UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
|X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for quarterly period ended June 30, 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 July
31, 2000 was 902,419,666.
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
FORM 10-Q FOR QUARTER ENDED JUNE 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 June 30, 2000 and 1999 22
Six months ended June 30, 2000 and 1999 23
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 24
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 2000 and 1999 25
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 26
Condensed Notes to Consolidated Financial Statements 27
PART II. OTHER INFORMATION 31
SIGNATURES 32
<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 both the Quarterly Report
on Form 10-Q for the quarter ended March 31, 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.
FINANCIAL SUMMARY
================================================================================
Three months Six months
Dollars in millions, ended June 30 ended June 30
except per share amounts 2000 1999 2000 1999
--------------------------------------------------------------------------------
Earnings
Net interest income
(FTE)(a) $ 1,686 $ 1,716 $ 3,409 $ 3,397
Noninterest income 2,358 1,751 5,079 3,309
Noninterest expense 2,223 2,081 4,735 4,016
Provision for credit losses 310 241 610 460
Net income 847 700 1,804 1,361
--------------------------------------------------------------------------------
Per Common Share
Basic earnings $ .93 $ .74 $ 1.98 $ 1.45
Diluted earnings .91 .72 1.94 1.41
Cash dividends declared .30 .27 .60 .54
Book value 16.24 15.31 16.24 15.31
--------------------------------------------------------------------------------
Ratios
Return on average assets 1.83% 1.48% 1.89% 1.48%
Return on average common
equity 23.53 19.78 25.17 19.57
Total equity to assets
(period-end) 8.39 8.02 8.39 8.02
Tangible common
equity to assets 6.04 5.51 6.04 5.51
Tier 1 risk-based capital
ratio 7.36 7.14 7.36 7.14
Total risk-based capital
ratio 11.66 11.45 11.66 11.45
Leverage ratio 7.66 7.02 7.66 7.02
--------------------------------------------------------------------------------
At June 30
Total assets $181,259 $184,473 $181,259 $184,473
Loans and leases 112,476 116,995 112,476 116,995
Deposits 104,692 115,380 104,692 115,380
Stockholders' equity 15,217 14,793 15,217 14,793
Nonperforming assets 950 704 950 704
================================================================================
(a) The fully taxable equivalent (FTE) adjustment included in net interest
income was $15 million and $14 million for the three months ended June 30,
2000 and 1999, respectively, and $30 million and $27 million for the six
months ended June 30, 2000 and 1999, respectively.
The Corporation recorded net income of $847 million, or $.91 per diluted
share, for the quarter ended June 30, 2000, compared to $700 million, or $.72
per diluted share, in the second quarter of 1999. Return on average assets (ROA)
and return on average common equity (ROE) were 1.83% and 23.53%, respectively,
for the second quarter of 2000, compared to 1.48% and 19.78%, respectively, for
the second quarter of 1999. Net income for the first six months of 2000 was $1.8
billion compared to $1.4 billion for the first six months of 1999. Diluted
earnings per share was $1.94 for the first half of 2000 compared to $1.41 for
the first half of 1999. ROA and ROE were 1.89% and 25.17%, respectively, for the
six months ended June 30, 2000 and 1.48% and 19.57%, respectively, for the 1999
period.
The second quarter of 2000 included a gain of $313 million ($127 million
after-tax) resulting from the Corporation's June 2000 divestitures of 88
branches in Massachusetts and Rhode Island and approximately $3.6 billion of
loans and $4 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 six months of 2000, the
Corporation completed the divestiture of 178 branches, approximately $7 billion
of loans and approximately $8 billion of deposits, and recorded gains of $679
million ($336 million after-tax). The Corporation completed its final
divestiture to Sovereign on July 21, 2000, divesting approximately $2 billion of
loans and $4 billion of deposits, and expects to complete its remaining
divestitures to various community banks during the second half of 2000.
The second quarter results also included approximately $87 million ($52
million after-tax) of merger integration costs incurred in connection with
integration efforts following the BankBoston merger. These merger integration
costs are being expensed as incurred. Since the completion of the merger, the
Corporation has incurred cumulative integration costs of approximately $290
million ($165 million after-tax), including $187 million ($112 million
after-tax) in the first six months of 2000, and expects to incur additional
pre-tax costs during the remainder of 2000 of approximately $15 million.
Excluding the divestiture gain and merger integration costs, operating net
income for the second quarter of 2000 was $772 million, or $.83 per diluted
share, a 10% increase over net income of $700 million and a 15% increase over
$.72 per diluted share in the second quarter of 1999. Operating net income for
the first six months of 2000 was $1.6 billion, or $1.69 per diluted share,
compared to net income of $1.4 billion and $1.41 per diluted share for the first
six months of 1999. These increases were largely the result of strong growth in
revenues from Quick & Reilly and the Corporation's Principal Investing business.
The six month increase also reflected strong revenue growth at Robertson
Stephens.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Interest Income
================================================================================
Three months Six months
FTE basis ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Interest income $3,361 $3,231 $6,822 $6,380
Tax-equivalent adjustment 15 14 30 27
Interest expense 1,690 1,529 3,443 3,010
--------------------------------------------------------------------------------
Net interest income $1,686 $1,716 $3,409 $3,397
================================================================================
Net interest income decreased $30 million in the second quarter of 2000
compared to the same period a year ago, primarily reflecting the impact of the
branch divestitures that occurred in the first quarter offset, in part, by
increased rates on domestic and international loans and wider deposit spreads.
<TABLE>
<CAPTION>
Net Interest Margin and Interest Rate Spread
================================================================================================================================
Three months ended June 30 Six months ended June 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 $ 23,184 6.64% $ 24,831 6.67% $ 23,710 6.57% $ 24,366 6.51%
Loans and leases:
Domestic 101,553 8.78 103,392 8.09 103,199 8.71 102,473 8.18
International 15,107 13.96 13,600 13.22 14,956 13.98 13,596 13.34
Due from brokers/dealers 3,897 5.63 3,566 4.16 3,909 5.45 3,486 4.28
Mortgages held for sale 1,105 8.30 2,708 6.98 1,152 8.19 3,284 6.92
Other 9,946 6.85 13,581 6.25 13,314 6.15 11,751 6.21
--------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 154,792 8.76 161,678 8.04 160,240 8.59 158,956 8.11
--------------------------------------------------------------------------------------------------------------------------------
Deposits 81,938 4.34 91,329 3.79 85,319 4.20 91,600 3.87
Short-term borrowings 17,734 6.10 24,245 4.85 21,862 5.82 22,852 4.88
Due to brokers/dealers 5,571 5.27 4,426 4.32 5,317 5.33 4,147 4.23
Long-term debt 27,249 6.56 21,520 6.05 26,429 6.60 20,131 6.06
--------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 132,492 5.07 141,520 4.33 138,927 4.95 138,730 4.37
--------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.69 3.71 3.64 3.74
Interest-free sources of funds 22,300 20,158 21,313 20,226
--------------------------------------------------------------------------------------------------------------------------------
Total sources of funds $154,792 4.34 $161,678 3.79 $160,240 4.30 $158,956 3.81
--------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.37% 4.25% 4.27% 4.30%
================================================================================================================================
</TABLE>
The Corporation's net interest margin for the second quarter of 2000 was
4.37%, compared to 4.25% for the second quarter of 1999. The 12 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 recent banking reform legislation, which became
effective in March 2000, the Corporation is no longer required to maintain the
matched book. In addition, wider spreads from domestic operations helped improve
the margin.
Future levels of net interest income and margin will be negatively
impacted by the aforementioned 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 are being
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 $1.8 billion to $101.6 billion
for the second quarter of 2000, compared with $103.4 billion for second quarter
of 1999, primarily driven by decreases in both commercial and industrial (C&I)
loans and residential mortgages, mainly due to the impact of divestitures,
offset by increases in consumer margin loans at Quick & Reilly and lease
financing. Average international loans and leases increased $1.5 billion to
$15.1 billion due to commercial loan growth, primarily in Brazil. The average
yields on domestic loans and leases increased over the second quarter of 1999
due to a rising interest rate environment.
Average mortgages held for resale decreased $1.6 billion compared to the
second quarter of 1999, due to lower production volume at Fleet Mortgage caused
by a rise in mortgage interest rates. The increase in mortgage rates caused
average yields on mortgages held for resale to increase 132 basis points.
Average other interest earning assets decreased $3.6 billion to $9.9
billion for the second 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.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The $9.4 billion decrease in average interest bearing deposits compared to
the second quarter of 1999 reflects the impact of divestitures, as well as
decreases in retail and wholesale time deposits.
The $6.5 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 $5.7 billion increase in average long-term
debt.
