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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-6366
-----------------------------
FLEET FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
RHODE ISLAND 05-0341324
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
617 / 346-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, $.01 Par Value New York Stock Exchange
Depositary Shares each representing a one-tenth interest in a share of
9.35% Cumulative Preferred Stock, $1 Par Value New York Stock Exchange
Depositary Shares each representing a one-tenth interest in a share of
Series V 7.25% Perpetual Preferred Stock, $1 Par Value New York Stock Exchange
Depositary Shares each representing a one-fifth interest in a share of
Series VI 6.75% Perpetual Preferred Stock, $1 Par Value New York Stock Exchange
8.00% Trust Originated Preferred Securities issued by Fleet Capital Trust I,
Guaranteed by Fleet Financial Group, Inc. New York Stock Exchange
7.05% Trust Originated Preferred Securities issued by Fleet Capital Trust III,
Guaranteed by Fleet Financial Group, Inc. New York Stock Exchange
7.17% Trust Originated Preferred Securities issued by Fleet Capital Trust IV,
Guaranteed by Fleet Financial Group, Inc. New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Warrants to purchase Common Stock New York Stock Exchange
</TABLE>
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES XX NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of February 26, 1999 (the latest practicable date), the aggregate market
value of the voting stock held by nonaffiliates of the Registrant was $23.8
billion, which excludes $659 million held by directors, executive officers, and
banking subsidiaries of the Registrant under trust agreements and other
instruments.
The number of shares of common stock of the Registrant outstanding as of
February 26, 1999 was 569,039,801.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Pertinent extracts from Registrant's 1998 Annual Report to Shareholders are
incorporated into Parts I, II, and IV.
2. Pertinent extracts from Registrant's Proxy Statement for its 1999 Annual
Meeting filed with the Commission are incorporated into Part III.
Such information by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
TABLE OF CONTENTS
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DESCRIPTION PAGE NUMBER
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<S> <C> <C> <C>
Part I. Item 1 ___Business............................................................ 3
Item 2 ___Properties.......................................................... 7
Item 3 ___Legal Proceedings................................................... 7
Item 4 ___Submission of Matters to a Vote of Security Holders................. 7
Part II. Item 5 ___Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................. 7
Item 6 ___Selected Financial Data............................................. 8
Item 7 ___Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
Item 7a ___Quantitative and Qualitative Disclosures About Market Risk.......... 8
Item 8 ___Financial Statements and Supplementary Data......................... 8
Item 9 ___Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 8
Part III. Item 10 ___Directors and Executive Officers of the Registrant.................. 8
Item 11 ___Executive Compensation.............................................. 10
Item 12 ___Security Ownership of Certain Beneficial Owners and Management 10
Item 13 ___Certain Relationships and Related Transactions...................... 10
Part IV. Item 14 ___Exhibits, Financial Statement Schedules and Reports on Form 8-K. 11
Signatures......................................................................... 15
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PART I.
ITEM 1. BUSINESS
GENERAL
Fleet Financial Group, Inc. (the "Registrant," "Corporation" or "Fleet") is
a diversified financial services company organized under the laws of the State
of Rhode Island. Fleet is a legal entity separate and distinct from its
subsidiaries, assisting such subsidiaries by providing financial resources and
management. By most measures, Fleet is among the ten largest bank holding
companies in the United States, with total assets of $104.4 billion at December
31, 1998. Fleet has approximately 36,000 employees.
Fleet reported net income for 1998 of $1.53 billion, or $2.52 per diluted
share. This compared to net income of $1.37 billion, or $2.30 per diluted share
in 1997. All common share amounts and associated ratios were adjusted to reflect
the Corporation's two-for-one common stock split which was effective October 7,
1998. For a more detailed discussion of the Corporation's financial results, see
"Management's Discussion and Analysis" (pages 21-39) of the Corporation's 1998
Annual Report to Shareholders, which is incorporated by reference herein.
Fleet is engaged in a general commercial banking and investment management
business throughout the states of Rhode Island, New York, Connecticut,
Massachusetts, New Jersey, Maine, and New Hampshire through its banking
subsidiaries: Fleet National Bank ("FNB"); Fleet Bank, National Association
("FBNA"); Fleet Bank of Maine ("Fleet-Maine"); and Fleet Bank-NH ("Fleet-NH").
All of the subsidiary banks are members of the Federal Reserve System, and the
deposits of each are insured by the Federal Deposit Insurance Corporation
("FDIC") to the extent provided by law. The Corporation also has a thrift
subsidiary, Fleet Bank, F.S.B. ("Fleet-FSB") located in Boca Raton, Florida.
Fleet also provides, through its subsidiaries, a variety of financial
services, including mortgage banking, asset-based lending, lease financing,
credit card services, real estate financing, brokerage, market-making and
securities clearing services, capital market services and investment banking,
investment advice and management, data processing and student loan servicing.
On March 15, 1999, Fleet and BankBoston Corporation ("BankBoston")
entered into a definitive merger agreement providing for the merger of
BankBoston with Fleet. Prior to the required regulatory divestitures of
approximately $13 billion of deposits and approximately $5 billion of loans,
the combined institution will have approximately $180 billion in assets,
approximately $118 billion in deposits, and will be headquartered in Boston,
Massachusetts. The merger agreement provides that each share of BankBoston
common stock would be exchanged for 1.1844 newly issued shares of Fleet
common stock on a tax-free basis. As a result of the merger, $360 million
(post-tax) of cost savings are expected to be realized primarily through:
reductions in staff; elimination, consolidation and/or divestiture of certain
branches; and the consolidation of certain offices, data processing and
other redundant back office operations and staff functions. Fleet expects to
take a one-time restructuring charge aggregating approximately $650 million
(post-tax) to cover exit costs relating to the merger. In addition,
approximately $60 million (post-tax) in other expenses related to the merger
will be recognized in future periods as they are incurred. The merger is
expected to be completed in the fourth quarter of 1999 and is subject to
certain conditions, including the approval of federal and state bank
regulators and the shareholders of both companies.
On February 1, 1999, the Corporation acquired Sanwa Business Credit
("Sanwa"), a leasing and asset-based lending company, from Sanwa Bank, Ltd. The
Sanwa acquisition provided approximately $6 billion of assets as well as
approximately $1 billion of securitized loans. This acquisition was accounted
for under the purchase method of accounting.
On February 20, 1998, the Corporation acquired the consumer credit card
operations of Advanta Corporation ("Advanta"). The Advanta acquisition provided
approximately $11.5 billion of managed credit card receivables. This acquisition
was accounted for under the purchase method of accounting.
On February 1, 1998, the Corporation acquired The Quick & Reilly Group,
Inc. ("Quick & Reilly"), a national discount brokerage firm. The transaction was
accounted for as a pooling-of-interests. Under the terms of the Quick & Reilly
merger, approximately 44 million Fleet common shares were exchanged for all of
the outstanding Quick & Reilly common shares at an exchange ratio of .289 shares
of Fleet for each share of Quick & Reilly.
On December 10, 1997, Fleet consummated its acquisition of Columbia
Management Company ("Columbia"), a Portland, Oregon-based asset management
company with approximately $21 billion of assets under management. Fleet
accounted for this acquisition under the purchase method of accounting.
On May 1, 1996, the Corporation acquired from National Westminster Plc
substantially all of the net assets of certain subsidiaries of NatWest Bancorp
("NatWest"). The former NatWest Bank was merged into FBNA. The acquisition of
NatWest contributed approximately $13 billion and $18 billion of loans and
deposits, respectively, and approximately 300 branches in New York and New
Jersey. The transaction was accounted for using the purchase method of
accounting.
On November 30, 1995, the merger of Fleet and Shawmut National Corporation
("Shawmut") was completed and was accounted for as a pooling-of-interests. Fleet
exchanged approximately 210 million common shares for all the outstanding shares
of Shawmut at an exchange ratio of .4461 shares of Fleet for each share of
Shawmut.
The Corporation is managed along the following business lines, as more
particularly described in "Management's Discussion and Analysis" (pages 26-29)
and "Notes to Consolidated Financial Statements" (pages 54-55): Commercial
Financial Services, Retail Banking, National Financial Services, Fleet
Investment Group, and Treasury.
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Commercial Financial Services provides a full range of credit and banking
services to corporate, middle-market, real estate, government and leasing
customers. Fleet enjoys a strong presence in the Northeast and also has several
specialty businesses of national scope which serve to diversify and complement
its client base.
Retail Banking includes consumer banking and Fleet's commercial small
business group. Retail Banking offers customers products and services to
conveniently access, move, and manage their money and delivers these services
through its network of nearly 1,200 branches. Fleet's business and
entrepreneurial services group provides a full range of financial services
targeted at businesses with annual sales of up to $10 million. Fleet is the
leading small-business lender in New England and ranks among the ten largest in
the country.
National Financial Services includes mortgage banking, credit card
services, venture capital and student loan processing (AFSA). Fleet's mortgage
banking business originates, sells and services first and second-mortgage
products spanning all customer segments. Fleet Mortgage Group originated
approximately $36 billion of loans in 1998. This business services a mortgage
portfolio of $119 billion and 1.4 million loans. Fleet Credit Card Services
provides a servicing function for approximately $14.5 billion of managed credit
card loans. Through acquisitions and internal growth, Fleet Credit Card Services
has become the eighth largest issuer of credit cards. Fleet Private Equity
provides management teams with the private equity capital necessary to acquire,
recapitalize or grow private and public companies. Student loan processing,
through the AFSA subsidiary, services 6.5 million accounts nationwide and is the
largest student loan servicer in the nation with $48.7 billion of student loans
serviced.
Fleet Investment Group is comprised of several businesses, all targeting
customers' growing need for investment products and services. These businesses
include Quick & Reilly which offers brokerage, market-making, and securities
clearing services, the private clients group which offers specialized asset
management, estate settlement and deposit and credit products to high-net-worth
customers, Columbia which sells proprietary mutual funds and manages personal
and institutional business lines in the Pacific Northwest, retail investments
which markets Galaxy (Fleet's proprietary mutual fund family) and third party
mutual funds and annuity products, and several other businesses which offer
retirement plan services, large institutional asset management and
not-for-profit investment services.
Treasury is responsible for managing the Corporation's securities and
residential mortgage portfolios, trading operations, asset-liability management
function and wholesale funding needs.
The preparation of the Corporation's financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. A significant estimate in the
Corporation's accounting process pertains to the reserve for credit losses. The
methodology for determining the adequacy of the reserve for credit losses
consists of various key elements, including risk rating migration, delinquency,
and loss trends by each portfolio segment.
The Corporation's loan portfolio consists primarily of commercial,
consumer, and commercial real estate loans, as well as leases. The reserve
levels for consumer and small business lending is based on credit quality
analytical reviews of homogeneous pools of loans. Reserve levels for the
commercial portfolio, which includes commercial real estate loans and leases,
are established based on loan by loan reviews and evaluations of current actual
losses and risk ratings of the individual loans. Self correcting mechanisms for
consumer and small business loans consist of comparing actual portfolio losses
to estimated results. The commercial portfolio self correcting mechanism
consists of a comparison of actual charge-offs to previous specific allocated
loan loss levels. Subsequent adjustments are made, as necessary, based on these
processes. The reserve methodology has been consistently applied.
COMPETITION
The Corporation's subsidiaries are subject to intense competition in all
aspects of the businesses in which they compete from domestic and foreign banks,
equipment leasing companies, finance companies, securities and investment
advisory firms, real estate financing companies, mortgage banking companies, and
other financial institutions. The Corporation principally competes on interest
rates and other terms of financing arrangements, including specialized customer
services and various banking arrangements and conveniences designed to attract
depositors, borrowers, and other customers.
SUPERVISION AND REGULATION
Banking is a highly regulated industry, with numerous federal and state
laws and regulations governing the organization and operation of banks and their
affiliates. As a bank holding company, Fleet is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Fleet-Maine
and Fleet-NH, as state-chartered member banks, are subject to regulation by the
Federal Reserve Board and bank regulators in their respective states. FBNA and
FNB are national banks subject to
4
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regulation and supervision by the Office of the Comptroller of the Currency (the
"OCC"). Fleet-FSB is a federal savings association subject to regulation and
supervision by the Office of Thrift Supervision (the "OTS"). Each subsidiary
bank's deposits are insured by the FDIC and each bank subsidiary is a member of
the Federal Reserve System. Fleet is also subject to the reporting and other
requirements of the Securities Exchange Act of 1934 (the "Exchange Act").
The BHCA requires that Fleet obtain prior approval from the Federal Reserve
Board for bank and nonbank acquisitions and restricts the business operations
permitted to Fleet. The BHCA also restricts the acquisition of shares of
out-of-state banks unless the acquisition is specifically authorized by the laws
of the state in which the bank to be acquired is located. In addition, Fleet's
bank subsidiaries must obtain prior approval from their respective primary
regulators for most acquisitions. Virtually all aspects of the subsidiary banks'
businesses are subject to regulation and examination, depending on the charter
of the particular banking subsidiary, by the Federal Reserve Board, the OCC, the
OTS, the FDIC, the banking regulatory agencies of the states in which they
operate, or a combination of the above.
As a result of the enactment of the Financial Institutions Reform,
Recovery, and Enforcement Act ("FIRREA") on August 9, 1989, any or all of
Fleet's subsidiary banks can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (a) the default of any other of Fleet's subsidiary banks or (b)
any assistance provided by the FDIC to any other of Fleet's subsidiary banks in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
without regulatory assistance.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA") provides for, among other things, increased funding for the Bank
Insurance Fund (the "BIF") of the FDIC and expanded regulation of depository
institutions and their affiliates, including parent holding companies. The
FDICIA provides the federal banking agencies with broad powers to take prompt
corrective action to resolve problems of insured depository institutions,
depending upon the particular institution's level of capital. The FDICIA
established five tiers of capital measurement for regulatory purposes ranging
from "well-capitalized" to "critically undercapitalized". A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position under certain circumstances. As of
December 31, 1998, all of Fleet's subsidiary banking institutions met the
requirements of a "well-capitalized" institution.
The FDICIA, as amended, directs each federal banking agency to prescribe
safety and soundness standards for depository institutions relating to internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, asset
quality, earnings and stock valuation. Final interagency regulations to
implement these new safety and soundness standards were adopted by the federal
banking agencies. As of October 1, 1996, standards for asset quality and
earnings have been incorporated into the Interagency Guidelines Establishing
Standards for Safety and Soundness. The three standards for Safety and Soundness
established by the guidelines are (1) operational and managerial; (2)
compensation; and (3) asset quality, earnings and stock valuation.
The FDICIA also contains a variety of other provisions that may affect
Fleet's operations, including new reporting requirements, regulatory standards
for real estate lending, "truth in savings" provisions, and the requirements
that a depository institution give 90 days prior notice to customers and
regulatory authorities before closing any branch.
Under the Federal Reserve Board's capital guidelines, the minimum ratio of
total capital to risk-adjusted assets (including certain off-balance sheet
items, such as standby letters of credit) is 8%. At least half of the total
capital is to be comprised of common equity, retained earnings, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of cumulative and noncumulative perpetual preferred stock, less
deductible intangibles ("Tier 1 capital"). The remainder may consist of
perpetual debt, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves ("Tier 2 capital"). In addition, the Federal Reserve Board requires a
leverage ratio (Tier 1 capital to average quarterly assets, net of goodwill) of
3% for bank holding companies that meet certain specified criteria, including
that they have the highest regulatory rating. The rule indicates that the
minimum leverage ratio should be 4% for all other holding companies. Fleet's
banking subsidiaries are subject to similar capital requirements except that
preferred stock must be noncumulative to qualify as Tier 1 capital. Under
federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including the termination
of deposit insurance by the FDIC and seizure of the institution. As of December
31, 1998, Fleet's capital ratios exceeded all minimum regulatory capital
requirements.
The federal banking agencies continue to consider capital requirements
applicable to banking organizations. Effective January 1, 1998, national
banks with significant exposure to market risk must maintain adequate capital
to support that exposure. As of December 31, 1998, the Corporation did not
have significant exposure to market risk. The OCC may apply this provision to
any national bank if the OCC deems it appropriate for safe and sound
practices.
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Fleet is a legal entity separate and distinct from its subsidiaries. The
ability of holders of debt and equity securities of Fleet to benefit from the
distribution of assets of any subsidiary upon the liquidation or reorganization
of such subsidiary is subordinate to prior claims of creditors of the subsidiary
(including depositors in the case of banking subsidiaries) except to the extent
that a claim of Fleet as a creditor may be recognized. There are various
statutory and regulatory limitations on the extent to which banking subsidiaries
of Fleet can finance or otherwise transfer funds to Fleet or its nonbanking
subsidiaries, whether in the form of loans, extensions of credit, investments or
asset purchases. Such transfers by any subsidiary bank to Fleet or any
nonbanking subsidiary are limited in amount to 10% of the bank's capital and
surplus and, with respect to Fleet and all such nonbanking subsidiaries, to an
aggregate of 20% of each such bank's capital and surplus. Furthermore, loans and
extensions of credit are required to be secured in specified amounts and are
required to be on terms and conditions consistent with safe and sound banking
practices.
In addition, there are regulatory limitations on the payment of dividends
directly or indirectly to Fleet from its banking subsidiaries. Federal and state
regulatory agencies also have the authority to limit further Fleet's banking
subsidiaries' payment of dividends based on other factors, such as the
maintenance of adequate capital for such subsidiary bank.
Under the policy of the Federal Reserve Board, Fleet is expected to act as
a source of financial strength to each subsidiary bank and to commit resources
to support such subsidiary bank in circumstances where it might not do so absent
such policy. In addition, any subordinated loans by Fleet to any of the
subsidiary banks would also be subordinate in right of payment to deposits and
obligations to general creditors of such subsidiary bank. Further, the Crime
Control Act of 1990 amended the federal bankruptcy laws to provide that in the
event of the bankruptcy of Fleet, any commitment by Fleet to its regulators to
maintain the capital of a banking subsidiary will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
The banking industry is also affected by the monetary and fiscal policies
of the federal government, including the Federal Reserve Board, which exerts
considerable influence over the cost and availability of funds obtained for
lending and investing. Proposals to change the laws and regulations governing
the operations and taxation of banks, companies that control banks, and other
financial institutions are frequently raised in Congress, in the state
legislatures, and before various bank regulatory authorities. The likelihood of
any major changes and the impact such changes might have on Fleet are impossible
to determine.
See "Note 19. Commitments, Contingencies and Other Disclosures" (page 62)
and "Note 20. Regulatory Matters" (page 63) of the Notes to Consolidated
Financial Statements and the "Liquidity Risk" (page 37) and "Capital" (pages
37-38) sections of Management's Discussion and Analysis in the 1998 Annual
Report to Shareholders (each of which are incorporated by reference herein) for
information concerning restrictions on the banking subsidiaries' ability to pay
dividends and other regulatory matters and legal proceedings.
STATISTICAL INFORMATION BY BANK HOLDING COMPANIES
The following information from the following portions of the 1998
Annual Report to Shareholders is incorporated by reference herein:
"Rate/Volume Analysis" table (page 65) for changes in the
taxable-equivalent interest income and expense for each major category of
interest-earning assets and interest-bearing liabilities.
"Consolidated Average Balances/Interest Earned-Paid/Rates 1994-1998"
table (pages 66-67) for average balance sheet amounts, related
taxable-equivalent interest earned or paid, and related average yields and
rates paid.
"Note 3. Securities" of the Notes to Consolidated Financial Statements
(pages 48-49) for information regarding book values, market values,
maturities, and weighted average yields of securities (by category).
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"Note 4. Loans" of the Notes to the Consolidated Financial Statements
(pages 49-50) for distribution of loans of the Registrant.
"Loan Maturity" table and "Interest Sensitivity of Loans Over One Year"
table (page 67) for maturities and sensitivities of loans to changes in
interest rates.
"Note 6. Nonperforming Assets" (page 50) and "Note 1. Summary of
Significant Accounting Policies - Loans" (page 46) of the Notes to
Consolidated Financial Statements for information on nonaccrual, past due,
and restructured loans and the Registrant's policy for placing loans on
nonaccrual status.
"Loans" section of Management's Discussion and Analysis (pages 29-31)
for information regarding loan concentrations of the Registrant.
"Reserve for Credit Losses" section of Management's Discussion and
Analysis (pages 31-32) for the analysis of loss experience, the allocation
of the reserve for credit losses, and a description of factors which
influenced management's judgment in determining the amount of additions to
the allowance charged to operating expense.
"Consolidated Average Balances/Interest Earned-Paid/Rates 1994-1998"
table (pages 66-67) and the "Funding Sources" section of Management's
Discussion and Analysis (pages 32-33) for deposit information.
"Selected Financial Highlights - Operating Basis" and "Summary of
Earnings" (page 1) for return on assets, return on equity, common dividend
payout ratio, and average equity to asset ratio.
"Note 9. Short-Term Borrowings" of the Notes to Consolidated Financial
Statements (page 51) for information on short-term borrowings of the
Registrant.
ITEM 2. PROPERTIES
The Registrant maintains its corporate headquarters at One Federal Street,
Boston, Massachusetts. The Registrant or its subsidiaries also maintain
principal offices at 100 and 111 Westminster Street, Providence, Rhode Island,
777 Main Street, Hartford, Connecticut, and 75 State Street, Boston,
Massachusetts. In addition, the Registrant or its subsidiaries maintain
operation centers located in: Kingston, Melville, Utica, Albany, West Seneca and
Menands, New York; Malden, Massachusetts; Moosic and Horsham, Pennsylvania;
Milwaukee, Wisconsin; Providence and Lincoln, Rhode Island; and Hartford,
Connecticut.
As of December 31, 1998, the Registrant's subsidiaries also operated
approximately 1,503 offices, of which approximately 671 are owned and 832 are
leased from others.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings of the Registrant is incorporated
by reference herein from "Note 19. Commitments, Contingencies and Other
Disclosures" (page 62) of the Registrant's 1998 Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For information regarding Fleet's common stock listed on the New York
Stock Exchange, high and low quarterly sales prices, and quarterly dividends
declared and paid, in each case on Fleet's common stock, see the "Common
Stock Price and Dividend Information" table (page 66) of the Registrant's
1998 Annual Report to Shareholders, which is incorporated by reference
herein. At December 31, 1998, Fleet had approximately 53,000 stockholders of
record.
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ITEM 6. SELECTED FINANCIAL DATA
The information set forth in "Selected Financial Highlights - Operating
Basis" and "Summary of Earnings" (page 1) of the Registrant's 1998 Annual Report
to Shareholders is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth in "Management's Discussion and Analysis" (pages
21-39) of the Registrant's 1998 Annual Report to Shareholders is incorporated by
reference herein.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth in the "Asset-Liability Management" section of
Management's Discussion and Analysis (pages 33-37) of the Registrant's 1998
Annual Report to Shareholders is incorporated by reference herein.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (including the information incorporated by
reference herein) 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
acquisitions and integrations of acquired businesses; 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.
Fleet regularly evaluates the potential acquisition of, and holds
discussions with, various potential acquisition candidates. As a general
rule, Fleet publicly announces such acquisitions only after a definitive
agreement has been reached.
The Corporation has limited international lending exposure. Less than 1% of
the outstanding loans were in the Asian/Latin American/Emerging Market sectors.
Fleet's exposure to these markets as of December 31, 1998 was approximately $485
million and related primarily to trade related financings with maturities
generally less than 90 days.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information set forth in the Registrant's 1998 Annual Report
to Shareholders is incorporated by reference herein:
The Consolidated Financial Statements, together with the report thereon by
KPMG Peat Marwick LLP (pages 41-45); the "Notes to the Consolidated Financial
Statements" (pages 46-64); and the unaudited information presented in the
"Quarterly Summarized Financial Information" table (page 65).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure as defined by Item 304 of Regulation S-K.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction G of Form 10-K and Item 402 of Regulation S-K, the
information set forth under the captions "Election of Directors" (pages 3-10),
"Certain Information Regarding the Board of Directors - Meetings and Committees"
(pages 10-11), "Compensation of Executive Officers - Severance Agreements and
Employment Contracts" (page 22), and "Other Information Relating to Directors,
Nominees and Executive Officers" (pages 23-24) in the Registrant's Proxy
Statement with respect to the name of each nominee or director, his or her age,
his or her positions and offices with the Registrant, his or her service on the
Registrant's Board, any arrangement or understanding pursuant to which he or she
has or is to be selected as a director or nominee, his or her business
experience, his or her directorships held in other public companies, certain
family relationships and involvement in certain legal proceedings is
incorporated by reference herein.
8
<PAGE>
The names, positions, ages and business experience during the past five
years of the executive officers of the Corporation as of March 1, 1999 are set
forth below. The term of office of each executive officer extends until the
annual meeting of the Board of Directors, and until a successor is chosen and
qualified or until they shall have resigned, retired, or have been removed.
<TABLE>
<CAPTION>
AGE AS OF
NAME POSITIONS WITH THE CORPORATION MARCH 1, 1999
- ---- ------------------------------ -------------
<S> <C> <C>
Terrence Murray............ Chairman and Chief Executive Officer 59
Robert J. Higgins.......... President and Chief Operating Officer 53
H. Jay Sarles.............. Vice Chairman and Chief Administrative Officer 53
David L. Eyles............. Vice Chairman and Chief Credit Policy Officer 59
Eugene M. McQuade.......... Vice Chairman and Chief Financial Officer 50
Gunnar S. Overstrom, Jr.... Vice Chairman 56
Michael R. Zucchini........ Vice Chairman and Chief Technology Officer 52
William C. Mutterperl...... Executive Vice President, Secretary and General Counsel 52
M. Anne Szostak............ Executive Vice President 48
Anne M. Finucane........... Senior Vice President 46
Robert B. Hedges, Jr....... Senior Vice President 40
Douglas L. Jacobs.......... Senior Vice President and Treasurer 51
Brian T. Moynihan.......... Senior Vice President, Corporate Strategy and Development 39
Robert C. Lamb, Jr......... Controller and Chief Accounting Officer 43
</TABLE>
Terrence Murray joined Fleet in 1962. After serving in various capacities
for Fleet National Bank and the Corporation, in 1978, he was elected President
of the Corporation. He became Chairman of the Board of Directors and Chief
Executive Officer of the Corporation in 1982. He has continued to serve in that
capacity, except in 1988 following the Norstar acquisition when he served as
President and Chief Operating Officer, and following the Shawmut acquisition
until December 1996, when Mr. Murray served as President and Chief Executive
Officer. Mr. Murray has been a Director of Fleet since 1976.
Robert J. Higgins joined Fleet National Bank in 1971 and was elected
President in 1986. In 1984, he was named a Vice President of the Corporation. In
1989, he was named an Executive Vice President of the Corporation and Chief
Executive Officer of Fleet National Bank. In 1993, he was named a Vice Chairman
of the Corporation and is currently responsible for the commercial services and
consumer banking divisions. In 1997, Mr. Higgins was named President and Chief
Operating Officer of the Corporation.
H. Jay Sarles is in charge of strategic planning, mergers and acquisitions,
staff support functions, credit card operations, venture capital, and mortgage
banking. Mr. Sarles joined Fleet National Bank in 1968. In 1980, he was
appointed a Vice President of the Corporation. Mr. Sarles was appointed
Executive Vice President of the Corporation in February of 1986. In 1991, Mr.
Sarles became President and Chief Executive Officer of Fleet Banking Group, Inc.
In March 1993, he was named a Vice Chairman of the Corporation. In 1996, Mr.
Sarles was named Chairman of Fleet Bank, National Association. In 1997, Mr.
Sarles was named Chief Administrative Officer of the Corporation.
David L. Eyles is the Chief Credit Policy Officer of the Corporation.
Between 1988 and 1991, he was Vice Chairman and Chairman of the Credit Policy
Committee at Mellon Bank Corporation/Mellon Bank, N.A. Mr. Eyles joined Shawmut
in 1992 and served as Vice Chairman and Chief Credit Policy Officer. In 1995,
Mr. Eyles was named Executive Vice President of the Corporation. In 1998, he was
named a Vice Chairman of the Corporation.
Eugene M. McQuade joined the Corporation in 1992 as Senior Vice
President-Finance. From 1980 to 1991, Mr. McQuade served in various capacities
with Manufacturers Hanover Corporation and Manufacturers Hanover Trust Company,
having served as its Executive Vice President and Controller from 1985 to 1991.
In March 1993, Mr. McQuade was named an Executive Vice President of the
Corporation and in July 1993 was elected as Chief Financial Officer. In 1997,
Mr. McQuade was named a Vice Chairman.
Gunnar S. Overstrom, Jr. is a Vice Chairman of the Corporation responsible
for investment services. Prior to the merger of Shawmut with Fleet in 1995, Mr.
Overstrom, who joined Shawmut in 1975, served in various capacities at Shawmut,
including Chairman, Chief Executive Officer and Director of its banking
subsidiaries, as well as President and Chief Operating Officer of Shawmut
Corporation from 1988 to 1995.
Michael R. Zucchini is responsible for Fleet Information Technology
(including the Year 2000 initiative), Quality Management and Re-engineering and
AFSA Data Corporation. Mr. Zucchini joined the Corporation in 1987 as Executive
Vice President and Chief Information Officer responsible for all data processing
activities of the Corporation and its
9
<PAGE>
subsidiaries. Since 1974, Mr. Zucchini had served in various capacities for
General RE Corp., Stamford, Connecticut. In 1993, Mr. Zucchini was named a Vice
Chairman of the Corporation. In 1997, Mr. Zucchini was named Chief Technology
Officer.
William C. Mutterperl joined Fleet National Bank in 1977. In June 1985, Mr.
Mutterperl was named Vice President, Secretary and General Counsel of the
Corporation. In 1989, Mr. Mutterperl was named a Senior Vice President of the
Corporation. In 1998, Mr. Mutterperl was named an Executive Vice President of
the Corporation.
M. Anne Szostak joined Fleet National Bank in 1973. In 1988, she was named
Vice President of Human Resources for the Corporation. In 1991, she was named
Chairman, President and Chief Executive Officer of Fleet-Maine. In 1994, Ms.
Szostak was named Senior Vice President, Human Resources, of the Corporation. In
1998, Ms. Szostak was named an Executive Vice President of the Corporation.
Anne M. Finucane joined Fleet in 1995 as Senior Vice President and Director
of Corporate Marketing and Corporate Communications from her own consulting
firm. From 1980 to 1994, Ms. Finucane held various executive positions at the
advertising agency of Hill, Holliday, Connors, Cosmopulos, Inc.
Robert B. Hedges, Jr. is a Senior Vice President responsible for Fleet's
retail distribution channels. Mr. Hedges joined Shawmut in 1993 from First
Manhattan Consulting Group, where he was Vice President from 1992 to 1993. From
1983 to 1992, Mr. Hedges was Vice President and banking practice leader of the
MAC Group, a consulting firm specializing in management consulting.
Douglas L. Jacobs joined Fleet Mortgage Group in 1988 as Executive Vice
President in charge of secondary marketing. Prior to joining Fleet, Mr. Jacobs
worked in a variety of positions at Citicorp. Mr. Jacobs was named Director of
Capital Markets in 1994 and in 1995 was named Treasurer. Mr. Jacobs is
responsible for all funding, investment portfolio, capital markets trading and
asset/liability functions. In 1998, Mr. Jacobs was named a Senior Vice President
of the Corporation.
Brian T. Moynihan joined the Corporation in 1993 as Deputy General Counsel.
In March 1994, he was named Managing Director, Corporate Strategy and
Development for the Corporation. From 1991 to 1993, Mr. Moynihan was a partner
in the law firm of Edwards & Angell, where he had been an associate since 1984.
In 1998, Mr. Moynihan was named a Senior Vice President of the Corporation.
Robert C. Lamb, Jr. is the Controller and Chief Accounting Officer for the
Corporation. Mr. Lamb joined the Corporation in 1986 as Controller of its data
processing subsidiary and was subsequently named Controller of Fleet Services
Corporation in 1988. Mr. Lamb was appointed Controller of another affiliate,
Fleet Credit Corporation, in 1990 and in 1991 was named Senior Vice President
and Chief Financial Officer of RECOLL Management Corporation, Fleet's management
and collection subsidiary. In April 1993, Mr. Lamb was named Controller of the
Corporation.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Instruction G of Form 10-K and Item 402 of Regulation S-K,
information set forth in the following sections of the Corporation's Proxy
Statement is incorporated by reference herein: "Compensation of Directors" (page
11), "Compensation of Executive Officers" (pages 18-22) and "Compensation
Committee Interlocks and Insider Participation" (page 24). Such incorporation by
reference shall not be deemed to specifically incorporate by reference the
information required by Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G of Form 10-K and Item 403 of Regulation S-K,
information set forth in the following sections of the Corporation's Proxy
Statement is incorporated by reference herein: "Security Ownership of Certain
Beneficial Owners" (page 2) and "Security Ownership of Directors and Executive
Officers" (pages 12-13).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G of Form 10-K and Item 404 of Regulation S-K,
information set forth under "Indebtedness and Other Transactions" (pages 23-24)
in the Corporation's Proxy Statement is incorporated by reference herein.
10
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). The financial statements of Fleet required in response to this Item are
listed in response to Item 8 of this Report and are incorporated by
reference herein.
(a)(2). All schedules to the consolidated financial statements required by
Article 9 of Regulation S-X and all other schedules to the financial
statements of the Registrant have been omitted because the information
is either not required, not applicable, or is included in the financial
statements or notes thereto.
(a)(3). See the exhibits listed below.
(b) Five Current Reports on Form 8-K were filed from October 1, 1998 to the
date of this Report:
- Current Report on Form 8-K dated October 21, 1998 announcing third
quarter earnings and a 10% increase in the quarterly common stock
dividend to $.27 per common share.
