-----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, D2iGUFNYijNYqpHqm40EDEUUpBuqg0I6DtLB/R+tu0m4UIuyLczCIKZWxAnkyydV ExOh6liNc+nb0wItcUTZ8A== 0000927016-99-000865.txt : 19990308 0000927016-99-000865.hdr.sgml : 19990308 ACCESSION NUMBER: 0000927016-99-000865 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKBOSTON 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-K SEC ACT: SEC FILE NUMBER: 001-06522 FILM NUMBER: 99558479 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF BOSTON CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number: 1-6522 BANKBOSTON CORPORATION (Exact name of Registrant as specified in its charter) Massachusetts 04-2471221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Federal Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (6l7) 434-2200 Securities registered pursuant to Section 12(b) of the Act: ------------------------------------- Title of each class - ------------- Common Stock, par value $1.00 per share Preferred Stock Purchase Rights Name of each exchange on which registered: --------------------------- Each class is registered on the New York Stock Exchange and the Boston Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ------------------------------------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of shares of common Number of shares of common stock held by non-affiliates of stock outstanding as of Registrant as of March 1, 1999 March 1, 1999 ------------------------------ ------------- $12,027,433,486 296,482,247 Documents Incorporated by Reference: - ---------------------- 1. Pertinent extracts from Registrant's 1998 Annual Report to Stockholders (Parts I, II and IV). 2. Pertinent extracts from Registrant's Proxy Statement in connection with the Registrant's 1999 Annual Meeting of Stockholders (Part III). INDEX
Name of Item Page - ------------ ---- PART I Item 1. Business..................................................... 3 Statistical Disclosure by Bank Holding Companies........... 13 Item 2. Properties................................................... 18 Item 3. Legal Proceedings............................................ 18 Item 3A. Executive Officers of the Corporation........................ 19 Item 4. Submission of Matters to a Vote of Security Holders.......... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 20 Item 6. Selected Financial Data...................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................ 20 Item 8. Financial Statements and Supplementary Data.................. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 21 PART III Item 10. Directors and Executive Officers of the Registrant........... 21 Item 11. Executive Compensation....................................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 21 Item 13. Certain Relationships and Related Transactions............... 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 22 SIGNATURES Signatures................................................... II-1
-2- PART I Item 1. Business. THE CORPORATION BankBoston Corporation (the "Corporation") is a registered bank holding company, organized in 1970 under Massachusetts law with both national and international operations. The Corporation, through its subsidiaries and, in certain cases, joint ventures, is engaged in consumer, small business and corporate banking in New England, delivers sophisticated financial solutions to corporations and governments nationally and internationally, and provides full- service banking in leading Latin American markets. As of December 31, 1998, approximately 68% of the Corporation's total loan volume consisted of domestic loans and leases, and the balance was overseas. As of December 31, 1998, the Corporation's subsidiaries employed, in the aggregate, approximately 24,500 full-time equivalent employees in their domestic and foreign operations. The Corporation's principal subsidiary is BankBoston, N.A. (the "Bank"), a national bank with its headquarters in Massachusetts. The Bank maintains branches in Massachusetts, Connecticut, Rhode Island and New Hampshire and, through its subsidiaries, operates a network of offices across the United States and in Latin America, and has a presence in Asia and Europe. During 1998, Rhode Island Hospital Trust National Bank, a former banking subsidiary of the Corporation, was merged into the Bank. The executive office of the Corporation and the head office of the Bank are located at 100 Federal Street, Boston, Massachusetts 02110 (Telephone (617) 434-2200). BUSINESS OF THE CORPORATION The Corporation is managed through the Office of the Chief Executive Officer (the "OCEO"), which is the senior decision-making group of the Corporation. The OCEO consists of five members, including Chairman and Chief Executive Officer Charles K. Gifford, President and Chief Operating Officer Henrique de Campos Meirelles, Vice Chairman, Chief Financial Officer and Treasurer Susannah M. Swihart, Vice Chairman, Wholesale Banking, Paul F. Hogan and Vice Chairman, Regional Banking, Bradford H. Warner. The OCEO meets periodically to discuss strategy and to review the operating performance of the Corporation's businesses. It maintains close contact with key administrative heads and business managers throughout the Corporation, including the management teams in Argentina and Brazil. The Corporation groups its principal revenue-producing businesses into the following major business lines: the Wholesale Bank, the Regional Bank, Argentina and Brazil. For a description of these four business lines and other businesses for 1998 and 1997, including their operating results and other key financial measures, as well as discussions of the Corporation's business activities, including its lending activities, its cross-border outstandings and its management of off-balance-sheet exposure and of the risks inherent in its businesses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated by reference from pages 23 through 54 of the Corporation's 1998 Annual Report to Stockholders (the "Annual Report"). -3- Activities in which the Corporation and its subsidiaries are presently engaged or which they may undertake in the future are subject to certain statutory and regulatory restrictions. Banks and bank holding companies are extensively regulated under both federal and state law. There are various legal limitations on the extent to which bank subsidiaries of the Corporation can finance or otherwise supply funds to the Corporation or certain of its affiliates. See "Supervision and Regulation." For financial information on the Corporation's revenue, net income and assets attributable to its domestic and international operations, see "Business Segment Information," which is incorporated by reference from Note 26 on pages 83 and 84, "Line of Business Information," which is incorporated by reference from pages 28 through 34, and "Cross-Border Outstandings," which is incorporated by reference from pages 44 through 47, of the Annual Report. COMPETITION AND INDUSTRY CONSOLIDATION The Corporation's subsidiaries compete with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, credit unions, consumer finance companies and other nonbank institutions, such as insurance companies, major retailers, brokerage firms, and investment companies in New England, throughout the United States and internationally. The principal methods of competing effectively in the financial services industry include improving customer service through the quality and range of services provided, improving efficiencies and pricing services competitively. One outgrowth of the competitive environment discussed above has been significant consolidation within the financial services industry on a global, national and regional level. The Corporation continues to implement strategic initiatives focused on expanding its core businesses and to explore, on an ongoing basis, acquisition, divestiture and joint venture opportunities. The Corporation analyzes each of its businesses in the context of customer demands, competitive advantages, industry dynamics and growth potential. Consistent with this strategy, in 1998, the Corporation engaged in the following transactions and other strategic initiatives: Acquisitions and Business Expansions During 1998, the Corporation further expanded its presence and distribution capacity in Latin America, primarily through its branch expansion programs in Argentina and Brazil; its acquisition in January 1998 of Deutsche Bank Argentina S.A. ("Deutsche Argentina"), including approximately $1 billion in loans and $1.5 billion in deposits; and its acquisition in July 1998 of the OCA Companies, a credit card and consumer finance business in Uruguay with loans of approximately $65 million at the date of acquisition. In addition, the Corporation pursued initiatives to build various Wholesale Bank businesses, including the expansion of its investment banking and other capital markets-related capabilities. In August 1998, the Corporation acquired the investment banking operations of Robertson Stephens from BankAmerica Corporation for $400 million in cash. The Corporation merged the acquired operations into its subsidiary, BancBoston Securities Inc., which was renamed BancBoston Robertson Stephens Inc. ("BancBoston Robertson Stephens"). In connection with the acquisition, the Corporation established a bonus pool based on employee -4- performance of approximately $400 million, consisting of $300 million in cash to be paid over three and one-half years and stock options valued at $100 million, which will vest over time. This acquisition combined the capital markets debt products that had previously been offered by the Wholesale Bank with the equity underwriting, distribution and research capability of Robertson Stephens. Divestitures and Strategic Alliances In November 1998, the Corporation sold its Berkshire County, Massachusetts, franchise, including approximately $300 million in deposits and $1 billion of Private Bank assets under management, for a pre-tax gain of approximately $51 million. In October 1998, the Corporation sold its domestic institutional custody business for a pre-tax gain of approximately $38 million, and outsourced the settlement and depository functions of its asset management business. In February 1998, the Corporation completed the sale of its 26% ownership interest in HomeSide, Inc. for a pre-tax gain of approximately $165 million. In January 1998, the Corporation completed an agreement to form a credit card venture, under which it contributed its $1.2 billion national credit card portfolio in exchange for cash, at par. The Corporation also received 19 percent of the common stock and $50 million of the preferred stock of the new company and an additional $5 million in cash. Other Initiatives In October 1997, the Corporation announced an initiative aimed at redesigning the way it does business, with the goals of making the Corporation more customer-focused and improving business retention. During 1998, the Regional Bank introduced a number of organizational, strategic and personnel changes in support of this initiative. Business functions across southern New England have been integrated to better enable individual sub-businesses to leverage from each other's strengths and increase cross-marketing opportunities. Other actions, including the expansion of certain product lines and improving the efficiency of certain delivery channels, are expected to be implemented during 1999. During 1998, the Corporation realigned its strategy in Asia to focus on capital markets, including debt underwriting and trading, foreign exchange and derivatives. The Corporation also continues to offer trade finance and cash management services in Asia. In connection with this realignment, in October 1998, the Corporation announced the closing of its representative office in India and its branch offices in Japan, the Philippines and Taiwan. In addition, in January 1998, the Corporation announced its plan to restructure its European operations by centralizing those operations in London. In connection with this restructuring plan, in June 1998, the Corporation closed its offices in Paris and Frankfurt. The Corporation intends to continue to explore strategic opportunities as they arise in order to expand its businesses in its selected markets, divest non-strategic businesses and improve service to its customers. Federal legislation was enacted in 1994 which permits certain interstate banking transactions. This legislation has facilitated, and is expected to continue to facilitate, consolidation within financial institutions that have separate operations in two or more states and within the financial services industry in general. See "Supervision and Regulation" for a discussion of the impact of this legislation upon the Corporation and its subsidiaries. -5- SUPERVISION AND REGULATION The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the states and countries where the Corporation and its subsidiaries operate. The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are often intended by the regulators primarily for the protection of depositors or are aimed at carrying out broad public policy goals, rather than for the protection of security holders. Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Corporation and its subsidiaries are subject are discussed below, along with certain regulatory matters concerning the Corporation and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and its subsidiaries. The Corporation The Corporation, as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and is regulated under the provisions of the BHCA. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under the BHCA, the Corporation is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks. The Corporation may, however, engage in, and own voting shares of, companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." The location of such "nonbank" subsidiaries of the Corporation is not restricted geographically under the BHCA. The BHCA requires the Corporation to file with the Federal Reserve Board periodic reports and such additional reports as the Federal Reserve Board may require. The Federal Reserve Bank of Boston performs periodic examinations of the Corporation and certain of its subsidiaries. Since the Corporation is also a bank holding company under the laws of Massachusetts, the Commissioner of Banks for The Commonwealth of Massachusetts has authority to require certain reports from the Corporation from time to time and to examine the Corporation and each of its subsidiaries other than national banks. Prior approval of the Massachusetts Board of Bank Incorporation also may be required before the Corporation may engage in certain acquisitions or other business expansions. Acquisitions by the Corporation of non-Massachusetts banks or bank holding companies may be subject to the prior approval by both the Massachusetts and the applicable state, federal or international banking regulators. Massachusetts has an interstate bank acquisition law that permits banking organizations outside Massachusetts to -6- acquire Massachusetts banking organizations if the state law of the acquiror permits acquisitions of banking organizations in that state by Massachusetts- based banking organizations. In addition, federal interstate banking legislation permits bank holding companies to acquire banks in any state and authorizes interstate mergers by banks in any state. See "Legislation" below with respect to federal interstate banking legislation. Massachusetts has a business combinations law which provides that if any acquiror buys 5% or more of a target company's stock without the prior approval of the target company's board of directors, it generally may not (i) complete the acquisition through a merger, (ii) pledge or sell any assets of the target company, or (iii) engage in other self-dealing transactions with the target company for a period of three years. The prior board approval requirement does not apply if the acquiror buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquiror, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquiror. This legislation automatically applies to Massachusetts corporations, including the Corporation, which did not elect to "opt out" of the statute. Massachusetts law also provides for classified boards of directors for most public companies incorporated in Massachusetts, unless the company elected to "opt out" of the law. As a result of this law, the Corporation's Board of Directors is divided into three classes of Directors and the three-year terms of the classes are staggered. Other Massachusetts legislation exists which is intended to provide limited anti-takeover protection to certain Massachusetts corporations by preventing an acquiror of certain percentages of such corporation's stock from obtaining voting rights in such stock unless the corporation's other stockholders authorize such voting rights. The legislation automatically applies to certain Massachusetts corporations that have not elected to "opt out" of the statute. The Corporation, by vote of its Board of Directors, has "opted out" of the statute's coverage. In 1990, the Board of Directors of the Corporation adopted a stockholder rights plan and entered into a rights agreement (the "Rights Agreement") with the Bank, as rights agent. Under the rights plan, each of the Corporation's common stockholders received a dividend of one preferred stock purchase right (a "Right") for each outstanding share of the Corporation's common stock that the stockholder owned at the time of the Rights dividend. Each share of common stock issued after stockholders received the Rights dividend has also received a Right. As a result of the Corporation's two-for-one stock split in June 1998, the Rights have been adjusted so that one-half of a Right is associated with each currently outstanding share of the Corporation's common stock. Each newly issued share of common stock will also have one-half of a Right associated with it under the rights plan. The Rights trade automatically with shares of the Corporation's common stock and become exercisable only under the circumstances described below. The purpose of the Rights is to encourage potential acquirors to negotiate with the Corporation's Board of Directors prior to attempting a takeover bid and to provide the Board with leverage in negotiating on behalf of all stockholders the terms of any proposed takeover. The Rights may have certain anti-takeover effects. They should not, however, interfere with any merger or other business combination approved by the Board of Directors. In general, the Rights will become exercisable a number of days after a person or group (i) acquires 15% or more of the Corporation's common stock or (ii) commences a tender offer or exchange offer that would result in their owning 15% or more of the Corporation's common -7- stock. Once it becomes exercisable, each Right will entitle its holder (other than the acquiring person or group) to buy a unit equal to one one-thousandth of a share of the Corporation's Series D Junior Participating Preferred Stock at an exercise price of $50 per unit, subject to adjustment. In general, if a person or group acquires 15% or more of the Corporation's outstanding common stock, each Right will then entitle its holder (other than the acquiring person or group) to purchase additional shares of the Corporation's common stock at a substantially reduced price. In addition, if the Corporation is acquired after the Rights have become exercisable, each Right will entitle its holder (other than the acquiring person or group) to purchase the acquiring company's common stock at a substantially reduced price. In December 1998, the Corporation's Board of Directors adopted a renewed Rights Agreement. The terms of the renewed Rights Agreement are substantially similar to those of the existing Rights Agreement. Under the renewed Rights Agreement, however, the exercise price will be $160 per unit and the beneficial ownership percentage relating to the exercisability of the Rights will be 10%. New Rights will be issued under the renewed Rights Agreement upon the expiration or earlier termination of the existing Rights. The above description is intended to present a general overview of the rights plan. For a full description of the rights plan, see the existing Rights Agreement, as amended through December 12, 1995, and the renewed Rights Agreement. The existing Rights Agreement is incorporated by reference from the Corporation's Registration Statement on Form 8-A dated July 2, 1990 and from the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. The renewed Rights Agreement is incorporated by reference from the Corporation's Current Report on Form 8-K dated December 17, 1998. The Corporation's Subsidiaries General The Corporation's bank subsidiaries are national banks subject to the supervision of, and regularly examined by, the Office of the Comptroller of the Currency (the "OCC"). The domestic deposits of the Corporation's subsidiary banks are insured (to the extent allowed by law) by the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and, accordingly, those banks are subject to certain FDIC regulations. As members of the Federal Reserve System, the Corporation's bank subsidiaries are also subject to regulation by the Federal Reserve Board. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled bank or (ii) any assistance provided by the FDIC to a commonly controlled bank in danger of default. The term "default" is defined as the appointment of a conservator or receiver for such bank and "in danger of default" as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In addition, FIRREA broadened the enforcement powers of the federal banking agencies, including the power to impose fines and penalties over all financial institutions. Further, under FIRREA, the failure to meet capital guidelines could subject a financial institution to a variety of regulatory actions, including the termination of deposit insurance by the FDIC. -8- FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") also provided for expanded regulation of financial institutions. Under FDICIA, banks are placed in one of five capital categories, ranging from "well-capitalized" to "critically undercapitalized," for which the federal banking agencies have established specific capital ratio levels. Pursuant to the agencies' regulations, an institution is considered "well capitalized" if it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a Tier 1 leverage ratio of at least 5% and is not subject to a cease and desist order, formal agreement, capital directive, or prompt corrective action directive that requires it to achieve or maintain a higher level of capital. At December 31, 1998, all of the Corporation's banking subsidiaries met the requirements of the "well capitalized" category. The capital categories of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. Other Regulatory Restrictions The FDIC's deposit insurance assessments are based on a risk-based system. The risk-based system places a bank in one of nine risk categories, principally on the basis of its capital level and an evaluation of the bank's risk to the BIF, and bases premiums on the probability of loss to the FDIC with respect to each individual bank. During 1998, the assessment premiums for the BIF risk- based system ranged from $0 to $.27 per $100 of insured deposits. The Corporation's domestic subsidiary banks and the subsidiaries of such banks are subject to a large number of other regulatory restrictions, including certain restrictions upon: (i) any extensions of credit by such banks to, from or for the benefit of the Corporation and the Corporation's nonbank affiliates (collectively with the Corporation, the "Affiliates"), (ii) the purchase of assets or services from, or the sale of assets or the provision of services to, Affiliates, (iii) the issuance of a guarantee, acceptance or letter of credit on behalf of, or for the benefit of, Affiliates, (iv) the purchase of securities of which an Affiliate is a principal underwriter during the existence of the underwriting and (v) investments in stock or other securities issued by Affiliates or acceptance of those securities as collateral for an extension of credit. The Corporation and all of its subsidiaries, including the Bank, are also subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale or distribution of certain types of securities. The Federal Reserve Board permits subsidiaries of bank holding companies to underwrite and deal in securities consistent with the provisions of Section 20 of the Glass-Steagall Act of 1933. The Corporation's "Section 20" subsidiary, BancBoston Robertson Stephens, offers corporate financing services and investments, including underwriting and dealing in debt and equity securities, loan syndications and private placements, as well as financial advisory, research and other investment banking services. The activities of BancBoston Robertson Stephens are subject to the rules and regulations of a number of regulators, including the Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange, the Municipal Securities Rulemaking Board, the Federal Reserve Board and various state securities commissions. In addition, both the BHCA and regulations issued by the Federal Reserve Board prohibit the Corporation and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of any service. In -9- operations in other countries, the Corporation and the Bank are also subject to restrictions imposed by the laws and banking authorities of such countries. The Corporation's bank subsidiaries are also required to maintain cash reserves against deposits and are subject to limitations, among others, upon (i) the nature and amount of loans which they may make to a borrower; (ii) the nature and amount of securities in which they may invest; (iii) the amount which may be invested in bank premises; (iv) the geographic location of their branches; and (v) the nature and extent to which they can borrow money. Dividends The Corporation's Board of Directors determines the payment of dividends based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors, including applicable government regulations and policies and the amount of dividends payable to the Corporation by its subsidiaries. In 1998, the Corporation declared aggregate dividends on its common and preferred stock of approximately $350 million. In each quarter of 1998, the Corporation declared and paid a dividend on its common stock of $.29 per share, as adjusted for the Corporation's two-for-one stock split in June 1998. In the first quarter of 1999, the Corporation declared and paid a dividend on its common stock of $.32 per share. The Corporation is a legal entity separate and distinct from its subsidiary banks and its other nonbank subsidiaries. The Corporation's revenues (on a parent company only basis) result primarily from interest and dividends paid to the Corporation by its subsidiaries. The right of the Corporation, and consequently the right of creditors and stockholders of the Corporation, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that claims of the Corporation in its capacity as a creditor may be recognized. It is the policy of the OCC and the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. In addition, the Federal Reserve Board expects a bank holding company to act as a source of financial strength to its subsidiary banks. Various laws, regulations and policies limit the ability of the Corporation's subsidiaries to pay dividends to the Corporation. Federal banking law requires the approval of the OCC if the aggregate total of the dividends declared by any of the Corporation's national bank subsidiaries in any calendar year will exceed the bank's net profits, as defined by applicable regulation, for that year combined with retained net profits for the preceding two years. In 1998, the Corporation's subsidiaries declared and paid to the Corporation an aggregate of approximately $.7 billion of dividends. The payment of any future dividends by the Corporation's subsidiaries will be determined based on a number of factors, including the subsidiary's liquidity, asset quality profile, capital adequacy and recent earnings history. Information concerning the Corporation and its bank subsidiaries with respect to dividends is incorporated by reference from Note 15 on page 74 of the Annual Report. See the related discussions set forth below in "Capital" and "Legislation." -10- Capital Information concerning the Corporation and its bank subsidiaries with respect to capital is incorporated by reference from Note 14 on page 73 and from the section entitled "Capital Management" on page 53 of the Annual Report. See also "Legislation" below and "Dividends" above. Legislation In addition to extensive existing government regulation, laws and regulations in the states and countries where the Corporation and its subsidiaries do business can change in unpredictable ways, often with significant effects on the way in which financial institutions may conduct business. The enactment of banking legislation such as FIRREA and FDICIA has affected the banking industry by, among other things, broadening the powers of the federal banking agencies in a number of areas. Subsequent banking legislation, such as the Riegle Community Development and Regulatory Improvement Act of 1994 and the Economic Growth and Regulatory Paperwork Reduction Act of 1996, have eased some of the regulatory burdens imposed on banks and bank holding companies, including certain FDICIA requirements, and are intended to make the bank regulatory system more efficient. Other legislation that has been enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and non-banking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Act") was enacted. The Interstate Act's provisions, among other things: (i) permit bank holding companies to acquire control of banks in any state, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to five years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state-sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, subject to the provisions noted in (i) and to any state laws that opt in as of an earlier date or opt out of the provision entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for certain additional limitations on foreign bank activities. The Interstate Act has facilitated, and is expected to continue to facilitate, consolidation within financial institutions that have separate operations in two or more states and within the financial services industry. Additional laws and regulations are considered from time to time that could affect the business of the Corporation, including a number of significant legislative proposals which, if adopted, would result in a fundamental restructuring of the financial services industry. The effect of any such legislation on the business of the Corporation and its subsidiaries cannot be accurately predicted. See also "Supervision and Regulation -- The Corporation" above. -11- GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS The U.S. economy is about to enter its ninth consecutive year of expansion. In each of the past three years, U.S. output has grown well in excess of three percent, a development that has lowered the nation's unemployment rate to about 4.5 percent. Moreover, contrary to most expectations and historical experience, inflationary pressures have diminished. At about 1.5 percent, consumer prices have advanced at a benign pace not seen since the 1960s. While the U.S. economy is expected to remain firmly on an expansion path in 1999, it is likely that the pace of growth will slow in the year ahead. Consumer spending has been growing well in excess of gains in income, and with the savings rate recently at a negative level, consumers are expected to be turning more cautious and conservative. Capital spending, rising at a double-digit pace in recent years, is also expected to soften in the face of falling levels of capacity utilization. Finally, recessions in Asia and Latin America are expected to continue contributing to a deterioration in the U.S. trade position. The Corporation's earnings and business are also affected by the policies of various government and regulatory authorities in New England and throughout the United States, as well as foreign governments and international agencies, including, in the United States, the Federal Reserve Board. Important functions of the Federal Reserve Board, in addition to those enumerated under "Supervision and Regulation" above, are to regulate the supply of money and of bank credit, to deal with general economic conditions within the United States and to be responsive to international economic conditions. From time to time, the Federal Reserve Board and the central banks of foreign countries have taken specific steps to effect changes in the value of the United States dollar in foreign currency markets, as well as to control domestic inflation and to control the country's money supply. The instruments of monetary policy employed by the Federal Reserve Board for these purposes (including interest rates and the level of cash reserves banks are required to maintain against deposits) influence, in various ways, the interest rates paid on interest bearing liabilities and the interest received on earning assets, as well as the overall level of bank loans, investments and deposits. Inflation has generally had a minimal impact on the Corporation because substantially all of its assets and liabilities are of a monetary nature and a large portion of its operations are in the United States and other countries where inflation has been low. Prospective domestic and international economic and political conditions and the policies of the Federal Reserve Board and the central banks of Argentina and Brazil, as well as other domestic and international regulatory authorities, may affect the future business and earnings of the Corporation. During 1998, world financial markets experienced significant volatility due to the Asian and Russian crises. These crises also impacted the economies of Latin America and, in particular, contributed to the economic and political instability recently experienced by Brazil. It is expected that the economic situation in Latin America, including the effect of the world financial markets on Latin American economies, will continue to be unsettled. The Corporation will continue to monitor the economic situation in those countries in which the Corporation has local operations or cross-border exposure, particularly in Latin America, and will take certain actions as it deems appropriate. Additional information with respect to the countries where the Corporation has local operations or cross-border exposure is incorporated by reference from the section entitled "Cross-Border Outstandings" on pages 44 through 47 of the Annual Report. This section should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations," which is incorporated by reference from pages 23 through 54 of the Annual Report. -12- STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The Corporation is providing the information set forth below in accordance with Industry Guide 3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Average Balances and Interest Rates The information required by this item is incorporated by reference from pages 55 and 56 of the Annual Report. Change in Net Interest Revenue-Volume and Rate Analysis: 1998 compared with 1997, and 1997 compared with 1996 The information required by this item is incorporated by reference from page 57 of the Annual Report. Securities The following table sets forth the carrying values of securities held to maturity on the dates indicated:
December 31 1998 1997 1996 (in millions) U.S. Treasury $ 7 $ 6 $ 3 U.S. government agencies and corporations - mortgage-backed securities 439 520 535 States and political subdivisions 6 Foreign debt securities 13 11 11 ----- ----- ----- $ 459 $ 537 $ 555 ===== ===== =====
The following table sets forth the carrying values of securities available for sale on the dates indicated:
December 31 1998 1997 1996 (in millions) U.S. Treasury $ 711 $ 943 $1,675 U.S. government agencies and corporations - mortgage-backed securities 7,095 5,860 3,801 States and political subdivisions 34 54 173 Foreign debt securities 2,111 1,383 1,133 Other debt securities 1,145 887 256 Marketable equity securities 339 306 269 Other equity securities 640 513 622 ------- ------ ------ $12,075 $9,946 $7,929 ======= ====== ======
The following tables set forth the relative maturities and weighted average interest rates of securities available for sale and held to maturity at December 31, 1998, excluding equity securities. Certain securities, such as mortgage- backed securities, may not become due at a single maturity date. Such securities have been classified within the category that encompasses the due dates for the majority of the instrument. Rates for states and political subdivisions are stated on a fully taxable equivalent basis assuming a 35% federal income tax rate, adjusted for applicable state and local income taxes net of related federal tax benefit. -13-
After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total ------------------ ------------------ ------------------ ---------------- ---------------- Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate AVAILABLE FOR SALE (dollars in millions) U.S. Treasury $ 225 6.8% $ 146 6.3% $ 340 5.0% $ 711 5.8% U.S. government agencies and corporations - mortgage-backed securities 52 7.0 415 5.8 $1,233 5.2% 5,395 6.4 7,095 6.1 States and political subdivisions 30 3.3 3 2.5 1 5.5 34 3.3 Foreign debt securities 1,291 10.0 585 10.9 42 8.5 193 6.6 2,111 9.9 Other debt securities 13 9.8 227 11.7 304 6.7 601 7.2 1,145 8.0 ------ ------ ------ ------ ------- Total carrying value $1,611 9.3% $1,376 9.0% $1,580 5.6% $6,529 6.4% $11,096 7.0% ====== ====== ====== ====== ======= After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total ------------------ ------------------ ------------------ ---------------- ---------------- Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate HELD TO MATURITY (dollars in millions) U.S. Treasury $ 7 4.2% $ 7 4.2% U.S. government agencies and corporations - mortgage-backed securities $ 110 6.5% $ 217 7.1% $ 112 6.5% 439 6.8 Foreign debt securities 4 7.2 9 6.8 13 6.9 ------ ------ ------ ------ ------- Total carrying value $ 7 4.2% $ 114 6.5% $ 226 7.1% $ 112 6.5% $ 459 6.7% ====== ====== ====== ====== =======
Loans and Leases Except for the information presented below, the information required by this item is incorporated by reference from page 38 of the Annual Report. Maturities and Sensitivities of Loans to Changes in Interest Rates The following table presents the maturities and interest rate sensitivity, based on original contractual terms, of the Corporation's loans at December 31, 1998, exclusive of domestic office loans secured by 1-4 family residential properties, domestic office loans to individuals and lease financing:
After One But Within After December 31, 1998 Within Five Five (in millions) One Year Years Years Total Commercial, industrial and financial $ 3,604 $ 9,125 $3,565 $16,294 Real estate Construction 65 114 36 215 Other 1,066 2,471 334 3,871 Overseas offices 10,179 2,069 913 13,161 ------- ------- ------ ------- $14,914 $13,779 $4,848 $33,541 ======= ======= ====== ======= Loans with predetermined interest rates $ 6,059 $ 2,934 $1,307 $10,300 Loans with floating interest rates 8,855 10,845 3,541 23,241 ------- ------- ------ ------- $14,914 $13,779 $4,848 $33,541 ======= ======= ====== =======
The Corporation does not have an automatic renewal policy for maturing loans. Rather, the Corporation renews loans at the maturity date only at the request of those customers who the Corporation deems to be creditworthy. Additionally, the Corporation reviews such requests in -14- substantially the same manner as applications by new customers for extensions of credit. The Corporation bases the maturity dates and interest terms of renewed loans, in part, upon the needs of the individual customer and the Corporation's credit review and evaluation of current and future economic conditions. Since these factors have varied considerably, and will most likely continue to do so, the Corporation believes it is impracticable to estimate the amount of loans in the portfolio that it may renew in the future. Nonaccrual Loans and Leases Except for the information presented below, the information required by this item is incorporated by reference from page 40 of the Annual Report. The following table presents a five-year analysis of the Corporation's loans and leases that were over ninety days past due and remained on accrual status:
December 31 1998 1997 1996 1995 1994 (in millions) Loans and leases over ninety days past due and on accrual status............... $ 41 $ 31 $ 41 $ 56 $ 49 ===== ===== ===== ===== =====
Renegotiated Loans Renegotiated loans at the end of each of the last five years were as follows:
December 31 1998 1997 1996 1995 1994 (in millions) Renegotiated loans....................... $ 0.3 $ 0.3 $ 8 $ 33 $ 82 ===== ===== ===== ===== =====
Cross-Border Outstandings The information required by this item is incorporated by reference from pages 44 through 47 and pages 50 and 51 of the Annual Report. Reserve for Credit Losses: Allocation of Reserve for Credit Losses and Analysis of Reserve for Credit Losses Except for the information presented below, the information required by this item is incorporated by reference from pages 42 and 43 of the Annual Report. Generally, the Corporation does not allocate its reserve for credit losses to specific loan and lease categories, because management views the reserve as being available for all categories of prospective loss. However, to be responsive to the Securities and Exchange Commission's Guide for Statistical Disclosure by Bank Holding Companies, the Corporation has allocated its year- end reserve for credit losses to the major loan and lease categories. The allocations result from giving consideration to management's evaluation of risk in the portfolios, current economic conditions, recent years' loss experience and levels of nonaccrual loans and leases. The following table presents the allocation of the reserve for credit losses by loan and lease financing category, with the excess between the total reserve and the amounts specifically allocated to each loan category identified as ''unallocated.'' The unallocated reserve is part of the general reserve of the Corporation and, as such, is available for both domestic and international credit losses. The percentage of loans outstanding in each category to total loans is incorporated by reference from page 38 of the Annual Report. -15-
DECEMBER 31 1998 1997 1996 1995 1994 (dollars in millions) Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total United States Commercial, industrial and financial.................. $ 367 48.7% $ 228 32.0% $ 230 26.0% $221 24.8% $284 34.3% Commercial real estate, including construction............... 38 5.0 35 4.9 83 9.4 158 17.8 194 23.5 Consumer related loans Secured by 1-4 family residential properties..... 6 0.8 9 1.3 13 1.5 36 4.0 34 4.1 Other 73 9.7 99 13.9 193 21.9 131 14.7 104 12.6 Lease financing...................... 13 1.7 10 1.4 16 1.8 22 2.5 21 2.5 ----- ----- ----- ----- ----- ----- ---- ----- ---- ----- 497 65.9 381 53.5 535 60.6 568 63.8 637 77.0 international........................ 227 30.1 189 26.6 217 24.6 171 19.2 99 12.0 ----- ----- ----- ----- ----- ----- ---- ----- ---- ----- 724 96.0 570 80.1 752 85.2 739 83.0 736 89.0 Unallocated.......................... 30 4.0 142 19.9 131 14.8 151 17.0 91 11.0 ----- ----- ----- ----- ----- ----- ---- ----- ---- ----- $ 754 100.0% $ 712 100.0% $ 883 100.0% $890 100.0% $827 100.0% ===== ===== ===== ===== ===== ===== ==== ===== ==== =====
The allocation presented above reflects provisions for credit losses attributable to international operations for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 of $209 million, $23 million, $83 million, $116 million and $29 million, respectively. The provision for credit losses attributable to international operations for 1998 was principally a result of increases in international net credit losses, including Asian credit losses resulting from the sustained economic crisis in that region; the charge-off of a series of loans to related borrowers made by a former officer in the International Private Bank; and increased credit losses from Argentina, primarily a reflection of growth in the consumer-related portfolio and the acquisition of Deutsche Argentina. In addition, in 1998, the Corporation's acquisitions of Deutsche Argentina and the OCA Companies resulted in aggregate additions to the overall reserve for credit losses of $26 million. Deposits Except for the information presented below, the information required by this item is incorporated by reference from pages 55 and 56 of the Annual Report. The aggregate amount of deposits by foreign depositors in domestic offices averaged $1,660 in 1998, $1,580 million in 1997 and $1,412 million in 1996. The following table presents the maturities of time certificates of deposit and other time deposits issued by domestic offices in denominations of $100,000 or more, at December 31, 1998:
Certificates Time of Deposit Deposits Total (in millions) Maturing within three months $2,727 $ 26 $2,753 After three but within six months 561 24 585 After six but within twelve months 554 59 613 After twelve months 439 76 515 ------ ---- ------ $4,281 $185 $4,466 ====== ==== ======
The majority of foreign office deposits are in denominations of $100,000 or more. Return on Equity and Assets The information required by this item is incorporated by reference from page 22 of the Annual Report. -16- Short-Term Borrowings The following table summarizes the Corporation's short-term borrowings for each of the three years ended December 31, 1998, 1997 and 1996:
Maximum Average Average Weighted Amount Amount Interest Balance Average Outstanding Outstanding Rate (dollars in millions) At End of Interest During the During the During the Category of Aggregate Short-Term Period Rate (1) Period Period Period Borrowings For the Year Ended December 31, 1998 Federal funds purchased (2) $ 628 4.86% $2,168 $1,329 5.35% Term federal funds purchased (2) 1,468 5.40 2,475 1,822 5.65 Securities sold under agreements to repurchase (3) 3,145 4.67 5,285 3,052 4.93 Demand notes issued to the U.S. Treasury (4) 2,303 824 5.41 Commercial paper (5) 94 5.19 94 22 5.32 All other (6) 4,246 7.66 6,670 5,934 8.24 For the Year Ended December 31, 1997 Federal funds purchased (2) $1,003 6.07% $2,184 $1,782 5.40% Term federal funds purchased (2) 2,530 5.78 2,530 1,834 6.91 Securities sold under agreements to repurchase (3) 1,789 5.25 2,872 2,401 5.31 Demand notes issued to the U.S. Treasury (4) 1,495 533 5.39 All other (6) 6,090 7.59 6,233 5,000 8.52 For the Year Ended December 31, 1996 Federal funds purchased (2) $ 527 5.21% $2,523 $1,348 5.35% Term federal funds purchased (2) 1,442 5.51 2,140 1,413 7.35 Securities sold under agreements to repurchase (3) 2,034 5.06 2,236 1,848 5.28 Demand notes issued to the U.S. Treasury (4) 704 6.01 1,183 390 5.37 All other (6) 3,801 10.93 3,801 2,372 12.65
________________________________________________________________________________ (1) The weighted average interest rates at year-end are not necessarily indicative of the Corporation's normal borrowing rates, since interest rates for certain categories of borrowings are subject to short-term fluctuations. (2) Federal funds purchased are overnight transactions while term federal funds purchased have maturities in excess of one day. A large portion of federal funds purchased arise because of money market activity in federal funds for regional correspondent banks. (3) The majority of securities sold under agreements to repurchase are by domestic offices, mature within one year and are collateralized by U.S. Treasury and U.S. government agency and corporate securities. (4) Demand notes issued to the U.S. Treasury represent depository liabilities that are not subject to reserve requirements and bear interest at one-quarter of one percent below the weekly average federal funds effective interest rate as published by the Federal Reserve Board. (5) Commercial paper represents unsecured obligations with maximum maturities of nine months. (6) The majority of all other short-term borrowings represent short-term and medium-term bank notes issued by the Bank and secured and unsecured obligations of the Corporation's overseas branches and subsidiaries. -17- Item 2. Properties. The head offices of the Corporation and the Bank are located in a 37-story building at 100 Federal Street, Boston, Massachusetts. In 1998, the Bank leased 1.2 million of the building's approximately 1.3 million square feet. The Bank also maintains headquarters for its regional operations in Rhode Island and Connecticut at One BankBoston Plaza, Providence, Rhode Island, and 100 Pearl Street, Hartford, Connecticut. In addition, the Bank maintains significant data processing, record keeping and other operations centers in Boston, Canton, Dedham and Waltham, Massachusetts, East Providence, Rhode Island and Windsor, Connecticut. Outside of the United States, the Bank maintains banking headquarters in Buenos Aires, Argentina, and Sao Paulo, Brazil. The Bank's Argentine headquarters are located in a 12-story building owned by the Bank, consisting of approximately 256,000 square feet. The Bank's headquarters in Brazil are located in three interconnected buildings, consisting of 126,000 square feet owned by the Bank and 141,000 square feet of leased space. In 1997, the Bank entered into a contract to construct a new headquarters building in Argentina of approximately 500,000 square feet, to be located near the existing headquarters. Construction began in the first quarter of 1998 and is expected to be completed in the second quarter of 2000. In addition, in September 1998, the Bank acquired a 172,000 square foot undeveloped site in Sao Paulo on which it will construct a new corporate office building in Brazil. None of these properties is subject to any material encumbrance. The Corporation's subsidiaries also own or lease numerous other premises used in their domestic and foreign operations. Item 3. Legal Proceedings. The Corporation and its subsidiaries were in 1998, or currently are, parties to a number of legal proceedings that have arisen in connection with the normal course of business activities of the Corporation, the Bank and the Corporation's other subsidiaries, including the following matters: Lender Liability Litigation. The Corporation's subsidiaries, in the normal course of their business in collecting outstanding obligations, are named as defendants in complaints or counterclaims filed in various jurisdictions by borrowers or others who allege that lending practices by such subsidiaries have damaged the borrowers or others. Such claims, commonly referred to as lender liability claims, frequently request not only relief from repayment of the debt obligation, but also recovery of actual, consequential and punitive damages. Fidelity Acceptance Corporation Litigation. In 1997, the Corporation sold Fidelity Acceptance Corporation, its consumer lending subsidiary. At the time of the sale, Fidelity Acceptance Corporation and/or certain of Fidelity Acceptance Corporation's subsidiaries (collectively referred to as "FAC") were defendants in class action and other lawsuits brought in various states by FAC borrowers. These lawsuits, which include claims for punitive damages, often for large dollar amounts, challenge various of FAC's lending and insurance practices, including, among others, the placing of collateral protection insurance, calculating the amount of credit life insurance and the determination of applicable interest rates. Pursuant to the terms of the sale of FAC, the Corporation has indemnified the buyer for various liabilities, including certain losses arising from such litigation pending at the time of the sale and for certain claims that may arise out of the operation of FAC prior to the sale. -18- Robertson Stephens Litigation. As noted above, in August 1998, the Corporation acquired the investment banking operations of Robertson Stephens from BankAmerica Corporation. At the time of sale, Robertson Stephens was a defendant in several lawsuits in various state and federal courts claiming damages, some in large dollar amounts, arising out of Robertson Stephens' actions in connection with the proposed or actual underwriting or placement of securities. Pursuant to the terms of the sale, these lawsuits are now the responsibility of the Corporation. Management, after reviewing all actions and proceedings pending against 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 results of operations or financial condition. Item 3A. Executive Officers of the Corporation. Information with respect to the executive officers of the Corporation, as of March 1, 1999, is set forth below. Executive Officers are generally elected annually by the Board of Directors and hold office until the following year and until their successors are chosen and qualified, unless they sooner resign, retire, die or are removed. Except where otherwise noted, the positions listed for the officers are for both the Corporation and the Bank.
