<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR QUARTERLY PERIOD ENDED MARCH 31, 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.)
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(Address of principal executive office) (Zip Code)
(617) 346-4000
(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 April
30, 2000 was 901,187,960.
================================================================================
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
FORM 10-Q FOR QUARTER ENDED MARCH 31, 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 March 31, 2000 and 1999 20
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 21
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2000 and 1999 22
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 23
Condensed Notes to Consolidated Financial Statements 24
PART II. OTHER INFORMATION 28
SIGNATURES 31
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
This discussion and analysis updates, and should be read in conjunction
with, Management's Discussion and Analysis included in the 1999 Annual Report on
Form 10-K of FleetBoston Financial Corporation (the Corporation). The
Corporation's name was changed from "Fleet Boston Corporation" to "FleetBoston
Financial Corporation" effective April 18, 2000. 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.
FINANCIAL SUMMARY
===================================================================
Three months ended March 31 2000 1999
DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
- -------------------------------------------------------------------
EARNINGS
Net interest income (FTE)(a) $ 1,723 $ 1,681
Noninterest income 2,722 1,558
Noninterest expense 2,512 1,935
Provision for credit losses 300 219
Net income 957 661
- -------------------------------------------------------------------
PER COMMON SHARE
Basic earnings $ 1.05 $ .70
Diluted earnings 1.03 .68
Cash dividends declared .30 .27
Book value 15.93 15.07
- -------------------------------------------------------------------
RATIOS
Return on average assets 1.94% 1.44%
Return on average common equity 26.83 18.92
Total equity to assets (period-end) 7.96 8.00
Tangible common equity to assets 5.61 5.43
Tier 1 risk-based capital ratio 6.66 6.83
Total risk-based capital ratio 11.02 11.24
Leverage ratio 6.67 6.99
- -------------------------------------------------------------------
AT MARCH 31
Total assets $ 187,814 $ 181,873
Loans and leases 117,353 116,425
Deposits 109,201 116,101
Stockholders' equity 14,953 14,553
Nonperforming assets 886 662
===================================================================
(a) The fully taxable equivalent (FTE) adjustment included in net interest
income was $15 million and $13 million, respectively, for the three
months ended March 31, 2000 and 1999.
The Corporation recorded net income of $957 million, or $1.03 per diluted
share, for the quarter ended March 31, 2000, compared to $661 million, or $.68
per diluted share, in the first quarter of 1999. Return on average assets (ROA)
and return on average common equity (ROE) were 1.94% and 26.83%, respectively,
for the first quarter of 2000, compared to 1.44% and 18.92%, respectively, for
the first quarter of 1999.
The first quarter of 2000 included a gain of $366 million ($209 million
after-tax) resulting from the Corporation's March 24, 2000 divestiture of 90
branches in Connecticut, Massachusetts and Rhode Island and approximately $4
billion each of loans and deposits to Sovereign Bancorp (Sovereign). This
divestiture was the first phase of the Corporation's overall divestiture plan,
which was agreed to in connection with obtaining regulatory approvals for the
BankBoston merger. The Corporation expects to complete the remaining phases of
its divestiture plan during the second and third quarters of 2000. The first
quarter results also included approximately $100 million ($60 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 $200 million, and expects
to incur an additional $100 million of such costs during the remainder of 2000.
Excluding the divestiture gain and merger integration costs, operating net
income for the first quarter of 2000 was $808 million, a 22% increase over net
income of $661 million in the first quarter of 1999. This increase was largely
the result of strong growth in capital markets and investment services revenue
at Robertson Stephens and Quick & Reilly, as well as the Corporation's Principal
Investing business.
RESULTS OF OPERATIONS
NET INTEREST INCOME
==================================================================
Three months ended March 31 2000 1999
FTE basis
IN MILLIONS
- ------------------------------------------------------------------
Interest income $3,461 $3,149
Tax-equivalent adjustment 15 13
Interest expense 1,753 1,481
- ------------------------------------------------------------------
Net interest income $1,723 $1,681
==================================================================
Net interest income increased $42 million in the first quarter of 2000
compared to the same period a year ago, primarily the result of loan growth,
particularly domestic leases as a result of the acquisition of Sanwa in February
1999, as well as higher average loan yields. These increases were offset in part
by higher rates paid to fund asset growth.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
NET INTEREST MARGIN AND INTEREST RATE SPREAD
===========================================================================
Three months ended March 31 2000 1999
FTE basis Average Average
DOLLARS IN MILLIONS Balance Rate Balance Rate
- ---------------------------------------------------------------------------
Securities $ 24,237 6.50% $ 23,896 6.36%
Loans and leases:
Domestic 104,845 8.64 101,543 8.28
International 14,805 13.99 13,593 13.46
Due from brokers/dealers 3,922 5.27 3,404 4.41
Mortgages held for sale 1,198 8.08 3,867 6.86
Other 16,680 5.74 9,901 6.15
- ---------------------------------------------------------------------------
Total interest earning assets 165,687 8.43 156,204 8.18
- ---------------------------------------------------------------------------
Deposits 88,699 4.07 91,875 3.96
Short-term borrowings 25,990 5.63 21,444 4.92
Due to brokers/dealers 5,062 5.39 3,865 4.12
Long-term debt 25,608 6.65 18,726 6.07
- ---------------------------------------------------------------------------
Interest bearing liabilities 145,359 4.85 135,910 4.41
- ---------------------------------------------------------------------------
Interest rate spread 3.58 3.77
Interest-free sources of funds 20,328 20,294
- ---------------------------------------------------------------------------
Total sources of funds $165,687 4.25 % $156,204 3.83 %
- ---------------------------------------------------------------------------
Net interest margin 4.18 % 4.35 %
===========================================================================
The Corporation's net interest margin for the first quarter of 2000 was
4.18%, compared to 4.35% for the first quarter of 1999. The 17 basis point
decrease in net interest margin was primarily attributable to a higher level of
low-yielding earning assets necessary to support an expanded investment banking
operation, partially offset by increased yields on domestic and international
loans, primarily commercial loans. During the current quarter, the Corporation
maintained approximately $8 billion of low-yielding assets in its Section 20
subsidiary's "matched book" to accommodate 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" and this will, in turn, benefit net
interest margin in future periods. Future levels of net interest income and
margin will be negatively impacted by the Corporation's divestiture of loans and
deposits to Sovereign and various community banks. The first phase of the
divestiture, which was completed on March 24, 2000, had minimal impact on first
quarter 2000 net interest income and margin. The remaining divestitures are
expected to be completed during the second and third quarters of 2000. The
Corporation anticipates that annualized net interest income will be reduced by
approximately $500 million as a result of the divestitures. Because the
divestitures will be 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 increased $3.3 billion to $104.8 billion
for the first quarter of 2000 compared with the first quarter of 1999, primarily
driven by increases in both consumer margin loans at Quick & Reilly and leases,
the latter a result of the acquisition of Sanwa in February 1999. Average
international loans and leases increased $1.2 billion to $14.8 billion due to
commercial loan growth, primarily in Argentina. The first quarter 2000 average
loan and lease balances were not materially affected by the aforementioned
divestiture, since it was completed on March 24, 2000.
Average mortgages held for resale decreased $2.7 billion compared to the
first 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
yields on mortgages held for resale to increase 122 basis points.
Other interest earning assets increased $6.8 billion to $16.7 billion in
the first quarter of 2000, primarily as a result of an increase in money market
instruments necessary to support an expanded investment banking operation.
The $3.2 billion decrease in average interest bearing deposits compared to
the first quarter of 1999 is primarily attributable to decreased retail and
wholesale time deposits, as a result of the Corporation utilizing long-term
funding vehicles to fund asset growth. The first quarter 2000 average interest
bearing deposit balances were not materially affected by the aforementioned
divestiture, since it was completed on March 24, 2000.
The $4.5 billion increase in average short-term borrowings is mainly
attributable to an increase in the availability and use of treasury, tax and
loan borrowings.
Average long-term debt increased $6.9 billion to $25.6 billion for the
first quarter of 2000, due primarily to net increases in senior and subordinated
debt and bank notes issued throughout 1999 and in the first quarter of 2000 in
order to fund acquisitions and overall asset growth. The 58 basis point increase
in the funding rate resulted from a rising interest rate environment.
NONINTEREST INCOME
=================================================================
Three months ended March 31 2000 1999
IN MILLIONS
- -----------------------------------------------------------------
Capital markets revenue $1,059 $ 397
Investment services revenue 500 356
Banking fees and commissions 364 350
Credit card revenue 159 162
Processing-related revenue 156 154
Gain on branch divestitures 366 -
Other noninterest income 118 139
- -----------------------------------------------------------------
Total noninterest income $2,722 $1,558
=================================================================
Noninterest income for the first quarter of 2000 increased $1.2 billion to
$2.7 billion compared to $1.6 billion for the same period in 1999, an increase
of 75%. This increase reflects a significant rise in capital markets and
investment services revenue resulting from very strong equity markets and
substantial transactional volume, as well as the previously mentioned $366
million gain on branch divestitures.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
CAPITAL MARKETS REVENUE
=============================================================
Three months ended March 31 2000 1999
IN MILLIONS
- -------------------------------------------------------------
Principal investing $ 312 $ 74
Underwriting revenue 256 61
Market-making revenue 221 91
Advisory fees 162 20
Trading profits and commissions 80 53
Foreign exchange revenue 45 60
Syndication/agency fees 41 35
Securities losses (58) (2)
Other - 5
- -------------------------------------------------------------
Total capital markets revenue $1,059 $397
=============================================================
Capital markets revenue showed a significant increase, rising $662 million,
or 167%, to $1.1 billion for the first quarter of 2000 compared to $397 million
for the first quarter of 1999. This increase was driven by strong principal
investing, underwriting and market-making revenue, as well as a significant
increase in advisory fees and trading profits and commissions, partially offset
by securities losses. The increase in revenues was a result of continued
strength in the U.S. capital markets. The Corporation's revenues from its
capital markets activities are impacted by a variety of factors, including the
condition of the economy, interest rates and equity markets. The equity market
for Internet and technology stocks has been subject to significant volatility.
Thus, the future level of such revenues cannot be predicted with certainty.
Principal investing revenues rose $238 million, or 322%, to $312 million
for the quarter ended March 31, 2000. The growth in revenue resulted from
liquidations of direct investments and appreciation in the value of fund
investments, reflecting effective investment strategies and continued strength
in the equity markets. During the first quarter of 2000, the Corporation made
new investments of $544 million. As of March 31, 2000, the Corporation's
Principal Investing portfolio had an aggregate carrying value of approximately
$4.3 billion. The gross pre-tax unrealized gain on the Corporation's direct
investments in public companies was approximately $800 million at March 31,
2000. As of April 30, 2000, this unrealized gain 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.
Underwriting revenue increased $195 million, or 320%, from $61 million in
the first quarter of 1999, to $256 million in the first quarter of 2000,
primarily the result of a 194% increase in transactions at Robertson Stephens.
Underwriting revenues are affected by the volume and timing of initial public
offerings and other transactions. Robertson Stephens' fees earned from
underwriting these transactions mainly resulted from the Internet and technology
market sectors. During the first quarter of 2000, 103 transactions, primarily
initial and follow-on public offerings, were completed, involving an aggregate
market value of approximately $40 billion, versus 35 such transactions involving
an aggregate market value of approximately $5 billion in the first quarter of
1999.
The $130 million, or 143%, increase in market-making revenue was a result
of market volatility and increased transactional volumes at Quick & Reilly and
Robertson Stephens.
Advisory fees increased $142 million to $162 million for the first quarter
of 2000, primarily reflecting an over 130% increase in merger and acquisition
(M&A) transactions at Robertson Stephens and an increase in the average fee per
transaction. Robertson Stephens' advisory activities were focused mainly in the
Internet and technology market sectors. During the quarter, Robertson Stephens
advised on 37 M&A transactions involving an aggregate market value of over $26
billion.
Trading profits and commissions rose $27 million to $80 million for the
quarter ended March 31, 2000 compared to $53 million for the quarter ended March
31, 1999, as the Corporation benefited from increased customer demand for
investment and risk management products and from short-term movements in market
prices.
The Corporation recognized $58 million of securities losses during the first
quarter of 2000, primarily as a result of a repositioning of its bond portfolio.
INVESTMENT SERVICES REVENUE
================================================================
Three months ended March 31 2000 1999
IN MILLIONS
- ----------------------------------------------------------------
Brokerage fees and commissions $262 $137
Investment management revenue 238 219
- ----------------------------------------------------------------
Total investment services revenue $500 $356
================================================================
Investment services revenue, which includes brokerage fees and commissions
as well as investment management revenue, increased $144 million, or 40%, over
the first quarter of 1999.
BROKERAGE FEES AND COMMISSIONS
Brokerage fees and commissions increased $125 million, or 91%, over the
first quarter of 1999, driven by the strong equity markets and increased trading
volumes on the NASDAQ and NYSE, which benefited the brokerage and clearing units
of Quick & Reilly and Robertson Stephens.
INVESTMENT MANAGEMENT REVENUE
================================================================
Three months ended March 31 2000 1999
IN MILLIONS
- ----------------------------------------------------------------
Private Clients Group $ 93 $ 93
Retail investments 37 29
Columbia Management Company 27 24
Institutional businesses 38 38
International 41 34
Other 2 1
- ----------------------------------------------------------------
Total $238 $219
================================================================
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
Investment management revenue increased 9% in the first quarter of 2000 to
$238 million, compared to $219 million for the first quarter of 1999. This
improvement was largely driven by increased fees resulting from growth in assets
under management, as well as increased sales of mutual funds and annuities, in
the Corporation's Retail Investments, Columbia Management and International
businesses. Assets under management grew to $131 billion at March 31, 2000 from
$122 billion at March 31, 1999.
BANKING FEES AND COMMISSIONS
Banking fees and commissions, which includes fees received for cash
management, deposit accounts, electronic banking fees and other fees, increased
$14 million to $364 million for the first quarter of 2000, primarily the result
of a larger customer base compared to March 31, 1999. Future levels of banking
fees and commissions will be negatively impacted by the divestiture of deposits
to Sovereign and various community banks during the second and third quarters of
2000. 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 will be 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 $3 million compared to the first quarter of
1999, primarily due to lower securitization income and increased amortization of
deferred acquisition costs. These declines were the result of narrower spreads
on securitizations, reflecting improving asset quality, and increased marketing
activities, respectively.
PROCESSING-RELATED REVENUE
=============================================================
Three months ended March 31 2000 1999
IN MILLIONS
- -------------------------------------------------------------
Mortgage banking revenue, net $ 87 $ 91
Student loan servicing fees 39 34
Other 30 29
- -------------------------------------------------------------
Total processing-related revenue $156 $154
=============================================================
Processing-related revenue increased $2 million compared to the first
quarter of 1999, due to increased student loan servicing fees and other
processing-related revenue, offset in part by decreased mortgage banking
revenue. Net mortgage banking revenue is discussed below. Student loan servicing
fees increased $5 million, or 15%, at AFSA Data Corporation (AFSA), the
Corporation's student loan servicing subsidiary, as accounts serviced increased
approximately 10% from March 31, 1999 to 7.3 million. AFSA is the largest
student loan servicer in the United States, with over $66 billion of loans
serviced.
