-----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, RPHRennZXI0RcmCBBZH3JHXIWWDlXkz0eEwh8EhrHmUFQ48HzQzCfSwd4EJ3LOHe yYQNlxzvaWtVEhYfl3M/eA== 0000950135-01-502538.txt : 20010815 0000950135-01-502538.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950135-01-502538 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEETBOSTON FINANCIAL CORP CENTRAL INDEX KEY: 0000050341 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 050341324 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06366 FILM NUMBER: 1713354 BUSINESS ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173464000 MAIL ADDRESS: STREET 1: 100 FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02210 FORMER COMPANY: FORMER CONFORMED NAME: FLEET BOSTON CORP DATE OF NAME CHANGE: 19991001 FORMER COMPANY: FORMER CONFORMED NAME: FLEET FINANCIAL GROUP INC DATE OF NAME CHANGE: 19880110 FORMER COMPANY: FORMER CONFORMED NAME: FLEET NORSTAR FINANCIAL GROUP INC DATE OF NAME CHANGE: 19920525 10-Q 1 b40055fbe10-q.txt FLEETBOSTON FINANCIAL CORPORATION 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED JUNE 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _________ TO __________ COMMISSION FILE NUMBER 1-6366 FLEETBOSTON FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) RHODE ISLAND 05-0341324 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 100 FEDERAL STREET BOSTON, MASSACHUSETTS 02110 (Address of principal executive office) (Zip Code) (617) 434-2200 (Registrant's telephone number, including area code) (Former name, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- -------- The number of shares of common stock of the Registrant outstanding as of July 31, 2001 was 1,085,251,056. 2 FLEETBOSTON FINANCIAL CORPORATION FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE PART I. FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations 3 Consolidated Statements of Income Three months and six months ended June 30, 2001 and 2000 18 Consolidated Balance Sheets June 30, 2001 and December 31, 2000 19 Consolidated Statements of Changes in Stockholders' Equity Six months ended June 30, 2001 and 2000 20 Consolidated Statements of Cash Flows Six months ended June 30, 2001 and 2000 21 Condensed Notes to Consolidated Financial Statements 22 PART II. OTHER INFORMATION 26 SIGNATURES 27 2 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FleetBoston Financial Corporation (FleetBoston or the Corporation), a diversified financial services company with over $200 billion in assets headquartered in Boston, Massachusetts, is currently the seventh-largest financial holding company in the United States based on total assets. Among its principal lines of business are commercial banking; consumer banking; investment banking and investment services; principal investing; securities brokerage, market-making and clearing services; credit cards; and full service banking in Latin America. This discussion and analysis updates, and should be read in conjunction with, Management's Discussion and Analysis included in both FleetBoston's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and its Current Report on Form 8-K dated May 4, 2001. Such Form 8-K contains restated consolidated financial statements for the year ended December 31, 2000 which give retroactive effect to the merger with Summit Bancorp. (Summit), which was completed on March 1, 2001 and accounted for as a pooling of interests. All prior period information included in this discussion and analysis has been restated to reflect the Summit merger. FINANCIAL SUMMARY
- -------------------------------------------------------------------------------------------------------------- Three months Six months Dollars in millions, ended June 30 ended June 30 except per share amounts 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------- EARNINGS Net interest income (FTE)(a) $ 1,918 $ 2,041 $ 3,853 $ 4,107 Noninterest income 1,326 2,467 2,850 5,287 Noninterest expense 2,059 2,466 4,911 5,211 Provision for credit losses 315 335 630 655 Net income 531 971 672 2,047 - -------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Basic earnings $ .48 $ .89 $ .60 $ 1.88 Diluted earnings .48 .87 .60 1.84 Cash dividends declared .33 .30 .66 .60 Book value 17.47 16.25 17.47 16.25 - -------------------------------------------------------------------------------------------------------------- RATIOS Return on average assets 1.01% 1.74% .64% 1.80% Return on average common equity 11.05 22.48 6.94 23.90 Total equity to assets (period-end) 9.54 8.23 9.54 8.23 Tangible common equity to assets 7.41 6.05 7.41 6.05 Tier 1 risk-based capital ratio 8.47 7.58 8.47 7.58 Total risk-based capital ratio 12.25 11.50 12.25 11.50 Leverage ratio 8.29 7.54 8.29 7.54 - -------------------------------------------------------------------------------------------------------------- AT JUNE 30 Total assets $202,100 $220,133 $202,100 $220,133 Loans and leases 129,066 137,473 129,066 137,473 Deposits 124,803 130,897 124,803 130,897 Long-term debt 27,816 31,350 27,816 31,350 Stockholders' equity 19,276 18,109 19,276 18,109 Nonperforming assets 1,394 1,117 1,394 1,117 - --------------------------------------------------------------------------------------------------------------
(a) The fully taxable equivalent (FTE) adjustment included in net interest income was $17 million for the three months ended June 30, 2001 and 2000, respectively, and $33 million and $35 million for the six months ended June 30, 2001 and 2000, respectively. Results for the three and six months ended June 30, 2001 and 2000 included the following: THREE MONTHS ENDED JUNE 30, 2001: - - Gains of $243 million ($151 million after-tax) from branch divestitures associated with the previously disclosed BankBoston merger. - - Write-downs of $470 million ($290 million after-tax) taken against the carrying value of the Principal Investing portfolio. - - Summit merger-related costs of $93 million ($58 million after-tax), composed of $55 million of merger integration costs and $38 million of accelerated depreciation of assets to be disposed of at a later date. - - An additional loss of $101 million ($60 million after-tax) on the sale of the mortgage banking business. THREE MONTHS ENDED JUNE 30, 2000: - - Branch divestiture gains of $313 million ($127 million after-tax). - - Merger integration costs of $87 million ($52 million after-tax) incurred in connection with the BankBoston merger. SIX MONTHS ENDED JUNE 30, 2001: - - Gains of $333 million ($204 million after-tax) from branch divestitures associated with the BankBoston merger. - - Write-downs of $602 million ($370 million after-tax) taken against the carrying value of the Principal Investing portfolio. - - Summit merger-related charges of $811 million ($511 million after-tax) consisting of $446 million ($292 million after-tax) of merger- and restructuring-related charges, $100 million ($61 million after-tax) of merger integration costs and a $265 million ($158 million after-tax) loss from the sale of low-margin securities following the merger. - - Restructuring charges of $79 million ($50 million after-tax) primarily related to a reorganization of capital markets-related businesses. 3 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - An aggregate loss of $428 million ($285 million after-tax) from the sale of the mortgage banking business. SIX MONTHS ENDED JUNE 30, 2000: - - Branch divestiture gains of $679 million ($336 million after-tax). - - Merger integration costs of $187 million ($112 million after-tax) incurred in connection with the BankBoston merger. In addition to the items listed above, decreases from the prior year in both the three and six month comparisons resulted from a significant drop in capital markets revenue, beyond the principal investing write-downs already mentioned, associated with the pronounced fallout experienced in U.S. capital markets in the second half of 2000 and the first half of 2001. This drop was partly offset by improved results in International Banking and Commercial Finance, lower operating expenses resulting from a corporate-wide cost containment program, and a drop in revenue-related compensation costs. RESULTS OF OPERATIONS NET INTEREST INCOME
- ----------------------------------------------------------------------------------------- Three months Six months FTE basis ended June 30 ended June 30 In millions 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------- Interest income $3,566 $4,063 $7,484 $8,179 Tax-equivalent adjustment 17 17 33 35 Interest expense 1,665 2,039 3,664 4,107 - ----------------------------------------------------------------------------------------- Net interest income $1,918 $2,041 $3,853 $4,107 - -----------------------------------------------------------------------------------------
Net interest income decreased 6% in both the three and six month comparisons, primarily due to the impact of the divestiture of $9 billion of loans and $13 billion of low-cost deposits throughout 2000 in connection with the BankBoston merger. Additional factors contributing to the decrease were a decline in domestic loan volume and lower brokerage volume and margin lending at Robertson Stephens and Quick & Reilly, respectively. These declines were partially offset by increases in Latin American units, primarily Brazil, from higher loan volumes and wider spreads. NET INTEREST MARGIN AND INTEREST RATE SPREAD
- --------------------------------------------------------------------------------------------------------------------------------- Three months ended June 30 Six months ended June 30 2001 2000 2001 2000 FTE basis Average Average Average Average Dollars in millions Balance Rate Balance Rate Balance Rate Balance Rate - --------------------------------------------------------------------------------------------------------------------------------- Securities $ 25,590 6.86% $ 34,788 6.62% $ 29,016 6.90% $ 35,165 6.55% Loans and leases: Domestic 111,648 8.04 125,982 8.70 113,566 8.41 127,110 8.63 International 19,210 11.32 15,106 13.98 18,738 11.61 14,956 13.99 Due from brokers/dealers 4,440 3.98 3,898 5.63 3,918 4.56 3,911 5.45 Mortgages held for sale 3,315 7.29 1,159 8.26 3,042 7.27 1,209 8.16 Other 16,350 6.24 10,042 6.86 13,667 7.09 13,401 6.16 - --------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 180,553 7.95 190,975 8.58 181,947 8.30 195,752 8.43 - --------------------------------------------------------------------------------------------------------------------------------- Deposits 97,962 3.84 102,451 4.29 98,314 4.12 105,403 4.16 Short-term borrowings 21,090 4.92 23,393 6.11 21,997 5.67 27,235 5.83 Due to brokers/dealers 4,072 4.07 5,574 5.27 3,873 5.10 5,320 5.32 Long-term debt 28,815 5.93 30,926 6.47 29,912 6.28 30,200 6.48 - --------------------------------------------------------------------------------------------------------------------------------- Interest bearing liabilities 151,939 4.39 162,344 5.00 154,096 4.79 168,158 4.88 - --------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 3.56 3.58 3.51 3.55 Interest-free sources of funds 28,614 28,631 27,851 27,594 - --------------------------------------------------------------------------------------------------------------------------------- Total sources of funds $180,553 3.70% $190,975 4.29% $181,947 4.06% $195,752 4.22% - --------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.25% 4.29% 4.24% 4.21% - ---------------------------------------------------------------------------------------------------------------------------------
The 4 basis point decrease in margin in the quarterly comparison was primarily attributable to the impact of divestitures throughout 2000, partially offset by a strategic repositioning of the balance sheet for a lower interest rate environment. In the quarterly comparison, average securities decreased $9.2 billion to $25.6 billion for the three months ended June 30, 2001, primarily due to the aforementioned sale of $8 billion of low-margin securities. Average domestic loans and leases decreased $14.3 billion to $111.6 billion for the second quarter of 2001, primarily driven by the divestiture of loans throughout 2000, commercial loan sales in the fourth quarter of 2000, securitization activity, and lower domestic commercial and residential mortgage loan levels. These declines were offset, in part, by strong growth in lease financing receivables. Quarter to quarter, average international loans and leases increased $4.1 billion to $19.2 billion due to commercial loan and lease growth in several countries, with the largest increase in Brazil. Average mortgages held for sale increased $2.2 billion compared to the second quarter of 2000, due to higher mortgage production volume caused by a decline in mortgage interest rates. The decrease in mortgage rates caused average yields on mortgages held for sale to decrease 97 basis points. The Corporation completed the sale of its mortgage banking business in the second quarter of 2001. 4 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average other interest earning assets increased $6.3 billion to $16.4 billion for the second quarter of 2001, partly the result of the reinvestment of proceeds from securities sales after the Summit merger in federal funds sold and securities purchased under agreements to resell. The $4.5 billion decrease in average interest bearing deposits compared to the second quarter of 2000 reflects the impact of the divestitures during the course of 2000, offset, in part, by an increase in international interest bearing deposits. The $2.3 billion decrease in average short-term borrowings in the quarterly comparison is mainly attributable to a decrease in federal funds purchased and securities sold under agreements to repurchase and short-term Federal Home Loan Bank borrowings. An additional factor in the six month comparison was the elimination of low-yielding liabilities at the end of the first quarter of 2000 that were previously necessary to support investment banking operations. Average long-term debt decreased $2.1 billion to $28.8 billion for the three months ended June 30, 2001, as a result of maturities throughout the first half of 2001. NONINTEREST INCOME
- -------------------------------------------------------------------------------------------------- Three months Six months ended June 30 ended June 30 In millions 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------- Banking fees and commissions $ 406 $ 403 $ 796 $ 808 Investment services revenue 363 450 751 976 Credit card revenue 162 177 327 343 Processing-related revenue 74 153 262 313 Capital markets revenue (100) 820 (6) 1,880 Gains on branch divestitures 263 313 353 679 Other 158 151 367 288 - -------------------------------------------------------------------------------------------------- Total noninterest income $ 1,326 $ 2,467 $ 2,850 $ 5,287 - --------------------------------------------------------------------------------------------------
Noninterest income for the second quarter of 2001 decreased $1.1 billion to $1.3 billion. This 46% decrease from the prior year quarter primarily reflects the effect of the slowdown in the U.S. economy on FleetBoston's capital markets and investment services businesses. Processing-related revenues also declined, due to the sale of the mortgage banking business in the second quarter of 2001. These decreases were offset, in part, by $263 million of gains from branch divestitures. BANKING FEES AND COMMISSIONS Banking fees and commissions, which include fees received for cash management, deposit accounts, electronic banking and other service fees, were relatively flat in both the quarterly and six month comparisons, primarily the result of lower deposit fees following the divestiture of deposits throughout 2000, partly offset by a rise in cash management fees resulting from a higher volume of business. INVESTMENT SERVICES REVENUE
- ----------------------------------------------------------------------------------------- Three months Six months ended June 30 ended June 30 In millions 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------- Investment management revenue $234 $264 $481 $524 Brokerage fees and commissions 129 186 270 452 - ----------------------------------------------------------------------------------------- Total investment services revenue $363 $450 $751 $976 - -----------------------------------------------------------------------------------------
Investment services revenue decreased $87 million, or 19%, to $363 million for the three months ended June 30, 2001, and decreased $225 million, or 23%, to $751 million for the first half of 2001. Investment Management Revenue
- ----------------------------------------------------------------------------------- Three months Six months ended June 30 ended June 30 In millions 2001 2000 2001 2000 - ----------------------------------------------------------------------------------- Private Clients Group $ 95 $104 $193 $205 Institutional businesses 38 44 81 88 International 34 39 72 80 Columbia Management Company 26 29 53 56 Quick & Reilly 22 28 44 57 Mutual Fund & Investment 16 17 32 33 Other 3 3 6 5 - ----------------------------------------------------------------------------------- Total $234 $264 $481 $524 - -----------------------------------------------------------------------------------
