-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AOXKVIlTbG+/VFj0UASjQ5bFSOMRWVjyhfwW5zz1/XLpXx10haMQTXqUUnvBQG7B V8jyzzqONk/oG7pyhxjbpQ== 0000927016-96-001762.txt : 19961118 0000927016-96-001762.hdr.sgml : 19961118 ACCESSION NUMBER: 0000927016-96-001762 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 96666017 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 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 BANK OF BOSTON 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, BOSTON, MASSACHUSETTS 02110 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) 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 October 31, 1996: Common Stock, $1.50 par value 152,967,802 BANK OF BOSTON CORPORATION -------------------------- TABLE OF CONTENTS -----------------
PAGE ---- CONSOLIDATED SELECTED FINANCIAL DATA 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Bank of Boston Corporation and Subsidiaries: Consolidated Balance Sheet 4 Consolidated Statement of Income 6 Consolidated Statement of Changes in Stockholders' Equity 7 Consolidated Statement of Cash Flows 8 Notes to Financial Statements 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II OTHER INFORMATION ITEM 1. Legal Proceedings 38 ITEM 6. Exhibits and Reports on Form 8-K 38 SIGNATURES 39 LIST OF TABLES Consolidated Average Balance Sheet - Nine Quarters 31 Consolidated Statement of Income - Nine Quarters 32 Average Balances and Interest Rates - Quarter 33 Average Balances and Interest Rates - Nine Months 35 Change in Net Interest Revenue - Volume and Rate Analysis 37
2 BANK OF BOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED SEPTEMBER 30 1996 1995 ---- ---- INCOME STATEMENT DATA Net interest revenue $ 591 $ 570 Provision for credit losses 57 51 Noninterest income 337 305 Noninterest expense (1) 713 518 Net income (1) 80 175 Per common share Primary (1) .46 1.06 Fully diluted (1) .45 1.05 Market value per common share High 57 7/8 47 5/8 Low 50 1/8 36 3/4 NINE MONTH ENDED SEPTEMBER 30 INCOME STATEMENT DATA Net interest revenue $ 1,728 $ 1,676 Provision for credit losses 171 194 Noninterest income 1,005 942 Noninterest expense (1) 1,772 1,531 Net income (1) 449 498 Per common share Primary (1) 2.74 3.07 Fully diluted (1) 2.69 3.00 Market value per common share High 57 7/8 47 5/8 Low 41 5/8 25 5/8 AT SEPTEMBER 30 BALANCE SHEET DATA Loans and lease financing $ 42,053 $ 39,188 Total assets 61,963 57,559 Deposits 43,328 39,624 Total stockholders' equity 4,754 4,499 Book value per common share 27.81 25.69 Regulatory capital ratios Risk-based capital ratios Tier 1 8.3% 8.4% Total 12.7 12.8 Leverage ratio 7.2 7.4
(1) Reflects, in 1996, $180 million ($117 million after-tax, or $.76 per share on a primary and fully diluted basis) of restructuring and merger-related charges, recorded in connection with the Corporation's acquisition of BayBanks, Inc. completed on July 29, 1996. 3 BANK OF BOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS SEPTEMBER 30 DECEMBER 31 1996 1995 ---------- --------- Cash and due from banks $ 3,755 $ 3,561 Interest bearing deposits in other banks 1,251 1,356 Federal funds sold and securities purchased under agreements to resell 1,680 1,548 Trading securities 1,549 1,159 Mortgages held for sale 33 910 Securities Available for sale 7,413 7,582 Held to maturity (fair value of $672 in 1996 and $667 in 1995) 685 660 Loans and lease financing United States Operations 32,552 30,163 International Operations 9,501 8,707 ------ ------ Total loans and lease financing (net of unearned income of $356 in 1996 and $277 in 1995) 42,053 38,870 Reserve for credit losses (897) (890) ------ ------ Net loans and lease financing 41,156 37,980 Premises and equipment, net 876 832 Due from customers on acceptances 486 360 Accrued interest receivable 519 554 Other assets 2,560 2,921 ------ ------ TOTAL ASSETS $ 61,963 $ 59,423 ====== ======
The accompanying notes are an integral part of these financial statements. 4 BANK OF BOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS) (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30 DECEMBER 31 1996 1995 ---------- --------- Deposits Domestic offices Noninterest bearing $ 7,416 $ 7,127 Interest bearing 24,970 24,392 Overseas offices Noninterest bearing 935 552 Interest bearing 10,007 8,993 ------ ------ Total deposits 43,328 41,064 Funds borrowed Federal funds purchased 636 1,869 Term federal funds purchased 1,626 870 Securities sold under agreements to repurchase 1,939 1,688 Other funds borrowed 5,049 5,076 Acceptances outstanding 487 360 Accrued expenses and other liabilities 1,298 1,605 Notes payable 2,846 2,189 ------ ------ TOTAL LIABILITIES 57,209 54,721 ------ ------ Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares - 10,000,000 Issued and outstanding shares - 4,593,941 508 508 Common stock, par value $1.50 in 1996 and $2.25 in 1995 Authorized shares -300,000,000 in 1996 and 200,000,000 in 1995 Issued shares -152,634,188 in 1996 and 155,785,611 in 1995 Outstanding shares -152,634,188 in 1996 and 155,296,203 in 1995 229 350 Surplus 1,181 1,240 Retained earnings 2,789 2,548 Net unrealized gain on securities available for sale, net of tax 53 82 Treasury stock, at cost (489,408 shares in 1995) (22) Cumulative translation adjustments, net of tax (6) (4) ------ ------ TOTAL STOCKHOLDERS' EQUITY 4,754 4,702 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,963 $ 59,423 ====== ======
The accompanying notes are an integral part of the financial statements. 5 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------- -------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- INTEREST INCOME Loans and lease financing, including fees $ 944 $ 1,006 $ 2,860 $ 2,863 Securities 146 124 423 362 Trading securities 36 61 129 146 Mortgages held for sale 9 18 17 Federal funds sold and securities purchased under agreements to resell 50 74 138 274 Deposits in other banks 23 46 74 178 ------- ------- ------- ------- Total interest income 1,199 1,320 3,642 3,840 ------- ------- ------- ------- INTEREST EXPENSE Deposits of domestic offices 242 235 704 640 Deposits of overseas offices 173 229 558 708 Funds borrowed 143 246 513 698 Notes payable 50 40 139 118 ------- ------- ------- ------- Total interest expense 608 750 1,914 2,164 ------- ------- ------- ------- NET INTEREST REVENUE 591 570 1,728 1,676 Provision for credit losses 57 51 171 194 ------- ------- ------- ------- Net interest revenue after provision for credit losses 534 519 1,557 1,482 ------- ------- ------- ------- NONINTEREST INCOME Financial service fees 140 162 327 465 Trust and agency fees 62 65 181 186 Trading profits and commissions 21 7 59 16 Net securities gains 7 1 24 7 Other income 107 71 414 268 ------- ------- ------- ------- Total noninterest income 337 306 1,005 942 ------- ------- ------- ------- NONINTEREST EXPENSE Salaries 244 246 729 704 Employee benefits 49 52 150 153 Occupancy expense 51 48 152 143 Equipment expense 34 34 102 99 Restructuring and merger-related costs 180 180 Other expense 155 138 459 432 ------- ------- ------- ------- Total noninterest expense 713 518 1,772 1,531 ------- ------- ------- ------- Income before income taxes 158 307 790 893 Provision for income taxes 78 132 341 395 ------- ------- ------- ------- NET INCOME $ 80 $ 175 $ 449 $ 498 ======= ======= ======= ======= NET INCOME APPLICABLE TO COMMON STOCK $ 71 $ 166 $ 421 $ 470 ======= ======= ======= ======= PER COMMON SHARE Net income Primary $ .46 $ 1.06 $ 2.74 $ 3.07 Fully diluted $ .45 $ 1.05 $ 2.69 $ 3.00 Dividends declared $ .44 $ .37 $ 1.25 $ .91 AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS) Primary 153,103 155,660 153,715 153,086 Fully diluted 155,183 157,599 156,300 156,407
The accompanying notes are an integral part of these financial statements. 6 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS)
1996 1995 NINE MONTHS ENDED SEPTEMBER 30 PREFERRED STOCK Balance, January 1 $ 508 $ 508 -------- -------- Balance, September 30 508 508 -------- -------- COMMON STOCK Balance, January 1 350 336 Change in par value (118) Common stock issued Dividend reinvestment and stock purchase plan 1 Exercise of stock options 3 2 Conversion of subordinated debentures 8 Acquisition of The Boston Bancorp 1 Acquisition of NFS Financial Corporation 2 Acquisition of BayBanks, Inc. (7) -------- -------- Balance, September 30 229 349 -------- -------- SURPLUS Balance, January 1 1,240 1,075 Change in par value 118 Dividend reinvestment and stock purchase plan 13 20 Exercise of stock options (25) 13 Acquisition of Ganis Credit Corporation 1 Conversion of subordinated debentures 71 Restricted stock grants, net of forfeitures 12 2 Acquisition of The Boston Bancorp 47 Acquisition of NFS Financial Corporation 37 Acquisition of BayBanks, Inc. (225) Other, principally employee benefit plans 1 4 -------- -------- Balance, September 30 1,181 1,223 -------- -------- RETAINED EARNINGS Balance, January 1 2,548 2,085 Net income 449 498 Restricted stock grants, net of forfeitures (3) 1 Payment on ESOP loan 3 3 Cash dividends declared Preferred stock (28) (28) Common stock (180) (130) -------- -------- Balance, September 30 2,789 2,429 -------- -------- NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE Balance, January 1 82 (40) Change in net unrealized gain (loss) on securities available for sale, net of tax (29) 34 -------- -------- Balance, September 30 53 (6) -------- -------- TREASURY STOCK Balance, January 1 (22) (27) Purchases of treasury stock (490) (28) Treasury stock reissued Dividend reinvestment and stock purchase plan 23 9 Exercise of stock options 52 1 Restricted stock grants, net of forfeitures 10 7 Conversion of subordinated debentures 15 Acquisition of The Boston Bancorp 181 Acquisition of BayBanks, Inc. 232 Acquisition of Ganis Credit Corporation 7 21 Other, principally employee benefit plans 7 2 -------- -------- Balance,September 30 -------- -------- CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (4) (6) Change in translation adjustments, net of tax (2) 2 -------- -------- Balance, September 30 (6) (4) -------- -------- TOTAL STOCKHOLDERS' EQUITY, SEPTEMBER 30 $4,754 $4,499 ======== ========
The accompanying notes are an integral part of these financial statements. 7 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
1996 1995 -------- ------- NINE MONTHS ENDED SEPTEMBER 30 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 449 $ 498 Reconciliation of net income to net cash provided from (used for) operating activities Provision for credit losses 171 194 Depreciation and amortization 111 170 Provision for deferred taxes 17 57 Net gains on sales of securities and other assets (292) (160) Change in trading securities (666) (99) Net change in mortgages held for sale 235 (394) Net change in interest receivables and payables 23 (20) Other, net (229) (198) ------- ------ Net cash provided from (used for) operating activities (181) 48 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from interest bearing deposits in other banks 105 204 Net cash used for federal funds sold and securities purchased under agreements to resell (132) (82) Purchases of securities held to maturity (67) (2,239) Purchases of securities available for sale (6,459) (2,663) Sales of securities available for sale 3,340 1,708 Maturities of securities held to maturity 37 2,524 Maturities of securities available for sale 3,649 736 Loans and lease financing originated by nonbank entities (13,493) (5,599) Loans and lease financing collected by nonbank entities 12,233 4,533 Proceeds from sales of loan portfolios by bank subsidiaries 142 131 Net cash used for lending activities of bank subsidiaries (2,178) (774) Lease financing originated by bank entities (5) (3) Lease financing collected by bank entities 16 44 Proceeds from sales of other real estate owned 32 61 Expenditures for premises and equipment (171) (164) Proceeds from sales of business units, premises and equipment 203 130 Other, net (24) (257) ------- ------ Net cash used for investing activities (2,772) (1,710) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from (used for) deposits 2,264 (624) Net cash provided from funds borrowed 859 2,256 Net repayments of notes payable (256) (154) Net proceeds from issuance of notes payable 913 138 Net proceeds from issuance of common stock 74 50 Purchases of treasury stock (490) (28) Dividends paid (208) (158) ------- ------ Net cash provided from financing activities 3,156 1,480 Effect of foreign currency translation on cash (9) (6) ------- ------ NET CHANGE IN CASH AND DUE FROM BANKS 194 (188) CASH AND DUE FROM BANKS AT JANUARY 1 3,561 3,146 ------- ------ CASH AND DUE FROM BANKS AT SEPTEMBER 30 $ 3,755 $ 2,958 ======= ====== Interest payments made $ 1,926 $ 2,124 Income tax payments made $ 343 $ 430
The accompanying notes are an integral part of these financial statements. 8 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. The accompanying interim consolidated financial statements of Bank of Boston 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. The financial statements reflect the acquisition of BayBanks, Inc. (BayBanks), which occurred on July 29, 1996. The acquisition was accounted for as a pooling of interests and, accordingly, the information included in the accompanying financial statements and notes presents the combined financial position and results of operations of the Corporation and BayBanks as if they had operated as a combined entity for all periods presented. Certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Corporation's 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. 2. ACQUISITIONS AND DIVESTITURES: During the first six months of 1996, the Corporation completed a transaction with two equity investment firms in which its mortgage banking subsidiary was sold to a newly formed independent mortgage company, HomeSide, Inc. (HomeSide), and in the second phase of the transaction, Barnett Mortgage Company was acquired by HomeSide. As a result of both phases of the transaction, the Corporation realized gains of $106 million, or $67 million after-tax. Under the sale agreement, the Corporation agreed to maintain a risk management program designed to protect the enterprise value of its mortgage banking subsidiary. The above-mentioned gains were offset by $111 million of losses, or $70 million after-tax, net of decreased servicing amortization, from the change in market value of contracts used to manage the prepayment risk in the mortgage servicing portfolio and the economic value of the mortgage banking subsidiary pending the completion of the sale to HomeSide. On June 28, 1996, the Corporation completed its acquisition of The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with $1.3 billion in deposits. The Corporation exchanged 4.6 million shares of its common stock, with a value of approximately $229 million, for all of the outstanding common stock of Bancorp. The Corporation has purchased an equivalent amount of shares in the open market for this transaction. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Bancorp were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the transaction is being amortized over a ten-year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. Pro forma results of operations including Bancorp for the nine months ended September 30, 1996 and 1995 are not presented since the results would not have been significantly different in relation to the Corporation's results of operations. On July 29, 1996, the Corporation completed its acquisition of BayBanks. The Corporation issued 43.6 million shares of its common stock in exchange for substantially all of the outstanding shares of BayBanks common stock by exchanging 2.2 shares of its common stock for each outstanding BayBanks share. The transaction was accounted for under the pooling of interests method of accounting. Under this method, the historical book values of the assets and liabilities of BayBanks, as reported in its consolidated balance sheet, are carried over onto the Corporation's consolidated balance sheet, and no goodwill or other intangible assets are created. In connection with the approval of the transaction by regulatory authorities, the Corporation agreed to sell 20 branches of the resulting combined entity, comprising a total of approximately $860 million in deposits. The sale of these branches is expected to be completed in the fourth quarter of 1996. Information with respect to restructuring and merger-related costs recorded upon completion of the acquisition is included in Note 9. The following tables set forth the results of operations of BayBanks and the Corporation for the six months ended June 30, 1996. These six month results are included in the results of operations for the nine months ended September 30, 1996 presented in the accompanying consolidated statement of income. SIX MONTHS ENDED JUNE 30, 1996 (in millions, except per share amounts) BAYBANKS CORPORATION COMBINED -------- ----------- -------- Net interest revenue $ 265 $ 872 $ 1,137 Noninterest income $ 118 $ 550 $ 668 Net income $ 74 $ 295 $ 369 Net income per common share Primary $ 3.71 $ 2.50 $ 2.27 Fully diluted $ 3.71 $ 2.46 $ 2.24 9 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS AND DIVESTITURES (CONTINUED): The following table reconciles the revenue and net income previously reported by the Corporation with the combined amounts presented in the accompanying consolidated statements of income for the quarter and nine months ended September 30, 1995. QUARTER ENDED SEPTEMBER 30, 1995 (in millions, except per share amounts) BAYBANKS CORPORATION COMBINED -------- ----------- -------- Net interest revenue $ 131 $ 439 $ 570 Noninterest income $ 57 $ 249 $ 306 Net income $ 35 $ 140 $ 175 Net income per share Primary $ 1.74 $ 1.17 $ 1.06 Fully diluted $ 1.74 $ 1.15 $ 1.05 NINE MONTHS ENDED SEPTEMBER 30, 1995 (in millions, except per share amounts) BAYBANKS CORPORATION COMBINED -------- ----------- -------- Net interest revenue $ 377 $ 1,299 $ 1,676 Noninterest income $ 164 $ 778 $ 942 Net income $ 99 $ 399 $ 498 Net income per share Primary $ 5.11 $ 3.36 $ 3.07 Fully diluted $ 5.10 $ 3.27 $ 3.00 10 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SECURITIES: A summary comparison of securities available for sale by type is as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 -------------------------- --------------------------- (in millions) COST CARRYING COST CARRYING ------- -------- -------- -------- VALUE VALUE ----- ----- U.S. Treasury $ 1,760 $ 1,760 $ 2,556 $ 2,591 U.S. government agencies and corporations - Mortgage-backed securities 3,388 3,378 2,969 3,037 States and political subdivisions 157 157 245 248 Foreign debt securities 1,046 1,076 698 685 Other debt securities 335 331 343 334 Marketable equity securities 169 240 170 222 Other equity securities 471 471 465 465 ----- ----- ----- ----- $ 7,326 $ 7,413 $ 7,446 $ 7,582 ===== ===== ===== =====
Other equity securities included in securities available for sale are not traded on established exchanges and are carried at cost. A summary comparison of securities held to maturity by type is as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------------------ ------------------------------ AMORTIZED AMORTIZED (in millions) COST FAIR VALUE COST FAIR VALUE ---------- ---------- ---------- ---------- U.S. Treasury $ 1 $ 1 $ 4 $ 4 U.S. government agencies and corporations - Mortgage-backed securities 542 529 523 530 States and political subdivisions 6 6 5 5 Foreign debt securities 11 11 11 11 Other equity securities 125 125 117 117 --- --- --- --- $ 685 $ 672 $ 660 $ 667 === === === ===
Other equity securities included in securities held to maturity represent securities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. 11 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. LOANS AND LEASE FINANCING: The following are the details of loan and lease financing balances:
SEPT. 30 DECEMBER 31 1996 1995 ---------- ---------- (in millions) UNITED STATES OPERATIONS Commercial, industrial and financial $ 13,828 $ 12,809 Commercial real estate Construction 323 386 Other 3,228 3,393 Consumer-related loans Residential mortgages 4,156 4,141 Home equity loans 2,842 2,556 Credit card loans 1,320 495 Other 5,349 5,059 Lease financing 1,778 1,564 Unearned income (272) (240) --------- --------- 32,552 30,163 --------- --------- INTERNATIONAL OPERATIONS Loans and lease financing 9,585 8,744 Unearned income (84) (37) --------- --------- 9,501 8,707 --------- --------- $ 42,053 $ 38,870 ========= =========
5. RESERVE FOR CREDIT LOSSES: An analysis of the reserve for credit losses is as follows:
QUARTERS ENDED NINE MONTHS ENDED SEPT. 30 SEPT. 30 -------- -------- 1996 1995 1996 1995 ---- ----- ---- ---- (in millions) BALANCE, BEGINNING OF PERIOD $ 895 $ 838 $ 890 $ 827 Provision 57 51 171 194 Reserves of entities sold (11) (32) Reserve of acquired bank 14 2 14 Domestic credit losses Commercial, industrial and financial (3) (10) (16) (36) Commercial real estate (3) (12) (23) (43) Consumer-related loans Residential mortgages (2) (6) (12) (16) Credit card loans (7) (3) (16) (9) Home equity loans (2) (3) (6) (7) Other (42) (18) (103) (53) International credit losses (14) (15) (36) (43) ------ ------ -------- ------- Total credit losses (73) (67) (212) (207) ------ ------ ------- ------- Domestic recoveries Commercial, industrial and financial 3 4 11 12 Commercial real estate 2 8 8 16 Consumer-related loans Residential mortgages 1 3 2 Credit card loans 2 1 Home equity loans 2 2 3 Other 7 6 20 20 International recoveries 4 3 11 8 ------ ------ ------- ------- Total recoveries 18 22 57 62 ------ ------ ------- ------- Net credit losses (55) (45) (155) (145) ------ ------ ------- ------- BALANCE, END OF PERIOD $ 897 $ 858 $ 897 $ 858 ====== ======= ======= ========
12 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. RESERVE FOR CREDIT LOSSES (CONTINUED): At September 30, 1996, 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 $320 million, of which $53 million related to loans with no valuation reserve and $267 million related to loans with a valuation reserve of $72 million. For the quarter and nine months ended September 30, 1996, average impaired loans were approximately $293 million and $275 million, respectively. Interest recognized on impaired loans during the third quarter and nine months ended September 30, 1996 was not material. 6. NOTES PAYABLE: During the first nine months of 1996, the Corporation issued $400 million in senior floating and fixed rate medium-term notes. These notes, which mature in 1997 through 1999, had weighted average interest rates of 5.66% during the third quarter of 1996. The Corporation entered into interest rate swap agreements that effectively converted the fixed rate obligations to floating rate obligations. In June 1996, the Corporation's $100 million floating rate senior notes, issued in 1994, matured. In September 1996, The First National Bank of Boston (FNBB), a major banking subsidiary of the Corporation, issued $200 million of 7 3/8% Subordinated Notes due 2006. When the notes were issued, FNBB entered into an interest rate swap agreement that effectively converted the fixed rate obligation to a floating rate obligation. Such interest rate was 6.15% at September 30, 1996. The subordinated notes are not subject to redemption prior to maturity. 7. 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 statements. 8. CAPITAL CHANGES: In April 1996, stockholders of the Corporation authorized an increase in the authorized shares of the Corporation's common stock from 200 million shares, par value $2.25 per share, to 300 million shares, par value $1.50 per share. This change in par value resulted in the transfer of $118 million from common stock to surplus in the accompanying consolidated balance sheet. 9. RESTRUCTURING AND MERGER-RELATED COSTS: During the third quarter of 1996, the Corporation recorded restructuring and merger-related costs of $180 million ($117 million after-tax) in connection with the BayBanks acquisition. Included in these costs were employee-related severance and property related costs; professional fees and other costs of effecting the acquisition; and systems and other conversion costs which were incurred during the third quarter. Significant components of the costs were as follows: (in millions) Personnel costs $ 81 Facility costs 50 Other costs 49 ---- Total $180 ---- Personnel costs relate primarily to the Corporation's plan to eliminate approximately 2,100 executive, managerial and staff positions through attrition, enhanced retirement plans and terminations. These costs include severance and retirement plan costs as well as employee assistance costs for separated employees. During the third quarter approximately 600 employees were either terminated or left the Corporation through enhanced retirement plans. Facility costs relate to branch and back office consolidations, and include lease termination costs and writedowns of bank owned properties and other facility related costs. Other costs principally consist of transaction related costs, such as professional fees and stock registration costs, as well as systems costs and other costs of effecting the acquisition which were incurred during the third quarter. Cash outlays during the quarter amounted to $39 million, including $5 million of termination benefits and $34 million of transaction, facility and systems and other conversion costs. The remaining reserves and other liabilities of $141 million at September 30, 1996 include expected cash outlays of $101 million and expected noncash costs of $40 million. Cash outlays are expected to occur throughout the integration process, which the Corporation expects to complete by the middle of 1997. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- GENERAL On July 29, 1996, Bank of Boston Corporation (the Corporation) completed its acquisition of BayBanks, Inc. (BayBanks). The Corporation acquired BayBanks in a tax-free exchange of stock, whereby the Corporation exchanged 2.2 shares of its common stock for each outstanding share of BayBanks common stock. Refer to Note 2 to the Financial Statements for further discussion of this transaction. The acquisition was accounted for as a pooling of interests and, accordingly, the information included in this discussion presents the combined results of BayBanks and the Corporation as if the Corporation and BayBanks had operated as a combined entity for all periods presented. The combination of the two Boston- based institutions created a consumer and corporate banking entity, with over $60 billion in assets and $40 billion in deposits. The Corporation's net income for the quarter ended September 30, 1996 was $80 million, compared with net income of $175 million for the same period in 1995. Net income per common share was $.46 on a primary basis and $.45 on a fully diluted basis for the third quarter of 1996, compared with net income per common share of $1.06 on a primary basis and $1.05 on a fully diluted basis for the third quarter of 1995. In the third quarter of 1996, the Corporation recorded restructuring and merger-related charges of $180 million ($117 million after- tax), or $.76 per share on a fully diluted basis, in connection with its acquisition of BayBanks. Excluding the effects of the restructuring and merger- related charges, net income for the third quarter of 1996 was $197 million, or $1.21 per share on a fully diluted basis, compared to $175 million, or $1.05 per share, in the third quarter of 1995. The Corporation expects to achieve total annualized cost savings in connection with the integration of BayBanks of $230 million. The major systems and branch conversions are expected to be completed by the middle of 1997, resulting in the full realization of these savings occurring in the latter half of 1997. The Corporation's expectations with respect to potential cost savings are forward-looking statements. Readers are cautioned that many factors could affect the Corporation's future financial performance and cause actual cost savings to differ materially from expected amounts. These factors, some of which are beyond the control of the Corporation, include, but are not limited to, the regulatory environment, regional and national economic conditions, inflation, competition, changes in integration plans, interest rate fluctuations and unanticipated changes in business conditions. Therefore, the ultimate level of such expected cost savings and the period within which such cost savings may be realized or achieved cannot be predicted with certainty. Net income for the first nine months of 1996 was $449 million, compared with $498 million for the first nine months of 1995. Net income per common share was $2.74 on a primary basis and $2.69 on a fully diluted basis for the first nine months of 1996, compared with $3.07 on a primary basis and $3.00 on a fully diluted basis for the first nine months of 1995. Excluding the effects of restructuring and merger-related charges, net income for the first nine months of 1996 was $566 million, or $3.44 per share on a fully diluted basis, compared to $498 million, or $3.00 per share, for the 1995 nine-month period. In connection with the BayBanks acquisition, and specifically to address competitive issues raised by the Department of Justice and the Massachusetts Attorney General relative to the transaction, the Corporation agreed to sell 20 branches having aggregate deposits of approximately $860 million. The transaction is expected to be completed in the fourth quarter of 1996. All comparisons are affected by the sale of the Corporation's corporate trust business and the joint venture of its stock transfer business in the fourth quarter of 1995, the acquisition of The Boston Bancorp (Bancorp) at the end of the second quarter of 1996, and the sale of the Corporation's mortgage banking subsidiary in the first half of 1996. Additional information on certain of these transactions can be found in Note 2 to the Financial Statements. The Corporation continues to explore, on an ongoing basis, acquisition and joint venture opportunities, as well as analyze each of its businesses in the context of competitive advantages, industry dynamics and growth potential, such as the assignment in September of 1996 of two senior executives to evaluate the Corporation's national consumer specialty businesses. 14 NET INTEREST REVENUE - (FULLY TAXABLE EQUIVALENT BASIS) The 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 appearing elsewhere in this report. For this review, 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 tables present summaries of 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 for United States and International Operations:
QUARTERS ENDED SEPTEMBER 30 Change - --------------------------- 1996 1995 Amount (dollars in millions) ----- ------ ------ UNITED STATES OPERATIONS: Net interest revenue $ 459 $ 456 $ 3 Average loans and lease financing 31,961 31,138 823 Average earning assets 40,477 39,286 1,191 Net interest margin 4.51% 4.60% (.09)% INTERNATIONAL OPERATIONS: Net interest revenue $ 137 $ 118 $ 19 Average loans and lease financing 9,262 7,895 1,367 Average earning assets 13,447 10,979 2,468 Net interest margin 4.07% 4.27% (.20)% CONSOLIDATED: Net interest revenue $ 596 $ 574 $ 22 Average loans and lease financing 41,223 39,033 2,190 Average earning assets 53,924 50,265 3,659 Net interest margin 4.40% 4.53% (.13)% NINE MONTHS ENDED SEPTEMBER 30 Change - ------------------------------ 1996 1995 Amount (dollars in millions) ----- ------ ------ UNITED STATES OPERATIONS: Net interest revenue $ 1,349 $ 1,360 $ (11) Average loans and lease financing 31,220 30,218 1,002 Average earning assets 40,061 38,377 1,684 Net interest margin 4.50% 4.74% (.24)% INTERNATIONAL OPERATIONS: Net interest revenue $ 394 $ 329 $ 65 Average loans and lease financing 8,956 7,702 1,254 Average earning assets 12,880 10,608 2,272 Net interest margin 4.08% 4.15% (.07)% CONSOLIDATED: Net interest revenue $ 1,743 $ 1,689 $ 54 Average loans and lease financing 40,176 37,920 2,256 Average earning assets 52,941 48,985 3,956 Net interest margin 4.40% 4.61% (.21)%
15 Domestic net interest revenue increased $3 million, while net interest margin decreased 9 basis points, in the quarterly comparison. The increase in net interest revenue was primarily driven by an increase in average earning assets, including growth in consumer-related loans and other average earning assets, and a higher level of interest recoveries on loans. The growth in other average earning assets principally reflected increased securities available for sale, mainly for asset and liability management purposes, which were partially offset by decreased mortgages held for sale, resulting from the sale of the mortgage banking business. The impact of volume increases was partially offset by a decrease in net interest margin, caused by narrower spreads, which were mitigated by the addition of $1.3 billion of retail deposits from the June 28 acquisition of Bancorp, which replaced more expensive wholesale funding. In the nine-month comparison, domestic net interest revenue decreased $11 million and net interest margin decreased 24 basis points. The decrease in net interest revenue was due to lower net interest margin, resulting from narrower spreads, including competitive pricing pressures, and the aggressive marketing of a new higher-rate savings product introduced during the second quarter of 1995. Partially offsetting the decrease in net interest revenue was an increase in average earning assets, as discussed above. Internationally, the increase in net interest revenue of $19 million in the quarterly comparison and $65 million in the nine-month comparison was primarily driven by increases in average earning assets of $2.5 billion and $2.3 billion in the quarterly and nine-month comparisons, respectively, reflecting increases in the Corporation's Latin American operations, primarily Brazil and Argentina. The increases in average earning assets included $1.4 billion and $1.3 billion increases in average loans and lease financing and $1.1 billion and $.9 billion in average treasury assets for the quarterly and nine-month comparisons, respectively. Volume increases included approximately $700 million of average loans and leases in Brazil for both comparisons, as well as $620 million and $380 million in treasury assets in the quarterly and nine-month comparisons, respectively. Average loans and leases in Argentina increased approximately $520 million and $450 million, and average treasury assets increased $490 million and $510 million in the quarterly and nine-month comparisons, respectively. For both the quarterly and nine-month comparisons, the impact of these volume increases on net interest revenue was partially offset by tighter Brazilian and Argentine net interest margins, reflecting lower interest rate spreads stemming from increasing economic stability in these countries, and mix changes in Argentine average earning assets. The decrease in interest rate spreads in Argentina and Brazil and the changes in mix in Argentina were primarily responsible for the decrease in international margin in the quarterly and nine-month comparisons. The level of net interest revenue and margin reported for the quarter ended September 30, 1996 is not necessarily indicative of future results. The Corporation has experienced and could experience continued pressure on margin in the future. Future levels of net interest revenue and margin will be affected by competitive pricing pressure on retail deposits, loans and other products; the mix and volume of assets and liabilities; the current interest rate environment; the economic and political situations in countries where the Corporation does business; and other factors. PROVISION FOR CREDIT LOSSES The provision for credit losses was $57 million for the quarter ended September 30, 1996, compared with $51 million for the same period in 1995. For the first nine months of 1996, the provision for credit losses was $171 million, compared with $194 million for the first nine months of 1995, including a special provision of $50 million in the first quarter of 1995 reflecting management's intent to strengthen further the Corporation's loan loss reserve. This was due to the uncertainty caused by economic events impacting the Argentine and Mexican economies in the early part of 1995, and industry trends in consumer credit, combined with the growth in the Corporation's Latin American lending and domestic consumer lending portfolios. The provision for credit losses in each quarter 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. The amount of future provisions will continue to be a function of the regular quarterly review of the reserve for credit losses, based upon management's assessment of risk at that time, and, as such, there can be no assurance as to the level of future provisions. 16 NONINTEREST INCOME The following table sets forth the components of noninterest income.
Third Quarter Nine Months ------------- ----------- 1996 1995 Change 1996 1995 Change ---- ---- ------ ---- ---- ------ Financial service fees Deposit and ATM-related fees $ 61 $ 58 $ 3 $ 180 $ 173 $ 7 Letter of credit and acceptance fees 18 18 51 55 (4) Syndication and agent fees 14 12 2 36 26 10 Other loan-related fees 9 8 1 28 25 3 Net mortgage servicing fees 3 25 (22) (82) 76 (158) Other financial service fees 35 41 (6) 114 110 4 --- --- --- ----- --- ---- Total financial service fees 140 162 (22) 327 465 (138) Mutual fund fees 24 18 6 69 48 21 Personal trust fees 32 29 3 97 84 13 Other trust and agency fees 6 18 (12) 15 54 (39) Trading profits and commissions 21 7 14 59 16 43 Securities portfolio gains, net 7 1 6 24 7 17 Net equity and mezzanine profits 51 25 26 165 65 100 Net foreign exchange trading profits 13 16 (3) 37 45 (8) Gain on sale of mortgage servicing 13 6 7 13 10 3 Other income 30 24 6 93 73 20 Gains on sales of businesses 106 75 31 --- --- --- ----- --- ---- Total $ 337 $ 306 $ 31 $ 1,005 $ 942 $ 63 === === === ===== === ====
Lower financial service fees during the first nine months of 1996 reflected $111 million of pre-tax losses ($70 million after-tax) from risk management activities, net of decreased mortgage servicing amortization, recorded during the first quarter of 1996 by BancBoston Mortgage Corporation (BBMC), the Corporation's mortgage banking subsidiary. These losses resulted from the change in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio which, in turn, protected the economic value of BBMC pending the completion of its sale to HomeSide, Inc. The value of mortgage servicing rights is affected by the expected level of prepayments made by mortgage holders resulting from changes in mortgage rates. The value of the contracts purchased to manage this risk fluctuates inversely with the value of the mortgage servicing assets. Due to the sharp increase in long-term interest rates during the first quarter of 1996, the value of these contracts declined. Concurrently, the value of the mortgage servicing assets and the amount of gain to be recognized by the Corporation on the disposition of BBMC increased. As a result, the losses from risk management activities were substantially offset by the pre-tax gain of $106 million ($67 million after-tax) realized on the sale of BBMC, which is included in gain on sales of businesses. Lower financial service fees also reflected a reduction in net mortgage servicing fees of approximately $22 million and $47 million in the quarterly and nine-month comparisons, respectively, principally due to the sale of BBMC in March 1996. Excluding the above-noted effects of BBMC, financial service fees were relatively flat in the quarterly comparison and increased $20 million in the nine-month comparison. The increase was primarily due to increases in deposit and ATM-related fees, and syndication and agent fees, reflecting a higher volume of transactions generated by the Corporation's Corporate Finance business. Net equity and mezzanine profits increased significantly compared with the prior year periods due to a higher level of gains realized on dispositions of investments, primarily as a result of a seasoning of the portfolio and favorable market conditions. The portfolio has been steadily growing and is diversified as to industry, geography and type of investment. The level of net profits from the equity and mezzanine business is impacted by market and economic conditions, and, as such, fluctuates from period to period. Mutual fund fees increased in the quarterly and nine-month comparisons primarily due to higher fees from the Corporation's Brazilian mutual fund business, reflecting growth in these funds to $3.5 billion at September 30, 1996, from $2.1 billion at September 30, 1995. Lower other trust and agency fees reflected the Corporation's sale of its corporate trust business and the joint venture of its stock transfer business in 17 the fourth quarter of 1995. Compared to prior year periods, trading profits and commissions increased, mainly due to increases from the Corporation's Global Capital Markets and Latin American units. Net securities portfolio gains increased from the prior year periods as certain domestic securities were sold as part of a repositioning of the available for sale securities portfolio. Net foreign exchange trading profits decreased from the prior year periods reflecting lower profits from Asia. The $13 million gain on the sale of mortgage servicing in the third quarter of 1996 resulted from the sale of BayBank's $4 billion mortgage servicing portfolio. Gain on sales of businesses in 1996 reflected the gain on the sale of BBMC as discussed above, and, in 1995, reflected the sale of the Corporation's Maine and Vermont banking subsidiaries for a gain of $75 million ($30 million after-tax). NONINTEREST EXPENSE The following table sets forth the components of noninterest expense.
