-----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, E+hZJ+LS0uqsFpxnpnmH5AGduTMsIS2O4scUq+IC/z0PC2abPaxek0Qk0BKj19Qh 0/elA7T6D4y3LeIIG0ITuw== 0001047469-98-040816.txt : 19981116 0001047469-98-040816.hdr.sgml : 19981116 ACCESSION NUMBER: 0001047469-98-040816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98748901 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 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 SEPTEMBER 30, 1998 [ ] 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 October 31, 1998 was 568,336,222. ================================================================================ FLEET FINANCIAL GROUP, INC. FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE PART I. ITEM 1. FINANCIAL INFORMATION Consolidated Statements of Income Three Months Ended September 30, 1998 and 1997 3 Nine Months Ended September 30, 1998 and 1997 4 Consolidated Balance Sheets September 30, 1998 and December 31, 1997 5 Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 30, 1998 and 1997 6 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997 7 Condensed Notes to Consolidated Financial Statements 8 PART I. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION 22 SIGNATURES 23 EXHIBITS 24 2 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
- ------------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30 DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 1997 - ------------------------------------------------------------------------------------------------------ Interest and fees on loans $ 1,514 $ 1,356 Interest on securities 164 143 Other 51 41 - ------------------------------------------------------------------------------------------------------ Total interest income 1,729 1,540 - ------------------------------------------------------------------------------------------------------ Interest expense: Deposits 471 410 Short-term borrowings 115 72 Long-term debt 118 83 Other 55 41 - ------------------------------------------------------------------------------------------------------ Total interest expense 759 606 - ------------------------------------------------------------------------------------------------------ Net interest income 970 934 - ------------------------------------------------------------------------------------------------------ Provision for credit losses 120 85 - ------------------------------------------------------------------------------------------------------ Net interest income after provision for credit losses 850 849 - ------------------------------------------------------------------------------------------------------ Noninterest income: Investment services revenue 210 178 Banking fees and commissions 197 180 Processing-related revenue 129 101 Capital markets revenue 124 103 Credit card revenue 117 16 Other 66 41 - ------------------------------------------------------------------------------------------------------ Total noninterest income 843 619 - ------------------------------------------------------------------------------------------------------ Noninterest expense: Employee compensation and benefits 489 428 Equipment 77 81 Occupancy 75 74 Intangible asset amortization 58 43 Legal and other professional 41 22 Other 302 225 - ------------------------------------------------------------------------------------------------------ Total noninterest expense 1,042 873 - ------------------------------------------------------------------------------------------------------ Income before income taxes 651 595 Applicable income taxes 250 243 - ------------------------------------------------------------------------------------------------------ Net income $ 401 $ 352 - ------------------------------------------------------------------------------------------------------ Net income applicable to common shares $ 388 $ 336 Diluted weighted average common shares outstanding 587,088,038 562,058,062 Basic earnings per share $ .68 $ .62 Diluted earnings per share .66 .60 Dividends declared .245 .225 - ------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
- ------------------------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30 DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 1997 - ------------------------------------------------------------------------------------------------------ Interest and fees on loans $ 4,372 $ 3,993 Interest on securities 506 421 Other 161 123 - ------------------------------------------------------------------------------------------------------ Total interest income 5,039 4,537 - ------------------------------------------------------------------------------------------------------ Interest expense: Deposits 1,383 1,233 Short-term borrowings 305 172 Long-term debt 311 257 Other 169 108 - ------------------------------------------------------------------------------------------------------ Total interest expense 2,168 1,770 - ------------------------------------------------------------------------------------------------------ Net interest income 2,871 2,767 - ------------------------------------------------------------------------------------------------------ Provision for credit losses 330 233 - ------------------------------------------------------------------------------------------------------ Net interest income after provision for credit losses 2,541 2,534 - ------------------------------------------------------------------------------------------------------ Noninterest income: Investment services revenue 631 513 Banking fees and commissions 556 532 Capital markets revenue 369 239 Processing-related revenue 315 372 Credit card revenue 271 45 Other 206 306 - ------------------------------------------------------------------------------------------------------ Total noninterest income 2,348 2,007 - ------------------------------------------------------------------------------------------------------ Noninterest expense: Employee compensation and benefits 1,415 1,330 Equipment 231 236 Occupancy 224 220 Intangible asset amortization 167 125 Legal and other professional 107 87 Merger-related charges 73 --- Other 840 804 - ------------------------------------------------------------------------------------------------------ Total noninterest expense 3,057 2,802 - ------------------------------------------------------------------------------------------------------ Income before income taxes 1,832 1,739 Applicable income taxes 715 706 - ------------------------------------------------------------------------------------------------------ Net income $ 1,117 $ 1,033 - ------------------------------------------------------------------------------------------------------ Net income applicable to common shares $ 1,079 $ 984 Diluted weighted average common shares outstanding 587,600,638 568,744,580 Basic earnings per share $ 1.90 $ 1.78 Diluted earnings per share 1.84 1.73 Dividends declared .735 .675 - ------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 FLEET FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (unaudited)
- -------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash, due from banks and interest-bearing deposits $ 4,606 $ 5,076 Federal funds sold and securities purchased under agreements to resell 153 498 Securities (market value: $10,232 and $9,367) 10,227 9,362 Loans 68,205 62,565 Reserve for credit losses (1,552) (1,432) - -------------------------------------------------------------------------------------------------------------------------- Net loans 66,653 61,133 - -------------------------------------------------------------------------------------------------------------------------- Due from brokers/dealers 3,248 3,510 Mortgages held for resale 2,638 1,526 Premises and equipment 1,223 1,205 Mortgage servicing rights 1,159 1,768 Intangible assets 2,927 2,196 Other assets 6,645 4,773 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 99,479 $ 91,047 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Demand $ 12,187 $ 13,148 Regular savings, NOW, money market 32,721 30,485 Time 21,047 20,102 - -------------------------------------------------------------------------------------------------------------------------- Total deposits 65,955 63,735 - -------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 3,595 3,635 Other short-term borrowings 5,840 3,870 Due to brokers/dealers 4,307 4,316 Long-term debt 7,368 4,500 Accrued expenses and other liabilities 3,239 2,539 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 90,304 82,595 - -------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 691 691 Common stock (571,169,430 shares issued in 1998 and 571,204,564 shares issued in 1997) 6 3 Common surplus 3,292 3,329 Retained earnings 5,102 4,437 Accumulated other comprehensive income 180 97 Treasury stock, at cost (3,649,012 shares in 1998 and 3,878,928 shares in 1997) (96) (105) - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 9,175 8,452 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 99,479 $ 91,047 - --------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
