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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
|X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for quarterly period ended March 31, 1999
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period _________ to __________
Commission File Number 1-6366
FLEET FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0341324
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Federal Street
Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
(617) 346-4000
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
The number of shares of common stock of the Registrant outstanding as of April
30, 1999 was 570,409,907.
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<PAGE>
FLEET FINANCIAL GROUP, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
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PART I. ITEM 1. FINANCIAL INFORMATION
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6
Condensed Notes to Consolidated Financial Statements 7
PART I. ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION 21
SIGNATURES 23
EXHIBITS 24
2
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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For the three months ended March 31
Dollars in millions, except per share amounts 1999 1998
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Interest and fees on loans $ 1,559 $ 1,378
Interest on securities 173 162
Other 46 54
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Total interest income 1,778 1,594
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Interest expense:
Deposits 424 438
Short-term borrowings 80 84
Long-term debt 201 89
Other 39 54
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Total interest expense 744 665
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Net interest income 1,034 929
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Provision for credit losses 149 92
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Net interest income after provision
for credit losses 885 837
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Noninterest income:
Investment services revenue 248 201
Banking fees and commissions 193 176
Processing-related revenue 153 59
Capital markets revenue 149 138
Credit card revenue 141 56
Other 75 65
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Total noninterest income 959 695
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Noninterest expense:
Employee compensation and benefits 542 445
Equipment 86 80
Occupancy 76 74
Intangible asset amortization 71 51
Legal and other professional 43 31
Merger-related charges -- 73
Other 307 243
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Total noninterest expense 1,125 997
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Income before income taxes 719 535
Applicable income taxes 281 212
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Net income $ 438 $ 323
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Net income applicable to common shares $ 422 $ 311
Basic earnings per share .74 .55
Diluted earnings per share .72 .53
Dividends declared .27 .245
Diluted weighted average common shares
outstanding 588,572,426 587,183,562
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See accompanying Condensed Notes to Consolidated Financial Statements
3
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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March 31, December 31,
Dollars in millions, except share amounts 1999 1998
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Assets
Cash and cash equivalents $ 4,862 $ 5,738
Securities (market value:
$10,972 and $10,797) 10,968 10,792
Loans 73,683 69,396
Reserve for credit losses (1,724) (1,552)
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Net loans 71,959 67,844
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Due from brokers/dealers 2,726 3,600
Mortgages held for resale 2,155 3,960
Premises and equipment 1,233 1,229
Mortgage servicing rights 2,098 1,405
Intangible assets 3,423 3,117
Other assets 6,742 6,697
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Total assets $ 106,166 $ 104,382
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Liabilities
Deposits:
Demand $ 11,150 $ 13,400
Regular savings, NOW, money market 34,898 34,696
Time 21,585 21,582
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Total deposits 67,633 69,678
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Federal funds purchased and securities
sold under agreements to repurchase 3,027 4,456
Other short-term borrowings 2,844 4,856
Due to brokers/dealers 3,823 3,975
Long-term debt 15,586 8,820
Accrued expenses and other liabilities 3,641 3,188
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Total liabilities 96,554 94,973
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Stockholders' equity
Preferred stock 691 691
Common stock (571,168,358 shares
issued in 1999 and 1998) 6 6
Common surplus 3,291 3,284
Retained earnings 5,602 5,337
Accumulated other comprehensive income 58 128
Treasury stock, at cost (2,435,203 shares in
1999 and 1,593,005 shares in 1998) (36) (37)
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Total stockholders' equity 9,612 9,409
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Total liabilities and stockholders' equity $ 106,166 $ 104,382
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See accompanying Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
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Accumulated
Common Other
Stock at Compre-
Three months ended March 31 Preferred $.01 Common Retained hensive Treasury
Dollars in millions, except share amounts Stock Par Surplus Earnings Income Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Balance at December 31, 1997 $ 691 $ 3 $3,329 $4,437 $ 97 $ (105) $8,452
Net income 323 323
Other comprehensive income, net of tax:
Adjustment to unrealized gain on securities
available for sale (21) (21)
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Comprehensive income 302
Cash dividends declared on common stock
($.245 per share) (139) (139)
Cash dividends declared on preferred stock (13) (13)
Common stock issued in connection with
employee benefit and stock option plans (14) (2) 34 18
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Balance at March 31, 1998 $ 691 $ 3 $3,315 $4,606 $ 76 $ (71) $8,620
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1999
Balance at December 31, 1998 $ 691 $ 6 $3,284 $5,337 $ 128 $ (37) $9,409
Net income 438 438
Other comprehensive income, net of tax:
Adjustment to unrealized gain on securities
available for sale (70) (70)
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Comprehensive income 368
Cash dividends declared on common stock
($.27 per share) (154) (154)
Cash dividends declared on preferred stock (13) (13)
Common stock issued in connection with
employee benefit and stock option plans 6 (5) 28 29
Treasury stock purchased (24) (24)
Other, net 1 (1) (3) (3)
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Balance at March 31, 1999 $ 691 $ 6 $3,291 $5,602 $ 58 $ (36) $9,612
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</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three months ended March 31
Dollars in millions 1999 1998
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Cash Flows from Operating Activities
Net income $ 438 $ 323
Adjustments for noncash items:
Depreciation and amortization of
premises and equipment 66 54
Amortization and impairment of mortgage
servicing rights 82 153
Amortization of other intangible assets 71 50
Provision for credit losses 149 92
Deferred income tax expense/(benefit) 104 (46)
Securities gains -- (51)
Merger-related charges -- 73
Originations and purchases of mortgages
held for resale (10,383) (5,172)
Proceeds from sales of mortgages held for resale 12,188 4,281
Decrease/(increase) in due from brokers/dealers 874 (57)
Decrease/(increase) in accrued receivables, net 59 (195)
(Decrease)/increase in due to brokers/dealers (152) 117
(Decrease)/increase in accrued liabilities, net (180) 523
Other, net (164) (227)
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Net cash flow provided by/(used in)
operating activities 3,152 (82)
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Cash Flows from Investing Activities
Purchases of securities available for sale (1,463) (2,980)
Proceeds from sales of securities
available for sale 628 912
Proceeds from maturities of securities
available for sale 567 208
Purchases of securities held to maturity (202) (172)
Proceeds from maturities of securities
held to maturity 186 150
Net cash and cash equivalents
(paid for)/received from businesses acquired (613) 380
Net decrease/(increase) in loans 1,177 (846)
Purchases of premises and equipment (38) (59)
Purchases of mortgage servicing rights (406) (61)
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Net cash flow used in investing activities (164) (2,468)
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Cash Flows from Financing Activities
Net (decrease)/increase in deposits (2,045) 1,843
Net (decrease)/increase in short-term borrowings (3,799) 218
Proceeds from issuance of long-term debt 2,228 918
Repayments of long-term debt (92) (398)
Proceeds from the issuance of common stock 29 18
Repurchase of common stock (24) --
Cash dividends paid (161) (130)
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Net cash flow (used in)/provided by
financing activities (3,864) 2,469
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Net decrease in cash and cash equivalents (876) (81)
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Cash and cash equivalents at beginning
of the period 5,738 5,574
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Cash and cash equivalents at end
of the period $ 4,862 $ 5,493
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See accompanying Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
FLEET FINANCIAL GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein has been
prepared in conformity with the accounting principles and practices in Fleet
Financial Group, Inc.'s (Fleet or the corporation) consolidated financial
statements included in the Annual Report on Form 10-K filed with the Securities
and Exchange Commission (SEC) for the year ended December 31, 1998. The
accompanying interim consolidated financial statements contained herein are
unaudited. However, in the opinion of the corporation, all adjustments
consisting of normal recurring items necessary for a fair statement of the
operating results for the periods shown have been made. The results of
operations for the three months ended March 31, 1999 may not be indicative of
operating results for the year ending December 31, 1999. Certain prior period
amounts have been reclassified to conform to current classifications.
NOTE 2. ACQUISITIONS
On February 1, 1999, the corporation acquired Sanwa Business Credit
(Sanwa), a leasing and asset-based lending company from Sanwa Bank, Ltd. Sanwa
offers a wide variety of asset-based lending, equipment leasing and vendor
finance programs throughout the United States and has approximately $6 billion
in assets. Goodwill of approximately $385 million was recorded and is being
amortized on a straight-line basis over 25 years.
On March 14, 1999, the corporation entered into a definitive agreement to
merge with BankBoston Corporation (BankBoston). Under the terms of the
agreement, BankBoston shareholders will receive 1.1844 shares of Fleet common
stock for each share of BankBoston common stock.
