Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-6366
-----------------------------
FLEET BOSTON CORPORATION
(Exact name of Registrant as specified in its charter)
RHODE ISLAND 05-0341324
(State of incorporation) (I.R.S. Employer Identification No.)
ONE FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
(Address of principal executive office) (Zip Code)
617 / 346-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Depositary Shares each representing a one-tenth interest in a share of
Series V 7.25% Perpetual Preferred Stock, $1 Par Value New York Stock Exchange
Depositary Shares each representing a one-fifth interest in a share of
Series VI 6.75% Perpetual Preferred Stock, $1 Par Value New York Stock Exchange
8.00% Trust Originated Preferred Securities issued by Fleet Capital
Trust I, Guaranteed by Fleet Boston Corporation New York Stock Exchange
7.05% Trust Originated Preferred Securities issued by Fleet Capital
Trust III, Guaranteed by Fleet Boston Corporation New York Stock Exchange
7.17% Trust Originated Preferred Securities issued by Fleet Capital
Trust IV, Guaranteed by Fleet Boston Corporation New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Warrants to purchase Common Stock New York Stock Exchange
----------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES XX NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
================================================================================
As of February 29, 2000, the aggregate market value of the voting stock
held by nonaffiliates of the Registrant was $24.3 billion.
The number of shares of common stock of the Registrant outstanding as of
February 29, 2000 was 902,784,913.
================================================================================
DOCUMENTS INCORPORATED BY REFERENCE
Pertinent extracts from Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission are incorporated into Part III.
Such information incorporated by reference shall not be deemed to
specifically incorporate by reference the information referred to in Item
402(a)(8) of Regulation S-K.
TABLE OF CONTENTS AND CROSS-REFERENCE INDEX
DESCRIPTION PAGE NUMBER
----------- -----------
Part 1. Item 1. Business................................................ 2-7
- Line of Business Information......................... 17-21, 55-56
- Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 11-37
- Acquisitions and Divestitures........................ 46-48
- Capital.............................................. 36, 63-64
- Dividends............................................ 35-36, 63-64
- Statistical Disclosure by Bank Holding Companies..... 6-7, 10, 22-27, 36,
44-45, 49-50, 52,
66-68
Item 2. Properties.............................................. 7
Item 3. Legal Proceedings....................................... 7, 63
Item 3A. Executive Officers of the Corporation................... 8-9
Item 4. Submission of Matters to a Vote of Security Holders..... 9
Part II. Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters..................................... 9, 66
Item 6. Selected Financial Data................................. 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 11-37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27-34, 38
Item 8. Financial Statements and Supplementary Data............. 38-65, 67
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 69
Part III. Item 10. Directors and Executive Officers of the Registrant...... 8-9, 69*
Item 11. Executive Compensation.................................. 69*
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 69*
Item 13. Certain Relationships and Related Transactions.......... 70*
Part IV. Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................ 40-43, 70-75
Signatures............................................................. 76
*The information required by this Item is incorporated by
reference to the Corporation's Proxy Statement for its 2000
Annual Meeting of Stockholders.
1
PART I.
ITEM 1. BUSINESS
GENERAL
On October 1, 1999, BankBoston Corporation ("BankBoston") merged with Fleet
Financial Group, Inc. ("Fleet") (the "Merger"). Following the Merger, Fleet was
renamed Fleet Boston Corporation (the "Corporation"), and is currently doing
business under the name "FleetBoston Financial". The Merger was accounted for as
a pooling of interests and, as such, financial information included in this
Report presents the combined financial condition and results of operations of
both companies as if they had operated as a combined entity for all periods
presented. In connection with obtaining regulatory approvals for the Merger, the
Corporation agreed to divest $13 billion of deposits and $9 billion of loans.
These divestitures will occur in 2000, and are expected to result in an
annualized reduction of net income of approximately $160 million, part of which
will impact 2000.
On February 1, 2000, the Office of the Comptroller of the Currency (the
"OCC") approved the Corporation's application to merge Fleet National Bank,
BankBoston, N.A. ("BKB"), Fleet Bank, National Association ("FBNA") and certain
other banking and trust subsidiaries of the Corporation. On March 1, 2000, Fleet
National Bank was merged into BKB, with the name of the surviving bank changed
to "Fleet National Bank" ("FNB"). The Corporation intends to consummate the
remaining bank mergers in stages throughout 2000.
The Corporation is a diversified financial services company organized under
the laws of the State of Rhode Island. The Corporation is a legal entity
separate and distinct from its subsidiaries, assisting such subsidiaries by
providing financial resources and management. At December 31, 1999, the
Corporation was the eighth largest bank holding company in the United States in
terms of total assets, with total assets of $190.7 billion, total deposits of
$114.9 billion and total stockholders' equity of $15.3 billion. As of that date,
the Corporation had approximately 59,200 employees.
The Corporation is engaged in a general commercial banking and investment
management business throughout the states of Rhode Island, New York,
Connecticut, Massachusetts, New Jersey, Maine, and New Hampshire and
internationally, principally in Latin America, through its principal banking
subsidiaries: FNB and FBNA. Each of these subsidiary banks is a member of the
Federal Reserve System, and the domestic deposits of each are insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by
law.
The Corporation also provides, through its subsidiaries, a variety of
financial services, including institutional and investment banking, cash
management, trade services, export finance, mortgage banking, corporate finance,
asset-based lending, commercial lending, real estate lending, government
banking, investment management services, equipment leasing, credit cards,
discount brokerage services, student loan processing and full-service banking in
leading Latin American markets.
The Corporation is managed along three principal business lines: Global
Banking and Financial Services, Commercial and Retail Banking and the National
Consumer Group. These business lines, including their operating results and
other key financial measures, are more fully discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
included in this Report under Item 7, and in Note 14 of the "Notes to
Consolidated Financial Statements" included under Item 8 of this Report.
For discussions of the Corporation's business activities, including its
lending activities, its cross-border outstandings and its management of
off-balance sheet exposure and the risks inherent in its businesses, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included under Item 7 of this Report.
This Report, as well as other written or oral communications made from time
to time by the Corporation (including, without limitation, the Corporation's
1999 Summary Annual Report to Stockholders), may contain statements relating to
the future results of the Corporation (including certain projections and
business trends) that are considered "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including, but not limited to, changes in political and economic conditions,
either domestically or internationally; interest rate and currency fluctuations;
competitive product and pricing pressures within the Corporation's markets;
equity and bond market fluctuations; personal and corporate customers'
bankruptcies; inflation; lower than expected revenues following mergers,
acquisitions and integrations of acquired businesses, including the Merger;
lower than expected cost savings in connection with the Merger; greater than
expected negative impact of the divestitures required to obtain regulatory
approval of the Merger; technological changes, including the impact of the
Internet on the Corporation's businesses; adverse legislation or regulatory
changes 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 Securities and Exchange Commission (the "SEC").
The executive office of the Corporation is located at One Federal Street,
Boston, Massachusetts, 02110 (telephone (617) 346-4000).
2
COMPETITION
The Corporation's subsidiaries compete with other major financial
institutions, including commercial banks, investment banks, mutual savings
banks, savings and loan associations, credit unions, consumer finance companies
and other non-bank institutions, such as insurance companies, major retailers,
brokerage firms, and investment companies in the Northeast, throughout the
United States and internationally. The principal methods of competing
effectively in the financial services industry include improving customer
service through the quality and range of services provided, improving
efficiencies and pricing services competitively.
One outgrowth of the competitive environment discussed above has been
significant consolidation within the financial services industry on a global,
national and regional level. The Corporation continues to implement strategic
initiatives focused on expanding its core businesses and to explore, on an
ongoing basis, acquisition, divestiture and joint venture opportunities. The
Corporation analyzes each of its businesses in the context of customer demands,
competitive advantages, industry dynamics and growth potential.
For additional information with regard to the Corporation's acquisition and
divestiture activities, refer to Note 2 of the "Notes to Consolidated Financial
Statements" included under Item 8 of this Report.
SUPERVISION AND REGULATION
The business in which the Corporation and its subsidiaries are engaged is
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies in the states and
countries where the Corporation and its subsidiaries operate. The supervision,
regulation and examination to which the Corporation and its subsidiaries are
subject are intended primarily for the protection of depositors or are aimed at
carrying out broad public policy goals, rather than for the protection of
security holders.
Several of the more significant regulatory provisions applicable to banks
and bank holding companies to which the Corporation and its subsidiaries are
subject are discussed below, along with certain regulatory matters concerning
the Corporation and its subsidiaries. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory provisions. Any change in
applicable law or regulation may have a material effect on the business and
prospects of the Corporation and its subsidiaries.
General
As a bank holding company, the Corporation is subject to regulation under
the Bank Holding Company Act of 1956, as amended, and to inspection, examination
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Under the Bank Holding Company Act, bank holding
companies generally may not acquire ownership or control of any company,
including a bank, without the prior approval of the Federal Reserve Board.
Various governmental requirements, including Sections 23A and 23B of the
Federal Reserve Act, as amended, limit borrowings by the Corporation and its
non-bank subsidiaries from its affiliate insured depository institutions, and
also limit various other transactions between the Corporation and its non-bank
subsidiaries, on the one hand, and its affiliate insured depository
institutions, on the other. Section 23A of the Federal Reserve Act also
generally requires that an insured depository institution's loans to its
non-bank affiliates be secured, and Section 23B of the Federal Reserve Act
generally requires that an insured depository institution's transactions with
its non-bank affiliates be on arm's length terms.
In addition to bank regulatory provisions, the Corporation and its
subsidiaries are also affected by the fiscal and monetary policies of the U.S.
federal government and the Federal Reserve Board, and by various other domestic
and international governmental requirements and regulations.
Liability for Bank Subsidiaries
Under current Federal Reserve Board policy, a bank holding company is
expected to act as a source of financial and managerial strength to each of its
subsidiary banks and to maintain resources adequate to support each subsidiary
bank. This support may be required at times when the bank holding company may
not have the resources to provide it. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a U.S. federal bank
regulatory agency to maintain the capital of a subsidiary bank would be assumed
by the bankruptcy trustee and entitled to priority of payment. If a default
occurred with respect to a bank, any capital loans to the bank from its parent
holding company would be subordinate in right of payment to payment of the
bank's depositors and certain of its other obligations.