MORTGAGE BANKING REVENUE, NET
==============================================================
Three months ended March 31 2000 1999
IN MILLIONS
- --------------------------------------------------------------
Net loan servicing revenue $158 $120
Mortgage production revenue 24 53
Mortgage servicing rights amortization (95) (82)
- --------------------------------------------------------------
Total mortgage banking revenue, net $ 87 $ 91
==============================================================
Net mortgage banking revenue decreased $4 million compared to the first
quarter of 1999, reflecting lower mortgage production revenue and higher
mortgage servicing rights (MSRs) amortization, offset in part by increased loan
servicing revenue.
The $38 million increase in loan servicing revenue was attributable to a
higher servicing spread on mortgage servicing acquired, as well as a 19%
increase in the size of the Corporation's servicing portfolio from March 31,
1999 to approximately $151 billion at March 31, 2000. Mortgage production
revenue declined $29 million as a result of lower mortgage production volume,
driven by the higher mortgage interest rate environment. MSR amortization
increased $13 million compared to the first quarter of 1999, the result of the
aforementioned increase in the size of the Corporation's servicing portfolio.
The Corporation expects to complete the sale of approximately $25 billion
of its servicing portfolio during the second quarter of 2000 at close to
carrying value.
OTHER
The $366 million gain on branch divestitures recognized in the first
quarter of 2000 resulted from the Corporation's March 24, 2000 divestiture of 90
branches in Connecticut, Massachusetts, and Rhode Island, and approximately $4
billion each of loans and deposits, to Sovereign.
Other noninterest income declined $21 million to $118 million for the first
quarter of 2000, compared to $139 million for the first quarter of 1999. This
decrease was primarily the result of a $17 million writedown of lease residuals.
NONINTEREST EXPENSE
====================================================================
Three months ended March 31 2000 1999
IN MILLIONS
- --------------------------------------------------------------------
Employee compensation and benefits $1,425 $1,016
Occupancy and equipment 306 269
Intangible asset amortization 88 86
Legal and other professional 82 68
Marketing and public relations 72 61
Printing and mailing 43 41
Telephone 43 43
Other 453 351
- --------------------------------------------------------------------
Total noninterest expense $2,512 $1,935
====================================================================
Noninterest expense for the first quarter of 2000 totaled $2.5 billion,
compared to $1.9 billion for the same period in 1999. This $577 million, or 30%,
increase was due primarily to higher compensation and benefit costs directly
attributable to higher levels of revenue, particularly
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
from Robertson Stephens and Quick & Reilly, offset in part by approximately $40
million of incremental cost savings realized as a result of merger integration
activities.
In connection with integration efforts following the BankBoston merger, the
Corporation incurred approximately $100 million of merger integration costs
during the first quarter of 2000, composed of $18 million of employee
compensation and benefits costs, $38 million of occupancy and equipment costs,
$10 million of legal and other professional costs, $4 million of marketing and
public relations costs, $4 million of printing and mailing costs and $26 million
of other costs.
Employee compensation and benefits costs increased $409 million compared to
the first quarter of 1999, due primarily to increased levels of incentive
payments in businesses with strong transactional volumes and revenue growth,
such as Robertson Stephens and Quick & Reilly, as well as the merger integration
costs previously mentioned. The Corporation's compensation and benefits costs,
excluding incentive and merger integration costs, grew only 5%, as a result of a
portion of the above-mentioned cost savings and employee reductions realized
from merger integration activities.
Occupancy and equipment costs rose $37 million, or 14%, to $306 million for
the three months ended March 31, 2000, as a result of the above-mentioned merger
integration costs of $38 million.
Legal and other professional costs, marketing and public relations costs
and other noninterest expense all increased compared to the first quarter of
1999, partly the result of $40 million of merger integration costs, offset by a
portion of the incremental cost savings discussed above.
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 March 31, 2000 had achieved
annualized cost savings of approximately $260 million.
In addition, the Corporation expects to achieve total annual cost savings
of approximately $400 million as a result of its divestiture of branches, loans
and deposits to Sovereign and various community banks during 2000. These cost
savings are expected to primarily benefit the second, third and fourth quarters
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.
Because merger integration efforts and the divestitures will proceed
throughout 2000, the impact of the resulting cost savings on calendar year 2000
noninterest expense will be only a portion of the annualized estimates. The
merger integration and divestiture process 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 cost savings
and the periods within which these cost savings may be achieved cannot be
predicted with absolute certainty.
INCOME TAXES
The Corporation recorded income tax expense of $661 million for the first
quarter of 2000, compared with $411 million for the same period a year ago. The
Corporation's effective tax rate was 40.9% and 38.3% for the first quarters of
2000 and 1999, respectively.
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 the
National Consumer Group. For additional information concerning these lines of
business, including supporting business units and their products and services,
refer to the "Line of Business Information" section of Management's Discussion
and Analysis, included on pages 17 through 21 of the Corporation's 1999 Annual
Report on Form 10-K. The financial performance of these lines of business is
monitored by an internal profitability measurement system, which provides line
of business results and key performance measures. In connection with the
BankBoston merger, a uniform set of management reporting methodologies was
developed and implemented effective January 1, 2000. These new management
reporting methodologies include allocation of provision for credit losses,
credit loss reserves, funds transfer pricing and equity allocations. The
following table presents selected line of business results that reflect this new
methodology. Prior periods have been restated to conform to these new
methodologies. The information is presented on a fully taxable equivalent basis.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
LINE OF BUSINESS EARNINGS SUMMARY
<TABLE>
<CAPTION>
===============================================================================================================
Three months ended March 31 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) $586 $290 $2,281 $1,372 38% 21%
Commercial and Retail Banking 320 280 1,448 1,387 21 20
National Consumer Group 50 57 390 437 9 10
All Other 1 34 326 43 - -
- ---------------------------------------------------------------------------------------------------------------
Total $957 $661 $4,445 $3,239 27% 19%
===============================================================================================================
</TABLE>
a) Includes revenue and net income from international operations, principally
Argentina and Brazil, of $411 million and $77 million, respectively, for the
first quarter of 2000, and $375 million and $61 million, respectively, for
the first quarter of 1999.
During the first quarter of 2000, both Global Banking and Financial
Services and Commercial and Retail Banking posted strong increases in earnings
and revenues compared to the first 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 the National Consumer Group, which includes the Corporation's credit
card lending, mortgage banking and student loan processing businesses, declined
from the same quarter a year ago, reflecting 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.
GLOBAL BANKING AND FINANCIAL SERVICES
========================================================
Three months ended March 31 2000 1999
DOLLARS IN MILLIONS
- --------------------------------------------------------
Income statement data:
Net interest income $ 557 $ 489
Noninterest income 1,724 883
Provision 74 70
Noninterest expense 1,233 821
Taxes 388 191
- --------------------------------------------------------
Net income $ 586 $ 290
- --------------------------------------------------------
Balance sheet data:
Average assets(a) $90,649 $71,653
Average loans 48,627 45,899
Average deposits 21,030 19,501
- --------------------------------------------------------
Return on equity 38% 21%
========================================================
(a) Includes international average assets of $21 billion and $18 billion
for the first quarters of 2000 and 1999, respectively.
Global Banking and Financial Services includes Investment Services,
Corporate and Investment Banking, International Banking and Principal Investing,
as well as the Corporation's retail brokerage and investment banking
subsidiaries, Quick & Reilly and Robertson Stephens, respectively. This business
line earned $586 million in the first quarter of 2000, a 102% increase from the
first quarter of 1999. Increased earnings for Global Banking and Financial
Services were driven by capital markets and investment services revenues, as
well as earnings growth in the international franchise.
Three months ended
March 31 2000 1999 % 2000 1999 %
DOLLARS IN MILLIONS Net Income Change Total Revenue Change
===================================================================
Principal Investing $153 $ 35 337% $ 288 $ 65 343%
Robertson Stephens 119 13 815 638 132 383
Corporate and
Investment Banking 103 92 12 337 334 1
International Banking 90 69 30 450 411 9
Quick & Reilly 62 47 32 322 213 51
Investment Services 59 34 74 246 217 13
- -------------------------------------------------------------------
Total $586 $ 290 102% $2,281 $1,372 66%
===================================================================
Principal Investing provides startup capital and debt financing to new
ventures and selected small business ventures that are predominantly privately
or closely held companies. The Principal Investing business earned $153 million
in the first quarter of 2000, an increase of 337% 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. For the first quarter of 2000, the
aggregate carrying value of the Principal Investing investment portfolio
averaged $4.2 billion.
Robertson Stephens earned $119 million on revenues of $638 million in the
first quarter of 2000, compared to net income of $13 million and revenues of
$132 million in the first quarter of 1999. Increased earnings were the result of
equity underwritings, M&A advisory services and higher trading volumes, focused
mainly in the Internet and technology market sectors.
The Corporate and Investment Banking unit, which includes specialized
industry lending, institutional banking and capital markets activities, recorded
earnings of $103 million in the first quarter of 2000, an increase of $11
million, or 12%, compared to the first quarter of 1999. Driving these increased
earnings were the combination of higher spreads on increased deposit volumes,
higher fee revenues, and declining levels of operating expenses in conjunction
with lower levels of employees, as merger integration efforts continue.
The International Banking unit includes operations 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
139 branches and approximately $10 billion of assets. Compared to the first
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
quarter of 1999, International Banking earnings increased $21 million, or
30%, driven primarily by favorable spreads and increased loan and deposit
volumes in key Latin American markets. Average deposit balances grew $1.1
billion during the first quarter, while average loan balances closed the
first quarter $1.3 billion ahead of the first quarter of 1999. At March 31,
2000, international mutual fund assets under management totaled $9 billion.
Quick & Reilly, which offers brokerage, market-making and securities
clearing services, earned $62 million in the first quarter of 2000, compared to
$47 million in the first quarter of 1999, an increase of $15 million, or 32%.
Higher brokerage and market-making revenues, which increased $96 million, or
55%, from the same quarter a year ago, were driven by increased transaction
volumes as a result of strong equity markets.
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 $59 million in the first quarter of
2000, an increase of $25 million, or 74%, 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 by almost $9 billion to approximately $122
billion at March 31, 2000, as well as increased sales of mutual funds and
annuities, which grew 10% from the prior year, reflecting the continued strength
of financial markets and increasing customer demand for these products.
COMMERCIAL AND RETAIL BANKING
===========================================================
Three months ended March 31 2000 1999
IN MILLIONS
- -----------------------------------------------------------
Income statement data:
Net interest income $ 1,070 $ 1,017
Noninterest income 378 370
Provision 89 85
Noninterest expense 815 822
Taxes 224 200
- -----------------------------------------------------------
Net income $ 320 $ 280
- -----------------------------------------------------------
Balance sheet data:
Average assets $70,580 $68,435
Average loans 60,942 57,078
Average deposits 79,393 78,803
- -----------------------------------------------------------
Return on equity 21% 20%
===========================================================
Commercial and Retail Banking includes domestic retail banking to consumer
and small business customers, community development banking, as well as 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, as well as ongoing changes to retail banking products and
distribution channels, and cost savings resulting from merger integration
efforts. Earnings for this unit increased $40 million, or 14%, as strong growth
in retail banking was accompanied by relatively slower growth in the commercial
banking sectors.
Three months ended
March 31 2000 1999 % 2000 1999 %
DOLLARS IN MILLIONS Net Income Change Total Revenue Change
====================================================================
Retail Distribution $101 $ 79 28% $ 595 $ 559 6%
Commercial Finance 90 98 (8) 279 295 (5)
Commercial Banking 64 54 19 261 244 7
Small Business 54 37 46 230 200 15
Consumer Lending 11 12 (8) 83 89 (7)
- --------------------------------------------------------------------
Total $320 $280 14% $1,448 $1,387 4%
====================================================================
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. During the first quarter of 2000,
Retail Distribution had average deposit balances of $55.7 billion. Retail
Distribution earned $101 million, a 28% increase over the first quarter of 1999.
Higher earnings were driven by increased spreads on deposits and lower operating
expenses related to a lower employee level as a result of merger-related
reductions in staff. Core deposit levels declined $852 million, as continued
customer migration toward higher-yielding mutual funds was partly offset by the
promotion of money market deposit accounts in selected markets.
Commercial Finance focuses on the asset financing needs of corporate
customers. Commercial Finance earned $90 million in the first quarter of 2000,
compared to $98 million a year ago, a decrease of 8%. The lower earnings were
primarily driven by aggressive credit actions taken against the lease portfolio
in the first quarter of 2000, including writedowns of lease residuals.
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 first quarter of 2000,
this unit's average loan and deposit balances were $16.6 billion and $9.9
billion, respectively. Commercial Banking earned $64 million in the first
quarter of 2000, a 19% increase over the $54 million earned in the first quarter
of 1999, primarily reflecting higher loan volumes and successful cost saving
initiatives related to the BankBoston merger.
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
first quarter of 2000, an increase of 46% over the first quarter a year earlier.
Higher deposit spreads and volumes, as well as fee-based revenues, drove
increased earnings. Average loan balances were down slightly to $4 billion for
the first quarter of 2000, while average deposit balances increased by $749
million compared to the first quarter of 1999, to $11.8 billion for
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
the first 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 has $10 billion in consumer loan balances,
excluding credit card and residential mortgage products, which are managed as
part of the National Consumer Group. The Consumer Lending business earned $11
million in the first quarter of 2000, a reduction of 8% from the prior year.
Lower earnings were influenced by a slight decline in loan balances, the result
of a strategic decision to exit specific segments of the business.
NATIONAL CONSUMER GROUP
===========================================================
Three months ended March 31 2000 1999
IN MILLIONS
- -----------------------------------------------------------
Income statement data:
Net interest income $ 99 $ 143
Noninterest income 291 294
Provision 82 99
Noninterest expense 225 244
Taxes 33 37
- -----------------------------------------------------------
Net income $ 50 $ 57
- -----------------------------------------------------------
Balance sheet data:
Average assets $13,164 $15,106
Average loans 5,088 5,120
Average deposits 1,936 2,535
- -----------------------------------------------------------
Return on equity 9% 10%
===========================================================
The National Consumer Group includes mortgage banking, credit card services
and student loan processing.
Three months ended
March 31 2000 1999 % 2000 1999 %
DOLLARS IN MILLIONS Net Income Change Total Revenue Change
======================================================================
Credit Cards $30 $29 3% $261 $283 (8)%
Mortgage Banking 11 21 (48) 77 109 (29)
Student Loan Processing 9 7 29 52 45 16
- ----------------------------------------------------------------------
Total $50 $57 (12)% $390 $437 (11)%
======================================================================
The Corporation's credit card subsidiary is the eighth largest credit card
company in the nation. Fleet Mortgage, with offices located in 15 states,
originated approximately $4.3 billion of loans in the first quarter of 2000 and
services a mortgage portfolio of $151 billion and 1.6 million loans. Student
loan processing, through the Corporation's AFSA subsidiary, services 7.3 million
accounts nationwide and is the largest student loan servicer in the nation, with
$66 billion of loans serviced. National Consumer Group earnings decreased 12%
from the first quarter of 1999 to $50 million for the three months ended March
31, 2000. Favorable earnings at the credit card unit, which increased $1.6
million, combined with increased earnings at AFSA, were offset by a 48% decline
in earnings at Fleet Mortgage. Earnings reductions at Fleet Mortgage were driven
by lower production revenues, as average mortgage rates increased to 8.5% for
the first quarter of 2000 from 7.1% for the first quarter of 1999.