A merger and restructuring-related charge of approximately $650 million
after-tax is anticipated to be recorded upon consummation of the merger or
shortly thereafter. This charge includes transaction costs, exit costs including
severance and facilities-related charges, and accelerated depreciation in excess
of normal scheduled depreciation on duplicate systems and excess facilities that
will be taken out of service. The corporation also expects to recognize a $60
million after-tax charge to earnings in subsequent periods, related to costs of
integrating the two companies.
In addition, Fleet and BankBoston anticipate that, in order to obtain
regulatory approval for the merger, the companies will be required to divest
approximately $13 billion of deposits, primarily in the Massachusetts,
Connecticut and Rhode Island markets. The merger, subject to shareholder and
regulatory approval, is anticipated to close in the fall of 1999. The
transaction will be accounted for under the pooling-of-interests method of
accounting.
NOTE 3. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash Flow Disclosure
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Three months ended March 31
Dollars in millions 1999 1998
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Supplemental disclosure for cash paid
during the period for:
Interest expense $ 688 $ 594
Income taxes, net of refunds 152 16
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Supplemental disclosure of noncash investing
and financing activities:
Transfer of loans to foreclosed property
and repossessed equipment 2 3
Adjustment to unrealized gain on
securities available for sale (70) (21)
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Assets acquired and liabilities assumed in business
combinations were as follows:
Assets acquired, net of cash and cash
equivalents received 6,074 2,845
Net cash and cash equivalents
(paid)/received (613) 380
Liabilities assumed 5,460 3,225
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NOTE 4. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The corporation has adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting information by
operating segment. The corporation discloses interim segment reporting in the
"Lines of Business" section of Management's Discussion and Analysis (pages
12-15) of this Form 10-Q.
7
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
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Three months ended March 31
Dollars in millions,
except per share amounts 1999 1998
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Earnings
Net income $ 438 $ 323
Net interest income (FTE)(a) 1,042 938
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Per Common Share
Basic earnings $ .74 $ .55
Diluted earnings .72 .53
Cash dividends declared .27 .245
Book value 15.69 13.96
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Operating Ratios
Return on average assets 1.63% 1.43%
Return on common equity 19.28 16.00
Efficiency ratio 55.9 56.6
Equity to assets (period-end) 9.05 8.82
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At March 31
Total assets $106,166 $97,687
Stockholders' equity 9,612 8,620
Nonperforming assets(b) 280 373
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(a) The FTE adjustment included in net interest income was $8 million and $9
million, respectively, for the three months ended March 31, 1999 and 1998.
(b) Nonperforming assets classified as held for sale by accelerated
disposition of $187 million and $176 million at March 31, 1999 and March
31, 1998, respectively, are not included in nonperforming assets and
related ratios.
Fleet reported net income of $438 million, or $.72 per diluted share, for
the quarter ended March 31, 1999, compared to $323 million, or $.53 per diluted
share, in the first quarter of 1998. Return on average assets (ROA) and return
on common equity (ROE) were 1.63% and 19.28%, respectively, for the first
quarter of 1999, compared to 1.43% and 16.00%, respectively, for the first
quarter of 1998.
The first quarter of 1998 included merger-related charges of $73 million
($44 million post-tax) pertaining to the acquisitions of Quick & Reilly and the
consumer credit card operations of Advanta. Excluding the impact of these
charges, the corporation's net income was $367 million, or $.60 per diluted
share, while ROA and ROE were 1.62% and 18.27%, respectively. The increase in
net income is largely due to strong growth in many of the corporation's
businesses, particularly credit cards, brokerage and investment services, and
mortgage banking, as well as earnings from the recent acquisitions of Sanwa and
Merrill Lynch Specialists, Inc. (MLSI).
INCOME STATEMENT ANALYSIS
Net Interest Income
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Three months ended March 31
FTE Basis
Dollars in millions 1999 1998
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Interest income $1,778 $1,594
Tax-equivalent adjustment 8 9
Interest expense 744 665
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Net interest income $1,042 $ 938
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Net interest income on a fully taxable equivalent basis (FTE) totaled
$1,042 million for the quarter ended March 31, 1999, compared to $938 million
for the same period in 1998. The $104 million increase is primarily attributable
to the inclusion of Sanwa for two months, the acquisition of $1.3 billion of
credit card receivables from Household International, Inc. (Household) at the
end of the fourth quarter of 1998, as well as stronger fee revenue as a result
of higher credit card and commercial loan fees.
Net Interest Margin and Interest-Rate Spread
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Three months ended March 31 1999 1998
FTE Basis Average Average
Dollars in millions Balance Rate Balance Rate
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Securities $ 10,565 6.53% $ 10,051 6.56%
Loans 72,649 8.32 62,603 8.66
Mortgages held for sale 3,819 6.86 1,637 7.25
Due from brokers/dealers 3,404 4.41 3,749 5.13
Other 1,377 5.21 1,025 4.99
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Total interest-earning assets 91,814 7.86 79,065 8.15
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Deposits 51,496 3.34 48,596 3.65
Short-term borrowings 8,071 4.03 6,914 4.90
Due to brokers/dealers 3,865 4.12 4,564 4.83
Long-term debt 13,198 6.08 4,853 7.31
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Interest-bearing liabilities 76,630 3.92 64,927 4.14
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Interest-rate spread 3.94 4.01
Interest-free sources of funds 15,184 14,138
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Total sources of funds $ 91,814 3.27% $ 79,065 3.40%
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Net interest margin 4.59% 4.75%
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The corporation's net interest margin for the first quarter of 1999 was
4.59%. The 16 basis point decrease in net interest margin is primarily
attributable to declining yields in the commercial loan portfolio, offset by
declining rates paid on deposits.
Average loans increased $10.0 billion to $72.7 billion for the first
quarter of 1999, when compared with the first quarter of 1998. This growth
resulted primarily from loan increases in the commercial, lease financing and
credit card portfolios. Additionally, the first quarter of 1999 was positively
impacted by the Sanwa acquisition which added $3 billion of average leases and
$800 million of average asset-backed loans, as well as the purchase of credit
card receivables from Household in late 1998.
8
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average mortgages held for resale increased $2.2 billion, or over 130%,
while the yield has declined 39 basis points over the first quarter of 1998, due
to the combination of increased loan production at Fleet Mortgage in a lower
mortgage-rate environment.
The $2.9 billion increase in average interest-bearing deposits compared to
the first quarter of 1998 is primarily attributable to increased money market
deposits. The increase was a result of the corporation's marketing efforts at
attracting money market deposits as well as paying competitive rates.
The $2.1 billion increase in average short-term borrowings is attributable
to an increase in federal funds purchased and securities sold under agreements
to repurchase and an increase in short-term bank notes as the corporation
utilized these funding vehicles to fund loan growth.
The $8.3 billion increase in average long-term debt was due primarily to
net increases in senior and subordinated debt and capital securities issued
during 1998 to fund acquisitions and overall asset growth. The 123 basis point
decrease in the funding rate was due to additional debt issued by the
corporation at lower floating rates.
Noninterest Income
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Three months ended March 31
Dollars in millions 1999 1998
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Investment services revenue $248 $201
Banking fees and commissions 193 176
Processing-related revenue 153 59
Capital markets revenue 149 138
Credit card revenue 141 56
Other noninterest income 75 65
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Total noninterest income $959 $695
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Noninterest income for the first quarter of 1999 increased $264 million to
$959 million compared to $695 million for the same period of 1998, an increase
of 38%. Increases were noted in all core revenue categories and reflects
revenues achieved from the acquisitions of Sanwa, MLSI and the consumer credit
card operations of Advanta, as well as strong growth and volume at Fleet
Mortgage, AFSA Data Corporation (AFSA) and Quick & Reilly.
Investment Services Revenue
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Three months ended March 31
Dollars in millions 1999 1998
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Investment management revenue $140 $125
Brokerage fees and commissions 108 76
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Total investment services revenue $248 $201
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Investment services revenue, which includes asset management revenues as
well as brokerage fees and commissions, increased $47 million, or 23%, over the
first quarter of 1998. Brokerage fees and commissions increased $32 million, or
42%, over the first quarter of 1998, driven by a strong equity market and
trading volumes which benefited the brokerage and clearing units of Quick &
Reilly. The major components of investment management revenue are as follows:
Investment Management Revenue
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Three months ended March 31
Dollars in millions 1999 1998
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Private clients group $ 58 $ 54
Retail investments 26 17
Columbia Management Company 24 23
Retirement plan services 18 16
Not-for-profit institutional services 12 12
Other 2 3
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Total $140 $125
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Investment management revenue increased 12% in the first quarter of 1999
to $140 million compared to $125 million in the first quarter of 1998. This
improvement was largely driven by growth in overall assets under management as
well as a 32% increase in the sales of mutual funds and annuities. Assets under
management have grown 6% to $86 billion at March 31, 1999 from $81 billion at
March 31, 1998. This increase reflects the corporation's continued focus on
developing, acquiring and growing fee-based businesses.
