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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _________ TO __________
COMMISSION FILE NUMBER 1-6366
FLEETBOSTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0341324
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(Address of principal executive office) (Zip Code)
(617) 434-2200
(Registrant's telephone number, including area code)
(Former name, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
The number of shares of common stock of the Registrant outstanding as of April
30, 2001 was 1,083,077,317.
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FLEETBOSTON FINANCIAL CORPORATION
FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations 3
Consolidated Statements of Income
Three months ended March 31, 2001 and 2000 19
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 20
Consolidated Statements of Changes in Stockholders' Equity
Three months ended March 31, 2001 and 2000 21
Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000 22
Condensed Notes to Consolidated Financial Statements 23
PART II. OTHER INFORMATION 29
SIGNATURES 31
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FleetBoston Financial Corporation (FleetBoston or the Corporation), a
diversified financial services company with $200 billion in assets headquartered
in Boston, Massachusetts, is currently the seventh-largest financial holding
company in the United States based on total assets. Among its key lines of
business are commercial banking; consumer banking; investment banking and
investment services; principal investing; securities brokerage, market-making
and clearing services; credit cards; and full service banking in Latin America.
On March 1, 2001, FleetBoston completed its acquisition of Summit Bancorp.
(Summit). Additional information concerning the Summit acquisition is included
in Note 3 to the Financial Statements. The acquisition was accounted for as a
pooling of interests and, accordingly, the information included in this
discussion and analysis presents the combined results of FleetBoston and Summit
as though the two companies had operated as a combined entity for all periods
presented. This discussion and analysis updates, and should be read in
conjunction with, FleetBoston's 2000 Annual Report on Form 10-K and its Current
Report on Form 8-K dated May 4, 2001.
FINANCIAL SUMMARY
===================================================================
Three months ended March 31 2001 2000
Dollars in millions,
except per share amounts
-------------------------------------------------------------------
EARNINGS
Net interest income (FTE)(a) $ 1,936 $ 2,066
Noninterest income 1,524 2,820
Noninterest expense 2,853 2,745
Provision for credit losses 315 320
Net income 142 1,076
-------------------------------------------------------------------
PER COMMON SHARE
Basic earnings $ .12 $ .99
Diluted earnings .12 .97
Cash dividends declared .33 .30
Book value 17.38 15.97
-------------------------------------------------------------------
RATIOS
Return on average assets .27% 1.84%
Return on average common equity 2.80 25.20
Total equity to assets (period-end) 9.15 7.91
Tangible common equity to assets 6.93 5.72
Tier 1 risk-based capital ratio 7.96 7.02
Total risk-based capital ratio 11.74 11.03
Leverage ratio 7.89 6.75
-------------------------------------------------------------------
AT MARCH 31
Total assets $211,741 $225,762
Loans and leases 131,640 141,373
Deposits 127,989 134,785
Stockholders' equity 19,378 17,864
Nonperforming assets 1,245 1,039
===================================================================
(a) The fully taxable equivalent (FTE) adjustment included in net interest
income was $17 million and $18 million, respectively, for the three months
ended March 31, 2001 and 2000.
Earnings for the first quarter of 2001 included approximately $718 million
($453 million after-tax) of charges incurred in connection with the Summit
acquisition. These charges consisted of $408 million ($268 million after-tax) of
merger and restructuring charges, $45 million ($27 million after-tax) of merger
integration costs and a $265 million ($158 million after-tax) loss from the sale
of approximately $8 billion of low-margin securities in connection with a
repositioning of the combined balance sheet. First quarter results also
reflected an estimated loss of $327 million ($225 million after-tax) from the
sale of the mortgage banking business. Additionally, FleetBoston recorded $79
million ($50 million after-tax) of restructuring charges related to a
reorganization of its capital markets-related businesses. The 2000 period
included $366 million ($209 million after-tax) of gains from divestitures, and
$100 million ($60 million after-tax) of merger integration costs.
Excluding the nonrecurring items discussed above, net income for the first
quarter of 2001 was $870 million, or $.79 per diluted share, a 6% decrease from
net income of $927 million and $.84 per diluted share in the first quarter of
2000. This decrease was due mainly to a significant drop in capital markets
revenue associated with the slowdown experienced in U.S. capital markets in the
second half of 2000 and the first three months of 2001, partly offset by a drop
in revenue-related compensation costs. The decline in capital markets-related
earnings was partly offset by improved results in International Banking,
Commercial Finance, Consumer Lending, Credit Card and Fleet Meehan Specialist.
RESULTS OF OPERATIONS
NET INTEREST INCOME
======================================================
Three months ended March 31 2001 2000
FTE basis
In millions
------------------------------------------------------
Interest income $3,918 $4,116
Tax-equivalent adjustment 17 18
Interest expense 1,999 2,068
------------------------------------------------------
Net interest income $1,936 $2,066
======================================================
Net interest income decreased $130 million in the first quarter of 2001
compared to the same period a year ago, primarily due to the impact of the
divestiture of $9 billion of loans and $13 billion of low-cost deposits
throughout 2000 in connection with the previously disclosed BankBoston merger.
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NET INTEREST MARGIN AND INTEREST RATE SPREAD
===========================================================================
Three months ended March 31 2001 2000
FTE basis Average Average
Dollars in millions Balance Rate Balance Rate
---------------------------------------------------------------------------
Securities $ 32,480 6.93% $ 35,542 6.47%
Loans and leases:
Domestic 115,507 8.76 128,239 8.55
International 18,260 11.91 14,805 13.99
Due from brokers/dealers 3,389 5.32 3,924 5.26
Mortgages held for sale 2,765 7.25 1,259 8.06
Other 10,955 8.37 16,760 5.74
---------------------------------------------------------------------------
Total interest earning assets 183,356 8.64 200,529 8.28
---------------------------------------------------------------------------
Deposits 98,670 4.41 108,355 4.03
Short-term borrowings 22,915 6.37 31,076 5.64
Due to brokers/dealers 3,672 6.24 5,066 5.39
Long-term debt 31,021 6.61 29,475 6.50
---------------------------------------------------------------------------
Interest bearing liabilities 156,278 5.18 173,972 4.78
---------------------------------------------------------------------------
Interest rate spread 3.46 3.50
Interest-free sources of funds 27,078 26,557
---------------------------------------------------------------------------
Total sources of funds $183,356 4.41% $200,529 4.14%
---------------------------------------------------------------------------
Net interest margin 4.23% 4.14%
===========================================================================
The 9 basis point increase in net interest margin from the prior year
quarter was primarily attributable to a strategic repositioning of the balance
sheet for a lower interest rate environment, as well as the elimination of
low-yielding earning assets that were previously necessary to support the higher
level of activities in FleetBoston's investment banking operation. Partially
offsetting this improvement was the impact of divestitures.
Average securities decreased $3.1 billion to $32.5 billion for the three
months ended March 31, 2001, primarily due to the sale of $8 billion of
low-margin securities subsequent to the Summit merger.
Average domestic loans and leases decreased $12.7 billion to $115.5 billion
for the first quarter of 2001, compared with $128.2 billion for the first
quarter of 2000, primarily driven by the divestiture of $9 billion of loans
throughout 2000, commercial loan sales and securitizations in the fourth quarter
of 2000, and lower domestic commercial loan levels. These declines were offset,
in part, by strong growth in lease financing receivables. Average international
loans and leases increased $3.5 billion to $18.3 billion due to commercial loan
growth, primarily in Brazil.
The $1.5 billion increase in average mortgages held for sale compared to
the first quarter of 2000 resulted from higher mortgage production in the second
half of 2000 and first quarter of 2001, caused by a decline in mortgage interest
rates. The decrease in mortgage rates caused average yields on mortgages held
for sale to decrease 81 basis points.
Average other interest earning assets decreased $5.8 billion to $11 billion
for the first quarter of 2001, primarily as a result of the previously mentioned
elimination of low-yielding earning assets used to support investment banking
operations.
The $9.7 billion decrease in average interest bearing deposits compared to
the first quarter of 2000 mainly reflects the impact of the $13 billion
divestiture during the course of 2000, offset, in part, by an increase in
international interest bearing deposits.
The $8.2 billion decrease in average short-term borrowings is mainly
attributable to the elimination of low-yielding liabilities that were previously
necessary to support investment banking operations, and a change in funding mix,
which resulted in a $1.5 billion increase in average long-term debt. Also
contributing to the decrease in average short-term borrowings was a decrease in
the availability and use of treasury, tax and loan borrowings.
NONINTEREST INCOME
=======================================================
Three months ended March 31 2001 2000
In millions
-------------------------------------------------------
Banking fees and commissions $ 390 $ 405
Investment services revenue 388 526
Processing-related revenue 188 160
Credit card revenue 164 166
Capital markets revenue 94 1,060
Other noninterest income 300 503
-------------------------------------------------------
Total noninterest income $1,524 $2,820
=======================================================
The 46% decrease in noninterest income for the first quarter of 2001 compared to
the same period in 2000 primarily reflects the effect of the capital markets
slowdown on FleetBoston's capital markets and investment services businesses, as
well as the absence of 2000 divestiture gains. In addition, first quarter 2001
capital markets revenue includes the previously mentioned $265 million loss on
the sale of low-margin securities related to balance sheet repositioning
subsequent to the Summit acquisition. These decreases were offset, in part, by
$146 million of gains related to additional consideration received on the 2000
branch divestitures and the sales of several small businesses.
BANKING FEES AND COMMISSIONS
Banking fees and commissions, which include fees received for cash
management, deposit accounts, electronic banking and other service fees,
decreased $15 million, or 4%, to $390 million for the first quarter of 2001,
primarily the result of lower deposit fees following the divestitures of $13
billion of deposits throughout 2000. Partially offsetting this decrease was a
rise in cash management fees related to a higher volume of business.
INVESTMENT SERVICES REVENUE
========================================================
Three months ended March 31 2001 2000
In millions
--------------------------------------------------------
Investment management revenue $247 $260
Brokerage fees and commissions 141 266
--------------------------------------------------------
Total investment services revenue $388 $526
========================================================
Investment services revenue decreased $138 million, or 26%, to $388 million
for the three months ended
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March 31, 2001. Changes in the components of investment management revenue are
discussed below. The $125 million, or 47%, decline in brokerage fees and
commissions was driven by the adverse market conditions experienced at both
Quick & Reilly and Robertson Stephens in the first quarter of 2001, compared to
the exceptionally strong markets in the prior year period.
Investment Management Revenue
==================================================
Three months ended March 31 2001 2000
In millions
--------------------------------------------------
Private Clients Group $ 98 $101
Institutional businesses 43 44
International 38 41
Columbia Management Company 27 27
Quick & Reilly 22 29
Mutual Fund & Investment 16 16
Other 3 2
--------------------------------------------------
Total $247 $260
==================================================
The 5% decline in investment management revenue in the first quarter of
2001, compared to the same period in 2000, was largely driven by adverse market
conditions experienced during the quarter, which resulted in a decline in the
market value of assets under management. At March 31, 2001, assets under
management amounted to $128 billion, compared to $138 billion at March 31, 2000.
PROCESSING-RELATED REVENUE
=======================================================
Three months ended March 31 2001 2000
In millions
-------------------------------------------------------
Mortgage banking revenue, net $107 $ 90
Student loan servicing fees 42 39
Other 39 31
-------------------------------------------------------
Total processing-related revenue $188 $160
=======================================================
Processing-related revenue increased $28 million, or 17.5%, in the first
quarter of 2001 compared to the first quarter of 2000, reflecting increases in
all categories, most notably mortgage banking revenue, which is more fully
discussed below. Student loan servicing fees increased at AFSA Data Corporation
(AFSA), FleetBoston's student loan servicing subsidiary, as accounts serviced
increased approximately 6% from the first quarter of 2000. AFSA is the largest
student loan servicer in the United States, with 7.7 million accounts and over
$76 billion of loans serviced. Other processing-related revenue increased $8
million, or 26%, to $39 million for the three months ended March 31, 2001, due
to the acquisition of Curtis & Associates, Inc. in the third quarter of 2000.
Mortgage Banking Revenue, Net
================================================================
Three months ended March 31 2001 2000
In millions
----------------------------------------------------------------
Net loan servicing revenue $ 169 $ 161
Mortgage production revenue 17 26
Gains on trading derivatives 43 --
Mortgage servicing rights amortization (122) (97)
----------------------------------------------------------------
Total mortgage banking revenue, net $ 107 $ 90
================================================================
Net mortgage banking revenue increased $17 million in the first quarter of
2001 compared to the first quarter of 2000, due mainly to gains from trading
derivatives that were previously accounted for as hedges. As part of
FleetBoston's adoption of SFAS No. 133, these positions were designated as
trading as of January 1, 2001. This gain was offset, in part, by an increase in
mortgage servicing rights (MSR) amortization recorded in the first quarter of
2001, primarily related to the declining rate environment, which reduces the
value of MSRs.