- Current Report on Form 8-K dated November 20, 1998 announcing that
the Corporation has entered into a stock purchase agreement with
Sanwa Bank, Ltd. to purchase all of the outstanding capital stock
of Sanwa Business Credit.
- Current Report on Form 8-K dated December 18, 1998 reporting the
sale of $250 million Floating Rate Capital Securities.
- Current Report on Form 8-K dated January 20, 1999 announcing fourth
quarter and fiscal 1998 earnings.
- Current Report on Form 8-K dated March 14, 1999 announcing that
Fleet and BankBoston Corporation have entered into an Agreement
and Plan of Merger. The Merger Agreement provides for the merger
of BankBoston with and into Fleet.
11
<PAGE>
(c) EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
2(a) Agreement and Plan of Merger dated December 19, 1995 between the Registrant and National Westminster
Bank Plc ("NatWest") (1)
2(b) First Amendment to Agreement and Plan of Merger dated May 1, 1996 between the Registrant and NatWest (2)
3(a) Restated Articles of Incorporation of the Registrant (3)
3(b) Certificate of Designations establishing the Registrant's Series V 7.25% Perpetual Preferred Stock (4)
3(c) Certificate of Designations establishing the Registrant's Series VI 6.75% Perpetual Preferred Stock (5)
3(d) Certificate of Designations establishing the Registrant's Series VII Fixed/Adjustable Rate Cumulative
Preferred Stock (6)
3(e) Certificate of Designations establishing the Registrant's Series VIII Fixed/Adjustable Rate Noncumulative
Preferred Stock (7)
3(f) By Laws of the Registrant, as amended (8)
4(a) Rights Agreement dated November 21, 1990 as amended by First Amendment to Rights Agreement dated March
28, 1991, a Second Amendment to Rights Agreement dated July 12, 1991, and a Third Amendment to Rights
Agreement dated February 20, 1995 (9)
4(b) Instruments defining the rights of security holders, including indentures (10)
4(c) Form of Rights Certificate for stock purchase rights issued to Whitehall Associates, L.P., and KKR
Partners II, L.P. (11)
10(a)* Form of Change in Control Agreement together with Schedule of Persons who have entered into such
contracts (12)
10(b)* Form of Change in Control Agreement with Gunnar S. Overstrom, Jr. (13)
10(c) Stock Purchase Agreement dated July 12, 1991 among Registrant and Whitehall Associates, L.P., and KKR
Partners II, L.P. (14)
10(d) Exchange Agreement dated December 31, 1995 among Registrant and Whitehall Associates, L.P., and KKR
Partners II, L.P. (15)
10(e)* Supplemental Compensation Plan for former Norstar directors (16)
10(f)* Fleet Financial Group Directors Retirement Plan (17)
10(g)* Supplemental Executive Retirement Plan (18)
10(h)* 1994 Performance-Based Bonus Plan for the Named Executive Officers (19)
10(i)* Amended and Restated 1992 Stock Option and Restricted Stock Plan (20)
10(j)* Employment Agreement dated as of February 20, 1995 between Registrant and Joel B. Alvord (21)
10(k)* Employment Agreement dated as of February 20, 1995 between Registrant and Gunnar S. Overstrom, Jr. (22)
10(l)* Shawmut National Corporation Stock Option and Restricted Stock Award Plan (assumed by Registrant on
November 30, 1995) (23)
10(m)* Shawmut National Corporation Secondary Stock Option and Restricted Stock Award Plan (assumed by
Registrant on November 30, 1995) (24)
10(n)* Shawmut National Corporation 1989 Nonemployees Directors' Restricted Stock Plan (assumed by Registrant
on November 30, 1995) (25)
10(o)* 1995 Restricted Stock Plan (26)
10(p)* Executive Deferred Compensation Plan No. 1 (27)
10(q)* Executive Deferred Compensation Plan No. 2 (28)
10(r)* Executive Supplemental Plan (29)
10(s)* Retirement Income Assurance Plan (30)
10(t)* Trust Agreement for the Executive Deferred Compensation Plans No. 1 and 2 (31)
10(u)* Trust Agreement for the Executive Supplemental Plan (32)
10(v)* Trust Agreement for the Retirement Income Assurance Plan and the Supplemental Executive Retirement Plan (33)
10(w)* Employment Agreement dated September 16, 1997 between Thomas C. Quick and The Quick & Reilly
Group, Inc. (assumed by a subsidiary of the Registrant on February 1, 1998) (34)
10(x)* Letter Agreement dated April 16, 1997 between Registrant and Gunnar S. Overstrom, Jr. amending
Employment Agreement and Change of Control Agreement, each dated February 20, 1995 (35)
10(y)* Amendment One to Supplemental Executive Retirement Plan (36)
10(z)* Stock Unit Contract dated December 17, 1997 between Registrant and Terrence Murray (37)
10(aa)* Fleet Financial Group, Inc./Quick & Reilly Group, Inc. Stock Option Plan, as amended by Amendment
No. 1 to Fleet Financial Group, Inc./Quick & Reilly Group, Inc. Stock Option Plan and Amendment No. 2
to Fleet Financial Group, Inc./Quick & Reilly Group, Inc. Stock Option Plan (38)
10(bb)* Directors Deferred Compensation and Stock Unit Plan
</TABLE>
12
<PAGE>
12 Statement re: computation of ratios
13 1998 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 1998 Financial Data Schedule
27(a) 1997 Restated Financial Data Schedule
27(b) 1996 Restated Financial Data Schedule
- ----------
*Management contract, or compensatory plan or arrangement
(1) Incorporated by reference to Exhibit 2 of Registrant's Form 8-K Current
Report dated December 19, 1995.
(2) Incorporated by reference to Exhibit 2 of Registrant's Form 8-K Current
Report dated May 1, 1996.
(3) Incorporated by reference to Exhibit 3 of Registrant's Form 10-Q/A for the
quarter ended September 30, 1998.
(4) Incorporated by reference to Exhibit 4(a) of Registrant's Form 8-K Current
Report dated February 21, 1996.
(5) Incorporated by reference to Exhibit 4(b) of Registrant's Form 8-K Current
Report dated February 21, 1996.
(6) Incorporated by reference to Exhibit 4(a) of Registrant's Form 8-K Current
Report dated March 26, 1996.
(7) Incorporated by reference to Exhibit 4(a) of Registrant's Form 8-K Current
Report dated September 27, 1996.
(8) Incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(9) Incorporated by reference to Registrant's Registration Statement Form 8-A
dated November 29, 1990, as amended by an Amendment to Application on
Report Form 8-A dated September 6, 1991, and as further amended by a Form
8-A/A dated March 17, 1995.
(10) 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.
(11) Incorporated by reference to Exhibit 4(c) of Registrant's Form 8-K Current
Report dated July 12, 1991.
(12) Incorporated by reference to Exhibit 10(a) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1997.
(13) Incorporated by reference to Exhibit 10(b) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(14) Incorporated by reference to Exhibit 4 of Registrant's Form 8-K Current
Report dated July 12, 1991.
(15) Incorporated by reference to Exhibit 2(b) of Registrant's Form 8-K Current
Report dated December 19, 1995.
(16) Incorporated by reference to Exhibit 10(i) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1993.
(17) Incorporated by reference to Exhibit 10(j) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1993.
(18) Incorporated by reference to Exhibit 10(d) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(19) Incorporated by reference to Exhibit 10(h) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1994.
13
<PAGE>
(20) Incorporated by reference to Exhibit 10(i) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1996.
(21) Incorporated by reference to Exhibit 10(j) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(22) Incorporated by reference to Exhibit 10(k) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(23) Incorporated by reference to Exhibit 10.1 of Shawmut's Form 10-K Annual
Report for the fiscal year ended December 31, 1994.
(24) Incorporated by reference to Exhibit 10(m) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(25) Incorporated by reference to Shawmut's 1989 Proxy Statement dated March 13,
1989.
(26) Incorporated by reference to Exhibit 10(o) of Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(27) Incorporated by reference to Exhibit 10(a) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(28) Incorporated by reference to Exhibit 10(b) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(29) Incorporated by reference to Exhibit 10(c) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(30) Incorporated by reference to Exhibit 10(e) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(31) Incorporated by reference to Exhibit 10(f) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(32) Incorporated by reference to Exhibit 10(g) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(33) Incorporated by reference to Exhibit 10(h) of Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(34) Incorporated by reference to Exhibit 10(w) of Registrant's Form 10-K Annual
Report for fiscal year ended December 31, 1997.
(35) Incorporated by reference to Exhibit 10(b) of Registrant's Form 10-Q for
the quarter ended June 30, 1997.
(36) Incorporated by reference to Exhibit 10(c) of Registrant's Form 10-Q for
the quarter ended June 30, 1997.
(37) Incorporated by reference to Exhibit 10(z) of Registrant's Form 10-K Annual
Report for fiscal year ended December 31, 1997.
(38) Incorporated by reference to Exhibits 4.1, 4.2 and 4.3 of Registrant's
Registration Statement on Form S-8 (File No. 333-42247).
(d) Financial Statement Schedules - None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FLEET FINANCIAL GROUP, INC.
(Registrant)
/s/ Eugene M. McQuade /s/ Robert C. Lamb, Jr.
---------------------------------- --------------------------------------
EUGENE M. MCQUADE ROBERT C. LAMB, JR.
VICE CHAIRMAN AND CONTROLLER AND
CHIEF FINANCIAL OFFICER CHIEF ACCOUNTING OFFICER
DATED MARCH 26, 1999 DATED MARCH 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated.
/s/ Terrence Murray /s/ Raymond C. Kennedy
----------------------------------- --------------------------------------
TERRENCE MURRAY, CHAIRMAN, RAYMOND C. KENNEDY, DIRECTOR
CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ Joel B. Alvord /s/ Robert J. Matura
----------------------------------- --------------------------------------
JOEL B. ALVORD, DIRECTOR ROBERT J. MATURA, DIRECTOR
/s/ William Barnet, III /s/ Arthur C. Milot
----------------------------------- --------------------------------------
WILLIAM BARNET, III, DIRECTOR ARTHUR C. MILOT, DIRECTOR
/s/ Bradford R. Boss /s/ Thomas D. O'Connor, Sr.
----------------------------------- --------------------------------------
BRADFORD R. BOSS, DIRECTOR THOMAS D. O'CONNOR, SR., DIRECTOR
/s/ Stillman B. Brown /s/ Michael B. Picotte
----------------------------------- --------------------------------------
STILLMAN B. BROWN, DIRECTOR MICHAEL B. PICOTTE, DIRECTOR
/s/ Paul J. Choquette, Jr. /s/ Thomas C. Quick
----------------------------------- --------------------------------------
PAUL J. CHOQUETTE, JR., DIRECTOR THOMAS C. QUICK, DIRECTOR
/s/ Kim B. Clark /s/ Lois D. Rice
----------------------------------- --------------------------------------
KIM B. CLARK, DIRECTOR LOIS D. RICE, DIRECTOR
/s/ John T. Collins /s/ John R. Riedman
----------------------------------- --------------------------------------
JOHN T. COLLINS, DIRECTOR JOHN R. RIEDMAN, DIRECTOR
/s/ James F. Hardymon /s/ Thomas M. Ryan
----------------------------------- --------------------------------------
JAMES F. HARDYMON, DIRECTOR THOMAS M. RYAN, DIRECTOR
/s/ Marian L. Heard /s/ Samuel O. Thier
----------------------------------- --------------------------------------
MARIAN L. HEARD, DIRECTOR SAMUEL O. THIER, M.D., DIRECTOR
/s/ Robert M. Kavner /s/ Paul R. Tregurtha
----------------------------------- --------------------------------------
ROBERT M. KAVNER, DIRECTOR PAUL R. TREGURTHA, DIRECTOR
15
<PAGE>
Exhibit 10(bb)
FLEET FINANCIAL GROUP, INC.
DIRECTORS DEFERRED COMPENSATION AND STOCK UNIT PLAN
(Effective December 17, 1997)
Section 1. PURPOSE
Fleet Financial Group, Inc. (the "COMPANY") has established, pursuant
to resolutions adopted on December 17, 1997, the Directors Deferred Compensation
and Stock Unit Plan (the "PLAN") to assist the Company in recruiting and
retaining highly qualified directors and to strengthen the commonality of
interest between directors and shareholders by enabling eligible members of the
Board of Directors (the "BOARD") to defer receipt of certain amounts of
compensation, as hereinafter described. The Plan hereby amends, restates and
continues all of the existing deferred compensation agreements, arrangements and
understandings for its current non-employee directors (the "PRIOR
ARRANGEMENTS"), effective as of December 17, 1997. The Plan supersedes and
replaces all Prior Arrangements.
Section 2. EFFECTIVE DATE
The effective date of the Plan is December 17, 1997, except as
otherwise provided herein. Amendments to the Plan, if any, shall become
effective when adopted by the Human Resources and Planning Committee, or any
successor committee, of the Board (the "COMMITTEE") in accordance with the
provisions of Section 20.
Section 3. DEFINITIONS
(a) "ACCOUNT" shall have the meaning set forth in Section 7.
(b) "ANNUAL EQUITY AWARD" shall have the meaning set forth in
Section 8(a).
(c) "ANNUAL RETAINER" shall mean the amount that a director is
entitled to receive for serving as a director for a calendar
year, as determined from time to time by the Committee. As of
the effective date of this Plan, the Annual Retainer is set at
$40,000.
(d) "BENEFICIARY FORM" shall have the meaning set forth in Section
12(b).
(e) "BOARD" shall have the meaning set forth in Section 1.
(f) "CHAIRMAN FEES" shall have the meaning set forth in Section
8(d).
-1-
<PAGE>
(g) "CHANGE OF CONTROL" shall mean: (a) the acquisition, other
than from the Company, by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of
the then outstanding shares of common stock of the Company
(the "OUTSTANDING COMPANY COMMON STOCK"); provided, however,
that any acquisition by the Company or its subsidiaries, or
any employee benefit plan (or related trust) of the Company or
its subsidiaries, of 25% or more of the Outstanding Company
Common Stock shall not constitute a Change of Control; and
further provided, however, that any acquisition by a
corporation with respect to which, following such acquisition,
more than 50% of the then outstanding shares of common stock
of such corporation is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding
Company Common Stock immediately prior to such acquisition in
substantially the same proportion as their ownership
immediately prior to such acquisition of the Outstanding
Company Common Stock, shall not constitute a Change of
Control; or (b) individuals who, as of the date of this Plan,
constitute the Board (the "INCUMBENT BOARD") cease for any
reason to constitute at least a majority of the Board,
provided that any individual becoming a director subsequent to
the date of this Plan whose election, or nomination for
election by the Company's stockholders, was approved by a vote
of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of
office is in connection with an actual or threatened election
contest relating to the election of the directors of the
Company (as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act); or (c) consummation
of a reorganization, merger, consolidation, sale or other
disposition of all or substantially all of the assets of the
Company (a "BUSINESS COMBINATION"), in each case, with respect
to which all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding
Company Common Stock immediately prior to such Business
Combination do not, following such Business Combination,
beneficially own, directly or indirectly, more than 50% of the
then outstanding shares of common stock of the corporation
resulting from such a Business Combination (including, without
limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of
the Company's assets either directly or through one or more
subsidiaries); or (d) approval by the stockholders of the
Company of a complete liquidation or dissolution of the
Company.
(h) "COMMITTEE" shall have the meaning set forth in Section 2.
-2-
<PAGE>
(i) "COMMON STOCK" shall mean Fleet Financial Group, Inc. Common
Stock, $.01 par value per share.
(j) "COMPANY" shall have the meaning set forth in Section 1.
(k) "DEFERRAL ELECTION" shall have the meaning set forth in
Section 8(f).
(l) "DEFERRAL ELECTION FORM" shall have the meaning set forth in
Section 8(f).
(m) "DEFERRED COMPENSATION" shall have the meaning set forth in
Section 12(b).
(n) "DEFERRED STOCK UNITS" shall represent the right to receive
the specified number of Shares from the Company on the date or
dates specified in the applicable Distribution Election Form.
(o) "DELEGATEE" shall have the meaning set forth in Section 4.
(p) "DISTRIBUTION ELECTION" shall have the meaning set forth in
Section 8(h).
(q) "DISTRIBUTION ELECTION FORM" shall have the meaning set forth
in Section 8(h).
(r) "ELIGIBLE DIRECTOR" shall mean any director of the Company who
is not an officer or employee of the Company or any subsidiary
thereof.
(s) "FAIR MARKET VALUE" shall mean, with respect to any date, the
closing price of the Common Stock as reported on the New York
Stock Exchange Composite Tape on such date or, if such date is
not a business day of the New York Stock Exchange, the closing
price of the Common Stock as reported on the New York Stock
Exchange Composite Tape on the last completed New York Stock
Exchange business day prior to such date.
(t) "FEES" shall mean, collectively, the Annual Retainer, the
Chairman Fees, and the Meeting Fees.
(u) "FIXED RATE" shall have the meaning set forth in Section
10(b).
(v) "FIXED RATE ACCOUNT" shall have the meaning set forth in
Section 12.
(w) "MANDATORY ANNUAL RETAINER AMOUNT" shall have the meaning set
forth in Section 8(b).
(x) "MEETING FEES" shall have the meaning set forth in Section
8(e).
-3-
<PAGE>
(y) "PHANTOM STOCK ACCOUNT" shall have the meaning set forth in
Section 9(b).
(z) "PHANTOM STOCK RATE" shall have the meaning set forth in
Section 10(c).
(aa) "PLAN" shall have the meaning set forth in Section 1.
(bb) "PLAN YEAR" shall mean January 1 through December 31.
(cc) "PRIOR ARRANGEMENTS" shall have the meaning set forth in
Section 1.
(dd) "RETAINER BALANCE" shall have the meaning set forth in Section
8(c).
(ee) "RETIREMENT PLANS" shall mean all retirement or other pension
plans of the Company or any subsidiary thereof in which any
Eligible Director is or was a participant and under which such
Eligible Director is or was entitled to receive any benefit.
(ff) "SHARES" shall have the meaning set forth in Section 6.
(gg) "STOCK UNIT ACCOUNT" shall have the meaning set forth in
Section 12.
Section 4. ADMINISTRATION AND PARTICIPANT ACKNOWLEDGMENT
The Plan will be administered by the Committee, whose construction and
interpretation of the terms and provisions of the Plan shall be final and
conclusive. No member of the Committee who is an Eligible Director may vote or
otherwise participate in any decision or act with respect to a matter relating
solely to himself or herself (or to his or her beneficiaries). Each Eligible
Director, by participating in the Plan, thereby acknowledges that he or she
consents to the terms of the Plan.
The Committee, in its sole discretion, may delegate by written
resolution certain of its duties, responsibilities and powers (including,
without limitation, its power to amend the Plan) to a senior officer or officers
of the Company, each acting singly (each a "DELEGATEE"). For purposes of the
Plan, any action taken by any Delegatee of the Committee will be considered to
have been taken by the Committee. No Committee member or Delegatee shall be
liable for any action or determination under the Plan made in good faith. The
Company agrees to indemnify and to defend to the fullest possible extent
permitted by law any member of the Committee and any Delegatee (including any
person who formerly served as a member of the Committee or as a Delegatee)
against all liabilities, damages, costs and expenses (including attorneys' fees
and amounts paid in settlement of any claims approved by the Company) occasioned
by any act or omission to act in connection with the Plan, if such act or
omission to act is or was made in good faith.
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<PAGE>
Section 5. ELIGIBILITY
Any Eligible Director is eligible to participate in the Plan.
Section 6. STOCK SUBJECT TO THE PLAN
Shares issuable under the Plan shall be shares of the Company's Common
Stock, which are held in the Company's treasury (the "SHARES"). The Company will
maintain a sufficient number of Shares of Common Stock in its treasury to
satisfy its obligations hereunder.
Section 7. DEFERRED COMPENSATION ACCOUNT; STATEMENT OF ACCOUNT
The Committee will establish and maintain a separate Account for each
Eligible Director reflecting the amounts due to such Eligible Director under the
Plan. Each Account will consist of up to three subaccounts, the Stock Unit
Account, the Fixed Rate Account, and the Phantom Stock Account (if any)
(collectively, the "ACCOUNT"), to reflect the value of the measuring investments
selected by such Eligible Director pursuant to the Plan. From time to time, and
at least quarterly, the Committee will adjust each Eligible Director's Account
(i) to credit the amount which the Eligible Director has elected to defer under
the Plan, and (ii) to reflect increases or decreases in the value of the Account
as a result of the measuring investments described under Section 10. An Eligible
Director's Account will continue to be adjusted under this Section 7 until the
entire amount has been paid to the Eligible Director or his or her beneficiary.
An Eligible Director's Account will also be adjusted to reflect benefit payments
and withdrawals made in accordance with the terms of the Plan. Such adjustments
will be made at such time and in such manner as the Committee shall determine.
Statements will be sent to each Eligible Director promptly following the close
of each calendar quarter as to the estimated value of his or her Account as of
the end of the preceding calendar quarter.
Section 8. AWARD OF DEFERRED STOCK UNITS AND DEFERRAL ELECTIONS
Commencing April 15, 1998, each Eligible Director shall be eligible to
defer certain portions of his or her compensation (as described in this Section
8) in the form of Deferred Stock Units or into a Fixed Rate Account. For the
period from December 17, 1997 through (but not including) April 15, 1998, any
Fees deferred pursuant to the Plan must be deferred into a Fixed Rate Account or
into a Phantom Stock Account (or a combination thereof) in accordance with
Section 10.
(a) ANNUAL EQUITY AWARD. Each Eligible Director shall receive, on
the date of the annual meeting in each year (or such
alternative date as the Committee may approve), Deferred Stock
Units with a value upon grant equal to 50% of the then current
Annual Retainer (the "ANNUAL EQUITY AWARD"). The Annual Equity
Award is in addition to the Mandatory Annual Retainer Amount
described in Section 8(b) below.
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<PAGE>
(b) MANDATORY ANNUAL RETAINER AMOUNT. Commencing April 15, 1998
with respect to the Annual Retainer payable for the remainder
of 1998 and in each year thereafter with respect to the Annual
Retainer for such year, each Eligible Director shall receive
25% of his or her Annual Retainer in the form of Deferred
Stock Units (the "MANDATORY ANNUAL RETAINER AMOUNT") as
provided hereunder.
(c) ELECTIVE ANNUAL RETAINER AMOUNT. Commencing April 15, 1998
with respect to the remaining 75% of his or her Annual
Retainer (the "RETAINER BALANCE") payable for the remainder of
1998 and in each year thereafter with respect to the Retainer
Balance for such year, each Eligible Director may elect to
defer all or a portion of the Retainer Balance in the form of
Deferred Stock Units, into a Fixed Rate Account, or into a
combination thereof, by so specifying on the Deferral Election
Form.
(d) ELECTIVE CHAIRMAN FEES AMOUNT. Commencing April 15, 1998 with
respect to the fees that he or she receives for serving as a
chairman or co-chairman of a committee of the Board (the
"CHAIRMAN FEES") for the remainder of 1998 and in each year
thereafter with respect to the Chairman Fees for such year,
each Eligible Director may elect to defer some or all of the
Chairman Fees in the form of Deferred Stock Units, into a
Fixed Rate Account, or into a combination thereof, by so
specifying on the Deferral Election Form.
(e) ELECTIVE MEETING FEES AMOUNT. Commencing April 15, 1998 with
respect to the fees that he or she receives for attending
meetings of the Board (the "MEETING FEES"), which term shall
include any fees received for attending meetings of one or
more committees of the Board, for the remainder of 1998 and in
each year thereafter with respect to the Meeting Fees for such
year, each Eligible Director may elect to defer some or all of
the Meeting Fees in the form of Deferred Stock Units, into a
Fixed Rate Account, or into a combination thereof, by so
specifying on the Deferral Election Form.
(f) DEFERRAL ELECTION. Eligible Directors must complete and
execute an election to defer receipt of Fees (a "DEFERRAL
ELECTION") in the form required by the Committee from time to
time (the "DEFERRAL ELECTION FORM") and deliver it to the
Secretary of the Company on or before December 31 of the year
prior to the year for which such Deferral Election will take
effect (or prior to April 15, 1998 solely with respect to
Deferral Elections for the remainder of 1998). The Deferral
Election Form shall specify the portion of the Fees to be
deferred and the subaccount(s) of the Account in which such
deferred Fees will be held. A Deferral Election once made is
irrevocable and may not be changed with respect to the Fees
earned in such year and the choice of subaccount(s) of the
Account into which such deferred Fees will be held.
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Future Deferral Elections with respect to Fees to be earned
in future years may specify a different choice of
subaccount(s) into which such future years' deferred Fees
will be held but any such change in an Eligible Director's
Deferral Election will not effect such Eligible Director's
previously deferred Fees.
(g) DEFERRAL ELECTION DURING A PLAN YEAR. Any Eligible Director
who becomes an Eligible Director during a Plan Year may make a
Deferral Election for the remainder of the Plan Year within
thirty (30) days after taking office in which case the
Deferral Election will be effective for the remainder of the
Plan Year. A nominee for director may make a Deferral Election
prior to his or her election.
(h) DISTRIBUTION ELECTION. Eligible Directors must complete and
execute an election form to choose the method of distribution
of the Deferred Compensation held in such Eligible Director's
Account (the "DISTRIBUTION ELECTION") in the form required by
the Committee from time to time (the "DISTRIBUTION ELECTION
FORM") and deliver it to the Secretary of the Company within
thirty (30) days after becoming an Eligible Director (or prior
to April 15, 1998 for directors who became Eligible Directors
prior to April 15, 1998). The Distribution Election Form shall
specify the method of distributing such Eligible Director's
Deferred Compensation held in such Eligible Director's
Account. An Eligible Director may change his or her
Distribution Election at any time up to 12 months prior to the
date of his or her cessation of service as a director of the
Company (including service as a director of any subsidiary of
the Company) by properly completing and delivering to the
Secretary of the Company a new Distribution Election Form
bearing a later date, provided, however, that any Distribution
Election made by an Eligible Director in the 12-month period
prior to his or her cessation of service as a director of the
Company (including service as a director of any subsidiary of
the Company) is not valid and will not be honored. In the
event an Eligible Director has not made a valid Distribution
Election in accordance with this Section 8(h), such Eligible
Director's Account will be fully distributed in a lump sum in
January of the year following the year in such Eligible
Director ceases to serve on the Board (including service on
the board of directors of any subsidiary of the Company).
Section 9. CONVERSION OF RETIREMENT PLAN BENEFITS AND PHANTOM STOCK ACCOUNT
BALANCES
(a) RETIREMENT PLAN BENEFITS. The accrued benefit owing to each
Eligible Director under the Company's Retirement Plans as of
December 31, 1997 may, at the election of such Eligible
Director, be converted into Deferred Stock Units by delivering
to the Secretary of the Company prior to April 15, 1998 a
conversion election form relating to such benefits. The number
of Deferred Stock Units credited in exchange for the accrued
benefit will equal the net present value of the accrued
benefit divided by the Fair Market Value of the Company's
Common Stock on April 15, 1998. Any benefit owing under
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<PAGE>
the Company's Retirement Plans not converted into Deferred
Stock Units will continue to be governed by the terms and
conditions of the applicable Retirement Plan.
(b) PHANTOM STOCK ACCOUNT BALANCE. The value of the phantom stock
account (the "PHANTOM STOCK ACCOUNT") balance as of April 15,
1998 payable in cash upon retirement to each Eligible Director
may, at the election of such Eligible Director, be converted
into Deferred Stock Units by delivering to the Secretary of
the Company, prior to April 15, 1998, a conversion election
form relating to such Phantom Stock Account. The number of
Deferred Stock Units credited in exchange for such Phantom
Stock Account balance will equal the balance in the Phantom
Stock Account divided by the Fair Market Value of the
Company's Common Stock on April 15, 1998. With respect to the
balance of each Eligible Director's Phantom Stock Account not
converted into Deferred Stock Units, the Eligible Director's
selection of the Phantom Stock Rate shall continue in full
force and effect.
(c) DETERMINATION OF VALUE OF UNCONVERTED PHANTOM STOCK ACCOUNT
BALANCES. For purposes of calculating the value of any Phantom
Stock Account not converted into Deferred Stock Units, such
account will continue to be credited based upon the Phantom
Stock Rate.
Section 10. MEASURING INVESTMENTS
(a) ELECTION OF MEASURING INVESTMENT. For deferral of Fees prior
to April 15, 1998, each Eligible Director may elect to defer
such fees into a Fixed Rate Account or a Phantom Stock
Account. Commencing April 15, 1998 each Eligible Director may
elect to defer Fees as Deferred Stock Units or into a Fixed
Rate Account and each Deferral Election Form shall specify the
portion of the Fees deferred that are to be credited to a
Fixed Rate Account and the portion to be deferred as Deferred
Stock Units.
(b) DETERMINATION OF FIXED RATE. The Committee shall from time to
time establish annual fixed rate factors (the "FIXED RATE").
The initial Fixed Rate shall be the highest fixed rate in
effect from time to time for deferral amounts under the
Company's Executive Deferred Compensation Plan No. 2 (1997
Restatement), as amended from time to time. The Fixed Rate
will be applied to each Eligible Director's Account at such
time and in such manner as the Committee shall determine and
may be changed from time to time by the Committee.
Notwithstanding the foregoing provisions of this Section 10 or
any other provision of the Plan to the contrary, following a
Change of Control of the Company, the Fixed Rate to be applied
under this Section 10 to increase the balance of the Eligible
Director's Account (as determined under the provisions of
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the Plan in effect immediately prior to such Change of
Control), for the period beginning on the date of such Change
of Control and ending on the date that the entire amount of
the Eligible Director's Account has been paid to the Eligible
Director or his or her beneficiary, shall not be less than the
Fixed Rate being applied under this Section 10 to deferral
amounts under the Eligible Director's Account under the
provisions of the Plan in effect immediately prior to such
Change of Control.
(c) DETERMINATION OF PHANTOM STOCK RATE. The stock equivalent
measurement (the "PHANTOM STOCK RATE") will be a rate equal to
(a)(i) the sum of (or the difference between) (x) the mean of
the high and low sales prices of the Company's Common Stock as
reported on the New York Stock Exchange Composite Tape on the
first business day of any fiscal quarter plus (y) the
aggregate amount of any cash dividends or other distributions
paid on the Company's Common Stock as of the first business
day of any fiscal quarter, minus (ii) the mean of the high and
low sales prices of the Company's Common Stock as reported on
the New York Stock Exchange Composite Tape on the first
business day of the prior fiscal quarter (the "PRIOR STOCK
PRICE"), divided by (b) the prior stock price.
Section 11. DIVIDENDS AND DISTRIBUTIONS
Whenever a cash dividend or any other distribution is paid with respect
to the Common Stock, each Eligible Director shall be entitled to receive an
additional number of Deferred Stock Units equal to the number of Shares,
including fractional Shares (up to three decimal places), that could have been
purchased had such dividend or other distribution been paid on each Share
underlying the then outstanding Deferred Stock Units in the Eligible Director's
Account (on the record date for such dividend or distribution) and the amount of
such dividend or value of such other distribution been used to acquire
additional Shares at their Fair Market Value on the date such dividend or other
distribution is paid. The value of a distribution of any property other than
cash on or related to the Shares shall, at the option of the Committee, be
either determined by the Committee or independently established.
Section 12. TERMS, CONDITIONS AND FORM OF DEFERRALS
Amounts deferred under the Plan that are to be credited with a Fixed
Rate shall be evidenced by a bookkeeping account record (the "FIXED RATE
ACCOUNT"), amounts deferred under the Plan that are to be credited with the
Phantom Stock Rate shall be evidenced by a Phantom Stock Account, and amounts
deferred as Deferred Stock Units shall be evidenced by a bookkeeping account
record (the "STOCK UNIT ACCOUNT") in accordance with Section 7 in such form as
the Committee shall from time to time approve, which shall be subject to the
following terms and conditions:
(a) TIMING OF DEFERRALS. Subject to Section 24, the Annual Equity
Award and any
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Fees deferred, whether mandatory or elective, shall be
credited to the appropriate subaccount of the Account on the
date such Annual Equity Award and such Fees are earned, as
described below. The number of Deferred Stock Units credited
to the Stock Unit Account shall be equal to the number
(including fractional amounts up to three decimal places)
obtained by dividing the dollar value of the portion of the
applicable Fees or Annual Equity Award by the Fair Market
Value of the Common Stock on the date that such Fee or Annual
Equity Award is earned, as described below. One quarter of the
Annual Retainer and one quarter of the annual Chairman Fees
will be earned on the first day of each calendar quarter.
Meeting Fees will be earned on the date of the meeting or, in
the case of a committee meeting held in conjunction with a
Board meeting, on the date of the related Board meeting. The
Annual Equity Award will be earned on the date of the
Company's annual meeting in such year, or such alternative
date as the Committee may approve.
(b) PAYMENT UPON DEATH. In the event of an Eligible Director's
death, the balance owing in such Eligible Director's Account
(the "DEFERRED COMPENSATION") shall be payable to the
designated beneficiary or beneficiaries in accordance with
such Eligible Director's Distribution Election. An Eligible
Director may elect to designate one or more beneficiaries to
receive his or her Deferred Compensation in the event of such
director's death. In order to designate a beneficiary or
beneficiaries, such director must complete and deliver to the
Secretary of the Company a written form (the "BENEFICIARY
FORM") on which he or she makes such designation. Such a
designation will become effective when received by the
Secretary of the Company. The designation shall be irrevocable
unless modified or revoked as provided in this subsection. In
order to modify or revoke a designation, an Eligible Director
must complete and deliver to the Secretary of the Company a
new Beneficiary Form bearing a later date. Payments to a
beneficiary under this Section 12 will be made commencing in
January of the year following the year that the Company is
notified of such director's death. If the director shall die
without making a designation (or if a designated beneficiary
does not survive the Eligible Director), the Deferred
Compensation shall be payable to the Eligible Director's
estate in one lump sum following the Company's receipt of
notification of such director's death.