Banking fees and commissions, which includes fees received for cash
management, deposit accounts, electronic banking fees and other fees, increased
$17 million, or 10%, to $193 million. The increase was due principally to the
development of new product packaging and fee schedules, as well as targeted
marketing efforts throughout 1998.
Processing-Related Revenue
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Three months ended March 31
Dollars in millions 1999 1998
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Mortgage banking revenue, net $ 91 $ 18
Student loan servicing fees 34 28
Other 28 13
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Total processing-related revenue $153 $ 59
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Processing-related revenue increased $94 million, or 159%, when compared
to the first quarter of 1998 due primarily to increased mortgage banking revenue
as a result of strong mortgage production. Student loan servicing fees increased
$6 million, or 21%, at AFSA, the corporation's student loan servicing
subsidiary. AFSA services 6.6 million accounts nationwide, an increase of 14%
from accounts serviced as of March 31, 1998, and is the largest student loan
servicer in the United States, with over $53 billion in loans serviced. Other
processing-related revenue increased $15 million over the first quarter of 1998,
due to strong tax and health care processing revenue.
9
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mortgage Banking Revenue, Net
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Net loan servicing revenue $120 $117
Mortgage production revenue 53 29
Gains on sales of mortgage servicing -- 25
Mortgage servicing rights amortization (82) (78)
Impairment charge -- (75)
- --------------------------------------------------------------------------------
Total mortgage banking revenue, net $ 91 $ 18
- --------------------------------------------------------------------------------
Net mortgage banking revenue was $91 million in the first quarter of 1999,
an increase of $73 million as compared to the first quarter of 1998. The first
quarter of 1998 included an impairment charge of $75 million taken as a result
of increased refinancings in a lower mortgage-rate environment, partially offset
by a $25 million gain on sales of mortgage servicing rights (MSRs). Excluding
the $75 million impairment charge and $25 million MSR gain, net mortgage banking
revenue increased $23 million, or 34%, compared to the first quarter of 1998.
Loan servicing revenue represents fees received for servicing residential
mortgage loans. The $3 million increase in loan servicing revenue is
attributable to the corporation receiving a higher servicing spread on mortgage
servicing acquired, as well as an increase in the size of the corporation's
servicing portfolio.
Mortgage production revenue increased $24 million to $53 million in the
first quarter of 1999 as a result of strong loan production volume driven by a
lower mortgage-rate environment as loan production volume reached $13.0 billion
in the first quarter of 1999 as compared to $6.2 billion in the same period a
year ago. This revenue includes income derived from the loan origination process
and net gains on sales of mortgage loans.
Capital Markets Revenue
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Brokerage market-making revenue $ 65 $ 31
Venture capital revenue 41 30
Foreign exchange/interest-rate products 21 14
Investment banking fees 14 6
Securities trading gains 8 6
Securities gains -- 51
- --------------------------------------------------------------------------------
Total capital markets revenue $149 $138
- --------------------------------------------------------------------------------
Capital markets revenue increased $11 million to $149 million for the
quarter ended March 31, 1999, when compared to the same quarter of 1998
primarily driven by increases in brokerage market-making, venture capital and
foreign exchange/interest-rate products revenue, partially offset by a decrease
in securities gains. Excluding $51 million of securities gains taken in the
first quarter of 1998, capital markets revenue increased 71%.
The $34 million rise in brokerage market-making revenue from Fleet's
specialists subsidiaries is a result of increased trading volumes and market
volatility as well as the inclusion of MLSI during the first quarter of 1999.
Venture capital revenue at Fleet Private Equity, the corporation's venture
capital business, increased by $11 million when compared with the first quarter
of 1998 as the corporation continued to experience gains in this business as a
result of the strength of the equity markets. The corporation's ability to
continue to experience increases in the value of these venture capital
investments depends on a variety of factors, including the condition of the
economy and equity markets. Thus, the likelihood of such gains in the future
cannot be predicted.
Strong foreign exchange and interest-rate product activities were due
primarily to customers locking in their foreign exchange and interest-rate risk
as a result of the volatility of these markets over the past year.
Credit card revenue rose $85 million, or 152%, over the first quarter of
1998 primarily attributable to acquisitions of various credit card portfolios
during 1998, including the consumer credit card operations of Advanta, which was
acquired in late February 1998.
Other noninterest income increased $10 million to $75 million due
primarily to higher leasing gains.
Noninterest Expense
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Employee compensation and benefits $ 542 $445
Equipment 86 80
Occupancy 76 74
Intangible asset amortization 71 51
Legal and other professional 43 31
Marketing 35 27
Printing and mailing 26 23
Telephone 22 20
Other 224 173
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Total noninterest expense excluding
merger-related charges 1,125 924
Merger-related charges -- 73
- --------------------------------------------------------------------------------
Total noninterest expense $1,125 $997
- --------------------------------------------------------------------------------
Noninterest expense for the first quarter of 1999 totaled $1,125 million
compared to $924 million for the same period of 1998, excluding $73 million of
merger-related charges in connection with the acquisitions of Quick & Reilly and
the consumer credit card operations of Advanta. The merger-related charges
pertained primarily to exit costs, severance costs and professional fees. The
$201 million increase over the first quarter of 1998, excluding merger-related
charges, was primarily the result of various acquisitions, which accounted for
50% of the increase. In addition, higher expenses in volume and
processing-related businesses, primarily
10
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fleet Mortgage, Quick & Reilly and AFSA, accounted for 31% of the increase. The
corporation's efficiency ratio improved from 56.6% to 55.9% from the first
quarter of 1998 to the first quarter of 1999, as revenue growth has outpaced the
increase in expenses.
Employee compensation and benefits increased $97 million compared with the
first quarter of 1998 due primarily to higher volumes at many of the
corporation's businesses, particularly Fleet Mortgage, Quick & Reilly and AFSA,
as well as annual merit increases.
Intangible asset amortization increased $20 million in the first quarter
of 1999 as compared to the same period a year ago as a result of goodwill added
from acquisitions in 1998 and 1999.
Legal and other professional increased $12 million to $43 million when
compared to the first quarter of 1998 as a result of legal fees pertaining to
acquisitions.
Other noninterest expense increased $51 million to $224 million in the
first quarter of 1999 primarily attributable to increased volume at the
corporation's brokerage and processing-related businesses as well as expenses
from acquired companies.
Impact of the Year 2000
The corporation's Year 2000 project continues to be directed by a Year
2000 Executive Management Steering Committee consisting of its President and
Vice Chairmen. The committee provides direct oversight of the Year 2000
initiative and continues to be updated monthly on the project's progress. The
corporation's Board of Directors continues to receive formal project updates on
a quarterly basis.
The corporation has completed its assessment of Year 2000 issues,
developed a plan, and arranged for the required resources to complete the
necessary remediation efforts for both information technology and
non-information technology systems and processes. The corporation continues to
utilize both internal and external resources to appropriately prepare Fleet for
the Year 2000. The corporation will continue to focus on the following key areas
throughout 1999: Testing, Vendor Management, Event Planning and Communication
with customers. Additionally, the corporation continues to work on high priority
new business technological initiatives that it deems critical to its ongoing
business success.
The corporation has made significant progress in remediating and testing
its internal systems. All internal systems have either been remediated, tested,
and returned to production or are in final stages of testing. 99% of those
systems are prepared for the Year 2000. The remaining 1% are expected to
complete testing by June 30, 1999. This activity continues to track in
accordance with the original plan and in accordance with Federal Financial
Institutions Examination Council (FFIEC) guidelines. The corporation has
established a separate test environment to accommodate its Year 2000 testing
activity.
The corporation relies on several vendors and service providers for key
business processes. The corporation continues to work closely with these vendors
and service providers. Validation of Year 2000 readiness of all the
corporation's vendors and service providers continues with a particular focus on
alternatives, where possible, for those groups that have been identified as
critical. The corporation's senior management has conducted on-site visits and
in many cases follow-up discussions with its most critical service providers to
further assess their Year 2000 readiness. In addition, the corporation continues
to receive written and verbal verification from its critical vendors and service
providers as to their Year 2000 readiness. A majority of its critical vendors
and service providers have represented themselves to the corporation as Year
2000 compliant.
Significant progress has also been made in testing with the corporation's
vendors, service providers, customers and regulatory agencies. As of March 31,
1999, the corporation was substantially complete with the testing of significant
vendors and service providers.