ALL OTHER
All Other includes certain transactions not allocable to specific business
units, the residual impact of methodology allocations such as the provision for
credit losses, credit loss reserves and equity allocations, combined with
transfer pricing offsets. The business activities of the Treasury unit are also
included in All Other. The Treasury unit is responsible for managing the
Corporation's securities and residential mortgage portfolios, the
asset-liability management function and wholesale funding needs. Earnings in All
Other can fluctuate with changes affecting the consolidated provision for credit
losses, one-time charges, gains and other actions not driven by specific
business units. In the first quarter of 2000, the Corporation recorded a $366
million gain on branch divestitures, which was partially offset by merger
integration costs of $100 million and securities losses of $58 million.
FINANCIAL CONDITION
Total assets were $187.8 billion as of March 31, 2000, a decrease of $2.9
billion from December 31, 1999, reflecting the divestiture of $3.6 billion of
loans to Sovereign, offset by growth in domestic loans during the quarter.
Total loans and leases at March 31, 2000 were $117.4 billion, a decrease of
$2.3 billion compared to $119.7 billion at December 31, 1999. This decrease was
due mainly to the divestiture of $3.6 billion of loans and leases to Sovereign
in March 2000 in connection with the first phase of the Corporation's
divestiture plan, offset in part by domestic loan growth, primarily consumer
margin and commercial and industrial (C&I) loans.
Total deposits decreased $5.7 billion to $109.2 billion at March 31, 2000,
primarily the result of the divestiture of approximately $4 billion of deposits
to Sovereign in March 2000 and a decrease in time deposits.
Short-term borrowings increased $682 million from December 31, 1999 to
March 31, 2000, attributable to the increased availability and use of treasury,
tax and loan borrowings, offset in part by decreased federal funds purchased and
securities sold under agreements to repurchase.
The $998 million increase in long-term debt was due to the issuance of $1.9
billion of medium-term floating rate notes, including $1 billion of bank notes,
offset by maturities of medium-term notes during the quarter.
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 $1.6 billion to $21.9
billion at March 31, 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 valuation of securities available for sale decreased $556 million
to a net unrealized gain (pre-tax) position of $136 million at March 31, 2000,
primarily the result of unrealized
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
depreciation 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 $800 million at
March 31, 2000, and $300 million at April 30, 2000.
<TABLE>
<CAPTION>
SECURITIES
=================================================================================================================================
March 31, 2000 December 31, 1999 March 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 $ 1,438 $ 1,388 $ 2,282 $ 2,196 $ 2,167 $ 2,165
Mortgage-backed securities 13,221 12,589 14,157 13,567 15,233 15,302
Other debt securities 4,471 4,469 4,850 4,853 4,397 4,334
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 19,130 18,446 21,289 20,616 21,797 21,801
- ---------------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 1,027 1,847 977 2,342 652 705
Other equity securities 1,706 1,706 1,173 1,173 894 894
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 21,863 21,999 23,439 24,131 23,343 23,400
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,084 1,084 1,081 1,081 1,494 1,502
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities $22,947 $23,083 $24,520 $25,212 $24,837 $24,902
=================================================================================================================================
</TABLE>
LOANS AND LEASES
==========================================================================
March 31, Dec. 31, March 31,
IN MILLIONS 2000 1999 1999
- --------------------------------------------------------------------------
Domestic:
Commercial and industrial $ 54,711 $ 55,184 $ 55,907
Commercial real estate 7,949 7,945 8,365
Consumer 29,070 30,885 28,220
Lease financing 10,801 10,933 10,102
- --------------------------------------------------------------------------
Total domestic loans and leases 102,531 104,947 102,594
- --------------------------------------------------------------------------
International:
Commercial 11,760 11,855 11,092
Consumer 3,062 2,898 2,739
- --------------------------------------------------------------------------
Total international loans
and leases 14,822 14,753 13,831
- --------------------------------------------------------------------------
Total loans and leases $117,353 $119,700 $116,425
==========================================================================
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 March 31, 2000 decreased $2.3 billion from
December 31, 1999. Domestic loans and leases decreased $2.4 billion, or 2%, due
primarily to the aforementioned divestiture of $3.6 billion of loans and leases
to Sovereign in March 2000, offset by consumer margin and C&I loan growth. The
Corporation's international loan portfolio was relatively flat compared to
December 31, 1999, reflecting economic slowdowns in Brazil and Argentina.
CONSUMER LOANS
====================================================================
March 31, Dec. 31, March 31,
IN MILLIONS 2000 1999 1999
- --------------------------------------------------------------------
Domestic:
Residential real estate $ 9,519 $10,881 $10,940
Home equity 6,547 7,095 6,473
Credit card 5,032 5,455 4,233
Student loans 1,525 1,407 1,504
Installment/other 6,447 6,047 5,070
- --------------------------------------------------------------------
Total domestic loans 29,070 30,885 28,220
- --------------------------------------------------------------------
International 3,062 2,898 2,739
- --------------------------------------------------------------------
Total consumer loans $32,132 $33,783 $30,959
====================================================================
Domestic consumer loans decreased $1.8 billion to $29.1 billion at March
31, 2000. This decrease was the result of the divestiture of $1.2 billion of
residential mortgage loans and $1.1 billion of other consumer loans to Sovereign
in March 2000, as well as the securitization of $750 million of credit card
receivables during the quarter. These decreases were offset, in part, by growth
in the Corporation's consumer margin loans at Quick & Reilly and growth in the
credit card portfolio.
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 March 31, 2000, total cross-border
outstandings were $12.7 billion, compared with $12.9 billion at December 31,
1999, which included $5.9 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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
In addition to credit risk, cross-border outstandings have the risk that,
as a result of political or economic conditions in a country, borrowers may be
unable to meet their contractual repayment obligations of principal and/or
interest when due because of the unavailability of, or restrictions on, foreign
exchange needed by borrowers to repay their obligations. The Corporation manages
its cross-border outstandings using country exposure limits established by the
Country Exposure Committee.
The following table details by country the Corporation's approximate
cross-border outstandings that individually amounted to 1% or more of its
consolidated total assets at March 31, 2000 and December 31, 1999.
SIGNIFICANT CROSS-BORDER OUTSTANDINGS(a)(b)
=============================================================
March 31, Dec. 31,
DOLLARS IN MILLIONS 2000 (c) 1999(c)
- -------------------------------------------------------------
Argentina:
Banks $ 410 $ 405
Government entities and agencies 1,210 1,470
Other 720 795
- -------------------------------------------------------------
Total $ 2,340 $ 2,670
- -------------------------------------------------------------
Percentage of total assets 1.2% 1.4%
- -------------------------------------------------------------
Commitments(d) $ 11 $ 12
- -------------------------------------------------------------
Brazil:
Banks $ 135 $ 170
Government entities and agencies 1,420 1,540
Other 320 210
- -------------------------------------------------------------
Total $ 1,875 $ 1,920
- -------------------------------------------------------------
Percentage of total assets 1.0% 1.0%
- -------------------------------------------------------------
Commitments(d) $ 35 $ 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 $2.2 billion and $2.7 billion at March 31, 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 March 31, 2000 and December 31, 1999 were
approximately as follows: March 31, 2000-United Kingdom-$1.4 billion, and
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 $360 $ 2 $ 11 $373
International -- 2 -- 2
Noncurrent
Domestic 169 15 65 249
International 94 42 81 217
Other real estate owned (OREO)
Domestic 1 17 11 29
International -- 12 4 16
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
NPAs, March 31, 1999:
Total NPAs-Domestic $280 $ 61 $125 $466
Total NPAs-International 77 1 118 196
- --------------------------------------------------------------------------------
Total NPAs, March 31, 1999 $357 $ 62 $243 $662
================================================================================
(a) NPAs do not include loans greater than 90 days past due and still accruing
interest ($293 million, $320 million and $291 million at March 31, 2000,
December 31, 1999 and March 31, 1999, respectively). Included in the 90
days past due and still accruing interest amounts were $213 million, $251
million and $228 million of consumer loans at March 31, 2000, December 31,
1999 and March 31, 1999, respectively.
Nonperforming assets (NPAs) at March 31, 2000 increased $45 million to $886
million when compared with December 31, 1999. The rise in NPAs was due primarily
to additions to domestic C&I nonperforming loans (NPLs), offset in part by
$73 million of NPLs reclassified to assets held for sale by accelerated
disposition during the quarter. NPAs at March 31, 2000, as a percentage of
total loans, leases and OREO, and as a percentage of total assets, were .75%
and .47%, 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
The following table sets forth the status of impaired loans, which are
primarily commercial and commercial real estate loans on nonaccrual status:
IMPAIRED LOANS
=================================================================
March 31, Dec. 31,
IN MILLIONS 2000 1999
- -----------------------------------------------------------------
Impaired loans with a reserve $506 $512
Impaired loans without a reserve 141 60
- -----------------------------------------------------------------
Total impaired loans $647 $572
- -----------------------------------------------------------------
Reserve for impaired loans (a) $209 $163
- -----------------------------------------------------------------
Quarterly average balance of impaired loans $636 $524
=================================================================
(a) The reserve for impaired loans is part of the Corporation's overall
reserve for credit losses.
Substantially all of the impaired loans presented above were on nonaccrual
status and the amount of interest income recognized on impaired loans was not
significant. The Corporation had no significant outstanding commitments to lend
additional funds to customers whose loans have been placed on nonaccrual status
or the terms of which have been modified.
At March 31, 2000 and December 31, 1999, the Corporation had assets held
for sale by accelerated disposition with a net carrying value of $498 million
and $370 million, respectively, of which approximately $320 million and $130
million, respectively, were nonperforming. 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
==============================================================================
Three months ended March 31 2000 1999
DOLLARS IN MILLIONS
- ------------------------------------------------------------------------------
Balance at beginning of year $ 2,488 $ 2,306
Loans charged off (324) (270)
Recoveries of loans charged off 49 54
- ------------------------------------------------------------------------------
Net charge-offs (275) (216)
Provision for credit losses 300 219
Acquisitions/Other (36) 172
- ------------------------------------------------------------------------------
Balance at end of period $ 2,477 $ 2,481
- ------------------------------------------------------------------------------
Ratios of net charge-offs to average loans .92% .76%
- ------------------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end loans 2.11 2.13
- ------------------------------------------------------------------------------
Ratios of reserve for credit losses to period-end NPLs 295 397
==============================================================================
The Corporation's reserve for credit losses at March 31, 2000 was
essentially unchanged compared to March 31, 1999, and decreased slightly from
December 31, 1999. This decrease was a result of the transfer of reserves
related to the divestiture of loans to Sovereign 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 $25
million. The provision for credit losses for the first quarter of 2000 was $300
million, $81 million higher than the prior year's first quarter. 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.
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-liability management is governed by policies
reviewed and approved annually by the Corporation's Board of Directors (the
Board). The Board delegates responsibility for asset-liability management to the
corporate Asset, Liability and Capital Committee (ALCCO). ALCCO sets strategic
directives that guide the day-to-day asset-liability management activities of
the Corporation and approves all major market risk, liquidity, and capital
management programs.
MARKET RISK
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 asset-liability management and related
policies, including its management of market risk, 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 comprised 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.
This risk arises directly from the Corporation's core banking activities -
lending, deposit gathering and loan servicing.
A major component of the Corporation's non-trading interest rate risk is the
exposure of net interest income to differences in the maturity and repricing
characteristics of the Corporation's core banking assets and liabilities - loans
and deposits. The Corporation manages this risk using both on-balance sheet
instruments, mainly fixed-rate portfolio securities, and off-balance sheet
instruments, mainly interest rate swaps.
A second major component of non-trading interest rate risk is the sensitivity
of MSRs to prepayments. A decline in interest rates and an actual (or probable)
increase in mortgage prepayments shorten the expected life of the MSR asset. To
mitigate this risk, the Corporation uses a variety of risk management
instruments, including futures contracts, interest rate swaps and options, and
swaps linked to mortgage assets, such as "principal only" (P.O.) securities.
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 gradual Federal Reserve Board tightening.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
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 March 31, 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)
- ------------------------------------------------------
March 31, 2000 Dec. 31, 1999
- ------------------------------------------------------
+200 $(77) $(58)
-200 26 (12)
======================================================
Management believes that the exposure of the Corporation's net interest
income to gradual and/or modest changes in interest rates, such as 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.
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 March 31, 2000. The
following table reflects the Corporation's estimated EVE 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)
- ---------------------------------------------------------
March 31, 2000 Dec. 31, 1999
- ---------------------------------------------------------
+200 $(509) $ 118
+100 (256) 65
-100 75 (539)
-200 (485) (1,457)
=========================================================
Estimated exposures are more modest and more balanced than at December 31,
1999. In particular, there is reduced exposure to a sharp decline in interest
rates. The change in the risk profile was largely related to two factors: first,
the sale of mortgage securities and loans and second, the addition of interest
rate swaps. Swaps were added to offset the sales of mortgage assets, which
reduced exposure to mortgage prepayments. Swaps were also added to reduce the
remaining exposure of net interest income and economic value to any possible
future decline in interest rates.
Off-balance sheet interest rate instruments used to manage net interest
income are designated as hedges of specific assets and liabilities. Accrual
accounting is applied to these hedges, and the income or expense is recorded in
the same category as that of the related balance sheet item. The periodic net
settlement of the interest rate risk management instruments is recorded as an
adjustment to net interest income. As of March 31, 2000, the Corporation had net
deferred income of approximately $15 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.
The derivative instruments used to manage potential impairment of MSRs are
designated as hedges of the MSRs. Changes in fair value of the hedges are
recorded as adjustments to the carrying value of the MSRs and related hedges.
During the first quarter of 2000, net hedge losses of $13 million were deferred
and recorded as adjustments to the carrying value of the MSRs and related
hedges. At March 31, 2000, the carrying value and fair value of the
Corporation's MSRs were $3.4 billion and $3.6 billion, respectively.
In connection with the Corporation's management of its MSR hedge program, the
Corporation terminated (in notional amounts) $17 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 first
quarter of 2000. Additionally, the Corporation added $1 billion of swap
contracts, and terminated $2 billion of interest rate caps and $2 billion of
swap contracts during the first quarter of 2000.
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 March 31, 2000 and December 31, 1999, the Corporation's
exposure to interest rate risk in its Latin American operations was not
significant.
With respect to foreign exchange rate risk, 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
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
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 ALCCO. The majority of the Corporation's
non-trading 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 March 31, 2000 and December 31, 1999, respectively.