3
The Corporation's principal domestic banks are FDIC-insured depository
institutions. As such, they can be held liable for any loss incurred, or
reasonably expected to be incurred, by the FDIC in connection with (1) the
default of a commonly controlled FDIC-insured depository institution; or (2) any
assistance provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default.
"Default" generally is defined as the appointment of a conservator or
receiver and "in danger of default" generally is defined as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance.
Capital Requirements
Information concerning the Corporation and its subsidiaries with respect
to capital requirements is incorporated by reference from Note 20, "Regulatory
Matters," of the "Notes to Consolidated Financial Statements" included under
Item 8 of this Report, and from the "Capital Management" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included under Item 7 of this Report.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") and its implementing regulations established five capital categories
for insured depository institutions -- well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Pursuant to the authority granted under FDICIA, U.S. bank
regulatory agencies were empowered to impose progressively more restrictive
constraints on the operations, management and capital distributions of an
insured depository institution, depending on the category in which an
institution is classified. Unless a banking institution is well capitalized, it
is subject to restrictions on its ability to offer brokered deposits and on
certain other aspects of its operations. An undercapitalized banking institution
must develop a capital restoration plan and its parent bank holding company must
guarantee the bank's or thrift's compliance with the plan up to the lesser of 5%
of the bank's or thrift's assets at the time it became undercapitalized and the
amount needed to comply with the plan.
As of December 31, 1999, each of the Corporation's banking subsidiaries
was well capitalized, based on the prompt corrective action guidelines. It
should be noted, however, that a bank's capital category is determined solely
for the purpose of applying the OCC's, or the FDIC's, prompt corrective action
regulations and that the capital category may not constitute an accurate
representation of the bank's overall financial condition or prospects.
Dividend Restrictions
Various U.S. federal and state statutory provisions limit the amount of
dividends the Corporation's banking subsidiaries can pay to the Corporation
without regulatory approval. Dividend payments by national banks are limited to
the lesser of (1) the level of undivided profits; and (2) absent regulatory
approval, an amount not in excess of net income for the current year combined
with retained net income for the preceding two years.
The approval of the Federal Reserve Board is required for any dividend by
a state-chartered bank that is a member of the Federal Reserve System (a "state
member bank") if the total of all dividends declared by the bank in any calendar
year would exceed the total of its net profits, as defined by regulatory
agencies, for that year, combined with its retained net profits for the
preceding two years. A state member bank may not pay a dividend in an amount
greater than its net profits then on hand. A U.S. federal savings bank is
required to file an application with the Office of Thrift Supervision (the
"OTS") prior to the payment of any dividends if the total amount of all
dividends and other capital distributions for the current calendar year paid by
a U.S. federal savings bank exceeds its net income for that year as well as its
retained net income for the preceding two years. A prior notice to the OTS is
required if, among other things, a U.S. federal savings bank is proposing to pay
a dividend that would reduce the amount of, or retire any of part of, its common
or preferred stock or retire any part of any debt instruments which are included
in its capital for purposes of OTS regulations.
U.S. federal bank regulatory agencies also have authority to prohibit
banking institutions from paying dividends if those agencies determine that,
based on the financial condition of the bank, such payment would constitute an
unsafe or unsound practice. The ability of the Corporation's banking
subsidiaries to pay dividends in the future is currently, and could be further,
influenced by bank regulatory policies and capital guidelines.
At December 31, 1999, approximately $1.4 billion of the total
stockholders' equity of the Corporation's banking subsidiaries was available for
payment of dividends to the Corporation, without approval by the applicable
regulatory authority. Additional information concerning the Corporation and its
banking subsidiaries with respect to dividends is incorporated by reference from
Note 19, "Commitments, Contingencies and Other Disclosures," and Note 20,
"Regulatory Matters," of the "Notes to Consolidated Financial Statements"
included under Item 8 of this Report, and the "Liquidity Risk" and "Capital
4
Management" sections of "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included under Item 7 of this Report.
Deposit Insurance Assessments
The deposits of each of the Corporation's domestic banks are insured up to
regulatory limits by the FDIC, and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund (the "BIF") and/or the
Savings Association Insurance Fund (the "SAIF") administered by the FDIC. The
FDIC has adopted regulations establishing a permanent risk-related deposit
insurance assessment system. Under this system, the FDIC places each insured
bank in one of nine risk categories based on (1) the bank's capitalization and
(2) supervisory evaluations provided to the FDIC by the institution's primary
U.S. federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it is classified by the FDIC.
Currently, the annual insurance premiums on bank deposits insured by the
BIF and the SAIF vary between $0.00 per $100 of deposits, for banks classified
in the highest category, to $0.27 per $100 of deposits for banks classified in
the lowest category.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF and
the SAIF (in addition to assessments currently imposed on depository
institutions with respect to BIF- and SAIF-insured deposits) to pay for the cost
of Financing Corporation ("FICO") funding. The FDIC established the FICO
assessment rates at $0.01184 per $100 annually for BIF-assessable deposits and
$0.05920 per $100 annually for SAIF-assessable deposits. The FICO assessments do
not vary depending upon a depository institution's capitalization or supervisory
evaluations. The Corporation's banks held approximately $97 billion and $3
billion, respectively, of BIF-assessable and SAIF-assessable deposits as of
December 31, 1999.
Depositor Preference Statute
In the liquidation or other resolution of an institution by any receiver,
U.S. federal legislation provides that deposits and certain claims for
administrative expenses and employee compensation against the insured depository
institution would be afforded a priority over other general unsecured claims
against that institution, including federal funds and letters of credit.
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal"), subject to certain concentration limits and other requirements:
(1) bank holding companies such as the Corporation are permitted to
acquire banks and bank holding companies located in any state;
(2) any bank that is a subsidiary of a bank holding company is permitted
to receive deposits, renew time deposits, close loans, service loans
and receive loan payments as an agent for any other bank subsidiary
of that bank holding company; and
(3) banks are permitted to acquire branch offices outside their home
states by merging with out-of-state banks, purchasing branches in
other states and establishing de novo branch offices in other
states. The ability of banks to acquire branch offices through the
purchase or opening of other branches is contingent, however, on the
host state having adopted legislation "opting in" to those
provisions of Riegle-Neal. In addition, the ability of a bank to
merge with a bank located in another state is contingent on the host
state not having adopted legislation "opting out" of that provision
of Riegle-Neal.
The Corporation is currently relying upon the provisions of Riegle-Neal to
consolidate certain of its banking subsidiaries under a single charter, and may
in the future rely upon Riegle-Neal to acquire banks in additional states.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company, unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as the
Corporation, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the bank holding company.
5
In addition, a company is required to obtain the approval of the Federal
Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the
case of an acquiror that is a bank holding company) or more of any class of
outstanding common stock of a bank holding company, or otherwise obtaining
control or a "controlling influence" over that bank holding company.
Recent Legislation
On November 12, 1999, President Clinton signed into law legislation that
allows bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "GLB Act"), a bank holding
company that elects to become a financial holding company may engage in any
activity that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines by regulation or order is (1) financial in nature, (2)
incidental to any such financial activity, or (3) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The GLB
Act makes significant changes in U.S. banking law, principally by repealing the
restrictive provisions of the 1933 Glass-Steagall Act. The GLB Act specifies
certain activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve Board under section 4(c)(8) of the Bank Holding Company Act.
The GLB Act does not authorize banks or their affiliates to engage in commercial
activities that are not financial in nature. A bank holding company may elect to
be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well capitalized, well managed and have
at least a satisfactory rating under the Community Reinvestment Act. On February
14, 2000, the Corporation filed a letter with the Federal Reserve Bank of Boston
electing to be treated as a financial holding company under the GLB Act. The
Corporation anticipates that the Federal Reserve Board will act affirmatively on
the Corporation's election by March 13, 2000, which would make the election
effective on March 13, 2000.
National banks are also authorized by the GLB Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve Board, determines is
financial in nature or incidental to any such financial activity, except (1)
insurance underwriting, (2) real estate development or real estate investment
activities (unless otherwise permitted by law), (3) insurance company portfolio
investments and (4) merchant banking. The authority of a national bank to invest
in a financial subsidiary is subject to a number of conditions, including, among
other things, requirements that the bank must be well managed and well
capitalized (after deducting from the bank's capital outstanding investments in
financial subsidiaries). The GLB Act provides that state banks may invest in
financial subsidiaries (assuming they have the requisite investment authority
under applicable state law) subject to the same conditions that apply to
national bank investments in financial subsidiaries.
The GLB Act also contains a number of other provisions that will affect
the Corporation's operations and the operations of all financial institutions.
One of the new provisions relates to the financial privacy of consumers,
authorizing federal banking regulators to adopt rules that will limit the
ability of banks and other financial entities to disclose non-public information
about consumers to non-affiliated entities. These limitations are expected to
require more disclosure to consumers, and in some circumstances, to require
consent by the consumer before information is allowed to be provided to a third
party.
At this time, the Corporation is unable to predict the impact the GLB Act
may have upon its or its subsidiaries' financial condition or results of
operations.
Future Legislation
Changes to the laws and regulations in the states and countries where the
Corporation and its subsidiaries do business can affect the operating
environment of bank holding companies and their subsidiaries in substantial and
unpredictable ways. The Corporation cannot accurately predict whether
legislation will ultimately be enacted, and, if enacted, the ultimate effect
that it, or implementing regulations, would have upon its or its subsidiaries'
financial condition or results of operations.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The following information, included under Items 6, 7 and 8 of this Report,
is incorporated by reference herein:
"Consolidated Average Balances/Interest Earned-Paid/Rates 1997-1999"
table - presents average balance sheet amounts, related taxable equivalent
interest earned or paid, and related average yields and rates paid.
6
"Rate/Volume Analysis" table - presents changes in the taxable
equivalent interest income and expense for each major category of interest
earning assets and interest bearing liabilities.