- --------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMMON COMPRE- STOCK AT HENSIVE NINE MONTHS ENDED SEPTEMBER 30 PREFERRED $.01 COMMON RETAINED INCOME TREASURY DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS STOCK PAR SURPLUS EARNINGS (LOSS) STOCK TOTAL - --------------------------------------------------------------------------------------------------------------------------------- 1997 Balance at December 31, 1996 $ 953 $ 3 $3,223 $3,640 $ 31 $ (60) $7,790 Net income 1,033 1,033 Other comprehensive income, net of tax: Adjustment to unrealized gain on securities available for sale 40 40 ------ Comprehensive income 1,073 Cash dividends declared on common stock ($.675 per share) (343) (343) Cash dividends declared on preferred stock (49) (49) Cash dividends declared by pooled company prior to (5) (5) merger Redemption of preferred stock (34) (34) Common stock issued in connection with: Employee benefit and stock option plans (31) 1 95 65 Acquisition of Nash Weiss & Co. 16 16 Adjustment to retained earnings reflecting pooled entity different year end (23) (23) Treasury stock purchased (788) (788) Exchange of Series V preferred stock for trust preferred securities (84) (84) Other, net (2) (2) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1997 $ 835 $ 3 $3,206 $4,254 $ 71 $ (753) $7,616 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 Balance at December 31, 1997 $ 691 $ 3 $3,329 $4,437 $ 97 $ (105) $8,452 Net income 1,117 1,117 Other comprehensive income, net of tax: Adjustment to unrealized gain on securities available for sale 83 83 ------ Comprehensive income 1,200 Cash dividends declared on common stock ($.735 per share) (414) (414) Cash dividends declared on preferred stock (38) (38) Common stock issued in connection with employee benefit and stock option plans (32) 60 28 Treasury stock purchased (51) (51) Two-for-one common stock split 3 (3) ------ Other, net (2) (2) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1998 $ 691 $ 6 $3,292 $5,102 $180 $ (96) $9,175 - -----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 FLEET FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- ------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30 DOLLARS IN MILLIONS 1998 1997 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,117 $ 1,033 Adjustments for noncash items: Depreciation and amortization of premises and equipment 184 158 Amortization and impairment of mortgage servicing rights 347 179 Amortization of other intangible assets 167 120 Provision for credit losses 330 233 Deferred income tax expense 185 225 Securities gains (71) (22) Merger and restructuring-related charges 73 --- Net gains on sales of business units --- (175) Originations and purchases of mortgages held for resale (20,964) (11,406) Proceeds from sales of mortgages held for resale 19,852 11,134 Decrease/(increase)in due from brokers/dealers 262 (153) Increase in accrued receivables, net (218) (59) (Decrease)/increase in due to brokers/dealers (9) 335 Increase in accrued liabilities, net 297 228 Other, net (1,107) (641) - ------------------------------------------------------------------------------------------------------------ Net cash flow provided by operating activities 445 1,189 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale (3,963) (2,140) Proceeds from maturities of securities available for sale 763 660 Proceeds from sales of securities available for sale 2,436 1,618 Purchases of securities held to maturity (1,024) (1,240) Proceeds from maturities of securities held to maturity 1,171 1,123 Net cash and cash equivalents received from businesses acquired 380 --- Purchase of loan portfolio (570) --- Net increase in loans (3,384) (2,991) Net cash received from sale of business units --- 2,719 Purchases of premises and equipment (137) (115) Purchases of mortgage servicing rights (319) (204) - ------------------------------------------------------------------------------------------------------------ Net cash flow used in investing activities (4,647) (570) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in deposits (366) (4,164) Net increase in short-term borrowings 1,339 2,897 Proceeds from issuance of long-term debt 3,486 189 Repayments of long-term debt (618) (844) Proceeds from the issuance of common stock 28 64 Repurchase and redemption of common and preferred stock (51) (822) Cash dividends paid (431) (394) - ------------------------------------------------------------------------------------------------------------ Net cash flow provided by/(used in) financing activities 3,387 (3,074) - ------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (815) (2,455) - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of the period 5,574 9,104 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of the period $ 4,759 $ 6,649 - ------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 FLEET FINANCIAL GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 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, 1997. On February 1, 1998, the corporation acquired The Quick & Reilly Group, Inc. (Quick & Reilly). Since the Quick & Reilly acquisition was accounted for under the pooling-of-interests method of accounting, all prior periods have been restated to include Quick & Reilly financial information. The corporation's December 31, 1997 Annual Report has been restated for the Quick & Reilly acquisition and has been filed on Form 8-K with the SEC. All quarterly and year-to-date per common share amounts and associated ratios were adjusted to reflect the corporation's two-for-one common stock split which was effective October 7, 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 nine months ended September 30, 1998 may not be indicative of operating results for the year ending December 31, 1998. NOTE 2. ACQUISITIONS AND MERGER-RELATED CHARGES During the fourth quarter of 1997, the corporation entered into a definitive agreement to acquire the consumer credit card operations of Advanta Corporation (Advanta). This acquisition closed on February 20, 1998 under the purchase method of accounting and, as such, the results of Advanta are included for the period subsequent to the acquisition date. Goodwill of approximately $500 million was recorded in connection with this transaction and is being amortized on a straight-line basis over 15 years. Additionally, purchased credit card intangible of approximately $150 million was recorded. Subject to the level of earnings at Advanta, Fleet may be required to make additional earnout payments up to $100 million over five years, which will be recorded as goodwill. During the first quarter of 1998, the corporation recorded $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 pertain primarily to exit costs, severance costs and professional fees. NOTE 3. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS CASH-FLOW DISCLOSURE - --------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 DOLLARS IN MILLIONS 1998 1997 - --------------------------------------------------------------- Supplemental disclosure for cash paid during the period for: Interest expense $2,143 $1,860 Income taxes, net of refunds 386 223 - --------------------------------------------------------------- - --------------------------------------------------------------- Supplemental disclosure of noncash investing and financing activities: Transfer of loans to foreclosed property and repossessed equipment 9 23 Exchange of Series V preferred stock for trust preferred securities --- 84 Adjustment to unrealized gain on securities available for sale 83 40 - --------------------------------------------------------------- - --------------------------------------------------------------- Assets acquired and liabilities assumed in business combinations were as follows: Assets acquired, net of cash and cash equivalents received 2,845 --- Net cash and cash equivalents received 380 --- Liabilities assumed 3,225 --- - --------------------------------------------------------------- Divestitures: Assets sold --- 2,552 Net cash received for divestitures --- 2,719 Liabilities sold --- 24 =============================================================== 8 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL SUMMARY - ------------------------------------------------------------------ THREE MONTHS NINE MONTHS DOLLARS IN MILLIONS, ENDED SEPT. 30 ENDED SEPT. 30 EXCEPT PER SHARE DATA 1998 1997 1998 1997 - ------------------------------------------------------------------ EARNINGS Net income $ 401 $ 352 $1,117 $1,033 Net interest income (FTE)(a) 979 944 2,898 2,795 - ------------------------------------------------------------------ PER COMMON SHARE Basic earnings .68 .62 1.90 1.78 Diluted earnings .66 .60 1.84 1.73 Cash dividends declared .245 .225 .735 .675 Book value 14.95 12.46 14.95 12.46 - ------------------------------------------------------------------ OPERATING RATIOS Return on average assets 1.60% 1.62% 1.60% 1.60% Return on common equity 18.56 19.99 18.60 19.77 Efficiency ratio 56.7 55.9 56.7 57.2 Equity to assets (period end) 9.22 8.64 9.22 8.64 - ------------------------------------------------------------------ AT SEPTEMBER 30 Total assets $99,479 $88,105 $99,479 $88,105 Stockholders' equity 9,175 7,616 9,175 7,616 Nonperforming assets(b) 289 479 289 479 - ------------------------------------------------------------------ (a) THE FTE ADJUSTMENT INCLUDED IN NET INTEREST INCOME WAS $9 MILLION AND $10 MILLION FOR THE THREE MONTHS ENDED AND $27 MILLION AND $28 MILLION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, RESPECTIVELY. (b) NONPERFORMING ASSETS AND RELATED RATIOS AT SEPTEMBER 30, 1998 AND 1997 DO NOT INCLUDE $126 MILLION AND $172 MILLION, RESPECTIVELY, OF NONPERFORMING ASSETS CLASSIFIED AS HELD FOR SALE OR ACCELERATED DISPOSITION. Fleet reported net income of $401 million, or $.66 per diluted share, for the quarter ended September 30, 1998, compared to $352 million, or $.60 per diluted share, in the third quarter of 1997. Return on average assets (ROA) and return on common equity (ROE) were 1.60% and 18.56%, respectively, for the third quarter of 1998, compared to 1.62% and 19.99%, respectively, for the third quarter of 1997. Net income for the first nine months of 1998 was $1,117 million, including 