Section 13. PERIOD OF DEFERRAL
An Eligible Director may elect in his or her Distribution Election Form
to defer receipt of compensation until his or her termination of service as a
director of the Company (including service as a director of any subsidiary of
the Company). If such a deferral is elected, distribution of balances in an
Eligible Director's Account will commence in January of the year following the
year in which such Eligible Director ceases to serve on the Company's Board
(including service on the board of directors of any subsidiary of the Company).
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Section 14. FORM OF PAYMENT AND METHOD OF DELIVERY
Delivery of Shares (but not fractional Shares, which fractional amount
will be payable in cash) representing the Deferred Stock Units and delivery of
cash representing balances in the Fixed Rate Account and the Phantom Stock
Account (if any) will be made to an Eligible Director in accordance with his or
her Distribution Election or, if no election applies, in January of the year
following the year in which such Eligible Director ceases to serve on the Board
(and any subsidiary board(s)). An Eligible Director may elect to receive amounts
due under the Plan either in (a) a lump sum, or (b) a number of annual
installments (not to exceed 10) as specified by that Eligible Director in his or
her Distribution Election Form. If installment payments are specified, annual
installments will be paid in January of each year such an installment payment is
due.
Section 15. EFFECT OF ELECTION: HARDSHIP WITHDRAWALS
All elections to defer compensation shall be irrevocable; provided,
however, that a director may request early payment of all or a portion of the
amounts deferred only upon a showing of severe financial hardship as a result of
an unanticipated emergency, as determined by the Committee in its sole
discretion. If a hardship election is approved by the Committee, then payment of
the amount approved by the Committee for early payment shall be made within
thirty (30) days of such approval.
Section 16. ADJUSTMENT PROVISIONS
(a) RECAPITALIZATIONS. If, as a result of any recapitalization or
reclassification of the Common Stock, or any stock dividend,
stock split, reverse stock split or other similar transaction,
(i) the outstanding shares of Common Stock are increased or
decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional
shares or new or different shares or other securities of the
Company or other non-cash assets of the Company are
distributed with respect to such shares of Common Stock or
other securities, an appropriate and proportionate adjustment
may be made in (x) the kind of shares reserved for issuance
under the Plan and (y) the number and kind of shares or other
securities subject to any then outstanding Deferred Stock Unit
under the Plan. In the event of any other extraordinary
dividend or distribution, whether in stock, cash or other
property, or a spinoff, split up or other extraordinary
transaction, the number of shares issuable under this Plan
shall be subject to such adjustment as the Committee may deem
appropriate, and the number of shares issuable pursuant to any
Deferred Stock Unit theretofore granted shall be subject to
such adjustment as the Committee may deem appropriate with a
view toward preserving the value of such Deferred Stock Unit.
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<PAGE>
(b) CHANGE OF CONTROL. In the event of a Change of Control of the
Company after which an Eligible Director does not continue on
the Board of the Company or the surviving company of the
Change of Control transaction, or any subsidiary board of the
Company or the surviving company of the Change of Control,
such Eligible Director's Deferred Compensation shall become
due and payable. The distribution of balances in such Eligible
Director's Account will commence in January of the year
following the year in which such Eligible Director ceases to
serve on the board of directors of the Company or any
successor company, or any subsidiary board of the Company or
any successor company.
Section 17. TAXES
All distributions under the Plan shall be subject to reduction for
applicable tax withholding obligations. Tax withholding obligations incurred in
connection with the distribution of Shares pursuant to the Plan may be satisfied
by an Eligible Director by directing the Company to withhold Shares having a
Fair Market Value equal to the applicable tax withholding obligation.
Section 18. DIRECTOR'S RIGHTS UNSECURED
The right of any director to receive future payments under the
provisions of the Plan shall be an unsecured, contractual claim against the
general assets of the Company. The Plan shall be unfunded. The Company shall not
be required to establish any special or separate fund or to make any segregation
of assets for the payment of any amounts under the Plan. An Eligible Director
shall have no right on account of the Plan in or to any specific assets of the
Company. The obligations of the Company hereunder shall be binding upon its
successors and assigns, whether by merger, consolidation or acquisition of all
or substantially all of its business or assets.
Section 19. LIMITATION OF RIGHTS
(a) NO RIGHT TO CONTINUE AS DIRECTOR. Neither the Plan, nor the
granting of a Deferred Stock Unit or any other Deferred
Compensation nor any other action taken pursuant to the Plan,
shall constitute or be evidence of any agreement or
understanding, expressed or implied, that the Company will
retain a director for any period of time. The Plan will not be
deemed to constitute a contract of employment between the
Company and any Eligible Director, or to be consideration for
the employment of any Eligible Director.
(b) NO SHAREHOLDER RIGHTS. An Eligible Director shall have no
rights as a shareholder with respect to the Shares covered by
his or her Deferred Stock Unit until the date of the issuance
to him or her of a stock certificate covering the Shares
underlying such Deferred Stock Unit.
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Section 20. AMENDMENT OF THE PLAN
The Plan may be altered, amended, revoked or terminated by the
Committee, or any Delegatee thereof, or by the Company, in any manner and at any
time; provided, however, no such alteration, amendment, revocation or
termination may adversely affect any person then receiving benefits under the
Plan without his or her written consent; and further provided, however,
following a Change of Control of the Company, no such alteration, amendment,
revocation or termination shall reduce the amount of an Eligible Director's
Account or his or her rights to such Account as determined under the provisions
of the Plan in effect immediately prior to such Change of Control, or in any way
adversely affect the annual measuring investment factors described in Section
10, or otherwise adversely affect the Eligible Director's benefits under the
Plan, without the written consent of the Eligible Director; and further
provided, however, following said Change of Control, the provisions of this
Section 20 may not be amended.
Section 21. TERMINATION OF THE PLAN
Unless earlier terminated pursuant to the terms of the Plan, the Plan
shall terminate upon the date on which all Shares available for issuance under
the Plan shall have been issued pursuant to Deferred Stock Units granted under
the Plan and all amounts owing to Eligible Directors under the Plan have been
paid.
Section 22. ASSIGNMENTS
All Deferred Compensation owing hereunder, by its terms shall not be
transferable by the Eligible Director otherwise than by will or by the laws of
descent and distribution, or pursuant to a qualified domestic relations order
(as defined in Section 414(p) of the Internal Revenue Code of 1986, as amended
or replaced from time to time) and shall be payable during the lifetime of the
Eligible Director only to such Eligible Director or a transferee pursuant to a
qualified domestic relations order. Such Deferred Compensation will not be
subject to being taken by his or her creditors by any process whatsoever, and
any attempt to cause such interest to be so subjected will not be recognized.
Section 23. NOTICE
Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Secretary of the Company and shall become
effective when it is received.
Section 24. GENERAL RESTRICTIONS
(a) INVESTMENT REPRESENTATIONS. The Company may require any person
to whom a Deferred Stock Unit is granted, as a condition of
the grant of such Deferred Stock
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Unit, to give written assurances in substance and form
satisfactory to the Company to the effect that such person is
acquiring the Shares underlying the Deferred Stock Unit for
his or her own account for investment and not with any present
intention of selling or otherwise distributing the same, and
to such other effects as the Company deems necessary or
appropriate in order to comply with federal and applicable
state securities laws.
(b) COMPLIANCE WITH SECURITIES LAWS. The settlement of each
Deferred Stock Unit shall be subject to the requirements that
if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the Shares
subject to such Deferred Stock Unit upon any securities
exchange or under any state or federal law is necessary as a
condition of, or in connection with, the issuance or purchase
of shares thereunder, such Shares may not be issued unless
such listing, registration, qualification, consent or
approval, or satisfaction of such condition shall have been
effected or obtained on conditions acceptable to the
Committee. Nothing herein shall be deemed to require the
Company to apply for or to obtain listing, registration or
qualification, or to satisfy such condition.
Section 25. SPECIAL PROVISIONS FOR ELIGIBLE DIRECTORS COVERED BY PRIOR
ARRANGEMENTS
Notwithstanding any provision of the Plan to the contrary, the
following special rules shall apply to each Eligible Director covered by a Prior
Arrangement on December 17, 1997.
(a) FORMS, CONSENTS, ETC.. In order to participate in the Plan,
such Eligible Director may be required to complete such
Deferral Election and Distribution Election or other forms or
consents as the Committee shall prescribe; and
(b) TERMINATION OF PRIOR ARRANGEMENTS. As of December 17, 1997,
such Eligible Director's Account under the Plan shall be
credited with an amount equal to the amount of his or her
account or accounts under the Prior Arrangements and the
Company shall have no further liability or obligations under
said Prior Arrangements.
Section 26. GOVERNING LAW
The Plan shall be construed in accordance with the laws of the State of
Rhode Island without giving effect to the conflict of laws provisions therein to
the extent those laws are not preempted by the Employee Retirement Income
Security Act of 1974, as amended.
Adopted by the Human Resources and
Planning Committee of the Board of
Directors as of December 17, 1997
----------------------------------
William C. Mutterperl
General Counsel
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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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes, extraordinary credit and
cumulative effect of accounting changes .......... $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds .............. 1,061 737 813 1,413 1,074
(2) 1/3 of rent ............................. 54 53 55 52 53
(b) Preferred dividends ........................... 83 104 117 62 51
====== ====== ====== ====== ======
(c) Adjusted earnings ............................. $3,705 $3,188 $3,055 $2,683 $2,638
====== ====== ====== ====== ======
Fixed charges and preferred dividends ................ $1,198 $ 894 $ 985 $1,527 $1,178
====== ====== ====== ====== ======
Adjusted earnings/fixed charges ...................... 3.09x 3.57x 3.10x 1.76x 2.24x
====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes, extraordinary credit and
cumulative effect of accounting changes .......... $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds ............... 1,061 737 813 1,413 1,074
(2) 1/3 of rent .............................. 54 53 55 52 53
(3) Interest on deposits ..................... 1,835 1,654 1,754 1,726 1,170
(b) Preferred dividends ........................... 83 104 117 62 51
====== ====== ====== ====== ======
(c) Adjusted earnings ............................. $5,540 $4,842 $4,809 $4,409 $3,808
====== ====== ====== ====== ======
Fixed charges and preferred dividends ................ $3,033 $2,548 $2,739 $3,253 $2,348
====== ====== ====== ====== ======
Adjusted earnings/fixed charges ...................... 1.83x 1.90x 1.76x 1.36x 1.62x
====== ====== ====== ====== ======
</TABLE>
<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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes, extraordinary credit and
cumulative effect of accounting changes .......... $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds .............. 1,061 737 813 1,413 1,074
(2) 1/3 of rent ............................. 54 53 55 52 53
====== ====== ====== ====== ======
(b) Adjusted earnings .............................. $3,622 $3,084 $2,938 $2,621 $2,587
====== ====== ====== ====== ======
Fixed charges ........................................ $1,115 $ 790 $ 868 $1,465 $1,127
====== ====== ====== ====== ======
Adjusted earnings/fixed charges ...................... 3.25x 3.90x 3.38x 1.79x 2.30x
====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes, extraordinary credit and
cumulative effect of accounting changes .......... $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds .............. 1,061 737 813 1,413 1,074
(2) 1/3 of rent ............................. 54 53 55 52 53
(3) Interest on deposits .................... 1,835 1,654 1,754 1,726 1,170
====== ====== ====== ====== ======
(b) Adjusted earnings .............................. $5,457 $4,738 $4,692 $4,347 $3,757
====== ====== ====== ====== ======
Fixed charges ........................................ $2,950 $2,444 $2,622 $3,191 $2,297
====== ====== ====== ====== ======
Adjusted earnings/fixed charges ...................... 1.85x 1.94x 1.79x 1.36x 1.64x
====== ====== ====== ====== ======
</TABLE>
<PAGE>
Exhibit 13
SELECTED FINANCIAL HIGHLIGHTS - OPERATING BASIS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Prepared on an FTE basis 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (a)
Net interest income $ 3,905 $ 3,739 $ 3,498 $ 3,118 $ 3,144
Noninterest income 3,237 2,456 2,333 1,939 1,630
Total revenue 7,142 6,195 5,831 5,057 4,774
Noninterest expense 4,056 3,535 3,512 3,090 3,036
Provision for credit losses 470 322 213 101 65
Net income 1,576 1,377 1,221 1,108 993
- -----------------------------------------------------------------------------------------------
PER COMMON SHARE
Basic earnings (a) $ 2.69 $ 2.38 $ 2.02 $ 2.02 $ 1.82
Diluted earnings (a) 2.60 2.31 1.98 1.81 1.68
Market price (year-end) 44.69 37.56 24.94 20.38 16.19
Cash dividends declared 1.00 .92 .87 .82 .70
Book value (year-end) 15.31 13.68 12.04 11.01 9.94
- -----------------------------------------------------------------------------------------------
AT YEAR-END
Assets $104,382 $91,047 $89,650 $87,955 $83,608
Securities 10,792 9,362 8,680 19,331 21,141
Loans 69,396 62,565 59,861 52,566 46,687
Reserve for credit losses 1,552 1,432 1,488 1,321 1,496
Deposits 69,678 63,735 67,071 57,122 55,528
Short-term borrowings 9,312 7,505 4,194 13,332 13,038
Long-term debt 8,820 4,500 5,114 6,481 5,931
Total stockholders' equity 9,409 8,452 7,790 6,667 5,708
- -----------------------------------------------------------------------------------------------
RATIOS
Return on average common equity (a) 18.61% 19.45% 17.68% 16.55% 17.63%
Return on average assets (a) 1.61 1.59 1.40 1.29 1.21
Common dividend payout ratio 38.34 36.32 40.64 79.22 35.86
Net interest margin 4.63 5.01 4.68 4.03 4.23
Efficiency ratio 56.7 57.0 60.2 61.1 63.5
Common equity-to-assets (year-end) 8.35 8.52 7.63 7.13 6.16
Average total equity-to-assets 9.07 8.76 8.50 7.96 7.33
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Operating earnings exclude the impact of merger and restructuring-related
charges as well as other special items.
SUMMARY OF EARNINGS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Prepared on an FTE basis 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 3,905 $ 3,739 $ 3,498 $ 3,118 $ 3,144
Noninterest income 3,237 2,631 2,333 1,939 1,654
Total revenue 7,142 6,370 5,831 5,057 4,798
Noninterest expense 4,129 3,715 3,512 3,755 3,221
Provision for credit losses 470 322 213 101 65
Net income 1,532 1,367 1,221 679 890
Basic earnings per share $ 2.61 $ 2.37 $ 2.02 $ .91 $ 1.62
Diluted earnings per share 2.52 2.30 1.98 .85 1.50
Return on average common equity 18.07% 19.30% 17.68% 9.93% 15.74%
Return on average assets 1.56 1.58 1.40 .79 1.08
- -----------------------------------------------------------------------------------------------
</TABLE>
[The following tables are represented as bar charts in the printed material.]
Diluted Earnings Per Share
PRESENTED ON AN OPERATING BASIS
1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------
$ 1.68 $ 1.81 $ 1.98 $ 2.31 $ 2.60
Market Capitalization
(DOLLARS IN BILLIONS)
1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------
$ 9.3 $ 11.7 $ 14.5 $ 21.4 $ 26.3
- ------ ------ ------ ------ ------
<PAGE>
FINANCIAL TABLE OF CONTENTS
21 Management's Discussion and Analysis
40 Management's Report on Financial Statements
41 Report of Independent Auditors
CONSOLIDATED FINANCIAL STATEMENTS
42 Consolidated Statements of Income
43 Consolidated Balance Sheets
44 Consolidated Statements of Changes in Stockholders' Equity
45 Consolidated Statements of Cash Flows
46 Notes to Consolidated Financial Statements
SUPPLEMENTAL FINANCIAL INFORMATION
65 Rate/Volume Analysis
65 Quarterly Summarized Financial Information
66 Consolidated Average Balances/Interest Earned-Paid/Rates 1994-1998
66 Common Stock Price and Dividend Information
67 Loan Maturity
67 Interest Sensitivity of Loans Over One Year
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL OVERVIEW
Fleet Financial Group (Fleet or the corporation) reported operating earnings of
$1.58 billion, or $2.60 per diluted share, for 1998, a 14% increase compared
with $1.38 billion, or $2.31 per diluted share, earned in 1997. Return on assets
(ROA) and return on common equity (ROE) on an operating basis were 1.61% and
18.61%, respectively, in 1998, compared to 1.59% and 19.45%, respectively, in
1997. Net income for 1998 was $1.53 billion, or $2.52 per diluted share,
compared with $1.37 billion, or $2.30 per diluted share in 1997. ROA and ROE
during 1998 were 1.56% and 18.07%, respectively, compared with 1.58% and 19.30%,
respectively, for 1997. All common share amounts and associated ratios were
adjusted to reflect the corporation's two-for-one common stock split which was
effective October 7, 1998.
Increases in both net income and earnings per share during 1998 primarily
reflect strong results achieved from the corporation's franchise businesses, as
well as companies acquired in 1998 (The Quick & Reilly Group, Inc., the consumer
credit card business of Advanta and Columbia Management Company).
Net interest income on a fully taxable equivalent (FTE) basis totaled $3.9
billion for 1998 and $3.7 billion for 1997. The increase was principally
attributable to a $10 billion increase in average earning assets, due largely to
an 11% increase in average loans, which includes strong growth in our commercial
loan portfolio and the acquisition of the credit card operations of Advanta. The
net interest margin for 1998 was 4.63%, a decline from 5.01% reported in 1997.
The decrease in net interest margin was primarily attributable to narrowed
margins due to the corporation's growth in core commercial loans, combined with
the acquisitions of lower rate spread activity at The Quick & Reilly Group, Inc.
(Quick & Reilly) and credit cards purchased from Advanta.
The provision for credit losses was $470 million in 1998, compared to $322
million in 1997. The increase in provision was due principally to increased
credit card charge-offs as a result of higher levels of credit card receivables
due to the acquisitions of various credit card portfolios.
Noninterest income increased over $600 million to $3.2 billion in 1998.
Increases were noted in nearly all core revenue categories including investment
services, capital markets and credit cards. These increases reflect growth in
the corporation's core businesses, the impact of recent acquisitions, and a
strong equity market. Fee revenue represented 45% of total 1998 revenue compared
to 36% on an operating basis in 1997, excluding the impact of the Quick & Reilly
acquisition that was accounted for as a pooling-of-interests.
Noninterest expense totaled $4.1 billion for 1998, compared with $3.7
billion in 1997, an increase of 11%, resulting primarily from acquisitions.
Excluding these acquisitions, noninterest expense would have been relatively
flat compared to 1997. The combination of increasing revenues and modest expense
growth positively impacted the corporation's efficiency ratio which improved to
56.7%.
Total loans at December 31, 1998, were $69.4 billion, an increase of 11%,
compared with $62.6 billion at December 31, 1997. The increase was attributable
to strong loan growth in the commercial and industrial (C&I) and lease financing
portfolios, as well as higher levels of credit card receivables as a result of
various portfolio acquisitions, offset by a slight decline in the commercial
real estate portfolio.
Total deposits increased $5.9 billion to $69.7 billion at December 31,
1998. The increase was due principally to a $4.8 billion increase in money
market deposits as a result of rates aimed at attracting new sources of funds.
Dividends Declared
[The following table was represented as a bar chart in the printed material.]
1994 $ .70
1995 $ .82
1996 $ .87
1997 $ .92
1998 $1.00
Management's discussion and analysis may contain forward-looking statements that
are provided to enhance the reader's ability to see the corporation's
anticipated financial performance through the eyes of management. However, such
performance involves risks and uncertainties, which may cause actual results to
differ materially from those expressed in such forward-looking statements. A
more complete discussion of these risks and uncertainties will be contained in
Fleet's Form 10-K for the year ended December 31, 1998.
ACQUISITIONS
Consistent with Fleet's strategy to combine the strengths of a leading regional
bank with the national distribution capabilities of a diversified financial
services company, the corporation announced and/or completed several key
acquisitions and new initiatives during 1998.
The acquisitions included Quick & Reilly and the consumer credit card
operations of Advanta, both completed in February of 1998. The acquisition of
Quick & Reilly, one of the country's largest discount brokerage firms with a
nationwide network of 118 investor centers, provides the corporation with four
strong, vertically integrated units, consisting of discount brokerage, including
securities trading over the Internet; correspondent clearing; New York Stock
Exchange (NYSE) specialist; and Nasdaq market-making capabilities. The
corporation also purchased Merrill Lynch Specialists, Inc. (MLSI), a NYSE
specialist firm, during the fourth quarter of 1998. The acquisitions of Quick &
Reilly and MLSI make the corporation the leading specialist firm on the NYSE.
Since the Quick & Reilly acquisition was accounted for under the
pooling-of-interests method of accounting, all prior periods have been restated
to include Quick & Reilly's financial information.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The acquisition of the consumer credit card operations of Advanta, along
with the purchase of credit card receivables from Crestar Financial and
Household International, Inc. place Fleet as the eighth largest issuer of credit
cards, with approximately 8 million credit card customers and $14.5 billion in
managed credit card receivables.
New investments included a 35% stake in Oechsle International Advisors,
L.P. (Oechsle), a leading international investment advisor with approximately
$13 billion in assets under management, a 20% ownership in Parallel Capital
Corporation (Parallel), an independent commercial mortgage conduit with a
national network of lending offices, and the recently completed acquisition of
Sanwa Business Credit (Sanwa), a leasing and asset-based lending company with
approximately $6 billion in assets. The Parallel and Oechsle investments closed
in the third and fourth quarters of 1998, respectively. The Sanwa acquisition
closed on February 1, 1999.
New initiatives included the formation of the High Yield Securities Group
and the Global Lease Finance unit. The Global Lease Finance unit complements
Fleet Capital Leasing's current capital markets activities and expands its
product capabilities in the market for large-lease transactions.
These acquisitions and new initiatives strengthen Fleet's competitive
position in higher-growth, higher-return businesses and advance Fleet's strategy
of accelerating revenue growth and diversifying earnings sources by both
business line and geography while achieving a more equal balance of fee-based
versus spread revenues. Furthermore, these acquisitions enhance Fleet's
capabilities in technology and information management, marketing and new product
development, and enable Fleet to offer additional products and services to our
customers.
INCOME STATEMENT ANALYSIS
Net Interest Income
Year ended December 31
FTE basis
Dollars in millions 1998 1997 1996
================================================================================
Interest income $6,765 $6,091 $6,028
Tax-equivalent adjustment 36 39 36
Interest expense 2,896 2,391 2,566
- --------------------------------------------------------------------------------
Net interest income $3,905 $3,739 $3,498
================================================================================
Net interest income on an FTE basis totaled $3.9 billion for the year ended
December 31, 1998, compared with $3.7 billion for 1997. The $166 million
increase was principally the result of strong C&I loan growth, selected credit
card portfolio purchases, and a higher level of securities.
Net Interest Margin and Interest-Rate Spread
Year ended December 31 1998 1997
FTE basis Average Average
Dollars in millions Balance Rate Balance Rate
===============================================================================
Securities $10,343 6.59% $ 8,674 6.73%
Loans 66,419 8.58 60,076 8.68
Due from brokers/dealers 3,765 4.89 2,884 4.62
Mortgages held for resale 2,623 7.05 1,413 7.65
Other 1,153 4.48 1,597 5.74
- -------------------------------------------------------------------------------
Total interest-earning assets 84,303 8.07 74,644 8.21
- -------------------------------------------------------------------------------
Deposits 50,572 3.63 47,514 3.48
Short-term borrowings 8,400 4.76 5,266 4.69
Due to brokers/dealers 4,501 4.75 3,463 4.39
Long-term debt 6,261 7.15 4,608 7.34
- -------------------------------------------------------------------------------
Interest-bearing liabilities 69,734 4.15 60,851 3.93
- -------------------------------------------------------------------------------
Interest-rate spread 3.92 4.28
Interest-free sources of funds 14,569 13,793
- -------------------------------------------------------------------------------
Total sources of funds $84,303 3.44% $74,644 3.20%
- -------------------------------------------------------------------------------
Net interest margin 4.63% 5.01%
===============================================================================
Net interest margin is a measurement of how effectively the corporation manages
the difference between the yield on earning assets and the rate paid on funds
used to support those assets, as well as the overall mix of interest-earning
assets and interest-bearing liabilities.
Net interest margin is affected by several factors, including fluctuations
in the overall interest-rate environment, funding strategies of the corporation,
the mix of interest-earning assets, interest-bearing liabilities and
noninterest-bearing liabilities, as well as interest-rate derivatives that are
used to manage interest-rate risk.
The net interest margin for 1998 declined 38 basis points to 4.63%. The
decrease in net interest margin was primarily attributable to narrowed margins
due to the corporation's growth in core commercial loans, combined with the
acquisitions of lower rate spread activity at Quick & Reilly and credit cards
purchased from Advanta.
Average securities increased $1.6 billion in 1998, due to Fleet's efforts
to maintain a relatively neutral interest-rate-sensitive position. The yield on
securities declined slightly as a result of a lower interest-rate environment.
Average loans increased $6.3 billion to $66.4 billion, or to nearly 80% of
average interest-earning assets in 1998, due primarily to the strong growth in
commercial loans, principally in middle-market lending and asset-based lending,
leases, and selected credit card portfolio purchases.
Average due from brokers/dealers and due to brokers/dealers increased $881
million and $1,038 million, respectively, as a result of increased match book
activity and funding of customers' margin accounts at Quick & Reilly.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Average mortgages held for resale increased $1.2 billion, or 86%, due to
increased loan production at Fleet Mortgage. The yield has declined by 60 basis
points as a result of a lower mortgage-rate environment.
Average interest-bearing deposits increased $3.1 billion to $50.6 billion
in 1998, primarily the result of increased money market deposits. The interest
rate paid on these interest-bearing deposits increased to 3.63% in 1998 from
3.48% in 1997. The increase in the cost of deposits reflects a shift in the mix
of deposits as a result of funding asset growth with higher-cost wholesale
deposits, as well as the corporation paying more competitive rates on
higher-yielding money market deposits.
The $3.1 billion increase in average short-term borrowings is attributable
to an increase in both federal funds purchased and treasury, tax and loan
borrowings as the corporation utilized these favorably priced funding vehicles
to fund asset growth. The $1.7 billion increase in long-term debt was due
primarily to net increases in senior and subordinated debt and the issuance of
capital securities. The 19 basis point decrease in the funding rate was due to
additional debt issued by the corporation in order to lock in longer-term
funding at lower interest rates.
The contribution to the net interest margin from interest-free sources of
funds during 1998 was 71 basis points, consistent with 1997.
Noninterest Income
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Investment services revenue $ 851 $ 696 $ 634
Banking fees and commissions 748 708 601
Capital markets revenue 530 326 269
Processing-related revenue 457 473 503
Credit card revenue 391 62 59
Gain from branch divestitures -- -- 92
Other noninterest income 260 191 175
- --------------------------------------------------------------------------------
Total noninterest income before net
gains on sales of business units 3,237 2,456 2,333
Net gains on sales of business units -- 175 --
- --------------------------------------------------------------------------------
Total noninterest income $3,237 $2,631 $2,333
================================================================================
As a result of intensified competition and changing customer needs in the
banking industry, Fleet has made strategic decisions directed at future
revenue-producing activities. Throughout the past several years, the corporation
has developed new products and service lines and broadened existing lines via
acquisitions to provide additional revenue streams to complement Fleet's
traditional banking products and services. These product lines include mutual
funds and annuity products, venture capital, direct banking, corporate finance,
brokerage, investment management, and credit cards.
Operating noninterest income totaled $3.24 billion for 1998, up 32% when
compared to $2.46 billion for 1997. This increase reflects continued growth in
fee revenue businesses and the impact of the strategic acquisitions described
earlier.
Investment Services Revenue
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Investment management revenue $523 $397 $364
Brokerage fees and commissions 328 299 270
- --------------------------------------------------------------------------------
Total investment services revenue $851 $696 $634
================================================================================
Investment services revenue, which includes investment management revenue as
well as brokerage fees and commissions revenue, increased $155 million, or 22%,
in 1998 to $851 million.
Investment Management Revenue
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Private clients group $216 $200 $181
Columbia Management Company 98 -- --
Retail investments 79 62 46
Retirement plan services 66 63 59
Not-for-profit institutional services 50 47 41
Other 14 25 37
- --------------------------------------------------------------------------------
Total $523 $397 $364
================================================================================
Investment management revenue rose 32% in 1998 to $523 million. The improvement
was due largely to the acquisition of Columbia Management Company (Columbia),
record sales of Fleet's Galaxy Mutual Funds in 1998, combined with growth in the
overall value of assets under management and administration that was
substantially aided by a strong equity market. Assets under management increased
from $77 billion at December 31, 1997 to $84 billion at December 31, 1998.
Brokerage fees and commissions revenue increased $29 million, or 10%, due
to increased customer trading volume at the corporation's brokerage subsidiary,
Quick & Reilly, as a result of the strong performance in the equity markets.
Banking fees and commissions, which includes fees received for cash
management, deposit accounts, electronic banking fees and other fees, increased
$40 million, or 6%, to $748 million. The increase was due principally to the
development of new product packaging and fee schedules, as well as targeted
marketing efforts.
Capital Markets Revenue
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Venture capital revenue $149 $ 71 $106
Brokerage market-making revenue 135 100 59
Foreign exchange/interest-rate products 74 49 34
Securities gains 74 33 43
Corporate finance fees 54 47 6
Securities trading gains 44 26 21
- --------------------------------------------------------------------------------
Total capital markets revenue $530 $326 $269
================================================================================
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capital markets revenue increased $204 million, or 63%, to $530 million for the
year ended December 31, 1998. This increase was driven by significant gains
pertaining to venture capital investments, brokerage market-making activities,
higher securities gains and robust foreign exchange and interest-rate product
revenue.
The gains on the investments of Fleet Private Equity, the corporation's
venture capital business, increased by $78 million in 1998 when compared with
1997 as a result of the strength in 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.
Brokerage market-making revenue increased $35 million, or 35%, to $135
million in 1998 as a result of market volatility and increased volume reflecting
the corporation's purchase of an over-the-counter market-maker in March 1997.
Foreign exchange/interest-rate products revenue increased $25 million, or
51%, to $74 million in 1998. Strong foreign exchange and interest-rate product
activities were primarily the result of customers locking in their interest-rate
and foreign exchange risk during volatile financial markets. Also contributing
to the rise in capital markets revenue were increases in securities trading
gains and securities gains due to the favorable interest-rate environment.
Processing-Related Revenue
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Mortgage banking revenue, net $258 $327 $372
Student loan servicing fees 121 101 99
Other 78 45 32
- --------------------------------------------------------------------------------
Total processing-related revenue $457 $473 $503
================================================================================
Processing-related revenue decreased $16 million to $457 million in 1998, from
$473 million in 1997. The decrease was a result of a $69 million decrease in net
mortgage banking revenue offset in part by increases in student loan servicing
fees and other processing-related fees. Student loan servicing fees increased
$20 million, or 20%, at AFSA Data Corporation (AFSA), the corporation's student
loan servicing subsidiary, as accounts serviced increased 18% to 6.5 million in
1998. Other processing-related revenue increased $33 million, due principally to
the addition of a healthcare processing unit during 1998.
Mortgage Banking Revenue, Net
Year ended December 31
Dollars in millions 1998 1997 1996
===============================================================================
Net loan servicing revenue $ 456 $ 450 $ 395
Mortgage production revenue 201 115 132
Gains on sales of mortgage servicing 34 10 33
Amortization/Impairment charge (433) (248) (188)
- -------------------------------------------------------------------------------
Total mortgage banking revenue, net $ 258 $ 327 $ 372
===============================================================================
Net mortgage banking revenue of $258 million in 1998 decreased $69 million from
the $327 million recorded in 1997. The decrease in net mortgage banking revenue
was due principally to increased mortgage servicing rights (MSRs) amortization,
a $75 million impairment charge taken as a result of increased refinancings in a
lower mortgage-rate environment, as well as the sale of Option One in 1997,
which contributed $40 million of mortgage banking revenue, primarily mortgage
production revenue, in 1997. Excluding the impact of the impairment charge in
1998 and the Option One revenue contribution in 1997, mortgage banking revenue
actually increased 16%, driven by strong mortgage production revenue as a result
of record loan production volume of nearly $36 billion in 1998.
Mortgage servicing rights amortization increased $110 million to $358
million in 1998. The level of amortization increased due to an acceleration in
prepayments resulting from a decline in mortgage interest rates. Since mortgage
servicing rights are an interest-rate-sensitive asset, the value of the
corporation's mortgage servicing portfolio and related mortgage banking revenue
may be adversely impacted if mortgage interest rates decline and actual or
expected loan prepayments increase. For additional information regarding
prepayment risk refer to the Asset-Liability Management discussion in
Management's Discussion and Analysis.
Credit card revenue increased $329 million to $391 million in 1998,
primarily the result of the acquisition of the consumer credit card operations
of Advanta in February 1998. As part of this acquisition, the corporation
acquired nearly $10 billion of securitized credit card receivables that are
currently serviced by Fleet. As a result of these securitizations, the
corporation recognizes securitization income, servicing revenue, interchange
fees, and amortization of deferred origination costs as the primary components
of credit card revenue.
Other noninterest income increased $69 million to $260 million in 1998,
due primarily to revenues resulting from acquisitions.