Until and after the Year 2000 rollover takes place, there can be no
assurance that Year 2000 related problems will not occur. The Year 2000 is an
unprecedented event. Despite the corporation's efforts to identify and address
Year 2000 issues, such issues present risks to the corporation. Such risks
include business disruptions, operational problems, financial losses, legal
liability, and other similar risks. The corporation's businesses, results of
operations, and financial position could be materially adversely affected.
The corporation had previously established business resumption plans for
its lines of business and subsidiaries. These plans have been reviewed and where
appropriate have been enhanced to address potential Year 2000 failure scenarios.
In addition, a corporate-wide Year 2000 Event Plan has been developed to govern
the corporation's activities prior to, during and after the calendar rollover to
2000. The Event Plan will be validated by conducting unit specific structured
walkthroughs, employee notification tests and structured plan walkthroughs
between interdependent units. This activity is expected to be substantially
complete by June 30, 1999. Event Plans will continue to be updated, as
appropriate, into the fourth quarter of 1999. In addition to the components
listed above, the corporation has Event Plan Validation Committees in place. The
Committees are comprised of middle and senior level managers, who are reviewing
the Event Plan strategy and Event Plan validation methodology to prepare the
corporation for the rollover Event.
11
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The corporation has also implemented a plan consisting of several
components to monitor fiduciary risk. For example, from an investment risk
perspective, the corporation is assessing the level of preparedness of
corporations in which investments are made on behalf of its customers. This
activity will continue throughout 1999.
The corporation's credit risk associated with borrowers may increase to
the extent borrowers are not adequately prepared for the Year 2000. As a result,
there may be increases in the corporation's problem loans and credit losses
subsequent to Year 2000. However, to mitigate the risk, the corporation assesses
quarterly the Year 2000 readiness of material business relationships to which it
extends credit. The assessment determines the customers' level of Year 2000
preparedness and their level of dependency on technology. Factored together with
the overall credit rating of the customer, the corporation identifies those
customers that present an unacceptable risk to the corporation due to Year 2000.
Of the material relationships the corporation has assessed, six-tenths of one
percent have presently been identified as unacceptable in their level of Year
2000 preparedness and will be required to take action to mitigate their Year
2000 risk. The corporation will continue to reassess the readiness of customers
receiving the unacceptable rating on a quarterly basis throughout 1999 to ensure
that the proper steps are being taken.
As an integral part of the corporation's risk assessment process, the
corporation has also assessed its material funds providers that provide sources
of funds to the corporation. The assessment sought to determine the funds
providers' level of Year 2000 preparedness and their level of dependency on
technology. 96% of material funds providers have been identified as acceptable
in their level of Year 2000 preparedness. Utilizing the same process, the
corporation also assessed its material funds takers which include financial
institutions to which the corporation provides short-term funds and its material
counterparties that have a capital markets relationship with the corporation.
100% of material funds takers and 94% of material counterparties have been
identified as acceptable in their level of Year 2000 preparedness. The
corporation will continue to closely monitor these funds providers, funds takers
and counterparties throughout 1999.
The corporation will continue communicating with employees and customers
throughout 1999 to discuss readiness progress through a variety of communication
vehicles: statement messages and inserts; ATM on screen and receipt messages;
brochures; direct mail initiatives; direct discussions with customers; seminars;
and through the corporation's internet web site (www.fleet.com).
On February 1, 1999, the corporation acquired Sanwa Business Credit
Corporation, now known as Fleet Business Credit Corporation (FBCC). An
assessment of its Year 2000 program is near completion and it is expected that
FBCC will be substantially complete with its Year 2000 preparations by June 30,
1999. The above description does not include FBCC. However, its Year 2000
monitoring will be migrated into the corporation's Year 2000 program management
and reporting process by the end of the second quarter of 1999.
The corporation continues to approximate that the cost of the Year 2000
project will be $150 million. The corporation incurred $10 million during the
first quarter of 1999 and $101 million of expenses since the inception of this
project.
Income Taxes
The corporation recorded income tax expense in the amount of $281 million
for the first quarter of 1999 compared with $212 million for the same period a
year ago. The effective tax rate was 39.1% and 39.6% for the first quarter of
1999 and 1998, respectively.
Lines of Business
The corporation is managed along the following lines of business:
Commercial Financial Services, Retail Banking, National Financial Services,
Fleet Investment Group, and Treasury. The performance of the corporation is
monitored by an internal profitability system, with results reported monthly and
quarterly to senior management. Management accounting methods are used for
assigning expenses that are not directly incurred by lines of business, such as
overhead, operations and technology expense. Additionally, equity, provision for
credit losses and reserves for credit losses are assigned on an economic basis.
The corporation has developed risk adjusted methodologies that quantify risk
types within business units and assigns capital accordingly. Within business
units, assets and liabilities are match-funded utilizing similar maturity,
liquidity and repricing information. Management accounting concepts and
organizational hierarchies are periodically refined and results may be restated
to reflect changes in methodology and organizational structure. Prior periods
have been restated to reflect these changes.
12
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fleet Financial Group
Net Income by Line of Business
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Commercial Financial Services $140 $ 98
Retail Banking 94 92
National Financial Services 88 9
Fleet Investment Group 79 55
Treasury 25 37
All Other 12 32
- --------------------------------------------------------------------------------
Total $438 $323
- --------------------------------------------------------------------------------
Commercial Financial Services
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 394 $ 315
Noninterest income 133 86
------- ------
Total Revenue 527 401
Provision 60 49
Noninterest expense 235 189
- --------------------------------------------------------------------------------
Net income $ 140 $ 98
- --------------------------------------------------------------------------------
Balance sheet data:
Average assets 54,067 41,129
Average loans 46,475 36,948
Average deposits 11,731 11,653
- --------------------------------------------------------------------------------
Return on equity 18% 19%
- --------------------------------------------------------------------------------
Commercial Financial Services includes traditional commercial banking,
national, specialized and asset-based lending, as well as investment banking,
government banking, trade finance and cash management services. First quarter
results also reflect the acquisition of Sanwa Business Credit, which added $3.8
billion to average loans. Commercial Financial Services earned $140 million in
the first quarter of 1999. Compared to the first quarter of 1998, earnings
increased $42 million, or 43%. Excluding the acquisition of Sanwa, loans
increased $5.7 billion, or 16%, reflecting strong growth within the commercial
banking, leasing, asset-based lending, and specialty units. Increased
noninterest revenue also helped bolster earnings growth. Excluding Sanwa, total
revenue increased by $85 million due to strong loan growth and increased
leasing, cash management, corporate finance and tax processing activities.
Retail Banking
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 435 $ 446
Noninterest income 144 135
------- ------
Total Revenue 579 581
Provision 26 28
Noninterest expense 381 381
- --------------------------------------------------------------------------------
Net income $ 94 $ 92
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 9,369 10,084
Average deposits 42,494 42,369
- --------------------------------------------------------------------------------
Return on equity 22% 21%
- --------------------------------------------------------------------------------
Retail Banking includes businesses engaged in consumer retail services
through branch banking and direct banking units, as well as small business
lending and deposit services. The Retail Banking unit earned $94 million in the
first quarter of 1999, up slightly from the first quarter of 1998. Increased
earnings reflect higher noninterest revenues associated with new product
features, as well as slightly lower provision for credit losses associated with
lower loan volumes. These shifts were partly offset by lower net interest income
from reduced retail loan and deposit volumes. Lower levels of deposits reflect a
continued migration of customers to alternative higher-rate investment products,
partly offset by higher levels of money market accounts. Operating costs were
unchanged as Retail Banking continues to reconfigure its product offerings and
distribution channels consistent with consumer preferences.
National Financial Services
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 130 $ 84
Noninterest income 339 142
------- -------
Total Revenue 469 226
Provision 94 63
Noninterest expense 235 147
- --------------------------------------------------------------------------------
Net income $ 88 $ 9
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 4,739 3,393
Average deposits 2,530 2,243
- --------------------------------------------------------------------------------
Return on equity 15% 3%
- --------------------------------------------------------------------------------
13
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
National Financial Services includes mortgage banking, credit card
services, student loan processing, and private equity. The credit card business
also includes acquired portfolios from Household and Crestar in the second half
of 1998. The following table presents comparative data for the four principal
businesses which comprise this group.
National Financial Services
Net Income by Unit
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Credit card $30 $ 6
Private equity 29 15
Mortgage banking 21 (18)
Student loan processing 8 6
- --------------------------------------------------------------------------------
Total $88 $ 9
- --------------------------------------------------------------------------------
First quarter 1999 earnings were up dramatically compared to the first
quarter of 1998. Excluding mortgage impairment charges and related gains taken
in the first quarter of 1998, earnings increased by $49 million, due to credit
card acquisitions, and improved operating performance in each business unit.