Note 3, "Securities," of the "Notes to Consolidated Financial
Statements" and "Securities" table included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" - discloses
information regarding book values, market values, maturities, and weighted
average yields of securities (by category).
Note 4, "Loans and Leases," of the "Notes to Consolidated Financial
Statements" - discloses distribution of loans of the Corporation.
"Loans and Leases Maturity" table and "Interest Sensitivity of Loans
and Leases Over One Year" table - presents maturities and sensitivities of
loans to changes in interest rates.
Note 6, " Nonperforming Assets" and Note 1, "Summary of Significant
Accounting Policies - Loans and Leases" of the "Notes to Consolidated
Financial Statements" - discloses information on nonaccrual and past due
loans and leases and the Corporation's policy for placing loans on
nonaccrual status.
"Loans and Leases" section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" - discloses information
regarding cross-border outstandings and other loan concentrations of the
Corporation.
"Reserve for Credit Losses" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" - presents an
analysis of loss experience, the allocation of the reserve for credit
losses, and a description of factors which influenced management's
judgment in determining the amount of additions to the reserve charged to
operating expense.
"Consolidated Average Balances/Interest Earned-Paid/Rates 1997-1999"
table and the "Funding Sources" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" - discloses
deposit information.
"Selected Financial Highlights" - presents return on assets, return on
equity, dividend payout ratio, and equity-to-assets ratio.
Note 9, "Short-Term Borrowings," of the "Notes to Consolidated
Financial Statements" - discloses information on short-term borrowings of
the Corporation.
ITEM 2. PROPERTIES
The Corporation maintains its corporate headquarters at One Federal Street,
Boston, Massachusetts. The Corporation or its subsidiaries also maintain
principal offices at 100 Federal Street and 75 State Street, Boston,
Massachusetts, 100 and 111 Westminster Street and One BankBoston Plaza,
Providence, Rhode Island and 777 Main Street and 100 Pearl Street, Hartford,
Connecticut. During 1999, the Corporation purchased 100 Federal Street, Boston,
Massachusetts from the lessor. The Corporation or its subsidiaries also maintain
administration and operations centers located in: Kingston, Melville, Utica,
Albany, West Seneca and Menands, New York; Boston, Dedham, Waltham and Malden,
Massachusetts; Moosic and Horsham, Pennsylvania; Milwaukee, Wisconsin;
Providence, East Providence and Lincoln, Rhode Island; and Hartford and Windsor,
Connecticut.
In Latin America, where FNB will continue to operate under the corporate
name "BankBoston, N.A." ("BankBoston"), BankBoston maintains banking
headquarters in Buenos Aires, Argentina, and Sao Paulo, Brazil. In 1997,
BankBoston entered into a contract to construct a new headquarters building in
Argentina, to be located near the existing headquarters. Construction began in
the first quarter of 1998 and is expected to be completed in the third quarter
of 2000. In addition, in September 1998, BankBoston acquired an undeveloped site
in Sao Paulo, Brazil. Construction of a new corporate office building commenced
in July 1999 and is expected to be completed in the fourth quarter of 2001.
None of these properties is subject to any material encumbrance. The
Corporation's subsidiaries also own or lease numerous other premises used in
their domestic and foreign operations.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings of the Corporation is incorporated
by reference herein from Note 19, "Commitments, Contingencies and Other
Disclosures" of the "Notes to Consolidated Financial Statements," included under
Item 8 of this Report.
7
ITEM 3A. EXECUTIVE OFFICERS OF THE CORPORATION
The names, positions, ages and business experience during the past five
years of the executive officers of the Corporation as of March 1, 2000 are set
forth below. The term of office of each executive officer extends until the
meeting of the Board of Directors immediately following the Annual Meeting of
Stockholders, and until a successor is chosen and qualified, unless they sooner
resign, retire, die or are removed.
AGE AS OF
NAME POSITIONS WITH THE CORPORATION MARCH 1, 2000
- ---- ------------------------------ -------------
Terrence Murray................ Chairman and Chief Executive Officer 60
Charles K. Gifford............. President and Chief Operating Officer 57
Robert J. Higgins.............. President of Commercial and Retail Banking 54
Henrique C. Meirelles.......... President of Global Banking and Financial Services 54
David L. Eyles................. Vice Chairman and Chief Credit Officer 60
Paul F. Hogan.................. Vice Chairman, Corporate and Investment Banking 55
Peter J. Manning............... Vice Chairman 61
Eugene M. McQuade.............. Vice Chairman and Chief Financial Officer 51
H. Jay Sarles.................. Vice Chairman, National Financial Services,
and Chief Administrative Officer 54
Joseph Smialowski.............. Vice Chairman, Technology and Operations 51
Bradford H. Warner............. Vice Chairman, Investment Services 48
Brian T. Moynihan.............. Executive Vice President 40
William C. Mutterperl.......... Executive Vice President, General Counsel and Secretary 53
M. Anne Szostak................ Executive Vice President 49
Erich Schumann................. Senior Vice President and Chief Accounting Officer 50
Robert C. Lamb, Jr............. Controller 44
Terrence Murray has served as Chairman, President and Chief Executive
Officer of the Corporation from 1989 to 1995, President and Chief Executive
Officer from 1995 to December 1996 and Chairman and Chief Executive Officer
since 1997. Mr. Murray has been a Director of the Corporation since 1976.
Charles K. Gifford became President and Chief Operating Officer of the
Corporation following the Merger. Prior to the Merger, Mr. Gifford had served as
Chairman, President and Chief Executive Officer of BankBoston from 1995 to 1996,
Chief Executive Officer from 1996 to 1997 and Chairman and Chief Executive
Officer from 1997 to October 1999. Mr. Gifford has been a Director of the
Corporation since October 1999.
Robert J. Higgins was named Vice Chairman of the Corporation in 1993,
President and Chief Operating Officer in 1997 and President of Commercial and
Retail Banking in October 1999. Mr. Higgins has been a Director of the
Corporation since October 1999.
Henrique C. Meirelles became President of Global Banking and Financial
Services of the Corporation following the Merger. Prior to the Merger, Mr.
Meirelles had served as BankBoston's Regional Manager of Brazil from 1994 to
1996 and President and Chief Operating Officer from 1996 to October 1999. Mr.
Meirelles has been a Director of the Corporation since October 1999.
David L. Eyles was named Executive Vice President and Chief Credit Officer
of the Corporation in 1995, and has been a Vice Chairman since 1998.
Paul F. Hogan became Vice Chairman, Corporate and Investment Banking of the
Corporation following the Merger. Prior to the Merger, Mr. Hogan had served as
Executive Vice President, Corporate Relationship Banking of BankBoston from 1995
to 1996, Vice Chairman, Corporate Banking from 1996 to 1997 and Vice Chairman,
Wholesale Banking from 1997 to October 1999.
Peter J. Manning became Vice Chairman of the Corporation following the
Merger. Prior to the Merger, Mr. Manning had served as Executive Director,
Mergers and Acquisitions of BankBoston from 1993 to 1996 and Executive Vice
President, Merger and Acquisitions from 1996 to October 1999.
Eugene M. McQuade was named Executive Vice President of the Corporation in
1993 and has served as Chief Financial Officer since 1993 and Vice Chairman
since 1997.
8
H. Jay Sarles was named Vice Chairman of the Corporation in 1993, Chairman
of FBNA in 1996, Chief Administrative Officer of the Corporation in 1997 and
Vice Chairman, National Financial Services, and Chief Administrative Officer of
the Corporation in October 1999.
Joseph Smialowski became Vice Chairman, Technology and Operations of the
Corporation following the Merger. Prior to the Merger, Mr. Smialowski had served
as Executive Vice President, Technology and Operations of BankBoston from 1998
to October 1999. Before joining BankBoston, Mr. Smialowski served as Senior Vice
President and Chief Information Officer of Sears, Roebuck & Co. from 1993 to
1998.
Bradford H. Warner became Vice Chairman, Investment Services of the
Corporation following the Merger. Prior to the Merger, Mr. Warner had served as
Group Executive, Global Treasury of BankBoston from 1995 to 1996, Executive Vice
President, Global Capital Markets from 1996 to 1998 and Vice Chairman, Regional
Banking from 1998 to October 1999.
Brian T. Moynihan was named Managing Director, Corporate Strategy and
Development of the Corporation in 1994, Senior Vice President in 1998 and
Executive Vice President in October 1999.
William C. Mutterperl has served as General Counsel and Secretary of the
Corporation since 1985, Senior Vice President from 1989 to 1998 and Executive
Vice President since 1998.
M. Anne Szostak was named Senior Vice President, Human Resources of the
Corporation in 1994 and has served as Executive Vice President since 1998.
Erich Schumann became Senior Vice President and Chief Accounting Officer of
the Corporation following the Merger. Prior to the Merger, Mr. Schumann had
served as Chief Administrative Officer of BankBoston's Brazilian operations from
1994 to 1997, Executive Director, Finance of BankBoston from 1997 to 1998 and
Executive Vice President, Finance from 1998 to October 1999.
Robert C. Lamb, Jr. has served as Controller of the Corporation since 1993.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is listed on the New York Stock Exchange. At
December 31, 1999, the Corporation had 69,549 stockholders of record. For
information regarding high and low quarterly sales prices, and quarterly
dividends declared and paid, in each case on the Corporation's common stock, see
the "Common Stock Price and Dividend Information" table included under Item 8 of
this Report, which is incorporated by reference herein.
