-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FzF+4VYv6qNbUcQWf8EBndwQ+ktJzMOsEou2CRTHR9SDnd6Ipevk4yk0Lh+OyKlS JVJmY8R9Wxo6cv33iPjAGA== 0000927016-99-002928.txt : 19990813 0000927016-99-002928.hdr.sgml : 19990813 ACCESSION NUMBER: 0000927016-99-002928 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKBOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06522 FILM NUMBER: 99686073 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF BOSTON CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6522 BANKBOSTON CORPORATION (Exact name of Registrant as specified in its charter) Massachusetts 04-2471221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Federal Street, 02110 Boston, Massachusetts (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code (617) 434-2200 Former name, former address and former fiscal year, if changed since last report: Not Applicable Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 30, 1999: Common Stock, $1.00 par value 297,260,752 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BANKBOSTON CORPORATION TABLE OF CONTENTS
Page ---- CONSOLIDATED SELECTED FINANCIAL DATA...................................... 3 PART I FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 4 Financial Statements BankBoston Corporation Consolidated Balance Sheet.......................................... 35 Consolidated Statement of Income.................................... 37 Consolidated Statement of Changes in Stockholders' Equity........... 38 Consolidated Statement of Cash Flows................................ 39 Notes to Financial Statements........................................ 40 PART II OTHER INFORMATION Item 4.Submission of Matters to a Vote of Security Holders................ 50 Item 6.Exhibits and Reports on Form 8-K................................... 50 Signatures................................................................ 51 LIST OF TABLES Consolidated Average Balance Sheet--Nine Quarters....................... 45 Consolidated Statement of Income--Nine Quarters......................... 46 Average Balances and Interest Rates--Quarter............................ 47 Average Balances and Interest Rates--Six Months......................... 48 Change in Net Interest Revenue--Volume and Rate Analysis................ 49
2 BANKBOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (dollars in millions, except per share amounts)
1999 1998 Quarters Ended June 30 ------- ------- Income Statement Data Net interest revenue.................................. $ 678 $ 640 Provision for credit losses........................... 95 60 Noninterest income.................................... 712 457 Noninterest expense................................... 899 647 Net income............................................ 250 242 Per common share Basic............................................... .84 .81 Diluted............................................. .83 .80 Market value per common share High................................................ 51 7/8 58 Low................................................. 43 1/16 51 15/16 Return on average common equity....................... 19.92% 20.70% Return on average total assets........................ 1.25 1.36 Six Months Ended June 30 Income Statement Data Net interest revenue.................................. $ 1,313 $ 1,243 Provision for credit losses........................... 165 200 Noninterest income.................................... 1,307 1,046 Noninterest expense................................... 1,705 1,308 Net income............................................ 473 480 Per common share Basic............................................... 1.60 1.61 Diluted............................................. 1.58 1.58 Market value per common share High................................................ 51 7/8 58 Low................................................. 34 1/2 43 15/16 Return on average common equity....................... 19.25% 21.01% Return on average total assets........................ 1.22 1.37 At June 30 Balance Sheet Data Loans and lease financing............................. $41,789 $43,254 Total assets.......................................... 77,564 70,499 Deposits.............................................. 49,036 45,196 Total stockholders' equity............................ 5,074 4,980 Book value per common share........................... 17.08 15.99 Regulatory capital ratios Risk-based capital ratios Tier 1.............................................. 7.4% 8.4% Total............................................... 11.7 13.0 Leverage ratio....................................... 6.8 7.8
3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS This discussion and analysis updates, and should be read in conjunction with, Management's Discussion and Analysis included in both the previously filed BankBoston Corporation (the Corporation) Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. On March 14, 1999, the Corporation and Fleet Financial Group, Inc. (Fleet) entered into an Agreement and Plan of Merger pursuant to which the Corporation will merge with Fleet. Under the terms of this agreement, on the closing date of the merger, each outstanding share of the Corporation's common stock will be converted into 1.1844 shares of common stock of the combined company. The merger is intended to constitute a tax-free reorganization for federal income tax purposes and to be accounted for as a pooling of interests. At June 30, 1999, Fleet had total assets of $107 billion and total stockholder's equity of $9.7 billion. The transaction, which was approved by stockholders of both companies at special meetings held on August 11, 1999 but remains subject to regulatory approval, is expected to be completed late in the third quarter or early in the fourth quarter of 1999. As a prerequisite to obtaining regulatory approval, it is expected that the combined organization will be required to divest approximately $13 billion of deposits. Additional information with respect to this merger can be found in Note 2 to the Financial Statements. Second Quarter 1999 Financial Highlights . The Corporation's net income for the quarter ended June 30, 1999 was $250 million, compared with $242 million for the same period in 1998. Net income per common share was $.84 and diluted net income per common share was $.83 for the second quarter of 1999, compared with $.81 and $.80, respectively, for the second quarter of 1998. . Net income for the first six months of 1999 was $473 million, compared with $480 million for the same period in 1998. Net income per common share was $1.60 and diluted net income per common share was $1.58 for the first six months of 1999, compared with $1.61 and $1.58, respectively, for the same period of 1998. . Noninterest income in the second quarter of 1999 increased $255 million, or 56 percent, compared with the same period in 1998, while noninterest income in the first six months of 1999 increased $261 million, or 25 percent, compared with the same six-month period in 1998. Financial service fees and commissions increased $261 million in the quarterly comparison and $429 million in the six-month comparison. These increases were mainly due to expansion activities, primarily the acquisition of Robertson Stephens, an investment bank with equity underwriting and research capabilities, acquired in the third quarter of 1998, and, to a lesser extent, acquisitions and branch expansion programs in Latin America. Other events impacting noninterest income comparisons were the Corporation's $50 million gain in connection with the sale of its minority interest in Partners First (a credit card company) and valuation writedowns of $25 million relating to the transfer of commercial loans into an accelerated disposition portfolio, both recorded in the second quarter of 1999, and a $165 million gain from the Corporation's sale of its 26 percent interest in HomeSide, Inc. (HomeSide), an independent mortgage banking company, in the first quarter of 1998. . In the second quarter of 1999, net interest revenue on a taxable equivalent basis increased $39 million, or 6 percent, from the same period in 1998. Net interest margin for the second quarter of 1999 was 4.03 percent, compared with 4.17 percent for the same period in 1998. . For the quarter ended June 30, 1999, the Corporation's Argentine and Brazilian operations reported increases in net income of 88 percent and 48 percent, respectively, from the second quarter of 1998. For the six- month period ended June 30, 1999, the Corporation's Argentine and Brazilian operations reported increases in net income of 63 percent and 43 percent, respectively, from the first six months of 1998. Both operations benefited from wider spreads and other revenue opportunities arising from 4 market volatility, as well as from higher fee income. In addition, Argentina benefited from a higher level of average earning assets. . Noninterest expense in the second quarter of 1999 increased $252 million, or 39 percent, compared with the same period in 1998, while noninterest expense in the first six months of 1999 increased $397 million, or 30 percent, compared with the same six-month period in 1998. These increases primarily reflect the third quarter 1998 acquisition of Robertson Stephens, the 1998 expansion programs in Argentina and Brazil, as well as higher levels of incentive compensation associated with the growth in revenue. . The provision for credit losses was $95 million in the second quarter of 1999, compared with $60 million in the second quarter of 1998. Net credit losses in the second quarter of 1999 were $61 million, compared with $51 million for the second quarter of 1998. The increased quarterly net credit losses in 1999 reflected higher charge-offs of $50 million, which included charges related to the transfer of certain domestic commercial loans to an accelerated disposition portfolio, partially offset by increased recoveries of $40 million related to a partial insurance recovery associated with international private bank loans that were charged off in the first quarter of 1998. On an annualized basis, net credit losses as a percentage of average loans and lease financing were .57 percent in the second quarter of 1999, compared with .46 percent in the same period of 1998. . Total nonaccrual loans and leases and OREO at June 30, 1999 decreased $16 million to $386 million from $402 million at December 31, 1998. Nonaccrual loans and leases and OREO represented .9 percent of related assets at both June 30, 1999 and December 31, 1998. . Return on average common equity was 19.92 percent and 19.25 percent for the second quarter and first six months of 1999, respectively. This compares with return on average common equity of 20.70 percent and 21.01 percent for the second quarter and first six months of 1998, respectively. Return on average assets was 1.25 percent and 1.22 percent for the second quarter and first six months of 1999, respectively. This compares with return on average assets of 1.36 percent and 1.37 percent for the second quarter and first six months of 1998, respectively. Forward-Looking Statements The Corporation may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance and assumptions relating thereto. The Corporation may include forward-looking statements in its filings with the Securities and Exchange Commission, in its reports to stockholders, including this Quarterly Report, in other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risk exists that predictions, forecasts, projections and other estimates contained in forward-looking statements will not be achieved. The following factors, among others, could cause actual results to differ materially from any forward-looking statements: significant changes and developments in world financial markets, particularly in Latin America and Asia; the ability of various countries in Asia and Latin America to institute timely and effective economic policies; the uses of monetary, fiscal and tax policy by various governments; political developments in the United States and other countries; developments in general economic conditions, both domestic and international, including interest rate and currency fluctuations, market fluctuations and perceptions, and inflation; demand for various forms of credit; legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; changes in the competitive environment for financial services organizations and the Corporation's responses to those changes; the Corporation's ability to retain key personnel, especially in view of the pending merger with Fleet; 5 the Corporation's ability and resources in both its domestic and international operations to effectively execute its articulated business strategies and manage risks associated with the integration of acquisitions and other expansion activities; changes in technology and the successful allocation of technology resources across multiple projects, including efforts to address the Year 2000 issue and demands for greater automation; and the ability of the Corporation's competitors, credit customers, wholesale fund providers, treasury and capital markets counterparties, and vendors and service providers to respond effectively to the Year 2000 issue. When relying on forward-looking statements to make decisions with respect to the Corporation, investors and others are cautioned to consider these and other risks and uncertainties. NET INTEREST REVENUE--(Fully Taxable Equivalent Basis) This discussion of net interest revenue should be read in conjunction with Average Balances and Interest Rates and Change in Net Interest Revenue--Volume and Rate Analysis, presented elsewhere in this report. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been adjusted to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35 percent, plus applicable state and local taxes, net of related federal tax benefits. The following table presents a summary of consolidated net interest revenue, on a fully taxable equivalent basis, and related average loans and lease financing and average earning asset balances and net interest margin.
Second Quarter Six Months ------------------------- ------------------------- 1999 1998 Change 1999 1998 Change ------- ------- ------- ------- ------- ------- (dollars in millions) Net interest revenue.... $ 684 $ 645 $ 39 $ 1,324 $ 1,252 $ 72 Average loans and lease financing.............. 42,538 44,196 (1,658) 42,537 43,952 (1,415) Average earning assets.. 68,146 61,961 6,185 66,223 61,228 4,995 Net interest margin..... 4.03% 4.17% (.14)% 4.03% 4.12% (.09)%
On a consolidated basis, net interest revenue increased $39 million and $72 million in the quarterly and six-month comparisons, respectively. The comparative improvement in net interest revenue for both periods was primarily driven by Argentina, which benefited from wider spreads and an increase in average assets of approximately $1 billion. The improvement in Argentina's spreads resulted from interest rate strategies that benefited from volatility in the local markets. The growth in Argentina's average assets was primarily driven by the Corporation's expansion activities in the country, including the acquisition of Deutsche Bank Argentina S.A. (Deutsche Argentina) and branch expansion. Both net interest revenue comparisons also benefited from higher fees on loans, higher levels of dividends from the Corporation's Private Equity business and the acquisition of the OCA Companies (OCA), a credit card and consumer finance company in Uruguay, in the third quarter of 1998. Consolidated average loans and lease financing decreased $1.7 billion and $1.4 billion in the quarterly and six-month comparisons, respectively. The comparative declines were primarily driven by a reduction in domestic consumer-related loans. During the second half of 1998, the Corporation securitized approximately $.8 billion of home equity loans. In addition, the Corporation experienced run-off in its residential mortgage and indirect auto portfolios. An increase in commercial loans was offset by a $2.2 billion securitization in the fourth quarter of 1998. Consolidated average earning assets increased $6.2 billion and $5.0 billion in the quarterly and six-month comparisons, respectively. The increases were primarily driven by a higher level of liquid, lower-yielding assets in the Corporation's Section 20 subsidiary to support the investment banking activities of Robertson Stephens. Average earning assets from the Section 20 subsidiary grew approximately $6.5 billion and $5.5 billion in the quarterly and six-month comparisons, respectively. 6 The decline in consolidated net interest margin for both comparative periods was primarily attributable to the growth of lower-yielding earning assets related to Robertson Stephens, a reduction in domestic consumer-related loans, and the impact of funding costs associated with an investment in bank owned life insurance policies, the revenues from which are recorded in noninterest income. PROVISION FOR CREDIT LOSSES The provision for credit losses was $95 million in the second quarter of 1999, compared with $60 million in the second quarter of 1998. In the first six months of 1999, the provision was $165 million, compared with $200 million in the first six months of 1998. The provision for credit losses reflects management's assessment of the adequacy of the reserve for credit losses, considering the current risk characteristics of the loan portfolio and economic conditions. See the section entitled "Reserve for Credit Losses" for a discussion of the factors which impacted the level of provision for 1999. The amount of future provisions will continue to be a function of management's assessment of risks based upon its quarterly review of the reserve for credit losses. These risks include the longer-term impact of continued economic instability in world financial markets and the status of implementing necessary economic reforms in various countries. As such, there can be no assurance as to the level of future provisions. 7 NONINTEREST INCOME The following table presents the components of noninterest income.