Executive Officer ----------------- Name Age Current Position Since ---- --- ---------------- ----- Charles K. Gifford 56 Chairman and Chief Executive Officer 1987 Henrique de Campos Meirelles 53 President and Chief Operating Officer 1994 Susannah M. Swihart 43 Vice Chairman, Chief Financial Officer and Treasurer of the Corporation and Vice Chairman and Chief Financial Officer of the Bank 1993 Paul F. Hogan 54 Vice Chairman, Wholesale Banking 1993 Bradford H. Warner 47 Vice Chairman, Regional Banking 1989 Edward J. Bayone 44 Executive Vice President and Chief Credit Officer December 1998 Melville E. Blake III 44 Executive Director, Strategic Planning 1993 Geraldo J. Carbone 42 Regional President, Brazil 1997 Helen G. Drinan 51 Executive Vice President, Human Resources 1993 Pamela D. Gormley 50 Director, Financial Accounting and Operations December 1998 Karen B. Green 53 Executive Vice President, Corporate Marketing 1997 Ira A. Jackson 50 Executive Vice President, Corporate & Community Affairs 1987 Robert T. Jefferson 51 Comptroller 1993 John A. Kahwaty 48 Executive Director, Investor Relations 1996 Lindsey C. Lawrence 61 Executive Vice President, Electronic Banking 1996 Peter J. Manning 60 Executive Vice President, Mergers & Acquisitions 1990 John L. Mastromarino 45 Executive Vice President, Risk Management 1995 Kathleen M. McGillycuddy 49 Executive Vice President, Global Markets 1996 Manuel R. Sacerdote 56 Regional President, Southern Cone 1994 Erich Schumann 49 Executive Vice President, Finance 1997 Gary A. Spiess 58 Executive Vice President, General Counsel & Clerk of the Corporation and Executive Vice President, General Counsel, Secretary & Cashier of the Bank 1987
-19- All of these individuals have been officers of the Corporation or one of its subsidiaries for the past five years, except for Mss. Gormley, Green and Lawrence and Mr. Mastromarino. Ms. Gormley came to the Corporation in September 1998 from KeyCorp, where she had served as Executive Vice President and Chief Financial Officer, Corporate Banking, from 1997 to September 1998 and as Executive Vice President and Chief Financial Officer of two KeyCorp subsidiaries, Great Lakes Regional Bank (from 1995 through 1996) and Society National Bank (from 1993 through 1994). Ms. Green joined the Corporation in 1996 and prior to that time had been Director of Consumer Marketing of BayBanks in 1996, Director of Marketing of BayBanks from 1995 to 1996 and Director of New York Retail Marketing of Citibank from 1993 to 1995. Prior to assuming her current position with the Corporation, Ms. Lawrence was employed by BayBank Systems, Inc., a BayBanks subsidiary, as President and Chief Operating Officer from 1988 to 1994 and as President and Chief Executive Officer from 1994 to 1996. Mr. Mastromarino came to the Corporation in 1995 from the OCC, where he had served as Examiner-in-Charge of the OCC's London office from 1993 to 1995, and as the OCC's Examiner-in-Charge at the Bank from 1988 to 1993. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required by this Item is incorporated by reference from pages 21, 22 and 58 of the Annual Report. Item 6. Selected Financial Data. The "Consolidated Selected Financial Data" of the Corporation for the six years ended December 31, 1998 is incorporated by reference from pages 21 and 22 of the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information in response to this Item is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated by reference from pages 23 through 54 of the Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this Item is incorporated by reference from pages 48 through 51 of the Annual Report. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data required by this Item are incorporated by reference from the pages of the Annual Report indicated below. -20-
Page of 1998 Annual Report to Stockholders Summary of Quarterly Consolidated Financial Information and Common Stock Data................ 58 Report of Independent Accountants..................... 60 BankBoston Corporation: Consolidated Balance Sheet as of December 31, 1998 and 1997......................................... 61 Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996........... 62 Consolidated Statement of Changes in Common Stockholders' Equity for the three years ended December 31, 1998.......................... 63 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996........... 64 Notes to Financial Statements......................... 65 through 89
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. Information concerning the Executive Officers of the Corporation which responds to this Item is incorporated by reference from Item 3A contained in Part I of this Report. The information that responds to this Item with respect to Directors is incorporated by reference from the section entitled "Election of Directors" in the Corporation's definitive proxy statement for its 1999 Annual Meeting of Stockholders, which is required to be filed pursuant to Regulation 14A under the Exchange Act and which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Corporation's fiscal year (the "Proxy Statement"). Information with respect to compliance by the Corporation's Directors and Executive Officers with Section 16(a) of the Exchange Act is incorporated by reference from the section entitled "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement. Item 11. Executive Compensation. The information required in response to this Item is incorporated by reference from the section entitled "Compensation of Executive Officers" in the Proxy Statement (other than the subsection entitled "Compensation Committee Report on Executive Compensation"). Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required in response to this Item is incorporated by reference from the sections entitled "Election of Directors," "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required in response to this Item is incorporated by reference from the section entitled "Interests of Directors and Executive Officers in Certain Transactions" in the Proxy Statement. -21- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) The financial statements required in response to this Item are incorporated by reference from Item 8 of this Report. (a)(2) Financial statement schedules have been omitted because the information is either not required, not applicable, or is included in the financial statements or notes thereto. (a)(3) Exhibits 3(a) - Restated Articles of Organization of the Corporation, effective as of November 18, 1998. 3(b) - By-Laws of the Corporation, as amended through January 1, 1998, incorporated herein by reference to Exhibit 3(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522). 4(a) - There are no agreements with respect to the long-term debt of the Corporation authorizing the issuance of securities in an amount exceeding 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation agrees to furnish a copy of any agreement defining the rights of the holders of the Corporation's long-term debt to the Securities and Exchange Commission upon request. 4(b) - Rights Agreement, as amended through December 12, 1995, between the Corporation and the Bank, as Rights Agent, and the description of the Rights, incorporated herein by reference to the Corporation's registration statement on Form 8-A relating to the Rights, Exhibit 1 to such registration statement and Exhibit 4(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-6522). 4(c) - Renewed Rights Agreement, dated as of December 17, 1998, between the Corporation and the Bank, as Rights Agent, incorporated herein by reference to Exhibit 4 to the Corporation's Current Report on Form 8-K dated December 17, 1998 (File No. 1-6522). 10(a) - BankBoston Corporation 1982 Stock Option Plan, as amended through October 23, 1997, incorporated herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -22- (a)(3) Exhibits (cont'd) 10(b) - BankBoston Corporation 1986 Stock Option Plan, as amended through October 23, 1997, incorporated herein by reference to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* 10(c) - BankBoston Corporation 1991 Long-Term Stock Incentive Plan, as amended through October 23, 1997, incorporated herein by reference to Exhibit 10(c) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* 10(d) - BankBoston Corporation 1996 Long-Term Incentive Plan, as amended through June 25, 1998.* 10(e) - BankBoston Corporation and its Subsidiaries Performance Recognition Opportunity Plan, as amended effective June 9, 1998.* 10(f) - BankBoston Corporation Executive Deferred Compensation Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(g) - BankBoston, N.A. Bonus Supplemental Employee Retirement Plan, as amended through June 23, 1994, incorporated herein by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(h) - Description of the Corporation's Supplemental Life Insurance Plan, incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988 (File No. 1-6522).* 10(i) - BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(j) - BankBoston Corporation Relocation Policy, as amended effective January 1, 1999.* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -23- (a)(3) Exhibits (cont'd) 10(k) - Description of the Corporation's Supplemental Long-Term Disability Plan, effective as of February 10, 1994, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-6522).* 10(l) - BankBoston Corporation's Director Stock Award Plan, as amended effective July 1, 1998.* 10(m) - Form of Severance Agreement for members of the Office of the Chief Executive Officer and certain other officers.* 10(n) - Form of Severance Agreement for other officers.* 10(o) - BankBoston Corporation Directors Deferred Compensation Plan, effective March 28, 1991, incorporated herein by reference to Exhibit 10(q) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(p) - BankBoston, N.A. Directors Deferred Compensation Plan, effective March 28, 1991, incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(q) - BankBoston Corporation 1997 Stock Option Plan for Non-Employee Directors, effective as of April 1, 1997, incorporated herein by reference to Exhibit 10(q) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* 10(r) - Description of the Corporation's Director Retirement Benefits Exchange Program, incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* 10(s) - 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended through October 23, 1987, incorporated herein by reference to Exhibit 10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959) and Exhibit 10(u) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -24- (a)(3) Exhibits (cont'd) 10(t) - BayBanks Supplemental Executive Retirement Plan, as amended through November 27, 1996, incorporated herein by reference to Exhibit 19.6 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Exhibit 10.8 to BayBanks' Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and Exhibit 10.8 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959) and to Exhibits 10(y) and 10(z) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-6522).* 10(u) - BayBanks Profit Sharing Excess Benefit Plan, as amended, incorporated herein by reference to Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 and Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 0-959).* 10(v) - BayBanks Deferred Payment Plans Trust Agreement, as amended through October 27, 1994, incorporated herein by reference to Exhibit 19 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 and Exhibit 10.10 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(w) - Consulting Agreement, dated as of December 30, 1997, between the Corporation and William M. Crozier, Jr., incorporated herein by reference to Exhibit 10(aa) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* 10(x) - Letter Agreement, dated as of August 15, 1997, between the Corporation and Henrique de Campos Meirelles, incorporated herein by reference to Exhibit 10(bb) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522).* 10(y) - Lease, as amended through October 1, 1997, between BankBoston, N.A. and Equitable Federal Street Realty Company Limited Partnership, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, to Exhibits 10(gg), 10(hh), 10(ii), 10(jj) and 10(kk) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, and to Exhibits 10(cc), 10(dd), 10(ee), 10(ff) and 10(gg) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-6522). - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -25- (a)(3) Exhibits (cont'd) 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). 13 Pages 21 through 58 and 60 through 89 of the Corporation's 1998 Annual Report to Stockholders. 21 - List of subsidiaries of BankBoston Corporation. 23 - Consent of Independent Accountants. 24 - Power of attorney of certain officers and directors (included on pages II-1 through II-2). 27 - Financial Data Schedule 99 - Notice of Annual Meeting and Proxy Statement for the Annual Meeting of the Corporation's Stockholders to be held April 22, 1999, incorporated herein by reference to the Corporation's filing under Regulation 14A of the Exchange Act (File No. 1-6522). Pursuant to General Instruction G(3) to Form 10-K, the information required to be filed by Part III hereof is incorporated by reference from the Corporation's definitive proxy statement which is required to be filed pursuant to Regulation 14A and which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Corporation's fiscal year. (b) During the fourth quarter of 1998, the Corporation filed two Current Reports on Form 8-K. The current reports, dated October 15, 1998 and December 17, 1998, each contained information pursuant to items 5 and 7 of Form 8-K. The Corporation also filed two Current Reports on Form 8-K, dated January 21, 1999 and February 3, 1999, each of which contained information pursuant to items 5 and 7 of Form 8-K. -26- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Boston, and the Commonwealth of Massachusetts, on the 5th day of March, 1999. BANKBOSTON CORPORATION By: /s/ CHARLES K. GIFFORD -------------------------- (Charles K. Gifford) (Chairman and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates listed below. By so signing, each of the undersigned, in his or her capacity as a director or officer, or both, as the case may be, of the Corporation, does hereby appoint Charles K. Gifford, Henrique de Campos Meirelles, Susannah M. Swihart, Erich Schumann, Robert T. Jefferson and Gary A. Spiess, and each of them severally, or if more than one acts, a majority of them, his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as a director or officer or both, as the case may be, of the Corporation, any and all amendments to said report and all instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the acts of said attorneys and each of them. Signature Title Date --------- ----- ---- /s/ CHARLES K. GIFFORD Chairman and Chief - -------------------------------- Executive Officer and (Charles K. Gifford) Director (Chief Executive Officer) March 5, 1999 /s/ HENRIQUE DE CAMPOS MEIRELLES President and Chief - -------------------------------- Operating Officer and (Henrique de Campos Meirelles) Director March 5, 1999 /s/ SUSANNAH M. SWIHART Vice Chairman, Chief - -------------------------------- Financial Officer and (Susannah M. Swihart) Treasurer (Chief Financial Officer) March 5, 1999 /s/ ROBERT T. JEFFERSON Comptroller - -------------------------------- (Chief Accounting (Robert T. Jefferson) Officer) March 5, 1999 II-1 Signature Title Date --------- ----- ---- /s/ WAYNE A. BUDD Director March 5, 1999 - -------------------------------- (Wayne A. Budd) /s/ WILLIAM F. CONNELL Director March 5, 1999 - -------------------------------- (William F. Connell) /s/ GARY L. COUNTRYMAN Director March 5, 1999 - -------------------------------- (Gary L. Countryman) /s/ WILLIAM M. CROZIER, JR. Director March 5, 1999 - -------------------------------- (William M. Crozier, Jr.) /s/ ALICE F. EMERSON Director March 5, 1999 - -------------------------------- (Alice F. Emerson) /s/ THOMAS J. MAY Director March 5, 1999 - -------------------------------- (Thomas J. May) /s/ DONALD F. MCHENRY Director March 5, 1999 - -------------------------------- (Donald F. McHenry) /s/ PAUL C. O'BRIEN Director March 5, 1999 - -------------------------------- (Paul C. O'Brien) /s/ THOMAS R. PIPER Director March 5, 1999 - -------------------------------- (Thomas R. Piper) /s/ FRANCENE S. RODGERS Director March 5, 1999 - -------------------------------- (Francene S. Rodgers) /s/ JOHN W. ROWE Director March 5, 1999 - -------------------------------- (John W. Rowe) /s/ GLENN P. STREHLE Director March 5, 1999 - -------------------------------- (Glenn P. Strehle) /s/ WILLIAM C. VAN FAASEN Director March 5, 1999 - -------------------------------- (William C. Van Faasen) /s/ THOMAS B. WHEELER Director March 5, 1999 - -------------------------------- (Thomas B. Wheeler) /s/ ALFRED M. ZEIEN Director March 5, 1999 - -------------------------------- (Alfred M. Zeien) II-2 EX-3.A 2 RESTATED ARTICLES OF ORGANIZATION EXHIBIT 3(A) FEDERAL IDENTIFICATION NO. 04-2471221 ------------------- THE COMMONWEALTH OF MASSACHUSETTS WILLIAM FRANCIS GALVIN Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 RESTATED ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B, SECTION 74) We, Henrique de Campos Meirelles , President --------------------------------------------------------------- and Michael R. Garfield , Assistant Clerk ---------------------------------------------------------- of BankBoston Corporation , ---------------------------------------------------------------------------- (Exact name of corporation) located at 100 Federal Street, Boston, MA 02110 , ------------------------------------------------------------------- (Street address of corporation in Massachusetts) do hereby certify that the following Restatement of the Articles of Organization was duly adopted at a meeting held on September 24, 1998 by a vote of the directors. ARTICLE I The name of the Corporation is: BankBoston Corporation ARTICLE II The purpose of the Corporation is to engage in the following business activities: To buy, sell, deal in, or hold securities of every kind and description; and in general to carry on any business permitted to corporations organized under Chapter 156B of the Massachusetts General Laws as now in force or hereafter amended. ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue:
- ----------------------------- ----------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE - ----------------------------- ----------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ----------------------------- ----------------------------------------- Common: Common: 500,000,000 $1.00 - ----------------------------- ----------------------------------------- - ----------------------------- ----------------------------------------- Preferred: 10,000,000* Preferred: - ----------------------------- ----------------------------------------- - ----------------------------- -----------------------------------------
*200,000 shares of Junior Participating Preferred Stock, Series D ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See Attachment A ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or any class of stockholders: See Attachment B ATTACHMENT A ARTICLE 4 (A) There shall be a class of common stock having a par value of $1.00 per share consisting of 500,000,000 shares. The holders of record of such common stock shall have one vote for each share of such common stock held by them, respectively. (B) There shall be a class of Preferred Stock consisting of 10,000,000 shares without par value. The shares of the Preferred Stock are to be issuable at any time or from time to time in one or more series as and when established by the Board of Directors, each such series to have such designation or title as may be fixed by the Directors prior to the issuance of any shares thereof, and each such series may differ from every other series already outstanding as may be determined by the Directors prior to the issuance of any shares thereof, in any or all of the following, but in no other respects: (a) the rate of dividend (cumulative or non-cumulative) to which holders of the Preferred Stock of any such series shall be entitled; (b) the terms and manner of the redemption by the corporation of the Preferred Stock of any such series; (c) the special or relative rights of the holders of the Preferred Stock of any such series in the event of the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up of the corporation; (d) the terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of any such series; (e) the right, if any, of the holders of Preferred Stock of any such series to convert the same into stock of any other class or classes or into other securities of the corporation, and the terms and conditions of such conversion; and (f) the voting rights, if any, of the holders of Preferred Stock of any such series. (C) Preferred Stock, Series A: {Redeemed on July 13, 1998; no additional shares of Preferred Stock may be issued as Series A Preferred Stock.} (D) Preferred Stock, Series B: {Redeemed on July 13, 1998; no additional shares of Preferred Stock may be issued as Series B Preferred Stock.} (E) Preferred Stock, Series C: {Redeemed on July 13, 1998; no additional shares of Preferred Stock may be issued as Series C Preferred Stock.} (F) Preferred Stock, Series D 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Junior Participating Preferred Stock, Series D" and the number of shares constituting such series shall be 200,000. 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of preferred stock ranking prior and superior to the shares of Junior Participating Preferred Stock, Series D with respect to dividends, the holders of shares of Junior Participating Preferred Stock, Series D shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Junior Participating Preferred Stock, Series D, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $3.10 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all noncash dividends or other distributions other than a dividend payable in shares of common stock, par value $2.25 per share, of the corporation (the "Common Stock") or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Junior Participating Preferred Stock, Series D. In the event the corporation shall at any time after June 28, 1990 ( the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Junior Participating Preferred Stock, Series D were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The corporation shall declare a dividend or distribution on the Junior Participating Preferred Stock, Series D as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $3.10 per share on the Junior Participating Preferred Stock, Series D shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Participating Preferred Stock, Series D from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Junior Participating Preferred Stock, Series D, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Junior Participating Preferred Stock, Series D entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Junior Participating Preferred Stock, Series D in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Junior Participating Preferred Stock, Series D entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Junior Participating Preferred Stock, Series D shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Junior Participating Preferred Stock, Series D shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the corporation. In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Junior Participating Preferred Stock, Series D were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Junior Participating Preferred Stock, Series D and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the corporation. (C)(i) If at any time dividends on any Junior Participating Preferred Stock, Series D shall be in arrears in an amount equal to the full accrued dividends for six (6) or more quarterly dividends periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1) and the holders of the shares of the Junior Participating Preferred Stock, Series D then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Junior Participating Preferred Stock, Series D by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph (C)(i) of this Section 3 shall cease (subject to renewal from time to time upon the same terms and conditions) and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (ii) At any time after the special voting rights shall have become vested in the holders of the shares of the Junior Participating Preferred Stock, Series D as provided in paragraph (C)(i) of this Section 3, the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Junior Participating Preferred Stock, Series D then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Junior Participating Preferred Stock, Series D for the purpose of electing such additional director, such meeting to be held at any place as provided by the Bylaws of the corporation for meetings of the corporation's stockholders, and upon not less then ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Junior Participating Preferred Stock, Series D then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less then ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting of the holders of the shares of the Junior Participating Preferred Stock, Series D and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Junior Participating Preferred Stock, Series D then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (C)(iii) With respect to a vacancy arising in the directorship referred to in paragraph (C)(i) of this Section 3 at any time when the special voting rights are in effect pursuant to paragraph (C)(i) of this Section 3, upon the written request of the holders of 10% of the shares of the Junior Participating Preferred Stock, Series D then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Junior Participating Preferred Stock, Series D of the election of a director to fill such vacancy caused by death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph (i) of this Section 3(c), any director who shall have been so elected by the holders of the Junior Participating Preferred Stock, Series D may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. (D) Except as set forth herein, holders of Junior Participating Preferred Stock, Series D shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Junior Participating Preferred Stock, Series D as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Junior Participating Preferred Stock, Series D outstanding shall have been paid in full, the corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Participating Preferred Stock, Series D; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Participating Preferred Stock, Series D, except dividends paid ratably on the Junior Participating Preferred Stock, Series D and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Participating Preferred Stock, Series D, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Junior Participating Preferred Stock, Series D; (iv) purchase or otherwise acquire for consideration any shares of Junior Participating Preferred Stock, Series D, or any shares of stock ranking on a parity with the Junior Participating Preferred Stock, Series D, except pursuant to Section 8 or in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. The corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for consideration any shares of stock of the corporation unless the corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Junior Participating Preferred Stock, Series D purchased or otherwise acquired by the corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Participating Preferred Stock, Series D unless, prior thereto, the holders of shares of Junior Participating Preferred Stock, Series D shall have received $1,000.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series D Liquidation Preference"). Following the payment of the full amount of the Series D Liquidation Preference, no additional distributions shall be made to the holders of shares of Junior Participating Preferred Stock, Series D unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series D Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii) immediately above being referred to as the "Adjustment Number"). Following the payment of the full amount of the Series D Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Junior Participating Preferred Stock, Series D and Common Stock, respectively, holders of Junior Participating Preferred Stock, Series D and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Junior Participating Preferred Stock, Series D and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series D Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Junior Participating Preferred Stock, Series D, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. In case the corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash or any other property, then in any such case the shares of Junior Participating Preferred Stock, Series D shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Junior Participating Preferred Stock, Series D shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. REDEMPTION. The outstanding shares of Junior Participating Preferred Stock, Series D may be redeemed at the option of the Board of Directors as a whole, but not in part, at any time, or from time to time, at a cash price per share equal to 100 percent of (i) the product of the Adjustment Number times the Average Market Value (as such term is hereinafter defined) of the Common Stock, plus (ii) all dividends which on the redemption date have accrued on the shares to be redeemed and have not been paid, or declared and a sum sufficient for the payment thereof set apart, without interest. The "Average Market Value" is the average of the closing sale prices of the Common Stock during the 30 day period immediately preceding the date before the redemption date on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the average of the closing sale prices with respect to a share of Common Stock during such 30 day period, as quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of the Common Stock as determined by the Board of Directors in good faith. 9. RANKING. The Junior Participating Preferred Stock, Series D shall rank junior to all other series of the corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. 10. AMENDMENT. At such time as shares of Junior Participating Preferred Stock, Series D are outstanding, the Articles of Organization of the corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Junior Participating Preferred Stock, Series D so as to affect them adversely without the affirmative vote of the holders of two-thirds or more of the outstanding shares of Junior Participating Preferred Stock, Series D, voting separately as a class. 11. FRACTIONAL SHARES. Junior Participating Preferred Stock, Series D may be issued in fractions of a share which shall entitle the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Junior Participating Preferred Stock, Series D. 12. CANCELLATION. Any shares of the Junior Participating Preferred Stock, Series D redeemed, exchanged, or purchased or otherwise acquired by the corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof; all such shares shall upon their cancellation become authorized but unissued shares of preferred stock. (G) Preferred Stock, Series E: {Redeemed on September 15, 1997; no additional shares of Preferred Stock may be issued as Series E Preferred Stock.} (H) Preferred Stock, Series F: {Redeemed on July 15, 1998; no additional shares of Preferred Stock may be issued as Series F Preferred Stock.} ATTACHMENT B ARTICLE 6 (A) The Directors may amend, add to or repeal the By-Laws in whole or in part except with respect to any provision thereof which, by law or the By-Laws requires action of the stockholders. (B) Meetings of the stockholders may be held anywhere in the United States. (C) The corporation may be a partner in any business enterprise which the corporation would have the power to conduct by itself. (D) No director shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that this provision shall not eliminate the liability of a director, to the extent that such liability is provided by applicable law, (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 (or successor provisions) of Chapter 156B of the Massachusetts General Laws or (iv) for any transaction from which the director derived an improper personal benefit. This provision shall not eliminate the liability of a director for any act or omission occurring prior to the date upon which this provision becomes effective. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ATTACHMENT C BANKBOSTON CORPORATION (FORMERLY BANK OF BOSTON CORPORATION) - --------------------------------------------------------------------------------
OFFICERS: - -------- Charles K. Gifford, Chairman and Blueberry Hill, Manchester, MA 01944 Chief Executive Officer Henrique de Campos Meirelles, President and 381 Warren Street, Brookline, MA 02146 Chief Operating Officer Susannah M. Swihart, Vice Chair, 17 Mayflower Terrace, Newton Highlands, MA 02161 Chief Financial Officer and Treasurer Paul F. Hogan, Vice Chair 41 Windsor Road, Milton, MA 02186 Bradford H. Warner, Vice Chair 19 Kress Farm Road, Hingham, MA 02043 Gary A. Spiess, Clerk *2 Davis Road, Marblehead, MA 01945 *Address for service of process is: 100 Federal Street, Boston, MA 02110 DIRECTORS: - --------- Wayne A. Budd 460 Park Drive, Boston, MA 02215 William F. Connell 111 Ocean Avenue, Swampscott, MA 01907 Gary L. Countryman 111 Hager Street, Marlboro, MA 01752 William M. Crozier, Jr. 41 Ridge Hill Farm Road, Wellesley, MA 02181 Alice F. Emerson 39 New Street, P.O. Box 206, Siasconset, MA 02654 Charles K. Gifford Blueberry Hill, Manchester, MA 01944 Thomas J. May 22 Longmeadow Drive, Westwood, MA 02090 Donald F. McHenry 2746 Unicorn Lane, N.W., Washington, D.C. 20015 Henrique de Campos Meirelles 381 Warren Street, Brookline, MA 02146 Paul C. O'Brien 451 Wellesley Street, Weston, MA 02493 Thomas R. Piper 106 Lee Drive, Concord, MA 01742 Francene S. Rodgers 72 Evans Road, Brookline, MA 02146 John W. Rowe 950 N. Michigan Avenue, No. 3306, Chicago, IL 60611 Glenn P. Strehle 188 Country Drive, Weston, MA 02193 William C. Van Faasen 12 Proctor Street, Manchester, MA 01944 Thomas B. Wheeler 288 Park Drive, Springfield, MA 01106 Alfred M. Zeien 300 Boylston Street, Boston, MA 02116
ARTICLE VII The effective date of the restated Articles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 100 Federal Street, Boston, MA 02110 b. The name, residential address and post office address of each director and officer of the corporation is as follows: NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Treasurer: See Attachment C Clerk: Directors: c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and address of the resident agent, if any, of the corporation is: **We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendment s to the following articles. Briefly describe amendments below: This Restatement also reflects the deletion from Articles 3 and 4 of the descriptions of the Series A,B,C,E and F Preferred Stock, which have been redeemed, and the restoration of those shares to the status of authorized but unissued shares of preferred stock in accordance with MGL C. 156B, Sec. 21A. SIGNED UNDER THE PENALTIES OF PERJURY, this 24th day of September, 1998, /s/ HENRIQUE DE CAMPOS MEIRELLES , President - ------------------------------------------------------------ Henrique de Campos Meirelles /s/ MICHAEL R. GARFIELD , Assistant Clerk - -------------------------------------------------------------- Michael R. Garfield THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B, SECTION 74) _________________________________________________________________ I hereby approve the within Articles of Amendment and, the filing fee in the amount of $400 having been paid, said articles are deemed to have been filed with me this 18th day of November, 1998. Effective date: ______________ /s/ WILLIAM FRANCIS GALVIN WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: Donna M. Rowan -------------------------------------------------- BankBoston Corporation -------------------------------------------------- 100 Federal Street, MA BOS 01-19-02 -------------------------------------------------- Telephone: Boston, MA 02110 -------------------------------------- 617 434-5360 EX-10.D 3 1996 LONG TERM INCENTIVE PLAN EXHIBIT 10(D) BANKBOSTON CORPORATION 1996 Long-Term Incentive Plan (As amended through June 25, 1998) 1. Purpose. ------- The BankBoston Corporation 1996 Long-Term Incentive Plan (the "Plan") has been adopted to create and enhance significant ownership of the Common Stock of the Corporation by key officers and employees of the Corporation and its Affiliates. Additional purposes of the Plan include providing a meaningful incentive to Participants to make substantial contributions to the Corporation's future success, enhancing the Corporation's ability to attract and retain persons who will make such contributions, and ensuring that the Corporation has competitive compensation opportunities for such key officers and employees. By furthering these objectives, the Plan is intended to benefit the interests of the stockholders of the Corporation. 2. Definitions. ----------- As used herein, the following words or terms have the meanings set forth below: 2.1. "Affiliate" means (a) a corporation or other entity in which the Corporation owns, directly or indirectly or has the power to vote or cause to be voted, stock or other ownership interests representing more than 50% of the total combined voting power of such entity or (b) any other entity in which the Corporation has a significant equity interest, as determined by the Committee. Except as determined by the Committee in particular cases, if an entity ceases to be an Affiliate for any reason (a "disaffiliation"), the employment of each individual who was employed by the entity shall be treated as having been involuntarily terminated by the Corporation and its Affiliates effective upon such disaffiliation, unless such individual thereafter continues to be employed by the Corporation or another entity which remains an Affiliate. 2.2. "Award" means any Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Other Awards granted under the Plan. -2- 2.3. "Award Documentation" means a writing delivered to a Participant specifying the terms and conditions of an Award and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable. 2.4. "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. 2.5. "Board" means the Board of Directors of the Corporation, except that, whenever action is to be taken under the Plan with respect to a Reporting Person, "Board" shall mean only such directors who are "disinterested persons" or "non-employee directors," as applicable, within the meaning of Rule 16b-3 under the Exchange Act or any successor rule. 2.6. A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: 2.6.1. There is an acquisition of control of the Corporation as defined in Section 2(a)(2) of the Bank Holding Company Act of 1956, or any similar successor provision, as in effect at the time of the acquisition; or 2.6.2. Continuing Directors constitute two-thirds (2/3) or less of the membership of the Board, whether as the result of a proxy contest or for any other reason or reasons; or 2.6.3. Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding voting securities; or 2.6.4. There is consummated a merger or consolidation (or similar transaction) of the Corporation or any direct or indirect subsidiary of the Corporation with any other corporation, other than (A) a merger or consolidation (or similar transaction) which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) directly or indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of the Corporation or such surviving or parent entity outstanding immediately after such merger or consolidation and which would result in those persons who -3- are Continuing Directors immediately prior to such merger or consolidation constituting more than two-thirds (2/3) of the membership of the Board or the board of such surviving or parent entity immediately after, or subsequently at any time as contemplated by or as a result of, such merger or consolidation (or similar transaction) or (B) a merger or consolidation effected to implement a recapitalization or restructuring of the Corporation or any of its subsidiaries (or similar transaction) in which no Person acquired twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding securities; or 2.6.5. The stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets (or any transaction having a similar effect), other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity in which the holders of the voting securities (entitled to vote generally for the election of directors) of the Corporation immediately prior to such sale or disposition continue to own proportionally and beneficially directly or indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of such entity outstanding immediately after such sale or disposition and which would result in those persons who are Continuing Directors immediately prior to such sale or disposition constituting more than two-thirds () of the membership of the Board or the board of such entity immediately after, or subsequently at any time as contemplated by or as a result of such sale or disposition. 2.7. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.8. "Committee" means the committee appointed by the Board with authority to administer the Plan. Membership of the Committee shall at all times be constituted consistent with exemption under Rule 16b-3 under the Exchange Act (or any successor rule) of those Awards that are intended to be so exempt and with qualification under the Performance-Based Exception of those Awards that are intended to so qualify. To the extent that the Committee delegates its power to make Awards as permitted by -4- Section 4.1, all references in the Plan to the Committee's authority to make Awards and determinations with respect thereto shall be deemed to include the Committee's delegate or delegates. 2.9. "Common Stock" or "Stock" means the Common Stock, par value $1.00 per share, of the Corporation. 2.10. "Continuing Director" means any director (a) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (b) who is a successor of a director described in clause (a), if such successor (and any intervening successor) shall have been recommended or elected to succeed a Continuing Director by a majority of the then Continuing Directors. 2.11. "Corporation" means BankBoston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. 2.12. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner acceptable to the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 2.13. "Disability" means a physical or mental condition of such a nature that it would qualify a Participant for benefits under the long-term disability insurance plan of BankBoston, N.A. or any successor plan. The Committee shall have the authority to determine whether and when, consistent with the foregoing, a Participant has suffered a Disability for purposes of the Plan. 2.14. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. 2.15. "Fair Market Value," in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "NYSE-Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "NYSE-Composite Transactions" cease to be reported, the Committee shall adopt some other appropriate method for determining Fair Market Value. -5- 2.16. "Freestanding SAR" means an SAR that is granted independently of any Options. 2.17. "Incentive Stock Option" means an Option, granted to a Participant pursuant to Section 8, which is intended to satisfy the requirements of Section 422(b) of the Code or any successor provision. 2.18. "Nonqualified Stock Option" means an Option, granted to a Participant pursuant to Section 8, which is not intended to qualify as an Incentive Stock Option. 2.19. "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 2.20. "Other Award" means an Award (other than an Option, SAR, Restricted Stock or Performance Share) granted to a Participant pursuant to Section 12. An Other Award may consist of Shares, fixed or variable units valued or based on Common Stock, fixed or variable units valued or based on measures (including performance measures) that are unrelated to Common Stock, or any combination of the foregoing. An Other Award that consists of units other than Shares, whether or not valued or based on Common Stock, may be made payable in cash or Shares or a combination of cash and Shares. 2.21. "Participant" means an individual selected by the Committee to receive an Award under the Plan. 2.22. "Performance-Based Exception" means the performance-based exception from the deductibility limits set forth in Section 162(m) of the Code and the Section 162(m) Regulations. 2.23. "Performance Goals" means, with respect to Awards that are intended to qualify for the Performance-Based Exception, objectively determinable performance goals established by the Committee within the time period specified in the Section 162(m) Regulations and based on any of the following criteria: (a) earnings, (b) return on equity, (c) return on assets, (d) return on investment, (e) revenues, (f) expenses; (g) the operating ratio; (h) stock price; (i) stockholder return; (j) market share; (k) charge-offs, (l) credit quality, or (m) customer satisfaction measures. Such Performance Goals may be particular to a Participant or the division, branch, line of business, Affiliate or other unit in which the Participant works, or may be based on the performance of the Corporation on a consolidated basis. Notwithstanding the preestablishment of a Performance Goal with respect to an Award in accordance with the Section 162(m) Regulations, nothing herein shall be construed as limiting the Committee's ability to reduce the amount -6- payable under the Award (including, for this purpose, reducing the amount of any Award that would otherwise be granted, or reducing the portion of any Award that would otherwise vest) upon attainment of such Performance Goal. 2.24. "Performance Period" means the period of time designated by the Committee applicable to a Performance Stock Award during which specified Performance Goals shall be measured. 2.25. "Performance Share" means an Award granted to a Participant pursuant to Section 11. 2.26. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (a) the Corporation or any of its subsidiaries, (b) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries, (c) an underwriter temporarily holding securities pursuant to a registered offering of such securities in accordance with an agreement with the Corporation, or (d) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation. 2.27. "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: 2.27.1. the Corporation enters into any agreement, the consummation of which would result in the occurrence of a Change in Control; 2.27.2. the Corporation or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or 2.27.3. any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing fifteen percent (15%) or more of the combined voting power of the Corporation's then outstanding securities (entitled to vote generally for the election of directors). 2.28. "Prior Plan" means the Corporation's 1991 Long-Term Stock Incentive Plan. 2.29. "Reporting Person" means a person required to file reports under Section 16(a) of the Exchange Act or any successor statute. -7- 2.30. "Restricted Period" means the period during which the transfer of shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of Performance Goals or upon the occurrence of other events as determined by the Committee), and the Shares are subject to a substantial risk of forfeiture, as provided in Section 10. 2.31. "Restricted Stock" means an Award granted to a Participant pursuant to Section 10. 2.32. "Retirement" means termination of employment with the Corporation or any Affiliate if such termination of employment constitutes normal retirement, early retirement, disability retirement or other retirement as provided for at the time of such termination of employment under the applicable retirement program then maintained by the Corporation or the Affiliate, provided that the Participant does not continue in the employment of the Corporation or any Affiliate and provided further that such termination does not constitute a Termination for Cause. 2.33. "Section 162(m) Regulations" means the regulations promulgated under Section 162(m) of the Code, as amended from time to time. 2.34 "Shares" means shares of Common Stock. 2.35. "Stock Appreciation Right" or "SAR" means an Award granted to a Participant, alone or in connection with a related Option, pursuant to Section 9. 2.36. "Tandem SAR" means an SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a share of Common Stock under the related Option (and when a share of Common Stock is purchased under the related Option, the Tandem SAR shall similarly be canceled). 