Investment management revenue decreased $30 million, or 11%, in the quarterly comparison and $43 million, or 8%, in the six month comparison, in both cases driven by adverse market conditions experienced during the 2001 periods, which resulted in a decline in the valuation of assets under management. At June 30, 2001, assets under management amounted to $129 billion, compared to $136 billion at June 30, 2000. In June 2001, FleetBoston announced a definitive agreement to purchase the asset management businesses of Liberty Financial Companies, Inc. for approximately $1 billion, consisting of $900 million in cash and the assumption of $110 million in revolving debt. This transaction will add approximately $50 billion to FleetBoston's assets under management, and FleetBoston will rank as the world's 29th largest investment management business. The transaction, which is subject to regulatory approvals, is expected to be completed in the second half of 2001. Brokerage Fees and Commissions Brokerage fees and commissions declined $57 million, or 31%, in the quarterly comparison, and $182 million, or 40%, in the six month comparison, due mainly to the impact of adverse market conditions on Quick & Reilly and Robertson Stephens in the first half of 2001, compared to the exceptionally strong markets in the first half of 2000. These conditions resulted in lower stock trading volumes and caused declines in revenue. CREDIT CARD REVENUE Credit card revenue decreased $15 million, or 8%, in the second quarter of 2001 compared to the second quarter 5 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of 2000, and $16 million, or 5%, in the six month comparison. Both decreases were primarily due to lower securitization income, attributable to a higher level of net charge-offs, as the level of bankruptcy filings increased in the second quarter of 2001, and lower penalty fee income, partially offset by improved interchange income driven by increased card usage. PROCESSING-RELATED REVENUE
- ---------------------------------------------------------------------------------------- Three months Six months ended June 30 ended June 30 In millions 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------- Student loan servicing fees $ 41 $ 39 $ 83 $ 78 Mortgage banking revenue, net -- 83 107 174 Other 33 31 72 61 - ---------------------------------------------------------------------------------------- Total processing-related revenue $ 74 $153 $262 $313 - ----------------------------------------------------------------------------------------
Processing-related revenue decreased $79 million in the second quarter of 2001 compared to the second quarter of 2000, and $51 million in the six month comparison, reflecting the sale of the mortgage banking business in the second quarter of 2001. Student loan servicing fees increased at AFSA Data Corporation (AFSA), FleetBoston's student loan servicing subsidiary, as accounts serviced increased approximately 6% from the second quarter of 2000. AFSA is the largest student loan servicer in the United States, with 7.7 million accounts and over $78 billion of loans serviced. FleetBoston completed the sale of its mortgage banking business in the second quarter of 2001, and recorded an additional pre-tax loss of $101 million ($60 million after-tax) in other noninterest expense. The loss was substantially the result of hedge ineffectiveness recorded in accordance with Statement of Financial Accounting Standards (SFAS) No. 133. FleetBoston will continue to originate mortgage loans through its retail banking branches. CAPITAL MARKETS REVENUE
- ----------------------------------------------------------------------------------------------------- Three months Six months ended June 30 ended June 30 In millions 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------- Market-making revenue $ 144 $ 226 $ 341 $ 447 Foreign exchange revenue 80 54 123 100 Syndication/agency fees 56 43 96 83 Advisory fees 35 58 76 220 Underwriting revenue 29 95 70 351 Securities gains/(losses) 2 10 (211) (48) Trading profits and commissions (10) 44 (7) 124 Principal investing (436) 290 (494) 603 - ----------------------------------------------------------------------------------------------------- Total capital markets revenue $ (100) $ 820 $ (6) $ 1,880 - -----------------------------------------------------------------------------------------------------
Capital markets revenue dropped $920 million, or 112%, and $1.9 billion, or 100%, for the second quarter and first six months of 2001, respectively, compared to the same periods a year ago. These decreases were driven by declines in nearly all categories of capital markets revenue from the remarkable levels recorded in the 2000 periods, as a result of the previously mentioned economic slowdown that began in the second quarter of 2000. Revenues from capital markets activities are impacted by a variety of factors, including the condition of the economy, interest rates and equity markets. These markets have experienced a significant slowdown over the past twelve months, and are expected to recover slowly. As such, capital markets revenues are not expected to return to the levels achieved in 2000 in the foreseeable future. The $82 million, or 36%, decrease in market-making revenue in the quarterly comparison and the $106 million, or 24%, decrease in the six month comparison resulted from decreased transaction volumes at Quick & Reilly and Robertson Stephens, due to the effect of market conditions on these businesses. Foreign exchange revenue increased $26 million, or 48%, to $80 million for the three months ended June 30, 2001, and $23 million, or 23%, to $123 million for the six months ended June 30, 2001. These increases were the result of favorable positions in Latin America, specifically Argentina, where the Corporation benefited from volatile market conditions. The $13 million increase in syndication/agency fees in both comparisons was due to a higher level of transactions during the second quarter of 2001 compared to the 2000 quarter. Such fees are a function of the timing and level of syndication transactions. Advisory fees decreased $23 million in the second quarter of 2001, and $144 million in the first half of 2001. These decreases reflect a lower level of merger and acquisition advisory activities at Robertson Stephens during the 2001 periods, reflecting lower demand for these services in the difficult market environment. Underwriting revenue declined $66 million, or 69%, in the second quarter of 2001. In the first six months of 2001, underwriting revenue declined $281 million, or 80%. Underwriting revenues are affected by the volume and timing of public offerings and other transactions. As a result of the slowdown in the technology sector, transaction volume at Robertson Stephens decreased 63% compared to the second quarter of 2000, and 80% in the six month comparison. Securities losses of $211 million for the first six months of 2001 included a $265 million loss recorded in the first quarter of 2001 on the previously mentioned sale of securities subsequent to the Summit merger, partly offset by gains from sales of bonds. Losses in the first six months of 2000 resulted from bond sales associated with a repositioning of the portfolio. Trading profits and commissions declined $54 million for the quarter ended June 30, 2001, and $131 million for the six months ended June 30, 2001. These decreases were primarily due to the effect of adverse market conditions. 6 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Decreases in principal investing revenues in the three and six month comparisons resulted primarily from investment write-downs of $470 million and $602 million in the three and six month 2001 periods, respectively. These write-downs were recorded to reflect the significant valuation impairment, particularly in the technology and telecommunications sectors, currently being experienced in the private equity industry. Of the $470 million of second quarter write-downs, 55%, or $258 million, related to direct investments in public and privately held companies. In addition, gains from sales of direct investments declined significantly. During the second quarter and first six months of 2001, FleetBoston made new investments of $215 million and $430 million, respectively. As of June 30, 2001, the Principal Investing portfolio had an aggregate carrying value of approximately $4.1 billion, composed of indirect investments in primary or secondary funds, direct investments in privately held companies and direct investments in companies whose stocks are publicly traded. OTHER Branch divestiture gains of $263 million and $353 million recorded in the three and six months ended June 30, 2001, respectively, resulted primarily from the divestitures required in connection with the BankBoston merger. In 2000, $313 million and $679 million of gains relating to these divestitures were recorded in the second quarter and first six months, respectively. In the six month comparison, other noninterest income increased $79 million, primarily as a result of gains from sales of several small businesses in the 2001 period. NONINTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------- Three months Six months ended June 30 ended June 30 In millions 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------- Employee compensation and benefits $ 985 $1,273 $2,029 $2,817 Occupancy and equipment 277 298 563 610 Intangible asset amortization 98 97 198 194 Legal and other professional 62 90 131 178 Marketing and public relations 58 77 121 156 Merger- and restructuring-related charges 38 25 525 62 Loss on sale of mortgage banking business 101 -- 428 -- Other 440 606 916 1,194 - --------------------------------------------------------------------------------------------------------- Total noninterest expense $2,059 $2,466 $4,911 $5,211 - ---------------------------------------------------------------------------------------------------------
The $407 million, or 17%, and $300 million, or 6%, decreases in the quarterly and six month comparisons, respectively, were primarily due to lower compensation and benefits costs directly attributable to lower levels of revenue, as well as lower operating expenses resulting from merger integration activities and the previously disclosed corporate-wide program to contain expenses in light of the slower economic environment. Employee compensation and benefits costs in the 2001 periods decreased $288 million compared to the second quarter of 2000 and $788 million compared to the first half of 2000, due primarily to revenue-related decreases in incentive compensation at Robertson Stephens, Quick & Reilly and the Principal Investing business, as well as expense reductions achieved from merger integration activities and corporate-wide cost containment. Occupancy and equipment, legal and other professional costs, marketing and public relations and other noninterest expense all decreased in both the three month and six month comparisons. These decreases were generally the result of the aforementioned corporate-wide cost containment effort, cost savings from merger integration activities and divestitures. The second quarter of 2001 included $93 million of costs associated with the Summit merger, composed of $55 million of merger integration costs, included in the preceding table by type of expense, and $38 million of incremental depreciation on certain assets that will be used in the merger integration and then disposed of. Noninterest expense for the second quarter of 2000 included $62 million of merger integration costs incurred in connection with the BankBoston merger and $25 million of incremental depreciation on certain assets that were used in the merger integration and then disposed of. For the first six months of 2001, noninterest expense included $525 million of merger and restructuring costs, composed of $446 million recorded in connection with the Summit merger, to accrue for merger-related costs and a restructuring plan, and $79 million related to a reorganization of capital markets businesses. Summit merger integration costs totaling $100 million were also incurred during the six month period. Noninterest expense for the 2000 period included $125 million of BankBoston merger integration costs and $62 million of incremental depreciation on certain assets that were used in the merger integration and were then disposed of. The Summit merger integration produced $7 million of incremental cost savings in the second quarter of 2001. FleetBoston expects to achieve $300 million in annualized cost savings by the end of the first quarter of 2002, and has achieved $52 million of annualized cost savings to date. The Corporation's cost containment program produced approximately $100 million of incremental cost savings in the second quarter of 2001. FleetBoston expects to achieve $500 million to $600 million of annualized cost savings by the end of 2001, and has achieved approximately $460 million of annualized cost savings to date. Because the cost containment program and integration are ongoing, actual savings in 2001 will be less than the annualized amounts. 7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME TAXES The Corporation recorded income tax expense of $322 million for the second quarter of 2001, compared to $719 million for the same period a year ago. FleetBoston's effective tax rate was 37.8% and 42.5% for the second quarters of 2001 and 2000, respectively, and 40.5% and 41.4% for the respective six month periods. The higher tax rate reported for the second quarter of 2000 generally resulted from the write-off of nondeductible goodwill in connection with branch divestitures. LINE OF BUSINESS INFORMATION FleetBoston is organized and managed along three principal lines of business: Wholesale and Global Banking, Consumer and Investment Services and Capital Markets. These business lines conform to the Corporation's customer-focused organizational structure implemented on January 1, 2001. For additional information about the products and services offered by each line of business, refer to the "Line of Business Information" section of Management's Discussion and Analysis included in the Corporation's Current Report on Form 8-K dated May 4, 2001. Information for the quarter and six months ended June 30, 2001 and 2000 is presented below. Prior period information has been restated for comparative purposes to reflect changes in management reporting implemented in 2001. The information is presented on a fully taxable equivalent basis. LINE OF BUSINESS EARNINGS SUMMARY
- ------------------------------------------------------------------------------------------------------------------------------ Three months ended June 30 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income Total Revenue Return on Equity - ------------------------------------------------------------------------------------------------------------------------------ Wholesale and Global Banking $ 423 $ 370 $ 1,437 $ 1,429 23% 20% Consumer and Investment Services 299 358 1,692 1,986 19 21 Capital Markets (284) 183 (283) 634 nm 36 All Other 93 60 398 459 nm nm - ------------------------------------------------------------------------------------------------------------------------------ Total $ 531 $ 971 $ 3,244 $ 4,508 11% 22% - ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Six months ended June 30 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income Total Revenue Return on Equity - ------------------------------------------------------------------------------------------------------------------------------ Wholesale and Global Banking $ 797 $ 714 $ 2,814 $ 2,816 22% 20% Consumer and Investment Services 594 717 3,413 4,001 18 21 Capital Markets (324) 480 (118) 1,635 nm 46 All Other (395) 136 594 942 nm nm - ------------------------------------------------------------------------------------------------------------------------------ Total $ 672 $ 2,047 $ 6,703 $ 9,394 7% 24% - ------------------------------------------------------------------------------------------------------------------------------
nm - not meaningful The following discussion focuses on the components of each of the three major business lines, and explains results in terms of their underlying businesses. WHOLESALE AND GLOBAL BANKING
- ------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 Dollars in millions 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------- Income statement data: Net interest income $ 949 $ 965 $ 1,883 $ 1,909 Noninterest income 488 464 931 907 Provision 166 144 333 288 Noninterest expense 567 663 1,158 1,327 Taxes 281 252 526 487 - ------------------------------------------------------------------------------------------------- Net income $ 423 $ 370 $ 797 $ 714 - ------------------------------------------------------------------------------------------------- Balance sheet data: Average assets $115,338 $118,580 $116,251 $122,953 Average loans 96,498 97,616 97,196 97,056 Average deposits 31,008 30,001 30,749 29,948 - ------------------------------------------------------------------------------------------------- Return on equity 23% 20% 22% 20% - -------------------------------------------------------------------------------------------------
Wholesale and Global Banking earned $423 million in the second quarter of 2001, a 14% increase over the $370 million earned in the second quarter of 2000. Increased earnings were driven by strong results in Commercial Finance and International Banking, partly offset by a decline in Corporate Banking.
