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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6366
FleetBoston Financial Corporation
(Exact name of Registrant as specified in its charter)
| Rhode Island | 05-0341324 |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| 100 Federal Street, Boston, Massachusetts | 02110 |
| (Address of principal executive office) | (Zip Code) |
617 / 434-2200
(Registrant’s telephone number, including area code)
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 Boston 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 FleetBoston Financial Corporation |
New York Stock Exchange |
| 7.05% Trust Originated Preferred Securities issued by Fleet Capital Trust III, Guaranteed by FleetBoston Financial Corporation |
New York Stock Exchange |
| 7.17% Trust Originated Preferred Securities issued by Fleet Capital Trust IV, Guaranteed by FleetBoston Financial Corporation |
New York Stock Exchange |
| 8.80% Trust Originated Preferred Securities issued by Fleet Capital Trust VI, Guaranteed by FleetBoston Financial Corporation |
New York Stock Exchange |
| 7.20% Capital Securities issued by Fleet Capital Trust VII, Guaranteed by FleetBoston Financial Corporation |
New York Stock Exchange |
| Preferred Share Purchase Rights | New York Stock Exchange Boston 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 January 31, 2002, the aggregate market value of the voting stock held by nonaffiliates of the Registrant was $34.9 billion.
The number of shares of common stock of the Registrant outstanding as of January 31, 2002 was 1,043,733,399.
DOCUMENTS INCORPORATED BY REFERENCE
Pertinent extracts from Registrant’s Proxy Statement for its 2002 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 I. | Item 1. | Business | 2-6 |
| - Line of Business Information | 10-14, 59-61 | ||
| - Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9-36 | ||
| - Acquisitions and Divestitures | 47 | ||
| - Capital | 34-35, 52-53 | ||
| - Dividends | 34-35, 52-53 | ||
| - Statistical Disclosure by Bank Holding Companies | 5-6, 9, 20-27, 29, 43-44, 47-49, 65-67 |
||
| Item 2. | Properties | 6 | |
| Item 3. | Legal Proceedings | 6-7, 57 | |
| Item 3A. | Executive Officers of the Corporation | 7-8 | |
| Item 4. | Submission of Matters to a Vote of Security Holders | 8 | |
| Part II. | Item 5. | Market for the Registrant’s Common Stock and Related Stockholder Matters | 8, 66 |
| Item 6. | Selected Financial Data | 9 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
9-36 | |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 30-34, 37 | |
| Item 8. | Financial Statements and Supplementary Data | 38-64, 66 | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
68 | |
| Part III. | Item 10. | Directors and Executive Officers of the Registrant | 7-8, 68* |
| Item 11. | Executive Compensation | 68* | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
68* | |
| Item 13. | Certain Relationships and Related Transactions | 68* | |
| Part IV. | Item 14. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
39-42, 69-72 |
| Signatures | 73-74 | ||
*The information required by this Item is incorporated herein by reference to the Corporation’s Proxy Statement for its 2002 Annual Meeting of Stockholders.
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PART I.
Item 1. Business
General
FleetBoston Financial Corporation (FleetBoston or the Corporation) is a diversified financial services company organized under the laws of the State of Rhode Island. FleetBoston is a legal entity separate and distinct from its subsidiaries, assisting those subsidiaries by providing financial resources and management. At December 31, 2001, the Corporation had total assets of $203.6 billion, total deposits of $129.3 billion, total stockholders’ equity of $17.6 billion and approximately 56,000 employees. In terms of total assets, FleetBoston is the seventh largest financial holding company in the United States. The executive office of the Corporation is located at 100 Federal Street, Boston, Massachusetts, 02110 (telephone (617) 434-2200).
On March 1, 2001, FleetBoston completed its acquisition of Summit Bancorp. (Summit). Approximately 180.5 million shares of FleetBoston common stock were issued in exchange for substantially all of Summit’s outstanding shares, through the exchange of 1.02 shares of FleetBoston stock for each outstanding Summit share. The transaction 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.
