================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
|X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for quarterly period ended September 30, 2000
|_| 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
FLEETBOSTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Rhode Island 05-0341324
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Federal Street
Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
(617) 434-2200
(Registrant's telephone number, including area code)
(Former name, if changed since last report)
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 October
31, 2000 was 905,079,861.
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations 3
Consolidated Statements of Income
Three months ended September 30, 2000 and 1999 22
Nine months ended September 30, 2000 and 1999 23
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 24
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 2000 and 1999 25
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 26
Condensed Notes to Consolidated Financial Statements 27
PART II. OTHER INFORMATION 31
SIGNATURES 32
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis updates, and should be read in conjunction
with, Management's Discussion and Analysis included in the Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000 and the 1999
Annual Report on Form 10-K of FleetBoston Financial Corporation (the
Corporation). All prior period information included in this discussion and
analysis has been restated to give retroactive effect to the Corporation's
merger with BankBoston Corporation (BankBoston), which was completed in October
1999 and accounted for as a pooling of interests. Certain prior period amounts
have been reclassified to conform to current period classifications.
On October 1, 2000, the Corporation entered into a definitive agreement to
acquire Summit Bancorp. (Summit), a New Jersey-based financial services company
with approximately $39.5 billion in assets and approximately $3 billion in
stockholders' equity at September 30, 2000. Under the terms of the agreement,
Summit stockholders will receive 1.02 shares of the Corporation's common stock
for each share of Summit common stock. The merger, which is subject to Summit
stockholder and regulatory approvals, is anticipated to close in the first
quarter of 2001, and is expected to be accounted for as a pooling of interests.
Additional information with respect to this merger is included in Note 2 to the
Financial Statements.
<TABLE>
<CAPTION>
FINANCIAL SUMMARY
=====================================================================================
Three months Nine months
Dollars in millions, ended Sept. 30 ended Sept. 30
except per share amounts 2000 1999 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Net interest income
(FTE)(a) $ 1,601 $ 1,714 $ 5,010 $ 5,111
Noninterest income 2,150 1,692 7,230 5,001
Noninterest expense 2,047 2,016 6,781 6,032
Provision for credit
losses 300 228 911 688
Net income 841 711 2,645 2,072
-------------------------------------------------------------------------------------
Per Common Share
Basic earnings $ .92 $ .76 $ 2.90 $ 2.20
Diluted earnings .90 .74 2.84 2.15
Cash dividends declared .30 .27 .90 .81
Book value 16.56 16.01 16.56 16.01
-------------------------------------------------------------------------------------
Ratios
Return on average assets 1.88% 1.50% 1.88% 1.47%
Return on average common
equity 22.41 19.55 24.22 19.42
Total equity to assets
(period-end) 8.68 8.34 8.68 8.34
Tangible common
equity to assets 6.30 5.81 6.30 5.81
Tier 1 risk-based capital
ratio 7.61 7.14 7.61 7.14
Total risk-based capital
ratio 11.93 11.28 11.93 11.28
Leverage ratio 7.90 7.21 7.90 7.21
-------------------------------------------------------------------------------------
At September 30
Total assets $179,093 $185,295 $179,093 $185,295
Loans and leases 111,097 119,772 111,097 119,772
Deposits 98,850 113,184 98,850 113,184
Stockholders' equity 15,550 15,457 15,550 15,457
Nonperforming assets 1,025 786 1,025 786
==================================================================================
</TABLE>
(a) The fully taxable equivalent (FTE) adjustment included in net interest in-
come was $16 million and $14 million for the three months ended Sep-
tember 30, 2000 and 1999, respectively, and $46 million and $41 million
for the nine months ended September 30, 2000 and 1999, respectively.
The Corporation recorded net income of $841 million, or $.90 per diluted
share, for the quarter ended September 30, 2000, compared to $711 million, or
$.74 per diluted share, for the third quarter of 1999. Return on average assets
(ROA) and return on average common equity (ROE) were 1.88% and 22.41%,
respectively, for the third quarter of 2000, compared to 1.50% and 19.55%,
respectively, for the third quarter of 1999. Net income for the first nine
months of 2000 was $2.6 billion, or $2.84 per diluted share, compared to $2.1
billion, or $2.15 per diluted share, for the first nine months of 1999. ROA and
ROE were 1.88% and 24.22%, respectively, for the nine months ended September 30,
2000 and 1.47% and 19.42%, respectively, for the 1999 period.
The third quarter of 2000 included a gain of $164 million ($84 million
after-tax) resulting from the Corporation's July and August 2000 divestitures of
134 branches in Massachusetts, Connecticut, and New Hampshire, and approximately
$2 billion of loans and $5 billion of deposits, to Sovereign Bancorp (Sovereign)
and various community banks. These divestitures were part of the Corporation's
overall divestiture plan, which was agreed to in connection with obtaining
regulatory approvals for the BankBoston merger. During the first nine months of
2000, the Corporation completed the divestiture of 312 branches, approximately
$9 billion of loans and approximately $13 billion of deposits, and recorded
gains of $843 million ($420 million after-tax). The Corporation has
substantially completed its planned divestitures, and expects to complete the
remaining divestiture of three branches during the fourth quarter of 2000. In
connection with its divestitures to Sovereign, the Corporation expects to
receive a deferred payment of approximately $196 million from Sovereign during
2001.
The third quarter results also included approximately $40 million ($25
million after-tax) of merger integration costs incurred in connection with
integration efforts following the BankBoston merger. These merger integration
costs are expensed as incurred. Since the completion of the merger, the
Corporation has incurred cumulative integration costs of approximately $329
million ($190 million after-tax), including $227 million ($137 million
after-tax) in the first nine months of 2000. The Corporation does not anticipate
incurring any additional integration costs in connection with the BankBoston
merger.
Excluding the divestiture gain and merger integration costs, operating net
income for the third quarter of 2000 was $782 million, or $.84 per diluted
share, a 10% increase over net income of $711 million and a 13.5% increase over
diluted earnings per share of $.74 in the third quarter of 1999. Operating net
income for the first nine months of 2000 was $2.4 billion, or $2.53 per diluted
share, a 14% increase compared to net income of $2.1 billion and an 18% increase
over diluted earnings per share of $2.15, for the first nine months of 1999.
These increases were largely the result of strong growth in capital markets and
investment services revenues from the Corporation's Principal Investing
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
business, Robertson Stephens and Quick & Reilly.
RESULTS OF OPERATIONS
Net Interest Income
==================================================================
Three months Nine months
FTE basis ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
------------------------------------------------------------------
Interest income $3,384 $3,298 $10,205 $9,678
Tax-equivalent adjustment 16 14 46 41
Interest expense 1,799 1,598 5,241 4,608
------------------------------------------------------------------
Net interest income $1,601 $1,714 $ 5,010 $5,111
==================================================================
Net interest income decreased $113 million in the third quarter of 2000 compared
to the same period a year ago, and $101 million in the nine month comparison,
primarily reflecting the impact of divestitures of approximately $13 billion of
low-cost deposits and $9 billion of loans during 2000.
<TABLE>
<CAPTION>
Net Interest Margin and Interest Rate Spread
========================================================================================================================
Three months ended Sept. 30 Nine months ended Sept. 30
2000 1999 2000 1999
FTE basis Average Average Average Average
Dollars in millions Balance Rate Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities $ 24,046 6.64% $ 24,627 6.49% $ 23,823 6.59% $ 24,454 6.51%
Loans and leases:
Domestic 95,609 9.10 104,323 8.12 100,651 8.84 103,096 8.16
International 16,066 14.08 14,131 13.38 15,328 14.01 13,777 13.35
Due from brokers/dealers 3,434 5.81 2,903 4.85 3,750 5.56 3,289 4.45
Mortgages held for sale 1,496 8.34 1,816 7.46 1,267 8.24 2,789 7.05
Other 9,484 6.90 13,980 6.64 12,028 6.35 12,503 6.37
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Total interest earning assets 150,135 9.02 161,780 8.14 156,847 8.73 159,908 8.12
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Deposits 77,794 4.71 89,749 3.79 82,792 4.36 90,976 3.85
Short-term borrowings 19,210 6.48 23,401 5.63 20,972 6.02 23,037 5.14
Due to brokers/dealers 4,439 6.00 3,947 5.05 5,022 5.53 4,079 4.50
Long-term debt 27,865 7.16 23,633 6.06 26,911 6.79 21,311 6.06
------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 129,308 5.54 140,730 4.51 135,697 5.14 139,403 4.42
------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.48 3.63 3.59 3.70
Interest-free sources of funds 20,827 21,050 21,150 20,505
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Total sources of funds $150,135 4.77 $161,780 3.93 $156,847 4.47 $159,908 3.85
------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.25% 4.21% 4.26% 4.27%
========================================================================================================================
</TABLE>
The Corporation's net interest margin for the third quarter of 2000 was
4.25%, compared to 4.21% for the third quarter of 1999. The 4 basis point
increase was primarily attributable to the absence of low-yielding earning
assets in the Section 20 subsidiary's "matched book" that were previously used
to satisfy regulatory requirements associated with revenue earned by Robertson
Stephens. As a result of banking reform legislation which became effective in
March 2000, the Corporation is no longer required to maintain the matched book.
The increase in margin was partially offset by the aforementioned branch
divestitures.
Future levels of net interest income and margin will continue to be
negatively impacted by the branch divestitures. The Corporation anticipates that
annualized net interest income will be reduced by approximately $500 million as
a result of the divestitures. Because the divestitures were completed in phases,
their impact on calendar year 2000 net interest income will be only a portion of
the annualized estimate.
Average domestic loans and leases decreased $8.7 billion to $95.6 billion
for the third quarter of 2000, compared with $104.3 billion for third quarter of
1999, primarily driven by decreases in both commercial and industrial (C&I)
loans and residential mortgages, mainly from divestitures, offset, in part, by
growth in lease financing. Average yields on domestic loans and leases increased
over the third quarter of 1999 as a result of rising interest rates throughout
2000. Average international loans and leases increased $1.9 billion to $16.1
billion, reflecting increased lending activity, primarily in Brazil, due to an
improving economy.
Average due from broker/dealers and due to broker/dealers increased $531
million and $492 million, respectively, from the third quarter of 1999. These
increases resulted from a higher level of market activity at Quick & Reilly
relative to the 1999 period.
Average mortgages held for resale decreased $320 million compared to the
third quarter of 1999, due to slightly lower production volume at Fleet
Mortgage, directly attributable to the higher interest rate environment during
the first nine months of 2000 relative to the 1999 period. The increase in
mortgage rates caused average yields on mortgages held for resale to increase 88
basis points in the quarter to quarter comparison.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average other interest earning assets decreased $4.5 billion to $9.5
billion for the third quarter of 2000, primarily as a result of the previously
mentioned elimination of the matched book. Partially offsetting this decrease
was an increase in trading assets.
The $12 billion decrease in average interest bearing deposits compared to
the third quarter of 1999 reflects the impact of divestitures, slightly offset
by an increase in international deposits.
The $4.2 billion decrease in average short-term borrowings is mainly
attributable to a decrease in federal funds purchased and securities sold under
agreements to repurchase, due to the elimination of the matched book, and a
change in funding mix, which resulted in a $4.2 billion increase in average
long-term debt. The rise in yields is a result of Federal Reserve Board rate
increases in the first half of 2000.
Noninterest Income
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Capital markets revenue $ 749 $ 471 $2,621 $1,371
Investment services revenue 399 363 1,324 1,108
Banking fees and commissions 351 388 1,065 1,104
Credit card revenue 178 193 507 542
Processing-related revenue 151 146 457 457
Gains on branch divestitures
and sales of businesses 164 -- 843 50
Other noninterest income 158 131 413 369
--------------------------------------------------------------------------------
Total noninterest income $2,150 $1,692 $7,230 $5,001
================================================================================
Noninterest income for the third quarter of 2000 increased $458 million to
$2.2 billion compared to $1.7 billion for the same period in 1999, an increase
of 27%. This increase reflects continued strength in the capital markets and
investment services businesses, offset in part by lower banking fees and
commissions. Increases in capital markets and investments services revenues
resulted from a higher level of gains from liquidations of direct investments in
public companies by the Principal Investing business and higher trading volumes
at Quick & Reilly and Robertson Stephens. The third quarter of 2000 also
included the previously mentioned $164 million gain from branch divestitures.
Capital Markets Revenue
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Principal investing $255 $104 $ 856 $ 249
Market-making revenue 175 95 622 297
Underwriting revenue 128 85 479 239
Advisory fees 77 49 296 141
Foreign exchange revenue 50 49 147 159
Syndication/agency fees 46 48 130 134
Trading profits and commissions 13 20 137 128
Securities gains (losses) 5 14 (46) 10
Other -- 7 -- 14
--------------------------------------------------------------------------------
Total capital markets revenue $749 $471 $2,621 $1,371
================================================================================
Capital markets revenue generating businesses showed continued strength,
rising $278 million, or 59%, to $749 million for the third quarter of 2000. This
rise in capital markets revenue reflects increases in almost all categories,
with the exception of trading profits and commissions, syndication/agency fees
and securities gains. For the first nine months of 2000, capital markets revenue
increased 91% over the same period in 1999, reflecting extraordinary levels
recorded in the first quarter of 2000 and substantial growth in the second and
third quarters of 2000 compared to the same periods a year ago. Second and third
quarter 2000 revenue levels generally declined from the extraordinary levels
recorded in the first quarter due to an industry-wide drop in capital markets
activities. The Corporation's revenues from its capital markets activities are
impacted by a variety of factors, including the condition of the economy,
interest rates and equity markets. The equity markets continued to endure
significant slowdowns during the third quarter of 2000, which resulted in
declines in certain capital markets revenues relative to the first quarter.
