-----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, FdKmK85nFt7ws7VGZsSFt8NjiLvdztLSPb/u+D47DUC7/jwt5wVM5y5jNDtZLyke TUEInVMQOyWf8nKfgGyn1g== 0001005477-99-002364.txt : 19990517 0001005477-99-002364.hdr.sgml : 19990517 ACCESSION NUMBER: 0001005477-99-002364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEET FINANCIAL GROUP INC 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: SEC FILE NUMBER: 001-06366 FILM NUMBER: 99623666 BUSINESS ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02211 BUSINESS PHONE: 6173464000 MAIL ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02211 FORMER COMPANY: FORMER CONFORMED NAME: FLEET FINANCIAL GROUP INC DATE OF NAME CHANGE: 19880110 FORMER COMPANY: FORMER CONFORMED NAME: INDUSTRIAL NATIONAL CORP DATE OF NAME CHANGE: 19820512 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------- FORM 10-Q |X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for quarterly period ended March 31, 1999 |_| 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 FLEET FINANCIAL GROUP, INC. (Exact name of registrant as specified in its charter) Rhode Island 05-0341324 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One Federal Street Boston, Massachusetts 02110 (Address of principal executive office) (Zip Code) (617) 346-4000 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| The number of shares of common stock of the Registrant outstanding as of April 30, 1999 was 570,409,907. ================================================================================ FLEET FINANCIAL GROUP, INC. FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE ---- PART I. ITEM 1. FINANCIAL INFORMATION Consolidated Statements of Income Three Months Ended March 31, 1999 and 1998 3 Consolidated Balance Sheets March 31, 1999 and December 31, 1998 4 Consolidated Statements of Changes in Stockholders' Equity Three Months Ended March 31, 1999 and 1998 5 Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 1998 6 Condensed Notes to Consolidated Financial Statements 7 PART I. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION 21 SIGNATURES 23 EXHIBITS 24 2 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) - -------------------------------------------------------------------------------- For the three months ended March 31 Dollars in millions, except per share amounts 1999 1998 - -------------------------------------------------------------------------------- Interest and fees on loans $ 1,559 $ 1,378 Interest on securities 173 162 Other 46 54 - -------------------------------------------------------------------------------- Total interest income 1,778 1,594 - -------------------------------------------------------------------------------- Interest expense: Deposits 424 438 Short-term borrowings 80 84 Long-term debt 201 89 Other 39 54 - -------------------------------------------------------------------------------- Total interest expense 744 665 - -------------------------------------------------------------------------------- Net interest income 1,034 929 - -------------------------------------------------------------------------------- Provision for credit losses 149 92 - -------------------------------------------------------------------------------- Net interest income after provision for credit losses 885 837 - -------------------------------------------------------------------------------- Noninterest income: Investment services revenue 248 201 Banking fees and commissions 193 176 Processing-related revenue 153 59 Capital markets revenue 149 138 Credit card revenue 141 56 Other 75 65 - -------------------------------------------------------------------------------- Total noninterest income 959 695 - -------------------------------------------------------------------------------- Noninterest expense: Employee compensation and benefits 542 445 Equipment 86 80 Occupancy 76 74 Intangible asset amortization 71 51 Legal and other professional 43 31 Merger-related charges -- 73 Other 307 243 - -------------------------------------------------------------------------------- Total noninterest expense 1,125 997 - -------------------------------------------------------------------------------- Income before income taxes 719 535 Applicable income taxes 281 212 - -------------------------------------------------------------------------------- Net income $ 438 $ 323 - -------------------------------------------------------------------------------- Net income applicable to common shares $ 422 $ 311 Basic earnings per share .74 .55 Diluted earnings per share .72 .53 Dividends declared .27 .245 Diluted weighted average common shares outstanding 588,572,426 587,183,562 - -------------------------------------------------------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements 3 FLEET FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (unaudited) - -------------------------------------------------------------------------------- March 31, December 31, Dollars in millions, except share amounts 1999 1998 - -------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 4,862 $ 5,738 Securities (market value: $10,972 and $10,797) 10,968 10,792 Loans 73,683 69,396 Reserve for credit losses (1,724) (1,552) - -------------------------------------------------------------------------------- Net loans 71,959 67,844 - -------------------------------------------------------------------------------- Due from brokers/dealers 2,726 3,600 Mortgages held for resale 2,155 3,960 Premises and equipment 1,233 1,229 Mortgage servicing rights 2,098 1,405 Intangible assets 3,423 3,117 Other assets 6,742 6,697 - -------------------------------------------------------------------------------- Total assets $ 106,166 $ 104,382 - -------------------------------------------------------------------------------- Liabilities Deposits: Demand $ 11,150 $ 13,400 Regular savings, NOW, money market 34,898 34,696 Time 21,585 21,582 - -------------------------------------------------------------------------------- Total deposits 67,633 69,678 - -------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 3,027 4,456 Other short-term borrowings 2,844 4,856 Due to brokers/dealers 3,823 3,975 Long-term debt 15,586 8,820 Accrued expenses and other liabilities 3,641 3,188 - -------------------------------------------------------------------------------- Total liabilities 96,554 94,973 - -------------------------------------------------------------------------------- Stockholders' equity Preferred stock 691 691 Common stock (571,168,358 shares issued in 1999 and 1998) 6 6 Common surplus 3,291 3,284 Retained earnings 5,602 5,337 Accumulated other comprehensive income 58 128 Treasury stock, at cost (2,435,203 shares in 1999 and 1,593,005 shares in 1998) (36) (37) - -------------------------------------------------------------------------------- Total stockholders' equity 9,612 9,409 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 106,166 $ 104,382 - -------------------------------------------------------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements. 4 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
- --------------------------------------------------------------------------------------------------------------------------------- Accumulated Common Other Stock at Compre- Three months ended March 31 Preferred $.01 Common Retained hensive Treasury Dollars in millions, except share amounts Stock Par Surplus Earnings Income Stock Total - --------------------------------------------------------------------------------------------------------------------------------- 1998 Balance at December 31, 1997 $ 691 $ 3 $3,329 $4,437 $ 97 $ (105) $8,452 Net income 323 323 Other comprehensive income, net of tax: Adjustment to unrealized gain on securities available for sale (21) (21) -------- Comprehensive income 302 Cash dividends declared on common stock ($.245 per share) (139) (139) Cash dividends declared on preferred stock (13) (13) Common stock issued in connection with employee benefit and stock option plans (14) (2) 34 18 - --------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1998 $ 691 $ 3 $3,315 $4,606 $ 76 $ (71) $8,620 - --------------------------------------------------------------------------------------------------------------------------------- 1999 Balance at December 31, 1998 $ 691 $ 6 $3,284 $5,337 $ 128 $ (37) $9,409 Net income 438 438 Other comprehensive income, net of tax: Adjustment to unrealized gain on securities available for sale (70) (70) -------- Comprehensive income 368 Cash dividends declared on common stock ($.27 per share) (154) (154) Cash dividends declared on preferred stock (13) (13) Common stock issued in connection with employee benefit and stock option plans 6 (5) 28 29 Treasury stock purchased (24) (24) Other, net 1 (1) (3) (3) - --------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1999 $ 691 $ 6 $3,291 $5,602 $ 58 $ (36) $9,612 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements. 5 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 438 $ 323 Adjustments for noncash items: Depreciation and amortization of premises and equipment 66 54 Amortization and impairment of mortgage servicing rights 82 153 Amortization of other intangible assets 71 50 Provision for credit losses 149 92 Deferred income tax expense/(benefit) 104 (46) Securities gains -- (51) Merger-related charges -- 73 Originations and purchases of mortgages held for resale (10,383) (5,172) Proceeds from sales of mortgages held for resale 12,188 4,281 Decrease/(increase) in due from brokers/dealers 874 (57) Decrease/(increase) in accrued receivables, net 59 (195) (Decrease)/increase in due to brokers/dealers (152) 117 (Decrease)/increase in accrued liabilities, net (180) 523 Other, net (164) (227) - -------------------------------------------------------------------------------- Net cash flow provided by/(used in) operating activities 3,152 (82) - -------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchases of securities available for sale (1,463) (2,980) Proceeds from sales of securities available for sale 628 912 Proceeds from maturities of securities available for sale 567 208 Purchases of securities held to maturity (202) (172) Proceeds from maturities of securities held to maturity 186 150 Net cash and cash equivalents (paid for)/received from businesses acquired (613) 380 Net decrease/(increase) in loans 1,177 (846) Purchases of premises and equipment (38) (59) Purchases of mortgage servicing rights (406) (61) - -------------------------------------------------------------------------------- Net cash flow used in investing activities (164) (2,468) - -------------------------------------------------------------------------------- Cash Flows from Financing Activities Net (decrease)/increase in deposits (2,045) 1,843 Net (decrease)/increase in short-term borrowings (3,799) 218 Proceeds from issuance of long-term debt 2,228 918 Repayments of long-term debt (92) (398) Proceeds from the issuance of common stock 29 18 Repurchase of common stock (24) -- Cash dividends paid (161) (130) - -------------------------------------------------------------------------------- Net cash flow (used in)/provided by financing activities (3,864) 2,469 - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (876) (81) - -------------------------------------------------------------------------------- Cash and cash equivalents at beginning of the period 5,738 5,574 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of the period $ 4,862 $ 5,493 - -------------------------------------------------------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements. 