On April 2, 2001, FleetBoston announced a definitive agreement to sell its
mortgage banking business. The sale is expected to close during the second
quarter of 2001, and an estimated pre-tax loss on the sale of approximately $327
million ($225 million after-tax) was recorded in other noninterest expense in
the first quarter of 2001. FleetBoston will continue to originate mortgage loans
through its retail banking branches.
CAPITAL MARKETS REVENUE
===========================================================
Three months ended March 31 2001 2000
In millions
-----------------------------------------------------------
Market-making revenue $ 197 $ 221
Foreign exchange revenue 43 46
Advisory fees 41 162
Underwriting revenue 40 256
Syndication/agency fees 40 40
Trading profits and commissions 3 80
Principal investing (57) 313
Securities losses (213) (58)
-----------------------------------------------------------
Total capital markets revenue $ 94 $ 1,060
===========================================================
Excluding the previously mentioned securities losses of $265 million from
balance sheet repositioning, more fully described below, capital markets revenue
showed a significant decrease, falling $701 million, or 66%, compared to the
first quarter of 2000. Nearly all categories of capital markets revenue declined
from the extraordinary levels recorded in the first quarter of 2000. Revenues
from capital markets activities are impacted by a variety of factors, including
the condition of the economy, interest rates and equity markets. The significant
slowdown in capital markets activities experienced in the first quarter is
expected to continue in the foreseeable future. As such, future levels of
capital markets revenue cannot be predicted with certainty.
The $24 million, or 11%, decrease in market-making revenue resulted from
decreased transaction volumes at Quick & Reilly and Robertson Stephens, offset,
in part,
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by increased activity at Fleet Meehan Specialist, where average daily trading
volumes increased 58% over the first quarter of 2000. Average trading volume on
the New York Stock Exchange (NYSE) increased in 2001 compared to 2000 levels for
the same period. Included in Fleet Meehan Specialist is the former M.J. Meehan
& Co., the NYSE specialist firm acquired by FleetBoston in October 2000.
Advisory fees decreased $121 million from the first quarter of 2000. This
decrease reflects a lower level of merger and acquisition (M&A) advisory
activities at Robertson Stephens during the 2001 period compared to the 2000
period.
Underwriting revenue declined $216 million, or 84%, in the first quarter of
2001 to $40 million. Underwriting revenues are affected by the volume and timing
of public offerings and other transactions. As a result of the economic
slowdown, transaction volume at Robertson Stephens decreased 87% compared to the
first quarter of 2000.
Trading profits and commissions declined $77 million compared to the
quarter ended March 31, 2000, primarily due to the effect of adverse market
conditions.
The $370 million decline in principal investing revenues from the first
quarter of 2000 resulted primarily from investment write-downs of $132 million
recorded during the 2001 quarter as a result of the weakened market environment,
as well as a significant decrease in gains from sales of direct
investments. During the first quarter of 2001, the Corporation made new
investments of $215 million, a level reflective of current market conditions.
During the first quarter of 2000, new investments totaled $544 million. As of
March 31, 2001, the Principal Investing portfolio had an aggregate carrying
value of approximately $4.4 billion, composed of indirect investments in primary
or secondary funds, direct investments in privately held companies and direct
investments in companies whose stocks are publicly traded.
Securities losses for the quarter ended March 31, 2001 included the
previously mentioned $265 million loss on the sale of low-margin securities
following a repositioning of FleetBoston's balance sheet subsequent to the
Summit merger. Excluding this loss, FleetBoston realized gains of $52 million
during the quarter, primarily attributable to sales of bonds, compared to losses
of $58 million in the 2000 period.
OTHER
Other noninterest income decreased $203 million to $300 million for the
first quarter of 2001, compared to $503 million for the first quarter of 2000.
The 2000 period included $366 million of divestiture gains. The 2001 period
included additional gains associated with 2000 branch divestitures, and gains
from the sale of several small businesses, all of which combined totaled $146
million.
NONINTEREST EXPENSE
====================================================================
Three months ended March 31 2001 2000
In millions
--------------------------------------------------------------------
Employee compensation and benefits $1,044 $1,544
Occupancy and equipment 300 310
Intangible asset amortization 100 97
Legal and other professional 69 88
Marketing and public relations 63 79
Merger- and restructuring-related charges 487 37
Loss on sale of mortgage banking business 327 --
Other 463 590
--------------------------------------------------------------------
Total noninterest expense $2,853 $2,745
====================================================================
Noninterest expense for the first quarter of 2001 increased $108 million,
or 4%, compared to the same period in 2000. The 2001 quarter included $487
million of costs, composed of $408 million of charges recorded in connection
with the Summit merger, to accrue for merger-related costs and a restructuring
plan, and $79 million of restructuring charges related to a reorganization of
capital markets businesses. Summit merger integration costs of $45 million,
included in the table above by type of expense, were also incurred during the
quarter. Finally, FleetBoston recorded a $327 million loss on the sale of its
mortgage banking business. Noninterest expense for the same period a year ago
included $100 million of integration costs incurred in connection with the
BankBoston merger, including $37 million of incremental depreciation on certain
assets that were used in the merger integration and were then disposed.
Excluding nonrecurring charges, noninterest expense totaled $2 billion for
the three months ended March 31, 2001, a decrease of $651 million, or 25%, from
noninterest expense of $2.6 billion a year ago. This decrease primarily reflects
lower incentive compensation directly related to lower levels of revenues in the
capital markets businesses, and the effect of expense reductions realized from
BankBoston merger integration activities and branch divestitures.
Employee compensation and benefits costs decreased $500 million compared to
the first quarter of 2000, principally due to revenue-related decreases in
incentive compensation, primarily at Robertson Stephens and Quick & Reilly, a
lower level of merger integration costs, and expense reductions achieved from
merger integration activities during 2000. FleetBoston incurred $3 million and
$18 million of merger integration costs in the first quarters of 2001 and 2000
related to the Summit and BankBoston mergers, respectively.
Legal and other professional costs decreased $19 million, or 22%, due
partly to merger integration costs of $4 million incurred in the first quarter
of 2001 versus $10 million in the first quarter of 2000, and a decline in
consulting fees, partly the result of a corporate-wide program to contain
expenses in light of the slower economic environment. Marketing and public
relations costs declined $16 million, or 20%, also as a result of corporate-wide
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expense reduction efforts.
Other noninterest expense decreased $127 million, or 22%, reflecting
expense reductions realized in 2000 from BankBoston merger and divestiture
activities. Included in other noninterest expense were integration costs of $32
million and $30 million for the first quarter of 2001 and 2000, respectively.
The Summit merger, which was completed on March 1, 2001, produced $6
million of incremental first quarter cost savings. FleetBoston expects to
achieve $300 million in annualized cost savings related to its merger with
Summit.
INCOME TAXES
Income tax expense totaled $133 million for the first quarter of 2001,
compared with $727 million for the same period a year ago, with an effective tax
rate of 48.4% and 40.3% for the first quarters of 2001 and 2000, respectively.
The increase in the effective tax rate was generally attributable to a portion
of the merger and restructuring-related charges that were nondeductible.
LINE OF BUSINESS INFORMATION
FleetBoston is organized and managed along three principal lines of
business: Corporate and Global Banking, Consumer and Investment Services and
Capital Markets. This newly created, customer focused organizational structure
was implemented on January 1, 2001. For additional information about the
products and services offered by each line of business, refer to the "Line of
Business Information" section of Management's Discussion and Analysis, included
in the Corporation's Current Report on Form 8-K dated May 4, 2001. The financial
performance of business lines is monitored by an internal profitability
measurement system, which provides business line results and key performance
measures. Information for both the first quarter of 2001 and the first quarter
of 2000 presented below reflects the merger with Summit. The information is
presented on a fully taxable equivalent basis.
LINE OF BUSINESS EARNINGS SUMMARY
============================================================================================
Three months ended March 31 2001 2000 2001 2000 2001 2000
Dollars in millions Net Income Total Revenue Return on Equity
--------------------------------------------------------------------------------------------
Corporate and Global Banking $373 $ 347 $1,378 $1,386 20% 19%
Consumer and Investment Services 313 372 1,810 2,095 17 20
Capital Markets (42) 296 166 1,000 -- 54
All Other (502) 61 106 405 -- --
--------------------------------------------------------------------------------------------
Total $142 $1,076 $3,460 $4,886 3% 25%
============================================================================================
The following discussion focuses on the components and results of each of
the three major business lines.
CORPORATE AND GLOBAL BANKING
==========================================================================
Three months ended March 31 2001 2000
Dollars in millions
--------------------------------------------------------------------------
Income statement data:
Net interest income $ 934 $ 943
Noninterest income 444 443
Provision 167 144
Noninterest expense 591 657
Taxes 247 238
--------------------------------------------------------------------------
Net income $ 373 $ 347
--------------------------------------------------------------------------
Balance sheet data:
Average assets $117,311 $129,744
Average loans 97,830 96,490
Average deposits 31,800 31,728
--------------------------------------------------------------------------
Return on equity 20% 19%
==========================================================================
Corporate and Global Banking earned $373 million in the first quarter of
2001, a 7% increase over the $347 million earned in the first quarter of 2000.
Increased earnings were driven by strong results in Commercial Finance and
International Banking, partly offset by declines in Corporate Banking and Middle
Market.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A more detailed analysis of the supporting business units follows.
================================================================================
Three months ended
March 31 2001 2000 % 2001 2000 %
Dollars in millions Net Income Change Total Revenue Change
--------------------------------------------------------------------------------
Commercial Finance $130 $105 24% $ 369 $ 339 9%
International 102 82 24 451 431 5
Banking
Corporate Banking 87 96 (9) 314 341 (8)
Middle Market 54 64 (16) 244 275 (11)
--------------------------------------------------------------------------------
Total $373 $347 7% $1,378 $1,386 (1)%
================================================================================
Commercial Finance
Commercial Finance earned $130 million in the first quarter of 2001,
compared to $105 million a year ago, an increase of 24%. Increased earnings were
driven primarily by higher leasing revenues and lower operating expenses.
International Banking
Compared to the first quarter of 2000, International Banking earnings
increased $20 million, or 24%, mainly due to strong loan growth in key Latin
American markets, primarily Brazil, and effective control of operating expenses.
Average deposit balances grew $1.2 billion during the quarter, while average
loan balances grew $3 billion over the first quarter of 2000. At March 31,
2001, international mutual fund assets under management totaled $8 billion.
Corporate Banking
Corporate Banking recorded earnings of $87 million in the first quarter of
2001, a decrease of $9 million, or 9%, compared to the first quarter of 2000.
This decline was driven by decreases in capital markets revenues and investment
banking fees associated with the adverse conditions in the financial markets, as
well as increased credit costs, partially offset by a corresponding decrease in
operating expenses.
Middle Market
For the first quarter of 2001, Middle Market earned $54 million, a decrease
of $10 million, or 16%, from the prior year quarter. Lower earnings were the
result of a $2.9 billion decline in the loan portfolio, a portion of which was
attributable to divestitures resulting from the BankBoston merger, partially
offset by lower credit costs and operating expense levels. Average loan and
deposit balances were $16.1 billion and $11 billion, respectively, for the first
quarter of 2001, compared to $18.9 billion and $10.8 billion, respectively, for
the 2000 period.
CONSUMER AND INVESTMENT SERVICES
=====================================================
Three months ended March 31 2001 2000
Dollars in millions
-----------------------------------------------------
Income statement data:
Net interest income $ 878 $ 1,049
Noninterest income 932 1,046
Provision 97 133
Noninterest expense 1,191 1,333
Taxes 209 257
-----------------------------------------------------
Net income $ 313 $ 372
-----------------------------------------------------
Balance sheet data:
Average assets $53,035 $56,491
Average loans 33,499 36,147
Average deposits 85,241 94,328
-----------------------------------------------------
Return on equity 17% 20%
=====================================================
Consumer and Investment Services, which includes domestic banking to
consumer and small business customers, investment management and retail
brokerage services, and the domestic credit card business, earned $313 million
in the first quarter of 2001, down from $372 million in the first quarter of
2000. Results reflect the impact of divestitures--primarily affecting the
Consumer and Small Business units--as well as lower earnings in the Wealth
Management and Brokerage units stemming from declines in the equity markets.