Noninterest Income
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Capital markets revenue $ 813 $ 503 $1,871 $ 900
Investment services revenue 426 390 925 746
Banking fees and
commissions 356 370 715 716
Credit card revenue 169 187 329 349
Processing-related revenue 150 157 306 311
Gains on branch divestitures and
sales of businesses 313 50 679 50
Other noninterest income 131 94 254 237
--------------------------------------------------------------------------------
Total noninterest income $2,358 $1,751 $5,079 $3,309
================================================================================
Noninterest income for the second quarter of 2000 increased $607 million
to $2.4 billion compared to $1.8 billion for the same period in 1999, an
increase of 35%. This increase reflects a significant rise in capital markets
and investment services revenue, resulting 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 second quarter of 2000 also included the previously mentioned $313
million gain from branch divestitures.
Capital Markets Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Principal investing $289 $ 71 $ 601 $145
Market-making revenue 226 111 447 202
Underwriting revenue 95 93 351 154
Advisory fees 57 72 219 92
Foreign exchange revenue 52 50 97 110
Trading profits and
commissions 44 55 124 108
Syndication/agency fees 43 51 83 86
Securities gains (losses) 7 (2) (51) (4)
Other -- 2 -- 7
--------------------------------------------------------------------------------
Total capital markets revenue $813 $503 $1,871 $900
================================================================================
Capital markets revenue showed a significant increase, rising $310
million, or 62%, to $813 million for the second quarter of 2000, compared to
$503 million for the second quarter of 1999. This increase was driven by strong
principal investing and market-making revenue, partially offset by a decrease in
advisory fees and syndication/agency fees. For the first six months of 2000,
capital markets revenue increased 108% over the same period in 1999, with the
majority of the increase occurring in the first quarter of this year. Second
quarter 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. During the second quarter of 2000, the equity market for
Internet and technology stocks endured a significant slowdown, which resulted
in declines in certain capital markets revenues, specifically underwriting
revenue and advisory fees, from first quarter levels. 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 six month
comparisons resulted from liquidations of direct investments in public companies
and appreciation in the value of primary fund investments. During the second
quarter of 2000, the Corporation made new investments of $600 million. In the
first six months, the Corporation's new investments were approximately $1.2
billion. As of June 30, 2000, the Corporation's Principal Investing portfolio
had an aggregate carrying value of approximately $4.5 billion, and the gross
pre-tax unrealized gain on the Corporation's direct investments in public
companies was approximately $300 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 $115 million, or 104%, 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 second quarter. For the first six months of 2000, market-making revenue
increased 121%.
Underwriting revenue was relatively flat in the second quarter of 2000 at
$95 million, compared to $93 million in the second quarter of 1999. Underwriting
revenues are affected by the volume and timing of public offerings and other
transactions. Transaction volume at Robertson Stephens decreased compared to the
second quarter of 1999; however, fees received per transaction helped maintain
prior year revenue levels. In the six month comparison, the $197 million, or
128%, increase over 1999 resulted from significantly higher initial and
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
other public offering activity in the first quarter of 2000 compared to the 1999
period.
Advisory fees decreased $15 million to $57 million in the second quarter
of 2000 from $72 million in the second quarter of 1999. This decrease reflects a
lower level of merger and acquisition (M&A) transactions during the quarter, as
Robertson Stephens advised on 14 transactions compared to 27 in the second
quarter of 1999. The increase in the six month comparison mainly resulted from a
much higher volume of M&A transactions in the first quarter of 2000 compared to
the first quarter of 1999.
Trading profits and commissions declined $11 million to $44 million for
the quarter ended June 30, 2000, compared to $55 million for the quarter ended
June 30, 1999, primarily due to volatile market conditions. The increase in the
six 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.
The decline in syndication/agency fees in both comparisons was due to a
lower level of transactions during 2000. Such fees are a function of the timing
and level of syndication transactions.
Investment Services Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Brokerage fees and commissions $184 $165 $445 $302
Investment management revenue 242 225 480 444
--------------------------------------------------------------------------------
Total investment services revenue $426 $390 $925 $746
================================================================================
Brokerage Fees and Commissions
Increased brokerage fees and commissions were driven by increased trading
volumes on the NASDAQ and New York Stock Exchanges, which benefited the
brokerage and clearing units of Quick & Reilly and Robertson Stephens,
especially in the first quarter of 2000. Trading volumes and resulting brokerage
fees declined in the second quarter to levels more comparable to the 1999
periods.
Investment Management Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Private Clients Group $ 96 $ 94 $189 $187
Institutional businesses 39 39 77 77
International 39 34 80 68
Retail investments 36 31 72 60
Columbia Management Company 29 25 56 49
Other 3 2 6 3
--------------------------------------------------------------------------------
Total $242 $225 $480 $444
================================================================================
Investment management revenue increased 8% in both the second quarter and
first six 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 $129 billion at June 30, 2000 from
$121 billion at June 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
$14 million to $356 million for the second quarter of 2000, primarily the result
of lower deposit fees following the divestitures of deposits to Sovereign.
Partially offsetting this decrease was a rise in cash management fees resulting
from a higher volume of business. Future levels of banking fees and commissions
will be negatively impacted by the divestitures of deposits to Sovereign and
various community banks. 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 are being 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 $18 million in the second quarter of 2000
compared to the second quarter of 1999, and $20 million in the six 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, and
increased marketing activities.
Processing-Related Revenue
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Mortgage banking revenue, net $ 81 $ 94 $168 $185
Student loan servicing fees 39 35 78 69
Other 30 28 60 57
--------------------------------------------------------------------------------
Total processing-related revenue $150 $157 $306 $311
================================================================================
Processing-related revenue decreased $7 million in the second quarter of
2000 compared to the second quarter of 1999, and $5 million in the six month
comparison, reflecting decreases in net mortgage banking revenue, offset, in
part, by increases in student loan servicing fees and other processing-related
revenue. Student loan servicing fees increased at AFSA Data Corporation (AFSA),
the Corporation's student loan servicing subsidiary, as accounts serviced
increased approximately 9% from the second quarter of 1999. AFSA is the largest
student loan servicer in the United States, with 7.2 million accounts and over
$67 billion of loans serviced.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mortgage Banking Revenue, Net
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Net loan servicing revenue $ 159 $ 133 $ 317 $ 253
Mortgage production revenue 15 53 39 106
Mortgage servicing rights amortization (93) (92) (188) (174)
--------------------------------------------------------------------------------
Total mortgage banking revenue, net $ 81 $ 94 $ 168 $ 185
================================================================================
Net mortgage banking revenue decreased $13 million in the second quarter
of 2000 compared to the second quarter of 1999, and $17 million in the six month
comparison, reflecting lower mortgage production revenue, offset in part by
increased loan servicing revenue.
The increases in loan servicing revenue for the quarter and six months
were attributable to a higher servicing spread on mortgage servicing acquired,
as well as an increase in the size of the Corporation's servicing portfolio from
approximately $132 billion at June 30, 1999 to approximately $140 billion at
June 30, 2000. Mortgage production revenue declined in both comparisons as a
result of lower mortgage production volume, driven by the higher mortgage
interest rate environment. Mortgage servicing rights (MSR) amortization
increased $14 million in the six month comparison, the result of the
aforementioned increase in the size of the Corporation's servicing portfolio,
which occurred during the second half of 1999. The Corporation sold
approximately $13 billion of mortgage servicing during the second quarter of
2000 at close to carrying value.
Other
The $313 million gain on branch divestitures recognized in the second
quarter of 2000 resulted from the Corporation's June 2000 divestitures of 88
branches in Massachusetts and Rhode Island, and approximately $3.6 billion of
loans and $4 billion of deposits, to Sovereign and various community banks. The
Corporation also recognized a gain on branch divestitures of $366 million in the
first quarter of 2000. The $50 million gain in the second quarter of 1999
related to the sale of the Corporation's minority interest in Partners First, a
credit card company.
Other noninterest income increased $37 million to $131 million for the
second quarter of 2000, compared to $94 million for the second quarter of 1999,
partly the result of student loan sales during the quarter.
<PAGE>
Noninterest Expense
================================================================================
Three months Six months
ended June 30 ended June 30
In millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Employee compensation and benefits $1,148 $1,126 $2,573 $2,142
Occupancy and equipment 283 269 589 538
Intangible asset amortization 87 85 175 171
Legal and other professional 83 71 165 138
Marketing and public relations 71 67 143 129
Other 551 463 1,090 898
--------------------------------------------------------------------------------
Total noninterest expense $2,223 $2,081 $4,735 $4,016
================================================================================
Noninterest expense for the second quarter of 2000 totaled $2.2 billion,
compared to $2.1 billion for the same period in 1999. The $142 million, or 7%,
increase was due primarily to higher compensation and benefit costs directly
attributable to higher levels of revenue, particularly from Quick & Reilly, as
well as 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 six month comparison, the
increase of $719 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 $187 million of merger integration costs incurred in the first six
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 $87 million of merger integration costs
during the second quarter of 2000, composed of $3 million of employee
compensation and benefits costs, $26 million of occupancy and equipment costs,
$11 million of legal and other professional costs, $13 million of marketing and
public relations costs, and $34 million of other costs.
