 6,886
<LIABILITIES-OTHER> 7,542
<LONG-TERM> 16,436
0
691
<COMMON> 6
<OTHER-SE> 9,043
<TOTAL-LIABILITIES-AND-EQUITY> 106,948
<INTEREST-LOAN> 3,116
<INTEREST-INVEST> 350
<INTEREST-OTHER> 95
<INTEREST-TOTAL> 3,561
<INTEREST-DEPOSIT> 827
<INTEREST-EXPENSE> 1,504
<INTEREST-INCOME-NET> 2,057
<LOAN-LOSSES> 295
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,303
<INCOME-PRETAX> 1,454
<INCOME-PRE-EXTRAORDINARY> 888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 888
<EPS-BASIC> 1.51
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 4.50
<LOANS-NON> 308
<LOANS-PAST> 216
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,552
<CHARGE-OFFS> 367
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 1,723
<ALLOWANCE-DOMESTIC> 1,723
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 277
</TABLE>