Noninterest Expense
Year ended December 31
Dollars in millions 1998 1997 1996
================================================================================
Employee compensation and benefits $1,927 $1,752 $1,735
Equipment 307 317 300
Occupancy 298 294 293
Intangible asset amortization 227 169 140
Legal and other professional 151 118 136
Marketing 132 109 106
Printing and mailing 95 79 81
Telephone 92 78 89
Other 827 774 632
- --------------------------------------------------------------------------------
Total noninterest expense, excluding
merger-related charges 4,056 3,690 3,512
Merger-related charges 73 25 --
- --------------------------------------------------------------------------------
Total noninterest expense $4,129 $3,715 $3,512
================================================================================
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Critical to Fleet's goals of maximizing long-term profitability and
increasing shareholder value is the corporation's expense management
strategy. The corporation has implemented various programs in the past
several years to reduce expenses. These expense management programs will
continue to be an ongoing process used to help Fleet meet its goals. The
corporation's successful expense management, coupled with revenue growth, is
illustrated by the improvement in the efficiency ratio which decreased 30
basis points from 1997 to 56.7% in 1998.
Efficiency Ratio
[The following table was represented as a bar chart in the printed material.]
1994 63.5%
1995 61.1%
1996 60.2%
1997 57.0%
1998 56.7%
Total noninterest expense was $4.13 billion in 1998 and $3.72 billion in 1997.
The $414 million, or 11%, increase was due primarily to various acquisitions,
new initiatives, as well as growth in selected business areas. Excluding
acquisitions, noninterest expense was relatively flat when compared to 1997.
Employee compensation and benefits increased $175 million during 1998, due
to increasing levels of compensation expense primarily attributable to
acquisitions, the newly formed business units, as well as increases in
compensation expense related to incentives at business units with strong revenue
growth. As a result of the acquisitions and new business initiatives, full-time
equivalent staff increased from 33,739 at December 31, 1997 to 35,612 at
December 31, 1998.
Intangible asset amortization increased $58 million to $227 million from
1997 due to the acquisitions of Columbia and the consumer credit card operations
of Advanta, as well as additional goodwill recorded in 1998, pertaining to the
NatWest earnout agreement. Intangible asset amortization will increase in 1999
as a result of 1998 acquisition activity and additional earnout payments.
Legal and other professional expense increased $33 million during 1998,
due to the aforementioned acquisitions and other initiatives. Marketing,
telephone, and printing and mailing expenses increased as a result of
promotional mailings and the day-to-day operations of the corporation's
processing-related businesses.
IMPACT OF THE YEAR 2000
The corporation's Year 2000 project continues to be directed by an 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 receives formal project updates at least quarterly.
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. The corporation will continue to utilize
both internal and external resources to appropriately prepare Fleet for the Year
2000. 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 made significant progress in remediating and testing
its information systems. All Fleet mission-critical systems have been
remediated, tested, and returned to production or are in final testing.
Additionally, 97% of all systems have been remediated, tested, and returned to
production. This activity continues to track in accordance with the original
plan. The corporation has established a separate test environment to accommodate
its Year 2000 testing activity and the anticipated need to test with select
customers and other third parties during 1999.
The corporation relies on several third party service providers for key
business processes. It continues to work closely with these companies to monitor
the progress of their Year 2000 efforts. 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 significant third party service providers and vendors as to their Year
2000 readiness.
The corporation began Year 2000 testing with several of these key vendors
and third parties in the third quarter of 1998 and plans to substantially
complete testing by the end of the second quarter of 1999. Validation of Year
2000 readiness of all the corporation's vendors continues with a particular
focus on the readiness and alternatives, where possible, for vendors that have
been identified as critical.
Until and after the Year 2000 rollover takes place, there can be no
assurance that Year 2000-related problems will not occur. Despite the
corporation's efforts to identify and address Year 2000 issues, such issues
present risks to the corporation, including business disruptions and financial
losses.
The corporation has previously established business resumption plans for
its lines of business and subsidiaries. These plans have been reviewed and where
appropriate are being enhanced to address potential Year 2000 failure scenarios.
This process will be completed by the second quarter of 1999. 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. Specific plans developed for each of Fleet's lines of business and
subsidiary companies are being reviewed and validated by an Event Plan Steering
Committee consisting of management from various areas of the corporation.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. The corporation cannot quantify the potential impact of
any such losses at this time. However, to mitigate the risk, the corporation has
assessed the Year 2000 readiness of 98% of the material business relationships
to which it extends credit. The assessment sought to determine 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 identified customers that present an unacceptable risk to the
corporation due to Year 2000. Of the material relationships the corporation has
assessed, less than 1% 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. The corporation will actively reassess the readiness of
customers receiving the unacceptable rating on a quarterly basis throughout 1999
to ensure that the proper steps are being taken.
The corporation continues to approximate that the cost of the Year 2000
project will be $150 million. The corporation incurred $75 million of expenses
in 1998 and $92 million since the inception of this project.
INCOME TAXES
The corporation recorded income tax expense in the amount of $975 million for
1998 compared with $927 million for 1997. The effective tax rate was 38.9% in
1998 compared with 40.4% in 1997. The decrease in the effective tax rate was
attributable, in part, to a decrease in the statutory rates of certain states in
which the corporation conducts business.
CREDIT CARD SECURITIZATION
The securitization of credit card receivables changes the corporation's status
from that of a lender to that of a loan servicer. Accordingly, there is a change
in the classification in which the revenue associated with the securitization is
reported in the income statement. The corporation's revenue over the terms of a
securitization transaction may vary depending upon the credit performance of the
securitized receivables because credit losses become a component of the cash
flows arising from the securitized transaction. However, the corporation's
exposure to credit losses on the securitized receivables is contractually
limited to these cash flows.
The following table depicts the consolidated financial statement impact as
if the securitized receivables had, in fact, been owned, as well as additional
financial information pertaining to credit card receivables.
Credit Card Securitization Summary
Year ended December 31 Credit Card
Dollars in millions Reported Securitization Managed
===============================================================================
Net interest income (FTE) $ 3,905 $ 743 $ 4,648
Provision for credit losses 470 518 988
Noninterest income 3,237 (225) 3,012
Noninterest expense 4,129 -- 4,129
Net income 1,532 -- 1,532
Assets-year-end $104,382 $ 8,808 $113,190
Assets-average 98,008 7,912 105,920
Net interest margin 4.63% 9.39% 5.04%
- ------------------------------------------------------------------------------
LINES OF BUSINESS
Fleet Financial Group is organized and managed along five lines of business:
Commercial Financial Services, Retail Banking, National Financial Services,
Fleet Investment Group, and Treasury. The financial performance of the
corporation is monitored by an internal profitability measurement system, which
provides line of business results and key performance measures. The following
table presents selected line of business results. As required by Statement of
Financial Accounting Standards No. 131, three years of business line comparative
financial statements are presented in Footnote 14.
Line of Business Earnings Summary
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1998 1997 1998 1997
Dollars in millions Net Income Total Revenue Return on Equity
====================================================================================
<S> <C> <C> <C> <C> <C> <C>
Commercial Financial Services $ 444 $ 371 $1,732 $1,601 20% 17%
Retail Banking 427 456 2,399 2,440 24 26
National Financial Services 242 97 1,504 811 12 11
Fleet Investment Group 238 187 1,201 981 21 28
Treasury 127 92 240 202 42 34
All Other 54 164 66 335 n/m n/m
- ------------------------------------------------------------------------------------
Total $1,532 $1,367 $7,142 $6,370 18% 19%
====================================================================================
</TABLE>
During 1998, increased earnings were recorded by all business lines with the
exception of Retail Banking. Increased earnings were driven by continued core
franchise growth which was further enhanced by acquisitions. 1998 results also
reflect increased resources directed towards higher growth fee-generating
businesses such as Fleet Investment Group and National Financial Services. In
1998, resources freed up by the sale of several units in 1997 were invested into
the acquisitions of Quick & Reilly, the consumer credit card operations of
Advanta, and Columbia. As a result of the ongoing evaluation of corporate
businesses, over 30% of corporate earnings are now from higher growth fee-based
businesses (Fleet Investment Group and National Financial Services), as compared
to just over 20% in 1997.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Earnings Composition by Line of Business
[The following table was represented as a bar chart in the printed material.]
1996 1997 1998
Commercial Financial Services 25% 27% 29%
Retail Banking 21% 33% 28%
National Financial Services 11% 7% 16%
Fleet Investment Group 14% 14% 15%
Treasury/All Other 29% 19% 12%
Commercial Financial Services
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Income Statement Data:
Net interest income (FTE) $ 1,316 $ 1,212
Noninterest income 416 389
Provision 207 218
Noninterest expense 796 740
Taxes/FTE adjustment 285 272
- -------------------------------------------------------------------------------
Net income $ 444 $ 371
- -------------------------------------------------------------------------------
Balance Sheet Data:
Average loans $39,697 $34,572
Average deposits 11,447 11,027
- -------------------------------------------------------------------------------
Return on equity 20% 17%
===============================================================================
Commercial Financial Services provides a full range of credit and banking
services to corporate, middle-market, real estate, government and leasing
customers. Fleet enjoys a strong presence in the Northeast and also has several
specialty businesses of national scope which serve to diversify and complement
its client base.
Commercial Financial Services earned $444 million in 1998, a 20% increase
from earnings of $371 million in 1997. Increased earnings resulted from strong
loan growth, up $5 billion, or 15%, over 1997, as well as increased noninterest
revenues across most Commercial Financial Services businesses. These results
also reflect investments in several business initiatives in the areas of high
yield lending, Fleet Leasing, Fleet Capital, and Corporate Finance. While loan
growth was evident in all commercial business lines, increased noninterest
revenues were driven by increased banking fees from cash management and trade
services, as well as increased corporate finance cross-selling efforts.
Retail Banking
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Income Statement Data:
Net interest income (FTE) $ 1,779 $ 1,862
Noninterest income 620 578
Provision 117 119
Noninterest expense 1,493 1,482
Taxes/FTE adjustment 362 383
- -------------------------------------------------------------------------------
Net income $ 427 $ 456
- -------------------------------------------------------------------------------
Balance Sheet Data:
Average loans $ 9,935 $10,590
Average deposits 42,614 43,434
- -------------------------------------------------------------------------------
Return on equity 24% 26%
===============================================================================
Retail Banking includes consumer banking and Fleet's commercial small business
group. Retail Banking offers customers products and services to conveniently
access, move, and manage their money and delivers these services through its
network of nearly 1,200 branches. Fleet's business and entrepreneurial services
group provides a full range of financial services targeted at businesses with
annual sales of up to $10 million. Fleet is the leading small-business lender in
New England and ranks among the ten largest in the country.
In 1998, Retail Banking earned $427 million, down from 1997 earnings of
$456 million. Lower earnings resulted primarily from lower net interest income
driven by lower loan and deposit volumes. Retail deposit volumes declined by
$820 million on average, as customers continued to migrate from traditional
deposit products towards investment products and mutual funds. While total
average retail deposits declined by $820 million, the runoff in lower cost
savings and NOW accounts was even greater. This decline, however, was partly
offset by an increase in money market accounts which typically carry higher
interest costs than traditional savings products. Lower net interest income was
partly offset by higher noninterest revenue driven by new product initiatives
and increased direct banking fees from ATM and debit card activity, as the
Retail Banking unit continued to invest in alternative delivery channels and
fee-based products.
In 1998, Retail Banking continued the ongoing reconfiguration of retail
product distribution channels in a manner consistent with changing customer
preferences. During 1998, the bank sold 33 branches and consolidated 15 other
branches in various well-serviced locations. While reducing the number of
traditional branches, Fleet increased retail distribution points by adding ATMs.
The following table shows the increase in total retail distribution points.
Retail Distribution Points
[The following table was represented as a bar chart in the printed material.]
1996 1997 1998
ATMs 2,021 2,389 2,530
Branches 1,248 1,197 1,151
----- ----- -----
3,269 3,586 3,681
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
National Financial Services
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Income Statement Data:
Net interest income (FTE) $ 489 $ 289
Noninterest income 1,015 522
Provision 297 203
Noninterest expense 810 452
Taxes/FTE adjustment 155 59
- -------------------------------------------------------------------------------
Net income $ 242 $ 97
- -------------------------------------------------------------------------------
Balance Sheet Data:
Average loans $4,634 $3,007
Average deposits 2,645 1,899
- -------------------------------------------------------------------------------
Return on equity 12% 11%
===============================================================================
National Financial Services includes mortgage banking, credit cards, venture
capital and student loan processing (AFSA). Fleet's mortgage banking business
originates, sells and services first and second-mortgage products spanning all
customer segments. Fleet Mortgage Group originated approximately $36 billion of
loans in 1998. This business services a mortgage portfolio of $119 billion and
1.4 million loans. In 1998, Fleet purchased three credit card portfolios. These
acquisitions rank Fleet as the eighth largest issuer of credit cards. Fleet
Private Equity provides management teams with the private equity capital
necessary to acquire, recapitalize or grow private and public companies. Student
loan processing, through the AFSA subsidiary, services 6.5 million accounts
nationwide and is the largest student loan servicer in the nation with $48.7
billion of student loans serviced.
National Financial Services earnings increased by $145 million compared to
1997, due primarily to the acquisition of the Advanta consumer credit card
business.
The following table presents the comparative net income for each of the
units which comprise National Financial Services.
National Financial Services
Net Income by Line of Business
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Credit cards $ 91 $ (5)
Venture capital 84 33
Mortgage banking 43 49
Student loan processing 24 20
- -------------------------------------------------------------------------------
Net income $242 $ 97
===============================================================================
In 1998, mortgage banking recorded a $75 million MSR impairment charge, partly
offset by related gains on the sale of servicing rights. Excluding these items,
mortgage banking earnings were $73 million, representing a 49% increase over
1997. This results from increased loan production volumes as refinancing
activity was strong in a low mortgage-rate environment. National Financial
Services also had increased earnings from AFSA student loan processing,
resulting from increases in student loan account volumes, while venture capital
net income increased by $51 million. Venture capital earnings are affected by
the condition of equity markets and the general state of the economy.
Accordingly, earnings for this unit can vary significantly from
period-to-period. During 1998, National Financial Services had a return on
equity of 12% which reflected the impact of the goodwill recorded in connection
with the purchase of Advanta's credit card operation, as well as the impact of
the impairment charge in the mortgage banking business.
Fleet Investment Group
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Income Statement Data:
Net interest income (FTE) $ 185 $ 170
Noninterest income 1,016 811
Provision 5 5
Noninterest expense 789 651
Taxes/FTE adjustment 169 138
- -------------------------------------------------------------------------------
Net income $ 238 $ 187
- -------------------------------------------------------------------------------
Assets under management $84,127 $76,654
- -------------------------------------------------------------------------------
Return on equity 21% 28%
===============================================================================
Fleet Investment Group is comprised of several businesses, all targeting
customers' growing need for investment products and services. These businesses
include Quick & Reilly which offers brokerage, market-making, and securities
clearing services, the private clients group which offers specialized asset
management, estate settlement and deposit and credit products to high-net-worth
customers, Columbia which sells proprietary mutual funds and manages personal
and institutional business lines in the Pacific Northwest, retail investments
which markets Galaxy (Fleet's proprietary mutual fund family) and third party
mutual fund and annuity products, and several other businesses which offer
retirement plan services, large institutional asset management and
not-for-profit investment services.
Combined, these units of Fleet Investment Group earned $238 million in
1998, an increase of $51 million compared to 1997. Revenue increased by $220
million, or 22%, driven by strong growth in assets under management, as well as
increased brokerage and market-making revenues. Increased investment management
revenue was the result of related growth in assets under management and
increased sales of mutual funds and annuity products, as well as the acquisition
of Columbia. Assets under management grew to over $84 billion in 1998.
Assets Under Management
(Dollars in billions)
[The following table was represented as a bar chart in the printed material.]
1994 $39
1995 $45
1996 $48
1997 $77
1998 $84
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenue growth was also the result of increased brokerage and market-making
revenues which increased by $64 million, or 16%, compared to 1997. Lower return
on equity in 1998 reflected the impact of the premium paid in connection with
the acquisition of Columbia.
Treasury
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Income Statement Data:
Net interest income (FTE) $ 118 $ 115
Noninterest income 122 87
Provision 14 15
Noninterest expense 64 64
Taxes/FTE adjustment 35 31
- -------------------------------------------------------------------------------
Net income $ 127 $ 92
- -------------------------------------------------------------------------------
Balance Sheet Data:
Average securities $9,349 $7,696
Average residential mortgages 7,519 6,608
- -------------------------------------------------------------------------------
Return on equity 42% 34%
===============================================================================
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
$127 million in 1998, an increase of $35 million from 1997. Excluding
securities gains in both periods, earnings increased by $25 million, or 35%.
Increased earnings were driven by increased sales of foreign exchange and
interest-rate protection products. Increased sales of these items were the
result of strong cross-selling efforts and referrals, primarily from the
Commercial Financial Services unit. Increased earnings were also influenced
by increased residential and investment portfolios.
All Other
All Other includes the parent company and certain transactions not allocable to
any specific business unit. In addition, the impact of methodology allocations
such as provision for credit losses, credit reserve, and equity are reported in
this unit. Similarly, for comparative purposes, certain businesses sold in 1997
have also been moved into this unit. Earnings in this unit can fluctuate with
changes affecting consolidated provision for credit losses, merger and
restructuring-related charges, gains and other actions not driven by specific
business units.
All Other earned $54 million in 1998 compared to $164 million in 1997. The
decline in earnings was due primarily to revenues and associated expenses in
1997 from business units Fleet exited in 1997, and higher merger charges taken
in 1998. Lower earnings also resulted from higher consolidated provision for
credit losses in 1998.
BALANCE SHEET ANALYSIS
Total assets increased $13.3 billion to $104.4 billion as of December 31, 1998,
as a result of strong loan growth, an increase in mortgages held for resale and
the acquisition of three credit card portfolios during the year.
Fleet's investment securities portfolio plays a significant role in the
management of the corporation's balance sheet as the liquid nature of the
securities portfolio enhances the efficiency of the balance sheet. The amortized
cost of securities available for sale increased $1.6 billion to $9.5 billion at
December 31, 1998 compared to $8.0 billion at December 31, 1997. The valuation
reserve for securities available for sale increased $53 million to an unrealized
gain position of $211 million at December 31, 1998, due to changes in the
interest-rate environment.
Securities
<TABLE>
<CAPTION>
1998 1997 1996
December 31 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 $ 434 $ 437 $ 1,126 $ 1,134 $ 1,077 $ 1,083
Mortgage-backed securities 7,784 7,982 6,177 6,298 5,987 6,006
Other debt securities 792 802 186 189 -- --
- --------------------------------------------------------------------------------------------------------------------
Total debt securities 9,010 9,221 7,489 7,621 7,064 7,089
- --------------------------------------------------------------------------------------------------------------------
Marketable equity securities 292 292 256 282 229 255
Other securities 211 211 210 210 159 159
- --------------------------------------------------------------------------------------------------------------------
Total securities available for sale 9,513 9,724 7,955 8,113 7,452 7,503
- --------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,068 1,073 1,249 1,254 1,177 1,172
- --------------------------------------------------------------------------------------------------------------------
Total securities $10,581 $10,797 $ 9,204 $ 9,367 $ 8,629 $ 8,675
====================================================================================================================
</TABLE>
Loans
The loan portfolio inherently includes credit risk. Fleet attempts to control
such risk through review processes that include analysis of credit applications,
portfolio diversification and ongoing examinations of outstandings and
delinquencies. Fleet strives to identify potential classified assets as early as
possible, to take charge-offs promptly based on realistic assessments of
probable losses and to maintain adequate reserves for credit losses. The
corporation's portfolio is well-diversified by borrower, industry and product,
thereby reducing risk.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Loans
December 31
Dollars in millions 1998 1997
================================================================================
Commercial and industrial $37,167 $32,000
Lease financing 4,225 3,376
Commercial real estate 5,374 5,677
Consumer 22,630 21,512
- --------------------------------------------------------------------------------
Total loans $69,396 $62,565
================================================================================
Total loans increased $6.8 billion, or 11%, over December 31, 1997. This
increase was due primarily to loan growth in the commercial and industrial and
lease financing portfolios, as well as the acquisition of the credit card
operations of Advanta and purchases of credit card receivables from Crestar
Financial and Household International, Inc., offset by a slight decline in the
commercial real estate and residential real estate portfolios.
LOANS
(Dollars in billions)
(The following table was represented as a bar chart in the printed material.)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Commercial $ 19.5 $ 23.1 $ 29.1 $ 32.0 $ 37.2
Consumer 20.2 22.3 21.7 21.5 22.6
Commercial RE 5.5 5.0 6.5 5.7 5.4
Lease Financing 1.5 2.2 2.6 3.4 4.2
------ ------ ------ ------ ------
$ 46.7 $ 52.6 $ 59.9 $ 62.6 $ 69.4
</TABLE>
Commercial and Industrial-Product Diversification
December 31
Dollars in millions 1998 1997
================================================================================
Banks and insurance $ 5,697 $ 4,596
Real estate/construction/contractors 3,018 2,188
Communications 2,604 2,568
Business services 2,055 1,699
Precious metals/jewelry 2,030 1,637
Retail 2,014 1,750
Healthcare 2,000 1,969
Transportation 1,780 1,656
Tourism and entertainment 1,580 1,306
Machinery and equipment 1,578 1,280
Computers and electronics 1,546 1,457
Apparel and textiles 1,232 1,077
Energy production and distribution 1,072 1,018
Printing and publishing 1,056 839
Food distribution and production 957 880
Forest products 932 1,015
Plastics, ceramics, rubber and misc. products 920 827
Other 5,096 4,238
- --------------------------------------------------------------------------------
Total $37,167 $32,000
================================================================================
C&I borrowers consist primarily of middle-market and corporate customers and are
well-diversified as to industry and companies within each industry. Although the
corporation is engaged in business nationwide, the lending done by the banking
subsidiaries is primarily concentrated in New England, New York and New Jersey.
The corporation has limited international lending exposure, which is
evidenced by the fact that $485 million, or less than 1% of the outstanding
loans were in the Asia/Latin America/Emerging Markets sectors. The corporation's
international loans are trade-related with maturities generally less than 90
days. Asia had outstandings of $95 million of which $92 million was outstanding
in Korea; Latin America had outstandings of $343 million of which $161 million
and $76 million were outstanding in Brazil and Argentina, respectively; and
other emerging markets had outstandings of $47 million. The corporation had no
direct exposure to Russia and other Eastern European countries.
Lease financing totaled $4.2 billion at December 31, 1998, compared with
$3.4 billion at December 31, 1997. This 25% increase was primarily attributable
to increased lease originations from both the direct leasing group and the newly
formed Global Lease Finance unit. The corporation provides a wide variety of
leasing products to the middle and large ticket marketplaces. The Sanwa Business
Credit acquisition closed on February 1, 1999 and added approximately $6 billion
of assets, of which approximately $4 billion are lease financings. This
acquisition significantly expands Fleet's geographic presence, existing product
line, and client base to include lease financing for manufacturers of capital
equipment and leasing programs for small businesses. As a result of this
acquisition, Fleet Capital Leasing has become the third ranked bank lessor and
one of the top ten leasing companies in the United States.
Commercial Real Estate-Product Diversification
December 31
Dollars in millions 1998 1997
================================================================================
Apartments $1,330 $1,196
Office 1,241 1,184
Retail 1,211 1,365
Industrial 321 366
Other 1,271 1,566
- --------------------------------------------------------------------------------
Total $5,374 $5,677
================================================================================
Commercial real estate (CRE) loans decreased by $303 million, or 5%, from
December 31, 1997 to December 31, 1998, as the corporation has strategically
sought to reduce this loan portfolio.
Consumer Loans
December 31
Dollars in millions 1998 1997
================================================================================
Residential real estate $ 9,314 $10,019
Home equity 4,257 4,851
Credit card 5,673 2,742
Student loans 812 1,029
Installment/other 2,574 2,871
- --------------------------------------------------------------------------------
Total $22,630 $21,512
================================================================================
Approximately 60% of the consumer loan portfolio at December 31, 1998
represented loans secured by residential real estate, including second
mortgages, home equity loans and lines of credit. The corporation manages the
risk associated with most types of consumer loans by utilizing uniform credit
standards when extending credit, together with systems that streamline the
process of monitoring delinquencies.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Outstanding residential real estate loans secured by one- to four-family
residences decreased $705 million to $9.3 billion at December 31, 1998. This
decline was primarily the result of the sale of $750 million of Community
Reinvestment Act (CRA) residential mortgage loans at book value. The loans were
sold to provide balance sheet capacity for further CRA lending.
The remainder of consumer loans increased $1.8 billion from December
31, 1997. The increase was directly attributable to the acquisition of the
consumer credit card operations of Advanta and purchases of credit card
receivables from Crestar Financial and Household International, Inc., as
credit card loans increased by $2.9 billion during the period.
NONPERFORMING ASSETS
Nonperforming Assets(a)(b)
Dollars in millions C&I CRE Consumer Total
================================================================================
Nonperforming loans:
Current or less than
90 days past due $123 $ 26 $ 2 $151
Noncurrent 48 27 39 114
Other real estate
owned (OREO) 2 4 11 17
- --------------------------------------------------------------------------------
Total NPAs December 31, 1998 $173 $ 57 $ 52 $282
- --------------------------------------------------------------------------------
Total NPAs December 31, 1997 $257 $ 83 $ 76 $416
================================================================================
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($234 million
and $202 million at December 31, 1998 and 1997, respectively). Included in
the 90 days past due and still accruing interest were $209 million and
$172 million of consumer loans at December 31, 1998 and 1997,
respectively.
(b) Nonperforming assets and related ratios at December 31, 1998 and 1997 do
not include $46 million and $214 million, respectively, of nonperforming
assets classified as held for sale by accelerated disposition.
Nonperforming assets (NPAs) are assets on which income recognition has either
ceased or is limited. NPAs negatively affect the corporation's earnings by
reducing interest income. In addition to NPAs, asset quality is measured by the
amount of provision, charge-offs and certain credit quality related ratios as
disclosed in the Reserve for Credit Losses Activity table.
NPAs decreased $134 million, or 32%, over the prior year. NPAs at December
31, 1998, as a percentage of total loans and as a percentage of total assets
were .41% and .27%, respectively, compared to .66% and .46%, respectively, at
December 31, 1997. This improvement was due to declining NPAs in all portfolios.
Activity in Nonperforming Assets
Year ended December 31
Dollars in millions 1998 1997
===============================================================================
Balance at beginning of year $ 416 $ 723
Additions 458 696
Reductions:
Payments/interest applied (303) (441)
Returned to accrual (47) (68)
Charge-offs/write-downs (166) (174)
Sales/other (43) (89)
- -------------------------------------------------------------------------------
Total reductions (559) (772)
- -------------------------------------------------------------------------------
Subtotal 315 647
- -------------------------------------------------------------------------------
Assets reclassified as held for sale
by accelerated disposition (33) (231)
- -------------------------------------------------------------------------------
Balance at end of year $ 282 $ 416
===============================================================================
RESERVE FOR CREDIT LOSSES
The reserve for credit losses represents the amount available for credit losses
inherent in the bank's portfolio. It reflects management's ongoing detailed
review of certain individual loans, supplemented by an analysis of the
historical net charge-off experience of the portfolio, an evaluation of
prevailing economic and business conditions, a review of industry
concentrations, including emerging market risk, and changes in the size and
characteristics of the portfolio, as well as other pertinent factors.
Assumptions utilized in the reserve calculation methodology have been relatively
consistent with actual results. Based on these analyses, and the assumptions
contained therein, the corporation believes that its year-end reserve for credit
losses is adequate.
Loans are charged off once the probability of loss has been established,
with consideration given to factors such as the customer's financial condition,
underlying collateral and guarantees, as well as general and industry economic
conditions.
Fleet's reserve for credit losses increased $120 million from December 31,
1997, to $1.552 billion at December 31, 1998, significantly due to reserves
acquired as part of the acquisition of the consumer credit card operations of
Advanta. The 1998 provision for credit losses was $470 million, $148 million
higher than the prior year level of $322 million. The increase in the provision
for credit losses was due primarily to a 59% increase in net charge-offs in the
credit card portfolio. The provision for credit losses is expected to increase
in 1999 due to the Sanwa and Household portfolio acquisitions. Total assets from
these acquisitions were $7.3 billion.
During 1998, the corporation experienced significant loan growth of $6.8
billion, or 11%, while the reserve for credit losses increased 8%. As a result
of core loan growth and the acquisition of various credit card portfolios, the
risk characteristics of the corporation's loan portfolio have been altered.
Specifically, the growth in credit card receivables of $2.9 billion required
that additional reserves be allocated to the consumer portfolio. Therefore, the
allocated reserve pertaining to the consumer portfolio has increased from 24% of
the total reserve for credit losses in 1997 to 39% in 1998. Additionally, even
though the corporation's loan portfolio increased 11%, the reserve for credit
losses, as a percent of total loans, decreased 2% as a result of the
corporation's reserve methodology assessing the impact of a strong domestic
economy combined with improvements in certain business sectors.
An integral component of the corporation's risk management process is to
ensure the proper allocation of the reserve for credit losses based upon an
analysis of risk characteristics, demonstrated losses, loan segmentations, and
other factors. The unallocated component of the reserve for credit losses
represents management's evaluation of the loan portfolio, including its size and
complexity, and the realization that there are estimable losses that have been
incurred within the portfolio but not yet specifically identified. At December
31, 1998, the corporation's unallocated reserve has declined 38% from 1997 as
the portfolio's risk characteristics have been altered resulting primarily from
the additional credit card receivables acquired throughout 1998.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Reserve for Credit Losses Allocation
<TABLE>
<CAPTION>
1998 1997 1996 1995
===================================================================================================================================
Percent of Percent of Percent of Percent of
December 31 Loan Type to Loan Type to Loan Type to Loan Type to
Dollars in millions Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 639 53.56% $ 626 51.15% $ 668 48.63% $ 606 43.85%
Consumer 609 19.19 345 18.37 365 22.79 209 20.54
Commercial real estate:
Construction 12 1.55 15 1.42 26 1.79 23 1.15
Interim/permanent 47 6.19 83 7.65 129 8.99 138 8.40
Residential real estate 24 13.42 41 16.01 67 13.44 90 21.83
Lease financing 18 6.09 18 5.40 20 4.36 19 4.23
Unallocated 203 -- 304 -- 213 -- 236 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,552 100.0% $1,432 100.0% $1,488 100.0% $1,321 100.0%
===================================================================================================================================
<CAPTION>
1994
=====================================================
Percent of
December 31 Loan Type to
Dollars in millions Amount Total Loans
=====================================================
<S> <C> <C>
Commercial and industrial $ 620 41.80%
Consumer 226 25.06
Commercial real estate:
Construction 17 1.43
Interim/permanent 190 10.26
Residential real estate 47 18.27
Lease financing 18 3.18
Unallocated 378 --
- -----------------------------------------------------
Total $1,496 100.0%
=====================================================
</TABLE>
Reserve for Credit Losses Activity
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions 1998 1997 1996 1995 1994
=================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning
of year $ 1,432 $ 1,488 $ 1,321 $ 1,496 $ 1,669
Gross charge-offs:
Consumer 83 118 98 84 100
Credit card 332 203 132 57 30
Commercial and
industrial 164 132 160 109 91
Commercial real estate 16 38 60 99 95
Residential real estate 13 21 30 65 52
Lease financing 1 2 4 4 9
- -------------------------------------------------------------------------------------------------
Total gross charge-offs 609 514 484 418 377
- -------------------------------------------------------------------------------------------------
Recoveries:
Consumer 22 29 22 29 32
Credit card 31 14 8 5 3
Commercial and
industrial 63 64 59 48 60
Commercial real estate 19 26 17 25 27
Residential real estate 2 3 4 4 11
Lease financing 2 2 4 5 5
- -------------------------------------------------------------------------------------------------
Total recoveries 139 138 114 116 138
- -------------------------------------------------------------------------------------------------
Net charge-offs 470 376 370 302 239
Provision 470 322 213 101 65
Acquired/other 120 (2) 324 26 1
- -------------------------------------------------------------------------------------------------
Balance at end of year $ 1,552 $ 1,432 $ 1,488 $ 1,321 $ 1,496
- -------------------------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans .71% .63% .65% .58% .53%
Ratio of reserve for credit
losses to year-end loans 2.24% 2.29% 2.49% 2.51% 3.20%
Ratio of reserve for credit
losses to year-end
nonperforming loans 586% 365% 214% 301% 224%
=================================================================================================
</TABLE>
Net charge-offs increased $94 million to $470 million in 1998. Net charge-offs
from the credit card portfolio increased $112 million to $301 million, due to a
$1.7 billion increase in average credit card loans, year-to-year, from the
acquisition of Advanta's consumer credit card portfolio. The ratio of net
charge-offs to average loans increased to .71% as compared to .63% at December
31, 1997. Net charge-offs are expected to increase in 1999 due to the
acquisition of Sanwa.
FUNDING SOURCES
Components of Funding Sources
December 31
Dollars in millions 1998 1997
================================================================================
Deposits:
Demand $13,400 $13,148
Regular savings and NOW 5,399 5,981
Money market 29,297 24,504
Time:
Domestic 17,764 16,258
Foreign 3,818 3,844
- --------------------------------------------------------------------------------
Total deposits 69,678 63,735
- --------------------------------------------------------------------------------
Short-term borrowed funds:
Federal funds purchased 1,857 1,005
Securities sold under agreements
to repurchase 2,599 2,630
Commercial paper 943 811
Other 3,913 3,059
- --------------------------------------------------------------------------------
Total short-term borrowed funds 9,312 7,505
- --------------------------------------------------------------------------------
Due to brokers/dealers 3,975 4,316
Long-term debt 8,820 4,500
- --------------------------------------------------------------------------------
Total $91,785 $80,056
================================================================================
Total deposits increased $5.9 billion to $69.7 billion at December 31, 1998. The
increase was due primarily to a $4.8 billion increase in money market deposits
as a result of rates aimed at attracting new sources of funds. Time deposits
increased $1.5 billion due to the corporation issuing jumbo time deposits to
fund earning asset growth during 1998.