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. Diluted earnings per share rose 6.4% to $1.84 for the first nine months of 1998 compared with $1.73 earned in the first nine months of 1997. ROA and ROE for the first nine months of 1998 were 1.60% and 18.60%, respectively, compared with 1.60% and 19.77%, respectively, for 1997. INCOME STATEMENT ANALYSIS NET INTEREST INCOME - ---------------------------------------------------------------------- THREE MONTHS NINE MONTHS FTE BASIS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ---------------------------------------------------------------------- Interest income $1,729 $1,540 $5,039 $4,537 Tax-equivalent adjustment 9 10 27 28 Interest expense 759 606 2,168 1,770 - ---------------------------------------------------------------------- Net interest income $ 979 $ 944 $2,898 $2,795 ====================================================================== Net interest income on a fully taxable equivalent basis (FTE) totaled $979 million for the quarter ended September 30, 1998, compared to $944 million for the same period in 1997. The increase is primarily attributable to the acquisition of Advanta, strong growth in Fleet's earning assets and increased loan fees. NET INTEREST MARGIN AND INTEREST-RATE SPREAD - --------------------------------------------------------------------- THREE MONTHS ENDED SEPT. 30 1998 1997 FTE BASIS AVERAGE AVERAGE DOLLARS IN MILLIONS BALANCE RATE BALANCE RATE - --------------------------------------------------------------------- Securities $10,010 6.62% $ 8,690 6.78% Loans 67,908 8.58 59,317 8.70 Due from brokers/dealers 3,380 5.25 2,772 5.34 Mortgages held for resale 3,064 7.08 1,222 7.47 Other 1,076 4.59 2,618 6.60 - --------------------------------------------------------------------- Total interest-earning assets 85,438 8.11 74,619 8.26 - --------------------------------------------------------------------- Deposits 50,967 3.67 47,020 3.46 Short-term borrowings 9,051 5.04 5,877 4.83 Due to brokers/dealers 4,350 5.00 3,415 4.80 Long-term debt 6,575 7.19 4,487 7.42 - --------------------------------------------------------------------- Interest-bearing 70,943 4.25 60,799 3.96 liabilities - --------------------------------------------------------------------- Interest-rate spread 3.86 4.30 Interest-free sources of funds 14,495 13,820 - --------------------------------------------------------------------- Total sources of funds $85,438 $74,619 - --------------------------------------------------------------------- Net interest margin 4.58% 5.03% ===================================================================== The corporation's net interest margin for the third quarter of 1998 was 4.58%, a decrease of 45 basis points from the third quarter of 1997. The decrease in net interest margin is primarily attributable to higher-cost sources of funds, principally wholesale time deposits and short-term borrowings, funding the corporation's growth in core commercial loans and the credit card loans obtained as part of the Advanta acquisition, coupled with substantial increases in lower rate spread activity at the corporation's brokerage subsidiary, Quick & Reilly. Average securities increased $1.3 billion from the third quarter of 1997, due to Fleet's efforts to reposition the corporation's interest-rate sensitivity. The yield on securities declined slightly as a result of a low interest-rate environment. Average loans increased $8.6 billion to $67.9 billion for the third quarter of 1998, when compared with the third quarter of 1997. This growth resulted primarily from the acquisition of Advanta, which incrementally added approximately $2.2 billion of average credit card loans at acquisition date, as well as increases in the commercial, corporate finance, and lease financing portfolios. 9 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average due from brokers/dealers and due to brokers/dealers increased $608 million and $935 million, respectively, as a result of increased match book activity and funding of customers' margin accounts at Quick & Reilly. Average mortgages held for resale increased $1.8 billion, or over 150%, while the yield has declined by 39 basis points over the third quarter of 1997, due to increased loan production at Fleet Mortgage as a result of a low mortgage-rate environment. The $3.9 billion increase in average interest-bearing deposits compared to the third quarter of 1997 is due primarily to $2.0 billion of time and savings deposits from the acquisition of Advanta. The net interest rate paid on average deposits increased 21 basis points to 3.67% for the third quarter of 1998 compared to the same period of 1997. The increase in the cost of deposits reflects a shift in the mix of deposits, partially attributable to an influx of wholesale time deposits as a result of the Advanta acquisition, as well as the corporation paying competitive rates on higher-yielding money market deposits. The $3.2 billion increase in average short-term borrowings is attributable to an increase in both federal funds purchased and treasury, tax and loan borrowings as the corporation utilized these favorably priced funding vehicles to fund asset growth. The $2.1 billion increase in average long-term debt was due principally to net increases of $1.8 billion in senior and subordinated debt, and the issuance of $270 million in trust preferred securities in order to take advantage of the low interest-rate environment and to strengthen the corporation's regulatory capital ratios. The 23 basis point decrease in the long-term debt rate was due to additional debt issued at lower rates. NONINTEREST INCOME - ------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------- Investment services revenue $210 $178 $ 631 $ 513 Banking fees and commissions 197 180 556 532 Processing-related revenue 129 101 315 372 Capital markets revenue 124 103 369 239 Credit card revenue 117 16 271 45 Other noninterest income 66 41 206 306 - ------------------------------------------------------------- Total noninterest income $843 $619 $2,348 $2,007 ============================================================ Noninterest income for the third quarter of 1998 increased $224 million to $843 million compared to $619 million for the same period of 1997, an increase of 36%. Increases were noted in all core revenue categories. These increases primarily reflect the acquisition of the consumer credit card operations of Advanta and enhanced revenue growth in the investment management business, which has been positively impacted by the acquisition of Columbia Management Company (Columbia) in late 1997. INVESTMENT SERVICES REVENUE - ------------------------------------------------------------------------ THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------------------ Investment management revenue $ 129 $ 99 $ 390 $ 295 Brokerage fees and commissions 81 79 241 218 - ------------------------------------------------------------------------ Total investment services revenue $ 210 $ 178 $ 631 $ 513 ======================================================================== Investment services revenue, which includes asset management revenues as well as brokerage fees and commissions, increased $32 million, or 18%, over the third quarter of 1997. Brokerage fees and commissions increased $2 million, or 2.5%, over the third quarter of 1997 due to increased customer trading. The major components of investment management revenue excluding brokerage revenue are as follows: - ------------------------------------------------------------------------ THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------------------ Private clients group $ 52 $ 52 $160 $149 Columbia Management Company 25 --- 75 --- Retail investments 19 16 56 47 Retirement plan services 16 16 50 47 Not-for-profit institutional services 12 12 37 35 Other 5 3 12 17 - ------------------------------------------------------------------------ Total $129 $ 99 $390 $295 - ------------------------------------------------------------------------ Investment management revenue increased 30% to $129 million compared to $99 million in the third quarter of 1997. This improvement was largely due to the acquisition of Columbia in December 1997, as well as growth in overall assets under management. Assets under management have grown 34%, including the acquisition of Columbia, to $74 billion at September 30, 1998 from $55 billion at September 30, 1997. This increase reflects the corporation's continued focus on developing, acquiring and growing fee-based businesses. PROCESSING-RELATED REVENUE - ------------------------------------------------------------------------ THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------------------ Mortgage banking revenue, net $ 76 $ 66 $172 $260 Student loan servicing fees 31 24 89 76 Other 22 11 54 36 - ------------------------------------------------------------------------ Total processing-related revenue $129 $101 $315 $372 - ------------------------------------------------------------------------ Processing-related revenue increased $28 million when compared to the third quarter of 1997 due primarily to increases in mortgage banking and servicing by the student loan and health care units. Student loan servicing fees increased $7 million, or 29%, at AFSA Data Corporation (AFSA), the corporation's student loan 10 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS servicing subsidiary. AFSA services 6.1 million accounts nationwide and is the largest third-party student loan servicer in the United States, with over $44.5 billion in loans serviced. Other processing-related revenue increased $11 million as a result of a recently acquired health care processing company. MORTGAGE BANKING REVENUE, NET - ------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------------------- Net loan servicing revenue $110 $112 $340 $337 Mortgage production revenue 60 18 145 92 Gains on sales of mortgage servicing --- --- 34 10 Mortgage servicing rights amortization (94) (64) (272) (179) Impairment charge --- --- (75) --- - ------------------------------------------------------------------------- Total mortgage banking revenue, net $ 76 $ 66 $172 $260 - ------------------------------------------------------------------------- Net mortgage banking revenue was $76 million in the third quarter of 1998, an increase of $10 million, or 15%, compared to the third quarter of 1997. The slight decline in loan servicing revenue during the third quarter of 1998 represents a reduction in fees received for servicing residential mortgage loans as the servicing portfolio declined $3 billion from September 30, 1997 to $118.5 billion at September 30, 1998. Due to a low mortgage-rate environment, mortgage production revenue increased $42 million to $60 million in the third quarter of 1998 as a result of strong loan production volume as loan production volume in the third quarter of 1998 exceeded $9.4 billion compared to $4.9 billion in the third quarter of 1997. This revenue includes income derived from the loan origination process and net gains on sales of mortgage loans. Mortgage servicing rights (MSRs) amortization increased $30 million to $94 million for the third quarter of 1998 as compared to the same period of 1997. The level of amortization increased due to a strong acceleration in prepayments resulting from a decline in mortgage interest rates, coupled with a higher level of amortization of recently purchased mortgage servicing rights with a higher servicing spread. CAPITAL MARKETS REVENUE - ------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------------------- Brokerage market-making revenue $ 29 $ 30 $ 92 $ 70 Securities trading gains 24 7 35 18 Venture capital revenue 21 29 90 57 Securities gains 20 4 71 22 Foreign exchange/interest-rate products 19 12 52 35 Corporate finance fees 11 21 29 37 - ------------------------------------------------------------------------- Total capital markets revenue $124 $103 $369 $239 ========================================================================= Capital markets revenue increased $21 million to $124 million for the quarter ended September 30, 1998 when compared to the same quarter of 1997. This was driven primarily by increases in securities trading gains and securities gains due to the favorable interest-rate environment. Strong foreign exchange and interest-rate product activities were primarily the result of customers locking in their interest-rate risk during this current interest-rate environment. Venture capital revenue declined $8 million to $21 million for the quarter ended September 30, 1998 when compared to the same quarter of 1997. As a result of the decline in the stock market, the investments of Fleet Private Equity, the corporation's venture capital business, did not experience the same level of appreciation when compared to the third quarter of 1997. The corporation's ability to experience gains in the capital markets group depends on a variety of factors, including the condition and volatility of the economy and financial markets. Accordingly, revenues generated by this group will continue to fluctuate. Other noninterest income increased $25 million to $66 million when compared to $41 million in the third quarter of 1997. This increase is due primarily to revenues resulting from the Advanta acquisition. NONINTEREST EXPENSE - ------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 DOLLARS IN MILLIONS 1998 1997 1998 1997 - ------------------------------------------------------------------------- Employee compensation and benefits $ 489 $ 428 $1,415 $1,330 Equipment 77 81 231 236 Occupancy 75 74 224 220 Intangible asset amortization 58 43 167 125 Legal and other professional 41 22 107 87 Marketing 35 34 97 78 Printing and mailing 25 19 71 60 Telephone 22 20 68 62 Other 220 152 604 605 - ------------------------------------------------------------------------- Total noninterest expense excluding merger-related charges 1,042 873 2,984 2,803 Merger-related charges --- --- 73 --- - ------------------------------------------------------------------------- Total noninterest expense $1,042 $ 873 $3,057 $2,803 ========================================================================= 11 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total noninterest expense for the third quarter of 1998 totaled $1.04 billion compared to $873 million for the same period of 1997. The increase is primarily attributable to the acquisitions of Advanta and Columbia. Employee compensation and benefits increased $61 million compared with the third quarter of 1997 due to increasing levels of compensation expense primarily attributable to Advanta, Columbia, the newly formed High Yield Securities and Structured Lease Advisory units, as well as increases in commissions expense related to strong origination activity at Fleet Mortgage. Intangible asset amortization increased $15 million in the third quarter of 1998 when compared to the third quarter of 1997. This increase was due to the acquisitions of Columbia and Advanta, as well as additional goodwill recorded in the third quarter of 1998 pertaining to the NatWest earnout agreement. Legal and other professional fees increased $19 million over the third quarter of 1997 due to higher levels of professional fees in the third quarter of 1998 due to acquisitions and initiatives, as well as the third quarter of 1997 being lower than normal. Other noninterest expense increased $68 million to $220 million in the third quarter of 1998 compared to $152 million in the third quarter of 1997, due primarily to the acquisition of Advanta. IMPACT OF THE YEAR 2000 ISSUE The corporation's Year 2000 project is directed by a Year 2000 Executive Management Steering Committee consisting of its President and Vice Chairmen. They provide direct oversight of the Year 2000 initiative and are updated monthly on the project's progress. The corporation's Board of Directors receives 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. The corporation will continue to utilize both internal and external resources to reprogram, or replace, and test the software and hardware for Year 2000 modifications. Additionally, the corporation continues to work on high priority new business initiatives that it deems critical to continued business success. The corporation has made significant progress in remediating and testing its information systems. Specifically, 99% of all Bank and Corporate Unit systems and 93% of the Nonbank Subsidiary systems have been remediated, tested, and returned to production or are in testing. This activity continues to track in accordance with the original plan and the corporation expects to have substantially completed the remediation and testing of all applications by the end of 1998. The corporation has established a separate test environment to accommodate its Year 2000 testing activity and the anticipated need to test with its customers and other third parties during 1999. The corporation relies on several third party service providers for key business processes. It continues to work closely with these companies to monitor the progress of their Year 2000 efforts. The corporation's senior management has conducted on-site visits with its most critical service providers to discuss and assess their Year 2000 readiness. In addition, the corporation is receiving written and verbal verification from its significant third party service providers and vendors as to their Year 2000 readiness. The corporation began Year 2000 testing with several of these key vendors and third parties in the third quarter of 1998 and plans to substantially complete testing by the end of the second quarter of 1999. Validation of Year 2000 readiness of all the corporation's vendors continues with a particular focus on the readiness and alternatives, where possible, for vendors that have been identified as critical. While the corporation continues to discuss these matters with, obtain written certification from and test the systems of such other companies as to the Year 2000 compliance, there can be no assurance that any potential impact associated with incompatible systems after December 31, 1999 would not have a material adverse effect on the corporation's business, financial condition or results of operations. The corporation had previously established business resumption plans for its lines of business and subsidiaries. These plans have been reviewed and where appropriate are being enhanced to address potential Year 2000 failure scenarios. This process will be completed by the second quarter of 1999. 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 corporation is actively assessing the Year 2000 readiness of those businesses to which we extend credit. At the end of the third quarter, it had received responses regarding the Year 2000 readiness from 96% of all material relationships. The corporation is presently undertaking an analysis of these responses. The corporation will conduct another assessment of these customers at the end of the first quarter of 1999. 