- ----------------------------------------------------------------------------------------------------------------------- Three months ended June 30 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income Total Revenue Return on Equity - ----------------------------------------------------------------------------------------------------------------------- Commercial Finance $ 142 $ 126 $ 399 $ 380 20% 18% International Banking 128 80 482 425 32 22 Corporate Banking 97 108 308 351 22 24 Middle Market 56 56 248 273 18 16 - ----------------------------------------------------------------------------------------------------------------------- Total $ 423 $ 370 $1,437 $1,429 23% 20% - -----------------------------------------------------------------------------------------------------------------------
Commercial Finance Commercial Finance earned $142 million in the second quarter of 2001, compared to $126 million a year ago, an increase of 13%. Increased earnings were driven primarily by higher leasing income and investment banking fees, combined with lower operating expenses which resulted from cost saving initiatives. 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS International Banking Compared to the second quarter of 2000, International Banking earnings increased $48 million, or 60%, mainly due to continued strong loan growth in key Latin American markets, primarily Brazil, coupled with effective control of operating expenses. In addition, strong foreign exchange revenue and improved spreads in Argentina contributed to the quarter over quarter increase in International Banking's earnings. Average deposit balances grew $1.2 billion, while average loan balances grew $3.2 billion, over the second quarter of 2000. Corporate Banking Corporate Banking recorded earnings of $97 million in the second quarter of 2001, a decrease of $11 million, or 10%, compared to the second quarter of 2000. This decline was driven by decreases in loan volumes resulting, in part, from repositioning of the portfolio to reduce credit exposure, and capital markets-related revenues associated with the adverse conditions in the financial markets, partially offset by a decrease in operating expenses. Middle Market For the second quarter of 2001, Middle Market earned $56 million, consistent with the prior year quarter. Higher cash management fees and cost saving initiatives offset the impact of decreases in the loan portfolio, a portion of which was attributable to divestitures resulting from the BankBoston merger. Average loan and deposit balances were $16.5 billion and $11.4 billion, respectively, for the second quarter of 2001, compared to $18.8 billion and $11.1 billion, respectively, for the 2000 period. CONSUMER AND INVESTMENT SERVICES
- --------------------------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 Dollars in millions 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------- Income statement data: Net interest income $ 863 $ 1,042 $ 1,750 $ 2,110 Noninterest income 829 944 1,663 1,891 Provision 101 107 197 243 Noninterest expense 1,092 1,273 2,226 2,544 Taxes 200 248 396 497 - --------------------------------------------------------------------------------------------- Net income $ 299 $ 358 $ 594 $ 717 - --------------------------------------------------------------------------------------------- Balance sheet data: Average assets $45,300 $48,775 $45,398 $49,729 Average loans 32,950 35,256 33,470 36,059 Average deposits 83,260 89,966 82,978 91,180 - --------------------------------------------------------------------------------------------- Return on equity 19% 21% 18% 21% - ---------------------------------------------------------------------------------------------
Consumer and Investment Services, which includes domestic banking to consumer and small business customers, investment management and retail brokerage services, as well as the domestic credit card business, earned $299 million in the second quarter of 2001, down from $358 million in the second quarter of 2000. Results reflect the impact of divestitures--primarily affecting the Consumer Businesses and Small Business units--as well as lower earnings in the Wealth Management and Brokerage units stemming from declines in the equity markets.
- --------------------------------------------------------------------------------------------------------------------------------- Three months ended June 30 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income Total Revenue Return on Equity - --------------------------------------------------------------------------------------------------------------------------------- Consumer Businesses $ 168 $ 171 $ 818 $ 916 27% 25% Wealth Management and Brokerage 51 94 385 529 12 23 Small Businesses 52 63 261 301 26 28 Credit Card 28 30 228 240 8 7 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 299 $ 358 $1,692 $1,986 19% 21% - ---------------------------------------------------------------------------------------------------------------------------------
Consumer Businesses The Consumer Businesses unit is composed of the retail distribution network, community banking, consumer lending and student loan processing. The results of the mortgage banking unit, which was sold in the second quarter of 2001, are included in All Other. The Consumer Businesses unit earned $168 million in the second quarter of 2001, a slight decrease from the prior year. Lower earnings were primarily driven by the impact of 2000 divestitures and lower deposit spreads arising from the declining interest rate environment. Wealth Management and Brokerage Wealth Management and Brokerage includes the Investment Services units: the Private Clients Group, Columbia Management, the Mutual Funds & Investments Group and several businesses offering retirement planning, large institutional asset management and not-for-profit investment services, as well as the Quick & Reilly retail brokerage and clearing units. Wealth Management and Brokerage earned $51 million in the second quarter of 2001, compared to $94 million in the second quarter of 2000, a decrease of $43 million, or 46%. These lower results were due to a significant decline in net income at Quick & Reilly ($41 million), as brokerage-related revenues continued to be negatively impacted by market conditions. In addition, the market value of domestic assets under management declined $6 billion from June 30, 2000 to approximately $121 billion at June 30, 2001, reflecting declines in the overall valuation of the stock market. Small Businesses Earnings were $52 million in the second quarter of 2001, $11 million, or 17%, lower than the second quarter of 2000, largely the result of 2000 divestitures. For the second quarter of 2001, average loans were $4.2 billion 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS while average deposits were $12.8 billion, reflecting decreases of approximately $900 million and $1.7 billion, respectively, from a year ago, again primarily due to divestitures. Credit Card FleetBoston's credit card subsidiary is the tenth largest bank credit card issuer in the nation in terms of managed credit card receivables. This unit earned $28 million for the second quarter of 2001, a slight decline from a year ago. Decreasing penalty fee income and securitization income due to increased charge-offs from a higher level of bankruptcy filings was partially offset by lower operating expenses and increased interchange income. CAPITAL MARKETS
- ---------------------------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 Dollars in millions 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------- Income statement data: Net interest income $ (29) $ 11 $ (47) $ 17 Noninterest income (254) 623 (71) 1,618 Provision -- -- -- -- Noninterest expense 182 327 415 839 Taxes (181) 124 (209) 316 - ---------------------------------------------------------------------------------------------- Net income $ (284) $ 183 $ (324) $ 480 - ---------------------------------------------------------------------------------------------- Balance sheet data: Average assets $ 8,278 $ 9,673 $ 8,721 $ 9,958 Average loans 225 389 255 417 Average deposits 73 40 68 31 - ---------------------------------------------------------------------------------------------- Return on equity nm 36% nm 46% - ---------------------------------------------------------------------------------------------- nm - not meaningful
Capital Markets includes Fleet Meehan Specialist, Robertson Stephens and Principal Investing. This group incurred a loss of $284 million for the second quarter of 2001, compared to net income of $183 million for the same quarter a year ago.
- ----------------------------------------------------------------------------------------------------------------- Three months ended June 30 2001 2000 2001 2000 2001 2000 Dollars in millions Net Income Total Revenue Return on Equity - ----------------------------------------------------------------------------------------------------------------- Fleet Meehan Specialist $ 23 $ 33 $ 82 $ 96 27% 76% Robertson Stephens (14) 25 104 294 nm 16 Principal Investing (293) 125 (469) 244 nm 41 - ----------------------------------------------------------------------------------------------------------------- Total $(284) $ 183 $(283) $ 634 nm 36% - ----------------------------------------------------------------------------------------------------------------- nm - not meaningful
Fleet Meehan Specialist Fleet Meehan Specialist, one of the largest specialist firms on the NYSE representing the equity securities of approximately 500 companies, earned $23 million for the second quarter of 2001, a decrease of $10 million from the second quarter of 2000. Decreased volatility in market prices and the impact of the conversion to decimal price quotes adopted by the NYSE reduced profit opportunities and narrowed spreads, compared to the second quarter of last year. Robertson Stephens Robertson Stephens is a full-service investment banking firm focused on providing growth companies with a comprehensive set of investment banking products and services, including equity underwriting, sales and trading, research, advisory services, convertible securities and equity derivatives. Robertson Stephens channels capital to companies by providing investment banking, brokerage services and research to investors. This unit incurred a net loss of $14 million in the second quarter of 2001, compared to net income of $25 million in the second quarter of 2000. Lower earnings were mainly a result of declining underwriting activities. The number of underwriting transactions that went to market in the 2001 period decreased 63% from the second quarter of 2000. Principal Investing Principal Investing provides capital and debt financing to business ventures that are predominantly privately or closely held companies, and also invests in primary or secondary funds. The Principal Investing business recorded a loss of $293 million in the second quarter of 2001, a decrease of $418 million from the same quarter last year. Principal Investing's earnings were affected by write-downs ($470 million, $290 million after-tax) taken by the Corporation against this portfolio, reflecting the impairment of value, particularly in the technology and telecommunications sectors, that has resulted from the slowdown in the U.S. economy, coupled with sharp declines in realized gains from sales of direct investments. At June 30, 2001, the aggregate carrying value of the Principal Investing portfolio was $4.1 billion. ALL OTHER All Other includes transactions not allocated to the principal business lines and the residual impact of methodology allocations, such as the provision for credit losses, credit loss reserves and equity allocations, combined with transfer pricing offsets. The business activities of FleetBoston's Treasury unit are also included in All Other. The Treasury unit is responsible for managing the Corporation's securities and residential mortgage portfolios, the balance sheet management function and wholesale funding needs. Earnings in All Other can fluctuate with changes affecting the consolidated provision for credit losses, one-time charges, gains and other corporate actions not driven by specific business units. All Other had net income of $93 million in the second quarter of 2001, compared to $60 million in the second quarter of 2000. The second quarter of 2001 included $93 million of net after-tax profits related to divestiture and integration activities, as well as after-tax charges of $60 million primarily related to hedge ineffectiveness recorded in 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS conjunction with the sale of the mortgage banking unit. The second quarter of 2000 benefited from $75 million of after-tax divestiture gains, net of merger integration expenses, related to the BankBoston merger. FINANCIAL CONDITION Total assets were $202.1 billion as of June 30, 2001 compared to $219.1 billion at December 31, 2000. This $17 billion decline reflected a $10.4 billion decrease in securities resulting primarily from the previously discussed sale of $8 billion of low-margin securities, and a $5.8 billion decrease in loans and leases as a result of securitization transactions, loan runoff and lower business volume. In addition, the sale of the mortgage banking business in the second quarter of 2001 removed approximately $8 billion of assets. These decreases were offset, in part, by a rise in federal funds sold and securities purchased under agreements to resell, due primarily to excess funds following the securities sales. Total deposits decreased from December 31, 2000 by $3.9 billion to $124.8 billion at June 30, 2001, primarily the result of the transfer of escrow deposits in connection with the mortgage banking business sale, partially offset by a $2.2 billion increase in international deposits. Short-term borrowings decreased $7.7 billion from December 31, 2000 to June 30, 2001, attributable to decreased use of federal funds purchased and securities sold under agreements to repurchase, Federal Home Loan Bank borrowings as well as treasury, tax and loan borrowings. The $3.9 billion decrease in long-term debt was due to maturities during the first half of the year. SECURITIES
- --------------------------------------------------------------------------------------------------------------------------------- June 30, 2001 March 31, 2001 Dec. 31, 2000 Amortized Market Amortized Market Amortized Market In millions Cost Value Cost Value Cost Value - --------------------------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Treasury and government agencies $ 558 $ 563 $ 815 $ 827 $ 1,770 $ 1,769 Mortgage-backed securities 14,778 14,840 15,256 15,484 19,327 19,411 Foreign debt securities 3,258 3,254 2,840 2,810 2,734 2,754 Other debt securities 2,518 2,519 2,997 3,017 2,843 2,832 - --------------------------------------------------------------------------------------------------------------------------------- Total debt securities 21,112 21,176 21,908 22,138 26,674 26,766 - --------------------------------------------------------------------------------------------------------------------------------- Marketable equity securities 651 641 846 757 1,099 1,072 Other equity securities 2,192 2,192 2,129 2,129 2,067 2,067 - --------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale 23,955 24,009 24,883 25,024 29,840 29,905 - --------------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 578 582 585 588 5,059 5,027 - --------------------------------------------------------------------------------------------------------------------------------- Total securities $24,533 $24,591 $25,468 $25,612 $34,899 $34,932 - ---------------------------------------------------------------------------------------------------------------------------------
The amortized cost of securities available for sale decreased to $24 billion at June 30, 2001, compared to $29.8 billion at December 31, 2000, due to the previously-mentioned securities sales and the write-down of certain securities available for sale to reflect impairment in value that was deemed other than temporary. The overall valuation of securities available for sale decreased $11 million from December 31, 2000 to a net unrealized (pre-tax) gain position of $54 million at June 30, 2001. The $4.5 billion decrease in securities held to maturity from December 31, 2000 resulted from a one-time reclassification of $5 billion of securities held to maturity to securities available for sale in connection with the adoption of SFAS No. 133. LOANS AND LEASES