6 FLEET FINANCIAL GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1. FINANCIAL STATEMENTS The unaudited consolidated financial information included herein has been prepared in conformity with the accounting principles and practices in Fleet Financial Group, Inc.'s (Fleet or the corporation) consolidated financial statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 1998. The accompanying interim consolidated financial statements contained herein are unaudited. However, in the opinion of the corporation, all adjustments consisting of normal recurring items necessary for a fair statement of the operating results for the periods shown have been made. The results of operations for the three months ended March 31, 1999 may not be indicative of operating results for the year ending December 31, 1999. Certain prior period amounts have been reclassified to conform to current classifications. NOTE 2. ACQUISITIONS On February 1, 1999, the corporation acquired Sanwa Business Credit (Sanwa), a leasing and asset-based lending company from Sanwa Bank, Ltd. Sanwa offers a wide variety of asset-based lending, equipment leasing and vendor finance programs throughout the United States and has approximately $6 billion in assets. Goodwill of approximately $385 million was recorded and is being amortized on a straight-line basis over 25 years. On March 14, 1999, the corporation entered into a definitive agreement to merge with BankBoston Corporation (BankBoston). Under the terms of the agreement, BankBoston shareholders will receive 1.1844 shares of Fleet common stock for each share of BankBoston common stock. A merger and restructuring-related charge of approximately $650 million after-tax is anticipated to be recorded upon consummation of the merger or shortly thereafter. This charge includes transaction costs, exit costs including severance and facilities-related charges, and accelerated depreciation in excess of normal scheduled depreciation on duplicate systems and excess facilities that will be taken out of service. The corporation also expects to recognize a $60 million after-tax charge to earnings in subsequent periods, related to costs of integrating the two companies. In addition, Fleet and BankBoston anticipate that, in order to obtain regulatory approval for the merger, the companies will be required to divest approximately $13 billion of deposits, primarily in the Massachusetts, Connecticut and Rhode Island markets. The merger, subject to shareholder and regulatory approval, is anticipated to close in the fall of 1999. The transaction will be accounted for under the pooling-of-interests method of accounting. NOTE 3. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS Cash Flow Disclosure - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Supplemental disclosure for cash paid during the period for: Interest expense $ 688 $ 594 Income taxes, net of refunds 152 16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Supplemental disclosure of noncash investing and financing activities: Transfer of loans to foreclosed property and repossessed equipment 2 3 Adjustment to unrealized gain on securities available for sale (70) (21) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Assets acquired and liabilities assumed in business combinations were as follows: Assets acquired, net of cash and cash equivalents received 6,074 2,845 Net cash and cash equivalents (paid)/received (613) 380 Liabilities assumed 5,460 3,225 - -------------------------------------------------------------------------------- NOTE 4. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The corporation has adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information by operating segment. The corporation discloses interim segment reporting in the "Lines of Business" section of Management's Discussion and Analysis (pages 12-15) of this Form 10-Q. 7 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL SUMMARY - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions, except per share amounts 1999 1998 - -------------------------------------------------------------------------------- Earnings Net income $ 438 $ 323 Net interest income (FTE)(a) 1,042 938 - -------------------------------------------------------------------------------- Per Common Share Basic earnings $ .74 $ .55 Diluted earnings .72 .53 Cash dividends declared .27 .245 Book value 15.69 13.96 - -------------------------------------------------------------------------------- Operating Ratios Return on average assets 1.63% 1.43% Return on common equity 19.28 16.00 Efficiency ratio 55.9 56.6 Equity to assets (period-end) 9.05 8.82 - -------------------------------------------------------------------------------- At March 31 Total assets $106,166 $97,687 Stockholders' equity 9,612 8,620 Nonperforming assets(b) 280 373 - -------------------------------------------------------------------------------- (a) The FTE adjustment included in net interest income was $8 million and $9 million, respectively, for the three months ended March 31, 1999 and 1998. (b) Nonperforming assets classified as held for sale by accelerated disposition of $187 million and $176 million at March 31, 1999 and March 31, 1998, respectively, are not included in nonperforming assets and related ratios. Fleet reported net income of $438 million, or $.72 per diluted share, for the quarter ended March 31, 1999, compared to $323 million, or $.53 per diluted share, in the first quarter of 1998. Return on average assets (ROA) and return on common equity (ROE) were 1.63% and 19.28%, respectively, for the first quarter of 1999, compared to 1.43% and 16.00%, respectively, for the first quarter of 1998. The first quarter of 1998 included merger-related charges of $73 million ($44 million post-tax) pertaining to the acquisitions of Quick & Reilly and the consumer credit card operations of Advanta. Excluding the impact of these charges, the corporation's net income was $367 million, or $.60 per diluted share, while ROA and ROE were 1.62% and 18.27%, respectively. The increase in net income is largely due to strong growth in many of the corporation's businesses, particularly credit cards, brokerage and investment services, and mortgage banking, as well as earnings from the recent acquisitions of Sanwa and Merrill Lynch Specialists, Inc. (MLSI). INCOME STATEMENT ANALYSIS Net Interest Income - -------------------------------------------------------------------------------- Three months ended March 31 FTE Basis Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Interest income $1,778 $1,594 Tax-equivalent adjustment 8 9 Interest expense 744 665 - -------------------------------------------------------------------------------- Net interest income $1,042 $ 938 - -------------------------------------------------------------------------------- Net interest income on a fully taxable equivalent basis (FTE) totaled $1,042 million for the quarter ended March 31, 1999, compared to $938 million for the same period in 1998. The $104 million increase is primarily attributable to the inclusion of Sanwa for two months, the acquisition of $1.3 billion of credit card receivables from Household International, Inc. (Household) at the end of the fourth quarter of 1998, as well as stronger fee revenue as a result of higher credit card and commercial loan fees. Net Interest Margin and Interest-Rate Spread - -------------------------------------------------------------------------------- Three months ended March 31 1999 1998 FTE Basis Average Average Dollars in millions Balance Rate Balance Rate - -------------------------------------------------------------------------------- Securities $ 10,565 6.53% $ 10,051 6.56% Loans 72,649 8.32 62,603 8.66 Mortgages held for sale 3,819 6.86 1,637 7.25 Due from brokers/dealers 3,404 4.41 3,749 5.13 Other 1,377 5.21 1,025 4.99 - -------------------------------------------------------------------------------- Total interest-earning assets 91,814 7.86 79,065 8.15 - -------------------------------------------------------------------------------- Deposits 51,496 3.34 48,596 3.65 Short-term borrowings 8,071 4.03 6,914 4.90 Due to brokers/dealers 3,865 4.12 4,564 4.83 Long-term debt 13,198 6.08 4,853 7.31 - -------------------------------------------------------------------------------- Interest-bearing liabilities 76,630 3.92 64,927 4.14 - -------------------------------------------------------------------------------- Interest-rate spread 3.94 4.01 Interest-free sources of funds 15,184 14,138 - -------------------------------------------------------------------------------- Total sources of funds $ 91,814 3.27% $ 79,065 3.40% - -------------------------------------------------------------------------------- Net interest margin 4.59% 4.75% - -------------------------------------------------------------------------------- The corporation's net interest margin for the first quarter of 1999 was 4.59%. The 16 basis point decrease in net interest margin is primarily attributable to declining yields in the commercial loan portfolio, offset by declining rates paid on deposits. Average loans increased $10.0 billion to $72.7 billion for the first quarter of 1999, when compared with the first quarter of 1998. This growth resulted primarily from loan increases in the commercial, lease financing and credit card portfolios. Additionally, the first quarter of 1999 was positively impacted by the Sanwa acquisition which added $3 billion of average leases and $800 million of average asset-backed loans, as well as the purchase of credit card receivables from Household in late 1998. 8 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average mortgages held for resale increased $2.2 billion, or over 130%, while the yield has declined 39 basis points over the first quarter of 1998, due to the combination of increased loan production at Fleet Mortgage in a lower mortgage-rate environment. The $2.9 billion increase in average interest-bearing deposits compared to the first quarter of 1998 is primarily attributable to increased money market deposits. The increase was a result of the corporation's marketing efforts at attracting money market deposits as well as paying competitive rates. The $2.1 billion increase in average short-term borrowings is attributable to an increase in federal funds purchased and securities sold under agreements to repurchase and an increase in short-term bank notes as the corporation utilized these funding vehicles to fund loan growth. The $8.3 billion increase in average long-term debt was due primarily to net increases in senior and subordinated debt and capital securities issued during 1998 to fund acquisitions and overall asset growth. The 123 basis point decrease in the funding rate was due to additional debt issued by the corporation at lower floating rates. Noninterest Income - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Investment services revenue $248 $201 Banking fees and commissions 193 176 Processing-related revenue 153 59 Capital markets revenue 149 138 Credit card revenue 141 56 Other noninterest income 75 65 - -------------------------------------------------------------------------------- Total noninterest income $959 $695 - -------------------------------------------------------------------------------- Noninterest income for the first quarter of 1999 increased $264 million to $959 million compared to $695 million for the same period of 1998, an increase of 