These markets could be subject to additional volatility in the foreseeable
future. As such, future levels of capital markets revenue cannot be predicted
with certainty.
Increases in principal investing revenues in the three and nine month
comparisons resulted from liquidations of direct investments in public companies
and appreciation in the value of primary fund investments. During the third
quarter and first nine months of 2000, the Corporation made new investments of
$537 million and $1.7 billion, respectively. As of September 30, 2000, the
Corporation's Principal Investing portfolio had an aggregate carrying value of
approximately $4.7 billion, and the gross pre-tax unrealized gain on the
Corporation's direct investments in public companies was approximately $200
million. The overall portfolio is composed of indirect investments in primary or
secondary funds, direct investments in privately held companies and direct
investments in companies whose stocks are publicly traded. The direct
investments in public companies are carried at fair value, with unrealized gains
and losses recorded, net of tax, in other comprehensive income, a component of
stockholders' equity.
The $80 million, or 84%, increase in market-making revenue in the
quarterly comparison was a result of market volatility and increased
transactional volumes at Quick & Reilly and Robertson Stephens over the prior
year's third quarter. For the first nine months of 2000, market-making revenue
increased 109%.
Underwriting revenue rose $43 million, or 51%, in the third quarter of
2000 to $128 million, compared to $85 million in the third quarter of 1999.
Underwriting revenues are affected by the volume and timing of public offerings
and other transactions. Although transaction volume at Robertson Stephens was
relatively consistent
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with the third quarter of 1999, fees received per transaction resulted in higher
revenues than the prior year. In the nine month comparison, the $240 million, or
100%, increase over 1999 resulted from fees received per transaction and higher
initial and other public offering activity in the first nine months of 2000
compared to the 1999 period.
Advisory fees increased $28 million to $77 million in the third quarter of
2000 from $49 million in the third quarter of 1999. This increase reflects a
higher level of merger and acquisition transactions closing in the third quarter
and first nine months of 2000 compared to the prior year periods. For the first
nine months of 2000, advisory fees increased 110%.
Syndication/agency fees in both comparisons were relatively flat compared
to the 1999 periods. Such fees are a function of the timing and level of
syndication transactions. The level of syndication activities has remained
relatively consistent during 2000 compared to 1999.
Trading profits and commissions decreased $7 million to $13 million for
the quarter ended September 30, 2000, compared to $20 million for the quarter
ended September 30, 1999, primarily due to the effect of NASDAQ market
conditions on Robertson Stephens. The increase in the nine month comparison
resulted from increased customer demand for investment and risk management
products, as well as short-term market volatility, in the first quarter of this
year.
Investment Services Revenue
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Brokerage fees and commissions $ 159 $ 138 $ 604 $ 439
Investment management revenue 240 225 720 669
--------------------------------------------------------------------------------
Total investment services revenue $ 399 $ 363 $1,324 $1,108
================================================================================
Brokerage Fees and Commissions
Increased brokerage fees and commissions in the quarterly comparison were
driven by increased trading volumes at Robertson Stephens, offset, in part, by a
slight decline in such revenues at Quick & Reilly. The increase in the nine
month comparison, however, included strong results from both the brokerage and
clearing units of Quick & Reilly and Robertson Stephens, as average trading
volumes on the NASDAQ and New York Stock Exchanges were higher than volumes
experienced in the first nine months of 1999 by these businesses.
Investment Management Revenue
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Private Clients Group $ 96 $ 93 $285 $280
International 41 36 121 104
Institutional businesses 40 39 117 116
Retail investments 33 31 105 91
Columbia Management Company 29 25 85 74
Other 1 1 7 4
--------------------------------------------------------------------------------
Total $240 $225 $720 $669
================================================================================
Investment management revenue grew 7% in the third quarter and 8% in the
first nine months of 2000, compared to the same periods in 1999. This
improvement was largely driven by increased fees resulting from growth in assets
under management, as well as increased sales of mutual funds and annuities, in
the Corporation's Retail Investments, Columbia Management and International
businesses. Assets under management grew to $131 billion at September 30, 2000
from $119 billion at September 30, 1999.
Banking Fees and Commissions
Banking fees and commissions, which includes fees received for cash
management, deposit accounts, electronic banking fees and other fees, decreased
$37 million to $351 million for the third quarter of 2000, primarily the result
of lower deposit fees following branch divestitures. Partially offsetting this
decrease was a rise in cash management fees resulting from a higher volume of
business, including new business that resulted from merger synergies. Future
levels of banking fees and commissions will be negatively impacted by the
aforementioned divestitures. The Corporation anticipates that annualized banking
fees and commissions will be reduced by approximately $160 million as a result
of the divestitures. Because the divestitures were completed in phases, their
impact on calendar year 2000 banking fees and commissions will be only a portion
of the annualized estimate.
Credit Card Revenue
Credit card revenue declined $15 million in the third quarter of 2000
compared to the third quarter of 1999, and $35 million in the nine month
comparison, primarily due to lower securitization income and increased
amortization of deferred acquisition costs. These changes were the result of
narrower spreads on securitizations, reflecting improving asset quality
throughout 2000, and increased marketing activities.
Processing-Related Revenue
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Mortgage banking revenue, net $ 79 $ 88 $246 $273
Student loan servicing fees 40 35 118 104
Other 32 23 93 80
--------------------------------------------------------------------------------
Total processing-related
revenue $151 $146 $457 $457
================================================================================
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Processing-related revenue increased $5 million in the third quarter of
2000 compared to the third quarter of 1999, and was flat in the nine month
comparison. The increase in the quarterly comparison reflects a rise in student
loan servicing fees and other processing-related revenue, offset, in part, by a
decrease in net mortgage banking revenue. Student loan servicing fees increased
at AFSA Data Corporation (AFSA), the Corporation's student loan servicing
subsidiary, as accounts serviced grew approximately 8% from the third quarter of
1999. AFSA is the largest student loan servicer in the United States, with 7.4
million accounts and over $70 billion of loans serviced. The 39% increase in
other processing-related revenue was primarily due to the impact of the
Corporation's recent acquisition of Curtis & Associates, Inc., a company that
specializes in assisting individuals transitioning from the welfare rolls to the
workforce.
Mortgage Banking Revenue, Net
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Net loan servicing revenue $ 159 $ 138 $ 477 $ 391
Mortgage production revenue 18 37 57 143
Mortgage servicing rights
amortization (98) (87) (288) (261)
--------------------------------------------------------------------------------
Total mortgage banking revenue, net $ 79 $ 88 $ 246 $ 273
================================================================================
Net mortgage banking revenue decreased $9 million in the third quarter of
2000 compared to the third quarter of 1999, and $27 million in the nine month
comparison, reflecting lower mortgage production revenue and higher mortgage
servicing rights (MSR) amortization offset, in part, by increased loan servicing
revenue.
The increase in loan servicing revenue in the quarterly comparison is
primarily attributable to a higher servicing spread on mortgage servicing
acquired, while the increase in the nine month comparison is primarily
attributable to a higher average servicing portfolio during the first nine
months of 2000 compared to the same period a year ago. The average servicing
portfolio was $145 billion for the first nine months of 2000 compared to $130
billion for the first nine months of 1999. Mortgage production revenue declined
in both comparisons as a result of lower mortgage production volume, driven by
the higher mortgage interest rate environment. MSR amortization increased $11
million in the three month comparison and $27 million in the nine month
comparison, the result of the above-mentioned rise in the average servicing
portfolio. The Corporation sold approximately $13 billion of mortgage servicing
during the second quarter of 2000, and approximately $9 billion of mortgage
servicing at the end of the third quarter of 2000, at close to carrying value.
Other
The $164 million gain on branch divestitures in the third quarter of 2000
resulted from the Corporation's July and August 2000 divestitures of 134
branches in Massachusetts, Connecticut and New Hampshire and approximately $2
billion of loans and $5 billion of deposits to Sovereign and various community
banks. The Corporation also recognized aggregate gains on branch divestitures in
the first six months of 2000 of $679 million. The $50 million gain in the nine
months ended September 30, 1999 related to the sale of the Corporation's
minority interest in Partners First, a credit card company.
Other noninterest income increased $27 million to $158 million for the
third quarter of 2000, compared to $131 million for the third quarter of 1999,
due, in part, to higher lease residual gains.
Noninterest Expense
================================================================================
Three months Nine months
ended Sept. 30 ended Sept. 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Employee compensation and
benefits $1,051 $1,053 $3,624 $3,196
Occupancy and equipment 259 271 848 809
Intangible asset amortization 87 88 263 259
Legal and other professional 81 68 247 206
Marketing and public relations 76 70 220 199
Other 493 466 1,579 1,363
--------------------------------------------------------------------------------
Total noninterest expense $2,047 $2,016 $6,781 $6,032
================================================================================
Noninterest expense for the third quarter of 2000 was relatively flat
compared to the third quarter of 1999. The less than 2%, or $31 million,
increase was due primarily to merger integration costs incurred during the
quarter. These increases were offset, in part, by expense reductions realized as
a result of both merger integration activities and branch divestitures. In the
nine month comparison, the increase of $749 million was primarily a result of
the effect of higher levels of revenue, particularly at Robertson Stephens and
Quick & Reilly, on compensation and benefits costs, principally in the first
quarter of 2000, and approximately $227 million of merger integration costs
incurred in the first nine months of 2000. These increases were offset, in part,
by expense reductions resulting from the merger integration and branch
divestitures.
In connection with integration efforts following the BankBoston merger,
the Corporation incurred approximately $40 million of merger integration costs
during the third quarter of 2000, composed of $5 million of employee
compensation and benefits costs, $9 million of occupancy and equipment costs, $7
million of legal and other professional costs, $6 million of marketing and
public relations costs, and $13 million of other costs. For the first nine
months of 2000, such costs totaled $227 million, composed of $26 million of
compensation and benefits costs, $73 million of occupancy and equipment costs,
$28 million of legal and other professional costs,
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$23 million of marketing and public relations costs and $77 million of other
costs.
Employee compensation and benefits costs declined slightly compared to the
third quarter of 1999, due primarily to expense reductions achieved in
connection with the merger, offset, in part, by increased incentive compensation
directly attributable to higher levels of revenue at both Quick & Reilly and
Robertson Stephens, as well as merger integration costs incurred during the
quarter. Excluding incentive and merger integration costs, employee compensation
and benefit costs decreased approximately 7% in the quarterly comparison, as a
result of the above-mentioned expense reductions. The overall increase in
compensation and benefits costs for the first nine months of 2000 over the same
period in 1999 resulted from incentive and volume-related increases at both
Quick & Reilly and Robertson Stephens.
Occupancy and equipment costs decreased $12 million in the three months
ended September 30, 2000, as a result of a portion of the above-mentioned
expense reductions, offset, in part, by merger integration costs incurred during
the quarter. In the nine month comparison, these costs rose $39 million,
reflecting merger integration costs incurred during 2000. Excluding the
integration costs, occupancy and equipment costs decreased $34 million,
reflecting expense reductions.
Legal and other professional costs and marketing and public relations
costs increased in the quarter and nine month comparisons, primarily as a result
of merger integration costs, offset, in part, by a portion of the
above-mentioned expense reductions.
Other noninterest expense increased $27 million in the third quarter of
2000 and $216 million in the nine month comparison. These increases were
partially due to merger integration costs incurred during the respective
periods.
The Corporation expects to achieve total annual cost savings of
approximately $600 million as a result of the BankBoston merger integration. The
integration process commenced during the fourth quarter of 1999, and major
systems conversions were completed in the third quarter of 2000. The Corporation
expects to complete its actions related to achieving these cost savings by the
end of 2000, and as of September 30, 2000 had achieved annualized cost savings
of approximately $470 million.
In addition, the Corporation expects to achieve total annual expense
reductions of approximately $400 million as a result of its divestitures of
branches, loans and deposits to Sovereign and various community banks during
2000. The Corporation achieved annualized expense reductions of approximately
$212 million in the third quarter of 2000, and expects additional expense
reductions to benefit the fourth quarter of 2000. For the first nine months of
2000, annualized expense reductions totaled approximately $340 million.
Information with respect to anticipated reductions in annualized revenues as a
result of the divestitures is included in the "Net Interest Income" and
"Noninterest Income-Banking Fees and Commissions" sections, included on pages 4
and 6, respectively, of this discussion and analysis.
For the first nine months of 2000, total annualized expense reductions
resulting from both merger integration activities and divestitures amounted to
approximately $800 million. Because merger integration efforts and the
divestitures have proceeded throughout 2000, the impact of the resulting expense
reductions on calendar year 2000 noninterest expense will be only a portion of
the annualized estimates. The merger integration and divestiture processes could
be affected by many factors beyond the control of the Corporation, such as
regional and national economic conditions and unanticipated changes in business
conditions. Thus, the Corporation's ability to achieve its expected expense
reductions and the periods within which they may be achieved cannot be predicted
with certainty.