================================================================================
Three months ended
March 31 2001 2000 % 2001 2000 %
Dollars in millions Net Income Change Total Revenue Change
--------------------------------------------------------------------------------
Consumer Businesses $172 $168 2% $ 892 $ 991 (10)%
Wealth Management
and Brokerage 65 111 (41) 436 547 (20)
Small Business 41 64 (36) 246 294 (16)
Credit Card 35 29 21 236 263 (10)
--------------------------------------------------------------------------------
Total $313 $372 (16)% $1,810 $2,095 (14)%
================================================================================
Consumer Businesses
The Consumer Businesses unit is composed of the retail distribution
network, community banking, consumer lending, student lending and mortgage
banking. The sale of the mortgage banking unit was announced in April 2001, and
the estimated loss on the sale is included in All Other. The Consumer Businesses
unit earned $172 million in the first quarter of 2001, a slight increase over
the prior year, despite the significant impact of divestitures. Increased
earnings were primarily driven by lower operating expenses as a result of
expense reductions realized from merger integration activities.
Wealth Management and Brokerage
Wealth Management and Brokerage includes the Investment Services units: the
Private Clients Group, Columbia Management, the Mutual Funds & Investments Group
and several businesses offering retirement planning, large institutional asset
management and not-for-profit investment services, as well as the Quick & Reilly
retail brokerage and clearing units. Wealth Management and Brokerage earned $65
million in the first quarter of
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9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2001, compared to $111 million in the first quarter of 2000, a decrease of $46
million. These lower results were due to the significant decline in performance
levels at Quick & Reilly, as brokerage-related revenues declined along with the
overall activity in the equity markets. In addition, the market value of
domestic assets under management declined $9.6 billion from March 31, 2000 to
approximately $120 billion at March 31, 2001.
Small Business
Earnings for this unit were $41 million in the first quarter of 2001, $23
million, or 36%, lower than the first quarter of 2000, largely the result of
divestitures. For the first quarter of 2001, average loans were $4.3 billion
while average deposits were $12.6 billion, reflecting decreases of $1 billion
and $1.9 billion, respectively, from a year ago, again due to divestitures.
Credit Card
FleetBoston's credit card subsidiary is the tenth largest bank credit card
issuer in the nation in terms of managed credit card receivables. This unit
earned $35 million for the first quarter of 2001, an increase of 21%, as
improvements in credit quality and the associated decrease in provision for
credit losses offset declines in revenues.
CAPITAL MARKETS
=====================================================
Three months ended March 31 2001 2000
Dollars in millions
-----------------------------------------------------
Income statement data:
Net interest income $ (16) $ 6
Noninterest income 182 994
Provision -- --
Noninterest expense 233 512
Taxes (25) 192
-----------------------------------------------------
Net income $ (42) $ 296
-----------------------------------------------------
Balance sheet data:
Average assets $ 9,164 $10,244
Average loans 286 444
Average deposits 63 23
-----------------------------------------------------
Return on equity --% 54%
=====================================================
Capital Markets includes Fleet Meehan Specialist, Robertson Stephens and
Principal Investing. This group incurred a loss of $42 million for the first
quarter of 2001, compared to net income of $296 million in the same quarter a
year ago. A more detailed analysis of these business units follows.
===========================================================================
Three months ended
March 31 2001 2000 % 2001 2000 %
Dollars in millions Net Income Change Total Revenue Change
---------------------------------------------------------------------------
Fleet Meehan
Specialist $ 32 $ 20 60% $ 97 $ 60 62%
Robertson Stephens (9) 121 (107) 158 647 (76)
Principal Investing (65) 155 (142) (89) 293 (130)
---------------------------------------------------------------------------
Total $(42) $296 (114)% $ 166 $1,000 (83)%
===========================================================================
Fleet Meehan Specialist
Fleet Meehan Specialist is one of the largest specialist firms on the NYSE,
representing the common stocks of more than 500 companies. This unit includes
the former M.J. Meehan & Co., which FleetBoston acquired in October 2000. This
unit earned $32 million for the first quarter of 2001, an increase of $12
million, or 60%, over the first quarter of 2000. Increased brokerage
market-making revenues, reflecting higher volumes and volatility in the stock
market, drove the increased earnings. This unit's average daily trading volumes
increased 58% over the first quarter of 2000.
Robertson Stephens
Robertson Stephens is a full-service investment banking firm focused on
providing growth companies with a comprehensive set of investment banking
products and services, including equity underwriting, sales and trading,
research, advisory services, convertible securities and equity derivatives.
Robertson Stephens channels capital to companies by providing investment
banking, brokerage services and research to investors. This unit incurred a net
loss of $9 million in the first quarter of 2001, compared to net income of $121
million in the first quarter of 2000. Lower earnings were mainly a result of
declining underwriting and M&A activities compared to the extraordinary levels
of the first quarter of 2000. The number of underwriting transactions that went
to market in the 2001 period decreased 87%, while the level of announced M&A
transactions declined 64%.
Principal Investing
Principal Investing provides capital and debt financing to business
ventures that are predominantly privately or closely held companies. The
Principal Investing business recorded a loss of $65 million in the first quarter
of 2001, a decrease of $220 million from the same quarter last year. Principal
Investing's earnings were affected by the sharp decline in gains realized on
sales of direct investments, coupled with $132 million of investment write-downs
during the 2001 quarter. Principal Investing earnings are sensitive to changes
in the condition of equity markets and the overall state of the economy.
Accordingly, earnings for this unit can fluctuate significantly. At March 31,
2001, the aggregate carrying value of the Principal Investing portfolio was $4.4
billion.
9
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALL OTHER
All Other includes transactions not allocated to the principal business
lines and the residual impact of methodology allocations, such as the provision
for credit losses, credit loss reserves and equity allocations, combined with
transfer pricing offsets. The business activities of FleetBoston's Treasury unit
are also included in All Other. The Treasury unit is responsible for managing
the Corporation's securities and residential mortgage portfolios, the balance
sheet management function and wholesale funding needs. Earnings in All Other can
fluctuate with changes affecting the consolidated provision for credit losses,
one-time charges, gains and other actions not driven by specific business units.
All Other had a net loss of $502 million in the first quarter of 2001, compared
to net income of $61 million in the first quarter of 2000. The first quarter of
2001 included after-tax charges of $728 million related to the Summit merger,
the sale of the mortgage banking unit and the restructuring of certain capital
markets businesses, as well as $146 million of additional gains from 2000
divestitures and the sale of several small businesses. The first quarter of 2000
benefited from $149 million of after-tax divestiture gains, net of merger
integration expenses, related to the BankBoston merger.
FINANCIAL CONDITION
Total assets were $211.7 billion as of March 31, 2001. The decrease of $7.3
billion from December 31, 2000 reflected a $9.4 billion decrease in securities,
resulting from the sale of $8 billion of low-margin securities in connection
with a repositioning of the balance sheet for asset and liability management
purposes following the Summit merger, and a decrease of $3.2 billion in loans
and leases as a result of runoff and a decline in business volume. These
decreases were offset in part by a rise in federal funds sold and securities
purchased under agreements to resell, due primarily to excess capital following
the securities sales.
Short-term borrowings decreased $4.5 billion from December 31, 2000 to
March 31, 2001, attributable to decreased use of federal funds purchased and
securities sold under agreements to repurchase. The $1.6 billion decrease in
long-term debt was primarily the result of maturities during the quarter.
SECURITIES
=================================================================================================================
March 31, 2001 December 31, 2000 March 31, 2000
Amortized Market Amortized Market Amortized Market
In millions Cost Value Cost Value Cost Value
-----------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and government agencies $ 815 $ 827 $ 1,770 $ 1,769 $ 2,050 $ 1,981
Mortgage-backed securities 15,256 15,484 19,327 19,411 18,347 17,572
Foreign debt securities 2,840 2,810 2,734 2,754 2,668 2,720
Other debt securities 2,997 3,017 2,843 2,832 2,046 1,988
-----------------------------------------------------------------------------------------------------------------
Total debt securities 21,908 22,138 26,674 26,766 25,111 24,261
-----------------------------------------------------------------------------------------------------------------
Marketable equity securities 846 757 1,099 1,072 1,356 2,180
Other equity securities 2,129 2,129 2,067 2,067 1,743 1,743
-----------------------------------------------------------------------------------------------------------------
Total securities available for sale 24,883 25,024 29,840 29,905 28,210 28,184
-----------------------------------------------------------------------------------------------------------------
Total securities held to maturity 585 588 5,059 5,027 6,429 6,196
-----------------------------------------------------------------------------------------------------------------
Total securities $25,468 $25,612 $34,899 $34,932 $34,639 $34,380
=================================================================================================================
The amortized cost of securities available for sale decreased to $24.9
billion at March 31, 2001 compared to $29.8 billion at December 31, 2000. This
decrease was due to the above-mentioned securities sales. The overall valuation
of securities available for sale increased to a net unrealized (pre-tax) gain
position of $141 million at March 31, 2001, primarily related to mortgage-backed
securities, as well as the balance sheet repositioning initiative. The $4.5
billion decrease in the amortized cost of securities held to maturity resulted
from a one-time reclassification of securities held to maturity to securities
available for sale in connection with the adoption of SFAS No. 133.
LOANS AND LEASES
=============================================================================
March 31, Dec. 31, March 31,
In millions 2001 2000 2000
-----------------------------------------------------------------------------
Domestic:
Commercial and industrial $ 54,249 $ 56,147 $ 62,945
Commercial real estate 11,336 11,641 11,164
Consumer 34,424 36,323 41,175
Lease financing 13,296 13,567 11,267
-----------------------------------------------------------------------------
Total domestic loans and leases 113,305 117,678 126,551
-----------------------------------------------------------------------------
International:
Commercial 15,415 14,221 11,760
Consumer 2,920 2,935 3,062
-----------------------------------------------------------------------------
Total international loans and
leases 18,335 17,156 14,822
-----------------------------------------------------------------------------
Total loans and leases $131,640 $134,834 $141,373
=============================================================================
10
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The loan and lease portfolio inherently includes credit risk, which is the
risk of loss arising from a counterparty's failure or inability to meet payment
or performance terms of a contract with the Corporation. FleetBoston attempts to
control such risk through analysis of credit applications, portfolio
diversification and ongoing examinations of outstandings and delinquencies.
FleetBoston strives to identify potential classified assets as early as
possible, to take charge-offs promptly based on realistic assessments of
probable losses and to maintain an adequate reserve for credit losses.
Total loans and leases at March 31, 2001 decreased $3.2 billion from
December 31, 2000. This decrease was due to declines of $1.9 billion in domestic
commercial and industrial (C&I) loans, resulting from loan run-off and lower
business volume, as well as a $1.9 billion decline in consumer loans,
attributable to lower consumer margin loans and a new credit card
securitization. These decreases were offset, in part, by a $1.2 billion increase
in the international loan portfolio, principally in Brazil.
CONSUMER LOANS
==============================================================
March 31, Dec. 31, March 31,
In millions 2001 2000 2000
--------------------------------------------------------------
Domestic:
Home equity $12,375 $12,507 $11,403
Residential real estate 11,051 11,425 15,384
Credit card 4,587 5,126 5,130
Student loans 1,202 1,109 1,613
Installment/other 5,209 6,156 7,645
--------------------------------------------------------------
Total domestic loans 34,424 36,323 41,175
--------------------------------------------------------------
International 2,920 2,935 3,062
--------------------------------------------------------------
Total consumer loans $37,344 $39,258 $44,237
==============================================================
Compared to December 31, 2000, domestic consumer loans decreased $1.9
billion, or 5%, to $34.4 billion at March 31, 2001. The $374 million decrease in
residential real estate loans from year-end was primarily the result of loan
run-off during the first quarter of 2001. Credit card loans declined $539
million to $4.6 billion at March 31, 2001, mainly due to a new securitization of
$950 million of credit card receivables during the first three months of 2001,
offset, in part, by growth in the owned portfolio. The $947 million decrease in
installment/other consumer loans was primarily attributable to lower margin
lending at Quick & Reilly.