Excluding mortgage impairment charges and related gains, mortgage banking
earnings increased by $9 million due to increased loan production volumes in a
favorable mortgage interest-rate environment and higher servicing revenues.
Student loan earnings increased by 28% or $2 million, as a result of an increase
in student loan account volumes. Credit card earnings increased by $24 million
compared to the first quarter of 1998 due to the aforementioned acquisitions;
while private equity earnings increased by $14 million compared to the same
period last year. Private equity earnings will normally fluctuate with the
performance of equity markets, as well as with general economic conditions.
Fleet Investment Group
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 47 $ 47
Noninterest income 333 246
------- -------
Total Revenue 380 293
Provision 1 1
Noninterest expense 246 197
- --------------------------------------------------------------------------------
Net income $ 79 $ 55
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 4,287 3,566
Average deposits 1,961 2,106
- --------------------------------------------------------------------------------
Return on equity 24% 20%
- --------------------------------------------------------------------------------
Assets Under Management $86,132 $81,198
- --------------------------------------------------------------------------------
Fleet Investment Group provides asset management services to institutional
and wealthy market clients, retail mutual fund and annuity sales, and securities
brokerage services. Results also include the recently acquired Merrill Lynch
Specialist unit which was purchased in December 1998. Fleet Investment Group
earnings increased $24 million compared to the first quarter of 1998. Increased
earnings were driven by strong increases in brokerage and market making revenues
which increased by $66 million at Quick & Reilly, while revenues from investment
management products and services increased by $15 million compared to the first
quarter of 1998. Increased market making revenues were partly attributable to
the acquisition of Merrill Lynch Specialists as well as increased trading
volumes. Higher investment management revenues were driven by increased sales of
mutual funds and annuity products, which increased by 32%, as well as growth in
assets under management which climbed to $86 billion in the first quarter of
1999.
Treasury
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Income statement data:
Net interest income $ 39 $ 33
Noninterest income 16 38
-------- -------
Total Revenue 55 71
Provision 3 4
Noninterest expense 18 15
- --------------------------------------------------------------------------------
Net income $ 25 $ 37
- --------------------------------------------------------------------------------
Balance sheet data:
Average loans 7,265 7,570
Average securities 9,462 8,945
Average deposits 8,906 5,333
- --------------------------------------------------------------------------------
Return on equity 37% 49%
- --------------------------------------------------------------------------------
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 $25 million in
the first quarter of 1999, down $12 million from the first quarter of 1998.
Excluding 1998 security gains, earnings increased slightly from the first
quarter of 1998, as higher revenues from foreign exchange and interest-rate
protection products were partly offset by associated increases in operating
costs.
All Other
This unit includes certain unallocated support unit costs, the management
accounting control units, and other transactions or events not driven by
specific business lines. Accordingly, earnings in this unit can fluctuate with
changes affecting consolidated provision for credit losses, one-time charges,
gains and other actions not driven by specific business units.
Earnings were $12 million, compared to $32 million in the first quarter of
1998. Lower earnings resulted from reduced revenues and an increased provision
for credit losses as compared to the first quarter of 1998. Lower revenues
resulted primarily from security gains recorded in the first quarter of 1998 (to
14
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
offset mortgage impairment charges taken last year). Increased provision
reflects higher legal provision for credit losses in the first quarter of 1999
compared to the first quarter of 1998. Earnings in this unit are negatively
impacted to the extent the legal provision for credit losses has increased in
excess of amounts allocated to the business units on an economic basis.
Securities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Dollars in millions Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government agencies $ 268 $ 269 $ 434 $ 437 $ 1,204 $ 1,211
Mortgage-backed securities 8,452 8,546 7,784 7,982 7,981 8,096
Other debt securities 503 504 792 802 255 255
- -----------------------------------------------------------------------------------------------------------------------
Total debt securities 9,223 9,319 9,010 9,221 9,440 9,562
- -----------------------------------------------------------------------------------------------------------------------
Marketable equity securities 331 330 292 292 289 288
Other securities 235 235 211 211 158 158
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale 9,789 9,884 9,513 9,724 9,887 10,008
- -----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,084 1,088 1,068 1,073 1,271 1,276
- -----------------------------------------------------------------------------------------------------------------------
Total securities $10,873 $10,972 $10,581 $10,797 $11,158 $11,284
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost of securities available for sale increased $276 million
to $9.8 billion at March 31, 1999 compared to December 31, 1998. The valuation
adjustment on securities available for sale decreased $116 million to an
unrealized gain position of $95 million at March 31, 1999, due to changes in the
interest-rate environment.
Loans
- --------------------------------------------------------------------------------
March 31, Dec. 31, March 31,
Dollars in millions 1999 1998 1998
- --------------------------------------------------------------------------------
Commercial and industrial $38,309 $37,167 $33,397
Lease financing 8,625 4,225 3,458
Commercial real estate 5,641 5,374 5,484
Consumer 21,108 22,630 22,647
- --------------------------------------------------------------------------------
Total loans $73,683 $69,396 $64,986
- --------------------------------------------------------------------------------
Total loans of $73.7 billion at March 31, 1999 increased $4.3 billion from
December 31, 1998. The increase is the result of loan growth in the commercial
and industrial and lease financing portfolios, largely due to the acquisition of
Sanwa. This increase was partially offset by a decline in the credit card
portfolio.
Commercial and industrial (C&I) loans increased $1.1 billion and lease
financings increased $4.4 billion from December 31, 1998 to March 31, 1999, due
primarily to the addition of Sanwa loans and leases.
The current financial situation in Asia, Latin America, Russia and
emerging markets has had minimal impact on the corporation as the corporation
has limited international exposure. The corporation has certain relationships
with customers in these marketplaces. These relationships contain both market
and credit risks. The corporation continues to monitor the financial
developments in these economies. Fleet's exposure to the Asian, Latin American
and other emerging markets as of March 31, 1999 was approximately $583 million,
($158 million, $369 million and $56 million, respectively) or less than 1% of
its loan portfolio. These exposures consist primarily of short-term trade
related financings with maturities generally less than 90 days. The corporation
had no direct exposure to Russia and other Eastern European countries at March
31, 1999.
Consumer Loans
- --------------------------------------------------------------------------------
March 31, Dec. 31, March 31,
Dollars in millions 1999 1998 1998
- --------------------------------------------------------------------------------
Residential real estate $ 9,151 $ 9,314 $ 9,344
Home equity 4,134 4,257 4,662
Credit card 3,855 5,673 4,741
Student loans 800 812 1,046
Installment/other 3,168 2,574 2,854
- --------------------------------------------------------------------------------
Total $21,108 $22,630 $22,647
- --------------------------------------------------------------------------------
Consumer loans decreased $1.5 billion from December 31, 1998. The decrease
is primarily the result of a $1.8 billion decrease in credit card loans, as the
corporation's credit card subsidiary, Fleet Credit Card Services, continues its
strategy of transitioning from primarily a one product portfolio to a
multi-product portfolio by focusing on accounts with higher profitability, lower
attrition levels, and better credit quality. The purchase of the $1.3 billion
Household portfolio in late 1998 has accelerated the implementation of this
strategy. The addition of this portfolio partially offset the transfer of $1.5
billion of credit card receivables to the securitized portfolio in order to
replenish the off-balance sheet securitized credit card pools, as well as
seasonal run-off.
15
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming Assets(a)(b)
- --------------------------------------------------------------------------------
Dollars in millions C&I CRE Consumer Total
- --------------------------------------------------------------------------------
Nonperforming loans:
Current or less than 90 days
past due $136 $ 7 $ 3 $146
Noncurrent 57 21 43 121
Other real estate owned (OREO) 2 3 8 13
- --------------------------------------------------------------------------------
Total NPAs March 31, 1999 $195 $ 31 $ 54 $280
- --------------------------------------------------------------------------------
Total NPAs December 31, 1998 $173 $ 57 $ 52 $282
- --------------------------------------------------------------------------------
Total NPAs March 31, 1998 $200 $ 91 $ 82 $373
- --------------------------------------------------------------------------------
(a) Throughout this document, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($252 million,
$234 million, and $225 million at March 31, 1999, December 31, 1998, and
March 31, 1998, respectively). Included in the 90 days past due and still
accruing interest were $196 million, $209 million, and $194 million of
consumer and residential loans at March 31, 1999, December 31, 1998, and
March 31, 1998, respectively.