- ----------------------------------------------------------------------------------------------- June 30, March 31, Dec. 31, In millions 2001 2001 2000 - ----------------------------------------------------------------------------------------------- Domestic: Commercial and industrial $ 51,642 $ 54,249 $ 56,147 Commercial real estate 11,447 11,336 11,641 Consumer 32,244 34,424 36,323 Lease financing 13,796 13,296 13,567 - ----------------------------------------------------------------------------------------------- Total domestic loans and leases 109,129 113,305 117,678 - ----------------------------------------------------------------------------------------------- International: Commercial 17,061 15,415 14,221 Consumer 2,876 2,920 2,935 - ----------------------------------------------------------------------------------------------- Total international loans and leases 19,937 18,335 17,156 - ----------------------------------------------------------------------------------------------- Total loans and leases $129,066 $131,640 $134,834 - -----------------------------------------------------------------------------------------------
Total loans and leases decreased $5.8 billion to $129.1 billion from December 31, 2000. This decrease was due to declines of $4.5 billion in domestic commercial & industrial (C&I) loans, resulting from loan runoff and lower business volume, and $4.1 billion in domestic consumer loans. These decreases were offset, in part, by a $2.8 billion increase in FleetBoston's international loan portfolio, principally in Brazil. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consumer Loans
- ---------------------------------------------------------------------------- June 30, March 31, Dec. 31, In millions 2001 2001 2000 - ---------------------------------------------------------------------------- Domestic: Home equity $11,662 $12,375 $12,507 Residential real estate 9,917 11,051 11,425 Credit card 4,891 4,587 5,126 Student loans 1,058 1,202 1,109 Installment/other 4,716 5,209 6,156 - ---------------------------------------------------------------------------- Total domestic loans 32,244 34,424 36,323 - ---------------------------------------------------------------------------- International 2,876 2,920 2,935 - ---------------------------------------------------------------------------- Total consumer loans $35,120 $37,344 $39,258 - ----------------------------------------------------------------------------
Compared to December 31, 2000, domestic consumer loans decreased $4.1 billion, or 11%, to $32.2 billion at June 30, 2001. The $845 million, or 7%, decline in home equity loans from year-end resulted primarily from a $750 million securitization transaction completed in the second quarter, while the $1.5 billion decline in residential real estate loans was mainly attributable to loan runoff. The $235 million decrease in credit card loans was attributable to new securitizations of approximately $1.7 billion during the first half of 2001, offset, in part, by growth in the owned portfolio and activity related to prior year securitizations. The decrease of $1.4 billion in installment/other consumer loans was primarily attributable to lower margin lending at Quick & Reilly. Cross-Border Outstandings In accordance with bank regulatory rules, cross-border outstandings are amounts payable to FleetBoston by residents of foreign countries, regardless of the currency in which the claim is denominated, and local country claims in excess of local country obligations. At June 30, 2001, total cross-border outstandings were $14.2 billion, compared with $13.2 billion at December 31, 2000, which included $6.8 billion and $6.5 billion, respectively, of cross-border outstandings to Latin America. Further information with respect to FleetBoston's cross-border outstandings is included in the "Cross-Border Outstandings" section of Management's Discussion and Analysis, contained in its Current Report on Form 8-K dated May 4, 2001. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. FleetBoston manages its cross-border outstandings using country exposure limits established by the Country Exposure Committee. The following table details by country FleetBoston's approximate cross-border outstandings that individually amounted to 1% or more of its consolidated total assets at June 30, 2001 and December 31, 2000. Significant Cross-Border Outstandings(a)(b)
- -------------------------------------------------------------------------- June 30, Dec. 31, Dollars in millions 2001(c)(d) 2000(c)(d) - -------------------------------------------------------------------------- Argentina: Banks $ 189 $ 115 Government entities and agencies 556 835 Other 1,497 1,425 - -------------------------------------------------------------------------- Total $2,242 $2,375 - -------------------------------------------------------------------------- Percentage of total assets 1.1% 1.1% - -------------------------------------------------------------------------- Commitments(e) $ 50 $ 13 - -------------------------------------------------------------------------- Brazil: Banks $ 31 -- Government entities and agencies 1,212 -- Other 809 -- - -------------------------------------------------------------------------- Total $2,052 -- - -------------------------------------------------------------------------- Percentage of total assets 1.0% -- - -------------------------------------------------------------------------- Commitments(e) $ 126 -- - --------------------------------------------------------------------------
(a) Cross-border outstandings include deposits in other banks, resale agreements, trading securities, securities available for sale and held to maturity, loans and leases, amounts due from customers on acceptances, accrued interest receivable and revaluation gains on trading derivatives. Excluded from cross-border outstandings are claims reallocated as a result of external guarantees, cash collateral and insurance contracts primarily issued by U.S. government agencies. (b) Cross-border outstandings in countries which totaled between .75% and 1% of consolidated total assets were approximately as follows: June 30, 2001-none; December 31, 2000-Brazil-$2 billion. (c) Local country assets and local country liabilities for Argentina and Brazil are summarized below. Local country assets in excess of local country liabilities are included in cross-border outstandings presented in the table above.
----------------------------------------------------------------------------- June 30, 2001 December 31, 2000 Local Country Local Country In billions Assets Liabilities Assets Liabilities ----------------------------------------------------------------------------- Argentina $ 5.8 $ 5.2 $ 6.2 $ 5.5 Brazil 7.7 6.2 6.5 5.2 -----------------------------------------------------------------------------
Included in local country liabilities are liabilities where the provider of funds assumes the risk of nonpayment due to currency exchange restrictions in a given country. Such liabilities were $4 billion at June 30, 2001 and $3.5 billion at December 31, 2000. (d) Excluding net local country outstandings, cross-border outstandings with a remaining maturity of less than one year, as a percentage of total outstandings, were approximately 59% for Argentina and 50% for Brazil at June 30, 2001 and 55% for Argentina and 70% for Brazil at December 31, 2000. (e) Commitments include legally binding cross-border letters of credit, guarantees and other commitments defined by the FFIEC guidelines. The Argentine economy continues to be impacted by the recession that began in 1999, and financial markets have recently experienced periods of significant volatility. While the Corporation's overall financial results relating to its Argentine operations have not been significantly impacted by this situation to date, it is not possible to predict what effect, if any, the economic and political events in Argentina will ultimately have on that country's economic growth or on FleetBoston's operations in Argentina and other Latin American countries. The Corporation will continue to closely monitor the Argentine economic and political situation and the potential impact future developments may have on its Argentine and other Latin American operations. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NONPERFORMING ASSETS (a)
- --------------------------------------------------------------------------------------------------------------------------------- June 30, 2001 March 31, 2001 December 31, 2000 - --------------------------------------------------------------------------------------------------------------------------------- Current or Current or Current or less than less than less than 90 days 90 days 90 days In millions past due Noncurrent Total past due Noncurrent Total past due Noncurrent Total - --------------------------------------------------------------------------------------------------------------------------------- Domestic: Commercial and industrial $ 705 $ 294 $ 999 $ 614 $ 255 $ 869 $ 578 $ 187 $ 765 Commercial real estate 27 34 61 27 21 48 3 25 28 Consumer 5 57 62 5 68 73 4 83 87 OREO -- 21 21 -- 29 29 -- 30 30 - --------------------------------------------------------------------------------------------------------------------------------- Total Domestic $ 737 $ 406 $1,143 $ 646 $ 373 $1,019 $ 585 $ 325 $ 910 - --------------------------------------------------------------------------------------------------------------------------------- International: Commercial and industrial $ 1 $ 84 $ 85 $ -- $ 75 $ 75 $ 3 $ 78 $ 81 Commercial real estate 3 83 86 4 73 77 2 64 66 Consumer -- 66 66 -- 59 59 -- 55 55 OREO -- 14 14 -- 15 15 -- 18 18 - --------------------------------------------------------------------------------------------------------------------------------- Total International $ 4 $ 247 $ 251 $ 4 $ 222 $ 226 $ 5 $ 215 $ 220 - --------------------------------------------------------------------------------------------------------------------------------- Total NPAs $ 741 $ 653 $1,394 $ 650 $ 595 $1,245 $ 590 $ 540 $1,130 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Throughout this Report, NPAs and related ratios do not include loans greater than 90 days past due and still accruing interest ($384 million, $352 million, and $361 million at June 30, 2001, March 31, 2001, and December 31, 2000, respectively). Included in these 90 days past due and still accruing amounts were $279 million, $264 million, and $276 million of consumer loans at June 30, 2001, March 31, 2001, and December 31, 2000, respectively. NPAs and related ratios also do not include assets held for sale by accelerated disposition (AHAD). Nonperforming assets (NPAs) at June 30, 2001 increased $264 million to $1.4 billion compared with December 31, 2000, and increased $149 million compared to March 31, 2001. The six month rise in NPAs was due primarily to additions to domestic C&I nonperforming loans (NPLs). NPAs at June 30, 2001, as a percentage of total loans, leases and OREO, and as a percentage of total assets, were 1.08% and .69%, respectively, compared to .84% and .52%, respectively, at December 31, 2000. FleetBoston had no significant outstanding commitments to lend additional funds to customers whose loans have been placed on nonaccrual status or the terms of which have been modified. As noted in previous public comments and prior filings with the Securities and Exchange Commission (the SEC), FleetBoston anticipates further increases in NPAs during 2001, primarily related to domestic C&I loans. Future levels of NPAs will be influenced by the economic environment, interest rates and other internal and external factors existing at the time. As such, no assurance can be given as to future levels of NPAs. Impaired Loans FleetBoston accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." As such, when the recorded investment in a loan exceeds the value of the loan measured using discounted cash flows or, in the case of collateral-dependent loans, the fair value of the collateral, the loan is classified as impaired. Such impairment is recognized as a valuation reserve, which is included as part of the Corporation's overall reserve for credit losses. Impaired loans, which are included in NPAs presented in the table above, are primarily commercial and commercial real estate loans on nonaccrual status. The following table presents the status of impaired loans. The amount of interest income recognized on impaired loans was not significant.
- --------------------------------------------------------------------------- June 30, Dec. 31, In millions 2001 2000 - --------------------------------------------------------------------------- Impaired loans with a reserve $ 852 $ 722 Impaired loans without a reserve 304 164 - --------------------------------------------------------------------------- Total impaired loans $1,156 $ 886 - --------------------------------------------------------------------------- Reserve for impaired loans (a) $ 348 $ 268 - --------------------------------------------------------------------------- Quarterly average balance of impaired loans $1,069 $1,007 - ---------------------------------------------------------------------------
(a) The reserve for impaired loans is part of the Corporation's overall reserve for credit losses. At June 30, 2001 and March 31, 2001, FleetBoston had AHAD with a net carrying value of $125 million and $177 million, respectively, none of which were accruing interest. At December 31, 2000, the net carrying value of AHAD was $138 million, of which approximately $136 million was not accruing interest. Transfers to this category are made in accordance with management's intention to focus appropriate resources on the disposition of these assets. Such assets are classified as other assets in the consolidated balance sheet. 13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESERVE FOR CREDIT LOSSES ACTIVITY
- ------------------------------------------------------------------------------------------- Six months ended June 30 2001 2000 Dollars in millions - ------------------------------------------------------------------------------------------- Balance at beginning of year $ 2,709 $ 2,816 Loans charged off (717) (710) Recoveries of loans charged off 125 107 - ------------------------------------------------------------------------------------------- Net charge-offs (592) (603) Provision for credit losses 630 655 Divestitures/Acquisitions/Other (1) (62) - ------------------------------------------------------------------------------------------- Balance at end of period $ 2,746 $ 2,806 - ------------------------------------------------------------------------------------------- Ratios of net charge-offs to average loans .90% .85% - ------------------------------------------------------------------------------------------- Ratios of reserve for credit losses to period-end loans 2.13 2.04 - ------------------------------------------------------------------------------------------- Ratios of reserve for credit losses to period-end NPLs 202 264 - -------------------------------------------------------------------------------------------
The reserve for credit losses to period-end loans at June 30, 2001 increased to 2.13% from 2.04% at June 30, 2000. The increase was the result of the provision for credit losses exceeding net charge-offs by $38 million in 2001, coupled with a lower level of loans. Further information with respect to the reserve for credit losses is included in the "Reserve for Credit Losses" section of Management's Discussion and Analysis contained in FleetBoston's Current Report on Form 8-K dated May 4, 2001. ASSET AND LIABILITY MANAGEMENT The goal of asset and liability management is the prudent control of market risk, liquidity risk and use of capital. Further information with respect to asset and liability management, including related policies, is included in the "Asset and Liability Management" section of Management's Discussion and Analysis contained in FleetBoston's Current Report on Form 8-K dated May 4, 2001. MARKET RISK MANAGEMENT FleetBoston is exposed to market risk both in its balance sheet management activities and its trading activities. The market risk management process for these activities applies to both balance sheet and off-balance sheet exposures. Balance Sheet Management - U.S. Dollar Denominated Risk U.S. dollar denominated assets and liabilities comprise the majority of the consolidated balance sheet. Interest rate risk is by far the most significant non-trading market risk to which the U.S. dollar denominated positions are exposed, and results almost entirely from domestic operations. To measure interest rate risk, FleetBoston performs net interest income simulation analysis, which involves projecting future net interest income from assets, liabilities, and derivative positions over a 1-3 year horizon in various interest rate scenarios. The following table reflects the estimated exposure of net interest income for the next 12 months due to an immediate shift in forecasted interest rates.