Certificates of deposit and other time deposits issued by domestic offices
in amounts of $100,000 or more as of December 31, 1998 will mature as follows:
Maturity of Time Deposits
December 31, 1998 Foreign
Dollars in millions, Certificates Time
Remaining maturity of Deposit Deposits
================================================================================
3 months or less $3,718 $3,810
3 to 6 months 799 6
6 to 12 months 1,531 2
Over 12 months 715 --
- --------------------------------------------------------------------------------
Total $6,763 $3,818
================================================================================
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total short-term borrowed funds increased $1.8 billion from December 31, 1997,
due primarily to increasing levels of federal funds purchased as a result of
needs to fund asset growth.
Long-term debt increased by $4.3 billion due to the issuance of $4.6
billion of new debt and $520 million of capital securities to fund acquisitions
and balance sheet growth, partially offset by almost $900 million of maturities.
Management believes Fleet has sufficient liquidity to meet its liabilities
of customer deposits and debt holders. The effect of maturing liabilities is
discussed in the Asset-Liability Management section that follows.
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity, and capital. Asset-liability management is governed by policies
reviewed and approved annually by the corporation's Board of Directors (the
Board). The Board delegates responsibility for asset-liability management to the
corporate Asset-Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset-liability management activities of
the corporation. ALCO also reviews and approves all major market risk,
liquidity, and capital management programs.
Market Risk
Market risk is the sensitivity of income to variations in interest rates,
foreign exchange rates, equity prices, commodity prices, and other market-driven
rates or prices. As discussed below, the corporation is exposed to market risk
in both its non-trading and trading operations.
Non-trading Market Risk
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. This risk arises directly from the corporation's core banking
activities - lending, deposit gathering, and loan servicing.
The primary goal of interest-rate risk-management is to control the
corporation's exposure to interest-rate risk both within limits approved by the
Board and within narrower guidelines approved by ALCO. These limits and
guidelines reflect the corporation's tolerance for interest-rate risk over both
short-term and long-term time horizons.
The corporation controls interest-rate risk by identifying, quantifying,
and hedging its exposures. The corporation identifies and quantifies its
interest-rate exposures using sophisticated simulation and valuation models, as
well as simpler gap analyses, reflecting the known or assumed maturity,
repricing, and other cash flow characteristics of the corporation's assets and
liabilities.
The corporation manages the interest-rate risk inherent in its core
banking operations using both on-balance sheet instruments, mainly fixed-rate
portfolio securities, and a variety of off-balance sheet instruments. The most
frequently used off-balance sheet instruments are interest-rate swaps and
options (e.g., interest-rate caps and floors). When appropriate, forward-rate
agreements, options on swaps, and exchange-traded futures and options are also
used.
The major source of the corporation's non-trading interest-rate risk is
the difference in the 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.
Most significantly, the corporation's core banking assets and liabilities
are mismatched with respect to repricing frequency, maturity and/or index. Most
of the corporation's commercial loans, for example, reprice rapidly in response
to changes in short-term interest rates (e.g., London Interbank Offered Rate
(LIBOR) and prime rate). In contrast, many of its consumer deposits reprice
slowly, if at all, in response to changes in market interest rates. As a result,
the core bank is asset-sensitive.
In managing net interest income, the corporation uses fixed-rate portfolio
securities and interest-rate swaps to offset the general asset-sensitivity of
the core bank. Additionally, the corporation uses interest-rate swaps to offset
basis risk, including the specific exposure to changes in the prime rate. At
December 31, 1998 and 1997, interest-rate swaps totaling $14.8 billion and $12.2
billion (notional amount), respectively, were being used to manage risk to net
interest income.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its mortgage servicing rights (MSRs) to prepayments. The
mortgage borrower has the option to prepay the mortgage loan at any time. When
mortgage interest rates decline, borrowers have a greater incentive to prepay
mortgage loans through a refinancing; when mortgage interest rates rise, this
incentive is reduced or eliminated. Since MSRs represent the right to service
mortgage loans, a decline in interest rates and an actual, or probable, increase
in mortgage prepayments shorten the expected life of the MSR asset and reduce
its economic value. Correspondingly, an increase in interest rates and an
actual, or probable, decline in mortgage prepayments lengthen the expected life
of the MSR asset and enhance its economic value. The expected income from and,
therefore, economic value of MSRs is sensitive to movements in interest rates
due to this sensitivity to mortgage prepayments.
To mitigate the risk of declining long-term interest rates, increased
mortgage prepayments, and the potential impairment of the MSRs, the corporation
uses a variety of risk-management instruments, including interest-rate swaps,
caps and floors tied to "constant maturity" yields on long-term (e.g., 10-year)
Treasury notes and swaps, options on swaps, and exchange-traded options on
Treasury bond and note futures contracts. These instruments gain value as
interest rates decline, mitigating the impairment of MSRs. At December 31, 1998
and 1997, the corporation had approximately $65.2 billion and $30.7 billion
(notional amount), respectively, of outstanding derivatives being used to manage
risk to the MSRs' valuation.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Complicating management's efforts to control non-trading exposure to
interest-rate risk is the fundamental uncertainty of the maturity, repricing,
and/or runoff characteristics of some of the corporation's core banking assets
and liabilities. This uncertainty often reflects optional features contained in
these financial instruments. The most important optional features are contained
in consumer deposits and loans.
For example, many of the corporation's interest-bearing retail deposit
products (e.g., interest checking, savings and money market deposits) have no
contractual maturity. Customers have the right to withdraw funds from these
deposit accounts freely. Deposit balances may therefore run off unexpectedly due
to changes in competitive or market conditions. To forestall such runoff, rates
on interest-bearing deposits may have to be increased more (or reduced less)
than expected. Such repricing may not be highly correlated with the repricing of
prime-based or LIBOR-based loans. Finally, balances that leave the banking
franchise may have to be replaced with other more expensive retail or wholesale
deposits. Given the uncertainties surrounding deposit runoff and repricing, the
interest-rate sensitivity of core bank liabilities cannot be determined
precisely.
Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, without penalty. As a result, the corporation's
mortgage-based assets (including mortgage loans and securities as well as
mortgage servicing rights) are subject to prepayment risk. This risk tends to
increase when interest rates fall due to the benefits of refinancing. Since the
future prepayment behavior of the bank's customers is uncertain, the
interest-rate sensitivity of mortgage assets cannot be determined exactly.
To cope with such uncertainties, management gives careful attention to its
assumptions. Depending on the product or behavior in question, each assumption
will reflect some combination of market data, research analysis, and business
judgment. For example, assumptions for mortgage prepayments are derived from
published dealer median prepayment estimates for comparable mortgage loans.
Assumptions for noncontractual deposits are based on a historical analysis of
repricing and runoff trends, heavily weighted to the recent past, modified by
business judgment concerning prospective competitive market influences.
To measure the sensitivity of its income to changes in interest rates, the
corporation uses a variety of methods, including simulation, gap, and valuation
analyses.
Simulation analysis involves dynamically modeling interest income and
expense from the corporation's balance sheet and off-balance sheet positions
over a specified time period under various interest-rate scenarios and balance
sheet structures. The corporation uses simulation analysis to measure the
sensitivity of net interest income over relatively short (e.g., 1-2 year) time
horizons.
Key assumptions in these simulation analyses (and in the gap and valuation
analyses discussed below) relate to the behavior of interest rates and spreads,
the growth or shrinkage of product balances and the behavior of the bank's
deposit and loan customers. As indicated above, the most material assumptions
relate to the prepayment of mortgage assets, as well as the repricing and/or
runoff of noncontractual deposits.
As the future path of interest rates cannot be known in advance,
management uses simulation analysis to project earnings under various
interest-rate scenarios. Some scenarios reflect reasonable or "most likely"
economic forecasts. Other scenarios are deliberately extreme, including
immediate interest-rate "shocks," gradual interest-rate "ramps," spread
widenings, and yield curve "twists."
Usually, each analysis incorporates what management believes to be the
most appropriate assumptions about customer and competitor behavior in the
specified interest-rate scenario. But in some analyses, assumptions are
deliberately manipulated to test the corporation's exposure to "assumption
risk."
The 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 December 31, 1998 and
1997. 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)
================================================================================
1998 1997
- --------------------------------------------------------------------------------
+200 $44 $72
-200 (142) (127)
- --------------------------------------------------------------------------------
Management believes that these estimates reflect a complete and accurate
representation of the corporate balance sheet. It should be emphasized, however,
that the results are dependent on material assumptions such as those previously
discussed.
Management believes that the exposure of the corporation's net interest
income to gradual and/or modest changes in interest rates is relatively small.
As indicated by the results of the simulation analyses, however, a sharp decline
in interest rates will tend to reduce net interest income, but by amounts that
are within corporate limits. This exposure is primarily related to two major
risk factors discussed earlier - the anticipated slow repricing of
noncontractual deposits and the assumed rapid prepayment of mortgage loans and
securities.
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 December
31, 1998, the estimated exposure was 5.4% asset-sensitive (see the following
table).
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest-Rate Gap Analysis
<TABLE>
<CAPTION>
Cumulatively Repriced Within
December 31, 1998 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 $ 62,763 $ 9,814 $ 5,006 $ 10,024 $ 16,775 $104,382
Total liabilities and stockholders' equity (51,358) (7,616) (5,254) (3,180) (36,974) (104,382)
Net off-balance sheet (10,276) 2,307 4,065 2,488 1,416
- -----------------------------------------------------------------------------------------------------------------------------------
Periodic gap 1,129 4,505 3,817 9,332 (18,783) --
Cumulative gap 1,129 5,634 9,451 18,783 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total assets-1998 1.1% 5.4% 9.1% 18.0%
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total assets-1997 4.7 3.6 2.3 8.9
===================================================================================================================================
</TABLE>
Valuation analysis involves projecting future cash flows from the corporation's
assets, liabilities, and off-balance sheet positions over a very long-term
horizon, discounting those cash flows at appropriate interest rates, and then
aggregating the discounted cash flows. The corporation's "economic value of
equity" (EVE) is the estimated net present value of the discounted cash flows.
The interest-rate sensitivity of EVE is a measure of the sensitivity of
long-term earnings to changes in interest rates. The corporation uses valuation
analysis (specifically, the sensitivity of EVE) to measure the exposure of
earnings and equity to changes in interest rates over a relatively long (e.g.,
greater than 2-year) time horizon. Valuation analysis provides a more
comprehensive measure of the corporation's exposure to interest-rate risk than
simulation analysis. Valuation analysis incorporates a longer time horizon, and
also includes certain interest-rate-sensitive components of noninterest income
and expense, specifically fee income and amortization from mortgage servicing
rights.
The 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 December 31, 1998 and 1997. 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.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (Dollars in millions)
================================================================================
1998 1997
- --------------------------------------------------------------------------------
+200 $ 69 $(158)
+100 152 9
-100 (498) (381)
-200 (713) (798)
================================================================================
During 1998, management continued to add fixed-rate portfolio securities and
interest-rate swaps to control the asset-sensitivity inherent in the maturity
and repricing mismatch of core bank assets and liabilities. The impact of these
programs was partly offset by a reduction in the assumed repricing sensitivity
of interest-bearing retail deposits. These assumptions, which are subject to
frequent and careful management review, are revised as necessary to reflect
current market conditions, business trends and product manager expectations.
In the fourth quarter of 1998, the corporation entered into a definitive
agreement to acquire Sanwa Business Credit. This transaction, which closed on
February 1, 1999, will reduce the corporation's estimated exposure to falling
interest rates. The year-end balance sheet position reflects management's
anticipation of this impact.
It should be emphasized that valuation analysis focuses on the long-term
economic value of the corporation's future cash flows. For some financial
instruments, the adverse impact of current movements in interest rates on
expected future cash flows must be recognized immediately. For example, if
interest rates decline and the hedge is not effective, thereby reducing
estimated future fee income from MSRs such that the estimated economic value of
the MSRs falls below book value, an immediate impairment charge is required. In
contrast, for other financial instruments, such as fixed-rate investment
securities, the beneficial impact of a decline in interest rates on future
income is unrecognized unless the instruments are sold.
As a result of such accounting requirements, a portion of the EVE exposure
attributable to mortgage servicing rights could materially impact earnings
within the next 12 months under certain extreme scenarios involving a tightening
of mortgage-treasury spreads, a decline in implied options volatilities, and/or
a greater than anticipated increase in prepayments.
Off-balance sheet interest-rate instruments used to manage net interest
income are designated as hedges of specific assets and liabilities. Accrual
accounting is applied to these hedges, and the income or expense is recorded in
the same category as that of the related balance sheet item. The periodic net
settlement of the interest-rate risk-management instruments is recorded as an
adjustment to net interest income. The interest-rate risk-management instruments
generated $45 million, $52 million, and $12 million of net interest income
during 1998, 1997, and 1996, respectively. As of December 31, 1998, the
corporation had net deferred income of $11.5 million relating to terminated
interest-rate swap contracts, which will be amortized over the remaining life of
the underlying terminated interest-rate contracts of approximately 8 years.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
During 1998, the corporation altered its interest-rate risk-management
portfolio to limit an increase in asset-sensitivity resulting from balance sheet
changes and swap runoff. In particular, $5.4 billion of receive-fixed swaps were
added through new transactions, partially offsetting maturities of $2.9 billion.
The interest-rate instruments used to manage potential impairment of MSRs
are designated as hedges of the MSRs. Changes in fair value of the hedges are
recorded as adjustments to the carrying value of the MSRs and related hedges.
During 1998, net hedge gains of $667 million were deferred and recorded as
adjustments to the carrying value of the MSRs and related hedges. At December
31, 1998, the carrying value and fair value of the corporation's MSRs were $1.4
billion and $1.8 billion, respectively.
In connection with the corporation's management of its MSR hedge program,
the corporation terminated (in notional amounts) $28 billion of interest-rate
floor agreements and $12 billion of call options and added $44 billion and $16
billion of interest-rate floor agreements and call options, respectively, during
1998. Additionally, the corporation added $10 billion of interest-rate cap
corridors and $6 billion of interest-rate swap contracts in its management of
the MSR hedge program.
These risk-management activities do not completely eliminate interest-rate
risk in the MSRs. The MSR hedges utilized were indexed to Treasury rates, swap
rates, and mortgage rates. At December 31, 1998, approximately 30%, 54%, and
16%, were indexed to Treasury, swap, and mortgage related rates, respectively.
Treasury rates and swap rates may not move in tandem with mortgage interest
rates. In addition, as mortgage interest rates change, actual prepayments may
not respond exactly as anticipated. Other pricing factors, such as the implied
volatility of market yields, may affect the value of the option hedges without
similarly impacting the MSRs. Therefore, the corporation's hedging activity may
not be sufficient to eliminate prepayment and other market risk completely in
all interest-rate scenarios.
Risk-Management Instrument Analysis
<TABLE>
<CAPTION>
Weighted Weighted Average
Assets- Average Rate
December 31, 1998 Notional Liabilities Maturity Fair --------------------
Dollars in millions Value Hedged (Years) Value Receive Pay
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest-rate risk-management instruments
Interest-rate swaps:
Receive-fixed/pay-variable $ 9,825 Variable-rate loans
356 Fixed-rate deposits
1,867 Long-term debt
---------
12,048 1.9 $ 165 6.74% 6.05%
- --------------------------------------------------------------------------------------------------------------------------------
Basis swaps 2,779 Deposits .3 -- 5.26 5.61
- --------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income 14,827 1.6 165 6.46 5.97
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage banking risk-management instruments
Interest rate swaps:
Receive-fixed/pay-variable, PO swaps 7,011 Mortgage servicing rights 3.0 83 5.88 5.59
Options:
Interest-rate floors and options on swaps 39,560 Mortgage servicing rights 4.3 517 --(a) --(a)
Interest-rate caps and cap corridors 14,759 Mortgage servicing rights 3.8 68 --(a) --(a)
Call options purchased 3,150 Mortgage servicing rights .1 27 -- --
Call options sold 730 Mortgage servicing rights .1 (5) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total options 58,199 3.9 607 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights 65,210 3.8 690 5.88 5.59
- --------------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $ 80,037 3.4 $ 855 6.27% 5.85%
================================================================================================================================
</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 5.28% and 6.50%, respectively.
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.
Interest-rate, foreign exchange, and precious metals contracts are primarily
entered into to satisfy the investment and risk-management needs of our
customers. The corporation generally enters into offsetting interest-rate,
foreign exchange, and precious metals contracts to mitigate the risk to
earnings. Equity positions result mainly from the corporation's market-making
activity. The corporation also enters into some proprietary on-balance sheet
trading positions, which principally include U.S. federal and state government
and agency securities.
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 system, using historical data to
estimate market volatility, measures the risk to earnings at a 99% confidence
level based on an assumed ten-day holding period. For instance, the
corporation's EAR measure
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
estimates the loss that would be suffered if its trading positions were held for
a full ten days during an adverse market move.
Management recognizes that this methodology, while standard, can
underestimate risk. The actual probability of an extreme market move is
generally greater than the statistics suggest because returns on financial
instruments are not normally distributed. Nevertheless, as applied to the
corporation's trading positions, the method appears to be a conservative measure
of risk because in any sustained adverse market move, it is unlikely that
trading positions would be held for a full ten days.
Measured market risk is controlled by earnings at risk limits, which are
reviewed and approved annually by the Board. Additionally, more restrictive
guidelines may be established by ALCO. During 1998, the Board limit was $46
million. The average daily exposure to this market risk was $11.2 million, and
the maximum daily exposure was $39.6 million.
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. 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 deposit, foreign branch deposits, federal funds, collateralized
borrowings, and a $10 billion bank-note program. During 1998, Fleet National
Bank enhanced its liquidity by lengthening the term of its wholesale funding
sources through the issuance of $4 billion of funds with maturities up to three
years.
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.
At December 31, 1998, the corporation had commercial paper outstanding of
$943 million, all of which was placed directly by Fleet in its local markets,
compared with $811 million at December 31, 1997. The corporation has a backup
line of credit totaling $1 billion to ensure that funding is not interrupted if
commercial paper is not available. At December 31, 1998 and 1997, Fleet had no
outstanding balance under the line of credit.
The parent company had $2.1 billion available for the issuance of common,
preferred stock or preferred securities, and senior or subordinated securities
at December 31, 1998 under the existing shelf registration filed with the
Securities and Exchange Commission (SEC). The parent company's ability to access
the capital markets was demonstrated in 1998 through the issuance of $1.3
billion in subordinated debt and the issuance of $520 million of capital
securities. The parent company also repaid $550 million of debt during 1998.
As shown in the consolidated statements of cash flows, cash and cash
equivalents increased by $164 million during 1998. The increase was due to cash
provided by financing activities of $8.3 billion, offset in part by cash used in
operating activities of $1.6 billion and cash used in investing activities of
$6.6 billion. Net cash provided by financing activities was the result of net
increases in deposits, short-term borrowings and long-term debt, offset in part
by cash dividends paid. Net cash used in operating activities was due to a net
increase in mortgages held for resale. Net cash used in investing activities was
attributable to a net increase in loans, resulting primarily from loan growth in
the commercial and industrial and lease financing portfolios and purchases of
credit card loan portfolios, as well as a net increase in securities.
CAPITAL
A financial institution's capital serves to support asset growth and provide
protection against loss to depositors and creditors. Common equity represents
the stockholders' investment in the corporation. In addition to common equity,
regulatory capital includes, within certain limits, preferred stock,
subordinated debt and loss reserves.
The corporation strives to maintain an optimal level of capital,
commensurate with its risk profile, on which an attractive return to
stockholders will be realized over both the short and long term, while serving
depositors', creditors' and regulatory needs. In determining optimal capital
levels, the corporation also considers the capital levels of its peers and the
evaluations of the major rating agencies that assign ratings to the
corporation's public debt.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
In blending the requirements of each of these constituencies, the
corporation has established target capital ranges that it believes will provide
for management flexibility and the deployment of capital in an optimally
efficient and profitable manner. These targets are reviewed periodically
relative to the corporation's risk profile and prevailing economic conditions.
The corporation strives to maintain regulatory capital at approximately
.75%-1.25% above the minimum regulatory requirements for a well-capitalized
institution, as defined in the FDIC Improvement Act. In addition, the
corporation currently has a tangible common equity-to-assets ratio target range
of 5.50%-6.00% and a total equity-to-assets target range of 7.25%-7.75%.
Capital Ratios
December 31
Dollars in millions 1998 1997
===============================================================================
Risk-adjusted assets $104,372 $90,063
Tier 1 risk-based capital (4% minimum) 7.08% 7.26%
Total risk-based capital (8% minimum) 11.22 10.71
Leverage ratio (4% minimum) 7.48 7.66
Common equity-to-assets 8.35 8.52
Total equity-to-assets 9.01 9.28
Tangible common equity-to-assets 5.53 6.26
Tangible total equity-to-assets 6.21 7.04
===============================================================================
At December 31, 1998, the corporation exceeded all regulatory required minimum
capital ratios and was categorized as well-capitalized. The corporation's
risk-based Tier 1 capital ratio decreased compared with December 31, 1997, due
mainly to growth in risk-adjusted assets. However, total risk-based capital
increased as the corporation issued $1.3 billion of subordinated debt during the
year. Excess capital, defined as common equity above the capital target, is
available for core business investments and acquisitions.
As registered brokers-dealers and member firms of the NYSE, certain
subsidiaries are subject to rules of both the SEC and the NYSE. These rules
require registrants to maintain minimum levels of net capital, as defined, and
may restrict a member from expanding its business and declaring dividends as its
net capital approaches specified levels. At December 31, 1998, these
subsidiaries had net capital, in the aggregate, of approximately $349 million
which exceeded aggregate minimum net capital requirements by approximately $304
million.
During 1998, the corporation announced its intention to repurchase up to
$1.5 billion of its common stock from time-to-time as market conditions permit.
In addition, the corporation's Board of Directors authorized a 10% increase in
the quarterly stock dividend to $.27 per common share payable January 1, 1999.
The corporation also effected a two-for-one stock split of the corporation's
common stock on October 7, 1998.
COMPARISON OF 1997 AND 1996
Fleet reported net income for 1997 of $1.37 billion, or $2.30 per diluted share,
compared with $1.22 billion, or $1.98 per diluted share in 1996. ROA and ROE
were 1.58% and 19.30%, respectively, for 1997 compared with 1.40% and 17.68%,
respectively, in 1996. All prior periods have been restated to reflect the
merger of Quick & Reilly which was accounted for under the pooling-of-interests
method of accounting. In addition, all common share amounts and associated
ratios were adjusted to reflect the corporation's two-for-one common stock split
which was effective October 7, 1998.
Net interest income on an FTE basis totaled $3.7 billion in 1997, compared
with $3.5 billion in 1996. The net interest margin for 1997 was 5.01%, compared
with 4.68% in 1996. The increase of 33 basis points was due principally to
increased loan fee revenue as well as a complete year's impact of a balance
sheet restructuring program undertaken during 1996 in connection with the
NatWest acquisition. This restructuring allowed the corporation to replace
lower-yielding assets and higher-cost sources of funds with a more favorable mix
of loans and core deposits.
The provision for credit losses was $322 million in 1997 compared with
$213 million in 1996, with the increase due principally to a higher level of
bankruptcies and delinquencies in the consumer loan portfolio.
Noninterest income increased $298 million to $2.6 billion in 1997. The
increase was due primarily to the inclusion of NatWest for four additional
months in 1997 as well as $175 million of net gains on sales of business units.
Noninterest expense totaled $3.72 billion for 1997, compared with $3.51
billion in 1996. Expenses only increased slightly in 1997, as a result of the
successful integrations of NatWest and Shawmut National Corporation in
combination with the corporation's continuing cost containment efforts.
Total loans at December 31, 1997 were $62.6 billion, compared with $59.9
billion at December 31, 1996. The increase is attributable to strong loan growth
in the commercial and industrial, lease financing and residential portfolios,
which was partially offset by the sale of $2.2 billion of indirect auto loans
and a $776 million and $485 million decline in commercial real estate and credit
card loans, respectively.
Total deposits decreased $3.3 billion to $63.7 billion at December 31,
1997. The decrease was due primarily to deposit runoff, which was anticipated as
a result of the corporation's efforts to maintain a competitive cost structure,
combined with the continued migration of deposits to higher-yielding investment
products.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 statement as well as the equity section of the balance sheet.
This standard is effective as of January 1, 2000. 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, 2000.
39
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements and related notes of the
corporation were prepared by management in conformity with generally accepted
accounting principles. Management is responsible for the integrity and fair
presentation of these financial statements.
Management has in place an internal accounting control system designed to
safeguard corporate assets from material loss or misuse and to ensure that all
transactions are first properly authorized and then recorded in its records. The
internal control system includes an organizational structure that provides
appropriate delegation of authority and segregation of duties, established
policies and procedures, and comprehensive internal audit and loan review
programs. Management believes that this system provides assurance that the
corporation's assets are adequately safeguarded and that its records, which are
the basis for the preparation of all financial statements, are reliable.
The Audit and Risk Management Committees of the Board of Directors consist
solely of directors who are not employees of the corporation or its
subsidiaries. During 1998, the Audit Committee met five times and the Risk
Management Committee met four times with internal auditors, credit review
management, the independent auditors, and representatives of senior management
to discuss the results of examinations and to review their activities to ensure
that each is properly discharging its responsibilities. The independent
auditors, internal auditors, and credit review management have direct and
unrestricted access to these committees at all times.
The corporation's consolidated financial statements have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. Its independent
auditors' report, which is based on an audit made in accordance with generally
accepted auditing standards, expresses an opinion as to the fair presentation of
the consolidated financial statements. In performing its audit, KPMG Peat
Marwick LLP considers the corporation's internal control to the extent it deems
necessary in order to issue its opinion on the consolidated financial
statements.
/s/ Terrence Murray /s/ Eugene M. McQuade
Terrence Murray Eugene M. McQuade
Chairman and Vice Chairman and
Chief Executive Officer Chief Financial Officer
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Fleet Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Fleet Financial
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fleet
Financial Group, Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Boston, Massachusetts /s/ KPMG Peat Marwick LLP
January 20, 1999
41
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions, except per share amounts 1998 1997 1996
===========================================================================================
<S> <C> <C> <C>
Interest and fees on loans $5,878 $5,357 $5,169
Interest on securities 673 570 723
Other 214 164 136
- -------------------------------------------------------------------------------------------
Total interest income 6,765 6,091 6,028
- -------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,835 1,654 1,754
Short-term borrowings 400 247 311
Long-term debt 448 338 390
Other 213 152 111
- -------------------------------------------------------------------------------------------
Total interest expense 2,896 2,391 2,566
- -------------------------------------------------------------------------------------------
Net interest income 3,869 3,700 3,462
- -------------------------------------------------------------------------------------------
Provision for credit losses 470 322 213
- -------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 3,399 3,378 3,249
- -------------------------------------------------------------------------------------------
Noninterest income:
Investment services revenue 851 696 634
Banking fees and commissions 748 708 601
Capital markets revenue 530 326 269
Processing-related revenue 457 473 503
Credit card revenue 391 62 59
Net gains on sales of business units -- 175 --
Other 260 191 267
- -------------------------------------------------------------------------------------------
Total noninterest income 3,237 2,631 2,333
- -------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,927 1,752 1,735
Equipment 307 317 300
Occupancy 298 294 293
Intangible asset amortization 227 169 140
Legal and other professional 151 118 136
Marketing 132 109 106
Merger-related charges 73 25 --
Other 1,014 931 802
- -------------------------------------------------------------------------------------------
Total noninterest expense 4,129 3,715 3,512
- -------------------------------------------------------------------------------------------
Income before income taxes 2,507 2,294 2,070
Applicable income taxes 975 927 849
- -------------------------------------------------------------------------------------------
Net income $1,532 $1,367 $1,221
===========================================================================================
Diluted weighted average common shares outstanding (in millions) 587.8 568.6 580.0
Net income applicable to common shares $1,481 $1,305 $1,149
Basic earnings per share 2.61 2.37 2.02
Diluted earnings per share 2.52 2.30 1.98
===========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
42
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
Dollars in millions, except share amounts 1998 1997
==============================================================================================================
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 5,635 $ 5,076
Federal funds sold and securities purchased under agreements to resell 103 498
Securities (market value: $10,797 and $9,367) 10,792 9,362
Loans 69,396 62,565
Reserve for credit losses (1,552) (1,432)
- --------------------------------------------------------------------------------------------------------------
Net loans 67,844 61,133
- --------------------------------------------------------------------------------------------------------------
Due from brokers/dealers 3,600 3,510
Mortgages held for resale 3,960 1,526
Premises and equipment 1,229 1,205
Mortgage servicing rights 1,405 1,768
Intangible assets 3,117 2,196
Other assets 6,697 4,773
- --------------------------------------------------------------------------------------------------------------
Total assets $ 104,382 $ 91,047
==============================================================================================================
Liabilities
Deposits:
Demand $ 13,400 $ 13,148
Regular savings, NOW, money market 34,696 30,485
Time 21,582 20,102
- --------------------------------------------------------------------------------------------------------------
Total deposits 69,678 63,735
- --------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 4,456 3,635
Other short-term borrowings 4,856 3,870
Due to brokers/dealers 3,975 4,316
Long-term debt 8,820 4,500
Accrued expenses and other liabilities 3,188 2,539
- --------------------------------------------------------------------------------------------------------------
Total liabilities 94,973 82,595
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock 691 691
Common stock (571,168,358 shares issued in 1998 and 571,204,564 shares issued in 1997) 6 3
Common surplus 3,284 3,329
Retained earnings 5,337 4,437
Accumulated other comprehensive income 128 97
Treasury stock, at cost (1,593,005 shares in 1998 and 3,878,928 shares in 1997) (37) (105)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,409 8,452
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 104,382 $ 91,047
==============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Other
Preferred Stock at Common Retained Comprehensive Treasury
Dollars in millions, except per share amounts Stock $.01 Par Surplus Earnings Income Stock Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 399 $ 3 $ 3,226 $ 2,994 $ 52 $ (7) $ 6,667
Net income -- -- -- 1,221 -- -- 1,221
Other comprehensive income:
Net unrealized securities gains arising during
the period, net of taxes of $3 -- -- -- -- 5 -- --
Less: reclassification adjustment for net gains
included in net income, net of taxes of $17 -- -- -- -- 26 -- --
-----
Other comprehensive income -- -- -- -- (21) -- (21)
------
Total comprehensive income -- -- -- -- -- -- 1,200
Cash dividends declared on common stock
($.87 per share) -- -- -- (457) -- -- (457)
Cash dividends declared on preferred stock -- -- -- (69) -- -- (69)
Cash dividends declared by pooled company prior
to merger -- -- -- (10) -- -- (10)
Issuance of preferred stock 650 -- (15) -- -- -- 635
Redemption of preferred stock (96) -- -- (3) -- -- (99)
Common stock issued in connection with:
Employee benefit plans -- -- 30 (31) -- 64 63
Warrants -- -- 15 -- -- -- 15
Treasury stock purchased -- -- -- -- -- (105) (105)
Other items, net -- -- (33) (5) -- (12) (50)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 953 $ 3 $ 3,223 $ 3,640 $ 31 $ (60) $ 7,790
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 1,367 -- -- 1,367
Other comprehensive income:
Net unrealized securities gains arising during
the period, net of taxes of $54 -- -- -- -- 86 -- --
Less: reclassification adjustment for net gains
included in net income, net of taxes of $13 -- -- -- -- 20 -- --
-----
Other comprehensive income -- -- -- -- 66 -- 66
-------
Total comprehensive income -- -- -- -- -- -- 1,433
Cash dividends declared on common stock
($.92 per share) -- -- -- (467) -- -- (467)
Cash dividends declared on preferred stock -- -- -- (62) -- -- (62)
Cash dividends declared by pooled company
prior to merger -- -- -- (7) -- -- (7)
Redemption of preferred stock (178) -- -- -- -- -- (178)
Common stock issued in connection with:
Employee benefit plans -- -- (51) (11) -- 162 100
Reissuance of treasury stock -- -- 161 -- -- 595 756
Acquisition of Nash Weiss & Co. -- -- 16 -- -- -- 16
Treasury stock purchased -- -- -- -- -- (803) (803)
Adjustment to retained earnings reflecting pooled
entity different year-end -- -- -- (23) -- -- (23)
Exchange of Series V preferred stock for trust
preferred securities (84) -- -- -- -- -- (84)
Other items, net -- -- (20) -- -- 1 (19)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 691 $ 3 $ 3,329 $ 4,437 $ 97 $(105) $ 8,452
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 1,532 -- -- 1,532
Other comprehensive income:
Net unrealized securities gains arising during
the period, net of taxes of $51 -- -- -- -- 76 -- --
Less: reclassification adjustment for net gains
included in net income, net of taxes of $29 -- -- -- -- 45 -- --
-----
Other comprehensive income -- -- -- -- 31 -- 31
-------
Total comprehensive income -- -- -- -- -- -- 1,563
Cash dividends declared on common stock
($1.00 per share) -- -- -- (568) -- -- (568)
Cash dividends declared on preferred stock -- -- -- (51) -- -- (51)
Common stock issued in connection with:
Employee benefit plans -- -- (40) (15) -- 119 64
Treasury stock purchased -- -- -- -- -- (51) (51)
Two-for-one common stock split -- 3 (3) -- -- -- --
Other items, net -- -- (2) 2 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 691 $ 6 $ 3,284 $ 5,337 $ 128 $ (37) $ 9,409
===================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions 1998 1997 1996
===========================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,532 $ 1,367 $ 1,221
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 247 213 200
Amortization and impairment of mortgage servicing rights 433 248 188
Amortization of other intangible assets 227 169 140
Provision for credit losses 470 322 213
Deferred income tax expense 177 341 443
Securities gains (74) (33) (43)
Net gains on sales of business units -- (175) --
Merger-related charges 73 25 --
Originations and purchases of mortgages held for resale (30,273) (15,400) (18,760)
Proceeds from sales of mortgages held for resale 27,839 14,997 20,025
Increase in due from brokers/dealers (90) (1,162) (692)
Increase in accrued receivables, net (145) (132) (430)
(Decrease) increase in due to brokers/dealers (341) 1,585 739
Increase (decrease) in accrued liabilities, net 238 88 (229)
Other, net (1,917) (219) 468
- -----------------------------------------------------------------------------------------------------------
Net cash flow (used in) provided by operating activities (1,604) 2,234 3,483
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of securities available for sale (5,516) (3,998) (5,682)
Proceeds from sales of securities available for sale 3,000 2,766 16,313
Proceeds from maturities of securities available for sale 1,085 884 4,161
Purchases of securities held to maturity (1,234) (1,428) (1,125)
Proceeds from maturities of securities held to maturity 1,415 1,317 791
Net cash and cash equivalents received (paid) for businesses acquired 380 (525) 2,386
Purchases of credit card loan portfolios (1,870) -- --
Net (increase) decrease in loans (3,136) (5,777) 1,617
Net cash and cash equivalents received from sales of business units -- 2,719 --
Net cash received from divestiture of assets and liabilities -- -- 768
Purchases of mortgage servicing rights (485) (271) (293)
Purchases of premises and equipment (189) (152) (164)
- -----------------------------------------------------------------------------------------------------------
Net cash flow (used in) provided by investing activities (6,550) (4,465) 18,772
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits 3,357 (3,335) (6,139)
Net increase (decrease) in short-term borrowings 1,215 3,311 (10,300)
Proceeds from issuance of long-term debt 5,209 492 697
Repayments of long-term debt (889) (1,106) (2,108)
Proceeds from issuance of common stock 64 856 78
Proceeds from issuance of preferred stock -- -- 635
Redemption and repurchase of common and preferred stock (51) (981) (204)
Cash dividends paid (587) (536) (509)
- -----------------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) financing activities 8,318 (1,299) (17,850)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 164 (3,530) 4,405
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 5,574 9,104 4,699
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,738 $ 5,574 $ 9,104
===========================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Summary of Significant Accounting Policies
The accounting and reporting policies of Fleet Financial Group (Fleet or the
corporation) conform to generally accepted accounting principles and prevailing
practices within the financial services industry. The corporation is a
diversified financial services company headquartered in Boston, Massachusetts,
and is organized along functional lines of business, which include: Commercial
Financial Services, Retail Banking, National Financial Services, Fleet
Investment Group, Treasury and all other.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
The following is a summary of the significant accounting policies:
Basis of Presentation. The consolidated financial statements of Fleet include
the accounts of the corporation and its subsidiaries. All material intercompany
transactions and balances have been eliminated. Certain prior year amounts have
been reclassified to conform to current year classifications. All common share
amounts and associated ratios were adjusted to reflect the corporation's
two-for-one common stock split which was effective October 7, 1998.