2.37. "Termination for Cause" means the termination of a Participant's employment due to any act which, in the discretionary judgment of the Committee, is deemed inimical to the best interests of the Corporation or any Affiliate, including, but not limited to: (a) willful and gross misconduct in respect of the Participant's duties for the Corporation or the Affiliate, (b) conviction of a felony or perpetration of a common law fraud, (c) willful failure to comply with applicable laws or regulations with respect to the execution of the Corporation's or the Affiliate's businesses or (d) theft, fraud, embezzlement, dishonesty -8- or other conduct which has resulted or is likely to result in material economic or other damage to the Corporation or any Affiliate. 3. Effective Date and Term. ----------------------- Subject to approval by the Corporation's stockholders, the Plan shall become effective as of January 1, 1997, and Awards may be granted under the Plan from and after that date. No Awards may be made under the Plan after December 31, 2006, but Awards theretofore granted may extend beyond that date. Notwithstanding the foregoing, no Incentive Stock Options shall be granted after December 20, 2005. 4. Administration. -------------- 4.1. The Plan shall be administered by the Committee. Subject to the provisions set forth herein, the Committee shall have full authority to determine the provisions of Awards, including, without limitation, vesting schedules, price, performance standards (including Performance Goals), length of relevant performance, restriction or option period, dividend rights, post- retirement and termination rights, payment alternatives such as cash, stock, contingent awards or other means of payment consistent with the purposes of the Plan and individual Award Documentation. The Committee also shall have full authority to interpret the terms of the Plan and of Awards made under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers who are also directors of the Corporation the power to make Awards to Participants who are not Reporting Persons at the time of such Awards and all determinations under the Plan with respect thereto, provided that the Committee shall fix the maximum amount of Awards for such Participants as a group. 4.2. Notwithstanding Section 4.1 and subject to the provisions set forth herein, the Board shall approve or ratify Awards made under the Plan to any executive officer who is also a director of the Corporation. 4.3. The decision of the Committee on any matter as to which it is given authority under Section 4.1 above shall be final and binding on all persons concerned. -9- 5. Shares Subject to the Plan. -------------------------- 5.1. Subject to adjustment in accordance with the provisions of Section 13.8 and subject to Section 5.4, (a) the total number of Shares available for grants of Awards (including, without limitation, Awards of Restricted Stock and Performance Shares) in any calendar year shall not exceed one and one-quarter percent (1.25%) of the outstanding Common Stock as of the first business day of such calendar year and (b) the total number of Shares available for grants of Restricted Stock and Performance Shares in any calendar year shall not exceed one-half of one percent (.5%) of the outstanding Common Stock as of the first business day of such calendar year. Shares issued under the Plan may consist in whole or in part of authorized but unissued Shares, Shares held as treasury stock or previously issued Shares reacquired by the Corporation, including Shares purchased on the open market. Notwithstanding the foregoing, the maximum number of Shares that may be issued under Incentive Stock Options awarded under the Plan, subject to adjustment in accordance with Section 13.8, shall be 10,000,000* Shares. 5.2. Subject to adjustment in accordance with Section 13.8, the total number of Shares available for grants of Awards in any calendar year to any Participant shall not exceed the lesser of (a) three-tenths of one percent (.3%) of the outstanding Common Stock as of the first business day of such calendar year or (b) 1,200,000* Shares. 5.3. For purposes of calculating the total number of Shares available for grants of Awards, (a) the grant of a Performance Share shall be deemed to be equal to the maximum number of Shares which may be issued upon payment of the Performance Share and (b) where the value of an Award is variable on the date it is granted, the value shall be deemed to be the maximum limitation of the Award. Awards payable solely in cash shall not reduce the number of Shares available for Awards granted under the Plan. 5.4. There shall be carried forward and available for Awards under the Plan in each succeeding calendar year, in addition to Shares available for grant under Section 5.1, all of the following: (a) any unused portion of the limit set forth in Section 5.1 for any preceding calendar years; (b) Shares represented by Awards which, during that calendar year or any preceding calendar years, have been ______________ * As adjusted for the Corporation's two-for-one stock split, effective as of June 22, 1998. -10- canceled, forfeited, surrendered, terminated or expire unexercised (with the exception of the termination of a Tandem SAR upon the exercise of the related Option, or the termination of a related Option upon exercise of the corresponding Tandem SAR), or which are settled in a manner that results in fewer Shares outstanding than were initially awarded (including, without limitation, the surrender of Shares as full or partial payment for the Award or any tax obligation thereon); (c) the excess amount of variable Awards which become fixed at less than their maximum limitations; (d) authorized Shares as to which Options, SARs and Restricted Stock were not granted under the Prior Plan as of December 31, 1996 and (e) Shares granted under the Prior Plan subject to Options, SARs or Restricted Stock which, during that calendar year or any preceding calendar years, have been canceled, forfeited, surrendered, terminated or expire unexercised or which are settled in a manner that results in fewer Shares outstanding than were initially awarded (including, without limitation, the surrender of Shares as full or partial payment for the Award or any tax obligation thereon). 6. Eligibility for Awards. Any officer or employee of the Corporation or its ---------------------- Affiliates who, in the opinion of the Committee, is in a position to have a significant effect upon the Corporation's business and consolidated earnings, shall be eligible to receive an Award under the Plan. 7. Grant of Awards. From time to time while the Plan is in effect, the --------------- Committee may, in its absolute discretion, select from among the persons eligible to receive Awards (including persons to whom Awards were previously granted) those persons to whom Awards are to be granted. Such Awards may be granted on a stand alone, combination or tandem basis. In addition to granting Awards for purposes of incentive compensation, Awards may also be made in tandem with or in lieu of other current or deferred employee compensation. -11- 8. Options. ------- 8.1. Grant of Options. Subject to the provisions of the Plan, the ---------------- Committee may award Options, alone or in combination with other Awards under the Plan. Options granted under the Plan may be either Incentive Stock Options or Nonqualified Stock Options. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422(b) of the Code or any successor provision, and any regulations thereunder. 8.2. Option Price. The Option price per share of Common Stock, with ------------ respect to each Option, shall not be less than the Fair Market Value per share at the time the Option is granted. 8.3. Period of Options. An Option shall be exercisable during such period ----------------- of time as the Committee shall determine, subject, in the case of Incentive Stock Options, to any limitation required by the Code. It is contemplated that the Committee will provide that an Option shall not be exercisable after the expiration of ten years from the date the Option is granted. 8.4. Exercise of Options. Each Option shall be made exercisable at such ------------------- time or times, and shall be subject to such conditions or restrictions, as the Committee shall determine. It is contemplated that the Committee will normally provide that the right to exercise an Option will accrue on the first anniversary of the date of grant with respect to 50 percent of the number of shares of Common Stock subject to the Option and that the right to exercise the Option with respect to the balance of the shares subject thereto will accrue on the second anniversary of the date of grant. However, the Committee may, in its discretion, in any case provide that the Option will be exercisable immediately with respect to all of the shares of Common Stock subject to the Option or that the right to exercise the Option will accrue in different installments and at different times from those set forth above. 8.5. Payment for and Delivery of Stock. Payment of the Option exercise --------------------------------- price may be made by any of the following methods, as determined by the Committee at the time the Option is granted: (a) in cash or its equivalent (b) by delivery of Shares already owned by the Participant, valued at their Fair Market Value on the date of exercise (provided that any Shares so delivered shall have been held by the Participant for such period, if any, as the Committee shall determine), (c) subject to such guidelines as -12- may be promulgated by the Committee, by delivery of a notice instructing the Corporation to deliver the Shares being purchased to a broker, subject to the broker's delivery of cash to the Corporation equal to the purchase price and any applicable withholding taxes, (d) by delivery of such other lawful consideration as the Committee may determine or (e) by any combination of the foregoing. The Committee may provide for the automatic award of an Option upon the delivery of Shares to the Corporation in payment of the exercise price of another Option for up to the number of Shares delivered to the Corporation in payment of the exercise price of such other Option. 8.6. Termination of Employment. Each Participant's Award Documentation ------------------------- shall set forth the extent to which the Participant or the Participant's legal representative, guardian or Designated Beneficiary shall have the right to exercise an Option following the termination of the Participant's employment with the Corporation and its Affiliates. Such provisions shall be determined in the sole discretion of the Committee and may reflect distinctions based on the reasons for termination of employment, including, without limitation, termination of employment by reason of the Participant's death, Retirement or Disability. 9. Stock Appreciation Rights. ------------------------- 9.1. Grant of SARs. Subject to the provisions of the Plan, the Committee ------------- may award SARs alone or in combination with other Awards under the Plan. 9.2. Grant Price. The grant price of a Freestanding SAR shall not be less ----------- than the Fair Market Value of the Common Stock at the time of grant of the SAR. The grant price of a Tandem SAR shall not be less than the Option exercise price of the related Option. 9.3. Term of SARs. An SAR shall be exercisable during such period of time ------------- as the Committee shall determine. It is contemplated that the Committee will provide that an SAR shall not be exercisable after the expiration of ten years from the date the SAR is granted. 9.4. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part ------------------------ of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the -13- related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. 9.5. Exercise of Freestanding SARs. Freestanding SARs shall be made ------------------------------ exercisable at such time or times, and shall be subject to such conditions or restrictions, as the Committee shall determine. It is contemplated that the Committee will normally provide that the right to exercise 50 percent of any Freestanding SARs granted hereunder will accrue on the first anniversary of the date of grant and that the right to exercise the balance of such Freestanding SARs will accrue on the second anniversary of the date of grant. However, the Committee may, in its discretion, in any case provide that Freestanding SARs will be exercisable immediately or that the right to exercise Freestanding SARs will accrue in different installments and at different times from those set forth above. 9.6. Payment of SARs. Upon exercise of an SAR, a Participant shall be --------------- entitled to receive payment from the Corporation in an amount determined by multiplying (a) the excess, if any, of the Fair Market Value of a share of Common Stock on the date of exercise over the grant price by (b) the number of Shares with respect to which the SAR is exercised. SARs may be payable in cash, Shares or a combination of the two, as provided by the Committee. Shares issued on the settlement of the exercise of SARs shall be valued at their Fair Market Value on the date of exercise. 9.7. Termination of Employment. Each Participant's Award Documentation ------------------------- shall set forth the extent to which the Participant or the Participant's legal representative, guardian or Designated Beneficiary shall have the right to exercise an SAR following the termination of the Participant's employment with the Corporation and its Affiliates. Such provisions shall be determined in the sole discretion of the Committee and may reflect distinctions based on the reasons for termination of employment, including, without limitation, termination of employment by reason of the Participant's death, Retirement or Disability. 10. Restricted Stock. ---------------- 10.1. Grant of Restricted Stock. Subject to the provisions of the Plan, ------------------------- the Committee may award Restricted Stock alone or in combination with other Awards under the Plan. -14- 10.2. Terms of Restricted Stock. The Restricted Period and other -------------------------- provisions of each Restricted Stock Award shall be established by the Committee and shall be set forth in the Participant's Award Documentation. 10.3. Nontransferability; Other Restrictions. Except as provided in this --------------------------------------- Section 10, shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period. The Committee may impose such other conditions and/or restrictions on any shares of Restricted Stock granted under the Plan as it may deem advisable including, without limitation, performance-based restrictions (whether or not based upon the achievement of Performance Goals), employment-based restrictions and/or restrictions under applicable federal or state securities laws. 10.4. Participants' Rights in Restricted Stock. Shares of Restricted ---------------------------------------- Stock shall be evidenced in such manner as the Committee may determine. Any certificates issued in respect of Restricted Stock shall be registered in the name of the Participant and, except as otherwise determined by the Committee, shall be delivered to the Participant after the last day of the Restricted Period. Except as otherwise provided by the Committee, during and after the Restricted Period, dividends with respect to any Restricted Stock shall be paid to, and voting rights with respect to any such Shares shall be vested in, the Participant. To the extent provided by the Committee, Participants may defer the receipt of any dividends payable during the Restricted Period with respect to Restricted Stock. 10.5. Termination of Employment. Each Participant's Award Documentation ------------------------- shall set forth the extent, if any, to which the Participant or the Participant's legal representative, guardian or Designated Beneficiary shall have the right to receive unvested shares of Restricted Stock following the termination of the Participant's employment with the Corporation and its Affiliates. Such provisions shall be determined in the sole discretion of the Committee and may reflect distinctions based on the reasons for termination of employment, including, without limitation, termination of employment by reason of the Participant's death, Retirement or Disability. 10.6. Consideration for Restricted Stock. Restricted Stock shall be issued ---------------------------------- for no cash consideration or such minimum consideration as may be required under applicable law. -15- 11. Performance Shares. ------------------- 11.1. Grant of Performance Shares. Subject to the provisions of the Plan, --------------------------- the Committee may award Performance Shares alone or in combination with other Awards under the Plan. The number and/or vesting of Performance Shares granted, in the Committee's discretion, shall be contingent upon the degree of attainment of the Performance Goals over the Performance Period. 11.2. Form and Timing of Payment of Performance Shares. During the course ------------------------------------------------- of a Performance Period, the Committee shall determine the number of Performance Shares as to which the Participant has earned the right to be paid based upon the attainment of the applicable Performance Goals. The Committee shall pay any earned Performance Shares as soon as practicable after they are earned in the form of cash, Shares or a combination thereof (as determined by the Committee) having an aggregate Fair Market Value equal to the number of Performance Shares earned multiplied by the Fair Market Value of a share of Common Stock determined as of the date such Performance Shares were earned. Any Shares used to pay out earned Performance Shares may be granted subject to any restrictions deemed appropriate by the Committee. To the extent provided by the Committee, Participants may defer the receipt of payment of any Performance Shares or other amounts (e.g., dividend equivalent rights) earned pursuant to the Award Documentation. 11.3. Termination of Employment. Each Participant's Award Documentation ------------------------- shall set forth the extent to which the Participant or the Participant's legal representative, guardian or Designated Beneficiary shall have the right to receive unearned Performance Shares following the termination of the Participant's employment with the Corporation and its Affiliates. Such provisions shall be determined in the sole discretion of the Committee and may reflect distinctions based on the reasons for termination of employment, including, without limitation, termination of employment by reason of the Participant's death, Retirement or Disability. 12. Other Awards. ------------- 12.1. Grant of Other Awards. Subject to the provisions of the Plan, the --------------------- Committee may award Other Awards alone or in combination with other Awards under the Plan. -16- 12.2. Terms of Other Awards. The Committee shall determine the terms and ---------------------- provisions of Other Awards including, without limitation, any transfer restrictions, vesting provisions, the value of such Awards and the form and timing of payment of such Awards. 12.3. Termination of Employment. Each Participant's Award Documentation ------------------------- shall set forth the extent to which the Participant or the Participant's legal representative, guardian or Designated Beneficiary shall have the right to exercise or receive Other Awards following the termination of the Participant's employment with the Corporation and its Affiliates. Such provisions shall be determined in the sole discretion of the Committee and may reflect distinctions based on the reasons for termination of employment, including, without limitation, termination of employment by reason of the Participant's death, Retirement or Disability. 13. General Provisions Applicable to Awards. --------------------------------------- 13.1. Non-transferability of Awards. Subject to the provisions of this ----------------------------- Section, (a) no Award under the Plan shall be transferable otherwise than by will, by the laws of descent and distribution, or by operation of a "qualified domestic relations order," as that term is defined in the Code, and (b) during the lifetime of the Participant to whom an Award has been granted, rights under the Award may be exercised only by the Participant, the Participant's guardian or legal representative, or by the assignee of the Award under a "qualified domestic relations order." Notwithstanding the foregoing, the Committee may provide for greater transferability in the case of any Award, including, without limitation, transfer to one or more members of the Participant's family or to a partnership or trust established for the benefit of one or more members of the Participant's family. In no event shall Incentive Stock Options awarded under the Plan be transferable other than as permitted under the rules prescribed in the Code for incentive stock options. An Award that is intended to be exempt under Rule 16b-3 under the Exchange Act or any successor rule, or that is intended to qualify for the Performance-Based Exception, shall be transferable only to the extent consistent with such exemption or qualification. Nothing in this Section shall be construed as restricting the transfer of Shares that have become free of other transfer restrictions under the Plan or that were awarded free of any such restrictions. -17- 13.3. Committee Discretion. Each type of Award may be made alone, in -------------------- addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of award or at any time thereafter. The Committee may grant Awards hereunder that are intended to satisfy the Performance-Based Exception and Awards that are not intended to satisfy that exception. Awards hereunder that are intended to satisfy the Performance-Based Exception shall be subject to the limitations of Section 5.2. In no event shall an Award hereunder which is not intended to satisfy the Performance-Based Exception be conditioned upon an Award hereunder (to the same Participant) which is intended to satisfy the Performance-Based Exception. 13.4. Tax Withholding. The Committee shall require, on such terms as it --------------- deems necessary, that the Participant pay to the Corporation, or make other satisfactory provision for payment of, any federal, state or local taxes required by law to be withheld in respect of Awards under the Plan. In the Committee's discretion, a Participant may elect to satisfy all or a portion of his or her federal, state and local tax withholding requirements or liability, up to the amount calculated by applying the Participant's maximum marginal tax rate, by having Shares withheld from the Shares otherwise issuable in connection with the event creating the tax obligation, or by delivering to the Corporation previously owned Shares, valued at their Fair Market Value on the date that withholding taxes are determined. The Corporation and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. 13.5. Foreign Nationals. Awards may be made to Participants who are ----------------- foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable laws. Notwithstanding the provisions of this Section 13.5, Awards to any such individuals who are Reporting Persons shall be made in accordance with the other provisions of the Plan, except as otherwise permitted by Rule 16b-3 under the Exchange Act or any successor rule. -18- 13.6. Amendment of Award. The Committee may amend, modify, terminate or ------------------ waive any condition or provision of any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonqualified Stock Option; provided, however, that the Committee may not (except in accordance with Section 13.8) increase the number of Shares subject to any outstanding Award or decrease the Option or award price of the Award. The Participant's consent to any such action shall be required unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 13.7. Acceleration of Vesting; Waiver of Restrictions. Notwithstanding ------------------------------------------------ any provision of the Plan or any Award Documentation to the contrary, the Committee, in its sole discretion, shall have the power at any time to (a) accelerate the vesting or exercisability of any Award granted under the Plan, including, without limitation, acceleration to such date that would result in such Awards becoming immediately vested or exercisable, or (b) waive any restrictions of any Award granted under the Plan. 13.8. Changes in Stock; Adjustment of Awards. In the event of a stock -------------------------------------- dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock or any other transaction (including, without limitation, an extraordinary cash dividend) which, in the determination of the Committee, affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Committee shall equitably adjust any or all of (a) the number and kind of Shares in respect of which Awards may be made under the Plan, (b) the number and kind of Shares subject to outstanding Awards, and (c) the Option or grant price with respect to any of the foregoing, provided that the number of Shares subject to any Award shall always be a whole number. In the event of any merger, consolidation, dissolution or liquidation of the Corporation, the Committee, in its sole discretion, may, as to any outstanding Awards, make such substitution or adjustment in the aggregate number of Shares reserved for issuance under the Plan and in the number and purchase price (if any) of Shares subject to such Awards as it may determine, make outstanding Awards fully exercisable, or amend or terminate such Awards upon such terms and -19- conditions as it shall provide (which, in the case of the termination of the vested portion of any Award, shall require payment or other consideration which the Committee deems equitable in the circumstances). Notwithstanding the foregoing, in the case of an Award intended to qualify as an Incentive Stock Option or to qualify for the Performance-Based Exception, adjustment shall be made under this Section 13.8 only to the extent, if any, consistent with continued qualification of the Award as an Incentive Stock Option or continued qualification of the award for the Performance-Based Exception, as the case may be. 13.9. Change In Control. Unless otherwise provided in a Participant's ------------------ Award Documentation, upon the occurrence of a Change in Control of the Corporation, (a) any and all Options and SARs granted hereunder shall become immediately exercisable, and shall remain exercisable through their entire term; (b) any Restricted Periods and restrictions imposed on Restricted Stock shall lapse; and (c) the target payout opportunities attainable under all outstanding Awards of Restricted Stock and Performance Shares shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change in Control, and the vesting of all Awards shall be accelerated as of the effective date of the Change in Control. 13.10. Dividend Equivalent Rights. The Committee may, in its discretion, --------------------------- provide that any dividends declared on Shares subject to an Award, and which would have been paid with respect to such Shares had they been owned by a Participant, be paid to the Participant in Shares, cash or a combination of cash and Shares, as specified in the Award Documentation. 14. Miscellaneous. ------------- 14.1. No Right to Employment. No person shall have any claim or right to ---------------------- be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment. The Corporation and its Affiliates expressly reserve the right at any time to terminate the employment of a Participant free from any liability or claim under the Plan, except as may be expressly provided in the applicable Award. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under the Plan shall not constitute an -20- element of damages in the event of termination of employment of a Participant, even if termination is in violation of an obligation of the Corporation or an Affiliate to the Participant, by contract or otherwise. 14.2. No Rights as a Stockholder. Subject to the provisions of the -------------------------- applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded shall be considered the holder of the stock at the time of the Award except as otherwise provided in the applicable Award. 14.3. No Fractional Shares. No fractional Shares shall be issued under -------------------- the Plan, and cash shall be paid in lieu of any fractional Shares in settlement. 14.4. Unfunded Plan. The Plan shall be unfunded, shall not create (or be ------------- construed to create) a trust or a separate fund or funds, and shall not establish any fiduciary relationship between the Corporation and any Participant or other person. 14.5. Successors and Assigns. The Plan shall be binding on all successors ---------------------- and assigns of the Participant, including without limitation the Participant's Designated Beneficiary or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 14.6. Amendment of Plan. The Board may amend, suspend or terminate the ----------------- Plan or any portion thereof at any time; provided, however, that no amendment which requires stockholder approval in order for those Awards that are intended to be exempt under Rule 16b-3 under the Exchange Act (or any successor rule) to be so exempt or for those Awards that are intended to qualify under the Performance-Based Exception to so qualify shall be effective unless approved by the requisite vote of the Corporation's stockholders. The Committee may make non-material amendments to the Plan. 14.7. Governing Law. The provisions of the Plan shall be governed by and ------------- interpreted in accordance with the laws of the Commonwealth of Massachusetts. EX-10.E 4 PERFORMANCE RECOGNITION OPPORTUNITY PLAN EXHIBIT 10(E) BANKBOSTON CORPORATION AND ITS SUBSIDIARIES PERFORMANCE RECOGNITION OPPORTUNITY PLAN (as amended and restated effective February 24, 1997 and as further amended through June 9, 1998) 1. Purpose. The purpose of the BankBoston Corporation and its Subsidiaries Performance Recognition Opportunity Plan (the "Plan") described herein is to establish a corporate-wide umbrella incentive/bonus plan for all non-base salary compensation plans and awards and to reward exempt-level employees of BankBoston Corporation (the "Company") and Participating Subsidiaries for job performance during the year. 2. Definitions. Except where the context otherwise indicates, as used herein: 2.1. BKB means BankBoston, N.A., a national banking association. --- 2.2. Board of Directors or Board shall mean the Board of Directors of the --------------------------- Company. 2.3. Change in Control shall be deemed to have occurred if the conditions ----------------- set forth in any one of the following paragraphs shall have been satisfied: (I) There is an acquisition of control of the Company as defined in Section 2(a)(2) of the Bank Holding Company Act of 1956, or any similar successor provision, as in effect at the time of the acquisition; or (II) Continuing Directors constitute two-thirds or less of the membership of the Board, whether as the result of a proxy contest or for any other reason or reasons; or (III) Any Person is or becomes the beneficial owner (as that term is defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; or (IV) There is consummated a merger or consolidation (or similar transaction) of the Company or any direct or indirect subsidiary of the Company with any other company, other than (i) a merger or consolidation (or similar transaction) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) directly or 1 indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation and which would result in those persons who are Continuing Directors immediately prior to such merger or consolidation constituting more than two-thirds (2/3) of the membership of the Board or the board of such surviving or parent entity immediately after, or subsequently at any time as contemplated by or as a result of, such merger or consolidation (or similar transaction) or (ii) a merger or consolidation effected to implement a recapitalization or restructuring of the Company or any of its subsidiaries (or similar transaction) in which no Person acquired twenty-five percent (25%) or more the combined voting power of the Company's then outstanding securities; or (V) The stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity in which the holders of the voting securities (entitled to vote generally for the election of directors) of the Company immediately prior to such sale of disposition continue to own proportionally and beneficially directly or indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of such entity outstanding immediately after such sale or disposition and which would result in those persons who are Continuing Directors immediately prior to such sale or disposition constituting more than two-thirds (2/3) of the membership of the Board or the board of such entity immediately after, or subsequently at any time as contemplated by or as a result of such sale or disposition. 2.4. Office of Chief Executive Officer ("OCEO") shall mean the Chairman, ------------------------------------------ President and any Vice Chairman of the Company and any other officer designated by the Chairman or President from time to time as being a member of the OCEO. The OCEO may act through such one or more of its members as the Chairman or President may designate. 2.5. Committee means the Compensation Committee of the Board of Directors. --------- 2.6. Company shall mean BankBoston Corporation and (except in determining ------- whether or not any Change in Control of the Company has occurred in connection with such succession) any successor to its business and/or assets which assumes or agrees to continue this Plan, by operation of law or otherwise. 2 2.7. Comparable Banking Institutions are those companies designated on a ------------------------------- schedule captioned "Table of Comparable Banking Institutions" as adopted by the Committee as part of the Guidelines. 2.8. Continuing Director shall mean any director (i) who has continuously ------------------- been a member of the Board of Directors of the Company since not later than the date (1) the Company enters into any agreement, the consummation of which would result in the occurrence of a Change in Control, (2) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control, or (3) any Person becomes the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act, as amended), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities (entitled to vote generally for the election of directors), or (ii) who is a successor of a director described in clause (i), if such successor (and any intervening successor) shall have recommended or elected to succeed a Continuing Director by a majority of the then Continuing Directors. 2.9. Eligible Employee means, for a Performance Year, for Category III ----------------- plans and awards, any exempt-level employee of the Company, BKB or any of the Participating Subsidiaries who is determined to be eligible under the Plan by the OCEO. 2.10. Guidelines means the general guidelines for interpreting and ---------- administering the Plan as approved from time to time by the Board of Directors, the Committee, the OCEO, or Human Resources as the case may be. 2.11. Human Resources means the Human Resources function of BKB. --------------- 2.12. Participating Subsidiary means a corporation or other entity in which ------------------------ the Company owns, directly or indirectly or has the power to vote or cause to be voted, stock or other ownership interests 3 representing more than 50 percent of the total combined voting power and which has been approved for participation in the Plan by the OCEO. 2.13. Performance Year means a fiscal year of the Company while the Plan --------------- is in effect. 2.14. Person shall have the meaning given in Section 3(a)(9) of the ------ Securities Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to a registered offering of such securities in accordance with an agreement with the Company, or (iv) a company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company. 2.15. Pool Allocation Determination means the criteria by which the OCEO ----------------------------- allocates amounts in the PRO Pool to the business or administrative groups of Participating Subsidiaries. 2.16. PRO Pool means the pool established for a Performance Year pursuant -------- to 5.3.2. 4 3. Administration -------------- 3.1. Authority to-Interpret the Plan and Adopt Policy. The Plan shall be ------------------------------------------------ administered by Human Resources. The OCEO shall have the power to interpret the Plan and adopt and amend rules and regulations thereto. Interpretations of the OCEO, including, but not limited to the severability of any and all of the provisions hereof shall be final, conclusive and binding on all Eligible Employees and any person claiming under or through any Eligible Employee. 3.2. Approvals by the Board of Directors and the Committee. Any matter ----------------------------------------------------- under the Plan which requires adoption or approval by the Board of Directors shall generally be submitted to the Board of Directors after the approval of the Committee. Recommendations concerning any such matters shall generally be made to the Committee by the OCEO. Any matter under the Plan which requires adoption or approval by the Committee shall generally be submitted to the Committee after the approval of the OCEO upon the recommendation of Human Resources. 4. Categories of Non-base -Salary Compensation Plans and Awards. ------------------------------------------------------------ 4.1. Category I. Includes hiring bonuses, instant awards, and special ---------- short-term sales performance programs and contests. 4.2. Category II. Includes plans of fee based businesses, and formula ----------- bonuses for sales and other revenue producing positions. For inclusion in this category, plans must establish performance goals, must be reviewed prior to the beginning of a Performance Year to determine appropriateness in light of strategic plan goals, and must be reviewed quarterly against established goals prior to pay out. These plans will be reviewed by the appropriate business executive and Human Resources prior to implementation and approved by the OCEO. 4.3. Category III. Includes incentive/bonus plans funded by the PRO Pool ------------ and includes annual performance awards. 5 5. Funding Mechanisms for each Category. ------------------------------------ 5.1. Category I. The plans under this Category will be funded by ----------- budgets proposed annually by the appropriate business executive and approved by the OCEO. 5.2. Category II. The plans under this Category will be funded based ------------ upon the performance of each business unit covered and approved by the OCEO. 5.3. Category III. The plans and awards under this Category will be funded ------------ through the PRO Pool as determined in Sections 5.3.1 through 5.3.5. 5.3.1. Procedures Relating to Determination of the PRO Pool. The ---------------------------------------------------- following shall be adopted as part of the Guidelines: (a) The OCEO, upon recommendation of Human Resources, shall adopt and recommend to the Compensation Committee the appropriate business targets and performance measures to be used to determine the PRO Pool for a Performance Year, and (b) The Committee shall adopt the Table of Comparable Banking Institutions. In general these items shall be adopted during or before the first quarter of the Performance Year and may be changed by the Committee during the Performance Year. 5.3.2. Determination of the PRO Pool. The PRO Pool available for a ----------------------------- Performance Year shall be determined by Human Resources and approved by the OCEO, giving due regard to the accomplishment of the business targets and performance measures determined under 5.3.1(a) and the Company's performance in relation to Comparable Banking Institutions. 5.3.3. Responsibilities of Finance. As soon as practicable after the --------------------------- close of a Performance Year, the Finance Group of BKB will provide Human Resources with an assessment of the Company's performance relative to the business targets and performance measures determined under Section 5.3.1(a). The Finance Group will also provide Human Resources with pertinent financial 6 information (which may include calculations of earnings per share and return on equity and information on capital adequacy, asset quality and market perception) for the latest fiscal year for the Company and for each of the banking institutions listed on the Table of Comparable Bank Institutions in effect. Calculations and information with respect to Comparable Banking Institutions will be based upon published financial data of such Comparable Banking Institutions giving consideration to the appropriate treatment of unusual or nonrecurring items of income or expense in making performance comparisons under the Plan. 5.3.4. Responsibilities of Human Resources, the OCEO and the ----------------------------------------------------- Committee. After receiving the information and calculations referred to in - --------- 5.3.3., Human Resources will compare the Company's performance relative to the achievement of the business targets and performance measures determined under Section 5.3.1(a), and taking into account the Company's performance relative to the Comparable Banking Institutions, as well as competitive bonus data from market surveys, will determine the amount of PRO Pool for the Performance Year. Human Resources will then present to the OCEO for their approval the recommended amount of the PRO Pool, together with comparisons of the Company's performance relative to Comparable Banking Institutions and the Company's achievement of the business targets and performance measures under Section 5.3.1(a). 5.3.5. Allocation of the PRO Pool. The PRO Pool shall be allocated -------------------------- to the business and administrative groups of the Participating Subsidiaries pursuant to the OCEO's Pool Allocation Determination. Amounts so allocated shall be used for the payment of any one or more types of bonus, incentive, commission or similar non-base salary compensation made pursuant to plans established by the various group or divisions of each Participating Subsidiary. 7 6. Determination and Approval of Awards. ------------------------------------ 6.1. Category I. The appropriate business executive, or the officer or ---------- committee designated in the plan, shall determine and approve awards and payments made pursuant to plans under this Category. 6.2. Category II. The business executive, or the officer or committee ----------- determined under the plan, shall determine and approve awards and payments made pursuant to plans under this Category. 6.3. Category III. The determination and approval of awards under this ------------ Category shall be as set forth in Sections 6.3.1 through 6.3.5. 6.3.1. Determination of Performance Awards. During the first ----------------------------------- quarter of a Performance Year, the OCEO, Human Resources and the business executives will prepare a schedule indicating (i) the name of each Eligible Employee proposed for an award and (ii) his or her Performance Award for the previous Performance Year. In making a recommendation concerning whether an Performance Award for a Performance Year will be made to an Eligible Employee, and, if so, in determining the amount of such award, consideration shall be given to one or more of the following factors: (i) the level of responsibility of the Eligible Employee, (ii) the personal contribution to the Company and/or the Participating Subsidiary made by the Eligible Employee, (iii) the performance of the business group or unit in which the Eligible Employee works, (iv) any minimum and average award guidelines established by Human Resources and (v) market bonus levels for comparable positions. In making such recommendations, the OCEO, Human Resources and the business executives shall have discretion to allocate up to as much as all, and as little as none, of such pool to any Eligible Employee. 6.3.2. Approval of Awards. After all the steps contemplated in 6.3.1 ------------------ have been completed, the OCEO shall approve the schedule of Eligible Employees receiving awards and the amount of awards for each, except that (i) the Committee shall approve the amount of the awards, if any, for those senior executives of the Participating Subsidiaries so designated by it from time to time, and (ii) the Committee shall recommend to the Board of Directors for approval the amount of award, if any, for any senior officer who is also a director of the Company or such other officer or officers as the 8 Committee may recommend and that the Board does so approve. Awards may be approved by the OCEO, the Committee and the Board of Directors for up to as many as all or as few as none of the persons listed on the schedule of Eligible Employees and awards shall be in such amounts as the OCEO, the Committee and the Board of Directors, respectively, approves. 6.3.3. Undistributed Amounts. The aggregate awards approved in a --------------------- Performance Year may be less than all of the available PRO Pool for a Performance Year. The undistributed amount in such pool shall be reallocated to the general funds of the Company. 6.3.4. Announcement and Timing of Awards. Awards shall be announced --------------------------------- in writing in the year following the Performance Year to which the awards relate promptly after the amount of the awards have been approved by the OCEO, the Committee or the Board of Directors, as the case may be. No Eligible Employee shall be entitled to any award under the Plan unless and until the date on which a written announcement of an award has been delivered to him or her or to his or her beneficiary. 6.3.5. Awards Available Under Special Circumstances. Performance -------------------------------------------- Awards may be made to an Eligible Employee (or his or her beneficiary in the event of his or her death during a Performance Period) if the employee is an Eligible Employee during a Performance Year and during that Performance Year: (i) dies or becomes totally and permanently disabled; (ii) retires, including a qualified early retirement, pursuant to the provisions of any pension or retirement plan of the Company, BKB or any of the other Participating Subsidiaries in which he or she is a participant; (iii) is on a leave of absence from the Company, BKB or any of the other Participations Subsidiaries, which leave is approved at any time by Human Resources for purposes of the Plan; or (iv) terminates service, which termination is approved at any time by Human Resources for purposes of the Plan. Under this provision, awards for the Performance Year may be made in such amounts as the OCEO, the Committee or the Board of Directors, as the case may be, deems appropriate under the circumstances. 6.4. Awards Upon a Change in Control. Notwithstanding Section 6.3.4 or ------------------------------- any other provision of the Plan, within 30 days following a Change in Control, the Company, or any successor (whether 9 direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, shall pay to each employee who was, immediately prior to such Change in Control, an Eligible Employee, a lump sum amount, in cash, equal to the sum of: (a) any unpaid incentive compensation, awards or bonuses awarded to the Eligible Employee in accordance with the Company's then current award determination process under the Plan, with respect to the completed Performance Year preceding such Change in Control; and (b) a pro rata portion to the date of such Change in Control of the aggregate value of any unpaid incentive compensation, awards or bonuses allocated to, or projected for, the Eligible Employee in accordance with the Company's then current award determination process under the Plan, with respect to the Performance Year in which such Change in Control occurs. 7. Modifications and Termination. ----------------------------- 7.1. In General. The Board of Directors may, generally upon the ---------- approval of the Committee and the recommendation of the OCEO, or the Committee may, generally upon the recommendation of the OCEO, amend, modify, suspend or terminate in whole or in part, and, if terminated, may reinstate, any or all of the provisions of the Plan from time to time or repeal the Plan entirely or direct the discontinuance of granting awards hereunder either temporarily or permanently. Notwithstanding the foregoing, no such amendment, modification, suspension or termination made after a Change in Control shall adversely affect, with respect to such Change in Control, the amounts payable as set forth in Section 6.4 or any other obligation, under the Plan, of the Company or any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company. 7.2. Effect on Previously Granted Awards. Amendment of the Plan shall ----------------------------------- have 10 no effect on the terms and conditions of awards outstanding for which a Participant has received written notification for a Performance Year. 8. General Provisions. ------------------ 8.1. Employment Rights. Neither the qualification or designation of any ----------------- person as an Eligible Employee for a Performance Year nor the grant of an award hereunder to any person shall give such person any right to be retained in the employ of one or more of the Company, BKB or any of the other Participating Subsidiaries or any rights with respect to any other Award Years. 