Estimated Exposure to Rate Change Net Interest Income (Basis Points) (In millions) - -------------------------------------------------------- June 30, March 31, Dec. 31, 2001 2001 2000 - -------------------------------------------------------- +200 $ 92 $ 68 $(121) -200 339 (137) 97 - --------------------------------------------------------
Management believes that the exposure of the Corporation's net interest income to modest changes in interest rates, such as the easing by the Federal Reserve Board currently built into the base forecast scenario, is insignificant. Furthermore, the current balance sheet position would tend to benefit from any sudden, severe change in interest rates. Estimated net interest income exposures changed materially from the prior quarter-end, especially in a scenario of declining interest rates. These changes were a direct result of interest rate risk management strategy. During the quarter, FleetBoston added interest rate floors and principal-only mortgage-backed securities to hedge exposures to lower short- and long-term interest rates. FleetBoston also performs valuation analysis, which involves projecting future cash flows from assets, liabilities and derivative positions over a very long-term horizon, discounting those cash flows at appropriate interest rates, and then aggregating the discounted cash flows. The "Economic Value of Equity" (EVE) is the estimated net present value of these discounted cash flows. The following table reflects estimated EVE exposures assuming an immediate shift in interest rates. While an immediate shift in interest rates is used in this analysis to provide an estimate of exposure under an extremely adverse scenario, management believes that a gradual shift in interest rates would have a much more modest impact.
Estimated Exposure to Rate Change Economic Value (Basis Points) (In millions) - --------------------------------------------------------- June 30, March 31, Dec. 31, 2001 2001 2000 - --------------------------------------------------------- +200 $(231) $(399) $(611) +100 (152) (372) (155) -100 92 150 (315) -200 (277) (343) (451) - ---------------------------------------------------------
As indicated, an immediate 200 basis point change in interest rates in either direction would reduce EVE, but by an amount that is well within Board-approved limits. Estimated EVE exposures at June 30, 2001 are more modest compared to those at March 31, 2001. These changes reflect the sale of the mortgage banking business, which eliminated exposure to the prepayment risk associ- 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ated with mortgage servicing rights, as well as the impact of the aforementioned risk management strategy. Risk Management Instruments
- ---------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average June 30, 2001 Notional Maturity Fair Rate Dollars in millions Value (Years) Value Receive Pay - ---------------------------------------------------------------------------------------------------------------- DOMESTIC INTEREST RATE RISK MANAGEMENT INSTRUMENTS Interest rate swaps: Receive fixed/ pay variable hedging: variable-rate loans $10,100 fixed-rate deposits 340 short-term debt 430 long-term debt 3,835 ------- 14,705 3.4 $ 860 6.33% 4.54% ------- Options hedging: variable-rate loans 12,000 securities 500 fixed-rate deposits 105 long-term debt 250 ------- 12,855 4.0 155 -- -- - ---------------------------------------------------------------------------------------------------------------- Total domestic interest rate risk management instruments 27,560 3.7 1,015 6.33% 4.54% - ---------------------------------------------------------------------------------------------------------------- INTERNATIONAL INTEREST RATE RISK MANAGEMENT INSTRUMENTS Interest rate swaps hedging foreign currency denominated variable-rate deposits 145 1.8 (1) 4.98% 5.44% - ---------------------------------------------------------------------------------------------------------------- Total international interest rate risk management instruments 145 1.8 (1) 4.98% 5.44% - ---------------------------------------------------------------------------------------------------------------- Total hedges of net interest income $27,705 3.7 $1,014 6.32% 4.55% - ---------------------------------------------------------------------------------------------------------------- FOREIGN EXCHANGE RISK MANAGEMENT INSTRUMENTS Swaps hedging foreign currency denominated repurchase and resale agreements $ 602 2.0 $ 26 -- -- Forward contracts hedging foreign currency denominated fixed- rate loans; fixed-rate deposits 826 .9 (4) -- -- Futures hedging foreign currency denominated resale agreements 1,736 .8 -- -- -- - ---------------------------------------------------------------------------------------------------------------- Total hedges of foreign exchange $ 3,164 1.1 $ 22 -- -- - ---------------------------------------------------------------------------------------------------------------- Total risk management instruments $30,869 3.4 $1,036 6.32% 4.55% - ----------------------------------------------------------------------------------------------------------------
Trading Activities FleetBoston's trading activities create exposure to price risk, or the risk of loss in earnings arising from adverse changes in the value of trading portfolios of financial instruments. Price risk arises from market-making, dealing and position-taking in interest rate, equity, currency exchange rate and precious metals markets. FleetBoston uses a VAR methodology, based on industry-standard risk measurement techniques, to measure the overall price risk inherent in its activities. This methodology is more fully described on page 21 of the Corporation's Current Report on Form 8-K dated May 4, 2001. Under this methodology, aggregate VAR averaged $40 million daily for the six months ended June 30, 2001, essentially unchanged from the daily average for all of 2000. At June 30, 2001, total VAR usage measured $38 million. In no instance during the current year did FleetBoston's daily VAR measure exceed the approved limit. For the six months ended June 30, 2001, most of the price risk in the Corporation's trading activities arose from interest rate risk, which includes directional and spread components, and averaged $23 million, or 59% of aggregate VAR. Interest rate risk arises primarily from trading activity in various domestic fixed-income markets, and in the Argentine and Brazilian sovereign and high-end corporate bond markets. The contribution to FleetBoston's VAR from equity trading activities for the first half of 2001 decreased somewhat, to an average of $9 million, or 23% of aggregate VAR. The individual activities that generate most of these risks include the Corporation's large NYSE specialist firm, as well as NASDAQ market-making, equity trading and a convertible bond trading and underwriting business. Risk from foreign exchange trading activities for the six months ended June 30, 2001 remained moderate at an average of $7 million, or 18% of aggregate VAR. The majority of foreign exchange risk arises from the Corporation's Argentine and Brazilian operations, which establish currency positions with the intention of taking advantage of expected movements in currency exchange rates and/or interest rates. During the first half of 2001, the Corporation primarily maintained local currency assets funded with U.S. dollars. The daily average for the Argentine exposure measured $247 million, while the daily average for the Brazilian exposure measured $17 million. This compares with a daily average of $366 million and $11 million, respectively, for the first six months of 2000. FleetBoston's independent Market Risk Management function routinely validates FleetBoston's measurement framework by conducting backtests, which compare the actual daily trading-related results against the estimated VAR with a one-day holding period. In no instance during the current year did a daily aggregate trading loss exceed the one-day aggregate VAR measure associated with that date. For the six months ended June 30, 2001, daily trading-related revenues, which include certain components of capital markets revenue (trading profits and commissions, foreign exchange revenue and market-making revenue), as well as net interest income from these trading positions, ranged from a loss of $19.7 million to a profit of $22.6 million. For the 2000 period, such revenues ranged from a loss of $.9 million to a profit of $18 million. Over the 2001 period, VAR with a one-day holding period ranged from $21 million to $36 million. 15 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY RISK MANAGEMENT The objective of liquidity risk management is to assure the ability of FleetBoston and its subsidiaries to meet their financial obligations, including the payment of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. Further information with respect to liquidity risk management, including sources of liquidity for FleetBoston and its banking and nonbanking subsidiaries, is included in the "Liquidity Risk Management" section of Management's Discussion and Analysis contained in FleetBoston's Current Report on Form 8-K dated May 4, 2001. At June 30, 2001, the parent company had commercial paper outstanding of $1.2 billion, compared with $1 billion at December 31, 2000. The parent company had excess funds at June 30, 2001 of $1 billion compared to $1.7 billion at December 31, 2000. The parent company has backup lines of credit totaling $1 billion to provide funding should commercial paper not be available. At June 30, 2001 and December 31, 2000, the parent company had no outstanding balances under these lines of credit. At June 30, 2001, the parent company had $1.6 billion available for the issuance of senior or subordinated debt securities and other debt securities, common stock, preferred stock or trust preferred securities, under a shelf registration statement filed with the SEC. Management believes the Corporation has sufficient liquidity to meet its liabilities to customers and debt holders. CAPITAL MANAGEMENT Capital Ratios
- ---------------------------------------------------------------------------------------- June 30, Dec. 31, June 30, 2001 2000 2000 - ---------------------------------------------------------------------------------------- Risk-adjusted assets (in millions) $201,757 $212,438 $218,505 Tier 1 risk-based capital ratio (4% minimum) 8.47% 8.08% 7.58% Total risk-based capital ratio (8% minimum) 12.25 11.87 11.50 Leverage (3% minimum) 8.29 8.01 7.54 Common equity to assets 9.38 8.58 7.97 Total equity to assets 9.54 8.84 8.23 Tangible common equity to assets 7.41 6.64 6.05 Tangible common equity to managed assets 6.84 6.18 5.68 Tangible total equity to assets 7.57 6.90 6.31 - ----------------------------------------------------------------------------------------
At June 30, 2001, FleetBoston exceeded all regulatory required minimum capital ratios, as its Tier 1 and Total risk-based capital ratios were 8.47% and 12.25%, respectively, compared with 8.08% and 11.87%, respectively, at December 31, 2000. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 8.29% at June 30, 2001 compared with 8.01% at December 31, 2000. On April 15, 2001, the Corporation redeemed all of the outstanding shares of its 7.25% Series V perpetual preferred stock at its aggregate liquidation value of $191 million. On April 25, 2001, FleetBoston repurchased 189,420 of the 600,000 outstanding shares of its 6.75% Series VI perpetual preferred stock, having an aggregate liquidation value of $47.4 million, and on July 11, 2001, repurchased an additional 28,130 shares having an aggregate liquidation value of $7 million. The Corporation may repurchase additional shares of its preferred stock from time to time, subject to market conditions, capital requirements and other factors. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains statements relating to future results of FleetBoston (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those contemplated as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to (1) changes in general political and economic conditions, either domestically or internationally, including the continuing weakness in the Latin American economies, particularly Argentina, and the potential impact of those economies on the economies of other countries; (2) further deterioration in credit quality, including the resultant effect on the level of the Corporation's NPA's and charge-offs; (3) interest rate and currency fluctuations, equity and bond market fluctuations and perceptions, including continued weakness in the global capital markets and the impact of such weakness on the Corporation's Principal Investing and other capital markets businesses; (4) changes in the competitive environment for financial services organizations and the Corporation's ability to manage those changes and to continue to develop competitive products and services; (5) legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; (6) technological changes, including the impact of the Internet on the Corporation's businesses; (7) the ability of the Corporation to fully realize expected cost savings and to realize those savings within the expected timeframes; and (8) the level of costs related to the integration of acquired businesses. 16 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT ACCOUNTING DEVELOPMENTS The FASB recently issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting, and prohibits the use of the pooling-of-interests method for such transactions. The new standard also requires identified intangible assets acquired in a business combination to be recognized as an asset apart from goodwill if they meet certain criteria. SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually. Identified intangible assets should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Within six months of initial application of the new standard, a transitional impairment test must be performed on all goodwill. Any impairment loss recognized as a result of the transitional impairment test should be reported as a change in accounting principle. In addition to the transitional impairment test, the required annual impairment test should be performed in the year of adoption of the standard. The new standard is effective for fiscal years beginning after December 15, 2001, and must be adopted as of the beginning of a fiscal year. Retroactive application is not permitted. The Corporation will adopt the new standard on January 1, 2002, and is currently evaluating the potential impact of the standard on its financial position and results of operations. 17 18 FLEETBOSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 Dollars in millions, except per share amounts 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans and leases $ 2,836 $ 3,274 $ 5,916 $ 6,542 Interest on securities and trading assets 477 641 1,090 1,257 Other 253 148 478 380 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 3,566 4,063 7,484 8,179 - ---------------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits of domestic offices 662 795 1,434 1,585 Deposits of international offices 276 297 576 594 Short-term borrowings 259 375 620 810 Long-term debt 427 499 937 977 Other 41 73 97 141 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,665 2,039 3,664 4,107 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 1,901 2,024 3,820 4,072 - ---------------------------------------------------------------------------------------------------------------------------------- Provision for credit losses 315 335 630 655 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 1,586 1,689 3,190 3,417 - ---------------------------------------------------------------------------------------------------------------------------------- Noninterest income: Banking fees and commissions 406 403 796 808 Investment services revenue 363 450 751 976 Credit card revenue 162 177 327 343 Processing-related revenue 74 153 262 313 Capital markets revenue (100) 820 (6) 1,880 Gains on branch divestitures 263 313 353 679 Other 158 151 367 288 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 1,326 2,467 2,850 5,287 - ---------------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Employee compensation and benefits 985 1,273 2,029 2,817 Occupancy and equipment 277 298 563 610 Intangible asset amortization 98 97 198 194 Legal and other professional 62 90 131 178 Marketing and public relations 58 77 121 156 Merger- and restructuring-related charges 38 25 525 62 Loss on sale of mortgage banking business 101 -- 428 -- Other 440 606 916 1,194 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,059 2,466 4,911 5,211 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 853 1,690 1,129 3,493 Applicable income taxes 322 719 457 1,446 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 531 $ 971 $ 672 $ 2,047 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted weighted average common shares outstanding (in millions) 1,094.5 1,101.8 1,095.2 1,099.5 Net income applicable to common shares $ 523 $ 961 $ 655 $ 2,028 Basic earnings per share .48 .89 .60 1.88 Diluted earnings per share .48 .87 .60 1.84 Dividends declared .33 .30 .66 .60 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 18 19 FLEETBOSTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited)