Second Quarter Six Months ------------------ --------------------- 1999 1998 Change 1999 1998 Change ---- ---- ------ ------ ------ ------ (in millions) Financial service fees and commissions Deposit and electronic banking fees............................... $ 94 $ 76 $ 18 $ 174 $ 146 $ 28 Investment banking fees and commissions........................ 235 24 211 369 38 331 Syndication and agent fees.......... 26 20 6 54 35 19 Other financial service fees........ 101 75 26 192 141 51 ---- ---- ---- ------ ------ ----- 456 195 261 789 360 429 Trust and investment management fees.. 82 82 161 161 Net securities gains (losses)......... (3) 11 (14) (5) 36 (41) Trading profits and commissions....... 41 (4) 45 80 30 50 Net foreign exchange profits.......... 37 32 5 82 61 21 Net equity and mezzanine profits...... 26 84 (58) 59 136 (77) Gain on sale of businesses............ 50 50 50 165 (115) Valuation writedowns--commercial loans transferred into an accelerated disposition portfolio................ (25) (25) (25) (25) Other income.......................... 48 57 (9) 116 97 19 ---- ---- ---- ------ ------ ----- $712 $457 $255 $1,307 $1,046 $ 261 ==== ==== ==== ====== ====== =====
Financial Service Fees and Commissions Deposit and Electronic Banking Fees
Six Second Quarter Months ---------------- --------- 1999 1998 1999 1998 ------- ------- ---- ---- (in millions) Service charges on deposits..................... $ 73 $ 61 $136 $118 Electronic banking fees......................... 21 15 38 28 ------- ------- ---- ---- $ 94 $ 76 $174 $146 ======= ======= ==== ====
In both comparisons, the increase in service charges on deposits was due, in part, to higher fees from Argentina and Brazil. Electronic banking fees increased from 1998, mainly due to a higher level of domestic activity and the re-pricing of certain domestic services. Investment Banking Fees and Commissions
Second Six Quarter Months --------- --------- 1999 1998 1999 1998 ---- ---- ---- ---- (in millions) Advisory fees............................................ $ 72 $11 $ 91 $16 Brokerage fees and commissions........................... 74 3 129 6 Underwriting fees........................................ 89 10 149 16 ---- --- ---- --- $235 $24 $369 $38 ==== === ==== ===
8 The significant improvement in each of the above categories was primarily attributable to the acquisition of Robertson Stephens. Business volumes were very strong during the first half of 1999, particularly in the second quarter. Syndication and Agent Fees Syndication and Agent Fees increased in the quarterly and six-month comparisons mainly due to a higher level of sales activity. Other Financial Service Fees
Second Six Quarter Months --------- --------- 1999 1998 1999 1998 ---- ---- ---- ---- (in millions) Letter of credit and acceptance fees.................... $ 19 $19 $ 39 $ 38 Credit card fees........................................ 23 12 44 22 Other loan-related fees................................. 19 17 37 31 Other................................................... 40 27 72 50 ---- --- ---- ---- $101 $75 $192 $141 ==== === ==== ====
The improvement in credit card fees was mainly due to fee growth in Brazil and Uruguay, the latter resulting from the acquisition of OCA. The increase in other miscellaneous financial service fees included a higher level of service fees, primarily from Argentine and Brazilian operations. Trust and Investment Management Fees
Six Second Quarter Months ---------------- --------- 1999 1998 1999 1998 ------- ------- ---- ---- (in millions) Mutual fund fees................................... $ 35 $ 32 $ 67 $ 62 Personal trust fees................................ 41 41 81 82 Other agency fees.................................. 6 9 13 17 ------- ------- ---- ---- $ 82 $ 82 $161 $161 ======= ======= ==== ====
Mutual fund fees increased in both comparisons due to a higher level of fees from Brazil and Argentina. The combined level of mutual fund assets under management in Argentina and Brazil was $6.3 billion at June 30, 1999 compared with $7.0 billion at June 30, 1998. The volume has grown in both countries; however, devaluation in Brazil has reduced the U.S. dollar amount of the assets. Net Securities Gains (Losses) Net securities losses were recorded in the current year periods while net gains, which were due to stronger domestic and international markets, were recorded in the same periods of 1998. Trading Profits and Commissions and Net Foreign Exchange Profits The improvement in trading profits and commissions for all prior periods was mainly due to profits from Robertson Stephens. Also contributing to the improvement were profits earned by the Boston-based emerging markets trading unit, which had incurred losses during 1998. 9 In addition, net foreign exchange profits continued to increase as the Corporation's Boston-based business benefited from a greater volume of customer transactions, partly due to volatile market conditions in 1999. Higher profits from the foreign exchange businesses in Chile and Mexico also contributed to the increase. Net Equity and Mezzanine Profits Net equity and mezzanine profits mainly relate to the sale of investments made by the Private Equity business. In both the quarterly and six-month comparisons, income declined primarily due to a lower level of sales activity. At June 30, 1999, this portfolio had a carrying value of $1.5 billion, compared with $1.2 billion at June 30, 1998. Other In the second quarter of 1999, gain on sale of businesses reflected a $50 million gain in connection with the sale of the Corporation's minority interest in Partners First. In addition, the Corporation also recorded valuation writedowns of $25 million from the transfer of commercial loans into an accelerated disposition portfolio. In the first quarter of 1998, the Corporation recorded a $165 million gain in connection with the sale of its 26 percent interest in HomeSide. Both the quarterly and six-month comparisons of other income were affected by higher levels of equity earnings in consolidated subsidiaries; increased revenue from bank-owned life insurance, the carrying costs of which were recorded in net interest revenue; the recognition of translation losses in the second quarter of 1999, which had previously been included in the translation component of equity; and a gain in the second quarter of 1998 from the sale of the Corporation's minority interest in a Mexican pension company. In addition, the six-month comparison was affected by gains that arose in the first quarter of 1999 from currency positions maintained in Brazil, as the Brazilian government devalued its currency by allowing it to float freely against the U.S. dollar. * * * The Corporation's capital markets-related businesses, including activity from its trading, investment banking, syndications, and equity and mezzanine businesses, are sensitive to volatile market and economic conditions. As such, it is not possible to predict their levels of revenue in the future. 10 NONINTEREST EXPENSE The following table presents the components of noninterest expense.
Second Quarter Six Months ---------------- -------------------- 1999 1998 Change 1999 1998 Change ---- ---- ------ ------ ------ ------ (in millions) Employee costs........................ $547 $368 $179 $1,021 $ 722 $299 Occupancy and equipment............... 113 96 17 221 190 31 Professional fees..................... 25 22 3 52 46 6 Advertising and public relations...... 32 32 56 54 2 Communications........................ 37 31 6 72 61 11 Software costs........................ 18 14 4 38 33 5 Amortization of goodwill.............. 13 8 5 25 16 9 Other................................. 114 76 38 220 186 34 ---- ---- ---- ------ ------ ---- $899 $647 $252 $1,705 $1,308 $397 ==== ==== ==== ====== ====== ====
In the quarterly and six-month comparisons, the growth in noninterest expense was primarily attributable to the Corporation's 1998 expansion activities, including the acquisition of Robertson Stephens, acquisitions and branch expansion in Argentina and Brazil, and the acquisition of OCA in Uruguay. In addition, higher levels of incentive compensation associated with the growth in revenue also contributed to the increase. Noninterest expense from wholesale banking increased $196 million for the quarter and $316 million for the first six months, reflecting the acquisition of Robertson Stephens in the third quarter of 1998. Brazil and Argentina noninterest expense increased approximately $24 million for the quarter and $63 million for the first six months. The six month increase was partially offset by the absence of approximately $48 million of charges recorded in the first quarter of 1998 in connection with the realignments of the Corporation's European operations, its private banking business and the Regional Bank, including costs related to the merger of Rhode Island Hospital Trust National Bank into BankBoston, N.A. and the Corporation's redesign project. At June 30, 1999, the Corporation had approximately 24,800 equivalent full- time employees, reflecting growth of 1,900 from June 30, 1998. This growth was primarily driven by the abovementioned 1998 expansion activities, partially offset by decreases due to initiatives in the Regional Bank, including the sale of the domestic institutional custody business, as well as various branch closings during 1998. PROVISION FOR INCOME TAXES The provision for income taxes was $146 million in the second quarter of 1999, compared with $148 million in the second quarter of 1998. For the first six months of 1999, the provision for income taxes was $277 million, compared to $301 million for the first half of 1998. In both the second quarter and first six months of 1999, the Corporation's effective tax rate was 37 percent. The effective tax rates were 38 percent and 39 percent in the second quarter and the first six months of 1998, respectively. 11 LINE OF BUSINESS INFORMATION The Corporation is managed through the Office of the Chief Executive Officer (the OCEO), which is the senior decision making group in the company. The OCEO consists of five members, including the Chairman and Chief Executive Officer (CEO), the President and Chief Operating Officer (COO), the Chief Financial Officer, the head of the Regional Bank and the head of the Wholesale Bank. The latter three individuals are also Vice Chairs of the Corporation. The OCEO meets periodically to discuss important matters of strategy and review the operating performance of the Corporation's businesses. The group maintains close contact with key administrative heads and business managers throughout the Corporation, including the management teams in Argentina and Brazil. The COO has primary responsibility for the Corporation's revenue producing businesses. In assessing the performance of the Corporation, the COO divides the company into four major business lines: the Wholesale Bank, the Regional Bank, Argentina and Brazil. The Wholesale and Regional Bank lines cover the vast majority of the Corporation's domestic operations, while the Argentina and Brazil lines cover the vast majority of the Corporation's international operations. Operating results and other key financial measures of these four major business lines for the second quarters and first six months of 1999 and 1998 are presented below. All other businesses not encompassed in the four major lines have been combined and are presented below in "Other Businesses." Information related to major business lines shown for the 1998 periods is presented on a basis consistent with 1999 and, as such, has been restated for changes in the Corporation's organizational structure and internal management reporting methodologies implemented during 1999. The line of business information shown below reflects assignments and allocations of items made within the Corporation's internal management reporting process. A discussion of these individual items is included on page 28 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. Certain revenue and expense items, which are not included in the business line results evaluated by management, are included in Corporate Adjustments. A summary of the significant items included in Corporate Adjustments follows: . Included in net interest revenue for all periods are net funding costs for certain noninterest bearing assets and liabilities. . Noninterest income for the second quarter and first six months of 1999 includes a gain of $50 million related to the sale of the Corporation's minority interest in Partners First and losses related to the writedown of certain assets, including loans that were transferred into an accelerated disposition portfolio during the second quarter. The first quarter of 1998 includes a gain of $165 million related to the sale of the Corporation's minority interest in HomeSide. . Net interest revenue has been increased, and noninterest income has been decreased, to eliminate transfers between these components related to compensating balance arrangements with certain customers. . Reductions to consolidated balance sheet and income statement totals stemming from the fourth quarter 1998 securitization of $2.2 billion of commercial loans are included in Corporate Adjustments. . The expenses shown in Corporate Adjustments for the current year periods include charges for bonus payments due to employees in connection with the Robertson Stephens acquisition, while the first six months of 1998 includes costs related to the realignment and downsizing of certain businesses. Also included in expenses for all periods presented is the amortization of goodwill. Selected financial information for the Corporation's lines of business for the second quarters and first six months of 1999 and 1998 is presented in the tables shown below. This information is presented on a fully taxable equivalent basis. Consolidated net interest revenue and income tax provision include tax-equivalent adjustments of $6 million in the second quarter of 1999, $5 million in the second quarter of 1998, $11 million in the first six 12 months of 1999 and $9 million in the first six months of 1998. Intersegment revenue and expense for the second quarters and first six months of both 1999 and 1998 were not significant.
Wholesale Regional Other Corporate Consolidated Quarter Ended Bank Bank Argentina Brazil Businesses Adjustments Totals June 30, 1999 --------- -------- --------- ------ ---------- ----------- ------------ (dollars in millions) Net interest revenue.... $ 191 $ 238 $ 103 $ 95 $ 53 $ 4 $ 684 Noninterest income...... 422 117 70 65 74 (36) 712 ------- ------- ------ ------ ------- ------- ------- Total revenue........... 613 355 173 160 127 (32) 1,396 Noninterest expense..... 348 250 104 94 75 28 899 ------- ------- ------ ------ ------- ------- ------- Operating income........ 265 105 69 66 52 (60) 497 Provision for credit losses................. 32 15 20 6 9 13 95 ------- ------- ------ ------ ------- ------- ------- Pre-tax income (loss)... 233 90 49 60 43 (73) 402 Income tax provision (benefit).............. 95 33 17 23 7 (23) 152 ------- ------- ------ ------ ------- ------- ------- Net income (loss)....... $ 138 $ 57 $ 32 $ 37 $ 36 $ (50) $ 250 ======= ======= ====== ====== ======= ======= ======= Average loans and lease financing.............. $25,467 $ 5,994 $6,129 $2,665 $ 4,492 $(2,209) $42,538 Average assets.......... $40,362 $ 7,439 $9,049 $6,287 $18,280 $ (873) $80,544 Average deposits........ $ 5,899 $26,449 $4,790 $2,361 $ 8,357 $ 244 $48,100 RAROE................... 23% 28% 22% 42% 28% 20% Quarter Ended June 30, 1998 Net interest revenue.... $ 159 $ 238 $ 78 $ 89 $ 52 $ 29 $ 645 Noninterest income...... 231 120 63 38 40 (35) 457 ------- ------- ------ ------ ------- ------- ------- Total revenue........... 390 358 141 127 92 (6) 1,102 Noninterest expense..... 152 256 96 78 58 7 647 ------- ------- ------ ------ ------- ------- ------- Operating income........ 238 102 45 49 34 (13) 455 Provision for credit losses................. 28 19 15 6 6 (14) 60 ------- ------- ------ ------ ------- ------- ------- Pre-tax income.......... 210 83 30 43 28 1 395 Income tax provision (benefit).............. 85 33 13 18 (1) 5 153 ------- ------- ------ ------ ------- ------- ------- Net income (loss)....... $ 125 $ 50 $ 17 $ 25 $ 29 $ (4) $ 242 ======= ======= ====== ====== ======= ======= ======= Average loans and lease financing.............. $23,010 $ 6,573 $5,470 $3,571 $ 5,580 $ (8) $44,196 Average assets.......... $27,940 $ 8,295 $8,075 $6,814 $18,372 $ 1,740 $71,236 Average deposits........ $ 5,762 $25,569 $4,503 $2,346 $ 7,104 $ 120 $45,404 RAROE................... 26% 24% 13% 29% 20% 21%
13
Wholesale Regional Other Corporate Consolidated Six Months Ended Bank Bank Argentina Brazil Businesses Adjustments Totals June 30, 1999 --------- -------- --------- ------ ---------- ----------- ------------ (dollars in millions) Net interest revenue.... $ 363 $ 473 $ 201 $ 170 $ 107 $ 10 $ 1,324 Noninterest income...... 745 222 129 139 144 (72) 1,307 ------- ------- ------ ------ ------- ------- ------- Total revenue........... 1,108 695 330 309 251 (62) 2,631 Noninterest expense..... 605 500 206 190 146 58 1,705 ------- ------- ------ ------ ------- ------- ------- Operating income........ 503 195 124 119 105 (120) 926 Provision for credit losses................. 61 32 41 11 18 2 165 ------- ------- ------ ------ ------- ------- ------- Pre-tax income (loss)... 442 163 83 108 87 (122) 761 Income tax provision (benefit).............. 181 57 31 42 15 (38) 288 ------- ------- ------ ------ ------- ------- ------- Net income (loss)....... $ 261 $ 106 $ 52 $ 66 $ 72 $ (84) $ 473 ======= ======= ====== ====== ======= ======= ======= Average loans and lease financing.............. $25,305 $ 6,071 $6,087 $2,676 $ 4,591 $(2,193) $42,537 Average assets.......... $38,653 $ 7,501 $9,063 $5,815 $18,266 $ (960) $78,338 Average deposits........ $ 6,007 $26,278 $4,832 $2,054 $ 8,426 $ 163 $47,760 RAROE................... 23% 26% 18% 37% 27% 19% Six Months Ended June 30, 1998 Net interest revenue.... $ 303 $ 476 $ 147 $ 172 $ 104 $ 50 $ 1,252 Noninterest income...... 416 229 116 73 111 101 1,046 ------- ------- ------ ------ ------- ------- ------- Total revenue........... 719 705 263 245 215 151 2,298 Noninterest expense..... 289 505 180 153 125 56 1,308 ------- ------- ------ ------ ------- ------- ------- Operating income........ 430 200 83 92 90 95 990 Provision for credit losses................. 59 40 26 12 30 33 200 ------- ------- ------ ------ ------- ------- ------- Pre-tax income.......... 371 160 57 80 60 62 790 Income tax provision.... 149 64 25 34 4 34 310 ------- ------- ------ ------ ------- ------- ------- Net income.............. $ 222 $ 96 $ 32 $ 46 $ 56 $ 28 $ 480 ======= ======= ====== ====== ======= ======= ======= Average loans and lease financing.............. $22,723 $ 6,695 $5,325 $3,450 $ 5,786 $ (27) $43,952 Average assets.......... $27,452 $ 8,441 $7,782 $6,659 $18,493 $ 1,649 $70,476 Average deposits........ $ 5,938 $25,548 $4,267 $2,239 $ 7,479 $ 116 $45,587 RAROE................... 24% 23% 13% 27% 17% 21%