38%. Increases were noted in all core revenue categories and reflects revenues achieved from the acquisitions of Sanwa, MLSI and the consumer credit card operations of Advanta, as well as strong growth and volume at Fleet Mortgage, AFSA Data Corporation (AFSA) and Quick & Reilly. Investment Services Revenue - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Investment management revenue $140 $125 Brokerage fees and commissions 108 76 - -------------------------------------------------------------------------------- Total investment services revenue $248 $201 - -------------------------------------------------------------------------------- Investment services revenue, which includes asset management revenues as well as brokerage fees and commissions, increased $47 million, or 23%, over the first quarter of 1998. Brokerage fees and commissions increased $32 million, or 42%, over the first quarter of 1998, driven by a strong equity market and trading volumes which benefited the brokerage and clearing units of Quick & Reilly. The major components of investment management revenue are as follows: Investment Management Revenue - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Private clients group $ 58 $ 54 Retail investments 26 17 Columbia Management Company 24 23 Retirement plan services 18 16 Not-for-profit institutional services 12 12 Other 2 3 - -------------------------------------------------------------------------------- Total $140 $125 - -------------------------------------------------------------------------------- Investment management revenue increased 12% in the first quarter of 1999 to $140 million compared to $125 million in the first quarter of 1998. This improvement was largely driven by growth in overall assets under management as well as a 32% increase in the sales of mutual funds and annuities. Assets under management have grown 6% to $86 billion at March 31, 1999 from $81 billion at March 31, 1998. This increase reflects the corporation's continued focus on developing, acquiring and growing fee-based businesses. Banking fees and commissions, which includes fees received for cash management, deposit accounts, electronic banking fees and other fees, increased $17 million, or 10%, to $193 million. The increase was due principally to the development of new product packaging and fee schedules, as well as targeted marketing efforts throughout 1998. Processing-Related Revenue - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Mortgage banking revenue, net $ 91 $ 18 Student loan servicing fees 34 28 Other 28 13 - -------------------------------------------------------------------------------- Total processing-related revenue $153 $ 59 - -------------------------------------------------------------------------------- Processing-related revenue increased $94 million, or 159%, when compared to the first quarter of 1998 due primarily to increased mortgage banking revenue as a result of strong mortgage production. Student loan servicing fees increased $6 million, or 21%, at AFSA, the corporation's student loan servicing subsidiary. AFSA services 6.6 million accounts nationwide, an increase of 14% from accounts serviced as of March 31, 1998, and is the largest student loan servicer in the United States, with over $53 billion in loans serviced. Other processing-related revenue increased $15 million over the first quarter of 1998, due to strong tax and health care processing revenue. 9 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mortgage Banking Revenue, Net - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Net loan servicing revenue $120 $117 Mortgage production revenue 53 29 Gains on sales of mortgage servicing -- 25 Mortgage servicing rights amortization (82) (78) Impairment charge -- (75) - -------------------------------------------------------------------------------- Total mortgage banking revenue, net $ 91 $ 18 - -------------------------------------------------------------------------------- Net mortgage banking revenue was $91 million in the first quarter of 1999, an increase of $73 million as compared to the first quarter of 1998. The first quarter of 1998 included an impairment charge of $75 million taken as a result of increased refinancings in a lower mortgage-rate environment, partially offset by a $25 million gain on sales of mortgage servicing rights (MSRs). Excluding the $75 million impairment charge and $25 million MSR gain, net mortgage banking revenue increased $23 million, or 34%, compared to the first quarter of 1998. Loan servicing revenue represents fees received for servicing residential mortgage loans. The $3 million increase in loan servicing revenue is attributable to the corporation receiving a higher servicing spread on mortgage servicing acquired, as well as an increase in the size of the corporation's servicing portfolio. Mortgage production revenue increased $24 million to $53 million in the first quarter of 1999 as a result of strong loan production volume driven by a lower mortgage-rate environment as loan production volume reached $13.0 billion in the first quarter of 1999 as compared to $6.2 billion in the same period a year ago. This revenue includes income derived from the loan origination process and net gains on sales of mortgage loans. Capital Markets Revenue - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Brokerage market-making revenue $ 65 $ 31 Venture capital revenue 41 30 Foreign exchange/interest-rate products 21 14 Investment banking fees 14 6 Securities trading gains 8 6 Securities gains -- 51 - -------------------------------------------------------------------------------- Total capital markets revenue $149 $138 - -------------------------------------------------------------------------------- Capital markets revenue increased $11 million to $149 million for the quarter ended March 31, 1999, when compared to the same quarter of 1998 primarily driven by increases in brokerage market-making, venture capital and foreign exchange/interest-rate products revenue, partially offset by a decrease in securities gains. Excluding $51 million of securities gains taken in the first quarter of 1998, capital markets revenue increased 71%. The $34 million rise in brokerage market-making revenue from Fleet's specialists subsidiaries is a result of increased trading volumes and market volatility as well as the inclusion of MLSI during the first quarter of 1999. Venture capital revenue at Fleet Private Equity, the corporation's venture capital business, increased by $11 million when compared with the first quarter of 1998 as the corporation continued to experience gains in this business as a result of the strength of the equity markets. The corporation's ability to continue to experience increases in the value of these venture capital investments depends on a variety of factors, including the condition of the economy and equity markets. Thus, the likelihood of such gains in the future cannot be predicted. Strong foreign exchange and interest-rate product activities were due primarily to customers locking in their foreign exchange and interest-rate risk as a result of the volatility of these markets over the past year. Credit card revenue rose $85 million, or 152%, over the first quarter of 1998 primarily attributable to acquisitions of various credit card portfolios during 1998, including the consumer credit card operations of Advanta, which was acquired in late February 1998. Other noninterest income increased $10 million to $75 million due primarily to higher leasing gains. Noninterest Expense - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Employee compensation and benefits $ 542 $445 Equipment 86 80 Occupancy 76 74 Intangible asset amortization 71 51 Legal and other professional 43 31 Marketing 35 27 Printing and mailing 26 23 Telephone 22 20 Other 224 173 - -------------------------------------------------------------------------------- Total noninterest expense excluding merger-related charges 1,125 924 Merger-related charges -- 73 - -------------------------------------------------------------------------------- Total noninterest expense $1,125 $997 - -------------------------------------------------------------------------------- Noninterest expense for the first quarter of 1999 totaled $1,125 million compared to $924 million for the same period of 1998, excluding $73 million of merger-related charges in connection with the acquisitions of Quick & Reilly and the consumer credit card operations of Advanta. The merger-related charges pertained primarily to exit costs, severance costs and professional fees. The $201 million increase over the first quarter of 1998, excluding merger-related charges, was primarily the result of various acquisitions, which accounted for 50% of the increase. In addition, higher expenses in volume and processing-related businesses, primarily 10 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fleet Mortgage, Quick & Reilly and AFSA, accounted for 31% of the increase. The corporation's efficiency ratio improved from 56.6% to 55.9% from the first quarter of 1998 to the first quarter of 1999, as revenue growth has outpaced the increase in expenses. Employee compensation and benefits increased $97 million compared with the first quarter of 1998 due primarily to higher volumes at many of the corporation's businesses, particularly Fleet Mortgage, Quick & Reilly and AFSA, as well as annual merit increases. Intangible asset amortization increased $20 million in the first quarter of 1999 as compared to the same period a year ago as a result of goodwill added from acquisitions in 1998 and 1999. Legal and other professional increased $12 million to $43 million when compared to the first quarter of 1998 as a result of legal fees pertaining to acquisitions. Other noninterest expense increased $51 million to $224 million in the first quarter of 1999 primarily attributable to increased volume at the corporation's brokerage and processing-related businesses as well as expenses from acquired companies. Impact of the Year 2000 The corporation's Year 2000 project continues to be directed by a Year 2000 Executive Management Steering Committee consisting of its President and Vice Chairmen. The committee provides direct oversight of the Year 2000 initiative and continues to be updated monthly on the project's progress. The corporation's Board of Directors continues to receive formal project updates on a quarterly basis. The corporation has completed its assessment of Year 2000 issues, developed a plan, and arranged for the required resources to complete the necessary remediation efforts for both information technology and non-information technology systems and processes. The corporation continues to utilize both internal and external resources to appropriately prepare Fleet for the Year 2000. The corporation will continue to focus on the following key areas throughout 1999: Testing, Vendor Management, Event Planning and Communication with customers. Additionally, the corporation continues to work on high priority new business technological initiatives that it deems critical to its ongoing business success. The corporation has made significant progress in remediating and testing its internal systems. All internal systems have either been remediated, tested, and returned to production or are in final stages of testing. 