8.2. Non-entitlement to an Award. The fact that a person is in a salary --------------------------- grade of officers generally eligible for an award shall not constitute entitlement to an award for any Performance Year. 8.3. Assignment, Pledge, etc, Prohibited. Except to the extent otherwise ----------------------------------- specifically provided in the Plan, no payment of an award pursuant to the Plan, shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, hypothecation, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, hypothecate, encumber or charge the same shall be void. 8.4. Other Plans Not Prohibited. The Plan is not intended to and shall not -------------------------- preclude the establishment or operation by the Company, BKB or any of the other Subsidiaries, or the grant, award or payment by the Company, BKB, or any of the other Subsidiaries of any right, benefit or amount under, any thrift, savings, investment, stock purchase, stock option, profit sharing, pension, retirement, medical, life or other insurance, or other non-bonus benefit or incentive plan, arrangement or award for any employee or employees, whether or not such officer or officers are at the same time an Eligible Employee or Eligible Employees in the Plan. Any such plan, arrangement or award, other than the Plan, referred to in this section may be authorized and payments made thereunder independent of and in addition to the Plan. 8.5. Awards Not Considered Salary. Unless such other plans provide to the ---------------------------- 11 contrary, the amounts of awards under the Plan shall not be included in calculations of salary for the purpose of determining retirement or pension benefits, insurance benefits or other benefit plan computations. 8.6. Governing Law. The Plan and all actions taken hereunder shall be ------------- governed by the laws of the Commonwealth of Massachusetts. 12 EX-10.J 5 RELOCATION POLICY EXHIBIT 10(J) DOMESTIC RELOCATION POLICY -------------------------- EFFECTIVE DATE OF POLICY: JANUARY 1, 1999 THIS POLICY IS FOR INTERNAL USE ONLY AND IS NOT TO BE DISTRIBUTED EXTERNALLY. It is the Policy of the bank to provide eligible employees with relocation assistance provided they meet the following criteria: . They are exempt internal transfers relocating at the Bank's request. . They are exempt new hires relocating within the United States at the Bank's request. The various provisions of this Policy may be provided in whole or in part. The granting of benefits in excess of the provisions of this Policy must be pre- approved in writing as an exception by the appropriate Director of Employment. DEFINITIONS - ----------- . Temporary Relocation: The employee is expected to relocate back to the place of origin or to another assignment within 1 year. No relocation benefits will be granted for temporary relocatees without approval from a Director of Employment. . Long Term Relocation: The employee's new assignment is expected to last longer than one year. . Homeowner: A relocating employee owning his/her primary residence at the time an offer is extended. . Renter: A relocating employee who does not own his/her primary residence when offer is extended. ELIGIBILITY - ----------- Relocation benefits may be provided if the distance between the new work location and the former residence is 50 miles or greater than the distance between the former residence and the former work location. RESPONSIBILITY - -------------- The Corporate Relocation Manager and the Human Resources Representative will assist Managers in the development of a relocation package best-suited to an employee's needs, according to the appropriate provisions by grade level and homeowner/renter status. A formal commitment letter to the employee will be generated and signed by the Human Resources Representative. A written package, which includes cost estimates, will be prepared by the Corporate Relocation Manager BEFORE a commitment is made to the relocating employee. ------ RELOCATION BENEFITS MAY NOT BE COMMUNICATED TO A RELOCATEE, BY ANY GRADE LEVEL MANAGER, WITHOUT THE PRIOR APPROVAL OF THE APPROPRIATE HUMAN RESOURCES REPRESENTATIVE AND THE CORPORATE RELOCATION MANAGER. THE COST OF GRANTING RELOCATION BENEFITS CAN BE EXTREMELY HIGH AND PRIOR APPROVAL IS ABSOLUTELY REQUIRED. 1 Benefits may not be communicated which are not specifically stated in this policy. It is the responsibility of the employee's supervisor to ensure that expenses are in accordance with Policy and that proper receipts and documentation accompany the appropriate reimbursement forms. The Corporate Relocation Manager(CRM)is responsible for administering this Policy and for providing estimated costs, advice and assistance to hiring managers. The CRM is also responsible for approving the specific relocation benefits granted to each relocating employee to ensure that proper approvals have been obtained and that they are within policy. Employees are expected to follow standards of reasonableness when incurring relocation expenses and must report such expenses promptly and accurately. INTERPRETATION, CANCELLATION OR AMENDMENT - ----------------------------------------- The Bank retains the right to interpret or apply any provisions of this Policy with respect to any situation and may at any time cancel in whole or in part or amend any of its provisions. EMERGENCY LEAVE - --------------- An employee on temporary relocation/assignment may be reimbursed by the Bank for economy air fare for a trip due to the death of an immediate family member or domestic partner. Extreme medical reasons may also be considered. Final approval for such Bank-paid travel rests with the employee's Supervisor. RESIGNATION - ----------- If an employee voluntarily resigns from the Bank while in the process of relocating or within one year of relocating to the new location, that employee will forfeit the right to receive reimbursement from the Bank for expenses incurred. The relocatee will be required to repay funds already received from the Bank as reimbursement for relocation expenses and funds paid by the Bank to home buying services on his/her behalf. TERMINATION - ----------- If an employee is involuntarily terminated by the Bank (other than for violation of company policy), during the relocation process or on temporary assignment, the Bank may pay actual expenses of returning family or domestic partner, household goods and personal effects to point of origin, provided the move occurs within sixty (60) days of termination. If moving to a location other than point of origin, reimbursement of actual cost is not to exceed cost of shipment to point of origin. No other expenses will be reimbursed. Employees who do not ship their household possessions and personal effects do not receive reimbursement in lieu of such shipments. If an employee is terminated FOR CAUSE during the relocation process or on --------- temporary assignment, the Bank will NOT pay expenses to return employee to point --- of origin. EXCLUSIONS - ---------- This policy does not cover temporary training assignments of one year or less. Staff members who seek another position through the job posting system requiring relocation will not be eligible for Domestic Relocation benefits. EXPIRATION - ---------- Relocation benefits expire one year and one day from start date of new assignment except for benefits for which other time frames are expressly stated. 2 ADMINISTRATION - -------------- The Corporate Relocation Manager(CRM)will provide consulting services to Managers and Human Resources Representatives. The CRM will provide operational details to relocating employees and the necessary forms and literature to be used for third-party assistance and reimbursements. The CRM will also process all benefits. EXCEPTIONS - ---------- Sections of this Policy clearly identify the organizational level required to make exceptions. All other exceptions, including grade level eligibility, must have written authorization from the Director of Employment. The Corporate Relocation Manager must have written authorization to implement any exceptions granted. ALLOCATION OF COSTS - ------------------- Costs incurred by the Bank under this Policy will be charged to the Responsibility Center where the employee is to be assigned upon relocation. REIMBURSABLE EXPENSES - --------------------- The Bank may reimburse the employee for expenses in accordance with the agreement between the hiring Manager, Human Resources Representative, Corporate Relocation Manager, and the employee. Reimbursable expenses are as follows: 3 HOUSEHUNTING TRIP - ----------------- ELIGIBILITY: ------------ EXEMPT GRADE HOMEOWNER RENTER ------------ --------- ------- MPP 8 Days Max 5 Days Max 30-32 8 Days Max 3 Days Max 26-29 5 Days Max 3 Days Max Mgmt. Trainee - see separate section The Bank may reimburse direct-route economy airfare or mileage and reasonable expenses for meals, lodging, telephone and ground transportation for the employee and spouse or domestic partner for ONE househunting trip to the new --- location. Direct hotel billing to the Bank is limited to room and tax only. Meals and other reimbursable expenses must be treated separately and cannot be charged to the hotel bill. Reasonable baby-sitting and kenneling costs may also be paid. TRANSFER OF EMPLOYEE AND FAMILY - ------------------------------- ELIGIBILITY: ALL EXEMPT EMPLOYEES ----------- The Bank may reimburse reasonable expenses for meals, lodging and transportation incurred by the employee and family or domestic partner when transferring from the former to the new location. Such costs are paid not only for the employee's spouse or domestic partner and children but also for other family members normally residing in the employee's household. The Bank may pay direct-route economy fares or, if using personal automobile, the standard Bank mileage allowance for the most direct route. EMPLOYEE DEPARTURE EXPENSES - --------------------------- ELIGIBILITY: ALL EXEMPT EMPLOYEES ----------- Prior to departure from the former location, temporary housing will be provided for up to two nights maximum. NOTE: ALL TRAVEL ARRANGEMENTS, INCLUDING AIRLINE TICKETS, AUTO RENTALS AND HOTEL RESERVATIONS MUST BE MADE THROUGH A TRAVEL COORDINATOR IN THE TRAVEL DEPARTMENT AT THE HEAD OFFICE (617-434-2501). TRANSPORTATION OF HOUSEHOLD POSSESSIONS - --------------------------------------- ELIGIBILITY: ----------- EXEMPT GRADE ------------ MPP 30-32 26-29 Mgmt. Trainee - see separate section The Bank may pay reasonable costs for packing, insuring and transporting the employee's household possessions from the permanent residence at the former location to EITHER a temporary or permanent residence at the new location. The ------ transportation cost of shipping household pets as accompanying baggage may also be paid. The Bank may pay for the transportation of bulky items such as those listed below with approval of the Corporate Relocation Manager: . Utility Sheds . Garden Tractors 4 . Pool Tables . Riding Lawnmowers THE BANK WILL NOT PAY FOR TRANSPORTATION OF FIREARMS, TRAILERS, BOATS, BUILDING --- SUPPLIES, FARM IMPLEMENTS, HORSES/LIVESTOCK, SHRUBS/PLANTS, FIREWOOD, CAMPERS, RECREATIONAL VEHICLES, FROZEN FOODS OR OTHER PERISHABLES. STORAGE - ------- ELIGIBILITY: ------------ EXEMPT GRADE HOMEOWNER RENTER ------------ --------- ------ MPP 60 Days 60 Days 30-32 60 Days 30 Days 26-29 30 Days N/A Mgmt. Trainee - see separate section The Bank may pay for storage of household effects, including all handling and insurance, if required at the new location. The Bank may also pay for boarding of household pets with approval of the Corporate Relocation Manager. When temporarily relocated (for less than one year), household effects that are not shipped and cannot be left in the home at the former location may be stored for the period of assignment at Bank expense. Short term training assignments do not qualify for storage of household goods. Exceptions for additional storage time must be approved by the Corporate Relocation Manager. NOTE: All arrangements for moving and storage of household possessions and personal effects MUST BE MADE THROUGH THE RELOCATION DEPARTMENT AT THE HEAD OFFICE (617-434-8632). INSURANCE - --------- ELIGIBILITY: ----------- EXEMPT GRADE ------------ MPP 30-32 26-29 Mgmt. Trainee - see separate section If the transportation of household goods is approved, the Bank, along with the carrier selected by the Relocation Department, will provide insurance protection up to full replacement value for all shipment articles listed by the employee on the carrier inventory. The Bank will not be responsible for items not listed on the carrier inventory. Qualified appraisals must be provided to the carrier for individual items valued in excess of $5,000. Because of ICC regulations, the following items are EXCLUDED FROM COVERAGE: DOCUMENTS, CASH, COLLECTIBLES, JEWELRY, WATCHES, AND PRECIOUS STONES. AUTOMOBILES - ----------- Eligibility: ----------- EXEMPT GRADE ------------ MPP 30-32 26-29 Mgmt. Trainee - see separate section 5 The Bank may pay the standard mileage allowance for driving a maximum of two automobiles to the new location. In cases where the distance exceeds 500 miles between the former and the new residence, the Bank may pay the cost of transporting a maximum of two (2) automobiles to the new location. TEMPORARY HOUSING - ----------------- ELIGIBILITY: ------------ EXEMPT GRADE HOMEOWNER RENTER ------------ --------- ------ MPP 60 Days 60 Days 30-32 60 Days 30 Days 26-29 30 Days N/A Mgmt. Trainee - see separate section If the employee is required to report to the new assignment prior to finding permanent housing, the Bank may provide temporary housing for the employee and family or domestic partner. A corporate apartment may be provided if available. However, if housed in a corporate apartment, expenses for food and laundry will not be reimbursed. If a corporate apartment is unavailable, hotel accommodations may be arranged and expenses for food and laundry will be reimbursed. Temporary living expenses in accordance with IRS guidelines may begin as of the date the employee reports to the new location. Corporate apartments must be treated with the same respect as other Bank assets. Willful damage may result in disciplinary action. Expenses for repair of damages may be charged directly to the employee. NOTE: All arrangements for temporary housing MUST BE MADE THROUGH THE RELOCATION DEPARTMENT AT THE HEAD OFFICE (617-434-8632). 6 TRIPS HOME - ---------- ELIGIBILITY: ------------ EXEMPT GRADE HOMEOWNER ------------ --------- MPP 4 Trips Max 30-32 4 Trips Max 26-29 2 Trips Max Mgmt. Trainee - see separate section Trips home may be authorized when an employee precedes his/her family or domestic partner to the assignment location and the nature and location of the assignment makes them feasible. Reasonable expenses, including economy air fare incurred for visits home, are reimbursed and must be taken at intervals of not less than every other week. The cost of a trip to conclude a home sale should be coordinated with authorized trips home. CLOSING COSTS NEW LOCATION/FORMER LOCATION - ------------------------------------------ ELIGIBILITY: ------------ EXEMPT GRADE ------------ MPP 30-32 26-29 Mgmt. Trainee - see separate section The Bank may pay reasonable expenses of certain closing costs for the purchase of a primary residence at the new location and the sale of the current primary residence, including: survey charges, title charges, reasonable attorney's fees, home inspection, termite inspection, mortgage application fee, recording and transfer charges, credit report and appraisal fee. The settlement statement provided by the lender at the closing must be submitted for reimbursement of closing costs. DUPLICATE CARRYING CHARGES - -------------------------- ELIGIBILITY: ------------ EXEMPT GRADE HOMEOWNER ------------ --------- MPP 60 Days Max 30-32 60 Days Max 26-29 60 Days Max Mgmt. Trainee - see separate section The Bank may reimburse duplicate carrying charges up to a maximum of two months on an unoccupied or unrented primary residence owned by the employee at the former location, provided the employee has secured a permanent residence at the new location, has legal possession of two residences and is incurring duplicate housing expenses. Carrying charges include: real estate taxes, property insurance, utilities and the interest portion of the lesser of the two mortgages. Reimbursement of these expenses will be pro-rated on a daily basis and will commence as of the date of possession of a permanent residence at the new location. The Bank will not reimburse the portion of the mortgage payment applied toward the principal or the costs of maintenance, repairs, improvements or security. 7 PRE-MARKETING ASSISTANCE - ------------------------ ELIGIBILITY: ALL EXEMPT EMPLOYEES ------------ The Bank may provide pre-marketing consulting services through a Relocation Management Consulting Company. This service is designed to reduce the length of time the former residence is on the market and obtain the maximum sale price for the employee. The Corporate Relocation Manager may make the necessary arrangements. HOME FINDING ASSISTANCE - ----------------------- ELIGIBILITY: ALL EXEMPT EMPLOYEES ------------ The Corporate Relocation Manager may provide home finding assistance, when necessary, to all relocating employees. SALE OF PRIMARY RESIDENCE - ------------------------- ELIGIBILITY: CONTACT THE CORPORATE RELOCATION MANAGER ------------ When an employee who owns their primary residence is relocated, the Bank may provide home-sale assistance at the discretion of the Manager, Human Resources Representative and the Corporate Relocation Manager. Primary residence is defined as a private or semi-private dwelling, or a condominium, owned by the employee. The Bank will not provide assistance in disposing of secondary tracts of land, vacation homes or property held primarily for investment purposes. RETAINED PRIMARY RESIDENCE - -------------------------- ELIGIBILITY: ----------- EXEMPT GRADE ------------ MPP only Internal transfers on temporary assignment (under 1 year) who own their home at the time of transfer are encouraged to retain their primary residence. If the employee decides to lease the home, the Bank may reimburse for rental management services for the duration of the temporary assignment and for reasonable increases in insurance premiums resulting from tenant/vs. homeowner coverage and/or occupied/vs. unoccupied coverage. Such services do not include cost of property repair or maintenance. Should an employee be unable to lease his/her primary residence before renting at the new location, the Bank may reimburse the employee for a maximum of two months commencing on the effective date of the lease at the new location or until the employee leases the home (whichever occurs first). BRIDGE LOAN - ----------- ELIGIBILITY: CONTACT THE CORPORATE RELOCATION MANAGER ------------ If an employee buys a home at the new location before selling the home at the former location, a bridge loan may be secured. BankBoston will obtain opinions of value from at least two real estate brokers. A lender chosen by BankBoston may then loan a percentage of the equity based on current market conditions. However, if broker's opinion of the value is being used, BankBoston reserves the right to negotiate the dollar amount of the bridge loan based on current local practices. The interest on these loans is charged to the appropriate Responsibility Center, and the loans are to be repaid within 15 days after the sale of the home at the former location. When the employee sells the former residence, the amount of the bridge loan must be forwarded directly to the lender. 8 The employee must complete an application (available from the Corporate Relocation Manager and submit evidence of the current balance of the present mortgage (including any liens or second mortgages). LEASE CANCELLATION (RENTERS) - ---------------------------- ELIGIBILITY: ------------ EXEMPT GRADE ------------ MPP 30-32 26-29 Mgmt. Trainee - see separate section The employee is responsible for canceling any lease remaining at the former location at the time of transfer and obtaining a written release from the lease obligation. The Bank may pay reasonable costs of canceling leases equivalent to a maximum of 2 MONTHS rent. -------- FINDER'S FEE/DEPOSITS (RENTERS) - ------------------------------- ELIGIBILITY: ------------ EXEMPT GRADE ------------ MPP 30-32 26-29 Mgmt. Trainee - see separate section The Bank may reimburse reasonable finder's fee to secure rental housing. Security deposits of up to 2 months rent may be advanced to the employee for a period of up to one year. These advances must be repaid by the end of the first year and may be provided interest free. 9 RELOCATION ALLOWANCE - -------------------- ELIGIBILITY: ------------ HOMEOWNER RENTER --------- ------ $2,000 $1,000 When relocating at the Bank's request, the Bank may provide a relocation allowance to defray miscellaneous expenses not specifically identified as reimbursable under other provisions of this policy. TAXES - ----- ELIGIBILITY: ALL EXEMPT EMPLOYEES ------------ In order to be eligible for deductibility of moving expenses for tax purposes, the employee must work full time for at least 39 weeks following the move. Under present IRS regulations certain relocation expenses are considered income to the employee and are subject to taxation. In order to compensate for additional Federal and State taxes the Payroll Department will make appropriate estimated adjustments at the time of payment. 10 EX-10.L 6 DIRECTOR STOCK AWARD PLAN EXHIBIT 10 (L) BANKBOSTON CORPORATION DIRECTOR STOCK AWARD PLAN (As amended, effective July 1, 1998) 1. Purpose. The BankBoston Corporation Director Stock Award Plan (the "Plan") has been adopted to assist in attracting and retaining non-employee members of the Corporation's Board of Directors and to promote identification of their interests with those of stockholders of the Corporation. 2. Definitions. As used herein, the following words or terms have the meanings set forth below: 2.1 "Affiliate" means any business entity that is directly or indirectly controlled by the Corporation or any entity in which the Corporation has a significant equity interest, as determined by the EVP, Human Resources. 2.2 "Annual Cash Retainer" means the annual cash retainer for Non- Employee Directors, exclusive of meeting fees and committee retainers. 2.3 "Award" means the Shares awarded under the Plan. 2.4 "Award Date" means January 1 and July 1 of each year, commencing on July 1, 1993. 2.5 "Award Period" means a six-month period immediately preceding each Award Date; provided, however, that the initial Award Period under the Plan shall begin on May 1, 1993 and shall end on June 30, 1993. 2.6 "Board of Directors" means the Board of Directors of the Corporation. 2.7 "Common Stock" means the Common Stock, par value $1.00 per share, of the Corporation. 2.8 "Corporation" means BankBoston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. -2- 2.9 "EVP, Human Resources" means the Executive Vice President, Human Resources, of the Corporation. 2.10 "Fair Market Value," in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "New York Stock Exchange Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "New York Stock Exchange Composite Transactions" cease to be reported, the EVP, Human Resources, shall adopt some other appropriate method for determining Fair Market Value. 2.11 "Full Award" means a number of Shares (rounded to the nearest whole share) having an aggregate Fair Market Value on the last business day of the immediately preceding Award Period equal to 70% of the Annual Cash Retainer in effect at the beginning of such Award Period. 2.12 "Non-Employee Director" means as of any date a person who on such date is a director of the Corporation and is not an employee of the Corporation or any Affiliate. A director of the Corporation who is also an employee of the Corporation or any Affiliate shall become eligible to participate in the Plan upon termination of such employment. 2.13 "Prorated Award" means a Full Award multiplied by a fraction, the numerator of which is the number of days that a person served as a Non-Employee Director during the immediately preceding Award Period and the denominator of which is the total number of days in such Award Period. 2.14 "Shares" means shares of Common Stock. 3. Effective Date. The Plan shall become effective on May 1, 1993, subject to the approval of the Corporation's stockholders at the Corporation's 1993 Annual Meeting of Stockholders. -3- 4. Administration. 4.1 The Plan shall be administered by the EVP, Human Resources. Subject to the provisions set forth herein, the EVP, Human Resources, shall have full authority to construe and interpret the terms of the Plan and to make all determinations and take all other actions necessary or advisable for the administration of the Plan, except that the persons entitled to receive Awards and the dates and amounts of such Awards shall be determined as provided in Article 7, and the EVP, Human Resources, shall have no discretion as to such matters. The EVP, Human Resources, may delegate to one or more officers of the Corporation or any Affiliate the authority to perform administrative functions under the Plan. 4.2 Any determinations or actions made or taken by the EVP, Human Resources, pursuant to this Article shall be binding and final. 5. Shares Available for Awards. 5.1 The maximum number of Shares that may be issued under the Plan shall be 200,000*, subject to adjustment in accordance with the provisions of Section 5.2. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. 5.2 In the event of any change in the outstanding shares of Common Stock by reason of a stock dividend or distribution, stock split, recapitalization, combination or exchange of shares, or by reason of any merger, consolidation, spinoff or other corporate reorganization in which the Corporation is the surviving corporation, the number and kind of Shares awarded thereafter in each grant under the Plan and the total number and kind of Shares that may be issued under the Plan shall be equitably adjusted by the Board of Directors, whose determination shall be binding and final. 6. Eligibility. Awards shall be made only to Non-Employee Directors, as provided in Article 7. ___________________ * As adjusted for the Corporation's two-for-one stock split, effective as of June 22, 1998. -4- 7. Awards. In consideration of past services rendered, on each Award Date, each person who is then a Non-Employee Director shall, automatically and without necessity of any action by the EVP, Human Resources, be entitled to receive (i) a Full Award, in the case of a person who was a Non-Employee Director during all of the immediately preceding Award Period or (ii) a Prorated Award, in the case of a person who was a Non-Employee Director for less than all of such Award Period. Stock certificates representing Awards shall be delivered to Non-Employee Directors as soon as practicable following each Award Date, unless other arrangements are made with the Corporation by the Non-Employee Director. In lieu of receiving Shares following each Award Date, each Non-Employee Director may elect to defer the receipt of his or her Shares under the Plan in accordance with Section 8 below. Awards hereunder shall be in addition to, and not in lieu of, the Non-Employee Director's Annual Cash Retainer, meeting fees and other compensation payable to each Non-Employee Director as a result of his or her service on the Board of Directors or any committee thereof. 8. Deferral of Awards. 8.1 Election of Deferral. A Non-Employee Director may elect to defer all of his or her Awards otherwise payable in or for a calendar year, subject to such conditions as the EVP, Human Resources, may prescribe prior to the start of such calendar year. A Non-Employee Director's election of deferral shall be in the form prescribed by the EVP, Human Resources, and must be filed prior to the first day of the calendar year for which the Awards are earned. Each election shall be binding with respect to the Awards for such calendar year and shall be irrevocable after January 1 of the calendar year to which it applies. A new Non-Employee Director must make an election of deferral within 30 days of the date upon which he or she first becomes a director of the Corporation. A new election of deferral must be filed for each calendar year. -5- 8.2 Share Deferral Account. The Corporation shall maintain a Share Deferral Account on behalf of each Non-Employee Director who files an election of deferral pursuant to Section 8.1. On each Award Date, the Corporation shall credit to such Account the number of Shares otherwise payable to the Non- Employee Director as a Full or Prorated Award, if not deferred. 8.3 Dividend Credits. As of each date a dividend is paid on the Common Stock, the Corporation shall credit to each Non-Employee Director's Share Deferral Account the number of Shares (rounded to the nearest thousandth of a share) determined by multiplying the total number of Shares credited to such account as of the dividend record date by the per share dividend amount, and then dividing the product by the Fair Market Value of a share of Common Stock on the dividend payment date. 8.4 Form and Timing of Distribution. Upon a Non-Employee Director's ceasing to be a director of the Corporation, credits to such Non-Employee Director's Share Deferral Account shall be distributed to him or her in whole shares of Common Stock (together with cash in lieu of a fractional share) as soon as practicable following his or her retirement or termination as a director. If a Non-Employee Director dies before receiving distribution of his or her Share Deferral Account, distribution shall be made to such Non-Employee Director's designated beneficiary or, in the absence of a designated beneficiary or if the designated beneficiary does not survive the Non-Employee Director, distribution shall be made to such Non-Employee Director's estate. 9. General Provisions. 9.1 Non-Assignability. No right to receive an Award hereunder shall be transferable or assignable by a Plan participant other than by will or the laws of descent and distribution. 9.2 No Right to Service. Participating in the Plan does not constitute a guarantee or contract of service as a director. -6- 9.3 Amendment and Termination. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time; provided, however, that the provisions of the Plan relating to the determination of persons entitled to receive Awards pursuant to Article 7 and the dates and amounts of such Awards shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 9.4 Registration of Shares. Nothing in the Plan shall be construed to require the Corporation to register under the Securities Act of 1933, as amended, any Shares awarded under the Plan. 9.5 Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. EX-10.M 7 FORM OF SEVERANCE AGREEMENT FOR CERTAIN OFFICERS EXHIBIT 10(M) AGREEMENT --------- THIS AGREEMENT dated as of , 1999, is made by and between BankBoston Corporation, a Massachusetts corporation (the "Company"), and _________ (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel; and WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties with the Company and/or the Bank, as the case may be, without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other valuable consideration, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof ----------------- and shall continue in effect through [last day of month in which occurs 24/th/ month from effective date], 2001, provided that commencing on [following month] 1, 2000 and each [same] 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than the immediately preceding [3 mo prior to effective date month] 31, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such [month following effective date month] 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than three (3) years beyond the last day of the month in which such Change in Control occurred. Notwithstanding the foregoing provisions of this Section 2, this Agreement shall terminate, unless earlier terminated in accordance with this Agreement, (i) one (1) year after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee, upon recommendation of the Company's chief executive officer, has voted to terminate this Agreement or (ii) if earlier, immediately after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee has determined that the Executive's level of responsibility (other than reporting responsibility) has substantially changed from the Executive's current level of responsibility, in either case only if the notification occurs prior to a Potential Change in Control that results in a Change in Control. By way of illustration, if there were a change in the nature of the Executive's responsibilities (e.g., from technology to human resources) but the only change in the level of the Executive's 2 responsibilities were a change in reporting responsibilities, these changes alone would not provide grounds for the Compensation Committee determination referred to in clause (ii) above. 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company or the Bank and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company or the Bank is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company or the Bank following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company or the Bank. 4. Executive's Covenants. --------------------- 4.1 The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain in the employ of the Company or the Bank until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control 3 in applying the definition of Good Reason), by reason of death, or (iv) the termination by the Company or the Bank of the Executive's employment for any reason. 4.2 The Executive agrees that, during the term of this Agreement and for a period ending on the third anniversary of the Date of Termination, he will not make or publish any statement which is, or may reasonably be considered to be, disparaging of the Company, its subsidiaries or affiliates, or directors, officers, employees or the operations, products or services of the Company or any of its subsidiaries or affiliates, except in connection with the performance of his services hereunder to the extent the Executive makes the statement to employees of the Company or its affiliates in good faith furtherance of the Company's business. In the event of a claimed breach by the Company of the terms of this Section 4.2, in addition to its right to institute legal proceedings to obtain damages for such breach, the Company shall be entitled to enforce the specific performance of this Section 4.2 and to enjoin any further violation of this Section 4.2. 5. Compensation Other Than Severance Payments. ------------------------------------------ 5.1 Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive becomes eligible for benefits at least equal to those to which the Executive would have been entitled under 4 the long-term disability insurance plan of the Company in effect immediately prior to the Change in Control. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay or make available to the Executive any rights, compensation and benefits which are vested in the Executive or which the Executive has or is otherwise entitled to receive under any plan or program of the Company (including without limitation any retirement plan or any welfare plan providing post-retirement benefits) to the Executive as such rights, compensation or benefits become due. Such rights, compensation and benefits shall be determined under, and paid or made available in accordance with, the Company's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. 6. Severance Payments. ------------------ 6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the term of this Agreement, 5 in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company or the Bank for Cause, (ii) by reason of death, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if the (x) Executive's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control, (y) Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person, or (z) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control; provided, however, in each such case, that a Change in Control occurs. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefits otherwise payable to the Executive under any then existing broad-based employee severance plan, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in 6 Control and (ii) the highest of the annual amounts paid to, or approved for, the Executive pursuant to the Performance Recognition Opportunity Plan, or any successor plan, with respect to the three (3) years (or the number of years employed, if less) immediately preceding (a) the occurrence of the event or circumstance upon which the Notice of Termination is based or (b) the Change in Control. (B) In lieu of any further life, disability, accident and health insurance benefits otherwise due to the Executive, the Company shall pay to the Executive a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Executive is eligible to receive such benefits immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason), for a period of three (3) years commencing on the Date of Termination. (C) The Executive shall continue to accrue service credit for a period of three (3) years (for all purposes, including without limitation benefit accrual and eligibility to receive matching contributions) under the Pension Plan, Thrift Plan, the Bonus SERP, the Excess SERP, the Deferred Compensation Plan or any successor plans thereto, (i) with respect to matching contributions under any such Plan, based on the highest level of contributions in effect under such Plan with respect to the Executive during the plan year during which the occurrence of the event or circumstance upon which the Notice of Termination is based or the Change in Control occurs, whichever is 7 higher, and (ii) for all other purposes under this Section 6.1(C), at the compensation level equal to the amount determined in accordance with Section 6.1(A) hereof. All payments made pursuant to this Section 6.1(C) may be made, in the Company's discretion, out of the general funds of the Company. (D) Notwithstanding any provision of the Performance Recognition Opportunity Plan or any other cash-based annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, based on performance year-to-date, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. 8 (E) (i) All outstanding equity awards that (x) were granted to the Executive prior to the date hereof and (y) are not vested and/or exercisable, as the case may be, as of the Date of Termination shall become fully vested and/or exercisable, as the case may be, as of the Date of Termination and (ii) all outstanding equity awards that (x) were granted to the Executive as of or following the date hereof and (y) are not vested and/or exercisable, as the case may be, as of the Date of Termination shall become fully vested and/or exercisable, as the case may be, as of the Date of Termination or the date on which the Change in Control occurs, whichever occurs later. (F) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three (3) years or, if earlier, until the first acceptance by the Executive of an offer of employment. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter called "Total Payments") will be subject (in whole or part) to any excise tax imposed under section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any 9 Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation on earned income in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that, after giving effect to any redeterminations described in subsection (D) of this Section 6.2, the sum of the Total Payments and the Gross-Up Payment (in each case after deduction of the net amount of federal, state and local income and employment taxes and the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments and the Gross-Up Payment) does not equal or exceed 110% of the largest amount of Total Payments that would result in no portion of the Total Payments being subject to the Excise Tax (after deduction of the net amount of federal, state and local income and employment taxes on such reduced Total Payments), then subsection (A) of this Section 6.2 shall not apply and, to the extent necessary to ensure that no portion of the Total Payments is subject to the Excise Tax, the cash Severance Payments shall first be reduced (if necessary, to zero), and the noncash Severance Benefits shall thereafter be reduced (if necessary, to zero); provided, -------- 10 however, that the Executive may elect to have the noncash Severance Payments - ------- reduced (or eliminated) prior to any reduction of the cash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the opinion of Tax Counsel with respect to the matter in dispute shall prevail. 11 (D) In the event that (i) amounts are paid to the Executive pursuant to subsection (A) of this Section 6.2, (ii) the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (iii) after giving effect to such redetermination, the Severance Payments are to be reduced pursuant to subsection (B) of this Section 6.2, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in no portion of the Total Payments being subject to the Excise Tax plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that (x) the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment) and (y) after giving effect to such redetermination, the Severance Payments should not have been reduced pursuant to subsection (B) of this Section 6.2, the Company shall make an additional Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion) within five (5) business days following the time that the amount of such excess is finally determined. 12 6.3 The payments provided for in Section 6.1 and Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination or, if later, the date on which the Change in Control occurs; however, if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking to obtain or enforce any benefit or right provided by this Agreement, in accordance with Section 14 hereof (including without limitation fees and expenses incurred in seeking to secure the Executive's rights provided by Section 14 hereof). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 13 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1 Notice of Termination. After a Change in Control and during the --------------------- term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any ------------------- purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination (which, in the case of a termination by the Company or the Bank, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be 14 less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after ------------------------------ any Notice of Termination is given or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 15 8. No Mitigation. If the Executive's employment by the Company or ------------- the Bank is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in Section 6 or Section 7.4 hereof shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or the Bank, or otherwise. 9. Successors; Binding Agreement. ----------------------------- 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 16 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 9.3 This Agreement supercedes all prior agreements between the parties hereto with respect to the subject matter hereof. 10. Notices. For the purpose of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: BankBoston Corporation 100 Federal Street Boston, MA 02110 Attention: Executive Vice President, Human Resources Copy to: General Counsel and Clerk 17 To the Executive: __________ __________ __________ 11. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. Except as expressly provided herein, no waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, and this Agreement shall be an instrument under seal. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6, 7, 8 and 14 hereof shall survive the expiration of the term of this Agreement. 18 12. Validity. The invalidity or unenforceability of any provision of -------- this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the Executive ----------------------------------- for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Executive shall, however, be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms ----------- shall have the meanings indicated below: 19 (A) "Bank" shall mean the Company's subsidiary, BankBoston, N.A., or if applicable, any other direct or indirect subsidiary of the Company by which the Executive is then employed during the term of this Agreement. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Bonus SERP" shall mean BankBoston, N.A. Bonus Supplemental Employee Retirement Plan. (E) "Cause" for termination by the Company or the Bank of the Executive's employment, after any Change in Control, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company or the Bank (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in gross misconduct which is demonstrably and materially injurious to the Company or any of its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive 20 not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (F) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) There is an acquisition of control of the Company as defined in Section 2(a)(2) of the Bank Holding Company Act of 1956, or any similar successor provision, as in effect at the time of the acquisition; or (II) Continuing Directors constitute two-thirds (2/3) or less of the membership of the Board, whether as the result of a proxy contest or for any other reason or reasons; or (III) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; or (IV) There is consummated a merger or consolidation (or similar transaction) of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation (or similar transaction) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) directly or indirectly sixty percent (60%) or more of the combined voting 21 power of the voting securities (entitled to vote generally for the election of directors) of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation and which would result in those persons who are Continuing Directors immediately prior to such merger or consolidation constituting more than two-thirds (2/3) of the membership of the Board or the board of such surviving or parent entity immediately after, or subsequently at any time as contemplated by or as a result of, such merger or consolidation (or similar transaction) or (ii) a merger or consolidation effected to implement a recapitalization or restructuring of the Company or any of its subsidiaries (or similar transaction) in which no Person acquired twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or (V) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity in which the holders of the voting securities (entitled to vote generally for the election of directors) of the Company immediately prior to such sale or disposition continue to own proportionally and beneficially directly or indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally 22 for the election of directors) of such entity outstanding immediately after such sale or disposition and which would result in those persons who are Continuing Directors immediately prior to such sale or disposition constituting more than two-thirds (2/3) of the membership of the Board or the board of such entity immediately after, or subsequently at any time as contemplated by or as a result of, such sale or disposition. (G) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (H) "Company" shall mean BankBoston Corporation and (except in determining, under Section 15(F) hereof, whether or not any Change in Control of the Company has occurred in connection with such succession) any successor to its business and/or assets which assumes or agrees to perform this Agreement, by operation of law or otherwise. Payments or benefits from the Company shall include those from the Bank or other subsidiary of the Company. (I) "Compensation Committee" shall mean the Compensation Committee of the Board. (J) "Continuing Director" shall mean any director (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is a successor of a director described in clause (i), if such successor (and any intervening successor) shall have been recommended or elected to succeed a Continuing Director by a majority of the then Continuing Directors. (K) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. 