Cross-Border Outstandings
In accordance with bank regulatory rules, cross-border outstandings are
amounts payable to FleetBoston by residents of foreign countries, regardless of
the currency in which the claim is denominated, and local country claims in
excess of local country obligations. At March 31, 2001, total cross-border
outstandings were $13.5 billion, compared with $13.2 billion at December 31,
2000, which included $6.9 billion and $6.5 billion, respectively, of
cross-border outstandings to Latin America. Further information with respect to
FleetBoston's cross-border outstandings is included in the "Cross-Border
Outstandings" section of Management's Discussion and Analysis, contained in its
Current Report on Form 8-K dated May 4, 2001.
In addition to credit risk, cross-border outstandings have the risk that,
as a result of political or economic conditions in a country, borrowers may be
unable to meet their contractual repayment obligations of principal and/ or
interest when due because of the unavailability of, or restrictions on, foreign
exchange needed by borrowers to repay their obligations. FleetBoston manages its
cross-border outstandings using country exposure limits established by its
Country Exposure Committee.
The following table details by country FleetBoston's approximate
cross-border outstandings that individually amounted to 1% or more of its
consolidated total assets at March 31, 2001 and December 31, 2000.
11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant Cross-Border Outstandings(a)(b)
March 31, Dec. 31,
Dollars in millions 2001(c)(d) 2000(c)(d)
====================================================================
Argentina:
Banks $ 140 $ 115
Government entities and agencies 855 835
Other 1,375 1,425
--------------------------------------------------------------------
Total $2,370 $2,375
--------------------------------------------------------------------
Percentage of total assets 1.1% 1.1%
--------------------------------------------------------------------
Commitments(e) $ 96 $ 13
--------------------------------------------------------------------
Brazil:
Banks $ 20 --
Government entities and agencies 1,130 --
Other 1,120 --
--------------------------------------------------------------------
Total $2,270 --
--------------------------------------------------------------------
Percentage of total assets 1.1% --
--------------------------------------------------------------------
Commitments(e) $ 90 --
====================================================================
(a) Cross-border outstandings include deposits in other banks, resale
agreements, trading securities, securities available for sale and held to
maturity, loans and leases, amounts due from customers on acceptances,
accrued interest receivable and revaluation gains on trading derivatives.
Excluded from cross-border outstandings are claims reallocated as a result
of external guarantees, cash collateral and insurance contracts primarily
issued by U.S. government agencies.
(b) Cross-border outstandings in countries which totaled between .75% and 1% of
consolidated total assets were approximately as follows: March 31,
2001-none; December 31, 2000-Brazil-$2 billion.
(c) Local country assets and local country liabilities for Argentina and Brazil
are summarized below. Local country assets in excess of local country
liabilities are included in cross-border outstandings.
----------------------------------------------------------
March 31, 2001 December 31, 2000
Local Country Local Country
In billions Assets Liabilities Assets Liabilities
----------------------------------------------------------
Argentina $ 6.4 $ 5.6 $ 6.2 $ 5.5
Brazil 7.3 5.7 6.5 5.2
----------------------------------------------------------
Included in local country liabilities are liabilities where the provider of
funds assumes the risk of nonpayment due to currency exchange restrictions
in a given country. Such liabilities were $3.5 billion at March 31, 2001
and December 31, 2000.
(d) Excluding net local country outstandings, cross-border outstandings with a
remaining maturity of less than one year, as a percentage of total
outstandings, were approximately 50% for Argentina and 90% for Brazil at
March 31, 2001 and 55% for Argentina and 70% for Brazil at December 31,
2000.
(e) Commitments include legally binding cross-border letters of credit,
guarantees and other commitments defined by the FFIEC guidelines.
The Argentine economy continues to be impacted by the recession that began
in 1999. Political discussions regarding a plan to improve the economy continue.
A new finance minister was appointed in March of this year and was given broad
powers to implement specific measures to improve the economy.
The Argentine financial markets continue to experience periods of
significant volatility. To date, Argentine cross-border outstandings and
securities portfolios have not been significantly impacted by the economic and
political situation described above. In management's judgment, the Argentine
situation has not significantly impacted other Latin American countries where
FleetBoston has operations. The Corporation will continue to closely monitor the
Argentine economic and political situation and its potential impact on Argentine
and other Latin American operations. However, it is not possible to predict what
effect, if any, the economic and political events in Argentina will ultimately
have on that country's economic growth or on FleetBoston's operations in
Argentina or in other Latin American countries.
The Argentine government recently announced plans to enter into a voluntary
swap of existing government securities held by bondholders. Existing securities
with principal and interest payments due between 2001-2006 will be swapped for
new securities with longer maturities. The government has agreed in principle
with seven investment banks to execute the swap. Current estimates are that
approximately $20 billion of existing government securities will be included in
the swap program. The specific conditions of the swap program are not yet
available.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONPERFORMING ASSETS(a)
===========================================================================================================================
March 31, 2001 December 31, 2000 March 31, 2000
---------------------------------------------------------------------------------------------------------------------------
Current or Current or Current or
less than less than less than
90 days 90 days 90 days
In millions past due Noncurrent Total past due Noncurrent Total past due Noncurrent Total
---------------------------------------------------------------------------------------------------------------------------
Domestic:
C&I $614 $255 $ 869 $578 $187 $ 765 $382 $231 $ 613
CRE 27 21 48 3 25 28 4 31 35
Consumer 5 68 73 4 83 87 10 111 121
OREO -- 29 29 -- 30 30 -- 35 35
---------------------------------------------------------------------------------------------------------------------------
Total Domestic $646 $373 $1,019 $585 $325 $ 910 $396 $408 $ 804
---------------------------------------------------------------------------------------------------------------------------
International:
C&I $ -- $ 75 $ 75 $ 3 $ 78 $ 81 $ -- $ 94 $ 94
CRE 4 73 77 2 64 66 2 42 44
Consumer -- 59 59 -- 55 55 -- 81 81
OREO -- 15 15 -- 18 18 -- 16 16
---------------------------------------------------------------------------------------------------------------------------
Total International $ 4 $222 $ 226 $ 5 $215 $ 220 $ 2 $233 $ 235
---------------------------------------------------------------------------------------------------------------------------
Total NPAs $650 $595 $1,245 $590 $540 $1,130 $398 $641 $1,039
===========================================================================================================================
(a) Throughout this Report, NPAs and related ratios do not include loans
greater than 90 days past due and still accruing interest ($352 million,
$361 million, and $293 million at March 31, 2001, December 31, 2000, and
March 31, 2000, respectively). Included in these 90 days past due and still
accruing amounts were $264 million, $276 million, and $213 million of
consumer loans at March 31, 2001, December 31, 2000, and March 31, 2000,
respectively.
Nonperforming assets (NPAs) at March 31, 2001 increased $115 million to
$1.2 billion when compared with December 31, 2000, and increased $206 million
compared to March 31, 2000. The three month rise in NPAs was due primarily to
additions to domestic C&I nonperforming loans (NPLs), offset, in part, by $61
million of NPLs which were reclassified during the first quarter of 2001 to
assets held for sale by accelerated disposition (AHAD). NPAs at March 31, 2001,
as a percentage of total loans, leases and OREO, and as a percentage of total
assets, were .95% and .59%, respectively, compared to .84% and .52%,
respectively, at December 31, 2000.
As noted in previous public comments and prior filings with the Securities
and Exchange Commission (the SEC), FleetBoston anticipates increases in NPAs
during 2001, primarily related to domestic C&I loans. Future levels of NPAs will
be influenced by the economic environment, interest rates and other internal and
external factors existing at the time. As such, no assurance can be given as to
future levels of NPAs.
The following table sets forth the status of impaired loans, which are
primarily commercial and commercial real estate loans on nonaccrual status.
Impaired Loans
==================================================================
March 31, Dec. 31,
In millions 2001 2000
------------------------------------------------------------------
Impaired loans with a reserve $ 801 $ 722
Impaired loans without a reserve 220 164
------------------------------------------------------------------
Total impaired loans $1,021 $ 886
------------------------------------------------------------------
Reserve for impaired loans(a) $ 328 $ 268
------------------------------------------------------------------
Quarterly average balance of impaired loans $ 956 $1,007
==================================================================
(a) The reserve for impaired loans is part of the Corporation's overall reserve
for credit losses.
Substantially all of the impaired loans presented above were on nonaccrual
status and the amount of interest income recognized on impaired loans was not
significant. FleetBoston had no significant outstanding commitments to lend
additional funds to customers whose loans have been placed on nonaccrual status
or the terms of which have been modified.
At March 31, 2001, FleetBoston had AHAD with a net carrying value of $177
million, all of which were not accruing interest. At December 31, 2000 and March
31, 2000, the net carrying value of AHAD was $138 million and $498 million
respectively, of which approximately $136 million and $320 million,
respectively, were not accruing interest. Transfers to this category are made in
accordance with management's intention to focus appropriate resources on the
disposition of these assets. Such assets are classified as other assets in the
consolidated balance sheet, and the portions not accruing interest are excluded
from the preceding NPA table.
RESERVE FOR CREDIT LOSSES ACTIVITY
=====================================================================
Three months ended March 31 2001 2000
Dollars in millions
---------------------------------------------------------------------
Balance at beginning of year $ 2,709 $ 2,816
Loans charged off (330) (351)
Recoveries of loans charged off 60 56
---------------------------------------------------------------------
Net charge-offs (270) (295)
Provision for credit losses 315 320
Divestitures/Acquisitions/Other -- (31)
---------------------------------------------------------------------
Balance at end of period $ 2,754 $ 2,810
---------------------------------------------------------------------
Ratios of net charge-offs to average loans .82% .83%
---------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end loans 2.09 1.99
---------------------------------------------------------------------
Ratios of reserve for credit losses to
period-end NPLs 229 284
=====================================================================
The reserve for credit losses at March 31, 2001 decreased $56 million from
March 31, 2000. This decrease
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
was the result of transfers of reserves throughout 2000 related to divestitures
of loans. The drop in net charge-offs in the quarterly comparison resulted from
lower levels of credit card and other consumer charge-offs, partly offset by
increased charge-offs of domestic C&I loans. The increase in the reserve for
credit losses from December 31, 2000 to March 31, 2001 was the result of the
provision for credit losses exceeding net charge-offs by $45 million. Further
information with respect to the reserve for credit losses is included in the
"Reserve for Credit Losses" section of Management's Discussion and Analysis
contained in FleetBoston's Current Report on Form 8-K dated May 4, 2001.
ASSET AND LIABILITY MANAGEMENT
The goal of asset and liability management is the prudent control of market
risk, liquidity risk and use of capital. Asset and liability management is
governed by policies reviewed and approved annually by the FleetBoston Board of
Directors (the Board), which delegates responsibility for asset and liability
management to the Asset, Liability and Capital Committee (ALCCO). Further
information with respect to asset and liability management, including related
policies, is included in the "Asset and Liability Management" section of
Management's Discussion and Analysis contained in FleetBoston's Current Report
on Form 8-K dated May 4, 2001.
MARKET RISK MANAGEMENT
Market risk is the sensitivity of income and capital to variations in
interest rates, foreign exchange rates, equity prices, commodity prices and
other market-driven rates or prices. FleetBoston is exposed to market risk both
in its balance sheet management activities and in its trading activities. The
market risk management process for these activities applies to both balance
sheet and off-balance sheet exposures.
Balance Sheet Management - U.S. Dollar Denominated Risk
U.S. dollar denominated assets and liabilities comprise the majority of the
consolidated balance sheet. Interest rate risk, which is the sensitivity of
income or financial condition to variations in interest rates, is by far the
most significant non-trading market risk to which the U.S. dollar denominated
positions are exposed. Interest rate risk arises directly from core banking
activities - lending and deposit gathering. The interest rate risk exposure of
U.S. dollar denominated positions results almost entirely from domestic
operations. Such exposure of U.S. dollar denominated assets and liabilities in
overseas operations is not significant.
Board-approved limits on interest rate risk specify that if interest rates
in the base forecast scenario 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 base scenario for March 31, 2001, intended to
reflect current market consensus, envisioned approximately 100 basis points of
further interest rate easing by the Federal Reserve Board, half of which
occurred in April 2001. The limit relates to the impact of an immediate increase
or decrease in forecasted interest rates relative to the base scenario.
FleetBoston was in compliance with the limit at March 31, 2001.
The following table reflects the estimated exposure of net interest income
for the next 12 months due to an immediate shift in forecasted interest rates.
This analysis reflects the balance sheet as of March 31, 2001, adjusted for the
anticipated sale of the mortgage banking business, which was announced in April
2001. The analysis does not reflect the impact of balance sheet management
transactions executed subsequent to quarter-end to offset the expected impact of
the sale on net interest income.