Employee compensation and benefits costs increased $22 million compared to
the second quarter of 1999, due primarily to incentive and volume-related
increases in compensation at Quick & Reilly. The Corporation's compensation and
benefits costs, excluding incentive and merger integration costs, decreased 2%
in the quarterly comparison as a result of a portion of the above-mentioned
expense reductions. These same costs increased only 2% in the six month
comparison. The overall increase in compensation and benefits costs for the six
months ended June 30, 2000 over the same period in 1999 resulted from incentive
and volume-related increases at both Quick & Reilly and Robertson Stephens.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Occupancy and equipment costs rose $14 million in the three months ended
June 30, 2000, and $51 million in the six months ended June 30, 2000, as a
result of merger integration costs, offset, in part, by a portion of the
above-mentioned expense reductions.
Legal and other professional costs and marketing and public relations
costs increased in the quarter and six 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 $88 million in the second quarter of
2000 and $192 million in the six 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 are expected to be completed by the end of 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 June 30, 2000 had achieved
annualized cost savings of approximately $396 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
$124 million in the second quarter of 2000, and expects additional expense
reductions to benefit the second half of 2000. 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.
Because merger integration efforts and the divestitures are proceeding
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, changes in integration plans 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 $649 million for the second
quarter of 2000, compared with $431 million for the same period a year ago. The
Corporation's effective tax rate was 43.4% and 38.1% for the second quarters of
2000 and 1999, respectively, and 42.0% and 38.2% for the respective six month
periods. The increases in the effective tax rates 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, and on pages 7 through 10 of the Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. 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 June 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) $ 460 $ 319 $ 1,872 $ 1,511 30% 22%
Commercial and Retail Banking 328 256 1,412 1,374 22 17
National Financial Services 93 90 472 529 14 13
All Other (34) 35 288 53 -- --
-------------------------------------------------------------------------------------------------------------------
Total $ 847 $ 700 $ 4,044 $ 3,467 24% 20%
===================================================================================================================
<CAPTION>
===================================================================================================================
Six months ended June 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) $ 1,034 $ 594 $ 4,125 $ 2,847 34% 21%
Commercial and Retail Banking 634 516 2,809 2,702 21 18
National Financial Services 175 182 948 1,061 13 13
All Other (39) 69 606 96 -- --
-------------------------------------------------------------------------------------------------------------------
Total $ 1,804 $ 1,361 $ 8,488 $ 6,706 25% 20%
===================================================================================================================
</TABLE>
(a) Includes net income and revenue from overseas operations, principally
Argentina and Brazil, of $82 million and $414 million, respectively, for
the second quarter of 2000, and $79 million and $406 million,
respectively, for the second quarter of 1999. Net income and revenue from
overseas operations was $159 million and $828 million, respectively,
for the first half of 2000, and $140 million and $781 million,
respectively, for the first half of 1999.
During the second quarter of 2000, both Global Banking and Financial
Services and Commercial and Retail Banking posted strong increases in earnings
and revenues compared to the second quarter of 1999. Improved results in these
business units were driven by strong performance in the Corporation's capital
markets businesses, continued growth in many of the Corporation's core
businesses, and cost savings from successful merger integration efforts.
Earnings of National Financial Services, which includes the Corporation's
commercial real estate lending, credit card lending, mortgage banking and
student loan processing businesses, increased slightly from the same quarter a
year ago, while revenues were down in the same comparison. Higher fee income and
lower operating expenses in the commercial real estate unit were partially
offset by the effects of the rising interest rate environment on the mortgage
business.
The following discussion by line of business focuses on the components of
each of the three major business lines, and explains results in terms of their
underlying businesses.
<PAGE>
Global Banking and Financial Services
================================================================================
Three months ended Six months ended
June 30 June 30
Dollars in millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Income statement data:
Net interest income $ 551 $ 522 $ 1,085 $ 982
Noninterest income 1,321 989 3,040 1,865
Provision 73 70 146 137
Noninterest expense 1,032 913 2,259 1,725
Taxes 307 209 686 391
--------------------------------------------------------------------------------
Net income $ 460 $ 319 $ 1,034 $ 594
--------------------------------------------------------------------------------
Balance sheet data:
Average assets(a) $78,476 $72,702 $82,927 $70,246
Average loans 47,394 43,062 46,656 42,711
Average deposits 20,620 19,471 20,655 19,339
--------------------------------------------------------------------------------
Return on equity 30% 22% 34% 21%
================================================================================
(a) Includes international average assets of $22 billion for the three months
and six months ended June 30, 2000 and $19 billion for the three months
and six months ended June 30, 1999.
Global Banking and Financial Services includes Principal Investing,
Corporate and Investment Banking, International 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 $460 million in the second quarter of 2000, a 44% increase from the
second quarter of 1999. Increased earnings for Global Banking and Financial
Services were driven by capital markets and investment services revenues.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Three months ended
June 30 2000 1999 % 2000 1999 %
Dollars in millions Net Income Change Total Revenue Change
--------------------------------------------------------------------------------
Principal Investing $ 122 $ 36 239% $ 240 $ 72 233%
Corporate and
Investment Banking 102 74 38 314 300 5
International
Banking 88 89 (1) 441 442 --
Quick & Reilly 68 49 39 350 238 47
Investment Services 52 42 24 235 222 6
Robertson Stephens 28 29 (3) 292 237 23
--------------------------------------------------------------------------------
Total $ 460 $ 319 44% $1,872 $1,511 24%
================================================================================
Principal Investing provides capital and debt financing to business
ventures that are predominantly privately or closely held companies. The
Principal Investing business earned $122 million in the second quarter of 2000,
an increase of 239% over the same quarter last year. Increased earnings were
driven by realized gains on sales of investments. 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 June 30, 2000, the aggregate carrying value of the
Principal Investing investment portfolio was $4.5 billion.
The Corporate and Investment Banking unit, which includes specialized
industry lending, institutional banking and capital markets activities, recorded
earnings of $102 million in the second quarter of 2000, an increase of $28
million, or 38%, compared to the second quarter of 1999. Driving these increased
earnings were higher capital markets revenues and cash management fees as well
as declining levels of operating expenses associated with lower levels of
employees, as merger integration efforts continued.
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 billion of assets, and Argentina,
where the Corporation has a market presence of 138 branches and approximately
$10 billion of assets. Compared to the second quarter of 1999, International
Banking earnings decreased slightly, driven primarily by a $5 million
(after-tax) write-down of an investment in the Asia Pacific unit. Excluding this
transaction, International Banking earnings increased $4 million, mainly due to
favorable spreads and increased loan and deposit volumes in key Latin American
markets. Average deposit balances grew $1 billion during the second quarter of
2000, while average loan balances grew $1.9 billion over the second quarter of
1999. At June 30, 2000, international mutual fund assets under management
totaled $9 billion.
Quick & Reilly, which offers brokerage, market-making and securities
clearing services, earned $68 million in the second quarter of 2000, compared to
$49 million in the second quarter of 1999, an increase of $19 million, or 39%.
Higher brokerage and market-making revenues, which increased $90 million, or
44%, from the same quarter a year ago, were driven by increased transaction
volumes in the equity markets. During the current quarter, Quick & Reilly
announced several key initiatives, including wireless securities trading, free
internet access for its brokerage clients, and an investment in a fast-growing
Japanese online brokerage firm, all in an effort to maintain its leadership
position in online brokerage services. In July 2000, Quick & Reilly announced
its plan to acquire a New York Stock Exchange floor specialist.
The Investment Services unit, which includes the Private Clients Group,
Columbia Management, the Retail Investments Group and several businesses which
offer retirement planning, large institutional asset management and
not-for-profit investment services, earned $52 million in the second quarter of
2000, an increase of $10 million, or 24%, 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 $6 billion from June 30, 1999 to
approximately $120 billion at June 30, 2000, as well as increased sales of
mutual funds and annuities, which grew 42% over the same period, reflecting the
continued strength of financial markets and increasing customer demand for these
products.
Robertson Stephens earned $28 million on revenues of $292 million in the
second quarter of 2000, compared to net income of $29 million and revenues of
$237 million in the second quarter of 1999. Increased revenues were the result
of equity underwriting and higher trading volumes, focused mainly in the
Internet and technology market sectors.