12 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The corporation continues to approximate that the cost of the Year 2000 project will not exceed $150 million. The corporation incurred $19 million of expenses during the quarter, $55 million year-to-date, and $71 million of expenses since the inception of this project. INCOME TAXES For the third quarter of 1998, the corporation recognized income tax expense of $250 million, an effective tax rate of 38.4%. Tax expense for the same period of 1997 was $243 million, an effective tax rate of 40.8%. The decrease in the effective tax rate is attributable, in part, to a decrease in the statutory rates of certain states in which the corporation conducts business. LINES OF BUSINESS The financial performance of the corporation is monitored by an internal profitability measurement system focused on risk adjusted return on equity, which provides line of business results and key performance measures. The corporation is managed along the following business lines: commercial financial services, retail banking, national financial services, investment services group, and treasury. Management accounting policies are in place 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. FLEET FINANCIAL GROUP NET INCOME BY LINE OF BUSINESS - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Commercial Financial Services $114 $104 Retail Banking 113 119 National Financial Services 67 31 Investment Services Group 56 50 Treasury 36 19 All Other 15 29 - -------------------------------------------------- Total $401 $352 ================================================== COMMERCIAL FINANCIAL SERVICES - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Income statement data: Net interest income $ 338 $ 310 Noninterest income 102 106 Provision 52 55 Noninterest expense 203 181 - -------------------------------------------------- Net income $ 114 $ 104 - -------------------------------------------------- Balance sheet data: Average loans 40,400 35,194 Average deposits 11,062 10,570 - -------------------------------------------------- Return on equity 20% 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. Commercial financial services earned $114 million in the third quarter of 1998. Compared to the third quarter of 1997, earnings increased $10 million, driven mostly by strong loan growth. Compared to the prior year's results loans increased 15%, or $5.2 billion, reflecting strong loan growth within the commercial banking, specialty and asset-based lending sectors. Despite overall loan growth of 15%, the provision for credit losses was slightly lower than the third quarter of 1997 due to improving credit quality. Increased deposit volumes and noninterest revenue also helped bolster earnings growth, as deposits increased by 5%, or $492 million. Noninterest revenues reflect strong growth in cash management, trade services, and tax processing activities, which substantially offset a lower level of corporate finance and leasing fees. 13 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RETAIL BANKING - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Income statement data: Net interest income $ 450 $ 467 Noninterest income 164 150 Provision 30 29 Noninterest expense 375 369 - -------------------------------------------------- Net income $ 113 $ 119 - -------------------------------------------------- Balance sheet data: Average loans 9,870 10,444 Average deposits 42,596 42,740 - -------------------------------------------------- Return on equity 26% 27% ================================================== 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 $113 million in the third quarter of 1998 a decrease of $6 million from the third quarter of 1997. Lower earnings reflect lower consumer loan volumes and reduced low cost core deposits, partly offset by the effective promotion of money market account products and higher levels of noninterest revenue. Noninterest revenue increased by $14 million driven by branch banking fees associated with new products and other initiatives aimed at improving branch banking revenues. Operating costs increased by less than 2% despite the continued work on initiatives such as product redesign, the introduction of new ATM locations, and the development of a data warehouse aimed at increasing customer cross selling opportunities, and improving our direct marketing capabilities. NATIONAL FINANCIAL SERVICES - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Income statement data: Net interest income $ 129 $ 76 Noninterest income 271 135 Provision 72 51 Noninterest expense 219 107 - -------------------------------------------------- Net income $ 67 $ 31 - -------------------------------------------------- Balance sheet data: Average loans 5,475 2,912 Average deposits 2,653 2,028 - -------------------------------------------------- Return on equity 11% 15% ================================================== National financial services includes mortgage banking, credit card services, student loan processing, and venture capital services. The following table presents comparative data for the four principal businesses which comprise national financial services. NATIONAL FINANCIAL SERVICES NET INCOME BY UNIT - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Credit card $ 33 $ -- Mortgage banking 19 12 Venture capital 9 15 Student loan processing 6 4 - -------------------------------------------------- Total $ 67 $ 31 ================================================== Third quarter earnings of $67 million increased $36 million compared to the same quarter a year ago. Increased credit card and mortgage banking earnings were partly offset by lower venture capital earnings. Venture capital earnings will normally fluctuate with the performance of equity markets, as well as with general economic conditions. Mortgage banking earnings increased due to continued higher loan production volumes, driven by refinancing activity resulting from the low mortgage-rate environment. The growth in credit card earnings reflects the impact of the acquisition of Advanta's credit card unit in the first quarter of 1998 coupled with the purchase of a $570 million receivable portfolio from Crestar Bank in the third quarter. INVESTMENT SERVICES GROUP - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Income statement data: Net interest income $ 48 $ 43 Noninterest income 245 213 Provision 1 1 Noninterest expense 197 167 - -------------------------------------------------- Net income $ 56 $ 50 - -------------------------------------------------- Balance sheet data: Average loans 4,018 3,293 Average deposits 2,022 2,070 - -------------------------------------------------- Return on equity 21% 30% - -------------------------------------------------- Assets under management $73,675 $54,951 ================================================== Investment Services Group provides asset management services to institutional and wealthy market clients, retail mutual fund and annuity sales, and securities brokerage services. The investment business earned $56 million in the third quarter of 1998 compared to $50 million in the third quarter of 1997, an increase of 12%. Increased earnings were driven by higher assets under management and higher broker- 14 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS age related revenues reflecting the acquisition of Columbia Management late in 1997, and increased brokerage related revenues at Quick & Reilly. At September 30, 1998 assets under management were $74 billion, compared to $55 billion a year ago. Lower return on equity reflects the impact of the premium paid in connection with the acquisition of Columbia Management. Excluding the impact of the goodwill associated with that transaction, return on equity would have been 38% in the third quarter of 1998. TREASURY - -------------------------------------------------- FOR THE THREE MONTHS ENDED SEPT. 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1997 - -------------------------------------------------- Income statement data: Net interest income $ 28 $ 28 Noninterest income 39 17 Provision 4 4 Noninterest expense 16 16 - -------------------------------------------------- Net income $ 36 $ 19 - -------------------------------------------------- Balance sheet data: Average loans 7,576 6,561 Average securities 9,136 7,735 Average deposits 7,476 5,027 - -------------------------------------------------- Return on equity 49% 25% ================================================== 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 $36 million in the third quarter of 1998, compared to $19 million in the third quarter of 1997. Excluding securities gains in both periods earnings increased by $8 million, reflecting increased fee income from the sale of foreign exchange and interest rate protection products. Higher residential loan volumes also contributed to the increase. ALL OTHER This unit includes allocated support units, the management accounting control units, and certain transactions or events not driven by specific business lines. Accordingly, earnings in this unit can fluctuate with changes affecting total company provision for credit losses, one time charges, gains and other actions not driven by specific business units. Earnings were $15 million compared to $29 million in the third quarter of 1997. Lower earnings resulted from lower net interest income and an increased provision for credit losses as compared to the third quarter of 1997. Earnings in this unit are negatively impacted to the extent the corporation's provision for credit losses has increased in excess of amounts allocated to the business units on an economic basis. Lower net interest income is due primarily to the sale of assets held for disposition and reductions in the affordable housing portfolio, both of which were included in this unit in 1997.