CURRENCY POSITIONS
March 31, 2000 Dec. 31, 1999
Quarter- Quarterly Quarter- Quarterly
IN MILLIONS End Average End Average
======================================================================
Argentina(a) $399 $363 $297 $333
Brazil(b) 18 11 35 19
======================================================================
(a) Positions represent local currency assets funded by U.S. dollars for both
periods presented.
(b) March 31, 2000 quarterly average position represents dollar assets funded
by local currency liabilities; March 31, 2000 quarter-end 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.
The following table summarizes the Corporation's notional amounts and fair
values of interest rate and foreign exchange derivatives included in its
asset-liability management portfolio discussed earlier.
<TABLE>
<CAPTION>
RISK MANAGEMENT INSTRUMENTS
===================================================================================================================================
Weighted
Assets- Average Weighted Average
March 31, 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 $16,572 Variable-rate loans
200 Securities
769 Fixed-rate deposits
55 Short-term debt
5,312 Long-term debt
-----------
22,908 3.8 $(417) 6.53% 6.46 %
-----------
Pay fixed/receive variable 7 Fixed-rate loans
-----------
7 3.9 - 5.95 7.45
-----------
Basis swaps 108 Securities
12 Variable rate loans
350 Long-term debt
50 Short-term debt
-----------
520 1.2 (15) 6.00 6.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic interest rate risk management
instruments 23,435 3.7 (432) 6.52 6.45
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL INTEREST RATE RISK MANAGEMENT
INSTRUMENTS
Interest rate swaps 936 Short-term assets and liabilities .4 (7) -(a) - (a)
Futures 1,318 Short-term assets and liabilities .4 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total international interest rate risk management
instruments 2,254 .4 (7) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income $25,689 3.4 $(439) 6.52 6.45
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING RISK MANAGEMENT INSTRUMENTS
Swaps:
Interest rate, P.O., and MBS swaps $ 4,221 MSRs 2.5 $ (91) 6.49% 6.28 %
Futures 190 MSRs .2 - - -
Options:
Interest rate floors and options on swaps 19,285 MSRs 4.2 196 -(b) - (b)
Interest rate caps 9,400 MSRs 4.2 197 -(b) - (b)
Treasury and futures options 200 MSRs .1 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total options 28,885 4.2 393 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights $33,296 3.9 $ 302 6.49% 6.28 %
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE RISK MANAGEMENT INSTRUMENTS
Swaps $ 5,299 Foreign currency denominated .7 $ (97) - -
assets and liabilities
Spot and forward contracts 422 Foreign currency denominated .2 13 - -
assets and liabilities
Futures 1,531 Foreign currency denominated .2 - - -
assets and liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
Total hedges of foreign exchange $ 7,252 .6 $ (84) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total risk management instruments $66,237 3.4 $(221) 6.51% 6.43 %
===================================================================================================================================
</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 5.51%
and 6.96%, respectively.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TRADING ACTIVITIES
The Corporation's trading activities create exposure to price risk, or the
risk of loss of 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.
This exposure mainly arises in the normal course of the Corporation's
business as a financial intermediary. The Corporation enters into interest rate,
currency exchange rate and precious metals contracts primarily to satisfy the
investment and risk management needs of its customers. Equity positions result
mainly from the Corporation's market-making and underwriting activities.
In addition, the Corporation takes certain proprietary trading positions,
including positions in high yield and emerging markets fixed income securities,
local currency debt and equity securities, and related derivatives. The
Corporation expects these proprietary trading positions to benefit from
short-term movements in the prices of securities and from perceived
inefficiencies among the prices of various securities issued by the same country
or entity. Domestic fixed income trading activities also include position-taking
in U.S. Treasury and U.S. government agency securities.
The following chart presents the aggregate daily trading-related revenues, in
millions of dollars, that resulted from the Corporation's combined trading
activities.
[GRAPHIC OMITTED
BAR CHART REPRESENTATION OF DAILY TRADING-RELATED REVENUES
FOR THE FIRST QUARTER OF 2000]
Revenues Number
(IN MILLIONS) of Days
--------------- --------
$(1) - $0 1
$0 - $1 4
$1 - $3 3
$3 - $5 9
$5 - $7 13
$7 - $9 12
$9 - $11 9
$11 - $13 8
$13 - $15 4
$15 - $17 --
> $17 2
Trading-related revenues presented above include trading profits and
commissions, foreign exchange revenue and market-making revenue, all components
of capital markets revenue, as well as net interest income from these trading
positions. During the first quarter of 2000, daily trading-related revenues
ranged from losses of $.3 million to profits of $18.3 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). The
VAR methodology requires a number of other key assumptions, including those
related to the holding period, the impact of cross-correlations, and the
treatment of event risk.
The Corporation's aggregate daily exposure averaged $43 million during the
first quarter of 2000, compared to $37 million during the first quarter of 1999.
At March 31, 2000, total VAR usage measured $45 million, well within the $88
million risk limit. These calculations do not take into account the potential
diversification benefits of positions taken across different trading businesses.
The table below presents the Corporation's average exposure with respect to
its aggregate trading portfolio:
VALUE-AT-RISK (VAR)
========================================================================
IN MILLIONS Average High Low
- ------------------------------------------------------------------------
Quarter ended March 31, 2000 $43 $49 $38
Quarter ended March 31, 1999 37 48 30
Quarter ended December 31, 1999 36 56 27
Year ended December 31, 1999 38 56 27
========================================================================
During the first quarter of 2000, the majority of the price risk in the
Corporation's trading activities arose from interest rate and equity components.
Interest rate risk, which includes directional and spread components, increased
to an average of $22 million, or approximately 50% of aggregate average VAR.
Interest rate risk arises primarily from trading activity in the domestic high
yield market and the Argentine and Brazilian sovereign and high-end corporate
bond markets.
The contribution to the Corporation's aggregate average VAR from equity
trading activities in the Robertson Stephens and Quick & Reilly units during the
first quarter of 2000 was $15 million, or approximately 35% of aggregate average
VAR. The individual activities that generate most of this equities risk include
the third largest NYSE specialist firm, NASDAQ market-making, equity trading and
a convertible bond trading and underwriting business.
Foreign exchange risk remained moderate throughout the first quarter of 2000
at an average of $6 million, or approximately 14% of aggregate average VAR. The
majority of foreign exchange risk arises from the Corporation's Argentine and
Brazilian operations. Commodity risk associated with a small trading activity
that supports a precious metals lending business remained modest during the
first quarter of 2000.
The following table presents the Corporation's aggregate average VAR by risk
type for the periods indicated. Average VAR for commodity risk was not
significant for the periods presented.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
VAR BY RISK TYPE
===========================================================
March 31, 2000 Dec. 31, 1999
Quarterly Quarterly 1999
IN MILLIONS Average Average Average
- -----------------------------------------------------------
Interest rate risk $22 $19 $19
Equity risk 15 10 12
Foreign exchange risk 6 7 7
- -----------------------------------------------------------
Aggregate price risk $43 $36 $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.
[GRAPHIC OMITTED]
LINE GRAPH REPRESENTATION OF DAILY TRADING-RELATED REVENUES AND
VAR MEASURES WITH A ONE-DAY HOLDING PERIOD
FOR THE 12 MONTHS ENDED MARCH 31, 2000]
The daily trading-related revenues include daily trading profits and
commissions and foreign exchange revenues, as well as daily trading-related
net interest income. During the 12 months ended March 31, 2000, the daily
trading-related revenues ranged from losses of $2.7 million per day to
profits of $18.4 million per day. VAR includes all trading portfolios and
the foreign exchange portfolio. During the 12 months ended March 31, 2000,
VAR with a one-day holding period ranged from $18 million per day to $40
million per day.
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.
TRADING INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Derivatives not used for asset-liability management are included in the
derivative trading portfolio, and principally relate to providing risk
management products to the Corporation's customers.
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 March 31, 2000:
==============================================================
Contract or
March 31, 2000 Notional Credit
IN MILLIONS Amount Exposure
- --------------------------------------------------------------
Interest rate contracts $144,106 $ 768
Foreign exchange contracts 73,287 1,657
Equity contracts 2,822 460
==============================================================
All of the Corporation's trading positions are carried at fair value, with
realized and unrealized gains and losses reflected in trading profits and
commissions, a component of capital markets revenue.
Notional principal amounts are a measure of the volume of agreements
transacted, but the level of credit exposure is significantly less. The amount
of credit exposure can be estimated by calculating the cost to replace, on a
present value basis and at current market rates, all profitable contracts
outstanding at period-end. Credit exposure relates to accounting losses that
would be recognized if the counterparties completely failed to perform their
obligations. To manage its level of credit exposure, the Corporation deals with
counterparties of good credit standing, establishes counterparty credit limits,
in certain cases has the ability to require securities collateral, and enters
into netting agreements whenever possible.
The amounts disclosed below represent the end-of-period fair values of
derivative financial instruments held or issued for trading purposes and the
quarterly average aggregate fair values for those instruments:
FAIR VALUES AND AVERAGE FAIR VALUES OF TRADING
INSTRUMENTS
===============================================================
Fair Value Average
March 31, 2000 (Carrying Fair
IN MILLIONS Amount) Value
- ---------------------------------------------------------------
Interest rate contracts:
Assets $ 768 $ 1,227
Liabilities (801) (1,135)
Foreign exchange contracts:
Assets $ 1,657 $ 1,752
Liabilities (1,645) (1,698)
Equity contracts:
Assets $ 460 $ 431
Liabilities (308) (232)
===============================================================
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
LIQUIDITY RISK
The objective of liquidity risk management is to assure the ability of the
Corporation and its subsidiaries to meet their financial obligations. These
obligations are the payment of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and the ability to take advantage of new business
opportunities. Liquidity is achieved by the maintenance of a strong base of core
customer funds; maturing short-term assets; the ability to sell marketable
securities; committed lines of credit and access to capital markets. Liquidity
may also be enhanced through the securitization of commercial and consumer
receivables. Further information with respect to the Corporation's liquidity
risk management is included on page 35 of its 1999 Annual Report on Form 10-K.
The primary sources of liquidity for the parent company are interest and
dividends from subsidiaries, committed lines of credit and access to the money
and capital markets. Dividends from banking subsidiaries are limited by various
regulatory requirements related to capital adequacy and retained earnings. The
Corporation's subsidiaries rely on cash flows from operations, core deposits,
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 March 31, 2000, the Corporation's parent company had commercial paper
outstanding of $1.4 billion, compared with $1.6 billion at December 31, 1999.
The Corporation's parent company had excess funds at March 31, 2000 of $603
million compared to $1.5 billion at December 31, 1999. The Corporation has
backup lines of credit totaling $1 billion to ensure funding is not interrupted
if commercial paper is not available. At March 31, 2000 and December 31, 1999,
the Corporation had no outstanding balances under these lines of credit.
The parent company currently has $1 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 currently
effective shelf registration 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
CAPITAL RATIOS
=======================================================================
March 31, Dec. 31, March 31,
2000 1999 1999
- -----------------------------------------------------------------------
Risk-adjusted assets
(in millions) $194,594 $189,488 $183,403
Tier 1 risk-based capital ratio
(4% minimum) 6.66% 6.82% 6.83%
Total risk-based capital ratio
(8% minimum) 11.02 11.50 11.24
Leverage ratio(a) 6.67 6.81 6.99
Common equity-to-assets
ratio 7.66 7.66 7.62
Total equity-to-assets ratio 7.96 8.03 8.00
Tangible common equity-
to-assets ratio 5.61 5.60 5.43
Tangible common equity-to-
managed assets ratio 5.21 5.20 5.05
Tangible total equity-to-
assets ratio 5.91 5.97 5.82
=======================================================================
(a) The Corporation was subject to a 3% minimum at March 31, 2000 and December
31, 1999, and a 4% minimum at March 31, 1999.
At March 31, 2000, the Corporation exceeded all regulatory required minimum
capital ratios, as the Corporation's Tier 1 and Total risk-based capital ratios
were 6.66 percent and 11.02 percent, respectively, compared with 6.82 percent
and 11.50 percent, respectively, at December 31, 1999. The leverage ratio, a
measure of Tier 1 capital to average quarterly assets, was 6.67 percent at March
31, 2000 compared with 6.81 percent at December 31, 1999.
On April 30, 2000, the Corporation called for redemption $186 million of
floating-rate subordinated notes due 2001, and will redeem these notes on May
31, 2000. 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.
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
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIION AND RESULTS OF OPERATIONS
businesses, including the BankBoston merger; greater than expected negative
impact of required divestitures completed or to be completed 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 both the income statement as
well as the equity section of the balance sheet. The impact of this Standard
cannot be currently estimated and will be dependent upon the fair value, nature
and purpose of the derivative instruments held by the Corporation as of January
1, 2001.