Commercial and Retail Banking
================================================================================
Three months ended Six months ended
June 30 June 30
Dollars in millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Income statement data:
Net interest income $ 1,027 $ 990 $ 2,053 $ 1,956
Noninterest income 385 384 756 746
Provision 78 95 162 175
Noninterest expense 779 842 1,571 1,646
Taxes 227 181 442 365
--------------------------------------------------------------------------------
Net income $ 328 $ 256 $ 634 $ 516
--------------------------------------------------------------------------------
Balance sheet data:
Average assets $60,982 $65,118 $62,134 $63,255
Average loans 51,992 52,937 52,920 51,577
Average deposits 74,723 78,049 76,285 77,746
--------------------------------------------------------------------------------
Return on equity 22% 17% 21% 18%
================================================================================
Commercial and Retail Banking includes domestic retail banking to consumer
and small business customers, community development banking, and domestic
commercial banking operations, which includes middle-market lending, asset-based
lending, leasing, cash management, trade finance and government banking
services. Operating results reflect growth in commercial banking loan and lease
portfolios, deposit pricing, cost savings and the timing of transactional items.
Earnings for this unit increased $72 million, or 28%, as strong growth in the
Retail Distribution and Consumer Lending units (43%) was accompanied by
continued steady growth in the Commercial Finance and Commercial Banking units
(13%).
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Three months ended
June 30 2000 1999 % 2000 1999 %
Dollars in millions Net Income Change Total Revenue Change
--------------------------------------------------------------------------------
Retail Distribution $ 112 $ 77 45% $ 590 $ 576 2%
Commercial Finance 82 74 11 246 245 --
Commercial Banking 63 54 17 255 254 --
Small Business 54 38 42 232 206 13
Consumer Lending 17 13 31 89 93 (4)
--------------------------------------------------------------------------------
Total $ 328 $ 256 28% $1,412 $1,374 3%
================================================================================
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 shown above is the Community Banking Group, which
was created to function as a catalyst for wealth creation and economic
development in low-and-moderate income, historically under-served, and
culturally diverse markets. Community Banking plays a key leadership role in
stabilizing urban and rural economies within the Corporation's footprint through
a comprehensive approach to community economic development and the Community
Reinvestment Act.
During the second quarter of 2000, the Retail Distribution group divested
88 branches and their associated deposit portfolios throughout Massachusetts and
Rhode Island. Retail Distribution had average deposit balances of $52.3 billion
for the second quarter of 2000, a decrease of $3.9 billion from the second
quarter of 1999, reflecting the effect of divestitures. Retail Distribution
earned $112 million, a 45% increase over the second quarter of 1999, driven, in
part, by increased spreads on deposits and lower operating expenses related to
cost savings.
Commercial Finance focuses on the asset financing needs of corporate
customers. Commercial Finance earned $82 million in the second quarter of 2000,
compared to $74 million a year ago, an increase of 11%. Increased advisory and
syndication fees recorded in the second quarter of 2000 primarily drove these
higher earnings as well as lower operating costs.
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. For the second quarter of 2000,
this unit's average loan and deposit balances were $16 billion and $10.3
billion, respectively. Loan balances decreased $.4 billion compared to the
second quarter of 1999, reflecting the divestiture of balances in the Middle
Market business segment, while deposits increased $.3 billion, primarily in the
Global Services unit. Commercial Banking earned $63 million in the second
quarter of 2000, a 17% increase over the $54 million earned in the second
quarter of 1999, primarily reflecting deposit spreads and increased
cross-selling of fee-based products, as well as lower operating costs.
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 ranks among
the leaders in the Northeast. Earnings for this unit were $54 million for the
second quarter of 2000, an increase of $16 million, or 42%, over the second
quarter a year earlier. Higher deposit spreads and volumes, as well as fee-based
revenues, drove increased earnings. Average loan balances declined slightly to
$3.7 billion for the second quarter of 2000, primarily due to divestitures, but
average deposit balances increased $.3 billion compared to the second quarter of
1999, to $11.8 billion for the second quarter of 2000.
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.
The Consumer Lending business had $9.1 billion in average consumer loan balances
for the second quarter of 2000, a decrease of $.7 billion from the second
quarter of 1999, due to declines related to divestitures offset by growth of
home equity products. 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 $17 million in the
second quarter of 2000, an increase of 31% from the prior year. Higher earnings
were influenced by increased volumes of home equity lines due to aggressive
promotion of those products and the strategic sales of certain loan portfolios,
which created associated cost savings, lower provision for credit losses and
gains on the sales.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
National Financial Services
================================================================================
Three months ended Six months ended
June 30 June 30
Dollars in millions 2000 1999 2000 1999
--------------------------------------------------------------------------------
Income statement data:
Net interest income $ 148 $ 185 $ 320 $ 408
Noninterest income 324 344 628 653
Provision 66 99 155 205
Noninterest expense 251 280 500 550
Taxes 62 60 118 124
--------------------------------------------------------------------------------
Net income $ 93 $ 90 $ 175 $ 182
--------------------------------------------------------------------------------
Balance sheet data:
Average assets $22,235 $23,711 $22,943 $24,880
Average loans 14,031 14,398 14,501 14,966
Average deposits 4,031 4,138 3,927 4,166
--------------------------------------------------------------------------------
Return on equity 14% 13% 13% 13%
================================================================================
National Financial Services includes Commercial Real Estate, Credit Cards,
Mortgage Banking and Student Loan Processing. National Financial Services
earnings increased $3 million, or 3%, from the second quarter of 1999 to $93
million for the second quarter of 2000.
--------------------------------------------------------------------------------
Three months ended
June 30 2000 1999 % 2000 1999 %
Dollars in millions Net Income Change Total Revenue Change
--------------------------------------------------------------------------------
Commercial Real Estate $ 41 $ 33 24% $102 $100 2%
Credit Cards 30 30 -- 238 274 (13)
Mortgage Banking 14 20 (30) 81 108 (25)
Student Loan
Processing 8 7 14 51 47 9
--------------------------------------------------------------------------------
Total $ 93 $ 90 3% $472 $529 (11)%
================================================================================
Commercial Real Estate earnings increased $8 million due to higher fee
income and lower operating expenses. Credit Cards earned $30 million for the
quarter, consistent with the prior year, as lower gross yields on portfolio
balances and increased amortization of deferred acquisition costs offset higher
fee revenue and improvements in credit quality. The Corporation's credit card
subsidiary is the eighth largest credit card company in the nation. Fleet
Mortgage, with offices located in 17 states, originated approximately $4.5
billion of loans in the second quarter of 2000 and currently services a mortgage
portfolio of approximately $140 billion and 1.5 million loans. Decreased
earnings in Mortgage Banking resulted from lower production revenues as mortgage
interest rates continued to increase. AFSA's earnings increase reflected higher
student loan processing revenues. Student loan processing, through the
Corporation's AFSA subsidiary, services 7.2 million accounts nationwide and is
the largest student loan servicer in the nation, with over $67 billion of loans
serviced.
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.
FINANCIAL CONDITION
Total assets were $181.3 billion as of June 30, 2000, a decrease of $9.4
billion from December 31, 1999, reflecting the divestiture of approximately $7
billion of loans to Sovereign and various community banks in March and June
2000, as well as a $2.4 billion decrease in securities resulting partly from a
respositioning of the bond portfolio.
Total loans and leases at June 30, 2000 were $112.5 billion, a decrease of
$7.2 billion compared to $119.7 billion at December 31, 1999. This decrease was
due mainly to the aforementioned divestitures.
Total deposits decreased $10.2 billion to $104.7 billion at June 30, 2000,
primarily the result of the divestiture of approximately $8 billion of deposits
to Sovereign and various community banks in March and June 2000, and a decrease
in domestic retail and wholesale time deposits. Partially offsetting these
decreases was an increase in international deposits.
Short-term borrowings decreased $2.5 billion from December 31, 1999 to
June 30, 2000, attributable to a decrease in federal funds purchased and
securities sold under agreements to repurchase as a result of the elimination of
the regulatory requirement to maintain a matched book at the Corporation's
Section 20 subsidiary. This decrease was offset in part by the increased
availability and use of treasury, tax and loan borrowings.
The $2.4 billion increase in long-term debt was due to the issuance of
approximately $4.2 billion of medium-term floating rate notes, including $2.8
billion of bank notes, and $300 million of trust preferred securities. These
issuances were offset, in part, by maturities of medium-term notes and the
redemption of $186 million of floating-rate subordinated notes.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 decreased to $22.3 billion at
June 30, 2000, compared to $23.4 billion at December 31, 1999. This decrease was
due in part to the Corporation's repositioning of its bond portfolio. The
overall valuation of securities available for sale decreased to a net unrealized
(pre-tax) loss position of $327 million at June 30, 2000, primarily the result
of 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 $300
million at June 30, 2000.