- --------------------------------------------------------------------------------------------------------------------------- June 30, December 31, Dollars in millions, except per share amounts 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash, due from banks and interest-bearing deposits $ 12,586 $ 12,826 Federal funds sold and securities purchased under agreements to resell 6,994 1,959 Trading assets 5,261 7,108 Mortgages held for sale 690 2,138 Securities (market value: $24,591 and $34,932) 24,587 34,964 Loans and leases 129,066 134,834 Reserve for credit losses (2,746) (2,709) - --------------------------------------------------------------------------------------------------------------------------- Net loans and leases 126,320 132,125 - --------------------------------------------------------------------------------------------------------------------------- Due from brokers/dealers 4,701 2,987 Premises and equipment 2,878 2,867 Mortgage servicing rights -- 2,695 Intangible assets 4,294 4,557 Other assets 13,789 14,859 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 202,100 $ 219,085 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Domestic: Noninterest bearing $ 25,166 $ 29,707 Interest bearing 78,438 80,073 International: Noninterest bearing 2,412 1,628 Interest bearing 18,787 17,331 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 124,803 128,739 - --------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 8,666 12,955 Other short-term borrowings 6,729 10,151 Trading liabilities 1,858 2,540 Due to brokers/dealers 4,479 4,122 Long-term debt 27,816 31,684 Accrued expenses and other liabilities 8,473 9,533 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 182,824 199,724 - --------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 8) STOCKHOLDERS' EQUITY Preferred stock 328 566 Common stock, par value $.01 (1,086.0 million shares issued in 2001 and 1,100.1 million shares issued in 2000) 11 11 Common surplus 4,019 4,814 Retained earnings 14,562 14,561 Accumulated other comprehensive income 422 40 Treasury stock, at cost (1.0 million shares in 2001 and 14.6 million shares in 2000) (66) (631) - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 19,276 19,361 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 202,100 $ 219,085 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 19 20 FLEETBOSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Six months ended June 30 Preferred Common Common Retained Comprehensive Treasury Dollars in millions, except per share amounts Stock Stock Surplus Earnings Income/(Loss) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- 2000 - ---- Balance at December 31, 1999 $ 691 $ 11 $ 5,273 $12,020 $ 301 $ (222) $18,074 Net income 2,047 2,047 Other comprehensive income, net of taxes: Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment (628) Change in translation adjustment, net of taxes 5 ------- Other comprehensive income (623) (623) ------- Total comprehensive income 1,424 Cash dividends declared on common stock ($.60 per share) (541) (541) Cash dividends declared by pooled company prior to merger (119) (119) Cash dividends declared on preferred stock (19) (19) Common stock issued in connection with dividend reinvestment and employee benefit plans (26) 3 109 86 Business combinations (26) 130 104 Redemption of preferred stock (125) (125) Treasury stock purchased (86) (86) Settlement of forward purchase contracts (679) (679) Other, net (11) 1 (10) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2000 $ 566 $ 11 $ 5,210 $13,391 $ (322) $ (747) $18,109 - ----------------------------------------------------------------------------------------------------------------------------------- 2001 - ---- Balance at December 31, 2000 $ 566 $ 11 $ 4,814 $14,561 $ 40 $ (631) $19,361 Net income 672 672 Other comprehensive income, net of taxes: Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment (9) Change in translation adjustment, net of taxes 2 Change in derivative instruments, net of taxes: Cumulative effect of adopting SFAS No. 133 204 Net change in fair values of derivatives 61 Net losses reclassified to statement of income 124 ------- Other comprehensive income 382 382 ------- Total comprehensive income 1,054 Cash dividends declared on common stock ($.66 per share) (716) (716) Cash dividends declared on preferred stock (17) (17) Common stock issued in connection with dividend reinvestment and employee benefit plans 160 62 114 336 Redemption and repurchase of preferred stock (238) (238) Exercise of common stock warrants 77 77 Treasury stock purchased (581) (581) Retirement of treasury stock (1,033) 1,033 -- Other, net 1 (1) -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2001 $ 328 $ 11 $ 4,019 $14,562 $ 422 $ (66) $19,276 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 20 21 FLEETBOSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- --------------------------------------------------------------------------------------------------------------------------- Six months ended June 30 2001 2000 In millions - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 672 $ 2,047 Adjustments for noncash items: Depreciation and amortization of premises and equipment 299 307 Amortization of mortgage servicing rights 122 192 Amortization of other intangible assets 198 194 Provision for credit losses 630 655 Deferred income tax (benefit)/expense (388) 231 Securities losses 211 48 Merger- and restructuring-related charges 525 62 Gains on branch divestitures (353) (679) Loss on sale of mortgage banking business 428 -- Write-downs of principal investing investments 602 -- Originations and purchases of mortgages held for sale (9,211) (7,343) Proceeds from sales of mortgages held for sale 6,086 7,514 Decrease/(increase) in trading assets 1,834 (356) Decrease in trading liabilities (682) (329) Increase in due from brokers/dealers (1,714) (152) Decrease in accrued receivables, net 1,028 156 Increase in due to brokers/dealers 357 305 (Decrease)/increase in accrued liabilities, net (1,168) 1,439 Other, net 559 (2,234) - --------------------------------------------------------------------------------------------------------------------------- Net cash flow provided by operating activities 35 2,057 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in federal funds sold and securities purchased under agreements to resell (5,035) (289) Purchases of securities available for sale (13,408) (6,738) Proceeds from sales of securities available for sale 18,277 5,480 Proceeds from maturities of securities available for sale 4,763 1,498 Purchases of securities held to maturity (386) (407) Proceeds from maturities of securities held to maturity 434 1,264 Net cash and cash equivalents received from businesses acquired -- 15 Proceeds from sales of loan portfolios by banking subsidiary 2,497 1,400 Net decrease/(increase) in loans and leases 2,606 (3,537) Net cash received in conjunction with branch divestitures and sales of businesses 6,849 313 Purchase of investment in corporate-owned life insurance -- (192) Purchases of premises and equipment (396) (333) Purchases of mortgage servicing rights (53) (79) - --------------------------------------------------------------------------------------------------------------------------- Net cash flow provided by/(used in) investing activities 16,148 (1,605) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in deposits (3,660) (765) Net decrease in short-term borrowings (7,711) (1,225) Proceeds from issuance of long-term debt 979 5,602 Repayments of long-term debt (4,847) (3,521) Proceeds from issuance of common stock and exercise of warrants 413 86 Repurchase of common stock (581) (86) Settlement of forward purchase contracts -- (679) Redemption and repurchase of preferred stock (238) (125) Cash dividends paid (723) (680) - --------------------------------------------------------------------------------------------------------------------------- Net cash flow used in financing activities (16,368) (1,393) - --------------------------------------------------------------------------------------------------------------------------- Effect of foreign currency translation on cash (55) (4) - --------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (240) (945) - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 12,826 11,860 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 12,586 $ 10,915 - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $ 3,581 $ 4,317 Income taxes paid 605 1,105 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 21 22 FLEETBOSTON FINANCIAL CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 1. BASIS OF PRESENTATION The accompanying interim consolidated financial statements of FleetBoston Financial Corporation (FleetBoston or the Corporation) are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results of operations contained herein have been made. Certain amounts reported in prior periods have been reclassified to conform to current period classifications. Prior period financial statements reflect the acquisition of Summit Bancorp. (Summit), which was completed in March 2001 and accounted for as a pooling of interests. This information should be read in conjunction with FleetBoston's Current Report on Form 8-K dated May 4, 2001, which contains restated consolidated financial statements for the year ended December 31, 2000 reflective of the Summit acquisition, and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. NOTE 2. MERGER, ACQUISITION AND DIVESTITURE ACTIVITIES In connection with the Summit acquisition, aggregate charges totaling $718 million were recorded in the first quarter of 2001. These charges were composed of $453 million of merger- and restructuring-related charges and integration costs, and $265 million of losses on sales of securities available for sale, which were completed as part of a repositioning of the combined balance sheet. An additional $93 million of merger-related costs were recorded in the second quarter of 2001. The merger- and restructuring-related charges and integration costs are more fully described in Note 5. FleetBoston completed the sale of its mortgage banking business in the second quarter of 2001. An additional pre-tax loss on the sale of approximately $101 million was recorded in other noninterest expense. In June 2001, FleetBoston announced a definitive agreement to purchase the asset management businesses of Liberty Financial Companies, Inc. for approximately $1 billion, consisting of $900 million in cash and the assumption of $110 million in revolving debt. This transaction, which is expected to add approximately $50 billion to FleetBoston's assets under management, is subject to regulatory approvals, and is expected to be completed in the second half of 2001. In the second quarter of 2001, FleetBoston recorded gains of $243 million on branch divestitures associated with the BankBoston merger, and a total of $333 million during the six months ended June 30, 2001. NOTE 3. LOANS AND LEASES The following table presents details of loan and lease financing balances:
- ------------------------------------------------------------------- June 30, Dec. 31, In millions 2001 2000 - ------------------------------------------------------------------- Domestic: Commercial and industrial $ 51,642 $ 56,147 Commercial real estate 11,447 11,641 Home equity 11,662 12,507 Residential real estate 9,917 11,425 Credit card 4,891 5,126 Other consumer 5,774 7,265 Lease financing 13,796 13,567 - ------------------------------------------------------------------- Total domestic loans and leases 109,129 117,678 - ------------------------------------------------------------------- International loans and leases 19,937 17,156 - ------------------------------------------------------------------- Total loans and leases $129,066 $134,834 - -------------------------------------------------------------------
NOTE 4. RESERVE FOR CREDIT LOSSES A summary of activity in the reserve for credit losses follows:
- ------------------------------------------------------------------ Six months ended June 30 2001 2000 In millions - ------------------------------------------------------------------ Balance at beginning of year $ 2,709 $ 2,816 Gross charge-offs: Domestic: Commercial and industrial 415 379 Commercial real estate 2 5 Residential real estate 1 4 Credit card 146 159 Other consumer 51 68 Lease financing 28 15 International 74 80 - ------------------------------------------------------------------ Total gross charge-offs 717 710 - ------------------------------------------------------------------ Recoveries: Domestic: Commercial and industrial 56 36 Commercial real estate 5 5 Residential real estate 1 1 Credit card 18 18 Other consumer 14 22 Lease financing 5 3 International 26 22 - ------------------------------------------------------------------ Total recoveries 125 107 - ------------------------------------------------------------------ Net charge-offs 592 603 Provision for credit losses 630 655 Divestitures/Acquisitions/Other (1) (62) - ------------------------------------------------------------------ Balance at end of period $ 2,746 $ 2,806 - ------------------------------------------------------------------
NOTE 5. MERGER- AND RESTRUCTURING- RELATED CHARGES In the first quarter of 2001, FleetBoston recorded aggregate merger- and restructuring-related charges of $487 million in connection with the Summit merger and a restructuring of its capital markets-related businesses. Of the $487 million, $408 million related to Summit and $79 22 23 FLEETBOSTON FINANCIAL CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 million primarily related to capital markets. The $408 million charge was composed of $73 million of merger charges, $322 million of restructuring-related charges, and $13 million of accelerated depreciation of assets to be disposed of at a later date, which resulted from revisions to the estimated useful lives of assets currently in use that will be disposed when the Summit integration has been completed. In addition to the merger- and restructuring-related charges, FleetBoston incurred $45 million of merger integration costs in the first quarter. These integration costs, which are expensed as incurred, include the costs of converting duplicate computer systems, training and relocation of employees and departments, consolidation of facilities and customer communications. During the second quarter of 2001, aggregate costs of $93 million, composed of $38 million and $55 million of additional accelerated depreciation and integration costs, respectively, were recorded. In 1999, the Corporation recorded $467 million of restructuring charges in connection with the BankBoston merger. Additional information concerning these 1999 charges is included in Note 14 to the Consolidated Financial Statements included in the Corporation's Current Report on Form 8-K dated May 4, 2001. During the second quarter of 2001, $14 million of such charges were reversed, primarily related to severance and facilities accruals which were not fully utilized. RESTRUCTURING-RELATED CHARGES Summit Of the $322 million restructuring-related charge, $150 million related to personnel, $96 million related to asset write-downs and contract cancellations, $60 million related to facilities and $16 million related to other restructuring expenses. Personnel-related costs of $150 million included severance, benefit program changes and outplacement services for approximately 2,700 positions identified during the first quarter for elimination in connection with restructuring, principally as a result of the elimination of duplicate functions within the combined company. During the first six months of 2001, approximately $35 million of personnel-related benefits were paid and approximately 890 employees were terminated and left the Corporation. Asset write-downs and contract cancellation costs of $96 million related to costs to dispose of duplicate or obsolete equipment and computer software, and penalties incurred to cancel leases and other contracts. During the first six months of 2001, $6 million of costs were paid and $49 million of write-downs were recorded. Facilities charges of $60 million represented minimum lease payments related to duplicate branch and other facilities. Other costs of $16 million included expenses and various other costs incurred to merge the two companies. During the first six months of 2001, $9 million of other costs were paid. Capital Markets Of the $79 million charge, $52 million related to severance, benefit program changes and outplacement services for approximately 750 positions identified during the first quarter for elimination in connection with the restructuring; $23 million of costs related to future lease obligations and write-downs of capitalized assets; and $4 million of other restructuring expenses. During the first six months of 2001, approximately 675 employees were terminated and left the Corporation, and $25 million of related benefits were paid. The following table presents activity in restructuring-related accruals during the six months ended June 30, 2001. Restructuring Accrual Activity