(b) Nonperforming assets classified as held for sale by accelerated
disposition of $187 million, $46 million and $176 million at March 31,
1999, December 31, 1998 and March 31, 1998, respectively, are not included
in NPAs and related ratios.
Nonperforming assets (NPAs) remained consistent with December 31, 1998 as
a $22 million increase in commercial and industrial nonperforming loans (NPLs)
was offset by a $25 million decline in commercial real estate NPLs. NPAs at
March 31, 1999, as a percentage of total loans and OREO and as a percentage of
total assets were .38% and .26%, respectively, compared to .41% and .27%,
respectively, at December 31, 1998.
During the quarter the corporation transferred $54 million of loans,
primarily C&I loans, which at December 31, 1998 had been classified as
nonperforming, to the assets held for sale by accelerated disposition pool
contained in other assets. Additionally, $62 million of nonperforming leases and
asset-backed loans pertaining to the Sanwa acquisition were also transferred to
assets held for sale by accelerated disposition. The transfer of these
nonperforming loans and leases are in accordance with management's intention to
focus appropriate resources on the accelerated disposition of these assets.
Reserve for Credit Loss Activity
- --------------------------------------------------------------------------------
Three months ended March 31
Dollars in millions 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of year $1,552 $1,432
Loans charged off (186) (122)
Recoveries of loans charged off 37 30
- --------------------------------------------------------------------------------
Net charge-offs (149) (92)
Provision charged against income 149 92
Acquisitions/Other 172 121
- --------------------------------------------------------------------------------
Balance at end of period $1,724 $1,553
- --------------------------------------------------------------------------------
Ratios of net charge-offs to
average loans .83% .60%
- --------------------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end loans 2.34 2.39
- --------------------------------------------------------------------------------
Ratio of reserve for credit losses to
period-end nonperforming loans 646 441
- --------------------------------------------------------------------------------
Fleet's reserve for credit losses increased from $1,552 million at
December 31, 1998 to $1,724 million at March 31, 1999. The overall increase in
the reserve for credit losses is a result of reserves acquired as part of the
Sanwa acquisition. The provision for credit losses for the first quarter of 1999
was $149 million, $57 million higher than the prior year's first quarter. The
increased provision is a result of increased net charge-offs in the commercial
and industrial and credit card portfolios.
Funding Sources
- --------------------------------------------------------------------------------
March 31, Dec. 31, March 31,
Dollars in millions 1999 1998 1998
- --------------------------------------------------------------------------------
Deposits:
Demand $11,150 $13,400 $13,006
Regular savings and NOW 5,226 5,399 6,072
Money market 29,672 29,297 25,826
Time:
Domestic 18,300 17,764 19,429
Foreign 3,285 3,818 3,832
- --------------------------------------------------------------------------------
Total deposits 67,633 69,678 68,165
- --------------------------------------------------------------------------------
Short-term borrowed funds:
Federal funds purchased 644 1,857 1,456
Securities sold under
agreements to repurchase 2,383 2,599 2,451
Commercial paper 901 943 834
Other 1,943 3,913 3,497
- --------------------------------------------------------------------------------
Total short-term borrowed
funds 5,871 9,312 8,238
- --------------------------------------------------------------------------------
Due to brokers/dealers 3,823 3,975 4,433
Long-term debt 15,586 8,820 5,095
- --------------------------------------------------------------------------------
Total $92,913 $91,785 $85,931
- --------------------------------------------------------------------------------
Total deposits decreased $2.0 billion to $67.6 billion at March 31, 1999
when compared to December 31, 1998 due principally to a $2.3 billion decrease in
demand deposits as a result of lower seasonal business deposits.
The $3.4 billion decrease in short-term borrowings since December 31, 1998
is attributable to a $1.2 billion decrease in federal funds purchased, as well
as a $1.7 billion decrease in treasury, tax and loan borrowings. Long-term debt
increased $6.8 billion to $15.6 billion at March 31, 1999 when compared to
December 31, 1998 due to the issuance of debt to fund acquisitions and balance
sheet growth.
16
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market
risk, liquidity, and capital.
Market Risk
Market risk is the sensitivity of income to variations in interest rates,
foreign exchange rates, equity prices, commodity prices, and other market-driven
rates or prices. As discussed below, the corporation is exposed to market risk
in both its non-trading and trading operations.
Non-trading Market Risk
Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-trading market risk to which the corporation is exposed.
Interest-rate risk is the sensitivity of income to variations in interest rates.
The major source of the corporation's non-trading interest-rate risk is
the difference in the repricing characteristics of the corporation's core
banking assets and liabilities - loans and deposits. This difference or mismatch
is a risk to net interest income.
The corporation's Board limits on interest-rate risk specify that if
interest rates were to shift immediately up or down 200 basis points, estimated
net interest income for the subsequent 12 months should decline by less than
7.5%. The corporation was in compliance with this limit at March 31, 1999. The
following table reflects the estimated exposure of the corporation's net
interest income for the next 12 months, assuming an immediate shift in interest
rates.
Estimated Exposure to
Rate Change Net Interest Income
(Basis Points) (Dollars in Millions)
- --------------------------------------------------------------------------------
March 31 1999
- --------------------------------------------------------------------------------
+200 $ 1
-200 (179)
- --------------------------------------------------------------------------------
Net interest income sensitivity to changes in interest rates remained low.
Asset-sensitivity declined, as expected, due to the acquisition of Sanwa on
February 1, 1999, as well as the impact of additional fixed-rate swaps during
the quarter. Revised expectations for deposit pricing, based on a reassessment
by product managers of rate trends and competitor actions, increased measured
exposure to extreme rate movements.
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 March 31,
1999, the estimated exposure was 1.8% asset-sensitive (see the following table).
Interest-Rate Gap Analysis
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Cumulatively Repriced Within
March 31, 1999 3 months 4 to 12 12 to 24 2 to 5 After 5
Dollars in millions, by repricing date or less months months years years Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 61,192 $ 8,468 $ 6,552 $11,624 $18,330 $ 106,166
Total liabilities and stockholders' equity (49,492) (8,930) (5,417) (3,582) (38,745) (106,166)
Net off-balance sheet (12,298) 2,936 3,991 3,580 1,791 --
- ---------------------------------------------------------------------------------------------------------------------
Periodic gap (598) 2,474 5,126 11,622 (18,624)
Cumulative gap (598) 1,876 7,002 18,624 --
- ---------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total
assets- March 31, 1999 (0.6)% 1.8% 6.6% 17.5%
- ---------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percent of total
assets- December 31, 1998 1.1 5.4 9.1 18.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risk-Management Instrument Analysis
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Assets- Average Weighted Average Rate
Notional Liabilities Maturity Fair ---------------------
Dollars in millions Value Hedged (Years) Value Receive Pay
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-rate risk-management instruments
Interest-rate swaps:
Receive-fixed/pay-variable $ 9,691 Variable-rate loans
356 Fixed-rate deposits
2,578 Long-term debt
--------
12,625 2.5 $ 49 6.22% 5.37%
- -------------------------------------------------------------------------------------------------------------------------------
Basis swaps 4,393 Deposits .7 1 5.10 5.10
- -------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income 17,018 2.0 50 5.93 5.30
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage banking risk-management instruments
Interest-rate swaps:
Receive-fixed/pay-variable, PO swaps 9,806 Mortgage servicing rights 3.6 (11) 6.07 5.20
Futures contracts:
Futures sold 530 Mortgage servicing rights .2 -- -- --
Options:
Interest-rate floors and options on swaps 34,185 Mortgage servicing rights 4.3 218 --(a) --(a)
Interest-rate caps and cap corridors 21,779 Mortgage servicing rights 3.7 167 --(a) --(a)
Call options purchased 3,250 Mortgage servicing rights .1 27 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total options 59,214 3.9 412 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights 69,550 3.8 401 6.07 5.20
- -------------------------------------------------------------------------------------------------------------------------------
Total risk-management instruments $86,568 3.4 $451 5.98% 5.27%
- -------------------------------------------------------------------------------------------------------------------------------
</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 5.06% and 6.53%, respectively.
Off-balance sheet interest-rate instruments used to manage net interest
income are designated as hedges of specific assets and liabilities. Accrual
accounting is applied to these hedges, and the income or expense is recorded in
the same category as that of the related balance sheet item. The periodic net
settlement of the interest-rate risk-management instruments is recorded as an
adjustment to net interest income. As of March 31, 1999, the corporation had net
deferred income of $9.8 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 5 years.
During the first quarter of 1999, 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, $2.7 billion of receive-fixed swaps were added through new
transactions, partially offset by maturities of $2.3 billion.