FleetBoston, through its subsidiaries, offers a comprehensive array of financial solutions to approximately 20 million customers. Its key businesses include consumer and small business banking; commercial banking, including middle-market lending, asset-based lending, leasing, cash management, trade finance and government banking; international banking; corporate banking; principal investing; investment banking; securities brokerage, market-making and clearing services; investment services, including asset management, mutual funds and retirement planning; credit card services; commercial real estate lending; and student loan and other processing. FleetBoston owns three national banking subsidiaries, including its principal banking subsidiary, Fleet National Bank (FNB). FNB is a member of the Federal Reserve System, and its domestic deposits are insured by the Federal Deposit Insurance Corporation (the FDIC) to the extent provided by law.
FleetBoston’s principal 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 16 of the “Notes to Consolidated Financial Statements” included under Item 8 of this Report. For discussions of FleetBoston’s business activities, including its lending activities, its cross-border outstandings and its management of credit risk, liquidity risk and other 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 contains statements (including, without limitation, statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Report under Item 7), that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. In addition, FleetBoston may make other written and oral communications from time to time (including, without limitation, in the Corporation’s 2001 Summary Annual Report to Stockholders) that contain such statements. Forward-looking statements, including statements as to industry trends, future expectations of the Corporation and other matters that do not relate strictly to historical facts, are based on certain assumptions by management. Actual results may differ materially from those projected as a result of the following risks and uncertainties, as well as any other risks and uncertainties detailed from time to
time in the filings of the Corporation with the Securities and Exchange Commission (the SEC):
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Competition
FleetBoston’s banking and non-banking 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. FleetBoston continues to implement strategic initiatives focused on expanding its core businesses and to explore, on an ongoing basis, acquisition, divestiture and joint venture opportunities. FleetBoston analyzes each of its businesses in the context of customer demands, competitive advantages, industry dynamics and growth potential.
For additional information with regard to FleetBoston’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 FleetBoston 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 FleetBoston and its subsidiaries are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of security holders.
Several of the more significant regulatory provisions applicable to banks and financial 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 FleetBoston and its subsidiaries.
Regulatory Agencies
Financial Holding Company. As a registered bank holding company and financial holding company, FleetBoston is subject to regulation under the Bank Holding Company Act of 1956 and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve Board).
Subsidiary Banks. FNB and FleetBoston’s other national banking subsidiaries are subject to regulation, supervision and examination primarily by the Office of the Comptroller of the Currency (the OCC) and secondarily by the Federal Reserve Board and the FDIC. FNB’s and FleetBoston’s operations in other countries are also subject to various restrictions imposed by the laws of those countries.
Non-bank Subsidiaries. Many of FleetBoston’s non-banking subsidiaries also are subject to regulation by the Federal Reserve Board and other applicable federal and state agencies. FleetBoston’s brokerage subsidiaries are regulated by the SEC, the New York Stock Exchange, the National Association of Securities Dealers, Inc. and state securities regulators. FleetBoston’s insurance subsidiaries are subject to regulation by applicable state insurance regulatory agencies. Other non-banking subsidiaries of the Corporation are subject to the laws and regulations of both the federal government and the various states in which they conduct business.
Other Requirements and Regulations. FleetBoston 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 governmental requirements and regulations in the states and countries where FleetBoston and its subsidiaries operate.
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Financial and Bank Holding Company Activities
“Financial in Nature” Requirement. As a financial holding company, the Corporation may engage in, and acquire companies engaged in, activities that are considered “financial in nature,” as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations. These activities include, among other things, securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, and merchant banking. If any banking subsidiary of the Corporation ceases to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve Board may, among other things, place limitations on the Corporation’s ability to conduct the broader financial activities permissible for financial holding companies or, if the deficiencies persist, require the Corporation to divest the banking subsidiary.
In addition, if any banking subsidiary of the Corporation receives a Community Reinvestment Act rating of less than satisfactory, the Corporation would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The Corporation may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, as long as it gives the Federal Reserve board after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks, such as FNB, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.
Interstate Banking and Branching. As a bank holding company, the Corporation is required to obtain prior Federal Reserve Board approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (Riegle-Neal), subject to certain concentration limits and other requirements, bank holding companies such as the Corporation may acquire banks and bank holding companies located in any state. Riegle-Neal also permits banks 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 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.
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. 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 voting stock of a bank holding company, or
otherwise obtaining control or a “controlling influence” over that bank holding company.
Liability for Banking Subsidiaries
Under 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 commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated 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.” All of FleetBoston’s subsidiary banks are FDIC-insured depository institutions.