- ------------------------------------------------------------------- Summit & Capital Markets BankBoston - ------------------------------------------------------------------- Balance at December 31, 2000 $ -- $ 146 Restructuring accrual/(reversal) 401 (14) Cash payments (75) (84) Noncash write-downs (49) -- - ------------------------------------------------------------------- Balance at June 30, 2001 $ 277 $ 48 - -------------------------------------------------------------------
The $84 million of cash payments included in the table above related to the BankBoston merger consisted of $70 million of personnel benefits, $13 million in facilities charges, and $1 million of other restructuring expenses. The remaining accrual at June 30, 2001 is composed primarily of expected cash outlays related to severance and facilities obligations. NOTE 6. LINE OF BUSINESS INFORMATION Information about operating segments for the quarters and six months ended June 30, 2001 and 2000 is included in the "Line of Business Information" section of Management's Discussion and Analysis included in this Report. 23 24 FLEETBOSTON FINANCIAL CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 7. EARNINGS PER SHARE A summary of the calculation of earnings per common share follows:
- ------------------------------------------------------------------------------------------------------------------------------ Three months ended June 30 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED - ------------------------------------------------------------------------------------------------------------------------------ Average shares outstanding 1,083,752,849 1,083,752,849 1,080,746,859 1,080,746,859 Additional shares due to: Stock options -- 10,766,704 -- 9,224,658 Warrants -- -- -- 11,834,503 - ------------------------------------------------------------------------------------------------------------------------------ Total equivalent shares 1,083,752,849 1,094,519,553 1,080,746,859 1,101,806,020 ============================================================================================================================== Earnings per share: Net income $531 $531 $971 $971 Less preferred stock dividends (8) (8) (10) (10) - ------------------------------------------------------------------------------------------------------------------------------ Net income available to common stockholders $523 $523 $961 $961 ============================================================================================================================== Total equivalent shares 1,083,752,849 1,094,519,553 1,080,746,859 1,101,806,020 ============================================================================================================================== Earnings per share $.48 $.48 $.89 $.87 ==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------ Six months ended June 30 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED - ------------------------------------------------------------------------------------------------------------------------------ Average shares outstanding 1,083,626,155 1,083,626,155 1,080,649,280 1,080,649,280 Additional shares due to: Stock options -- 11,296,677 -- 7,599,817 Warrants -- 274,706 -- 11,249,023 - ------------------------------------------------------------------------------------------------------------------------------ Total equivalent shares 1,083,626,155 1,095,197,538 1,080,649,280 1,099,498,120 ============================================================================================================================== Earnings per share: Net income $672 $672 $2,047 $2,047 Less preferred stock dividends (17) (17) (19) (19) - ------------------------------------------------------------------------------------------------------------------------------ Net income available to common stockholders $655 $655 $2,028 $2,028 ============================================================================================================================== Total equivalent shares 1,083,626,155 1,095,197,538 1,080,649,280 1,099,498,120 ============================================================================================================================== Earnings per share $.60 $.60 $1.88 $1.84 ==============================================================================================================================
NOTE 8. COMMITMENTS AND CONTINGENCIES FleetBoston and its subsidiaries are involved in various legal proceedings arising out of, and incidental to, their respective businesses. Management, based on its review with counsel of the development of these matters to date, considers that the aggregate loss resulting from the final outcome, if any, of these proceedings should not be material to FleetBoston's financial condition or results of operations. NOTE 9. SECURITIZATIONS OF ASSETS During the first six months of 2001, FleetBoston sold approximately $1.7 billion of credit card receivables and approximately $750 million of home equity loans in new securitization transactions. The Corporation will receive annual servicing fees as compensation for servicing the outstanding balances. The Corporation's aggregate retained interests related to these new transactions are subordinate to investors' interests, and the values of the retained interests are subject to credit, prepayment and interest rate risks related to the transferred assets. Gains recognized on the securitizations were not significant. NOTE 10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES FleetBoston adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as of January 1, 2001. The adoption resulted in an after-tax increase to other comprehensive income, a component of stockholders' equity, of approximately $200 million, and an increase of approximately $14 million to other noninterest income ($8 million after-tax). Concurrent with adoption of the Standard, and as 24 25 FLEETBOSTON FINANCIAL CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 permitted by its provisions, approximately $5 billion of securities held to maturity were reclassified as securities available for sale. This reclassification resulted in an after-tax loss of approximately $160 million, which was recorded in other comprehensive income. In the normal course of business, FleetBoston enters into a variety of interest rate and foreign exchange derivative contracts in connection with its balance sheet management activities, which involve the management of interest rate and foreign exchange rate risk, and its trading activities. These contracts involve, to varying degrees, credit (repayment) risk and market risk. For additional information with respect to the Corporation's use of derivatives, including related accounting policies, refer to Notes 2 and 11 of the Condensed Notes to Consolidated Financial Statements included in FleetBoston's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. BALANCE SHEET MANAGEMENT ACTIVITIES In connection with balance sheet management activities, non-trading derivative financial instruments are used to manage market risk, primarily interest rate risk. FAIR VALUE HEDGES. Derivatives categorized as fair value hedges are utilized to convert fixed-rate debt to floating-rate debt, as part of the Corporation's overall interest rate risk management process. For the quarter and six months ended June 30, 2001, FleetBoston recognized net pre-tax losses of approximately $115 million and $131 million, respectively, which represented the ineffective portion of all fair value hedges, primarily hedges of mortgage servicing rights, excluding the time value of option contracts and the interest rate differential on foreign currency forward contracts. The components of fair value excluded from the assessment of fair value hedge effectiveness for the quarter and six months ended June 30, 2001 were losses of approximately $5 million and $19 million, respectively. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted. CASH FLOW HEDGES. Derivatives categorized as cash flow hedges are utilized primarily to convert floating-rate loans to fixed-rate loans; and to convert floating-rate, non-functional currency denominated assets to fixed-rate, functional currency denominated assets. For the quarter and six months ended June 30, 2001, FleetBoston recognized net pre-tax gains of approximately $.1 million and $.5 million, respectively, which represented the total ineffectiveness of all cash flow hedges. Gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income to current period earnings are included in the line item in which the hedged item is recorded. As of June 30, 2001, approximately $214 million of the deferred net after-tax gains on derivative instruments included in accumulated other comprehensive income is expected to be reclassified to earnings during the next twelve months. This expectation is based on the net discounted cash flows from derivative instruments hedging variable-rate assets, as well as the amortization of gains from the termination of cash flow hedge derivatives. HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS. Derivatives categorized as hedges of net investments in foreign operations are utilized to protect the value of an investment against adverse exchange rate fluctuations. For the quarter and six months ended June 30, 2001, net after-tax gains related to these derivatives, recorded in other comprehensive income, were approximately $6 million. CREDIT RISK The use of non-trading and trading derivatives creates exposure to credit risk. This credit exposure relates to accounting losses that would be recognized if the counterparties completely failed to perform their obligations. The amount of credit exposure can be estimated by calculating the cost to replace all profitable derivative contracts, on a present value basis and at current market prices. To manage its level of credit exposure, FleetBoston deals only with counterparties of good credit standing, establishes counterparty credit limits, in certain cases has the ability to require securities collateral, and enters into master netting agreements whenever possible. Reserves related to credit exposure associated with derivative instruments are included in other liabilities in the consolidated balance sheet. Non-trading derivative instruments, other than those used for foreign exchange, had credit exposure of $1,063 million at June 30, 2001, versus $690 million at March 31, 2001. Foreign exchange derivative instruments had credit exposure of $43 million at June 30, 2001, versus $103 million at March 31, 2001. Trading derivatives had credit exposure of $2.2 billion at June 30, 2001, versus $2.7 billion at March 31, 2001. 25 26 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit Index Exhibit Number 3(a) Certificate of Correction filed with the Rhode Island Secretary of State correcting a typographical error in the Corporation's Restated Articles of Incorporation. 3(b) Certificate of Votes filed with the Rhode Island Secretary of State reducing the number of reserved shares of the Corporation's Cumulative Participating Junior Preferred Stock. 3(c) Statement of Resolutions establishing the Corporation's Cumulative Participating Junior Preferred Stock (Series 2000) as a Series of Preferred Stock, filed with the Rhode Island Secretary of State. 12 Computation of Consolidated Ratios of Earnings to Fixed Charges. (b) Current Reports on Form 8-K FleetBoston filed three Current Reports on Form 8-K during the period from April 1, 2001 to the date of the filing of this report. - Current Report on Form 8-K, dated April 17, 2001, announcing the Corporation's first quarter 2001 earnings. - Current Report on Form 8-K, dated May 4, 2001, containing restated consolidated financial statements of the Corporation reflecting the merger with Summit Bancorp, which was completed on March 1, 2001. - Current Report on Form 8-K, dated July 18, 2001, announcing the Corporation's second quarter 2001 earnings. 26 27 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. FleetBoston Financial Corporation --------------------------------- (Registrant) /s/ Eugene M. McQuade /s/ Ernest L. Puschaver ----------------------- ------------------------ Eugene M. McQuade Ernest L. Puschaver Vice Chairman and Chief Accounting Officer Chief Financial Officer DATE: August 13, 2001 27 EX-3.(A) 3 b40055fbex3-a.txt CERTIFICATE OF CORRECTION 1 EXHIBIT 3(a) Filing Fee: $10.00 ID No. 6486 STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS CERTIFICATE OF FLEETBOSTON FINANCIAL CORPORATION Pursuant to the provisions of the General Laws of Rhode Island, 1956, as amended, the undersigned corporation submits the following Certificate for the purpose of correcting a typographical error in a document which was filed with the Rhode Island Secretary of State: 1. The name of the corporation is FleetBoston Financial Corporation. 2. The document to be corrected is the Restated Certificate of Incorporation of FleetBoston Financial Corporation which was filed with the Rhode Island Secretary of State on November 9, 1999. 3. The typographical error in the Restated Certificate of Incorporation is that the first sentence set forth in Section 1 of Exhibit D to the Restated Certificate of Incorporation relating to the Cumulative Participating Junior Preferred Stock erroneously states that the number of shares constituting the Cumulative Participating Junior Preferred Stock shall be 3,000,000. 4. The correction to the Restated Certificate of Incorporation shall be as follows: That the first sentence in Section 1 of Exhibit D to the Restated Certificate of Incorporation of FleetBoston Financial Corporation relating to the Cumulative Participating Junior Preferred Stock be corrected to read as follows: "Section 1. Designation and Amount. The shares of such series shall be designated as "Cumulative Participating Junior Preferred Stock" (the "Junior Preferred Stock") and the number of shares constituting the Junior Preferred Stock shall be 6,000,000." Under penalty of perjury, I declare and affirm that I have examined this Certificate, including any accompanying attachments, and that all statements contained herein are true and correct as of the 21st day of November, 2000. FLEETBOSTON FINANCIAL CORPORATION By: /s/ Gary A. Spiess ------------------------------------ Name: Gary A. Spiess ------------------------------ Title: Senior Vice President ----------------------------- EX-3.(B) 4 b40055fbex3-b.txt CERTIFICATE OF VOTES 1 EXHIBIT 3(b) FILING FEE: $10.00 ID NUMBER: 6486 --------- STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS Office of the Secretary of State Corporations Division 100 North Main Street Providence, Rhode Island 02903-1335 BUSINESS CORPORATION ------------ CERTIFICATE OF VOTE(S) AUTHORIZING ISSUANCE OF A CLASS OR SERIES OF ANY CLASS OF SHARES (TO BE FILED IN DUPLICATE ORIGINAL) Pursuant to the provisions of Section 7-1.1-15 of the General Laws, 1956, as amended, the undersigned corporation submits the following certificate of vote(s) for the purpose of authorizing issuance of a class or series of a class and fixing and determining the relative rights and preferences thereof: 1. The name of the corporation is FLEETBOSTON FINANCIAL CORPORATION 2. The following vote(s), authorizing issuance of a class or series of any class, and fixing and determining the voting powers, designations, preferences, and relative, participating, optional, or other rights, if any, or the qualifications, limitations, or restrictions thereof, if any, was provided for in the following vote or votes adopted by the board of directors of the corporation on August 16, 2000. [INSERT COPY OF VOTE(S)] See Exhibit A attached hereto and made a part hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Form No. 105 Revised: 01/99 2 3. Upon filing, this certificate shall constitute an amendment to the articles of incorporation. Date: November 17, 2000 FleetBoston Financial Corporation ----------------------- ----------------------------------- Print Corporate Name By /s/ GARY A. SPIESS ----------------------------------- [ ] President or [X] Vice President (check one) AND By /s/ JANICE B. LIVA ----------------------------------- [ ] Secretary or [X] Assistant Secretary (check one) STATE OF Massachusetts -------------------- COUNTY OF Suffolk ------------------- In Boston, on this 17th day of November, 2000 personally appeared before me Gary A. Spiess who, being by me first duly sworn, declared that he/she is the president/vice president of the corporation, and that he/she signed the foregoing document as the president/vice president of the corporation, and that the statements herein contained are true. /s/ STELLA S. L. MAK ----------------------------------- Notary Public My Commission Expires: ------------ STELLA S. L. MAK Notary Public My Commission Expires April 28, 2006 3 EXHIBIT A RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS OF FLEETBOSTON FINANCIAL CORPORATION REDUCING THE NUMBER OF RESERVED SHARES OF CUMULATIVE PARTICIPATING JUNIOR PREFERRED STOCK TO ONE SHARE AUGUST 16, 2000 RESOLVED: That the number of shares of Cumulative Participating Junior Preferred Stock, par value $1.00 per share, reserved for issuance in accordance with the Corporation's current shareholder rights plan, which is scheduled to expire on November 21, 2000 (the "Existing Plan") shall, as of the expiration date of the Existing Plan, be reduced to one share, and the shares that are no longer so reserved shall thereupon resume the status of authorized but unissued, unreserved shares. RESOLVED: That the Board of Directors hereby adopts, as if expressly set forth herein, the form of any resolution required by any authority to be filed in connection with any applications, consents to service, issuer's covenants or other documents if (i) in the opinion of the officers of the Corporation executing the same, the adoption of such resolutions is necessary or desirable and (ii) the Secretary or any Assistant Secretary of the Corporation evidences such adoption by inserting in the minutes of the meetings copies of such resolutions, which will thereupon be deemed to be adopted by the Board of Directors with the same force and effect as if presented at this meeting. RESOLVED: That the officers of the Corporation be, and each of them hereby is, authorized and directed, in the name and on behalf of the Corporation, to execute and deliver any and all certificates, agreements and other documents, and to take any and all steps, and do any and all things which they deem necessary or advisable in order to effectuate the purposes of the foregoing resolutions. RESOLVED: That any actions taken by any officer of the Corporation prior to the date of this meeting that are within the authority conferred hereby are hereby ratified, confirmed and approved in all respects as the acts and deeds of the Corporation. EX-3.