9
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL HIGHLIGHTS(A)
Dollars in millions, except per share amounts 1999 1998 1997 1996 1995
Prepared on a fully taxable equivalent basis
- -----------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 6,799 $ 6,454 $ 6,192 $ 5,858 $ 5,389
Noninterest income 6,974 5,281 4,206 3,658 3,237
Total revenue 13,773 11,735 10,398 9,516 8,626
Noninterest expense 9,357 7,050 6,050 5,831 5,831
Provision for credit losses 933 850 522 444 376
Net income 2,038 2,324 2,246 1,860 1,351
- -----------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Basic earnings $ 2.16 $ 2.47 $ 2.39 $ 1.88 $ 1.25
Diluted earnings 2.10 2.41 2.33 1.84 1.19
Market price (year-end)(b) 34.81 44.69 37.56 24.94 20.38
Cash dividends declared(b) 1.11 1.00 .92 .87 .82
Book value (year-end) 15.96 14.70 13.23 12.08 11.15
- -----------------------------------------------------------------------------------------------------------
AT YEAR-END
Assets $190,692 $177,894 $160,314 $151,955 $147,373
Securities 25,212 23,369 19,845 17,164 27,578
Loans 119,700 112,094 106,545 100,922 91,436
Reserve for credit losses 2,488 2,306 2,144 2,371 2,211
Deposits 114,896 118,178 109,497 109,902 98,186
Short-term borrowings 18,106 19,176 19,224 13,327 22,818
Long-term debt 25,349 14,411 8,191 8,460 8,686
Total stockholders' equity 15,307 14,204 13,041 12,702 11,359
- -----------------------------------------------------------------------------------------------------------
RATIOS
Return on average common equity 14.12% 17.64% 19.71% 16.31% 13.16%
Return on average assets 1.08 1.37 1.48 1.27 .95
Common dividend payout ratio 51.51 40.15 35.55 40.71 50.76
Net interest margin 4.23 4.40 4.68 4.57 4.24
Efficiency ratio(c) 60.0 58.2 57.2 59.9 60.4
Common equity-to-assets (year-end) 7.66 7.60 7.53 7.40 7.09
Average total equity-to-assets 7.82 8.03 8.02 8.31 7.69
- -----------------------------------------------------------------------------------------------------------
SUMMARY OF 1999 AND 1998 OPERATING RESULTS(A)(C)
Dollars in millions, except per share amounts
Prepared on a fully taxable equivalent basis 1999 1998
- ---------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 6,799 $ 6,454
Noninterest income 6,974 5,281
Total revenue 13,773 11,735
Noninterest expense 8,255 6,832
Provision for credit losses 933 850
Net income 2,798 2,459
- ---------------------------------------------------------------------------
PER COMMON SHARE
Basic earnings $ 2.98 $ 2.62
Diluted earnings 2.91 2.55
- ---------------------------------------------------------------------------
RATIOS
Return on average common equity 19.52% 18.69%
Return on average assets 1.48 1.44
- ---------------------------------------------------------------------------
(a)Information presented has been restated to reflect the merger with
BankBoston, which was accounted for as a pooling of interests.
(b)Amounts represent the historical market value and cash dividends of the
Corporation.
(c)Operating results and efficiency ratio exclude the impact of merger- and
restructuring-related charges and other special items.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On October 1, 1999, BankBoston Corporation (BankBoston) merged with Fleet
Financial Group, Inc. (Fleet). Following the merger, Fleet was renamed Fleet
Boston Corporation (the Corporation). The merger was accounted for as a pooling
of interests and, as such, financial information included in this discussion
presents the combined financial condition and results of operations of both
companies as if they had operated as a combined entity for all periods
presented. Refer to Note 2 to the Consolidated Financial Statements for further
discussion of the merger.
The Corporation's earnings were $2.0 billion, or $2.10 per diluted share,
for 1999, compared with $2.3 billion, or $2.41 per diluted share, for 1998.
Return on assets (ROA) and return on common equity (ROE) were 1.08% and 14.12%,
respectively, in 1999, compared to 1.37% and 17.64%, respectively, in 1998.
The Corporation recorded merger- and restructuring-related charges and
other costs of $1.1 billion ($760 million after-tax) in the fourth quarter of
1999. These items were composed of $850 million of charges to accrue for
merger-related expenses and a restructuring plan; $102 million of merger
integration costs that were incurred during the quarter; and $150 million to
establish a defined contribution plan to provide retention incentives at
Robertson Stephens. In 1998, the Corporation recorded merger- and
restructuring-related charges and other costs of $218 million ($135 million
after-tax) in connection with its acquisitions of The Quick & Reilly Group, Inc.
(Quick & Reilly), the domestic consumer credit card operations of Advanta
Corporation and Robertson Stephens, as well as a realignment of its Asian
operations and reductions in staff in its Emerging Market Sales, Trading and
Research unit. Refer to the Noninterest Expense section of this discussion, as
well as Note 8 to the Consolidated Financial Statements, for further discussion
of certain of these costs.
Excluding the effects of the merger- and restructuring-related charges and
other costs, operating net income increased 14% to $2.8 billion, or $2.91 per
diluted share in 1999, compared to operating net income of $2.5 billion, or
$2.55 per diluted share in 1998. On this same basis, ROA and ROE were 1.48% and
19.52%, respectively, in 1999 and 1.44% and 18.69%, respectively, in 1998.
In connection with obtaining regulatory approvals for the merger with
BankBoston, the Corporation agreed to divest $13 billion of deposits and $9
billion of loans. These divestitures will occur in 2000, and are expected to
result in an annualized net income reduction of approximately $160 million, part
of which will impact 2000.
The Corporation expects to achieve total annual cost savings of
approximately $600 million in connection with the integration of Fleet and
BankBoston. The integration process is well underway, and major systems
conversions are expected to be completed in 2000. The Corporation expects to
complete its actions related to achieving these cost savings by the end of 2000,
and as of year-end 1999 had achieved annualized cost savings of approximately
$100 million.
Excluding the effects of the aforementioned merger- and
restructuring-related charges and other costs, increases in both net income and
earnings per share during 1999 primarily reflect growth in many of the
Corporation's domestic businesses and in its Latin American operations. The
improved earnings also reflect the results of Robertson Stephens, acquired by
the Corporation in August 1998, for a full year versus four months in 1998, and
of Sanwa Business Credit (Sanwa), acquired by the Corporation in February 1999.
Net interest income on a fully taxable equivalent (FTE) basis totaled $6.8
billion for 1999, compared to $6.5 billion for 1998. This increase was
principally attributable to an increase in average loans and leases of $6.5
billion, due primarily to the Sanwa acquisition. Net interest margin for 1999
was 4.23%, a decline from 4.40% in 1998, primarily attributable to a higher
level of low-yield earning assets necessary to support an expanded investment
banking operation.
The provision for credit losses was $933 million in 1999, compared to $850
million in 1998. The increase in provision was due principally to the
acquisition of Sanwa, as well as higher credit losses in the domestic commercial
and international consumer loan portfolios.
Noninterest income increased $1.7 billion to $7.0 billion in 1999.
Increases were noted in all core revenue categories, in particular capital
markets, investment services, credit card and processing-related revenues.
Strong growth was noted over 1998 as a result of the aforementioned
acquisitions, as well as growth within existing and acquired businesses.
Noninterest expense totaled $9.4 billion for 1999, compared with $7.1
billion in 1998, resulting primarily from the aforementioned acquisitions,
growth in many of the Corporation's businesses, a rise in compensation expense
due to incentive payments related to higher revenue levels and the merger- and
restructuring-related charges and other costs described above.
This discussion may contain statements relating to future results of the
Corporation (including certain projections and business trends) that are
considered "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, which are more fully
discussed under Item 1 of this Report.
11
RESULTS OF OPERATIONS
The following is a discussion and analysis of the Corporation's consolidated
results of operations. In order to understand this section in context, it should
be read in conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements included under Item 8 of this Report.
NET INTEREST INCOME
Year ended December 31 1999 1998 1997
FTE basis
In millions
===========================================================
Interest income $13,052 $12,341 $11,255
Tax-equivalent adjustment 57 59 64
Interest expense 6,310 5,946 5,127
- -----------------------------------------------------------
Net interest income $6,799 $6,454 $6,192
===========================================================
The $345 million, or 5%, increase in net interest income for 1999 compared to
1998 was due principally to higher interest income resulting from strong loan
growth in the domestic commercial and lease financing portfolios, primarily
loans and leases from the Sanwa acquisition.
NET INTEREST MARGIN AND INTEREST RATE SPREAD
Year ended December 31 1999 1998
FTE basis Average Average
Dollars in millions Balance Rate Balance Rate
==============================================================
Securities $24,518 6.48% $21,727 6.81%
Loans and leases:
Domestic 103,511 8.21 96,806 8.51
International 14,017 13.47 14,233 12.11
Due from brokers/dealers 3,239 4.57 3,765 4.89
Mortgages held for resale 2,445 7.18 2,685 7.04
Other 12,906 6.28 7,478 7.89
- --------------------------------------------------------------
Total interest earning 160,636 8.16 146,694 8.45
assets
- --------------------------------------------------------------
Deposits 90,687 3.88 88,634 4.18
Short-term borrowings 23,109 5.32 21,669 5.81
Due to brokers/dealers 4,145 4.65 4,501 4.75
Long-term debt 22,290 6.15 10,962 7.00
- --------------------------------------------------------------
Interest bearing 140,231 4.50 125,766 4.73
liabilities
- --------------------------------------------------------------
Interest rate spread 3.66 3.72
Interest free sources of 20,405 20,928
funds
- --------------------------------------------------------------
Total sources of funds $160,636 3.93% $146,694 4.05%
- --------------------------------------------------------------
Net interest margin 4.23% 4.40%
==============================================================
Net interest margin represents the relationship between net interest income and
average earning assets. Net interest margin is affected by several factors,
including fluctuations in the overall interest rate environment, funding
strategies of the Corporation, the mix of interest earning assets, interest
bearing liabilities and noninterest bearing liabilities, as well as the use of
interest rate derivatives that are used to manage interest rate risk.
Net interest margin for 1999 declined 17 basis points to 4.23%. This
decrease was primarily attributable to a higher level of low-yielding earning
assets necessary to support an expanded investment banking operation, as well as
an increased reliance on wholesale funding.
Average securities increased $2.8 billion to $24.5 billion in 1999, due
primarily to increases in international investments and marketable equity
securities.