23 (L) "Deferred Compensation Plan" shall mean the Company's Deferred Compensation Plan. (M) "Excess SERP" shall mean BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan. (N) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company or the Bank, or failures by the Company or the Bank to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof or, in the case of paragraph (III) below, such act is not objected to in writing by the Executive within four (4) months after notification by the Company to the Executive of the Company's or the Bank's intention to take the action contemplated by such paragraph (III): (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or the Bank or a meaningful alteration, adverse to the Executive, in the nature or status of the 24 Executive's responsibilities (other than reporting responsibilities) from those in effect immediately prior to the Change in Control; (II) a reduction by the Company or the Bank in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the- board salary reductions similarly affecting all senior executives of the Company or the Bank, as the case may be, and all senior executives of any Person in control of the Company; (III) the Company's or the Bank's requiring the Executive to be based anywhere other than the Boston Metropolitan Area (or, if different, the metropolitan area in which the Company's or the Bank's principal executive offices are located immediately prior to the Change in Control) except for required travel on Company or Bank business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within fourteen (14) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, 25 including without limitation the Company's stock award, incentive compensation and bonus plans, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the 26 requirements of Section 9.1 hereof; for purposes of this Agreement, no such purported termination shall be effective; or (VIII) during the 30-day period following the first anniversary of the consummation of a Change in Control, the Executive makes a good faith determination that there has been an adverse change in the nature, terms or conditions of his position with the Company as a result of the Change in Control. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (Q) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (R) "Pension Plan" shall mean the BankBoston Cash Balance Retirement Plan. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to a registered offering of such securities in accordance with an agreement with the Company, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 27 (T) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities (entitled to vote generally for the election of directors). (U) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (V) "Thrift Plan" shall mean the BankBoston Thrift-Incentive 401(k) Plan. (W) "Total Payments" shall mean those payments described in Section 6.2 hereof. 28 IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Company have executed this Agreement as of the date first written above. BANKBOSTON CORPORATION By: __________________________ Name: Helen G. Drinan Title: Executive Vice President, Human Resources __________________________ [Executive] 29 EX-10.N 8 FORM OF SEVERANCE AGREEMENT FOR OTHER OFFICERS EXHIBIT 10 (N) AGREEMENT --------- THIS AGREEMENT dated as of , 1999, is made by and between BankBoston Corporation, a Massachusetts corporation (the "Company"), and ______________ (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel; and WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties with the Company and/or the Bank, as the case may be, without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other valuable consideration, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof ----------------- and shall continue in effect through November 30, 2000, provided that commencing on December 1, 1999 and each December 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than the immediately preceding August 31, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such December 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than two (2) years beyond the last day of the month in which such Change in Control occurred. Notwithstanding the foregoing provisions of this Section 2, this Agreement shall terminate, unless earlier terminated in accordance with this Agreement, (i) one (1) year after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee, upon recommendation of the Company's chief executive officer, has voted to terminate this Agreement or (ii) if earlier, immediately after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee has determined that the Executive's level of responsibility (other than reporting responsibility) has substantially changed from the Executive's current level of responsibility, in either case only if the notification occurs prior to a Potential Change in Control that results in a Change in Control. By way of illustration, if there were a change in the nature of the Executive's responsibilities (e.g., from technology to human resources) but the only change in the level of the Executive's responsibilities were a change in reporting responsibilities, these changes alone would not provide grounds for the Compensation Committee determination referred to in clause (ii) above. 2 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company or the Bank and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company or the Bank is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company or the Bank following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company or the Bank. 4. Executive's Covenants. --------------------- 4.1 The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain in the employ of the Company or the Bank until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason), by reason of death, or (iv) the termination by the Company or the Bank of the Executive's employment for any reason. 3 4.2 The Executive agrees that, during the term of this Agreement and for a period ending on the third anniversary of the Date of Termination, he will not make or publish any statement which is, or may reasonably be considered to be, disparaging of the Company, its subsidiaries or affiliates, or directors, officers, employees or the operations, products or services of the Company or any of its subsidiaries or affiliates, except in connection with the performance of his services hereunder to the extent the Executive makes the statement to employees of the Company or its affiliates in good faith furtherance of the Company's business. In the event of a claimed breach by the Company of the terms of this Section 4.2, in addition to its right to institute legal proceedings to obtain damages for such breach, the Company shall be entitled to enforce the specific performance of this Section 4.2 and to enjoin any further violation of this Section 4.2. 5. Compensation Other Than Severance Payments. ------------------------------------------ 5.1 Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive becomes eligible for benefits at least equal to those to which the Executive would have been entitled under the long- term disability insurance plan of the Company in effect immediately prior to the Change in Control. 4 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay or make available to the Executive any rights, compensation and benefits which are vested in the Executive or which the Executive has or is otherwise entitled to receive under any plan or program of the Company (including without limitation any retirement plan or any welfare plan providing post-retirement benefits) to the Executive as such rights, compensation or benefits become due. Such rights, compensation and benefits shall be determined under, and paid or made available in accordance with, the Company's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. 6. Severance Payments. ------------------ 6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company or the Bank for Cause, (ii) by reason of death, or (iii) by the Executive 5 without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if the (x) Executive's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control, (y) Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person, or (z) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control; provided, however, in each such case, that a Change in Control occurs. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefits otherwise payable to the Executive under any then existing broad- based employee severance plan, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two (2) times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control and (ii) the highest of the annual amounts paid to, or approved for, the Executive pursuant to the Performance Recognition Opportunity Plan, or any successor plan, with 6 respect to the three (3) years (or the number of years employed, if less) immediately preceding (a) the occurrence of the event or circumstance upon which the Notice of Termination is based or (b) the Change in Control. (B) In lieu of any further life, disability, accident and health insurance benefits otherwise due to the Executive, the Company shall pay to the Executive a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Executive is eligible to receive such benefits immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason), for a period of two (2) years commencing on the Date of Termination. (C) The Executive shall continue to accrue service credit for a period of two (2) years (for all purposes, including without limitation benefit accrual and eligibility to receive matching contributions) under the Pension Plan, Thrift Plan, the Bonus SERP, the Excess SERP, the Deferred Compensation Plan or any successor plans thereto, (i) with respect to matching contributions under any such Plan, based on the highest level of contributions in effect under such Plan with respect to the Executive during the plan year during which the occurrence of the event or circumstance upon which the Notice of Termination is based or the Change in Control occurs, whichever is higher, and (ii) for all other purposes under this Section 6.1(C), at the compensation level equal to the amount determined in accordance with Section 6.1(A) hereof. All payments made pursuant to 7 this Section 6.1(C) may be made, in the Company's discretion, out of the general funds of the Company. (D) Notwithstanding any provision of the Performance Recognition Opportunity Plan or any other cash-based annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, based on performance year-to-date, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. (E) (i) All outstanding equity awards that (x) were granted to the Executive prior to the date hereof and (y) are not vested and/or exercisable, as the case may be, as of the Date of Termination shall become fully vested and/or exercisable, as the 8 case may be, as of the Date of Termination and (ii) all outstanding equity awards that (x) were granted to the Executive as of or following the date hereof and (y) are not vested and/or exercisable, as the case may be, as of the Date of Termination shall become fully vested and/or exercisable, as the case may be, as of the Date of Termination or the date on which the Change in Control occurs, whichever occurs later. (F) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of (2) two years or, if earlier, until the first acceptance by the Executive of an offer of employment. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter called "Total Payments") will be subject (in whole or part) to any excise tax imposed under section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay 9 federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation on earned income in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that, after giving effect to any redeterminations described in subsection (D) of this Section 6.2, the sum of the Total Payments and the Gross-Up Payment (in each case after deduction of the net amount of federal, state and local income and employment taxes and the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments and the Gross-Up Payment) does not equal or exceed 110% of the largest amount of Total Payments that would result in no portion of the Total Payments being subject to the Excise Tax (after deduction of the net amount of federal, state and local income and employment taxes on such reduced Total Payments), then subsection (A) of this Section 6.2 shall not apply and, to the extent necessary to ensure that no portion of the Total Payments is subject to the Excise Tax, the cash Severance Payments shall first be reduced (if necessary, to zero), and the noncash Severance Benefits shall thereafter be reduced (if necessary, to zero); provided, however, that the Executive may elect to have the -------- ------- noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall 10 be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) In the event that (i) amounts are paid to the Executive pursuant to subsection (A) of this Section 6.2, (ii) the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (iii) after giving effect to such redetermination, the Severance Payments are to be reduced pursuant to subsection 11 (B) of this Section 6.2, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in no portion of the Total Payments being subject to the Excise Tax plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that (x) the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment) and (y) after giving effect to such redetermination, the Severance Payments should not have been reduced pursuant to subsection (B) of this Section 6.2, the Company shall make an additional Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion) within five (5) business days following the time that the amount of such excess is finally determined. 6.3 The payments provided for in Section 6.1 and Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination or, if later, the date on which the Change in Control occurs; however, if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such 12 day, the Company shall pay to the Executive on such day an estimate, as determined by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking to obtain or enforce any benefit or right provided by this Agreement, in accordance with Section 14 hereof (including without limitation fees and expenses incurred in seeking to secure the Executive's rights provided by Section 14 hereof). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1 Notice of Termination. After a Change in Control and during the term --------------------- of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a 13 "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any ------------------- purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination (which, in the case of a termination by the Company or the Bank, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party 14 that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. If the Executive's employment by the Company or the ------------- Bank is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in Section 6 or Section 7.4 hereof shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, 15 by offset against any amount claimed to be owed by the Executive to the Company or the Bank, or otherwise. 9. Successors; Binding Agreement. ----------------------------- 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless 16 otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 9.3 This Agreement supercedes all prior agreements between the parties hereto with respect to the subject matter hereof. 10. Notices. For the purpose of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: BankBoston Corporation 100 Federal Street Boston, MA 02110 Attention: Executive Vice President, Human Resources Copy to: General Counsel and Clerk To the Executive: ________________ ________________ ________________ 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by 17 the Executive and such officer as may be specifically designated by the Board. Except as expressly provided herein, no waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, and this Agreement shall be an instrument under seal. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6, 7, 8 and 14 hereof shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, ------------ each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18 14. Settlement of Disputes; Arbitration. All claims by the Executive for ----------------------------------- benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Executive shall, however, be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall ----------- have the meanings indicated below: (A) "Bank" shall mean the Company's subsidiary, BankBoston, N.A., or if applicable, any other direct or indirect subsidiary of the Company by which the Executive is then employed during the term of this Agreement. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Bonus SERP" shall mean BankBoston, N.A. Bonus Supplemental Employee Retirement Plan. 19 (E) "Cause" for termination by the Company or the Bank of the Executive's employment, after any Change in Control, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company or the Bank (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in gross misconduct which is demonstrably and materially injurious to the Company or any of its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (F) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) There is an acquisition of control of the Company as defined in Section 2(a)(2) of the Bank Holding Company Act of 1956, or any similar successor provision, as in effect at the time of the acquisition; or 20 (II) Continuing Directors constitute two-thirds (2/3) or less of the membership of the Board, whether as the result of a proxy contest or for any other reason or reasons; or (III) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; or (IV) There is consummated a merger or consolidation (or similar transaction) of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation (or similar transaction) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) directly or indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation and which would result in those persons who are Continuing Directors immediately prior to such merger or consolidation constituting more than two-thirds (2/3) of the membership of the Board or the board of such surviving or parent entity immediately after, or subsequently at any time as contemplated by or as a result of, such merger or 21 consolidation (or similar transaction) or (ii) a merger or consolidation effected to implement a recapitalization or restructuring of the Company or any of its subsidiaries (or similar transaction) in which no Person acquired twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or (V) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity in which the holders of the voting securities (entitled to vote generally for the election of directors) of the Company immediately prior to such sale or disposition continue to own proportionally and beneficially directly or indirectly sixty percent (60%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of such entity outstanding immediately after such sale or disposition and which would result in those persons who are Continuing Directors immediately prior to such sale or disposition constituting more than two-thirds (2/3) of the membership of the Board or the board of such entity immediately after, or subsequently at any time as contemplated by or as a result of, such sale or disposition. 22 (G) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (H) "Company" shall mean BankBoston Corporation and (except in determining, under Section 15(F) hereof, whether or not any Change in Control of the Company has occurred in connection with such succession) any successor to its business and/or assets which assumes or agrees to perform this Agreement, by operation of law or otherwise. Payments or benefits from the Company shall include those from the Bank or other subsidiary of the Company. (I) "Compensation Committee" shall mean the Compensation Committee of the Board. (J) "Continuing Director" shall mean any director (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is a successor of a director described in clause (i), if such successor (and any intervening successor) shall have been recommended or elected to succeed a Continuing Director by a majority of the then Continuing Directors. (K) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (L) "Deferred Compensation Plan" shall mean the Company's Deferred Compensation Plan. (M) "Excess SERP" shall mean BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan. (N) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 23 (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company or the Bank, or failures by the Company or the Bank to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof or, in the case of paragraph (III) below, such act is not objected to in writing by the Executive within four (4) months after notification by the Company to the Executive of the Company's or the Bank's intention to take the action contemplated by such paragraph (III): (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or the Bank or a meaningful alteration, adverse to the Executive, in the nature or status of the Executive's responsibilities (other than reporting responsibilities) from those in effect immediately prior to the Change in Control; (II) a reduction by the Company or the Bank in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the- board salary reductions similarly affecting all senior executives of the Company or the Bank, as the case may be, and all senior executives of any Person in control of the Company; 24 (III) the Company's or the Bank's requiring the Executive to be based anywhere other than the Boston Metropolitan Area (or, if different, the metropolitan area in which the Company's or the Bank's principal executive offices are located immediately prior to the Change in Control) except for required travel on Company or Bank business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within fourteen (14) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including without limitation the Company's stock award, incentive compensation and bonus plans, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's 25 participation relative to other participants, as existed at the time of the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. 26 (Q) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (R) "Pension Plan" shall mean the BankBoston Cash Balance Retirement Plan. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to a registered offering of such securities in accordance with an agreement with the Company, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (T) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities (entitled to vote generally for the election of directors). 27 (U) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (V) "Thrift Plan" shall mean the BankBoston Thrift-Incentive 401(k) Plan. (W) "Total Payments" shall mean those payments described in Section 6.2 hereof. 28 IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Company have executed this Agreement as of the date first written above. BANKBOSTON CORPORATION By: _______________________________ Name: Helen G. Drinan Title: Executive Vice President, Human Resources __________________________ [Executive] 29 EX-12.A 9 COMPUTATION OF THE CONSOLIDATED RATIO OF EARNINGS EXHIBIT 12(a) BANKBOSTON CORPORATION 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 five years ended December 31, 1998 were as follows:
Years Ended December 31, ------------------------ (Dollars in millions) 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- Net income $ 792 $ 879 $ 650 $ 678 $ 542 Extraordinary item, net of tax 7 Income tax expense 477 589 483 529 422 ------- ------- ------- ------- ------- Pretax earnings 1,269 1,468 1,133 1,207 971 ------- ------- ------- ------- ------- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 42 39 40 38 35 Interest on borrowed funds 1,179 1,050 873 1,079 1,038 ------- ------- ------- ------- ------- Total fixed charges 1,221 1,089 913 1,117 1,073 ------- ------- ------- ------- ------- Earnings (for ratio calculation) $ 2,490 $ 2,557 $ 2,046 $ 2,324 $ 2,044 ======= ======= ======= ======= ======= Total fixed charges $ 1,221 $ 1,089 $ 913 $ 1,117 $ 1,073 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 2.04 2.35 2.24 2.08 1.90 ======= ======= ======= ======= =======
For purposes of computing the consolidated ratio of earnings to fixed charges, "earnings" represent income before extraordinary item 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. EX-12.B 10 COMPUTATION OF THE CONSOLIDATED RATIO OF EARNINGS EXHIBIT 12(b) BANKBOSTON CORPORATION 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 five years ended December 31, 1998 were as follows:
Years Ended December 31, ------------------------ (Dollars in millions) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net income $ 792 $ 879 $ 650 $ 678 $ 542 Extraordinary item, net of tax 7 Income tax expense 477 589 483 529 422 -------- -------- -------- -------- -------- Pretax earnings 1,269 1,468 1,133 1,207 971 -------- -------- -------- -------- -------- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 42 39 40 38 35 Interest on borrowed funds 1,179 1,050 873 1,079 1,038 Interest on deposits 1,871 1,685 1,680 1,791 1,301 -------- -------- -------- -------- -------- Total fixed charges 3,092 2,774 2,593 2,908 2,374 -------- -------- -------- -------- -------- Earnings (for ratio calculation) $ 4,361 $ 4,242 $ 3,726 $ 4,115 $ 3,345 ======== ======== ======== ======== ======== Total fixed charges $ 3,092 $ 2,774 $ 2,593 $ 2,908 $ 2,374 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.41 1.53 1.44 1.42 1.41 ======== ======== ======== ======== ========
For purposes of computing the consolidated ratio of earnings to fixed charges, "earnings" represent income before extraordinary item 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. EX-13 11 PAGES 21-58 / 60-89 OF THE 1998 ANNUAL REPORT EXHIBIT 13 BankBoston Corporation Consolidated Selected Financial Data
Years Ended December 31 1998 1997 1996 1995 1994 1993 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------------------- Income Statement Data(1) Interest income........... $ 5,577 $ 5,164 $ 4,893 $ 5,119 $ 4,376 $ 3,330 Interest expense.......... 3,050 2,735 2,553 2,870 2,339 1,561 -------- -------- -------- -------- -------- -------- Net interest revenue.... 2,527 2,429 2,340 2,249 2,037 1,769 Provision for credit losses................... 380 200 231 275 154 107 -------- -------- -------- -------- -------- -------- Net interest revenue after provision for credit losses.......... 2,147 2,229 2,109 1,974 1,883 1,662 Noninterest income........ 2,032 1,563 1,344 1,309 1,035 945 Noninterest expense....... 2,910 2,324 2,320 2,076 1,947 2,002 -------- -------- -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles............... 1,269 1,468 1,133 1,207 971 605 Provision for income taxes.................. 477 589 483 529 422 262 -------- -------- -------- -------- -------- -------- Income before extraordinary item and cumulative effect of changes in accounting principles............... 792 879 650 678 549 343 Extraordinary loss from early extinguishment of debt, net of tax......... (7) Cumulative effect of changes in accounting principles, net of tax(2)................... 24 -------- -------- -------- -------- -------- -------- Net income.............. $ 792 $ 879 $ 650 $ 678 $ 542 $ 367 ======== ======== ======== ======== ======== ======== Net income applicable to common stock........... $ 783 $ 848 $ 613 $ 641 $ 505 $ 332 ======== ======== ======== ======== ======== ======== Per common share Income before extraordinary item and cumulative effect of changes in accounting principles Basic................... $ 2.66 $ 2.86 $ 2.00 $ 2.09 $ 1.72 $ 1.05 Diluted................. 2.64 2.82 1.96 2.05 1.68 1.03 Net income Basic................... 2.66 2.86 2.00 2.09 1.70 1.13 Diluted................. 2.64 2.82 1.96 2.05 1.66 1.11 Cash dividends declared.. 1.16 .99 .85 .64 .47 .20 Average number of common shares (in thousands) Basic.................... 293,873 295,918 307,058 307,712 297,826 294,066 Diluted.................. 296,663 300,080 312,224 313,536 307,232 304,134 - -------------------------------------------------------------------------------------------
(1) All per share and average share information has been adjusted to reflect the Corporation's two-for-one stock split effected in 1998. (2) Includes a cumulative benefit of $77 million resulting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and a cumulative charge of $53 million, net of tax, relating to a change in accounting principles pertaining to the valuation of purchased mortgage servicing rights. - -------------------------------------- 21 -------------------------------------- BankBoston Corporation Consolidated Selected Financial Data
Years Ended December 31 1998 1997 1996 1995 1994 1993 (dollars in millions, except per share amounts) - ----------------------------------------------------------------------------------- Selected Ratios Return on average assets.................. 1.10% 1.35% 1.09% 1.22% 1.01% .76% Return on average common equity(1)............... 16.91 20.05 14.47 16.86 15.50 11.39 Common dividend payout ratio................... 43.5 34.3 40.4 28.1 24.9 14.4 Common equity to total assets.................. 6.6 6.3 7.1 7.1 6.2 6.1 Average total stockholders' equity to average total assets.... 6.6 7.2 8.0 7.7 7.1 7.1 Risk-based capital ratios Tier 1................. 7.1 8.0 9.2 8.5 7.7 7.7 Total.................. 11.7 12.1 13.6 12.8 12.7 12.4 Leverage ratio........... 6.7 7.4 8.2 7.4 6.7 6.9 Net credit losses to average loans and lease financing............... .81 .66 .57 .51 .81 .87 Reserve for credit losses to loans and lease financing............... 1.76 1.62 2.15 2.29 2.19 2.70 Reserve for credit losses to nonaccrual loans and lease financing......... 200.6 222.2 219.6 238.9 197.0 142.2 Nonaccrual loans and OREO as a percent of related asset categories........ .9 .8 1.1 1.1 1.5 2.5 Market value/book value.. 238.4 316.0 222.4 171.2 112.2 108.9 Balance Sheet Data at December 31 Loans and lease financing............... $42,806 $43,980 $41,061 $38,870 $37,708 $34,819 Reserve for credit losses.................. (754) (712) (883) (890) (827) (941) Total assets............. 73,513 69,268 62,306 59,423 55,411 50,711 Deposits................. 48,500 45,761 42,831 41,064 40,249 38,316 Funds borrowed........... 12,016 12,865 9,660 9,827 7,430 5,487 Notes payable............ 4,593 2,941 2,821 2,189 2,219 2,023 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures.............. 995 747 500 Stockholders' equity..... 4,817 4,610 4,934 4,702 3,931 3,615 Common shares outstanding (in thousands).......... 294,972 145,707 153,173 155,296 148,343 147,036 Common stockholders of record(2)............... 25,896 26,522 27,672 27,662 27,505 28,233 Number of employees...... 24,519 21,495 21,990 23,710 24,009 24,215 Per common share(3) Book value.............. $ 16.33 $ 14.87 $ 14.45 $ 13.51 $ 11.54 $ 10.57 Market value............ 38 15/16 46 31/32 32 1/8 23 1/8 12 15/16 11 1/2 Average Balance Sheet Data Loans and lease financing............... $44,683 $42,383 $40,589 $38,283 $36,017 $32,565 Securities............... 11,419 9,741 8,122 7,463 6,473 5,631 Other earning assets..... 6,290 5,584 4,699 3,821 5,027 4,684 -------- -------- ------- ------- -------- ------- Total earning assets... 62,392 57,708 53,410 49,567 47,517 42,880 -------- -------- ------- ------- -------- ------- Cash and due from banks.. 3,007 3,069 2,610 2,591 2,708 2,419 Other assets............. 6,801 4,486 3,503 3,586 3,164 2,638 -------- -------- ------- ------- -------- ------- Total average assets... $72,200 $65,263 $59,523 $55,744 $53,389 $47,937 ======== ======== ======= ======= ======== ======= Deposits................. $45,778 $42,853 $41,603 $38,406 $37,919 $37,163 Funds borrowed........... 13,271 11,864 8,751 9,132 8,018 4,500 Other liabilities........ 3,676 2,497 1,759 1,760 1,563 1,087 Notes payable(4)......... 4,698 3,382 2,666 2,142 2,123 1,797 Stockholders' equity..... 4,777 4,667 4,744 4,304 3,766 3,390 -------- -------- ------- ------- -------- ------- Total average liabilities and stockholders' equity.. $72,200 $65,263 $59,523 $55,744 $53,389 $47,937 ======== ======== ======= ======= ======== ======= - -----------------------------------------------------------------------------------
(1) For purposes of this ratio, preferred stock dividends have been deducted from net income. (2) The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. (3) All per share information has been adjusted to reflect the Corporation's two-for-one stock split effected in 1998. (4) Averages for 1998, 1997 and 1996 include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. - -------------------------------------- 22 -------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Overview BankBoston Corporation (the Corporation) is a registered bank holding company which, together with its subsidiaries and, in certain cases, joint ventures, operates through a network of offices across the U.S. and in Latin America, Asia and Europe. The Corporation's major banking subsidiary is BankBoston, N.A. (the Bank). 1998 Highlights . The Corporation's net income for 1998 was $792 million, compared with $879 million for 1997. Net income per common share was $2.66 and diluted net in- come per common share was $2.64 in 1998, compared with $2.86 and $2.82, re- spectively, in 1997. All per common share amounts reflect the Corporation's two-for-one stock split effected in June 1998. . Return on average common equity was 16.91 percent, compared with 20.05 per- cent in 1997. Return on average assets was 1.10 percent, compared with 1.35 percent in 1997. . The Corporation further expanded its presence and distribution capacity in Latin America, primarily through branch expansion programs in Argentina and Brazil; the first quarter 1998 acquisition of Deutsche Bank Argentina S.A. (Deutsche Argentina), including approximately $1 billion in loans and $1.5 billion in deposits; and the third quarter 1998 acquisition of the OCA Com- panies (OCA), a credit card and consumer finance business in Uruguay with approximately $65 million of loans at the date of acquisition. The Corpora- tion's Brazilian operations reported record earnings in 1998, reflecting an increase of 39 percent over net income in 1997. Likewise, the Corporation's Argentine operations achieved record earnings, with growth of 17 percent from the previous year. . Initiatives to build various Wholesale Bank businesses continued in 1998, including the expansion of its investment banking and other capital mar- kets-related capabilities. In August 1998, the Corporation acquired the in- vestment banking operations of Robertson Stephens from BankAmerica Corpora- tion. This acquisition complemented the Wholesale Bank's other businesses by adding equity underwriting, distribution and research capabilities to the Corporation's range of products and services available to its corporate customers. . Taxable equivalent net interest revenue increased $97 million, or 4 per- cent, from 1997. This increase was principally driven by growth in the Ar- gentine and domestic commercial loan portfolios, combined with wider spreads in Brazil arising from market volatility. This growth was partially offset by the Corporation's divestiture of its national consumer businesses in 1997 and early 1998. . Noninterest income increased $469 million, or 30 percent, from 1997. This increase resulted largely from higher fees and commissions, particularly from Argentine and Brazilian operations and the acquisition of Robertson Stephens, as well as a higher level of gains on sales of businesses. These increases were offset, in part, by a lower level of trading income and net securities gains. . During 1998, the Corporation pursued a number of strategic divestitures, which resulted in an aggregate pre-tax gain on sales of businesses of ap- proximately $254 million. In the fourth quarter of 1998, the Corporation sold its Berkshire County, Massachusetts franchise, including approximately $300 million of deposits and $1 billion of Private Banking assets under management, for a pre-tax gain of approximately $51 million. During the same period, the Corporation also sold its domestic institutional custody business for a pre-tax gain of approximately $38 million, and outsourced the settlement and depository functions of its asset management business. Additionally, in the first quarter of 1998, the Corporation sold its 26 percent interest in HomeSide, Inc. (HomeSide) for a pre-tax gain of $165 million. . Trading profits and commissions decreased by $61 million compared with 1997. This decrease reflected significant volatility in world financial markets during 1998. This volatility resulted in trading losses incurred by the Corporation's Boston-based emerging markets and high yield units. The impact of these losses was partially offset by higher trading profits from Latin American operations as well as by improved performance from the Cor- poration's derivatives unit. Additionally, the impact of these losses was offset, in part, by a higher level of net foreign exchange profits. . Noninterest expense increased $586 million, or 25 percent, from 1997. This increase was primarily driven by the previously mentioned strategic initiatives in Latin America and the various Wholesale Bank businesses, in- cluding the acquisition of Robertson Stephens. Noninterest expense also re- flected investments in the Corporation's Regional Bank and risk management and technology operations, as well as the realignment and downsizing of various businesses. . The provision for credit losses was $380 million, compared with $200 mil- lion in 1997. Net credit losses in 1998 were $364 million, compared with $279 million in 1997. Net credit losses to average loans and lease financ- ing was .81 percent, compared with .66 percent in the prior year. . Total loans and lease financing decreased approximately $1.2 billion from 1997. This decrease was largely driven by the securitization of $2.2 bil- lion of domestic commercial and industrial (C&I) loans in December 1998, the Corporation's contribution of its $1.2 billion national credit card portfolio to a joint venture in the first quarter of 1998, and - -------------------------------------- 23 -------------------------------------- the securitizations of $.8 billion of home equity loans during the year. Lower levels of residential mortgage and indirect auto loans also contrib- uted to the decrease. Offsetting the abovementioned declines, domestic loans and lease financing increased approximately $3 billion from the prior year. In addition, the international loan and lease financing portfolio grew by approximately $1.1 billion, particularly from Argentine operations. Additional information with respect to certain of the Corporation's acquisi- tions and divestitures can be found in Note 2 to the Financial Statements. Forward-Looking Statements The Corporation may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Secu- rities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future opera- tions, estimates of future economic performance and assumptions relating there- to. The Corporation may include forward-looking statements in its filings with the Securities and Exchange Commission, in its reports to stockholders, including this Annual Report, in other written materials, and in statements made by se- nior management to analysts, rating agencies, institutional investors, repre- sentatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risk exists that predictions, forecasts, projec- tions and other estimates contained in forward-looking statements will not be achieved. The following factors, among others, could cause actual results to differ materially from any forward-looking statements: significant changes and developments in world financial markets, particularly in Latin America and Asia; the ability of various countries in Asia and Latin America, particularly in Brazil, to institute timely and effective economic policies; the uses of monetary, fiscal and tax policy by various governments; political developments in the United States and other countries; developments in general economic con- ditions, both domestic and international, including interest rate and currency fluctuations, market fluctuations and perceptions, and inflation; demand for various forms of credit; legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other as- pects of the financial services industry; changes in the competitive environ- ment for financial services organizations and the Corporation's responses to those changes; the Corporation's ability and resources in both its domestic and international operations to effectively execute its articulated business strat- egies and manage risks associated with the integration of acquisitions and ex- pansion plans; changes in technology and the successful allocation of technol- ogy resources across multiple projects, including efforts to address the Year 2000 issue and demands for greater automation; and the ability of the Corpora- tion's competitors, credit customers, wholesale fund providers, treasury and capital markets counterparties and vendors and service providers to respond ef- fectively to the Year 2000 issue. When relying on forward-looking statements to make decisions with respect to the Corporation, investors and others are cau- tioned to consider these and other risks and uncertainties. Results of Operations The following is a discussion and analysis of the Corporation's consolidated results of operations. In order to understand this section in context, it should be read in conjunction with the Consolidated Financial Statements and Notes to the Financial Statements included elsewhere in this report. Net Interest Revenue This discussion of net interest revenue should be read in conjunction with Av- erage Balances and Interest Rates and Change in Net Interest Revenue -- Volume and Rate Analysis, presented elsewhere in this report. Table 1 presents a sum- mary of net interest revenue, related average earning assets and net interest margin. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been ad- justed 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. Table 1 -- Net Interest Revenue, Average Earning Assets and Net Interest Margin
Years Ended December 31 (dollars in millions) U.S. International Consolidated - ------------------------------------------------------------------------------ Net interest revenue (fully taxable equivalent basis) 1998...................................... $ 1,686 $ 864 $ 2,550 1997...................................... 1,822 631 2,453 1996...................................... 1,826 534 2,360 Average earning assets 1998...................................... $43,199 $19,193 $62,392 1997...................................... 41,849 15,859 57,708 1996...................................... 40,211 13,199 53,410 Net interest margin 1998...................................... 3.90% 4.50% 4.09% 1997...................................... 4.36 3.98 4.25 1996...................................... 4.54 4.05 4.42
1998 Compared with 1997 Net interest revenue represents the difference between the interest earned on certain of the Corporation's assets and the interest incurred on the liabili- ties used to pay for these assets. On a consolidated basis, net interest reve- nue increased approximately $97 million in 1998, compared with 1997. This im- provement was primarily attributable to the Corporation's international op- - -------------------------------------- 24 -------------------------------------- erations, particularly in Brazil and Argentina. Specifically, these operations were able to benefit from growth in average earning assets, particularly in Ar- gentina, combined with wider interest rate spreads in Brazil arising from mar- ket volatility. During the year, the Brazilian and Argentine loan and lease fi- nancing portfolios experienced average growth of approximately $.6 billion and $2.1 billion, respectively. Argentine growth included the acquisition of Deutsche Argentina. The increase in consolidated net interest revenue also re- flected growth in the domestic commercial portfolio. The improvement in net in- terest revenue was partially offset by the Corporation's 1997 and 1998 divesti- ture of its national consumer businesses, discussed below, which resulted in a decline in average loans and lease financing of approximately $2 billion. Net interest margin represents the relationship between net interest revenue and average earning assets. Spread, another term used in this discussion, is defined as the difference between the yield on the Corporation's earning assets and the rate paid to fund those assets. Both margin and spread are affected by strategic decisions and the mix of assets and liabilities on the Corporation's balance sheet, as well as interest rate trends. The decline in margin from 1997 was primarily driven by the Corporation's divestiture of its national consumer businesses, as well as costs incurred to fund noninterest earning activities. In addition, the higher level of investment securities used to manage interest rate risk also influenced the margin decline. As mentioned previously, the de- cline in margin was partially mitigated by wider spreads in Brazil. In 1997, the Corporation began the divestiture of its national consumer businesses, with the sales of Ganis Credit Corporation (Ganis) and Fidelity Acceptance Corpora- tion (FAC). This divestiture was completed with the first quarter 1998 contri- bution of the national credit card portfolio to a joint venture. The aggregate impact of this divestiture was to reduce margin by approximately 28 basis points. Domestic margin was further reduced by the Corporation's investment, in 1998, in bank-owned life insurance. The revenue from these investments was re- corded in noninterest income and, therefore, did not offset the cost of carry- ing the assets, which is a component of net interest margin. In addition, do- mestic margin was reduced due to new issuances of guaranteed preferred benefi- cial interests in the Corporation's junior subordinated debentures, the cost of which was included in interest expense. While resulting in higher interest ex- pense, these issuances were used to fund the Corporation's redemption of its preferred shares, eliminating the higher cost of preferred dividends. Refer to the "Capital Management" section for further discussion of this strategy. Future levels of net interest revenue and margin will be affected by competi- tive pricing pressure on retail deposits, loans and other products; the mix and volume of assets and liabilities; the interest rate environment; government policies and the economic and political conditions in the countries where the Corporation does business; and other factors. As such, there can be no assur- ance as to the level of the Corporation's future net interest revenues or net interest margins. Noninterest Income The composition of noninterest income is presented in Table 2. Table 2 -- Noninterest Income
Years Ended December 31 1998 1997 1996 (in millions) - -------------------------------------------------------------------------------- Financial service fees and commissions Deposit and ATM-related fees............................ $ 312 $ 259 $ 238 Investment banking fees................................. 179 57 23 Syndication and agent fees.............................. 68 95 58 Net mortgage servicing fees............................. (82) Other financial service fees............................ 318 252 240 ------ ------ ------ 877 663 477 Trust and investment management fees..................... 326 283 246 Net securities gains..................................... 41 80 23 Trading profits and commissions.......................... (3) 58 76 Net foreign exchange profits............................. 127 88 54 Net equity and mezzanine profits......................... 233 221 209 Gains on sales of businesses............................. 254 68 153 Other income............................................. 177 102 106 ------ ------ ------ $2,032 $1,563 $1,344 ====== ====== ======
1998 Compared with 1997 Financial Service Fees and Commissions
Years Ended December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------- Deposit and ATM-related fees Service charges on deposits......................................... $248 $206 ATM-related fees.................................................... 64 53 ---- ---- $312 $259 ==== ====
Service charges on deposits increased $42 million from 1997. This increase was due, in part, to growth in Argentine operations, including the acquisition of Deutsche Argentina. ATM-related fees increased $11 million from 1997, primarily due to a higher level of domestic activity and the repricing of certain domes- tic services.
Years Ended December 31 1998 1997 (in millions) - -------------------------------------------------------------------------------- Investment banking fees Advisory fees........................................................ $ 70 $28 Brokerage fees and commissions....................................... 62 11 Underwriting fees.................................................... 47 18 ---- --- $179 $57 ==== ===
Investment banking fees increased $122 million from 1997. The improvement in each of these categories was primarily attributable to the acquisition of Rob- ertson Stephens in August 1998, and, to a lesser extent, higher fees from the Corporation's high yield unit. - -------------------------------------- 25 -------------------------------------- Syndication and agent fees decreased $27 million compared with 1997, primarily due to a lower level of activity. During 1998, the Corporation completed 189 syndications, totaling $15.2 billion, compared with 207 transactions, totaling $18.8 billion, in 1997.