99% of those systems are prepared for the Year 2000. The remaining 1% are expected to complete testing by June 30, 1999. This activity continues to track in accordance with the original plan and in accordance with Federal Financial Institutions Examination Council (FFIEC) guidelines. The corporation has established a separate test environment to accommodate its Year 2000 testing activity. The corporation relies on several vendors and service providers for key business processes. The corporation continues to work closely with these vendors and service providers. Validation of Year 2000 readiness of all the corporation's vendors and service providers continues with a particular focus on alternatives, where possible, for those groups that have been identified as critical. The corporation's senior management has conducted on-site visits and in many cases follow-up discussions with its most critical service providers to further assess their Year 2000 readiness. In addition, the corporation continues to receive written and verbal verification from its critical vendors and service providers as to their Year 2000 readiness. A majority of its critical vendors and service providers have represented themselves to the corporation as Year 2000 compliant. Significant progress has also been made in testing with the corporation's vendors, service providers, customers and regulatory agencies. As of March 31, 1999, the corporation was substantially complete with the testing of significant vendors and service providers. Until and after the Year 2000 rollover takes place, there can be no assurance that Year 2000 related problems will not occur. The Year 2000 is an unprecedented event. Despite the corporation's efforts to identify and address Year 2000 issues, such issues present risks to the corporation. Such risks include business disruptions, operational problems, financial losses, legal liability, and other similar risks. The corporation's businesses, results of operations, and financial position could be materially adversely affected. The corporation had previously established business resumption plans for its lines of business and subsidiaries. These plans have been reviewed and where appropriate have been enhanced to address potential Year 2000 failure scenarios. In addition, a corporate-wide Year 2000 Event Plan has been developed to govern the corporation's activities prior to, during and after the calendar rollover to 2000. The Event Plan will be validated by conducting unit specific structured walkthroughs, employee notification tests and structured plan walkthroughs between interdependent units. This activity is expected to be substantially complete by June 30, 1999. Event Plans will continue to be updated, as appropriate, into the fourth quarter of 1999. In addition to the components listed above, the corporation has Event Plan Validation Committees in place. The Committees are comprised of middle and senior level managers, who are reviewing the Event Plan strategy and Event Plan validation methodology to prepare the corporation for the rollover Event. 11 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The corporation has also implemented a plan consisting of several components to monitor fiduciary risk. For example, from an investment risk perspective, the corporation is assessing the level of preparedness of corporations in which investments are made on behalf of its customers. This activity will continue throughout 1999. The corporation's credit risk associated with borrowers may increase to the extent borrowers are not adequately prepared for the Year 2000. As a result, there may be increases in the corporation's problem loans and credit losses subsequent to Year 2000. However, to mitigate the risk, the corporation assesses quarterly the Year 2000 readiness of material business relationships to which it extends credit. The assessment determines the customers' level of Year 2000 preparedness and their level of dependency on technology. Factored together with the overall credit rating of the customer, the corporation identifies those customers that present an unacceptable risk to the corporation due to Year 2000. Of the material relationships the corporation has assessed, six-tenths of one percent have presently been identified as unacceptable in their level of Year 2000 preparedness and will be required to take action to mitigate their Year 2000 risk. The corporation will continue to reassess the readiness of customers receiving the unacceptable rating on a quarterly basis throughout 1999 to ensure that the proper steps are being taken. As an integral part of the corporation's risk assessment process, the corporation has also assessed its material funds providers that provide sources of funds to the corporation. The assessment sought to determine the funds providers' level of Year 2000 preparedness and their level of dependency on technology. 96% of material funds providers have been identified as acceptable in their level of Year 2000 preparedness. Utilizing the same process, the corporation also assessed its material funds takers which include financial institutions to which the corporation provides short-term funds and its material counterparties that have a capital markets relationship with the corporation. 100% of material funds takers and 94% of material counterparties have been identified as acceptable in their level of Year 2000 preparedness. The corporation will continue to closely monitor these funds providers, funds takers and counterparties throughout 1999. The corporation will continue communicating with employees and customers throughout 1999 to discuss readiness progress through a variety of communication vehicles: statement messages and inserts; ATM on screen and receipt messages; brochures; direct mail initiatives; direct discussions with customers; seminars; and through the corporation's internet web site (www.fleet.com). On February 1, 1999, the corporation acquired Sanwa Business Credit Corporation, now known as Fleet Business Credit Corporation (FBCC). An assessment of its Year 2000 program is near completion and it is expected that FBCC will be substantially complete with its Year 2000 preparations by June 30, 1999. The above description does not include FBCC. However, its Year 2000 monitoring will be migrated into the corporation's Year 2000 program management and reporting process by the end of the second quarter of 1999. The corporation continues to approximate that the cost of the Year 2000 project will be $150 million. The corporation incurred $10 million during the first quarter of 1999 and $101 million of expenses since the inception of this project. Income Taxes The corporation recorded income tax expense in the amount of $281 million for the first quarter of 1999 compared with $212 million for the same period a year ago. The effective tax rate was 39.1% and 39.6% for the first quarter of 1999 and 1998, respectively. Lines of Business The corporation is managed along the following lines of business: Commercial Financial Services, Retail Banking, National Financial Services, Fleet Investment Group, and Treasury. The performance of the corporation is monitored by an internal profitability system, with results reported monthly and quarterly to senior management. Management accounting methods are used for assigning expenses that are not directly incurred by lines of business, such as overhead, operations and technology expense. Additionally, equity, provision for credit losses and reserves for credit losses are assigned on an economic basis. The corporation has developed risk adjusted methodologies that quantify risk types within business units and assigns capital accordingly. Within business units, assets and liabilities are match-funded utilizing similar maturity, liquidity and repricing information. Management accounting concepts and organizational hierarchies are periodically refined and results may be restated to reflect changes in methodology and organizational structure. Prior periods have been restated to reflect these changes. 12 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fleet Financial Group Net Income by Line of Business - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Commercial Financial Services $140 $ 98 Retail Banking 94 92 National Financial Services 88 9 Fleet Investment Group 79 55 Treasury 25 37 All Other 12 32 - -------------------------------------------------------------------------------- Total $438 $323 - -------------------------------------------------------------------------------- Commercial Financial Services - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Income statement data: Net interest income $ 394 $ 315 Noninterest income 133 86 ------- ------ Total Revenue 527 401 Provision 60 49 Noninterest expense 235 189 - -------------------------------------------------------------------------------- Net income $ 140 $ 98 - -------------------------------------------------------------------------------- Balance sheet data: Average assets 54,067 41,129 Average loans 46,475 36,948 Average deposits 11,731 11,653 - -------------------------------------------------------------------------------- Return on equity 18% 19% - -------------------------------------------------------------------------------- Commercial Financial Services includes traditional commercial banking, national, specialized and asset-based lending, as well as investment banking, government banking, trade finance and cash management services. First quarter results also reflect the acquisition of Sanwa Business Credit, which added $3.8 billion to average loans. Commercial Financial Services earned $140 million in the first quarter of 1999. Compared to the first quarter of 1998, earnings increased $42 million, or 43%. Excluding the acquisition of Sanwa, loans increased $5.7 billion, or 16%, reflecting strong growth within the commercial banking, leasing, asset-based lending, and specialty units. Increased noninterest revenue also helped bolster earnings growth. Excluding Sanwa, total revenue increased by $85 million due to strong loan growth and increased leasing, cash management, corporate finance and tax processing activities. Retail Banking - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Income statement data: Net interest income $ 435 $ 446 Noninterest income 144 135 ------- ------ Total Revenue 579 581 Provision 26 28 Noninterest expense 381 381 - -------------------------------------------------------------------------------- Net income $ 94 $ 92 - -------------------------------------------------------------------------------- Balance sheet data: Average loans 9,369 10,084 Average deposits 42,494 42,369 - -------------------------------------------------------------------------------- Return on equity 22% 21% - -------------------------------------------------------------------------------- Retail Banking includes businesses engaged in consumer retail services through branch banking and direct banking units, as well as small business lending and deposit services. The Retail Banking unit earned $94 million in the first quarter of 1999, up slightly from the first quarter of 1998. Increased earnings reflect higher noninterest revenues associated with new product features, as well as slightly lower provision for credit losses associated with lower loan volumes. These shifts were partly offset by lower net interest income from reduced retail loan and deposit volumes. Lower levels of deposits reflect a continued migration of customers to alternative higher-rate investment products, partly offset by higher levels of money market accounts. Operating costs were unchanged as Retail Banking continues to reconfigure its