Income Taxes
The Corporation recorded income tax expense of $547 million for the third
quarter of 2000, compared with $437 million for the same period a year ago. The
Corporation's effective tax rate was 39.4% and 38.1% for the third quarters of
2000 and 1999, respectively, and 41.2% and 38.2% for the respective nine month
periods. The increases in the effective tax rates in both periods were generally
a result of the write-off of non-deductible goodwill in connection with branch
divestitures.
LINE OF BUSINESS INFORMATION
The Corporation is organized and managed along three lines of business:
Global Banking and Financial Services, Commercial and Retail Banking and
National Financial Services. For additional information concerning these lines
of business, including supporting business units and their products and
services, refer to the "Line of Business Information" section of Management's
Discussion and Analysis, included on pages 17 through 21 of the Corporation's
1999 Annual Report on Form 10-K. The financial performance of these lines of
business is monitored by an internal profitability measurement system, which
provides line of business results and key performance measures. In connection
with the BankBoston merger, a uniform set of management reporting methodologies
was developed and implemented effective January 1, 2000. These management
reporting methodologies include allocation of provision for credit losses,
credit loss reserves, funds transfer pricing and equity allocations. The
following tables present selected line of business results that reflect these
methodologies. Prior periods have been restated to conform to these
methodologies. The information is presented on a fully taxable equivalent basis.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Line of Business Earnings Summary
<TABLE>
<CAPTION>
=======================================================================================================
Three months ended September 30 2000 1999 2000 1999 2000 1999
Dollars in millions Net Income Total Revenue Return on Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Banking and Financial Services(a) $ 449 $ 295 $1,804 $1,443 29% 21%
Commercial and Retail Banking 286 292 1,304 1,403 21 20
National Financial Services 111 102 501 526 16 15
All Other (5) 22 142 34 -- --
-------------------------------------------------------------------------------------------------------
Total $ 841 $ 711 $3,751 $3,406 22% 20%
=======================================================================================================
<CAPTION>
=============================================================================================================
Nine months ended September 30 2000 1999 2000 1999 2000 1999
Dollars in millions Net Income Total Revenue Return on Equity
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Banking and Financial Services(a) $ 1,483 $ 889 $ 5,930 $ 4,290 33% 22%
Commercial and Retail Banking 918 808 4,110 4,105 22 19
National Financial Services 286 284 1,449 1,587 14 14
All Other (42) 91 751 130 -- --
-------------------------------------------------------------------------------------------------------------
Total $ 2,645 $ 2,072 $12,240 $10,112 24% 19%
=============================================================================================================
</TABLE>
(a) Includes net income and revenue from overseas operations, principally
Argentina and Brazil, of $91 million and $436 million, respectively, for
the third quarter of 2000, and $84 million and $423 million, respectively,
for the third quarter of 1999. Net income and revenue from overseas
operations was $251 million and $1.3 billion, respectively, for the first
nine months of 2000, and $224 million and $1.2 billion, respectively, for
the first nine months of 1999.
During the third quarter of 2000, overall earnings and revenues grew 18%
and 10%, respectively, compared to the third quarter of 1999. Improved results
in Global Banking and Financial Services were driven by strong performance in
the Corporation's capital markets businesses and international units. Commercial
and Retail Banking earnings were significantly impacted by divestitures agreed
to in connection with regulatory approval of the BankBoston merger, which were
substantially completed in the first nine months of 2000. National Financial
Services earnings increased 9% over the same quarter a year ago, as Credit Card
earnings increased 18% due to higher loan spreads and improved credit quality.
Global Banking and Financial Services
======================================================================
Three months ended Nine months ended
Sept. 30 Sept. 30
Dollars in millions 2000 1999 2000 1999
----------------------------------------------------------------------
Income statement data:
Net interest income $ 548 $ 508 $ 1,634 $ 1,491
Noninterest income 1,256 935 4,296 2,799
Provision for credit
losses 81 73 227 210
Noninterest expense 981 879 3,240 2,603
Taxes 293 196 980 588
----------------------------------------------------------------------
Net income $ 449 $ 295 $ 1,483 $ 889
----------------------------------------------------------------------
Balance sheet data:
Average assets(a) $76,705 $74,712 $80,833 $71,749
Average loans 46,881 44,284 46,731 43,241
Average deposits 21,807 19,491 21,042 19,390
----------------------------------------------------------------------
Return on equity 29% 21% 33% 22%
======================================================================
(a) Includes international average assets of $22 billion for the three months
and nine months ended September 30, 2000 and $20 billion for the three
months and $19 billion for the nine months ended September 30, 1999.
Global Banking and Financial Services includes Principal Investing,
International Banking, Corporate Banking, and Investment Services, as well as
the Corporation's retail brokerage and investment banking subsidiaries, Quick &
Reilly and Robertson Stephens, respectively. This business line earned $449
million in the third quarter of 2000, a 52% increase over the third quarter of
1999. Increased earnings for Global Banking and Financial Services were driven
by capital markets and investment services revenues, as well as improved results
in the international units.
<TABLE>
<CAPTION>
===================================================================================
Three months ended
September 30 2000 1999 % 2000 1999 %
Dollars in millions Net Income Change Total Revenue Change
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Principal Investing $ 108 $ 39 177% $ 206 $ 89 131%
International Banking 106 89 19 483 455 6
Corporate Banking 97 72 35 305 282 8
Investment Services 50 42 19 229 221 4
Quick & Reilly 45 39 15 247 201 23
Robertson Stephens 43 14 207 334 195 71
-----------------------------------------------------------------------------------
Total $ 449 $ 295 52% $1,804 $1,443 25%
===================================================================================
</TABLE>
Principal Investing provides capital and debt financing to business
ventures that are predominantly privately or closely held companies. The
Principal Investing business earned $108 million in the third quarter of 2000,
an increase of $69 million, or 177%, over the same quarter last year. Increased
earnings were driven by realized gains on sales of investments, as this unit
continued to benefit from the protracted strength of financial markets.
Principal Investing earnings are affected by the condition of equity markets,
the general state of the economy and the timing of sales. Accordingly, earnings
for this unit can fluctuate significantly. At September 30, 2000, the aggregate
carrying value of the Principal Investing investment portfolio was $4.7 billion.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The International Banking unit includes operations in Latin America and
Asia, as well as foreign exchange and derivatives businesses. The largest
operations are in Brazil, where the Corporation has a franchise with
approximately 64 offices and approximately $8.7 billion of assets, and
Argentina, where the Corporation has a market presence of 137 branches and
approximately $9.2 billion of assets. Compared to the third quarter of 1999,
International Banking earnings increased $17 million, or 19%. Improved results
were due to increased lending volume in Brazil, while expense levels remained
stable, and a record level of capital markets activity in Asia during the
current year quarter compared to the prior year period. Average deposit balances
grew $1.1 billion during the third quarter of 2000, while average loan balances
grew $2.2 billion, both compared to the third quarter of 1999. At September 30,
2000, international mutual fund assets under management totaled $9 billion.
Corporate Banking, which includes specialized industry lending,
institutional banking and capital markets activities, recorded earnings of $97
million in the third quarter of 2000, an increase of $25 million, or 35%,
compared to the third quarter of 1999. This earnings increase was driven by the
absence of trading losses incurred in third quarter of 1999 on high yield
investments. Excluding these trading losses, Corporate Banking earnings
increased 11.5%, as higher cash management fees and lower operating expenses
resulting from the BankBoston merger integration were partially offset by higher
credit costs and lower investment banking fees.
The Investment Services unit, which includes the Private Clients Group,
Columbia Management, the Retail Investments Group and several businesses
offering retirement planning, large institutional asset management and
not-for-profit investment services, earned $50 million in the third quarter of
2000, an increase of $8 million compared to the same period in 1999. This
performance was generated by increased fees on a higher level of domestic assets
under management, which grew $10 billion from September 30, 1999 to
approximately $122 billion at September 30, 2000, reflecting the continued
strength of financial markets and customer demand for these products. Investment
services also benefited from lower operating expenses in conjunction with merger
integration efforts.
Quick & Reilly, which offers brokerage, market-making and securities
clearing services, earned $45 million in the third quarter of 2000, compared to
$39 million in the third quarter of 1999, an increase of $6 million, or 15%.
Higher market-making revenues continued to outpace the prior year's results due
to increased volumes in the equity markets. During the third quarter, Quick &
Reilly announced its plan to acquire a New York Stock Exchange (NYSE) floor
specialist, M.J. Meehan & Co. LLC. In October 2000, this business was merged
with the Corporation's existing specialist company to create Fleet Meehan
Specialist, the largest specialist firm on the NYSE.
Robertson Stephens earned $43 million on revenues of $334 million in the
third quarter of 2000, compared to net income of $14 million and revenues of
$195 million in the third quarter of 1999. Increased revenues resulting from
equity underwriting and advisory services and higher trading volumes, focused
mainly in the Internet and technology market sectors, were partially offset by
increased revenue-related compensation and higher infrastructure expenses
necessary to support this unit's growth.
Commercial and Retail Banking
================================================================================
Three months ended Nine months ended
Sept. 30 Sept. 30
Dollars in millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Income statement data:
Net interest income $ 927 $ 1,013 $ 2,976 $ 2,969
Noninterest income 377 390 1,134 1,136
Provision for credit losses 80 88 242 263
Noninterest expense 739 817 2,310 2,463
Taxes 199 206 640 571
--------------------------------------------------------------------------------
Net income $ 286 $ 292 $ 918 $ 808
--------------------------------------------------------------------------------
Balance sheet data:
Average assets $58,372 $64,441 $60,871 $63,655
Average loans 50,089 53,397 51,970 52,190
Average deposits 66,691 77,693 73,102 77,728
--------------------------------------------------------------------------------
Return on equity 21% 20% 22% 19%
================================================================================
Commercial and Retail Banking includes domestic retail banking to consumer
and small business customers, community development banking, and domestic
commercial banking operations, which is comprised of middle-market lending,
asset-based lending, leasing, cash management, trade finance and government
banking services. Commercial and Retail Banking earned $286 million during the
third quarter of 2000, down slightly from $292 million in the 1999 period.
Earnings for this group were significantly impacted by the above-mentioned
divestitures, particularly the Retail Distribution and Small Business units.
Excluding these transactions, Commercial and Retail Banking net income increased
6% over the third quarter of 1999. Similarly, total revenue on an adjusted basis
increased 4% over the same period, reflecting higher leasing gains in Commercial
Finance, increased processing revenues in Commercial Banking and improved
spreads in the deposit taking businesses.
--------------------------------------------------------------------------------
Three months ended
September 30 2000 1999 % 2000 1999 %
Dollars in millions Net Income Change Total Revenue Change
--------------------------------------------------------------------------------
Retail Distribution $ 91 $ 104 (13)% $ 531 $ 609 (13)%
Commercial Finance 89 79 13 261 244 7
Commercial Banking 58 54 7 236 249 (5)
Small Business 41 48 (15) 208 222 (6)
Consumer Lending 7 7 -- 68 79 (14)
--------------------------------------------------------------------------------
Total $ 286 $ 292 (2)% $1,304 $1,403 (7)%
================================================================================
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Distribution offers consumer retail services through various
delivery channels and includes consumer deposit products and direct banking
services. The Corporation distributes consumer retail products and services
through a network of branches, ATMs, convenient in-store branches, Internet
banking and 24-hour customer call centers. Included in the results of the Retail
Distribution group presented above is the Community Banking Group, which
functions as a catalyst for wealth creation and economic development in
low-and-moderate income, historically under-served, and culturally diverse
markets, and oversees the Corporation's activities related to the Community
Reinvestment Act. During the third quarter of 2000, Retail Distribution earned
$91 million, a decline of 13%, reflecting the year-to-date effect of divesting
312 branches and their associated deposit portfolios. Excluding the
divestitures, Retail Distribution earnings increased 10%, and revenues increased
4%. Retail Distribution had average deposit balances of $46.2 billion for the
third quarter of 2000, a decrease of $9.5 billion from the third quarter of
1999, driven by the divestitures.
Commercial Finance focuses on the asset financing needs of corporate
customers. Commercial Finance earned $89 million in the third quarter of 2000,
compared to $79 million a year ago, an increase of 13%, which was driven
primarily by higher lease residual gains in the current year quarter.
Commercial Banking provides traditional middle-market commercial lending,
government banking services, trade services, and cash management services to
customers generally ranging in size from $10 million to $500 million in annual
sales, as well as government banking customers. Commercial Banking earned $58
million in the third quarter of 2000, an increase of $4 million, or 7%, from the
same period of the prior year, the result of increased processing revenues in
the Government Banking unit, which performs tax processing for the State of New
York, and Poorman Douglas, which provides bankruptcy processing. For the third
quarter of 2000, this unit's average loan and deposit balances were $14.9
billion and $9.5 billion, respectively.
The Small Business group provides a full range of financial services to
businesses with annual sales up to $10 million. The Corporation is widely
recognized as the leading small business lender in New England and the number
one Small Business Administration lender in the country. Earnings for this unit
were $41 million for the third quarter of 2000, a decrease of $7 million, or
15%, from the third quarter a year earlier. Adjusting for the impact of
divestitures, Small Business earnings and revenues increased 14% and 5%,
respectively. Higher deposit spreads and lower operating costs contributed to
the growth. Average loan balances and average deposit balances declined $1
billion and $1.4 billion, respectively, in the quarterly comparison, primarily
due to divestitures.