<TABLE>
<CAPTION>
Securities
=====================================================================================================================
June 30, 2000 March 31, 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 $ 1,391 $ 1,336 $ 1,438 $ 1,388 $ 2,282 $ 2,196
Mortgage-backed securities 13,545 12,991 13,221 12,589 14,157 13,567
Other debt securities 4,616 4,590 4,471 4,469 4,850 4,853
---------------------------------------------------------------------------------------------------------------------
Total debt securities 19,552 18,917 19,130 18,446 21,289 20,616
---------------------------------------------------------------------------------------------------------------------
Marketable equity securities 965 1,273 1,027 1,847 977 2,342
Other equity securities 1,824 1,824 1,706 1,706 1,173 1,173
---------------------------------------------------------------------------------------------------------------------
Total securities available for sale 22,341 22,014 21,863 21,999 23,439 24,131
---------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 832 834 1,084 1,084 1,081 1,081
---------------------------------------------------------------------------------------------------------------------
Total securities $23,173 $22,848 $22,947 $23,083 $24,520 $25,212
=====================================================================================================================
</TABLE>
Loans and Leases
================================================================================
June 30, March 31, Dec. 31,
In millions 2000 2000 1999
--------------------------------------------------------------------------------
Domestic:
Commercial and industrial $ 53,413 $ 54,711 $ 55,184
Commercial real estate 7,979 7,949 7,945
Consumer 24,248 29,070 30,885
Lease financing 12,035 10,801 10,933
--------------------------------------------------------------------------------
Total domestic loans and leases 97,675 102,531 104,947
--------------------------------------------------------------------------------
International:
Commercial 11,873 11,760 11,855
Consumer 2,928 3,062 2,898
--------------------------------------------------------------------------------
Total international loans and leases 14,801 14,822 14,753
--------------------------------------------------------------------------------
Total loans and leases $112,476 $117,353 $119,700
================================================================================
<PAGE>
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 June 30, 2000 decreased $7.2 billion from
December 31, 1999. This decrease was entirely due to domestic loans and leases,
which decreased $7.3 billion, or 7%, due primarily to the aforementioned
divestitures of $7 billion of loans, composed of $2 billion of C&I loans and $5
billion of consumer loans, to Sovereign and various community banks in March and
June 2000. The Corporation's international loan portfolio was relatively flat
compared to December 31, 1999.
Consumer Loans
================================================================================
June 30, March 31, Dec. 31,
In millions 2000 2000 1999
--------------------------------------------------------------------------------
Domestic:
Residential real estate $ 7,091 $ 9,519 $10,881
Home equity 6,818 6,547 7,095
Credit card 3,972 5,032 5,455
Student loans 999 1,525 1,407
Installment/other 5,368 6,447 6,047
--------------------------------------------------------------------------------
Total domestic loans 24,248 29,070 30,885
--------------------------------------------------------------------------------
International 2,928 3,062 2,898
--------------------------------------------------------------------------------
Total consumer loans $27,176 $32,132 $33,783
================================================================================
Compared to December 31, 1999, domestic consumer loans decreased $6.6
billion to $24.2 billion at June 30, 2000. The $3.8 billion decrease in
residential real estate loans from year-end was primarily the result of the
divestiture of $3.5 billion of such loans during the six month period. Credit
card loans declined $1.5 billion to $4 billion at June 30, 2000, mainly due to
the securitization of $1.4 billion of credit card receivables during the first
half of 2000. The decrease in other consumer loan categories was directly
attributable to divestitures of $1.5 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 June 30, 2000, total cross-border
outstandings were $11.7 billion, compared with $12.9 billion at December 31,
1999, which included $5.8 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.
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
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 June 30, 2000 and December 31, 1999.
Significant Cross-Border Outstandings(a)(b)
================================================================================
June 30, Dec. 31,
Dollars in millions 2000(c) 1999(c)
--------------------------------------------------------------------------------
Argentina:
Banks $ 130 $ 405
Government entities and agencies 850 1,470
Other 1,190 795
--------------------------------------------------------------------------------
Total $2,170 $2,670
--------------------------------------------------------------------------------
Percentage of total assets 1.2% 1.4%
--------------------------------------------------------------------------------
Commitments(d) $ 8 $ 12
--------------------------------------------------------------------------------
Brazil:
Banks -- $ 170
Government entities and agencies -- 1,540
Other -- 210
--------------------------------------------------------------------------------
Total -- $1,920
--------------------------------------------------------------------------------
Percentage of total assets -- 1.0%
--------------------------------------------------------------------------------
Commitments(d) -- $ 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 billion and $2.7 billion at June 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 June 30, 2000 and December 31, 1999 were
approximately as follows: June 30, 2000 - Brazil-$1.6 billion; December
31, 1999-none.
(d) Included within commitments are letters of credit, guarantees and the
undisbursed portions of loan commitments.
<PAGE>
Nonperforming Assets(a)
================================================================================
In millions C&I CRE Consumer Total
--------------------------------------------------------------------------------
Nonperforming loans and leases:
Current or less than 90 days past due
Domestic $401 $ 2 $ 6 $409
International 4 1 -- 5
Noncurrent
Domestic 185 19 64 268
International 89 49 79 217
Other real estate owned (OREO)
Domestic 1 15 15 31
International -- 16 4 20
--------------------------------------------------------------------------------
Total NPAs-Domestic $587 $ 36 $ 85 $708
Total NPAs-International 93 66 83 242
--------------------------------------------------------------------------------
Total NPAs, June 30, 2000 $680 $102 $168 $950
--------------------------------------------------------------------------------
NPAs, March 31, 2000:
Total NPAs-Domestic $530 $ 34 $ 87 $651
Total NPAs-International 94 56 85 235
--------------------------------------------------------------------------------
Total NPAs, March 31, 2000 $624 $ 90 $172 $886
--------------------------------------------------------------------------------
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 ($271 million, $293 million and $320 million at June 30, 2000,
March 31, 2000 and December 31, 1999, respectively). Included in the 90
days past due and still accruing interest amounts were $184 million, $213
million and $251 million of consumer loans at June 30, 2000, March 31,
2000 and December 31, 1999, respectively.
Nonperforming assets (NPAs) at June 30, 2000 increased $109 million to
$950 million when compared with December 31, 1999, and increased $64 million
compared to March 31, 2000. The six month rise in NPAs was due primarily to
additions to domestic C&I nonperforming loans (NPLs), offset in part by $126
million of NPLs reclassified to assets held for sale by accelerated disposition
during the first six months of 2000. NPAs at June 30, 2000, as a percentage of
total loans, leases and OREO, and as a percentage of total assets, were .84% and
.52%, respectively, compared to .70% and .44%, respectively, at December 31,
1999.
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.
The following table sets forth the status of impaired loans, which are
primarily commercial and commercial real estate loans on nonaccrual status:
Impaired Loans
================================================================================
June 30, Dec. 31,
In millions 2000 1999
--------------------------------------------------------------------------------
Impaired loans with a reserve $614 $512
Impaired loans without a reserve 98 60
--------------------------------------------------------------------------------
Total impaired loans $712 $572
--------------------------------------------------------------------------------
Reserve for impaired loans (a) $236 $163
--------------------------------------------------------------------------------
Quarterly average balance of impaired loans $689 $524
================================================================================
(a) The reserve for impaired loans is part of the Corporation's overall
reserve for credit losses.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 June 30, 2000, March 31, 2000 and December 31, 1999, the Corporation
had assets held for sale by accelerated disposition with a net carrying value of
$300 million, $498 million and $370 million, respectively, of which
approximately $259 million, $320 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
================================================================================
Six months ended June 30 2000 1999
Dollars in millions
--------------------------------------------------------------------------------
Balance at beginning of year $ 2,488 $ 2,306
Loans charged off (655) (574)
Recoveries of loans charged off 95 151
--------------------------------------------------------------------------------
Net charge-offs (560) (423)
Provision for credit losses 610 460
Divestitures/Acquisitions/Other (66) 172
--------------------------------------------------------------------------------
Balance at end of period $ 2,472 $ 2,515
--------------------------------------------------------------------------------
Ratios of net charge-offs to average loans .95% .73%
--------------------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end loans 2.20 2.15
--------------------------------------------------------------------------------
Ratios of reserve for credit losses to period-end NPLs 275 374
================================================================================
The Corporation's reserve for credit losses at June 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 the provision for credit losses exceeding net charge-offs by $50 million. The
provision for credit losses for the first six months of 2000 was $610 million,
$150 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 modest additional Federal Reserve Board
tightening. The limit relates to the impact of an immediate increase or decrease
in the forecasted interest rates. The Corporation was in compliance with this
limit at June 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)
----------------------------------------------------------
June 30, March 31, Dec. 31,
2000 2000 1999
----------------------------------------------------------
+200 $(113) $(77) $(58)
-200 88 26 (12)
==========================================================
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management believes that the exposure of the Corporation's net interest
income to modest changes in interest rates, such as the tightening by the
Federal Reserve Board currently built into the base forecast scenario, is
relatively insignificant. 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 very modestly liability-sensitive.