Average domestic loans and leases increased $6.7 billion to $103.5 billion
in 1999, due primarily to the Sanwa acquisition. Other interest earning assets
increased $5.4 billion to $12.9 billion during 1999, as a result of an increase
in money market instruments necessary to support an expanded investment banking
operation.
Average interest bearing deposits increased $2.1 billion to $90.7 billion
in 1999, primarily the result of increased domestic money market deposits,
partially offset by a decline in savings and NOW balances and domestic time
deposits.
Average short-term borrowings increased $1.4 billion to $23.1 billion
during 1999, due to increases in securities sold under agreements to repurchase
necessary to support an expanded investment banking operation, partially offset
by declines in other short-term borrowings.
The $11.3 billion increase in average long-term debt was due primarily to
net increases in senior and subordinated debt and bank notes used to fund
acquisitions and loan growth. The 85 basis point decrease in the funding rate
was due to the issuance of additional debt at lower floating interest rates. It
is anticipated that the average rate on the Corporation's long-term portfolio
will more closely track movements in short-term interest rates, such as the
London Interbank Offered Rate (LIBOR), the prime rate and the Federal Funds
rate. These indices are closely related to the underlying assets responsible for
recent balance sheet growth.
NONINTEREST INCOME
Year ended December 31 1999 1998 1997
In millions
==========================================================
Capital markets revenue $2,104 $1,140 $ 914
Investment services revenue 1,513 1,212 990
Banking fees and commissions 1,501 1,339 1,207
Credit card revenue 737 455 98
Processing-related revenue 609 452 469
Gains on branch divestitures
and sales of businesses 50 254 243
Other noninterest income 460 429 285
- ----------------------------------------------------------
Total noninterest income $6,974 $5,281 $4,206
==========================================================
Noninterest income totaled $7.0 billion for 1999, up 32%, compared to $5.3
billion for 1998. This increase reflects growth in many of the Corporation's
businesses, such as Quick & Reilly and Robertson Stephens, and includes the full
year impact of the acquisition of Robertson Stephens, versus four months in
1998.
As a result of intensified competition and changing customer needs in the
financial services industry, the Corporation has made strategic decisions
directed at enhancing future fee revenue-producing activities. Throughout the
past several years, the Corporation has developed new products and service
lines, and broadened existing lines via acquisitions, to provide additional
revenue streams to complement its traditional banking products and services.
These include investment banking, brokerage, investment management, mutual fund
and annuity products, credit cards, venture capital investments, Internet
banking and domestic and international banking expansion.
12
CAPITAL MARKETS REVENUE
Year ended December 31 1999 1998 1997
In millions
=============================================================
Principal investing $ 494 $ 381 $292
Market-making revenue 426 162 100
Underwriting revenue 366 47 19
Advisory fees 230 71 30
Trading profits and commissions 204 69 92
Foreign exchange revenue 203 174 128
Syndication/agency fees 164 105 133
Securities gains 7 115 113
Other revenue 10 16 7
- -------------------------------------------------------------
Total capital markets revenue $2,104 $1,140 $914
=============================================================
Capital markets revenue showed a significant increase, rising $964 million, or
85%, to $2.1 billion for 1999. This increase was driven by strong principal
investing, market-making and underwriting revenue, as well as a significant
increase in advisory fees, syndication/agency fees and trading profits and
commissions, partially offset by lower securities gains. These results include
the full year impact of Robertson Stephens in 1999 compared to four months in
1998, as well as strong growth within their business lines during 1999. In
addition to the impact of this acquisition, much of the increase in these
revenues was a result of the unprecedented strength in the U.S. capital markets,
particularly the technology sector. The Corporation's ability to continue to
experience increases in these types of revenues depends on a variety of factors,
including the condition of the economy, interest rates and equity markets. Thus,
the level of such revenues in the future cannot be predicted with certainty.
Principal investing revenues rose $113 million, or 30%, to $494 million for
1999. The growth in revenue included gains on the sale of several technology
stocks, reflecting effective investment strategies and continued strength in the
equity markets. The Corporation has been in the principal investing business
since 1959, and has one of the largest bank-owned businesses, with offices in
Boston, Providence, Palo Alto, London, Hong Kong, Buenos Aires and Sao Paulo.
During 1999, the Corporation made new investments totaling approximately $1
billion. As of December 31, 1999, the Corporation's Principal Investing
portfolio was composed of investments with an aggregate carrying value of
approximately $4 billion, 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. Approximately 25% to
30% of the total portfolio is composed of investments in companies which operate
in the "new economy".
The total portfolio is diversified as to industry and geographically, with
approximately 75% of the portfolio domestic and 25% international, principally
Europe. The direct investments in public companies are carried at fair value,
with unrealized gains and losses recorded, net of tax, in other comprehensive
income, which is recorded as a separate component of stockholders' equity. These
gains or losses are not recorded in the Corporation's income statement until the
related investments are sold. The gross pre-tax unrealized gain on these direct
investments in public companies, none of which have been recorded in the income
statement, amounted to approximately $1.4 billion at December 31, 1999.
Market-making revenue increased $264 million, or 163%, to $426 million in
1999, reflecting growth in this business at Robertson Stephens and Quick &
Reilly, as well as the full year impact of the Corporation's purchase of
Robertson Stephens in August 1998 and Merrill Lynch Specialists, Inc. (MLSI) in
December 1998. Quick & Reilly is the second largest New York Stock Exchange
(NYSE) market-maker and also makes a market in over 4,300 NASDAQ securities.
These businesses benefited from the favorable market environment, which resulted
in increased transaction volume.
Underwriting revenue increased $319 million during 1999, again reflective
of the August 1998 acquisition of Robertson Stephens and the high volume of
initial public offering and private offering activity in that business during
1999.
Advisory fees increased $159 million to $230 million during 1999 as a
result of increased fees at Robertson Stephens. Advisory fees include fees
received for providing financial advice on mergers and acquisitions, private
clients transactions and other transactions.
Trading profits and commissions rose $135 million to $204 million in 1999,
primarily the result of the inclusion of Robertson Stephens for a full year in
1999 and the absence of losses incurred in 1998 in the emerging markets and high
yield trading portfolios.
Foreign exchange revenue increased $29 million, or 17%, to $203 million in
1999, as a result of higher customer demand during periods of volatility in
world financial markets.
Syndication/agency fees increased $59 million to $164 million in 1999, as a
result of higher transactional volume during 1999.
Securities gains declined $108 million as a result of fewer transactions in
the securities available for sale portfolio in response to the interest rate
risk position of the Corporation and the overall interest rate environment, as
well as impairment losses which were recorded on certain securities.
INVESTMENT SERVICES REVENUE
Year ended December 31 1999 1998 1997
In millions
========================================================
Investment management revenue $ 892 $ 849 $680
Brokerage fees and 621 363 310
commissions
- --------------------------------------------------------
Total investment services $1,513 $1,212 $990
revenue
========================================================
13
Investment services revenue increased $301 million, or 25%, in 1999 to $1.5
billion. Changes in these revenues are discussed in more detail below.
Investment Management Revenue
Year ended December 31 1999 1998 1997
In millions
========================================================
Private Clients Group $374 $367 $333
Institutional businesses 150 156 149
International 142 131 109
Retail investments 122 92 72
Columbia Management Company 98 98 -
Other 6 5 17
- --------------------------------------------------------
Total $892 $849 $680
========================================================
Investment management revenue rose $43 million, or 5%, in 1999 to $892 million.
This improvement was due to the rise in the domestic equities market, which led
to increased sales of annuities and mutual fund products, and increased the
value of assets under management from approximately $116 billion at December 31,
1998 to approximately $129 billion at December 31, 1999. Internationally, the
Corporation is among the largest mutual fund providers in Argentina and Brazil.
Brokerage Fees and Commissions
Brokerage fees and commissions increased $258 million, or 71% in 1999 to $621
million, due to the aforementioned acquisition of Robertson Stephens, increased
transactional activity at Quick & Reilly, and higher clearing levels within U.S.
Clearing as a result of the strong performance in the domestic equity markets.
BANKING FEES AND COMMISSIONS
Banking fees and commissions, which includes fees received for cash management,
deposit accounts, electronic banking and other service fees, increased $162
million, or 12%, to $1.5 billion in 1999. The increase was due principally to
the continuing development of new product packaging and fee schedules, as well
as growth in the Corporation's customer base.
CREDIT CARD REVENUE
Credit card revenue increased $282 million, or 62%, to $737 million in 1999,
primarily the result of increased securitization revenue due to higher volumes,
as well as a full year impact of 1998 portfolio acquisitions. Increased
securitization revenue was a direct result of a strategic repositioning from a
primarily one-product portfolio to a multi-product portfolio, which focused on
replacing promotional rate products with stable fixed rate products. The
Corporation services $14.9 billion of securitized and owned credit card
receivables. The primary components of credit card revenue are related to the
Corporation's securitization activities. These activities result in
securitization income, servicing revenue, interchange fees, and amortization of
deferred acquisition costs.
The securitization of credit card receivables changes the Corporation's
status from that of a lender to that of a loan servicer. Accordingly, there is a
change in the classification of the revenue associated with the securitization
which is reported in the income statement. The Corporation's revenue over the
term of a securitization transaction may vary depending upon the credit
performance of the securitized receivables, because credit losses become a
component of the cash flows arising from the securitized receivables.
The following table depicts the consolidated financial statement impact as
if the securitized credit card receivables had, in fact, been owned, as well as
additional financial information pertaining to credit card receivables.
Credit Card Securitization Summary
Credit Card
Year ended December 31,1999 Securiti-
Dollars in millions Reported zation Managed
============================================================
Net interest income (FTE) $ 6,799 $ 984 $ 7,783
Provision for credit losses 933 573 1,506
Noninterest income 6,974 (411) 6,563
Noninterest expense 9,357 --- 9,357
Net income 2,038 --- 2,038
Assets at year-end $190,692 $9,086 $199,778
Average assets 188,779 8,857 197,636
Net interest margin 4.23% 11.11% 4.59%
============================================================
PROCESSING-RELATED REVENUE
Year ended December 31 1999 1998 1997
In millions
========================================================
Mortgage banking revenue, net $364 $253 $323
Student loan servicing fees 142 121 101
Other 103 78 45
- --------------------------------------------------------
Total processing-related $609 $452 $469
revenue
========================================================
Processing-related revenue increased $157 million, to $609 million in 1999, as
all components experienced growth in revenues. Net mortgage banking revenue is
discussed below. Student loan servicing fees increased $21 million, or 17%, at
AFSA Data Corporation (AFSA), the Corporation's student loan servicing
subsidiary, as accounts serviced increased 11% to 7.2 million in 1999. Other
processing-related revenue increased $25 million, due principally to higher
volume at the Corporation's healthcare processing business.