product offerings and distribution channels consistent with consumer preferences. National Financial Services - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Income statement data: Net interest income $ 130 $ 84 Noninterest income 339 142 ------- ------- Total Revenue 469 226 Provision 94 63 Noninterest expense 235 147 - -------------------------------------------------------------------------------- Net income $ 88 $ 9 - -------------------------------------------------------------------------------- Balance sheet data: Average loans 4,739 3,393 Average deposits 2,530 2,243 - -------------------------------------------------------------------------------- Return on equity 15% 3% - -------------------------------------------------------------------------------- 13 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS National Financial Services includes mortgage banking, credit card services, student loan processing, and private equity. The credit card business also includes acquired portfolios from Household and Crestar in the second half of 1998. The following table presents comparative data for the four principal businesses which comprise this group. National Financial Services Net Income by Unit - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Credit card $30 $ 6 Private equity 29 15 Mortgage banking 21 (18) Student loan processing 8 6 - -------------------------------------------------------------------------------- Total $88 $ 9 - -------------------------------------------------------------------------------- First quarter 1999 earnings were up dramatically compared to the first quarter of 1998. Excluding mortgage impairment charges and related gains taken in the first quarter of 1998, earnings increased by $49 million, due to credit card acquisitions, and improved operating performance in each business unit. Excluding mortgage impairment charges and related gains, mortgage banking earnings increased by $9 million due to increased loan production volumes in a favorable mortgage interest-rate environment and higher servicing revenues. Student loan earnings increased by 28% or $2 million, as a result of an increase in student loan account volumes. Credit card earnings increased by $24 million compared to the first quarter of 1998 due to the aforementioned acquisitions; while private equity earnings increased by $14 million compared to the same period last year. Private equity earnings will normally fluctuate with the performance of equity markets, as well as with general economic conditions. Fleet Investment Group - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Income statement data: Net interest income $ 47 $ 47 Noninterest income 333 246 ------- ------- Total Revenue 380 293 Provision 1 1 Noninterest expense 246 197 - -------------------------------------------------------------------------------- Net income $ 79 $ 55 - -------------------------------------------------------------------------------- Balance sheet data: Average loans 4,287 3,566 Average deposits 1,961 2,106 - -------------------------------------------------------------------------------- Return on equity 24% 20% - -------------------------------------------------------------------------------- Assets Under Management $86,132 $81,198 - -------------------------------------------------------------------------------- Fleet Investment Group provides asset management services to institutional and wealthy market clients, retail mutual fund and annuity sales, and securities brokerage services. Results also include the recently acquired Merrill Lynch Specialist unit which was purchased in December 1998. Fleet Investment Group earnings increased $24 million compared to the first quarter of 1998. Increased earnings were driven by strong increases in brokerage and market making revenues which increased by $66 million at Quick & Reilly, while revenues from investment management products and services increased by $15 million compared to the first quarter of 1998. Increased market making revenues were partly attributable to the acquisition of Merrill Lynch Specialists as well as increased trading volumes. Higher investment management revenues were driven by increased sales of mutual funds and annuity products, which increased by 32%, as well as growth in assets under management which climbed to $86 billion in the first quarter of 1999. Treasury - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Income statement data: Net interest income $ 39 $ 33 Noninterest income 16 38 -------- ------- Total Revenue 55 71 Provision 3 4 Noninterest expense 18 15 - -------------------------------------------------------------------------------- Net income $ 25 $ 37 - -------------------------------------------------------------------------------- Balance sheet data: Average loans 7,265 7,570 Average securities 9,462 8,945 Average deposits 8,906 5,333 - -------------------------------------------------------------------------------- Return on equity 37% 49% - -------------------------------------------------------------------------------- Treasury is responsible for managing the corporation's securities and residential mortgage portfolios, trading operations, asset-liability management function and wholesale funding needs. The Treasury unit earned $25 million in the first quarter of 1999, down $12 million from the first quarter of 1998. Excluding 1998 security gains, earnings increased slightly from the first quarter of 1998, as higher revenues from foreign exchange and interest-rate protection products were partly offset by associated increases in operating costs. All Other This unit includes certain unallocated support unit costs, the management accounting control units, and other transactions or events not driven by specific business lines. Accordingly, earnings in this unit can fluctuate with changes affecting consolidated provision for credit losses, one-time charges, gains and other actions not driven by specific business units. Earnings were $12 million, compared to $32 million in the first quarter of 1998. Lower earnings resulted from reduced revenues and an increased provision for credit losses as compared to the first quarter of 1998. Lower revenues resulted primarily from security gains recorded in the first quarter of 1998 (to 14 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS offset mortgage impairment charges taken last year). Increased provision reflects higher legal provision for credit losses in the first quarter of 1999 compared to the first quarter of 1998. Earnings in this unit are negatively impacted to the extent the legal provision for credit losses has increased in excess of amounts allocated to the business units on an economic basis. Securities
- ----------------------------------------------------------------------------------------------------------------------- March 31, 1999 December 31, 1998 March 31, 1998 - ----------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Amortized Market Dollars in millions Cost Value Cost Value Cost Value - ----------------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Treasury and government agencies $ 268 $ 269 $ 434 $ 437 $ 1,204 $ 1,211 Mortgage-backed securities 8,452 8,546 7,784 7,982 7,981 8,096 Other debt securities 503 504 792 802 255 255 - ----------------------------------------------------------------------------------------------------------------------- Total debt securities 9,223 9,319 9,010 9,221 9,440 9,562 - ----------------------------------------------------------------------------------------------------------------------- Marketable equity securities 331 330 292 292 289 288 Other securities 235 235 211 211 158 158 - ----------------------------------------------------------------------------------------------------------------------- Total securities available for sale 9,789 9,884 9,513 9,724 9,887 10,008 - ----------------------------------------------------------------------------------------------------------------------- Total securities held to maturity 1,084 1,088 1,068 1,073 1,271 1,276 - ----------------------------------------------------------------------------------------------------------------------- Total securities $10,873 $10,972 $10,581 $10,797 $11,158 $11,284 - -----------------------------------------------------------------------------------------------------------------------
The amortized cost of securities available for sale increased $276 million to $9.8 billion at March 31, 1999 compared to December 31, 1998. The valuation adjustment on securities available for sale decreased $116 million to an unrealized gain position of $95 million at March 31, 1999, due to changes in the interest-rate environment. Loans - -------------------------------------------------------------------------------- March 31, Dec. 31, March 31, Dollars in millions 1999 1998 1998 - -------------------------------------------------------------------------------- Commercial and industrial $38,309 $37,167 $33,397 Lease financing 8,625 4,225 3,458 Commercial real estate 5,641 5,374 5,484 Consumer 21,108 22,630 22,647 - -------------------------------------------------------------------------------- Total loans $73,683 $69,396 $64,986 - -------------------------------------------------------------------------------- Total loans of $73.7 billion at March 31, 1999 increased $4.3 billion from December 31, 1998. The increase is the result of loan growth in the commercial and industrial and lease financing portfolios, largely due to the acquisition of Sanwa. This increase was partially offset by a decline in the credit card portfolio. Commercial and industrial (C&I) loans increased $1.1 billion and lease financings increased $4.4 billion from December 31, 1998 to March 31, 1999, due primarily to the addition of Sanwa loans and leases. The current financial situation in Asia, Latin America, Russia and emerging markets has had minimal impact on the corporation as the corporation has limited international exposure. The corporation has certain relationships with customers in these marketplaces. These relationships contain both market and credit risks. The corporation continues to monitor the financial developments in these economies. Fleet's exposure to the Asian, Latin American and other emerging markets as of March 31, 1999 was approximately $583 million, ($158 million, $369 million and $56 million, respectively) or less than 1% of its loan portfolio. These exposures consist primarily of short-term trade related financings with maturities generally less than 90 days. The corporation had no direct exposure to Russia and other Eastern European countries at March 31, 1999. Consumer Loans - -------------------------------------------------------------------------------- March 31, Dec. 31, March 31, Dollars in millions 1999 1998 1998 - -------------------------------------------------------------------------------- Residential real estate $ 9,151 $ 9,314 $ 9,344 Home equity 4,134 4,257 4,662 Credit card 3,855 5,673 4,741 Student loans 800 812 1,046 Installment/other 3,168 2,574 2,854 - -------------------------------------------------------------------------------- Total $21,108 $22,630 $22,647 - -------------------------------------------------------------------------------- Consumer loans decreased $1.5 billion from December 31, 1998. The decrease is primarily the result of a $1.8 billion decrease in credit card loans, as the corporation's credit card subsidiary, Fleet Credit Card Services, continues its strategy of transitioning from