19
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
================================================================================
Three months ended March 31 2000 1999
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
- -------------------------------------------------------------------------------
Interest income:
Interest and fees on loans and leases $2,794 $2,593
Interest on securities and trading assets 435 402
Other 232 154
- -------------------------------------------------------------------------------
Total interest income 3,461 3,149
- -------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 601 612
Deposits of international offices 297 285
Short-term borrowings 363 260
Long-term debt 424 285
Other 68 39
- -------------------------------------------------------------------------------
Total interest expense 1,753 1,481
- -------------------------------------------------------------------------------
Net interest income 1,708 1,668
- -------------------------------------------------------------------------------
Provision for credit losses 300 219
- -------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,408 1,449
- -------------------------------------------------------------------------------
Noninterest income:
Capital markets revenue 1,059 397
Investment services revenue 500 356
Banking fees and commissions 364 350
Credit card revenue 159 162
Processing-related revenue 156 154
Gain on branch divestitures 366 -
Other 118 139
- -------------------------------------------------------------------------------
Total noninterest income 2,722 1,558
- -------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,425 1,016
Occupancy 160 139
Equipment 146 130
Intangible asset amortization 88 86
Legal and other professional 82 68
Marketing and public relations 72 61
Other 539 435
- -------------------------------------------------------------------------------
Total noninterest expense 2,512 1,935
- -------------------------------------------------------------------------------
Income before income taxes 1,618 1,072
Applicable income taxes 661 411
- -------------------------------------------------------------------------------
Net income $ 957 $ 661
================================================================================
Diluted weighted average common shares outstanding 919.7 942.1
(in millions)
Net income applicable to common shares $ 947 $ 645
Basic earnings per share 1.05 .70
Diluted earnings per share 1.03 .68
Dividends declared .30 .27
================================================================================
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
===================================================================================
March 31, December 31,
DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS 2000 1999
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash, due from banks and interest-bearing deposits $ 8,901 $10,627
Federal funds sold and securities purchased under
agreements to resell 3,177 2,353
Trading assets 8,020 7,849
Securities (market value: $23,083 and $25,212) 23,083 25,212
Loans and leases 117,353 119,700
Reserve for credit losses (2,477) (2,488)
- -----------------------------------------------------------------------------------
Net loans and leases 114,876 117,212
- -----------------------------------------------------------------------------------
Due from brokers/dealers 4,252 3,003
Mortgages held for resale 904 1,244
Premises and equipment 2,742 2,794
Mortgage servicing rights 3,365 3,325
Intangible assets 4,087 4,164
Other assets 14,407 12,909
- -----------------------------------------------------------------------------------
Total assets $187,814 $190,692
===================================================================================
LIABILITIES
Deposits:
Domestic:
Noninterest bearing $24,921 $24,773
Interest bearing 67,023 73,428
International:
Noninterest bearing 1,486 1,532
Interest bearing 15,771 15,163
- -----------------------------------------------------------------------------------
Total deposits 109,201 114,896
- -----------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements to repurchase 6,810 9,529
Other short-term borrowings 11,978 8,577
Trading liabilities 3,329 3,807
Due to brokers/dealers 5,561 4,468
Long-term debt 26,347 25,349
Accrued expenses and other liabilities 9,635 8,759
- -----------------------------------------------------------------------------------
Total liabilities 172,861 175,385
- -----------------------------------------------------------------------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock 566 691
Common stock, par value $.01 (917,536,415 shares issued in
2000 and 917,061,055 shares issued in 1999) 9 9
Common surplus 4,148 4,150
Retained earnings 10,797 10,129
Accumulated other comprehensive income 56 387
Treasury stock, at cost (14,623,135 shares in 2000 and
1,401,453 shares in 1999) (623) (59)
- -----------------------------------------------------------------------------------
Total stockholders' equity 14,953 15,307
- -----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $187,814 $190,692
===================================================================================
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
21
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
===================================================================================================================
Accumulated
Other
Three months ended March 31 Preferred Common Common Retained Comprehensive Treasury
DOLLARS IN MILLIONS, EXCEPT Stock Stock Surplus Earnings Income Stock Total
PER SHARE AMOUNTS
- -------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 691 $ 9 $4,706 $9,210 $ 95 $(507) $14,204
Net income 661 661
Other comprehensive income, net of tax:
Adjustment to unrealized
gain on securities available
for sale, net of taxes (74)
Change in translation adjustment -
----------
Other comprehensive income (74) (74)
--------
Total comprehensive income 587
Cash dividends declared on common stock
($.27 per share) (154) (154)
Cash dividends declared by
pooled company prior to merger (95) (95)
Cash dividends declared on
preferred stock (13) (13)
Common stock issued in connection with
dividend reinvestment and employee
benefit plans (6) (46) 103 51
Treasury stock purchased (24) (24)
Other, net 1 (4) (3)
- --------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $ 691 $ 9 $4,701 $9,563 $ 21 $ (432) $14,553
- --------------------------------------------------------------------------------------------------------------------
2000
Balance at December 31, 1999 $ 691 $ 9 $4,150 $10,129 $ 387 $ (59) $15,307
Net income 957 957
Other comprehensive income, net of tax:
Adjustment to unrealized
gain on securities available
for sale, net of taxes (331)
Change in translation adjustment -
----------
Other comprehensive income (331) (331)
--------
Total comprehensive income 626
Cash dividends declared on common stock
($.30 per share) (271) (271)
Cash dividends declared on
preferred stock (10) (10)
Common stock issued in connection with
dividend reinvestment and employee
benefit plans (2) (8) 22 12
Redemption of preferred stock (125) (125)
Settlement of forward purchase contracts (585) (585)
Other, net (1) (1)
- ----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $ 566 $ 9 $4,148 $10,797 $ 56 $ (623) $14,953
===================================================================================================================
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
22
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
===================================================================================================
Three months ended March 31 2000 1999
IN MILLIONS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 957 $ 661
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 148 109
Amortization of mortgage servicing rights 95 82
Amortization of other intangible assets 88 86
Provision for credit losses 300 219
Deferred income tax expense 122 99
Securities losses 58 2
Gain on branch divestitures (366) --
Originations and purchases of mortgages held for resale (3,508) (10,383)
Proceeds from sales of mortgages held for resale 3,848 12,263
Increase in trading assets (171) (492)
(Decrease)/increase in trading liabilities (478) 8
(Increase)/decrease in due from brokers/dealers (1,249) 874
(Increase)/decrease in accrued receivables, net (4) 21
Increase/(decrease) in due to brokers/dealers 1,093 (152)
Increase/(decrease) in accrued liabilities, net 1,323 (146)
Other, net (2,276) (246)
- ---------------------------------------------------------------------------------------------------
Net cash flow (used in)/provided by operating activities (20) 3,005
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and securities purchased
under agreements to resell (824) (1,094)
Purchases of securities available for sale (2,560) (5,599)
Proceeds from sales of securities available for sale 3,748 2,834
Proceeds from maturities of securities available for sale 388 1,168
Purchases of securities held to maturity (165) (207)
Proceeds from maturities of securities held to maturity 164 240
Net cash and cash equivalents paid for businesses acquired -- (613)
Proceeds from sale of loan portfolio by banking subsidiary 750 --
Net (increase)/decrease in loans and leases (2,307) 907
Net cash and cash equivalents received from branch divestitures 55 --
Purchases of premises and equipment (141) (124)
Purchases of mortgage servicing rights (35) (406)
- ---------------------------------------------------------------------------------------------------
Net cash flow used in investing activities (927) (2,894)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (1,486) (2,077)
Net increase/(decrease) in short-term borrowings 682 (1,886)
Proceeds from issuance of long-term debt 2,187 2,593
Repayments of long-term debt (1,189) (434)
Proceeds from the issuance of common stock 12 51
Repurchase of common stock -- (24)
Settlement of forward purchase contracts (585) --
Redemption of preferred stock (125) --
Cash dividends paid (282) (256)
- ---------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (786) (2,033)
- ---------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash 7 (54)
- ---------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,726) (1,976)
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 10,627 10,941
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,901 $ 8,965
===================================================================================================
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 classification.
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 $100 million of merger integration costs
during the first quarter 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 the first phase of
these divestitures on March 24, 2000, divesting $4.2 billion of deposits, $3.6
billion of loans and 90 branches in Rhode Island, Connecticut and Massachusetts
to Sovereign Bancorp (Sovereign). In connection with this divestiture, the
Corporation recorded a $366 million ($209 million after-tax) gain. The remaining
divestitures to Sovereign and various community banks are expected to occur
during the second and third quarters of 2000.
NOTE 3. LOANS AND LEASES
The following table presents details of loan and lease financing balances:
============================================================
March 31, Dec. 31,
IN MILLIONS 2000 1999
- ------------------------------------------------------------
Domestic:
Commercial and industrial $ 54,711 $ 55,184
Commercial real estate 7,949 7,945
Residential real estate 9,519 10,881
Credit card 5,032 5,455
Other consumer 14,519 14,549
Lease financing 10,801 10,933
- ------------------------------------------------------------
Total domestic loans and leases 102,531 104,947
- ------------------------------------------------------------
International loans and leases 14,822 14,753
- ------------------------------------------------------------
Total loans and leases $117,353 $119,700
============================================================
NOTE 4. RESERVE FOR CREDIT LOSSES
An analysis of the reserve for credit losses follows:
==========================================================
Three months ended March 31 2000 1999
IN MILLIONS
- ----------------------------------------------------------
Balance at beginning of year $ 2,488 $ 2,306
Gross charge-offs:
Domestic:
Commercial and industrial 156 68
Commercial real estate 1 11
Residential real estate 1 3
Credit card 92 105
Other consumer 30 40
Lease financing 6 6
International 38 37
- ----------------------------------------------------------
Total gross charge-offs 324 270
- ----------------------------------------------------------
Recoveries:
Domestic:
Commercial and industrial 16 22
Commercial real estate 2 5
Residential real estate -- 2
Credit card 9 8
Other consumer 10 10
Lease financing 1 --
International 11 7
- ----------------------------------------------------------
Total recoveries 49 54
- ----------------------------------------------------------
Net charge-offs 275 216
Provision for credit losses 300 219
Acquired/other (36) 172
- ----------------------------------------------------------
Balance at end of period $ 2,477 $ 2,481
==========================================================
24
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 of merger integration costs during the first quarter of
2000.
RESTRUCTURING-RELATED CHARGES
Of the $467 million charge, $357 million related to personnel, $77 million
related to technology and operations, $28 million related to facilities and $5
million related to other restructuring expenses. Management expects to complete
implementation of the restructuring plan by the end of 2000.
Personnel-related costs of $357 million related to severance, benefit
program changes and outplacement services for approximately 4,000 employees that
the Corporation identified in 1999 for termination in connection with the
restructuring, principally as a result of duplicate functions within the
combined company. Substantially all of the affected employees will have been
notified by September 30, 2000. The Corporation anticipates that approximately
88% of terminated employees will leave the Corporation by the end of the third
quarter of 2000, and that the remaining employees will leave the Corporation by
December 31, 2000. During the first quarter of 2000, $44 million of personnel
benefits were paid and approximately 1,125 employees were terminated and left
the Corporation, bringing total personnel benefits paid through March 31, 2000
to $71 million. To date, approximately 1,900 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 first quarter of 2000, $8
million in contract cancellation penalties were paid, bringing total contract
cancellation penalties paid to date to $21 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 first quarter of 2000, approximately $1 million in
facilities charges were paid.
The following table presents activity in the restructuring-related accrual
during the quarter ended March 31, 2000.
RESTRUCTURING ACCRUAL ACTIVITY
========================================
IN MILLIONS
- ----------------------------------------
Balance at December 31, 1999 $387
Cash payments (53)
- ----------------------------------------
Balance at March 31, 2000 $334
========================================
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 $37 million of the total integration costs incurred in
the first quarter 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 SECURITIES
The Corporation has nine 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 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 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 securities. The Corporation fully and
unconditionally guarantees each trust's obligations under the trust securities.
25
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
A summary of the trust securities issued and outstanding at March 31, 2000
and December 31, 1999 follows. These trust securities are included in
long-term debt in the accompanying consolidated balance sheet.
<TABLE>
<CAPTION>
Amount Earliest Distribution Liquidation
Outstanding Original Prepayment Stated Payment Preference per
(IN MILLIONS) Issue Date Rate Option Date Maturity Frequency Trust Security
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BankBoston Capital Trust I $ 250 11/26/96 8.25% 12/15/2006 12/15/2026 semi-annually $1,000
Fleet Capital Trust I 84 2/4/97 8.00% 4/15/2001 2/15/2027 quarterly 25
BankBoston Capital Trust II 250 12/10/96 7.75% 12/15/2006 12/15/2026 semi-annually 1,000
Fleet Capital Trust II 250 12/11/96 7.92% 12/15/2006 12/11/2026 semi-annually 1,000
BankBoston Capital Trust III 248 6/4/97 LIBOR + .75% 6/15/2007 6/15/2027 quarterly 1,000
Fleet Capital Trust III 120 1/29/98 7.05% 3/31/2003 3/31/2028 quarterly 25
BankBoston Capital Trust IV 247 6/8/98 LIBOR + .60% 6/08/2003 6/08/2028 quarterly 1,000
Fleet Capital Trust IV 150 4/28/98 7.17% 3/31/2003 3/31/2028 quarterly 25
Fleet Capital Trust V 250 12/18/98 LIBOR + 1.00% 12/18/2003 12/18/2028 quarterly 1,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust securities $1,849
==================================================================================================================================
</TABLE>
All of the trust 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 March
31, 2000, the interest rates on the BankBoston Capital Trust III and IV and
Fleet Capital Trust V floating-rate trust securities were 6.90%, 6.72% and
7.19%, respectively.
NOTE 7. LINE OF BUSINESS INFORMATION
Information about the Corporation's operating segments for the quarters
ended March 31, 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 7-10) of this Form 10-Q.
NOTE 8. EARNINGS PER SHARE
A summary of the Corporation's calculation of earnings per common share follows:
<TABLE>
<CAPTION>
========================================================================================================================
Three months ended March 31 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS BASIC DILUTED BASIC DILUTED
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average shares outstanding 903,905,926 903,905,926 919,051,555 919,051,555
Additional shares due to:
Stock options -- 5,287,037 -- 10,373,416
Warrants -- 10,539,820 -- 12,663,411
- ------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 903,905,926 919,732,783 919,051,555 942,088,382
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Net income $ 957 $ 957 $ 661 $ 661
Less preferred stock dividends and other (10) (10) (16) (16)
- ------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 947 $ 947 $ 645 $ 645
- ------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 903,905,926 919,732,783 919,051,555 942,088,382
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 1.05 $ 1.03 $ .70 $ .68
========================================================================================================================
</TABLE>
26
<PAGE>
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
=====================================================================
Three months ended March 31 2000 1999
IN MILLIONS
- ---------------------------------------------------------------------
Supplemental disclosure for cash paid
During the period for:
Interest $ 1,755 $ 1,430
Income taxes, net of refunds 75 169
- ---------------------------------------------------------------------
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 3,920 --
Net cash received for divestitures 55 --
Liabilities sold 4,231 --
=====================================================================
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Corporation held its Annual Meeting of Stockholders on April 18, 2000.
(b) Not applicable.
(c) A brief description of each matter voted upon at the meeting, and the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to each such matter, follows. A
separate tabulation with respect to each nominee for office is also
included. Four matters were voted on at the Annual Meeting.
1. ELECTION OF DIRECTORS
All eight nominees for election as directors were elected. There were no
abstentions or broker non-votes for any of the nominees.
NAME OF DIRECTOR FOR AUTHORITY WITHHELD TERM EXPIRATION
William Barnet, III 780,133,157 12,242,037 2003
John T. Collins 780,078,210 12,296,984 2003
William F. Connell 776,416,749 15,958,445 2003
Gary L. Countryman 778,852,281 13,522,913 2003
Charles K. Gifford 772,560,436 19,814,758 2003
Marian L. Heard 779,737,451 12,637,743 2003
Thomas J. May 772,919,419 19,455,775 2003
Terrence Murray 773,715,472 18,659,722 2003
The following directors will continue in office and were not up for
re-election.
NAME OF DIRECTOR TERM EXPIRATION
Joel B. Alvord 2001
Daniel P. Burnham 2001
James F. Hardymon 2001
Robert J. Higgins 2001
Henrique C. Meirelles 2001
Thomas C. Quick 2001
Paul R. Tregurtha 2001
Thomas R. Piper 2001
Paul J. Choquette, Jr. 2002
Alice F. Emerson 2002
Robert M. Kavner 2002
Donald F. McHenry 2002
Michael B. Picotte 2002
Francene S. Rodgers 2002
John W. Rowe 2002
Thomas M. Ryan 2002
2. APPROVAL OF AN AMENDMENT TO THE CORPORATION'S RESTATED ARTICLES OF
INCORPORATION TO CHANGE ITS NAME TO "FLEETBOSTON FINANCIAL CORPORATION"
The second proposal voted on by stockholders of the Corporation was to
approve an Amendment to the Corporation's Restated Articles of
Incorporation to change its name to "FleetBoston Financial Corporation."
This proposal was approved with 787,379,034 votes cast for, 2,071,056 votes
cast against and 2,925,104 abstentions. There were no broker non-votes on
this proposal.
28
<PAGE>
3. RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The third proposal voted on by stockholders of the Corporation, to ratify
the selection of PricewaterhouseCoopers LLP to serve as the Corporation's
independent accountants for 2000, was approved with 787,367,639 votes cast
for, 2,154,073 votes cast against and 2,853,482 abstentions. There were no
broker non-votes on this proposal.