SECURITIES - ------------------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1998 JUNE 30, 1998 DECEMBER 31, 1997 ------------------ ------------- ----------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET DOLLARS IN MILLIONS COST VALUE COST VALUE COST VALUE - --------------------------------------- ------------- -------------- ------------- -------------- ------------- -------------- Securities available for sale: US Treasury and government agencies $ 433 $ 438 $ 1,091 $ 1,106 $1,126 $1,134 Mortgage-backed securities 7,270 7,545 7,941 8,094 6,177 6,298 Other debt securities 618 637 494 496 186 189 - --------------------------------------- ------------- -------------- ------------- -------------- ------------- -------------- Total debt securities 8,321 8,620 9,526 9,696 7,489 7,621 - --------------------------------------- ------------- -------------- ------------- -------------- ------------- -------------- Marketable equity securities 300 295 315 314 256 282 Other securities 210 210 209 209 210 210 - --------------------------------------- ------------- -------------- ------------- -------------- ------------- -------------- Total securities available for sale 8,831 9,125 10,050 10,219 7,955 8,113 - --------------------------------------- ------------- -------------- ------------- -------------- ------------- -------------- Total securities held to maturity 1,102 1,107 1,074 1,079 1,249 1,254 - --------------------------------------- ------------- -------------- ------------- -------------- ------------- -------------- Total securities $ 9,933 $10,232 $11,124 $11,298 $9,204 $9,367 - --------------------------------------- ------------- -------------- ------------- -------------- ------------- --------------
The amortized cost of securities available for sale increased $876 million to $8.8 billion at September 30, 1998 compared to December 31, 1997 due to a program designed to reposition the corporation's interest-rate sensitivity. The unrealized gain on securities available for sale increased $136 million during this period to $294 million at September 30, 1998 due to a favorable interest-rate environment. LOANS - ------------------------------------------------------------- SEPT. 30, JUNE 30, DEC. 31, DOLLARS IN MILLIONS 1998 1998 1997 - ------------------------------------------------------------- Commercial and industrial $36,414 $34,360 $32,000 Lease financing 3,813 3,775 3,376 Commercial real estate 5,160 5,280 5,677 Residential real estate 9,490 9,768 10,019 Consumer 13,328 13,571 11,493 - ------------------------------------------------------------- Total loans $68,205 $66,754 $62,565 ============================================================= 15 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total loans increased $5.6 billion from December 31, 1997 to $68.2 billion at September 30, 1998, resulting primarily from loan growth in the commercial and industrial (C&I) and lease financing portfolios, as well as the acquisitions of the consumer credit card operations of Advanta and the Crestar Bank credit card portfolio, offset by declines in the commercial real estate (CRE) portfolio. Commercial and industrial loans increased $4.4 billion from December 31, 1997 due primarily to growth in asset-based lending, large corporate loans, and continued participation in the syndication market within the corporation's corporate finance group. CRE loans decreased $517 million from December 31, 1997 to September 30, 1998 due to pay-downs as a result of market conditions. 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 September 30, 1998 was approximately $489 million ($114 million, $325 million and $50 million, respectively) or less than 1% of its loan portfolio. These exposures consist of short-term trade-related financings. The corporation had no direct exposure to the Russian marketplace as of September 30, 1998. Outstanding residential real estate loans secured by one-to four-family residences decreased $529 million to $9.5 billion at September 30, 1998 compared to $10.0 billion at December 31, 1997. This decline is the result of the sale of $750 million of CRA residential mortgage loans. CONSUMER LOANS - ------------------------------------------------------------- SEPT. 30, JUNE 30, DEC. 31, DOLLARS IN MILLIONS 1998 1998 1997 - ------------------------------------------------------------- Credit card $ 4,825 $ 5,032 $ 2,742 Home equity 4,376 4,523 4,851 Student loans 1,041 984 1,029 Installment/Other 3,086 3,032 2,871 - ------------------------------------------------------------- Total $13,328 $13,571 $11,493 ============================================================= Consumer loans increased $1.8 billion from December 31, 1997. The increase is primarily the result of the acquisitions of the consumer credit card portfolio of Advanta and the Crestar Bank credit card portfolio, offset by strategically designed marketing to constrain overall credit card portfolio growth. NONPERFORMING ASSETS(a)(b) - ------------------------------------------------------------------ DOLLARS IN MILLIONS C&I CRE CONSUMER TOTAL - ------------------------------------------------------------------ Nonperforming loans: Current or less than 90 days past due $ 86 $ 35 $ 3 $124 Noncurrent 68 26 56 150 Other real estate owned (OREO) 1 4 10 15 - ------------------------------------------------------------------ Total NPAs September 30, 1998 $155 $ 65 $ 69 $289 - ------------------------------------------------------------------ Total NPAs June 30, 1998 $181 $ 79 $ 77 $337 - ------------------------------------------------------------------ Total NPAs December 31, 1997 $257 $ 83 $ 76 $416 ================================================================== (a) THROUGHOUT THIS DOCUMENT, NPAS AND RELATED RATIOS DO NOT INCLUDE LOANS GREATER THAN 90 DAYS PAST DUE AND STILL ACCRUING INTEREST ($227 MILLION, $208 MILLION, AND $202 MILLION AT SEPTEMBER 30, 1998, JUNE 30, 1998, AND DECEMBER 31, 1997, RESPECTIVELY). INCLUDED IN THE 90 DAYS PAST DUE AND STILL ACCRUING INTEREST WERE $198 MILLION, $183 MILLION, AND $172 MILLION OF CONSUMER AND RESIDENTIAL LOANS AT SEPTEMBER 30, 1998, JUNE 30, 1998, AND DECEMBER 31, 1997, RESPECTIVELY. (b) NONPERFORMING ASSETS AND RELATED RATIOS AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 DO NOT INCLUDE $126 MILLION AND $214 MILLION, RESPECTIVELY, OF NONPERFORMING ASSETS CLASSIFIED AS HELD FOR SALE OR ACCELERATED DISPOSITION. Nonperforming assets (NPAs) decreased $127 million, or over 30%, from December 31, 1997 to $289 million at September 30, 1998. NPAs at September 30, 1998, as a percentage of total loans and as a percentage of total assets improved to 0.42% and 0.29%, respectively, compared to 0.66% and 0.46%, respectively, at December 31, 1997. This improvement was due primarily to declining levels of nonperforming assets in the commercial and industrial and commercial real estate portfolios. RESERVE FOR CREDIT LOSS ACTIVITY - ----------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 DOLLARS IN MILLIONS 1998 1997 - ----------------------------------------------------------- Balance at beginning of year $1,432 $1,488 Provision charged against income 330 233 Loans charged off (440) (386) Recoveries of loans charged off 110 101 - ----------------------------------------------------------- Net charge-offs (330) (285) Acquisitions/Other 120 (4) - ----------------------------------------------------------- Balance at end of period $1,552 $1,432 - ----------------------------------------------------------- Ratio of net charge-offs to average loans .67% .64% - ----------------------------------------------------------- Ratio of reserve for credit losses to period end loans 2.28 2.37 - ----------------------------------------------------------- Ratio of reserve for credit losses to period end nonperforming loans 566 315 =========================================================== Fleet's reserve for credit losses increased from $1.432 billion at December 31, 1997 to $1.552 billion at September 30, 1998. The overall increase in the reserve for credit losses is a result of reserves acquired as part of the acquisition of Advanta. The provision for credit losses for the first nine months of 1998 was $330 million, an increase of $97 million over the prior year's first nine months. The increase is the result of increased net charge-offs in the credit card portfolio predominantly attributable to the Advanta acquisition. 16 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUNDING SOURCES - ------------------------------------------------------------- SEPT. 30, JUNE 30, DEC. 31, DOLLARS IN MILLIONS 1998 1998 1997 - ------------------------------------------------------------- Deposits: Demand $12,187 $13,101 $13,148 Regular savings, NOW, money market 32,721 32,276 30,485 Time: Domestic 17,424 17,948 16,258 Foreign 3,623 3,667 3,844 - ------------------------------------------------------------- Total deposits 65,955 66,992 63,735 - ------------------------------------------------------------- Short-term borrowed funds: Federal funds purchased 1,096 722 1,004 Securities sold under agreements to repurchase 2,499 2,454 2,630 Commercial paper 803 745 811 Other 5,037 7,226 3,060 - ------------------------------------------------------------- Total short-term borrowed funds 9,435 11,147 7,505 - ------------------------------------------------------------- Due to brokers/dealers 4,307 4,983 4,316 - ------------------------------------------------------------- Long-term debt 7,368 5,654 4,500 - ------------------------------------------------------------- Total $87,065 $88,776 $80,056 ============================================================= Total deposits increased $2.2 billion to $66.0 billion at September 30, 1998 when compared to December 31, 1997 due principally to a $2.5 billion increase in money market deposits as a result of rates aimed at attracting new sources of funds, as well as time and savings deposits acquired as part of the Advanta acquisition. This increase was offset by a $1.0 billion decline in demand deposits due to timing and seasonality as average demand deposits remained stable throughout the year. The $1.9 billion increase in short-term borrowings since December 31, 1997 is due to increasing levels of treasury, tax and loan borrowings as the corporation utilized this favorably-priced funding vehicle. Long-term debt increased $2.9 billion to $7.4 billion at September 30, 1998 when compared to December 31, 1997 due to net increases of $2.6 billion of senior and subordinated debt and $270 million of trust preferred securities, as the corporation took advantage of the low interest-rate environment. 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, 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 September 30, 1998. 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) - ------------------------------------------------------ +200 $ 17 -200 (98) - ------------------------------------------------------ Estimated exposure to a sharp downturn in rates increased slightly during the third quarter due to certain transactions. As part of a year-long initiative to reduce the impact of mortgage asset prepayments, the corporation sold mortgage-backed securities and CRA loans during the third quarter; the corporation also took advantage of the current low rate environment to issue longer term funding at favorable rates. Although the exposure of net interest income to declining rates increased due to these recent activities, it is well within Board limits for risk tolerance and is expected to remain low. 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. 17 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 September 30, 1998, the estimated exposure was 0.9% asset-sensitive (see the following table). The gap position changed from a modest liability-sensitive position at June 30, 1998 to an equivalent asset-sensitive posture at September 30, 1998.