Capital Requirements
Information concerning FleetBoston and its subsidiaries with respect to capital requirements is incorporated by reference from Note 10, “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 the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions--well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized--and requires federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet
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minimum capital requirements based on these categories. Unless a bank 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 bank must develop a capital restoration plan and its parent bank holding company must guarantee the bank’s compliance with the plan up to the lesser of 5% of the bank’s assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2001, each of FleetBoston’s banking subsidiaries was considered well capitalized based on the guidelines implemented by the bank regulatory agencies.
Dividend Restrictions
FleetBoston’s funds for cash distributions to its stockholders are derived from a variety of sources, including cash and temporary investments. One of the principal sources of those funds and funds used to pay principal and interest on FleetBoston’s indebtedness is dividends received from its subsidiary banks. Various federal laws limit the amount of dividends FleetBoston’s banking subsidiaries can pay to FleetBoston without regulatory approval. In addition, federal bank regulatory agencies have authority to prohibit the Corporation’s banking subsidiaries from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute an unsafe or unsound practice. The ability of FleetBoston’s banking subsidiaries to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines. Additional information concerning FleetBoston and its banking subsidiaries with respect to dividends is incorporated by reference from Note 10, “Regulatory Matters,” of the “Notes to Consolidated Financial Statements” included under Item 8 of this Report, and the “Liquidity Risk Management” and “Capital 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 FleetBoston’s banking subsidiaries 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. As of December 31, 2001, FleetBoston’s banking subsidiaries held approximately $101 billion and $9 billion, respectively, of BIF- and SAIF-assessable deposits. FleetBoston currently pays no insurance assessments on these deposits under the FDIC’s risk-related assessment system. However, insurance assessments could be required as early as 2003.
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.
Future Legislation
Changes to the laws and regulations in the states and countries where FleetBoston and its subsidiaries do business can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. FleetBoston cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of FleetBoston.
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 1999-2001” table - presents average balance sheet amounts, related taxable equivalent interest earned or paid, and related average yields and rates paid.
“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” - discloses information regarding book values, market values, maturities, and weighted average yields of securities (by category).
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Note 4, “Loans and Leases,” of the “Notes to Consolidated Financial Statements” and “Loans and Leases” table included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” - 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 1, “Summary of Significant Accounting Policies - Loans and Leases” of the “Notes to Consolidated Financial Statements” and “Nonperforming Assets” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” - 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 1999-2001” table and the “Components of Funding Sources” table included in “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, and equity-to-assets ratio.
Note 6, “Short-Term Borrowings,” of the “Notes to Consolidated Financial Statements” - discloses information on short-term borrowings of the Corporation.
Item 2. Properties
FleetBoston maintains its corporate headquarters at 100 Federal Street, Boston, Massachusetts. FleetBoston or its domestic subsidiaries also maintain principal offices at One Federal Street, Boston, Massachusetts; 111 Westminster Street and One Financial Plaza, Providence, Rhode Island; 777 Main Street, Hartford, Connecticut; 1185 Avenue of the Americas and 26 Broadway, New York, New York; 555 California Street, San Francisco, California; and 301 Carnegie Center, Princeton, New Jersey. FleetBoston or its subsidiaries also maintain administration and operations centers located in New York, Massachusetts, Pennsylvania, Rhode Island, Connecticut, Colorado, Illinois, Delaware, New Jersey and California.
In Latin America, where FNB operates under the corporate name “BankBoston, N.A.,” BankBoston, N.A. maintains banking headquarters in Buenos Aires, Argentina, and Sao Paulo, Brazil. In 1998, BankBoston, N.A. acquired an undeveloped site in Sao Paulo, Brazil to construct a new corporate office building. Construction commenced in July 1999 and is expected to be completed in the second quarter of 2002.
None of these properties is subject to any material encumbrance. FleetBoston’s subsidiaries also own or lease numerous other premises used in their domestic and foreign operations.