Consumer Lending offers a convenient and competitive selection of loan
products to consumers. Products and services are delivered through the many
types of retail distribution channels available to the Corporation's customers.
Consumer Lending excludes credit card and residential mortgage products, which
are managed as part of National Financial Services and Treasury, respectively.
The Consumer Lending business earned $7 million in the third quarter of 2000.
Earnings were influenced by a lower level of student loan sale gains in the
current period, offset by increased home equity line volumes, due to the
aggressive promotion of those products, and lower operating expenses. The
Consumer Lending business had $8.5 billion in average consumer loan balances for
the third quarter of 2000, a decrease of $1 billion from the third quarter of
1999, due to divestiture-related portfolio sales, partially offset by the growth
of home equity products.
National Financial Services
================================================================================
Three months ended Nine months ended
Sept. 30 Sept. 30
Dollars in millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Income statement data:
Net interest income $ 170 $ 181 $ 491 $ 589
Noninterest income 331 345 958 998
Provision for credit losses 59 85 215 290
Noninterest expense 258 272 759 822
Taxes 73 67 189 191
--------------------------------------------------------------------------------
Net income $ 111 $ 102 $ 286 $ 284
--------------------------------------------------------------------------------
Balance sheet data:
Average assets $22,732 $23,471 $22,872 $24,405
Average loans 14,171 14,576 14,390 14,834
Average deposits 4,419 4,136 4,092 4,156
--------------------------------------------------------------------------------
Return on equity 16% 15% 14% 14%
================================================================================
National Financial Services includes Credit Cards, Commercial Real Estate,
Mortgage Banking and Student Loan Processing. National Financial Services
earnings increased $9 million, or 9%, from the third quarter of 1999 to $111
million for the third quarter of 2000.
--------------------------------------------------------------------------------
Three months ended
September 30 2000 1999 % 2000 1999 %
Dollars in millions Net Income Change Total Revenue Change
================================================================================
Credit Cards $ 46 $ 39 18% $259 $278 (7)%
Commercial Real Estate 40 40 -- 101 105 (4)
Mortgage Banking 16 15 7 83 96 (14)
Student Loan and
Other Processing 9 8 13 58 47 23
--------------------------------------------------------------------------------
Total $111 $102 9% $501 $526 (5)%
================================================================================
Credit Card's earnings increased $7 million, or 18%, over the prior year,
as higher loan spreads combined with improvements in credit quality and lower
operating expenses offset declines in loan fees and other revenues. The
Corporation's credit card subsidiary is the eleventh largest credit card company
in the nation. Commercial
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Real Estate earned $40 million in the third quarter of 2000, flat compared to
the third quarter of 1999, as lower operating expenses in the current year
offset the absence of a nonrecurring gain recognized in the third quarter of
1999. Mortgage Banking earnings reached $16 million for the third quarter of
2000, an increase of $1 million over the third quarter of 1999, primarily due to
lower operating expenses. Decreased revenues at the Mortgage Banking unit
resulted from lower production income reflecting the higher interest rate
environment. Fleet Mortgage, with offices located in 17 states, originated
approximately $6.4 billion of loans in the third quarter of 2000 and currently
services a mortgage portfolio of approximately $132 billion and 1.6 million
loans. The Corporation's student loan and other processing units showed an
increase in earnings of $1 million over the same quarter a year earlier, largely
due to the impact of the current quarter acquisition of Curtis & Associates,
Inc., a company in the business of helping individuals transition from the
welfare rolls to the traditional workforce.
All Other
All Other includes certain transactions not allocable to specific business
units, the residual impact of methodology allocations such as the provision for
credit losses, credit loss reserves and equity allocations, combined with
transfer pricing offsets. The business activities of the Treasury unit are also
included in All Other. The Treasury unit is responsible for managing the
Corporation's securities and residential mortgage portfolios, the
asset-liability management function and wholesale funding needs. Earnings in All
Other can fluctuate with changes affecting the consolidated provision for credit
losses, one-time charges, gains and other actions not driven by specific
business units. In the current quarter, All Other included pre-tax divestiture
gains of $164 million and merger integration costs of $40 million.
FINANCIAL CONDITION
Total assets were $179.1 billion as of September 30, 2000, a decrease of
$11.6 billion from December 31, 1999, reflecting the aforementioned divestitures
of approximately $9 billion of loans in 2000, as well as a $1.1 billion decrease
in securities, resulting partly from a decline in the net unrealized
appreciation in the market value of securities held by the Corporation's
Principal Investment portolio and from a repositioning of the bond portfolio.
Total loans and leases at September 30, 2000 were $111.1 billion, a
decrease of $8.6 billion compared to $119.7 billion at December 31, 1999. This
decrease was due mainly to the above-mentioned divestitures, as well as credit
card securitizations during the year, offset in part by growth in lease
financing and international commercial loans, primarily in Brazil.
Total deposits decreased $16 billion to $98.9 billion at September 30,
2000, primarily the result of the aforementioned divestitures of approximately
$13 billion of deposits in 2000, as well as decreases in domestic money market,
savings and NOW, and retail time deposits. Partially offsetting these decreases
were increases in domestic demand deposits and international deposits.
Short-term borrowings increased $548 million from December 31, 1999 to
September 30, 2000, attributable to the increased availability and use of
treasury, tax and loan borrowings. This increase was offset by a decrease in
federal funds purchased and securities sold under agreements to repurchase as a
result of the elimination of the matched book at the Corporation's Section 20
subsidiary.
The $4.3 billion increase in long-term debt was due to the issuance of
approximately $6.9 billion of medium-term floating rate notes (including $5.5
billion of bank notes), $1.5 billion of fixed-rate senior notes and $300 million
of trust preferred securities. These issuances were offset, in part, by
maturities and the redemption of $186 million of floating-rate subordinated
notes.
The Corporation's investment securities portfolio plays a significant role
in the management of the Corporation's balance sheet, as the liquid nature of
the securities portfolio enhances the efficiency of the balance sheet. The
amortized cost of securities available for sale increased slightly to $23.5
billion at September 30, 2000, from $23.4 billion at December 31, 1999. The
overall valuation of securities available for sale decreased to a net unrealized
(pre-tax) loss position of $107 million at September 30, 2000, primarily the
result of net unrealized losses on the Corporation's debt securities and a
decline in unrealized appreciation in the market value of securities held by the
Corporation's Principal Investing business. The net unrealized (pre-tax) gain
related to the Principal Investing portfolio amounted to approximately $200
million at September 30, 2000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Securities
===========================================================================================================================
Sept. 30, 2000 June 30, 2000 Dec. 31, 1999
Amortized Market Amortized Market Amortized Market
In millions Cost Value Cost Value Cost Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and government agencies $ 1,256 $ 1,224 $ 1,391 $ 1,336 $ 2,282 $ 2,196
Mortgage-backed securities 14,336 14,032 13,545 12,991 14,157 13,567
Other debt securities 5,095 5,112 4,616 4,590 4,850 4,853
--------------------------------------------------------------------------------------------------------------------------
Total debt securities 20,687 20,368 19,552 18,917 21,289 20,616
--------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 831 1,043 965 1,273 977 2,342
Other equity securities 2,008 2,008 1,824 1,824 1,173 1,173
--------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 23,526 23,419 22,341 22,014 23,439 24,131
--------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 714 717 832 834 1,081 1,081
--------------------------------------------------------------------------------------------------------------------------
Total securities $24,240 $24,136 $23,173 $22,848 $24,520 $25,212
===========================================================================================================================
</TABLE>
Loans and Leases
--------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
In millions 2000 2000 1999
--------------------------------------------------------------------------------
Domestic:
Commercial and industrial $ 51,306 $ 53,413 $ 55,184
Commercial real estate 8,049 7,979 7,945
Consumer 23,430 24,248 30,885
Lease financing 12,252 12,035 10,933
--------------------------------------------------------------------------------
Total domestic loans and leases 95,037 97,675 104,947
--------------------------------------------------------------------------------
International:
Commercial 13,155 11,873 11,855
Consumer 2,905 2,928 2,898
--------------------------------------------------------------------------------
Total international loans and leases 16,060 14,801 14,753
--------------------------------------------------------------------------------
Total loans and leases $111,097 $112,476 $119,700
================================================================================
The loan and lease portfolio inherently includes credit risk, which is
defined as the risk of loss arising from a counterparty's failure or inability
to meet payment or performance terms of a contract with the Corporation. The
Corporation attempts to control such risk through analysis of credit
applications, portfolio diversification and ongoing examinations of outstandings
and delinquencies. The Corporation strives to identify potential classified
assets as early as possible, to take charge-offs promptly based on realistic
assessments of probable losses and to maintain an adequate reserve for credit
losses.
Total loans and leases at September 30, 2000 decreased $8.6 billion from
December 31, 1999. This decrease was due primarily to the aforementioned
divestitures of $9 billion of loans, composed of $3 billion of C&I loans and $6
billion of consumer loans in 2000, and the securitization of $2 billion of
credit card receivables during the year. These transactions were offset, in
part, by strong growth in the lease financing portfolio. The Corporation's
international loan portfolio increased $1.3 billion compared to December 31,
1999, due to new business growth in Brazil.
In October 2000, the Corporation sold approximately $2 billion of C&I
loans in a securitization transaction. The Corporation retained servicing of the
loans as well as a subordinated interest. Investors in the securities sold by
the special purpose entity that purchased the loans will be repaid principal, as
well as interest, from cash received through collection of the loans.
Consumer Loans
================================================================================
Sept. 30, June 30, Dec. 31,
In millions 2000 2000 1999
--------------------------------------------------------------------------------
Domestic:
Residential real estate $ 6,148 $ 7,091 $10,881
Home equity 6,952 6,818 7,095
Credit card 4,201 3,972 5,455
Student loans 1,117 999 1,407
Installment/other 5,012 5,368 6,047
--------------------------------------------------------------------------------
Total domestic loans 23,430 24,248 30,885
--------------------------------------------------------------------------------
International 2,905 2,928 2,898
--------------------------------------------------------------------------------
Total consumer loans $26,335 $27,176 $33,783
================================================================================
Compared to December 31, 1999, domestic consumer loans decreased $7.5
billion to $23.4 billion at September 30, 2000. The $4.7 billion decrease in
residential real estate loans from year-end was the result of the divestiture of
$4.3 billion of such loans in 2000. Credit card balances declined $1.3 billion
to $4.2 billion at September 30, 2000, due to the securitization of $2 billion
of credit card receivables during 2000, and seasonal declines in receivables
from the end of 1999, offset, in part, by growth in new receivables and activity
related to prior year securitizations. The aggregate decreases in the remaining
consumer loan categories were directly attributable to divestitures of $1.7
billion, as well as student loan sales during the period.
Cross-Border Outstandings
In accordance with bank regulatory rules, cross-border outstandings are
amounts payable to the Corporation by residents of foreign countries, regardless
of the currency in which the claim is denominated, and local country claims in
excess of local country obligations. At September 30, 2000, total cross-border
outstandings were $12 billion, compared with $12.9 billion at December 31, 1999,
which included $6 billion and $6.4 billion, respectively, of cross-border
outstandings to Latin America. Further information with respect to the
Corporation's cross-border outstandings is included on pages 23 and 24 of its
1999 Annual Report on Form 10-K.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to credit risk, cross-border outstandings have the risk that,
as a result of political or economic conditions in a country, borrowers may be
unable to meet their contractual repayment obligations of principal and/or
interest when due because of the unavailability of, or restrictions on, foreign
exchange needed by borrowers to repay their obligations. The Corporation manages
its cross-border outstandings using country exposure limits established by the
Country Exposure Committee.
The following table details by country the Corporation's approximate
cross-border outstandings that individually amounted to 1% or more of its
consolidated total assets at September 30, 2000 and December 31, 1999.
Significant Cross-Border Outstandings(a)(b)
================================================================================
Sept. 30, Dec. 31,
Dollars in millions 2000(c) 1999(c)
--------------------------------------------------------------------------------
Argentina:
Banks $ 70 $ 405
Government entities and agencies 780 1,470
Other 1,160 795
--------------------------------------------------------------------------------
Total $2,010 $2,670
--------------------------------------------------------------------------------
Percentage of total assets 1.1% 1.4%
--------------------------------------------------------------------------------
Commitments(d) $ 9 $ 12
--------------------------------------------------------------------------------
Brazil:
Banks $ 25 $ 170
Government entities and agencies 1,315 1,540
Other 575 210
--------------------------------------------------------------------------------
Total $1,915 $1,920
--------------------------------------------------------------------------------
Percentage of total assets 1.1% 1.0%
--------------------------------------------------------------------------------
Commitments(d) $ 64 $ 30
================================================================================
(a) Cross-border outstandings include deposits in other banks, resale
agreements, trading securities, securities available for sale and held to
maturity, loans and leases, amounts due from customers on acceptances,
accrued interest receivable and revaluation gains on trading derivatives.
(b) Excluded from cross-border outstandings are local country claims funded by
non-local country obligations where the provider of funds assumes the risk
of nonpayment due to currency exchange restrictions in a given country
(such outstandings were $3.1 billion and $2.7 billion at September 30,
2000 and December 31, 1999, respectively); and claims reallocated as a
result of external guarantees, cash collateral and insurance contracts
primarily issued by U.S. government agencies.