The Corporation also performs valuation analysis, which involves
projecting future cash flows from the Corporation's assets, liabilities and
off-balance sheet positions over a very long-term horizon, discounting those
cash flows at appropriate interest rates, and then 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 June 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 shift in interest rates would have a much
more modest impact, due partly to anticipated hedge activity.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (In millions)
--------------------------------------------------------
June 30, March 31, Dec. 31,
2000 2000 1999
--------------------------------------------------------
+200 $(941) $(565) $ 118
+100 (388) (256) 65
-100 215 75 (539)
-200 260 (273) (1,457)
========================================================
Estimated EVE exposures are more asymmetrical compared to the prior
quarter-end and, 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 six months 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 June 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
June 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 $21,551 Variable-rate loans
200 Securities
630 Fixed-rate deposits
55 Short-term debt
5,027 Long-term debt
-------
27,463 3.8 $(388) 6.69% 6.95%
-------
Pay fixed/receive variable 18 Fixed-rate loans
-------
18 3.0 1 5.19 5.62
-------
Basis swaps 67 Securities
7 Variable rate loans
-------
74 5.2 1 6.07 6.65
------------------------------------------------------------------------------------------------------------------------------------
Total domestic interest rate risk 27,555 3.8 (386) 6.69% 6.95%
management instruments
------------------------------------------------------------------------------------------------------------------------------------
International interest rate risk management
instruments
Interest rate swaps 1,386 Short-term assets and
liabilities .7 -- --(a) -- (a)
------------------------------------------------------------------------------------------------------------------------------------
Total international interest rate risk management
instruments 1,386 .7 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income $28,941 3.7 $(386) 6.69% 6.95%
------------------------------------------------------------------------------------------------------------------------------------
Mortgage banking risk management instruments
Swaps:
Interest rate, P.O., and MBS swaps $ 2,912 MSRs 2.5 $(40) 6.70% 6.49%
Options:
Interest rate floors and options on swaps 19,035 MSRs 4.0 218 --(b) --(b)
Interest rate caps 8,050 MSRs 4.1 126 --(b) --(b)
Treasury and futures options 400 MSRs .4 1 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total options 27,485 4.0 345 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights $30,397 3.8 $305 6.70% 6.49%
------------------------------------------------------------------------------------------------------------------------------------
Foreign exchange risk management instruments
Swaps $ 4,772 Foreign currency denominated
assets and liabilities .8 $ (29) -- --
Spot and forward contracts 1,236 Foreign currency denominated
assets and liabilities .1 6 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total hedges of foreign exchange $ 6,008 .7 $ (23) -- --
------------------------------------------------------------------------------------------------------------------------------------
Total risk management instruments $65,346 3.5 $(104) 6.69% 6.90%
====================================================================================================================================
</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 5.91%
and 7.22%, respectively.
As of June 30, 2000, the Corporation had net deferred income of
approximately $14 million relating to terminated interest rate swap contracts,
which will be amortized over the remaining life of the underlying terminated
interest rate contracts of approximately 8 years.
During the second quarter of 2000, net hedge losses of $3 million were
deferred and recorded as adjustments to the carrying value of MSRs and related
hedges. At June 30, 2000, the carrying value and fair value of the Corporation's
MSRs were $3.2 billion and $3.3 billion, respectively. In connection with the
Corporation's management of its MSR hedge program, the Corporation terminated
(in notional amounts) $4 billion of interest rate floor and option on swap
agreements and $2 billion of Treasury and futures options, and added $4 billion
and $2 billion of interest rate floor and option on swap agreements and Treasury
and futures options, respectively, during the second quarter of 2000.
Additionally, the Corporation added $2 billion of swap contracts and $1 billion
of interest rate caps, and terminated $3 billion of swap contracts and $2
billion of interest rate caps during the second 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 trading
portfolios of financial instruments. 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 during the first half of 2000.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[BAR CHART REPRESENTATION OF
DAILY TRADING-RELATED REVENUES FOR THE FIRST HALF OF 2000]
Revenues Number of Days
-------- --------------
(In millions)
$(1) - 0 4
$ 0 - 1 7
$ 1 - 3 14
$ 3 - 5 27
$ 5 - 7 25
$ 7 - 9 21
$ 9 - 11 13
$11 - 13 11
$13 - 15 6
$15 - 17 --
Above $17 2
Trading-related revenues presented above include trading profits and
commissions, foreign exchange and market-making revenue, which are all
components of capital markets revenue, as well as net interest income from these
trading positions. During the first half of 2000, daily trading-related revenues
ranged from losses of $.9 million to profits of $18 million. The Corporation has
implemented a price risk management process to limit the volatility of these
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).
<PAGE>
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 $43 million during the
first half of 2000, compared to $39 million during the first half of 1999. At
June 30, 2000, total VAR usage measured $43 million. The Corporation did not
report any day during the first half of 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
--------------------------------------------------------------------------------
Six months ended June 30, 2000 $43 $59 $37
Six months ended June 30, 1999 39 49 30
Year ended December 31, 1999 38 56 27
================================================================================
During the first half 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 51% 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
during the first half of 2000 averaged $15 million, or 35% 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 during the first half of
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
================================================================================
Six months ended
June 30, 2000 1999
In millions Average Average
--------------------------------------------------------------------------------
Interest rate risk $22 $19
Equity risk 15 12
Foreign exchange risk 6 7
--------------------------------------------------------------------------------
Aggregate price risk $43 $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 revenues against the estimated VAR with
a one-day holding period. The graph below 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 12 MONTHS ENDED JUNE 30, 2000]
During the twelve months ended June 30, 2000, the daily trading-related
revenues ranged from losses of $2.7 million to profits of $18 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 that 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.
<PAGE>
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 June 30, 2000:
================================================================================
Contract or
June 30, 2000 Notional Credit
In millions Amount Exposure
--------------------------------------------------------------------------------
Interest rate contracts $249,515 $1,378
Foreign exchange contracts 57,345 157
Equity contracts 1,853 112
================================================================================
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
June 30, 2000 (Carrying Fair
In millions Amount) Value
--------------------------------------------------------------------------------
Interest rate contracts:
Assets $1,378 $1,073
Liabilities 1,403 1,102
Foreign exchange contracts:
Assets 157 907
Liabilities 248 947
Equity contracts:
Assets 112 286
Liabilities -- 154
================================================================================
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 June
30, 2000 and December 31, 1999, respectively.
Currency Positions
June 30, 2000 Dec. 31, 1999
Quarter- Quarterly Quarter- Quarterly
In millions End Average End Average
--------------------------------------------------------------------------------
Argentina(a) $261 $370 $297 $333
Brazil(b) 94 11 35 19
================================================================================
(a) Positions represent local currency assets funded by U.S. dollars for both
periods presented.
(b) June 30, 2000 quarter-end position represents dollar assets funded by
local currency liabilities; June 30, 2000 quarterly average 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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries, committed lines of credit and access to the money
and capital markets. Dividends from banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and retained earnings. The
Corporation's subsidiaries rely on cash flows from operations, core deposits,
borrowings, short-term high-quality liquid assets, and, in the case of
non-banking subsidiaries, funds from the parent company. 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 banking subsidiaries have access to the Euro market under a
$3 billion Euro note program.
At June 30, 2000, the parent company had commercial paper outstanding of
$1.7 billion, compared with $1.6 billion at December 31, 1999. The parent
company had excess funds at June 30, 2000 of $1.1 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 June 30, 2000 and December 31, 1999, the parent company had no
outstanding balances under these lines of credit.
At June 30, 2000, the parent company had $3.7 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
================================================================================
June 30, Dec. 31, June 30,
2000 1999 1999
--------------------------------------------------------------------------------
Risk-adjusted assets
(in millions) $ 189,322 $ 189,488 $ 182,223
Tier 1 risk-based capital ratio
(4% minimum) 7.36% 6.82% 7.14%
Total risk-based capital ratio
(8% minimum) 11.66 11.50 11.45
Leverage ratio(a) 7.66 6.81 7.02
Common equity-to-assets
ratio 8.08 7.66 7.64
Total equity-to-assets ratio 8.39 8.03 8.02
Tangible common equity-
to-assets ratio 6.04 5.60 5.51
Tangible common equity-to-
managed assets ratio 5.61 5.20 5.13
Tangible total equity-to-
assets ratio 6.36 5.97 5.89
================================================================================
(a) The Corporation was subject to a 3% minimum at June 30, 2000 and December
31, 1999, and a 4% minimum at June 30, 1999.
At June 30, 2000, the Corporation exceeded all regulatory required minimum
capital ratios, as the Corporation's Tier 1 and Total risk-based capital ratios
were 7.36% and 11.66%, 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 7.66% at June 30, 2000 compared with
6.81% at December 31, 1999.