INTEREST-RATE GAP ANALYSIS - ------------------------------------------------------------------------------------------------------------------------------ Cumulatively Repriced Within September 30, 1998 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 $ 61,308 $ 8,529 $ 5,178 $ 10,004 $ 14,460 $ 99,479 Total liabilities and stockholders' equity (49,193) (9,561) (5,117) (2,844) (32,764) (99,479) Net off-balance sheet (13,271) 3,049 5,194 3,560 1,468 --- - ------------------------------------------------------------------------------------------------------------------------------ Periodic gap (1,156) 2,017 5,255 10,720 (16,836) Cumulative gap (1,156) 861 6,116 16,836 --- - ------------------------------------------------------------------------------------------------------------------------------ Cumulative gap as a percent of total assets-Sept. 30, 1998 (1.2)% 0.9% 6.1% 16.9% - ------------------------------------------------------------------------------------------------------------------------------ Cumulative gap as a percent of total assets-June 30, 1998 (2.7) (0.9) 2.9 14.7 ==============================================================================================================================
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 $10,475 Variable-rate loans 356 Fixed-rate deposits 2,117 Long-term debt ------------ 12,948 2.8 $ 238 6.73% 6.53% - --------------------------------------------------------------------------------------------------------------------------------- Basis swaps 2,779 Deposits .5 - 5.55 5.59 - --------------------------------------------------------------------------------------------------------------------------------- Total hedges of net interest income 15,727 2.4 238 6.53 6.36 - --------------------------------------------------------------------------------------------------------------------------------- MORTGAGE BANKING RISK-MANAGEMENT INSTRUMENTS Interest rate swaps: Mortgage servicing rights Receive-fixed/pay-variable, PO swaps 7,209 and escrow deposits 3.6 113 5.91 4.53 Options: Interest-rate floors, synthetic floors and swaptions purchased 35,345 Mortgage servicing rights 4.3 642 - (a) - (a) Interest-rate cap corridors sold 8,809 Mortgage servicing rights 3.5 18 - (a) - (a) Call options purchased 1,000 Mortgage servicing rights .3 23 - - - --------------------------------------------------------------------------------------------------------------------------------- Total options 45,154 683 - - - --------------------------------------------------------------------------------------------------------------------------------- Total hedges of mortgage servicing rights and 52,363 4.0 796 5.91 4.53 escrow deposits - --------------------------------------------------------------------------------------------------------------------------------- Total risk-management instruments $68,090 3.6 $1,034 6.33% 5.79% - ---------------------------------------------------------------------------------------------------------------------------------
(a) The mortgage-banking risk-management interest-rate floors, synthetic floors and swaptions purchased, and interest-rate cap corridors sold have weighted average strike rates of 5.41% and 6.82%, 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 September 30, 1998, the corporation had net deferred income of $12 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 7.4 years. During the third quarter of 1998, $1.2 billion of receive-fixed/pay-variable swaps matured. Additionally, the corporation entered into approximately $300 million of receive-fixed/pay-variable swaps during the quarter. A second major source of the corporation's non-trading interest-rate risk is the sensitivity of its 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. Off-balance sheet 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 values of the MSRs and the related hedges. At September 30, 1998, net hedge gains of $785 million have been deferred and recorded as adjustments to the carrying value of the MSRs. Deferred hedge gains include $105 million of realized hedge gains related to the termination of certain risk-management instruments. At September 30, 1998, the carrying value and fair value of the corporation's MSRs were $1.2 billion and $1.4 billion, respectively. In connection with the corporation's management of its MSRs hedge program, the corporation terminated $23.2 billion of interest-rate floor agreements and $2.7 billion of call options and added $34.7 billion and $3.7 billion of interest-rate floor agreements and call options, respectively, during the first nine months of 1998. Additionally, the corporation added $4.5 billion of interest-rate cap corridors and $4.9 billion of interest-rate swap contracts in its management of the mortgage servicing rights 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 corporation was in compliance with this limit at September 30, 1998. TRADING MARKET RISK The corporation's trading portfolios are exposed to market risk due to variations in interest rates, currency exchange rates, 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 $10.6 million, and the maximum daily exposure was $21.7 million during the third quarter of 1998. The increase in EAR from December 31, 1997 was due principally to the first quarter acquisition of Quick & Reilly. 18 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 19 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 September 30, 1998 and December 31, 1997, the corporation had commercial paper outstanding of $803 million and $811 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 September 30, 1998, 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 a total amount of funds available of approximately $2.3 billion at September 30, 1998. As shown in the consolidated statement of cash flows, cash and cash equivalents decreased by $815 million during the first nine months of 1998. The decrease was due to cash used in investing activities of $4.7 billion, offset by cash provided by operating activities of $445 million and cash provided by financing activities of $3.4 billion. Net cash provided by financing activities was principally due to a net increase in short-term borrowings of $1.4 billion and a net increase in long-term debt of $2.9 billion. Net cash used in investing activities was attributable to net purchases of securities and a net increase in loans resulting primarily from loan growth in the commercial and industrial and consumer credit card portfolios. CAPITAL - -------------------------------------------------------------------- SEPT. 30, JUNE 30, SEPT. 30, DOLLARS IN MILLIONS 1998 1998 1997 - -------------------------------------------------------------------- Risk-adjusted assets $100,350 $100,110 $ 85,870 Tier 1 risk-based capital (4% minimum) 6.88% 6.80% 7.19% Total risk-based capital (8% minimum) 11.21 10.84 10.74 Leverage ratio (4% minimum) 7.16 7.05 7.30 Common equity-to-assets 8.53 8.11 7.70 Total equity-to-assets 9.22 8.80 8.64 Tangible common equity-to-assets 5.76 5.53 5.81 Tangible total equity-to-assets 6.47 6.23 6.78 ==================================================================== At September 30, 1998, the corporation exceeded all regulatory required minimum capital ratios as Fleet's Tier 1 and Total risk-based capital ratios were 6.88 percent and 11.21 percent, respectively, compared with 6.80 percent and 10.84 percent, respectively, at June 30, 1998. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 7.16 percent at September 30, 1998 compared with 7.05 percent at June 30, 1998. 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, interest rate fluctuations, competitive product and pricing pressures within the corporation's market, equity and bond market fluctuations, personal and corporate customers' bankruptcies, inflation, 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), 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 the gain or loss due to 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, the gains or losses 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. This standard is effective as of January 1, 2000. The corporation has formed an internal task force from various functions within its organization that continues to evaluate the impact of this standard on its computer systems, hedging strategies, accounting policies, as well as other business issues. This task force is also closely monitoring the deliberations of the FASB's derivative implementation task force. Currently, the corporation has not yet determined the impact on its financial condition and results of operations. 20 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This standard requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking is no longer required to classify all retained mortgage-backed securities as trading securities. However, a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process. This standard is effective for the first quarter of 1999. The effect of adopting this standard is not expected to have a material impact on the corporation's financial condition or results of operations. 