Third Quarter Nine Months ------------- ----------- 1996 1995 Change 1996 1995 Change ---- ---- ------ ---- ---- ------ Employee costs $ 293 $ 298 $ (5) $ 879 $ 857 $ 22 Occupancy and equipment 85 82 3 254 242 12 Professional fees 15 17 (2) 42 50 (8) Advertising and public relations 26 19 7 84 60 24 Communications 24 24 74 66 8 Goodwill amortization 7 5 2 17 13 4 FDIC insurance premiums 3 (3) 1 36 (35) Other 78 68 10 234 199 35 ---- ---- ---- ----- --- ---- Noninterest expense before restructuring and merger- related costs and OREO costs 528 516 12 1,585 1,523 62 Restructuring and merger- related costs 180 180 180 180 OREO costs 5 2 3 7 8 (1) ---- ---- ---- ----- ------ ---- Total $ 713 $ 518 $ 195 $ 1,772 $ 1,531 $ 241 ==== ==== ==== ====== ====== ====
The increase in noninterest expense before restructuring and merger-related costs and OREO of $12 million in the quarterly comparison and $62 million in the nine-month comparison is primarily due to ongoing expansion and investment spending in several of the Corporation's growth businesses, mainly Latin America, Global Capital Markets and Consumer Finance. Initiatives in these units included: branch expansion and growth in fee-based businesses in Latin America; the hiring of sales and trading professionals in all the Global Capital Markets businesses, including the start-up of a high-yield debt unit; and marketing campaigns related to credit card, home equity and other products in Consumer Finance. The current period expense levels also included higher incentive compensation costs related to improved business unit performance, and the effects of the June 28, 1996 acquisition of Bancorp. These increases were partially offset by cost savings related to the integration of BayBanks, the elimination of FDIC insurance premiums in 1996, which amounted to $3 million in the third quarter of 1995 and $36 million in the first nine months of 1995, and the absence of operating expenses associated with disposed businesses, including BBMC and the corporate trust and stock transfer businesses. Total staff levels decreased by about 7 percent, or 1,600, from September 1995, principally due to the absence of the above businesses, and the BayBanks integration. Legislation was passed at the end of the third quarter of 1996 to resolve issues with respect to capitalization of the Savings Association Insurance Fund (SAIF). The Corporation does not expect this legislation to have a material impact on its results of operations. In the third quarter of 1996, the Corporation recorded restructuring and merger- related charges of $180 million in connection with its acquisition of BayBanks. The charges included severance costs, primarily related to separation programs and employee assistance costs, 18 related to the Corporation's plan to eliminate approximately 2,100 positions; facility costs and other restructuring and merger-related costs, including consolidations of branch and back office operations, resulting in lease termination costs and writedowns of bank owned property and equipment; and professional fees and other costs of effecting the merger; as well as systems and other conversion costs, which were incurred during the third quarter. (See Note 9 to the Financial Statements for further discussion.) OREO expense increased in the quarterly comparison due to a writedown on one property. PROVISION FOR INCOME TAXES The Corporation's tax provision was $78 million in the third quarter of 1996, compared with $132 million in the third quarter of 1995. Included in the third quarter of 1996 is a tax benefit of $63 million related to the $180 million restructuring and merger-related charges recorded in connection with the acquisition of BayBanks. The low level of tax benefit associated with the charge reflects the effect of certain non tax deductible costs associated with the acquisition. For the first nine months of 1996, the provision for income taxes was $341 million, compared with $395 million for the first nine months of 1995, including $45 million associated with the $75 million pre-tax gain on the sales of the Corporation's Maine and Vermont banking subsidiaries during the first quarter of 1995. The high level of tax associated with this gain reflected the lower tax bases in these investments as a result of $35 million of non-tax deductible goodwill associated with these subsidiaries. Excluding the effects of the restructuring and merger-related charges and the gains on the sales of the banking subsidiaries, the Corporation's effective tax rate was 42 percent for the third quarter and first nine-months of 1996, compared to an effective tax rate of 43 percent for the third quarter and first nine-months of 1995. The reduction in the effective tax rate from 1995 periods is due to the effect of mid-1995 changes in Massachusetts tax law which permit apportionment of a bank's taxable income and reduce the state income tax rate for banks from 12.5 percent to 10.5 percent to be phased in over five years. FINANCIAL CONDITION ------------------- CONSOLIDATED BALANCE SHEET At September 30, 1996, the Corporation's total assets were $62.0 billion compared with $59.4 billion at December 31, 1995. The $2.6 billion increase was due to a higher level of earning assets, mainly loans and trading securities, with the increases partially offset by a reduction in mortgages held for sale resulting from the sale of BBMC (see "Credit Profile" below for a further discussion of loans). The decline in other assets reflected the removal of over $500 million of mortgage servicing rights from the Corporation's balance sheet due to the sale of BBMC. Domestic deposits increased approximately $.9 billion, reflecting the addition of $1.3 billion of deposits from the acquisition of Bancorp, partially offset by a decline in certain savings accounts. Deposits overseas also increased $1.4 billion from December 31, 1995, primarily from the Corporation's Latin American operations. Notes payable increased approximately $660 million from December 31, 1995, mainly due to the issuance of medium-term notes by the Corporation and additional issuances of Brazilian debt, partially offset by the maturity of certain senior notes of the Corporation. 19 CREDIT PROFILE A discussion of the Corporation's credit management policies is included on page 28 of its 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. The segments of the lending portfolio are as follows:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 1996 1996 1996 1995 1995 --------- -------- ------- -------- --------- United States Operations Commercial, industrial and financial $ 13,828 $ 12,915 $ 12,677 $ 12,809 $ 13,162 Commercial real estate Construction 323 410 383 386 460 Other 3,228 3,326 3,242 3,393 3,340 Consumer-related loans Residential mortgages 4,156 4,133 4,218 4,141 5,244 Home equity loans 2,842 2,775 2,644 2,556 2,455 Credit card 1,320 1,223 810 495 369 Other 5,349 5,218 5,200 5,059 4,820 Lease financing 1,778 1,627 1,565 1,564 1,510 Unearned income (272) (245) (240) (240) (238) ------ ------ ------ ------ ------ 32,552 31,382 30,499 30,163 31,122 ------ ------ ------ ------ ------ International Operations Loans and lease financing, net of unearned income 9,501 9,271 8,769 8,707 8,066 ------ ------ ------ ------ ------ ------ Total loan and lease financing $ 42,053 $ 40,653 $ 39,268 $ 38,870 $ 39,188 ====== ====== ====== ====== ======
The $3.2 billion increase in loans and lease financing since December 31, 1995 reflects a $2.4 billion increase in domestic loans, including increases in both consumer-related and commercial, industrial and financial loans, and a $.8 billion increase in international loans. Domestic consumer-related loans increased $1.4 billion, primarily reflecting the Corporation's re-entry into the domestic credit card business during the latter part of 1995, as well as the origination activities of its home equity lending business and national consumer finance franchise. The $1.0 billion increase in commercial and industrial loans occurred in various regional and national portfolios, including specialized industries, New England corporate banking and asset based lending; loan levels are also affected by the timing of syndication activity. The $.8 billion increase in international loans and lease financing since December 31, 1995, reflected ongoing growth in the Latin American portfolios, primarily those of Argentina and Brazil. A further discussion of the Argentine and Brazilian operations is included in the "Cross-Border Outstandings" section. Approximately 74 percent of domestic commercial real estate loans were located in New England at September 30, 1996, compared with approximately 76 percent at December 31, 1995. The portion of domestic commercial real estate loans located outside of New England was dispersed among 27 and 28 states at September 30, 1996 and December 31, 1995, respectively. The Corporation's total loan portfolio at September 30, 1996 and December 31, 1995, included $1.6 billion and $1.3 billion of highly leveraged transaction (HLT) loans to 129 and 101 customers, respectively. The average HLT loan size at September 30, 1996 and December 31, 1995, was $12 million and $13 million, respectively. The amount of unused commitments for HLTs at September 30, 1996 was $614 million, compared with $639 million at December 31, 1995. 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 September 30, 1996 and December 31, 1995, there were no nonaccrual HLT loans. Credit losses from HLT loans were $1.2 million in the first nine months of 1996. The Corporation does not currently anticipate a substantial increase in HLT lending over the September 30, 1996 level. 20 A discussion of the Corporation's real estate and HLT lending activities, policies and the effect of these activities on results of operations is included on page 30 of its 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. NONACCRUAL LOANS AND OREO The details of consolidated nonaccrual loans and OREO are as follows:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 (dollars in millions) 1996 1996 1996 1995 1995 -------- ------- -------- ------- -------- United States Commercial, industrial and financial $ 114 $ 140 $ 93 $ 88 $ 120 Commercial real estate Construction 9 10 22 25 23 Other 84 86 102 103 110 Consumer-related loans Residential mortgages 60 45 46 42 43 Home equity loans 22 20 16 14 17 Credit card 5 2 Other 44 38 42 35 31 ---- ---- ---- ---- ---- 338 341 321 307 344 ---- ---- ---- ---- ---- International 106 57 63 66 69 ---- ---- ---- ---- ---- Total nonaccrual loans 444 398 384 373 413 OREO 52 62 65 69 81 ---- ---- ---- ---- ---- Total $ 496 $ 460 $ 449 $ 442 $ 494 ==== ==== ==== ==== ==== Nonaccrual loans and OREO as a percent of related asset categories 1.2% 1.1% 1.1% 1.1% 1.3 %
Nonaccrual loans and OREO at September 30, 1996 increased $54 million from December 31, 1995, and $36 million from June 30, 1996. The increase from June 30, 1996 reflected the placement of a large international loan on nonaccrual status, and additional increases in domestic consumer-related non-accrual loans, about half of which resulted from conforming BayBanks consumer loan nonaccrual policies to those of the Corporation. These increases were partially offset by decreases in the domestic commercial loan portfolio as well as the commercial real estate loan and OREO portfolios. The level of nonaccrual loans and OREO is influenced by the economic environment, interest rates, and other internal and external factors. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO. RESERVE FOR CREDIT LOSSES The reserve for credit losses at September 30, 1996 was $897 million, or 2.13 percent of outstanding loans and leases, compared with $895 million, or 2.20 percent, at June 30, 1996, and $858 million, or 2.19 percent at September 30, 1995. The reserve for credit losses was 202 percent of nonaccrual loans and leases at September 30, 1996, compared with 225 percent at June 30, 1996, and 208 percent at September 30, 1995. Net credit losses were $55 million for the third quarter of 1996, and $155 million for the first nine months of 1996. This compares with $45 million for the third quarter of 1995, and $145 million for the first nine months of 1995. Higher net credit losses for both the quarter and nine-month comparisons were primarily driven by the increase in consumer-related loan net credit losses, which was partially offset by lower net credit losses from the commercial real estate and commercial and industrial portfolios. Net credit losses from the consumer-related portfolio amounted to $44 million in the third quarter of 1996, compared to $23 million in the third quarter of 1995, and $110 million in 21 the 1996 nine-month period, compared to $59 million in the 1995 nine-month period. The increases in the quarterly and nine-month comparisons were principally due to higher net credit losses from the national consumer finance portfolios, principally Fidelity Acceptance Corporation, reflecting the continuing upward trend of net credit losses in these portfolios. International net credit losses decreased in both the quarterly and nine-month comparisons, primarily due to lower net credit losses from the loan portfolios in Argentina and Uruguay, partially offset by higher net credit losses in the Brazilian consumer loan portfolio. As a percentage of average loans and leases on an annualized basis, net credit losses were .53 percent in the third quarter of 1996, compared with .49 percent for the second quarter of 1996, and .46 percent for the third quarter of 1995. Net credit losses are as follows:
Third Quarter Nine Months (in millions) 1996 1995 1996 1995 ---- ---- ---- ---- United States Operations Commercial, industrial and financial $ 6 $ 5 $ 24 Commercial real estate $ 1 4 15 27 Consumer-related loans Residential mortgages 2 5 9 14 Credit card 7 3 14 8 Home equity loans 3 4 4 Other 35 12 83 33 ---- ---- ---- ---- 45 33 130 110 International Operations 10 12 25 35 ---- ---- ---- ---- Total $ 55 $ 45 $ 155 $ 145 ==== ==== ==== ====
CROSS-BORDER OUTSTANDINGS At September 30, 1996 and December 31, 1995, total cross-border outstandings represented 13 percent and 14 percent of consolidated total assets, respectively. In accordance with the bank regulatory rules, cross-border outstandings are: . Amounts payable to the Corporation in U.S. dollars or other non-local currencies. . Amounts payable to the Corporation in local currency but funded with U.S. dollars or other non-local currencies. Included in these outstandings are 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 and accrued interest receivable. 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 payment 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 Corporation manages its cross-border outstandings using country exposure limits. A discussion of the Corporation's credit management policies is included on page 28 of its 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. Excluded from cross-border outstandings for a given country are: . Local currency assets funded with 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 September 30, 1996, such transactions related to emerging markets countries totaled $1.9 billion compared with $1.3 billion at December 31, 1995. . Local currency outstandings funded with local currency. . U.S. dollar or other non-local currency outstandings reallocated as a result of external guarantees or cash collateral. . U.S. dollar or other non-local currency outstandings reallocated as a result of insurance contracts, primarily issued by U.S. government agencies. 22 Cross-border outstandings in countries which individually amounted to 1.0 percent or more of consolidated total assets at September 30, 1996 and December 31, 1995 were approximately as follows:
Consolidated Percentage of Public Banks Other Total Total Assets Commitments (2) -------- ------- ------- --------------- -------------- --------------- (dollars in millions) September 30, 1996 (1) Argentina $490 $ 40 $1,940 $2,470 4.0% $ 65 Brazil 10 45 940 995 1.6 80 Chile 165 235 285 685 1.1 20 December 31, 1995 (1) Argentina $465 $ 50 $1,710 $2,225 3.7% $ 45 Brazil 25 60 980 1,065 1.8 35 United Kingdom 125 570 695 1.1 130 Chile 150 140 365 655 1.1 15
(1) There were no countries where cross-border outstandings fell within .75 percent and 1 percent of consolidated total assets at September 30, 1996 and December 31, 1995. (2) Included within commitments are letters of credit, guarantees and the undisbursed portion of loan commitments. To comply with the regulatory definition of cross-border outstandings, the Corporation included approximately $1.5 billion and $1.3 billion of Argendollar outstandings in its cross-border totals for Argentina at September 30, 1996 and December 31, 1995, respectively. These outstandings are payable to the Corporation in U.S. dollars, which are funded entirely by dollars borrowed within Argentina. EMERGING MARKETS COUNTRIES At September 30, 1996, approximately $5.2 billion of the Corporation's cross- border outstandings, or approximately 8.4 percent of total assets, were to emerging markets countries, of which most were to countries in which the Corporation maintains a branch network and/or subsidiaries, compared to $4.9 billion at December 31, 1995. These cross-border outstandings, of which approximately 78 percent were loans at September 30, 1996, were mainly comprised of short-term trade credits, non-trade-related loans and leases not subject to country debt rescheduling agreements, government securities and capital investments in branches and subsidiaries. ARGENTINA AND BRAZIL During the first nine months of 1996, the Argentine government announced a series of political and economic actions aimed at stimulating growth. The government continues to propose measures to reduce both the fiscal deficit and unemployment. The government has expressed expectations for continued low inflation, which amounted to zero percent during the first nine months of 1996, and an increase in credit activity, accompanied by declining interest rates. Total deposits in the country's financial system, which have grown by approximately 18 percent in the first nine months of 1996, remained steady during the quarter. The Corporation's Argentine deposits increased by approximately $400 million from December 31, 1995, and its loans increased by approximately $420 million from December 31, 1995, including increases in both commercial and consumer lending. The level of Argentine nonaccrual loans increased from $52 million at December 31, 1995, to $82 million at September 30, 1996, due to the placement of one large international loan on nonaccrual status, which was partially offset by decreases in other nonaccrual loans. Net credit losses declined from $23 million in the first nine months of 1995, to $14 million in the first nine months of 1996. Brazil's inflation rate of 8.5 percent for the first nine months of 1996 compares favorably to the inflation rate of 17.2 percent for the first nine months of 1995. During the third quarter of 1996, Brazil's inflation averaged .6 percent per month compared with 2.0 23 percent per month during the third quarter of 1995. The government continued to maintain a floating band exchange rate policy, which currently stands at 1.00 to 1.04 Reais to the U.S. dollar. The exchange rate at September 30, 1996 was 1.02 Reais to the U.S. dollar. Certain local Brazilian banks experienced liquidity and other problems in 1995, which continued into 1996. This has generally resulted in customers moving their funds to banks perceived to have more stability, contributing, in part, to the increases in the Corporation's deposit and mutual funds levels. The Corporation's deposit levels in Brazil increased from December 31, 1995 by approximately $600 million, to approximately $1 billion at September 30, 1996. Additionally, the Corporation's mutual funds under management in Brazil increased approximately $1 billion from December 31, 1995, to $3.5 billion at September 30, 1996. The Corporation's loan level in Brazil increased approximately $500 million from December 31, 1995, to $2.7 billion at September 30, 1996, which included increases from various segments of the loan portfolio. Net credit losses were $4 million in both the third quarter and second quarter of 1996, primarily due to higher credit losses from the consumer portfolio. Nonaccrual loans and OREO increased from $12 million at the end of the second quarter of 1996 to $20 million at the end of the third quarter of 1996. During the third quarter of 1996, the Corporation's Argentine and Brazilian operations continued to structure their balance sheets to take positions in their local currencies as deemed appropriate. Such positions are taken when the Corporation believes that it can maximize its spread from interest operations by funding local currency assets with U.S. dollars rather than using local currency liabilities or by funding U.S. dollar assets with local currency liabilities. The average currency positions for Argentina and Brazil during the third quarter of 1996 were $117 million and $105 million, respectively, compared to $112 million and $32 million, respectively, in the second quarter of 1996. Additionally, the Corporation maintained average positions in Chile and Korea of $42 million and $49 million, respectively, during the third quarter of 1996, which compared to $23 million and $101 million, respectively, during the second quarter of 1996. Currency positions are actively managed and, therefore, it is not unusual for levels to fluctuate from period to period. To date, these positions have been liquid in nature and local management has been able to close and re-open these positions as necessary. For additional information related to the Corporation's currency positions, see page 37 of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. The economic situation in Latin American countries can be volatile, including the effect of world financial markets on these economies. As such, changes in the economies of the Latin American countries in which the Corporation does business could have an impact on the Corporation in the future. The Corporation has not experienced any collection problems as a result of currency restrictions or foreign exchange liquidity problems on its current portfolio of cross-border outstandings to emerging markets countries. However, if economic actions implemented by Latin American governments do not remain effective over time, the Corporation's operations could experience adverse effects, including stress on liquidity, deterioration of credit quality, a decline in the value of its securities portfolio and declines in loan and deposit levels. The Corporation will continue to monitor the economies of Latin American countries in which it has local operations, cross-border outstandings and/or currency positions. 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. For additional information related to the Corporation's Latin American cross-border outstandings see pages 35 through 38, of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. LIQUIDITY MANAGEMENT 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, stood at $6.4 billion at September 30, 1996, compared with $7.4 billion at December 31, 1995. Also, the Corporation has access to additional funding through the public markets. Management considers overall liquidity at September 30, 1996 to be adequate to meet current obligations, to support expectations for future changes in asset and liability levels and to carry on normal operations. For additional information related to the Corporation's liquidity management, see pages 38 and 39 of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current report on Form 8-K dated September 6, 1996. 24 INTEREST RATE RISK Interest rate risk is defined as the exposure of the Corporation's net income or financial position to adverse movements in interest rates. The Corporation manages its interest rate risk within policies and limits established by the Asset and Liability Management Committee (ALCO) and approved by the Board of Directors (Board). ALCO issues strategic directives to specify the extent to which Board-approved rate risk limits are utilized, taking into account the results of the rate risk modeling process as well as other internal and external factors. Interest rate risk related to non-trading, U.S. dollar denominated positions, which represents a significant portion of the consolidated balance sheet at September 30, 1996, is managed centrally through the Boston Treasury group. Interest rate risk associated with these positions is evaluated and managed through 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 ALCO and at least quarterly with the Board. 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 asset and liability mix, and other management actions, and, therefore, 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 ALCO directives, market value sensitivity cannot exceed 3 percent of risk-based capital and net interest revenue at risk cannot exceed 2 percent of net interest revenue over the next twelve-month period. The ALCO market value sensitivity directive was increased from 2 percent of risk-based capital at December 31, 1995. The following table shows the Corporation's market value sensitivity and net interest revenue at risk positions at September 30, 1996 and December 31, 1995, respectively. MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK POSITIONS
September 30, 1996 December 31, 1995 (3) ------------------ --------------------- Quarterly Quarterly (dollars in millions) Quarter-end Average Quarter-end Average - -------------------------------------------------------------------------------- Market Value Sensitivity (1)......... $142 $145 $ 87 $ 84 % of risk-based capital 2.1% 2.4% 1.6% 1.6% - -------------------------------------------------------------------------------- Net Interest Revenue at Risk (2)............. $ 29 $ 25 $ 24 $ 21 % of net interest revenue 1.3% 1.2% 1.4% 1.2% - --------------------------------------------------------------------------------
(1) Based on a 100 basis point adverse interest rate shock. (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 September 30, 1996 and December 31, 1995 the adverse position was based upon a 200 basis point decline in interest rates over the next twelve-month period. See further discussion below. (3) December 31, 1995 amounts were not restated for the acquisition of BayBanks due to the use of different interest rate risk modeling techniques by BayBanks; consequently, restatement was impractical. At September 30, 1996, and December 31, 1995, the Corporation's adverse market value sensitivity was to rising interest rates. The increase in the market value sensitivity position since December 31, 1995, was primarily due to an increase in fixed rate assets, the 25 lengthening of asset durations, and the termination of $8.2 billion of a series of interest rate futures contracts during the first quarter of 1996 that were linked to the Corporation's short-term floating rate wholesale funding. The Corporation's adverse net interest revenue at risk position was to declining interest rates at September 30, 1996 and December 31, 1995. Non-U.S. dollar denominated interest rate risk is managed by the Corporation's overseas units, with oversight by the Boston Treasury group. The Corporation, through ALCO, has established limits for its non-U.S. dollar denominated interest rate risk using cumulative gap limits for each country in which the Corporation has local market interest rate risk. The level of U.S. dollar and Non-U.S. dollar interest rate exposure maintained by the Corporation is a function of the market environment and will change from period to period based on interest rate and other economic conditions at a particular point in time. Additional information with respect to the Corporation's management of interest rate risk is included on pages 39 to 43 of the Corporation's 1995 Annual Report to Stockholders which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. DERIVATIVE FINANCIAL INSTRUMENTS The Corporation utilizes a variety of financial instruments to manage interest rate risk including derivatives and securities. Derivatives provide the Corporation with significant flexibility in managing its interest rate risk exposure, enabling it to manage risk efficiently and respond quickly to changing market conditions by minimizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps and futures, as part of its asset and liability management practices. All derivative activities are managed on a comprehensive basis, are included in the overall market value sensitivity and net interest revenue at risk measures and limits described above, and are subject to credit standards similar to those for balance sheet exposures. 26 The following table summarizes the notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in the Corporation's asset and liability management (ALM) portfolio.