Cash and Cash Equivalents. For purposes of the Consolidated Statements of Cash
Flows, the corporation defines cash and cash equivalents to include cash, due
from banks, interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
Securities. Securities are classified at the time of purchase, based on
management's intentions, as held to maturity, available for sale or trading
account.
Securities held to maturity are those that management has the positive
intent and ability to hold to maturity. Securities held to maturity are stated
at cost, net of the amortization of any premium and the accretion of any
discount. Securities available for sale are those that management intends to
hold for an indefinite period of time, including securities used as part of the
asset/liability management strategy, that may be sold in response to changes in
interest rates, prepayment risk, liquidity needs, the desire to increase capital
or other similar factors. Securities available for sale are recorded at their
fair value. Securities that do not have a readily determinable fair value are
stated at cost.
Unrealized losses on an individual security deemed to be other than
temporary are written down to their fair value in the accounting period in which
such determination is made. The specific identification method is used to
determine gains and losses on sales of securities.
Trading account securities, principally debt securities, and other trading
instruments, including foreign exchange and interest-rate derivatives, are
purchased and held primarily for the purpose of sale in the near term. Realized
and unrealized gains and losses on trading instruments are included in trading
revenue. Interest income realized on trading instruments is included in interest
income.
Securities owned and securities sold, but not yet purchased, are valued at
market and the resulting unrealized gains and losses are reflected in the
consolidated statements of income.
Loans. Loans are stated at the principal amounts outstanding, net of unearned
income. Loans are placed on nonaccrual status as a result of past-due status or
a judgment by management that, although payments are current, such action is
prudent. Except in the case of most consumer and residential real estate loans,
loans on which payments are past due 90 days or more are placed on nonaccrual
status, unless they are well-secured and in the process of collection or
renewal. Consumer loans, including residential real estate, are generally placed
on nonaccrual status at 180 days past due, or earlier if deemed to be
uncollectible, and losses are charged off no later than 180 days past due. When
a loan is placed on nonaccrual status, all interest accrued in the current year,
but uncollected, is reversed against interest income; prior year amounts are
charged against the reserve for credit losses. Cash receipts on nonaccruing
commercial loans are generally applied to reduce the unpaid principal balance,
and cash receipts on nonaccruing consumer loans are recognized in income on a
cash basis. Loans can be returned to accrual status when they become current as
to principal and interest or demonstrate a period of performance under the
contractual terms and, in management's opinion, are fully collectible.
Reserve for Credit Losses. The corporation continually evaluates the reserve for
credit losses by performing detailed reviews of certain individual loans,
reviewing historical net charge-off experience of the portfolio as a whole,
evaluating prevailing economic and business conditions, reviewing industry
concentrations, including emerging market risk, and changes in the size and
characteristics of the portfolio, as well as other pertinent factors. The
reserve for credit losses related to loans that are identified as impaired,
which are primarily commercial and commercial real estate loans on nonaccrual
status, is based on discounted cash flows using the loan's effective interest
rate, or the fair value of the collateral for collateral-dependent loans, or the
observable market price of the impaired loan. Based on these analyses, the
reserve for credit losses is maintained at levels considered adequate by
management to provide for loan losses inherent in these portfolios.
Loans, or portions thereof, deemed uncollectible are charged off against
the reserve, while recoveries of amounts previously charged off are credited to
the reserve. Amounts are charged off once the probability of loss has been
established, giving consideration to such factors as the customer's financial
condition, underlying collateral and guarantees, and general and industry
economic conditions.
Mortgages Held for Resale. Mortgages held for resale are recorded at the lower
of aggregate cost or market value. Market value is determined by outstanding
commitments from investors or by current investor yield requirements.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Servicing Rights (MSRs). The corporation recognizes rights to service
mortgage loans as separate assets. The total cost of mortgage loans sold or
securitized is allocated between loans and servicing rights based upon the
relative fair values of each. Purchased MSRs are initially recorded at fair
value. Capitalized MSRs are assessed for impairment based upon the fair value of
those rights. Fair values are estimated based on market prices for similar MSRs
and on the discounted anticipated future net cash flows considering market loan
prepayment predictions, interest rates, servicing costs and other economic
factors. For purposes of impairment evaluation and measurement, the corporation
stratifies MSRs based on predominant risk characteristics of the underlying
loans, including loan type, amortization type (fixed or adjustable) and note
rate. To the extent that the carrying value of MSRs exceeds fair value by
individual stratum, a valuation reserve is established, which is adjusted in the
future as the value of MSRs increases or decreases. The cost of MSRs is
amortized in proportion to and over the period of estimated net servicing
income.
Due to/Due from Brokers/Dealers. Receivables from brokers/dealers and clearing
organizations include amounts receivable for securities failed to deliver,
certain deposits for securities borrowed, amounts receivable from clearing
organizations relating to open transactions, good-faith and margin deposits, and
commissions and floor-brokerage receivables. Payables to brokers/dealers and
clearing organizations include amounts payable for securities failed to receive,
certain deposits received for securities loaned, amounts payable to clearing
organizations on open transactions, and floor-brokerage payables. In addition,
the net receivable or payable arising from unsettled trades is reflected in
these captions.
Intangible Assets. Intangible assets are generally amortized on a straight-line
basis over the estimated period benefited. The excess of cost over the fair
value of net assets acquired (goodwill) in business combinations is amortized
over appropriate periods given the characteristics of the assets acquired. In
certain acquisitions, a core deposit intangible asset is recorded and amortized
over a period not to exceed ten years. Purchased credit card intangibles are
amortized over a period not to exceed six years. The corporation periodically
reviews its intangible assets for events or changes in circumstances that may
indicate that the carrying amount of the assets may not be recoverable, in which
case an impairment charge may be recorded.
Income Taxes. The corporation records deferred tax assets and liabilities for
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Risk-Management Activities. The corporation enters into certain interest-rate
instruments, including interest-rate swaps, cap and floor agreements, and
futures contracts to manage exposure to interest-rate risk associated with
interest-earning assets and interest-bearing liabilities. For those
interest-rate instruments that alter the repricing characteristics of assets or
liabilities, the net differential to be paid or received on the instruments is
treated as an adjustment to the yield on the underlying assets or liabilities
(the accrual method).
To qualify for accrual accounting, the interest-rate instrument must be
designated to specific assets or liabilities or pools of similar assets or
liabilities and must effectively alter the interest-rate characteristics of the
related assets or liabilities. For instruments that are designated to
floating-rate assets or liabilities to be effective, there must be high
correlation between the floating interest-rate index on the underlying asset or
liability and the offsetting rate on the derivative. The corporation measures
initial and ongoing correlation by statistical analysis of the relative
movements of the interest-rate indices over time.
If correlation were to cease on any interest-rate instrument hedging net
interest income, it would then be accounted for as a trading instrument. If an
interest-rate instrument hedging net interest income is terminated, the gain or
loss is deferred and amortized over the shorter of the remaining contractual
life of the terminated risk-management instrument or the maturity of the
designated asset or liability. If the designated asset or liability matures, is
sold, is settled or its balance falls below the notional amount of the
instrument, the hedge is usually terminated; if not, accrual accounting is
discontinued to the extent that the notional amount exceeds the balance, and
accounting for trading instruments is applied.
The corporation also uses interest-rate instruments and combinations of
interest-rate instruments to hedge the value of the corporation's mortgage
servicing portfolio. Such instruments are designated as hedges of specific
strata of MSRs. To qualify for hedge accounting, net changes in value of the
hedges are expected to be highly correlated with changes in the value of the
hedged MSRs, and combinations of options purchased and sold must be entered into
simultaneously and result in a net purchased option position. Changes in the
value of risk-management instruments are treated as adjustments to the carrying
value of the hedged MSRs.
If correlation were to cease on the interest-rate instrument hedging MSRs,
they would then be accounted for as trading instruments. If an interest-rate
instrument hedging MSRs is terminated, the gain or loss is treated as an
adjustment to the carrying value of hedged MSRs and amortized over its remaining
life.
Note 2.
Mergers, Acquisitions, and Divestitures
On February 1, 1998, the corporation consummated its acquisition of The Quick &
Reilly Group, Inc. (Quick & Reilly), one of the country's largest discount
brokerage
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
firms. The acquisition was accounted for as a pooling-of-interests and,
therefore, these consolidated financial statements have been restated for all
periods presented to include the results of operations, financial position and
changes in cash flows of Quick & Reilly. Under the terms of the Quick & Reilly
merger, approximately 44 million Fleet common shares were exchanged for all of
the outstanding Quick & Reilly common shares at an exchange ratio of .289 shares
of Fleet for each share of Quick & Reilly.
On February 20, 1998, the corporation consummated its acquisition of the
consumer credit card operations of Advanta Corporation. Since this acquisition
was accounted for under the purchase method of accounting, the results of the
acquisition are included for the periods subsequent to the acquisition date. The
acquisition provided approximately $11.5 billion of managed credit card
receivables, of which approximately $2 billion reside on the balance sheet in
consumer loans. Purchased credit card intangible of approximately $150 million
was recorded and is being amortized over 6 years. Additionally, goodwill of
approximately $500 million was recorded and is being amortized on a
straight-line basis over 15 years. Subject to the level of earnings, Fleet may
be required to make additional payments up to $100 million over 5 years, which
if paid, will be recorded as goodwill.
On December 18, 1998, the corporation acquired Merrill Lynch Specialists,
Inc. (MLSI), a New York Stock Exchange (NYSE) specialist firm, from Merrill
Lynch & Co., Inc. The management staff and listings of MLSI merged with JJC
Specialist, a division of Fleet Securities, Inc. Goodwill of approximately $106
million was recorded and is being amortized on a straight-line basis over 15
years.
During the fourth quarter of 1998, the corporation entered into a
definitive agreement with Sanwa Bank, Ltd. to purchase its subsidiary, Sanwa
Business Credit (Sanwa), a leasing and asset-based lending company. Sanwa offers
a wide variety of asset-based lending, equipment leasing and vendor finance
programs throughout the United States and has approximately $6 billion in
assets. This acquisition closed on February 1, 1999. Goodwill of approximately
$385 million was recorded and is being amortized on a straight-line basis over
25 years.
On December 10, 1997, Fleet consummated its acquisition of Columbia
Management Company (Columbia), a Portland, Oregon-based asset management company
with approximately $21 billion of assets under management. Goodwill of
approximately $466 million was initially recorded in connection with this
transaction and is being amortized on a straight-line basis over 30 years. Fleet
may be required to make additional payments up to $110 million in accordance
with an earnout calculation which, if paid, will be recorded as goodwill. Fleet
accounted for this acquisition under the purchase method of accounting.
Accordingly, the corporation's financial statements include the effect of
Columbia for the periods subsequent to the December 10, 1997 acquisition date.
During 1997, the corporation sold Option One, a mortgage banking
subsidiary; the corporate trust division; and its indirect auto lending
portfolio. The pretax net gain recorded on these sales totaled $175 million.
On May 1, 1996, the corporation acquired from National Westminster Plc
substantially all of the net assets of certain subsidiaries of NatWest Bancorp
(NatWest). The acquisition of NatWest contributed approximately $13 billion and
$18 billion of loans and deposits, respectively, and approximately 300 branches
in New York and New Jersey. In accordance with the NatWest merger agreement,
Fleet paid a purchase price at closing of $2.7 billion. Goodwill of
approximately $660 million was initially recorded in connection with this
transaction and is being amortized on a straight-line basis over 15 years.
Subject to the level of earnings of NatWest, Fleet may be required to make
additional earnout payments of up to $560 million over eight years to be
recorded as goodwill, if paid, of which $142 million was paid in 1998 and $270
million to date. The transaction was accounted for under the purchase method of
accounting. Accordingly, the corporation's financial statements include the
effect of NatWest for the period subsequent to the May 1, 1996 acquisition date.
Note 3.
Securities
<TABLE>
<CAPTION>
1998 1997
Gross Gross Gross Gross
December 31 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government agencies $ 434 $ 3 $ -- $ 437 $ 1,126 $ 8 $ -- $ 1,134
Mortgage-backed securities 7,784 200 2 7,982 6,177 123 2 6,298
Other debt securities 792 11 1 802 186 3 -- 189
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 9,010 214 3 9,221 7,489 134 2 7,621
- ----------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 292 -- -- 292 256 27 1 282
Other securities 211 -- -- 211 210 -- -- 210
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 9,513 214 3 9,724 7,955 161 3 8,113
- ----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
State and municipal 1,056 5 -- 1,061 1,238 5 -- 1,243
Other debt securities 12 -- -- 12 11 -- -- 11
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,068 5 -- 1,073 1,249 5 -- 1,254
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities $10,581 $ 219 $ 3 $10,797 $ 9,204 $ 166 $ 3 $ 9,367
==================================================================================================================================
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from sales of debt securities during 1998, 1997 and 1996 were $3
billion, $3 billion and $16 billion, respectively. Gross gains of $48 million
and gross losses of $7 million were realized on those sales in 1998, gross gains
of $19 million and gross losses of $9 million were realized on those sales in
1997, and gross gains of $73 million and gross losses of $48 million were
realized on those sales in 1996. Net realized gains on sales of marketable
equity securities were $33 million, $23 million and $18 million in 1998, 1997
and 1996, respectively.
The amortized cost and estimated market value, by contractual maturity, of
debt securities held to maturity and securities available for sale are shown in
the following tables. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Maturities of Securities Available for Sale
December 31, 1998 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
===============================================================================
Amortized cost:
U.S. Treasury
and government
agencies $403 $ 10 $ 21 $ -- $ 434
Mortgage-backed
securities -- 4 1,258 6,522 7,784
Other debt securities 5 189 593 5 792
- -------------------------------------------------------------------------------
Total debt securities $408 $203 $1,872 $6,527 $9,010
- -------------------------------------------------------------------------------
Percent of total
debt securities 4.53% 2.25% 20.78% 72.44% 100%
Weighted average yield(a) 6.13 6.26 6.41 6.68 6.59
- -------------------------------------------------------------------------------
Market value $410 $205 $1,899 $6,707 $9,221
===============================================================================
Maturities of Securities Held to Maturity
December 31, 1998 Within 1 to 5 5 to 10 After 10
Dollars in millions 1 Year Years Years Years Total
===============================================================================
Amortized cost:
State and municipal $ 954 $ 76 $ 22 $ 4 $1,056
Other debt securities -- 12 -- -- 12
- -------------------------------------------------------------------------------
Total debt securities $ 954 $ 88 $ 22 $ 4 $1,068
- -------------------------------------------------------------------------------
Percent of total
debt securities 89.33% 8.24% 2.06% .37% 100%
Weighted average yield(a) 5.70 7.83 9.07 6.60 5.93
- -------------------------------------------------------------------------------
Market value $ 954 $ 90 $ 25 $ 4 $1,073
===============================================================================
(a) A tax-equivalent adjustment has been included in the calculations of the
yields to reflect this income as if it had been fully taxable. The
tax-equivalent adjustment is based upon the applicable federal and state
income tax rates.
Note 4.
Loans
<TABLE>
<CAPTION>
December 31
Dollars in millions 1998 1997 1996 1995 1994
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Loans:
Commercial and industrial $ 37,167 $32,000 $29,107 $23,052 $19,520
Residential real estate 9,314 10,019 8,048 11,475 8,529
Consumer 13,316 11,493 13,642 10,796 11,700
Commercial real estate:
Construction 1,079 890 1,074 606 666
Interim/permanent 4,295 4,787 5,379 4,414 4,789
- -------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 65,171 59,189 57,250 50,343 45,204
- -------------------------------------------------------------------------------------------------------------------------
Lease financing:
Lease receivables 4,316 3,342 2,587 2,267 1,765
Estimated residual value 1,075 936 688 520 212
Unearned income (1,166) (902) (664) (564) (494)
- -------------------------------------------------------------------------------------------------------------------------
Lease financing, net of unearned income(a) 4,225 3,376 2,611 2,223 1,483
- -------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $ 69,396 $62,565 $59,861 $52,566 $46,687
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The corporation's leases consist principally of full-payout, direct
financing leases. The corporation's investment in leverage leases totaled
$1,355 million and $935 million for 1998 and 1997, respectively. For
federal income tax purposes, the corporation has the tax benefit of
depreciation on the entire leased unit and interest on the long-term debt.
Deferred taxes arising from leverage leases totaled $858 million in 1998
and $503 million in 1997. Future minimum lease payments to be received are
$608 million, 1999; $571 million, 2000; $480 million, 2001; $364 million,
2002; $266 million, 2003; $2,027 million, 2004 and thereafter.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total loans increased $6.8 billion from $62.6 billion at December 31, 1997 to
$69.4 billion at December 31, 1998 due primarily to growth in the commercial and
industrial and lease financing portfolios, as well as purchases of various
credit card portfolios.
Concentrations of Credit Risk. Although the corporation is engaged in business
nationwide, the lending done by the banking subsidiaries is primarily
concentrated in New England, New York and New Jersey.
Note 5.
Reserve for Credit Losses
Year ended December 31
Dollars in millions 1998 1997 1996
===============================================================================
Balance at beginning of year $ 1,432 $ 1,488 $ 1,321
Provision charged to income 470 322 213
Loans charged off (609) (514) (484)
Recoveries of loans charged off 139 138 114
Acquisitions/other 120 (2) 324
- -------------------------------------------------------------------------------
Balance at end of year $ 1,552 $ 1,432 $ 1,488
===============================================================================
The reserve for credit losses increased $120 million from December 31, 1997, to
$1.552 billion at December 31, 1998. The 1998 provision for credit losses was
$470 million, $148 million higher than the prior year level of $322 million. The
increase in the provision for credit losses was due primarily to increased net
charge-offs in the credit card portfolio.
"Acquisitions/Other" primarily related to the acquisitions of credit card
receivables in 1998, and NatWest in 1996, which added $120 million and $335
million to the reserves, respectively, offset by reserve transfers related to
assets held for sale by accelerated disposition.
Note 6.
Nonperforming Assets
December 31
Dollars in millions 1998 1997 1996 1995 1994
===============================================================================
Nonperforming loans:
Current or less
than 90 days
past due $151 $216 $264 $157 $186
Noncurrent 114 176 432 283 480
Other real estate
owned (OREO) 17 24 27 59 95
- -------------------------------------------------------------------------------
Total NPAs(a) $282 $416 $723 $499 $761
- -------------------------------------------------------------------------------
NPAs as a percent
of outstanding loans
and OREO .41% .66% 1.21% .95% 1.63%
- -------------------------------------------------------------------------------
Accruing loans
contractually
past due 90
days or more $234 $202 $247 $198 $139
===============================================================================
(a) Excludes $46 million, $214 million, and $265 million of NPAs classified as
held for sale by accelerated disposition at December 31, 1998, 1997 and
1996, respectively.
Nonperforming assets (NPAs) decreased $134 million from December 31, 1997 to
December 31, 1998, due primarily to declining levels of nonperforming assets in
all loan and OREO portfolios as a result of the successful resolution of certain
commercial and industrial and commercial real estate loans, as well as $33
million of nonperforming assets transferred to assets held for sale by
accelerated disposition.
The gross interest income that would have been recorded if the
nonperforming loans had been current in accordance with their original terms,
and had been outstanding throughout the period (or since origination if held for
part of the period), was $20 million, $43 million and $71 million in 1998, 1997
and 1996, respectively. The actual amount of interest income on those loans
included in net income for the period was $10 million, $11 million and $18
million in 1998, 1997 and 1996, respectively.
The following table displays the status of impaired loans, which are
primarily commercial and commercial real estate loans on nonaccrual status:
Impaired Loans
December 31
Dollars in millions 1998 1997
================================================================================
Impaired loans with a reserve $121 $228
Impaired loans without a reserve 99 95
- --------------------------------------------------------------------------------
Total impaired loans $220 $323
- --------------------------------------------------------------------------------
Reserve for impaired loans(a) $ 36 $ 63
- --------------------------------------------------------------------------------
Average balance of impaired loans
during the year ended December 31 $248 $422
- --------------------------------------------------------------------------------
(a) The reserve for impaired loans is part of Fleet's overall reserve for
credit losses.
Substantially all of the impaired loans were on nonaccrual status and the amount
of interest income recognized on impaired loans was not material. The
corporation had no material outstanding commitments to lend additional funds to
customers whose loans have been placed on nonaccrual status or the terms of
which have been modified.
Note 7.
Mortgage Servicing Rights
Year ended December 31
Dollars in millions 1998 1997 1996
===============================================================================
Balance at beginning of year $ 1,768 $ 1,566 $ 1,276
Additions 803 586 429
Sales (66) (20) (39)
Deferred hedge (gain)/loss (667) (116) 40
Amortization/Impairment charge (433) (248) (188)
Impairment reserve -- -- 48
- -------------------------------------------------------------------------------
Balance at end of year $ 1,405 $ 1,768 $ 1,566
- -------------------------------------------------------------------------------
Various interest-rate instruments, which are designated as hedges of the MSRs,
are used to manage potential impairment. Changes in fair value of the hedges are
recorded as adjustments to the carrying value of the MSRs and related hedges.
During 1998 and 1997, net hedge gains of $667 million and $116 million,
respectively, were deferred and recorded as adjustments to the carrying value of
the MSRs and the related hedges. The aggregate fair value of the corporation's
MSRs was approximately $1.8 billion as of December 31, 1998. The level of
amortization increased due to an increase in prepayments resulting from a
decline in mortgage interest rates. (See Footnote 17 for further discussion of
MSR risk management).
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8.
Merger-Related Liabilities
During 1998 and 1997, the corporation incurred $73 million and $25 million,
respectively, of merger-related charges in connection with the acquisitions of
Quick & Reilly and the consumer credit card operations of Advanta. At December
31, 1998, the remaining accrued liabilities relating to these charges were $33
million. These charges are direct incremental costs associated with the
acquisitions and are presented in the following table:
Components of Merger-Related Charges
Year ended December 31
Dollars in millions 1998 1997
================================================================================
Professional fees $ 8 $18
Personnel costs 30 7
Other expenses 35 --
- --------------------------------------------------------------------------------
Total $73 $25
================================================================================
Professional fees pertain to investment banking, attorneys, and accounting fees.
Personnel costs relate primarily to the costs of employee severance, retention
payments, and employee assistance for separated employees. Other merger expenses
consist primarily of facilities-related exit costs, conversion costs and the
write off of various assets.
In addition to the above merger-related charges, the corporation incurred
as part of the purchase of the consumer credit card operations of Advanta, $14
million of exit costs that were included in goodwill at the time of the
acquisition. An exit plan had been formulated at the acquisition date and
included a $3 million charge to write off certain facilities, and $11 million of
personnel expenses, primarily severance costs.
Note 9.
Short-Term Borrowings
<TABLE>
<CAPTION>
Securities
Federal Sold Under Other Total
Funds Agreements to Commercial Short-Term Short-Term
Dollars in millions Purchased Repurchase Paper Borrowings Borrowings
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
1998
Balance at December 31 $1,857 $2,599 $ 943 $3,913 $ 9,312
Highest balance at any month-end 2,449 2,599 962 7,225 13,235
Average balance for the year 1,892 2,328 863 3,317 8,400
Weighted average interest rate as of December 31 3.73% 3.88% 5.27% 4.55% 4.27%
Weighted average interest rate paid for the year 5.39 4.27 5.48 5.27 4.76
- --------------------------------------------------------------------------------------------------------------------------
1997
Balance at December 31 $1,005 $2,630 $ 811 $3,059 $ 7,505
Highest balance at any month-end 2,002 2,630 940 3,733 9,305
Average balance for the year 778 2,284 799 1,405 5,266
Weighted average interest rate as of December 31 5.92% 4.77% 5.77% 4.70% 5.06%
Weighted average interest rate paid for the year 5.52 4.48 5.51 4.20 4.69
- --------------------------------------------------------------------------------------------------------------------------
1996
Balance at December 31 $ 488 $2,382 $ 676 $ 648 $ 4,194
Highest balance at any month-end 1,221 3,579 2,889 4,238 11,927
Average balance for the year 838 2,730 1,368 1,415 6,351
Weighted average interest rate as of December 31 5.54% 4.72% 5.41% 4.44% 4.82%
Weighted average interest rate paid for the year 5.21 4.63 5.46 4.73 4.91
==========================================================================================================================
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
generally mature within thirty days of the transaction date. The corporation
generally maintains the control of the securities in repurchase transactions.
Commercial paper and other short-term borrowings generally mature within 90
days, although commercial paper may have a term of up to 270 days. Total
credit facilities available were $1 billion with no amount outstanding at
December 31, 1998 and 1997.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10.
Long-Term Debt
December 31 Maturity
Dollars in millions Date 1998 1997
================================================================================
Senior notes and debentures:
Parent company:
6.849% MTNs 1998-2005 $15 $165
6.00% notes 1998 -- 250
7.25% notes 1999 200 200
7.125% notes 2000 250 250
Floating-rate notes 2000 -- 50
Other 2013 1 1
- --------------------------------------------------------------------------------
Total parent company 466 916
- --------------------------------------------------------------------------------
Affiliates:
6.50% notes 1999-2000 350 350
MTNs 6.24%-7.06% 1998-2003 130 192
FHLB borrowings 1998-2018 238 244
Floating-rate bank notes 1999-2026 2,859 12
Fixed-rate bank notes 2000-2012 307 5
Other 1998-2026 64 70
- --------------------------------------------------------------------------------
Total affiliates 3,948 873
- --------------------------------------------------------------------------------
Total senior notes and debentures 4,414 1,789
- --------------------------------------------------------------------------------
Subordinated notes and debentures:
Floating-rate subordinated notes 1998 -- 100
7.625%-9.85% subordinated notes 1999 450 450
9.00%-9.90% subordinated notes 2001 325 325
6.875%-7.20% subordinated notes 2003 300 300
8.125% subordinated notes 2004 250 250
8.625% subordinated notes 2005 250 250
7.125% subordinated notes 2006 300 300
8.625% subordinated notes 2007 107 107
6.375% subordinated notes 2008 500 --
7.00%-7.75% subordinated MTNs 2011-2013 320 295
6.70%-6.875% subordinated notes 2028 750 --
- --------------------------------------------------------------------------------
Total subordinated notes and debentures 3,552 2,377
- --------------------------------------------------------------------------------
Company-obligated mandatorily redeemable
capital securities of Fleet Capital Trust:
7.05%-8.00% 604 334
Floating-rate 250 --
- --------------------------------------------------------------------------------
Total long-term debt $8,820 $4,500
================================================================================
Fleet has a shelf registration with the Securities and Exchange Commission
(SEC), providing for the issuance of common and preferred stock, senior or
subordinated debt securities, and other debt securities with $2.1 billion of
funds available at December 31, 1998.
The corporation has five statutory business trusts, Fleet Capital Trust I
through Fleet Capital Trust V (Trust I through Trust V), of which the
corporation owns all of the common stock. These trusts exist for the sole
purpose of issuing trust securities and investing the proceeds thereof in an
equivalent amount of junior subordinated debt securities of Fleet.
The sole assets of Trust I through Trust V are $84 million of 8.00%, $250
million of 7.92%, $120 million of 7.05%, $150 million of 7.17% and $250 million
of floating-rate notes, respectively, junior subordinated deferrable interest
debentures due in 2027, 2026, 2028, 2028 and 2028, respectively. The
floating-rate notes pay interest based on the three-month London Interbank
Offered Rate (LIBOR), reset quarterly. The junior subordinated debt securities
are unsecured obligations of Fleet and are subordinate and junior in right of
payment to all present and future senior and subordinated indebtedness and
certain other financial obligations of Fleet. The subordinated debentures and
related income statement effects are eliminated in the corporation's
consolidated financial statements. Fleet fully and unconditionally guarantees
each Trust's obligations under the preferred securities and capital securities.
The fixed-rate subordinated notes all provide for single principal
payments at maturity with the exception of $150 million of 9.85% subordinated
notes and subordinated Medium-Term Notes (MTNs). The subordinated MTNs are
callable as follows: $100 million in 2000; $195 million in 2001; and $25 million
in 2002. The 9.85% subordinated notes mature on June 1, 1999, and at the
corporation's option, the notes will either be exchanged for common stock,
preferred stock, or certain other primary capital securities of the corporation
having a market value equal to the principal amount of the notes, or will be
repaid from the proceeds of other issuances of such securities. The corporation
may, however, at its option, revoke its obligation to redeem the notes with
capital securities based upon the capital treatment of the notes by its primary
regulator or consent by its primary regulator for such revocation. The holders
of the capital notes are subordinate in rights to depositors and other
creditors.
During 1998, the corporation issued $1.3 billion of subordinated debt with
interest rates ranging from 6.375% to 7.00%. All of the parent company
fixed-rate senior notes pay interest semiannually, provide for single principal
payments and are not redeemable prior to maturity.
Long-term senior borrowings of affiliates include $350 million of 6.50%
notes and $130 million of MTNs with rates ranging from 6.24% to 7.06% issued by
Fleet Mortgage Group.
Fleet National Bank issued $3.1 billion of fixed- and floating-rate bank
notes during 1998. The fixed rates range from 6.45% to 7.18%. The floating-rate
bank notes pay interest at rates tied to one-month or three-month LIBOR reset
monthly or quarterly.
As part of its interest-rate risk-management process, the corporation uses
interest-rate swaps to modify the repricing and maturity characteristics of
certain long-term debt. These interest-rate risk-management activities are
discussed in greater detail in Note 17 to the Consolidated Financial Statements.
The aggregate payments required to retire long-term debt are: $873 million
in 1999; $2.511 billion in 2000; $1.487 billion in 2001; $88 million in 2002;
$401 million in 2003; $252 million in 2004; and $3.208 billion thereafter.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11.
Preferred Stock
The following is a summary of the corporation's preferred stock outstanding at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Earliest
December 31 Stated Outstanding Outstanding Redemption Redemption Interest
Dollars in millions, except per share amounts Value Shares at 1998 at 1997 Date Price(a) Per Share(d)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
7.25% Series V perpetual preferred $250 765,000 $191 $191 04/15/2001 $250 10%
6.75% Series VI perpetual preferred 250 600,000 150 150 04/15/2006 250 20
6.60% Series VII cumulative preferred(b) 250 700,000 175 175 04/01/2006 250 20
6.59% Series VIII noncumulative preferred(c) 250 200,000 50 50 10/01/2001 250 20
9.35% cumulative preferred 250 500,000 125 125 01/15/2000 250 10
- -----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock $691 $691
===================================================================================================================================
</TABLE>
(a) Plus accrued but unpaid dividends.