primarily a one product portfolio to a multi-product portfolio by focusing on accounts with higher profitability, lower attrition levels, and better credit quality. The purchase of the $1.3 billion Household portfolio in late 1998 has accelerated the implementation of this strategy. The addition of this portfolio partially offset the transfer of $1.5 billion of credit card receivables to the securitized portfolio in order to replenish the off-balance sheet securitized credit card pools, as well as seasonal run-off. 15 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nonperforming Assets(a)(b) - -------------------------------------------------------------------------------- Dollars in millions C&I CRE Consumer Total - -------------------------------------------------------------------------------- Nonperforming loans: Current or less than 90 days past due $136 $ 7 $ 3 $146 Noncurrent 57 21 43 121 Other real estate owned (OREO) 2 3 8 13 - -------------------------------------------------------------------------------- Total NPAs March 31, 1999 $195 $ 31 $ 54 $280 - -------------------------------------------------------------------------------- Total NPAs December 31, 1998 $173 $ 57 $ 52 $282 - -------------------------------------------------------------------------------- Total NPAs March 31, 1998 $200 $ 91 $ 82 $373 - -------------------------------------------------------------------------------- (a) Throughout this document, NPAs and related ratios do not include loans greater than 90 days past due and still accruing interest ($252 million, $234 million, and $225 million at March 31, 1999, December 31, 1998, and March 31, 1998, respectively). Included in the 90 days past due and still accruing interest were $196 million, $209 million, and $194 million of consumer and residential loans at March 31, 1999, December 31, 1998, and March 31, 1998, respectively. (b) Nonperforming assets classified as held for sale by accelerated disposition of $187 million, $46 million and $176 million at March 31, 1999, December 31, 1998 and March 31, 1998, respectively, are not included in NPAs and related ratios. Nonperforming assets (NPAs) remained consistent with December 31, 1998 as a $22 million increase in commercial and industrial nonperforming loans (NPLs) was offset by a $25 million decline in commercial real estate NPLs. NPAs at March 31, 1999, as a percentage of total loans and OREO and as a percentage of total assets were .38% and .26%, respectively, compared to .41% and .27%, respectively, at December 31, 1998. During the quarter the corporation transferred $54 million of loans, primarily C&I loans, which at December 31, 1998 had been classified as nonperforming, to the assets held for sale by accelerated disposition pool contained in other assets. Additionally, $62 million of nonperforming leases and asset-backed loans pertaining to the Sanwa acquisition were also transferred to assets held for sale by accelerated disposition. The transfer of these nonperforming loans and leases are in accordance with management's intention to focus appropriate resources on the accelerated disposition of these assets. Reserve for Credit Loss Activity - -------------------------------------------------------------------------------- Three months ended March 31 Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- Balance at beginning of year $1,552 $1,432 Loans charged off (186) (122) Recoveries of loans charged off 37 30 - -------------------------------------------------------------------------------- Net charge-offs (149) (92) Provision charged against income 149 92 Acquisitions/Other 172 121 - -------------------------------------------------------------------------------- Balance at end of period $1,724 $1,553 - -------------------------------------------------------------------------------- Ratios of net charge-offs to average loans .83% .60% - -------------------------------------------------------------------------------- Ratios of reserve for credit losses to period-end loans 2.34 2.39 - -------------------------------------------------------------------------------- Ratio of reserve for credit losses to period-end nonperforming loans 646 441 - -------------------------------------------------------------------------------- Fleet's reserve for credit losses increased from $1,552 million at December 31, 1998 to $1,724 million at March 31, 1999. The overall increase in the reserve for credit losses is a result of reserves acquired as part of the Sanwa acquisition. The provision for credit losses for the first quarter of 1999 was $149 million, $57 million higher than the prior year's first quarter. The increased provision is a result of increased net charge-offs in the commercial and industrial and credit card portfolios. Funding Sources - -------------------------------------------------------------------------------- March 31, Dec. 31, March 31, Dollars in millions 1999 1998 1998 - -------------------------------------------------------------------------------- Deposits: Demand $11,150 $13,400 $13,006 Regular savings and NOW 5,226 5,399 6,072 Money market 29,672 29,297 25,826 Time: Domestic 18,300 17,764 19,429 Foreign 3,285 3,818 3,832 - -------------------------------------------------------------------------------- Total deposits 67,633 69,678 68,165 - -------------------------------------------------------------------------------- Short-term borrowed funds: Federal funds purchased 644 1,857 1,456 Securities sold under agreements to repurchase 2,383 2,599 2,451 Commercial paper 901 943 834 Other 1,943 3,913 3,497 - -------------------------------------------------------------------------------- Total short-term borrowed funds 5,871 9,312 8,238 - -------------------------------------------------------------------------------- Due to brokers/dealers 3,823 3,975 4,433 Long-term debt 15,586 8,820 5,095 - -------------------------------------------------------------------------------- Total $92,913 $91,785 $85,931 - -------------------------------------------------------------------------------- Total deposits decreased $2.0 billion to $67.6 billion at March 31, 1999 when compared to December 31, 1998 due principally to a $2.3 billion decrease in demand deposits as a result of lower seasonal business deposits. The $3.4 billion decrease in short-term borrowings since December 31, 1998 is attributable to a $1.2 billion decrease in federal funds purchased, as well as a $1.7 billion decrease in treasury, tax and loan borrowings. Long-term debt increased $6.8 billion to $15.6 billion at March 31, 1999 when compared to December 31, 1998 due to the issuance of debt to fund acquisitions and balance sheet growth. 16 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity, and capital. Market Risk Market risk is the sensitivity of income to variations in interest rates, foreign exchange rates, equity prices, commodity prices, and other market-driven rates or prices. As discussed below, the corporation is exposed to market risk in both its non-trading and trading operations. Non-trading Market Risk Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-trading market risk to which the corporation is exposed. Interest-rate risk is the sensitivity of income to variations in interest rates. The major source of the corporation's non-trading interest-rate risk is the difference in the repricing characteristics of the corporation's core banking assets and liabilities - loans and deposits. This difference or mismatch is a risk to net interest income. The corporation's Board limits on interest-rate risk specify that if interest rates were to shift immediately up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 7.5%. The corporation was in compliance with this limit at March 31, 1999. The following table reflects the estimated exposure of the corporation's net interest income for the next 12 months, assuming an immediate shift in interest rates. Estimated Exposure to Rate Change Net Interest Income (Basis Points) (Dollars in Millions) - -------------------------------------------------------------------------------- March 31 1999 - -------------------------------------------------------------------------------- +200 $ 1 -200 (179) - -------------------------------------------------------------------------------- Net interest income sensitivity to changes in interest rates remained low. Asset-sensitivity declined, as expected, due to the acquisition of Sanwa on February 1, 1999, as well as the impact of additional fixed-rate swaps during the quarter. Revised expectations for deposit pricing, based on a reassessment by product managers of rate trends and competitor actions, increased measured exposure to extreme rate movements. Gap analysis provides a static view of the maturity and repricing characteristics of the on- and off-balance sheet positions. The interest-rate gap is prepared by scheduling all assets, liabilities and off-balance sheet positions according to scheduled or anticipated repricing or maturity. Interest-rate gap analysis can be viewed as a complement to simulation analysis. The corporation's Board limits on interest-rate risk specify that the cumulative one-year gap should be less than 10% of total assets. As of March 31, 1999, the estimated exposure was 1.8% asset-sensitive (see the following table). Interest-Rate Gap Analysis
- --------------------------------------------------------------------------------------------------------------------- Cumulatively Repriced Within March 31, 1999 3 months 4 to 12 12 to 24 2 to 5 After 5 Dollars in millions, by repricing date or less months months years years Total - --------------------------------------------------------------------------------------------------------------------- Total assets $ 61,192 $ 8,468 $ 6,552 $11,624 $18,330 $ 106,166 Total liabilities and stockholders' equity (49,492) (8,930) (5,417) (3,582) (38,745) (106,166) Net off-balance sheet (12,298) 2,936 3,991 3,580 1,791 -- - --------------------------------------------------------------------------------------------------------------------- Periodic gap (598) 2,474 5,126 11,622 (18,624) Cumulative gap (598) 1,876 7,002 18,624 -- - --------------------------------------------------------------------------------------------------------------------- Cumulative gap as a percent of total assets- March 31, 1999 (0.6)% 1.8% 6.6% 17.5% - --------------------------------------------------------------------------------------------------------------------- Cumulative gap as a percent of total assets- December 31, 1998 1.1 5.4 9.1 18.0 - ---------------------------------------------------------------------------------------------------------------------
17 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Risk-Management Instrument Analysis