21 PART II. OTHER INFORMATION PART II. ITEM 5. If a stockholder desires to bring business before the Corporation's Annual Meeting of Stockholders which is not a proposal submitted to the Corporation for inclusion in the Corporation's Proxy Statement, the stockholder must follow procedures prescribed in the Corporation's By-Laws. One of the procedural requirements in the By-Laws is timely notice in writing to the Corporation's Secretary, at the Corporation's principal executive offices, of the business the stockholder proposes to bring before the Annual Meeting. Notice must be received not less than 120 calendar days prior to the date that the Corporation's Proxy Statement was released to stockholders in connection with the previous year's Annual Meeting of Stockholders. For the 1999 Annual Meeting of Stockholders, such notice must be received by the Secretary of the Corporation on or before November 2, 1998. 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 July 1, 1998 to the date of the filing of this report. - Current Report on Form 8-K dated July 7, 1998 reporting the issuance of $250 million of 6.70% Subordinated Debentures. - Current Report on Form 8-K dated July 15, 1998 announcing second quarter earnings and a two-for-one stock split. - Current Report on Form 8-K dated September 25, 1998 authorizing the sale of and establishing the terms of $2 billion in aggregate principal amount of medium term notes under Registration Statement No. 333-62905. - Current Report on Form 8-K dated October 21, 1998 announcing third quarter earnings and a 10% increase in the quarterly common stock dividend to $.27 per common share. 22 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLEET FINANCIAL GROUP, INC. --------------------------- (Registrant) /s/ Eugene M. McQuade --------------------------- Eugene M. McQuade Vice Chairman Chief Financial Officer /s/ Robert C. Lamb, Jr. --------------------------- Robert C. Lamb, Jr. Controller Chief Accounting Officer DATE: November 13, 1998 23 EX-11 2 STATEMENT RE: COMP. OF PER SHARE EARNINGS EXHIBIT 11 FLEET FINANCIAL GROUP, INC. COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS ($ IN MILLIONS, EXCEPT PER SHARE DATA)
For the Three Months ended September 30, ------------------------------------------------------------------------ 1998 1997 --------------------------------- -------------------------------- BASIC DILUTED BASIC DILUTED ---------------- --------------- ---------------- --------------- Equivalent shares: Average shares outstanding 567,650,764 567,650,764 544,831,312 544,831,312 Additional shares due to: Stock options --- 7,138,826 --- 6,048,704 Warrants --- 12,298,448 --- 11,178,046 ---------------- --------------- ---------------- --------------- Total equivalent shares 567,650,764 587,088,038 544,831,312 562,058,062 ================ =============== ================ =============== Earnings per share Net income $ 401 $ 401 $ 352 $ 352 Less: Preferred stock dividends (13) (13) (16) (16) ---------------- ---------------- ---------------- ---------------- Adjusted net income $ 388 $ 388 $ 336 $ 336 ================ =============== ================ =============== Total equivalent shares 567,650,764 587,088,038 544,831,312 562,058,062 ================ =============== ================ =============== Earnings per share on net income $ .68 $ .66 $ .62 $ .60 ================ =============== ================ ===============
EXHIBIT 11 FLEET FINANCIAL GROUP, INC. COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS ($ IN MILLIONS, EXCEPT PER SHARE DATA)
For the Nine Months ended September 30, ------------------------------------------------------------------------ 1998 1997 --------------------------------- -------------------------------- BASIC DILUTED BASIC DILUTED ---------------- --------------- ---------------- -------------- Equivalent shares: Average shares outstanding 567,873,966 567,873,966 552,509,092 552,509,092 Additional shares due to: Stock options --- 7,363,594 --- 5,567,868 Warrants --- 12,363,078 --- 10,667,620 ---------------- --------------- ---------------- -------------- Total equivalent shares 567,873,966 587,600,638 552,509,092 568,744,580 ================ =============== ================ ============== Earnings per share Net income $ 1,117 $ 1,117 $ 1,033 $ 1,033 Less: Preferred stock dividends (38) (38) (49) (49) ---------------- --------------- ---------------- -------------- Adjusted net income $ 1,079 $ 1,079 $ 984 $ 984 ================ =============== ================ ============== Total equivalent shares 567,873,966 587,600,638 552,509,092 568,744,580 ================ =============== ================ ============== Earnings per share on net income $ 1.90 $ 1.84 $ 1.78 $ 1.73 ================ =============== ================ ==============
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 Nine months months ended ended Sept. 30, Sept. 30, Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 651 $1,832 $2,294 $2,070 $1,156 $1,460 $1,173 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 288 786 737 813 1,413 1,074 790 (2) 1/3 of rent 13 40 53 55 52 53 54 (b) Preferred dividends 21 62 104 117 62 51 54 ------ ------ ------ ------ ------ ------ ------ (c) Adjusted earnings $ 973 $2,720 $3,188 $3,055 $2,683 $2,638 $2,071 ====== ====== ====== ====== ====== ====== ====== Fixed charges and preferred dividends $ 322 $ 888 $ 894 $ 985 $1,527 $1,178 $ 898 ====== ====== ====== ====== ====== ====== ====== Adjusted earnings/Fixed charges and preferred dividends 3.02x 3.06x 3.57x 3.10x 1.76x 2.24x 2.31x ====== ====== ====== ====== ====== ====== ======
INCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Three Nine months months ended ended Sept. 30, Sept. 30, Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 651 $1,832 $2,294 $2,070 $1,156 $1,460 $1,173 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 288 786 737 813 1,413 1,074 790 (2) 1/3 of rent 13 40 53 55 52 53 54 (3) Interest on deposits 472 1,383 1,654 1,754 1,726 1,170 1,165 (b) Preferred dividends 21 62 104 117 63 51 54 ------ ------ ------ ------ ------ ------ ------ (c) Adjusted earnings $1,445 $4,103 $4,842 $4,809 $4,410 $3,808 $3,236 ====== ====== ====== ====== ====== ====== ====== Fixed charges and preferred dividends $ 794 $2,271 $2,548 $2,739 $3,254 $2,348 $2,063 ====== ====== ====== ====== ====== ====== ====== Adjusted earnings/Fixed charges and preferred dividends 1.82x 1.81x 1.90x 1.76x 1.36x 1.62x 1.57x ====== ====== ====== ====== ====== ====== ======
EXHIBIT 12 (CONTINUED) FLEET FINANCIAL GROUP, INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Three Nine months months ended ended Sept. 30, Sept. 30, Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 651 $1,832 $2,294 $2,070 $1,156 $1,460 $1,173 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 288 786 737 813 1,413 1,074 790 (2) 1/3 of rent 13 40 53 55 52 53 54 ------ ------ ------ ------ ------ ------ ------ (b) Adjusted earnings $ 952 $2,658 $3,084 $2,938 $2,621 $2,587 $2,017 ====== ====== ====== ====== ====== ====== ====== Fixed charges $ 301 $ 826 $ 790 $ 868 $1,465 $1,127 $ 844 ====== ====== ====== ====== ====== ====== ====== Adjusted earnings/Fixed charges 3.16x 3.22x 3.90x 3.38x 1.79x 2.30x 2.39x ====== ====== ====== ====== ====== ====== ======
INCLUDING INTEREST ON DEPOSITS (DOLLARS IN MILLIONS)
Three Nine months months ended ended Sept. 30, Sept. 30, Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1998 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Earnings: Income before income taxes and cumulative effect of accounting changes $ 651 $1,832 $2,294 $2,070 $1,156 $1,460 $1,173 Adjustments: (a) Fixed charges: (1) Interest on borrowed funds 288 786 737 813 1,413 1,074 790 (2) 1/3 of rent 13 40 53 55 52 53 54 (3) Interest on deposits 472 1,383 1,654 1,754 1,726 1,170 1,165 ------ ------ ------ ------ ------ ------ ------ (b) Adjusted earnings $1,424 $4,041 $4,738 $4,692 $4,347 $3,757 $3,182 ====== ====== ====== ====== ====== ====== ====== Fixed charges $ 773 $2,209 $2,444 $2,622 $3,191 $2,297 $2,009 ====== ====== ====== ====== ====== ====== ====== Adjusted earnings/Fixed charges 1.84x 1.83x 1.94x 1.79x 1.36x 1.64x 1.58x ====== ====== ====== ====== ====== ====== ======
EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1998 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. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,197 409 153 295 9,125 1,102 1,107 68,205 (1,552) 99,479 65,955 13,742 3,239 7,368 0 691 3,298 5,186 99,479 4,372 506 161 5,039 1,383 2,168 2,871 330 71 3,057 1,832 1,117 0 0 1,117 1.90 1.84 4.64 274 227 0 0 1,432 440 110 1,552 1,552 0 356
EX-27.A 5 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1998 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. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 5,128 150 1,371 236 7,511 1,259 1,264 60,494 (1,432) 88,105 62,907 10,501 2,622 4,459 0 835 3,209 3,572 88,105 3,993 421 123 4,537 1,233 1,770 2,767 233 22 2,803 1,739 1,033 0 0 1,033 1.78 1.73 5.03 455 236 0 0 1,488 386 101 1,432 1,432 0 272
-----END PRIVACY-ENHANCED MESSAGE-----