Item 3. Legal Proceedings
The Corporation and its subsidiaries are involved in various legal proceedings arising out of, and incidental to, their respective businesses, including the following matter:
During 2001, Robertson Stephens, the Corporation’s investment banking subsidiary, and many other underwriters, as well as various issuers and their officers and directors, were named as defendants in approximately 200 class action lawsuits alleging violations of federal securities laws in connection with the underwriting of initial public offerings (IPOs). The plaintiffs contend that the defendants violated the securities laws by failing to make certain required disclosures in prospectuses, by manipulating the prices of IPO securities in the aftermarkets through, among other things, alleged agreements with companies receiving allocations to purchase additional shares in the aftermarket and by false and misleading analyst reports. Robertson Stephens and other leading underwriters have also been named as defendants in class action lawsuits under the antitrust laws alleging that the underwriters conspired to manipulate the aftermarkets for the IPO securities
and to extract anticompetitive fees in connection with the IPOs. Robertson Stephens believes that it acted lawfully in respect to the foregoing allegations and is contesting these suits. Robertson Stephens is also involved in various governmental reviews and investigations concerning the foregoing.
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Management of the Corporation, based on its review with counsel of all actions and proceedings pending against the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation’s financial condition or results of operations.
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 defined in the Securities Exchange Act of 1934, as of February 25, 2002 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.
| Name | Positions with the Corporation | Age as of February 25, 2002 |
| Terrence Murray | Chairman | 62 |
| Charles K. Gifford | President and Chief Executive Officer | 59 |
| Henrique C. Meirelles | President of Global Banking | 56 |
| Eugene M. McQuade | Vice Chairman and Chief Financial Officer | 53 |
| H. Jay Sarles | Vice Chairman, Wholesale Banking | 56 |
| Paul F. Hogan | Vice Chairman and Chief Risk Officer | 56 |
| Peter J. Manning | Vice Chairman | 63 |
| T. Joseph Semrod | Vice Chairman | 65 |
| Joseph Smialowski | Vice Chairman, Technology and Operations | 53 |
| Bradford H. Warner | Vice Chairman, Consumer Financial Services | 50 |
| Anne M. Finucane | Executive Vice President | 49 |
| John L. Mastromarino | Executive Vice President | 48 |
| Brian T. Moynihan | Executive Vice President | 42 |
| Gary A. Spiess | Executive Vice President, General Counsel and Secretary | 61 |
| M. Anne Szostak | Executive Vice President | 51 |
| Ernest L. Puschaver | Chief Accounting Officer | 54 |
Terrence Murray has served as Chairman of the Corporation since 1982 (except from 1988 to 1989 and from 1995 to 1996, when he served as President) and Chief Executive Officer from 1982 through December 2001 (except from 1988 to 1989, when he served as Chief Operating Officer). 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 of BankBoston Corporation (BankBoston) with Fleet Financial Group, Inc. in 1999 (the BankBoston merger) and became President and Chief Executive Officer in December 2001. Prior to the BankBoston 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 1999. Mr. Gifford has been a Director of the Corporation since 1999.
Henrique C. Meirelles became President of Global Banking and Financial Services of the Corporation following the BankBoston merger, was named President of Corporate and Global Banking in November 2000 and became President of Global Banking in October 2001. Prior to the BankBoston merger, Mr. Meirelles had served as BankBoston’s President and Chief Operating Officer from 1996 to 1999. Mr. Meirelles has been a Director of the Corporation since 1999.
Eugene M. McQuade was named Executive Vice President and Chief Financial Officer of the Corporation in 1993, and has served as Vice Chairman and Chief Financial Officer since 1997.
H. Jay Sarles became Vice Chairman of the Corporation in 1993, Vice Chairman and Chief Administrative Officer in 1997 and Vice Chairman, Wholesale Banking, in October 2001.
Paul F. Hogan became Vice Chairman, Corporate and Investment Banking, of the Corporation following the BankBoston merger and was named Vice Chairman and Chief Risk Officer in 2000. Prior to the BankBoston merger, Mr. Hogan had served as Vice Chairman, Corporate Banking, of BankBoston from 1996 to 1997 and Vice Chairman, Wholesale Banking, from 1997 to 1999.
Peter J. Manning became Vice Chairman of the Corporation following the BankBoston merger. Prior to the BankBoston merger, Mr. Manning had served as Executive Vice President, Mergers and Acquisitions, of BankBoston from 1996 to 1999.
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T. Joseph Semrod became Vice Chairman of the Corporation following the acquisition of Summit by the Corporation in March 2001. Prior to the Summit acquisition, Mr. Semrod had served as Chairman of the Board and Chief Executive Officer of Summit from 1981 to March 2001.
