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