Wholesale Bank The Wholesale Bank provides a full range of commercial and investment banking products to its predominately middle market, non-investment grade corporate customer base. The geographic reach of this business is national in scope, with approximately three quarters of the profits from this business not dependent on the New England economy. The Wholesale Bank seeks to establish and maintain lead bank status with its clients by offering a variety of products and services which cover the full spectrum of a company's needs. Within the Wholesale Bank there are three major sub-businesses: the Commercial Bank, the Investment Bank and Private Equity. Each of these sub- businesses seeks to leverage the strengths of the other two in creating business opportunities. They also look to leverage the Corporation's international franchise, particularly in Latin America, to attract customers doing business abroad. A detailed discussion of the products and services offered by these sub-businesses is included on pages 30 and 31 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. The approximate 14 contribution from each sub-business to the Wholesale Bank's operating income (pre-tax income before provision for credit losses) for the first six months of 1999 and 1998 is as follows:
1999 1998 Six Months Ended June 30 ---- ---- Commercial Bank...................................................... 79% 78% Investment Bank...................................................... 15 Private Equity....................................................... 6 22 --- --- Total Wholesale Bank............................................... 100% 100% === ===
The growth in the contribution to operating income from the Investment Bank reflects the acquisition of Robertson Stephens, an investment bank that was purchased by the Corporation during the third quarter of 1998. The contribution to operating income from Private Equity declined due to a lower level of gains from sales of investments. Net income from the Wholesale Bank for the first six months of 1999 was $261 million, which represented an improvement of $39 million, or 18 percent, from the first six months of 1998. Net income in the second quarter of 1999 was $138 million, which represented an improvement of $13 million, or 10 percent, from the second quarter of 1998. Net interest revenue improved $60 million in the six month comparison and $32 million in the quarterly comparison reflecting an increase in average loans and leases of approximately $2.5 billion. In addition, the acquisition of Robertson Stephens contributed to the improvement in both comparisons. The loan growth came from a variety of the Commercial Bank's lending divisions, including Energy and Utilities, Media and Communications, Multinational, Transportation, and Business Credit. Noninterest income increased $329 million in the six month comparison and $191 million in the quarterly comparison as revenue recorded by Robertson Stephens in 1999, mainly underwriting, brokerage and advisory fees, was partially offset by lower gains from sales of Private Equity investments. Also contributing to the improvement in noninterest income were higher syndication fees and net foreign exchange profits. Noninterest expense grew $316 million in the six month comparison and $196 million in the quarterly comparison, with a substantial portion of these increases due to the acquisition of Robertson Stephens. Quarterly charges related to goodwill amortization and bonus payments paid annually to employees in connection with the Robertson Stephens acquisition are, as mentioned previously, included within Corporate Adjustments. Average assets in the Wholesale Bank grew over $10 billion in both comparisons due to a higher level of liquid, lower-yielding assets in the Corporation's Section 20 subsidiary, which was needed to support the high level of revenue being earned by Robertson Stephens, as well as the increase in loans noted above. Regional Bank The Regional Bank is a New England-based business that provides for the financial services needs of its three major customer groups: consumers, high net worth individuals and small businesses. The Regional Bank operates through franchises in Massachusetts, Rhode Island, Connecticut and New Hampshire. The Massachusetts banking franchise is the largest in that state. The major sub-businesses of the Regional Bank are Consumer and Community Banking, Business Banking, and Private Banking. A detailed discussion of the Regional Bank's sub-businesses, distribution system and product groups is included on pages 31 and 32 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. The approximate contribution from each sub-business to the Regional Bank's operating income for the first six months of 1999 and 1998 is as follows:
1999 1998 Six Months Ended June 30 ---- ---- Consumer and Community Banking...................................... 64% 61% Business Banking.................................................... 16 16 Private Banking..................................................... 20 23 --- --- Total Regional Bank............................................... 100% 100% === ===
15 Net income from the Regional Bank for the first six months of 1999 was $106 million, which represented an improvement of $10 million, or 10 percent, from the first six months of 1998. Net income in the second quarter of 1999 was $57 million, which represented an improvement of $7 million, or 14 percent, from the second quarter of 1998. The improvements in net income were primarily due to an increase in deposit and electronic banking fees, a higher volume of deposits, a lower provision for credit losses, and a lower effective income tax rate. The decline in the provision for credit losses was due, in part, to the continued runoff of the indirect auto portfolio. These improvements were partially offset by the absence of operating income in the 1999 periods from the Berkshire branch network and institutional custody business, both of which were sold in the fourth quarter of 1998. Argentina The Corporation has maintained a presence in Argentina since 1917. As a result of an expansion program undertaken in 1998, which included the acquisition of Deutsche Argentina and the opening of 64 new branches in various parts of the country, the Corporation now operates one of the largest banks in the country. The expansion effort is the main reason why the Corporation's total average assets in Argentina grew to approximately $9 billion in 1999, from approximately $8 billion in 1998. The Corporation's Argentine operations consist of three main sub-businesses: Corporate Banking, Retail Banking and Treasury/Other. A detailed discussion of these sub-businesses, as well as the products and services offered by the Corporation in Argentina, is included on page 32 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. The approximate contribution from each sub- business to operating income from Argentine operations in the first six months of 1999 and 1998 is as follows:
1999 1998 Six Months Ended June 30 ---- ---- Corporate Banking.................................................... 34% 37% Retail Banking....................................................... 34 35 Treasury/Other....................................................... 32 28 --- --- Total Argentina.................................................... 100% 100% === ===
Net income from Argentine operations for the first six months of 1999 was $52 million, which represented an improvement of $20 million, or 63 percent, from the first six months of 1998. Net income in the second quarter of 1999 was $32 million, which represented an improvement of $15 million, or 88 percent, from the second quarter of 1998. This improvement was mainly due to revenue growth as net interest revenue increased $54 million in the six month comparison and $25 million in the quarterly comparison, reflecting wider spreads from market volatility and a higher level of average earning assets, mainly loans. In addition, noninterest income increased in the six month and quarterly comparisons by $13 million and $7 million, respectively, mainly due to a higher level of financial service fees. Partially offsetting the revenue growth was an increase in the provision for credit losses, which grew $15 million in the six month comparison and $5 million in the quarterly comparison. The higher provision for credit losses was mainly related to an increase in credit losses on consumer loans due to recessionary conditions in the country and growth in that loan portfolio. Total net credit losses from Argentine operations were $39 million in the first half of 1999, compared with $18 million in the first half of last year, with most of the increase related to the consumer portfolio. Noninterest expense increased $26 million compared with the first half of last year and $8 million compared to the second quarter of last year primarily due to the aforementioned expansion program. Brazil The Corporation has maintained a presence in Brazil since 1947. While Brazil's population is much larger than Argentina's, the Corporation's balance sheet in Brazil is smaller than the size of its balance sheet in Argentina and the branch network is about half as large. This reflects the Corporation's Brazilian strategy of 16 operating in focused and targeted up-tier markets, a strategy that is not conducive to maintaining a large balance sheet. To further penetrate this targeted customer base, the Corporation embarked on a branch expansion program during 1998, which has nearly doubled the size of the branch network. The Corporation's Brazilian operations consist of three main sub-businesses: Corporate Banking, Retail Banking and Treasury. A detailed discussion of these sub-businesses, as well as the products and services offered by the Corporation in Brazil, is included on page 33 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. The approximate contribution from each sub- business to operating income from Brazilian operations in the six months of 1999 and 1998 is as follows:
1999 1998 Six Months Ended June 30 ---- ---- Corporate Banking.................................................... 46% 55% Retail Banking....................................................... 11 20 Treasury............................................................. 43 25 --- --- Total Brazil....................................................... 100% 100% === ===
The relative contribution to operating income from Treasury increased from 1998 due to higher revenue in 1999 stemming from volatile market conditions. This, in turn, resulted in a decline in the relative contributions to operating income from Corporate Banking and Retail Banking. Net income from Brazilian operations for the first six months of 1999 was $66 million, which represented an improvement of $20 million, or 43 percent, from the first six months of 1998. Net income in the second quarter of 1999 was $37 million, which represented an improvement of $12 million, or 48 percent, from the second quarter of 1998. Revenue increased $64 million in the six month comparison and $33 million in the quarterly comparison due, in part, to higher levels of fee income, including higher fees from credit card, deposit, mutual fund and trade finance transactions. Wider spreads also contributed to the overall growth in revenue, partially offset by a decline in average loans and leases, reflecting the current recessionary environment. In addition, the revenue growth from the first half of 1998 was helped by gains that arose in Brazil from currency positions maintained during the first quarter of 1999, as the Brazilian government devalued its currency by allowing it to float freely against the U.S. dollar. These gains, however, were partially offset by other factors, mainly related to various aspects of fiscal reforms recently passed by the Brazilian government, including certain tax measures. Noninterest expense increased $37 million in the six month comparison and $16 million in the quarterly comparison, primarily due to costs related to the 1998 expansion program. Other Businesses Individual businesses that have been combined in Other Businesses include Global Treasury, Other Latin America, Asia, the International Private Bank, Emerging Markets Sales, Trading and Research (EMSTR), and various joint ventures. In addition, the first quarter of 1998 includes the national credit card business, which was contributed to a joint venture in January 1998. The Corporation sold its interest in this joint venture, known as Partners First, during the second quarter of 1999. Further information on these businesses is included on page 34 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. Net income from Other Businesses for the first six months of 1999 was $72 million, compared with $56 million for the first six months of 1998. Net income from Other Businesses was $36 million in the second quarter of 1999, compared with $29 million for the second quarter of last year. Operating income increased $15 million in the six month comparison and $18 million in the quarterly comparison as an increase from Other Latin America, which includes the acquisition of OCA and improvements from EMSTR and Asia, was partially offset by the absence of a second quarter 1998 gain from the sale of the Corporation's minority interest in a Mexican pension company and lower securities gains in Global Treasury. The six month comparison was also affected by 17 the absence of a net operating loss in the first quarter of 1998 from the national credit card business. This had a negative impact on the operating income comparison but a favorable impact on the provision for credit loss comparison. The low effective tax rates for both periods in 1998 and 1999 resulted from the tax treatment of various Global Treasury investments. Total revenue from international operations included in Other Businesses was $93 million and $189 million in the second quarter and first six months of 1999, respectively, and $52 million and $132 million, respectively, in the 1998 periods. FINANCIAL CONDITION CONSOLIDATED BALANCE SHEET At June 30, 1999, the Corporation's total assets were $77.6 billion, reflecting a $4.1 billion increase from total assets of $73.5 billion at December 31, 1998. This increase was mainly attributable to a $3.8 billion increase in federal funds sold and securities purchased under agreements to resell and a $1.3 billion increase in available for sale securities, particularly U.S. government agency mortgage-backed securities, used to manage portfolio risk. Total loans and lease financing at June 30, 1999 decreased by approximately $1.0 billion, principally due to a decline in the domestic portfolio, which resulted from lower levels of commercial and home equity loans due, in part, to syndication and securitization activity, respectively, as well as continued runoff of the indirect auto portfolio. The increase in assets was primarily funded by interest bearing deposits, federal funds purchased and securities sold under agreements to repurchase and other funds borrowed, mainly demand notes. Notes payable increased $6 million from December 31, 1998, reflecting the issuance of $300 million of senior medium-term notes by the Corporation and $90 million of notes by the Corporation's overseas offices under various note programs, offset by the maturity of $165 million of senior medium-term notes previously issued by the Corporation and the maturity or repayment of $219 million of notes previously issued by the Corporation's overseas offices under various note programs. The Corporation's tangible common equity and common equity to total assets ratios were 5.6 percent and 6.5 percent, respectively, at June 30, 1999, compared with 5.5 percent and 6.6 percent, respectively, at December 31, 1998. The Corporation's Tier 1 and total capital ratios were 7.4 percent and 11.7 percent, respectively, at June 30, 1999, compared with 7.1 percent and 11.7 percent, respectively, at December 31, 1998. The Corporation's leverage ratio at June 30, 1999 was 6.8 percent, compared with 6.7 percent at December 31, 1998. The Corporation has a capital planning process that is designed to maintain appropriate regulatory capital levels and ratios. As of June 30, 1999, the Corporation and its bank subsidiaries met all capital adequacy requirements to which they are subject. RISK MANAGEMENT The Corporation has a risk management process in place for the identification, measurement, monitoring and control of the risks inherent in its business, including credit, liquidity, market, transaction, strategic, compliance, reputation and transfer risks. One transitory event that continues to impact these primary risk factors is the Year 2000. Year 2000 The following Year 2000 statements constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure Act of 1998. This disclosure should be read in conjunction with the Year 2000 disclosure in the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and in the Corporation's 1998 Annual Report to Stockholders on pages 35 through 37, which is incorporated by reference into its 1998 Annual Report on Form 10-K. 18 The Corporation has implemented a comprehensive and integrated plan designed to achieve Year 2000 readiness across its critical systems (whether owned or licensed by the Corporation), and believes it is well positioned to address the issues associated with the event and to have its systems and operations in compliance. Information Technology The information technology elements of the Corporation's Year 2000 program have proceeded through the following phases: Awareness, Inventory, Assessment, Remediation, Certification (including unit, system and interface testing) and Readiness Testing. As of June 30, 1999, the Corporation has completed certification and the testing required by banking regulators for all critical application systems, technology infrastructure and desktop application systems. Readiness Testing Readiness testing, including application integration testing and external testing, validates that a business's critical core process, and the application systems, infrastructure and service providers on which it depends, will continue to operate beyond 1999. Application systems included in readiness testing are those which the Corporation has deemed critical, and which have a significant degree of integrated processing with other application systems. Mission critical application systems have been categorized into five integrated testing segments, of which four had been completed successfully and the fifth is expected to be completed in the third quarter of 1999. At June 30, 1999, mission critical service provider testing and external testing with the Corporation's material third parties was approximately 97 percent complete domestically. Brazil and Southern Cone service provider testing was well underway. While the Corporation expects to substantially complete its readiness testing by September 1999, it also anticipates some continuation of this testing through the end of 1999 since it is deemed a valuable tool for detection of currently unknown potential Year 2000 issues. Customers, Counterparties and Wholesale Funds Providers The Corporation is working to identify and limit potential credit, liquidity and operational risks posed by the Corporation's significant customers and counterparties. In 1998, the Corporation evaluated over 90 percent of its significant non-consumer credit risk, over 90 percent of its significant wholesale funds provider risk and over 80 percent of its significant treasury and capital markets counterparty risk. Results showed that a significant majority of entities surveyed did not expect a material adverse impact to their businesses. The Corporation is in the process of updating this 1998 information through additional surveys of selected customers, counterparties and wholesale funds providers. The results of the Corporation's surveys have been and are continuing to be incorporated into the Corporation's credit risk management processes, including customer risk ratings, as well as into liquidity and cash settlement planning strategies to limit exposure around critical dates. Throughout the remainder of 1999, the Corporation will continue to monitor and assess, through refined surveys, the potential impact of its customers and counterparties on the Corporation's Year 2000 readiness. Non-Technology Vendors and Service Providers The success of the Corporation's Year 2000 efforts depends not only upon the Year 2000 readiness of its systems but also those of its critical vendors and service providers. The Corporation's Year 2000 plan includes analyzing the risk presented by its dependency upon critical vendors and other third parties and developing contingency plans based upon these assessments. The level of assessment is dictated by the relative importance of vendors and products to core business processes, as defined through Year 2000 contingency planning efforts. At June 30, 1999, substantially all vendors deemed "core process critical" have been certified. A remaining small number of core process critical service providers will be monitored throughout 1999. Vendor assessments may include reviews of published materials and websites, discussions about Year 2000 readiness plans and requests for Year 2000 warranties to the Corporation. Additionally, the Corporation is continuing a process to identify and certify non-core process critical vendor supplied products. The Corporation expects this element of the program to remain challenging due to the complexities of vendor management. Consequently, the Corporation will continue to monitor and assess, throughout 1999, the potential impact of the Year 2000 issue on its vendor supplied products and services. 