4. STOCKHOLDER PROPOSAL REGARDING DATE OF ANNUAL STOCKHOLDERS' MEETING
The fourth proposal voted on by stockholders of the Corporation, to change
the date that the Annual Stockholders' Meeting is held, was rejected with
29,409,177 votes cast for, 647,978,197 votes cast against, 17,861,019
abstentions and 97,126,801 broker non-votes.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
EXHIBIT
NUMBER
3(a) Restated Articles of Incorporation of the Corporation, as amended
through November 5, 1999, incorporated by reference to Exhibit 3
of the Corporation's Form 10-Q for the quarter ended September
30, 1999.
3(b) Amendment, dated April 18, 2000, to the Corporation's Restated
Articles of Incorporation.
10(a) Form of Letter Agreement for certain officers, together with
Schedule of Executive Officers who have entered into such
agreements.
10(b) Amendment to Employment Agreement between the Corporation and
Charles K. Gifford.
10(c) Amendment to Employment Agreement between the Corporation and
Henrique C. Meirelles, with related side letter.
10(d) Amendment to Employment Agreement between the Corporation and
Paul F. Hogan, with related side letter.
10(e) Amendment to Employment Agreement between the Corporation and
Bradford H. Warner, with related side letter.
10(f) Retention and Deferred Compensation Agreement between the
Corporation and John L. Mastromarino.
12 Computation of Consolidated Ratios of Earnings to Fixed Charges
27 March 31, 2000 Financial Data Schedule
27(a) March 31, 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 January 1, 2000 to the date of the filing of this report.
- Current Report on Form 8-K dated December 23, 1999, reporting the
establishment of a $2 billion medium-term note program under the
Corporation's shelf registration statement.
- Current Report on Form 8-K dated January 19, 2000, as amended by a
Form 8-K/A dated March 9, 2000, announcing the Corporation's fourth
quarter and fiscal 1999 earnings.
29
<PAGE>
- Current Report on Form 8-K dated March 5, 2000, announcing that the
Corporation had entered into an agreement to invest $250 million in
North Fork Bancorporation in connection with North Fork
Bancorporation's proposed exchange offer to Dime Bancorp.
- Current Report on Form 8-K dated April 13, 2000, announcing the
Corporation's first quarter earnings.
30
<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
/s/ Erich Schumann
------------------
Erich Schumann
Senior Vice President and
Chief Accounting Officer
DATE: May 12, 2000
31
<PAGE>
EXHIBIT 3(b)
FILING FEE $50.00 ID NUMBER: 6486
-------
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
OFFICE OF THE SECRETARY OF STATE
CORPORATIONS DIVISION
100 NORTH MAIN STREET
PROVIDENCE, RHODE ISLAND 02903-1335
BUSINESS CORPORATION
----------
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
(TO BE FILED IN DUPLICATE ORIGINAL)
PURSUANT TO THE PROVISIONS OF SECTION 7-1.1-56 OF THE GENERAL LAWS, 1956, AS
AMENDED, THE UNDERSIGNED CORPORATION ADOPTS THE FOLLOWING ARTICLES OF AMENDMENT
TO ITS ARTICLES OF INCORPORATION:
1. THE NAME OF THE CORPORATION IS FLEET BOSTON CORPORATION
---------------------------------------------
2. THE SHAREHOLDERS OF THE CORPORATION (OR, WHERE NO SHARES HAVE BEEN ISSUED,
THE BOARD OF DIRECTORS OF THE CORPORATION)
---------------------------------------------------------------------------
ON APRIL 18, 2000, IN THE MANNER PRESCRIBED BY CHAPTER 7-1.1 OF THE GENERAL
LAWS, 1956, AS AMENDED,
---------------------------------------------------------------------------
ADOPTED THE FOLLOWING AMENDMENT(S) TO THE ARTICLES OF INCORPORATION:
[INSERT AMENDMENT(S)]
(IF ADDITIONAL SPACE IS REQUIRED, PLEASE LIST ON SEPARATE ATTACHMENT)
THAT THE NAME OF THE CORPORATION BE CHANGED TO FLEETBOSTON FINANCIAL
CORPORATION.
THAT ARTICLE FIRST OF THE RESTATED ARTICLES OF INCORPORATION OF FLEET
BOSTON CORPORATION IS HEREBY AMENDED IN ITS ENTIRELY TO READ AS
FOLLOWS: "FIRST: THE NAME OF THE CORPORATION IS FLEETBOSTON FINANCIAL
CORPORATION."
3. THE NUMBER OF SHARES OF THE CORPORATION OUTSTANDING AT THE TIME OF SUCH
ADOPTION WAS 904,365,508; AND THE NUMBER OF SHARES ENTITLED TO VOTE THEREON
WAS 902,100,498.
4. THE DESIGNATION AND NUMBER OF OUTSTANDING SHARES OF EACH CLASS ENTITLED TO
VOTE THEREON AS A CLASS WERE AS FOLLOWS: (IF INAPPLICABLE, INSERT "NONE.")
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES
----------------------------------------------------------------------------
<S> <C>
COMMON 902,100,498
</TABLE>
<PAGE>
5. THE NUMBER OF SHARES VOTED FOR SUCH AMENDMENT WAS 787,379,034 ; AND THE
NUMBER OF SHARES VOTED AGAINST SUCH AMENDMENT WAS 2,071,056 .
6. THE NUMBER OF SHARES OF EACH CLASS ENTITLED TO VOTE THEREON AS A CLASS
VOTED FOR AND AGAINST SUCH AMENDMENT, RESPECTIVELY, WAS: (IF INAPPLICABLE,
INSERT "NONE.")
NUMBER OF SHARES VOTED
--------------------------------------------------
<TABLE>
<CAPTION>
CLASS FOR AGAINST
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON 787,379,034 2,071,056
</TABLE>
7. THE MANNER, IF NOT SET FORTH IN SUCH AMENDMENT, IN WHICH ANY EXCHANGE,
RECLASSIFICATION, OR CANCELLATION OF ISSUED SHARES PROVIDED FOR IN THE
AMENDMENT SHALL BE EFFECTED, IS AS FOLLOWS: (IF NO CHANGE, SO STATE)
NO CHANGE
8. THE MANNER IN WHICH SUCH AMENDMENT EFFECTS A CHANGE IN THE AMOUNT OF STATED
CAPITAL, AND THE AMOUNT (EXPRESSED IN DOLLARS) OF STATED CAPITAL AS CHANGED
BY SUCH AMENDMENT, ARE AS FOLLOWS: (IF NO CHANGE, SO STATE)
NO CHANGE
9. AS REQUIRED BY SECTION 7-1.1-57 OF THE GENERAL LAWS, THE CORPORATION HAS
PAID ALL FEES AND FRANCHISE TAXES.
10. DATE WHEN AMENDMENT IS TO BECOME EFFECTIVE UPON THE FILING OF THESE
ARTICLES OF AMENDMENT.
(not prior to, nor more than 30 days after, the filing of these articles of
amendment)
DATE: APRIL 18, 2000 FLEET BOSTON CORPORATION
----------------------------------------
PRINT CORPORATE NAME
BY /s/ WILLIAM C. MUTTERPERL
-------------------------------------
[ ] PRESIDENT OR [X] VICE PRESIDENT
(CHECK ONE) William C. Mutterperl
BY /s/ JANICE B. LIVA
-------------------------------------
[ ] SECRETARY OR [X] SECRETARY
(CHECK ONE) Janice B. Liva
STATE OF MASSACHUSETTS
------------------
COUNTY OF SUFFOLK
------------------
IN BOSTON , ON THIS 18TH DAY OF APRIL, 2000, PERSONALLY APPEARED BEFORE
ME WILLIAM C. MUTTERPERL WHO, BEING BY ME FIRST DULY SWORN, DECLARED THAT HE/SHE
IS THE VICE PRESIDENT OF THE CORPORATION AND THAT HE/SHE SIGNED THE FOREGOING
DOCUMENT AS SUCH OFFICER OF THE CORPORATION, AND THAT THE STATEMENTS HEREIN
CONTAINED ARE TRUE.
/s/ PATRICK D. GANNON
-----------------------------------
NOTARY PUBLIC PATRICK D. GANNON
MY COMMISSION EXPIRES: 10-11-2002
-------------
<PAGE>
EXHIBIT 10(a)
FLEET BOSTON CORPORATION
Schedule of Executive Officers Who Have Entered into
Certain Letter Agreements
Terrence Murray
Eugene M. McQuade
H. Jay Sarles
Anne M. Finucane
Brian T. Moynihan
William C. Mutterperl
M. Anne Szostak
<PAGE>
[Fleet Letterhead]
August 24 1999
[ ]
Dear [ ]:
On behalf of the Human Resources and Planning Committee, I am pleased to tell
you that, in consideration of future service as an Executive Officer of Fleet
Boston, and in recognition of your past years of dedicated service, Fleet Boston
will provide you with an enhanced severance benefit equal to continuation of
your base salary for two years (the "Severance Period") if your employment is
terminated by Fleet without Cause, or by you for Good Reason (a "Covered
Termination").
During the Severance Period, you will continue to be deemed an active employee
for purposes of all qualified and/or non-qualified retirement and savings plans
offered to similarly-situated executives, health and welfare programs,
equity-based incentive plans and your existing change in control agreement
(provided that, in the event of a change in control of Fleet Boston, any
benefits to which you are entitled under that agreement are not duplicative with
benefits provided by this letter).
[In addition, if your employment should cease due to a Covered Termination prior
to your having reached age fifty-five, you will be deemed to be vested in the
deferred compensation plan, allowing your account balance to be distributed
according to your valid distribution election form (as opposed to an immediate
lump sum payment upon termination). Further, while your funds remain in the
account, they will earn the highest crediting rate as in effect for active
employees.]
"Good Reason" is defined as: 1) the assignment of any duties and
responsibilities inconsistent in any material respect with those customarily
associated with your position (including status, office, title and reporting
relationship), or any other action that results in a diminution of duties or
other material adverse change in your position; 2) any failure by Fleet Boston
to provide base salary, annual bonus, incentive, savings and retirement
<PAGE>
plans, and welfare benefit plans as are provided generally to similarly-situated
executives; or 3) any requirement by the Company that your principal work
location be other than Boston, Massachusetts or Providence, Rhode Island.
"Cause" is defined as fraud, intentional wrong-doing, malfeasance that is
harmful to Fleet Boston or a material violation of Fleet Boston's Code of
Ethics.
Please keep a copy of this letter for your records. If you have any questions,
please call me.
Sincerely,
[ ]
<PAGE>
Exhibit 10(b)
AMENDMENT TO
EMPLOYMENT AGREEMENT
--------------------
The Employment Agreement by and between FLEET FINANCIAL GROUP, INC., a
Rhode Island corporation (the "Company"), and CHARLES K. GIFFORD (the
"Executive"), dated as of March 14, 1999 (the "Agreement") is hereby amended,
effective as of February 7 , 2000, as set forth below.
1. Section 5(a)(i)(A) of the Agreement is hereby restated in its
entirety to read as follows:
(A) the "Severance Payments" as defined in Section 6.1 of the Prior
Agreement (including without limitation payment to the Executive on
account of the items described in paragraph (C) of such Section
6.1), representing the amounts and benefits to which the Executive
would have been entitled under the Prior Agreement, as determined by
the Auditor no later than 30 days after the execution of this
Agreement, plus interest from the Effective Date to the date of the
payment of such Severance Payments (the "Interest Term"), at an
annual rate equal to the "prime" rate as in effect from time to time
(subject to the limitation that the average interest rate used
during the Interest Term shall in no event exceed 10%), compounded
daily (the "New Severance Payment"), provided that the Executive may
elect to reduce the Severance Payments by the amount described in
paragraph (B) of Section 6.1 of the Prior Agreement and, in lieu
thereof, receive for a period of three years following the Date of
Termination the continuation of the benefits described in Section
3(f)(ii); and
2. The following new Section 5(e) is hereby added immediately following
Section 5(d) of the Agreement.
(e) Notwithstanding anything contained in this Agreement to the
contrary, the Executive shall not be entitled to receive any of the
payments set forth in this Section 5 until the earlier of (i) such
time as the limitations on deductibility imposed by Section 162(m)
of the Code are no longer applicable to remuneration paid by the
Company to the Executive and (ii) three (3) months following the
Date of Termination.
IN WITNESS WHEREOF, the Executive and the Company have caused this
Amendment to the Agreement to be entered into, as of the day and year set forth
above.
/s/ CHARLES K. GIFFORD
------------------------------------------------
CHARLES K. GIFFORD
FLEET BOSTON CORPORATION
By: /s/ EUGENE M. MCQUADE
--------------------------------------------
Title: Vice Chairman and Chief Financial Officer
-----------------------------------------
<PAGE>
EXHIBIT 10(c)
AMENDMENT TO
EMPLOYMENT AGREEMENT
--------------------
The Employment Agreement by and between FLEET FINANCIAL GROUP,
INC., a Rhode Island corporation (the "Company"), and HENRIQUE DE CAMPOS
MEIRELLES (the "Executive"), dated as of March 14, 1999 (the "Agreement") is
hereby amended, effective as of March 14, 2000, as set forth below.
1. Section 5(a)(i)(A) of the Agreement is hereby restated in its
entirety to read as follows:
(A) the "Severance Payments" as defined in Section 6.1 of the
Prior Agreement (including without limitation payment to the
Executive on account of the items described in paragraph (C)
of such Section 6.1), representing the amounts and benefits to
which the Executive would have been entitled under the Prior
Agreement, as determined by the Auditor (as defined in Section
5(d)) no later than 30 days after the execution of this
Agreement, plus interest from the Effective Date to the date
of the payment of such Severance Payments (the "Interest
Term"), at an annual rate equal to the "prime" rate as in
effect from time to time (subject to the limitation that the
average interest rate used during the Interest Term shall in
no event exceed 10%), compounded daily (the "New Severance
Payment"), provided that, notwithstanding the foregoing, if
the Executive's employment is terminated other than by the
Company without Cause or by the Executive for Good Reason
prior to the second anniversary of the Effective Date, the
Executive shall not be entitled to receive the New Severance
Payment and shall instead be entitled to receive the Severance
Payments as defined in Section 6.1 of the Prior Agreement
without interest thereon and, provided, further that the
Executive may elect to reduce the Severance Payments by the
amount described in paragraph (B) of Section 6.1 of the Prior
Agreement and, in lieu thereof, receive for a period of three
years following the Date of Termination the continuation of
the benefits described in Section 3(f)(ii); and
2. Section 5(b) of the Agreement is hereby amended by adding the
following sentence at the end thereof.
Notwithstanding anything contained in this Agreement to the
contrary, if the Executive voluntarily terminates employment,
other than for Good Reason, prior to the second anniversary of
the Effective Date, the Executive shall not be entitled to
receive the New Severance Payment and shall instead be
entitled to receive the Severance Payments as defined in
Section 6.1 of the Prior Agreement without interest thereon.