14
Mortgage Banking Revenue, Net
Year ended December 31 1999 1998 1997
In millions
==========================================================
Net loan servicing revenue $ 548 $456 $450
Mortgage production revenue 173 196 111
Gains on sales of mortgage
servicing --- 34 10
Amortization/impairment charge (357) (433) (248)
- ----------------------------------------------------------
Total mortgage banking revenue, $ 364 $253 $323
net
==========================================================
Net mortgage banking revenue in 1999 increased $111 million, or 44%, from $253
million in 1998. This increase was due principally to increased net loan
servicing revenue and a decline in mortgage servicing rights (MSRs)
amortization/impairment, offset by a decline in the level of sales of mortgage
servicing and decreased mortgage production revenue.
Net loan servicing revenue represents fees received for servicing
residential mortgage loans. The $92 million, or 20%, increase in net loan
servicing revenue is attributable to the 26% growth in the size of the servicing
portfolio from approximately $119 billion at December 31, 1998 to approximately
$150 billion at December 31, 1999.
Mortgage production revenue includes income derived from the loan
origination process and gains on sales of mortgage originations. Mortgage
production revenue declined in 1999, but remained strong as loan production
volume equaled 1998 record levels. The Corporation did not recognize any gain on
the sales of MSRs during 1999. The Corporation's decision to sell MSRs depends
on a variety of factors, including the available markets and current market
prices for such servicing rights.
MSR amortization decreased $76 million to $357 million in 1999, due to the
absence of a $75 million impairment charge recorded in 1998 caused by the low
mortgage rate environment. Since MSRs are an interest rate-sensitive asset, the
value of the Corporation's mortgage servicing portfolio and related mortgage
banking revenue may be adversely impacted if mortgage interest rates decline and
actual or expected loan prepayments increase. For additional information
regarding pre-payment risk, refer to the Asset-Liability Management section of
this discussion.
OTHER
Gains on branch divestitures and sales of businesses consisted of a $50 million
gain on the Corporation's sale of its interest in a credit card venture in 1999.
1998 results included a $165 million gain from the Corporation's sale of its 26%
interest in HomeSide, Inc., an independent mortgage banking company, and gains
of $51 million and $38 million related to the sales of the BankBoston Berkshire
County, Massachusetts franchise and domestic institutional custody business,
respectively.
Other noninterest income increased $31 million to $460 million in 1999, due
primarily to revenues resulting from the aforementioned acquisitions and
increases in the Corporation's insurance and lease residual income.
NONINTEREST EXPENSE
Year ended December 31 1999 1998 1997
In millions
==========================================================
Employee compensation and
benefits $4,568 $3,556 $3,031
Occupancy and equipment 1,114 1,003 961
Intangible asset amortization 349 274 206
Legal and other professional 307 254 172
Marketing and public relations 276 253 225
Telephone 177 167 141
Printing and mailing 165 152 128
Other 1,551 1,253 1,161
- ----------------------------------------------------------
Merger- and restructuring-related
charges 850 138 25
- ----------------------------------------------------------
Total noninterest expense $9,357 $7,050 $6,050
==========================================================
Noninterest expense increased $2.3 billion, or 33%, to $9.4 billion in 1999, due
primarily to acquisitions, merger- and restructuring-related charges and other
costs, growth in acquired and existing businesses and higher compensation and
benefit costs resulting mainly from increases in incentive compensation.
Noninterest expense for 1999 reflects the full year impact of Robertson
Stephens, compared to four months for 1998, as well as Sanwa, acquired by the
Corporation in February 1999.
In connection with the merger, the Corporation recorded merger- and
restructuring-related charges and other costs of $1.1 billion in the fourth
quarter of 1999. These costs were composed of $850 million of charges to accrue
for merger-related costs and a restructuring plan; $102 million of integration
costs incurred during the fourth quarter; and $150 million to establish a
defined contribution plan for retention incentives at Robertson Stephens. The
$102 million of integration costs were composed of $25 million of employee
compensation and benefits costs, $39 million of occupancy and equipment costs,
$17 million of legal and other professional costs, primarily consulting fees,
and $21 million of other costs. The integration process is expected to be
completed by the end of 2000, during which the Corporation expects to incur
additional integration costs of approximately $200 million.
In 1998, the Corporation recorded merger- and restructuring-related charges
and other costs of $218 million in connection with its acquisitions of Quick &
Reilly, Robertson Stephens and the domestic consumer credit card operations of
Advanta, as well as a realignment of its Asian operations and reductions in
staff in its Emerging Market Sales, Trading and Research unit. Refer to Note 8
to the Consolidated Financial Statements for additional information on certain
of these costs.
Employee compensation and benefits increased $1 billion during 1999, due to
increased levels of incentive payments in businesses with strong volumes and
revenue growth, such as Robertson Stephens and Quick & Reilly. As previously
mentioned, the Corporation recorded a $150 million charge in 1999 related to the
establishment of a defined contribution plan for retention incentives at
Robertson Stephens.
Occupancy and equipment increased $111 million, or 11%, to $1.1 billion,
primarily as a result of merger integration costs of $39 million recorded in
the fourth quarter of 1999, as well as increased expenses associated with the
aforementioned acquisitions.
15
Intangible asset amortization increased $75 million to $349 million in
1999, due mainly to the acquisitions of various credit card portfolios in 1998,
Sanwa, Robertson Stephens and MLSI, as well as additional goodwill recorded in
1999 related to the NatWest earnout agreement.
Legal and other professional expense increased $53 million during 1999, the
result of $17 million of merger integration costs incurred in the fourth quarter
of 1999, as well as the aforementioned acquisitions and other initiatives.
Marketing and public relations, telephone, and printing and mailing expenses
increased as a result of promotional mailings and higher volume at the
Corporation's processing-related businesses.
Other noninterest expense increased $298 million, or 24%, the result of
merger integration costs incurred in the fourth quarter of 1999 and increases
due to acquisitions and growth in existing businesses.
Excluding the effects of the merger- and restructuring-related charges and
other costs of $1.1 billion and $218 million in 1999 and 1998, respectively,
noninterest expense increased $1.4 billion, or 21%, in 1999 compared to 1998.
This increase resulted primarily from growth in the Corporation's businesses
acquired in 1999 and 1998, as well as the full year impact in 1999 of Robertson
Stephens and the February 1999 acquisition of Sanwa.
The Corporation expects to achieve total annual cost savings of
approximately $600 million as a result of the integration of Fleet and
BankBoston. The merger integration process is well underway, and major systems
conversions are expected to be completed in 2000. The Corporation expects to
complete its actions related to achieving these cost savings by the end of 2000,
and as of year-end 1999 had achieved annualized cost savings of approximately
$100 million. Because the merger integration 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, 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.
YEAR 2000
The Corporation smoothly transitioned into the Year 2000. All systems,
processing functions, infrastructure and facilities were fully operational
during the century date change, and have remained fully operational to date. All
of the Corporation's business units (banks, international locations and other
subsidiaries) reported that they successfully conducted "business as usual" on
Monday, January 3, 2000, the first business day of 2000. In addition, the
Corporation's supermarket and mall branches that were scheduled to open for
business on January 1, 2000 did so successfully. Several thousand employees were
on hand over the rollover weekend to monitor and validate the transition into
the Year 2000, including all levels of management.
While the rollover to Year 2000 was successful, there can be no assurance
that Year 2000-related problems will not occur. Despite the Corporation's
efforts to identify and address Year 2000 issues, such issues may continue to
present risks to the Corporation, including business disruptions, operational
problems, credit and other financial losses, legal liability and other similar
risks. The Corporation's businesses, results of operations, and financial
position could be materially adversely affected. The Corporation has not
experienced, and does not anticipate, any significant problems related to its
transition into the Year 2000.
Both Fleet and BankBoston had extensive Year 2000 programs in place prior
to the merger. Based on the timing of the merger in relation to the beginning of
2000, management concluded that each of the Year 2000 programs should continue
to be carried out separately. As such, the Corporation's Year 2000 programs were
not significantly affected by the merger. Total costs for the Fleet program are
expected to be approximately $150 million, of which approximately 83% had been
incurred through December 31, 1999. The BankBoston program is expected to incur
incremental costs of $75 million. It is estimated that these incremental costs
represent over half of the BankBoston total program costs. Approximately 86% of
the BankBoston program costs had been incurred through December 31, 1999.
16
INCOME TAXES
The Corporation recorded income tax expense of $1.4 billion for 1999 compared
with $1.5 billion for 1998. The effective tax rate was 40.5% in 1999 compared
with 38.5% in 1998. The increase in the effective tax rate was attributable to
the portion of the merger- and restructuring-related charge that was
nondeductible.
LINE OF BUSINESS INFORMATION
The Corporation is organized and managed along three principal lines of
business: Global Banking and Financial Services, Commercial and Retail Banking
and the National Consumer Group. 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. The following
table presents selected line of business results on an operating basis. These
results have been realigned to reflect the new organization that resulted from
the merger of Fleet and BankBoston, and have been reported using the management
reporting methodologies used by the combining companies during the periods
presented. A uniform set of management reporting methodologies has been
developed and will be implemented in 2000. The information is presented on a
fully taxable equivalent basis. Refer to Note 14 to the Consolidated Financial
Statements for additional information on the Corporation's lines of business.