(b) After April 1, 2006, the rate will adjust based on a U.S. Treasury
security rate.
(c) After October 1, 2006, the rate will adjust based on a U.S. Treasury
security rate.
(d) Represents ownership interest in depositary shares.
Dividends on outstanding preferred stock issues are payable quarterly. All the
preferred stock outstanding has preference over the corporation's common stock
with respect to the payment of dividends and distribution of assets in the event
of a liquidation or dissolution of the corporation. Except in certain
circumstances, the holders of preferred stock have no voting rights.
Note 12.
Common Stock
At December 31, 1998, Fleet had 1.2 billion common shares authorized for
issuance with 569.6 million common shares outstanding. Shares reserved for
future issuance in connection with the corporation's stock plans, outstanding
rights and warrants, and stock options totaled 66 million.
The following table presents the warrants that were outstanding as of
December 31, 1998:
Stock Warrants
December 31, 1998 Exercise Expiration
Shares in millions Shares Price Date
================================================================================
13.0 $ 8.83 7/12/01
4.9 21.94 1/27/01
================================================================================
During 1990, Fleet's Board of Directors declared a dividend of one preferred
share purchase right for each outstanding share of Fleet common stock (adjusted
to one-half of a right per share upon Fleet's two-for-one common stock split
which was effective October 7, 1998). Under certain conditions, a right may be
exercised to purchase 1/100 of the corporation's cumulative participating
preferred stock at a price of $50, subject to adjustment. The rights become
exercisable if a party acquires 10% or more (in the case of certain qualified
investors, 15% or more) of the issued and outstanding shares of Fleet common
stock, or after the commencement of a tender or exchange offer for 10% or more
of the issued and outstanding shares. When exercisable under certain conditions,
each right would entitle the holder to receive upon exercise of a right that
number of shares of common stock having a market value of two times the exercise
price of the right. The rights will expire in the year 2000 and may be redeemed
in whole, but not in part, at a price of $.005 per share at any time prior to
expiration or the acquisition of 10% of Fleet common stock.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13.
Earnings Per Share
The following table presents a reconciliation of earnings per share as of
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
Dollars in millions, except per share amounts Basic Diluted Basic Diluted Basic Diluted
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 568,059,117 568,059,117 551,956,482 551,956,482 568,896,262 568,896,262
Additional shares due to:
Stock options -- 7,344,899 -- 5,795,650 -- 3,198,176
Warrants -- 12,365,147 -- 10,852,678 -- 7,931,536
- -----------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 568,059,117 587,769,163 551,956,482 568,604,810 568,896,262 580,025,974
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Net income $1,532 $1,532 $1,367 $1,367 $1,221 $1,221
Less preferred stock dividends (51) (51) (62) (62) (72) (72)
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $1,481 $1,481 $1,305 $1,305 $1,149 $1,149
- -----------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 568,059,117 587,769,163 551,956,482 568,604,810 568,896,262 580,025,974
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share on net income $2.61 $2.52 $2.37 $2.30 $2.02 $1.98
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options and warrants to purchase 810,050 shares of common stock at exercise
prices between $40.22 and $44.16; 8,237,060 shares of common stock at exercise
prices between $31.88 and $37.02; and 7,704,930 shares of common stock at
exercise prices between $22.22 and $27.50 at December 31, 1998, 1997, and 1996,
respectively, were outstanding but not included in the computation of diluted
EPS because the options and warrants were antidilutive.
Note 14.
Management Reporting
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.
Fleet Financial Group is managed through five principal business lines.
These are Commercial Financial Services, Retail Banking, National Financial
Services, Fleet Investment Group, and Treasury. Commercial Financial Services
includes traditional commercial banking, leasing and asset-based lending, as
well as investment banking, government banking, trade finance, and cash
management services. Retail Banking includes the distribution of consumer
financial services and small business lending and deposit services. The National
Financial Services business line includes mortgage banking, credit card
services, student loan processing, and venture capital, all marketed nationally.
Fleet Investment Group provides asset management services to institutional and
wealthy market clients, retail mutual fund and annuity sales, and brokerage,
market-making and securities clearing services. Treasury is responsible for
managing the corporation's securities and residential mortgage portfolios,
asset-liability management function and wholesale funding needs. All Other
includes unallocated support units, the management accounting control units and
certain transactions and events not allocated to specific business lines.
Management accounting control units includes management accounting offsets to
transfer pricing, equity, and provision allocations.
Management Reporting Policies
The financial performance of the corporation is monitored by an internal
profitability measurement system. Monthly financial statements are produced and
reviewed by senior management. Within business units, assets, liabilities, and
equity are match-funded utilizing similar maturity, liquidity and repricing
information. Additionally, equity, provision for credit losses and reserve for
credit losses are determined on an economic basis. The corporation has developed
a risk-adjusted methodology that quantifies risk types (e.g., credit and
operating risk) within business units and assigns capital accordingly. Provision
for credit losses and reserve for credit losses are allocated to each business
line based on economic modeling of long-term expected loss rates. Management
accounting policies are in place for assigning expenses that are not directly
incurred by businesses, such as overhead, operations and technology expense.
Internal users of these services meet with suppliers of services annually, and
are charged on an agreed-upon measure of usage. Management accounting concepts
are periodically refined and results are periodically restated to reflect
methodological and/or management organization changes.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Commercial National Fleet Fleet
December 31, 1998 Financial Retail Financial Investment All Financial
Dollars in millions Services Banking Services Group Treasury Other Group
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:(a)
Net interest income (FTE) $ 1,316 $ 1,779 $ 489 $ 185 $ 118 $ 18 $ 3,905
Noninterest income 416 620 1,015 1,016 122 48 3,237
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,732 2,399 1,504 1,201 240 66 7,142
Noninterest expense 796 1,493 810 789 64 177 4,129
Provision for credit losses 207 117 297 5 14 (170) 470
Taxes/FTE adjustment 285 362 155 169 35 5 1,011
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 444 $ 427 $ 242 $ 238 $ 127 $ 54 $ 1,532
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average total assets $44,021 $13,088 $12,952 $ 9,200 $18,088 $ 659 $98,008
Other Financial Data (pre-tax):
Return on Equity 19.86% 24.34% 11.67% 21.31% 42.16% n/m 18.07%
Return on Assets 1.01 3.26 1.87 2.59 .70 n/m 1.56
Expenditures for long-lived assets $ 9 $ 61 $ 26 $ 3 $ -- $ 90 $ 189
Depreciation and amortization(b) 44 165 505 42 2 149 907
Merger charges 73 73
==============================================================================================================================
<CAPTION>
Commercial National Fleet Fleet
December 31, 1997 Financial Retail Financial Investment All Financial
Dollars in millions Services Banking Services Group Treasury Other Group
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:(a)
Net interest income (FTE) $ 1,212 $ 1,862 $ 289 $ 170 $ 115 $ 91 $ 3,739
Noninterest income 389 578 522 811 87 244 2,631
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,601 2,440 811 981 202 335 6,370
Noninterest expense 740 1,482 452 651 64 326 3,715
Provision for credit losses 218 119 203 5 15 (238) 322
Taxes/FTE adjustment 272 383 59 138 31 83 966
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 371 $ 456 $ 97 $ 187 $ 92 $ 164 $ 1,367
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average total assets $38,664 $14,016 $ 8,345 $ 6,989 $15,664 $ 2,982 $86,660
Other Financial Data (pre-tax):
Expenditures for long-lived assets $ 7 $ 62 $ 15 $ 10 $ 3 $ 55 $ 152
Depreciation and amortization(b) 43 171 288 23 3 102 630
Merger charges 25 25
==============================================================================================================================
<CAPTION>
Commercial National Fleet Fleet
December 31, 1996 Financial Retail Financial Investment All Financial
Dollars in millions Services Banking Services Group Treasury Other Group
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:(a)
Net interest income (FTE) $ 1,174 $ 1,691 $ 266 $ 161 $ 149 $ 57 $ 3,498
Noninterest income 321 430 598 710 73 201 2,333
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,495 2,121 864 871 222 258 5,831
Noninterest expense 750 1,512 510 569 82 89 3,512
Provision for credit losses 196 107 125 5 18 (238) 213
Taxes/FTE adjustment 248 246 88 127 45 131 885
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 301 $ 256 $ 141 $ 170 $ 77 $ 276 $ 1,221
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average total assets $34,401 $14,097 $ 9,081 $ 5,930 $21,847 $ 1,382 $86,738
Other Financial Data (pre-tax):
Expenditures for long-lived assets $ 10 $ 62 $ 17 $ 7 $ 1 $ 67 $ 164
Depreciation and amortization(b) 37 156 222 20 2 91 528
==============================================================================================================================
</TABLE>
(a) Prepared on a fully taxable equivalent basis.
(b) Includes amortization of mortgage servicing rights, core deposit
intangibles, purchased credit card intangibles and goodwill.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15.
Employee Benefits
Stock Option Plan. The corporation has a stock option plan under which incentive
and nonqualified stock options are granted to certain employees for the purchase
of Fleet common stock at the fair value on the date of grant. Options granted
under the plan generally vest over a three- to five-year period and expire at
the end of ten years.
The following tables summarize information about stock options outstanding
at December 31:
Stock Options
<TABLE>
<CAPTION>
December 31 1998 1997 1996
====================================================================================================================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 29,646,044 $23.35 26,108,868 $18.74 23,460,616 $15.92
Granted 10,330,142 39.26 9,120,516 32.00 8,798,870 22.36
Exercised (3,447,862) 18.88 (4,035,500) 14.52 (5,141,958) 12.15
Forfeited (1,217,173) 26.50 (1,547,840) 19.58 (1,008,660) 18.54
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 35,311,151 $28.32 29,646,044 $23.35 26,108,868 $18.74
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 14,591,445 $21.45 10,981,724 $17.98 8,785,142 $14.86
====================================================================================================================
</TABLE>
Stock Options Outstanding and Exercisable
<TABLE>
<CAPTION>
December 31, 1998 Options Outstanding Options Exercisable
==============================================================================================================
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
==============================================================================================================
<S> <C> <C> <C> <C> <C>
$ 4- $18 6,197,411 4.7 Years $ 15.91 5,490,645 $ 15.62
$19- $24 11,006,114 7.0 Years 21.89 6,579,651 21.90
$25- $45 18,107,626 9.1 Years 36.48 2,521,149 32.96
- --------------------------------------------------------------------------------------------------------------
$ 4- $45 35,311,151 7.7 Years $ 28.32 14,591,445 $ 21.45
==============================================================================================================
</TABLE>
Restricted Stock Plan. The corporation maintains restricted stock plans under
which key employees are awarded shares of the corporation's common stock subject
to certain vesting requirements.
Certain restricted stock granted in 1998, 1997 and 1996 vests, in whole or
in part, only if certain preestablished performance goals are attained. The
performance periods range from two to five years. The remaining restricted stock
vests over three years. During 1998, 1997 and 1996, grants of 538,000; 475,000;
and 194,000 shares, respectively, of restricted stock were made. As of December
31, 1998, 1997 and 1996, outstanding shares totaled 954,333; 629,000; and
609,500, respectively, with average grant prices of $36.18, $29.85 and $17.84,
respectively. Compensation cost recognized for restricted stock during 1998,
1997 and 1996 was $9 million, $7 million and $3 million, respectively.
Pro Forma Fair Value Information. The corporation has adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." This standard defines a fair
value-based method of accounting for employee stock options and similar equity
instruments, but permits companies to continue to use the intrinsic value-based
method. The corporation has elected to continue the intrinsic value-based
method. Pro forma net income and earnings per share information, as required by
SFAS No. 123, has been calculated as if the corporation had accounted for
employee stock options and other stock-based compensation under the fair value
method. The fair value was estimated as of the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 4.33% for 1998, 6.09% for 1997 and
6.37% for 1996, a dividend yield approximating the current yield, volatility of
the corporation's common stock of 26% for 1998 and 25% for 1997 and 1996. The
weighted average expected life of the stock options is 7 years. The weighted
average grant date fair values of stock options granted during 1998, 1997 and
1996 were $10.28, $8.95 and $6.19, respectively.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility. Because
the corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock-based compensation.
For purposes of pro forma disclosures, the estimated fair value is
amortized on a straight-line basis over the vesting period.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information
Dollars in millions,
except per share amounts 1998 1997 1996
================================================================================
Net income As reported $1,532 $1,367 $1,221
Pro forma 1,500 1,346 1,212
Diluted earnings As reported 2.52 2.30 1.98
per share Pro forma 2.48 2.27 1.97
================================================================================
Pension Plans. The corporation maintains noncontributory, defined benefit
pension plans covering substantially all employees. Effective January 1, 1997,
the corporation amended the defined benefit pension plan that covers the
majority of its employees from a final average pay plan to a cash balance plan.
Benefits are based on length of service, level of compensation and an interest
crediting rate. The amounts contributed to the plans are determined annually
based upon the amount needed to satisfy the Employment Retirement Income
Security Act (ERISA) funding standards. Assets of the plans are primarily
invested in listed stocks, corporate obligations, and U.S. Treasury and
government agency obligations.
The corporation also maintains supplemental, noncontributory defined
benefit plans covering certain employees whose benefits exceed the Internal
Revenue Service limitation under the corporation's qualified defined benefit
plans.
Pension and Postretirement Benefit Plans
Pension Postretirement
Benefits Benefits
December 31 ---------------------------------------
Dollars in millions 1998 1997 1998 1997
===============================================================================
Change in benefit obligation
Benefit obligation at
beginning of year $957 $868 $140 $139
Service cost 41 40 -- --
Interest cost 69 64 8 11
Participant contributions -- -- 5 5
Plan amendments 13 (51) -- --
Benefits paid (108) (81) (20) (24)
Actuarial loss or (gain) 66 117 (12) 9
===============================================================================
Benefit obligation at
end of year $1,038 $957 $121 $140
===============================================================================
Change in plan assets
Fair value of plan assets
at beginning of year $1,055 $923 $19 $16
Actual return on plan assets 149 202 4 3
Employer contributions 60 11 27 19
Participant contributions -- -- 5 5
Benefits paid (108) (81) (20) (24)
===============================================================================
Fair value of plan assets
at end of year $1,156 $1,055 $35 $19
===============================================================================
Reconciliation of funded status
Funded status $118 $98 $(86) $(121)
Unrecognized actuarial
loss or (gain) 80 54 (14) (1)
Unrecognized transition
(asset) or obligation (1) (1) 62 66
Unrecognized prior
service cost 1 (6) (1) --
- -------------------------------------------------------------------------------
Net amount recognized
at year-end $198 $145 $(39) $(56)
===============================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $158 million, $112 million and $14 million, respectively, as
of December 31, 1998 and $139 million, $98 million and $12 million,
respectively, as of December 31, 1997.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension and Postretirement Benefit Expense
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
December 31 -----------------------------------------------------------------
Dollars in millions 1998 1997 1996 1998 1997 1996
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit costs
Service cost $ 41 $ 40 $ 43 $ -- $ -- $ 1
Interest cost 69 64 57 8 11 10
Expected return on plan assets (105) (90) (75) (2) (2) (1)
Net amortization and recognized actuarial loss 6 -- 6 5 3 3
- --------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 11 $ 14 $ 31 $ 11 $ 12 $ 13
- --------------------------------------------------------------------------------------------------------------------
Assumptions as of December 31
Discount rate 6.75% 7.25% 7.85% 6.75% 7.25% 7.85%
Expected rate of return on plan assets 10.00 10.00 10.00 10.00 10.00 10.00
Rate of compensation increase 5.00 5.00 5.00 -- -- --
Healthcare cost trend rate -- -- -- 6.50 8.50 9.50
====================================================================================================================
</TABLE>
The corporation maintains various defined contribution savings plans covering
substantially all employees. The corporation's savings plan expense was $51
million, $50 million and $43 million for 1998, 1997 and 1996, respectively.
Postretirement Healthcare Benefits. In addition to providing pension benefits,
the corporation provides healthcare cost assistance and life insurance benefits
for retired employees. The cost of providing these benefits was $11 million, $12
million and $13 million in 1998, 1997 and 1996, respectively.
The healthcare cost trend rate was 6.50% as of December 31, 1998,
decreasing gradually to 4.50% through the year 2001, and level thereafter. The
healthcare cost trend rate assumption has a minimal effect on the amounts
reported. A one-percentage point change in the assumed healthcare cost trend
rate would have had the following effects on 1998 service and interest cost and
the accumulated postretirement benefit obligation at December 31, 1998:
Healthcare Cost Trend
One-Percentage One-Percentage
Dollars in thousands Point Increase Point Decrease
===============================================================================
Effect on total of service and interest
cost components for 1998 $195 $(190)
Effect on year-end 1998
postretirement benefit obligation 2,141 (2,090)
===============================================================================
Note 16.
Income Taxes
The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 were as follows:
Income Tax Expense
December 31
Dollars in millions 1998 1997 1996
================================================================================
Current income taxes:
Federal $669 $512 $305
State and local 129 74 101
- --------------------------------------------------------------------------------
798 586 406
Deferred income tax expense:
Federal 139 244 369
State and local 38 97 74
- --------------------------------------------------------------------------------
177 341 443
Total income tax expense:
Federal 808 756 674
State and local 167 171 175
- --------------------------------------------------------------------------------
Applicable income taxes $975 $927 $849
================================================================================
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax expense for the years ended December 31, 1998, 1997 and 1996,
varied from the amount computed by applying the statutory income tax rate to
income before taxes. A reconciliation between the statutory and effective tax
rates follows:
Statutory Rate Analysis
December 31 1998 1997 1996
==============================================================================
Tax at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in taxes resulting from:
State and local income taxes, net
of federal income tax benefit 4.3 4.9 6.4
Goodwill amortization 1.5 1.4 1.6
Tax-exempt income (1.1) (1.0) (1.0)
Other, net (0.8) 0.1 (1.0)
- ------------------------------------------------------------------------------
Effective tax rate 38.9% 40.4% 41.0%
==============================================================================
The corporation had $485 million and $521 million of state net operating loss
carryforwards at December 31, 1998 and 1997, respectively. These carryforwards
will begin to expire in 1999 and continue through 2013.
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amount used for income tax purposes.
Significant components of the corporation's deferred tax assets and deferred tax
liabilities as of December 31, 1998 and 1997, are presented in the following
table:
Net Deferred Tax Liability
December 31
Dollars in millions 1998 1997
================================================================================
Deferred tax assets:
Reserve for credit losses $538 $540
Expenses not currently deductible 111 248
Other 347 231
- --------------------------------------------------------------------------------
Total gross deferred tax assets 996 1,019
Less: valuation reserve 23 23
- --------------------------------------------------------------------------------
Total deferred tax assets 973 996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing 1,119 805
Mortgage banking 162 292
Other 305 273
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 1,586 1,370
- --------------------------------------------------------------------------------
Net deferred tax liability $613 $374
================================================================================
The corporation has evaluated the available evidence supporting the realization
of its gross tax assets of $973 million and $996 million at December 31, 1998
and 1997, respectively, including the amount and timing of future taxable
income, and has determined it is more likely than not that the asset will be
realized. Given the nature of state tax laws, the corporation believes that
uncertainty remains concerning the realization of tax benefits in various state
jurisdictions. State valuation reserves in the amount of $23 million,
established at December 31, 1997, are still in effect at December 31, 1998.
These benefits may, however, be recorded in the future either as they are
realized or, as it becomes more likely than not, that such tax benefits or
portions thereof will be realized.
Note 17.
Trading Activities, Other Derivative Financial
Instruments and Off-Balance Sheet Items
Trading Activities. All of the corporation's trading positions are currently
stated at market value with realized and unrealized gains and losses reflected
in other noninterest income. The following table represents the notional or
contractual amount of Fleet's off-balance sheet, interest-rate and foreign
exchange trading instruments and related credit exposure:
Trading Instruments with Off-Balance Sheet Risk
Contract or
Notional Credit
December 31 Amount Exposure
Dollars in millions 1998 1997 1998 1997
================================================================================
Interest-rate contracts $16,570 $8,959 $165 $55
Foreign exchange contracts 2,429 2,395 30 53
================================================================================
Notional principal amounts are a measure of the volume of agreements transacted,
but the level of credit exposure is significantly less. The amount of credit
exposure can be estimated by calculating the cost to replace, on a present value
basis and at current market rates, all profitable contracts outstanding at
year-end. Credit exposure disclosures relate to accounting losses that would be
recognized if the counterparties completely failed to perform their obligations.
To manage its level of credit exposure, the corporation deals with
counterparties of good credit standing, establishes counterparty credit limits,
in certain cases has the ability to require securities collateral, and enters
into netting agreements whenever possible.
The amounts disclosed below represent the end-of-period fair value of
derivative financial instruments held or issued for trading purposes and the
average aggregate fair values during the year for those instruments:
Trading Instruments
Fair Value Average
December 31, 1998 (Carrying Fair
Dollars in millions Amount) Value
===============================================================================
Interest-rate contracts:
Assets $165 $130
Liabilities (136) (103)
Foreign exchange contracts:
Assets $30 $38
Liabilities (31) (39)
===============================================================================
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk-Management Activities. The corporation's principal objective in holding or
issuing derivatives for purposes other than trading, is the management of
interest-rate risk.
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. In managing net interest income, the
corporation uses interest-rate swaps to offset the general asset-sensitivity of
the core bank. Additionally, the corporation uses interest-rate swaps to offset
basis risk, including the specific exposure to changes in prime rate.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its MSRs to prepayments. The mortgage borrower has the
option to prepay the mortgage loans at any time. When mortgage interest rates
decline, borrowers have a greater incentive to prepay mortgage loans through a
refinancing. To mitigate the risk of declining long-term interest rates,
increased mortgage prepayments, and the potential impairment of the MSRs, the
corporation uses a variety of risk-management instruments, including
interest-rate swaps, caps and floors, options on swaps, and exchange-traded
options on Treasury bond and note futures. These instruments gain value as
interest rates decline, mitigating the impairment of MSRs. Increases in the
value of these instruments and related cash flows aggregating $667 million were
recorded as adjustments to the carrying value of the MSRs during 1998.
The following table presents the notional amount and fair value of
risk-management instruments at December 31, 1998 and 1997:
Risk-Management Instruments
1998 1997
December 31 Notional Fair Notional Fair
Dollars in millions Amount Value Amount Value
===============================================================================
Interest-rate risk-management
instruments:
Receive-fixed/pay-variable $12,048 $165 $9,509 $48
Basis swaps 2,779 -- 2,729 (1)
Mortgage banking
risk-management instruments:
Receive-fixed/pay-variable,
PO swaps 7,011 83 2,502 --
Interest-rate floors
and options on swaps 39,560 517 23,870 138
Interest-rate caps and
cap corridors 14,759 68 4,309 (25)
Call options purchased 3,150 27 -- --
Call options sold 730 (5) -- --
- -------------------------------------------------------------------------------
Total risk-management
instruments $80,037 $855 $42,919 $160
===============================================================================
Interest-rate swap agreements involve the exchange of fixed- and variable-rate
interest payments based upon a notional principal amount and maturity date.
Interest-rate basis swaps involve the exchange of floating-rate interest
payments based on various indices, such as U.S. Treasury bill and LIBOR. In a
purchased interest-rate floor agreement, cash interest payments are received
only if current interest rates fall below a predetermined interest rate.
Purchased or sold interest-rate cap agreements are similar to interest-rate
floor agreements except that cash interest payments are received or made only if
current interest rates rise above predetermined interest rates. Options on swap
agreements provide the holder the right to enter into an interest-rate swap at a
predetermined rate and time in the future.
The corporation's interest-rate risk-management instruments had credit
exposure of $258 million at December 31, 1998, versus $61 million at December
31, 1997. The corporation's mortgage banking risk-management instruments had
credit exposure of $349 million at December 31, 1998, versus $114 million at
December 31, 1997. The increase in the credit exposure from year-to-year mainly
reflects the increase in the market value of the remaining risk-management
instruments. The periodic net settlement of interest-rate risk-management
instruments is recorded as an adjustment to net interest income and generated
$45 million, $52 million and $12 million of net interest income during 1998,
1997 and 1996, respectively. As of December 31, 1998, the corporation had net
deferred income of $11.5 million related to terminated interest-rate swap
contracts, which will be amortized over the remaining life of the underlying
terminated contracts of approximately 8 years.
Other Financial Instruments
Contract or
December 31 National Amount
Dollars in millions 1998 1997
================================================================================
Other financial instruments whose notional or
contractual amounts exceed the amount of
potential credit risk:
Commitments to sell loans $6,069 $2,247
Commitments to originate or purchase loans 3,206 1,308
Financial instruments whose notional or contractual
amounts represent potential credit risk:
Commitments to extend credit 105,706 50,865
Letters of credit, financial guarantees and foreign
office guarantees (net of participations) 6,092 4,996
Assets sold with recourse 9,122 386
================================================================================
Commitments to sell loans have off-balance sheet market risk to the extent that
the corporation does not have available loans to fill those commitments, which
would require the corporation to purchase loans in the open market. Commitments
to originate or purchase loans have off-balance sheet market risk to the extent
the corporation does not have matching commitments to sell loans obtained under
such commitments, which could expose the corporation to lower-of-cost or
market-valuation adjustments in a rising interest-rate environment.
Commitments to extend credit are agreements to lend to customers in
accordance with contractual provisions. These commitments usually are for
specific periods or contain termination clauses and may require the payment of a
fee. The total amounts of unused commitments do not necessarily represent future
cash requirements in that commitments often expire without being drawn upon.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments to Extend Credit
December 31
Dollars in millions 1998 1997
================================================================================
Commercial and industrial loans $39,837 $34,059
Revolving, open-end loans secured by residential
properties (e.g., home equity lines) 3,672 3,641
Credit card lines 53,546 6,919
Residential mortgages 3,542 1,531
Commercial real estate 2,461 1,776
Other unused commitments 2,648 2,939
- --------------------------------------------------------------------------------
Total $105,706 $50,865
================================================================================
Letters of credit and financial guarantees are agreements whereby the
corporation guarantees the performance of a customer to a third party.
Collateral is required to support letters of credit in accordance with
management's evaluation of the creditworthiness of each customer. The credit
exposure assumed in issuing letters of credit is essentially equal to that in
other lending activities. Management does not anticipate any material losses as
a result of these transactions.
Note 18.
Fair Value of Financial Instruments
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and judgments made regarding risk characteristics of various
financial instruments, discount rates, estimates of future cash flows, future
expected loss experience, and other factors. Changes in assumptions could
significantly affect these estimates and the resulting fair values. Derived fair
value estimates cannot necessarily be substantiated by comparison to independent
markets and, in many cases, could not be realized in an immediate sale of the
instrument. Also, because of differences in methodologies and assumptions used
to estimate fair values, Fleet's fair values should not be compared to those of
other financial institutions.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the corporation.
The following describes the methods and assumptions used by Fleet in
estimating the fair values of financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the balance
sheet approximate fair values because maturities are less than 90 days.
Securities. Fair values are based primarily on quoted market prices.
Loans. The fair values of certain commercial and consumer loans are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. The
carrying value of certain other loans approximates fair value due to the
short-term and/or frequent repricing characteristics of these loans. The fair
value of the credit card portfolio excludes the value of the ongoing customer
relationships, a factor that can represent a significant premium over the
carrying value. For residential real estate loans, fair value is estimated by
reference to quoted market prices. For nonperforming loans and certain loans
where the credit quality of the borrower has deteriorated significantly, fair
values are estimated by discounting expected cash flows at a rate commensurate
with the risk associated with the estimated cash flows, based on recent
appraisals of the underlying collateral, or by reference to recent loan sales.
Mortgages Held for Resale. Fair value is estimated using the quoted market
prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained.
Deposits. The fair value of deposits with no stated maturity or a maturity of
less than 90 days is considered to be equal to the carrying amount. The fair
value of time deposits is estimated by discounting contractual cash flows using
interest rates currently offered on the deposit products. The fair value
estimates for deposits do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of alternative
forms of funding (core deposit intangibles).
Short-Term Borrowings. Short-term borrowings generally mature in 90 days or less
and, accordingly, the carrying amount reported in the balance sheet approximates
fair value.
Long-Term Debt. The fair value of Fleet's long-term debt, including the
short-term portion, is estimated based on quoted market prices for the issues
for which there is a market or by discounting cash flows based on current rates
available to Fleet for similar types of borrowing arrangements.
Off-Balance Sheet Instruments. Fair values for off-balance sheet instruments are
estimated based on quoted market prices or dealer quotes and is the amount the
corporation would receive or pay to execute a new agreement with identical terms
considering current interest rates.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
1998 1997
December 31 Carrying Fair Carrying Fair
Dollars in millions Value Value Value Value
===============================================================================
On-balance sheet financial assets:
Financial assets for which
carrying value approximates
fair value $6,288 $6,288 $6,085 $6,085
Securities 10,792 10,797 9,362 9,367
Loans(a) 63,679 65,251 57,805 59,146
Mortgages held for resale 3,960 3,960 1,526 1,526
Trading account securities 355 355 290 290
Trading instruments 195 195 108 108
Other 1,046 1,046 412 412
On-balance sheet financial liabilities:
Deposits with no stated maturity 48,096 48,096 43,633 43,633
Time deposits 21,582 22,023 20,102 20,470
Short-term borrowings 9,312 9,312 7,505 7,505
Long-term debt 8,820 9,104 4,500 4,612
Trading instruments 167 167 92 92
Other 261 261 212 212
Off-balance sheet financial
instruments:
Interest-rate risk-management
instruments 32 165 1 47
Commitments to originate
or purchase loans -- 15 -- 7
Commitments to sell loans 2 (1) 1 (5)
===============================================================================
(a) Excludes net book value of leases of $4,165 million and $3,328 million at
December 31, 1998 and 1997, respectively.
Certain assets which are not financial instruments and, accordingly, are not
included in the above fair values, contribute substantial value to the
corporation in excess of the related amounts recognized in the balance sheet.
These include the core deposit intangibles and the related retail banking
network, the value of customer relationships associated with certain types of
consumer loans (particularly the credit card portfolio), lease financing
business, and mortgage servicing rights.
Note 19.
Commitments, Contingencies, and Other Disclosures
The corporation and its subsidiaries are involved in various legal proceedings
arising out of, and incidental to, their respective businesses. Management of
the corporation, based on its review with counsel of the development of these
matters to date, does not anticipate that any losses incurred as a result of
these legal proceedings would have a materially adverse effect on the
corporation's financial position.
Lease Commitments. The corporation has entered into a number of noncancelable
operating lease agreements for premises and equipment. The minimum annual rental
commitments under these leases at December 31, 1998, exclusive of taxes and
other charges, were as follows: $133 million, 1999; $117 million, 2000; $102
million, 2001; $86 million, 2002; $62 million, 2003; and $243 million, 2004 and
thereafter. Total rental expense for 1998, 1997 and 1996, including cancelable
and noncancelable leases, amounted to $137 million, $136 million and $144
million, respectively.
Certain leases contain escalation clauses, which correspond with increased
real estate taxes and other operating expenses, and renewal options calling for
increased rents as the leases are renewed. No restrictions are imposed by any
lease agreement regarding the payment of dividends, additional debt financing,
or entering into further lease agreements.
Transaction and Dividend Restrictions. Fleet's banking subsidiaries are subject
to restrictions under federal law that limit the transfer of funds by the
subsidiary banks to Fleet and its nonbanking subsidiaries. Such transfers by any
subsidiary bank to Fleet or any nonbanking subsidiary are limited in amount to
10% of the bank's capital and surplus.
Various federal and state banking statutes limit the amount of dividends
the subsidiary banks can pay to Fleet without regulatory approval. The payment
of dividends by any subsidiary bank may also be affected by other factors such
as the maintenance of adequate capital for such subsidiary bank. Various
regulators and the Boards of Directors of the affected institutions continue to
review dividend declarations and capital requirements of Fleet and its
subsidiaries consistent with current earnings, future earning prospects, and
other factors.
Restrictions on Cash and Due from Banks. The corporation's banking subsidiaries
are subject to requirements of the Federal Reserve Board (the Federal Reserve)
to maintain certain reserve balances. At December 31, 1998 and 1997, these
reserve balances were $1,132 million and $1,110 million, respectively.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20.
Regulatory Matters
As a bank holding company, Fleet is subject to regulation by the Federal
Reserve, the Office of the Comptroller of the Currency (OCC) and the Office of
Thrift Supervision (OTS), as well as state regulators. Under the regulatory
capital adequacy guidelines and FDIC Improvement Act (FDICIA), Fleet and its
banking subsidiaries must meet specific capital requirements. These requirements
are expressed in terms of the following ratios: (1) Risk-based Total Capital
(Total Capital/risk-weighted on- and off-balance sheet assets); (2) Risk-based
Tier 1 Capital (Tier 1 Capital/risk-weighted on- and off-balance sheet assets);
and (3) Leverage (Tier 1 Capital/average quarterly assets).
To meet all minimum regulatory capital requirements, Fleet and its banking
subsidiaries must maintain a minimum risk-based Total Capital ratio of at least
8%, risk-based Tier 1 Capital ratio of at least 4%, and Tier 1 Leverage ratio of
at least 4%. Failure to meet minimum capital requirements can initiate certain
mandatory- and possibly discretionary-actions by regulators that, if undertaken,
could have a direct material effect on financial statements. To be categorized
as well-capitalized under the prompt corrective action provision of FDICIA,
Fleet's banking subsidiaries must maintain a risk-based Total Capital ratio of
at least 10%, a risk-based Tier 1 Capital ratio of at least 6%, and a Leverage
ratio of at least 5%, and not be subject to a written agreement, order or
capital directive. Neither Fleet nor any of its subsidiaries has entered into
formal written agreements with state and federal regulators or are subject to
any orders or capital directives.