Joseph Smialowski became Vice Chairman, Technology and Operations, of the Corporation following the BankBoston merger. Prior to the BankBoston merger, Mr. Smialowski had served as Executive Vice President, Technology and Operations, of BankBoston from 1998 to 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 BankBoston merger and was named Vice Chairman, Consumer Business Group, in 2000 and Vice Chairman, Consumer Financial Services, in January 2002. Prior to the BankBoston merger, Mr. Warner had served as Executive Vice President, Global Capital Markets, of BankBoston from 1996 to 1998 and Vice Chairman, Regional Banking, from 1998 to 1999.
Anne M. Finucane has served as Senior Vice President and Director of Corporate Marketing and Corporate Communications of the Corporation from 1995 to 1999 and Executive Vice President since 1999.
John L. Mastromarino became Executive Vice President of the Corporation following the BankBoston merger. Prior to the BankBoston merger, Mr. Mastromarino had served as Executive Vice President, Risk Management, of BankBoston from 1995 to 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 1999.
Gary A. Spiess was named Senior Vice President, Deputy General Counsel and Assistant Secretary of the Corporation following the BankBoston merger and became Executive Vice President, General Counsel and Secretary in January 2002. Prior to the BankBoston merger, Mr. Spiess had served as General Counsel and Clerk of BankBoston from 1987 to 1999 and as Executive Vice President from 1998 to 1999.
M. Anne Szostak was named Senior Vice President, Human Resources, of the Corporation in 1994 and has served as Executive Vice President since 1998.
Ernest L. Puschaver was named Chief Accounting Officer of the Corporation in 2000. Prior to joining the Corporation, Mr. Puschaver had been a partner at PricewaterhouseCoopers LLP since 1983.
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 2001.
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 and Boston Stock Exchanges. At December 31, 2001, FleetBoston had 85,312 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 “Quarterly Summarized Financial Information” table included under Item 8 of this Report, which is incorporated by reference herein.
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Item 6. Selected Financial Data
SELECTED FINANCIAL HIGHLIGHTS
| Dollars in millions, except per share amounts Prepared on a fully taxable equivalent basis |
2001 | 2000 | 1999 | 1998 | 1997 | |||||
| For the Year | ||||||||||
| Net interest income | $ 7,454 | $ 7,975 | $ 8,091 | $ 7,653 | $ 7,344 | |||||
| Noninterest income | 5,340 | 9,461 | 7,366 | 5,625 | 4,508 | |||||
| Total revenue | 12,794 | 17,436 | 15,457 | 13,278 | 11,852 | |||||
| Noninterest expense | 8,913 | 9,610 | 10,253 | 7,847 | 6,878 | |||||
| Provision for credit losses | 2,330 | 1,295 | 1,061 | 916 | 581 | |||||
| Net income | 931 | 3,910 | 2,476 | 2,771 | 2,606 | |||||
| Per Common Share | ||||||||||
| Basic earnings | $ .84 | $ 3.58 | $ 2.21 | $ 2.48 | $ 2.32 | |||||
| Diluted earnings | .83 | 3.52 | 2.16 | 2.42 | 2.27 | |||||
| Market price (year-end) | 36.50 | 37.56 | 34.81 | 44.69 | 37.56 | |||||
| Cash dividends declared | 1.34 | 1.23 | 1.11 | 1.00 | .92 | |||||
| Book value (year-end) | 16.61 | 17.31 | 15.92 | 14.78 | 13.43 | |||||
| At Year-End | ||||||||||
| Assets | $ 203,638 | $219,085 | $226,808 | $210,828 | $190,278 | |||||
| Securities | 26,662 | 34,964 | 36,009 | 33,356 | 29,077 | |||||
| Loans | 128,180 | 134,834 | 142,861 | 133,037 | 125,433 | |||||
| Reserve for credit losses | 3,634 | 2,709 | 2,816 | 2,628 | 2,440 | |||||
| Deposits | 129,337 | 128,739 | 139,592 | 141,310 | 131,826 | |||||
| Short-term borrowings | 15,457 | 23,106 | 22,700 | 22,472 | 22,821 | |||||
| Long-term debt | 25,530 | 31,684 | 29,214 | 17,878 | 9,239 | |||||
| Total stockholders’ equity | 17,608 | 19,361 | 18,074 | 16,896 | 15,641 | |||||
| Ratios | ||||||||||
| Return on average assets | .45 | % | 1.75 | % | 1.11 | % | 1.38 | % | 1.44 | % |
| Return on average common equity | 4.77 | 22.04 | 14.45 | 17.51 | 18.74 | |||||
| Net interest margin | 4.15 | 4.17 | 4.19 | 4.35 | 4.60 | |||||
| Common equity-to-assets (year-end) | 8.51 | 8.58 | 7.66 | 7.69 | 7.71 | |||||
| Average total equity-to-assets | 9.25 | 8.10 | 7.83 | 8.12 | 8.12 | |||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis of FleetBoston Financial Corporation’s (FleetBoston or the Corporation) financial condition and results of operations should be read in conjunction with its Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 8 of this Report. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications. The preparation of consolidated financial statements requires management to make estimates and assumptions, in the application of certain of its accounting policies, about the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues and expenses. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies.