Estimated Exposure to
Rate Change Net Interest Income
(Basis Points) (In millions)
-----------------------------------------------------
March 31, Dec. 31,
2001 2000
-----------------------------------------------------
+200 $ 68 $(121)
-200 (137) 97
=====================================================
As indicated, an immediate 200 basis point decrease in interest rates
relative to the base scenario would tend to reduce net interest income but by an
amount that is well within Board-approved limits. An immediate 200 basis point
increase in interest rates would tend to enhance net interest income.
The change in position during the quarter ended March 31, 2001 reflects a
number of events, including the termination of $6 billion of
receive-fixed/pay-variable interest rate swaps in January 2001; the completion
of the Summit acquisition; and the announcement of the sale of the mortgage
banking business. While the balance sheet position as of March 31, 2001 appears
modestly asset-sensitive, subsequent balance sheet management transactions
related to the sale of the mortgage banking business have reduced this exposure.
Furthermore, while an immediate and severe shift in interest rates is used in
this analysis to provide an estimate of exposure under an extremely adverse
scenario, management believes that the exposure of net interest income to
gradual and modest changes in interest rates is relatively insignificant. Given
a gradual (1-year) 200 basis point increase or decrease in interest rates
relative to the base scenario, there is currently no material exposure to annual
net interest income. Net interest income would tend to benefit from a steepening
of the yield curve.
FleetBoston also performs valuation analysis, which involves projecting
future cash flows from assets, liabilities and derivative positions over a very
long-term horizon, discounting those cash flows at appropriate interest rates,
and then aggregating the discounted cash flows. The "Economic Value of Equity"
(EVE) is the estimated net present value of these discounted cash flows.
Board-approved limits on interest rate risk specify that if interest rates
in the base forecast scenario were to shift immediately up or down 200 basis
points, the estimated EVE should decline by less than 10%. FleetBoston was in
compliance with this limit at March 31, 2001.
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table reflects estimated EVE exposures assuming an immediate
shift in interest rates. Exposures are reported for shifts of +/- 100 basis
points as well as +/- 200 basis points because the sensitivity of EVE to changes
in interest rates can be very nonlinear.
Estimated Exposure to
Rate Change Economic Value
(Basis Points) (In millions)
-------------------------------------------------------
March 31, Dec. 31,
2001 2000
-------------------------------------------------------
+200 $(399) $(611)
+100 (372) (155)
-100 150 (315)
-200 (343) (451)
=======================================================
As indicated, an immediate 200 basis point change in interest rates in
either direction would reduce EVE, but by an amount that is well within
Board-approved limits.
Estimated EVE exposures at March 31, 2001 were similar but smaller than at
December 31, 2000. These changes were a result of the balance sheet management
transactions executed in the period as well as the acquisition of Summit;
however, the major factor impacting estimated exposures was the anticipated sale
of MSRs in connection with the sale of the mortgage banking business.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was adopted as of January 1, 2001. For additional information on
this new Standard, refer to Notes 2 and 11 to the Financial Statements.
Balance Sheet Management - Non-U.S. Dollar Denominated Risk
Non-U.S. dollar denominated assets and liabilities are exposed to interest
rate and foreign exchange rate risks. The majority of the non-U.S. dollar
denominated interest rate and foreign exchange rate risk exposure stems from
operations in Latin America, primarily Argentina and Brazil. At March 31, 2001,
exposure to non-trading interest rate risk in Latin American operations was not
significant. Exposure to non-trading foreign exchange rate risk in Latin
American operations is managed using a Value-at-Risk (VAR) methodology, which is
discussed in the Trading Activities section of this discussion and analysis.
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risk Management Instruments
==================================================================================================================================
Weighted
Assets- Average Weighted Average
March 31, 2001 Notional Liabilities Maturity Fair Rate
Dollars in millions Value Hedged (Years) Value Receive Pay
----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC INTEREST RATE RISK MANAGEMENT INSTRUMENTS
Interest rate swaps:
Receive fixed/pay variable $ 13,318 Variable-rate loans
340 Fixed-rate deposits
485 Short-term debt
5,835 Long-term debt
---------
19,978 3.2 $680 6.93 % 5.79 %
---------
Pay fixed/receive variable 100 Short-term debt
---------
100 4.1 (7) 4.93 6.87
---------
Options 1,500 Securities
450 Fixed-rate deposits
855 Long-term debt
---------
2,805 4.2 (45) --- ---
----------------------------------------------------------------------------------------------------------------------------------
Total domestic interest rate risk management
instruments 22,883 3.4 $628 6.92 % 5.80 %
----------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL INTEREST RATE RISK MANAGEMENT
INSTRUMENTS
Interest rate swaps 135 Foreign currency 2.1 (2) 5.34 % 5.52 %
denominated
variable-rate deposits
----------------------------------------------------------------------------------------------------------------------------------
Total international interest rate risk management
instruments 135 2.1 (2) 5.34 % 5.52 %
----------------------------------------------------------------------------------------------------------------------------------
Total hedges of net interest income $ 23,018 3.3 $626 6.91 % 5.79 %
----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING RISK MANAGEMENT INSTRUMENTS
Swaps:
Interest rate, P.O., and MBS swaps $ 15,498 MSRs 3.2 $ 4 6.00 % 4.93 %
Options:
Interest rate floors and options on swaps 56,882 MSRs 2.7 566 --- (a) --- (a)
Interest rate caps 11,634 MSRs 3.7 49 --- (a) --- (a)
Other options 477 MSRs .2 4 --- ---
----------------------------------------------------------------------------------------------------------------------------------
Total options 68,993 2.9 619 --- ---
----------------------------------------------------------------------------------------------------------------------------------
Total hedges of mortgage servicing rights $ 84,491 2.9 $623 6.00 % 4.93 %
----------------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE RISK MANAGEMENT INSTRUMENTS
Swaps $ 1,225 Foreign currency 1.1 $ 89 --- ---
denominated
resale agreements
Forward contracts 461 Foreign currency 1.0 5 --- ---
denominated
fixed-rate loans;
fixed-rate deposits
Futures 1,041 Foreign currency 1.1 --- --- ---
denominated
resale agreements
----------------------------------------------------------------------------------------------------------------------------------
Total hedges of foreign exchange $ 2,727 1.1 $ 94 --- ---
----------------------------------------------------------------------------------------------------------------------------------
Total risk management instruments $110,236 3.0 $1,343 6.51 % 5.42 %
==================================================================================================================================
(a)The mortgage banking risk management interest rate floors and options on
swaps, and interest rate caps, have weighted average strike rates of 5.46%
and 7.39%, respectively.
Trading Activities
The Corporation's trading activities create exposure to price risk, or the
risk of loss in earnings arising from adverse changes in the value of trading
portfolios of financial instruments. Price risk arises from market-making,
dealing and position-taking in interest rate, equity, currency exchange rate and
precious metals markets.
Trading-related revenues include certain components of capital markets
revenue (trading profits and commissions, foreign exchange revenue and
market-making revenue), as well as net interest income from these trading
positions. For the three months ended March 31, 2001, daily trading-related
revenues ranged from a loss of $19.7 million to a profit of $22.6 million. For
the 2000 period, such revenues ranged from a loss of $.3 million to a profit of
$18.3 million.
The Corporation uses a VAR methodology, based on industry-standard risk
measurement techniques, to measure the overall price risk inherent in its
activities. This methodology is more fully described on page 21 of the Current
Report on Form 8-K dated May 4, 2001. Under this methodology, aggregate VAR
averaged $40 million daily for the three months ended March 31, 2001,
essentially unchanged from the daily average for all of 2000. At March 31, 2001,
total VAR usage measured $46 million. In no instance during the current year
quarter did FleetBoston's daily VAR measure exceed the approved limit.
For the three months ended March 31, 2001, most of the price risk in the
Corporation's trading activities arose from interest rate risk, which includes
directional and spread components, and averaged $23 million, or 58%, of
aggregate VAR. Interest rate risk arises primarily from trading activity in
various domestic fixed-income markets, and in the Argentine and Brazilian
sovereign and high-end corporate bond markets.
The contribution to FleetBoston's VAR from equity trading activities for
the first quarter of 2001 decreased somewhat, to an average of $10 million, or
25%, of aggregate VAR. The individual activities that generate most of these
risks include the Corporation's large NYSE specialist firm, as well as NASDAQ
market-making, equity
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
trading and a convertible bond trading and underwriting business.
Risk from foreign exchange trading activities for the three months ended
March 31, 2001 remained moderate at an average of $7 million, or 17%, of
aggregate VAR. The majority of foreign exchange risk arises from the
Corporation's Argentine and Brazilian operations, which establish positions with
the intention of taking advantage of expected movements in currency exchange
rates and/or interest rates. During the first quarter of 2001, the Corporation
primarily maintained local currency assets funded with U.S. dollars. The daily
average for the Argentine exposure measured $342 million, while the daily
average for the Brazilian exposure measured $24 million. This compares with $294
million and $26 million, respectively, for the fourth quarter of 2000.
Average VAR for commodity risk remained insignificant during the three
months ended March 31, 2001.
FleetBoston's independent Market Risk Management function routinely
validates FleetBoston's measurement framework by conducting backtests, which
compare the actual daily trading-related results against the estimated VAR with
a one-day holding period. In no instance during the current year quarter did a
daily aggregate trading loss exceed the one-day aggregate VAR measure associated
with that date.
[GRAPHIC OMITTED - LINE GRAPH REPRESENTATION OF DAILY TRADING-RELATED REVENUES
AND VAR MEASURE WITH A ONE-DAY HOLDING PERIOD FOR THE THREE MONTHS ENDED MARCH
31, 2001]
During the three months ended March 31, 2001, the daily trading-related revenues
ranged from a loss of $19.7 million to a profit of $22.6 million. Over the same
period, VAR with a one-day holding period ranged from $22 million to $36
million.
In addition to the VAR framework, FleetBoston employs other risk
measurement tools to evaluate and control price risk. These tools include
cumulative loss limits and overall portfolio size limits, as well as regular
stress tests and scenario analyses. While the VAR framework and the additional
risk measurement tools effectively ensure exposures remain within the
Corporation's expressed tolerance for price risk, they do not guarantee the
avoidance of trading losses during periods of extreme volatility.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity risk management is to assure the ability of
FleetBoston and its subsidiaries to meet their financial obligations. These
obligations are the payment of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and the ability to take advantage of new business
opportunities. 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 commercial and consumer
receivables. Further information with respect to liquidity risk management,
including sources of liquidity for FleetBoston and its banking and nonbanking
subsidiaries, is included in the "Liquidity Risk Management" section of
Management's Discussion and Analysis contained in FleetBoston's Current Report
on Form 8-K dated May 4, 2001.
At March 31, 2001, the parent company had excess funds of $1.3 billion,
compared to $1.7 billion at December 31, 2000, and commercial paper outstanding
of $1 billion at March 31, 2001 and December 31, 2000. In addition, the parent
company has backup lines of credit totaling $1 billion to provide funding should
commercial paper not be available. At March 31, 2001 and December 31, 2000, the
parent company had no outstanding balances under these lines of credit.
At March 31, 2001, the parent company had $1.6 billion available for the
issuance of senior or subordinated debt securities and other debt securities,
common stock, preferred stock or trust preferred securities under a shelf
registration statement filed with the SEC. Management believes the Corporation
has sufficient liquidity to meet its liabilities to customers and debt holders.
CAPITAL MANAGEMENT
CAPITAL RATIOS
==============================================================
March 31, Dec. 31, March 31,
2001 2000 2000
--------------------------------------------------------------
Risk-adjusted assets
(in millions) $209,399 $212,438 $222,216
Tier 1 risk-based
capital (4% minimum) 7.96 % 8.08 % 7.02 %
Total risk-based
capital (8% minimum) 11.74 11.87 11.03
Leverage (3% minimum) 7.89 8.01 6.75
Common equity to assets 8.88 8.58 7.66
Total equity to assets 9.15 8.84 7.91
Tangible common equity
to assets 6.93 6.64 5.72
Tangible common equity
to managed assets 6.44 6.18 5.37
Tangible total equity to
assets 7.20 6.90 5.97
==============================================================
At March 31, 2001, FleetBoston exceeded all regulatory required minimum
capital ratios, as its Tier 1 and Total risk-based capital ratios were 7.96% and
11.74%, respectively, compared with 8.08% and 11.87%, respectively, at December
31, 2000. The leverage ratio, a
17
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
measure of Tier 1 capital to average quarterly assets, was 7.89% at March 31,
2001 compared with 8.01% at December 31, 2000.