IN WITNESS WHEREOF, the Executive and the Company have caused
this Amendment to the Agreement to be entered into, as of the day and year set
forth above.
/s/ HENRIQUE DE CAMPOS MEIRELLES
--------------------------------
HENRIQUE DE CAMPOS MEIRELLES
FLEET BOSTON CORPORATION
By: /s/ EUGENE M. MCQUADE
---------------------------
Title: VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER
-----------------------------------------
<PAGE>
[FleetBoston Financial Letterhead]
March 6, 2000
Henrique de Campos Meirelles
President of Global Banking and Financial Services
Fleet Boston Corporation
One Federal Street
Boston, Massachusetts 02110
Dear Henrique:
This letter is to confirm our understanding that, in the event
of a termination of your employment with Fleet Boston Corporation prior to the
second anniversary of the Effective Date (as defined in Section 1 of the
Employment Agreement between you and Fleet Boston Corporation (formerly Fleet
Financial Group, Inc.), dated March 14, 1999, as amended (the "Employment
Agreement")) due to your death or Disability (as defined in Section 4(a) of the
Employment Agreement) that entitles you to receive the payments set forth in
Section 5(a)(i) of the Employment Agreement, you, or in the event of your death
your legal representative, will be entitled to receive the New Severance Payment
(as defined in Section 5(a)(i)(A) of the Employment Agreement), notwithstanding
anything to the contrary contained in Section 5(a)(i)(A) of the Employment
Agreement.
As acknowledgement of this understanding, please return a
signed copy of this letter to Jannene Wagner.
Sincerely,
/s/ EUGENE M. MCQUADE
Eugene M. McQuade
Acknowledged and Agreed:
/s/ HENRIQUE DE CAMPOS MEIRELLES Dated: March 14, 2000
- --------------------------------
<PAGE>
Exhibit 10(d)
AMENDMENT TO
EMPLOYMENT AGREEMENT
--------------------
The Employment Agreement by and between FLEET FINANCIAL GROUP, INC., a
Rhode Island corporation (the "Company"), and PAUL F. HOGAN (the "Executive"),
dated as of March 14, 1999 (the "Agreement") is hereby amended, effective as of
March 17 , 2000, as set forth below.
1. Section 5(a)(i)(A) of the Agreement is hereby restated in its
entirety to read as follows:
(A) the "Severance Payments" as defined in Section 6.1 of the Prior
Agreement (including without limitation payment to the Executive on
account of the items described in paragraph (C) of such Section
6.1), representing the amounts and benefits to which the Executive
would have been entitled under the Prior Agreement, as determined by
the Auditor (as defined in Section 5(d)) no later than 30 days after
the execution of this Agreement, plus interest from the Effective
Date to the date of the payment of such Severance Payments (the
"Interest Term"), at an annual rate equal to the "prime" rate as in
effect from time to time (subject to the limitation that the average
interest rate used during the Interest Term shall in no event exceed
10%), compounded daily (the "New Severance Payment"), provided that,
notwithstanding the foregoing, if the Executive's employment is
terminated other than by the Company without Cause or by the
Executive for Good Reason prior to the second anniversary of the
Effective Date, the Executive shall not be entitled to receive the
New Severance Payment and shall instead be entitled to receive the
Severance Payments as defined in Section 6.1 of the Prior Agreement
without interest thereon and, provided, further that the Executive
may elect to reduce the Severance Payments by the amount described
in paragraph (B) of Section 6.1 of the Prior Agreement and, in lieu
thereof, receive for a period of three years following the Date of
Termination the continuation of the benefits described in Section
3(d)(ii); and
2. Section 5(b) of the Agreement is hereby amended by adding the
following sentence at the end thereof.
Notwithstanding anything contained in this Agreement to the
contrary, if the Executive voluntarily terminates employment, other
than for Good Reason, prior to the second anniversary of the
Effective Date, the Executive shall not be entitled to receive the
New Severance Payment and shall instead be entitled to receive the
Severance Payments as defined in Section 6.1 of the Prior Agreement
without interest thereon.
IN WITNESS WHEREOF, the Executive and the Company have caused this
Amendment to the Agreement to be entered into, as of the day and year set forth
above.
/s/ PAUL F. HOGAN
-------------------------------------------------
PAUL F. HOGAN
FLEET BOSTON CORPORATION
By: /s/ EUGENE M. MCQUADE
--------------------------------------------
Title: Vice Chairman and Chief Financial Officer
------------------------------------------
<PAGE>
[FleetBoston Financial Letterhead]
March 6, 2000
Paul F. Hogan
Vice Chairman, Corporate/Investment Banking
Fleet Boston Corporation
One Federal Street
Boston, Massachusetts 02110
Dear Paul:
This letter is to confirm our understanding that, in the event of a
termination of your employment with Fleet Boston Corporation prior to the second
anniversary of the Effective Date (as defined in Section 1 of the Employment
Agreement between you and Fleet Boston Corporation (formerly Fleet Financial
Group, Inc.), dated March 14, 1999, as amended (the "Employment Agreement")) due
to your death or Disability (as defined in Section 4(a) of the Employment
Agreement) that entitles you to receive the payments set forth in Section
5(a)(i) of the Employment Agreement, you, or in the event of your death your
legal representative, will be entitled to receive the New Severance Payment (as
defined in Section 5(a)(i)(A) of the Employment Agreement), notwithstanding
anything to the contrary contained in Section 5(a)(i)(A) of the Employment
Agreement.
As acknowledgement of this understanding, please return a signed copy of
this letter to Jannene Wagner.
Sincerely,
/s/ EUGENE M. MCQUADE
Eugene M. McQuade
Acknowledged and Agreed:
/s/ PAUL F. HOGAN Dated: March 17 , 2000
- ------------------------------ ----
<PAGE>
Exhibit 10(e)
AMENDMENT TO
EMPLOYMENT AGREEMENT
--------------------
The Employment Agreement by and between FLEET FINANCIAL GROUP, INC., a
Rhode Island corporation (the "Company"), and BRADFORD H. WARNER (the
"Executive"), dated as of March 14, 1999 (the "Agreement") is hereby amended,
effective as of March 30 , 2000, as set forth below.
1. Section 5(a)(i)(A) of the Agreement is hereby restated in its
entirety to read as follows:
(A) the "Severance Payments" as defined in Section 6.1 of the Prior
Agreement (including without limitation payment to the Executive on
account of the items described in paragraph (C) of such Section
6.1), representing the amounts and benefits to which the Executive
would have been entitled under the Prior Agreement, as determined by
the Auditor (as defined in Section 5(d)) no later than 30 days after
the execution of this Agreement, plus interest from the Effective
Date to the date of the payment of such Severance Payments (the
"Interest Term"), at an annual rate equal to the "prime" rate as in
effect from time to time (subject to the limitation that the average
interest rate used during the Interest Term shall in no event exceed
10%), compounded daily (the "New Severance Payment"), provided that,
notwithstanding the foregoing, if the Executive's employment is
terminated other than by the Company without Cause or by the
Executive for Good Reason prior to the second anniversary of the
Effective Date, the Executive shall not be entitled to receive the
New Severance Payment and shall instead be entitled to receive the
Severance Payments as defined in Section 6.1 of the Prior Agreement
without interest thereon and, provided, further that the Executive
may elect to reduce the Severance Payments by the amount described
in paragraph (B) of Section 6.1 of the Prior Agreement and, in lieu
thereof, receive for a period of three years following the Date of
Termination the continuation of the benefits described in Section
3(d)(ii); and
2. Section 5(b) of the Agreement is hereby amended by adding the
following sentence at the end thereof.
Notwithstanding anything contained in this Agreement to the
contrary, if the Executive voluntarily terminates employment, other
than for Good Reason, prior to the second anniversary of the
Effective Date, the Executive shall not be entitled to receive the
New Severance Payment and shall instead be entitled to receive the
Severance Payments as defined in Section 6.1 of the Prior Agreement
without interest thereon.
IN WITNESS WHEREOF, the Executive and the Company have caused this
Amendment to the Agreement to be entered into, as of the day and year set forth
above.
/s/ BRADFORD H. WARNER
-------------------------------------------------
BRADFORD H. WARNER
FLEET BOSTON CORPORATION
By: /s/ EUGENE M. MCQUADE
---------------------------------------------
Title: Vice Chairman and Chief Financial Officer
------------------------------------------
<PAGE>
[FleetBoston Financial Letterhead]
March 6, 2000
Bradford H. Warner
Vice Chairman, Investment Services
Fleet Boston Corporation
One Federal Street
Boston, Massachusetts 02110
Dear Brad:
This letter is to confirm our understanding that, in the event of a
termination of your employment with Fleet Boston Corporation prior to the second
anniversary of the Effective Date (as defined in Section 1 of the Employment
Agreement between you and Fleet Boston Corporation (formerly Fleet Financial
Group, Inc.), dated March 14, 1999, as amended (the "Employment Agreement")) due
to your death or Disability (as defined in Section 4(a) of the Employment
Agreement) that entitles you to receive the payments set forth in Section
5(a)(i) of the Employment Agreement, you, or in the event of your death your
legal representative, will be entitled to receive the New Severance Payment (as
defined in Section 5(a)(i)(A) of the Employment Agreement), notwithstanding
anything to the contrary contained in Section 5(a)(i)(A) of the Employment
Agreement.
As acknowledgement of this understanding, please return a signed copy of
this letter to Jannene Wagner.
Sincerely,
/s/ EUGENE M. MCQUADE
Eugene M. McQuade
Acknowledged and Agreed:
/s/ BRADFORD H. WARNER Dated: March 30, 2000
- ----------------------------- ----
<PAGE>
Exhibit 10(f)
EXECUTION COPY
RETENTION AND DEFERRED COMPENSATION AGREEMENT
THIS RETENTION AND DEFERRED COMPENSATION AGREEMENT ("Agreement"), dated
February 28, 2000 and effective as of October 1, 1999 (the "Effective Date"), by
and between Fleet Boston Corporation, a corporation organized under the laws of
Rhode Island (the "Company") and John L. Mastromarino (the "Executive").
WITNESSETH:
WHEREAS, the Company has determined that appropriate steps should be taken
to encourage the Executive to remain employed by the Company by providing for
certain benefits;
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree to the following:
1. DEFINITIONS. The following terms shall have the meanings ascribed to
them below.
(a) "Cause," for termination of the Executive's employment by the
Company, shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a notice
of termination for Good Reason by the Executive) after a written demand for
substantial performance is delivered to the Executive by the Board, which demand
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties, or (ii) the
willful engaging by the Executive in gross misconduct which is demonstrably and
materially injurious to the Company or any of its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or
failure to act, on the Executive's part shall be deemed "willful" unless done,
or omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's act, or failure to act, was in
<PAGE>
the best interest of the Company. A termination of the Executive's employment
for Cause shall not be effective for purposes of this Agreement unless there is
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters (3/4) of the entire membership
of the Company's Board of Directors ("Board") at a meeting of the Board that was
called and held for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty of
conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
(b) "Change in Control" shall mean
(i) The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 25% or more of the then outstanding
shares of common stock of the Company (the "Outstanding Company Common
Stock"); provided, however, that any acquisition by the Company or its
subsidiaries, or any employee benefit plan (or related trust) of the
Company or its subsidiaries, of 25% or more of the Outstanding Company
Common Stock shall not constitute a Change of Control; and provided,
further, that any acquisition by a corporation with respect to which,
following such acquisition, more than 50% of the then outstanding shares
of common stock of such corporation is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners of the Outstanding Company Common Stock
immediately prior to such acquisition in substantially the same proportion
as their ownership immediately prior to such acquisition of the
Outstanding Company Common Stock, shall not constitute a Change of
Control; or
(ii) Individuals who, as of the date of this Agreement,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any individual
becoming a director subsequent to the date of this Agreement whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption
2
<PAGE>
of office is in connection with an actual or threatened election contest
relating to the election of the Directors of the Company (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act); or
(iii) Consummation of a reorganization, merger, consolidation,
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, with respect to which
all or substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Common Stock immediately
prior to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 50% of
the then outstanding shares of common stock of the corporation resulting
from such a Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly or through
one or more subsidiaries).
(iv) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
Anything in this Agreement to the contrary notwithstanding, if an event
that would, but for this paragraph, constitute a Change of Control results from
or arises out of a purchase or other acquisition of the Company, directly or
indirectly, by a corporation or other entity in which the Executive has a
greater than ten percent (10%) direct or indirect equity interest, such event
shall not constitute a Change of Control.
(c) "Date of Termination," with respect to termination of employment
by reason of death, shall mean the date of death, and with respect to any other
termination of employment, shall mean the date specified in the Notice of
Termination (which, in the case of a termination by the Company, shall not be
less than thirty (30) days (except in the case of a termination for Cause) and,
in the case of a termination by the Executive, shall not be less than fifteen
(15) days nor more than sixty (60) days, respectively, from the date such Notice
of Termination is given). "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied upon, shall
(if applicable) set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated, and shall specify the date on which the termination
of employment shall be effective.
3
<PAGE>
(d) "Good Reason" shall mean (i) a meaningful alteration, adverse to
the Executive, in the nature or status of the Executive's position (including
duties and reporting responsibilities) from the position offered to the
Executive by Fleet Financial Group, Inc. (a predecessor of the Company) in an
offer letter (the "Offer Letter") dated May 7, 1999, and thereafter accepted by
the Executive; (ii) a reduction in the Executive's annual base salary set forth
in the Offer Letter; or (iii) requiring the Executive to be based anywhere other
than the Boston Metropolitan Area except for required travel to an extent
substantially consistent with the Executive's present business travel
obligations. Notwithstanding the foregoing, a termination by the Executive for
Good Reason shall not be effective unless (x) the Executive has delivered to the
Company a notice of termination for Good Reason; and (y) the Company has not
cured such event or circumstance within 10 business days of its receipt of such
notice of termination.
2. RETENTION PAYMENT.
(a) The Executive shall be entitled to receive on the Distribution
Date (as defined in Section 3) an amount equal to $2,320,000 (the "Retention
Payment") if any of the following events shall occur:
(i) the Executive's employment with the Company continues
through the second anniversary of the Effective Date of this Agreement
(the "Retention Date"), or
(ii) the Executive's employment with the Company is terminated
prior to the Retention Date by the Company without Cause, or
(iii) the Executive's employment with the Company is
terminated prior to the Retention Date by the Executive for Good Reason,
or
(iv) the Executive's employment with the Company is terminated
prior to the Retention Date by reason of death or disability; or
(v) a Change in Control occurs prior to the Retention Date.
If the Executive's employment is terminated prior to the Retention Date (i) by
the Company for Cause or (ii) by the Executive other than for Good Reason, the
Executive shall not be entitled to any portion of the Retention Payment.
4
<PAGE>
(b) The Retention Payment shall accrue interest at an annual rate
equal to the "prime rate," as in effect from time to time, compounded daily,
during the period (the "Interest Term") commencing on the Effective Date of this
Agreement and ending on the Distribution Date, as defined in Section 3 (subject
to the limitation that the average interest rate used in each full or partial
calendar year during the Interest Term shall in no event exceed 10%). If the
Executive's employment is terminated prior to the Retention Date (i) by the
Company for Cause or (ii) by the Executive other than for Good Reason, the
Executive shall not be entitled to any portion of such accrued interest.