LINE OF BUSINESS EARNINGS SUMMARY
Year ended December 31 1999 1998 1999 1998 1999 1998
Dollars in millions Net Income Total Revenue Return on Equity
================================================================================================================
Global Banking and Financial Services $1,290 $ 876 $6,127 $4,352 23% 19%
Commercial and Retail Banking 1,226 1,069 5,785 5,359 22 23
National Consumer Group 255 152 1,725 1,426 11 7
All Other (733) 227 136 598 - -
- ----------------------------------------------------------------------------------------------------------------
Total $2,038 $2,324 $13,773 $11,735 14% 18%
================================================================================================================
During 1999, each of the three principal business lines posted increases in
earnings and revenue compared to 1998. Improved results were driven by growth in
existing businesses, as well as the Corporation's acquisitions. All Other for
1999 and 1998 included $1.1 billion ($760 million after-tax) and $218 million
($135 million after-tax), respectively, of merger- and restructuring-related
charges and other costs. These costs are more fully discussed in the Noninterest
Expense section of this discussion, and the merger- and restructuring-related
costs are more fully discussed in Note 8 to the Consolidated Financial
Statements.
The following discussion focuses on the components and results of each of
the three major business lines.
GLOBAL BANKING AND FINANCIAL SERVICES
Year ended December 31 1999 1998
Dollars in millions
===========================================================
Income Statement Data:
Net interest income (FTE) $2,012 $1,752
Noninterest income 4,115 2,600
Provision for credit losses 303 237
Noninterest expense 3,678 2,625
Taxes/FTE adjustment 856 614
- -----------------------------------------------------------
Net Income $1,290 $ 876
- -----------------------------------------------------------
Balance Sheet Data:
Average assets $77,860 $63,525
Average loans and leases 46,743 43,509
Average deposits 20,071 18,815
- -----------------------------------------------------------
Return on Equity 23% 19%
===========================================================
Global Banking and Financial Services includes Corporate and Investment Banking,
International Banking, Investment Services and Principal Investing. This unit
earned $1.3 billion in 1999, a 47% increase from 1998 earnings of $876 million.
Increased earnings for Global Banking and Financial Services were driven by
capital markets and investment services revenues, as the Corporation capitalized
on strategic acquisitions completed during the prior year, as well as the
strength of world financial markets. In addition, this group incurred pre-tax
trading losses and write-downs in 1998 totaling $125 million, primarily related
to the Asian financial crisis. A more detailed analysis of the supporting
business units follows.
Year ended December 31 1999 1998 1999 1998
Dollars in millions Net Income % Change Total Revenue % Change
================================================================================
Corporate and Investment
Banking $ 406 $183 122% $2,108 $1,032 104%
International Banking 338 243 39 1,816 1,517 20
Investment Services 334 269 24 1,752 1,444 21
Principal Investing 212 181 17 451 359 26
- --------------------------------------------------------------------------------
Total $1,290 $876 47% $6,127 $4,352 41%
================================================================================
17
Corporate and Investment Banking
This line of business includes national specialized industry lending,
institutional banking, investment banking and capital markets activities. As a
result of its focus on the needs of large corporate customers and specialized
industries, this unit represents a diverse mix of corporate customers both by
geographic region and industry. Investment banking is conducted by Robertson
Stephens, which was acquired in August 1998, as well as the Corporation's other
corporate finance units. These units provide business customers with capital
formation, acquisition finance and long-term financial strategies. The
specialized industry and institutional lending units provide financial services
to corporate customers across the nation in high growth industries such as
media, communications, high tech, energy, financial institutions and healthcare.
This unit also services international clients through the multinational and
European units.
Corporate and Investment Banking earnings increased by $223 million, or
122%, compared to 1998, primarily due to the record levels of investment banking
activities which were reached in the world financial markets in 1999. Both
Robertson Stephens and the industry banking unit were benefactors of this
favorable investment banking environment. During 1998, Corporate and Investment
Banking incurred pre-tax trading losses of $105 million in connection with world
financial market volatility.
International Banking
The International Banking unit includes the Corporation's international
operations, predominantly in Brazil, where the Corporation has been in business
since 1947, and Argentina, where the Corporation has done business since 1917.
In both countries the Corporation is a recognized leader among financial
institutions. Further leveraging the expertise which it enjoys in these markets,
the Corporation has been able to develop unique strategies for managing
businesses in Argentina and Brazil. This business unit also includes operations
in other Latin American countries, as well as Asia, and offers sophisticated
foreign exchange products and other services through the capital markets unit.
This business line excludes operations in Europe, as well as international
operations related to large corporate and multinational customers, all of which
are part of the Corporate and Investment Banking business unit.
During the 1990s, Argentina has experienced a period of economic stability
and low inflation, with the Peso exchange rate tied one-for-one with the U.S.
dollar. Economic stability and growth has helped foster expansion and
acquisitions in the Argentine markets, where the Corporation currently operates
139 branches, including the operations of Deutsche Bank Argentina, S.A., which
were acquired in January 1998. The Corporation's total assets in Argentina
amounted to approximately $10 billion at December 31, 1999, compared to
approximately $9 billion at December 31, 1998. The Corporation operates diverse
businesses in this market. Corporate customer product offerings include
traditional retail lending services, cash management, trade services, foreign
exchange syndications, corporate finance and various investment banking
services. Consumers are provided access to mutual fund, insurance, credit card
and pension management products, in addition to the traditional deposit and
lending products.
Brazil has also enjoyed relative economic stability with a transition from
a sustained period of "hyperinflation," which lasted through the mid-1990s, to a
period of low inflation over the past few years. The Corporation offers a
diverse product mix in the Brazilian market. The corporate banking business
focuses principally on large companies, offering a full range of commercial and
investment banking products, with a significant portion of the lending book
related to import and export activity. In retail banking, the focus is on an
upscale customer base and offers a full line of products, including traditional
lending and deposit products, as well as credit cards, mutual funds, telebanking
and home banking. The Corporation has expanded branch banking in Brazil to 64
locations, and operates a strong mutual fund business, which is among the
largest in the country. The Corporation's total assets in Brazil amounted to
approximately $8 billion at December 31, 1999, compared to approximately $6
billion at December 31, 1998.
Compared to 1998, International Banking earnings increased by $95 million,
or 39%, driven primarily by increased revenues in Argentina and Brazil, as well
as a 23% increase in foreign exchange revenues, primarily in the capital markets
unit. These increases were attained despite economic volatility in 1999, which
resulted in a devaluation of the Brazilian currency and a significant recession
in Argentina. Revenues increased as a result of widening interest rate spreads
as well as increased banking fees, credit card revenues, mutual fund fees and
foreign exchange revenues in both countries. These higher revenues were partly
offset by increased operating costs associated with the regional branch
expansion and a higher provision for credit losses. International operations
increasingly emphasize deposit gathering (Argentina), top-tier consumer lending
opportunities (Brazil) and mutual fund fee generation. At December 31, 1999,
international mutual fund assets under management totaled $8.3 billion, while
average deposit balances were $9.6 billion for 1999. Loan balances at December
31, 1999 were $822 million ahead of 1998 at $14.5 billion, due primarily to
growth in commercial loans. Additional information relating to international
cross-border outstandings and currency positions and risks related to the
Corporation's International Banking unit is presented in the Cross-Border
Outstandings and Asset-Liability Management sections of this discussion.
18
Investment Services
The Investment Services business line is comprised of several businesses
targeting the growing customer need for investment products and services. These
businesses include Quick & Reilly, which offers securities brokerage,
market-making and securities clearing services; the Private Clients Group, which
offers specialized asset management, estate settlement and deposit and credit
products to high-net-worth customers; Columbia Management, which sells
proprietary mutual funds and a wide range of investment products to retail and
institutional customers; and the Retail Investments Group, which markets the
Corporation's proprietary mutual fund families, as well as third party mutual
funds and annuity products through traditional retail distribution channels. In
addition, the Investment Services group includes several businesses which offer
retirement planning, large institutional asset management and not-for-profit
investment services.
The Investment Services unit earned $334 million in 1999, an increase of
$65 million, or 24%, compared to 1998. Assets under management, as well as
increased brokerage and market-making revenues, drove increased earnings. A $255
million, or 55%, increase in brokerage and market-making revenues at Quick &
Reilly resulted from the strength of financial markets during 1999. In addition,
investment management revenue remained strong at $694 million, as increased
sales of mutual funds and annuity products resulted in growth in assets under
management. At December 31, 1999, domestic assets under management totaled
approximately $120 billion.
Principal Investing
This business line 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 line had assets with an
aggregate carrying value of approximately $4 billion at year-end 1999. In 1999,
earnings increased $31 million to $212 million. Increased earnings were driven
by realized gains on the sale of several technology stocks as a result of
effective investment strategies and continued strength in the equity markets.
Principal Investing earnings are affected by the condition of equity markets,
the general state of the economy and the timing of sales.
COMMERCIAL AND RETAIL BANKING
Year ended December 31 1999 1998
Dollars in millions
============================================================
Income Statement Data:
Net interest income (FTE) $4,204 $3,941
Noninterest income 1,581 1,418
Provision for credit losses 374 339
Noninterest expense 3,351 3,194
Taxes/FTE adjustment 834 757
- ------------------------------------------------------------
Net Income $1,226 $1,069
- ------------------------------------------------------------
Balance Sheet Data:
Average assets $70,995 $60,918
Average loans and leases 59,667 52,489
Average deposits 79,014 78,174
- ------------------------------------------------------------
Return on Equity 22% 23%
============================================================
Commercial and Retail Banking includes domestic banking to consumer and small
business customers, 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. Earnings for this unit
increased $157 million, or 15%, as strong growth in commercial services was
complemented by relatively slower growth in the retail banking units.