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 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 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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 market;
equity and bond market fluctuations and perceptions; the level of personal and
corporate customers' bankruptcies; 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, including the BankBoston merger; greater than expected negative
impact of required divestitures in connection with the BankBoston merger;
adverse legislation or regulatory developments affecting the businesses in which
the Corporation is engaged; 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," 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 this Standard 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 not completed
the complex analysis required to assess the impact that this Standard will have
on its financial position and results of operations.
21
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
================================================================================================
Three months ended June 30 2000 1999
Dollars in millions, except per share amounts
------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $2,763 $2,584
Interest on securities and trading assets 450 441
Other 148 206
------------------------------------------------------------------------------------------------
Total interest income 3,361 3,231
------------------------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 587 594
Deposits of international offices 297 268
Short-term borrowings 288 293
Long-term debt 446 326
Other 72 48
------------------------------------------------------------------------------------------------
Total interest expense 1,690 1,529
------------------------------------------------------------------------------------------------
Net interest income 1,671 1,702
------------------------------------------------------------------------------------------------
Provision for credit losses 310 241
------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,361 1,461
------------------------------------------------------------------------------------------------
Noninterest income:
Capital markets revenue 813 503
Investment services revenue 426 390
Banking fees and commissions 356 370
Credit card revenue 169 187
Processing-related revenue 150 157
Gains on branch divestitures and sales of businesses 313 50
Other 131 94
------------------------------------------------------------------------------------------------
Total noninterest income 2,358 1,751
------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,148 1,126
Occupancy 137 143
Equipment 146 126
Intangible asset amortization 87 85
Legal and other professional 83 71
Marketing and public relations 71 67
Other 551 463
------------------------------------------------------------------------------------------------
Total noninterest expense 2,223 2,081
------------------------------------------------------------------------------------------------
Income before income taxes 1,496 1,131
Applicable income taxes 649 431
------------------------------------------------------------------------------------------------
Net income $ 847 $ 700
================================================================================================
Diluted weighted average common shares outstanding (in millions) 922.0 946.9
Net income applicable to common shares $ 837 $ 685
Basic earnings per share .93 .74
Diluted earnings per share .91 .72
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>
================================================================================================
Six months ended June 30 2000 1999
Dollars in millions, except per share amounts
------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $5,557 $5,177
Interest on securities and trading assets 885 844
Other 380 359
------------------------------------------------------------------------------------------------
Total interest income 6,822 6,380
------------------------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 1,188 1,207
Deposits of international offices 593 553
Short-term borrowings 650 553
Long-term debt 870 610
Other 142 87
------------------------------------------------------------------------------------------------
Total interest expense 3,443 3,010
------------------------------------------------------------------------------------------------
Net interest income 3,379 3,370
------------------------------------------------------------------------------------------------
Provision for credit losses 610 460
------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 2,769 2,910
------------------------------------------------------------------------------------------------
Noninterest income:
Capital markets revenue 1,871 900
Investment services revenue 925 746
Banking fees and commissions 715 716
Credit card revenue 329 349
Processing-related revenue 306 311
Gains on branch divestitures and sales of businesses 679 50
Other 254 237
------------------------------------------------------------------------------------------------
Total noninterest income 5,079 3,309
------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 2,573 2,142
Occupancy 297 282
Equipment 292 256
Intangible asset amortization 175 171
Legal and other professional 165 138
Marketing and public relations 143 129
Other 1,090 898
------------------------------------------------------------------------------------------------
Total noninterest expense 4,735 4,016
------------------------------------------------------------------------------------------------
Income before income taxes 3,113 2,203
Applicable income taxes 1,309 842
------------------------------------------------------------------------------------------------
Net income $1,804 $1,361
================================================================================================
Diluted weighted average common shares outstanding (in millions) 920.7 944.7
Net income applicable to common shares $1,785 $1,330
Basic earnings per share 1.98 1.45
Diluted earnings per share 1.94 1.41
Dividends declared .60 .54
================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
23
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
============================================================================================================
June 30, December 31,
Dollars in millions, except per share amounts 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, due from banks and interest-bearing deposits $ 9,597 $ 10,627
Federal funds sold and securities purchased under agreements to resell 2,647 2,353
Trading assets 8,199 7,849
Securities (market value: $22,848 and $25,212) 22,846 25,212
Loans and leases 112,476 119,700
Reserve for credit losses (2,472) (2,488)
------------------------------------------------------------------------------------------------------------
Net loans and leases 110,004 117,212
------------------------------------------------------------------------------------------------------------
Due from brokers/dealers 3,158 3,003
Mortgages held for resale 1,087 1,244
Premises and equipment 2,689 2,794
Mortgage servicing rights 3,170 3,325
Intangible assets 3,935 4,164
Other assets 13,927 12,909
------------------------------------------------------------------------------------------------------------
Total assets $ 181,259 $ 190,692
------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Domestic:
Noninterest bearing $ 23,977 $ 24,773
Interest bearing 62,413 73,428
International:
Noninterest bearing 1,649 1,532
Interest bearing 16,653 15,163
------------------------------------------------------------------------------------------------------------
Total deposits 104,692 114,896
------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 6,299 9,529
Other short-term borrowings 9,279 8,577
Trading liabilities 3,478 3,807
Due to brokers/dealers 4,773 4,468
Long-term debt 27,733 25,349
Accrued expenses and other liabilities 9,788 8,759
------------------------------------------------------------------------------------------------------------
Total liabilities 166,042 175,385
------------------------------------------------------------------------------------------------------------
Commitments and contingencies
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 4,134 4,150
Retained earnings 11,376 10,129
Accumulated other comprehensive income (209) 387
Treasury stock, at cost (15,309,328 shares in 2000 and 1,401,453 shares in 1999) (659) (59)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,217 15,307
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 181,259 $ 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
Six months ended June 30 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) $14,204
Net income 1,361 1,361
Other comprehensive income, net of taxes:
Adjustment to unrealized gain on securities
available for sale, net of taxes and
reclassification adjustment (325)
Change in translation adjustment, net of taxes 12
------
Other comprehensive income (313) (313)
-------
Total comprehensive income 1,048
Cash dividends declared on common stock
($.54 per share) (307) (307)
Cash dividends declared by pooled company prior
to merger (190) (190)
Cash dividends declared on preferred stock (25) (25)
Common stock issued in connection with dividend
reinvestment and employee benefit plans 42 (37) 85 90
Treasury stock purchased (24) (24)
Other, net 2 (3) (2) (3)
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $691 $ 9 $4,750 $10,009 $ (218) $(448) $14,793
------------------------------------------------------------------------------------------------------------------------------------
2000
Balance at December 31, 1999 $691 $ 9 $4,150 $10,129 $ 387 $(59) $15,307
Net income 1,804 1,804
Other comprehensive income, net of taxes:
Adjustment to unrealized gain on securities
available for sale, net of taxes and
reclassification adjustment (601)
Change in translation adjustment, net of taxes 5
------
Other comprehensive income (596) (596)
-------
Total comprehensive income 1,208
Cash dividends declared on common stock
($.60 per share) (541) (541)
Cash dividends declared on preferred stock (19) (19)
Common stock issued in connection with dividend
reinvestment and employee benefit plans (6) 3 79 76
Redemption of preferred stock (125) (125)
Settlement of forward purchase contracts (679) (679)
Other, net (10) (10)
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $566 $ 9 $4,134 $11,376 $ (209) $(659) $15,217
====================================================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
25
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
=================================================================================================================
Six months ended June 30 2000 1999
In millions
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,804 $ 1,361
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 291 218
Amortization of mortgage servicing rights 188 174
Amortization of other intangible assets 175 171
Provision for credit losses 610 460
Deferred income tax expense 320 256
Securities losses 51 4
Gains on branch divestitures and sales of businesses (679) (50)
Originations and purchases of mortgages held for resale (7,143) (18,195)
Proceeds from sales of mortgages held for resale 7,300 20,882
Increase in trading assets (350) (808)
(Decrease)/increase in trading liabilities (329) 298
(Increase)/decrease in due from brokers/dealers (155) 1,156
Decrease/(increase) in accrued receivables, net 187 (331)
Increase/(decrease) in due to brokers/dealers 305 (200)
Increase/(decrease) in accrued liabilities, net 1,429 (45)
Other, net (2,242) (295)
-----------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 1,762 5,056
-----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net increase in federal funds sold and securities purchased under agreements to resell (294) (3,712)
Purchases of securities available for sale (5,276) (8,891)
Proceeds from sales of securities available for sale 5,445 4,609
Proceeds from maturities of securities available for sale 1,080 2,749
Purchases of securities held to maturity (406) (577)
Proceeds from maturities of securities held to maturity 650 781
Net cash and cash equivalents paid for businesses acquired -- (613)
Proceeds from sale of loan portfolio by banking subsidiary 1,400 400
Net increase in loans and leases (1,927) (305)
Net cash and cash equivalents received from branch divestitures and sales of businesses 313 50
Purchases of premises and equipment (287) (240)
Purchases of mortgage servicing rights (79) (472)
-----------------------------------------------------------------------------------------------------------------
Net cash flow provided by/(used in) investing activities 619 (6,221)
-----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in deposits (1,971) (2,798)
Net (decrease)/increase in short-term borrowings (2,528) 21
Proceeds from issuance of long-term debt 5,091 3,640
Repayments of long-term debt (2,707) (648)
Proceeds from the issuance of common stock 76 90
Repurchase of common stock -- (24)
Settlement of forward purchase contracts (679) --
Redemption of preferred stock (125) --
Cash dividends paid (564) (523)
-----------------------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (3,407) (242)
-----------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash (4) (57)
-----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,030) (1,464)
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 10,627 10,941
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,597 $ 9,477
=================================================================================================================
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
26
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
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 $87 million of merger integration costs
during the second quarter of 2000 and $187 million of such costs during the
first half of 2000. These charges and costs are more fully discussed in Note 5.