(c) Cross-border outstandings in countries which totaled between .75% and 1%
of consolidated total assets at September 30, 2000 and December 31, 1999
were approximately as follows: September 30, 2000-none; December 31,
1999-none.
(d) Included within commitments are letters of credit, guarantees and the
undisbursed portions of loan commitments.
During 2000, the Argentine economy has recovered slowly from the recession
that it experienced in 1999. Political discussions regarding a plan to improve
the economy continue. This situation has led to significant declines in the
Argentine debt and equity markets. In response, the government has outlined
measures to reduce its costs and effect economic growth. Commitments for
additional international financing are also being obtained. To date, the
Corporation's Argentine cross-border outstandings and securities portfolio have
not been significantly impacted by the economic and political situation
described above. The Argentine situation has not significantly impacted other
Latin American countries where the Corporation has operations. The Corporation
will continue to closely monitor the Argentine economic and political situation
and its potential impact on the Corporation's Argentine and other Latin American
operations. However, it is not possible to predict what effect, if any, the
economic and political events in Argentina will ultimately have on that
country's economic growth or on the Corporation's operations in Argentina or in
other Latin American countries. For additional information concerning the
Corporation's Latin American operations, including Argentina, refer to the "Line
of Business Information" section on pages 8 to 12 of this discussion and
analysis.
Nonperforming Assets(a)
================================================================================
In millions C&I CRE Consumer Total
--------------------------------------------------------------------------------
Nonperforming loans and leases:
Current or less than 90 days past due
Domestic $ 654 $ 1 $ 6 $ 661
International 1 3 -- 4
Noncurrent
Domestic 62 12 39 113
International 95 55 52 202
Other real estate owned (OREO)
Domestic 6 6 14 26
International 5 14 -- 19
--------------------------------------------------------------------------------
Total NPAs-Domestic 722 19 59 800
Total NPAs-International 101 72 52 225
--------------------------------------------------------------------------------
Total NPAs, September 30, 2000 $ 823 $ 91 $ 111 $1,025
--------------------------------------------------------------------------------
NPAs, June 30, 2000:
Total NPAs-Domestic $ 587 $ 36 $ 85 $ 708
Total NPAs-International 93 66 83 242
--------------------------------------------------------------------------------
Total NPAs, June 30, 2000 $ 680 $ 102 $ 168 $ 950
--------------------------------------------------------------------------------
NPAs, December 31, 1999:
Total NPAs-Domestic $ 436 $ 46 $ 99 $ 581
Total NPAs-International 96 61 103 260
--------------------------------------------------------------------------------
Total NPAs, December 31, 1999 $ 532 $ 107 $ 202 $ 841
================================================================================
(a) NPAs do not include loans greater than 90 days past due and still accruing
interest ($306 million, $271 million and $320 million at September 30,
2000, June 30, 2000, and December 31, 1999, respectively). Included in the
90 days past due and still accruing interest amounts were $227 million,
$184 million and $251 million of consumer loans at September 30, 2000,
June 30, 2000 and December 31, 1999, respectively.
Nonperforming assets (NPAs) at September 30, 2000 increased $184 million
to $1 billion when compared with December 31, 1999, and increased $75 million
compared to June 30, 2000. The nine month rise in NPAs was due primarily to
additions to domestic C&I nonperforming loans (NPLs), including a $48 million
credit to a borrower that filed for bankruptcy early in the fourth quarter of
2000, offset in part by $132 million of NPLs reclassified to assets held for
sale by accelerated disposition during the first nine months of 2000. NPAs at
September 30, 2000, as a percentage of total loans, leases and OREO, and as a
percentage of total assets, were .92% and .57%, respectively, compared to .70%
and .44%, respectively, at December 31, 1999.
It is the Corporation's expectation that NPAs will increase over the next
few quarters. Future levels of NPAs will be influenced by the economic
environment, interest rates and other internal and external factors existing at
the time. As such, no assurance can be given as to future levels of NPAs.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the status of impaired loans, which are
primarily commercial and commercial real estate loans on nonaccrual status:
Impaired Loans
================================================================================
Sept. 30, Dec. 31,
In millions 2000 1999
-------------------------------------------------------------------------------
Impaired loans with a reserve $746 $512
Impaired loans without a reserve 99 60
-------------------------------------------------------------------------------
Total impaired loans $845 $572
-------------------------------------------------------------------------------
Reserve for impaired loans (a) $277 $163
-------------------------------------------------------------------------------
Quarterly average balance of impaired loans $795 $524
================================================================================
(a) The reserve for impaired loans is part of the Corporation's overall
reserve for credit losses.
Substantially all of the impaired loans presented above were on nonaccrual
status and the amount of interest income recognized on impaired loans was not
significant. The Corporation had no significant outstanding commitments to lend
additional funds to customers whose loans have been placed on nonaccrual status
or the terms of which have been modified.
At September 30, 2000, June 30, 2000 and December 31, 1999, the
Corporation had assets held for sale by accelerated disposition with a net
carrying value of $155 million, $300 million and $370 million, respectively, of
which approximately $138 million, $259 million and $130 million, respectively,
were not accruing interest. Transfers to this category are made in accordance
with management's intention to focus appropriate resources on the disposition of
these assets. Such assets are included in other assets in the Corporation's
consolidated balance sheet.
Reserve for Credit Losses Activity
================================================================================
Nine months ended September 30 2000 1999
Dollars in millions
--------------------------------------------------------------------------------
Balance at beginning of year $ 2,488 $ 2,306
Loans charged off (1,009) (873)
Recoveries of loans charged off 153 222
--------------------------------------------------------------------------------
Net charge-offs (856) (651)
Provision for credit losses 911 688
Divestitures/Acquisitions/Other (80) 172
--------------------------------------------------------------------------------
Balance at end of period $ 2,463 $ 2,515
--------------------------------------------------------------------------------
Ratios of net charge-offs to average loans .99% .74%
--------------------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end loans 2.22 2.10
--------------------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end NPLs 251 341
================================================================================
The Corporation's reserve for credit losses at September 30, 2000
decreased slightly from December 31, 1999. This decrease was the result of
transfers of reserves related to divestitures, as well as reserves related to
loans transferred to assets held for sale by accelerated disposition, partially
offset by a provision for credit losses that exceeded net charge-offs. The
provision for credit losses for the first nine months of 2000 was $911 million,
$223 million higher than the prior year period. Further information with respect
to the Corporation's reserve for credit losses is included on pages 25-27 of its
1999 Annual Report on Form 10-K.
MARKET RISK MANAGEMENT
Market risk is defined as 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 activities. Further
information with respect to the Corporation's management of market risk,
including related policies, is included on pages 27-34 of its 1999 Annual Report
on Form 10-K.
Non-trading Activities
U.S. Dollar Denominated Risk
U.S. dollar denominated assets and liabilities comprise the majority of
the Corporation's balance sheet. Interest rate risk, including mortgage
prepayment risk, is by far the most significant non-trading market risk to which
the U.S. dollar denominated positions are exposed. Interest rate risk is defined
as the sensitivity of income or financial condition to variations in interest
rates and arises directly from the Corporation's core banking activities -
lending, deposit gathering and loan servicing.
The Corporation's Board-approved limits on interest rate risk specify that
if interest rates in the base forecast scenario 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 base scenario, intended to reflect
market consensus, currently envisions stable Federal Reserve Board interest rate
policy. The limit relates to the impact of an immediate increase or decrease in
the forecasted interest rates relative to this base scenario. The Corporation
was in compliance with this limit at September 30, 2000. The following table
reflects the estimated exposure of the Corporation's net interest income for the
next 12 months due to an immediate shift in forecasted interest rates.
Estimated Exposure to
Rate Change Net Interest Income
(Basis Points) (In millions)
-----------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
2000 2000 1999
-----------------------------------------------------------------------
+200 $(55) $(113) $(58)
-200 1 88 (12)
=======================================================================
Estimated net interest income exposures are more modest than those at June
30, 2000. These September 30, 2000 exposures reflect modified assumptions
regarding the evolution of the balance sheet in anticipation of and preparation
for the Summit acquisition.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As indicated, an immediate 200 basis point increase in interest rates
would tend to reduce net interest income but by an amount that is well within
corporate limits. An immediate 200 basis point decrease in interest rates would
currently tend to enhance net interest income. Thus, the current balance sheet
position is modestly liability-sensitive. While an immediate and severe shift in
interest rates is used in this analysis to provide an estimate of exposure under
an extremely adverse scenario, management believes that the exposure of the
Corporation's net interest income to gradual and modest changes in interest
rates is relatively insignificant.
The Corporation also performs valuation analysis, which involves
projecting future cash flows from the Corporation's current assets, liabilities
and off-balance sheet positions over a very long-term horizon, discounting those
cash flows at appropriate interest rates, and then aggregating the discounted
cash flows. The Corporation's "Economic Value of Equity" (EVE) is the estimated
net present value of these discounted cash flows.
The Corporation's Board-approved limits on interest rate risk specify that
if interest rates in the base forecast scenario were to shift immediately up or
down 200 basis points, the estimated EVE should decline by less than 10%. The
Corporation was in compliance with this limit at September 30, 2000.
The following table reflects the Corporation's estimated EVE exposures
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 hedged MSRs, to changes in interest
rates can be nonlinear. While an immediate shift in interest rates is used in
this analysis to provide an estimate of exposure under an extremely adverse
scenario, management believes that a gradual shift in interest rates would have
a much more modest impact, due partly to anticipated MSR hedge activity.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (In millions)
--------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
2000 2000 1999
--------------------------------------------------------------------------------
+200 $ (943) $ (941) $ 118
+100 (468) (388) 65
-100 347 215 (539)
-200 52 260 (1,457)
================================================================================
Estimated EVE exposures are similar to those at June 30, 2000, but, in
contrast to year-end 1999, the adverse scenario is a sharp rise rather than a
sharp fall in interest rates. These changes are a direct result of interest rate
risk management strategy: As Federal Reserve Board tightening of monetary policy
continued in the first half of 2000 and as the prospect of a future economic
slowdown increased, the Corporation added interest rate swaps, as well as fixed
rate securities, to reduce the exposure of economic value to any possible future
decline in interest rates.
Non-U.S. Dollar Denominated Risk
The Corporation's non-U.S. dollar denominated assets and liabilities are
exposed to interest rate and foreign exchange rate risks. The majority of the
Corporation's non-U.S. dollar denominated interest rate and foreign exchange
rate risk exposure stems from its operations in Latin America, primarily
Argentina and Brazil. At September 30, 2000 and December 31, 1999, the
Corporation's exposure to interest rate risk in its Latin American operations
was not significant.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Risk Management Instruments
================================================================================================================================
Weighted
Assets- Average Weighted Average
September 30, 2000 Notional Liabilities Maturity Fair Rate
Dollars in millions Value Hedged (Years) Value Receive Pay
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic interest rate risk
management instruments
Interest rate swaps:
Receive fixed/pay variable $21,163 Variable-rate loans
200 Securities
635 Fixed-rate deposits
4,992 Long-term debt
-------
26,990 3.6 $ (42) 6.80% 7.08%
-------
Pay fixed/receive variable 7 Fixed-rate loans
-------
7 3.5 (1) 6.72 7.56
-------
Basis swaps 67 Securities
-------
67 5.2 (1) 6.07 6.65
--------------------------------------------------------------------------------------------------------------------------------
Total domestic interest rate
risk management instruments 27,064 3.6 (44) 6.80% 7.08%
--------------------------------------------------------------------------------------------------------------------------------
International interest rate risk
management instruments
Interest rate swaps 1,261 Short-term assets and .5 5 --(a) --(a)
liabilities
--------------------------------------------------------------------------------------------------------------------------------
Total international interest
rate risk management instruments 1,261 .5 5 -- --
--------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income $28,325 3.5 $ (39) 6.80% 7.08%
--------------------------------------------------------------------------------------------------------------------------------
Mortgage banking risk management
instruments Swaps:
Interest rate, P.O., and MBS swaps $3,227 MSRs 3.5 $ (33) 7.11% 6.78%
Options:
Interest rate floors and options on swaps 26,085 MSRs 4.6 284 --(b) --(b)
Interest rate caps 14,450 MSRs 4.2 101 --(b) --(b)
Treasury and futures options 100 MSRs -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Total options 40,635 4.5 385 -- --
--------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights $43,862 4.4 $352 7.11% 6.78%
--------------------------------------------------------------------------------------------------------------------------------
Foreign exchange risk management instruments
Swaps $3,647 Foreign currency denominated .9 $(22) -- --
assets and liabilities
Spot and forward contracts 672 Foreign currency denominated .2 3 -- --
assets and liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Total hedges of foreign exchange $4,319 .8 $(19) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total risk management instruments $76,506 3.8 $294 6.83% 7.05%
===================================================================================================================================
</TABLE>
(a) These interest rate swaps typically include the exchange of floating rate
indices that are indigenous to the Brazilian market and have been excluded
from the weighted average rate.
(b) The mortgage banking risk management interest rate floors and options on
swaps, and interest rate caps, have weighted average strike rates of 6.29%
and 7.44%, respectively.
As of September 30, 2000, the Corporation had net deferred income of
approximately $13 million relating to terminated interest rate swap contracts,
which will be amortized over the remaining life of the underlying terminated
interest rate contracts of approximately 7 years.