19 Facilities In domestic operations, all site and facility vendors have been inventoried and assessed for criticality. Substantially all critical sites have completed certification at June 30, 1999. The remaining critical sites are expected to be certified by September 1999. The Corporation currently has business resumption contingency plans in place that have been updated and tested annually, and have been revised to reflect considerations specific to the Year 2000 issue. Final Readiness Efforts and Contingency Planning The Corporation has developed a strategy to combine the various efforts within the Year 2000 program and assess and report upon the readiness of mission critical elements by the core processes of business units. This strategy includes validating core processes, linking the interdependencies between critical application systems, technical infrastructure and non- technology elements, including vendors and service providers, identifying weak links and planning around known and unknown risks. In this regard, the Corporation has developed business resumption contingency plans as well as event plans to prepare for potential systems failures at critical dates, failures of critical third parties to effectively remediate and certify their technologies, as well as any other anticipated events that could arise with the date change. The development of these plans includes the assessment of failure scenarios on the core business processes critical to the Corporation's business and operations. These plans have been subject to independent internal reviews. The Corporation's contingency planning for the Year 2000 issue was substantially completed by the end of June 1999. Additionally, as previously discussed, the Corporation will continue readiness testing through 1999 to detect currently unknown risks. Risks and Uncertainties The Corporation expects to successfully complete its Year 2000 program in a timely and effective manner that mitigates risk. However, the Corporation is subject to risks and uncertainties due to the uniqueness of the Year 2000 issue, the significant interdependencies in business and financial markets and the range of activities and events outside of the Corporation's control. Furthermore, the progress of mission critical elements has been impacted by resource prioritization within its Year 2000 program and across other business initiatives, including mergers and acquisitions, as well as by the level of Year 2000 awareness in various countries. As a result of the risks and uncertainties associated with the Year 2000 issue, particularly with respect to vendors, service providers and other third parties, the Corporation is unable to predict with any certainty the extent of potential Year 2000 failures that could result, nor quantify the potential effect that such failures could have on the Corporation's operations and financial condition. Those risks and uncertainties could result in service delays, inaccurate and untimely information processing, funding delays, contract settlement and counterparty failures, and increased credit losses. Costs As of June 30, 1999, the Corporation continues to expect that its total incremental costs for its Year 2000 program, including costs already incurred, will be approximately $75 million. It is estimated that these incremental costs represent over half of the Corporation's total program costs, which include the redeployment of internal resources from all areas of the Corporation. The Corporation continues to expect capital expenditures of approximately $20 million, including costs incurred for accelerated and out of cycle replacements of technology. As of June 30, 1999, the Corporation had incurred approximately 70 percent of its Year 2000 costs. The Corporation has not incurred, and is not likely to incur, project costs that are material to any reporting period. The majority of remaining costs are expected to be directed to the testing phase as well as final readiness efforts to mitigate both currently known and subsequently discovered risks. Throughout the remainder of the project, the Corporation will also continue to allocate internal resources to address the Year 2000 issue. 20 The Corporation's estimated costs and expected timetables with respect to its Year 2000 initiative represent forward-looking statements that could differ materially from actual results due to changes in assumptions as the program evolves and new information becomes available; the Corporation's ability and resources to effectively execute its Year 2000 program; the impact of external market pressures on technology resources; the ability of critical third parties to mitigate their Year 2000 risks; and the extent to which unanticipated issues arise late in the program. 21 CREDIT RISK MANAGEMENT Credit risk is defined as the risk of loss from a counterparty's failure or inability to meet the payment or performance terms of a contract with the Corporation. The Corporation's risk management process includes the management of all forms of credit risk, including balance sheet and off-balance sheet exposures. A discussion of the Corporation's credit risk management policies is included on page 37 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. CREDIT PROFILE The components of the lending portfolio are as follows:
June 30, March 31, Dec. 31, Sept. 30, June 30, 1999 1999 1998 1998 1998 -------- --------- -------- --------- -------- (in millions) United States operations Commercial, industrial and financial.................... $16,603 $17,028 $16,294 $18,218 $16,275 Commercial real estate Construction................ 353 228 215 209 219 Other....................... 3,323 3,531 3,871 4,089 3,876 Consumer-related loans Residential mortgages....... 1,729 1,840 2,035 2,111 2,229 Home equity loans........... 2,051 2,325 2,294 2,672 2,871 Credit card................. 375 379 404 393 412 Other....................... 2,357 2,433 2,532 2,693 2,753 Lease financing............... 1,810 1,768 1,801 1,607 1,609 Unearned income............... (282) (291) (275) (231) (232) ------- ------- ------- ------- ------- 28,319 29,241 29,171 31,761 30,012 ------- ------- ------- ------- ------- International operations Commercial and industrial..... 9,158 9,288 9,295 9,320 9,065 Banks and other financial institutions................. 472 523 597 835 696 Governments and official institutions................. 144 138 95 73 82 Consumer related Residential mortgages....... 1,281 1,249 1,251 1,383 1,318 Credit card................. 351 327 362 339 248 Other....................... 1,166 1,162 1,192 1,164 1,087 Lease financing............... 677 705 725 652 519 All other..................... 396 359 369 408 375 Unearned income............... (175) (217) (251) (188) (148) ------- ------- ------- ------- ------- 13,470 13,534 13,635 13,986 13,242 ------- ------- ------- ------- ------- Total loans and lease financing................ $41,789 $42,775 $42,806 $45,747 $43,254 ======= ======= ======= ======= =======
Total loans and lease financing decreased approximately $1.0 billion from December 31, 1998, reflecting a $.9 billion decrease in the domestic loan and lease financing portfolio. The international credit portfolio remained relatively unchanged from December 31, 1998. The decrease in the domestic portfolio included a $.8 billion decrease in consumer-related loans, including a $.4 billion home equity loan securitization, and a $.4 billion decrease in commercial real estate loans. The decreases in the domestic portfolio were partially offset by a $.3 billion increase in commercial, industrial and financial loans. The Corporation's total loan portfolio at June 30, 1999 and December 31, 1998 included $1.4 billion and $1.3 billion of highly leveraged transaction (HLT) loans to 115 and 108 customers, respectively. The average HLT loan size at both June 30, 1999 and December 31, 1998 was approximately $12 million. The amount of 22 unused commitments for HLT's at June 30, 1999 was $703 million, compared with $765 million at December 31, 1998. The amount of unused commitments does not necessarily represent the actual future funding requirements of the Corporation, since a portion can be syndicated or assigned to others or may expire without being drawn upon. At June 30, 1999, the Corporation had one nonaccrual HLT loan of approximately $3 million compared with one nonaccrual HLT loan of approximately $4 million at December 31, 1998. There was one credit loss of approximately $3 million from HLT loans in the second quarter of 1999 and one credit loss of approximately $2 million from HLT loans in the second quarter of 1998. A discussion of the Corporation's HLT lending activities and policies, and the effect of these activities on results of operations, is included on page 39 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. NONACCRUAL LOANS AND LEASES AND OREO The details of consolidated nonaccrual loans and leases and OREO are as follows:
June 30, March 31, Dec. 31, Sept. 30, June 30, 1999 1999 1998 1998 1998 -------- --------- -------- --------- -------- (dollars in millions) United States Commercial, industrial and financial.................... $ 54 $ 81 $ 86 $ 71 $ 63 Commercial real estate Construction................ 2 2 2 2 Other....................... 9 17 19 30 33 Consumer-related Residential mortgages....... 29 30 36 36 42 Home equity................. 15 16 17 18 15 Credit card................. 5 6 6 6 6 Other....................... 14 16 20 21 18 ---- ---- ---- ---- ---- 126 168 186 184 179 ---- ---- ---- ---- ---- International Commercial and industrial..... 121 77 86 103 107 Consumer-related Residential mortgages....... 58 56 50 39 36 Credit card................. 6 8 6 7 6 Other....................... 53 49 47 33 26 ---- ---- ---- ---- ---- 238 190 189 182 175 ---- ---- ---- ---- ---- Total nonaccrual loans and leases..................... 364 358 375 366 354 OREO............................ 22 24 27 29 28 ---- ---- ---- ---- ---- Total....................... $386 $382 $402 $395 $382 ==== ==== ==== ==== ==== Nonaccrual loans and leases and OREO as a percent of related asset categories............... 0.9% 0.9% 0.9% 0.9% 0.9%
Total nonaccrual loans and leases and OREO at June 30, 1999 decreased $16 million from December 31, 1998, reflecting a $60 million decrease in the domestic portfolio, offset by a $49 million increase in the international portfolio. The domestic decline included a $32 million decrease in nonaccrual commercial, industrial and financial loans and a $16 million decrease in nonaccrual consumer-related loans. The increase in international nonaccrual loans was mainly due to the placement of one large Argentine credit on nonaccrual and the ongoing recession in that country. The level of nonaccrual loans and leases and OREO is influenced by the economic environment, including interest rate trends and other internal and external factors. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO. 23 RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses considering evaluations of individual credits, net losses charged to the reserve, changes in quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in the size and character of credit risks, and other pertinent factors. The credit risk of off-balance-sheet exposures is managed as part of the overall extension of credit to individual customers and is considered in assessing the overall adequacy of the reserve for credit losses. The amount of the reserve for credit losses associated with off-balance-sheet exposures is not significant. The amount of the reserve for credit losses is reviewed by management quarterly. The reserve for credit losses at June 30, 1999 was $792 million, compared with $754 million at December 31, 1998. At June 30, 1999, the reserve for credit losses represented 1.89 percent of outstanding loans and lease financing, compared with 1.76 percent at December 31, 1998. The reserve for credit losses was 218 percent of nonaccrual loans and leases at June 30, 1999, compared to 201 percent at December 31, 1998. The increase in the reserve reflects some downturn in the credit cycle, as well as the recessionary environments in the various markets in which the Corporation operates. The future level of the reserve for credit losses will continue to be a function of management's evaluation of the Corporation's credit exposures existing at the time, which will be affected by future events and general economic conditions in the United States, Latin America, Asia and various other overseas markets; the impact of the Corporation's strategic decisions on various credit portfolios; and the potential impact that the Year 2000 issue could have on the ability of the Corporation's customers to repay their obligations. Therefore, no assurance can be given as to future levels of the reserve. Net credit losses were as follows:
June 30, March 31, Dec. 31, Sept. 30, June 30, 1999 1999 1998 1998 1998 Quarters Ended -------- --------- -------- --------- -------- (in millions) United States Commercial, industrial and financial.................... $ 49 $21 $ 38 $ 9 $ 5 Commercial real estate........ (3) (1) (1) Consumer-related Residential mortgages....... 2 1 1 Home equity................. 1 1 2 1 1 Credit card................. 4 4 5 6 6 Other....................... 9 13 13 13 11 ---- --- ---- --- --- 63 36 60 29 23 ---- --- ---- --- --- International Commercial and industrial..... (26) 8 34 7 13 Consumer-related Credit card................. 5 4 5 6 2 Other....................... 19 18 14 17 13 ---- --- ---- --- --- (2) 30 53 30 28 ---- --- ---- --- --- Total....................... $ 61 $66 $113 $59 $51 ==== === ==== === ===
Net credit losses in the second quarter of 1999 increased $10 million compared with the second quarter of 1998. The increase in domestic credit losses was due to higher gross charge-offs of $50 million, primarily in the commercial, industrial and financial portfolios, including charge-offs on loans transferred into an accelerated disposition portfolio. The carrying value of this portfolio was approximately $100 million at June 30, 1999. The increase in charge-offs was offset by increased recoveries of $40 million, due to a partial insurance recovery related to international private banking loans that were charged off in the first quarter of 1998. 24 The future level of charge-offs will continue to be affected by the impact of global economic events on various domestic and international portfolios, as well as the mix and size of various portfolios. As such, there can be no assurance as to the level of future charge-offs. CROSS-BORDER OUTSTANDINGS In accordance with bank regulatory rules, cross-border outstandings are amounts payable to the Corporation by residents of foreign countries regardless of the currency in which the claim is denominated and local country claims in excess of local country obligations. Excluded from cross-border outstandings are the following: . Local country claims that are funded by local country obligations payable only in the country where issued. . Local country claims funded by non-local country obligations (typically U.S. dollars or other non-local currency) where the providers of funds agree that, in the event their claims cannot be repaid in the designated currency due to currency exchange restrictions in a given country, they may either accept payment in local currency or wait to receive the non- local currency until such time as it becomes available in the local market. At June 30, 1999, such outstandings related to emerging markets countries totaled $2.4 billion, compared with $2.2 billion at December 31, 1998. . Claims reallocated as a result of external guarantees, cash collateral or insurance contracts issued primarily by U.S. government agencies. Cross-border outstandings include deposits in other banks, resale agreements, trading securities, securities available for sale, securities held to maturity, loans and lease financing, amounts due from customers on acceptances, accrued interest receivable and revaluation gains on trading derivatives. At June 30, 1999 and December 31, 1998, total cross border outstandings were approximately $9.3 billion and $8.7 billion, respectively, which included outstandings to emerging markets countries of $6.2 billion and $5.9 billion, respectively. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers are unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. The following table summarizes by country the Corporation's approximate cross-border outstandings to countries that individually amounted to 1 percent or more of consolidated total assets at June 30, 1999 and December 31, 1998.