3. DISTRIBUTION OF RETENTION PAYMENT.
(a) No portion of the Retention Payment may be distributed to the
Executive during the period that the Executive is employed by the Company. If
the Executive becomes entitled to the Retention Payment pursuant to Section
2(a), the Executive may elect to have the Retention Payment distributed in any
of the following forms: (i) in a cash lump sum no later than the fifth business
day following the Date of Termination; or (ii) in periodic instalments for a
period of 5, 10 or 15 years following the Date of Termination; PROVIDED,
HOWEVER, if the Executive is less than 55 years old when the Executive becomes
entitled to distribution of the Retention Payments, only the lump sum payment
option described in (i) above shall be available to the Executive. The term
"Distribution Date," with respect to a lump-sum payment or one in a series of
periodic payments, shall mean the date on which such payment is made.
(b) The Executive may designate a beneficiary who will be entitled
to any portion of the Retention Payment to which the Executive is entitled in
the event of his death. The beneficiary may be designated or changed by the
Executive (without the consent of any prior beneficiary) on a form provided by
the Company and delivered to the Company before his death. If no such
beneficiary shall have been designated, or if no designated beneficiary shall
survive the Executive, the Retention Payment, if not previously paid, shall be
paid to the Executive's estate.
(c) On the Effective Date of this Agreement, the Executive shall
make an initial written election as to the form and time of the distribution of
the Retention Payment, in the space provided on the signature page of this
Agreement. At any time after the initial election, the Executive may change his
election by delivering to the Company written notice of such change; PROVIDED,
HOWEVER, that no
5
<PAGE>
such subsequent election shall be effective unless such notice is delivered to
the Company at least 12 months prior to the Executive's (i) reasonably
anticipated retirement from the Company or (ii) termination of employment.
4. ADDITIONAL PAYMENT. It is the intention of the parties hereto that no
part of the Retention Payment will be treated as an "excess parachute payment"
for purposes of the excise tax (the "Excise Tax") imposed under section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"). If, however, an
Excise Tax is imposed upon the Retention Payment or any other payment or deemed
payment made to the Executive, then the Company shall make an additional payment
to the Executive in accordance with the terms and conditions set forth on
Appendix I hereto.
5. LEGAL FEES. The Company also shall pay to the Executive all legal fees
and expenses that may be incurred in good faith by the Executive in seeking to
obtain or enforce any benefit or right provided by this Agreement. Such payments
shall be made within five (5) business days after delivery of the Executive's
written requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
6. NO EFFECT ON OTHER CONTRACTUAL RIGHTS. The provisions of this
Agreement, and any payment provided for hereunder, shall not reduce any amounts
otherwise payable, or in any way diminish the Executive's existing rights (or
rights which would accrue solely as a result of the passage of time) under any
employee benefit plan or employment agreement or other contract, plan or
arrangement nor shall any amounts payable hereunder be considered in determining
the amount of benefits payable to the Executive under any such plan, agreement
or contract.
7. NONALIENATION OF BENEFITS. The right of the Executive or any other
person to the payment of deferred compensation or other benefits under this
Agreement shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment or garnishment by
creditors of the Executive or the Executive's beneficiary or estate.
8. SUCCESSORS; BINDING AGREEMENT.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance reasonably satisfactory to the Executive, expressly to assume
and agree to
6
<PAGE>
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid that
becomes bound by the terms and provisions of this Agreement, by operation of law
or otherwise.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, legatees and beneficiaries. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
9. NOTICE. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed, if to the Executive, to the address
printed on the signature page of this Agreement, and if to the Company, to its
headquarters, attention: General Counsel, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notices of change of address shall be effective only upon receipt.
10. MISCELLANEOUS. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party that are not set forth expressly in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Massachusetts
without regard to its conflicts of law principles.
7
<PAGE>
11. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
13. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein, and shall
be deemed to supersede the agreement entered into between the Executive and
BankBoston Corporation, dated June 25, 1998, as amended (the "Severance
Agreement"), and any promises, covenants, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto with respect to the subject matter contained herein.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FLEET BOSTON CORPORATION
/s/ M. ANNE SZOSTAK
---------------------------------------
By: M. Anne Szostak
Title: Executive Vice President
/s/ JOHN L. MASTROMARINO
---------------------------------------
Name: John L. Mastromarino
Address: [ ]
I hereby elect to receive the Retention Payment as follows:
[x] In one lump-sum payment, within five days following the Date of
Termination.
[ ] In a series of quarterly payments, commencing on the Date of
Termination and ending on the ______anniversary thereof (select 5th,
10th or 15th anniversary).
/s/ JOHN L. MASTROMARINO
---------------------------
John L. Mastromarino
9
<PAGE>
Appendix I
Procedures for Determination of Additional Payment
--------------------------------------------------
(a) Subject to the limitations set forth in paragraph (e) of this
Appendix, if the Executive becomes subject to the excise tax (the "Excise Tax")
imposed under section 4999 of the Internal Revenue Code of 1986, as amended(the
"Code"), upon "excess parachute payments" (as defined in section 280G of the
Code), the Company shall promptly pay the Executive the amount or amounts (a
"Gross-Up Payment") that are necessary to place the Executive in the same
after-tax (taking into account federal, state, local income, excise,
unemployment and other taxes) financial position that he would have been in if
he had not incurred any tax liability under section 4999 of the Code, but only
to the extent that the Excise Tax results in a payment to the Internal Revenue
Service.
(b) If the Company has determined that no Gross-Up Payment is necessary,
then in no case will the Executive file a tax return which takes a position that
any Excise Tax is payable, unless he receives a written opinion from his tax
advisor that it is more likely than not that such Excise Tax is due and payable.
Upon receipt of such written opinion, the Executive shall communicate such
written opinion to the Company not less than 30 days prior to filing the tax
return to which the opinion refers. Prior to the due date for the filing of such
tax return, the Company shall pay to the Executive the Gross-Up Payment
described above.
(c) Each party will notify the other in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after such party is informed in
writing of such a claim and such party shall apprise the other party of the
nature of such claim and the date on which such claim is requested to be paid.
(d) The Company shall bear and pay directly all costs and expenses
(including legal fees and additional interest and penalties) incurred in
connection with any such claim or proceeding, to the extent related to the
Excise Tax, and shall indemnify and hold the Executive harmless, on an after-tax
basis, as provided in paragraph (a) of this Appendix, for any Excise Tax or
income tax (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses.
(e) In the event that all "parachute payments," as defined in section 280G
of the Code, payable to the Executive (after deduction of the net amount of
federal, state and local income and employment taxes and the amount of Excise
Tax to which the Executive would be subject in respect of such "parachute
payments") does not equal or exceed 110% of the largest amount of "parachute
payments" that would result in no portion thereof being subject to the Excise
Tax (after deduction of the net amount of federal, state and local income and
employment taxes on such reduced payments), then paragraph (a) of this Appendix
shall not apply
10
<PAGE>
and the Retention Payment shall be reduced as necessary to ensure that no
portion of the "parachute payments" is subject to the Excise Tax.
(f) If it is finally determined that the Excise Tax is less than the
amount taken into account in calculating the Gross-Up Payment under paragraph
(a) hereof, and/or the Retention Payment is to be reduced or further reduced
pursuant to paragraph (e) hereof, then the Executive shall promptly repay to the
Company (x) the portion of the Gross-Up Payment attributable to the excess
Excise Tax and/or (y) the excess Retention Payment, as applicable, plus interest
on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code, but such repayment plus interest thereon shall be
required only to the extent that such repayment results (1) (in the case of any
repayment in the Gross-Up Payment) in a reduction in the Excise Tax and (2) (in
the case of any repayment in the Gross-Up Payment or the Retention Payment) a
dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes. If it is
finally determined that the Excise Tax exceeds the amount taken into account in
calculating the Gross-Up Payment under paragraph (a) hereof and/or the Retention
Payment should not have been reduced to the extent that it was, the Company
shall promptly make an additional Gross-Up Payment to the Executive and/or pay
the Executive any portion of the Retention Payment incorrectly reduced, as
appropriate (plus any interest, penalties or additions payable by the Executive
with respect to such excess and such portion), plus interest on the amount of
such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the
Code.
11
<PAGE>
EXHIBIT 12
FLEETBOSTON FINANCIAL CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED DIVIDENDS
EXCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
- -------------------------------------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $1,618 $1,073 $3,426 $3,776 $3,762 $3,185 $2,354
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 855 584 2,794 2,240 1,788 1,686 2,492
(2) 1/3 of rent 21 26 103 96 92 95 90
(b) Preferred dividends 16 20 85 97 157 183 129
------ ------ ------ ------ ------ ------ ------
(c) Adjusted earnings $2,510 $1,703 $6,408 $6,209 $5,799 $5,149 $5,065
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $ 892 $ 630 $2,982 $2,433 $2,037 $1,964 $2,711
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 2.81x 2.70x 2.15x 2.55x 2.85x 2.62 x 1.87x
====== ====== ====== ====== ====== ====== ======
INCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
<CAPTION>
Three months ended
March 31, Year ended December 31,
- -------------------------------------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $1,618 $1,073 $3,426 $3,776 $3,762 $3,185 $2,354
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 855 584 2,794 2,240 1,788 1,686 2,492
(2) 1/3 of rent 21 26 103 96 92 95 90
(3) Interest on deposits 898 897 3,516 3,706 3,339 3,433 3,517
(b) Preferred dividends 16 20 85 97 157 183 129
------ ------ ------ ------ ------ ------ ------
(c) Adjusted earnings $3,408 $2,600 $9,924 $9,915 $9,138 $8,582 $8,582
====== ====== ====== ====== ====== ====== ======
Fixed charges and preferred dividends $1,790 $1,527 $6,498 $6,139 $5,376 $5,397 $6,228
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.90x 1.70x 1.53x 1.62x 1.70x 1.59x 1.38x
====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
EXHIBIT 12 (CONTINUED)
FLEETBOSTON FINANCIAL CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
- ------------------------------------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $1,618 $1,073 $3,426 $3,776 $3,762 $3,185 $2,354
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 855 584 2,794 2,240 1,788 1,686 2,492
(2) 1/3 of rent 21 26 103 96 92 95 90
------ ------ ------ ------ ------ ------ ------
(b) Adjusted earnings $2,494 $1,683 $6,323 $6,112 $5,642 $4,966 $4,936
====== ====== ====== ====== ====== ====== ======
Fixed charges $ 876 $ 610 $2,897 $2,336 $1,880 $1,781 $2,582
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 2.85x 2.76x 2.18x 2.62x 3.00x 2.79x 1.91x
====== ====== ====== ====== ====== ====== ======
INCLUDING INTEREST ON DEPOSITS
(DOLLARS IN MILLIONS)
<CAPTION>
Three months ended
March 31, Year ended December 31,
- ------------------------------------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $1,618 $1,073 $3,426 $3,776 $3,762 $3,185 $2,354
Adjustments:
(a) Fixed charges:
(1) Interest on borrowed funds 855 584 2,794 2,240 1,788 1,686 2,492
(2) 1/3 of rent 21 26 103 96 92 95 90
(3) Interest on deposits 898 897 3,516 3,706 3,339 3,433 3,517
------ ------ ------ ------ ------ ------ ------
(b) Adjusted earnings $3,392 $2,580 $9,839 $9,818 $8,981 $8,399 $8,453
====== ====== ====== ====== ====== ====== ======
Fixed charges $1,774 $1,507 $6,413 $6,042 $5,219 $5,214 $6,099
====== ====== ====== ====== ====== ====== ======
Adjusted earnings/fixed charges 1.91x 1.71x 1.53x 1.62x 1.72x 1.61x 1.39x
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 2000 CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED IN THE
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,072
<INT-BEARING-DEPOSITS> 1,829
<FED-FUNDS-SOLD> 3,177
<TRADING-ASSETS> 8,020
<INVESTMENTS-HELD-FOR-SALE> 21,999
<INVESTMENTS-CARRYING> 1,084
<INVESTMENTS-MARKET> 1,084
<LOANS> 117,353
<ALLOWANCE> 2,477
<TOTAL-ASSETS> 187,814
<DEPOSITS> 109,201
<SHORT-TERM> 18,788
<LIABILITIES-OTHER> 18,525
<LONG-TERM> 26,347
0
566
<COMMON> 9
<OTHER-SE> 14,378
<TOTAL-LIABILITIES-AND-EQUITY> 187,814
<INTEREST-LOAN> 2,794
<INTEREST-INVEST> 435
<INTEREST-OTHER> 232
<INTEREST-TOTAL> 3,461
<INTEREST-DEPOSIT> 898
<INTEREST-EXPENSE> 1,753
<INTEREST-INCOME-NET> 1,708
<LOAN-LOSSES> 300
<SECURITIES-GAINS> (58)
<EXPENSE-OTHER> 2,512
<INCOME-PRETAX> 1,618
<INCOME-PRE-EXTRAORDINARY> 1,618
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 957
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.18
<LOANS-NON> 841
<LOANS-PAST> 293
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,488
<CHARGE-OFFS> 324
<RECOVERIES> 49
<ALLOWANCE-CLOSE> 2,477
<ALLOWANCE-DOMESTIC> 1,948
<ALLOWANCE-FOREIGN> 364
<ALLOWANCE-UNALLOCATED> 165
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED IN THIS
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,245
<INT-BEARING-DEPOSITS> 1,720
<FED-FUNDS-SOLD> 3,660
<TRADING-ASSETS> 4,856
<INVESTMENTS-HELD-FOR-SALE> 23,400
<INVESTMENTS-CARRYING> 1,494
<INVESTMENTS-MARKET> 1,502
<LOANS> 116,425
<ALLOWANCE> 2,481
<TOTAL-ASSETS> 181,873
<DEPOSITS> 116,101
<SHORT-TERM> 17,648
<LIABILITIES-OTHER> 12,371
<LONG-TERM> 21,200
0
691
<COMMON> 9
<OTHER-SE> 13,853
<TOTAL-LIABILITIES-AND-EQUITY> 181,873
<INTEREST-LOAN> 2,593
<INTEREST-INVEST> 402
<INTEREST-OTHER> 154
<INTEREST-TOTAL> 3,149
<INTEREST-DEPOSIT> 897
<INTEREST-EXPENSE> 1,481
<INTEREST-INCOME-NET> 1,668
<LOAN-LOSSES> 219
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 1,935
<INCOME-PRETAX> 1,072
<INCOME-PRE-EXTRAORDINARY> 1,072
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 661
<EPS-BASIC> .70
<EPS-DILUTED> .68
<YIELD-ACTUAL> 4.35
<LOANS-NON> 625
<LOANS-PAST> 291
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,306
<CHARGE-OFFS> 270
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 2,481
<ALLOWANCE-DOMESTIC> 2,035
<ALLOWANCE-FOREIGN> 273
<ALLOWANCE-UNALLOCATED> 173
</TABLE>