During the third quarter of 2000, net hedge gains of $71 million were
deferred and recorded as adjustments to the carrying value of MSRs and related
hedges. At September 30, 2000, the carrying value and fair value of the
Corporation's MSRs were $2.9 billion and $3 billion, respectively. In connection
with the Corporation's management of its MSR hedge program, the Corporation
added (in notional amounts) $6.5 billion and terminated $6.3 billion of interest
rate floor and option on swap agreements during the third quarter of 2000.
Additionally, the Corporation added $2.5 billion of swap contracts and $3.2
billion of interest rate caps, and terminated $2.3 billion of swap contracts and
$1.1 billion of interest rate caps during the third quarter of 2000.
Trading Activities
The Corporation's trading activities create exposure to price risk, or the
risk of loss in earnings arising from adverse changes in the value of financial
instrument trading portfolios. The Corporation's price risk arises from
market-making, dealing and position-taking in interest rate, currency exchange
rate, equity and precious metals markets.
The following chart presents the aggregate daily trading-related revenues,
in millions of dollars, that resulted from the Corporation's combined trading
activities through the nine months ended September 30, 2000.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[BAR CHART REPRESENTATION OF DAILY TRADING-RELATED
REVENUES THROUGH SEPTEMBER 30, 2000]
Revenues Number of Days
-------- --------------
(In millions)
$(2) - 0 5
$0 - 2 17
$2 - 4 36
$4 - 6 56
$6 - 8 32
$8 - 10 21
$10 - 12 16
$12 - 14 6
$14 - 16 4
$16 - 18 -
Above $18 2
Trading-related revenues presented above include trading profits and
commissions, foreign exchange revenue and market-making revenue, which are all
components of capital markets revenue, as well as net interest income from these
trading positions. Through September 30, 2000, daily trading-related revenues
ranged from losses of $1.7 million to profits of $18.2 million. The Corporation
has implemented a price risk management process to limit the potential of large
negative daily earnings results.
The Corporation uses a Value-at-Risk (VAR) methodology, based on
industry-standard risk measurement techniques, to measure the overall price risk
inherent in its trading activities. The system draws on historical and current
market data to estimate potential market volatility, and measures the risk to
earnings at a 99% confidence level, which means that the Corporation expects
daily results to exceed the potential loss as calculated by VAR only
occasionally (i.e., no more than one time for at least 100 trading days).
The VAR methodology includes holding periods for each position based upon
an assessment of relative trading market liquidity for each instrument, and a
conservative view of cross-product correlations that does not reflect the full
diversification benefits of positions taken across different trading businesses.
The Corporation's aggregate daily exposure averaged $42 million for the
nine months ended September 30, 2000, compared to $38 million for the 1999
period. At September 30, 2000, total VAR usage measured $43 million. The
Corporation did not report any day during the nine months ended September 30,
2000 for which total VAR usage exceeded the approved limit.
The table below presents the Corporation's exposure with respect to its
combined trading portfolio:
Value-at-Risk (VAR)
================================================================================
In millions Average High Low
--------------------------------------------------------------------------------
Nine months ended September 30, 2000 $42 $59 $35
Nine months ended September 30, 1999 38 56 28
Year ended December 31, 1999 38 56 27
================================================================================
For the first nine months of 2000, most of the price risk in the
Corporation's trading activities arose from interest rate risk, which includes
directional and spread components, and averaged $22 million, or 52% of aggregate
VAR. Interest rate risk arises primarily from trading activity in the domestic
high yield market, the Argentine and Brazilian sovereign and high-end corporate
bond markets, as well as some exposure to fixed income markets in the
Asia-Pacific region.
The contribution to the Corporation's VAR from equity trading activities
through September 30, 2000 averaged $14 million, or 33% of aggregate VAR. The
individual activities that generate most of these risks include the
Corporation's large NYSE specialist firm, NASDAQ market-making, equity trading
and a convertible bond trading and underwriting business.
Risk from foreign exchange trading activities through September 30, 2000
remained moderate at an average of $6 million, or 14% of aggregate VAR. The
majority of foreign exchange risk arises from the Corporation's Argentine and
Brazilian operations.
The following table presents the Corporation's aggregate average VAR by
risk type for the periods presented. Average VAR for commodity risk remained
insignificant for the periods shown.
VAR by Risk Type
================================================================================
Nine months ended Full year
Sept. 30, 2000 1999
In millions Average Average
--------------------------------------------------------------------------------
Interest rate risk $22 $19
Equity risk 14 12
Foreign exchange risk 6 7
--------------------------------------------------------------------------------
Aggregate price risk $42 $38
================================================================================
The Corporation's independent Market Risk Management function routinely
validates the Corporation's measurement framework by conducting backtests, which
compare the actual daily trading-related results against the estimated VAR with
a one-day holding period. The following graph presents this comparison for the
most recent 12 months. No daily aggregate trading losses exceeded the one-day
aggregate VAR measure associated with that date, which compares favorably with
the Corporation's expectation for 3 such breaches.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[LINE GRAPH REPRESENTATION OF DAILY TRADING-RELATED
REVENUES AND VAR MEASURE WITH A ONE-DAY HOLDING PERIOD
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2000]
During the twelve months ended September 30, 2000, daily trading-related
revenues ranged from losses of $2.7 million to profits of $18.2 million. Over
the same time period, VAR with a one-day holding period ranged from $18 million
to $41 million.
In addition to the VAR framework, the Corporation employs other risk
measurement tools to evaluate and control price risk. These tools include
cumulative loss limits and overall portfolio size limits, as well as regular
stress tests and scenario analyses. Stress testing employs a VAR calculation
based on a ten standard deviation change in the prices of underlying risk
factors. Scenario analyses apply actual market conditions experienced in the
past against current positions.
While the VAR framework and the additional risk measurement tools
effectively ensure exposures remain within the Corporation's expressed tolerance
for price risk, they do not guarantee the avoidance of trading losses during
periods of extreme volatility.
Trading Instruments with Off-Balance Sheet Risk
The following table represents the notional, or contractual, amount of the
Corporation's off-balance sheet interest rate, foreign exchange and equity
trading instruments and related credit exposure at September 30, 2000:
================================================================================
Contract or
September 30, 2000 Notional Credit
In millions Amount Exposure
--------------------------------------------------------------------------------
Interest rate contracts $173,869 $ 921
Foreign exchange contracts 46,688 1,096
Equity contracts 4,774 402
================================================================================
The amounts disclosed below represent the end-of-period fair values of
derivative financial instruments held or issued for trading purposes and the
quarterly average aggregate fair values for those instruments:
================================================================================
Fair Value Average
September 30, 2000 (Carrying Fair
In millions Amount) Value
--------------------------------------------------------------------------------
Interest rate contracts:
Assets $ 921 $1,150
Liabilities 861 1,132
Foreign exchange contracts:
Assets 1,096 627
Liabilities 1,026 637
Equity contracts:
Assets 402 257
Liabilities 287 144
================================================================================
When deemed appropriate, the Corporation will take positions in certain
currencies with the intention of taking advantage of movements in currency and
interest rates. The Corporation takes currency positions by funding local
currency assets with dollars or by funding dollar assets with local currency
liabilities. Currency positions expose the Corporation to gains or losses that
depend on the relationship between currency price movements and interest rate
differentials. These positions are subject to limits established by the Market
Risk Committee. The majority of the Corporation's foreign exchange risk is
generated by its operations in Argentina and Brazil. The following table
represents the Corporation's currency positions in Argentina and Brazil at
September 30, 2000 and December 31, 1999, respectively.
Currency Positions
================================================================================
Sept. 30, 2000 Dec. 31, 1999
Quarter- Quarterly Quarter- Quarterly
In millions End Average End Average
-------------------------------------------------------------------------------
Argentina(a) $255 $281 $297 $333
Brazil(b) 36 17 35 19
===============================================================================
(a) Positions represent local currency assets funded by U.S. dollars for both
periods presented.
(b) September 30, 2000 quarter-end position represents local currency assets
funded by U.S. dollars; September 30, 2000 quarterly average position
represents dollar assets funded by local currency liabilities and December
31, 1999 positions represent local currency assets funded by U.S. dollars.
To date, the Corporation's currency positions have been liquid in nature,
and management has been able to close and re-open these positions as necessary.
Liquidity Risk Management
The objective of liquidity risk management is to assure the ability of the
Corporation and its subsidiaries to meet their financial obligations. These
obligations are the payment of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and the ability to take advantage of new business
opportunities. Liquidity is achieved by the maintenance of a strong base of core
customer funds; maturing short-term assets; the ability to sell marketable
securities; committed lines of credit and access to capital markets. Liquidity
may also be enhanced through the securitization of commercial and consumer
receivables. Further information with respect to the Corporation's liquidity
risk management is included on page 35 of its 1999 Annual Report on Form 10-K.
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries, committed lines of credit and access to the money
and capital markets. Dividends from banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and retained earnings. The
Corporation's subsidiaries rely on cash flows from operations, core deposits,
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
borrowings, short-term high-quality liquid assets and, in the case of
non-banking subsidiaries, funds from the parent company. Wholesale funding
sources include large certificates of deposit, foreign branch deposits, federal
funds, collateralized borrowings and a $10 billion bank note program. Another
important source of bank funding is the securitization market. Additionally, the
Corporation and its primary banking subsidiary, Fleet National Bank (FNB), have
access to the Euro market under a Euro medium-term note program, which had $2.5
billion available as of September 30, 2000. During the third quarter, the parent
company accessed the global capital markets for $1.5 billion of 7.25% senior
notes due in 2005, and FNB issued $500 million of floating-rate Euro notes due
in 2005.
At September 30, 2000, the parent company had commercial paper outstanding
of $1 billion, compared with $1.6 billion at December 31, 1999. The parent
company had excess funds at September 30, 2000 of $2 billion compared to $1.5
billion at December 31, 1999. The parent company has backup lines of credit
totaling $1 billion to ensure funding is not interrupted if commercial paper is
not available. At September 30, 2000 and December 31, 1999, the parent company
had no outstanding balances under these lines of credit.
At September 30, 2000, the parent company had $2.2 billion available for
the issuance of senior or subordinated debt securities and other debt
securities, common stock, preferred stock or trust preferred securities, under a
shelf registration statement filed with the Securities and Exchange Commission
(the SEC). Management believes the Corporation has sufficient liquidity to meet
its liabilities to customers and debt holders.
Capital Management
Capital Ratios
================================================================================
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
--------------------------------------------------------------------------------
Risk-adjusted assets
(in millions) $182,867 $189,488 $188,318
Tier 1 risk-based capital ratio
(4% minimum) 7.61% 6.82% 7.14%
Total risk-based capital ratio
(8% minimum) 11.93 11.50 11.28
Leverage ratio(a) 7.90 6.81 7.21
Common equity to assets ratio 8.37 7.66 7.97
Total equity to assets ratio 8.68 8.03 8.34
Tangible common equity
to assets ratio 6.30 5.60 5.81
Tangible common equity to
managed assets ratio 5.83 5.20 5.40
Tangible total equity to
assets ratio 6.63 5.97 6.19
================================================================================
(a) The Corporation was subject to a 3% minimum at September 30, 2000 and
December 31, 1999, and a 4% minimum at September 30, 1999.
At September 30, 2000, the Corporation exceeded all regulatory required
minimum capital ratios, as the Corporation's Tier 1 and Total risk-based capital
ratios were 7.61% and 11.93%, respectively, compared with 6.82% and 11.50%,
respectively, at December 31, 1999. The leverage ratio, a measure of Tier 1
capital to average quarterly assets, was 7.90% at September 30, 2000 compared
with 6.81% at December 31, 1999.
On April 18, 2000, the Corporation's Board approved a plan to repurchase
up to $2 billion of the Corporation's common stock from time to time, as market
conditions permit. On October 1, 2000, the Board rescinded its approval of the
plan in connection with the announcement of the proposed merger with Summit.
During the third quarter of 2000, the Corporation agreed to settle outstanding
warrants on 13 million shares of its common stock, for an aggregate cash payment
of approximately $441 million to the holders of the warrants. On August 16,
2000, the Corporation's Board declared a dividend of one preferred share
purchase right (the "rights") for each outstanding share of common stock of the
Corporation. This dividend is payable on November 22, 2000 to shareholders of
record on November 21, 2000. The rights replace similar rights issued in 1990,
which are scheduled to expire on November 21, 2000. On June 30, 2000, the
Corporation issued $300 million of trust preferred securities. These securities
qualify as Tier 1 capital. On May 31, 2000, the Corporation redeemed its $186
million floating-rate subordinated notes due 2001. On January 15, 2000, the
Corporation redeemed all of the outstanding shares of its 9.35% cumulative
preferred stock at its aggregate carrying value of $125 million.
FORWARD-LOOKING STATEMENTS
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 contemplated as a result of certain risks and uncertainties,
including, but not limited to, changes in general political and economic
conditions, either domestically or internationally or in the states in which the
Corporation conducts its business; interest rate and currency fluctuations;
competitive product and pricing pressures within the Corporation's markets;
equity and bond market fluctuations and perceptions; changes in credit quality,
including increases in the level of nonperforming assets; inflation;
technological changes, including the impact of the Internet; lower than expected
cost savings or higher than expected costs associated with acquisitions and
integrations of acquired businesses; greater than expected negative impact of
any divestitures required by regulators in connection with acquisitions; adverse
legislative or regulatory developments affecting the businesses in which the
Corporation is engaged;
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
as well as other risks and uncertainties detailed from time to time in the
filings of the Corporation with the SEC.