Percentage of Public Banks Other Total Total Assets Commitments(1) ------ ----- ------ ------ ------------- -------------- (dollars in millions) June 30, 1999(2) Argentina............ $1,105 $ 60 $ 970 $2,135 2.8% $ 5 Brazil............... 1,255 35 260 1,550 2.0 95 United Kingdom....... 530 280 810 1.0 95 December 31, 1998(2) Argentina............ $ 775 $ 50 $1,155 $1,980 2.7% $10 Brazil............... 405 495 900 1.2 40
- -------- (1) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. (2) Cross-border outstandings in countries which fell between .75% and 1% of consolidated total assets were approximately as follows: June 30, 1999 -- None; December 31, 1998 -- Chile, $690 million; United Kingdom, $630 million. 25 Latin America At June 30, 1999, approximately $5.7 billion, or 61 percent, of total cross- border outstandings were to countries in Latin America, compared with $5.3 billion, or 61 percent, at December 31, 1998. Substantially all of these cross-border outstandings were to customers in countries in which the Corporation maintained branch networks and/or subsidiaries. The Corporation's total assets in Argentina at both June 30, 1999 and December 31, 1998 amounted to approximately $9 billion. Included in these total assets were the Argentine cross-border outstandings presented in the table above. At both June 30, 1999 and December 31, 1998, Argentine loans and lease financing was approximately $6 billion. The Corporation's nonaccrual Argentine loans were $184 million at June 30, 1999, compared with $140 million at both March 31, 1999 and December 31, 1998. The change was due to increased commercial and industrial nonaccruals, including one large credit placed on nonaccrual in the second quarter of 1999. The percentage of nonaccrual loans to total Argentine loans and lease financing was 3.0 percent at June 30, 1999, compared with 2.3 percent at December 31, 1998. The Corporation's total assets in Brazil at June 30, 1999 amounted to approximately $7 billion, compared with approximately $6 billion at December 31, 1998. Included in these total assets were the Brazilian cross-border outstandings presented in the table above. At both June 30, 1999 and December 31, 1998, Brazilian loans and lease financing was approximately $3 billion. The Corporation's nonaccrual Brazilian loans were $22 million at June 30, 1999, compared with $12 million at March 31, 1999 and $18 million at December 31, 1998. The change was due to increases in nonaccrual consumer loans. The percentage of nonaccrual loans to total Brazilian loans and lease financing was .7 percent at June 30, 1999, compared with .6 percent at December 31, 1998. For additional information on Argentina and Brazil, see the "Line of Business Information" section. For further discussion of the Corporation's nonaccrual loans and leases and net credit losses, see the "Nonaccrual Loans and Leases and OREO" and "Reserve for Credit Losses" sections. During 1998, world financial markets experienced significant volatility due to the Asian and Russian crises. These crises also impacted the economies of Latin America, and, in particular, contributed to the economic instability recently experienced by Brazil. The financial pressures created by the Asian and Russian turmoil led to a significant deterioration in the level of Brazil's foreign currency reserves starting in August 1998. The reduction in foreign currency reserves and the Brazilian government's need to reduce both its current account and fiscal deficits led the government to allow Brazil's currency, the Real, to float freely against the U.S. dollar beginning in mid- January 1999, which resulted in a significant devaluation of the Real against the U.S. dollar. Since then the Real has regained some of its value against the U.S. dollar, due in part to the passage by the Brazilian government of a number of fiscal reforms aimed at controlling the public deficit and meeting the requirements of its agreement with the International Monetary Fund. While Brazil has been influenced by these events, the extent of contraction and inflation has been less than expected, particularly with the inflow of foreign investment into the country in response to the positive actions taken by the Brazilian government. The conditions described above in world markets and in Brazil have also affected economic conditions in Argentina. Argentina is currently experiencing a significant slowdown in economic activity. In addition, a presidential election is scheduled for October 1999. By law, there will be a new president elected since the incumbent is not allowed to serve another term. The specter of a new government has led to some uncertainty regarding the new government's economic policy. Such uncertainty is also contributing to the country's economic situation. The Corporation has not experienced collection problems as a result of world economic volatility, currency restrictions or foreign exchange liquidity problems in its current portfolio of cross-border outstandings to Latin 26 America. However, if actions implemented by the Brazilian government and other Latin American governments are not effective over time, the Corporation's operations could experience adverse effects. It is expected that the economic situation in Latin America, including the effect of world financial markets on these economies, will continue to be unsettled. In addition, as described above, the upcoming presidential election in Argentina creates the potential for change in economic policy, both before and after the election. The impact that these events will ultimately have on Latin American economies and, therefore, the Corporation's operations in that region, is uncertain. The Corporation will continue to monitor the economies of the Latin American countries in which it has local operations and cross-border outstandings, as well as the economies of other emerging markets countries which could impact the performance of the Corporation, and will take actions as it deems appropriate. Each emerging markets country is at a different stage of development with a unique set of economic fundamentals; therefore, it is not possible to predict what developments will occur and what impact these developments will ultimately have on the economies of these countries or on the Corporation's financial statements. Asia At June 30, 1999, approximately $690 million, or approximately 7 percent, of total cross-border outstandings were to countries in Asia, compared with approximately $800 million, or approximately 9 percent, at December 31, 1998. This decrease reflects the impact of the Corporation's efforts to actively manage and reduce its Asian exposures, including the closing of four offices in early 1999. A significant portion of these cross-border outstandings were to customers in countries in which the Corporation maintains branch networks and/or subsidiaries. At June 30, 1999, the Corporation had Asian nonaccrual loans of $12 million, compared with $14 million at December 31, 1998. The Corporation had Asian net credit losses of $4 million in the second quarter of 1999, compared with $10 million in the second quarter of 1998. The Corporation continues to closely monitor the situation in Asian markets and to manage its portfolio in order to maximize its future results, all within the parameters of the Corporation's established risk management processes. LIQUIDITY RISK MANAGEMENT Liquidity risk is defined as the risk of loss from the Corporation's inability to meet its obligations when they come due, without incurring unacceptable costs. For additional information related to the Corporation's liquidity risk management, see pages 47 and 48 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. The Corporation's liquid assets, which consist primarily of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans and unencumbered U.S. Treasury and government agency securities, were $10.8 billion at June 30, 1999, compared with $8.2 billion at December 31, 1998. This increase reflected an increase in the Corporation's available for sale portfolio used to manage interest rate risk. The Corporation also has access to additional funding through the public markets. Management considers overall liquidity at June 30, 1999 to be adequate to meet current obligations, to support expectations for future changes in asset and liability levels and to carry on normal operations. MARKET RISK MANAGEMENT Market risk is defined as the risk of loss arising from adverse changes in market prices, such as interest rates and foreign exchange rates, on financial instruments. The Corporation's market risk management process includes the management of all forms of market risk, including balance sheet and off- balance-sheet exposures. 27 Market risk is managed within policies and limits established by the Asset, Liability and Capital Committee (ALCCO) and the Market Risk Committee (MRC) and approved by the Corporation's Board of Directors (the Board). The MRC is responsible for allocating the overall market risk limits set by ALCCO to the Corporation's market risk-taking activities, considering the results of its risk modeling process as well as other internal and external factors. Further information with respect to the Corporation's management of market risk is included on pages 48 through 51 of the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. Trading Activities The Corporation's trading activities involve providing risk management and capital markets products and services to its customers, including interest rate derivatives, foreign exchange contracts, and debt and equity underwriting and distribution capabilities. In addition, the Corporation takes proprietary trading positions, including positions in domestic equity securities, high yield and emerging markets fixed income securities, and local currency debt and equity securities and related derivatives. The risk positions taken by the Corporation in these financial instruments are subject to ALCCO and MRC approved limits. The Corporation manages the market risk related to its trading businesses on a daily basis using a Value-at-Risk (VAR) methodology. VAR is defined as the statistical estimate of the potential loss that the Corporation could incur from an adverse movement in market prices. The Corporation uses a 99 percent confidence level, which means that the Corporation would not expect to exceed the potential loss as calculated by VAR more than once out of every 100 trading days. The VAR methodology requires a number of key assumptions including those relating to the time to liquidate positions, the confidence level for losses, the number of days of price and rate history to be used, the impact of credit spread risk, and the treatment of event risk. The following table shows the aggregate VAR for the Corporation's trading businesses at June 30, 1999 and December 31, 1998.
June 30, December 31, 1999 1998 (1) Quarters Ended -------- ------------ (in millions) VAR....................................................... $46 $30 Average VAR............................................... 41 33 VAR limit................................................. 56 56
(1) The December 31, 1998 VAR limit has been restated for comparability. The VAR calculations above include the effects of various interest rate and foreign exchange rate risks. The VAR exposure can vary at any given point in time depending upon market conditions. The aggregate VAR and average VAR associated with the Corporation's foreign exchange activities were approximately $7 million and $5 million, respectively, for the second quarter of 1999 and $7 million and $6 million, respectively, for the fourth quarter of 1998. The calculations do not take into account the potential diversification benefits of the different positions taken across trading portfolios. In addition to the VAR methodology, the Corporation employs other market risk management tools which include loss limits and overall portfolio size limits, as well as monthly stress tests and scenario analyses. While the VAR methodology and supplementary risk management tools are effective for managing market risk, they do not preclude the occurrence of trading losses during periods of extreme volatility. Asset and Liability Management (ALM) The Corporation's U.S. dollar denominated assets and liabilities are exposed to interest rate risk, which can be defined as the exposure of the Corporation's net income or financial condition to adverse movements in interest rates. At June 30, 1999, U.S. dollar denominated assets comprised the majority of the Corporation's 28 balance sheet. The Corporation's U.S. dollar denominated positions are evaluated and managed centrally through the Global Treasury group, utilizing several modeling methodologies. The two principal methodologies used are market value sensitivity and net interest revenue at risk. The results of these models are reviewed monthly with ALCCO and at least quarterly with the Board. Market value sensitivity is defined as the potential change in market value, or the economic value, of the Corporation's assets and liabilities resulting from changes in interest rates. Net interest revenue at risk is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in interest rates. Both of these methodologies are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions, and they exclude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other management actions. Therefore, they are not by themselves measures of future levels of net interest revenue. These two methodologies provide different but complementary measures of the level of interest rate risk; the longer-term view is modeled through market value sensitivity, while the shorter-term view is evaluated through net interest revenue at risk over the next twelve months. Under current ALCCO directives, market value sensitivity cannot exceed 3.6 percent of total risk- based capital and net interest revenue at risk cannot exceed 2 percent of annual net interest revenue. The following table illustrates the Corporation's quarter-end and average U.S. dollar denominated positions for market value sensitivity and net interest revenue at risk at June 30, 1999 and December 31, 1998.
June 30, 1999 December 31, 1998 ------------------ ------------------ Quarter- Quarterly Quarter- Quarterly End Average End Average -------- --------- -------- --------- (dollars in millions) Market value sensitivity(1)............... $236 $245 $145 $124 Percent of risk-based capital............. 2.8% 3.0% 1.8% 1.5% Net interest revenue at risk(2)........... $ 32 $ 28 $ 21 $ 18 Percent of net interest revenue........... 1.2% 1.1% .9% .7%
- -------- (1) Based on a 100 basis point adverse interest rate shock. At both June 30, 1999 and December 31, 1998, the Corporation's market value sensitivity was negatively biased to rising interest rates. The increase in market value sensitivity was primarily attributable to the growth in the Corporation's available for sale securities portfolio. (2) Based on the greater of a 100 basis point adverse interest rate shock or a 200 basis point adverse change in interest rates over the next twelve- month period. At June 30, 1999, the adverse position was based on a 200 basis point increase in interest rates over the next twelve-month period, and at December 31, 1998, the adverse position was based on a 200 basis point decline in interest rates over the next twelve-month period. The Corporation's non-U.S. dollar denominated assets and liabilities are exposed to interest rate and foreign exchange rate risks. Non-U.S. dollar denominated interest rate and foreign exchange rate risks are managed by the Corporation's overseas units, with oversight by the Boston-based Global Treasury group. ALCCO establishes overall limits for each country in which the Corporation has local market interest rate risk and foreign exchange rate risk. Limits are updated at least annually for current market conditions, considering business and economic conditions in the country at a particular point in time. The overseas units report as to compliance with these limits on a regular basis. The majority of the Corporation's non-U.S. dollar denominated interest rate and foreign exchange rate risk exposure stems from its operations in Latin America, primarily Argentina and Brazil. The Corporation's Argentine balance sheet and off-balance-sheet ALM positions primarily relate to its corporate lending and retail businesses. At June 30, 1999, the market value sensitivity and net interest revenue at risk of the Corporation's Argentine non-U.S. dollar denominated ALM positions were approximately $12 million and $5 million, 29 respectively, and the limits were $18 million and $22 million, respectively. At December 31, 1998, the market value sensitivity and net interest revenue at risk of the Corporation's Argentine non-U.S. dollar denominated ALM positions were approximately $6 million and $5 million, respectively. The Corporation's Brazilian balance sheet and off-balance-sheet ALM positions, which are mostly short-term in nature, primarily relate to corporate lending, trade financing and treasury activities. The interest rate risk related to these ALM positions is managed using a VAR methodology, which is discussed above in the "Trading Activities" section. The VAR positions are calculated on a daily basis. The VAR exposure for the Corporation's Brazilian non-U.S. dollar denominated ALM positions was approximately $4 million and $7 million at June 30, 1999 and December 31, 1998, respectively. The total VAR limit was $16 million. The Corporation's Brazilian operation also utilizes other market risk management tools such as stress testing, scenario analyses, and concentration and notional limits to manage the interest rate exposure in its ALM portfolio. When deemed appropriate, the Corporation will take positions in certain currencies with the intention of taking advantage of movements in currency and interest rates. Whenever these positions are taken, they are subject to limits established by ALCCO and the MRC, as discussed above. Compliance with these limits is reviewed regularly by the Corporation's independent capital markets risk management function. The majority of the Corporation's foreign exchange risk is generated by its operations in Argentina and Brazil, and is managed within the overall currency positions. The average currency positions during the quarters ended June 30, 1999 and December 31, 1998 were as follows:
Quarterly Average --------------------- June 30, December 31, 1999 1998 -------- ------------ (in millions) Argentina(1).............................................. $329 $350 Brazil(2)................................................. 5 95
- -------- (1) Positions represent local currency assets funded by U.S. dollar denominated liabilities. (2) Positions represent U.S. dollar assets funded by local currency liabilities. To date, the Corporation's currency positions have been liquid in nature and management has been able to close and re-open these positions as necessary. The level of U.S. dollar and non-U.S. dollar exposure maintained by the Corporation is a function of the market environment and may change from period to period based on interest rate and other economic expectations. 30 DERIVATIVE FINANCIAL INSTRUMENTS Derivatives provide the Corporation with significant flexibility in managing its interest rate risk and foreign exchange exposures, enabling it to manage risk efficiently and respond quickly to changing market conditions while minimizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps, as part of its asset and liability management practices. The level and term of such contracts may be modified as necessary, in response to balance sheet changes and other management actions, while complying with ALCCO directives for market value sensitivity and net interest revenue at risk. Derivatives not used for asset and liability management are included in the derivative trading portfolio and principally relate to providing risk management products to the Corporation's customers. The following table is a summary of the Corporation's notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in its trading and ALM portfolios.
June 30, 1999 ---------------------------------------------------------------------------- Trading Portfolio(1) ALM Portfolio(1) ------------------------------ --------------------------------------------- Fair Value(2)(3)(4) Fair Value(2)(3) Notional --------------------- Notional -------------------- Unrecognized Amount Asset Liability Amount Asset Liability Gain (Loss)(5) -------- --------- ----------- -------- -------- ---------- -------------- (in millions) Interest rate contracts Futures and forwards.. $ 6,971 $ 6 $ 618 $ (4) Interest rate swaps... 30,143 303 $ 309 12,693 $ 242 $ 317 (28) Interest rate options Purchased(6)........ 46,909 415 2,281 42 42 Written or sold(6).. 33,256 414 1,781 26 (26) -------- --------- --------- ------- -------- -------- ---- $117,279 $ 724 $ 723 $17,373 $ 284 $ 343 $(16) ======== ========= ========= ======= ======== ======== ==== Foreign exchange contracts Spot and forward contracts............ $113,768 $ 1,572 $ 1,635 $ 4,096 $ 80 $ 89 $ 1 Options purchased..... 3,772 59 Options written or sold................. 3,523 66 -------- --------- --------- ------- -------- -------- ---- $121,063 $ 1,631 $ 1,701 $ 4,096 $ 80 $ 89 $ 1 ======== ========= ========= ======= ======== ======== ====
31
December 31, 1998 ---------------------------------------------------------------------- Trading Portfolio(1) ALM Portfolio(1) ------------------------------ --------------------------------------- Fair Fair Value(2)(3)(4) Value(2)(3) Notional --------------------- Notional --------------- Unrecognized Amount Asset Liability Amount Asset Liability Gain (Loss)(5) -------- --------- ----------- -------- ----- --------- -------------- (in millions) Interest rate contracts Futures and forwards.. $ 4,037 $ 2 $ 734 $ (6) Interest rate swaps... 29,164 471 $ 470 8,366 $219 $ 81 110 Interest rate options Purchased(6)........ 32,640 191 2,411 89 89 Written or sold(6).. 24,199 200 1,911 66 (66) ------- --------- --------- ------- ---- ---- ---- $90,040 $ 664 $ 670 $13,422 $308 $147 $127 ======= ========= ========= ======= ==== ==== ==== Foreign exchange contracts Spot and forward contracts............ $48,206 $ 1,221 $ 1,274 $ 3,469 $ 35 $ 22 $ 13 Options purchased..... 3,581 68 68 Options written or sold................. 3,711 54 ------- --------- --------- ------- ---- ---- ---- $55,498 $ 1,289 $ 1,328 $ 3,537 $ 35 $ 22 $ 13 ======= ========= ========= ======= ==== ==== ====
- -------- (1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in trading assets or funds borrowed, as applicable. The majority of derivatives that are part of the ALM portfolio are accounted for on the accrual basis, and are not carried at fair value. When certain contracts, such as futures, are subject to daily cash settlements, the fair value of these instruments is zero. (3) The current credit exposure from interest rate derivatives and foreign exchange contracts at June 30, 1999 and December 31, 1998 is represented by the fair value of contracts reported in the "Asset" column. (4) The average asset and liability fair value amounts for interest rate derivatives included in the trading portfolio for the quarters ended June 30, 1999 and December 31, 1998 were approximately $640 million and $663 million, respectively, and $635 million and $657 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were both approximately $1.5 billion for the quarter ended June 30, 1999. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were both approximately $1.1 billion for the quarter ended December 31, 1998. (5) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, which has not been recognized in the income statement as of the balance sheet date. This includes amounts related to contracts that have been terminated. Such amounts are recognized as an adjustment of yield over the period being managed. At June 30, 1999, there were $3 million of unrecognized gains related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 53 months. At December 31, 1998, there were $4 million of unrecognized gains related to terminated contracts that were being amortized to net interest revenue over a weighted average period of 46 months. (6) The ALM portfolio includes equity contracts entered into by the Corporation's Argentine operations. These contracts are linked to Argentine deposit products, where the holder receives payment based on changes in the prices of underlying Argentine securities. The majority of these contracts are scheduled to mature prior to the end of 1999. 32 The decrease of $220 million in the net fair value of interest rate contracts included in the ALM portfolio was primarily due to an increase in domestic interest rates, which resulted in a decrease in the fair value of the domestic receive fixed interest rate swap portfolio. Net trading gains or losses from interest rate derivatives are recorded in trading profits and commissions. The Corporation's interest rate derivative trading activities primarily include providing risk management products to customers. Net trading gains from interest rate derivatives for the quarter and six months ended June 30, 1999 were $9 million and $12 million, respectively, and for the quarter and six months ended June 30, 1998 were $6 million and $12 million, respectively. Derivatives are also used to manage risk in other trading portfolios, such as emerging markets securities. The results of these derivative activities are combined with the results of the respective trading portfolio to determine the overall performance of the trading business and, as such, are not included in the results of derivative trading activities. Net trading gains from foreign exchange activities, which include foreign exchange spot, forward and options contracts, for the quarter and six months ended June 30, 1999 were $37 million and $82 million, respectively, and for the quarter and six months ended June 30, 1998 were $32 million and $61 million, respectively, and are recorded in other income. The following table summarizes the remaining maturity and notional amount of interest rate derivatives as of June 30, 1999, and the notional amount of interest rate derivatives as of December 31, 1998, entered into for asset and liability management purposes.