September 30, 1996 (1) December 31, 1995 (1) --------------------------------------------------------------------------------------------------- Notional Fair Value (2)(3) Unrecognized(4) NOTIONAL FAIR VALUE (2)(3) UNRECOGNIZED (4) (DOLLARS IN MILLION) AMOUNT ASSET LIABILITY GAIN (LOSS) AMOUNT ASSET LIABILITY GAIN (LOSS) - ----------------------- ---------------------------------------------- ------------------------------------------------- Interest rate contracts Futures and forwards $3,458 $1 $(55) $12,558 $10 $(89) Interest rate swaps 6,984 4 73 (54) 5,852 $93 8 102 Interest rate options Purchased 3,968 119 2 Written or sold 360 34 ---------------------------------------------- --------------------------------------------- Total interest rate contracts $10,442 $4 $74 $(109) $22,738 $212 $52 $15 ============================================== ============================================= Foreign exchange spot and forward contracts (5) $1,132 $6 $5 $1 $1,258 $3 $5 $(2) ---------------------------------------------- --------------------------------------------- Total foreign exchange contracts $1,132 $6 $5 $1 $1,258 $3 $5 $(2) ============================================== =============================================
(1) Contracts under master netting agreements are shown on a net basis. (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 majority of derivatives that are part of the ALM portfolio are accounted for on the accrual basis, and not carried at fair value. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) The credit exposure of interest rate derivative and foreign exchange contracts at September 30, 1996 and December 31, 1995, is represented by the fair value of contracts reported in the "Asset" Column. (4) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts which have been terminated. Such amounts are recognized as an adjustment of yield of the linked assets or liabilities over the period being managed. At September 30, 1996, there were $20 million of unrecognized gains and $41 million of unrecognized losses related to terminated contracts that are being amortized as an adjustment of the yield of the assets or liabilities to which they were linked over a weighted average period of 29 months and 16 months, respectively. At December 31, 1995, unrecognized gains of $32 million and unrecognized losses of $2 million related to terminated contracts were being amortized over weighted average periods of 32 months and 23 months, respectively. (5) Foreign exchange spot and forward contracts are used to manage the risk related to foreign exchange transactions in the Corporation's overseas operations. The decrease in fair value of interest rate derivative contracts, as reflected in the change from a net unrecognized gain of $15 million at December 31, 1995, to a net unrecognized loss of $109 million at September 30, 1996, was primarily due to an increase in long-term interest rates during the first three quarters of 1996, which principally impacted the receive fixed interest rate swap portfolio and resulted in a decline in its fair value. The Corporation's utilization of derivative instruments is modified from time to time in response to changing market conditions, as well as changes in the characteristics and mix of the Corporation's related assets and liabilities. In this respect, during the first quarter of 1996, the Corporation terminated $8.2 billion of a series of interest rate futures contracts that were linked to the Corporation's continuing need for short-term wholesale funding. The remaining unrecognized loss of $40 million at September 30, 1996, related to the terminated futures contracts is being amortized to net interest revenue as an adjustment of the yield of the short-term liabilities to which they were linked over the remainder of the period that was being managed. 27 The following table summarizes the remaining maturity of interest rate derivative financial instruments entered into for asset and liability management purposes as of September 30, 1996.
Remaining Maturity -------------------------------------------------------------------- 1996 1997 1998 1999 ----------- ------------ ---------- ------------ (dollars in millions) INTEREST RATE SWAPS Domestic Receive fixed rate swaps (1) Notional amount $ 37 $ 201 $ 60 Weighted average receive rate 6.28% 8.20% 5.60% Weighted average pay rate 5.59% 5.53% 5.81% Pay fixed rate swaps (1) Notional amount $ 28 $ 3 $ 32 $ 2 Weighted average receive rate 5.44% 5.83% 5.82% 5.66% Weighted average pay rate 5.83% 7.36% 8.71% 7.15% Basis swaps (2) Notional amount $ 135 $ 75 $ 50 Weighted average receive rate 5.54% 5.57% 5.54% Weighted average par rate 5.44% 5.56% 5.48% Total Domestic Interest Rate Swaps Notional amount $ 200 $ 279 $ 142 $ 2 Weighted average receive rate (3) 5.66% 7.47% 5.63% 5.66% Weighted average pay rate (3) 5.52% 5.56% 6.35% 7.155 Total International Interest Rate Swaps Notional Amount (4) $ 2,631 $ 1,272 OTHER DERIVATIVE PRODUCTS Futures and forwards (5) $ 3,458 Interest rate options (6) Purchased Written or sold --------- -------- ------ -------- Total Consolidated Notional Amount $ 6,289 $ 1,551 $ 142 $ 2 ========= ======== ====== ======== Remaining Maturity --------------------------------------------------------------------- Sept. 30, 1996 Dec. 31, 1995 2000 2001+ Total Total ----------- ------------ ---------- ------------- (dollars in millions) INTEREST RATE SWAPS Domestic Receive fixed rate swaps (1) Notional amount $ 340 $ 1,700 $ 2,338 $ 2,463 Weighted average receive rate 5.50% 6.46% 6.45% 6.36% Weighted average pay rate 5.70% 5.75% 5.72% 5.87% Pay fixed rate swaps (1) Notional amount $ 39 $ 34 $ 138 $ 315 Weighted average receive rate 5.61% 5.75% 5.67% 6.25% Weighted average pay rate 7.13% 7.11% 7.23% 6.91% Basis swaps (2) Notional amount $ 50 $ 295 $ 605 $ 1,599 Weighted average receive rate 5.88% 5.92% 5.76% 5.97% Weighted average par rate 5.63% 5.67% 5.59% 5.86% Total Domestic Interest Rate Swaps Notional amount $ 429 $ 2,029 $ 3,081 $ 4,377 Weighted average receive rate (3) 5.55% 6.37% 6.28% 6.21% Weighted average pay rate (3) 5.82% 5.76% 5.76% 5.94% Total International Interest Rate Swaps Notional Amount (4) $ 3,903 $ 1,475 OTHER DERIVATIVE PRODUCTS Futures and forwards (5) $ 3,458 $ 12,558 Interest rate options (6) Purchased 3,968 Written or sold 360 ------- -------- ---------- --------- Total Consolidated Notional Amount $ 429 $ 2,029 $ 10,442 $ 22,738 ======= ======== ========== =========
(1) Of the receive fixed rate swaps, $1 billion were linked to floating rate loans, and the remainder principally to fixed rate notes payable. Of the swaps linked to notes payable, approximately $1 billion are scheduled to mature in 2001 and thereafter. The majority of pay fixed rate swaps are linked to fixed rate securities and short-term bank notes. (2) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. The majority of basis swaps are linked to short-term bank notes and floating rate mortgages. (3) The majority of the Corporations's interest rate swaps accrue at LIBOR (London Interbank Offered Rate). In arriving at the variable weighted average receive and pay rates, LIBOR rates in effect as of September 30, 1996 have been implicitly assumed to remain constant throughout the terms of the swaps. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) The majority of the international portfolio is comprised of swaps entered into by the Corporation's Brazilian operation. These swaps are short-term and typically include the exchange of floating rate indices that are limited to the Brazilian market. (5) At December 31, 1995, the majority of the futures used by the Corporation were linked to short-term liabilities and were exchange-traded instruments. The reference instruments for these contracts comprise the major types available, such as Eurodollar deposits and U.S. Treasury notes. During the first quarter of 1996, the Corporation terminated a series of futures contracts which accounts for the majority of the decline from December 31, 1995 (see discussion above). The majority of the futures contracts at September 30, 1996 were entered into by the Corporation's Brazilian operation and are linked to short-term interest bearing assets and liabilities. Average rates are not meaningful for these products. (6) At December 31, 1995, primarily includes interest rate options used to manage prepayment risk related to the mortgage servicing portfolio of the Corporation's mortgage banking subsidiary which was sold in the first quarter of 1996. 28 Derivatives not used for asset and liability management are included in the derivatives trading portfolio. The primary focus of the Corporation's derivatives trading activities is related to providing risk management products to its customers. The following table summarizes the notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in the Corporation's trading portfolio.
September 30, 1996 (1) December 31, 1995 (1) ----------------------------------- ------------------------------------- Notional Fair Value (2)(3)(4) NOTIONAL FAIR VALUE (2)(3)(4) (DOLLARS IN MILLIONS) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY - ------------------------------------------------------------------------------ ------------------------------------- Interest rate contracts Futures and forwards $50,044 $58 $61 $30,821 Interest rate swaps 7,521 58 45 9,169 $91 $80 Interest rate options Purchased 6,478 20 3,411 9 Written or sold 4,504 20 3,986 9 ----------------------------------- ------------------------------------- Total interest rate contracts $68,547 $136 $126 $47,387 $100 $ 89 =================================== ===================================== Foreign exchange contracts Spot and forward contracts $20,691 $182 $180 $13,254 $172 $167 Options purchased 2,050 29 1,044 13 Options written or sold 1,738 25 1,130 16 ----------------------------------- ------------------------------------- Total foreign exchange contracts $24,479 $211 $205 $15,428 $185 $183 =================================== =====================================
(1) Contracts under master netting agreements are shown on a net basis. (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 other assets or other liabilities, as applicable. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) The credit exposure of interest rate derivative and foreign exchange contracts at September 30, 1996 and December 31, 1995 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 contracts included in the trading portfolio for the quarters ended September 30, 1996 and December 31, 1995 were $121 million and $125 million, respectively, and $89 million and $71 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were $202 million and $200 million, respectively, for the quarter ended September 30, 1996, and $233 million and $222 million, respectively, for the quarter-ended December 31, 1995. Net trading gains from interest rate derivatives for the quarter and nine months ended September 30, 1996 were $.7 million and $7.8 million, respectively, and for the quarter and nine months ended September 30, 1995 were ($.3) million and $3.3 million, respectively. Net trading gains from foreign exchange activities, which include foreign exchange spot, forward and option contracts, for the quarter and nine months ended September 30, 1996 were $13 million and $37 million, respectively, and for the quarter and nine months ended September 30, 1995 were $16 million and $45 million, respectively. Additional information on the Corporation's derivative products, including accounting policies, is included on pages 40 to 42 of, and in Notes 1 and 20 to the Financial Statements in, the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K and its Current Report on Form 8-K dated September 6, 1996. 29 CAPITAL The Corporation's Tier 1 and total capital ratios were 8.3 percent and 12.7 percent, respectively, at September 30, 1996, compared with 8.5 percent and 12.8 percent, respectively, at December 31, 1995. The Corporation's leverage ratio at September 30, 1996 was 7.2 percent compared with 7.4 percent at December 31, 1995. As of September 30, 1996, the capital ratios of the Corporation and all of its banking subsidiaries exceeded the minimum capital ratio requirements of the "well capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The capital categories of the Corporation's banking subsidiaries are determined solely for purposes of applying FDICIA's provisions and, accordingly, such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's banking subsidiaries. In October 1996, the Board declared a quarterly common stock dividend of $.44 per share, payable on November 29, 1996, to stockholders of record on November 4, 1996. The payment and level of future common dividends will continue to be determined by the Board based on the Corporation's financial condition, recent earnings history and other factors. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board (the FASB) issued SFAS No. 125, ''Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities." This standard is based on a financial- components approach under which an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred as a result of a transfer of financial assets, and derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and must be applied prospectively. The Corporation does not expect that, upon adoption, this standard will have a material effect on its consolidated financial statements. 30 Consolidated Balance Sheet Averages by Quarter Last Nine Quarters (in millions)
1994 1995 1996 -------------------------------------------------------------------------------------------------- 3 4 1 2 3 4 1 2 3 ------- ------- ------- ------- ------- ------- ------- ------- ------- ASSETS Interest bearing deposits in other banks $ 1,133 $ 1,065 $ 1,262 $ 1,310 $ 1,332 $ 1,454 $ 1,338 $ 1,313 $ 1,256 Federal funds sold and securities purchased under agreements to resell 2,691 1,807 1,482 1,294 1,004 972 1,416 1,532 1,708 Trading securities 636 768 721 815 922 929 1,136 1,624 1,467 Loans held for sale 681 345 258 262 506 760 960 69 21 Securities 6,753 7,478 7,218 7,335 7,468 7,823 8,143 8,065 8,249 Loans and lease financing 36,589 37,606 36,894 37,811 39,033 39,357 39,179 40,114 41,223 ------- ------- ------- ------- ------- ------- ------- ------ ------- Total earning assets 48,483 49,069 47,835 48,827 50,265 51,295 52,172 52,717 53,924 Other assets 6,055 6,036 5,722 6,034 6,447 6,506 6,415 5,664 6,125 ------- ------- ------- ------- ------- ------- ------- ------ ------- TOTAL ASSETS $ 54,538 $ 55,105 $ 53,557 $ 54,861 $ 56,712 $ 57,801 $ 58,587 $ 58,381 $ 60,049 ======= ======= ======= ======= ======= ======= ======= ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing $ 6,469 $ 6,738 $ 6,079 $ 6,091 $ 6,285 $ 6,509 $ 6,586 $ 6,420 $ 6,694 Interest bearing 23,960 24,034 22,530 23,108 24,190 24,700 24,849 24,931 26,003 Overseas offices: Noninterest bearing 415 481 415 416 501 492 499 465 491 Interest bearing 7,703 7,875 8,318 7,967 7,790 8,202 8,698 9,302 9,429 ------ ------ ------ ------ ------ ------ ------- ------- ------ Total deposits 38,547 39,128 37,342 37,582 38,766 39,903 40,632 41,118 42,617 Federal funds purchased and repurchase agreements 4,721 4,388 4,723 4,696 3,959 4,672 3,959 4,561 4,739 Other funds borrowed 3,726 3,913 3,684 4,432 5,661 4,683 5,102 3,721 3,562 Notes payable 2,041 2,192 2,183 2,112 2,115 2,159 2,421 2,584 2,674 Other liabilities 1,702 1,580 1,618 1,818 1,790 1,806 1,767 1,709 1,698 Stockholders' equity 3,801 3,904 4,007 4,221 4,421 4,578 4,706 4,688 4,759 ------ ------ ------ ------ ------ ------ ------- ------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,538 $ 55,105 $ 53,557 $ 54,861 $ 56,712 $ 57,801 $ 58,587 $ 58,381 $ 60,049 ====== ====== ====== ====== ====== ====== ======= ======= ======
31 Consolidated Statement of Income by Quarter - Taxable Equivalent Basis Last Nine Quarters (in millions, except per share amounts)
1994 1995 1996 3 4 1 2 3 4 1 2 3 ----- ----- ----- ----- ----- ----- ----- ----- ----- NET INTEREST REVENUE: $ 543.9 $ 556.9 $ 549.0 $ 557.3 $ 569.6 $ 572.9 $ 565.5 $ 571.5 $ 591.4 Taxable equivalent adjustment 3.2 4.1 4.2 4.9 4.4 8.4 5.5 4.7 5.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total net interest revenue 547.1 561.0 553.2 562.2 574.0 581.3 571.0 576.2 596.4 Provision for credit losses 31.0 41.0 96.5 46.5 51.0 81.0 56.9 57.1 57.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net interest revenue after provision for credit losses 516.1 520.0 456.7 515.7 523.0 500.3 514.1 519.1 539.4 ----- ----- ----- ----- ----- ----- ----- ----- ----- NONINTEREST INCOME: Financial service fees 148.4 148.6 146.7 155.9 162.2 230.6 51.6 135.3 140.4 Trust and agency fees 56.0 58.5 58.3 63.0 64.4 54.8 57.4 61.9 61.6 Trading profits and commissions 11.4 .5 1.8 6.8 7.2 9.1 12.9 25.0 20.7 Net securities gains 1.3 2.5 6.1 .2 .8 1.9 13.4 3.4 7.1 Other income 37.6 39.2 131.6 65.8 71.2 71.3 149.9 157.3 106.7 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest income 254.7 249.3 344.5 291.7 305.8 367.7 285.2 382.9 336.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- NONINTEREST EXPENSE: Salaries 218.8 227.8 227.0 230.7 245.9 243.2 240.8 239.9 244.2 Employee benefits 47.0 43.8 50.0 51.0 52.2 45.8 52.2 49.0 49.1 Occupancy expense 47.9 46.6 47.3 46.8 48.3 48.6 51.1 49.7 51.1 Equipment expense 31.5 31.4 32.2 33.6 33.5 33.8 34.3 33.9 34.2 Acquisition, divestiture and restructuring expenses 5.0 28.2 180.0 Other expense 145.2 149.4 144.2 149.7 138.0 146.1 148.5 159.7 153.8 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest expense 495.4 499.0 500.7 511.8 517.9 545.7 526.9 532.2 712.4 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes 275.4 270.3 300.5 295.6 310.9 322.3 272.4 369.8 163.5 Provision for income taxes 119.2 114.7 140.5 123.0 132.0 133.6 112.0 151.3 78.5 Taxable equivalent adjustment 3.2 4.1 4.2 4.9 4.4 8.4 5.5 4.7 5.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- 122.4 118.8 144.7 127.9 136.4 142.0 117.5 156.0 83.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- NET INCOME $ 153.0 $ 151.5 $ 155.8 $ 167.7 $ 174.5 $ 180.3 $ 154.9 $ 213.8 $ 80.0 ===== ===== ===== ===== ===== ===== ===== ===== ===== PER COMMON SHARE: Net Income: Primary $ .96 $ .95 $ .98 $ 1.03 $ 1.06 $ 1.09 $ .94 $ 1.33 $ .46 Fully diluted .94 .92 .95 1.02 1.05 1.08 .93 1.32 .45 Cash dividends declared .22 .27 .27 .27 .37 .37 .37 .44 .44
32
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS Quarter Ended September 30, 1996 (dollars In millions) - --------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE ASSETS VOLUME INTEREST(1) RATE ------------------------------------ INTEREST BEARING DEPOSITS WITH OTHER BANKS U.S. $ 173 $ 2 4.99% International 1,083 21 7.44 ------ ----- Total 1,256 23 7.10 ------ ----- ---- FEDERAL FUNDS SOLD AND RESALE AGREEMENTS U.S. 480 7 5.52 International 1,228 43 13.98 ------ ----- Total 1,708 50 11.60 ------ ----- ----- TRADING SECURITIES U.S. 470 7 6.13 International 997 29 11.67 ------ ----- Total 1,467 36 9.89 ------ ----- ----- MORTGAGES HELD FOR SAlE U.S. 21 8.74 ------ ----- SECURITIES U.S. Available for sale (2) 6,686 109 6.51 Held to maturity 686 10 6.06 International Available for sale (2) 871 30 14.11 Held to maturity 6 1 31.12 ------ ----- Total 8,249 150 7.23 ------ ----- ----- LOANS AND LEASE FINANCING (NET OF UNEARNED INCOME) U.S. 31,961 687 8.55 International 9,262 258 11.08 ------ ----- Total loans and lease financing (3) 41,223 945 9.12 ------ ----- ----- Earning assets 53,924 1,204 8.89 ------ ----- ----- Nonearning assets 6,125 ------ TOTAL ASSETS $ 60,049 ====== --------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS U.S. Savings deposits $ 15,001 $ 102 2.70% Time deposits 11,002 153 5.55 International 9,429 160 6.76 ------ ----- Total 35,432 415 4.67 ------ ----- ----- FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS U.S. 4,643 68 5.85 International 96 3 11.07 ------ ----- Total 4,739 71 5.95 ------ ----- ----- OTHER FUNDS BORROWED U.S. 2,580 37 5.74 International 982 35 14.22 ------ ----- Total 3,562 72 8.08 ------ ----- ----- NOTES PAYABLE U.S. 2,087 35 6.55 International 587 15 10.14 ------ ----- Total 2,674 50 7.34 ------ ----- ----- Total interest bearing liabilities 46,407 608 5.21 ----- ----- Demand deposits U.S. 6,694 Demand deposits International 491 Other noninterest bearing liabilities 1,698 Total Stockholders' Equity 4,759 ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,049 ====== --------------------------------------------------------------------------------- NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 40,477 $ 459 4.51% International 13,447 137 4.07 ------ ----- Total $ 53,924 $ 596 4.40% ====== ===== ---------------------------------------------------------------------------------
(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 and renegotiated balances. 33
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS Quarter Ended September 30, 1995 (dollars In millions) - --------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE ASSETS VOLUME INTEREST(1) RATE ------------------------------------ INTEREST BEARING DEPOSITS WITH OTHER BANKS U.S. $ 238 $ 4 6.40% International 1,094 42 15.19 ------ ----- Total 1,332 46 13.63 ------ ----- ----- FEDERAL FUNDS SOLD AND RESALE AGREEMENTS U.S. 413 6 5.91 International 591 68 45.62 ------ ----- Total 1,004 74 29.31 ------ ----- ----- TRADING SECURITIES U.S. 209 3 6.07 International 713 59 32.41 ------ ----- Total 922 62 26.45 ------ ----- ----- MORTGAGES HELD FOR SALE U.S. 506 9 7.03 ------ ----- ----- SECURITIES U.S. Available for sale (2) 2,903 47 6.46 Held to maturity 3,879 59 6.05 International Available for sale (2) 462 15 14.28 Held to maturity 224 6 9.70 ------ ----- Total 7,468 127 6.77 ------ ----- ----- LOANS AND LEASE FINANCING (NET OF UNEARNED INCOME) U.S. 31,138 690 8.79 International 7,895 316 15.90 ------ ----- Total loans and lease financing (3) 39,033 1,006 10.23 ------ ----- ----- Earning assets 50,265 1,324 10.45 ----- ----- Nonearning assets 6,447 ------ TOTAL ASSETS $ 56,712 ====== ------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS U.S. Savings deposits $ 14,606 $ 100 2.76% Time deposits 9,584 139 5.74 International 7,790 225 11.44 ------ ----- Total 31,980 464 5.77 ------ ----- ----- FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS U.S. 3,799 46 4.81 International 160 10 24.40 ------ ----- Total 3,959 56 5.60 ------ ----- ----- OTHER FUNDS BORROWED U.S. 4,831 74 6.05 International 830 116 55.70 ------ ----- Total 5,661 190 13.33 ------ ----- ----- NOTES PAYABLE U.S. 1,912 34 7.06 International 203 6 11.00 ------ ----- Total 2,115 40 7.44 ------ ----- ----- Total interest bearing liabilities 43,715 750 6.81 ----- ----- Demand deposits U.S. 6,285 Demand deposits International 501 Other noninterest bearing liabilities 1,790 Total Stockholders' Equity 4,421 ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,712 ====== ------------------------------------------------------------------- NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 39,286 $ 456 4.60% International 10,979 118 4.27 ------ ----- Total $ 50,265 $ 574 4.53% ====== ===== ----------------------------------------------------------------------
(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 and renegotiated balances. 34