Years Ended December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------- Other financial service fees Letter of credit and acceptance fees................................ $ 77 $ 73 Credit card fees.................................................... 64 36 Other loan-related fees............................................. 45 39 Other............................................................... 132 104 ---- ---- $318 $252 ==== ====
Compared with 1997, the $66 million increase in other financial service fees was largely attributable to a $28 million increase in credit card fees and a $28 million increase in other miscellaneous financial service fees. The im- provement in credit card fees reflected approximately $25 million of fee growth from the credit card portfolios in Argentina, Brazil and Uruguay, the latter resulting from the acquisition of OCA. The increase in other miscellaneous fi- nancial service fees also included a higher level of service fees from Argen- tine operations due, in part, to insurance-related fees. Trust and Investment Management Fees
Years Ended December 31 1998 1997 (in millions) - -------------------------------------------------------------------------------- Mutual fund fees..................................................... $132 $111 Personal trust fees.................................................. 162 145 Other agency fees.................................................... 32 27 ---- ---- $326 $283 ==== ====
Mutual fund fees increased $21 million from 1997. This increase was attribut- able, in part, to a $1.5 billion aggregate increase in assets under management by the Brazilian and Argentine operations. The Corporation is the largest mu- tual fund provider in Argentina and the fourth largest in Brazil. Additionally, domestic mutual fund assets under management, excluding those related to the Private Banking business, increased by approximately $1.5 billion, primarily as a result of greater sales from cash management operations and the Regional Bank. Personal trust fees are primarily based on assets managed by the Private Banking business. These fees increased by $17 million, primarily due to a $1.7 billion increase in assets under management, prior to the sale of the Berkshire County franchise in the fourth quarter of 1998, which had approximately $1 bil- lion of assets under management. Other agency fees primarily relate to custody operations. Although these fees increased modestly during the year, they are expected to decline in the future as a result of the sale of the Corporation's domestic institutional custody business in the fourth quarter of 1998. Net Securities Gains The $39 million decline in net securities gains mainly reflected the absence of an approximately $20 million gain in 1997 from the Argentine available for sale portfolio, combined with a $22 million loss in 1998 from the recognition of other than temporary impairment related to certain available for sale securi- ties held in the Corporation's Boston-based emerging markets portfolio. Trading Profits and Commissions and Net Foreign Exchange Profits The $61 million decline in trading profits and commissions was driven by losses arising from the Boston-based emerging markets and high yield trading portfo- lios, which generated combined trading losses in 1998 of approximately $105 million. The majority of these losses were incurred during the third quarter of 1998 when world financial markets experienced significant volatility due to the escalation of economic crises in Asia and Russia and the spill-over effect that these crises had on other markets, particularly emerging markets. The losses were mostly offset by trading profits from Brazilian and Argentine operations as well as a higher level of profits from the derivatives unit. Additionally, net foreign exchange profits increased $39 million from 1997. These profits, like derivatives profits, grew due to higher customer demand for risk manage- ment products, arising from the same volatile conditions and market uncertain- ties noted above. Net Equity and Mezzanine Profits Net equity and mezzanine profits mainly relate to the sale of investments made by the Private Equity business. This income increased $12 million from 1997, primarily as a result of a higher level of sales activity in the first half of 1998. At December 31, 1998, this portfolio had a carrying value of $1.3 bil- lion, compared with $965 million at December 31, 1997. Other Gains on sales of businesses included a $165 million gain recorded in the first quarter of 1998 from the sale of the Corporation's 26 percent interest in HomeSide and gains of $51 million and $38 million related to the sales of the Corporation's Berkshire County franchise and domestic institutional custody business, respectively, in the fourth quarter of 1998. Additional information on these transactions can be found in Note 2 to the Financial Statements. In 1997, the gains on sales of businesses related to the sale of FAC. Other income increased $75 million compared with 1997. This improvement was largely driven by earnings on the Corporation's investment in bank-owned life insurance of approximately $47 million, the funding costs of which contributed to a corresponding decline in net interest revenue and margin. Additionally, the increase reflected a higher level of gains on the sale of loans, as well as the absence of a 1997 charge related to interest rate futures contracts that had been used to hedge the funding of FAC. These increases were partially off- set by a $20 million charge in 1998 related to the Corporation's 17.5 percent equity investment in Korean Merchant Banking Corporation (KMBC), reflecting de- terioration of that company's financial condition. * * * - -------------------------------------- 26 -------------------------------------- The Corporation's capital markets-related businesses, including activity from its trading, investment banking and private equity businesses, are sensitive to the volatile market and economic conditions, which continued into the first quarter of 1999. As such, it is not possible to predict how the continued level of volatility in world financial markets will affect these businesses and their levels of revenues in the future. Noninterest Expense The composition of noninterest expense is presented in Table 3. Table 3 -- Noninterest Expense
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------ Employee costs........................................... $1,630 $1,279 $1,178 Occupancy and equipment.................................. 398 350 341 Advertising and public relations......................... 109 107 108 Communications........................................... 132 112 101 Professional fees........................................ 111 61 56 Software costs........................................... 71 44 35 Amortization of goodwill ................................ 39 27 24 Other.................................................... 420 344 297 ------ ------ ------ Noninterest expense before acquisition-related restructuring costs..................................... 2,910 2,324 2,140 Aquisition-related restructuring costs................... 180 ------ ------ ------ $2,910 $2,324 $2,320 ====== ====== ======
1998 Compared with 1997 Noninterest expense increased $586 million compared with the prior year. This increase was primarily driven by growth and investment spending in Latin Ameri- ca, including the acquisitions of Deutsche Argentina and OCA and the branch ex- pansion programs in Brazil and Argentina; and ongoing initiatives to build the Corporation's various Wholesale Bank businesses, including the acquisition of Robertson Stephens and the expansion of other capital markets-related capabili- ties. Although this investment spending affected all categories of noninterest expense, it was most evident in the growth of employee costs, including sala- ries, benefits and incentive compensation, as well as occupancy and equipment costs, communication costs and amortization of goodwill. At December 31, 1998, the number of full-time equivalent employees was approxi- mately 24,500, reflecting growth of approximately 3,500 from December 31, 1997. Almost all of this growth was attributable to the abovementioned areas of in- vestment. This growth was partially offset by reductions in various support functions as well as in the Regional Bank, reflecting, in part, the previously mentioned sales of the Berkshire County franchise and the domestic institu- tional custody business, as well as various branch closings during the year. Higher incentive compensation, which included $94 million of bonus payments in connection with the Robertson Stephens acquisition, also contributed to the in- crease in employee costs. The increases in employee costs were partially offset by the lower costs resulting from the Corporation's abovementioned divestiture of its national consumer businesses. In addition, noninterest expense increased over 1997 levels as a result of a number of other initiatives undertaken by the Corporation. These initiatives particularly contributed to the increases in professional fees and other ex- penses. In the first quarter of 1998, the Corporation recorded charges related to the realignments of its European operations and the Private Banking busi- ness. During the third quarter of 1998, the Corporation recorded various costs associated with a 25 percent reduction in staff of its Emerging Market Sales, Trading and Research (EMSTR) unit, as well as a realignment of its Asian opera- tions, including the closing of offices in India, Japan, the Philippines and Taiwan. Specifically, these costs consisted of anticipated employee severance costs, costs of terminating existing lease obligations and other business con- tract losses. The annual comparison also included costs incurred in 1998 re- lated to the Regional Bank, including the integration of Rhode Island Hospital Trust National Bank into the Bank and the Corporation's redesign project, the final results of which have been integrated into the Corporation's business planning process. The Corporation also made various investments with respect to risk management and technology, including its responses to the introduction of the euro and to the Year 2000 issue. Additional information on the introduction of the euro and the Year 2000 issue can be found in the "Risk Management" sec- tion. In both comparisons, these expenses were offset partially by the Corpora- tion's divestiture of its national consumer businesses, as well as the absence of 1997 costs related to the integration of BayBanks, Inc. (BayBanks) and Bank of Boston Connecticut into the Bank. Provision for Credit Losses The provision for credit losses was $380 million in 1998, compared with $200 million in 1997. The provision for credit losses reflects management's assess- ment of the adequacy of the reserve for credit losses, considering the current risk characteristics of the loan portfolio and economic conditions. In 1998, the level of provision reflected a higher level of losses during the year. The amount of future provisions will continue to be a function of management's as- sessment of credit risk based upon its quarterly review of the reserve for credit losses. These risk assessments include the potential impact of continued economic instability in world financial markets and the status of economic pro- grams in various countries. Due to this economic volatility, which has contin- ued into the first quarter of 1999, particularly with respect to various emerg- ing markets countries, management currently expects increased pressure on the ability of certain customers to repay their debts to the Corporation. As such, there can be no assurance as to the level of future provisions. Additional in- formation on the reserve for credit losses and net credit losses can be found in the "Reserve for Credit Losses" section and Note 7 to the Financial State- ments. Provision for Income Taxes The 1998 provision for income taxes was $477 million, compared with $589 mil- lion for 1997. The Corporation's effective tax rate was 38 percent in 1998, compared with 40 percent in 1997. The reduction in the Corporation's effective tax rate from 1997 was primarily due to a change in the mix of the Corpora- tion's tax base. - -------------------------------------- 27 -------------------------------------- Line of Business Information The Corporation is managed through the Office of the Chief Executive Officer (the OCEO), which is the senior decision making group in the company. The OCEO consists of five members, including the Chairman and Chief Executive Officer (CEO), the President and Chief Operating Officer (COO), the Chief Financial Officer, the head of the Regional Bank and the head of the Wholesale Bank. The latter three individuals are also Vice Chairs of the Corporation. The OCEO meets periodically to discuss important matters of strategy and review the op- erating performance of the Corporation's businesses. The group maintains close contact with key administrative heads and business managers throughout the Corporation, including the management teams in Argentina and Brazil. The COO has primary responsibility for the Corporation's revenue producing businesses. In assessing the performance of the Corporation, the COO divides the company into four major business lines: the Wholesale Bank, the Regional Bank, Argentina and Brazil. The Wholesale and Regional Bank lines cover the vast majority of the Corporation's domestic operations, while the Argentina and Brazil lines cover the vast majority of the Corporation's international operations. Operating results and other key financial measures of these four major business lines for 1998, 1997 and 1996 are presented below. All other businesses not encompassed in the four major lines have been combined and are presented below in "Other Businesses". Certain revenue and expense items, mainly of a nonrecurring nature, which were not considered by management in the evaluation of a business unit's core operating results, are included in "Corporate Adjustments" shown below. Information shown for 1997 and 1996 is presented on a basis consistent with 1998 and, as such, has been restated for changes in the Corporation's organizational structure and internal management reporting methodologies implemented during 1998. The line of business information shown below reflects assignments and alloca- tions of items made within the Corporation's internal management reporting process. Descriptions of individual items are as follows: . Most balance sheet, as well as revenue and expense, items are derived from the internal management reporting system, where they are specifically at- tributable to individual business units. . Net interest revenue is allocated to the business units using a funds transfer pricing process, which incorporates a matched funding concept, with the residual assigned to the Global Treasury group. . Various techniques are employed to allocate certain costs associated with corporate support areas, including the use of unit costs and service vol- umes. . The provision for credit losses is allocated to each line of business based on actual net credit losses for consumer loans and on an "expected loss" methodology for commercial loans. This applies to both domestic and inter- national business units. Expected loss is determined under the Corporation's risk adjusted return on equity (RAROE) methodology and is an estimate of the average loss rate that individual credit portfolios will experience over an economic cycle, based on the Corporation's historical experiences and various market data. This method is different from the method used to determine the Corporation's consolidated provision for credit losses in any given period, which is based on an evaluation of the adequacy of the reserve for credit losses considering the risk characteris- tics in the credit portfolio at a point in time. Since this expected loss methodology, which averages peaks and valleys of the credit cycle, is in- tended to be a longer term view of the credit costs of a business, it would be expected to result in a lower allocation in declining periods of a credit cycle and a higher allocation in improving periods of a credit cy- cle. The difference between the sum of the provisions for each line of business determined using this methodology and the Corporation's consoli- dated provision is included in Corporate Adjustments. . The provision for income taxes applied to each business line reflects an estimate of the actual effective tax rate related to each business line for each year presented. These rates will vary due to a number of factors, in- cluding differences in state tax rates, foreign tax issues and the tax ram- ifications of certain transactions. . The return on equity shown for each line of business is based upon the Cor- poration's RAROE methodology. The amount of common equity allocated to each business line is based on 1) an evaluation of the various risks associated with the business, including credit, market, country and operating risk, and 2) the amount of capital necessary to support other investments, such as fixed assets and joint ventures. The amount of capital necessary to sup- port goodwill is not allocated to individual businesses for RAROE purposes and, accordingly, is included in Corporate Adjustments. The difference be- tween the aggregate amount of capital allocated under this methodology, in- cluding the amount related to goodwill, and the Corporation's total book capital is essentially allocated to the business lines on a pro-rata basis. Businesses are allocated goodwill when evaluated under an economic value added approach, which is another analytical tool that the Corporation uses to assess the performance of business units. . Certain revenue and expense items, which are not included in the business line results evaluated by management, are included in Corporate Adjust- ments. The major source of revenue shown in Corporate Adjustments for each year presented is gains on sales of businesses. In 1998, total revenue of $212 million included $254 million of gains on sales of businesses, par- tially offset by net funding costs for certain noninterest bearing assets and liabilities. The components of revenue are also affected by transfers between net interest revenue and noninterest income related to compensating balance arrangements with certain customers. The expenses shown in Corpo- rate Adjustments for all three years are primarily composed of three items: amortization of goodwill; costs related to acquisitions or the realignment and downsizing of certain businesses; and, in 1998, bonus payments due em- ployees in connection with the Robertson Stephens acquisition. - -------------------------------------- 28 -------------------------------------- Selected financial information for the Corporation's lines of business for 1998, 1997 and 1996 is presented in Table 4 shown below. This financial infor- mation is presented on a fully taxable equivalent basis. Further information on the Corporation's line of business information can be found in Note 26 to the Financial Statements. Table 4 -- Line of Business Selected FInancial Information
Wholesale Regional Other Corporate Consolidated (dollars in millions) Bank Bank Argentina Brazil Businesses Adjustments Totals - -------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 Net interest revenue.... $ 618 $ 952 $ 332 $ 345 $ 234 $ 69 $ 2,550 Noninterest income...... 861 450 244 174 160 143 2,032 ------- ------- ------ ------ ------- ------ ------- Total revenue........... 1,479 1,402 576 519 394 212 4,582 Noninterest expense..... 697 1,012 381 327 282 211 2,910 ------- ------- ------ ------ ------- ------ ------- Operating income........ 782 390 195 192 112 1 1,672 Provision for credit losses................. 118 78 64 24 46 50 380 ------- ------- ------ ------ ------- ------ ------- Pre-tax income (loss)... 664 312 131 168 66 (49) 1,292 Income tax provision (benefit).............. 273 119 57 69 5 (23) 500 ------- ------- ------ ------ ------- ------ ------- Net income (loss)....... $ 391 $ 193 $ 74 $ 99 $ 61 $ (26) $ 792 ======= ======= ====== ====== ======= ====== ======= Average loans and lease financing.............. $23,641 $ 6,488 $5,640 $3,590 $ 5,482 $ (158) $44,683 Average assets.......... $29,365 $ 8,148 $8,227 $6,297 $18,394 $1,769 $72,200 Average deposits........ $ 5,301 $25,608 $4,495 $2,136 $ 8,111 $ 127 $45,778 RAROE................... 20% 23% 17% 27% 13% 17% - -------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Net interest revenue.... $ 575 $ 954 $ 205 $ 265 $ 382 $ 72 $ 2,453 Noninterest income...... 710 406 145 138 181 (17) 1,563 ------- ------- ------ ------ ------- ------ ------- Total revenue........... 1,285 1,360 350 403 563 55 4,016 Noninterest expense..... 502 979 217 260 312 54 2,324 ------- ------- ------ ------ ------- ------ ------- Operating income........ 783 381 133 143 251 1 1,692 Provision for credit losses................. 120 81 21 18 139 (179) 200 ------- ------- ------ ------ ------- ------ ------- Pre-tax income.......... 663 300 112 125 112 180 1,492 Income tax provision.... 269 117 49 54 45 79 613 ------- ------- ------ ------ ------- ------ ------- Net income.............. $ 394 $ 183 $ 63 $ 71 $ 67 $ 101 $ 879 ======= ======= ====== ====== ======= ====== ======= Average loans and lease financing.............. $21,074 $ 7,010 $3,552 $3,036 $ 7,562 $ 149 $42,383 Average assets.......... $25,131 $ 8,776 $5,160 $5,466 $19,698 $1,032 $65,263 Average deposits........ $ 5,306 $25,388 $2,576 $1,437 $ 7,969 $ 177 $42,853 RAROE................... 23% 21% 23% 24% 10% 20% - -------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Net interest revenue.... $ 540 $ 914 $ 183 $ 213 $ 441 $ 69 $ 2,360 Noninterest income...... 552 407 108 105 206 (34) 1,344 ------- ------- ------ ------ ------- ------ ------- Total revenue........... 1,092 1,321 291 318 647 35 3,704 Noninterest expense..... 419 939 173 199 358 232 2,320 ------- ------- ------ ------ ------- ------ ------- Operating income........ 673 382 118 119 289 (197) 1,384 Provision for credit losses................. 106 44 20 16 116 (71) 231 ------- ------- ------ ------ ------- ------ ------- Pre-tax income (loss)... 567 338 98 103 173 (126) 1,153 Income tax provision (benefit).............. 235 148 40 46 70 (36) 503 ------- ------- ------ ------ ------- ------ ------- Net income (loss)....... $ 332 $ 190 $ 58 $ 57 $ 103 $ (90) $ 650 ======= ======= ====== ====== ======= ====== ======= Average loans and lease financing.............. $19,431 $ 6,428 $2,987 $2,480 $ 9,196 $ 67 $40,589 Average assets.......... $22,497 $ 8,149 $4,275 $4,616 $19,312 $ 674 $59,523 Average deposits........ $ 5,467 $25,192 $2,160 $1,060 $ 7,643 $ 81 $41,603 RAROE................... 20% 22% 19% 23% 12% 14%
- -------------------------------------- 29 -------------------------------------- Wholesale Bank The Wholesale Bank provides a full range of commercial and investment banking products to its predominately middle market, non-investment grade corporate customer base. The geographic reach of this business is national in scope, with approximately three-quarters of this business not dependent on the New England economy. The Wholesale Bank seeks to establish and maintain lead bank status with its clients by offering the following products and services, which cover the full spectrum of a company's needs: . Lending . Leasing . Cash Management Services . Risk Management Products (foreign exchange and derivatives) . Trade Services . Loan Syndications . Equity Underwriting . High Yield Debt Underwriting . Merger and Acquisition Advisory Services . Private Placements . Private Equity Within the Wholesale Bank there are three major sub-businesses: the Commercial Bank, the Investment Bank and Private Equity. Each of these sub-businesses seeks to leverage the strengths of the other two in creating business opportu- nities. They also look to leverage the Corporation's international franchise, particularly in Latin America, to attract customers doing business abroad. In 1998, a substantial portion of the Wholesale Bank's operating income came from the Commercial Bank, with the remainder from Private Equity. In 1998, the Investment Bank recorded a net loss in operating income of approximately $50 million, due mainly to trading losses incurred by the high yield unit, as liquidity in that market suffered greatly from turmoil in the global capital markets during the last half of 1998. The approximate revenue contribution made by each of the Wholesale Bank's sub- businesses in 1998 is depicted in the chart shown below. Chart 1 Wholesale Bank - Revenue . Commercial Bank 77% . Private Equity 14% . Investment Bank* 9% * It is expected that the relative contribution to revenue made by the Invest- ment Bank will increase next year due, in part, to Robertson Stephens being part of the Corporation for a full year in 1999, compared with four months in 1998. The Commercial Bank has primary responsibility for managing individual customer relationships. Historically, corporate customers have generally been brought into the Bank through a lending transaction and the Commercial Bank's relation- ship managers seek to expand the relationship into other products and services. Major divisions of the Commercial Bank are New England Corporate Banking, Busi- ness Credit, Leasing and additional lending groups which are organized along specialized industry lines. The Corporation enjoys a national presence in many of these specialized industry groups, including High Technology, Media, Con- sumer and Specialty Retail, Transportation, Environmental Services, Real Es- tate, Telecommunications, Restaurants, Energy and Utilities, Health Care, and Financial Institutions. In addition, the Multinational and European divisions provide support to the Wholesale Bank's multinational clients. Relationship managers from all divisions offer customers loan syndication services and a package of fee-generating products such as foreign exchange, derivatives, cash management and trade services, while working closely with counterparts from the Investment Bank in ensuring that all financing needs of their customers are met. The compensation structure for employees in the Commercial and Investment Banks incents them to produce cross-sell opportunities for each other's prod- ucts. The Investment Bank falls under the umbrella of BancBoston Robertson Stephens Inc., which essentially combines the capital markets debt products that had previously been offered by the Wholesale Bank with the equity underwriting, distribution and research capabilities of Robertson Stephens, an investment bank that was purchased by the Corporation during the third quarter of 1998. The purchase of Robertson Stephens also enhanced the Wholesale Bank's advisory and private placement capabilities. Strategically, the acquisition was designed to preserve the Wholesale Bank's customer relationships by rounding out its product set and providing customers with "one-stop shopping." The Corporation has been in the Private Equity business for approximately 40 years and during that time has invested approximately $3 billion, including committing over $650 million in 1998, to a wide range of companies. Private Equity's portfolio, which had a carrying value of approximately $1.3 billion at the - -------------------------------------- 30 -------------------------------------- end of 1998, is diversified as to industry, geography, maturity, investment size and investment type. While most investments have been made in the U.S. through the main office in Boston and another office in Palo Alto, Private Eq- uity also has a strong global presence with offices in London, Hong Kong, Buenos Aires and Sao Paulo, as well as strategic alliances worldwide. The busi- ness provides a wide range of capital options, from early stage venture capital for emerging growth companies in the health care and information technology sectors to equity sponsorship, co-investment and mezzanine capital for buyouts, recapitalizations and expansion of mid-size companies. Gains are realized through a variety of channels including strategic or financial buyouts, recapi- talizations, and public offerings. In addition, Private Equity has initiated a new line of asset management products for institutions and high net worth indi- viduals, including the successful closing of a $150 million "fund of funds" in 1998. Net income from the Wholesale Bank in 1998 was essentially flat with 1997. The comparison was affected by the previously discussed operating losses incurred by the Investment Bank in 1998, stemming from trading losses in the high yield unit. In addition, revenue from Private Equity slowed in the second half of 1998 due to market conditions, while expenses from this business were higher in 1998 due, in part, to higher incentive compensation and an increase in staff. Net income from the Commercial Bank, however, increased approximately 13 per- cent from 1997. Contributing to this improvement was higher net interest reve- nue, reflecting a $2.5 billion increase in average loans and leases. This was caused by growth in many of the Commercial Bank's lending divisions, including Real Estate, Business Credit, Energy and Utilities, and Environmental Services, as well as growth in the lease portfolio. In addition, an increase in profits from the foreign exchange and derivatives areas, reflecting higher customer de- mand for these risk management products, also contributed to the increase in net income. Partially offsetting these revenue increases in the Commercial Bank were higher expenses due, in part, to increased employee costs, including higher levels of incentive compensation for those areas which produced improved revenues. Regional Bank The Regional Bank is a New England-based business that provides for the finan- cial services needs of its three major customer groups: consumers, high net worth individuals and small businesses. The Regional Bank operates through franchises in Massachusetts, Rhode Island, Connecticut and New Hampshire. The Massachusetts banking franchise is the largest in that state. The customer mix of the Regional Bank includes: . Approximately 1.7 million consumer households . Approximately 11,000 private banking clients, mainly high net worth indi- viduals, served through 13 private banking offices in southern New England and Florida . Nearly 130,000 small business relationships Customers are offered a wide array of lending, investment and deposit products, and are served through a number of convenience distribution channels, as well as traditional branch locations. A summary of the Regional Bank's distribution system follows: . Nearly 1,600 ATM locations with over three-quarters of these located in Massachusetts . Approximately 430 full service branches, of which approximately 20 percent are located in stores or shopping malls . Two major telebanking centers, which handle approximately 33 million calls per year . One of the most widely used home banking products in the country, with ap- proximately 370,000 customers Major product groups are as follows: . Deposits totaling $26 billion, which provide other parts of the Corporation with a major source of funding. . A $6 billion loan portfolio, of which $5 billion are loans to consumers and the remainder small business loans. The consumer loan products include home equity, credit card, residential mortgage, automobile, education and other types of installment loans. . A family of 18 no-load mutual funds, known as the Boston 1784 Funds, which have approximately $10 billion of assets under management. These funds are managed by the Corporation's Global Treasury group. . Approximately $23 billion of assets under management (including approxi- mately $4 billion which are invested in the Boston 1784 Funds) in connec- tion with wealth management and private banking services that are provided for high net worth individuals. The major sub-businesses of the Regional Bank are Consumer and Community Bank- ing, Business Banking, and Private Banking. The estimated percentage contribu- tion to operating income for each sub-business in 1998 follows. Chart 2 Regional Bank - Operating Income . Consumer and Community Banking 61% . Private Banking 22% . Business Banking 17% In connection with an initiative first announced in October 1997, aimed at redesigning the way in which it does business, the Regional Bank introduced some major organizational, strategic and personnel changes in 1998. The goal of this effort is to make the business more customer focused and improve business retention by enhancing the customer's overall experience with the Bank. Busi- ness functions across southern New England have been integrated to better ena- ble individual sub-businesses to leverage from each other's strengths and in- crease cross-marketing opportunities. In connection with this effort, the do- mestic - -------------------------------------- 31 -------------------------------------- private banking unit was incorporated into the Regional Bank and small middle market business relationships are being transferred from the Wholesale Bank. Other actions which are scheduled to be implemented during 1999 include ex- panding certain product lines, such as investment products (e.g. mutual funds), and improving the efficiency of certain delivery channels, particularly home banking through the Internet, telebanking and the branch network. Also, in light of the rapidly changing consumer banking environment, a dedicated team has been formed to create a range of products and services designed to generate new revenue streams, especially associated with electronic commerce. Net income from the Regional Bank increased $10 million, or 5 percent, from 1997. This increase was driven by a higher level of noninterest income, includ- ing increases in personal trust, electronic banking and investment management fees. Partially offsetting the growth in noninterest income was an increase in noninterest expense related to various initiatives which resulted in higher levels of employee costs, professional fees and software expenditures. This growth was partially offset by cost savings from branch closings. Net interest revenue was essentially flat with 1997, as narrower spreads caused by the low rate environment and continued runoff of the indirect auto loan portfolio were offset by improvements in spread from a favorable change in deposit mix and higher revenue from other loan products reflecting improved volume, spreads and fees. The declining volume of indirect auto loans reflects the Corporation's strategic decision to allow this portfolio to run off due to the low returns generated by this business. Argentina The Corporation has maintained a presence in Argentina since 1917. During the 1990s, Argentina, a country of approximately 35 million people, has enjoyed a period of economic stability highlighted by a very low inflation rate, which was 0.7 percent in 1998, and the establishment of the Convertibility Plan, which has fixed the Argentine peso at a one-to-one exchange rate against the U.S. dollar for most of the decade. The Corporation operates in both the corporate and consumer banking sectors. The corporate banking business caters to large corporations, middle market cus- tomers and companies operating in a variety of specialized industries. Corpo- rate customers are offered a full array of products, including traditional lending services, cash management, trade services, foreign exchange, syndica- tions, corporate finance and various investment banking services. On the con- sumer side, in addition to offering various deposit and lending products, cus- tomers are also provided access to mutual fund, insurance, credit card and pen- sion management products. As a result of the aforementioned economic stability, the Corporation expanded its Argentine operations and now operates one of the largest banks in the coun- try. Beginning in the fourth quarter of 1997 and extending through the first half of 1998, the Corporation undertook a significant expansion of its Argen- tine branch network, which included the acquisition of Deutsche Argentina and the opening of 64 new branches in various parts of the country. As a result of this expansion program, the Corporation now has 139 branches throughout the country, compared with 43 prior to the program. The expansion effort is one of the main reasons why the Corporation's total assets in Argentina have grown to approximately $9 billion at the end of 1998, from less than $7 billion at the end of 1997, including growth in the loan portfolio to approximately $6 billion at the end of 1998, from less than $5 billion at the end of 1997. The major components of the loan portfolio at the end of 1998 follow. Chart 3 Argentina - Loans . Large Corporate 55% . Consumer* 32% . Middle Market 13% * Nearly three-quarters of the consumer portfolio is collateralized. The Corporation's Argentine operations are comprised of three main sub-busi- nesses: Corporate Banking, which includes Large Corporate and Middle Market, Retail Banking and Treasury. Products and services of the Corporate and Retail Banking sub-businesses are discussed above. The Treasury sub-business is mainly responsible for asset and liability management and trading activities. The es- timated percentage contribution to operating income for each sub-business in 1998 follows. Chart 4 Argentina - Operating Income . Retail Banking 39% . Corporate Banking 30% . Treasury 29% . Other 2% Net income from Argentine operations increased $11 million, or 17 percent, from 1997. This improvement was achieved despite net costs incurred in connection with the previously discussed expansion efforts undertaken during the year, which affected the earnings growth rate and contributed to a decline in RAROE from 1997. Operating income increased $62 million on the strength of higher net interest revenue, which was caused by an increase in average loans and leases of approximately $2 billion; higher levels of deposit fees, as average deposits grew by nearly $2 billion from 1997; increased credit card fees related to a 78 percent increase in the number of credit card holders; improved mutual fund fees, as the Corporation maintained its status as the largest mutual fund pro- vider in Argentina; and improved trading account and foreign exchange profits. The - -------------------------------------- 32 -------------------------------------- improved revenue picture was partially offset by an increase in expenses and a higher provision for credit losses. Much of the expense growth came from em- ployee costs, due to a combination of expansion activities and higher incentive compensation in line with the increased revenues. The Corporation employs ap- proximately 3,600 people in Argentina, up over 1,000 from the end of 1997. Other expense items, such as occupancy, equipment, telecommunications, travel and advertising, increased due, in part, to expansion, which included integra- tion expenses related to the Deutsche Argentina acquisition. The higher provi- sion for credit losses mainly related to an increase in credit losses on con- sumer loans due, in part, to growth in those loan portfolios. Consumer loans, which more than doubled to approximately $1.8 billion by the end of 1998, gen- erally carry wider spreads and a higher loss rate than loans in the commercial portfolio. Total net credit losses from Argentine operations were $57 million in 1998, compared with $23 million in 1997, with most of the increase related to the consumer portfolio. In order to more fully understand how the Corpora- tion manages its cross-border and other market risks in Argentina, you should refer to the "Cross-Border Outstandings" and "Non-U.S. Dollar Denominated Risk Management" sections. Brazil The Corporation has maintained a presence in Brazil since 1947. Like Argentina, Brazil enjoyed a period of relative economic stability during a portion of the 1990s as a result of the Real Plan which was instituted in mid-1994. This plan, which included a managed exchange rate policy, reduced inflation significantly from hyperinflationary levels in the early 1990s to "deflation" (or negative inflation) of 2 percent in 1998. As a result of pressure caused by economic turmoil in other emerging markets countries during 1998 and Brazil's need to reduce both its current account and fiscal deficits, the Brazilian government decided to allow the local currency to float freely against the U.S. dollar be- ginning in mid-January 1999. This action is expected to cause an economic con- traction and a rise in inflation during 1999. Brazil, a country of approximately 165 million people, has a much larger popu- lation than Argentina; however, the Corporation's balance sheet in Brazil is only about two-thirds the size of its balance sheet in Argentina and the branch network is about half as large. This reflects the Corporation's Brazilian strategy of operating in very focused and targeted up-tier markets, a strategy that is not conducive to maintaining a large balance sheet. The Corporate Bank- ing business principally focuses on large multinational and domestic companies, offering them a full range of commercial and investment banking products. In Retail Banking, the focus is on an upscale customer base, specifically the top 10 percent of the wage earners in the country. As with Corporate Banking, re- tail customers are offered a full product set, including lending, credit cards, mutual funds, deposit products, telebanking and home banking. To further pene- trate its targeted customer base, the Corporation embarked on a branch expan- sion program during 1998, which has nearly doubled the size of the branch net- work to approximately 65 locations. The Corporation's total assets in Brazil at the end of 1998 and 1997 were ap- proximately $6 billion, which in both years included a loan portfolio of ap- proximately $3 billion. The major components of the 1998 loan portfolio follow. Chart 5 Brazil - Loans . Corporate 87% . Consumer* 9% . Middle Market 4% * Approximately two-thirds of the consumer portfolio is collateralized. As noted in the chart, the substantial portion of loans are to large corpora- tions, and approximately 90 percent of these loans are related to import/export transactions. Given the nature of this loan portfolio, commercial loan net credit losses have historically been minimal and totaled $1 million in 1998 and $2 million in 1997. The consumer portfolio, which totals approximately $300 million, is made up of mortgages, auto loans, credit card receivables and over- drafts. Net credit losses related to consumer loans were $13 million in 1998 and $7 million in 1997. The Corporation's Brazilian operations consist of three main sub-businesses: Corporate Banking, Retail Banking and Treasury. Products and services of the Corporate and Retail Banking sub-businesses are discussed above. The Treasury sub-business is mainly responsible for asset and liability management and trad- ing activities. The estimated percentage contribution to operating income for each sub-business in 1998 follows. Chart 6 Brazil - Operating Income . Corporate Banking 61% . Treasury 22% . Retail Banking 17% Net income from Brazilian operations increased $28 million, or 39 percent, from 1997. This improvement was achieved despite costs incurred in 1998 to expand the branch network, as previously discussed. Operating income increased $49 million on the strength of higher net interest revenue, due to wider spreads and an increase in average earning assets; higher levels of mutual fund, depos- it, credit card and letter of credit fees; and improved trading account prof- its. The mutual fund business accounts for - -------------------------------------- 33 -------------------------------------- nearly 15 percent of the Brazilian operation's total revenue, reflecting its status as the fourth largest mutual fund company in the country. An increase in expenses partially offset the revenue improvements. Substantially all of the increase in expenses came from the Retail Banking sub-business due, in large part, to the branch expansion activities in 1998. This also had the effect of lowering Retail Banking's contribution to operating income in 1998. In order to more fully understand how the Corporation manages its cross-border and other market risks in Brazil, you should refer to the "Cross-Border Outstandings" and "Non-U.S. Dollar Denominated Risk Management" sections. Other Businesses The following is a listing of individual businesses that have been combined in Other Businesses: . Global Treasury This unit is primarily responsible for asset and liability risk management (see the "Asset and Liability Management" section for a further discussion of asset and liability risk management). Global Treasury accounts for approximately $12 billion of the average assets shown in Other Businesses, mainly related to securities portfolios used to manage the Cor- poration's U.S. dollar interest rate risk exposure. In addition, operating results from investments made in bank-owned life insurance are included in Global Treasury's results. . Other Latin America In addition to its major operations in Argentina and Brazil, the Corporation also maintains a network of smaller offices throughout Latin America which, in the aggregate, contribute approximately $3 billion of the average assets shown in Other Businesses. These offices are located in Chile, Uruguay, Mexico, Colombia, Panama and Peru. . National Consumer During 1997, the Corporation sold two of its three na- tional consumer businesses, FAC and Ganis. The remaining business, national credit card, was contributed to a joint venture in January 1998. . Remaining Businesses The remaining businesses include Asia, the Interna- tional Private Bank and EMSTR. These businesses account for the remainder of the average assets shown in Other Businesses. All of these areas have undergone realignments during 1998, and asset levels in Asia and EMSTR have declined. Also included in Other Businesses are the following joint ven- tures: Argentine pension, domestic stock transfer, national credit card and Mexican pension, the latter of which was sold during 1998. Net income from Other Businesses declined $6 million from 1997, which included a lower level of operating income, a decline in the provision for credit losses and a decline in the effective tax rate. Operating income declined $139 million as a result of EMSTR, mainly reflecting trading losses incurred in 1998, cou- pled with the Corporation's exit from its national consumer businesses. These declines were partially offset by a higher level of securities gains from Global Treasury. The exit from the national consumer businesses was primarily responsible for the $93 million decline in the provision for credit losses, while the low effective tax rate in 1998 resulted from the tax treatment of various Global Treasury investments. Financial Condition Risk Management The Corporation's management of the risks inherent in its businesses is essen- tial for understanding and assessing its financial performance and for creating long-term value. Four of the Corporation's primary risk factors are credit risk, market risk, operating risk and liquidity risk. All of these risks, if not effectively managed, can result in a potential loss of earnings, both cur- rent and future, erosion of capital and/or reputational harm. The Corporation has a series of risk processes intended to identify, monitor and control these risks. These processes are structured around certain fundamental building blocks, including commitment from senior level management; business unit owner- ship; clearly defined policies and procedures; training; independent oversight; established approval processes; utilization of management information systems, measurement and analytical tools; and capital allocation and other performance evaluation processes. While sound risk management processes assist the Corpora- tion in managing its risk exposures, they do not insulate the Corporation from losses. Despite the Corporation's best efforts to control its risks, losses can, and do, periodically result, particularly from fraud and collusion and un- anticipated events that challenge the limits of these processes. As such, the Corporation continually seeks to improve its risk management culture to better balance associated risks with its goal of optimizing value to its stockholders and customers while operating in a dynamic environment. The Risk Management unit oversees the Corporation's worldwide risk management processes, except for liquidity risk which is managed by Global Treasury (see the "Liquidity Risk Management" section). The Risk Management unit is led by the Executive Vice President of Risk Management, who reports directly to the CEO, and is composed of credit risk, market risk and operating risk management functions. It