Remaining Maturity-Notional Amount ---------------------------------------------------- Greater June 30, December 31, Less than 1-3 3-5 than 1999 1998 1 year years years 5 years Total Total --------- ------ ----- ------- -------- ------------ (in millions) Futures and forwards(1).... $ 618 $ 618 $ 734 Interest rate swaps(2)..... 8,160 $1,341 $626 $2,566 12,693 8,366 Interest rate options(3) Purchased................ 2,189 92 2,281 2,411 Written or sold.......... 1,689 92 1,781 1,911 ------- ------ ---- ------ ------- ------- $12,656 $1,525 $626 $2,566 $17,373 $13,422 ======= ====== ==== ====== ======= =======
- -------- (1) At June 30, 1999 and December 31, 1998, represents contracts entered into by the Corporation's Brazilian operations in the local market which are linked to short-term interest bearing assets and liabilities. (2) At June 30, 1999, includes $6.0 billion and $6.7 billion of interest rate swap contracts entered into by the Corporation's domestic and international operations, respectively. Of the domestic interest rate swaps, approximately $3.4 billion are linked to notes payable, $.7 billion to deposits and $1.0 billion to loans. Of the international interest rate swaps, approximately $6.6 billion were entered into by the Brazilian operations and are scheduled to mature in less than one year. The Brazilian interest rate swaps typically include the exchange of floating rate indices that are indigenous to the Brazilian market. (3) At June 30, 1999 and December 31, 1998, includes equity contracts entered into by the Corporation's Argentine operations. These contracts are linked to Argentine deposit products, where the holder receives payment based on changes in the prices of underlying Argentine securities. The majority of these contracts are scheduled to mature prior to the end of 1999. The Corporation routinely reviews its asset and liability derivative positions to determine that such instruments continue to function as effective risk management tools. Additional information on the Corporation's derivative products, including accounting policies, is included on pages 51 and 52, and in Notes 1 and 22 to the Financial Statements, in the Corporation's 1998 Annual Report to Stockholders, which is incorporated by reference into its 1998 Annual Report on Form 10-K. 33 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. Changes in the derivative's fair value should be recognized currently in earnings unless the derivative is designated as a hedge. When designated as a hedge, the fair value should be recognized currently in earnings or in other nonowner changes in equity, depending on whether such designation is as a fair value or as a cash flow hedge. With respect to fair value hedges, the fair value of the derivative, as well as changes in the fair value of the hedged item, are reported in the income statement. With cash flow hedges, changes in the derivative's fair value are reported in other nonowner changes in equity and reclassified to the income statement in periods in which earnings are affected by the hedged variable cash flows or forecasted transaction. SFAS No. 133 also requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Corporation intends to adopt the SFAS No. 133 as of January 1, 2001; however, it has not yet quantified the financial statement impact of adoption, nor determined the method of adoption. The Corporation anticipates that adoption could increase volatility in earnings and other nonowner changes in equity, and could result in certain modifications to systems and hedging methodologies. 34 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (in millions, except share and per share amounts)
June 30, December 31, 1999 1998 ------- ------------ ASSETS Cash and due from banks................................... $ 2,877 $ 3,773 Interest bearing deposits in other banks.................. 1,605 1,533 Federal funds sold and securities purchased under agreements to resell..................................... 6,271 2,463 Trading assets............................................ 4,422 3,802 Securities Available for sale...................................... 13,427 12,118 Held to maturity (fair value of $395 in 1999 and $464 in 1998).................................................. 397 459 Loans and lease financing United States operations................................ 28,319 29,171 International operations................................ 13,470 13,635 ------- ------- Total loans and lease financing (net of unearned income of $457 in 1999 and $526 in 1998)............. 41,789 42,806 Reserve for credit losses................................. (792) (754) Premises and equipment, net............................... 1,295 1,319 Due from customers on acceptances......................... 410 338 Accrued interest receivable............................... 664 561 Other assets.............................................. 5,199 5,095 ------- ------- TOTAL ASSETS.............................................. $77,564 $73,513 ======= =======
The accompanying notes are an integral part of these financial statements. 35 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (in millions, except share and per share amounts) (continued)
June 30, December 31, 1999 1998 -------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing................................ $ 6,387 $ 6,554 Interest bearing................................... 28,147 28,371 Overseas offices Noninterest bearing................................ 1,322 1,144 Interest bearing................................... 13,180 12,431 ------- ------- Total deposits................................... 49,036 48,500 Funds borrowed Federal funds purchased.............................. 869 628 Term federal funds purchased......................... 1,004 1,468 Securities sold under agreements to repurchase....... 5,384 3,145 Other funds borrowed................................. 7,732 6,775 Acceptances outstanding................................ 410 338 Accrued expenses and other liabilities................. 2,461 2,254 Notes payable.......................................... 4,599 4,593 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures.......... 995 995 ------- ------- TOTAL LIABILITIES...................................... 72,490 68,696 ------- ------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares--10,000,000 Issued and outstanding shares--none Common stock, par value $1.00 Authorized shares--500,000,000 Issued shares--306,869,982 in 1999 and 307,317,780 in 1998 Outstanding shares--297,041,235 in 1999 and 294,971,900 in 1998................................. 307 307 Surplus............................................... 1,101 1,118 Retained earnings..................................... 4,143 3,895 Accumulated other nonowner changes in equity Net unrealized loss on securities available for sale, net of tax.......................................... (100) (19) Cumulative translation adjustments, net of tax....... (2) (14) Treasury stock, at cost (9,828,747 shares in 1999 and 12,345,880 shares in 1998)........................... (375) (470) ------- ------- TOTAL STOCKHOLDERS' EQUITY............................. 5,074 4,817 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $77,564 $73,513 ======= =======
The accompanying notes are an integral part of these financial statements. 36 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME (dollars in millions, except per share amounts)
Quarter Ended Six Months Ended June 30 June 30 ---------------- ------------------ 1999 1998 1999 1998 ------- ------- -------- -------- Interest Income Loans and lease financing, including fees................................... $ 1,027 $ 1,032 $ 2,061 $ 2,043 Securities.............................. 234 202 440 380 Trading assets.......................... 30 36 53 66 Federal funds sold and securities purchased under agreements to resell... 129 94 210 179 Deposits in other banks................. 28 26 55 60 ------- ------- -------- -------- Total interest income................. 1,448 1,390 2,819 2,728 ------- ------- -------- -------- Interest Expense Deposits of domestic offices............ 226 237 455 476 Deposits of overseas offices............ 233 227 477 450 Funds borrowed.......................... 221 210 401 417 Notes payable........................... 90 76 173 142 ------- ------- -------- -------- Total interest expense................ 770 750 1,506 1,485 ------- ------- -------- -------- Net interest revenue...................... 678 640 1,313 1,243 Provision for credit losses............. 95 60 165 200 ------- ------- -------- -------- Net interest revenue after provision for credit losses.......................... 583 580 1,148 1,043 ------- ------- -------- -------- Noninterest Income Financial service fees and commissions.. 456 195 789 360 Trust and investment management fees.... 82 82 161 161 Trading profits and commissions......... 41 (4) 80 30 Securities gains/(losses), net.......... (3) 11 (5) 36 Other income............................ 136 173 282 459 ------- ------- -------- -------- Total noninterest income.............. 712 457 1,307 1,046 ------- ------- -------- -------- Noninterest Expense Salaries................................ 482 305 884 598 Employee benefits....................... 65 63 137 124 Occupancy expense....................... 68 56 132 110 Equipment expense....................... 45 40 89 80 Other expense........................... 239 183 463 396 ------- ------- -------- -------- Total noninterest expense............. 899 647 1,705 1,308 ------- ------- -------- -------- Income before income taxes.............. 396 390 750 781 Provision for income taxes.............. 146 148 277 301 ------- ------- -------- -------- NET INCOME................................ $ 250 $ 242 $ 473 $ 480 ======= ======= ======== ======== NET INCOME APPLICABLE TO COMMON STOCK..... $ 250 $ 238 $ 473 $ 471 ======= ======= ======== ======== Per common share Net income Basic................................... $ .84 $ .81 $ 1.60 $ 1.61 Diluted................................. $ .83 $ .80 $ 1.58 $ 1.58 Dividends declared........................ $ .32 $ .29 $ .64 $ .58 Average number of common shares (in thousands) Basic................................... 296,832 293,769 296,386 293,159 Diluted................................. 301,662 298,275 300,095 297,579
The accompanying notes are an integral part of these financial statements. 37 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions)
1999 1998 Six Months Ended June 30 ------ ------ Balance, beginning of period................................... $4,817 $4,610 Net income..................................................... 473 480 Other nonowner changes in equity Change in unrealized loss on securities available for sale, net of tax and reclassification adjustment.................. (81) (8) Change in foreign currency translation adjustment, net of tax......................................................... 12 ------ ------ Total nonowner changes in equity........................... 404 472 ------ ------ Common stock issued in connection with Exercise of stock options.................................... 12 33 Dividend reinvestment and common stock purchase plan......... 11 11 Restricted stock grants, net of forfeitures.................. 2 11 Other, principally employee benefit plans.................... 18 22 Cash dividends declared Preferred stock.............................................. (9) Common stock................................................. (190) (170) ------ ------ Balance, end of period......................................... $5,074 $4,980 ====== ======
The accompanying notes are an integral part of these financial statements. 38 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)
1999 1998 Six Months Ended June 30 ------- ------- Cash Flows From Operating Activities Net income.................................................. $ 473 $ 480 Reconciliation of net income to net cash provided from operating activities Provision for credit losses................................ 165 200 Depreciation and amortization.............................. 113 90 Provision for deferred taxes............................... 4 35 Net gains on sales of securities available for sale and other assets.............................................. (44) (324) Change in trading assets................................... (431) (33) Net change in interest receivable and payable.............. (88) 24 Other, net................................................. 409 (171) ------- ------- Net cash provided from operating activities.............. 601 301 ------- ------- Cash Flows From Investing Activities Net cash provided from (used for) interest bearing deposits in other banks............................................. (72) 368 Net cash used for federal funds sold and securities purchased under agreements to resell....................... (3,808) (597) Securities available for sale Sales...................................................... 3,872 5,387 Maturities................................................. 1,763 1,504 Purchases.................................................. (6,980) (8,128) Securities held to maturity Maturities................................................. 67 45 Purchases.................................................. (5) (31) Net cash provided from lending and lease activities......... 253 172 Proceeds from sales of loan portfolios...................... 400 1,207 Proceeds from sales of other real estate owned.............. 15 28 Expenditures for premises and equipment..................... (150) (179) Proceeds from sales of businesses and premises and equipment.................................................. 133 400 Payment for purchase business combination, net of cash acquired................................................... (207) Purchases of investment in bank-owned life insurance........ (400) Other, net.................................................. 20 213 ------- ------- Net cash used for investing activities................... (4,492) (218) ------- ------- Cash Flows From Financing Activities Net cash provided from (used for) deposits.................. 536 (2,016) Net cash provided from funds borrowed....................... 2,660 784 Repayment/repurchase of notes payable....................... (384) (172) Net proceeds from issuance of notes payable................. 390 913 Net proceeds from issuance of guaranteed preferred beneficial interest in Corporation's junior subordinated debentures................................................. 248 Net proceeds from issuance of common stock.................. 40 66 Dividends paid.............................................. (190) (179) ------- ------- Net cash provided from (used for) financing activities... 3,052 (356) Effect of foreign currency translation on cash.............. (57) (6) ------- ------- NET CHANGE IN CASH AND DUE FROM BANKS....................... (896) (279) Cash and Due from Banks at January 1........................ 3,773 4,006 ------- ------- Cash and Due from Banks at June 30.......................... $ 2,877 $ 3,727 ======= ======= Interest payments made...................................... $ 1,491 $ 1,467 Income tax payments made.................................... $ 137 $ 207
The accompanying notes are an integral part of these financial statements. 39 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS 1.The accompanying interim consolidated financial statements of BankBoston Corporation (the Corporation) are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information contained herein have been made. Certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Corporation's 1998 Annual Report on Form 10-K. 2.Merger Agreement In March 1999, the Corporation entered into an Agreement and Plan of Merger with Fleet Financial Group, Inc. (Fleet), a bank holding company based in Boston with assets of $107 billion at June 30, 1999, pursuant to which the Corporation will merge with Fleet. On the closing date of the merger, each share of common stock of the Corporation outstanding immediately prior to the merger will be converted into 1.1844 shares of common stock of the combined company. Outstanding options to purchase common stock of the Corporation will be converted into options to purchase common stock of Fleet on the same basis. The merger is expected to be accounted for as a pooling of interests. The Corporation expects to complete the merger, which was approved by the stockholders of both companies on August 11, 1999 but remains subject to regulatory approvals, late in the third quarter or early in the fourth quarter of 1999. The Corporation anticipates that, as a prerequisite to obtaining regulatory approval of the transaction, the combined entity will be required to divest approximately $13 billion of deposits. It is expected that the combined entity will record merger and restructuring charges of approximately $1 billion (on a pre-tax basis) in connection with the merger. 3.Securities A summary comparison of securities available for sale by type is as follows:
December 31, June 30, 1999 1998 ---------------- ---------------- Carrying Carrying Cost Value Cost Value ------- -------- ------- -------- (in millions) U.S. Treasury................................. $ 563 $ 547 $ 704 $ 711 U.S. government agencies and corporations-- mortgage-backed securities................... 8,010 7,817 7,065 7,095 States and political subdivisions............. 36 36 34 34 Foreign debt securities....................... 2,360 2,333 2,184 2,111 Other debt securities......................... 1,374 1,369 1,178 1,188 Marketable equity securities.................. 566 643 346 339 Other equity securities....................... 682 682 640 640 ------- ------- ------- ------- $13,591 $13,427 $12,151 $12,118 ======= ======= ======= =======
Other equity securities include securities which are not traded on established exchanges and are carried at cost. A summary comparison of securities held to maturity by type is as follows:
December 31, June 30, 1999 1998 --------------- --------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- (in millions) U.S. Treasury................................... $ 3 $ 3 $ 7 $ 7 U.S. government agencies and corporations-- mortgage-backed securities..................... 381 379 439 444 Foreign debt securities......................... 13 13 13 13 ---- ---- ---- ---- $397 $395 $459 $464 ==== ==== ==== ====
40 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) 4.Loans and Lease Financing The following are the details of loans and lease financing balances:
June 30, December 31, 1999 1998 -------- ------------ (in millions) United States operations Commercial, industrial and financial................... $16,603 $16,294 Commercial real estate Construction......................................... 353 215 Other................................................ 3,323 3,871 Consumer-related Residential mortgages................................ 1,729 2,035 Home equity.......................................... 2,051 2,294 Credit card.......................................... 375 404 Other................................................ 2,357 2,532 Lease financing........................................ 1,810 1,801 Unearned income........................................ (282) (275) ------- ------- 28,319 29,171 ------- ------- International operations Commercial and industrial.............................. 9,158 9,295 Banks and other financial institutions................. 472 597 Governments and official institutions.................. 144 95 Consumer-related Residential mortgages................................ 1,281 1,251 Credit card.......................................... 351 362 Other................................................ 1,166 1,192 Lease financing........................................ 677 725 All other.............................................. 396 369 Unearned income........................................ (175) (251) ------- ------- 13,470 13,635 ------- ------- $41,789 $42,806 ======= =======
41 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) 5.Reserve for Credit Losses An analysis of the reserve for credit losses is as follows:
Quarters Ended Six Months Ended June 30, June 30, ---------------- ------------------ 1999 1998 1999 1998 ------- ------- -------- -------- (in millions) Balance, beginning of period............... $ 758 $ 725 $ 754 $ 712 Provision.................................. 95 60 165 200 Reserves of entities acquired.............. 14 Domestic credit losses Commercial, industrial and financial..... (51) (8) (73) (24) Commercial real estate................... (1) (3) (1) (4) Consumer-related Residential mortgages.................. (1) (1) (4) Credit card............................ (4) (6) (9) (27) Home equity............................ (2) (2) (3) (4) Other.................................. (13) (17) (30) (40) International credit losses................ (52) (36) (89) (126) ------- ------ -------- -------- Total credit losses.................. (123) (73) (206) (229) ------- ------ -------- -------- Domestic recoveries Commercial, industrial and financial..... 2 3 3 6 Commercial real estate................... 1 4 4 6 Consumer-related Residential mortgages.................. 1 1 Credit card............................ 1 1 Home equity............................ 1 1 1 1 Other.................................. 4 6 8 10 International recoveries................... 54 8 61 12 ------- ------ -------- -------- Total recoveries..................... 62 22 79 37 ------- ------ -------- -------- Net credit losses.......................... (61) (51) (127) (192) ------- ------ -------- -------- Balance, end of period..................... $ 792 $ 734 $ 792 $ 734 ======= ====== ======== ========
During the second quarter of 1999, the Corporation transferred certain lower quality domestic commercial loans to an accelerated disposition portfolio. These loans were transferred at their estimated disposition value of approximately $100 million; credit losses resulting from certain of these transfers are included in net credit losses for the period. At June 30, 1999, loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," totaled $177 million, of which loans totaling $6 million required no valuation reserve and loans totaling $171 million required a valuation reserve of $42 million. At December 31, 1998, impaired loans totaled $191 million, of which loans totaling $15 million required no valuation reserve and loans totaling $176 million required a valuation reserve of $40 million. For the six months ended June 30, 1999 and 1998, average impaired loans were approximately $175 million and $180 million, respectively. Interest recognized on impaired loans during these periods was not significant. 42 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) 6.Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures Since November 1996, the Corporation has formed five wholly-owned grantor trusts, BankBoston Capital Trust I, II, III, IV and V (collectively, the Trusts), for the exclusive purpose of issuing capital securities (Trust Securities) and investing the proceeds from the sale of such securities in junior subordinated debentures issued by the Corporation. The aggregate amount of such debentures outstanding totaled $995 million at both June 30, 1999 and December 31, 1998. There have been no issuances of Trust Securities by BankBoston Capital Trust V. A summary of the Trust Securities issued and outstanding, net of discount, is as follows:
BankBoston BankBoston BankBoston BankBoston Capital Trust I Capital Trust II Capital Trust III Capital Trust IV --------------- ---------------- ----------------- ---------------- Amount outstanding (in millions).............. $250 $250 $248 $247 Original issue date..... 11/26/96 12/10/96 6/4/97 6/8/98 Rate.................... 8.25% 7.75% Libor + .75% Libor + .60% Earliest prepayment option date............ 12/15/06 12/15/06 6/15/07 6/8/03 Stated maturity......... 12/15/26 12/15/26 6/15/27 6/8/28 Distribution payment frequency.............. semi-annually semi-annually quarterly quarterly Liquidation preference per Trust Security..... $1,000 $1,000 $1,000 $1,000
All of the Trust Securities may be prepaid at the option of the Trusts, in whole or in part, on or after the prepayment option dates listed above. At June 30, 1999, the interest rates on the Capital Trust III and IV floating rate Trust Securities were 5.89% and 5.70%, respectively. The Corporation's guarantees of the Trust Securities, together with the other obligations of the Corporation with respect to the Trust Securities, constitute a full and unconditional guarantee by the Corporation of all of the Trusts' obligations under the Trust Securities. The Corporation owns all of the common securities of the Trusts, the sole assets of which are their respective subordinated debentures. The principal amount of subordinated debentures held by each Trust equals the aggregate liquidation amount of its Trust Securities and its common securities. The subordinated debentures bear interest at the same rate, and will mature on the same date, as the corresponding Trust Securities. 7.Business Segment Information Effective December 31, 1998, the Corporation adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This new standard requires disclosure of financial and descriptive information about an entity's reportable operating segments. In accordance with the new standard, the Corporation has presented financial and descriptive information for four principal operating segments--the Wholesale Bank, the Regional Bank, Argentina and Brazil. For information about these segments, as well as other segments not individually reportable, see Management's Discussion and Analysis under the section entitled "Line of Business Information." 43 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (continued) 8.Earnings per Share A summary of the Corporation's calculation of earnings per share follows:
Quarters Ended Six Months Ended June 30, June 30, --------------- ----------------- 1999 1998 1999 1998 ------- ------- -------- -------- (in millions) Net income................................... $ 250 $ 242 $ 473 $ 480 Less preferred dividends..................... 4 9 ------- ------- -------- -------- Net income applicable to common stock........ $ 250 $ 238 $ 473 $ 471 ======= ======= ======== ======== (in thousands) Weighted average number of common shares outstanding used in calculation of basic earnings per share.......................... 296,832 293,769 296,386 293,159 Incremental shares from the assumed exercise of dilutive stock options as of the beginning of the period..................... 4,830 4,506 3,709 4,420 ------- ------- -------- -------- Weighted average number of common shares outstanding used in calculation of diluted earnings per share.......................... 301,662 298,275 300,095 297,579 ======= ======= ======== ======== Basic earnings per common share............ $ .84 $ .81 $ 1.60 $ 1.61 ======= ======= ======== ======== Diluted earnings per common share.......... $ .83 $ .80 $ 1.58 $ 1.58 ======= ======= ======== ========
9.Contingencies The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the normal course of business. Management, after reviewing all actions and proceedings pending against or involving 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. 10.Nonowner Changes in Equity The Corporation reports nonowner changes in equity in accordance with SFAS No. 130, "Reporting Comprehensive Income." Nonowner changes in equity consist of net income and other nonowner changes, composed of unrealized gains and losses on securities available for sale and foreign currency translation adjustments. The Corporation has reported nonowner changes in equity for the six months ended June 30, 1999 and 1998 in the accompanying consolidated statement of changes in stockholders' equity on a net-of-tax basis. The changes in unrealized gain (loss) on securities available for sale have also been presented net of reclassification adjustments related to net securities gains (losses) that were realized from sales and writedowns of such securities during the respective periods. These gains (losses), on an after-tax basis, amounted to $(3) million and $22 million for the six months ended June 30, 1999 and 1998, respectively. Tax provisions (benefits) related to other nonowner changes in equity for the six months ended June 30, 1999 and 1998 were as follows: change in unrealized gain (loss) on securities available for sale, $(52) million and $7 million, respectively; reclassification adjustment, $(2) million and $14 million, respectively; and change in foreign currency translation, $7 million and zero, respectively. 44 Consolidated Balance Sheet Averages by Quarter Last Nine Quarters
1997 1998 1999 ----------------------- ------------------------------- --------------- 2 3 4 1 2 3 4 1 2 ------- ------- ------- ------- ------- ------- ------- ------- ------- (in millions) ASSETS Interest bearing deposits in other banks.................. $ 1,748 $ 1,737 $ 1,683 $ 1,579 $ 1,077 $ 962 $ 1,238 $ 1,100 $ 1,150 Federal funds sold and securities purchased under agreements to resell................. 1,896 2,018 2,322 2,524 3,252 3,483 3,470 5,523 8,583 Trading assets.......... 1,590 1,924 1,769 2,072 2,248 1,663 1,594 1,874 1,977 Securities.............. 9,488 9,661 10,538 10,606 11,188 11,692 12,171 13,247 13,898 Loans and lease financing.............. 42,112 42,429 43,242 43,706 44,196 45,069 45,731 42,536 42,538 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets... 56,834 57,769 59,554 60,487 61,961 62,869 64,204 64,280 68,146 Other assets............ 7,112 7,935 8,538 9,223 9,275 9,632 11,127 11,830 12,398 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL ASSETS........... $63,946 $65,704 $68,092 $69,710 $71,236 $72,501 $75,331 $76,110 $80,544 ======= ======= ======= ======= ======= ======= ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing.... $ 7,229 $ 7,182 $ 7,535 $ 7,482 $ 7,031 $ 6,186 $ 5,763 $ 5,688 $ 6,053 Interest bearing....... 24,657 24,713 24,825 25,594 25,786 26,147 28,618 28,750 28,607 Overseas offices Noninterest bearing.... 626 709 883 1,134 1,178 1,019 1,091 1,350 1,371 Interest bearing....... 9,734 10,385 11,009 11,564 11,409 11,187 11,917 11,628 12,069 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total deposits......... 42,246 42,989 44,252 45,774 45,404 44,539 47,389 47,416 48,100 Federal funds purchased and repurchase agreements............. 5,776 6,047 6,318 5,337 5,358 6,825 7,267 8,448 12,080 Other funds borrowed.... 5,690 6,320 6,412 6,972 7,696 7,598 6,012 4,928 4,870 Notes payable(1)........ 3,351 3,336 3,524 3,749 4,392 5,149 5,477 5,526 5,586 Other liabilities....... 2,216 2,464 3,106 3,148 3,508 3,618 4,417 4,915 4,869 Stockholders' equity.... 4,667 4,548 4,480 4,730 4,878 4,772 4,769 4,877 5,039 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $63,946 $65,704 $68,092 $69,710 $71,236 $72,501 $75,331 $76,110 $80,544 ======= ======= ======= ======= ======= ======= ======= ======= =======
- -------- (1)Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 45 Consolidated Statement of Income by Quarter--Taxable Equivalent Basis Last Nine Quarters
1997 1998 1999 -------------------- ----------------------------- -------------- 2 3 4 1 2 3 4 1 2 ------ ------ ------ ------ ------ ------ ------ ------ ------ (in millions, except per share amounts) Net Interest Revenue.... $615.9 $571.1 $621.5 $603.3 $639.5 $624.9 $658.9 $634.8 $678.2 Taxable equivalent adjustment............. 4.5 5.4 9.6 3.7 5.4 4.7 9.3 4.3 6.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net interest revenue............... 620.4 576.5 631.1 607.0 644.9 629.6 668.2 639.1 684.6 Provision for credit losses................. 60.0 40.0 40.0 140.0 60.0 60.0 120.0 70.0 95.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue after provision for credit losses......... 560.4 536.5 591.1 467.0 584.9 569.6 548.2 569.1 589.6 ------ ------ ------ ------ ------ ------ ------ ------ ------ Noninterest Income Financial service fees and commissions........ 157.6 170.4 195.7 165.1 194.6 222.8 294.5 333.5 455.7 Trust and investment management fees........ 69.4 72.8 74.8 79.3 82.1 82.3 82.4 79.1 81.6 Trading profits and commissions............ 27.9 19.9 (8.6) 34.0 (3.7) (52.1) 19.0 39.0 40.9 Securities gains/(losses), net.... 31.9 11.3 27.4 24.8 11.4 16.6 (12.2) (2.0) (2.7) Other income............ 90.0 173.8 119.1 285.8 173.0 115.5 216.8 145.1 136.2 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest income................ 376.8 448.2 408.4 589.0 457.4 385.1 600.5 594.7 711.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ Noninterest Expense Salaries................ 260.2 263.8 283.0 292.7 305.1 384.4 390.9 401.9 482.5 Employee benefits....... 51.3 54.0 56.3 60.9 63.3 64.1 68.2 71.5 65.1 Occupancy expense....... 52.1 49.6 51.3 54.4 55.8 58.3 62.9 64.0 67.9 Equipment expense....... 35.8 36.1 38.4 40.1 39.6 40.8 45.9 44.6 44.8 Other expense........... 178.5 197.8 171.5 212.9 183.6 238.0 248.0 223.5 239.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest expense............... 577.9 601.3 600.5 661.0 647.4 785.6 815.9 805.5 899.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes.................. 359.3 383.4 399.0 395.0 394.9 169.1 332.8 358.3 401.9 Provision for income taxes.................. 142.8 152.3 154.7 153.0 147.6 59.4 116.6 131.0 145.3 Taxable equivalent adjustment............. 4.5 5.4 9.6 3.7 5.4 4.7 9.3 4.3 6.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ Taxable equivalent provision............. 147.3 157.7 164.3 156.7 153.0 64.1 125.9 135.3 151.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME.............. $212.0 $225.7 $234.7 $238.3 $241.9 $105.0 $206.9 $223.0 $250.2 ====== ====== ====== ====== ====== ====== ====== ====== ====== Per Common Share Net Income Basic.................. $ .68 $ .75 $ .79 $ .80 $ .81 $ .35 $ .70 $ .75 $ .84 Diluted................ .68 .73 .78 .79 .80 .35 .70 .75 .83 Cash dividends declared............... .26 .26 .26 .29 .29 .29 .29 .32 .32
46 AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis