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS Nine Months Ended September 30, 1996 (dollars In millions) - ------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ---------------------------------- ASSETS INTEREST BEARING DEPOSITS WITH OTHER BANKS U.S. $ 211 $ 9 5.67% International 1,091 65 8.01 ------ ----- Total 1,302 74 7.63 ------ ----- ----- FEDERAL FUNDS SOLD AND RESALE AGREEMENTS U.S. 456 18 5.33 International 1,096 120 14.60 ------ ----- Total 1,552 138 11.87 ------ ----- ----- TRADING SECURITIES U.S. 466 20 5.62 International 943 110 15.58 ------ ----- Total 1,409 130 12.29 ------ ----- ----- MORTGAGES HELD FOR SALE U.S. 332 17 7.00 International 17 1 6.11 ------ ----- Total 349 18 6.96 ------ ----- ----- SECURITIES U.S. Available for sale (2) 6,692 321 6.42 Held to maturity 684 31 6.08 International Available for sale (2) 738 77 13.89 Held to maturity 39 5 16.60 ------ ----- Total 8,153 434 6.98 ------ ----- ----- LOANS AND LEASE FINANCING (NET OF UNEARNED INCOME) U.S. 31,220 2,008 8.59 International 8,956 855 12.75 ------ ----- Total loans and lease financing (3) 40,176 2,863 9.52 ------ ----- ----- Earning assets 52,941 3,657 9.23 ----- ----- Nonearning assets 6,069 ------ TOTAL ASSETS $ 59,010 ====== ------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS U.S. Savings deposits $ 14,938 $ 300 2.69% Time deposits 10,325 435 5.62 International 9,145 527 7.69 ------ ----- Total 34,408 1,262 4.90 ------ ----- ----- FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS U.S. 4,319 186 5.75 International 102 10 12.90 ------ ----- Total 4,421 196 5.91 ------ ----- ----- OTHER FUNDS BORROWED U.S. 3,180 142 5.98 International 946 175 24.66 ------ ----- Total 4,126 317 10.26 ------ ----- ----- NOTES PAYABLE U.S. 2,022 99 6.55 International 538 40 10.02 ------ ----- Total 2,560 139 7.28 ------ ----- ----- Total interest bearing liabilities 45,515 1,914 5.62 ----- ----- Demand deposits U.S. 6,567 Demand deposits International 485 Other noninterest bearing liabilities 1,725 Total Stockholders' Equity 4,718 ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,010 ====== ------------------------------------------------------------------- NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 40,061 $ 1,349 4.50% International 12,880 394 4.08 ------ ----- Total $ 52,941 $ 1,743 4.40% ====== ===== -------------------------------------------------------------------
(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 and renegotiated balances. 35
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS Nine Months Ended September 30, 1995 (dollars In millions) - ------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE VOLUME INTEREST (1) RATE ------------------------------------ ASSETS INTEREST BEARING DEPOSITS WITH OTHER BANKS U.S. $ 243 $ 9 5.16% International 1,059 169 21.26 ------ ----- Total 1,302 178 18.26 ------ ----- ----- FEDERAL FUNDS SOLD AND RESALE AGREEMENTS U.S. 593 27 5.98 International 665 247 49.66 ------ ----- Total 1,258 274 29.05 ------ ----- ----- TRADING SECURITIES U.S. 229 10 6.37 International 591 136 30.67 ------ ----- Total 820 146 23.90 ------ ----- ----- MORTGAGES HELD FOR SALE U.S. 343 17 6.89 ------ ----- ----- SECURITIES U.S. Available for sale (2) 2,616 131 6.71 Held to maturity 4,135 186 6.02 International Available for sale (2) 381 40 14.04 Held to maturity 210 15 9.55 ------ ----- Total 7,342 372 6.77 ------ ----- ----- LOANS AND LEASE FINANCING (NET OF UNEARNED INCOME) U.S. 30,218 2,001 8.85 International 7,702 865 15.02 ------ ----- Total loans and lease financing (3) 37,920 2,866 10.11 ------ ----- ----- Earning assets 48,985 3,853 10.52 ----- ----- Nonearning assets 6,068 ------ TOTAL ASSETS $ 55,053 ====== ------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS U.S. Savings deposits $ 14,191 $ 276 2.60% Time deposits 9,090 375 5.52 International 8,024 697 11.60 ------ ----- Total 31,305 1,348 5.75 ------ ----- ----- FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS U.S. 4,294 161 5.03 International 162 36 29.47 ------ ----- Total 4,456 197 5.92 ------ ----- ----- OTHER FUNDS BORROWED U.S. 3,725 172 6.20 International 875 329 50.17 ------ ----- Total 4,600 501 14.56 ------ ----- ----- NOTES PAYABLE U.S. 1,973 104 7.08 International 164 14 11.56 ------ ----- Total 2,137 118 7.43 ------ ----- ----- Total interest bearing liabilities 42,498 2,164 6.81 ----- ----- Demand deposits U.S. 6,153 Demand deposits International 444 Other noninterest bearing liabilities 1,742 Total Stockholders' Equity 4,216 ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,053 ====== ------------------------------------------------------------------- NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 38,377 $ 1,360 4.74% International 10,608 329 4.15 ------ ----- Total $ 48,985 $ 1,689 4.61% ====== ===== -------------------------------------------------------------------
(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 and renegotiated balances. 36 CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS Third Quarter 1996 Compared With Third Quarter 1995 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, and the change because of the difference in the number of days in the periods has been allocated to rate.
INCREASE (DECREASE) DUE TO CHANGE IN ---------------- (IN MILLIONS) VOLUME RATE NET CHANGE ------ ---- ---------- INTEREST INCOME LOANS AND LEASE FINANCING U.S. $ 18 $ (21) $ (3) International 38 (96) (58) --------- (61) --------- OTHER EARNING ASSETS U.S. 6 1 7 International 32 (98) (66) --------- (59) --------- TOTAL INTEREST INCOME 82 (202) (120) TOTAL INTEREST EXPENSE 41 (183) (142) --------- NET INTEREST REVENUE $ 22 =========
Nine Months Ended September 30, 1996 Compared With Nine Months Ended September 30, 1995 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, and the change because of the difference in the number of days in the periods has been allocated to rate.
INCREASE (DECREASE) DUE TO CHANGE IN ---------------- (IN MILLIONS) VOLUME RATE NET CHANGE ------ ---- ---------- INTEREST INCOME LOANS AND LEASE FINANCING U.S. $ 64 $ (57) $ (7) International 120 (130) (10) --------- (3) --------- OTHER EARNING ASSETS U.S. 32 4 36 International 98 (327) (229) --------- (193) --------- TOTAL INTEREST INCOME 273 (469) (196) TOTAL INTEREST EXPENSE 144 (394) (250) --------- NET INTEREST REVENUE $ 54 =========
37 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported, in March 1993, a complaint was filed in Delaware Chancery Court against the Corporation, Society for Savings Bancorp, Inc. ("Society") and certain Society directors. The action was brought by a Society stockholder, individually and as a class action on behalf of all Society stockholders of record on the date the Corporation's proposed acquisition of Society was announced, and sought an injunction with respect to the acquisition and damages in an unspecified amount. In May 1993, the Chancery Court denied the plaintiff's motion for a preliminary injunction and in July 1993, the Corporation acquired Society. On January 23, 1995, the defendants filed a motion for summary judgment with the Chancery Court and on June 15, 1995, the Court granted summary judgment in favor of the defendants on all claims except for an aiding and abetting claim against the Corporation, on which no summary judgement motion was filed. The Chancery Court also denied plaintiff's motion for rehearing. Following the entry of an Order of Final Judgment by the Chancery Court, the plaintiff appealed the June 15, 1995 opinion to the Delaware Supreme Court. On June 25, 1996, the Supreme Court affirmed the Chancery Court's decision in its entirety, and remanded the case on the sole remaining claim for aiding and abetting. While vigorously denying any wrongdoing of any kind, including the claim that it aided and abetted any breach of fiduciary duty, the Corporation agreed on September 20, 1996 to settle the lawsuit in order to avoid the substantial expense and distraction associated with continued litigation. The Chancery Court approved the settlement on November 6, 1996. The settlement provides for payment by the Corporation of $5 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3 - By-Laws of the Corporation, as amended through October 24, 1996 11 - Computation of Earnings Per Common Share 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) 27.1 - Financial Data Schedule 27.2 - Restated Financial Data Schedule for the nine months ended September 30, 1995 (b) Current Reports on Form 8-K During the third quarter of 1996, the Corporation filed three Current Reports on Form 8-K. The current reports, dated July 18, 1996, July 25, 1996 and September 6, 1996, contained information pursuant to Items 5 and 7, Items 2, 5 and 7 and Items 5 and 7, respectively, of Form 8-K. The Corporation also filed a Current Report on Form 8-K, dated October 17, 1996, which contained information pursuant to Items 5 and 7 of Form 8-K. 38 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. BANK OF BOSTON CORPORATION /s/ Charles K. Gifford --------------------------------------- Charles K. Gifford Chief Executive Officer /s/ William J. Shea --------------------------------------- William J. Shea Vice Chairman, Chief Financial Officer and Treasurer Date: November 14, 1996 39 EX-3 2 BY-LAWS EXHIBIT 3 [BANK OF BOSTON LOGO APPEARS HERE] BANK OF BOSTON CORPORATION --------------------- BY-LAWS --------------------- REVISED TO OCTOBER 24, 1996 HH-895 REVISED (10/96) BY-LAWS OF BANK OF BOSTON CORPORATION -------------------------- TABLE OF CONTENTS ARTICLE I MEETINGS OF THE STOCKHOLDERS
PAGE ---- SECTION 1. Place of Meeting; Adjournment................. 1 SECTION 2. Annual Meeting................................ 1 SECTION 3. Special Meetings.............................. 1 SECTION 4. Notices of Meetings........................... 2 SECTION 5. Quorum........................................ 3 SECTION 6. Organization.................................. 4 SECTION 7. Voting by Stockholders; Proxies............... 4 SECTION 8. Inspectors.................................... 5 SECTION 9. Action without Meeting........................ 5
ARTICLE II BOARD OF DIRECTORS
SECTION 1. General Powers; Issue of Stock............... 5 SECTION 2. Number, Qualification, Election and Term of office................................... 5 SECTION 3. Nominations for Director..................... 6 SECTION 4. Quorum and Manner of Acting.................. 7 SECTION 5. First Meeting................................ 8 SECTION 6. Regular Meetings............................. 8 SECTION 7. Special Meetings............................. 8 SECTION 8. Notices of Meetings.......................... 8 SECTION 9. Organization of Meetings..................... 9 SECTION 10. Order of Business............................ 9 SECTION 11. Action by Directors without a Meeting........ 9 SECTION 12. Resignation.................................. 9 SECTION 13. Removal...................................... 9
ii
PAGE ---- SECTION 14. Vacancies.................................. 10 SECTION 15. Fees and Expenses of Directors............. 10 SECTION 16. Validity of Acts of Directors.............. 10 SECTION 17. Transactions with the Corporation.......... 10
ARTICLE III COMMITTEES
SECTION 1. Executive Committee........................ 11 SECTION 2. Audit Committee............................ 12 SECTION 3. Compensation Committee..................... 13 SECTION 4. Board Governance and Nominating Committee.. 14 SECTION 5. Community Investment Committee............. 14 SECTION 6. Other Committees........................... 15 SECTION 7. Changes in Committee Membership; Filling of Vacancies................................. 15 SECTION 8. Records of Committee Action and Board of Directors' Approval.................... 15 SECTION 9. Committee Proceedings...................... 15 SECTION 10. Action of Committees without a Meeting..... 16 SECTION 11. General Authority of Committees............ 16
ARTICLE IV OFFICERS
SECTION 1. Titles and Qualifications.................. 16 SECTION 2. Appointment and Terms of Office............ 16 SECTION 3. Duties; Fidelity Bond...................... 17 SECTION 4. The Chief Executive Officer................ 17 SECTION 5. The Chairman of the Board.................. 17 SECTION 6 The President and Chief Operating Officer.. 17 SECTION 7. The Vice Chairmen.......................... 18 SECTION 8. The Executive Officers..................... 18 SECTION 9. The Treasurer.............................. 18 SECTION 10. The Comptroller............................ 18 SECTION 11 The Clerk and the Secretary of the Board of Directors....................... 18 SECTION 12. The General Auditor........................ 19 SECTION 13. The Vice Presidents........................ 19 SECTION 14. The Assistant Treasurers and Assistant Clerks.......................... 19 SECTION 15. Resignation................................ 19 SECTION 16. Vacancies.................................. 19
iii
PAGE ---- SECTION 17. Compensation of Officers, Employees and Other Agents................................ 20 SECTION 18. Designated Officer........................... 20
ARTICLE V STOCK SECTION 1. Stock Certificates........................... 20 SECTION 2. Transfer of Stock............................ 20 SECTION 3. Transfer Agent and Registrar; Regulations................................. 21 SECTION 4. Lost, Mutilated or Destroyed Certificates.... 21 SECTION 5. Record Date for Determination of Stockholders' Rights; Close of Transfer Books............. 21 SECTION 6. Dividends.................................... 22 SECTION 7. Control Share Acquisitions................... 22
ARTICLE VI GENERAL PROVISIONS
SECTION 1. Offices...................................... 22 SECTION 2. Seal......................................... 22 SECTION 3. Fiscal Year.................................. 23 SECTION 4. Execution of Instruments..................... 23 SECTION 5. Voting of Securities......................... 23 SECTION 6. Powers of Attorney........................... 23 SECTION 7. Issue of Debt Securities and Other Obligations........................... 24 SECTION 8. Corporate Records............................ 24 SECTION 9. Indemnification of Directors, Officers and Others.................................. 24
ARTICLE VII AMENDMENTS
SECTION 1. General..................................... 27
iv PAGE ---- ARTICLE VIII EMERGENCY BY-LAWS
SECTION 1. Effective Period........................... 28 SECTION 2. Meetings of the Board of Directors......... 28 SECTION 3. Emergency Location of Head Office.......... 28 SECTION 4. Preservation of Continuity of Management... 28 SECTION 5. Immunity................................... 28 SECTION 6. Amendment of Emergency By-Laws............. 28
BANK OF BOSTON CORPORATION ---------- BY-LAWS ---------- ARTICLE I MEETINGS OF THE STOCKHOLDERS SECTION 1. Place of Meeting; Adjournment. Meetings of the stockholders may be held at the main office of the corporation in the City of Boston, County of Suffolk, Commonwealth of Massachusetts, or at such places within or without the Commonwealth of Massachusetts as may be specified in the notices of such meetings; provided, that, when any meeting is convened, the presiding officer, if directed by the Board of Directors, may adjourn the meeting for a period of time not to exceed 30 days if (a) no quorum is present for the transaction of business or (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders (i) to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or (ii) otherwise to exercise effectively their voting rights. The presiding officer in such event shall announce the adjournment and date, time and place of reconvening and shall cause notice thereof to be posted at the place of meeting designated in the notice which was sent to the stockholders, and if such date is more than 10 days after the original date of the meeting the Clerk shall give notice thereof in the manner provided in Section 4 of this Article I. SECTION 2. Annual Meeting. The annual meeting of stockholders of the corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as shall be determined by the Board of Directors each year, which date and time may subsequently be changed at any time, including the year any such determination occurs. SECTION 3. Special Meetings. Except as provided in the Articles of Organization with respect to the ability of holders of preferred stock to call a special meeting in certain circumstances, special meetings of the stockholders may be called by the Chief Executive Officer or the Chairman of the Board or by a majority of the directors, and shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer upon the written application of stockholders who hold one hundred percent in interest of the capital stock of the corporation entitled to be voted at the proposed meeting. Such request shall state the purpose or purposes of the proposed meeting and may designate the place, date and hour of such meeting; provided, however, that no such request shall designate a date not a full business day or an hour not within normal business hours as the date or hour of such meeting. -2- As used in these By-Laws, the expression business day means a day other than a day which, at a particular place, is a public holiday or a day other than a day on which banking institutions at such place are allowed or required, by law or otherwise, to remain closed. SECTION 4. Notices of Meetings. A printed notice of the place, date and hour and stating the purposes of each meeting of the stockholders shall be given by the Clerk (or other person authorized by law or these By-Laws) at least l0 days before the date fixed for the meeting to each stockholder entitled to vote at such meeting, and to each other stockholder who, under the Articles of Organization or these By-Laws, is entitled to such notice, by leaving such notice with him or her at his or her residence or usual place of business, or by mailing such notice by mail, postage prepaid and addressed to such stockholder at his or her address as it appears in the records of the corporation. Such further notice shall be given by publication or otherwise, as may be required by law or as may be ordered by the Board of Directors. No notice need be given to any stockholder if such stockholder, or his or her authorized attorney, waives such notice by a writing executed before or after the meeting and filed with the records of the meeting or by his or her presence, in person or by proxy, at the meeting. It shall be the duty of every stockholder to furnish to the Clerk of the corporation or to the transfer agent, if any, of the class of stock owned by such stockholder, his or her post office address and to notify the Clerk or the transfer agent of any change therein. No business may be transacted at a meeting of the stockholders except that (a) specified in the notice thereof given by or at the direction of the Board of Directors or in a supplemental notice given by or at the direction of the Board of Directors and otherwise in compliance with the provisions hereof, (b) brought before the meeting by or at the direction of the Board of Directors or the presiding officer or (c) properly brought before the meeting by or on behalf of any stockholder who shall have been a stockholder of record at the time of giving of notice by such stockholder provided for in this paragraph and who shall continue to be entitled at the time of such meeting to vote thereat and who complies with the notice procedures set forth in this paragraph with respect to any business sought to be brought before the meeting by or on behalf of such stockholder other than the election of directors and with the notice provisions set forth in Section 3 of Article II with respect to the election of directors. In addition to any other applicable requirements, for business to be properly brought before a meeting by or on behalf of a stockholder (other than a stockholder proposal included in the corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), the stockholder must have given timely notice thereof in writing to the Clerk of the corporation. In order to be timely given, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (a) not less than 75 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation or (b) in the case of a special meeting or in the event that the annual meeting is called for a date (including any change in a date determined by the Board pursuant to Section 2 of this Article I) more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so -3- received not later than the close of business on the 20th day following the day on which notice of the date of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and record address of the stockholder proposing such business, (c) the class and number of shares of capital stock of the corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice by the stockholder and (d) all other information which would be required to be included in a proxy statement or other filings required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Regulation 14A under the Exchange Act (the "Proxy Rules"). In the event the proposed business to be brought before the meeting by or on behalf of a stockholder relates or refers to a proposal or transaction involving the stockholder or a third party which, if it were to have been consummated at the time of the meeting, would have required of such stockholder or third party or any of the affiliates of either of them any prior notification to, filing with, or any orders or other action by, any governmental authority, then any such notice to the Clerk shall be accompanied by appropriate evidence of the making of all such notifications or filings and the issuance of all such orders and the taking of all such actions by all such governmental authorities. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 4; provided, however, that nothing in this Section 4 shall be deemed to preclude discussion by any stockholder of any business properly brought before such meeting. The presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and that business shall be disregarded. SECTION 5. Quorum. At all meetings of the stockholders, the holders of record of a majority in interest of all stock issued, outstanding and entitled to vote thereat, or, if two or more classes of stock are issued, outstanding and entitled to vote as separate classes, a majority in interest of each class, present in person or represented by proxy, shall constitute a quorum requisite for the transaction of business, except as otherwise provided by law, by the Articles of Organization or by these By-Laws. Stock of the corporation owned directly or indirectly by the corporation, if any, other than shares of stock held in a fiduciary capacity shall not be deemed outstanding for this purpose. If a quorum is not present or represented at any meeting of the stockholders, the stockholders present or represented and entitled to vote thereat, present in person or represented by proxy, by a majority vote, shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until the requisite amount of voting stock shall be present or represented. At any adjourned meeting at which a quorum is present or represented, any business may be transacted -4- which might have been transacted at the meeting as first convened had there been a quorum. The stockholders present at a duly organized meeting may continue to transact business until adjournment notwithstanding the withdrawal of one or more stockholders or their proxy or proxies so as to leave less than a quorum present or represented. SECTION 6. Organization. At every meeting of the stockholders, the Chief Executive Officer or the Chairman of the Board or, in their absence, the President, or in the absence of all such officers, a person chosen by majority vote of the stockholders entitled to vote thereat, present in person or represented by proxy, shall act as chairman; and the Clerk, or in his or her absence, any Assistant Clerk, or in the absence of all such officers, any person present appointed by the chairman shall act as secretary of the meeting. The secretary of the meeting need not be sworn. SECTION 7. Voting by Stockholders; Proxies. Except as otherwise provided by law or the Articles of Organization, at all meetings of stockholders each stockholder shall have one vote for each share of stock entitled to vote and registered in his or her name. Any stockholder may vote in person or by proxy dated not more than six months prior to the meeting and filed with the secretary of the meeting. Every proxy shall be in writing, executed by a stockholder or his or her authorized attorney-in-fact, and dated. A proxy need not be sealed, witnessed or acknowledged. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. No proxy shall be valid after the final adjournment of the meeting. The attendance at any meeting of a stockholder who has therefore given a proxy shall not have the effect of revoking the same unless the stockholder so attending shall, in writing, so notify the secretary of the meeting at any time prior to the voting of the proxy. The corporation shall not, directly, or indirectly, vote any of its own stock other than shares of stock held in a fiduciary capacity. Any shares disqualified from being voted shall not be counted in determining the proportion of or the number of shares or votes required to pass or to vote upon or to consent or assent to any matter. Prior to each meeting of stockholders, the Clerk shall make or cause to be made a full, true and complete list, in alphabetical order, of stockholders entitled to notice of and to vote at the meeting showing the number of shares of each class having voting rights held of record by each. When a determination of stockholders entitled to vote at any meeting has been made as provided by law, such determination shall apply to any adjournment of such meeting, except when the determination has been made by the closing of the transfer books and the stated period has expired. At all meetings of stockholders, all questions, except as otherwise expressly provided by law or the Articles of Organization or these By-Laws, shall be determined by a majority vote of the stockholders entitled to vote thereon who are present in person or represented by proxy, or, if two or more classes of stock are entitled to vote -5- as separate classes, a majority vote of the stockholders of each class, present in person or represented by proxy. Except as otherwise expressly provided by law, the Articles of Organization or these By-Laws, at all meetings of stockholders the voting shall be by show of hands or voice vote, but any qualified voter may demand a stock vote, by shares of stock, upon any question, whereupon such stock vote shall be taken by ballot, each of which shall state the name of the stockholder voting and the number of shares voted by him or her, and, if such ballot be cast by a proxy, it shall also state the name of the proxy. All elections shall be decided by plurality vote. SECTION 8. Inspectors. At each meeting of the stockholders, the polls shall be opened and closed by the proxies and ballots shall be received and taken in charge by and all questions touching on the qualifications of voters and the validity of proxies and the acceptance and rejection of votes shall be decided by two inspectors. Such inspectors shall be appointed by the Board of Directors before or at the meeting, or, if no such appointment shall have been made, then by the presiding officer at the meeting. If for any reason any inspector previously appointed shall fail to attend or refuse or be unable to serve, an inspector in place of the one so failing to attend or refusing or unable to serve shall be appointed, either by the Board of Directors or by the presiding officer at the meeting. No director or candidate for the office of director shall be appointed an inspector. The inspectors shall file with the Clerk or other secretary of the meeting a certificate setting forth the results of each vote taken by ballot at the meeting. SECTION 9. Action without Meeting. Any action which may be taken by stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action by a writing filed with the records of the meetings of stockholders. Any such consent shall be treated for all purposes as a vote at a meeting and may be described as such in any certificate or other document filed with or furnished to any public official, governmental agency or other person having dealings with the corporation. ARTICLE II BOARD OF DIRECTORS SECTION 1. General Powers; Issue of Stock. The property and business of the corporation shall be managed by the Board of Directors which may exercise all powers of the corporation except such powers as are by law or by the Articles of Organization or by these By-Laws conferred upon or reserved to the stockholders. The Board of Directors and the Executive Committee shall have power to issue and sell or otherwise dispose of such shares of the corporation's authorized but unissued capital stock to such persons and at such times and for such consideration and upon such terms as it shall determine from time to time. SECTION 2. Number, Qualification, Election and Term of Office. The Board of Directors shall be composed of not less than three nor more than thirty-five directors. Within the limits specified, the number of directors shall be determined from time to time by vote of a majority of the entire Board; provided, however, that no decrease in the -6- number of directors constituting the entire Board of Directors made pursuant to this Section 2 shall shorten the term of any incumbent director. The Board of Directors shall be divided into three classes, as nearly equal in number as possible. The Directors need not be stockholders. To be nominated to serve or to serve as a director, an individual must be eligible to serve as a director both at the time the Board of Directors votes to nominate such individual or receives notice in accordance with Section 3 of this Article of a stockholder's intent to nominate such individual and at the time of such election, and the stockholder making such nomination (and any party on whose behalf or in concert with whom such stockholder is acting) must be qualified at the time of making such nomination to have such individual serve as the nominee of such stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) if such individual is elected. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are duly elected and qualified or until their earlier resignation, death or removal; provided, that in the event of failure to hold such an annual meeting or to hold such election at such meeting, the election of directors may be held at any special meeting of the stockholders called for that purpose. Directors, except those appointed by the Board of Directors to fill vacancies, shall be elected by a plurality vote of the stockholders, voting by ballot either in person or by proxy. As used in these By-Laws, the expression "entire Board" means the number of directors in office at a particular time. SECTION 3. Nominations for Director. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors, except as provided in the Articles of Organization with respect to nominations by holders of preferred stock in certain circumstances. Nominations of persons for election to the Board of Directors at the annual meeting may be made at the annual meeting of stockholders (a) by the Board of Directors or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or (b) by any stockholder of record at the time of giving of notice provided for in this Section 3 and who shall continue to be entitled at the time of the meeting to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3 rather than the notice procedures with respect to other business set forth in Section 4 of Article I. Nominations by stockholders shall be made only after timely notice by such stockholder in writing to the Clerk of the corporation. In order to be timely given, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 75 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation; provided, however, that in the event that the meeting is called for a date, including any change in a date determined by the Board pursuant to Section 2 of Article I, more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received not later than the close of business on the 20th day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal -7- occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation, if any, which are beneficially owned by the person, (iv) any other information regarding the nominee as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules, and (v) the consent of each nominee to serve as a director of the corporation if so elected; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice, (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a representation that the stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) is qualified at the time of giving such notice to have such individual serve as the nominee of such stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) if such individual is elected, accompanied by copies of any notification or filings with, or orders or other actions by, any governmental authority which are required in order for such stockholder (and any party on whose behalf such stockholder is acting) to be so qualified, (v) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder and (vi) such other information regarding such stockholder as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth herein. The presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 4. Quorum and Manner of Acting. One-third of the directors in office (but in no event fewer than two) shall constitute a quorum for the transaction of business at any meeting and, except as otherwise provided by law or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Directors shall be deemed present at a meeting when present in person or by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. In the absence of a quorum, a majority of the directors present, or if only two directors are present, either director, or the sole director present, may adjourn any meeting to a day certain or from time to time until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted if the meeting had been held when originally called. A director may not vote or otherwise act by proxy. -8- SECTION 5. First Meeting. The Board of Directors elected at any annual meeting of stockholders shall meet at the Head Office of The First National Bank of Boston in the City of Boston and Commonwealth of Massachusetts, or at such other location as the Board may determine, promptly after the final adjournment of such meeting or as soon as practicable (but not more than 30 days) thereafter for purposes of organization, the election of officers for the succeeding year and the transaction of other business. No notice of such meeting need be given. SECTION 6. Regular Meetings. Except for the first meeting of the Board of Directors to be held immediately following the annual election of directors, regular meetings of the Board of Directors shall be held on the fourth Thursday in each month, except the month in which the annual election of directors is held, at one o'clock in the afternoon in the directors' room at the Head Office of The First National Bank of Boston in the City of Boston, or at such other time or at such other place, or both, as shall be designated in the notice of meeting given to the directors as provided in these By-Laws. If the day designated for a regular meeting of the Board of Directors would not be a business day (as defined in Section 3 of Article I of these By-Laws) at the place where the meeting is to be held, then the meeting shall be held on such other business day as the Board of Directors may have previously designated, or if no such day shall have been designated, the meeting shall be held on the first business day at such place preceding the date originally designated for such meeting. Any regular meeting of the Board of Directors may be dispensed with by an appropriate vote passed by the Board of Directors at any prior meeting. SECTION 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chief Executive Officer and shall be called by the Clerk at the written request of three or more directors. Special meetings of the Board of Directors may be held at such place and time as may be designated in the call of the meeting. SECTION 8. Notices of Meetings. Notice of the time and place of each regular or special meeting of the Board of Directors shall be given to each director at least 48 hours before such meeting if delivered personally or sent by mail or at least 24 hours before such meeting if given by telephone, telex, telegraph or other electronic means. Notice by mail shall be deemed to be given when deposited in the post office or a letter box in postage-paid sealed wrappers or when transmitted by telegraph or telex, and addressed separately to each director at his or her address appearing on the records of the corporation. Notices of meetings of the Board of Directors need not include a statement of the business to be transacted thereat unless required by law or these By-Laws. No notice of any adjourned meeting of the Board of Directors need be given other than by announcement at the session of the meeting which is being adjourned. Failure to give any such notice of any meeting, or any irregularity in the notice thereof, shall not invalidate any proceedings taken thereat if a quorum is present and if all absent directors, either before or after the meeting, shall sign a waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the minutes of the meetings to which they relate. -9- SECTION 9. Organization of Meetings. At each meeting of the Board of Directors, the Chairman of the Board or, in his or her absence, the Chief Executive Officer or, in their absence, an officer designated by the Chief Executive Officer, or in the absence of all such officers, a director chosen by a majority of the directors present shall act as chairman. The Clerk, or, in his or her absence, any person appointed by the chairman, shall act as secretary of the meeting and keep minutes of the proceedings. The secretary of the meeting need not be sworn. SECTION 10. Order of Business. At all meetings of the Board of Directors, business shall be transacted in the order determined by the chairman of the meeting, subject to approval of the directors present thereat. SECTION 11. Action by Directors without a Meeting. Unless otherwise restricted by the Articles of Organization or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or of such committee. Any such consent shall be treated for all purposes as a vote duly adopted by the Board of Directors or such committee at a meeting and may be described as such in any certificate or other document filed with or furnished to any public official, governmental agency or other person having dealings with the corporation. SECTION 12. Resignation. Any director may resign at any time by giving written notice of his or her resignation to the Chairman of the Board or the Chief Executive Officer or the Clerk. Such resignation shall take effect upon its receipt or at any later date specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 13. Removal. A director may be removed by the affirmative vote of a majority of the shares outstanding and entitled to vote in the election of directors only for cause. A director may be removed for cause only after reasonable notice and opportunity to be heard before the stockholders. For such time as the corporation is subject to paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws, "cause" with respect to the removal of any director by the stockholders shall mean only (a) conviction of a felony, (b) declaration of unsound mind by order of court, (c) gross dereliction of duty, (d) commission of an action involving moral turpitude, or (e) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the corporation. If at any time the corporation shall no longer be subject to paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws, (a) a director may be removed from office with or without cause by the vote of the holders of a majority of the shares entitled to vote in the election of directors and may be removed from office with cause by vote of a majority of the directors then in office, and (b) a director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him or her. -10- SECTION 14. Vacancies. The Board of Directors may act notwithstanding a vacancy or vacancies in its membership; but if the office of any director shall become vacant by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a director or otherwise, such vacancy or vacancies shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum. Any director elected in accordance with this Section 14 shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until his or her successor shall have been elected and qualified or until his or her earlier resignation, death or removal. SECTION 15. Fees and Expenses of Directors. Each director who is not an officer or employee of the corporation or any of its affiliates may be paid such fees for his or her services and for attendance at meetings of the Board of Directors or of any committee thereof as the Board of Directors may determine from time to time to be appropriate. Such fees may be payable currently or on a deferred basis. In addition, each such director shall be entitled to reimbursement for reasonable expenses incurred by him or her in order to attend meetings of the Board of Directors and committees thereof or otherwise in connection with the performance of his or her duties as a director. SECTION 16. Validity of Acts of Directors. All action taken by any meeting of the Board of Directors or of a committee of the directors or by any person acting as a director shall, notwithstanding that it shall afterwards be discovered that there was some defect in the election or appointment or continuance in office of any such director or person acting as a director, or that they or any of them were disqualified, or had vacated office, or were not entitled to vote in relation to the matter acted upon, be as valid as if such person had been duly elected or appointed, had continued in office and was qualified to be a director and entitled to vote on such matter. SECTION 17. Transactions with the Corporation. No contract or other transaction between the corporation and one or more of its directors or between the corporation or any other corporation, partnership, voluntary association, trust or other organization of which any of its directors is a director or officer or in which he or she has any financial interest shall be void or voidable for this reason or because any such director is present at or participates in the meeting of the Board of Directors or of the committee thereof which authorizes the contract or transactions or because his or her vote is counted for such purpose (a) if the material facts as to the contract or transaction and as to his or her relationship or interest are disclosed to the Board of Directors or such committee and the Board of Directors or such committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of disinterested directors even though the disinterested directors be less than a quorum or (b) if the material facts as to the contract or transaction and as to his or her relationship or interest are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the shareholders or (c) if the contract or transaction is fair and reasonable as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, such committee or the shareholders. Common or interested directors may -11- be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee thereof which authorizes the contract or transaction. ARTICLE III COMMITTEES SECTION 1. Executive Committee. There shall be an Executive Committee composed of the Chairman of the Board, the Chief Executive Officer and such number of other directors as the Board of Directors may appoint from time to time by resolution passed by the vote of a majority of the entire Board. The Board of Directors may also, from time to time, by similar resolution, appoint one or more alternate members of the Executive Committee who may attend and act in the place of any absent or disqualified member or members of the Executive Committee at any meeting thereof. Subject to the provisions of Section 6 of this Article III, the term of office of any appointed member or alternate member of the Executive Committee shall expire on the date specified in the resolution of appointment or any earlier date on which he or she ceases to be a director. Any director who has served as a member or alternate member of the Executive Committee shall be eligible for reappointment to a new term of office. At all meetings of the Executive Committee, the Chief Executive Officer or, in his or her absence, an officer designated by the Chief Executive Officer, or in the absence of such a designation, a director chosen by a majority of the directors present shall preside. During the intervals between meetings of the Board of Directors, the Executive Committee, unless expressly provided otherwise by law or these By- Laws, shall have and may exercise all the authority of the Board of Directors, except that it shall not be entitled to (i) change the principal office of the corporation; (ii) amend or repeal these By-Laws or to adopt new by-laws; (iii) elect officers required by law to be elected by the stockholders or directors or to fill vacancies in any such offices; (iv) change the number of the Board of Directors or to fill vacancies in the Board of Directors; (v) remove officers or directors from office; (vi) fix the remuneration of any director for serving on the Board of Directors or any Committee thereof or for services to the corporation in any other capacity; (vii) authorize the payment of any dividend or distribution to stockholders; (viii) authorize the reacquisition for value of stock of the corporation; or -12- (ix) authorize a merger of a subsidiary entity into the corporation. In addition to its other duties, the Executive Committee shall establish the quarterly provision and reserve for credit losses, make recommendations concerning dividends and shall be available to the Chief Executive Officer, at his discretion, to discuss strategic opportunities. The action taken by the Executive Committee at each meeting shall be reported to the Board of Directors and shall be subject to alteration or repeal by the latter, provided that no alteration or repeal by the Board of Directors of action taken by the Executive Committee shall prejudice the rights or acts of any third person. The Executive Committee shall hold meetings at such times and places and upon such notice as it may from time to time determine. Other meetings of the Executive Committee may be called at any time by the Chief Executive Officer or by any two members of the Executive Committee or by the Secretary of the Board of Directors at the written request of the person or persons entitled to call such a meeting. SECTION 2. Audit Committee. There shall be an Audit Committee composed of such number of directors (not less than three) as the Board of Directors, by resolution passed by the vote of a majority of the entire Board may appoint, none of whom shall be an employee of the corporation. The duties of the Audit Committee shall be (a) to recommend to the Board of Directors for approval by the stockholders the appointment of a firm of independent public accountants ("the Auditors") to audit the accounts of the corporation and such of its subsidiaries as the Committee may recommend for the financial year in respect of which such appointment is made; (b) to make, or cause to be made by the Auditors, such examinations or audits of the affairs and operations of the corporation or of any one or more of its subsidiaries, of such scope, with such objects, and at such times or intervals as the Committee may determine in its discretion or as may be ordered by the Board of Directors or the Executive Committee; (c) to submit to the Board of Directors as soon as may be convenient following the conclusion of each examination or audit made by or at the direction of the Committee, a written report relative thereto; (d) to oversee the activities of the General Auditor and his or her staff. The Committee shall also be responsible for conducting periodic performance evaluations and establishing the compensation of the General Auditor; and -13- (e) to review matters associated with internal control and the management of risk. A notation with respect to each report made to the Board of Directors by the Audit Committee and of the action taken thereon by the Board of Directors shall be made in the minutes of the latter. SECTION 3. Compensation Committee. There shall be a Compensation Committee composed of such number of directors as the Board of Directors, by resolution passed by vote of a majority of the entire Board, may appoint, none of whom shall be an employee of the corporation or any subsidiary. The duties of the Compensation Committee shall be (a) to review the Corporation's overall executive compensation strategy; (b) to review the design and administration of executive compensation and incentive plans and employee benefit plans, including ensuring that all plans are consistent with the Corporation's strategy and budget; (c) to review all new equity-related plans for executive officers and Directors prior to submission to stockholders; (d) to make recommendations to the Board of Directors on new corporate-wide benefit plans or any material changes to existing plans; (e) to execute as it sees fit from time to time the powers and to discharge the duties vested in it from time to time by the terms of any pension or other benefit plan or arrangement affecting directors or employees of the corporation; (f) to review the compensation of the Chief Executive Officer, the President and the Chairman of the Board and that of other employee Directors and to make