also has administrative responsibility for the global assurance function that monitors compliance with regulatory and various operating poli- cies. Oversight of these risk management processes is provided by a number of cross-functional committees, including the Credit Policy Committee (CPC), the Market Risk Committee (MRC) and the Operating Risk Committee (ORC), which are chaired by the Executive Vice President of Risk Management or various senior executives who report to him. Additional information on the Corporation's risk management processes and the abovementioned committees can be found in the "Credit Risk Management," "Market Risk Management" and "Operating Risk Manage- ment" sections. During 1998, the Corporation successfully managed the risks associated with the introduction of the euro, a unified currency that was adopted by participating European countries on January 4, 1999. One transitory item that continues to impact all of the Corporation's primary risk factors is the Year 2000 issue. A discussion of the Corporation's Year 2000 program follows. - -------------------------------------- 34 -------------------------------------- Year 2000 The following Year 2000 statements constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure Act of 1998. Because memory was expensive in the early days of computing, programmers cre- ated a standard of storing data using two rather than four-digit years. Most application software programs use this standard, and, unless it is corrected, 01/01/00 could be recognized as the first day of 1900 and not the beginning of the year 2000. This error could force computers to shut down or lead to the generation of inaccurate data. The Corporation has deployed a significant num- ber of cross-functional resources with technical, business unit, legal and fi- nancial expertise in order to achieve Year 2000 readiness. The Corporation has an extensive worldwide program in place to address its ex- posure to the Year 2000 issue. This program is designed to assess, correct, monitor, report and minimize the Year 2000 risks associated with application systems; technical infrastructure, including the hardware through which appli- cations operate, networking services, telecommunications and desktop applica- tion systems; facilities, including embedded chip technologies in facilities equipment and environmental systems; credit customers; wholesale fund provid- ers, including various governments; counterparties in treasury and capital mar- kets contracts; vendors and service providers, including utilities and telecom- munications suppliers and third party processing agents; and fiduciary activi- ties related to the Corporation's asset management services. In addition, the Corporation has an internal and external communications pro- gram in place to educate interested parties about the Year 2000 issue. The Cor- poration's employees receive information via a dedicated newsletter, the intranet, email and an awareness video. The Corporation is also conducting an external program of awareness education and support for its business partners, merchants, vendors and credit customers. This program serves a dual purpose of helping those who do business with the Corporation to understand the broad im- plications of the Year 2000 problem and of minimizing the Corporation's expo- sure to Year 2000 risks which are not under its direct control. Information Technology The information technology elements of the Corporation's Year 2000 program are proceeding through the following phases: . Awareness Phase -- the development of a comprehensive awareness strategy and structure for managing the project. . Inventory Phase -- the identification of a comprehensive inventory, includ- ing mission critical application systems and technical infrastructure, that could be impacted by the Year 2000 issue. . Assessment Phase -- the creation of detailed action plans to mitigate Year 2000 risks associated with the inventoried items. These plans include time- tables and resource requirements that reflect the items' potential impact on the Corporation's businesses. . Remediation Phase -- the execution of action plans that include code en- hancements and changes in application design, as well as software and hard- ware upgrades or replacements. . Certification Phase -- the execution of pre-defined processes by cross- functional teams, including business unit partners, in an effort to ensure that application systems and technical infrastructure meet specific Year 2000 certification requirements. . Readiness Testing Phase -- the testing of critical interdependencies be- tween internal systems and business processes and third party technology interfaces using defined plans in an effort to ensure that certain require- ments are met for the Year 2000. Integration testing focuses on internally dependent application systems, technology infrastructure and business processes. External testing focuses on mission critical technology inter- faces with external third parties. The complexity and magnitude of the Year 2000 issue have required the Corporation to adopt a dynamic approach that is tailored by the characteristics of each mission critical element as well as by the dynamics of the affected operations. Furthermore, the progress of mission critical elements is impacted by resource prioritization within the program and across Year 2000 and other business initiatives, as deemed appropriate, as well as by the level of Year 2000 awareness in various countries. Program status is tracked by mission critical components, using completion percentages. The completion of phases is designed to coincide with regulatory guidelines. The Awareness, Inventory and Assessment phases were substantially completed by early 1998. As of December 31, 1998, the status of other information technology phases was as follows: Remediation and Certification Remediation of application systems was 100 percent complete across all of the Corporation's operations. Certification was more than 90 percent complete for domestic and Brazilian operations, and Argentine operations were approximately 40 percent certified. While Argentina is somewhat behind the other operations due to recent acquisitions and other initiatives during the year, the Corpora- tion anticipates that certification of application systems will be substan- tially completed for all operations, including Argentina, by the end of the first quarter of 1999. With respect to technical infrastructure, remediation was over 70 percent com- plete for domestic operations, over 75 percent complete for Brazilian opera- tions and over 80 percent complete for Argentine operations. The Corporation expects to substantially complete its remediation and certification of techni- cal infrastructure for all operations by the end of the first quarter of 1999. Desktop application systems are currently being tested using a standard toolkit, and are scheduled to be completed by the end of the first quarter of 1999. - -------------------------------------- 35 -------------------------------------- Readiness Testing The Readiness Testing phase began in the third quarter of 1998. While mission critical readiness testing is expected to be substantially completed by mid- 1999, the Corporation anticipates that it will continue testing through the end of 1999. To date, testing has focused on the internal dependencies between ap- plication systems, technical infrastructure and internal business processes. Mission critical applications have been categorized into five integrated test- ing segments, of which two have been completed successfully. Testing with mis- sion critical external parties with whom the Corporation exchanges data is ex- pected to be substantially completed by the end of the first quarter of 1999; however, the Corporation expects to continue this testing through the remainder of 1999. Non-Information Technology Credit customers, wholesale fund providers and treasury and capital markets counterparties have been assessed using structured questionnaires combined with evaluations of potential monetary impact on the Corporation. Non-information technology vendors and service providers are rated based on their importance to mission critical processes. These processes are being identified in conjunction with the Corporation's Year 2000 contingency planning efforts, a discussion of which follows. As of December 31, 1998, the status of these non-information technology components of the Corporation's program was as follows: Facilities. In domestic operations, all sites and facilities vendors have been inventoried and assessed for criticality. All critical sites are scheduled for certification by mid-1999, after component testing and remediation as well as site integration testing. Brazilian and Argentine operations currently antici- pate that their mission critical facilities will be substantially remediated, tested and certified by September 1999. The Corporation currently has business resumption contingency plans in place that have been updated and tested annual- ly, and will be revised to reflect considerations specific to the Year 2000 is- sue. Credit Customers. The Corporation has surveyed customers representing approxi- mately 90 percent of the Corporation's total credit exposure. Of those sur- veyed, the Corporation has received over 90 percent positive responses as to Year 2000 readiness. The results of the Corporation's surveys have been incor- porated into the Corporation's credit risk management processes, including cus- tomer risk ratings. The Corporation will continue to monitor and assess, throughout 1999, the potential impact of the Year 2000 issue on its loan port- folio. Wholesale Fund Providers. The Corporation has evaluated over 80 percent of its mission critical and important funding sources, of which approximately 80 per- cent have provided positive responses as to Year 2000 readiness. Additionally, the Corporation has developed strategies to limit liquidity exposure around critical dates and will continue to monitor and assess, throughout 1999, the potential impact of the Year 2000 issue on its funding sources. Treasury and Capital Markets Counterparties. The Corporation has surveyed counterparties who comprise at least 90 percent of its counterparty exposures, of which over 90 percent have provided positive responses as to Year 2000 read- iness. The Corporation is currently developing action plans for high risk counterparties, and will continue to monitor and assess, throughout 1999, the impact of the Year 2000 issue on its critical counterparty exposures. Non-Information Technology Vendors and Service Providers. The Corporation has a program in place to assess non-information technology vendor, service provider and product readiness. The level of assessment is dictated by the relative im- portance of vendors, service providers and products to mission critical busi- ness processes, as defined through Year 2000 contingency planning efforts. Man- agement expects this element of the Corporation's Year 2000 program to remain challenging due to the complexities of vendor and service provider management and the scope of readiness efforts outside of the Corporation's control. Conse- quently, the Corporation will continue to monitor and assess, throughout 1999, the impact of the Year 2000 issue on its purchased products and services. Fiduciary Activities. The Corporation has developed a strategy to monitor the Year 2000 readiness of its significant investments made on behalf of its mutual fund and private banking clients. These efforts will be performed throughout 1999, and will mainly include reviews of published materials, including regula- tory filings and internet sites, as well as reviews of independent reports on third party transfer, accounting and custodial agents. Risks and Uncertainties The Corporation expects to complete its Year 2000 program in a timely and ef- fective manner that mitigates risk. However, the Corporation is subject to risks and uncertainties due to the uniqueness of the Year 2000 issue; the sig- nificant interdependencies in business and financial markets and the range of activities and events outside of the Corporation's control; as well as the challenges created by recent acquisitions (i.e. Deutsche Argentina, Robertson Stephens and OCA), including the integration of acquired businesses into the Corporation's Year 2000 program and the additional pressures placed on informa- tion technology resources. As a result of the risks and uncertainties associ- ated with the Year 2000 issue, particularly with respect to vendors and service providers and other third parties, the Corporation is unable to predict with any certainty the extent of potential Year 2000 failures that could result, nor quantify the potential effect that such failures could have on the Corpora- tion's results of operations and financial condition. However, these risks and uncertainties could result in service delays, inaccurate and untimely informa- tion processing, funding delays, contract settlement and counterparty failures, increased credit losses and reputation risk. - -------------------------------------- 36 -------------------------------------- Final Readiness Efforts and Contingency Planning The Corporation has developed a strategy to combine the various efforts within the Year 2000 program, and assess and report upon the readiness of mission critical components and processes of business units. This strategy includes ob- taining validation from senior management of mission critical processes; link- ing the interdependencies between application systems, technical infrastructure and non-information technology elements, including vendors and service provid- ers; identifying weak links; and planning around known and currently unknown risks. In this regard, the Corporation is developing business resumption, remediation, and event contingency plans to prepare for potential systems fail- ures at critical dates, failures of critical third parties to effectively reme- diate and certify their technologies, as well as other unanticipated events that could arise with the date change. The development of these plans includes the assessment of failure scenarios as well as the identification of mission critical business processes. The Corporation expects that its contingency plan- ning for the Year 2000 issue will be substantially completed by the end of June 1999. Additionally, as previously discussed, the Corporation will continue readiness testing through 1999 in an effort to detect currently unknown risks. Costs The Corporation currently expects that its total incremental costs for its Year 2000 program, including costs already incurred, will be approximately $75 mil- lion. It is estimated that these incremental costs represent slightly over 50 percent of the Corporation's total program costs, which also include the rede- ployment of internal resources from many areas of the Corporation. Addition- ally, the Corporation expects to incur capital expenditures of approximately $20 million, including costs for accelerated and out of cycle replacements of technology. As of December 31, 1998, the Corporation had incurred approximately half of its expected Year 2000 costs. The Corporation has not incurred, and is not likely to incur, incremental project costs that are material to any report- ing period. The majority of remaining costs are expected to be directed to the testing phase as well as final readiness efforts to mitigate both currently known and subsequently discovered risks. Throughout the remainder of the proj- ect, the Corporation will also continue to allocate internal resources to ad- dress the Year 2000 issue. *** The Corporation's estimated costs and expected timetables with respect to its Year 2000 program represent forward-looking statements that could differ mate- rially from actual results due to changes in assumptions as the program evolves and new information becomes available; the impact of acquisitions; the Corpora- tion's ability and resources to effectively execute its Year 2000 program; the impact of external market pressures on technology resources; the status of ef- forts by critical third parties to mitigate Year 2000 risks; and the extent to which unanticipated issues arise late in the project. Credit Risk Management Credit risk is defined as the risk of loss arising from a counterparty's fail- ure or inability to meet payment or performance terms of a contract with the Corporation. The Corporation's risk management processes are intended to address the manage- ment of all forms of credit risk, including balance sheet and off-balance-sheet exposures. The CPC, on a corporate-wide basis, establishes all credit policies for the Corporation, approves underwriting standards and concentration limits, and grants credit approval authorities. An independent credit function monitors compliance by individual units with the Corporation's credit policies, works to ensure that credit due diligence and credit administration meet acceptable standards, and is responsible for the effectiveness of the loan review process. The credit function includes a staff of credit officers reporting directly to the Chief Credit Officer (CCO). These credit officers are assigned to work with the various business units to ensure the integrity of the credit process. Busi- ness unit management has the primary responsibility to evaluate credit risk, ensure that each individual credit exposure is appropriately risk rated, and monitor and manage credit risks within policy and portfolio guidelines. In ad- dition, a credit information unit provides reports on credit exposures on a corporate-wide basis. A risk review unit, which reports independently of both the business and credit units, audits the integrity of risk ratings and the ad- equacy of the credit process for all units of the Corporation. Senior management in Boston oversees the worldwide credit activities, both cor- porate and consumer, of the Corporation. The level of management needed to ap- prove credit exposures varies according to the size and level of perceived risk of the credit. Corporate credits that meet specified size and risk rating thresholds must be approved by the Senior Credit Committee, which is chaired by the CCO and is composed of senior credit officers and senior business unit man- agers on a rotating basis. Portfolio limits and underwriting standards are es- tablished by the CPC for both consumer and commercial credit exposures with common risk characteristics, such as industry or product type. An important as- pect of the Corporation's portfolio management process is the management of large, individual credits, which are governed by relationship limits that are set according to risk rating. The CPC has also established target risk rating profiles for the Corporation. All limits are reviewed regularly and adjusted based on the CPC's assessment of relevant conditions. In addition, the Country Exposure Committee, also chaired by the CCO, sets country limits on cross-bor- der exposures to borrowers and counterparties domiciled in other countries. The Corporation's loan syndications unit, which is part of the Wholesale Bank, is integral to portfolio management by enhancing the liquidity of the wholesale loan portfolio. Syndications is responsible for arranging participations in loans where the Corporation is the lead bank. This unit maintains contact with other institutional lenders and investors in bank structured loans, maintains information on credit structure and pricing by risk category, evaluates the market liquidity of facilities, and syndicates Corporation-agented facilities to attain desired hold levels. The Corporation employs a corporate-wide process to review individual credits and identify emerging problems. Credits that deteriorate into certain defined risk categories are managed by a separate loan review unit composed of profes- sional asset recovery specialists who establish detailed asset management plans designed to mitigate risk of credit loss to the Corporation. - -------------------------------------- 37 -------------------------------------- Loans and Lease Financing Table 5 shows a breakdown of the portfolio for the last five years. Table 5 -- Loans and Lease Financing Portfolio
December 31 1998 1997 1996 1995 1994 (dollars in millions) Balance Percent Balance Percent Balance Percent Balance Percent Balance Percent - -------------------------------------------------------------------------------------------------------------- United States Commercial, industrial and financial.......... $16,294 38.1% $15,268 34.7% $13,162 32.0% $12,809 33.0% $13,122 34.8% Commercial real estate Construction........... 215 .5 271 .6 284 .7 386 1.0 391 1.0 Other.................. 3,871 9.0 4,211 9.6 3,240 7.9 3,393 8.7 4,065 10.8 Consumer-related Secured by 1-4 family residential properties............ 4,329 10.1 5,393 12.3 6,062 14.8 6,697 17.2 7,079 18.8 Other.................. 2,936 6.9 4,712 10.7 6,898 16.8 5,554 14.3 4,559 12.1 Lease financing......... 1,801 4.2 1,938 4.4 1,816 4.4 1,564 4.0 1,482 3.9 Unearned income......... (275) (.6) (302) (.7) (287) (.7) (240) (.6) (239) (.6) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 29,171 68.2 31,491 71.6 31,175 75.9 30,163 77.6 30,459 80.8 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- International Commercial and industrial............. 9,295 21.7 8,826 20.1 6,946 16.9 6,422 16.5 5,161 13.6 Banks and other financial institutions........... 597 1.4 860 2.0 866 2.1 796 2.1 749 2.0 Governments and official institutions........... 95 .2 95 .2 79 .2 82 .2 33 .1 Consumer-related Residential mortgages.. 1,251 2.9 947 2.2 699 1.7 526 1.4 454 1.2 Other.................. 1,554 3.6 1,010 2.3 606 1.5 470 1.2 410 1.1 Lease financing......... 725 1.7 452 1.0 368 .9 285 .7 329 .9 All other............... 369 .9 378 .8 415 1.0 163 .4 189 .5 Unearned income......... (251) (.6) (79) (.2) (93) (.2) (37) (.1) (76) (.2) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 13,635 31.8 12,489 28.4 9,886 24.1 8,707 22.4 7,249 19.2 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- $42,806 100.0% $43,980 100.0% $41,061 100.0% $38,870 100.0% $37,708 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- -------------------------------------- 38 -------------------------------------- Total loans and lease financing decreased approximately $1.2 billion from De- cember 31, 1997, reflecting a decrease in domestic loans and lease financing of $2.3 billion, which was partially offset by a $1.1 billion increase in the in- ternational portfolio. The decrease in the domestic loan and lease portfolio was primarily driven by a $2.2 billion C&I loan securitization, as well as a $2.8 billion decrease in consumer-related loans. The decrease in consumer-re- lated loans included the Corporation's contribution of its national credit card portfolio of approximately $1.2 billion to a joint venture, the securitizations of $.8 billion of home equity loans and lower levels of residential mortgage and indirect auto loans. Offsetting the abovementioned declines, domestic loans and lease financing increased approximately $3 billion from the prior year. This increase included growth in the Business Credit, Energy and Utilities, and Environmental Services portfolios. Further information on the abovementioned securitizations can be found in Note 6 to the Financial Statements. The increase in international loans included a $.5 billion increase in C&I loans and a $.8 billion increase in consumer-related loans. This increase was primarily driven by growth in the Argentine portfolio, including the acquisi- tion of Deutsche Argentina. A further discussion of the Corporation's Argentine and Brazilian operations is included in the " Line of Business Information" and "Cross-Border Outstandings" sections. Highly Leveraged Transactions Included in commercial, industrial and financial loans are loans made by many of the Corporation's lending businesses to finance transactions involving leveraged buyouts, acquisitions and recapitalizations. These loans are desig- nated as highly leveraged transactions (HLTs) if, by the nature of the loan terms and the profile of the customer, the transaction qualifies for this clas- sification under the current bank regulatory definition of HLTs. Additionally, the HLT definition encompasses other more traditional credit arrangements where a high degree of leverage would be expected, such as asset-based lending and lending to the communications industry, particularly cable, where equity is traditionally low and cash flow is the predominant factor in assessing repay- ment ability. Table 6 summarizes the Corporation's HLT portfolio for the last three years. Table 6 -- HLT Portfolio
December 31 1998 1997 1996 (dollars in millions) - ------------------------------------------------------------------------------- Total loans............................................... $1,267 $1,551 $1,319 Number of companies....................................... 108 129 116 Average loan size......................................... $ 12 $ 12 $ 11 Unused lending commitments................................ $ 765 $1,191 $ 677 Equity and mezzanine investments.......................... $ 224 $ 235 $ 187
The Corporation's HLT portfolio is spread among a variety of industries. At De- cember 31, 1998, the largest segments of the HLT portfolio by industry were as follows: media and communications -- $323 million to 19 customers; petroleum, chemicals, rubbers and plastics -- $123 million to 11 customers; healthcare, education and childcare -- $98 million to 5 customers; and leisure, amusement, motion pictures and entertainment -- $95 million to 9 customers. Yields on HLT loans are generally higher than on most other commercial loans. Typically, in- terest rates on new HLTs range from 2.3 percent to 4.5 percent over the London Interbank Offered Rate (LIBOR) and fees charged range from .25 percent to .65 percent of the principal amount committed. At December 31, 1998, the Corpora- tion had one nonaccrual HLT loan of approximately $4 million. There were no nonaccrual HLT loans at December 31, 1997. In addition, there were two net credit losses, totaling approximately $9 million, in 1998, compared with no net credit losses in 1997. 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. The Corporation has historically been involved in transactions that meet the regulatory definition of HLTs, and it expects to continue to agent and par- ticipate in such transactions in the future. - -------------------------------------- 39 -------------------------------------- Nonaccrual Loans and Leases and OREO Table 7 summarizes nonaccrual loans and leases by type and as a percentage of the related consolidated loan category. Table 7 -- Nonaccrual Loans and Leases and OREO
December 31 1998 1997 1996 1995 1994 Percent Percent Percent Percent Percent of Loan of Loan of Loan of Loan of Loan (dollars in millions) Balance Category Balance Category Balance Category Balance Category Balance Category - ------------------------------------------------------------------------------------------------------------- United States Commercial, industrial and financial.......... $ 86 .5% $ 59 .4% $ 82 .6% $ 88 .7% $130 1.0% Commercial real estate Construction........... 2 .9 3 1.1 6 2.1 25 6.5 13 3.3 Other.................. 19 .5 40 .9 67 2.1 103 3.0 133 3.3 Consumer-related Secured by 1-4 family residential properties............ 53 1.2 64 1.2 80 1.3 56 .8 53 .7 Other.................. 26 .9 46 1.0 61 .9 35 .6 26 .6 ---- ---- ---- ---- ---- 186 .6 212 .7 296 1.0 307 1.0 355 1.2 ---- ---- ---- ---- ---- International Commercial and industrial............. 76 .8 64 .7 74 1.1 34 .5 17 .3 Banks and other financial institutions........... 10 1.7 1 .1 Consumer-related Residential mortgages.. 50 4.0 28 3.0 22 3.1 20 3.8 11 2.4 Other.................. 53 3.4 16 1.6 10 1.7 11 2.3 6 1.5 All other............... 1 .6 30 15.9 ---- ---- ---- ---- ---- 189 1.4 108 .9 106 1.1 66 .8 65 .9 ---- ---- ---- ---- ---- Total nonaccrual loans and leases........... 375 .9 320 .7 402 1.0 373 1.0 420 1.1 OREO.................... 27 36 50 69 143 ---- ---- ---- ---- ---- $402 $356 $452 $442 $563 ==== ==== ==== ==== ====
- -------------------------------------- 40 -------------------------------------- Total nonaccrual loans and leases and OREO increased $46 million from December 31, 1997, reflecting an increase in international nonaccrual loans of $81 mil- lion, offset, in part, by a decrease in domestic nonaccrual loans of $26 mil- lion. The increase in international nonaccrual loans was primarily related to growth in Argentine and Asian nonaccrual loans of approximately $49 million and $14 million, respectively. The increase in Argentine nonaccrual loans reflected growth in Argentine loan portfolios, including the acquisition of Deutsche Ar- gentina, and consisted primarily of consumer-related loans. The increase in Asian nonaccrual loans was mainly related to Indonesia. The decrease in domes- tic nonaccrual loans reflected decreases in the Consumer and Community Banking, Real Estate and Multinational portfolios, offset, in part, by an increase in the Business Credit portfolio. The decrease in domestic consumer-related nonaccrual loans was due largely to the Corporation's divestiture of its na- tional credit card portfolio in the first quarter of 1998. The future level of nonaccrual loans and leases and OREO will be influenced by the economic environment, interest rates and other internal and external fac- tors existing at the time, including the effect, if any, of developments in various emerging markets countries and the impact of sustained volatility in world financial markets. In this regard, the Corporation is monitoring economic events in Brazil, and the effect these events might have on the level of nonaccrual loans and leases and OREO that could result in its Brazilian portfo- lio, as well as the potential impact on other Latin American portfolios, espe- cially in Argentina. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO, although a sustained regional economic downturn could result in a higher level of nonaccrual loans and leases and OREO. The management of, and the accounting policy for, the Corporation's nonaccrual loans and leases and OREO is discussed above in the "Credit Risk Management" section and in Note 1 to the Financial Statements, respectively. Table 8 -- Changes in Nonaccrual Loans and Leases and OREO
(dollars in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Balance, January 1............................................ $356 $452 $442 Assets of entities acquired................................... 22 Assets of entities divested................................... (20) (27) Additions..................................................... 705 527 618 Sales, payments and other decreases........................... (218) (225) (304) Credit losses and valuation adjustments....................... (443) (371) (304) ---- ---- ---- Balance, December 31.......................................... $402 $356 $452 ==== ==== ==== Ending balance as a percentage of related assets.............. 0.9% 0.8% 1.1%
The $178 million increase in additions to nonaccrual loans in 1998 included ap- proximately $70 million, largely from a series of loans in the International Private Bank, discussed below in the "Reserve for Credit Losses" section, and approximately $50 million of Asian additions, primarily from Indonesia, re- flecting the continuing economic crisis in that country. - -------------------------------------- 41 -------------------------------------- Reserve for Credit Losses The Corporation determines the level of its reserve for credit losses by as- sessing a number of factors, including evaluations of individual credits and concentrations of credit risks, net losses charged to the reserve, changes in the quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in the size and char- acter of the credit risk and other pertinent factors. The credit risk of off- balance-sheet exposures is managed as part of the overall extension of credit to individual customers and is considered in assessing the overall adequacy of the reserve for credit losses. The amount of the reserve for credit losses as- sociated with off-balance-sheet exposures is not significant. The amount of the reserve for credit losses is reviewed quarterly by management and the Corpora- tion's Board of Directors (the Board). Refer to Notes 7 and 22 to the Financial Statements for a further discussion of the reserve for credit losses and credit risk related to off-balance-sheet exposures. Table 9 presents a five-year analysis of the Corporation's reserve for credit losses and related ratios. Table 9 -- Reserve for Credit Losses and Related Ratios
(dollars in millions) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Balance, January 1................ $ 712 $ 883 $ 890 $ 827 $ 941 Provision......................... 380 200 231 275 154 Reserves of entities acquired..... 26 3 3 16 25 Reserves of entities divested..... (95) (11) (32) Credit losses(1).................. (441) (366) (310) (282) (379) Recoveries........................ 77 87 80 86 86 ------- ------- ------- ------- ------- Net credit losses................. (364) (279) (230) (196) (293) ------- ------- ------- ------- ------- Balance, December 31.............. $ 754 $ 712 $ 883 $ 890 $ 827 ======= ======= ======= ======= ======= Loans and lease financing at December 31...................... $42,806 $43,980 $41,061 $38,870 $37,708 Average loans and lease financing........................ $44,683 $42,383 $40,589 $38,283 $36,017 Reserve for credit losses to total loans and leases at December 31.. 1.76% 1.62% 2.15% 2.29% 2.19% Reserve for credit losses to nonaccrual loans and leases at December 31...................... 201% 222% 220% 239% 197% Reserve for credit losses to nonaccrual and renegotiated loans and leases at December 31........ 201% 222% 215% 219% 165% Net credit losses to average loans and lease financing.............. .81% .66% .57% .51% .81% Net credit losses to provision for credit losses.................... 95.79% 139.50% 99.57% 71.27% 190.26% Total recoveries to total credit losses........................... 17.46% 23.77% 25.81% 30.50% 22.69% - --------------------------------------------------------------------------------
(1) For 1994, includes $119 million related to transferring certain lower qual- ity real estate exposures to an accelerated disposition portfolio (ADP). - -------------------------------------- 42 -------------------------------------- The reserve for credit losses at December 31, 1998 was $754 million, or 1.76 percent of outstanding loans and leases, compared with $712 million, or 1.62 percent, at December 31, 1997. The reserve for credit losses was 201 percent of nonaccrual loans and leases at December 31, 1998, compared with 222 percent at December 31, 1997. The future level of the reserve for credit losses will con- tinue to be a function of management's evaluation of the Corporation's credit exposures existing at the time, which will be affected by future events and general economic conditions in the United States, Latin America, Asia and vari- ous other overseas markets; the impact of the Corporation's strategic decisions on various credit portfolios; and the potential impact that the Year 2000 issue could have on the Corporation's credit portfolios. While no assurance can be given regarding the future level of the reserve, the above factors could result in an increased level of reserve in the future. Table 10 summarizes net credit losses by type for the last five years. Table 10 -- Net Credit Losses
Years Ended December 31 1998 1997 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Domestic Credit Losses Commercial, industrial and financial.... $ (75) $ (42) $ (21) $ (47) $ (38) Commercial real estate Construction........................... (6) (7) (10) Other.................................. (7) (8) (39) (49) (62) Consumer-related Secured by 1-4 family residential properties............................ (15) (18) (25) (26) (22) Other.................................. (112) (222) (167) (94) (80) ----- ----- ----- ----- ----- (209) (290) (258) (223) (212) International Credit Losses Commercial.............................. (142) (38) (20) (24) (28) Consumer................................ (90) (38) (32) (35) (20) ----- ----- ----- ----- ----- (232) (76) (52) (59) (48) ----- ----- ----- ----- ----- Total credit losses, excluding those related to ADP....................... (441) (366) (310) (282) (260) Domestic Recoveries Commercial, industrial and financial.... 10 9 13 17 22 Commercial real estate Construction........................... 5 1 4 Other.................................. 9 13 9 20 14 Consumer-related Secured by 1-4 family residential properties............................ 3 6 7 5 4 Other.................................. 20 34 31 28 24 ----- ----- ----- ----- ----- 42 62 65 71 68 International Recoveries Commercial.............................. 12 12 4 7 13 Consumer................................ 23 13 11 8 5 ----- ----- ----- ----- ----- 35 25 15 15 18 ----- ----- ----- ----- ----- Total recoveries...................... 77 87 80 86 86 ----- ----- ----- ----- ----- Net credit losses, before credit losses related to ADP................ (364) (279) (230) (196) (174) Credit losses related to ADP............ (119) ----- ----- ----- ----- ----- $(364) $(279) $(230) $(196) $(293) ===== ===== ===== ===== =====
- -------------------------------------- 43 -------------------------------------- Net credit losses increased $85 million from 1997, reflecting a decline in do- mestic net credit losses of $61 million and an increase in international net credit losses of $146 million. The international increase was principally driven by an increase in Asian net credit losses of $27 million, primarily from Indonesian credits that had been adversely affected by the sustained economic crisis in that region; and a charge-off of approximately $66 million related to a series of loans to related borrowers that were initiated by a former officer in the Corporation's International Private Bank. The Corporation has completed its investigation of the circumstances surrounding the abovementioned series of International Private Bank loans and has taken disciplinary action with respect to a number of individuals. The Corporation is also actively pursuing collec- tion of these loans. Further, the Corporation is vigorously pursuing claims un- der its insurance coverage. In addition, net credit losses from the Argentine portfolio increased $34 million from the prior year, primarily reflecting growth in the consumer-related portfolio and the acquisition of Deutsche Argen- tina. The decrease in domestic net credit losses primarily reflected the Corpora- tion's divestiture of its national consumer businesses, including the 1997 sales of FAC and Ganis as well as the Corporation's contribution of its na- tional credit card portfolio to a joint venture in the first quarter of 1998. For the years ended December 31, 1998 and 1997, aggregate net charge-offs from these portfolios were approximately $16 million and $120 million, respectively. During 1998, the reduction in domestic net credit losses was partially offset by the charge-off of one large domestic commercial credit in the fourth quarter of 1998. The future level of net credit losses will be influenced by the economic envi- ronment and other external factors, including the effect, if any, of develop- ments in various emerging markets countries and the impact of sustained vola- tility in world financial markets. In this regard, the Corporation is closely monitoring economic events in Brazil, and the effect these events might have on the level of credit losses that could result in its Brazilian portfolio, as well as the potential impact on other Latin American portfolios, particularly in Argentina. As such, no assurance can be given as to the future levels of net charge-offs, although a sustained regional economic downturn could result in a higher level of net charge-offs. The Corporation's willingness to extend new credit is a function of a variety of factors, including competition for customers' business; an analysis of a loan's potential profitability and risk profile; and economic conditions in New England, other parts of the United States and other countries where the Corpo- ration does business. In addition, certain segments of the loan portfolio may increase or decrease from the December 31, 1998 level in accordance with stra- tegic or credit management decisions made by the Corporation, including the ac- quisition or divestiture of companies or portfolios. Given these factors, the rate of change in the size and mix of the Corporation's loan portfolios experi- enced during the past few years may not be indicative of the future. The above factors may also affect the levels of nonaccrual loans, net credit losses and the reserve for credit losses. Further information on the Corporation's loan and lease financing portfolio can be found in Note 6 to the Financial State- ments. Cross-Border Outstandings In accordance with bank regulatory rules, cross-border outstandings are amounts payable to the Corporation by residents of foreign countries, regardless of the currency in which the claim is denominated, and local country claims in excess of local country obligations. At December 31, 1998, total cross-border outstandings were $8.7 billion, compared with $8.6 billion at December 31, 1997, which included $5.9 billion and $6.5 billion, respectively, of cross-bor- der outstandings to emerging markets countries. Excluded from cross-border outstandings are the following: . Local country claims that are funded by local country obligations payable only in the country where issued regardless of the currency in which the claim or obligation is denominated. . Local country claims funded by non-local country obligations (typically de- nominated in 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 des- ignated 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 December 31, 1998, such outstandings related to emerging markets countries totaled $2.2 billion, compared with $2.8 billion at December 31, 1997. . Claims reallocated as a result of external guarantees, cash collateral, or insurance contracts issued primarily by U.S. government agencies. Cross-border outstandings include deposits in other banks, resale agreements, trading securities, securities available for sale, securities held to maturity, loans and lease financing, amounts due from customers on acceptances, accrued interest receivable and revaluation gains on trading derivatives. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be un- able to meet their contractual repayment obligations of principal and/or inter- est when due because of the unavailability of, or restrictions on, foreign ex- change needed by borrowers to repay their obligations. The Corporation manages its cross-border outstandings using country exposure limits as discussed in the "Credit Risk Management" section. - -------------------------------------- 44 -------------------------------------- Table 11 details by country the Corporation's approximate cross-border outstandings that individually amounted to 1 percent or more of its consoli- dated total assets at December 31, 1998, 1997 and 1996. Table 11 -- Significant Cross-Border Outstandings
Percentage of (dollars in millions) Public Banks Other Total Total Assets Commitments(1) - -------------------------------------------------------------------------------- December 31, 1998(2) Argentina............... $775 $ 50 $1,155 $1,980 2.7% $ 10 Brazil.................. 405 495 900 1.2 40 December 31, 1997(2) Argentina............... $740 $ 5 $1,035 $1,780 2.6% $ 15 Brazil.................. 415 120 785 1,320 1.9 130 Chile................... 130 225 350 705 1.0 20 December 31, 1996(2) Argentina............... $605 $ 15 $ 945 $1,565 2.5% $ 55 Brazil.................. 305 30 585 920 1.5 40 Chile................... 60 265 385 710 1.1 30 - --------------------------------------------------------------------------------
(1) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. (2) Cross-border outstandings in countries which totaled between .75% and 1% of consolidated total assets at December 31, 1998, 1997 and 1996 were approxi- mately as follows: 1998--Chile, $690 million, United Kingdom, $630 million; 1997--None; 1996--None. Latin America Total cross-border outstandings and commitments to Latin American countries are presented below in Table 12. At December 31, 1998 and 1997, approximately 61 percent of total cross-border outstandings were to countries in Latin America. The Corporation maintains branch networks and/or subsidiaries in each of the individual countries named in the following table. Table 12 -- Cross-Border Outstandings and Commitments to Latin America
Years Ended December 31 1998 1997 Cross-Border Cross-Border (in millions) Outstandings Commitments Outstandings Commitments - -------------------------------------------------------------------------------- Argentina..................... $1,980 $ 10 $1,780 $ 15 Brazil........................ 900 40 1,320 130 Chile......................... 690 35 705 20 Mexico........................ 470 25 435 50 Uruguay....................... 300 10 200 Peru.......................... 290 10 190 20 Colombia...................... 245 5 255 5 Panama........................ 155 190 Other......................... 240 30 170 80 ------ ---- ------ ---- $5,270 $165 $5,245 $320 ====== ==== ====== ==== - --------------------------------------------------------------------------------