1999 1998 Quarters Ended June 30 --------------------------- --------------------------- Average Average Average Average Volume Interest(1) Rate Volume Interest(1) Rate ------- ----------- ------- ------- ----------- ------- ASSETS (dollars in millions) Interest Bearing Deposits with Other Banks U.S.................... $ 173 $ 2 5.27% $ 84 $ 1 5.61% International.......... 977 26 10.50 993 25 10.15 ------- ----- ------- ----- Total................ 1,150 28 9.71 1,077 26 9.80 ------- ----- ----- ------- ----- ----- Federal Funds Sold and Resale Agreements U.S.................... 6,706 85 5.10 1,105 15 5.67 International.......... 1,877 44 9.35 2,147 79 14.75 ------- ----- ------- ----- Total................ 8,583 129 6.03 3,252 94 11.66 ------- ----- ----- ------- ----- ----- Trading Assets U.S.................... 1,379 20 5.69 1,210 18 5.78 International.......... 598 10 6.84 1,038 18 7.11 ------- ----- ------- ----- Total................ 1,977 30 6.04 2,248 36 6.40 ------- ----- ----- ------- ----- ----- Securities U.S. Available for sale(2).............. 10,686 177 6.60 8,692 150 6.96 Held to maturity...... 403 6 6.76 613 10 6.62 International Available for sale(2).............. 2,809 55 7.79 1,883 47 9.96 ------- ----- ------- ----- Total................ 13,898 238 6.89 11,188 207 7.40 ------- ----- ----- ------- ----- ----- Loans and Lease Financing (Net of Unearned Income) U.S.................... 29,107 581 8.01 30,255 630 8.36 International.......... 13,431 448 13.38 13,941 402 11.56 ------- ----- ------- ----- Total(3)............. 42,538 1,029 9.70 44,196 1,032 9.37 ------- ----- ----- ------- ----- ----- Total earning assets............... 68,146 1,454 8.56 61,961 1,395 9.03 ----- ----- ----- ----- Nonearning assets..... 12,398 9,275 ------- ------- Total Assets......... $80,544 $71,236 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits...... $17,860 $ 102 2.29% $15,274 $ 101 2.66% Time deposits......... 10,747 134 4.98 10,512 145 5.52 International.......... 12,069 223 7.42 11,409 218 7.67 ------- ----- ------- ----- Total................ 40,676 459 4.52 37,195 464 5.01 ------- ----- ----- ------- ----- ----- Federal Funds Purchased and Repurchase Agreements U.S.................... 11,885 133 4.49 5,103 68 5.32 International.......... 195 6 12.30 255 3 4.15 ------- ----- ------- ----- Total................ 12,080 139 4.61 5,358 71 5.26 ------- ----- ----- ------- ----- ----- Other Funds Borrowed U.S.................... 3,184 39 4.90 5,870 86 5.91 International.......... 1,686 43 10.33 1,826 53 11.70 ------- ----- ------- ----- Total................ 4,870 82 6.78 7,696 139 7.28 ------- ----- ----- ------- ----- ----- Notes Payable U.S.(4)................ 5,359 84 6.23 4,051 67 6.70 International.......... 227 6 10.86 341 9 10.31 ------- ----- ------- ----- Total................ 5,586 90 6.42 4,392 76 6.98 ------- ----- ----- ------- ----- ----- Total interest bearing liabilities.......... 63,212 770 4.88 54,641 750 5.51 ----- ----- ----- ----- Demand deposits--U.S.... 6,053 7,031 Demand deposits-- International.......... 1,371 1,178 Other noninterest bearing liabilities.... 4,869 3,508 Stockholders' equity.... 5,039 4,878 ------- ------- Total Liabilities and Stockholders' Equity.............. $80,544 $71,236 ======= ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S.................... $48,454 $ 425 3.52% $41,959 $ 431 4.12% International.......... 19,692 259 5.29% 20,002 214 4.29% ------- ----- ------- ----- Total................ $68,146 $ 684 4.03% $61,961 $ 645 4.17% ======= ===== ======= =====
- -------- (1)Income is shown on a fully taxable equivalent basis. (2)Average rates for securities available for sale are based on the securities' amortized cost. (3)Loans and lease financing includes nonaccrual balances. (4)Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 47 AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis
1999 1998 Six Months Ended June 30 --------------------------- --------------------------- Average Average Average Average Volume Interest(1) Rate Volume Interest(1) Rate ------- ----------- ------- ------- ----------- ------- ASSETS (dollars in millions) Interest Bearing Deposits with Other Banks U.S.................... $ 185 $ 5 5.41% $ 101 $ 3 5.69% International.......... 940 50 10.78 1,226 57 9.38 ------- ------ ------- ------ Total................ 1,125 55 9.90 1,327 60 9.10 ------- ------ ----- ------- ------ ----- Federal Funds Sold and Resale Agreements U.S.................... 5,569 135 4.88 867 25 5.75 International.......... 1,493 75 10.17 2,023 154 15.36 ------- ------ ------- ------ Total................ 7,062 210 6.00 2,890 179 12.48 ------- ------ ----- ------- ------ ----- Trading Assets U.S.................... 1,328 33 4.95 1,179 33 5.71 International.......... 597 21 7.17 982 33 6.74 ------- ------ ------- ------ Total................ 1,925 54 5.64 2,161 66 6.18 ------- ------ ----- ------- ------ ----- Securities U.S. Available for sale(2).............. 10,533 331 6.31 8,536 283 6.76 Held to maturity...... 420 13 6.39 624 20 6.44 International Available for sale(2).............. 2,621 102 7.76 1,738 85 9.77 ------- ------ ------- ------ Total................ 13,574 446 6.63 10,898 388 7.17 ------- ------ ----- ------- ------ ----- Loans and Lease Financing (Net of Unearned Income) U.S.................... 29,113 1,171 8.11 30,321 1,271 8.45 International.......... 13,424 894 13.43 13,631 773 11.44 ------- ------ ------- ------ Total(3)............. 42,537 2,065 9.79 43,952 2,044 9.38 ------- ------ ----- ------- ------ ----- Total earning assets............... 66,223 2,830 8.62 61,228 2,737 9.01 ------ ----- ------ ----- Nonearning assets..... 12,115 9,248 ------- ------- Total Assets......... $78,338 $70,476 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits...... $17,671 $ 200 2.28% $15,003 $ 199 2.67% Time deposits......... 11,007 276 5.06 10,687 295 5.56 International.......... 11,850 456 7.75 11,486 432 7.59 ------- ------ ------- ------ Total................ 40,528 932 4.64 37,176 926 5.02 ------- ------ ----- ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S.................... 10,066 222 4.44 5,153 142 5.56 International.......... 208 9 8.68 194 5 5.42 ------- ------ ------- ------ Total................ 10,274 231 4.53 5,347 147 5.56 ------- ------ ----- ------- ------ ----- Other Funds Borrowed U.S.................... 3,475 85 4.94 5,634 168 5.99 International.......... 1,424 85 12.10 1,702 102 12.11 ------- ------ ------- ------ Total................ 4,899 170 7.02 7,336 270 7.41 ------- ------ ----- ------- ------ ----- Notes Payable U.S.(4)................ 5,292 161 6.15 3,740 126 6.79 International.......... 264 12 8.89 333 16 9.49 ------- ------ ------- ------ Total................ 5,556 173 6.28 4,073 142 7.01 ------- ------ ----- ------- ------ ----- Total interest bearing liabilities.......... 61,257 1,506 4.96 53,932 1,485 5.55 ------ ----- ------ ----- Demand deposits--U.S.... 5,872 7,255 Demand deposits-- International.......... 1,360 1,156 Other noninterest bearing liabilities.... 4,892 3,330 Stockholders' equity.... 4,957 4,803 ------- ------- Total Liabilities and Stockholders' Equity.............. $78,338 $70,476 ======= ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S.................... $47,148 $ 826 3.53% $41,628 $ 853 4.13% International.......... 19,075 498 5.26% 19,600 399 4.11% ------- ------ ------- ------ Total................ $66,223 $1,324 4.03% $61,228 $1,252 4.12% ======= ====== ======= ======
- -------- (1)Income is shown on a fully taxable equivalent basis. (2)Average rates for securities available for sale are based on the securities' amortized cost. (3)Loans and lease financing includes nonaccrual balances. (4)Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 48 CHANGE IN NET INTEREST REVENUE--VOLUME AND RATE ANALYSIS The following table presents, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes. The change due to the volume/rate variance has been allocated to volume. Second Quarter 1999 Compared With Second Quarter 1998
Increase (Decrease) Due to Change in ---------------------- Volume Rate Net Change ---------- ---------- ---------- (in millions) Interest income Loans and lease financing U.S...................................... $ (22) $ (27) $ (49) International............................ (17) 63 46 ----- (3) ----- Other earning assets U.S...................................... 114 (18) 96 International............................ 5 (39) (34) ----- 62 ----- Total interest income........................ 132 (73) 59 Total interest expense....................... 70 (50) 20 ----- Net interest revenue......................... 61 (22) $ 39 ===== Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998 Increase (Decrease) Due to Change in ---------------------- Volume Rate Net Change ---------- ---------- ---------- (in millions) Interest income Loans and lease financing U.S...................................... $ (48) $ (52) $(100) International............................ (14) 135 121 ----- 21 ----- Other earning assets U.S...................................... 193 (40) 153 International............................ (15) (66) (81) ----- 72 ----- Total interest income........................ 213 (120) 93 Total interest expense....................... 113 (92) 21 ----- Net interest revenue......................... 98 (26) $ 72 =====
49 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) A Special Meeting of the Stockholders of the Corporation was held on August 11, 1999 (the Special Meeting). (b) Not applicable. (c) The following matter was submitted to a vote of the Stockholders of the Corporation at the Special Meeting: (1)To approve the Agreement and Plan of Merger between the Corporation and Fleet and the consummation of the transactions contemplated by that agreement Total Votes For 234,258,865 Total Votes Against 8,124,929 Total Abstentions 1,697,411
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 12(a) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 27 --Financial Data Schedule.
(b) Current Reports on Form 8-K. During the second quarter of 1999, the Corporation filed three Current Reports on Form 8-K, dated April 2, 1999, April 15, 1999 and May 14, 1999, respectively, which contained information pursuant to Items 5 and 7 of Form 8- K. The Corporation also filed a Current Report on Form 8-K, dated July 15, 1999, which contained information pursuant to Items 5 and 7 of Form 8-K. 50 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. BANKBOSTON CORPORATION /s/ Charles K. Gifford _____________________________________ Charles K. Gifford Chairman of the Board and Chief Executive Officer /s/ Susannah M. Swihart _____________________________________ Susannah M. Swihart Vice Chairman, Chief Financial Officer and Treasurer Date: August 12, 1999 51 EX-12.(A) 2 COMPUTATION OF CONSOLIDATED RATIO EXHIBIT 12(a) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the six months ended June 30, 1999 and 1998 and for the five years ended December 31, 1998 were as follows:
Six Months Ended June 30, Years Ended December 31, --------------- --------------------------------------------- (Dollars in millions) 1999 1998 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- ----- ----- Net income $ 473 $ 480 $ 792 $ 879 $ 650 $ 678 $ 542 Extraordinary item, net of tax 7 Income tax expense 277 301 477 589 483 529 422 ----- ----- ----- ----- ----- ----- ----- Pretax earnings $ 750 $ 781 $ 1,269 $ 1,468 $ 1,133 $ 1,207 $ 971 ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 24 $ 20 $ 42 $ 39 $ 40 $ 38 $ 35 Interest on borrowed funds 574 559 1,179 1,050 873 1,079 1,038 ----- ----- ----- ----- ----- ----- ----- Total fixed charges $ 598 $ 579 $ 1,221 $ 1,089 $ 913 $ 1,117 $ 1,073 ===== ===== ===== ===== ===== ===== ===== Earnings (for ratio calculation) $ 1,348 $ 1,360 $ 2,490 $ 2,557 $ 2,046 $ 2,324 $ 2,044 ===== ===== ===== ===== ===== ===== ===== Total fixed charges $ 598 $ 579 $ 1,221 $ 1,089 $ 913 $ 1,117 $ 1,073 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 2.25 2.35 2.04 2.35 2.24 2.08 1.90 ===== ===== ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income before extraordinary item plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. EX-12.(B) 3 COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS EXHIBIT 12(b) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the six months ended June 30, 1999 and 1998 and for the five years ended December 31, 1998 were as follows:
Six Months Ended June 30, Years Ended December 31, --------------- -------------------------------------------- (Dollars in millions) 1999 1998 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- ----- ----- Net income $ 473 $ 480 $ 792 $ 879 $ 650 $ 678 $ 542 Extraordinary item, net of tax 7 Income tax expense 277 301 477 589 483 529 422 ----- ----- ----- ----- ----- ----- ----- Pretax earnings $ 750 $ 781 $ 1,269 $ 1,468 $ 1,133 $ 1,207 $ 971 ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 24 $ 20 $ 42 $ 39 $ 40 $ 38 $ 35 Interest on borrowed funds 574 559 1,179 1,050 873 1,079 1,038 Interest on deposits 932 926 1,871 1,685 1,680 1,791 1,301 ----- ----- ----- ----- ----- ----- ----- Total fixed charges $ 1,530 $ 1,505 $ 3,092 $ 2,774 $ 2,593 $ 2,908 $ 2,374 ===== ===== ===== ===== ===== ===== ===== Earnings (for ratio calculation) $ 2,280 $ 2,286 $ 4,361 $ 4,242 $ 3,726 $ 4,115 $ 3,345 ===== ===== ===== ===== ===== ===== ===== Total fixed charges $ 1,530 $ 1,505 $ 3,092 $ 2,774 $ 2,593 $ 2,908 $ 2,374 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.49 1.52 1.41 1.53 1.44 1.42 1.41 ===== ===== ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income before extraordinary item plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. EX-12.(C) 4 COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS EXHIBIT 12(c) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Excluding Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (excluding interest on deposits) for the six months ended June 30, 1999 and 1998 and for the five years ended December 31, 1998 were as follows:
Six Months Ended June 30, Years Ended December 31, ---------------- ---------------------------------------------- (Dollars in millions) 1999 1998 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- ----- ----- Net income $ 473 $ 480 $ 792 $ 879 $ 650 $ 678 $ 542 Extraordinary item, net of tax 7 Income tax expense 277 301 477 589 483 529 422 ----- ----- ----- ----- ----- ----- ----- Pretax earnings $ 750 $ 781 $ 1,269 $ 1,468 $ 1,133 $ 1,207 $ 971 ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 24 $ 20 $ 42 $ 39 $ 40 $ 38 $ 35 Interest on borrowed funds 574 559 1,179 1,050 873 1,079 1,038 ----- ----- ----- ----- ----- ----- ----- Total fixed charges 598 579 1,221 1,089 913 1,117 1,073 Preferred stock dividend requirements 0 14 15 53 65 68 67 ----- ----- ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 598 $ 593 $ 1,236 $ 1,142 $ 978 $ 1,185 $ 1,140 ===== ===== ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 1,348 $ 1,360 $ 2,490 $ 2,557 $ 2,046 $ 2,324 $ 2,044 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.25 2.29 2.01 2.24 2.09 1.96 1.79 ===== ===== ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income before extraordinary item plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. EX-12.(D) 5 COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS EXHIBIT 12(d) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Including Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (including interest on deposits) for the six months ended June 30, 1999 and 1998 and for the five years ended December 31, 1998 were as follows:
Six Months Ended June 30, Years Ended December 31, --------------- --------------------------------------------- (Dollars in millions) 1999 1998 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- ----- ----- Net income $ 473 $ 480 $ 792 $ 879 $ 650 $ 678 $ 542 Extraordinary item, net of tax 7 Income tax expense 277 301 477 589 483 529 422 ----- ----- ----- ----- ----- ----- ----- Pretax earnings $ 750 $ 781 $ 1,269 $ 1,468 $ 1,133 $ 1,207 $ 971 ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 24 $ 20 $ 42 $ 39 $ 40 $ 38 $ 35 Interest on borrowed funds 574 559 1,179 1,050 873 1,079 1,038 Interest on deposits 932 926 1,871 1,685 1,680 1,791 1,301 ----- ----- ----- ----- ----- ----- ----- Total fixed charges 1,530 1,505 3,092 2,774 2,593 2,908 2,374 Preferred stock dividend requirements 0 14 15 53 65 68 67 ----- ----- ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 1,530 $ 1,519 $ 3,107 $ 2,827 $ 2,658 $ 2,976 $ 2,441 ===== ===== ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 2,280 $ 2,286 $ 4,361 $ 4,242 $ 3,726 $ 4,115 $ 3,345 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.49 1.50 1.40 1.50 1.40 1.38 1.37 ===== ===== ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income before extraordinary item plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. EX-27.1 6 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1999 JUN-30-1999 2,877 1,605 6,271 4,422 13,427 397 395 41,789 (792) 77,564 49,036 12,352 2,461 5,953 0 0 307 4,767 77,564 2,061 440 318 2,819 932 1,506 1,313 165 (5) 463 750 473 0 0 473 1.60 1.58 4.03 364 37 0 0 754 (206) 79 792 447 277 68 INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR SUBORDINATED DEBENTURES.
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