RECENT ACCOUNTING DEVELOPMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an amendment of FASB 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 Corporation intends to adopt SFAS No. 133 as of January 1, 2001. The
adoption of this Standard may cause volatility in the income statement as well
as the equity section of the balance sheet. The impact of adoption will be
dependent upon the fair value, nature and purpose of the derivative instruments
held by the Corporation as of January 1, 2001. The Corporation has completed
much of the complex analysis required to assess the impact that adoption of this
Standard will have on its financial position and results of operations. However,
in light of significant unresolved accounting and implementation issues that
continue to be addressed by the Financial Accounting Standards Board's
Derivatives Implementation Group, the Corporation's overall assessment of the
Standard's impact is not yet complete.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140, which replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", provides accounting and
reporting standards for securitizations and other transfers of assets. The
Standard is based on the application of a financial components approach that
focuses on control, and provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The Standard requires disclosure of information about securitized
assets, including principal outstanding of securitized and other managed assets,
accounting policies, key assumptions related to the determination of the fair
value of retained interests, deliquencies and credit losses. The accounting
requirements of the Standard are effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001, and must be applied prospectively. The disclosures related to
securitization transactions are required for fiscal years ending after December
15, 2000, and comparative disclosures for prior periods are not required. The
Corporation intends to provide the required disclosures as of December 31, 2000,
and does not expect the impact of the accounting requirements of the Standard to
be material to its financial position or results of operations in future
periods.
21
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
=====================================================================================
Three months ended September 30 2000 1999
Dollars in millions, except per share amounts
-------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $2,785 $2,644
Interest on securities and trading assets 472 428
Other 127 226
-------------------------------------------------------------------------------------
Total interest income 3,384 3,298
-------------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 588 582
Deposits of international offices 332 276
Short-term borrowings 312 332
Long-term debt 500 358
Other 67 50
-------------------------------------------------------------------------------------
Total interest expense 1,799 1,598
-------------------------------------------------------------------------------------
Net interest income 1,585 1,700
-------------------------------------------------------------------------------------
Provision for credit losses 300 228
-------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,285 1,472
-------------------------------------------------------------------------------------
Noninterest income:
Capital markets revenue 749 471
Investment services revenue 399 363
Banking fees and commissions 351 388
Credit card revenue 178 193
Processing-related revenue 151 146
Gains on branch divestitures 164 --
Other 158 131
-------------------------------------------------------------------------------------
Total noninterest income 2,150 1,692
-------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,051 1,053
Occupancy 132 143
Equipment 127 128
Intangible asset amortization 87 88
Legal and other professional 81 68
Marketing and public relations 76 70
Other 493 466
-------------------------------------------------------------------------------------
Total noninterest expense 2,047 2,016
-------------------------------------------------------------------------------------
Income before income taxes 1,388 1,148
Applicable income taxes 547 437
-------------------------------------------------------------------------------------
Net income $ 841 $ 711
-------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding (in millions) 923.2 946.5
Net income applicable to common shares $ 831 $ 698
Basic earnings per share .92 .76
Diluted earnings per share .90 .74
Dividends declared .30 .27
=====================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
22
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
====================================================================================
Nine months ended September 30 2000 1999
Dollars in millions, except per share amounts
------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $ 8,343 $ 7,821
Interest on securities and trading assets 1,357 1,271
Other 505 586
------------------------------------------------------------------------------------
Total interest income 10,205 9,678
------------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 1,776 1,788
Deposits of international offices 925 829
Short-term borrowings 962 886
Long-term debt 1,370 968
Other 208 137
------------------------------------------------------------------------------------
Total interest expense 5,241 4,608
------------------------------------------------------------------------------------
Net interest income 4,964 5,070
------------------------------------------------------------------------------------
Provision for credit losses 911 688
------------------------------------------------------------------------------------
Net interest income after provision for credit losses 4,053 4,382
------------------------------------------------------------------------------------
Noninterest income:
Capital markets revenue 2,621 1,371
Investment services revenue 1,324 1,108
Banking fees and commissions 1,065 1,104
Credit card revenue 507 542
Processing-related revenue 457 457
Gains on branch divestitures and sales of businesses 843 50
Other 413 369
------------------------------------------------------------------------------------
Total noninterest income 7,230 5,001
------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 3,624 3,196
Occupancy 429 425
Equipment 419 384
Intangible asset amortization 263 259
Legal and other professional 247 206
Marketing and public relations 220 199
Other 1,579 1,363
------------------------------------------------------------------------------------
Total noninterest expense 6,781 6,032
------------------------------------------------------------------------------------
Income before income taxes 4,502 3,351
Applicable income taxes 1,857 1,279
------------------------------------------------------------------------------------
Net income $ 2,645 $ 2,072
------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding (in millions) 921.1 945.0
Net income applicable to common shares $ 2,616 $ 2,028
Basic earnings per share 2.90 2.20
Diluted earnings per share 2.84 2.15
Dividends declared .90 .81
====================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
23
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
============================================================================================================
September 30, December 31,
Dollars in millions, except per share amounts 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest bearing deposits $ 9,101 $ 10,627
Federal funds sold and securities purchased under agreements to resell 1,258 2,353
Trading assets 7,459 7,849
Securities (market value: $24,136 and $25,212) 24,133 25,212
Loans and leases 111,097 119,700
Reserve for credit losses (2,463) (2,488)
------------------------------------------------------------------------------------------------------------
Net loans and leases 108,634 117,212
------------------------------------------------------------------------------------------------------------
Due from brokers/dealers 3,293 3,003
Mortgages held for resale 1,212 1,244
Premises and equipment 2,588 2,794
Mortgage servicing rights 2,930 3,325
Intangible assets 3,942 4,164
Other assets 14,543 12,909
------------------------------------------------------------------------------------------------------------
Total assets $ 179,093 $ 190,692
------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Domestic:
Noninterest bearing $ 22,405 $ 24,773
Interest bearing 58,612 73,428
International:
Noninterest bearing 1,704 1,532
Interest bearing 16,129 15,163
------------------------------------------------------------------------------------------------------------
Total deposits 98,850 114,896
------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 5,915 9,529
Other short-term borrowings 12,739 8,577
Trading liabilities 1,740 3,807
Due to brokers/dealers 4,627 4,468
Long-term debt 29,682 25,349
Accrued expenses and other liabilities 9,990 8,759
------------------------------------------------------------------------------------------------------------
Total liabilities 163,543 175,385
------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock 566 691
Common stock, par value $.01 (917,508,406 shares issued in 2000 and
917,061,055 shares issued in 1999) 9 9
Common surplus 3,687 4,150
Retained earnings 11,938 10,129
Accumulated other comprehensive (loss)/income (75) 387
Treasury stock, at cost (12,548,759 shares in 2000 and 1,401,453 shares in 1999) (575) (59)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,550 15,307
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 179,093 $ 190,692
============================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
24
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
===============================================================================================================================
Accumulated
Other
Nine months ended September 30, 2000 Preferred Common Common Retained Comprehensive Treasury
Dollars in millions, except per share amounts Stock Stock Surplus Earnings Income/(Loss) Stock Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
----
Balance at December 31, 1998 $691 $9 $4,706 $ 9,210 $ 95 $(507) $14,204
Net income 2,072 2,072
Other comprehensive income, net of taxes:
Adjustment to unrealized gain on securities
available for sale, net of taxes and
reclassification adjustment (152)
Change in translation adjustment, net of taxes 8
----------
Other comprehensive income (144) (144)
----------
Total comprehensive income 1,928
Cash dividends declared on common stock
($.81 per share) (461) (461)
Cash dividends declared by pooled company prior
to merger (285) (285)
Cash dividends declared on preferred stock (38) (38)
Common stock issued in connection with dividend
reinvestment and employee benefit plans 41 (28) 125 138
Treasury stock purchased (24) (24)
Other, net 2 (4) (3) (5)
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $691 $9 $4,749 $10,466 $(49) $(409) $15,457
-------------------------------------------------------------------------------------------------------------------------------
2000
----
Balance at December 31, 1999 $691 $9 $4,150 $10,129 $ 387 $(59) $15,307
Net income 2,645 2,645
Other comprehensive income, net of taxes:
Adjustment to unrealized gain on securities
available for sale, net of taxes and
reclassification adjustment (467)
Change in translation adjustment, net of taxes 5
----------
Other comprehensive income (462) (462)
----------
Total comprehensive income 2,183
Cash dividends declared on common stock
($.90 per share) (813) (813)
Cash dividends declared on preferred stock (29) (29)
Common stock issued in connection with dividend
reinvestment and employee benefit plans (7) 6 163 162
Redemption of preferred stock (125) (125)
Settlement of forward purchase contracts (679) (679)
Settlement of common stock warrants (441) (441)
Other, net (15) (15)
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $566 $9 $3,687 $11,938 $(75) $(575) $15,550
===============================================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
25
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
=============================================================================================================
Nine months ended September 30 2000 1999
In millions
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,645 $ 2,072
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 414 328
Amortization of mortgage servicing rights 288 261
Amortization of other intangible assets 263 259
Provision for credit losses 911 688
Deferred income tax expense 356 648
Securities losses/(gains) 46 (10)
Gains on branch divestitures and sales of businesses (843) (50)
Originations and purchases of mortgages held for resale (12,213) (23,805)
Proceeds from sales of mortgages held for resale 12,245 26,821
Decrease/(increase) in trading assets 390 (1,686)
(Decrease)/increase in trading liabilities (2,067) 1,032
(Increase)/decrease in due from brokers/dealers (290) 744
Decrease in accrued receivables, net 77 415
Increase/(decrease) in due to brokers/dealers 159 (91)
Increase in accrued liabilities, net 1,044 143
Other, net (2,845) (1,927)
-------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 580 5,842
-------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net decrease in federal funds sold and securities purchased under agreements to resell 1,095 62
Purchases of securities available for sale (11,804) (11,816)
Proceeds from sales of securities available for sale 9,353 6,272
Proceeds from maturities of securities available for sale 2,562 3,816
Purchases of securities held to maturity (629) (1,068)
Proceeds from maturities of securities held to maturity 990 1,087
Net cash and cash equivalents paid for businesses acquired -- (613)
Proceeds from sale of loan portfolio by banking subsidiary 2,050 400
Net increase in loans and leases (3,499) (3,283)
Net cash paid in conjunction with branch divestitures (2,171) --
Net cash and cash equivalents received from sales of businesses -- 50
Purchases of premises and equipment (438) (352)
Purchases of mortgage servicing rights (121) (749)
-------------------------------------------------------------------------------------------------------------
Net cash flow used in investing activities (2,612) (6,194)
-------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in deposits (2,905) (4,994)
Net increase/(decrease) in short-term borrowings 548 (2,245)
Proceeds from issuance of long-term debt 9,273 7,768
Repayments of long-term debt (4,940) (1,568)
Proceeds from the issuance of common stock 162 138
Repurchase of common stock -- (24)
Settlement of forward purchase contracts (679) --
Redemption of preferred stock (125) --
Cash dividends paid (816) (779)
-------------------------------------------------------------------------------------------------------------
Net cash flow provided by/(used in) financing activities 518 (1,704)
-------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash (12) (56)
-------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,526) (2,112)
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 10,627 10,941
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,101 $ 8,829
=============================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
26
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of FleetBoston
Financial Corporation (the Corporation) included herein have been prepared on a
basis consistent with the audited consolidated financial statements of the
Corporation included in its 1999 Annual Report on Form 10-K, and should be read
in conjunction with that report. Prior period financial statements have been
restated to give retroactive effect to the merger with BankBoston Corporation
(BankBoston) completed in October 1999, which was accounted for as a pooling of
interests. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information presented herein have been made. Certain prior period amounts have
been reclassified to conform to current period classifications.
NOTE 2. MERGER AND DIVESTITURE ACTIVITIES
On October 1, 2000, the Corporation entered into a definitive agreement to
acquire Summit Bancorp. (Summit), a New Jersey-based financial services company
with approximately $39.5 billion in assets and approximately $3 billion in
stockholders' equity at September 30, 2000. Under the terms of the agreement,
Summit stockholders will receive 1.02 shares of the Corporation's common stock
for each share of Summit common stock. The merger, which is subject to Summit
stockholder and regulatory approvals, is anticipated to close in the first
quarter of 2001, and is expected to be accounted for as a pooling of interests.
The Corporation anticipates recording a merger- and restructuring-related
charge of approximately $400 million, or $250 million after-tax, upon
consummation of the merger, consisting of exit costs related to employee
severance, excess facilities and systems, and transaction costs. The Corporation
also expects to incur an additional $100 million, or $60 million after-tax, of
charges in subsequent periods, related to integration of the two companies.
In connection with the BankBoston merger, the Corporation recorded merger-
and restructuring-related charges and merger integration costs of $850 million
and $102 million, respectively, during the fourth quarter of 1999. The
Corporation incurred an additional $40 million of merger integration costs
during the third quarter of 2000, and $227 million of such costs during the
first nine months of 2000. These charges and costs are more fully discussed in
Note 5.