The accounting policies considered significant in this respect are the valuation of principal investing securities and derivative instruments, and the determination of the reserve for credit losses. These significant accounting policies are discussed in the Capital Markets Revenue and Reserve for Credit Losses sections of this discussion and analysis and in Note 1 of the “Notes to Consolidated Financial Statements.” 9 markets and investment services businesses, increased credit costs, and the impact of political and economic instability in Argentina. Results for 2001 and 2000 included the following, which are more fully discussed in other sections of this Report: Year ended December 31, 2000: LINE OF BUSINESS INFORMATION FleetBoston is managed along a customer-focused organizational structure that includes five principal lines of business: Wholesale Banking, Consumer Financial Services, Wealth Management and Brokerage, International Banking, and Capital Markets. Business line results are subject to periodic restatements based on modifications to management accounting methodology, profitability measurement enhancements and organizational changes. Accordingly, information for the years ended December 31, 2001 and 2000 presented in this section has been restated for comparative purposes to reflect management reporting changes implemented in 2001, including the revised organizational structure adopted in October 2001, and the March 2001 acquisition of Summit. The table below highlights FleetBoston’s segment results and is presented on a fully taxable equivalent (FTE) basis. Line of Business Earnings Summary 10 The following discussion focuses on the components of each of the five major business lines, and explains results in terms of their underlying businesses. Wholesale Banking earned $1.2 billion in 2001, a decrease of $122 million from the prior year. Earnings from the wholesale banking units reflected weak demand for both loan and capital markets-related products as the economic environment has deteriorated. In addition, economic conditions have impacted credit quality, contributing to increases in nonperforming loans and the provision for credit losses. Strong sales of cash management and interest rate protection products, along with the impact of cost saving initiatives, helped to moderate the impact of the weak economic climate. The Commercial Finance unit offers creative financing solutions for the complex needs of a nationwide customer base using commercial real estate lending, leasing and asset-based financing products. Commercial Finance earned $500 million in the current year, compared to $495 million in 2000. Increased customer demand for cash management and trade services, along with strong fee generation in the leasing unit and cost saving initiatives, combined to offset declining investment banking fees and higher credit costs. The loan and lease portfolio experienced strong growth in leasing and real estate loans, but this growth was limited by declines in the asset-based portfolio, which was repositioned to reduce credit exposure. Total average loans grew to $38.1 billion for 2001 from $37.9 billion a year earlier. 11 Consumer Financial Services Consumer Financial Services, which provides a host of basic banking products and services to individuals in domestic markets, earned $866 million in the current year, an increase of $63 million, or 8%, over 2000. Retail Distribution offers consumer retail services to more than 5.5 million consumer households through various delivery channels, and includes consumer deposit products and direct banking services. FleetBoston distributes consumer retail products and services through a network of 1,500 branches, over 3,800 ATMs, electronic banking products, Internet banking and customer call centers. The Corporation continues to expand its electronic banking customer base, primarily through its HomeL ink product, which has grown from just over 1.2 million customers in 2000 to 2.3 million customers. The Wealth Management and Brokerage business line earned $149 million in 2001, compared to $359 million in 2000. These lower results were primarily due to significant declines in performance levels at Quick & Reilly, with net income down $178 million from the prior period, as the negative impacts of market conditions weighed heavily on this business. Wealth Management includes the Private Clients Group and Columbia Management Group. The Private Clients Group offers specialized asset management, estate settlement and deposit and credit products to high-net-worth 12
This discussion and analysis 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.