- ------------------------------------------------------------------------------------------------------------------------------- Weighted Assets- Average Weighted Average Rate Notional Liabilities Maturity Fair --------------------- Dollars in millions Value Hedged (Years) Value Receive Pay - ------------------------------------------------------------------------------------------------------------------------------- Interest-rate risk-management instruments Interest-rate swaps: Receive-fixed/pay-variable $ 9,691 Variable-rate loans 356 Fixed-rate deposits 2,578 Long-term debt -------- 12,625 2.5 $ 49 6.22% 5.37% - ------------------------------------------------------------------------------------------------------------------------------- Basis swaps 4,393 Deposits .7 1 5.10 5.10 - ------------------------------------------------------------------------------------------------------------------------------- Total hedges of net interest income 17,018 2.0 50 5.93 5.30 - ------------------------------------------------------------------------------------------------------------------------------- Mortgage banking risk-management instruments Interest-rate swaps: Receive-fixed/pay-variable, PO swaps 9,806 Mortgage servicing rights 3.6 (11) 6.07 5.20 Futures contracts: Futures sold 530 Mortgage servicing rights .2 -- -- -- Options: Interest-rate floors and options on swaps 34,185 Mortgage servicing rights 4.3 218 --(a) --(a) Interest-rate caps and cap corridors 21,779 Mortgage servicing rights 3.7 167 --(a) --(a) Call options purchased 3,250 Mortgage servicing rights .1 27 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total options 59,214 3.9 412 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total hedges of mortgage servicing rights 69,550 3.8 401 6.07 5.20 - ------------------------------------------------------------------------------------------------------------------------------- Total risk-management instruments $86,568 3.4 $451 5.98% 5.27% - -------------------------------------------------------------------------------------------------------------------------------
(a) The mortgage-banking risk-management interest-rate floors and options on swaps, and interest-rate caps and cap corridors have weighted average strike rates of 5.06% and 6.53%, respectively. Off-balance sheet interest-rate instruments used to manage net interest income are designated as hedges of specific assets and liabilities. Accrual accounting is applied to these hedges, and the income or expense is recorded in the same category as that of the related balance sheet item. The periodic net settlement of the interest-rate risk-management instruments is recorded as an adjustment to net interest income. As of March 31, 1999, the corporation had net deferred income of $9.8 million relating to terminated interest-rate swap contracts, which will be amortized over the remaining life of the underlying terminated interest-rate contracts of approximately 5 years. During the first quarter of 1999, the corporation altered its interest-rate risk-management portfolio to limit an increase in asset-sensitivity resulting from balance sheet changes and swap runoff. In particular, $2.7 billion of receive-fixed swaps were added through new transactions, partially offset by maturities of $2.3 billion. A second major source of the corporation's non-trading interest-rate risk is the sensitivity of its mortgage servicing rights (MSRs) to prepayments. Since MSRs represent the right to service mortgage loans, a decline in interest rates and an actual, or probable, increase in mortgage prepayments shorten the expected life of the MSR asset and reduce its economic value. Correspondingly, an increase in interest rates and an actual, or probable, decline in mortgage prepayments lengthen the expected life of the MSR asset and enhance its economic value. The expected income from and, therefore, economic value of MSRs is sensitive to movements in interest rates due to this sensitivity to mortgage prepayments. The interest-rate instruments used to manage potential impairment of MSRs are designated as hedges of the MSRs. Changes in fair value of the hedges are recorded as adjustments to the carrying value of the MSRs and related hedges. During the first quarter of 1999, net hedge losses of $369 million were deferred and recorded as adjustments to the carrying value of the MSRs and related hedges. At March 31, 1999, the carrying value and fair value of the corporation's MSRs were $2.1 billion and $2.3 billion, respectively. In connection with the corporation's management of its MSR hedge program, the corporation terminated (in notional amounts) $5.7 billion of interest-rate floor and options on swaps agreements and $13.4 billion of call options and added $6.0 billion and $13.5 billion of interest-rate floor and options on swaps agreements and call options, respectively, during the first quarter of 1999. Additionally, the corporation added $2.1 billion of interest-rate cap corridors and $3.3 billion of interest-rate swap contracts in its management of the MSR hedge program. The corporation also performs valuation analysis which involves projecting future cash flows from the corporation's assets, liabilities and off-balance sheet positions over a very long-term horizon, discounting those cash flows at appropriate interest rates, and then summing the discounted cash flows. The corporation's "economic value of equity" (EVE) is the estimated net present value of the discounted cash flows. The corporation's Board limits on interest-rate risk specify that if interest rates were to shift immediately up or down 200 basis points, the estimated economic value of equity should decline by less than 10%. The 18 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS corporation was in compliance with this limit at March 31, 1999.The following table reflects the corporation's estimated exposure to economic value assuming an immediate shift in interest rates. Exposures are reported for shifts of +/- 100 basis points, as well as +/- 200 basis points because the sensitivity of EVE, in particular, the sensitivity of the hedged MSRs, to changes in interest rates can be nonlinear. The primary factors modifying the reported position in the first quarter of 1999 were additions to fixed-rate assets and swaps as well as more conservative assessments of exposures to MSRs. Given the assumption of an immediate interest rate movement with no management intervention, the corporation would be adversely impacted by extreme rate changes in either direction. Estimated Exposure to Rate Change Economic Value (Basis Points) (Dollars in millions) - -------------------------------------------------------------------------------- March 31 1999 - -------------------------------------------------------------------------------- +200 $(575) +100 (213) -100 (503) -200 (646) - -------------------------------------------------------------------------------- Trading Market Risk The corporation's trading portfolios are exposed to market risk due to variations in interest rates, currency exchange rates, equity prices, precious metals prices, and related market volatilities. This exposure arises in the normal course of the corporation's business as a financial intermediary. The corporation uses an "earnings at risk" (EAR) system, based on an industry-standard risk measurement methodology, to measure the overall market risk inherent in its trading activities. The average daily exposure to this market risk was $19.8 million, and the maximum daily exposure was $41.8 million during the first quarter of 1999. The increase in EAR from December 31, 1998 was due principally to volatility in the equity markets as well as the acquisition of MLSI. Liquidity Risk Liquidity risk-management's objective is to assure the ability of the corporation and its subsidiaries to meet their financial obligations. These obligations are the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. Liquidity is achieved by the maintenance of a strong base of core customer funds, maturing short-term assets, the ability to sell marketable securities, committed lines of credit and access to capital markets. Liquidity may also be enhanced through the securitization of consumer asset receivables. Liquidity at Fleet is measured and monitored daily, allowing management to better understand and react to balance sheet trends. The Asset-Liability Management Committee (ALCO) is responsible for implementing the Board's policies and guidelines governing liquidity. Liquidity at the bank level is managed through the monitoring of anticipated changes in loans, core deposits, and wholesale funds. Diversification of liquidity sources by maturity, market, product, and counterparty are mandated through ALCO guidelines. The corporation's banking subsidiaries routinely model liquidity under three economic scenarios, two of which involve increasing levels of economic difficulty and financial market strain. Management also maintains a detailed contingency liquidity plan designed to respond either to an overall decline in the condition of the banking industry or a problem specific to Fleet. The strength of Fleet's liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources in the capital markets, as well as from direct customer contacts. Wholesale funding sources include large certificates of deposit, foreign branch deposits, federal funds, collateralized borrowings, and a bank-note program. The primary sources of liquidity for the parent company are interest and dividends from subsidiaries, committed lines of credit and access to the money and capital markets. Dividends from banking subsidiaries are limited by various regulatory requirements related to capital adequacy and earning trends. The corporation's subsidiaries rely on cash flows from operations, core deposits, borrowings, short-term high-quality liquid assets, and, in the case of nonbanking subsidiaries, funds from the parent company. At March 31, 1999 and December 31, 1998, the corporation had commercial paper outstanding of $901 million and $943 million, respectively. The corporation has a backup line of credit to ensure that funding is not interrupted if commercial paper is not available. The total amount of funds available under this agreement was $1 billion at March 31, 1999, with no outstanding balance under this line of credit. Fleet has a shelf registration statement that provides for the issuance of common and preferred stock, senior or subordinated debt securities, and other securities with total amounts of funds available of approximately $1.5 billion at March 31, 1999. As shown in the consolidated statements of cash flows, cash and cash equivalents decreased by $876 million during the first quarter of 1999. The decrease was due to cash used in investing activities of $164 million and cash used in financing activities of $3.9 19 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS billion, offset by cash provided by operating activities of $3.2 billion. Net cash used in investing activities was attributable to net purchases of securities, purchases of mortgage servicing rights and net cash and cash equivalents paid for businesses acquired, partially offset by a net decrease in loans. Net cash used in financing activities was principally due to a net decrease in deposits and short-term borrowings, partially offset by proceeds from the issuance of long-term debt. Net cash provided by operating activities was primarily the result of a net decrease in mortgages held for resale and a decrease in due from brokers/dealers. CAPITAL - -------------------------------------------------------------------------------- March 31, Dec. 31, March 31, Dollars in millions 1999 1998 1998 - -------------------------------------------------------------------------------- Risk-adjusted assets $111,059 $104,372 $100,087 Tier 1 risk-based capital (4% minimum) 6.60% 7.08% 6.39% Total risk-based capital (8% minimum) 10.90 11.22 10.37 Leverage ratio (4% minimum) 7.07 7.48 7.19 Common equity-to-assets 8.40 8.35 8.12 Total equity-to-assets 9.05 9.01 8.82 Tangible common equity- to-assets 5.35 5.53 5.39 Tangible total equity-to-assets 6.02 6.21 6.12 - -------------------------------------------------------------------------------- At March 31, 1999, the corporation exceeded all regulatory required minimum capital ratios as Fleet's Tier 1 and Total risk-based capital ratios were 6.60 percent and 10.90 percent, respectively, compared with 7.08 percent and 11.22 percent, respectively, at December 31, 1998. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 7.07 percent at March 31, 1999 compared with 7.48 percent at December 31, 1998. The reduction in capital ratios was a result of the Sanwa acquisition. Capital ratios are expected to increase during the second quarter. CAUTIONARY STATEMENT This Quarterly Report on Form 10-Q contains statements relating to future results of the corporation (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to changes in political and economic conditions, either nationally or in the states in which the corporation conducts its business; interest rate fluctuations; competitive product and pricing pressures within the corporation's market; equity and bond market fluctuations; personal and corporate customers' bankruptcies; inflation; lower than expected savings associated with acquisitions and integrations of acquired businesses; risks relating to Year 2000 issues (particularly with respect to compliance by third parties on which the corporation relies); adverse legislation or regulatory changes affecting the businesses in which Fleet is engaged; as well as other risks and uncertainties detailed from time to time in the filings of the corporation with the Securities and Exchange Commission. RECENT ACCOUNTING DEVELOPMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes comprehensive accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The standard requires that all derivative instruments be recorded in the balance sheet at fair value. However, the accounting for changes in fair value of the derivative instrument depends on whether the derivative instrument qualifies as a hedge. If the derivative instrument does not qualify as a hedge, changes in fair value are reported in earnings when they occur. If the derivative instrument qualifies as a hedge, the accounting treatment varies based on the type of risk being hedged. The adoption of this standard may cause volatility in both the income statement as well as the equity section of the balance sheet. This standard is effective as of January 1, 2000. The impact of this Statement is not estimable and will be dependent upon the fair value, nature and purpose of the derivative instruments held by the corporation as of January 1, 2000. 20 PART II. OTHER INFORMATION PART II. ITEM 2. CHANGES IN SECURITIES On January 26, 1999, the corporation sold 8,750,000 shares of common stock at $44.00 per share in a private placement to NationsBank, N.A. These shares had been held in treasury as part of the corporation's share repurchase program. This transaction was part of the corporation's ongoing capital and risk-management activities. Exemption from registration was claimed pursuant to Section 4(2) of the Securities Act of 1933. PART II. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The corporation held its Annual Meeting of Stockholders on April 21, 1999. (b) Not applicable. (c) A brief description of each matter voted upon at the meeting, and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to each such matter, follows. A separate tabulation with respect to each nominee for office is also included. Three matters were voted on at the Annual Meeting. 1. Election of Directors All seven nominees for election as directors were elected. There were no abstentions nor broker non-votes for any of the nominees. Name of Director For Against Term Expiration - ---------------- --- ------- --------------- Paul J. Choquette, Jr. 478,373,930 3,939,746 2002 Robert M. Kavner 478,313,536 4,000,140 2002 Thomas D. O'Connor, Sr. 478,404,820 3,908,856 2002 Michael B. Picotte 478,495,625 3,818,051 2002 Thomas C. Quick 478,429,755 3,883,921 2002 Thomas M. Ryan 478,417,289 3,896,387 2002 Paul R. Tregurtha 478,403,407 3,910,269 2002 The following directors will continue in office and were not up for re-election. William Barnet, III 2000 John T. Collins 2000 Marian L. Heard 2000 Robert J. Matura 2000 Terrence Murray 2000 Samuel O. Thier 2000 Joel B. Alvord 2001 Bradford R. Boss 2001 Stillman B. Brown 2001 Kim B. Clark 2001 James F. Hardymon 2001 Arthur C. Milot 2001 Lois D. Rice 2001 2. Approval of Amended and Restated 1992 Stock Option and Restricted Stock Plan The second proposal voted on by stockholders of the corporation was to approve the Amended and Restated 1992 Stock Option and Restricted Stock Plan. This proposal was approved with 436,833,038 votes cast for, 41,815,547 votes cast against, and 3,665,091 abstentions. There were no broker non-votes. 21 3. Ratification of Selection of Independent Auditors The third proposal voted on by stockholders of the corporation, to approve the appointment of KPMG Peat Marwick LLP to serve as independent auditors of the corporation for the current fiscal year ended December 31, 1999, was approved with 479,378,377 votes cast for, 1,221,137 votes cast against, and 1,714,162 abstentions. There were no broker non-votes. (d) Not applicable. PART II. ITEM 6. (a) Exhibit Index Exhibit Number - ------ 4* Instruments defining the rights of security holders, including Debentures 11 Statement re: computation of per share earnings 12 Statement re: computation of ratios 27 Financial data schedule * Registrant has no instruments defining the rights of holders of equity or debt securities where the amount of securities authorized thereunder exceeds 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. (b) Four Form 8-K's were filed during the period from January 1, 1999 to the date of the filing of this report. - Current Report on Form 8-K dated January 20, 1999 announcing fourth quarter earnings and fiscal 1998 earnings. - Current Report on Form 8-K dated March 14, 1999 announcing that Fleet and BankBoston Corporation have entered into an Agreement and Plan of Merger. The Merger Agreement provides for the merger of BankBoston with and into Fleet. - Current Report on Form 8-K dated April 2, 1999 filing the unaudited pro forma condensed combined financial statements and notes thereto in connection with the proposed merger with BankBoston Corporation. - Current Report on Form 8-K dated April 14, 1999 announcing first quarter earnings. 22 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fleet Financial Group, Inc. ------------------------------ (Registrant) /s/ Eugene M. McQuade ------------------------------ Eugene M. McQuade Vice Chairman Chief Financial Officer /s/ Robert C. Lamb, Jr. ------------------------------ Robert C. Lamb, Jr. Controller Chief Accounting Officer DATE: May 14, 1999 23 EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 FLEET FINANCIAL GROUP, INC. COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS ($ in millions, except per share data)
For the Three Months ended March 31, ----------------------------------------------------------------------------------- 1999 1998 ------------------------------------- ------------------------------------ BASIC DILUTED BASIC DILUTED --------------- --------------- --------------- --------------- Equivalent shares: Average shares outstanding 568,546,007 568,546,007 567,778,128 567,778,128 Additional shares due to: Stock options -- 7,363,008 -- 7,245,164 Warrants -- 12,663,411 -- 12,160,270 --------------- --------------- --------------- --------------- Total equivalent shares 568,546,007 588,572,426 567,778,128 587,183,562 =============== =============== =============== =============== Earnings per share Net income $438 $438 $323 $323 Less: Preferred stock dividends and other (16) (16) (12) (12) --------------- --------------- --------------- --------------- Adjusted net income $422 $422 $311 $311 =============== =============== =============== =============== Total equivalent shares 568,546,007 588,572,426 567,778,128 587,183,562 =============== =============== =============== =============== Earnings per share on net income $.74 $.72 $ .55 $ .53 =============== =============== =============== ===============
24 EX-12 3 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 FLEET FINANCIAL GROUP, INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS EXCLUDING INTEREST ON DEPOSITS (dollars in millions)
Three Months ended March 31, Year ended December 31, - --------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074 (2) 1/3 of rent 14 54 53 55 52 53 (b) Preferred dividends 21 83 104 117 62 51 ------ ------ ------ ------ ------ ------ (c) Adjusted earnings $1,074 $3,705 $3,188 $3,055 $2,683 $2,638 ====== ====== ====== ====== ====== ====== Fixed charges and preferred dividends $ 355 $1,198 $ 894 $ 985 $1,527 $1,178 ====== ====== ====== ====== ====== ====== Adjusted earnings/fixed charges 3.02x 3.09x 3.57x 3.10x 1.76x 2.24x ====== ====== ====== ====== ====== ======
INCLUDING INTEREST ON DEPOSITS (dollars in millions)
Three Months ended March 31, Year ended December 31, - --------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074 (2) 1/3 of rent 14 54 53 55 52 53 (3) Interest on deposits 424 1,835 1,654 1,754 1,726 1,170 (b) Preferred dividends 21 83 104 117 62 51 ------ ------ ------ ------ ------ ------ (c) Adjusted earnings $1,498 $5,540 $4,842 $4,809 $4,409 $3,808 ====== ====== ====== ====== ====== ====== Fixed charges and preferred dividends $ 779 $3,033 $2,548 $2,739 $3,253 $2,348 ====== ====== ====== ====== ====== ====== Adjusted earnings/fixed charges 1.92x 1.83x 1.90x 1.76x 1.36x 1.62x ====== ====== ====== ====== ====== ======
25 EXHIBIT 12 (continued) FLEET FINANCIAL GROUP, INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS (dollars in millions)
Three Months ended March 31, Year ended December 31, - --------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074 (2) 1/3 of rent 14 54 53 55 52 53 ------ ------ ------ ------ ------ ------ (b) Adjusted earnings $1,053 $3,622 $3,084 $2,938 $2,621 $2,587 ====== ====== ====== ====== ====== ====== Fixed charges $ 334 $1,115 $ 790 $ 868 $1,465 $1,127 ====== ====== ====== ====== ====== ====== Adjusted earnings/fixed charges 3.15x 3.25x 3.90x 3.38x 1.79x 2.30x ====== ====== ====== ====== ====== ======
INCLUDING INTEREST ON DEPOSITS (dollars in millions)
Three Months ended March 31, Year ended December 31, - --------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 719 $2,507 $2,294 $2,070 $1,156 $1,460 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 320 1,061 737 813 1,413 1,074 (2) 1/3 of rent 14 54 53 55 52 53 (3) Interest on deposits 424 1,835 1,654 1,754 1,726 1,170 ------ ------ ------ ------ ------ ------ (b) Adjusted earnings $1,477 $5,457 $4,738 $4,692 $4,347 $3,757 ====== ====== ====== ====== ====== ====== Fixed charges $ 758 $2,950 $2,444 $2,622 $3,191 $2,297 ====== ====== ====== ====== ====== ====== Adjusted earnings/fixed charges 1.95x 1.85x 1.94x 1.79x 1.36x 1.64x ====== ====== ====== ====== ====== ======
26 EX-27 4 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the March 31, 1999 consolidated financial statements and management's discussion and analysis of financial condition and results of operations contained in the Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1999 MAR-31-1999 4,253 604 5 486 9,884 1,084 1,088 73,683 1,724 106,166 67,633 9,694 3,641 15,586 0 691 3,297 5,624 106,166 1,559 173 46 1,778 424 744 1,034 149 0 1,125 719 438 0 0 438 .74 .72 4.59 267 252 1 0 1,552 186 37 1,724 1,724 0 155
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