(C) 5 b40055fbex3-c.txt STATEMENT OF RESOLUTIONS 1 EXHIBIT 3(c) STATEMENT OF RESOLUTIONS ESTABLISHING CUMULATIVE PARTICIPATING JUNIOR PREFERRED STOCK (SERIES 2000) AS A SERIES OF PREFERRED STOCK of FLEETBOSTON FINANCIAL CORPORATION (Pursuant to Section 7-1 of the Rhode Island Business Corporation Act) ----------------------------- FleetBoston Financial Corporation, a corporation organized and existing under the Rhode Island Business Corporation Act (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation in accordance with Sections 7-1.1-14 and 7-1.1-15 of the Rhode Island Business Corporation Act at a meeting duly called and held on August 16, 2000: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of Article FOURTH of the Restated Articles of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $1.00 per share, of the Corporation (the "Preferred Stock") and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: CUMULATIVE PARTICIPATING JUNIOR PREFERRED STOCK Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Cumulative Participating Junior Preferred Stock (Series 2000)" (the "Junior Preferred Stock") and the number of shares constituting the Junior Preferred Stock shall be 500,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Junior Preferred Stock. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) The holders of shares of Junior Preferred Stock, in preference to the holders of Common Stock, par value $.01 per share (the "Common Stock"), of the Corporation, and of any other junior stock, but subject to the rights of holders of any senior stock, shall be 2 entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first days of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Junior Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $100 or (b) subject to the provision for adjustment hereinafter set forth, 10,000 times the aggregate per share amount of all cash dividends, and 10,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Junior Preferred Stock. In the event the Corporation shall at any time after August 16, 2000 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or split or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), then in each such case the amount to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Junior Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $100 per share on the Junior Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the Record Date for the determination of holders of shares of Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 50 days prior to the date fixed for the payment thereof. -2- 3 Section 3. VOTING RIGHTS. The holders of shares of Junior Preferred Stock shall have the following voting rights: (A) Each share of Junior Preferred Stock shall entitle the holder thereof to ten thousand votes (subject to adjustment as set forth below) on all matters submitted to a vote of the stockholders of the Corporation (including, without limitation, the election of directors). In the event the Corporation shall at any time after August 16, 2000 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or split or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), then in each such case the number of votes to which holders of shares of Junior Preferred Stock were entitled to immediately prior to such event shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Restated Articles of Incorporation, or by law, the holders of shares of Junior Preferred Stock, the holders of shares of Common Stock and the holders of any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Junior Preferred Stock shall be in arrears in an amount equal to the full accrued dividends for six (6) or more quarterly dividend periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the Corporation shall promptly take all necessary actions to increase the authorized number of directors of the Corporation by one (1) and the holders of the shares of the Junior Preferred Stock then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the Corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; PROVIDED, HOWEVER, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Junior Preferred Stock by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph (C)(i) of this Section 3 shall cease (subject to renewal from time to time upon the same terms and conditions) and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the Corporation shall be automatically reduced by one (1). (ii) At any time after the special voting rights shall have become vested in the holders of the shares of the Junior Preferred Stock as provided in paragraph (C)(i) of this Section 3, the Secretary of the Corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Junior Preferred Stock then outstanding, addressed to the Corporation at its principal office, shall call a special meeting of the holders of the shares of the Junior Preferred Stock for the purpose of electing such additional director, such meeting to be held at any place as provided by -3- 4 the Bylaws of the Corporation for meetings of the Corporation's stockholders, and upon not less than ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Secretary of the Corporation, then the holders of 10% of the shares of the Junior Preferred Stock then outstanding may, by written notice to the Secretary of the Corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less than ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the Corporation. No such special meeting of the holders of the shares of the Junior Preferred Stock and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the Corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Junior Preferred Stock then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the Corporation. (iii) With respect to a vacancy arising in the directorship referred to in paragraph (C)(i) of this Section 3 at any time when the special voting rights are in affect pursuant to paragraph (C)(i) of this Section 3, upon the written request of the holders of 10% of the shares of the Junior Preferred Stock then outstanding, addressed to the Corporation at its principal office, the Secretary of the Corporation shall give notice of a special meeting of holders of the shares of the Junior Preferred Stock of the election of a director to fill such vacancy caused by the death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Secretary of the Corporation of such written request. So long as special voting rights are in effect pursuant to paragraph (i) of this Section 3(c), any director who shall have been so elected by the holders of the Junior Preferred Stock may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. (D) Except as set forth herein, or as otherwise provided by the Restated Articles of Incorporation or by law, holders of Junior Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (E) Holders of Junior Preferred Stock shall be entitled to such notice of each meeting of stockholders as is furnished to the holders of Common Stock with respect to such meeting. Section 4. CERTAIN RESTRICTIONS. (A) Subject to the provisions of the Restated Articles of Incorporation, whenever quarterly dividends or other dividends or distributions payable on the Junior Preferred Stock as provided in Section 2 are in arrears as of any Quarterly Dividend Payment Date, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, -4- 5 on shares of Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, except dividends paid ratably on the Junior Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends and upon dissolution, liquidation or winding up) to the Junior Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Junior Preferred Stock, or any shares of stock ranking on a parity with the Junior Preferred Stock, except in accordance with the terms of the Restated Articles of Incorporation and with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Articles of Incorporation, or as otherwise required by law. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior -5- 6 (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock unless, prior thereto, the holders of shares of Junior Preferred Stock shall have received $10,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Junior Preferred Liquidation Preference"). Following the payment of the full amount of the Junior Preferred Liquidation Preference, no additional distributions shall be made to the holders of shares of Junior Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Junior Preferred Liquidation Preference by (ii) 10,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii) immediately above being referred to as the "Adjustment Number"). Following the payment of the full amount of the Junior Preferred Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Junior Preferred Stock and Common Stock, respectively, holders of Junior Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Junior Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Junior Preferred Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Junior Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after August 16, 2000, (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide or split the outstanding Common Stock, or (iii) combine or consolidate the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation should enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Junior Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 10,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after August 16, 2000 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or split or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a -6- 7 dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange of change of shares of Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. RANKING. The Junior Preferred Stock shall rank, as to dividends and upon liquidation, dissolution or winding up, (a) on a parity with the Common Stock, and (b) (to the extent permitted by the Restated Articles of Incorporation) junior to any other series of Preferred Stock and to any other class of capital stock of the Corporation unless the terms of such series or class shall expressly provide otherwise (and, if not so permitted by the Restated Articles of Incorporation, on a parity with such series or class). Section 9. NO REDEMPTION. The shares of Junior Preferred Stock shall not be redeemable. Section 10. FRACTIONAL SHARES. The Junior Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of shares of Junior Preferred Stock. IN WITNESS WHEREOF, this Statement of Resolutions Establishing a Series of Shares is executed on behalf of the Corporation by its duly authorized officer and attested by its Assistant Secretary as of the 17th day of November, 2000. /s/ GARY A. SPIESS ------------------------------ [Title: Senior Vice President] Attest: /s/ JANICE B. LIVA - ----------------------------- Assistant Secretary STATE OF MASSACHUSETTS COUNTY OF SUFFOLK In Boston, on this 17th day of November, 2000 personally appeared before me Gary A. Spiess to me known and known by me to be the person executing the foregoing instrument, and he/she acknowledged said instrument by him/her executed to be his/her free act and deed. /s/ STELLA S. L. MAK ------------------------------ STELLA S. L. MAK Notary Public Notary Public My Commission Expires: My Commission Expires April 28, 2006 ------- -7- EX-12 6 b40055fbex12.txt COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS 1 EXHIBIT 12 FLEETBOSTON FINANCIAL CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS EXCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Six Three months months ended ended June 30, June 30, Year ended December 31, - -------------------------------------------------------------------------------------------------------------------------------- 2001 2001 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes $ 1,129 $ 853 $ 6,461 $ 4,075 $ 4,444 $ 4,314 $ 3,619 Adjustments: Fixed charges: Interest on borrowed funds 1,654 727 3,985 3,198 2,569 2,026 1,881 1/3 of rent 56 28 108 127 119 118 114 Preferred dividends 29 12 64 83 96 155 185 ------- ------- ------- ------- ------- ------- ------- Adjusted earnings $ 2,868 $ 1,620 $10,618 $ 7,483 $ 7,228 $ 6,613 $ 5,799 ======= ======= ======= ======= ======= ======= ======= Fixed charges and preferred dividends $ 1,739 $ 767 $ 4,157 $ 3,408 $ 2,784 $ 2,299 $ 2,180 ======= ======= ======= ======= ======= ======= ======= Adjusted earnings/fixed charges 1.65x 2.11x 2.55x 2.20x 2.60x 2.88x 2.66x ======= ======= ======= ======= ======= ======= =======
INCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Six Three months months ended ended June 30, June 30, Year ended December 31, - -------------------------------------------------------------------------------------------------------------------------------- 2001 2001 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes $ 1,129 $ 853 $ 6,461 $ 4,075 $ 4,444 $ 4,314 $ 3,619 Adjustments: Fixed charges: Interest on borrowed funds 1,654 727 3,985 3,198 2,569 2,026 1,881 1/3 of rent 56 28 108 127 119 118 114 Interest on deposits 2,010 938 4,512 4,202 4,379 4,021 4,092 Preferred dividends 29 12 64 83 96 155 185 ------- ------- ------- ------- ------- ------- ------- Adjusted earnings $ 4,878 $ 2,558 $15,130 $11,685 $11,607 $10,634 $ 9,891 ======= ======= ======= ======= ======= ======= ======= Fixed charges and preferred dividends $ 3,749 $ 1,705 $ 8,669 $ 7,610 $ 7,163 $ 6,320 $ 6,272 ======= ======= ======= ======= ======= ======= ======= Adjusted earnings/fixed charges 1.30x 1.50x 1.75x 1.54x 1.62x 1.68x 1.58x ======= ======= ======= ======= ======= ======= =======
2 EXHIBIT 12 (CONTINUED) FLEETBOSTON FINANCIAL CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Six Three months months ended ended June 30, June 30, Year ended December 31, - -------------------------------------------------------------------------------------------------------------------------------- 2001 2001 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes $ 1,129 $ 853 $ 6,461 $ 4,075 $ 4,444 $ 4,314 $ 3,619 Adjustments: Fixed charges: Interest on borrowed funds 1,654 727 3,985 3,198 2,569 2,026 1,881 1/3 of rent 56 28 108 127 119 118 114 ------- ------- ------- ------- ------- ------- ------- Adjusted earnings $ 2,839 $ 1,608 $10,554 $ 7,400 $ 7,132 $ 6,458 $ 5,614 ======= ======= ======= ======= ======= ======= ======= Fixed charges $ 1,710 $ 755 $ 4,093 $ 3,325 $ 2,688 $ 2,144 $ 1,995 ======= ======= ======= ======= ======= ======= ======= Adjusted earnings/fixed charges 1.66x 2.13x 2.58x 2.23x 2.65x 3.01x 2.81x ======= ======= ======= ======= ======= ======= =======
INCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Six Three months months ended ended June 30, June 30, Year ended December 31, - -------------------------------------------------------------------------------------------------------------------------------- 2001 2001 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes $ 1,129 $ 853 $ 6,461 $ 4,075 $ 4,444 $ 4,314 $ 3,619 Adjustments: Fixed charges: Interest on borrowed funds 1,654 727 3,985 3,198 2,569 2,026 1,881 1/3 of rent 56 28 108 127 119 118 114 Interest on deposits 2,010 938 4,512 4,202 4,379 4,021 4,092 ------- ------- ------- ------- ------- ------- ------- Adjusted earnings $ 4,849 $ 2,546 $15,066 $11,602 $11,511 $10,479 $ 9,706 ======= ======= ======= ======= ======= ======= ======= Fixed charges $ 3,720 $ 1,693 $ 8,605 $ 7,527 $ 7,067 $ 6,165 $ 6,087 ======= ======= ======= ======= ======= ======= ======= Adjusted earnings/fixed charges 1.30x 1.50x 1.75x 1.54x 1.63x 1.70x 1.59x ======= ======= ======= ======= ======= ======= =======
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