On March 1, 2001, FleetBoston acquired Summit Bancorp. (Summit). The acquisition was accounted for as a pooling of interests and, as such, financial information included in this discussion and analysis has been restated to present the combined financial condition and results of operations of both companies as if the acquisition had been in effect for all periods presented. Refer to Note 2 of the “Notes to Consolidated Financial Statements,” included under Item 8 of this Report, for further discussion of the acquisition.
FleetBoston’s earnings for 2001 were $931 million, or $.83 per diluted share, compared with $3.9 billion, or $3.52 per diluted share, in 2000. Return on assets and return on common equity were .45% and 4.77%, respectively, in 2001, compared to 1.75% and 22.04%, respectively, in 2000.
Decreases in earnings and operating ratios from 2000 were mainly a result of the impact of the slowdown in the U.S. economy throughout 2001 on revenues of the capital
Year ended December 31
2001
2000
2001
2000
2001
2000
Dollars in millions
Net Income/(Loss)
Revenue
Return on Equity
Wholesale Banking
$1,242
$1,364
$ 4,689
$ 5,085
19
%
20
%
Consumer Financial Services
866
803
4,955
5,129
22
19
Wealth Management and Brokerage
149
359
1,581
1,966
8
21
International Banking
(214
)
353
1,486
1,756
nm
24
Capital Markets
(642
)
700
(255
)
2,622
nm
32
All Other
(470
)
331
338
878
nm
nm
Total
$ 931
$3,910
$12,794
$17,436
5
%
22
%
nm — not meaningful
Wholesale Banking
Year ended December 31
2001
2000
Dollars in millions
Income Statement Data:
Revenue
$ 4,689
$ 5,085
Provision for credit losses
652
540
Noninterest expense
1,930
2,220
Taxes
865
961
Net income
$ 1,242
$ 1,364
Balance Sheet Data:
Average assets
$94,075
$106,723
Average loans
83,205
88,372
Average deposits
32,925
34,488
Return on equity
19
%
20
%
Year ended December 31
2001
2000
2001
2000
2001
2000
Dollars in millions
Net Income
Revenue
Return on Equity
Commercial Finance
$ 500
$ 495
$1,509
$1,503
18
%
18
%
Corporate Banking
319
414
1,166
1,384
18
22
Commercial Banking
216
219
972
1,040
17
16
Small Business
207
236
1,042
1,158
25
27
Total
$1,242
$1,364
$4,689
$5,085
19
%
20
%
Corporate Banking includes national specialized industry lending, institutional banking, and certain capital markets activities. These units provide solutions with capital formation, acquisition finance and long-term financing strategies. The specialized industry and institutional lending units provide financial services to corporate customers across the nation in industries such as media, communications, high technology, energy, financial institutions and healthcare. This group also services international clients through its multinational and European units.
The Corporate Banking unit earned $319 million for the year, a decrease of 23% compared to 2000. This decline was driven by decreases in loan volumes resulting, in part, from repositioning of the portfolio to reduce credit exposure, and from declines in capital markets-related revenues, primarily venture capital and investment banking fees, due to adverse market conditions. These declines were partially offset by decreases in operating expenses as a result of the corporate-wide cost containment program. Average loans were $24.7 billion for 2001, compared to $27.3 billion for 2000, a decline of $2.6 billion, or 10%.
Commercial Banking is composed of middle market commercial lending, which provides credit, cash management and trade services to companies with annual revenues between $10 million to $500 million, and government banking services, which supports cash management, lockbox, investment services and underwriting to municipal, state and national government agencies.
Earnings of the Commercial Banking group were $216 million, down slightly from the prior year, but increased approximately 4% if the impact of the regulatory required divestitures in 2000 is excluded. Commercial Banking was adversely impacted by weaker loan demand. However, the impact of higher cash management fees and lower operating expenses from cost saving initiatives offset the effects of declining loan portfolios and higher credit costs. Average loan balances decreased $2.1 billion to $16.3 billion, while deposits grew approximately $800 million to $11.6 billion, when compared to the prior year.