recommendations to the Board of Directors; (g) to review and approve the recommendations of the Chief Executive Officer on compensation for key executive officers; (h) to review diversity representation at the senior and mid-management level; (i) to conduct an annual evaluation of the Chief Executive Officer; (j) to review succession and development plans for Executive Management and the Chief Executive Officer; (k) to review candidate assessment and selection for key executive officer positions; (l) to review major organizational changes proposed by the Chief Executive Officer, as appropriate; and (m) to perform such functions as may be assigned to it from time to time by the Board of Directors. -14- SECTION 4. Board Governance and Nominating Committee. There shall be a Board Governance and Nominating Committee composed of such number of directors (no more than two of which may be members of Executive Management) as the Board of Directors, by resolution passed by vote of a majority of the entire Board, may appoint. The Chief Executive Officer shall serve as a member of the Committee. The duties of this Committee shall be (a) to review the size and composition of the Board of Directors and the tenure of directors; (b) to recommend criteria for qualifications for Board membership, such as experience, affiliations, and personal characteristics; (c) to review the qualifications of individual nominees for director as recommended by the Chief Executive Officer or by a stockholder and to make recommendations to the Board of Directors; (d) to review the composition of the committees as recommended by the Chief Executive Officer; (e) to review the compensation and benefits of non-employee Directors and to make recommendations to the Board of Directors; and (f) to evaluate the effectiveness of the Board of Directors; (g) to evaluate the responsibilities and effectiveness of Board Committees and to make recommendations to the Board with respect thereto; (h) to perform such other functions as may be assigned to it from time to time by the Board of Directors. SECTION 5. Community Investment Committee. The Board of Directors may from time to time appoint a Community Investment Committee composed of not less than three nor more than five directors. The duties of the Committee shall be from time to time to review and evaluate the policies established by the corporation's subsidiary banks relating to the discharge by the subsidiary banks of their responsibilities under the Community Reinvestment Act of 1977, as amended (Section 2901 et seq. of Title 12 of the United States Code) and regulations thereunder, or any other applicable Federal or state law or regulations thereunder relating to substantially the same subject as the Community Reinvestment Act of 1977, as amended, and oversee the implementation of such policies by the corporation's subsidiary banks and make reports to the Board of Directors from time to time of its findings and recommendations. -15- SECTION 6. Other Committees. The Board of Directors may, from time to time, by resolution passed by the vote of a majority of the entire Board, constitute such other standing or special committees as it deems desirable and may dissolve any such committee by like resolution at its pleasure. Each such committee shall have such authority and perform such duties not inconsistent with law and these By-Laws as may be assigned to it by the Board of Directors. Vacancies in any such committee shall be filled by resolution passed by the vote of a majority of the entire Board. No such committee shall be granted or shall exercise any authority which shall have been delegated to another committee by these By-Laws or by resolution of the Board of Directors or which, in the absence of such delegation, could not be exercised by the Executive Committee. SECTION 7. Changes in Committee Membership; Filling of Vacancies. The Board of Directors by resolution passed by a vote of the majority of the entire Board may at any time or from time to time (a) increase or reduce the number of members of any committee, within any applicable limits imposed by these By-Laws, (b) remove any member from any committee, (c) appoint a director to fill a vacancy in, or to be an additional member of, any committee, and (d) discharge any committee except a standing committee established pursuant to this Article III. SECTION 8. Records of Committee Action and Board of Directors' Approval. Each committee appointed by the Board of Directors shall keep a record of its acts and proceedings which shall be open for inspection at any time by any director. Such record shall be submitted to the Board of Directors at such time or times as may be required by these By-Laws or as may be requested by the Board of Directors. Failure to submit such record, or failure of the Board of Directors to approve any action indicated therein shall not invalidate any action otherwise lawful, to the extent that it has been carried out by the corporation prior to the time the record of such action was, or should have been, submitted to the Board of Directors as herein provided. The action of the Board of Directors at any meeting with respect to action taken by any standing committee shall be recorded in the minutes of the meeting. SECTION 9. Committee Proceedings. In the absence of specific provisions in these By-Laws or regulations imposed by the Board of Directors, a committee may meet and adjourn and otherwise regulate its meetings as it thinks fit. A committee may appoint a chairman of its meetings if none has been appointed by the Board of Directors or is designated elsewhere in this Article III. If no such chairman has been appointed, or if at any meeting the chairman is not present within five minutes after the time appointed for the holding of the meeting, the members present may choose one of their number to be chairman of the meeting. A quorum for the transaction of business at any meeting of a committee shall be a majority of the fixed number of members -16- thereof for the time being (whether or not any seat is vacant) unless a different rule shall have been adopted by a resolution passed by the vote of a majority of the Board of Directors. A resolution passed by the vote of a majority of the members present at the time of voting if a quorum is present shall be the act of the committee. In the case of an equality of votes the Chairman shall have a second or casting vote. A committee cannot sub-delegate any of its powers or duties within its membership or to any other person or persons unless authorized to do so by the Board of Directors or these By-Laws. Committee members cannot vote by proxy. SECTION 10. Action of Committees without a Meeting. Any action required or permitted to be taken by a committee of the Board of Directors may be taken without a meeting if all members of the committee consent thereto in writing either before or after the action is taken and the writing or writings evidencing such consent are filed with the minutes of proceedings of such committee. For all purposes of these By-Laws, any such consent shall constitute a resolution duly passed by such committee. SECTION 11. General Authority of Committees. Any committee appointed by the Board of Directors pursuant to this Article III shall be at liberty (a) to meet and confer with employees of the corporation and its subsidiaries on all matters relating to the work of the committee which fall within the purview of such employees and to be informed by any of them as to the policies, practices, and controls of the division or department of the corporation or of the subsidiary of the corporation to which he or she is assigned; and (b) to examine all reports which are relevant to the work of the committee (i) made by the corporation or any of its subsidiaries to regulatory authorities and (ii) of examinations of the corporation or any of its subsidiaries made by regulatory authorities. ARTICLE IV OFFICERS SECTION 1. Titles and Qualifications. The officers of the corporation shall be a Chief Executive Officer, a Chairman of the Board, a President, a Treasurer, a Comptroller, a Clerk, a General Auditor, one or more Vice Presidents of any rank and such other officers including one or more Vice Chairmen as may be appointed from time to time in accordance with these By- Laws. Except as otherwise provided by law, the duties of any two officers may be discharged by the same person, but the President shall not serve at the same time as Treasurer, Comptroller, or Clerk. The Chief Executive Officer, the Chairman of the Board and the President must be directors. SECTION 2. Appointment and Terms of Office. The Chief Executive Officer, the Chairman of the Board, the President, any Vice Chairman, any Executive Vice President, the Treasurer, the Comptroller, the Clerk and the General Auditor shall be chosen by a majority vote of the entire Board at the first meeting of the Board of -17- Directors following each annual meeting of stockholders (or special meeting of stockholders in lieu of such annual meeting) or by the Board of Directors from time to time and each shall serve at the pleasure of the Board unless he or she sooner resigns, retires, dies, is removed or becomes disqualified. Other officers may be appointed from time to time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, any Vice Chairman, any Executive Vice President or any other Executive Officer. Each other officer shall have such title, exercise such power and perform such duties and hold office for such term as shall be determined by the Board or the appointing officer as the case may be. SECTION 3. Duties; Fidelity Bond. The duties and authority of each officer of the corporation, other than as set forth in these By-Laws, shall be prescribed and may be varied from time to time by the Board of Directors, or the Chief Executive Officer, or the President, as the case may be. The Board of Directors shall provide for such bond and fidelity insurance covering the officers of the corporation and for the faithful and honest discharge of their duties as the Board may determine. Such bonds or insurance may be in individual, schedule or blanket form and the premiums therefor shall be paid by the corporation. SECTION 4. The Chief Executive Officer. The Chief Executive Officer of the corporation shall have the general control and management of, and shall be responsible to the Board for the conduct of, its business, affairs and operations. The Chief Executive Officer shall report to the Board of Directors on the business, affairs and financial condition of the corporation. The Chief Executive Officer shall have such powers and shall perform such duties as are usually incident to the Office of Chief Executive Officer and such additional duties may be prescribed by law, the Articles of Organization and these By-Laws or as may be conferred upon or assigned to him or her by the Board of Directors. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at meetings of the Board of Directors. The Chief Executive Officer shall be a member of the Executive Committee and shall preside at meetings of that Committee. SECTION 5. The Chairman of the Board. The Chairman of the Board shall preside at meetings of the Board of Directors. The Chairman of the Board shall have such powers and shall perform such duties as may be prescribed by law, the Articles of Organization and these By-Laws or as may be conferred upon or assigned to him or her by the Board of Directors. The Chairman of the Board shall have such additional responsibilities and shall discharge such further duties as from time to time may be requested of him or her by the Chief Executive Officer. The Chairman of the Board shall be a member of the Executive Committee. SECTION 6. The President and Chief Operating Officer. The President shall be the Chief Operating Officer of the Corporation and shall have the day to day responsibility for the control and management of its operations of the Corporation. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at all meetings of the Board of Directors. The President shall be subject to the direction of the Chief Executive Officer under whose direct supervision he or she shall be. The President shall perform such duties as may be -18- imposed on him or her by law, the Articles of Organization and these By-Laws or as may be assigned to him or her by the Chief Executive Officer. He or she shall have such powers and duties as are usually incident to the Office of President and Chief Operating Officer. SECTION 7. The Vice Chairmen. Each Vice Chairman shall perform the duties imposed upon him or her by these By-Laws or assigned to him or her by the Chief Executive Officer or the President. The Vice Chairmen shall be senior in rank to the Vice Presidents of any rank. SECTION 8. The Executive Officers. The Chief Executive Officer, the Chairman of the Board, the President, any Vice Chairman, any Executive Vice President, the Clerk, and such other Executive Officers as may be so designated from time to time by the Board of Directors shall be the Executive Officers of the corporation. SECTION 9. The Treasurer. The Treasurer shall have custody and control over all funds and securities of the corporation, maintain full and adequate accounts of all moneys received and paid by him or her on account of the corporation and, subject to the control of the Board of Directors shall discharge all duties incident to the office of Treasurer. The Treasurer shall have authority, in connection with the normal business of the corporation, to sign or endorse negotiable instruments, contracts, leases and other documents. The Treasurer shall render an account of his or her transactions to the Board of Directors whenever and as often as may be requested. SECTION 10. The Comptroller. The Comptroller shall be the chief accounting officer of the corporation. He or she shall establish accounting policy for the corporation, maintain complete and accurate books and records concerning its financial transactions, prepare its financial statements and, subject to the control of the Board of Directors, discharge all duties incident to the office of the Comptroller. The Comptroller shall have authority, in connection with the normal business of the corporation, to sign or endorse negotiable instruments, contracts, leases and other documents. SECTION 11. The Clerk and the Secretary of the Board of Directors. The Clerk shall be the principal recording officer of the corporation. He or she shall be the Secretary of the Board of Directors and of the Executive Committee and of the Audit Committee. He or she shall attend and keep minutes of all proceedings at meetings of the stockholders, the Board of Directors, the Executive Committee and of each committee appointed by the Board of Directors which shall not have appointed any other person to serve as its secretary. The Clerk shall have charge of the corporate seal, minute books of the corporation and of such other corporate records, books and papers as the Board of Directors or the Executive Committee may order to be kept in his or her custody or under his or her control. The Clerk shall have authority to affix the seal of the corporation to all instruments executed under seal and to attest thereto. As required by law, these By-Laws or the Board of Directors, the Clerk shall give or cause to be given notice to the stockholders of each annual and special meeting and to the directors of each regular and special meeting of the Board of Directors except the first meeting after their election in each year; and the Clerk shall perform such other -19- duties as may be imposed upon him or her by law, these By-Laws, the Board of Directors, the Audit Committee or the Chief Executive Officer, under whose direct supervision he or she shall be. The Clerk shall be a resident of the Commonwealth of Massachusetts unless a resident agent has been appointed by the corporation pursuant to law to accept service of process. SECTION 12. The General Auditor. The General Auditor shall direct the internal audit activities of the corporation and shall provide the Audit Committee with objective and timely information to aid in measuring and evaluating the operations of the corporation. In the conduct of this responsibility, the General Auditor shall perform such duties as may be imposed upon him or her by these By-Laws, the Board of Directors and the Audit Committee. To assure the professional independence of the General Auditor, he or she shall report directly and solely to the Audit Committee. For purposes of internal administration, the General Auditor shall report to a senior officer of the corporation other than the Chairman of the Board, the Chief Executive Officer, or the President. SECTION 13. The Vice Presidents. Each Vice President of whatever rank shall perform the duties imposed upon him or her by these By-Laws or assigned to him or her by the Board of Directors, the Chief Executive Officer or the President. The Executive Vice President shall be senior in rank to all other Vice Presidents including Senior Vice Presidents. SECTION 14. The Assistant Treasurers and Assistant Clerks. Each Assistant Treasurer shall perform such duties as may be assigned to him or her by the Board of Directors, the Chief Executive Officer, the President or the Treasurer. Each Assistant Clerk shall perform such duties as may be assigned to him or her by the Board of Directors, the Chief Executive Officer or the Clerk, and shall have the authority to affix the seal of the corporation to all instruments executed under seal and to attest thereto. SECTION 15. Resignation. Any officer may resign at any time by giving written notice to the Chairman of the Board, the Chief Executive Officer, the President or the Clerk. The resignation of any officer shall take effect upon its receipt or on any later date specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be required to make it effective. SECTION 16. Vacancies. Any vacancy occurring in the offices of the Chairman of the Board, the Chief Executive Officer, the President, the Treasurer, the Comptroller, the Clerk and the General Auditor shall be promptly filled by the Board of Directors. Any vacancy occurring in the offices of Vice Chairmen, Executive Vice Presidents, or other Executive Officers not specifically referred to in the preceding sentence may be filled by the Board of Directors. Except for those offices to be filled by the Board of Directors, the Chief Executive Officer may fill any vacancy occurring in any office by reason of death, resignation, retirement or other cause and may, in his or her discretion, leave offices unfilled for such period as he or she may determine. -20- SECTION 17. Compensation of Officers, Employees and Other Agents. The Board of Directors shall have power to fix, and to vary from time to time, the compensation of all officers, employees and other agents of the corporation for their services as such. SECTION 18. Designated Officer. The term designated officer of the corporation, whenever it appears in a resolution or vote of the Board of Directors of the corporation shall refer to any one of the Chief Executive Officer, Chairman of the Board, the President, any Vice Chairman, the Treasurer, an Assistant Treasurer, the Comptroller, any Vice President of whatever rank, the Clerk, an Assistant Clerk, the Secretary of the Board of Directors, the General Counsel and the General Auditor unless the resolution or vote of the Board of Directors otherwise provides. ARTICLE V STOCK SECTION 1. Stock Certificates. Each stockholder shall be entitled to a certificate or certificates of stock of the corporation in such form as the Board of Directors may from time to time prescribe. Each certificate shall be numbered and entered in the books of the corporation as it is issued, shall state the holder's name and the number and the class and the designation of the series, if any, of his or her shares, shall be signed by the Chairman of the Board, the Chief Executive Officer, the President or a Vice President of any rank and by the Treasurer or an Assistant Treasurer and may, but need not, be sealed with the seal of the corporation. If any stock certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation, the signatures of the officers of the corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed on any certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the corporation and delivered with the same effect as if he or she were such officer at the time of issue. Every certificate of stock which is subject to any restriction on transfer pursuant to the Articles of Organization, these By-Laws or any agreement to which the corporation is a party, or which is issued while the corporation is authorized to issue more than one class or series of stock, shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back the full text of the restriction or the preferences, voting powers, qualifications and special or relative rights of each class or series or, alternatively, a statement of the existence of such restriction and such preferences, powers, qualifications and rights and a statement that the corporation will furnish a copy of the restriction and such preferences, powers, qualifications and rights to the holder of such certificate upon written request and without charge. SECTION 2. Transfer of Stock. Subject to any applicable transfer restrictions at the time in force, shares of stock of the corporation shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives. Such transfer shall be effected by delivery of the old certificate, together with a duly executed assignment and power to transfer endorsed thereon or attached thereto and with such proof of the authenticity of the signature and such -21- proof of authority to make the transfer as the corporation or its agents may reasonably require, to the person in charge of the stock and transfer books and ledgers or to such other person as the Board of Directors may designate, who shall thereupon cancel the old certificate and issue a new certificate. The corporation may treat the holder of record of any share or shares of stock as the owner of such stock, and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, or otherwise, save as expressly provided by law. SECTION 3. Transfer Agent and Registrar; Regulations. The corporation shall, if and whenever the Board of Directors shall so determine, maintain one or more transfer offices or agencies, each in charge of a transfer agent designated by the Board of Directors at which the shares of the capital stock of the corporation shall be transferable, and also one or more registry offices, each in charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered, and no certificate for shares of the capital stock of the corporation in respect of which a registrar and transfer agent shall have been designated, shall be valid unless countersigned by such transfer agent and registered by such registrar. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. SECTION 4. Lost, Mutilated or Destroyed Certificates. No certificate for shares of stock of the corporation shall be issued in place of any certificate alleged to have been lost, mutilated or destroyed, except upon production of such evidence of the loss, mutilation or destruction and upon indemnification of the corporation and its agents to such extent and in such manner as the Board of Directors may prescribe and as permitted by law. SECTION 5. Record Date for Determination of Stockholders' Rights; Close of Transfer Books. The Board of Directors may fix in advance a date, not exceeding 60 days preceding the date of any meeting of stockholders, or the date fixed for the payment of any dividend, or the making of any other distribution to stockholders, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend or distribution, or receive any such allotment of rights, or as the last day on which stockholders may effectively exercise rights in respect of any such change or conversion or exchange of capital stock, or as the last day on which they may effectively express such consent or dissent, and in such case only stockholders of record on the date so fixed shall be so entitled, notwithstanding any transfer of stock on the books of the corporation after the date fixed as aforesaid. In lieu of fixing such a record date or last day, the Board of Directors may close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed: -22- (i) The record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceding the day on which notice is given. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. SECTION 6. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Organization, may be declared by the Board of Directors at any regular or special meeting, payable in cash, in property, or in shares of the capital stock, subject to the limitations, if any, imposed by law or the Articles of Organization. Before payment of any dividends, there may be set aside out of any funds of the corporation available for dividends, such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve. SECTION 7. Control Share Acquisitions. Until such time as this Section 7 shall be repealed or these By-Laws shall be amended to provide otherwise, in each case in accordance with Article VII of these By-Laws, the provisions of Chapter 110D of the Massachusetts General Laws shall not apply to "control share acquisitions" of the corporation within the meaning of said Chapter 110D. ARTICLE VI GENERAL PROVISIONS SECTION 1. Offices. The principal office of the corporation shall be in the City of Boston, County of Suffolk, Commonwealth of Massachusetts. The corporation may also have offices at such other place or places within or without the Commonwealth of Massachusetts as the Board of Directors may from time to time determine. SECTION 2. Seal. The seal of the corporation shall be in the following form: [seal] When authorized by the Board of Directors and to the extent permitted by law and these By-Laws, a facsimile of the corporate seal may be affixed or reproduced. -23- SECTION 3. Fiscal Year. The fiscal year of the corporation shall be coincident with the calendar year unless another fiscal year shall have been fixed by the Board of Directors. SECTION 4. Execution of Instruments. All contracts, conveyances, promises or orders for the payment of money or other obligations authorized by the Board of Directors to be executed or endorsed by an officer of the corporation in its behalf shall be executed or endorsed by any one of the Chief Executive Officer, the Chairman of the Board, the President, any Vice Chairman, any Vice President of whatever rank, the Treasurer and the Clerk, except as the Board of Directors may generally or in particular cases otherwise determine and except that checks drawn on any dividend and special accounts may bear the facsimile signature, affixed thereto by a mechanical device, of such officer or agent as the Board of Directors shall authorize, and except also that bonds, notes, debentures or other evidences of indebtedness authenticated by a manual signature on behalf of a trustee or an authenticating agent appointed by the Board of Directors may bear such facsimile signature or signatures of such officer or officers of the corporation as the Board of Directors shall authorize. SECTION 5. Voting of Securities. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer, the Chairman of the Board, the President, each Vice Chairman, the Treasurer, each Executive Officer, each Vice President of any rank, and the Clerk, each acting alone, shall have authority on behalf of the corporation (a) to attend and act and vote in person for the corporation and as its duly appointed agent and attorney-in- fact at any meeting of the holders of securities or creditors of any person (as hereinafter defined) any securities of whom are owned or held with power to vote by the corporation or any indebtedness of whom is owed to the corporation, (b) to appoint, by an instrument in writing, a proxy or several proxies to attend and act and vote for the corporation at any such meeting and (c) to execute and deliver in the name and on behalf of the corporation any consent or waiver by the corporation as a security holder or creditor of any such person. As used in this Section, the word "person" includes a natural person, a corporation, a company, a partnership, a voluntary association, a proprietorship, a trust, an estate, a government (national, state, regional or local) or a department or agency thereof, and any other form of legal entity however designated and wherever formed or existing. Each officer named in this Section and each person designated by any such officer as a proxy for this corporation shall have and may exercise at any such meeting any and all rights and powers incident to the ownership of such securities or indebtedness which an owner would have if personally present. SECTION 6. Powers of Attorney. The Chief Executive Officer, the Chairman of the Board, the President, each Vice Chairman, any Executive Vice President, any Executive Officer, or the Clerk may from time to time and at any time by power of attorney appoint any person (as defined in Section 6 of this Article VI) or persons to be the attorney or attorneys of the corporation for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board of Directors) and for such period and subject to such conditions as the officer making such appointment may think fit, and any such power of attorney may contain such -24- provisions for the protection and convenience of persons dealing with such attorney or attorneys as the officer making such appointment may think it and may also authorize any such attorney to appoint a substitute or substitutes and to delegate all or any of the powers, authorities and discretions vested in any such attorney or attorneys, except such power of substitution (without prejudice to the power of such attorney or attorneys to exercise concurrently any of the powers delegated and to revoke or vary any such appointment). The Chief Executive Officer, the Chairman of the Board, the President, each Vice Chairman, any Executive Vice President, any Executive Officer, or the Clerk may at any time revoke any power of attorney executed by any of those officers currently or formerly in office, provided that no such revocation shall invalidate any act performed by the attorney or attorneys (or any substitute or substitutes appointed thereunder) in the exercise of the powers conferred thereby between the revocation thereof and the time such revocation becomes known to the attorney or attorneys, or to any such substitute or substitutes, and any such power of attorney shall at all times be conclusively binding on the corporation and its successors in favor of third parties who have not received notice of the revocation thereof. SECTION 7. Issue of Debt Securities and Other Obligations. The Board of Directors shall have the power to authorize and cause to be executed and issued bonds, notes, debentures, warrants, guaranties or other obligations of the corporation, secured or not secured, upon such terms, in such manner and upon such conditions as may be fixed or approved by vote of the Board of Directors or of the Executive Committee prior to the issue thereof. SECTION 8. Corporate Records. The original, or attested copies, of the Articles of Organization, By-Laws and records of all meetings of incorporators and stockholders, and stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in the Commonwealth of Massachusetts at the principal office of the corporation, or at an office of its Clerk, its resident agent or its transfer agent. Such copies and records need not all be kept in the same office. They shall be available at all reasonable times for inspection by any stockholder for any proper purpose. They shall not be available for inspection to secure a list of stockholders or other information for the purpose of selling such list or information or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. SECTION 9. Indemnification of Directors, Officers and Others. (a) The corporation shall, to the extent legally permissible, indemnify each of the directors and officers of the corporation against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by such director or officer in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which such director or officer may be involved or with which such director or officer may be threatened, while in office or thereafter, by reason of such director or officer being or having been such a director or officer of the corporation or by reason of such director or officer serving or having served at the request of the corporation as a director, -25- officer or trustee of a wholly owned subsidiary of the corporation or having served in any capacity with respect to any employee benefit plan maintained by the corporation or any wholly owned subsidiary of the corporation, except with respect to any matter as to which such director or officer shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation or of such subsidiary or, to the extent that such matter relates to service with respect to any such employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such indemnification shall be ordered by a court or unless such compromise shall be approved as in the best interest of the corporation, after notice that it involves such indemnification: (i) by a disinterested majority of the directors of the corporation then in office; or (ii) by a majority of the disinterested directors of the corporation then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation; or (iii) by the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested director or officer. Expenses, including counsel fees, reasonably incurred by any director or officer of the corporation in connection with the defense or disposition of any such action, suit or other proceeding shall be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this paragraph (a). If in an action, suit or proceeding brought by or in the right of the corporation, a director of the corporation is held not liable for monetary damages, whether because that director is relieved of personal liability under the provisions of Article 6 of the Articles of Organization of the corporation or otherwise, that director shall be deemed to have met the standard of conduct set forth above and to be entitled to indemnification for expenses reasonably incurred in the defense of such action, suit or proceeding. (b) The corporation shall, to the extent legally permissible, indemnify each person who serves at the request of the corporation as a director of any wholly-owned subsidiary of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary, and the Board of Directors of the corporation may, to the extent legally permissible, indemnify any person who serves as a trustee, employee or agent of the corporation or who serves at the request of the corporation as an officer, trustee, employee or agent of any wholly-owned subsidiary of the corporation, against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by such person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which such person may be involved or with which such person may be threatened, while in office or thereafter, by reason of such person being or having been a trustee, employee or agent of the corporation or a director, officer, trustee, employee or agent of such subsidiary -26- or having acted in any such capacity with respect to any such employee benefit plan, except with respect to any matter as to which such person shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation or of such subsidiary or, to the extent that such matter relates to service with respect to any such employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan. Expenses, including counsel fees, reasonably incurred by any person who serves at the request of the corporation as a director of a wholly-owned subsidiary of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary in connection with the defense or disposition of any such action, suit or other proceeding shall, and if incurred by a person who serves as a trustee, employee or agent of the corporation or who serves at the request of the corporation as an officer, trustee, employee or agent of a wholly-owned subsidiary of the corporation may, in each case to the extent legally permissible, be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such person to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this Section. Except as hereinafter provided in this paragraph (b), indemnification of persons who serve as a trustee, employee or agent of the corporation or who serve at the request of the corporation as an officer, trustee, employee or agent of a wholly-owned subsidiary of the corporation under this paragraph (b) shall be made by the corporation only as authorized by the Board of Directors of the corporation in each specific case. To the extent that any person who serves at the request of the corporation as an officer or trustee of any wholly owned subsidiary of the corporation has been wholly successful in the defense of any action, suit or proceeding referred to above in this paragraph (b) or of any claim or issue therein, such person shall, without further authorization of the Board of Directors of the corporation, be indemnified by the corporation as herein above provided upon presentation to the Board of Directors of the corporation of a claim for indemnification and evidence reasonably satisfactory to the Board of Directors of the corporation of such wholly successful defense. As used in this paragraph (b) the term "wholly successful" means that the action, suit or proceeding or the claim or issue has been finally terminated without a finding of liability or guilt against the person seeking indemnification and the time for taking an appeal or other court or administrative action therein has expired or, in the case of a threatened proceeding, a reasonable period of time, determined by independent legal counsel selected by the Board of Directors of the corporation, has elapsed since the threat was made without the proceeding having been instituted and, in either case, without any payment or promise having been made to induce a settlement or compromise. (c) As used in this Section, the terms "director", "officer", "trustee", "employee" and "agent" include the relevant individual's heirs, executors and administrators, an "interested" director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending, and a "wholly-owned subsidiary" means any corporation, business trust, partnership or other business entity of which the corporation owns directly or through one or more -27- wholly-owned subsidiaries all of the outstanding capital stock or other shares of beneficial interest (other than directors' qualifying shares) entitled to vote generally. All directors, officers, trustees, employees and agents of wholly-owned subsidiaries of the corporation and persons who serve in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary shall be deemed to serve or to have served in such capacity at the request of the corporation. The indemnification by the corporation provided for in this Section 9 shall not be exclusive of or affect any other rights to which any director, officer, trustee, employee, agent or pension plan fiduciary or other person may be entitled. Nothing contained in this Section shall either limit the power of the corporation to indemnify corporate personnel other than directors and officers or affect any rights to indemnification by the corporation to which corporate personnel other than directors, officers, trustees, employees and agents of the corporation and persons who serve at the request of the corporation as directors, officers, trustees, employees or agents of wholly-owned subsidiaries of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary may be entitled by contract or otherwise under law. ARTICLE VII AMENDMENTS SECTION 1. General. These By-Laws may be amended, added to or repealed in whole or in part (a) by vote of the stockholders at a meeting where the substance of the proposed amendment is stated in the notice of the meeting, or (b) by vote of a majority of the entire Board, except that no amendment may be made by the Board of Directors on matters reserved to the stockholders by law or the Articles of Organization or which changes the provisions of these By- Laws relating to the removal of directors or to the requirements for amendment of these By-Laws. Notice of any amendment, addition or repeal of any By-Law by the directors stating the substance of such action shall be given to all stockholders entitled to vote on amending the By-Laws not later than the time when notice is given of the meeting of stockholders next following such action by the Board of Directors. Any By-Law adopted by the directors may be amended or repealed by the stockholders. ARTICLE VIII EMERGENCY BY-LAWS SECTION 1. Effective Period. The emergency By-Laws set forth in this Article VIII shall be effective only during the continuance of a national emergency proclaimed by the President of the United States of America or by other governmental authority following an attack on the United States of America or another catastrophic event as a result of which a regular quorum of the Board of Directors or of the Executive Committee cannot readily be convened. During any such emergency, the provisions of this Article VIII shall supersede any different provisions contained in the preceding Articles of these By-Laws. -28- SECTION 2. Meetings of the Board of Directors. During any such emergency, a meeting of the Board of Directors may be called by any director or officer who deems it necessary. The meeting shall be held at such time or place as the person calling the meeting may specify in giving notice thereof. Such notice may be given in writing or orally and by such means of communication (including announcement by radio) as in the judgment of the person giving the same are then feasible to reach as many of the directors as it is reasonably possible to reach under the prevailing circumstances. Two directors shall constitute a quorum for the transaction of business at any such meeting. SECTION 3. Emergency Location of Head Office. With effect during any such emergency, the Board of Directors may change the location of the Head Office of the corporation or designate one or more alternative locations or authorize one or more officers to do so. SECTION 4. Preservation of Continuity of Management. In order to preserve continuity of management of the corporation during any such emergency, the Board of Directors may provide and from time to time change lines of succession in management in the event that during such emergency any or all of the officers shall die or be missing or for any reason be rendered incapable of discharging his or her or their respective duties. SECTION 5. Immunity. No director, officer or employee of the corporation acting in accordance with these emergency By-Laws shall be liable for any act or omission except willful misconduct. SECTION 6. Amendment of Emergency By-Laws. The provisions of this Article VIII can be amended or repealed during any emergency by resolution of the directors or the shareholders but no such amendment or repeal shall prejudice any rights or immunities acquired by any director, officer or employee under Section 5 of this Article VIII in respect of action taken or omitted by him or her prior to such amendment or repeal. Any such amendment may make such further or different provisions as may be deemed to be practical and necessary to deal with the circumstances of the emergency. EX-11 3 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 BANK OF BOSTON CORPORATION Computation of Earnings Per Common Share
Quarters Ended Nine Months Ended Sept. 30 Sept. 30 EARNINGS (in millions) 1996 1995 1996 1995 -------- ------ ------ ------ ------ 1. Net income $ 80 $ 175 $ 449 $ 498 2. Less: Preferred dividends 9 9 28 28 ------- ------- ------- ------- 3. Net income applicable to primary and fully diluted earnings per common share $ 71 $ 166 421 $ 470 ======= ======= ======= ======= SHARES (in thousands) ------ 4. Weighted average number of common shares outstanding 153,103 155,660 153,715 153,086 5. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 2,080 1,939 2,585 2,140 6. Incremental shares from assumed conversion 1,181 of debentures at date of issuance -------- ------- ------- ------- 7. Adjusted number of common shares 155,183 157,599 156,300 156,407 ======== ======= ======= ======= PER SHARE CALCULATION --------------------- 8. Primary net income per common share $ .46 $ 1.06 $ 2.74 $ 3.07 (Item 3 divided by Item 4) 9. Fully diluted net income per common share $ .45 $ 1.05 $ 2.69 $ 3.00 (Item 3 divided by Item 7)
EX-12.A 4 CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES BANK OF BOSTON CORPORATION EXHIBIT 12(A) COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the nine months ended September 30, 1996 and 1995 and for the five years ended December 31, 1995 were as follows:
Nine Months Ended Sept. 30, Years Ended December 31, (dollars in millions) 1996 1995 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- ---- ---- Net income (loss) $ 449 $ 498 $ 678 $ 542 $ 367 $ 338 $ (103) Extraordinary items, net of tax 7 (73) (8) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense (benefit) 341 395 529 422 262 190 (51) ----- ----- ----- ----- ----- ---- ---- Pretax earnings (loss) $ 790 $ 893 $ 1,207 $ 971 $ 605 $ 455 $ (162) ===== ===== ===== ===== ===== ==== ==== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 30 28 38 35 36 37 39 Interest on borrowed funds 652 816 1,079 1,038 384 352 386 ----- ----- ----- ----- ----- ---- ---- Total fixed charges 682 844 1,117 1,073 420 389 425 ----- ----- ----- ----- ----- ---- ---- Earnings (for ratio calculation) $ 1,472 $ 1,737 $ 2,324 $ 2,044 $ 1,025 $ 844 $ 263 ===== ===== ===== ===== ===== ==== ==== Total fixed charges $ 682 $ 844 $ 1,117 $ 1,073 $ 420 $ 389 $ 425 ===== ===== ===== ===== ===== ==== ==== Ratio of earnings to fixed charges 2.16 2.06 2.08 1.90 2.44 2.17 .62 ===== ===== ===== ===== ===== ==== ====
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. For the year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary for the year ended December 31, 1991 to bring the ratio of earnings to fixed charges to a one-to-one basis are $162 million. EX-12.B 5 CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES BANK OF BOSTON CORPORATION EXHIBIT 12(B) COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the nine months ended September 30, 1996 and 1995 and for the five years ended December 31, 1995 were as follows:
Nine Months Ended Sept. 30, Years Ended December 31, (dollars in millions) 1996 1995 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- ----- ----- Net income (loss) $ 449 $ 498 $ 678 $ 542 $ 367 $ 338 $ (103) Extraordinary items, net of tax 7 (73) (8) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense (benefit) 341 395 529 422 262 190 (51) ----- ----- ----- ----- ----- ----- ----- Pretax earnings (loss) $ 790 $ 893 $ 1,207 $ 971 $ 605 $ 455 $ (162) ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 30 28 38 35 36 37 39 Interest on borrowed funds 652 816 1,079 1,038 384 352 386 Interest on deposits 1,262 1,348 1,791 1,301 1,177 1,640 2,202 ----- ----- ----- ----- ----- ----- ----- Total fixed charges 1,944 2,192 2,908 2,374 1,597 2,029 2,627 ----- ----- ----- ----- ----- ----- ----- Earnings (for ratio calculation) $ 2,734 $ 3,085 $ 4,115 $ 3,345 $ 2,202 $ 2,484 $ 2,465 ====== ===== ===== ===== ===== ===== ===== Total fixed charges $ 1,944 $ 2,192 $ 2,908 $ 2,374 $ 1,597 $ 2,029 $ 2,627 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.41 1.41 1.42 1.41 1.38 1.22 .94 ===== ===== ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. For the year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary for the year ended December 31, 1991 to bring the ratio of earnings to fixed charges to a one-to-one basis are $162 million. EX-27.1 6 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 SEP-30-1996 3,755 1,251 1,680 1,549 7,413 685 672 42,053 (897) 61,963 43,328 8,441 2,594 2,846 0 508 229 4,017 61,963 2,860 423 359 3,642 1,262 1,914 1,728 171 24 459 790 449 0 0 449 2.74 2.69 4.40 444 40 11 0 890 (212) 57 897 541 202 154
EX-27.2 7 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY RESTATED FINANCIAL INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 1995 EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30,1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT. 9-MOS DEC-31-1995 SEP-30-1995 2,953 1,351 1,426 671 3,619 3,944 3,985 39,188 (858) 57,559 39,624 7,432 3,895 2,109 0 508 350 3,641 57,559 2,863 362 615 3,840 1,348 2,164 1,676 194 7 432 893 498 0 0 498 3.07 3.00 4.61 413 43 31 0 827 (207) 62 858 567 184 107
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