On April 15, 2001, the Corporation redeemed all of the outstanding shares
of its 7.25% Series V perpetual preferred stock at its aggregate liquidation
value of $191 million. On April 25, 2001, FleetBoston repurchased 189,420 of the
600,000 outstanding shares of its 6.75% Series VI perpetual preferred stock,
having an aggregate liquidation value of $47.4 million. The Corporation may
repurchase additional shares of its preferred stock from time to time, subject
to market conditions, capital requirements and other factors.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements relating to future
results of FleetBoston (including certain projections and business trends) that
are considered "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
contemplated as a result of certain risks and uncertainties, including, but not
limited to, changes in general political and economic conditions, either
domestically or internationally; interest rate and currency fluctuations;
competitive product and pricing pressures within FleetBoston's market; equity
and bond market fluctuations and perceptions; the level of nonperforming assets;
inflation; technological changes, including the impact of the Internet; lower
than expected cost savings or higher than expected costs associated with
acquisitions and integrations of acquired businesses; greater than expected
negative impact of required divestitures; adverse legislation or regulatory
developments affecting the businesses in which FleetBoston is engaged; as well
as other risks and uncertainties detailed from time to time in the filings of
FleetBoston with the SEC.
RECENT ACCOUNTING DEVELOPMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
Standard provides consistent accounting standards for transfers of financial
assets, and requires disclosure of information about securitized assets. The
accounting requirements of the Standard are effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001, and must be applied prospectively. The required disclosures
related to securitization transactions were provided in Note 18 to the
Consolidated Financial Statements included in the Corporation's Current Report
on Form 8-K dated May 4, 2001, and the impact of the accounting requirements of
the Standard, which FleetBoston adopted as of April 1, 2001, is not expected to
be material to its financial position or results of operations in future
periods.
18
19
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
========================================================================================
Three months ended March 31 2001 2000
Dollars in millions, except per share amounts
----------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans and leases $3,080 $3,268
Interest on securities and trading assets 613 616
Other 225 232
----------------------------------------------------------------------------------------
Total interest income 3,918 4,116
----------------------------------------------------------------------------------------
Interest expense:
Deposits of domestic offices 772 790
Deposits of international offices 300 297
Short-term borrowings 361 435
Long-term debt 510 478
Other 56 68
----------------------------------------------------------------------------------------
Total interest expense 1,999 2,068
----------------------------------------------------------------------------------------
Net interest income 1,919 2,048
----------------------------------------------------------------------------------------
Provision for credit losses 315 320
----------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,604 1,728
----------------------------------------------------------------------------------------
Noninterest income:
Banking fees and commissions 390 405
Investment services revenue 388 526
Processing-related revenue 188 160
Credit card revenue 164 166
Capital markets revenue 94 1,060
Other 300 503
----------------------------------------------------------------------------------------
Total noninterest income 1,524 2,820
----------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 1,044 1,544
Occupancy 154 182
Equipment 146 128
Intangible asset amortization 100 97
Legal and other professional 69 88
Marketing and public relations 63 79
Merger- and restructuring-related charges 487 37
Other 790 590
----------------------------------------------------------------------------------------
Total noninterest expense 2,853 2,745
----------------------------------------------------------------------------------------
Income before income taxes 275 1,803
Applicable income taxes 133 727
----------------------------------------------------------------------------------------
Net income $ 142 $1,076
========================================================================================
Diluted weighted average common shares outstanding
(in millions) 1,095.9 1,097.4
Net income applicable to common shares $ 132 $1,066
Basic earnings per share .12 .99
Diluted earnings per share .12 .97
Dividends declared .33 .30
========================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
19
20
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
===================================================================================================================
March 31, December 31,
Dollars in millions, except per share amounts 2001 2000
-------------------------------------------------------------------------------------------------------------------
ASSETS
Cash, due from banks and interest-bearing deposits $ 11,497 $ 12,826
Federal funds sold and securities purchased under agreements to resell 6,615 1,959
Trading assets 6,523 7,108
Mortgages held for sale 3,574 2,138
Securities (market value: $25,612 and $34,932) 25,609 34,964
Loans and leases 131,640 134,834
Reserve for credit losses (2,754) (2,709)
-------------------------------------------------------------------------------------------------------------------
Net loans and leases 128,886 132,125
-------------------------------------------------------------------------------------------------------------------
Due from brokers/dealers 3,448 2,987
Premises and equipment 2,865 2,867
Mortgage servicing rights 2,735 2,695
Intangible assets 4,448 4,557
Other assets 15,541 14,859
-------------------------------------------------------------------------------------------------------------------
Total assets $211,741 $219,085
===================================================================================================================
LIABILITIES
Deposits:
Domestic:
Noninterest bearing $ 27,462 $ 29,707
Interest bearing 80,973 80,073
International:
Noninterest bearing 1,595 1,628
Interest bearing 17,959 17,331
-------------------------------------------------------------------------------------------------------------------
Total deposits 127,989 128,739
-------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 8,428 12,955
Other short-term borrowings 10,134 10,151
Trading liabilities 2,195 2,540
Due to brokers/dealers 3,700 4,122
Long-term debt 30,134 31,684
Accrued expenses and other liabilities 9,783 9,533
-------------------------------------------------------------------------------------------------------------------
Total liabilities 192,363 199,724
-------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY
Preferred stock 566 566
Common stock, par value $.01 (1,085.8 million shares issued in 2001 and
1,100.1 million shares issued in 2000) 11 11
Common surplus 4,013 4,814
Retained earnings 14,392 14,561
Accumulated other comprehensive income 539 40
Treasury stock, at cost (3.5 million shares in 2001 and 14.6 million shares in 2000) (143) (631)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,378 19,361
-------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $211,741 $219,085
===================================================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
20
21
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
=============================================================================================================================
Accumulated
Other
Three months ended March 31 Preferred Common Common Retained Comprehensive Treasury
Dollars in millions, except per share amounts Stock Stock Surplus Earnings Income/(Loss) Stock Total
-----------------------------------------------------------------------------------------------------------------------------
2000
----
Balance at December 31, 1999 $691 $11 $5,273 $12,020 $301 $(222) $18,074
Net income 1,076 1,076
Other comprehensive income, net of taxes:
Change in unrealized gain on securities
available for sale, net of taxes and
reclassification adjustment (347)
Change in translation adjustment, net of
taxes ---
--------------
Other comprehensive income (347) (347)
---------
Total comprehensive income 729
Cash dividends declared on common stock
($.30 per share) (271) (271)
Cash dividends declared by pooled company
prior to merger (58) (58)
Cash dividends declared on preferred stock (10) (10)
Common stock issued in connection with
dividend reinvestment and employee benefit plans (12) (12) 38 14
Business combinations (26) 130 104
Redemption of preferred stock (125) (125)
Treasury stock purchased (9) (9)
Settlement of forward purchase contracts (585) (585)
Other, net 1 1
-----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $566 $11 $5,235 $12,745 $(46) $(647) $17,864
-----------------------------------------------------------------------------------------------------------------------------
2001
----
Balance at December 31, 2000 $566 $11 $4,814 $14,561 $ 40 $(631) $19,361
Net income 142 142
Other comprehensive income, net of taxes:
Change in unrealized gain on securities
available for sale, net of taxes and
reclassification adjustment 68
Change in translation adjustment, net of
taxes 5
Change in derivative instruments, net of taxes:
Cumulative effect of adopting SFAS No. 133 204
Changes in fair values of derivatives 88
Net losses reclassified to noninterest
income 134
--------------
Other comprehensive income 499 499
---------
Total comprehensive income 641
Cash dividends declared on common stock
($.33 per share) (358) (358)
Cash dividends declared on preferred stock (10) (10)
Common stock issued in connection with
dividend reinvestment and employee benefit plans 154 57 37 248
Exercise of common stock warrants 77 77
Treasury stock purchased (581) (581)
Retirement of treasury stock (1,033) 1,033 ---
Other, net 1 (1) ---
-----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $566 $11 $4,013 $14,392 $539 $(143) $19,378
=============================================================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
21
22
FLEETBOSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
=====================================================================================================================
Three months ended March 31 2001 2000
In millions
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 142 $ 1,076
Adjustments for noncash items:
Depreciation and amortization of premises and equipment 135 156
Amortization of mortgage servicing rights 122 97
Amortization of other intangible assets 100 97
Provision for credit losses 315 320
Deferred income tax (benefit)/expense (125) 61
Securities losses 213 58
Merger- and restructuring-related charges 487 37
Gains on branch divestitures --- (366)
Originations and purchases of mortgages held for sale (9,211) (3,589)
Proceeds from sales of mortgages held for sale 7,775 3,947
Decrease/(increase) in trading assets 585 (173)
Decrease in trading liabilities (345) (478)
Increase in due from brokers/dealers (461) (1,248)
Decrease/(increase) in accrued receivables, net 715 (31)
(Decrease)/increase in due to brokers/dealers (422) 1,094
(Decrease)/increase in accrued liabilities, net (241) 1,430
Other, net (537) (2,297)
---------------------------------------------------------------------------------------------------------------------
Net cash flow (used in)/provided by operating activities (753) 191
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and securities purchased under agreements to resell (4,656) (825)
Purchases of securities available for sale (2,741) (3,747)
Proceeds from sales of securities available for sale 9,828 3,775
Proceeds from maturities of securities available for sale 1,773 595
Purchases of securities held to maturity (155) (165)
Proceeds from maturities of securities held to maturity 197 463
Net cash and cash equivalents received from businesses acquired --- 15
Proceeds from sale of loan portfolio by banking subsidiary 950 750
Net decrease/(increase) in loans and leases 1,936 (2,921)
Net cash and cash equivalents received from branch divestitures --- 55
Purchases of premises and equipment (196) (171)
Purchases of mortgage servicing rights (33) (35)
---------------------------------------------------------------------------------------------------------------------
Net cash flow provided by/(used in) investing activities 6,903 (2,211)
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (750) (901)
Net (decrease)/increase in short-term borrowings (4,544) 1,325
Proceeds from issuance of long-term debt 976 2,403
Repayments of long-term debt (2,526) (1,447)
Proceeds from issuance of common stock 325 14
Repurchases of common stock (581) (9)
Settlement of forward purchase contracts --- (585)
Redemption of preferred stock --- (125)
Cash dividends paid (342) (339)
---------------------------------------------------------------------------------------------------------------------
Net cash flow (used in)/provided by financing activities (7,442) 336
---------------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash (37) 7
---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,329) (1,677)
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 12,826 11,860
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $11,497 $10,183
=====================================================================================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 1,936 $ 2,054
Income taxes paid 150 88
=====================================================================================================================
See accompanying Condensed Notes to Consolidated Financial Statements.
22
23
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of FleetBoston
Financial Corporation (FleetBoston or the Corporation) are unaudited. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results of operations
contained herein have been made. Certain amounts reported in prior periods have
been reclassified to conform to current period classifications.
The financial statements reflect the acquisition of Summit Bancorp.
(Summit), which was completed on March 1, 2001. The acquisition was accounted
for as a pooling of interests and, accordingly, the information included in the
accompanying consolidated financial statements and notes presents the combined
financial position and results of operations of FleetBoston and Summit as if
they had operated as a combined entity for all periods presented. This
information should be read in conjunction with FleetBoston's 2000 Annual Report
on Form 10-K and its Current Report on Form 8-K dated May 4, 2001.
NOTE 2. ACCOUNTING FOR DERIVATIVE
INSTRUMENTS
FleetBoston adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as of
January 1, 2001. The transition adjustments related to adoption of the Standard
resulted in an after-tax increase to other comprehensive income, a component of
stockholders' equity, of approximately $200 million, and an increase of
approximately $14 million to other noninterest income ($8 million after-tax).
Concurrent with adoption of the Standard, and as permitted by its provisions,
approximately $5 billion of securities held to maturity were reclassified as
securities available for sale. As a result, these securities will be eligible as
hedged items in future fair value and cash flow hedge transactions. This
reclassification resulted in an after-tax loss of approximately $160 million,
which was initially recorded in other comprehensive income. Significant
accounting policies related to derivative instruments are described below, and
other disclosures required by the Standard are included in Note 11.