In connection with obtaining regulatory approvals for the BankBoston
merger, the Corporation signed definitive agreements to divest approximately $13
billion of deposits and $9 billion of loans. The Corporation has substantially
completed its divestiture plan, divesting $13 billion of deposits, $9 billion of
loans and 312 branches in Massachusetts, Connecticut, New Hampshire and Rhode
Island to Sovereign Bancorp (Sovereign) and various community banks during the
first nine months of 2000. In connection with these divestitures, the
Corporation recorded gains totaling $843 million ($420 million after-tax). The
remaining divestiture of three branches is expected to occur in the fourth
quarter of 2000.
NOTE 3. LOANS AND LEASES
The following table presents details of loan and lease financing balances:
================================================================================
Sept. 30, Dec. 31,
In millions 2000 1999
--------------------------------------------------------------------------------
Domestic:
Commercial and industrial $ 51,306 $ 55,184
Commercial real estate 8,049 7,945
Residential real estate 6,148 10,881
Credit card 4,201 5,455
Other consumer 13,081 14,549
Lease financing 12,252 10,933
--------------------------------------------------------------------------------
Total domestic loans and leases 95,037 104,947
--------------------------------------------------------------------------------
International loans and leases 16,060 14,753
--------------------------------------------------------------------------------
Total loans and leases $111,097 $119,700
================================================================================
NOTE 4. RESERVE FOR CREDIT LOSSES
A summary of activity in the reserve for credit losses follows:
================================================================================
Nine months ended September 30 2000 1999
In millions
--------------------------------------------------------------------------------
Balance at beginning of year $ 2,488 $ 2,306
Gross charge-offs:
Domestic:
Commercial and industrial 555 298
Commercial real estate 4 13
Residential real estate 3 7
Credit card 220 293
Other consumer 81 114
Lease financing 24 20
International 122 128
--------------------------------------------------------------------------------
Total gross charge-offs 1,009 873
--------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and industrial 47 60
Commercial real estate 8 14
Residential real estate 6 3
Credit card 25 29
Other consumer 25 28
Lease financing 4 6
International 38 82
--------------------------------------------------------------------------------
Total recoveries 153 222
--------------------------------------------------------------------------------
Net charge-offs 856 651
Provision for credit losses 911 688
Divestitures/Acquisitions/Other (80) 172
--------------------------------------------------------------------------------
Balance at end of period $ 2,463 $ 2,515
================================================================================
27
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 5. MERGER-AND RESTRUCTURING-RELATED CHARGES
In the fourth quarter of 1999, the Corporation recorded $850 million of
merger- and restructuring-related charges in connection with its merger with
BankBoston, composed of $383 million of merger-related charges and $467 million
of restructuring charges. In addition to the merger- and restructuring-related
charges, the Corporation incurred $102 million of integration costs. These
integration costs, which are expensed as incurred, resulted from the merger
integration process the Corporation began in the fourth quarter of 1999 and has
substantially completed as of September 30, 2000. The Corporation incurred an
additional $40 million of such costs during the third quarter of 2000, and $227
million during the first nine months of 2000.
Restructuring-Related Charges
Of the $467 million charge, $357 million related to personnel, $77 million
related to technology and operations, $28 million related to facilities and $5
million related to other restructuring expenses. Management expects to complete
implementation of the restructuring plan by the end of 2000.
Personnel-related costs of $357 million related to severance, benefit
program changes and outplacement services for approximately 4,000 employees that
the Corporation identified in 1999 for termination in connection with the
restructuring, principally as a result of duplicate functions within the
combined company. Substantially all of the affected employees were notified by
September 30, 2000. During the third quarter of 2000, $48 million of personnel
benefits were paid, bringing total personnel benefits paid through September 30,
2000 to $166 million. To date, approximately 3,300 employees have been
terminated and have left the Corporation. The Corporation anticipates that
substantially all of the remaining employees will have left the Corporation by
December 31, 2000.
Technology and operations costs of $77 million included $37 million of
liabilities incurred for contract cancellation penalties resulting from
duplicate or incompatible systems, and $40 million of write-offs of certain
capitalized assets, including business projects in process that will not be
completed by the Corporation, and losses incurred from the write-off of computer
hardware and software held for disposition. To date, $27 million in contract
cancellation penalties have been paid.
Facilities charges of $28 million represented the present value of future
lease obligations and lease cancellation penalties recorded in connection with
vacating duplicate headquarters, banking operations facilities and branch
offices. During the third quarter of 2000, approximately $2 million in
facilities charges were paid.
The following table presents activity in the restructuring-related accrual
during the nine months ended September 30, 2000. The remaining accrual at
September 30, 2000 is composed primarily of expected cash outlays related to
severance and facilities obligations.
Restructuring Accrual Activity
================================================================================
In millions
--------------------------------------------------------------------------------
Balance at December 31, 1999 $387
Cash payments (157)
Noncash write-downs (4)
--------------------------------------------------------------------------------
Balance at September 30, 2000 $226
================================================================================
Integration Costs
Integration costs, which are expensed as incurred, include the costs of
converting duplicate computer systems, training and relocation of employees and
departments, consolidation of facilities and customer communications. Certain
assets, principally computer hardware and software, banking operations and
administrative facilities, will be used during 2000 until the integration of
computer systems and banking operations has been completed, and will then be
disposed. Approximately $6 million of the total integration costs incurred in
the third quarter of 2000, and approximately $68 million in the first nine
months of 2000, related to the incremental depreciation on those assets, which
was calculated based on the assets' shortened useful lives, over the
depreciation that would otherwise have been recorded.
28
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 6. TRUST PREFERRED SECURITIES
The Corporation has ten statutory business trusts, of which the
Corporation owns all of the common securities. These trusts have no independent
assets or operations, and exist for the sole purpose of issuing trust preferred
securities and investing the proceeds thereof in an equivalent amount of junior
subordinated debentures issued by the Corporation.
The junior subordinated debentures, which are the sole assets of the
trusts, are unsecured obligations of the Corporation, and are subordinate and
junior in right of payment to all present and future senior and subordinated
indebtedness and certain other financial obligations of the Corporation. The
principal amount of subordinated debentures held by each trust equals the
aggregate liquidation amount of its trust preferred securities and its common
securities. The subordinated debentures bear interest at the same rate, and will
mature on the same date, as the corresponding trust preferred securities. The
Corporation fully and unconditionally guarantees each trust's obligations under
the trust preferred securities.
A summary of the trust preferred securities issued and outstanding at
September 30, 2000 and December 31, 1999 follows. These trust preferred
securities are included in long-term debt in the accompanying consolidated
balance sheet.
<TABLE>
<CAPTION>
Amount Outstanding
Sept.30, Dec. 31, Earliest Distribution Liquidation
2000 1999 Original Prepayment Stated Payment Preference per
(In millions) Issue Date Rate Option Date Maturity Frequency Trust Security
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BankBoston Capital Trust I $ 250 $ 250 11/26/96 8.25% 12/15/2006 12/15/2026 semi-annually $1,000
Fleet Capital Trust I 84 84 2/4/97 8.00% 4/15/2001 2/15/2027 quarterly 25
BankBoston Capital Trust II 250 250 12/10/96 7.75% 12/15/2006 12/15/2026 semi-annually 1,000
Fleet Capital Trust II 250 250 12/11/96 7.92% 12/15/2006 12/11/2026 semi-annually 1,000
BankBoston Capital Trust III 248 248 6/4/97 LIBOR + .75% 6/15/2007 6/15/2027 quarterly 1,000
Fleet Capital Trust III 120 120 1/29/98 7.05% 3/31/2003 3/31/2028 quarterly 25
BankBoston Capital Trust IV 247 247 6/8/98 LIBOR + .60% 6/08/2003 6/08/2028 quarterly 1,000
Fleet Capital Trust IV 150 150 4/28/98 7.17% 3/31/2003 3/31/2028 quarterly 25
Fleet Capital Trust V 250 250 12/18/98 LIBOR + 1.00% 12/18/2003 12/18/2028 quarterly 1,000
Fleet Capital Trust VI 300 -- 6/30/00 8.80% 6/30/2005 6/30/2030 quarterly 25
-----------------------------------------------------------------------------------------------------------------------------------
Total trust securities $2,149 $1,849
====================================================================================================================================
</TABLE>
All of the trust preferred securities may be prepaid at the option of the
trusts, in whole or in part, on or after the prepayment option dates listed
above. At September 30, 2000, the interest rates on the BankBoston Capital Trust
III and IV and Fleet Capital Trust V floating-rate trust preferred securities
were 7.41%, 7.25% and 7.66%, respectively.
NOTE 7. LINE OF BUSINESS INFORMATION
Information about the Corporation's operating segments for the quarters
and nine months ended September 30, 2000 and 1999 is included in the "Line of
Business Information" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 8-12) of this Form 10-Q.
29
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMEBER 30, 2000
NOTE 8. EARNINGS PER SHARE
A summary of the Corporation's calculation of earnings per common share follows:
<TABLE>
<CAPTION>
======================================================================================================================
Three months ended September 30 2000 1999
----------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average shares outstanding 903,381,791 903,381,791 921,818,389 921,818,389
Additional shares due to:
Stock options -- 9,641,681 -- 12,282,112
Warrants -- 10,191,635 -- 12,371,186
----------------------------------------------------------------------------------------------------------------------
Total equivalent shares 903,381,791 923,215,107 921,818,389 946,471,687
======================================================================================================================
Earnings per share:
Net income $ 841 $ 841 $ 711 $ 711
Less preferred stock dividends (10) (10) (13) (13)
----------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 831 $ 831 $ 698 $ 698
======================================================================================================================
Total equivalent shares 903,381,791 923,215,107 921,818,389 946,471,687
======================================================================================================================
Earnings per share $ .92 $ .90 $ .76 $ .74
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================================================================================================
Nine months ended September 30 2000 1999
----------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average shares outstanding 903,075,984 903,075,984 920,666,950 920,666,950
Additional shares due to:
Stock options -- 7,154,502 -- 11,775,460
Warrants -- 10,916,231 -- 12,553,392
----------------------------------------------------------------------------------------------------------------------
Total equivalent shares 903,075,984 921,146,717 920,666,950 944,995,802
======================================================================================================================
Earnings per share:
Net income $ 2,645 $ 2,645 $ 2,072 $ 2,072
Less preferred stock dividends and other (29) (29) (44) (44)
----------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 2,616 $ 2,616 $ 2,028 $ 2,028
======================================================================================================================
Total equivalent shares 903,075,984 921,146,717 920,666,950 944,995,802
======================================================================================================================
Earnings per share $ 2.90 $ 2.84 $ 2.20 $ 2.15
======================================================================================================================
</TABLE>
NOTE 9. CONTINGENCIES
The Corporation and its subsidiaries are involved in various legal
proceedings arising out of, and incidental to, their respective businesses.
Management of the Corporation, based on its review with counsel of the
development of these matters to date, considers that the aggregate loss
resulting from the final outcome, if any, of these proceedings should not be
material to the Corporation's financial condition or results of operations.
30
<PAGE>
NOTE 10. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash Flow Disclosure
================================================================================
Nine months ended September 30 2000 1999
In millions
--------------------------------------------------------------------------------
Supplemental disclosure for cash paid during the
period for:
Interest $ 5,522 $ 4,471
Income taxes, net of refunds 1,244 831
--------------------------------------------------------------------------------
Assets acquired and liabilities assumed in
business combinations:
Assets acquired, net of cash and cash
equivalents received -- $ 6,073
Net cash and cash equivalents paid -- (613)
Liabilities assumed -- 5,460
--------------------------------------------------------------------------------
Divestitures:
Assets sold $ 10,166 --
Net cash paid (2,171) --
Liabilities sold 13,180 --
================================================================================
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index
Exhibit
Number
12 Computation of Consolidated Ratios of Earnings to Fixed Charges
27 September 30, 2000 Financial Data Schedule
27(a) September 30, 1999 Restated Financial Data Schedule
(b) Current Reports on Form 8-K
The Corporation filed six Current Reports on Form 8-K during the period
from July 1, 2000 to the date of the filing of this report.
- Current Report on Form 8-K dated June 30, 2000, reporting the sale of $300
million of 8.80% Trust Originated Preferred Securities of Fleet Capital
Trust VI, a subsidiary trust of the Corporation, under the Corporation's
shelf registration statement.
- Current Report on Form 8-K dated July 17, 2000, announcing the
Corporation's second quarter 2000 earnings.
- Current Report on Form 8-K dated August 16, 2000, announcing the approval
of a new shareholder rights plan.
- Current Report on Form 8-K dated September 12, 2000, reporting the sale of
$1.5 billion of 7.25% senior notes under the Corporation's shelf
registration statement.
- Current Report on Form 8-K dated October 1, 2000, announcing that the
Corporation and Summit Bancorp. have entered into an Agreement and Plan of
Merger.
- Current Report on Form 8-K dated October 17, 2000, announcing the
Corporation's third quarter 2000 earnings.
31
<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.
FleetBoston Financial Corporation
----------------------------------------
(Registrant)
/s/ Eugene M. McQuade
----------------------------------------
Eugene M. McQuade
Vice Chairman,
Chief Financial Officer
and Chief Accounting Officer
DATE: November 14, 2000
32