The following table presents capital information for the corporation as of
December 31, 1998 and 1997:
Regulatory Capital Ratios
December 31
Dollars in millions 1998 1997
===============================================================================
Actual:
Risk-Based Tier 1 Capital $7,385 7.08% $6,542 7.26%
Risk-Based Total Capital 11,706 11.22 9,649 10.71
Leverage 7,385 7.48 6,542 7.66
Minimum regulatory capital standards:
Risk-Based Tier 1 Capital 4,175 4.00 3,603 4.00
Risk-Based Total Capital 8,350 8.00 7,205 8.00
Leverage 3,947 4.00 3,416 4.00
===============================================================================
As of December 31, 1998, Fleet's banking subsidiaries were all categorized as
well-capitalized. There are no conditions or events since that date that
management believes have changed the institutions category.
As registered broker-dealers and member firms of the NYSE, certain
subsidiaries are subject to rules of both the SEC and the NYSE. These rules
require registrants to maintain minimum levels of net capital, as defined, and
may restrict a member from expanding its business and declaring dividends as its
net capital approaches specified levels. At December 31, 1998, the subsidiaries
had net capital, in the aggregate, of approximately $349 million, which exceeded
aggregate minimum net capital requirements by approximately $304 million.
Note 21.
Disclosure for Statements of Cash Flows
Cash Flow Disclosure
Year ended December 31
Dollars in millions 1998 1997 1996
===============================================================================
Supplemental disclosure for cash
paid during the period for:
Interest expense $2,861 $2,484 $ 2,531
Income taxes, net of refund 593 428 356
- -------------------------------------------------------------------------------
Supplemental disclosure of non-cash
investing and financing activities:
Transfer of loans to foreclosed property
and repossessed equipment $ 15 $ 30 $ 27
Securitization of residential loans -- -- 1,998
Retirement of common stock -- -- 34
Transfer of assets to held for sale
by accelerated disposition 33 231 110
Adjustment to unrealized gain
(loss) on securities available for sale 31 66 (21)
- -------------------------------------------------------------------------------
Assets acquired and liabilities assumed
in business combinations were as follows:
Assets acquired, net of cash and cash
equivalents received $2,845 $ 544 $17,848
Net cash and cash equivalents
received (paid) 380 (523) 2,386
Liabilities assumed 3,225 21 20,234
- -------------------------------------------------------------------------------
Divestitures:
Assets sold, net of cash received $ -- $2,552 $ 3,119
Net cash received for divestitures -- 2,719 768
Liabilities sold -- 24 2,351
===============================================================================
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22.
Parent Company Only Financial Statements
Statements of Income
Year ended December 31
Dollars in millions 1998 1997 1996
===============================================================================
Dividends from subsidiaries:
Banking subsidiaries $755 $1,098 $727
Other subsidiaries 270 170 130
Interest income 246 192 205
Other 43 35 38
- -------------------------------------------------------------------------------
Total income 1,314 1,495 1,100
- -------------------------------------------------------------------------------
Interest expense 358 294 306
Noninterest expense 33 34 50
- -------------------------------------------------------------------------------
Total expenses 391 328 356
- -------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiaries 923 1,167 744
Applicable income taxes (benefit) (43) (61) (47)
- -------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 966 1,228 791
Equity in undistributed income
of subsidiaries 566 139 430
- -------------------------------------------------------------------------------
Net income $1,532 $1,367 $1,221
===============================================================================
Balance Sheets
December 31
Dollars in millions 1998 1997
================================================================================
Assets:
Money market instruments $582 $859
Securities 5 78
Loans receivable from:
Banking subsidiaries 2,454 2,159
Other subsidiaries 1,203 860
- --------------------------------------------------------------------------------
3,657 3,019
Investment in subsidiaries:
Banking subsidiaries 9,698 8,028
Other subsidiaries 793 615
- --------------------------------------------------------------------------------
10,491 8,643
Other 826 532
- --------------------------------------------------------------------------------
Total assets $15,561 $13,131
================================================================================
Liabilities:
Short-term borrowings $988 $811
Accrued liabilities 516 481
Long-term debt 4,648 3,387
- --------------------------------------------------------------------------------
Total liabilities 6,152 4,679
- --------------------------------------------------------------------------------
Stockholders' equity 9,409 8,452
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $15,561 $13,131
================================================================================
Statements of Cash Flows
Year ended December 31
Dollars in millions 1998 1997 1996
===============================================================================
Cash flows from operating activities:
Net income $1,532 $1,367 $1,221
Adjustments for noncash items:
Equity in undistributed income
of subsidiaries (566) (139) (430)
Depreciation and amortization 10 11 11
Net securities gains (33) (22) (18)
Increase (decrease) in accrued
liabilities, net 35 (11) (26)
Other, net (494) 54 (119)
- -------------------------------------------------------------------------------
Net cash flow provided by
operating activities 484 1,260 639
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities -- (15) (3)
Proceeds from sales and maturities
of securities 80 58 65
Net increase in loans made to affiliates (638) (307) (57)
Return of capital from subsidiaries 112 3 1,756
Capital contributions to subsidiaries (1,179) (253) (1,802)
- -------------------------------------------------------------------------------
Net cash flow used in investing activities (1,625) (514) (41)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings 177 135 (144)
Proceeds from issuance of long-term debt 1,811 281 650
Repayments of long-term debt (550) (455) (484)
Proceeds from issuance of common stock 64 856 77
Proceeds from issuance of preferred stock -- -- 635
Redemption and repurchase of common
and preferred stock (51) (981) (204)
Cash dividends paid (587) (536) (509)
- -------------------------------------------------------------------------------
Net cash flow provided by (used in)
financing activities 864 (700) 21
- -------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (277) 46 619
- -------------------------------------------------------------------------------
Cash and cash equivalents at beginning
of year 859 813 194
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $582 $859 $813
===============================================================================
64
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
Rate/Volume Analysis (Unaudited)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to(a) Increase (Decrease) Due to(a)
- ---------------------------------------------------------------------------------------------------------------
Dollars in millions Volume Rate Net Volume Rate Net
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:(b)
Interest-bearing deposits $ 8 $ (1) $ 7 $ 3 $ -- $ 3
Federal funds sold and securities purchased
under agreements to resell (7) (1) (8) (16) 1 (15)
Trading account securities 5 -- 5 -- 2 2
Securities available for sale 103 (11) 92 (193) 32 (161)
Securities held to maturity -- (2) (2) (10) 4 (6)
Nontaxable securities 8 -- 8 17 (1) 16
Loans 543 (57) 486 262 42 304
Due from brokers/dealers 43 8 51 32 6 38
Mortgages held for resale 84 (7) 77 (36) (4) (40)
Assets held for disposition (22) (23) (45) (40) (35) (75)
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 765 (94) 671 19 47 66
- ---------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits-
Savings 24 31 55 22 (17) 5
Time 104 21 125 (49) (56) (105)
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 128 52 180 (27) (73) (100)
- ---------------------------------------------------------------------------------------------------------------
Short-term borrowings 149 4 153 (51) (13) (64)
Due to brokers/dealers 48 14 62 36 5 41
Long-term debt 119 (9) 110 (66) 14 (52)
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 444 61 505 (108) (67) (175)
- ---------------------------------------------------------------------------------------------------------------
Net interest differential(c) $321 $(155) $166 $127 $114 $241
===============================================================================================================
</TABLE>
(a) The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
(b) Tax-equivalent adjustment has been included in the calculations to reflect
this income as if it had been fully taxable. The tax-equivalent adjustment
is based upon the applicable federal and state income tax rates. The FTE
adjustment included in interest income was $36 million in 1998, $40
million in 1997 and $36 million in 1996.
(c) Includes fee income of $272 million, $210 million and $165 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Quarterly Summarized Financial Information (Unaudited)
<TABLE>
<CAPTION>
By quarter
Dollars in millions, 1998 1997
except per share amounts 1 2 3 4 Year 1 2 3 4 Year
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,594 $1,716 $1,729 $1,726 $6,765 $1,490 $1,507 $1,540 $1,554 $6,091
Interest expense 665 744 759 728 2,896 581 583 606 621 2,391
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 929 972 970 998 3,869 909 924 934 933 3,700
- -----------------------------------------------------------------------------------------------------------------------
Provision for credit losses 92 118 120 140 470 65 83 85 89 322
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 837 854 850 858 3,399 844 841 849 844 3,378
Securities gains 51 -- 20 3 74 12 4 4 13 33
Other noninterest income 644 809 823 887 3,163 601 771 615 611 2,598
- -----------------------------------------------------------------------------------------------------------------------
1,532 1,663 1,693 1,748 6,636 1,457 1,616 1,468 1,468 6,009
Noninterest expense 997 1,017 1,042 1,073 4,129 904 1,025 873 913 3,715
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 535 646 651 675 2,507 553 591 595 555 2,294
Applicable income taxes 212 253 250 260 975 219 244 243 221 927
- -----------------------------------------------------------------------------------------------------------------------
Net income $323 $393 $401 $415 $1,532 $334 $347 $352 $334 $1,367
=======================================================================================================================
Basic earnings per share $.55 $.67 $.68 $.71 $2.61 $.57 $.60 $.62 $.58 $2.37
Diluted earnings per share .53 .65 .66 .69 2.52 .55 .58 .60 .57 2.30
=======================================================================================================================
</TABLE>
65
<PAGE>
Consolidated Average Balances/Interest Earned-Paid/Rates 1994-1998 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
Interest Interest
December 31 Average Earned/ Average Earned/
Dollars in millions(a) Balance Paid(b) Rate Balance Paid(b) Rate
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 339 $ 14 4.17% $ 141 $ 7 4.96%
Federal funds sold and securities purchased
under agreements to resell 302 15 5.29 423 23 5.44
Trading account securities 331 20 5.97 259 15 5.79
Securities available for sale 9,036 595 6.59 7,461 503 6.74
Securities held to maturity 12 1 8.75 32 3 7.12
Nontaxable securities 1,295 85 6.54 1,181 77 6.52
Loans(c) 66,419 5,700 8.58 60,076 5,214 8.68
Due from brokers/dealers 3,765 184 4.89 2,884 133 4.62
Mortgages held for resale 2,623 185 7.05 1,413 108 7.65
Assets held for disposition 161 2 1.12 746 47 6.17
Foreclosed property and repossessed equipment 20 -- -- 28 -- --
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 84,303 6,801 8.07 74,644 6,130 8.21
===================================================================================================================
Accrued interest receivable 487 -- -- 473 -- --
Reserve for credit losses (1,509) -- -- (1,454) -- --
Other assets 14,727 -- -- 12,997 -- --
- -------------------------------------------------------------------------------------------------------------------
Total assets $98,008 $6,801 -- $86,660 $6,130 --
===================================================================================================================
Liabilities and stockholders' equity:
Deposits
Savings $28,540 $ 674 2.36% $27,478 $ 619 2.25%
Time 22,032 1,160 5.27 20,036 1,035 5.16
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 50,572 1,834 3.63 47,514 1,654 3.48
===================================================================================================================
Short-term borrowings 8,400 400 4.76 5,266 247 4.69
Due to brokers/dealers 4,501 214 4.75 3,463 152 4.39
Long-term debt 6,261 448 7.15 4,608 338 7.34
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 69,734 2,896 4.15 60,851 2,391 3.93
- -------------------------------------------------------------------------------------------------------------------
Net interest spread 3,905 3.92 3,739 4.28
- -------------------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits 16,326 -- -- 15,882 -- --
Other liabilities 3,056 -- -- 2,338 -- --
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 89,116 2,896 -- 79,071 2,391 --
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity and dual
convertible preferred stock 8,892 -- -- 7,589 -- --
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $98,008 $2,896 -- $86,660 $2,391 --
- -------------------------------------------------------------------------------------------------------------------
Net interest margin 4.63% 5.01%
===================================================================================================================
<CAPTION>
1996 1995 1994
Interest Interest Interest
December 31 Average Earned/ Average Earned/ Average Earned/
Dollars in millions(a) Balance Paid(b) Rate Balance Paid(b) Rate Balance Paid(b) Rate
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 82 $ 4 4.39% $ 325 $ 23 7.08% $ 292 $ 14 4.79%
Federal funds sold and securities
purchased under agreements to resell 733 38 5.24 662 39 5.89 296 15 5.07
Trading account securities 257 13 5.37 238 14 5.45 205 10 4.88
Securities available for sale 10,287 664 6.45 12,779 797 6.24 16,923 1,023 6.05
Securities held to maturity 121 9 7.20 6,954 412 5.92 7,971 447 5.61
Nontaxable securities 924 61 6.60 782 59 7.54 816 51 6.25
Loans(c) 57,046 4,910 8.61 52,164 4,688 8.99 44,754 3,668 8.20
Due from brokers/dealers 2,179 95 4.35 1,927 109 5.64 1,606 70 4.36
Mortgages held for resale 1,878 148 7.87 1,459 116 7.96 1,322 91 6.90
Assets held for disposition 1,253 122 9.77 -- -- -- -- -- --
Foreclosed property and repossessed
equipment 52 -- -- 97 -- -- 166 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 74,812 6,064 8.11 77,387 6,257 8.09 74,351 5,389 7.25
==================================================================================================================================
Accrued interest receivable 481 -- -- 539 -- -- 533 -- --
Reserve for credit losses (1,493) -- -- (1,489 ) -- -- (1,600) -- --
Other assets 12,938 -- -- 9,804 -- -- 8,859 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $86,738 $6,064 -- $86,241 $6,257 -- $82,143 $5,389 --
==================================================================================================================================
Liabilities and stockholders' equity:
Deposits
Savings $26,363 $ 614 2.33% $22,987 $ 592 2.57% $24,803 $ 495 2.00%
Time 20,971 1,140 5.44 20,133 1,135 5.64 15,310 676 4.41
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 47,334 1,754 3.70 43,120 1,727 4.00 40,113 1,171 2.92
==================================================================================================================================
Short-term borrowings 6,351 311 4.91 14,807 815 5.50 15,807 636 4.02
Due to brokers/dealers 2,645 111 4.20 2,341 119 5.08 1,821 74 4.06
Long-term debt 5,486 390 7.10 6,581 478 7.26 5,383 364 6.76
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 61,816 2,566 4.15 66,849 3,139 4.69 63,124 2,245 3.56
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3,498 3.96 3,118 3.40 3,144 3.69
- ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits and other
noninterest-bearing time deposits 15,042 -- -- 10,910 -- -- 11,227 -- --
Other liabilities 2,511 -- -- 1,619 -- -- 1,773 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 79,369 2,566 -- 79,378 3,139 -- 76,124 2,245 --
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity and dual
convertible preferred stock 7,369 -- -- 6,863 -- -- 6,019 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $86,738 $2,566 -- $86,241 $3,139 -- $82,143 $2,245 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.68% 4.03% 4.23%
==================================================================================================================================
</TABLE>
(a) The data in this table is presented on a fully taxable equivalent basis.
The tax-equivalent adjustment is based upon the applicable federal and
state income tax rates.
(b) Includes fee income of $272 million, $210 million, $165 million, $110
million and $108 million for the years ended December 31, 1998, 1997,
1996, 1995 and 1994, respectively.
(c) Nonperforming loans are included in average balances used to determine
rates.
Common Stock Price and Dividend Information(a) (Unaudited)
<TABLE>
<CAPTION>
1998 1997
By quarter 1 2 3 4 Year 1 2 3 4 Year
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Price
High $ 42.53 $ 45.00 $ 44.22 $ 44.69 $ 45.00 $ 31.38 $ 32.91 $ 35.38 $ 37.56 $ 37.56
Low 34.31 39.00 32.78 31.69 31.69 24.81 27.75 31.69 30.97 24.81
- ----------------------------------------------------------------------------------------------------------------------
Dividends declared .245 .245 .245 .270 1.00 .225 .225 .225 .245 .92
Dividends paid .245 .245 .245 .245 .98 .225 .225 .225 .225 .90
======================================================================================================================
</TABLE>
(a) Fleet's common stock is listed on the New York Stock Exchange (NYSE). The
table above sets forth, for the periods indicated, the range of high and
low sale prices per share of Fleet's common stock on the composite tape
and dividends declared and paid per share. All per common share data for
all periods presented reflects the two-for-one common stock split which
was effective October 7, 1998.
Loan Maturity (Unaudited)
December 31, 1998 Within 1 to 5 After 5
Dollars in millions 1 Year Years Years Total
================================================================================
Commercial and industrial $11,409 $16,537 $ 9,221 $37,167
Residential real estate 1,594 3,935 3,785 9,314
Consumer 4,451 5,880 2,985 13,316
Commercial real estate:
Construction 331 480 268 1,079
Interim/permanent 1,318 1,912 1,065 4,295
Lease financing 672 3,465 88 4,225
- --------------------------------------------------------------------------------
Total $19,775 $32,209 $17,412 $69,396
================================================================================
Interest Sensitivity of Loans Over One Year (Unaudited)
December 31, 1998 Predetermined Floating
Dollars in millions Interest Rates Interest Rates Total
================================================================================
1 to 5 years $ 9,315 $ 22,894 $ 32,209
After 5 years 4,014 13,398 17,412
- --------------------------------------------------------------------------------
Total $ 13,329 $ 36,292 $ 49,621
================================================================================
66 & 67
<PAGE>
EXHIBIT 21
FLEET FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Fleet Financial Group, Inc. (name holder only) Delaware
Fleet Bank - NH New Hampshire
FFG Asset Holding Company II, Inc. Rhode Island
National Mortgage Company, Inc. New Hampshire
NH Lafayette Properties, Inc. Delaware
NH Red Brick Properties, Inc. Delaware
Fleet Bank of Maine Maine
Maine Credit Holdings, Inc. Rhode Island
ME Saturn Properties, Inc. Delaware
ME Orion Properties, Inc. Delaware
Fleet National Bank United States
Fleet Bank (RI), National Association United States
Fleet (Delaware) Insurance Agency Services, Inc. Delaware
Fleet (Delaware) Consumer Services, Inc. Delaware
Fleet Credit Card Holdings, Inc. Delaware
Fleet Credit Card Services, L.P. (98.73%)
Fleet Insurance Company Arizona
Fleet Life Insurance Company Arizona
Columbia Management Co. Oregon
Columbia Financial Center Incorporated Oregon
Columbia Funds Management Company Oregon
Columbia Trust Company (79% owned by Columbia Funds
Management Company and 21% owned by Fleet National Bank) Oregon
The Providence Group Investment Advisory Company Rhode Island
FFG Asset Holding Company VII, Inc. Rhode Island
FFG Asset Holding Company III, Inc. Rhode Island
RECOLL Management Corporation Rhode Island
Onyx Properties Limited Partnership (99% owned by Fleet National Bank and
1% owned by GTT Corp.)
GTT Realty Limited Partnership (99% owned by Fleet National Bank and
1% owned by GTT Corp.)
Fleet Insurance Agency Corp. - Connecticut Connecticut
Fleet Insurance Agency Corporation Massachusetts
The Stamford Fidelity Realty Company, Inc. Connecticut
CNB Equity Corporation Connecticut
CB Asset Recovery Incorporated Connecticut
NEMAC Escrow Corp. Connecticut
NEMAC, Inc. Connecticut
Fleet Mortgage Group, Inc. Rhode Island
Fleet Mortgage Securities, Inc. Rhode Island
Fleet Mortgage Corp. South Carolina
Norstar Mortgage Corporation New York
Fleet Mortgage Asset Management Corp. Rhode Island
Fleet Mortgage Reinsurance Company, Inc. Rhode Island
</TABLE>
<PAGE>
EXHIBIT 21
FLEET FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
(Continued)
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Fleet Holding Corp. Rhode Island
Fleet Capital Corporation Rhode Island
AdFleet, Inc. Connecticut
Industrial National Leasing Corporation Massachusetts
Industrial Leasing Corporation of Fitchburg, Inc. Massachusetts
OneFed Leasing Corporation Rhode Island
Industrial Leasing Corporation of Massachusetts, Inc. Massachusetts
Industrial Leasing Corporation of Springfield, Inc. Massachusetts
Fleet Precious Metals Inc. Rhode Island
AFSA Data Corporation Delaware
Benova, Inc. Oregon
North East Hillcroft, Inc. Texas
Fleet RI Holding Corp. Rhode Island
FIS Securities, Inc. Delaware
Fleet Investment Advisors Inc. New York
Fleet Investment Services, Inc. Rhode Island
Investment & Insurance Services, Inc. Rhode Island
Investment & Insurance Services, Inc. Maine
Investment & Insurance Services, Inc. Connecticut
Fleet Associates, Inc. Rhode Island
RI Waterman Properties, Inc. Delaware
Broadmoor Property Associates (50%)
Wamsutta Associates (50%)
RI Hillcroft, Inc. Delaware
Fleet Investment Funding Corp. Rhode Island
Meca Software, LLC (16%) Delaware
Fleet Land Company Rhode Island
Poorman-Douglas Corporation Rhode Island
Felton Management Corporation Massachusetts
Felton Real Estate Limited Partnership (99% owned by Fleet National
Bank and 1% owned by Felton Management Corporation)
WSB Property Management Company Massachusetts
Sterling Investment Corporation I Massachusetts
Fleet Trade Services, Limited Hong Kong
Metro Plaza, Inc. Massachusetts
BancNewEngland Mortgage Company, Inc. Rhode Island
Plymouth, Incorporated Florida
Dade Investment Services, Inc. Florida
FFG Asset Holding Company VIII, Inc. Rhode Island
FFG Asset Holding Company X, Inc. Rhode Island
FFG Asset Holding Company XI, Inc. Rhode Island
FFG Asset Holding Company IX, Inc. Rhode Island
FFG Asset Holding Company A, Inc. Rhode Island
Fleet Funding, Inc. Massachusetts
Colex Realty Limited Partnership (99% owned by Fleet National Bank and
1% owned by DBT Corp.)
Kendall Realty Trust Massachusetts
FNB Realty Trust Massachusetts
SB Asset Recovery Incorporated Massachusetts
</TABLE>
<PAGE>
EXHIBIT 21
FLEET FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
(Continued)
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
First Service Corporation of New England Massachusetts
First Service Insurance Agency, Inc. Massachusetts
Essex Leeway Investment Company Massachusetts
Parallel Capital Group, L.L.C. (20%) Delaware
CBT Realty Corporation Connecticut
Fleet Trust and Investment Services Company, National Association United States
Fleet Bank, National Association United States
CF Leasing Corp. New Jersey
C.F. Property, Inc. New Jersey
CFN-Cedar Cove, Inc. New Jersey
Fleet (NJ) Brokerage Services Inc. New Jersey
FFG Asset Holding Company XIII, Inc. Rhode Island
Fleet Pennsylvania Services Inc. Delaware
Connecticut Realty Corp. IV Rhode Island
FFG Asset Holding Company B, Inc. Rhode Island
Fleet Funding II, Inc. Massachusetts
Fleet (NJ) Credit Corp. New York
Fleet Capital Markets Group Inc. New Jersey
Fleet Connecticut Corp. Connecticut
Fleet Global Trade, Limited Hong Kong
Fleet LIHTC Corporation Delaware
Family Security Corporation New York
FJN-Goodlands Inc. New Jersey
Fleet Insurance Agency Corp. - New York New York
Fleet Insurance Agency (NJ), Inc. New Jersey
Fleet NJ Community Development Corp. New Jersey
Fleet LIHTC II Corporation Delaware
Western Project Holding Corp. New York
Western Redding Ltd. New York
Fleet Financial Pennsylvania Corp. Pennsylvania
Fleet (Delaware) Servicing Corp. Delaware
Fleet New Jersey Corp. New Jersey
Fleet Enterprises Inc. New York
International Broadcasting Corporation Delaware
H.G. Disposition Corp. Delaware
I.C. Disposition Corp. Delaware
Stuarts Department Stores, Inc. (12.03%) Delaware
Citizens First Investment Corp. New Jersey
Fleet Delaware Corp. Delaware
FFG-NJ Vehicle Funding Corp. of NJ New Jersey
FFG-NJ Vehicle Management Corp. New Jersey
FFG-NJ Vehicle Funding Corp. New York
Nobility Hill Realty Trust Massachusetts
DBT Corp. Massachusetts
Shawmut Life Insurance Co., Inc. Arizona
HNC Realty Company Connecticut
GTT Corp. Connecticut
</TABLE>
<PAGE>
EXHIBIT 21
FLEET FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
(Continued)
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Indian Head Banks, Inc. New Hampshire
Indian Head Plaza Associates (50%)
Fleet Financial Corporation Rhode Island
Fleet Finance, Inc. Delaware
Fleet Consumer Discount Company Pennsylvania
Fleet Finance of Louisiana, Inc. Louisiana
Fleet Finance, Inc. of GA Georgia
Fleet Finance, Inc. South Carolina
Fleet Finance, Inc. Tennessee
Home Equity USA, Inc. Rhode Island
Home Equity USA, Inc. Delaware
Fleet Home Equity USA, Inc. Florida
Fleet Insurance Agency, Inc. Georgia
Consumer Life Insurance Co. Arizona
Fleet Finance, Inc. Florida
Fleet Finance & Mortgage, Inc. Florida
Home Equity USA Loan Co. of Minnesota, Inc. Minnesota
Fleet Home Equity USA, Inc. Delaware
Quick & Reilly/Fleet Securities, Inc. Delaware
Fleet Clearing Corporation Delaware
Q & R Capital Corp. New York
Quick & Reilly, Inc. New York
Fleet Securities, Inc. New York
Quick & Reilly, Ltd. United Kingdom
Q & R Charter, Inc. Delaware
Quick & Reilly Tara Corporation Rhode Island
Financial Systemware, Inc. Delaware
SureTrade, Inc. Delaware
Fleet Capital Trust I Delaware
Fleet Capital Trust II Delaware
Fleet Capital Trust III Delaware
Fleet Capital Trust IV Delaware
Fleet Capital Trust V Delaware
Fleet Employee Benefit Services, Inc. New York
Fleet Mortgage Brokers, Inc. Florida
Fleet Corporate Finance, Inc. Massachusetts
FFG Property Holding Corp. Rhode Island
Fleet Services Corporation New York
Business Benefits Administrators, Inc. Massachusetts
Interpay, Inc. (69.7%) Massachusetts
Fleet Community Development Corporation Rhode Island
AFSA, Inc. Rhode Island
Fleet Real Estate, Inc. Rhode Island
Reed Street Partners, L.P. (99%)
Pioneer Credit Corporation Connecticut
</TABLE>
<PAGE>
EXHIBIT 21
FLEET FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
(Continued)
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Fleet Property Company Rhode Island
Fleet Center Associates (45.6%)
Fleet Garage Associates (47.5%)
Fleet Historical Associates (47.5%)
Fleet Employer Services, Inc. Delaware
Westminster Properties, Inc. Delaware
Fleet Real Estate Capital, Inc. Rhode Island
Fleet Mezzanine Capital, Inc. Rhode Island
Fleet Mezzanine Partners
Fleet Overseas Asset Management, Inc. Rhode Island
Oechsle International Advisors, L.P. (36.4%)
FFG Insurance Co., Ltd. Bermuda
Industrial Investment Corporation Rhode Island
Industrial Investment Corporation - NH New Hampshire
IIC - NY Corporation New York
Fleet Private Equity Co., Inc. Rhode Island
Fleet Growth Resources, Inc. Rhode Island
PEP Guide Fleet, L.L.C. (99.5%) Delaware
Navigator Partners, L.P. (27%)
Fleet Growth Resources II, Inc. Delaware
Fleet Equity Partners VI, L.P.
Fleet Equity Partners V, L.P.
Investment Fund Partners
Fleet Equity Partners VII, L.P.
Norstar Venture Partners I
Fleet Venture Partners I
Fleet Venture Partners II
Fleet Venture Partners III
Fleet Venture Partners IV, L.P.
Mezzanine Capital Fund I, LLC (29%) Massachusetts
Navigator Institutional Fund, L.P.
Fleet Venture Resources, Inc. Rhode Island
Fleet Bank, F.S.B. United States
CN Transportation Company, Inc. Delaware
Shawmut Association, Incorporated Massachusetts
NYCE Corporation (21.1%) Delaware
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Fleet Financial Group, Inc.
We consent to incorporation by reference in the Registration Statements (Nos.
33-19425, 33-25872, 33-65230, 33-48818, 33-56061, 33-62367, 33-58933, 33-64635,
33-59139, 333-16037, 333-44517 and 333-68153) on Form S-8, the Registration
Statements (Nos. 333-37231, 333-43625, 33-36707, 333-48043 and 333-62905) on
Form S-3, and the Registration Statements (Nos. 33-58573 and 33-58933) on Form
S-4 of Fleet Financial Group, Inc. of our report dated January 20, 1999,
relating to the consolidated balance sheets of Fleet Financial Group, Inc. as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the 1998
Annual Report to Shareholders of Fleet Financial Group, Inc. and has been
incorporated by reference on Form 10-K of Fleet Financial Group, Inc. for the
year ended December 31, 1998.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1998 consolidated financial statements and management's discussion and
analysis of financial condition and results of operations contained in the Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,191
<INT-BEARING-DEPOSITS> 444
<FED-FUNDS-SOLD> 103
<TRADING-ASSETS> 355
<INVESTMENTS-HELD-FOR-SALE> 9,724
<INVESTMENTS-CARRYING> 1,068
<INVESTMENTS-MARKET> 1,073
<LOANS> 69,396
<ALLOWANCE> 1,552
<TOTAL-ASSETS> 104,382
<DEPOSITS> 69,678
<SHORT-TERM> 13,287
<LIABILITIES-OTHER> 3,188
<LONG-TERM> 8,820
0
691
<COMMON> 3,290
<OTHER-SE> 5,428
<TOTAL-LIABILITIES-AND-EQUITY> 104,382
<INTEREST-LOAN> 5,878
<INTEREST-INVEST> 673
<INTEREST-OTHER> 214
<INTEREST-TOTAL> 6,765
<INTEREST-DEPOSIT> 1,835
<INTEREST-EXPENSE> 2,896
<INTEREST-INCOME-NET> 3,869
<LOAN-LOSSES> 470
<SECURITIES-GAINS> 74
<EXPENSE-OTHER> 4,129
<INCOME-PRETAX> 2,507
<INCOME-PRE-EXTRAORDINARY> 2,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,532
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.52
<YIELD-ACTUAL> 4.63
<LOANS-NON> 265
<LOANS-PAST> 234
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,432
<CHARGE-OFFS> 609
<RECOVERIES> 139
<ALLOWANCE-CLOSE> 1,552
<ALLOWANCE-DOMESTIC> 1,552
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 203
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1997 restated consolidated financial statements and management's discussion
and analysis of financial condition and results of operations contained in the
Form 8-K dated May 5, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,000
<INT-BEARING-DEPOSITS> 76
<FED-FUNDS-SOLD> 498
<TRADING-ASSETS> 290
<INVESTMENTS-HELD-FOR-SALE> 8,113
<INVESTMENTS-CARRYING> 1,249
<INVESTMENTS-MARKET> 1,254
<LOANS> 62,565
<ALLOWANCE> 1,432
<TOTAL-ASSETS> 91,047
<DEPOSITS> 63,735
<SHORT-TERM> 11,821
<LIABILITIES-OTHER> 2,539
<LONG-TERM> 4,500
0
691
<COMMON> 3,332
<OTHER-SE> 4,429
<TOTAL-LIABILITIES-AND-EQUITY> 91,047
<INTEREST-LOAN> 5,357
<INTEREST-INVEST> 570
<INTEREST-OTHER> 164
<INTEREST-TOTAL> 6,091
<INTEREST-DEPOSIT> 1,654
<INTEREST-EXPENSE> 2,391
<INTEREST-INCOME-NET> 3,700
<LOAN-LOSSES> 322
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 3,715
<INCOME-PRETAX> 2,294
<INCOME-PRE-EXTRAORDINARY> 2,294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,367
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 2.30
<YIELD-ACTUAL> 5.01
<LOANS-NON> 392
<LOANS-PAST> 202
<LOANS-TROUBLED> 12
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,488
<CHARGE-OFFS> 514
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 1,432
<ALLOWANCE-DOMESTIC> 1,432
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 304
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1997 restated consolidated financial statements and management's discussion
and analysis of financial condition and results of operations contained in the
Form 8-K dated May 5, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,474
<INT-BEARING-DEPOSITS> 858
<FED-FUNDS-SOLD> 1,772
<TRADING-ASSETS> 237
<INVESTMENTS-HELD-FOR-SALE> 7,503
<INVESTMENTS-CARRYING> 1,177
<INVESTMENTS-MARKET> 1,172
<LOANS> 59,861
<ALLOWANCE> 1,488
<TOTAL-ASSETS> 89,650
<DEPOSITS> 67,071
<SHORT-TERM> 7,274
<LIABILITIES-OTHER> 2,401
<LONG-TERM> 5,114
0
953
<COMMON> 3,226
<OTHER-SE> 3,611
<TOTAL-LIABILITIES-AND-EQUITY> 89,650
<INTEREST-LOAN> 5,169
<INTEREST-INVEST> 723
<INTEREST-OTHER> 136
<INTEREST-TOTAL> 6,028
<INTEREST-DEPOSIT> 1,754
<INTEREST-EXPENSE> 2,566
<INTEREST-INCOME-NET> 3,462
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 3,512
<INCOME-PRETAX> 2,070
<INCOME-PRE-EXTRAORDINARY> 2,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,221
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 4.68
<LOANS-NON> 696
<LOANS-PAST> 247
<LOANS-TROUBLED> 9
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,321
<CHARGE-OFFS> 484
<RECOVERIES> 114
<ALLOWANCE-CLOSE> 1,488
<ALLOWANCE-DOMESTIC> 1,488
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213
</TABLE>