All derivatives are recognized in the consolidated balance sheet at their
fair value. On the date a derivative contract is entered into, the derivative is
designated as: (1) a hedge of the fair value of a recognized fixed-rate asset or
liability or of an unrecognized firm commitment (a "fair value" hedge); (2) a
hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized variable-rate asset or liability (a
"cash flow" hedge); (3) a foreign currency fair value or cash flow hedge (a
"foreign currency" hedge); (4) a hedge of a net investment in a foreign
operation, or (5) "held for trading" ("trading" instruments).
Changes in the fair value of a derivative that is highly effective - and
that is designated and qualifies - as a fair value hedge, along with changes in
fair value of the hedged asset or liability that is attributable to the hedged
risk (including losses or gains on firm commitments), are recorded in the
current period in noninterest income. Changes in the fair value of a derivative
that is highly effective - and that is designated and qualifies as - a cash flow
hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of the
hedged cash flows (e.g., when periodic settlements on a variable-rate asset or
liability are recorded in earnings). Cash flow hedge ineffectiveness, defined as
the extent that the changes in fair value of the derivative exceed the
variability of cash flows of the forecasted transaction, is recorded in the
current period in noninterest income. Changes in the fair value of derivatives
that are highly effective - and that are designated and qualify as - foreign
currency hedges are recorded in either current period noninterest income or
other comprehensive income, depending on whether the hedge transaction meets the
criteria for a fair value or a cash flow hedge. If, however, a derivative is
used as a hedge of a net investment in a foreign operation, its changes in fair
value, to the extent effective as a hedge, are recorded in the cumulative
translation adjustments component of other comprehensive income. Lastly, changes
in the fair value of derivative trading instruments are reported in the current
period in noninterest income.
FleetBoston formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value, cash flow or foreign
currency hedges to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. FleetBoston formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in
offsetting changes in fair values or cash flows of hedged items and whether they
are expected to continue to be highly effective in future periods. When it is
determined that a derivative has ceased to be a highly effective hedge, hedge
accounting is discontinued prospectively.
Specifically, hedge accounting is discontinued prospectively when: (1) it
is determined that the derivative is no longer effective in offsetting changes
in the fair value or
23
24
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
cash flows of a hedged item; (2) the derivative expires or is sold, terminated,
or exercised; (3) the hedged firm commitment no longer meets the definition of a
firm commitment; (4) it is probable that the forecasted transaction will not
occur by the end of the specified time period; or (5) management determines that
the fair value or cash flow hedge designation is no longer appropriate.
When it is determined that the derivative no longer qualifies as an
effective fair value or cash flow hedge or management removes the hedge
designation, the derivative will continue to be carried on the balance sheet at
its fair value, with changes in fair value recognized in current period
noninterest income. The asset or liability under a fair value hedge will no
longer be adjusted for changes in fair value. The component of other
comprehensive income related to discontinued cash flow hedges is amortized to
noninterest income over the original term of the hedge contract.
When hedge accounting is discontinued because the hedged item no longer
meets the definition of a firm commitment, or because it is probable that the
forecasted transaction will not occur by the end of the specified time period,
the derivative will continue to be carried on the balance sheet at its fair
value, with changes in fair value recognized in current period noninterest
income. Any asset or liability that was recorded pursuant to recognition of the
firm commitment is removed from the balance sheet and recognized in current
period noninterest income. Gains and losses that were accumulated in other
comprehensive income pursuant to the hedge of a forecasted transaction are
recognized immediately in current period noninterest income.
NOTE 3. MERGER AND DIVESTITURE
ACTIVITIES
On March 1, 2001, FleetBoston completed its acquisition of Summit.
Approximately 180.5 million shares of FleetBoston common stock were issued in
exchange for substantially all of Summit's outstanding shares, through the
exchange of 1.02 shares of FleetBoston stock for each outstanding Summit share.
The transaction was accounted for as a pooling of interests.
In connection with the Summit acquisition, aggregate charges totaling $718
million were recorded in the first quarter of 2001. These charges were composed
of $453 million of merger- and restructuring-related charges and integration
costs, and $265 million of losses on sales of securities available for sale,
which were completed as part of a repositioning of the combined balance sheet.
The merger- and restructuring-related charges and integration costs are more
fully described in Note 6.
The following table sets forth a reconciliation of revenue and net income
previously reported by each of the companies, with the combined amounts
presented in the accompanying consolidated statement of income for the quarter
ended March 31, 2000. Information presented for Summit has been conformed to
FleetBoston's accounting policies.
Quarter ended March 31, 2000
in millions FleetBoston Summit Combined
-------------------------------------------------------------
Net interest income $1,708 $340 $2,048
Noninterest income 2,722 98 2,820
Net income 957 119 1,076
-------------------------------------------------------------
On April 2, 2001, FleetBoston announced a definitive agreement to sell its
mortgage banking business. The sale is expected to close during the second
quarter of 2001, and an estimated pre-tax loss on the sale of approximately $327
million ($225 million after-tax) was recorded in other noninterest expense in
the first quarter of 2001.
NOTE 4. LOANS AND LEASES
The following table presents details of loan and lease financing balances:
======================================================
Three months ended March 31 2001 2000
In millions
------------------------------------------------------
Domestic:
Commercial and industrial $ 54,249 $ 62,945
Commercial real estate 11,336 11,164
Residential real estate 11,051 15,384
Credit card 4,587 5,130
Other consumer 18,786 20,661
Lease financing 13,296 11,267
------------------------------------------------------
Total domestic loans and
leases 113,305 126,551
------------------------------------------------------
International loans and leases 18,335 14,822
------------------------------------------------------
Total loans and leases $131,640 $141,373
======================================================
24
25
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 5. RESERVE FOR CREDIT LOSSES
A summary of activity in the reserve for credit losses follows:
====================================================
Three months ended March 31 2001 2000
In millions
----------------------------------------------------
Balance at beginning of year $2,709 $2,816
Gross charge-offs:
Domestic:
Commercial and industrial 190 176
Commercial real estate --- 2
Residential real estate 1 3
Credit card 67 92
Other consumer 26 35
Lease financing 12 5
International 34 38
----------------------------------------------------
Total gross charge-offs 330 351
----------------------------------------------------
Recoveries:
Domestic:
Commercial and industrial 24 20
Commercial real estate 2 3
Residential real estate 1 1
Credit card 9 9
Other consumer 7 11
Lease financing 3 1
International 14 11
----------------------------------------------------
Total recoveries 60 56
----------------------------------------------------
Net charge-offs 270 295
Provision for credit losses 315 320
Divestitures/Acquisitions/Other --- (31)
----------------------------------------------------
Balance at end of period $2,754 $2,810
====================================================
NOTE 6. MERGER- AND RESTRUCTURING-RELATED CHARGES
In the first quarter of 2001, FleetBoston recorded aggregate merger- and
restructuring-related charges of $487 million in connection with its merger with
Summit and a restructuring of its capital markets-related businesses. Of the
$487 million, $408 million related to the Summit acquisition and $79 million
related to the capital markets restructuring. The $408 million charge was
composed of $73 million of merger charges, $322 million of restructuring-related
charges and $13 million of accelerated depreciation of assets to be disposed of
at a later date. In addition to the merger- and restructuring-related charges,
FleetBoston incurred $45 million of merger integration costs. These integration
costs are being expensed as incurred, and include the costs of converting
duplicate computer systems, training and relocation of employees and
departments, consolidation of facilities and customer communications. The
following table discloses information about the merger- and
restructuring-related charges and integration costs.
In millions
------------------------------------------------------------
Merger charges
Personnel $ 25
Transaction costs/other 48
------------------------------------------------------------
Total merger charges $ 73
------------------------------------------------------------
Restructuring charges
Personnel 202
Asset write-downs and contract
cancellations 110
Facilities 69
Other 20
------------------------------------------------------------
Total restructuring charges 401
------------------------------------------------------------
Accelerated depreciation 13
------------------------------------------------------------
Total merger- and restructuring-related
charges $487
------------------------------------------------------------
Integration costs 45
------------------------------------------------------------
Total $532
------------------------------------------------------------
In 1999, the Corporation recorded $850 million of merger- and
restructuring-related charges in connection with the BankBoston merger, composed
of $383 million of merger-related charges and $467 million of restructuring
charges, and $28 million of restructuring charges related to a realignment of
key business lines. Additional information concerning these 1999 charges is
included in Note 14 to the Consolidated Financial Statements included in the
Corporation's Current Report on Form 8-K dated May 4, 2001.
MERGER-RELATED CHARGES
Merger-related charges of $73 million related to costs incurred as a direct
result of the merger, with $25 million related to personnel and $48 million
related to transaction costs and other merger-related expenses.
Personnel-related costs consisted of contractual arrangements for key
executives. Transaction costs/other principally related to investment banking
fees, legal and accounting fees and other costs related to regulatory filings
necessary to obtain regulatory approvals of the merger.
RESTRUCTURING-RELATED CHARGES
The restructuring charge of $322 million resulted from a restructuring plan
that management committed to and communicated to employees in the first quarter
of 2001 in connection with its integration of FleetBoston and Summit. Of the
$322 million charge, $150 million related to personnel, $96 million related to
asset write-downs and contract cancellations, $60 million related to facilities
and $16 million related to other restructuring expenses.
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FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
Personnel-related costs of $150 million included severance, benefit program
changes and outplacement services primarily associated with the elimination of
duplicate functions within the combined company. The severance may be paid in a
lump sum or over a defined period. These costs reflect FleetBoston's
identification of approximately 2,700 positions to be eliminated in connection
with the restructuring. Of the total positions to be eliminated, approximately
6% are in Corporate and Global Banking, 24% are in Consumer and Investment
Services, and the remaining 70% are in support units. During the first quarter
of 2001, approximately $1 million of personnel-related benefits were paid.
Asset write-downs and contract cancellation costs of $96 million related to
costs to dispose of duplicate or obsolete equipment and computer software, and
penalties incurred to cancel leases and other contracts. During the first
quarter of 2001, $4 million of costs were paid and $42 million of write-downs
were recorded.
Facilities charges of $60 million represented minimum lease payments
related to duplicate branch and other facilities. Other costs of $16 million
included expenses and various other costs incurred to merge the two companies.
Accelerated depreciation expense of $13 million resulted from revisions to
the estimated useful lives of assets currently in use that will be disposed of
when the integration of Summit operations has been completed.
The $79 million restructuring charge was composed of $52 million related to
severance, benefit program changes and outplacement services; $23 million of
costs related to future lease obligations and write-downs of capitalized assets;
and $4 million of other restructuring expenses. Approximately 750 positions were
identified in the first quarter for elimination in connection with this
restructuring, and substantially all of the affected employees were notified by
March 31, 2001. During the first quarter, 270 employees were terminated and left
the Corporation, and $6 million of related benefits were paid. It is expected
that the remaining affected employees will be leaving the company by the end of
the second quarter of 2001.
The following table presents activity in the 2001 and 1999
restructuring-related accruals during the three months ended March 31, 2001. The
remaining accrual at March 31, 2001 is composed primarily of expected cash
outlays related to severance and facilities obligations.
Restructuring Accrual Activity
===============================================================
Summit &
Capital
Markets
Businesses BankBoston
---------------------------------------------------------------
Balance at Dec. 31, 2000 $--- $146
Restructuring accrual 401 ---
Cash payments (11) (58)
Noncash write-downs (42) ---
---------------------------------------------------------------
Balance at March 31, 2001 $348 $ 88
===============================================================
The $58 million of cash payments included in the table above related to the
BankBoston merger consisted of $45 million of personnel benefits, bringing total
personnel benefits paid through March 31, 2001 to $283 million, $12 million in
facilities charges, with a total of $17 million paid to date, and $1 million of
other restructuring expenses.
NOTE 7. TRUST PREFERRED SECURITIES
FleetBoston has eleven statutory business trusts, of which it owns all of
the common securities. These trusts have no independent assets or operations,
and exist for the sole purpose of issuing trust preferred securities and
investing the proceeds thereof in an equivalent amount of junior subordinated
debentures issued by the Corporation.
The junior subordinated debentures, which are the sole assets of the
trusts, are unsecured obligations of FleetBoston, and are subordinate and junior
in right of payment to all present and future senior and subordinated
indebtedness and certain other financial obligations of the Corporation. The
principal amount of subordinated debentures held by each trust equals the
aggregate liquidation amount of its trust preferred securities and its common
securities. The subordinated debentures bear interest at the same rate, and will
mature on the same date, as the corresponding trust preferred securities.
FleetBoston fully and unconditionally guarantees each trust's obligations under
the trust preferred securities.
All of the trust preferred securities, which are included in long-term debt
in the accompanying consolidated balance sheet, may be prepaid at the option of
the trusts, in whole or in part, on or after their respective prepayment option
dates.