The Small Business group provides a full range of financial services to businesses with annual sales up to $10 million and credit needs of up to $2 million. Services and products include commercial lending, real estate lending, deposits and cash management. FleetBoston is widely recognized as the leading small business lender in the Northeast, and has been ranked the number one Small Business Administration (SBA) lender in the country for the past two years.
Earnings for this group were $207 million in 2001, compared to $236 million in 2000, reflecting the impact of regulatory required divestitures in 2000, combined with declining deposit spreads that were driven by the eleven Federal Reserve interest rate cuts in 2001. This business also experienced declining expense levels as a result of the previously mentioned divestitures coupled with cost saving initiatives implemented during the year. For 2001, average loans were $4.2 billion while average deposits were $13.1 billion, compared to $4.8 billion and $14 billion, respectively, in 2000. Excluding the impact of divestitures, deposits grew modestly when compared to 2000.
Year ended December 31 2001 2000 Dollars in millions Income Statement Data: Revenue $ 4,955 $ 5,129 Provision for credit losses 934 908 Noninterest expense 2,610 2,884
Taxes 545 534 Net income $ 866 $ 803 Balance Sheet Data: Average assets $ 35,911 $ 36,428 Average loans 31,126 31,281 Average deposits 66,085 69,034 Return on equity 22% 19%
Year ended December 31 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income Revenue Return on Equity Retail Distribution $ 588 $ 531 $ 2,586 $ 2,836 34% 28% Credit Card 166 168 1,633 1,594 11 11 Consumer Lending 112 104 736 699 14 13 Total $ 866 $ 803 $ 4,955 $ 5,129 22% 19%
Retail Distribution earned $588 million in 2001, compared to $531 million in 2000. Included in 2001 earnings were gains related to the sale of the Corporation’s interest in the NYCE ATM network ($146 million, $91 million after-tax) and certain non-strategic branches in upstate New York ($77 million, $48 million after-tax), as well as the impact of lost revenues associated with the prior year’s regulatory required divestitures. Declines in retail interest rates, which have not kept pace with the declines in wholesale rates and reflect a decision made by FleetBoston to preserve customer relationships in accordance with its customer-focused strategy, have further reduced 2001 revenues. In addition, expense levels were reduced significantly by divestitures and cost saving initiatives. Excluding the impact of the aforementioned divestitures, average deposits increased $1.3 billion over the prior year, primarily reflecting growth in the unit’s core money market deposit
products.
Operating out of its Horsham, Pennsylvania headquarters, FleetBoston’s credit card unit is the ninth largest bank credit card issuer in the nation in terms of managed credit card receivables with balances totaling $15.7 billion at December 31, 2001.
This unit earned $166 million for the year ended December 31, 2001, a decline of $2 million from a year ago, as the deteriorating economic environment slowed volume growth in the second half of 2001. Higher credit costs associated with increased charge-offs due to a higher level of bankruptcy filings were partially offset by revenue growth.
Consumer Lending offers a convenient and competitive selection of loan products and services to individuals. These products and services are delivered through the Corporation’s many types of retail distribution channels. Home equity lines and loans, mortgages, as well as student loans and other forms of consumer credit, are available. This business unit also includes FleetBoston’s student loan processing subsidiary, AFSA Data Corporation (AFSA). AFSA services approximately 8.1 million accounts nationwide and is the largest student loan service provider, with approximately $83.6 billion of student loans serviced.
Consumer Lending earned $112 million in 2001, an increase of 8% over 2000. Increased earnings were driven by expense management and a shift in product mix achieved through a planned exit of the less profitable indirect lending products acquired in connection with the Summit acquisition. The core consumer lending portfolio increased $477 million, or 4%, over 2000.
Wealth Management and Brokerage Year ended December 31 2001 2000 Dollars in millions Income Statement Data: Revenue $ 1,581 $ 1,966 Provision for credit losses 34 17 Noninterest expense 1,286 1,343 Taxes 112 247 Net income $ 149 $ 359 Balance Sheet Data: Average assets $ 13,103 $ 14,501 Average loans 7,207 8,601 Average deposits 4,153 3,786 Return on equity 8% 21%
Year ended December 31 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income/(Loss) Revenue Return on Equity Wealth Management $ 200 $ 232 $ 974 $ 959 15% 20% Quick & Reilly (51) 127 607 1,007 nm 24 Total $ 149 $ 359 $ 1,581 $ 1,966 8% 21% nm — not meaningful