A second major source of the corporation's non-trading interest-rate risk
is the sensitivity of its mortgage servicing rights (MSRs) to prepayments. Since
MSRs represent the right to service mortgage loans, a decline in interest rates
and an actual, or probable, increase in mortgage prepayments shorten the
expected life of the MSR asset and reduce its economic value. Correspondingly,
an increase in interest rates and an actual, or probable, decline in mortgage
prepayments lengthen the expected life of the MSR asset and enhance its economic
value. The expected income from and, therefore, economic value of MSRs is
sensitive to movements in interest rates due to this sensitivity to mortgage
prepayments.
The interest-rate instruments used to manage potential impairment of MSRs
are designated as hedges of the MSRs. Changes in fair value of the hedges are
recorded as adjustments to the carrying value of the MSRs and related hedges.
During the first quarter of 1999, net hedge losses of $369 million were deferred
and recorded as adjustments to the carrying value of the MSRs and related
hedges. At March 31, 1999, the carrying value and fair value of the
corporation's MSRs were $2.1 billion and $2.3 billion, respectively.
In connection with the corporation's management of its MSR hedge program,
the corporation terminated (in notional amounts) $5.7 billion of interest-rate
floor and options on swaps agreements and $13.4 billion of call options and
added $6.0 billion and $13.5 billion of interest-rate floor and options on swaps
agreements and call options, respectively, during the first quarter of 1999.
Additionally, the corporation added $2.1 billion of interest-rate cap corridors
and $3.3 billion of interest-rate swap contracts in its management of the MSR
hedge program.
The corporation also performs valuation analysis which involves projecting
future cash flows from the corporation's assets, liabilities and off-balance
sheet positions over a very long-term horizon, discounting those cash flows at
appropriate interest rates, and then summing the discounted cash flows. The
corporation's "economic value of equity" (EVE) is the estimated net present
value of the discounted cash flows.
The corporation's Board limits on interest-rate risk specify that if
interest rates were to shift immediately up or down 200 basis points, the
estimated economic value of equity should decline by less than 10%. The
18
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
corporation was in compliance with this limit at March 31, 1999.The following
table reflects the corporation's estimated exposure to economic value assuming
an immediate shift in interest rates. Exposures are reported for shifts of +/-
100 basis points, as well as +/- 200 basis points because the sensitivity of
EVE, in particular, the sensitivity of the hedged MSRs, to changes in interest
rates can be nonlinear. The primary factors modifying the reported position in
the first quarter of 1999 were additions to fixed-rate assets and swaps as well
as more conservative assessments of exposures to MSRs. Given the assumption of
an immediate interest rate movement with no management intervention, the
corporation would be adversely impacted by extreme rate changes in either
direction.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (Dollars in millions)
- --------------------------------------------------------------------------------
March 31 1999
- --------------------------------------------------------------------------------
+200 $(575)
+100 (213)
-100 (503)
-200 (646)
- --------------------------------------------------------------------------------
Trading Market Risk
The corporation's trading portfolios are exposed to market risk due to
variations in interest rates, currency exchange rates, equity prices, precious
metals prices, and related market volatilities. This exposure arises in the
normal course of the corporation's business as a financial intermediary.
The corporation uses an "earnings at risk" (EAR) system, based on an
industry-standard risk measurement methodology, to measure the overall market
risk inherent in its trading activities. The average daily exposure to this
market risk was $19.8 million, and the maximum daily exposure was $41.8 million
during the first quarter of 1999. The increase in EAR from December 31, 1998 was
due principally to volatility in the equity markets as well as the acquisition
of MLSI.
Liquidity Risk
Liquidity risk-management's objective is to assure the ability of the
corporation and its subsidiaries to meet their financial obligations. These
obligations are the withdrawal of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and the ability to take advantage of new business
opportunities. Liquidity is achieved by the maintenance of a strong base of core
customer funds, maturing short-term assets, the ability to sell marketable
securities, committed lines of credit and access to capital markets. Liquidity
may also be enhanced through the securitization of consumer asset receivables.
Liquidity at Fleet is measured and monitored daily, allowing management to
better understand and react to balance sheet trends. The Asset-Liability
Management Committee (ALCO) is responsible for implementing the Board's policies
and guidelines governing liquidity.
Liquidity at the bank level is managed through the monitoring of
anticipated changes in loans, core deposits, and wholesale funds.
Diversification of liquidity sources by maturity, market, product, and
counterparty are mandated through ALCO guidelines. The corporation's banking
subsidiaries routinely model liquidity under three economic scenarios, two of
which involve increasing levels of economic difficulty and financial market
strain. Management also maintains a detailed contingency liquidity plan designed
to respond either to an overall decline in the condition of the banking industry
or a problem specific to Fleet. The strength of Fleet's liquidity position is a
result of its base of core customer deposits. These core deposits are
supplemented by wholesale funding sources in the capital markets, as well as
from direct customer contacts. Wholesale funding sources include large
certificates of deposit, foreign branch deposits, federal funds, collateralized
borrowings, and a bank-note program.
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries, committed lines of credit and access to the money
and capital markets. Dividends from banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and earning trends. The
corporation's subsidiaries rely on cash flows from operations, core deposits,
borrowings, short-term high-quality liquid assets, and, in the case of
nonbanking subsidiaries, funds from the parent company.
At March 31, 1999 and December 31, 1998, the corporation had commercial
paper outstanding of $901 million and $943 million, respectively. The
corporation has a backup line of credit to ensure that funding is not
interrupted if commercial paper is not available. The total amount of funds
available under this agreement was $1 billion at March 31, 1999, with no
outstanding balance under this line of credit.
Fleet has a shelf registration statement that provides for the issuance of
common and preferred stock, senior or subordinated debt securities, and other
securities with total amounts of funds available of approximately $1.5 billion
at March 31, 1999.
As shown in the consolidated statements of cash flows, cash and cash
equivalents decreased by $876 million during the first quarter of 1999. The
decrease was due to cash used in investing activities of $164 million and cash
used in financing activities of $3.9
19
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
billion, offset by cash provided by operating activities of $3.2 billion. Net
cash used in investing activities was attributable to net purchases of
securities, purchases of mortgage servicing rights and net cash and cash
equivalents paid for businesses acquired, partially offset by a net decrease in
loans. Net cash used in financing activities was principally due to a net
decrease in deposits and short-term borrowings, partially offset by proceeds
from the issuance of long-term debt. Net cash provided by operating activities
was primarily the result of a net decrease in mortgages held for resale and a
decrease in due from brokers/dealers.
CAPITAL
- --------------------------------------------------------------------------------
March 31, Dec. 31, March 31,
Dollars in millions 1999 1998 1998
- --------------------------------------------------------------------------------
Risk-adjusted assets $111,059 $104,372 $100,087
Tier 1 risk-based capital
(4% minimum) 6.60% 7.08% 6.39%
Total risk-based capital
(8% minimum) 10.90 11.22 10.37
Leverage ratio
(4% minimum) 7.07 7.48 7.19
Common equity-to-assets 8.40 8.35 8.12
Total equity-to-assets 9.05 9.01 8.82
Tangible common equity-
to-assets 5.35 5.53 5.39
Tangible total
equity-to-assets 6.02 6.21 6.12
- --------------------------------------------------------------------------------
At March 31, 1999, the corporation exceeded all regulatory required
minimum capital ratios as Fleet's Tier 1 and Total risk-based capital ratios
were 6.60 percent and 10.90 percent, respectively, compared with 7.08 percent
and 11.22 percent, respectively, at December 31, 1998. The leverage ratio, a
measure of Tier 1 capital to average quarterly assets, was 7.07 percent at March
31, 1999 compared with 7.48 percent at December 31, 1998. The reduction in
capital ratios was a result of the Sanwa acquisition. Capital ratios are
expected to increase during the second quarter.
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements relating to future
results of the corporation (including certain projections and business trends)
that are considered "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to changes in political and economic conditions, either
nationally or in the states in which the corporation conducts its business;
interest rate fluctuations; competitive product and pricing pressures within the
corporation's market; equity and bond market fluctuations; personal and
corporate customers' bankruptcies; inflation; lower than expected savings
associated with 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.
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.
20
<PAGE>
PART II. OTHER INFORMATION
PART II. ITEM 2. CHANGES IN SECURITIES
On January 26, 1999, the corporation sold 8,750,000 shares of common stock at
$44.00 per share in a private placement to NationsBank, N.A. These shares had
been held in treasury as part of the corporation's share repurchase program.
This transaction was part of the corporation's ongoing capital and
risk-management activities. Exemption from registration was claimed pursuant to
Section 4(2) of the Securities Act of 1933.