Further information with respect to trust preferred securities is included
in Note 9 to the Consolidated Financial Statements included in FleetBoston's
Current Report on Form 8-K dated May 4, 2001.
NOTE 8. LINE OF BUSINESS INFORMATION
Information about operating segments for the quarters ended March 31, 2001
and 2000 is included in the "Line of Business Information" section of
Management's Discussion and Analysis included in this Report.
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FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 9. EARNINGS PER SHARE
A summary of the calculation of earnings per common share follows:
===================================================================================================================================
Three months ended March 31 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, except per share amounts BASIC DILUTED BASIC DILUTED
-----------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 1,083,498,054 1,083,498,054 1,080,551,702 1,080,551,702
Additional shares due to:
Stock options -- 11,826,649 -- 6,320,618
Warrants -- 549,412 -- 10,539,820
-----------------------------------------------------------------------------------------------------------------------------------
Total equivalent shares 1,083,498,054 1,095,874,115 1,080,551,702 1,097,412,140
===================================================================================================================================
Earnings per share:
Net income $ 142 $ 142 $ 1,076 $ 1,076
Less preferred stock dividends (10) (10) (10) (10)
-----------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 132 $ 132 $ 1,066 $ 1,066
===================================================================================================================================
Total equivalent shares 1,083,498,054 1,095,874,115 1,080,551,702 1,097,412,140
===================================================================================================================================
Earnings per share $ .12 $ .12 $ .99 $ .97
===================================================================================================================================
NOTE 10. COMMITMENTS AND CONTINGENCIES
FleetBoston and its subsidiaries are involved in various legal proceedings
arising out of, and incidental to, their respective businesses. Management,
based on its review with counsel of the development of these matters to date,
considers that the aggregate loss resulting from the final outcome, if any, of
these proceedings should not be material to FleetBoston's financial condition or
results of operations.
NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, FleetBoston enters into a variety of
interest rate and foreign exchange derivative contracts in connection with its
balance sheet management activities, which involve the management of interest
rate and foreign exchange rate risk, and its trading activities. These contracts
involve, to varying degrees, credit (repayment) risk and market risk. Credit
risk is the possibility that a loss may occur if a counterparty to a transaction
fails to perform according to the terms of the contract. Market risk is the
sensitivity of income and capital to variations in interest rates, foreign
exchange rates, equity prices, commodity prices and other market-driven rates or
prices.
BALANCE SHEET MANAGEMENT ACTIVITIES
Balance sheet management activities are governed by the Asset, Liability and
Capital Committee (ALCCO), which is responsible for setting strategic directives
that guide day-to-day market risk management activities. In connection with
these activities, non-trading derivative financial instruments are used to
manage market risk.
Interest rate risk, including mortgage prepayment risk, is by far the most
significant non-trading market risk to which U.S. dollar denominated positions
are exposed. Interest rate risk is the sensitivity of income or financial
condition to variations in interest rates, and arises directly from the
Corporation's core banking activities - lending, deposit gathering and loan
servicing. The Corporation controls interest rate risk by identifying,
quantifying and hedging its exposures. The Corporation hedges the interest rate
risk inherent in its core banking operations using both on-balance sheet
instruments, mainly fixed-rate portfolio securities, and a variety of derivative
instruments. The most frequently used derivative instruments are interest rate
swaps and options (e.g., interest rate caps and floors). When appropriate,
forward rate agreements, options on swaps, and exchange-traded futures and
options are also used.
A second major source of non-trading U.S. dollar denominated interest rate
risk is the sensitivity of mortgage servicing rights (MSRs) to prepayments. A
mortgage borrower has the option to prepay a mortgage loan at any time, without
penalty. As a result, the Corporation's mortgage-based assets (not only MSRs but
also mortgage loans and securities) are subject to prepayment risk. This risk
tends to increase when interest rates fall due to the benefits of refinancing.
To mitigate the risk of declining long-term interest rates, increased mortgage
prepayments, and the potential impairment of MSRs, FleetBoston uses a variety of
derivative instruments, including interest rate swaps, caps and floors, options
on swaps, and exchange-traded options on Treasury bond and note futures, and
swaps linked to mortgage assets such as "principal only" (P.O.) securities.
These instruments gain value as interest rates decline, mitigating the
impairment of MSRs. As more fully discussed in Note 3, the Corporation has
agreed to sell its mortgage banking business. The sale is expected to close in
the second quarter of 2001.
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28
FLEETBOSTON FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
FleetBoston's non-U.S. dollar denominated assets and liabilities are
primarily exposed to foreign exchange rate risk. The majority of this exposure
stems from operations in Latin America, primarily Argentina and Brazil, and is
managed through the use of foreign currency spot, forward, futures, option and
swap contracts.
FAIR VALUE HEDGES. Derivatives categorized as fair value hedges are utilized
to convert fixed-rate debt to floating-rate debt, as part of the Corporation's
overall interest rate risk management process; to mitigate the impairment risk
of MSRs; and to reduce the price risk resulting from the origination and sale of
mortgage loans.
For the quarter ended March 31, 2001, FleetBoston recognized a net pre-tax
loss of approximately $16 million, which represented the ineffective portion of
all fair value hedges, primarily hedges of MSRs, excluding the time value of
option contracts and the interest rate differential on foreign currency forward
contracts. The component of fair value excluded from the assessment of fair
value hedge effectiveness was a loss of approximately $14 million. All
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness, unless otherwise noted.
CASH FLOW HEDGES. Derivatives categorized as cash flow hedges are utilized
primarily to convert floating-rate loans to fixed-rate loans; and to convert
floating-rate, non-functional currency denominated assets to fixed-rate,
functional currency denominated assets.
For the quarter ended March 31, 2001, FleetBoston recognized a net pre-tax
gain of approximately $.4 million, which represented the total ineffectiveness
of all cash flow hedges.
Gains and losses on derivative contracts that are reclassified from
accumulated other comprehensive income to current period earnings are included
in the line item in which the hedged item is recorded. As of March 31, 2001,
approximately $180 million of the deferred net after-tax gains on derivative
instruments included in accumulated other comprehensive income is expected to be
reclassified to earnings during the next twelve months. This expectation is
based on the net discounted cash flows from derivative instruments hedging
variable-rate assets, as well as the amortization of gains from the termination
of cash flow hedge derivatives.
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS. Derivatives categorized as
hedges of net investments in foreign operations are utilized to protect the
value of an investment against adverse exchange rate fluctuations. For the
quarter ended March 31, 2001, net after-tax gains related to these derivatives,
recorded in other comprehensive income, were approximately $6 million.
TRADING ACTIVITIES
Trading activities create exposure to price risk, or the risk of loss of
income arising from adverse changes in the value of financial instrument trading
portfolios. This exposure arises in the normal course of business as a financial
intermediary. FleetBoston enters into interest rate, foreign exchange and
precious metals derivative contracts primarily to satisfy the investment and
risk management needs of its customers. Equity derivative contracts result
mainly from market-making and underwriting activities.
The price risk management process includes trading derivatives activities.
This process identifies, measures, monitors and controls the effects of changes
in interest rates, foreign exchange rates and equity prices on results of
operations and financial condition. Price risk policies and limits are reviewed
by ALCCO and the Market Risk Committee at least annually, or more often if
warranted by current market, economic or business conditions. Line of business
management has primary responsibility for the actual market risk profile,
ensuring the appropriate measurement, monitoring and control of exposures within
approved policies and limits.
CREDIT RISK
The use of non-trading and trading derivatives creates exposure to credit
risk. This credit exposure relates to accounting losses that would be recognized
if the counterparties completely failed to perform their obligations. The amount
of credit exposure can be estimated by calculating the cost to replace all
profitable derivative contracts, on a present value basis and at current market
prices. To manage its level of credit exposure, FleetBoston deals only with
counterparties of good credit standing, establishes counterparty credit limits,
in certain cases has the ability to require securities collateral, and enters
into master netting agreements whenever possible. Reserves related to credit
exposure associated with non-trading derivative instruments are included in
other liabilities in the Corporation's consolidated balance sheet.
Non-trading derivative instruments, other than those used for mortgage
banking and foreign exchange, had credit exposure of $690 million at March 31,
2001, versus $720 million at December 31, 2000. Mortgage banking derivative
instruments had credit exposure of $137 million at March 31, 2001, versus $217
million at December 31, 2000. Foreign exchange derivative instruments had credit
exposure of $103 million at March 31, 2001, versus $132 million at December 31,
2000. Trading derivatives had credit exposure of $2.7 billion at March 31, 2001,
versus $2.8 billion at December 31, 2000.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) FleetBoston held its Annual Meeting of Stockholders on April 17, 2001.
(b) Not applicable.
(c) A brief description of each matter voted upon at the meeting, and the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to each such matter, follows. A
separate tabulation with respect to each nominee for office is also
included. Four matters were voted on at the Annual Meeting. A fifth matter,
a stockholder proposal to change the date of the Annual Stockholders'
Meeting, was not voted upon by FleetBoston stockholders because
neither the proponent nor the proponent's qualified personal representative
attended the meeting and presented the proposal.
1. Election of Directors
All seven nominees for election as directors were elected. There were no
abstentions or broker non-votes for any of the nominees.
Authority Term
Name of Director For Withheld Expiration
---------------- --- -------- ----------
Joel B. Alvord 664,527,170 46,580,820 2004
Daniel P. Burnham 665,232,627 45,875,363 2004
T.J. Dermot Dunphy 665,250,480 45,857,510 2004
Robert J. Higgins 635,236,720 75,871,270 2004
Henrique C. Meirelles 635,142,337 75,965,653 2004
T. Joseph Semrod 640,890,972 70,217,018 2004
Paul R. Tregurtha 665,170,701 45,937,289 2004
The following directors will continue in office and were not up for
re-election.
Term
Name of Director Expiration
---------------- ----------
Paul J. Choquette, Jr. 2002
Alice F. Emerson 2002
Robert M. Kavner 2002
Donald F. McHenry 2002
Michael B. Picotte 2002
Francene S. Rodgers 2002
John W. Rowe 2002
Thomas M. Ryan 2002
William Barnet, III 2003
John T. Collins 2003
William F. Connell 2003
Gary L. Countryman 2003
Charles K. Gifford 2003
Marian L. Heard 2003
Thomas J. May 2003
Terrence Murray 2003
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30
2. Ratification of Selection of Independent Accountants
The second proposal voted on by stockholders of the Corporation, to ratify
the selection of PricewaterhouseCoopers LLP to serve as the Corporation's
independent accountants for 2001, was approved with 658,872,537 votes cast
for, 48,895,207 votes cast against and 3,340,246 abstentions. There were no
broker non-votes on this proposal.
3. Stockholder Proposal A regarding Term Limits for Outside Directors
The third proposal voted on by stockholders of the Corporation, to require
term limits for outside directors, was rejected with 36,641,162 votes cast
for, 566,608,989 votes cast against, 10,703,944 abstentions and 97,153,895
broker non-votes.
4. Stockholder Proposal B regarding the Establishment of an Executive
Compensation Review
The fourth proposal voted on by stockholders of the Corporation, to
establish an executive compensation review, was rejected with 86,167,087
votes cast for, 511,698,575 votes cast against, 16,088,433 abstentions and
97,153,895 broker non-votes.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
Exhibit
Number
3 By-Laws of the Corporation, as amended.
12 Computation of Consolidated Ratios of Earnings to Fixed Charges.
(b) Current Reports on Form 8-K
FleetBoston filed five Current Reports on Form 8-K during the period from
January 1, 2001 to the date of the filing of this report.
- Current Report on Form 8-K, dated January 17, 2001, announcing the
Corporation's fourth quarter and fiscal 2000 earnings.
- Two Current Reports on Form 8-K, each dated March 1, 2001, announcing
the completion of the Corporation's acquisition of Summit Bancorp.
- Current Report on Form 8-K, dated April 17, 2001, announcing the
Corporation's first quarter earnings.
- Current Report on Form 8-K, dated May 4, 2001, containing restated
consolidated financial statements of the Corporation reflecting the
merger with Summit, completed on March 1, 2001.
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31
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.
FleetBoston Financial Corporation
---------------------------------
(Registrant)
/s/ Eugene M. McQuade /s/ Ernest L. Puschaver
--------------------- -----------------------
Eugene M. McQuade Ernest L. Puschaver
Vice Chairman and Chief Accounting Officer
Chief Financial Officer
DATE: May 15, 2001
31