Year ended December 31 1999 1998 % 1999 1998 %
Dollars in millions Net Income Change Total Revenue Change
=======================================================================
Commercial Finance $380 $265 43% $1,146 $ 770 49%
Retail Distribution 345 314 10 2,355 2,322 1
Commercial Banking 226 203 11 1,070 1,023 5
Small Business 224 214 5 850 828 3
Consumer Lending 51 73 (30) 364 416 (13)
- -----------------------------------------------------------------------
Total $1,226 $1,069 15% $5,785 $5,359 8%
=======================================================================
Commercial Finance
Commercial Finance focuses on the asset financing needs of corporate customers,
and offers asset-based lending, commercial real estate loans and leasing
products to corporate customers located throughout the nation. Commercial
Finance customers also have access to debt capital markets, cash management,
trade services, foreign exchange, international services, interest rate
protection and investment products. Commercial Finance earned $380 million in
1999, an increase of 43% compared to 1998. This increase in earnings was
primarily driven by
19
loan growth of $8 billion, including the first quarter 1999 acquisition of
Sanwa, which accounted for nearly $6 billion of additional loan and lease
balances at the time of purchase. Completing strategic acquisitions like Sanwa
allows the Corporation to expand its market presence, differentiate itself from
the competition and strengthen account relationships by being able to offer
corporate customers a full range of sophisticated financing products to meet
their needs. Commercial Finance had $28 billion in average loans and leases
outstanding during 1999 compared to $20 billion during 1998.
Retail Distribution
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 over 1,500 branches, including convenient in-store branches, 4,000
ATMs, electronic banking products, Internet banking and 24-hour customer call
centers. These delivery channels provide customers with the convenience to
manage their finances in virtually any manner suited to their needs. The
Corporation continues to expand its electronic banking customer base, which has
grown from 438,000 in 1998 to 669,000 in 1999, and currently has several
electronic banking initiatives in process.
This unit also includes the Corporation's Community Banking group, which
seeks to stimulate the economic revitalization of low and moderate income
neighborhoods in our eight state footprint. Community Banking is also
responsible for oversight of the Corporation's compliance with the provisions of
the Community Reinvestment Act. Community Banking includes 48 branches in select
inner-city neighborhoods where it serves the needs and reflects the linguistic
and cultural diversity of its 140,000 customers. A staff of community
development officers serves as information brokers who provide financial
education and referral services to low and moderate income customers. In
addition to providing traditional banking products and services, this group is a
leading provider of equity and at-risk capital for low and moderate and
historically underserved minority and women-owned businesses.
In 1999, Retail Distribution earned $345 million, a 10% increase over 1998
earnings of $314 million. Higher earnings were driven by increased fee revenues
resulting from product enhancements and aggressive pricing strategies
established in the latter part of 1998. Core deposit levels declined marginally,
as continued customer migration towards higher-yielding deposit products and
mutual funds was partly offset by the successful promotion of money market
accounts in selected markets. Operating costs remained relatively flat with the
prior year despite the need for continuing reconfiguration of distribution
channels to keep pace with the ever-changing preferences of today's customers.
During 1999, Retail Distribution had average core deposit balances of $55.1
billion compared with $55.5 billion during 1998.
Commercial Banking
Commercial Banking represents middle-market commercial lending, government
banking services, trade services and cash management services. Commercial
Banking provides a wide range of credit and banking services to customers
generally ranging in size from $10 million to $500 million in annual sales, as
well as government banking customers. As in the Commercial Finance unit, the
Corporation provides its Commercial Banking customers with superior access to
financial solutions, and supports its customers with services such as foreign
exchange, international services, interest rate protection and investment
products.
Commercial Banking earned $226 million in 1999, an 11% increase over the
$203 million earned in 1998, resulting from increased levels of cash management,
trade services and investment banking revenue. Declining spreads diminished some
of the additional revenue generated by the $1 billion of loan growth during the
year.
Small Business
The Small Business group provides a full range of financial services to
businesses with annual sales of up to $10 million. Services offered include
commercial lending, real estate lending, deposit products and cash management.
This unit also offers an array of innovative solutions to small business
customers, including: Business Solution Centers, where customers can
conveniently shop for tax, payroll, cash management and other services; Business
Leasing, where small business customers can access a number of leasing
alternatives; and StoreFronts@Fleet.com, where the Corporation helps small
businesses develop a retail presence on the Internet. The Corporation is widely
recognized as the leading small business lender in the Northeast and the fourth
largest SBA lender in the country. Earnings for this unit were $224 million in
1999, slightly higher than 1998 earnings of $214 million. Higher account service
charges and increased merchant fees drove the increased earnings, enhanced by an
improved spread on loans and deposits and slightly improved credit quality.
Average loan balances were relatively unchanged at $4 billion for 1999, while
average deposit balances increased by $1 billion to nearly $12 billion. Fee
revenue generated from higher deposit volumes was offset by increased processing
costs and increased interest expense associated with the changing deposit mix.
20
Consumer Lending
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. Products
offered include home equity loans and student loans, as well as both direct and
indirect installment lending programs. The Consumer Lending business has nearly
$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 $51 million in 1999, a decline of 30% from
1998. Lower earnings were primarily the result of lower loan balances, as this
unit has shifted away from certain higher-risk loan types.
NATIONAL CONSUMER GROUP
Year ended December 31 1999 1998
Dollars in millions
============================================================
Income Statement Data:
Net interest income (FTE) $ 456 $ 549
Noninterest income 1,269 877
Provision for credit losses 336 335
Noninterest expense 971 841
Taxes/FTE adjustment 163 98
- ------------------------------------------------------------
Net Income $ 255 $ 152
- ------------------------------------------------------------
Balance Sheet Data:
Average assets $13,435 $13,148
Average loans and leases 4,533 5,141
Average deposits 2,403 2,650
- ------------------------------------------------------------
Return on Equity 11% 7%
============================================================
The National Consumer Group includes credit card services, mortgage banking and
student loan processing. A more detailed analysis of these business lines
follows.
Year ended December 31 1999 1998 % 1999 1998 %
Dollars in millions Net Income Change Total Revenue Change
=======================================================================
Credit Cards $154 $85 81% $1,134 $921 23%
Mortgage Banking 71 42 69 404 357 13
Student Loan Processing 30 25 20 187 148 26
- -----------------------------------------------------------------------
Total $255 $152 68% $1,725 $1,426 21%
=======================================================================
The Corporation's credit card subsidiary is the eighth largest bank credit card
issuer in the nation. Fleet Mortgage, with offices located in 15 states,
originated approximately $35 billion of loans in 1999 and currently services a
mortgage portfolio of $150 billion and 1.6 million loans. Student Loan
Processing, through the Corporation's AFSA subsidiary, services approximately 7
million accounts nationwide and is the largest student loan service provider in
the nation, with approximately $61 billion of student loans serviced.
National Consumer Group earnings increased $103 million compared to 1998,
due primarily to the integration of 1998 acquisitions in the domestic consumer
credit card business and strong consumer confidence during 1999, as well as
increased mortgage banking revenues. The National Consumer Group also had
increased earnings in its AFSA unit, due to increased student loan account
volumes.
ALL OTHER
All Other includes certain transactions not allocated to the principal business
lines, 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. For comparative
purposes, businesses sold during the year have been allocated to All Other.
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 both 1999 and 1998, All Other included
several such transactions. The Corporation recorded merger- and
restructuring-related charges and other costs totaling $1.1 billion and $218
million in 1999 and 1998, respectively, and gains on sales of businesses of $50
million and $254 million in 1999 and 1998, respectively.
All Other had a net loss of $733 million in 1999 compared to net income of
$227 million in 1998. The decrease in earnings is primarily attributable to the
aforementioned merger- and restructuring-related charges and other costs
recorded in the fourth quarter of 1999 in connection with the merger with
BankBoston, as well as the absence of the gains realized on sales of businesses
in 1998.
21
FINANCIAL CONDITION
Total assets increased $12.8 billion to $190.7 billion as of December 31, 1999,
the result of increases in trading assets, investment securities, mortgage
servicing rights and strong loan growth, offset, in part, by a decrease in
mortgages held for resale. In connection with obtaining regulatory approvals for
the merger with BankBoston, the Corporation agreed to divest $13 billion of
deposits and $9 billion of loans. These divestitures will occur in 2000.
Total loans at December 31, 1999 were $119.7 billion, an increase of 7%,
compared with $112.1 billion at December 31, 1998. The increase was attributable
to the acquisition of Sanwa and strong loan growth in the domestic commercial
loan and lease financing portfolios, offset, in part, by securitization activity
of $2.3 billion.
Total deposits decreased $3.3 billion to $114.9 billion at December 31,
1999. The decrease was due principally to declines of $1.4 billion in domestic
regular savings and NOW deposits, $2.6 billion in domestic time deposits and
$698 million in international deposits, partially offset by a $1.5 billion
increase in domestic money market deposits resulting from the Corporation's
efforts to maintain competitive low cost funding sources.
Short-term borrowings decreased $1.1 billion to $18.1 billion at December
31, 1999, primarily the result of a decrease in treasury, tax and loan
borrowings.
Long-term debt increased $10.9 billion to $25.3 billion as a result of
funding both acquisitions and balance sheet growth.
The Corporation's investment securities portfolio plays a significant role
in the management of the Corporation's balance sheet, as the liquid nature of
the securities portfolio enhances the efficiency of the balance sheet. The
amortized cost of securities available for sale increased $1.8 billion to $23.4
billion at December 31, 1999, compared to $21.7 billion at December 31, 1998.
The valuation of securities available for sale increased $514 million to a net
unrealized gain (pre-tax) position of $692 million at December 31, 1999, due to
increases in the value of marketable equity securities, primarily investments
held by the Corporation's Principal Investing business. Excluding the Principal
Investing portfolio, the Corporation's more traditional investment portfolio had
a net unrealized loss (pre-tax) of $673 million.
SECURITIES
December 31 1999 1998 1997
Amortized Market Amortized Market Amortized Market
In millions Cost Value Cost Value Cost Value
===========================================================================================================================
Securities available for sale:
U.S. Treasury and government agencies $2,282 $2,196 $1,821 $1,845 $3,435 $3,466
Mortgage-backed securities 14,157 13,567 14,166 14,380 10,602 10,769
Other debt securities 4,850 4,853 4,188 4,135 2,521 2,513
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 21,289 20,616 20,175 20,360 16,558 16,748
- ---------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 977 2,342 446 439 392 447
Other equity securities