PART II. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The corporation held its Annual Meeting of Stockholders on April 21, 1999.
(b) Not applicable.
(c) A brief description of each matter voted upon at the meeting, and the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes, as to each such matter, follows. A
separate tabulation with respect to each nominee for office is also
included.
Three matters were voted on at the Annual Meeting.
1. Election of Directors
All seven nominees for election as directors were elected. There were no
abstentions nor broker non-votes for any of the nominees.
Name of Director For Against Term Expiration
- ---------------- --- ------- ---------------
Paul J. Choquette, Jr. 478,373,930 3,939,746 2002
Robert M. Kavner 478,313,536 4,000,140 2002
Thomas D. O'Connor, Sr. 478,404,820 3,908,856 2002
Michael B. Picotte 478,495,625 3,818,051 2002
Thomas C. Quick 478,429,755 3,883,921 2002
Thomas M. Ryan 478,417,289 3,896,387 2002
Paul R. Tregurtha 478,403,407 3,910,269 2002
The following directors will continue in office and were not up for
re-election.
William Barnet, III 2000
John T. Collins 2000
Marian L. Heard 2000
Robert J. Matura 2000
Terrence Murray 2000
Samuel O. Thier 2000
Joel B. Alvord 2001
Bradford R. Boss 2001
Stillman B. Brown 2001
Kim B. Clark 2001
James F. Hardymon 2001
Arthur C. Milot 2001
Lois D. Rice 2001
2. Approval of Amended and Restated 1992 Stock Option and Restricted Stock
Plan
The second proposal voted on by stockholders of the corporation was to
approve the Amended and Restated 1992 Stock Option and Restricted Stock
Plan. This proposal was approved with 436,833,038 votes cast for,
41,815,547 votes cast against, and 3,665,091 abstentions. There were no
broker non-votes.
21
<PAGE>
3. Ratification of Selection of Independent Auditors
The third proposal voted on by stockholders of the corporation, to approve
the appointment of KPMG Peat Marwick LLP to serve as independent auditors
of the corporation for the current fiscal year ended December 31, 1999,
was approved with 479,378,377 votes cast for, 1,221,137 votes cast
against, and 1,714,162 abstentions. There were no broker non-votes.
(d) Not applicable.
PART II. ITEM 6.
(a) Exhibit Index
Exhibit
Number
- ------
4* Instruments defining the rights of security holders, including Debentures
11 Statement re: computation of per share earnings
12 Statement re: computation of ratios
27 Financial data schedule
* Registrant has no instruments defining the rights of holders of equity or
debt securities where the amount of securities authorized thereunder
exceeds 10% of the total assets of the registrant and its subsidiaries on
a consolidated basis. Registrant hereby agrees to furnish a copy of any
such instrument to the Commission upon request.
(b) Four Form 8-K's were filed during the period from January 1, 1999 to
the date of the filing of this report.
- Current Report on Form 8-K dated January 20, 1999 announcing
fourth quarter earnings 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.
- Current Report on Form 8-K dated April 2, 1999 filing the
unaudited pro forma condensed combined financial statements
and notes thereto in connection with the proposed merger with
BankBoston Corporation.
- Current Report on Form 8-K dated April 14, 1999 announcing
first quarter earnings.
22
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fleet Financial Group, Inc.
------------------------------
(Registrant)
/s/ Eugene M. McQuade
------------------------------
Eugene M. McQuade
Vice Chairman
Chief Financial Officer
/s/ Robert C. Lamb, Jr.
------------------------------
Robert C. Lamb, Jr.
Controller
Chief Accounting Officer
DATE: May 14, 1999
23
EXHIBIT 11
FLEET FINANCIAL GROUP, INC.
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
($ in millions, except per share data)
<TABLE>
<CAPTION>
For the Three Months ended March 31,
-----------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
BASIC DILUTED BASIC DILUTED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 568,546,007 568,546,007 567,778,128 567,778,128
Additional shares due to:
Stock options -- 7,363,008 -- 7,245,164
Warrants -- 12,663,411 -- 12,160,270
--------------- --------------- --------------- ---------------
Total equivalent shares 568,546,007 588,572,426 567,778,128 587,183,562
=============== =============== =============== ===============
Earnings per share
Net income $438 $438 $323 $323
Less: Preferred stock dividends
and other (16) (16) (12) (12)
--------------- --------------- --------------- ---------------
Adjusted net income $422 $422 $311 $311
=============== =============== =============== ===============
Total equivalent shares 568,546,007 588,572,426 567,778,128 587,183,562
=============== =============== =============== ===============
Earnings per share on net income $.74 $.72 $ .55 $ .53
=============== =============== =============== ===============
</TABLE>
24
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>
Three
Months
ended
March 31, Year ended December 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and
cumulative effect of accounting
changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074
(2) 1/3 of rent 14 54 53 55 52 53
(b) Preferred dividends 21 83 104 117 62 51
------ ------ ------ ------ ------ ------
(c) Adjusted earnings $1,074 $3,705 $3,188 $3,055 $2,683 $2,638
====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $ 355 $1,198 $ 894 $ 985 $1,527 $1,178
====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 3.02x 3.09x 3.57x 3.10x 1.76x 2.24x
====== ====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Three
Months
ended
March 31, Year ended December 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and
cumulative effect of accounting
changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074
(2) 1/3 of rent 14 54 53 55 52 53
(3) Interest on deposits 424 1,835 1,654 1,754 1,726 1,170
(b) Preferred dividends 21 83 104 117 62 51
------ ------ ------ ------ ------ ------
(c) Adjusted earnings $1,498 $5,540 $4,842 $4,809 $4,409 $3,808
====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $ 779 $3,033 $2,548 $2,739 $3,253 $2,348
====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.92x 1.83x 1.90x 1.76x 1.36x 1.62x
====== ====== ====== ====== ====== ======
</TABLE>
25
<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>
Three
Months
ended
March 31, Year ended December 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and
cumulative effect of accounting
changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074
(2) 1/3 of rent 14 54 53 55 52 53
------ ------ ------ ------ ------ ------
(b) Adjusted earnings $1,053 $3,622 $3,084 $2,938 $2,621 $2,587
====== ====== ====== ====== ====== ======
Fixed charges $ 334 $1,115 $ 790 $ 868 $1,465 $1,127
====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 3.15x 3.25x 3.90x 3.38x 1.79x 2.30x
====== ====== ====== ====== ====== ======
</TABLE>
INCLUDING INTEREST ON DEPOSITS
(dollars in millions)
<TABLE>
<CAPTION>
Three
Months
ended
March 31, Year ended December 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and
cumulative effect of accounting
changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074
(2) 1/3 of rent 14 54 53 55 52 53
(3) Interest on deposits 424 1,835 1,654 1,754 1,726 1,170
------ ------ ------ ------ ------ ------
(b) Adjusted earnings $1,477 $5,457 $4,738 $4,692 $4,347 $3,757
====== ====== ====== ====== ====== ======
Fixed charges $ 758 $2,950 $2,444 $2,622 $3,191 $2,297
====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.95x 1.85x 1.94x 1.79x 1.36x 1.64x
====== ====== ====== ====== ====== ======
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1999 consolidated financial statements and management's discussion and
analysis of financial condition and results of operations contained in the Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,253
<INT-BEARING-DEPOSITS> 604
<FED-FUNDS-SOLD> 5
<TRADING-ASSETS> 486
<INVESTMENTS-HELD-FOR-SALE> 9,884
<INVESTMENTS-CARRYING> 1,084
<INVESTMENTS-MARKET> 1,088
<LOANS> 73,683
<ALLOWANCE> 1,724
<TOTAL-ASSETS> 106,166
<DEPOSITS> 67,633
<SHORT-TERM> 9,694
<LIABILITIES-OTHER> 3,641
<LONG-TERM> 15,586
0
691
<COMMON> 3,297
<OTHER-SE> 5,624
<TOTAL-LIABILITIES-AND-EQUITY> 106,166
<INTEREST-LOAN> 1,559
<INTEREST-INVEST> 173
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 1,778
<INTEREST-DEPOSIT> 424
<INTEREST-EXPENSE> 744
<INTEREST-INCOME-NET> 1,034
<LOAN-LOSSES> 149
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,125
<INCOME-PRETAX> 719
<INCOME-PRE-EXTRAORDINARY> 438
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 438
<EPS-PRIMARY> .74
<EPS-DILUTED> .72
<YIELD-ACTUAL> 4.59
<LOANS-NON> 267
<LOANS-PAST> 252
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,552
<CHARGE-OFFS> 186
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 1,724
<ALLOWANCE-DOMESTIC> 1,724
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 155
</TABLE>