In connection with obtaining regulatory approvals for the merger, the
Corporation signed definitive agreements to divest approximately $13 billion of
deposits and $9 billion of loans. The Corporation completed two major phases of
its divestiture plan in March 2000 and June 2000, divesting $8 billion of
deposits and $7 billion of loans and 178 branches in Massachusetts, Connecticut
and Rhode Island to Sovereign Bancorp (Sovereign) and various community banks.
In connection with these divestitures, the Corporation recorded a $679 million
($336 million after-tax) gain. The remaining divestiture to Sovereign was
completed in July, and additional divestitures to various community banks will
be completed during the second half of 2000.
NOTE 3. LOANS AND LEASES
The following table presents details of loan and lease financing balances:
================================================================================
June 30, Dec. 31,
In millions 2000 1999
--------------------------------------------------------------------------------
Domestic:
Commercial and industrial $ 53,413 $ 55,184
Commercial real estate 7,979 7,945
Residential real estate 7,091 10,881
Credit card 3,972 5,455
Other consumer 13,185 14,549
Lease financing 12,035 10,933
--------------------------------------------------------------------------------
Total domestic loans and leases 97,675 104,947
--------------------------------------------------------------------------------
International loans and leases 14,801 14,753
--------------------------------------------------------------------------------
Total loans and leases $112,476 $119,700
================================================================================
<PAGE>
NOTE 4. RESERVE FOR CREDIT LOSSES
An analysis of the reserve for credit losses follows:
================================================================================
Six months ended June 30 2000 1999
In millions
--------------------------------------------------------------------------------
Balance at beginning of year $ 2,488 $ 2,306
Gross charge-offs:
Domestic:
Commercial and industrial 339 175
Commercial real estate 4 12
Residential real estate 2 4
Credit card 159 205
Other consumer 56 76
Lease financing 15 13
International 80 89
--------------------------------------------------------------------------------
Total gross charge-offs 655 574
--------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and industrial 28 39
Commercial real estate 5 10
Residential real estate 1 2
Credit card 17 18
Other consumer 19 19
Lease financing 3 2
International 22 61
--------------------------------------------------------------------------------
Total recoveries 95 151
--------------------------------------------------------------------------------
Net charge-offs 560 423
Provision for credit losses 610 460
Divestitures/Acquisitions/Other (66) 172
--------------------------------------------------------------------------------
Balance at end of period $ 2,472 $ 2,515
================================================================================
27
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 being expensed as incurred, resulted from the
merger integration process the Corporation began in the fourth quarter of 1999
and expects to complete by the end of 2000. The Corporation incurred an
additional $100 million and $87 million of such costs during the first and
second quarters of 2000, respectively.
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 will have been
notified by September 30, 2000. The Corporation anticipates that approximately
94% of terminated employees will have left the Corporation by the end of the
third quarter of 2000, and that substantially all of the remaining employees
will have left the Corporation by December 31, 2000. During the second quarter
of 2000, $47 million of personnel benefits were paid, bringing total personnel
benefits paid through June 30, 2000 to $118 million. To date, approximately
2,550 employees have been terminated and have left the Corporation.
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. During the second quarter of 2000,
$6 million in contract cancellation penalties were paid, bringing total contract
cancellation penalties paid to date to $27 million.
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 second quarter of 2000, approximately $1 million in
facilities charges were paid.
The following table presents activity in the restructuring-related accrual
during the six months ended June 30, 2000.
Restructuring Accrual Activity
================================================================================
In millions
--------------------------------------------------------------------------------
Balance at December 31, 1999 $ 387
Cash payments (107)
--------------------------------------------------------------------------------
Balance at June 30, 2000 $ 280
================================================================================
Integration Costs
Integration costs, which are being 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 $25 million of the total integration costs incurred in
the second quarter of 2000, and approximately $62 million in the first six
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.
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.
28
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
A summary of the trust preferred securities issued and outstanding at June
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>
Liquidation
Amount Outstanding Earliest Distribution Preference
June 30, 2000 Dec. 31, 1999 Original Prepayment Stated Payment per Trust
(In millions) Issue Date Rate Option Date Maturity Frequency Security
====================================================================================================================================
<S> <C> <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 June 30, 2000, the interest rates on the BankBoston Capital Trust III
and IV and Fleet Capital Trust V floating-rate trust preferred securities were
7.56%, 7.39% and 7.78%, respectively.
NOTE 7. LINE OF BUSINESS INFORMATION
Information about the Corporation's operating segments for the quarters
and six months ended June 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.
<PAGE>
NOTE 8. EARNINGS PER SHARE
A summary of the Corporation's calculation of earnings per common share follows:
<TABLE>
<CAPTION>
=====================================================================================================================
Three months ended June 30 2000 1999
---------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average shares outstanding 901,936,876 901,936,876 921,100,431 921,100,431
Additional shares due to:
Stock options -- 8,216,052 -- 13,195,564
Warrants -- 11,834,503 -- 12,625,580
---------------------------------------------------------------------------------------------------------------------
Total equivalent shares 901,936,876 921,987,431 921,100,431 946,921,575
=====================================================================================================================
Earnings per share:
Net income $847 $847 $ 700 $ 700
Less preferred stock dividends and other (10) (10) (15) (15)
---------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $837 $837 $ 685 $ 685
=====================================================================================================================
Total equivalent shares 901,936,876 921,987,431 921,100,431 946,921,575
=====================================================================================================================
Earnings per share $ .93 $ .91 $ .74 $ .72
=====================================================================================================================
<CAPTION>
Six months ended June 30 2000 1999
---------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average shares outstanding 902,921,401 902,921,401 920,081,652 920,081,652
Additional shares due to:
Stock options -- 6,578,724 -- 11,997,552
Warrants -- 11,249,023 -- 12,644,496
---------------------------------------------------------------------------------------------------------------------
Total equivalent shares 902,921,401 920,749,148 920,081,652 944,723,700
=====================================================================================================================
Earnings per share:
Net income $1,804 $1,804 $1,361 $1,361
Less preferred stock dividends and other (19) (19) (31) (31)
---------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $1,785 $1,785 $1,330 $1,330
=====================================================================================================================
Total equivalent shares 902,921,401 920,749,148 920,081,652 944,723,700
=====================================================================================================================
Earnings per share $ 1.98 $ 1.94 $1.45 $1.41
=====================================================================================================================
</TABLE>
29
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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.
NOTE 10. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash Flow Disclosure
================================================================================
Six months ended June 30 2000 1999
In millions
--------------------------------------------------------------------------------
Supplemental disclosure for cash paid
during the period for:
Interest $ 3,663 $ 2,928
Income taxes, net of refunds 866 593
--------------------------------------------------------------------------------
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 7,897 --
Net cash received for divestitures 313 --
Liabilities sold 8,263 --
================================================================================
30
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index
Exhibit
Number
10(a) Amendment, effective as of July 1, 2000, to the Directors Deferred
Compensation and Stock Unit Plan.
10(b) Letter Agreement, dated as of May 24, 2000, between the
Corporation and Henrique C. Meirelles.
12 Computation of Consolidated Ratios of Earnings to Fixed Charges
27 June 30, 2000 Financial Data Schedule
27(a) June 30, 1999 Restated Financial Data Schedule
(b) Current Reports on Form 8-K
The Corporation filed four Current Reports on Form 8-K during the period
from April 1, 2000 to the date of the filing of this report.
- Current Report on Form 8-K dated April 13, 2000, announcing the
Corporation's first quarter 2000 earnings.
- Current Report on Form 8-K dated June 2, 2000, reporting the
establishment of a $3 billion medium-term note program under the
Corporation's shelf registration statement.
- 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.
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 and
Chief Financial Officer
DATE: August 11, 2000
32