- -------------------------------------- 45 -------------------------------------- The Corporation's total assets in Argentina at December 31, 1998 amounted to approximately $9 billion, reflecting an increase of approximately $2 billion from December 31, 1997. Included in these total assets were the Argentine cross-border outstandings presented in the table above. At December 31, 1998 and 1997, Argentine loans and lease financing was $6.0 billion and $4.7 bil- lion, respectively. These increases reflected the acquisition of Deutsche Ar- gentina and the Argentine branch expansion program. The Corporation's nonaccrual Argentine loans were $140 million at December 31, 1998, compared with $91 million at December 31, 1997. The increase in nonaccrual loans was due primarily to growth in the Argentine portfolio, in- cluding a higher level of consumer-related lending. The percentage of nonaccrual loans to total Argentine loans and lease financing was 2.3 percent at December 31, 1998, compared with 1.9 percent at December 31, 1997. The Corporation's total assets in Brazil at December 31, 1998 and 1997 amounted to approximately $6 billion. Included in these total assets were the Brazilian cross-border outstandings presented in the table above. At December 31, 1998 and 1997, Brazilian loans and lease financing was approximately $3 billion. The Corporation's nonaccrual Brazilian loans were $18 million at December 31, 1998, compared with $12 million at December 31, 1997. The percentage of nonaccrual loans to total Brazilian loans and lease financing was .6 percent at December 31, 1998, compared with .4 percent at December 31, 1997. For additional information on Argentina and Brazil, see the "Line of Business Information" section. For further discussion of the Corporation's nonaccrual loans and net credit losses, see the "Nonaccrual Loans and Leases and OREO" and "Reserve for Credit Losses" sections. During 1998, world financial markets experienced significant volatility due to the Asian and Russian crises. These crises also impacted the economies of Latin America, and, in particular, contributed to the economic and political insta- bility recently experienced by Brazil. The financial pressures created by the Asian and Russian turmoil led to a significant deterioration in the level of Brazil's foreign currency reserves starting in August 1998. The reduction in foreign currency reserves and the Brazilian government's need to reduce both its current account and fiscal deficits led the government to allow Brazil's currency to float freely against the U.S. dollar beginning in mid-January 1999. This resulted in a significant devaluation of the Real against the U.S. dollar. The government's departure from the managed exchange rate policy, that was in- stituted in July 1994, has led to an expectation that the Brazilian economy will contract and inflation will rise during 1999. The government also has passed a number of fiscal reforms aimed at controlling the public deficit and to meet the requirements of its agreement with the International Monetary Fund. In anticipation of a deterioration in the Brazilian financial markets, the Cor- poration's Brazilian operations implemented a number of measures in December and January to protect the Corporation in the event of a devaluation. These measures are expected to benefit the Corporation's Brazilian unit in the first quarter of 1999. The Corporation has not experienced collection problems as a result of world economic volatility, currency restrictions or foreign exchange liquidity prob- lems in its current portfolio of cross-border outstandings to Latin America. However, if actions implemented by the Brazilian government and other Latin American governments are not effective over time, the Corporation's operations could experience adverse effects. It is expected that the economic situation in Latin America, including the effect of world financial markets on these econo- mies, will continue to be unsettled. The impact that these events will ulti- mately have on Latin American economies and, therefore, the Corporation's oper- ations in that region, is uncertain. The Corporation will continue to monitor the economies of the Latin American countries in which it has local operations and cross-border outstandings, as well as the economies of other emerging mar- kets which could impact the performance of the Corporation, and will take cer- tain actions as it deems appropriate. Each emerging markets country is at a different stage of development with a unique set of economic fundamentals; therefore, it is not possible to predict what developments will occur and what impact these developments will ultimately have on the economies of these coun- tries or on the Corporation's financial statements. Asia At December 31, 1998, the Corporation's total cross-border outstandings to countries in Asia amounted to approximately $.8 billion, or 9 percent of total cross-border outstandings, compared with $1.2 billion, or 14 percent, at Decem- ber 31, 1997. The decrease in Asian cross-border outstandings reflected the Corporation's efforts to actively manage and reduce its Asian exposure. In 1998, the Corporation realigned its strategy in Asia to focus on capital markets, including debt underwriting and trading, foreign exchange and deriva- tives. The Corporation also conducts activities in trade finance and cash man- agement. Credit-related services primarily support these capital markets and trade activities. In addition, the Corporation announced the closing of its representative office in India and branch offices in Japan, the Philippines and Taiwan. At December 31, 1998, the Corporation had Asian nonaccrual loans of $14 mil- lion. During 1998, the Corporation charged off $27 million of Asian credits, most of which related to Indonesia, and recorded a $20 million charge to nonin- terest income related to its 17.5 percent equity investment in KMBC, reflecting deterioration of that company's financial condition. In 1997, nonaccrual loans and net credit losses were not significant. - -------------------------------------- 46 -------------------------------------- The Corporation continues to closely monitor the situation in Asian markets and to manage its portfolio in order to maximize its future results, all within the parameters of the Corporation's established risk management processes. Liquidity Risk Management Liquidity risk is defined as the risk of loss arising from the Corporation's inability to meet known near-term and projected long-term funding commitments, including supporting selective business expansion in accordance with the Corpo- ration's strategic plan. The Corporation manages liquidity risk according to policy set, and oversight provided, by the Asset, Liability and Capital Committee (ALCCO), to ensure its ability to meet present and future funding needs in domestic and overseas mar- kets. U.S. dollar liquidity management is centralized in Boston, with overseas operations managing their local currency liquidity requirements. The Corpora- tion's U.S. dollar liquidity is monitored on a daily basis, and is reviewed monthly by ALCCO and at least quarterly by the Board. Available liquidity sources are measured against anticipated needs of the Corporation as a whole, the parent company and each of the subsidiary banks. Alternative funding strat- egies are reviewed, updated and implemented by ALCCO as considered necessary. The Corporation's liquid assets consist primarily of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans, and unencumbered U.S. Treasury and U.S. government agency securities. Table 13 presents the level of the Corporation's liquid assets at each of the last three year ends. Table 13 -- Liquid Assets
December 31 1998 1997 1996 (in billions) - -------------------------------------------------------------------------------- Liquid assets.................................................... $8.7 $9.5 $7.3
Deposits are the principal source of the Corporation's funding. Table 14 in- cludes information related to the Corporation's funding sources for the last three years. Certain prior year amounts have been reclassified for comparative purposes. Table 14 -- Funding Sources
December 31 1998 1997 1996 (dollars in billions) - -------------------------------------------------------------------------------- Domestic Interest bearing deposits................................ $28.4 $25.1 $24.7 Noninterest bearing deposits............................. 6.6 8.5 8.3 ----- ----- ----- Total deposits........................................... 35.0 33.6 33.0 Funds borrowed........................................... 10.0 10.9 8.1 Notes payable(1)......................................... 5.2 3.4 2.7 ----- ----- ----- $50.2 $47.9 $43.8 ===== ===== ===== International Interest bearing deposits................................ $12.4 $11.1 $ 9.0 Noninterest bearing deposits............................. 1.1 1.1 .8 ----- ----- ----- Total deposits........................................... 13.5 12.2 9.8 Funds borrowed........................................... 2.0 1.9 1.6 Notes payable............................................ .4 .3 .6 ----- ----- ----- $15.9 $14.4 $12.0 ===== ===== ===== Consolidated Interest bearing deposits................................ $40.8 $36.2 $33.7 Noninterest bearing deposits............................. 7.7 9.6 9.1 ----- ----- ----- Total deposits........................................... 48.5 45.8 42.8 Funds borrowed........................................... 12.0 12.8 9.7 Notes payable(1)......................................... 5.6 3.7 3.3 ----- ----- ----- $66.1 $62.3 $55.8 ===== ===== ===== Deposits as a percentage of Loans.................................................... 113% 104% 104% Total assets............................................. 66% 66% 69% - --------------------------------------------------------------------------------
(1) At December 31, 1998 and 1997, includes $1 billion and $.8 billion, respec- tively, of Trust Securities (defined below). Consolidated deposits increased approximately $2.7 billion compared with Decem- ber 31, 1997, reflecting increases in both domestic and international deposits. The increase in domestic deposits was mainly driven by growth in commercial de- posits. The increase in international deposits mainly reflected deposit growth in Argentina, including the acquisition of Deutsche Argentina. Consolidated notes payable increased $1.9 billion compared with December 31, 1997, primarily due to issuances of $1.2 billion of senior medium-term notes by the Corporation and $.8 billion of subordinated debt by the Bank. Additionally, in June 1998, the Corporation issued $250 million of Trust Securities. - -------------------------------------- 47 -------------------------------------- The Corporation has established a number of trusts, the sole purpose of which is to issue Trust Securities and invest the proceeds in junior subordinated de- bentures issued by the Corporation. The Corporation has unconditionally guaran- teed the trusts' obligations under the Trust Securities. The Trust Securities are presented in the Corporation's Consolidated Balance Sheet as "Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Deben- tures." Additional information on the Corporation's notes payable and the Trust Securities can be found in Notes 10 and 11 to the Financial Statements, respec- tively. Another source of medium-term funding is the securitization market. During the second half of 1998, the Corporation securitized $2.2 billion of C&I loans and $.8 billion of home equity loans. Additional information on these transactions can be found in Note 6 to the Financial Statements. The Corporation also has in place shelf registration statements with current availability of $1.75 billion, which can be used for the issuance of debt or equity securities, including me- dium-term notes and Trust Securities. At December 31, 1998, the Corporation also had availability under various other borrowing arrangements of approxi- mately $.9 billion. Based upon the Corporation's liquid asset level and its ability to access the public markets for additional funding when necessary, management considers overall liquidity at December 31, 1998 adequate to meet current obligations, support expectations for future changes in asset and liability levels and carry on normal operations. Market Risk Management Market risk is defined as the risk of loss arising from adverse changes in mar- ket prices, such as interest rates and foreign exchange rates, on financial in- struments. The Corporation's market risk management process includes the management of all forms of market risk, including balance sheet and off-balance-sheet exposures. Market risk is managed within policies and limits established by ALCCO and the MRC and approved by the Board. ALCCO issues overall strategic directives to specify the extent to which Board-approved risk limits are utilized, based on the Corporation's willingness to accept market risk. The MRC, which is chaired by the Chief Market Risk Officer (CMRO), is responsible for allocating the overall market risk limits set by ALCCO to the Corporation's market risk-taking activities, considering the results of the risk modeling process as well as other internal and external factors. Market risk policies and limits are re- viewed by ALCCO and the MRC at least annually, or more often if warranted by current market, economic or business conditions. The Corporation's independent capital markets risk management function monitors compliance, by individual business unit, with the Corporation's market risk policies and limits. The capital markets risk management function includes a staff of capital markets risk officers reporting directly to the CMRO. These capital markets risk officers are assigned to work with various business units to ensure the integrity of the market risk management process. Business unit management is primarily responsible for evaluating market risk, ensuring that actual exposures are appropriately measured, and monitoring and managing market risks within approved policies and limits. Through monthly meetings, senior management oversees the worldwide market risks arising from the trading and as- set and liability management activities of the Corporation. The objective of the Corporation's market risk management process is to manage and control the effects of changes in market prices, interest rates and foreign exchange rates on the Corporation's results of operations and financial condi- tion. Management seeks to limit the volatility of earnings and protect economic value, as well as balance its level of market risk exposure with its objective of optimizing value to its stockholders and customers. This is attained through the development and implementation of market risk management strategies, in- cluding various balance sheet actions and the use of securities and derivatives and foreign exchange contracts, all within the limits discussed above. While sound market risk policies, methodologies, strategies and infrastructure assist the Corporation in managing its exposure to market risks, they do not insulate the Corporation from losses, such as those experienced in the last half of 1998 due to the period of extreme volatility in various emerging markets countries and the pressure placed on U.S. capital markets during this volatile period. Trading Activities The Corporation's trading activities involve providing risk management and cap- ital markets products and services to its customers, including interest rate derivatives, foreign exchange contracts and debt and equity underwriting and distribution. Interest rate derivatives include interest rate swaps and inter- est rate options, futures and forwards. Foreign exchange activities include trading spot, forward and option contracts, primarily in major foreign curren- cies. Additional information with respect to the Corporation's trading deriva- tives, including accounting policies, is provided in Notes 1 and 22 to the Fi- nancial Statements. In addition, the Corporation takes proprietary trading positions, including po- sitions in domestic equity securities, high yield and emerging markets fixed income securities and local currency debt and equity securities and related de- rivatives. These proprietary trading positions are intended to benefit from short-term movements in the prices of securities and from inefficiencies among various securities issued by the same country or entity. Domestic fixed income trading activities also include trading of U.S. Treasury and U.S. government agency securities. The risk positions taken by the Corporation in these finan- cial instruments are subject to ALCCO and MRC approved limits. The Corporation manages the market risk related to its trading businesses on a daily basis using a Value-at-Risk (VAR) methodology. VAR is defined as the sta- tistical estimate of the potential loss that the Corporation could incur from an adverse movement in market prices. The Corporation uses a 99% confidence level, which means that the Corporation would not expect to exceed the poten- tial loss as calculated by VAR more than once out of every 100 trading days. The VAR methodology requires a number of key assumptions including those relat- ing to the time to liquidate positions, the confidence level for losses, the number of days of price and rate history to be used, the impact of credit spread risk, and the treatment of event risk. - -------------------------------------- 48 -------------------------------------- Table 15 presents VAR amounts for 1998 and 1997. Table 15 -- Aggregate VAR for Trading Businesses
(in millions) 1998 1997 - -------------------------------------------------------------------------------- Year-end VAR.......................................................... $30 $35 Average VAR........................................................... 33 20 Year-end VAR Limit.................................................... 45 40 - --------------------------------------------------------------------------------
The VAR calculations above include the effects of various interest rate and foreign exchange rate risks. The 1998 aggregate year-end VAR and average VAR associated with the Corporation's foreign exchange activities were both approx- imately $7 million. In 1997, the aggregate year-end VAR and average VAR associ- ated with the Corporation's foreign exchange activities were not significant. The calculations do not take into account the potential diversification bene- fits of the different positions taken across trading portfolios. The 1998 increase in the Corporation's aggregate average VAR is due primarily to the increase in market volatility during 1998. Volatility is a contributing risk factor to the VAR calculation; therefore, the sudden market movements wit- nessed during 1998 acted to increase the amount of related risk measured and reported by the Corporation. The validity of the VAR measurement is evaluated by routinely conducting backtests, which compare the estimated VAR amount for trading positions against the actual trading profits and losses of those positions. The chart below de- picts the Corporation's daily aggregate trading VAR and its daily trading prof- its and losses. Trading profits and losses include both the amounts recorded as trading profits and commissions and net foreign exchange profits, a component of other income, in the Corporation's income statement, as well as net interest revenue from these trading positions. Chart 7 - 1998 Combined Backtest Results The daily trading profits and losses include daily trading profits and commissions and net foreign exchange profits, as well as daily trading-related net interest revenue. During 1998, the daily trading profits and losses ranged from losses of $7 million per day to profits of $9 million per day. VAR includes all trading portfolios and the foreign exchange portfolio. During 1998, VAR ranged from $15 million per day to $32 million per day. During 1998, cumulative trading losses of approximately $105 million (excluding trading-related net interest revenue) were incurred in the Corporation's Bos- ton-based emerging markets and high yield portfolios. The losses resulted from the significant volatility in the world financial markets due to the escalation of economic crises in Asia and Russia and the spill-over effect that these cri- ses had on other markets, particularly in emerging markets. These trading losses were offset by gains from other trading portfolios, as well as gains from the Corporation's foreign exchange portfolio. See the "Results of Opera- tions" section for additional discussion. Accordingly, as depicted by the chart on backtest results, the Corporation's aggregate daily trading results were within the estimated aggregate daily risk position throughout the year. In addition to the VAR methodology, the Corporation employs other market risk management tools to manage and evaluate market risk. These risk management tools include loss limits and overall portfolio size limits, as well as monthly stress tests and scenario analyses. Stress testing employs a VAR calculation based on a ten standard deviation change in the prices of the underlying in- struments. Scenario analyses apply actual market conditions observed during past market events against current positions. While the VAR methodology and supplementary risk management tools are effective for managing market risk, they do not preclude the occurrence of trading losses during periods of extreme volatility. Asset and Liability Management (ALM) U.S. Dollar Denominated Risk Management The Corporation's U.S. dollar denominated assets and liabilities are exposed to interest rate risk, which can be defined as the exposure of the Corporation's net income or financial condition to adverse movements in interest rates. At December 31, 1998, U.S. dollar denominated assets comprised the majority of the Corporation's balance sheet. The Corporation's U.S. dollar denominated posi- tions are evaluated and managed centrally through the Global Treasury group, utilizing several modeling methodologies. The two principal methodologies used are market value sensitivity and net interest revenue at risk. The results of these models are reviewed monthly with ALCCO and at least quarterly with the Board. Market value sensitivity is defined as the potential change in market value, or the economic value, of the Corporation resulting from changes in interest rates. Market value sensitivity is determined by calculating the effect on the Corporation's existing assets, liabilities and off-balance-sheet positions of an immediate rise or fall in interest rates (rate shock). Net interest revenue at risk is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in in- terest rates. Net interest revenue at risk is modeled based on both an interest rate shock scenario and one that allows for a gradual change in interest rates over a period of time. The simulated net interest revenue under these scenarios is used to evaluate how differences in asset, liability and off-balance-sheet repricing structures will be reflected in the next twelve months' results of operations. - -------------------------------------- 49 -------------------------------------- The rate risk models consider such variables as: . repricing characteristics of assets and liabilities; . rate change differentials, such as federal funds rates versus savings ac- count rates; . maturity effects; . rate barrier effects, such as caps and floors, on assets and liabilities; and . prepayment volatility on various fixed rate assets, such as residential mortgages. Both of these methodologies are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions, and they ex- clude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other management actions. Therefore, they are not by themselves measures of future levels of net interest revenue. These two methodologies provide different but complementary measures of the level of interest rate risk; the longer-term view is modeled through market value sensitivity, while the shorter-term view is evaluated through net inter- est revenue at risk over the next twelve months. Under current ALCCO direc- tives, market value sensitivity cannot exceed 3 percent of total risk-based capital and net interest revenue at risk over the next twelve-month period can- not exceed 2 percent of annual net interest revenue. Table 16 illustrates the year-end and average U.S. dollar denominated positions for market value sensitivity and net interest revenue at risk. Table 16 -- Market Value Sensitivity and Net Interest Revenue at Risk Positions - -- U.S. Dollar Denominated Positions
1998 1997 (1) (dollars in millions) Year end Average Year end Average - -------------------------------------------------------------------------------- Market value sensitivity(2)................... $145 $145 $154 $142 Percent of risk-based capital................. 1.8% 1.9% 2.2% 2.0% Net interest revenue at risk(3)............... $ 21 $ 15 $ 9 $ 6 Percent of net interest revenue............... .9% .6% .4% .3% - --------------------------------------------------------------------------------
(1) December 31, 1997 amounts have been restated for comparative purposes. (2) Based on a 100 basis point adverse interest rate shock. At December 31, 1998 and 1997, the Corporation's market value sensitivity was negatively biased to rising interest rates. (3) 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 December 31, 1998, the adverse position was based on a 200 basis point decline in interest rates over the next twelve-month period and at December 31, 1997, the adverse position was based on a 100 basis point up- ward interest rate shock. During the second quarter of 1998, the Corporation implemented a new interest rate risk model to measure the interest rate risk of its U.S. dollar denomi- nated assets and liabilities. The model has various enhanced capabilities which include more complete automatic data feeds, increased availability of data on a transaction or account level, expanded scenario analysis, and automated recon- ciliations. The new model generates more refined market value sensitivity and net interest revenue at risk position calculations and provides for increased efficiency in the risk measurement process. The level of exposure maintained by the Corporation is a function of the market environment and may change from period to period based on interest rate and other economic expectations. As noted above, the market value sensitivity and net interest revenue at risk models are complementary in nature. The Corpora- tion's exposure to interest rate movements is managed in compliance with ALCCO directives. ALCCO determines its interest rate risk management strategy by con- sidering the impact of changes in interest rates on each model, and, hence, the short- and long-term effects on the Corporation. Non-U.S. Dollar Denominated Risk Management The Corporation's non-U.S. dollar denominated assets and liabilities are ex- posed to interest rate and foreign exchange rate risks. Non-U.S. dollar denomi- nated interest rate and foreign exchange rate risks are managed by the Corpora- tion's overseas units, with oversight by the Global Treasury group. ALCCO establishes overall limits for each country in which the Corporation has local market interest rate risk and foreign exchange rate risk. Limits are updated at least annually for current market conditions, considering business and economic conditions in the country at a particular point in time. The overseas units report as to compliance with these limits on a regular basis. The majority of the Corporation's non-U.S. dollar denominated interest rate and foreign exchange rate risk exposure stems from its operations in Latin America, primarily Argentina and Brazil. These countries maintain local market risk functions, which independently manage local interest rate and foreign exchange rate risks. The local asset and liability committees in Argentina and Brazil are responsible for establishing market risk policies within the limit struc- ture established by ALCCO and the MRC. Each country has a local capital markets risk officer, who reports to the CMRO and is responsible for ensuring the integrity of the market risk management process. Interest Rate Risk The Corporation's Argentine balance sheet and off-balance-sheet ALM positions primarily relate to its corporate lending and retail businesses. During most of 1998, the interest rate risk related to these ALM positions was managed using cumulative gap limits. Gap is the difference between the amount of assets and liabilities that mature or are repriced during a given period of time. In De- cember 1998, the Corporation implemented a new interest rate risk model to im- prove the measurement of local Argentine interest rate risk. In conjunction with the implementation of the model, a new limit structure incorporating mar- - -------------------------------------- 50 -------------------------------------- ket value sensitivity and net interest revenue at risk was established. At De- cember 31, 1998, the market value sensitivity and net interest revenue at risk of the Corporation's Argentine non-U.S. dollar denominated ALM positions were approximately $6 million and $5 million, respectively, and the limits were $18 million and $22 million, respectively. The Corporation's Brazilian balance sheet and off-balance-sheet ALM positions, which are mostly short-term in nature, primarily relate to corporate lending, trade financing and treasury activities. The interest rate risk related to these ALM positions is managed using a VAR methodology, which methodology is discussed above in the "Trading Activities" section. The VAR positions are cal- culated on a daily basis. The VAR exposure for the Corporation's Brazilian non- U.S. dollar denominated ALM positions was approximately $7 million at December 31, 1998, and the limit was $8 million. The Corporation's Brazilian operation also utilizes other market risk management tools such as stress testing and scenario analyses, and concentration and notional limits to manage the interest rate exposure in its ALM portfolio. Foreign Exchange Rate Risk When deemed appropriate, the Corporation will take positions in certain curren- cies with the intention of taking advantage of movements in currency and inter- est rates. The Corporation takes currency positions by funding local currency assets with dollars or by funding dollar assets with local currency liabili- ties. Whenever these positions are taken, they are subject to limits estab- lished by ALCCO and the MRC, as discussed above. Compliance with these limits is reviewed regularly by the Corporation's independent capital markets risk management function. The majority of the Corporation's foreign exchange risk is generated by its operations in Argentina and Brazil, and is managed within the overall currency positions. Table 17 represents the Corporation's currency po- sitions in Argentina and Brazil for 1998 and 1997. Table 17 -- Currency Positions
1998 1997 (in millions) Year end Average Year end Average - -------------------------------------------------------------------------------- Argentina(1).................................. $421 $230 $368 $116 Brazil(2)..................................... 13 2 132 113 - --------------------------------------------------------------------------------
(1) Positions represent local currency assets funded by U.S. dollars in both periods presented. (2) Positions represent dollar assets funded by local currency liabilities in 1998 and local currency assets funded by U.S. dollars in 1997. Currency positions expose the Corporation to gains or losses when currency price movements are greater or lower than the spread between the local currency interest rate and the U.S. dollar interest rate. To date, the Corporation's currency positions have been liquid in nature and management has been able to close and re-open these positions as necessary. For additional information related to the Corporation's international opera- tions, see the "Line of Business Information" and "Cross-Border Outstandings" sections. Derivative Financial Instruments Derivatives provide the Corporation with significant flexibility in managing its interest rate risk and foreign exchange exposures, enabling it to manage risk efficiently and respond quickly to changing market conditions while mini- mizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps, as part of its asset and liability management practices. The level and term of such contracts may be modified as necessary, in response to balance sheet changes and other management actions, while complying with ALCCO direc- tives for market value sensitivity and net interest revenue at risk. Table 18 summarizes the remaining maturity and notional amount of interest rate derivatives as of December 31, 1998, and the notional amount of interest rate derivatives as of December 31, 1997, entered into for asset and liability man- agement purposes. - -------------------------------------- 51 -------------------------------------- Table 18 -- Remaining Maturity of Interest Rate Derivatives
Remaining Maturity-Notional Amount Less than 1-3 3-5 Greater than 1998 1997 (in millions) 1 year years years 5 years Total Total - -------------------------------------------------------------------------------- Futures and forwards(1)..... $ 734 $ 734 $ 3,947 Interest rate swaps(2)...... 4,495 $1,015 $313 $2,543 8,366 11,162 Interest rate options(3) Purchased................. 2,411 2,411 2,765 Written or sold........... 1,911 1,911 ------ ------ ---- ------ ------- ------- $9,551 $1,015 $313 $2,543 $13,422 $17,874 ====== ====== ==== ====== ======= ======= - --------------------------------------------------------------------------------
(1) At December 31, 1998 and 1997, represents contracts entered into by the Corporation's Brazilian operations in the local market which are linked to short-term interest bearing assets and liabilities. (2) At December 31, 1998, includes $5.4 billion and $3 billion of interest rate swap contracts entered into by the Corporation's domestic and international operations, respectively. Of the domestic interest rate swaps, approxi- mately $3.5 billion are linked to notes payable and $1.6 billion to loans. Of the international interest rate swaps, approximately $2.8 billion were entered into by the Brazilian operations and are scheduled to mature in less than one year. The Brazilian interest rate swaps typically include the exchange of floating rate indices that are indigenous to the Brazilian mar- ket. (3) At December 31, 1998 and 1997, includes equity contracts entered into by the Corporation's Argentine operations. These contracts are linked to Ar- gentine deposit products, where the holder receives payment based on changes in the prices of underlying Argentine securities. Table 19 summarizes the fair value and unrecognized gains (losses) of deriva- tives used for asset and liability management purposes. 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. Table 19 -- Fair Value and Unrecognized Gains (Losses) of Derivatives
December 31 1998 1997 Fair Value(1) Unrecognized Fair Value(1) Unrecognized (in millions) Notional Asset Liability Gain (Loss)(2) Notional Asset Liability Gain (Loss)(2) - -------------------------------------------------------------------------------------------------------- Futures and forwards.... $ 734 $ (6) $ 3,947 $ 21 $ 11 Interest rate swaps..... 8,366 $219 $ 81 110 11,162 132 $11 96 Interest rate options Purchased............. 2,411 89 89 2,765 13 2 Written or sold....... 1,911 66 (66) ------- ---- ---- ---- ------- ---- --- ---- $13,422 $308 $147 $127 $17,874 $166 $11 $109 ======= ==== ==== ==== ======= ==== === ==== - --------------------------------------------------------------------------------------------------------
(1) When certain instruments, such as futures, are subject to daily cash set- tlements, the fair value of these instruments is zero. (2) Unrecognized gain or loss is based upon fair values and represents the amount of gain or loss that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts that have been terminated. 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. Included in unrecognized gains (losses) at December 31, 1998 were deferred gains of $4 million related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 46 months. At December 31, 1997, unrecognized gains of $7 million related to terminated contracts were being amortized to net interest revenue over a weighted average period of four- teen months. The Corporation routinely reviews its asset and liability deriva- tive positions to determine that such instruments continue to function as ef- fective risk management tools. See Note 22 to the Financial Statements for ad- ditional information on derivative financial instruments. Operating Risk Management Operating risk is defined by the Corporation as the risk of loss that can arise from such factors as inadequate, incomplete or incorrect management informa- tion; inadequate technology or infrastructure; deficient policies, processes, procedures, supervision and controls; failures of vendors, service providers and other external dependencies; unplanned events; and human error or dishones- ty. In dynamic operating environments, companies must continue to monitor and re-evaluate their risk management processes and culture. During 1998, the Corporation formed the ORC which is responsible for the Corpo- ration's operating risk management strategy and policies and for the monitoring and assessment of critical operating risks throughout the Corporation. The ORC is chaired - -------------------------------------- 52 -------------------------------------- by the Executive Vice President of Risk Management. This committee is comprised of senior level executives from Risk Management, the Corporation's core busi- nesses, as well as representatives from various support functions. Business unit management is primarily accountable for maintaining strong control envi- ronments in their areas of responsibility, including the identification and evaluation of significant risk factors, the development and presentation of ac- tion plans to mitigate these risk factors, and the performance of assurance ac- tivities to test the effectiveness of their operating control environments. In addition, senior operating risk officers of each key business serve as liaisons between the business units and the operating risk management organization, im- plement strategies tailored to their respective businesses and serve as members of the ORC. Corporate Audit and Risk Review are responsible for executing inde- pendent assurance procedures, in accordance with annual plans that are approved by the Audit Committee of the Board. Capital Management At December 31, 1998, the Corporation had $4.8 billion in stockholders' equity, compared with $4.6 billion at December 31, 1997. At the Corporation's annual meeting held on April 23, 1998, the Corporation's stockholders approved an in- crease in the number of authorized shares of common stock from 300 million shares to 500 million shares. The stockholders also approved a change in the par value of these common shares from $1.50 to $1.00 per share. On the same day, the Corporation's Board approved a two-for-one stock split of the Corpora- tion's common stock, executed in the form of a stock dividend of one share for each share held, which dividend was paid in June 1998. In July 1998, the Corporation redeemed all of its remaining preferred stock, including its adjustable rate cumulative preferred stock, Series A, B and C, and its fixed rate cumulative preferred stock, Series F, for a total redemption value of $278 million, which equaled the aggregate carrying value of the pre- ferred stock. The Corporation's quarterly common stock dividend was $.29 per share during 1998 (as adjusted to reflect the impact of the stock split). In the first quar- ter of 1999, the quarterly dividend was increased 10 percent, to $.32 per share. The level of dividends paid on the Corporation's common stock is deter- mined by the Board based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors deemed relevant by the Board, including the amount of divi- dends paid to the Corporation by its subsidiaries. The Corporation has a capital planning process to determine the appropriate level of capital required to support its various businesses and to ensure that the Corporation maintains this level of capital. Included in the determination of appropriate capital levels are the various capital requirements established by the Corporation's principal regulatory agencies. The Global Treasury group is responsible for developing capital plans for the Corporation and its banking subsidiaries that support the Corporation's strategic objectives. These plans, which are regularly reviewed and approved by ALCCO, include current and pro forma capital positions that are measured using various capital ratios, includ- ing tangible common equity and common equity, as well as three regulatory capi- tal ratios: Tier 1, Total and Tier 1 leverage. At December 31, 1998, the Corpo- ration and its bank subsidiaries met all regulatory capital adequacy require- ments to which they are subject. Table 20 presents the Corporation's capital ratios as of the last two year ends. Table 20 -- Capital Position
December 31 1998 1997 - ------------------------------------------------------------------------------ Tangible common equity ratio (common equity minus intangibles/total assets minus intangibles)...................... 5.5% 5.8% Common equity ratio (common equity/total assets).................. 6.6% 6.3% Regulatory capital ratios Tier 1 capital ratio (Tier 1 capital/total risk-adjusted assets)......................................................... 7.1% 8.0% Total capital ratio (total capital/total risk-adjusted assets)... 11.7% 12.1% Tier 1 leverage ratio (Tier 1 capital/adjusted total average assets).......................... 6.7% 7.4%
Compared with the prior year end, the decrease in the Corporation's regulatory capital ratios at December 31, 1998 reflected the Corporation's acquisitions of Deutsche Argentina, OCA and Robertson Stephens during the year. Additional in- formation on the Corporation's regulatory capital can be found in Note 14 to the Financial Statements. Recent Accounting and Regulatory Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Fi- nancial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that all deriva- tive instruments, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet, as either an asset or liability, measured at its fair value. Changes in the derivative's fair value should be recognized currently in earnings unless the derivative is designated as a hedge. When designated as a hedge, the fair value should be recognized cur- rently in earnings or in other nonowner changes in equity, depending on whether such designation is as a fair value or as a cash flow hedge. With respect to fair value hedges, the fair value of the derivative, as well as changes in the fair value of the hedged item, are reported in the income statement. For cash flow hedges, changes in the derivative's fair value are reported in other non- owner changes in equity and reclassified to the income statement in periods in which earnings are affected by the hedged variable cash flows or forecasted transaction. SFAS No. 133 also requires a company to formally document, desig- nate and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning af- ter June 15, 1999, and cannot be applied retroactively. The Corporation intends to adopt the Statement as of January 1, 2000; however, it has not yet quantified the financial statement impact of adoption, nor determined the method of adoption. The Corporation anticipates that adoption could - -------------------------------------- 53 -------------------------------------- increase volatility in earnings and other nonowner changes in equity, and could result in certain modifications to systems and hedging methodologies. 1997 Compared With 1996 Net Interest Revenue Consolidated net interest revenue in 1997 increased $93 million over 1996. A 17 basis point decline in consolidated net interest margin was more than offset by a $4.3 billion increase in average earning assets. The decrease in net interest margin was primarily due to the sale of FAC in 1997, as well as narrower spreads from Argentine operations. These declines in net interest margin were partially offset by wider spreads in Brazil arising from higher interest rates due to fourth quarter of 1997 market volatility. The increase in average earn- ing assets was driven by an increase of approximately $1.9 billion in trading and available for sale securities, due to growth in domestic-based capital mar- kets-related businesses and balance sheet positioning, as well as an increase in average C&I loans from international operations, particularly in Argentina and Brazil, of approximately $1.7 billion. Average loans and lease volume in domestic operations was relatively unchanged from 1996. A $1.6 billion increase in commercial, industrial and financial loans and commercial real estate loans was offset by a $1.7 billion decrease in consumer-related loans, reflecting the 1997 sales of FAC and Ganis and a lower level of residential mortgages. Noninterest Income Excluding net mortgage servicing fees, financial service fees increased $104 million compared with 1996. The improvement was due to an increase in syndica- tion and agent fees, reflecting a higher volume of transactions generated by the Corporation's loan syndications business; an increase in deposit and ATM- related fees due to repricing of certain domestic products; and an increase in investment banking fees resulting from increased underwriting and financial ad- visory activities in the Corporation's capital markets-related businesses. Net mortgage servicing fees in 1996 included $111 million of pre-tax losses from risk management activities, net of decreased mortgage servicing amortiza- tion. These losses resulted from the decline in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio which, in turn, protected the economic value of the Corporation's mortgage banking subsidiary pending the completion of its sale to HomeSide. Concurrently, the market value of the mortgage servicing assets increased, resulting in a pre-tax gain of $106 million upon the sale of the mortgage banking subsidiary, which substantially offset the losses from risk management activities. The pre-tax gain is included in gains on sales of businesses. Trust and investment management fees increased $37 million, primarily due to higher fees from the Corporation's Argentine mutual fund and Private Banking businesses, reflecting growth in assets under management by these respective businesses. Compared with 1996, trading profits and commissions decreased $18 million. This decrease included losses incurred by the Boston-based emerging markets and high yield units as a result of volatility caused by the emergence, in the fourth quarter of 1997, of the Asian economic crisis. These losses were partially offset by higher net foreign exchange profits arising from growth in the business and an increase in customer demand due to market volatility. The $57 million increase in net securities gains in 1997 mainly reflected net gains related to securities sales in the emerging markets business in the fourth quarter of 1997, and the sale of certain securities in the Argentine available for sale portfolio. Net equity and mezzanine profits increased $12 million over 1996, reflecting continued gains in the Private Equity business. Gains on sales of businesses in 1997 was composed of a $68 million pre-tax gain from the sale of FAC, and, in 1996, a $106 million pre-tax gain from the sale of the Corporation's mortgage banking subsidiary discussed above and a $47 mil- lion pre-tax gain from the sale of branches. The $4 million decrease in other noninterest income included an $11 million loss, recognized in connection with the sale of FAC, on interest rate futures contracts that had been used to hedge the funding of this subsidiary. Noninterest Expense Noninterest expense before acqusition-related restructuring costs increased $184 million compared with 1996. The increase was primarily driven by invest- ment spending in Argentina and Brazil, including the opening of seventeen new branches in Argentina and ten new branches in Brazil; the growth of the Corpo- ration's capital markets-related businesses, including the hiring of additional sales and trading professionals, the opening of the Corporation's Section 20 subsidiary and the formation of a high yield unit; and increased incentive com- pensation related to improved business performance and higher merit increases. In addition, during 1997, the Corporation incurred additional conversion costs associated with its Regional Bank, costs related to the unveiling of the new BankBoston brand in Latin America, and costs in connection with its Year 2000 project. These costs are the principal components of the increase in other non- interest expense. The additional conversion costs included integrating teller, ATM and other back-office systems; additional part-time and temporary help re- lated to the integration of BayBanks; and costs related to the planned closing of additional branches. Also included are costs associated with the extension of the new products set to the Corporation's Connecticut operations in conjunc- tion with the merger of Bank of Boston Connecticut into the Bank, which oc- curred in October 1997. These increases were offset, in part, by lower operat- ing expenses of FAC and Ganis, due to their disposition during 1997, and cost savings related to the integration of BayBanks. In 1996, the Corporation recorded acquisition-related restructuring costs of $180 million in connection with its acquisition of BayBanks. The charges in- cluded severance costs, facility costs, including consolidations of branch and back office operations, and professional fees and other costs of effecting the acquisition. Also included are systems and other conversion costs which were incurred at the time of the acquisition. - -------------------------------------- 54 -------------------------------------- BankBoston Corporation Average Balances and Interest Rates, Taxable Equivalent Basis
Years Ended December 31 1998 1997 Average Average Average Average (dollars in millions) Balance Interest(1) Rate Balance Interest(1) Rate - --------------------------------------------------------------------------------- Assets Interest bearing deposits in other banks U.S.................... $ 142 $ 8 5.77% $ 319 $ 18 5.78% International.......... 1,070 109 10.18 1,462 126 8.61 ------- ------ ------- ------ Total................ 1,212 117 9.66 1,781 144 8.11 ------- ------ ----- ------- ------ ----- Federal funds sold and resale agreements U.S.................... 1,735 90 5.19 635 35 5.43 International.......... 1,451 219 15.09 1,471 215 14.65 ------- ------ ------- ------ Total................ 3,186 309 9.70 2,106 250 11.87 ------- ------ ----- ------- ------ ----- Trading assets U.S.................... 1,099 63 5.71 969 60 6.19 International.......... 793 49 6.22 728 51 7.08 ------- ------ ------- ------ Total................ 1,892 112 5.93 1,697 111 6.57 ------- ------ ----- ------- ------ ----- Securities U.S. Available for sale(2)............. 8,986 583 6.55 7,766 518 6.74 Held to maturity..... 598 37 6.15 658 42 6.34 International Available for sale(2)............. 1,835 178 9.48 1,317 159 12.27 ------- ------ ------- ------ Total................ 11,419 798 6.99 9,741 719 7.38 ------- ------ ----- ------- ------ ----- Loans and lease financing U.S.................... 30,639 2,554 8.34 31,502 2,716 8.62 International.......... 14,044 1,710 12.18 10,881 1,248 11.46 ------- ------ ------- ------ Total(3)............. 44,683 4,264 9.54 42,383 3,964 9.35 ------- ------ ----- ------- ------ ----- Total earning assets.... 62,392 5,600 8.98 57,708 5,188 8.99 ------ ----- ------ ----- Nonearning assets....... 9,808 7,555 ------- ------- Total assets(4)...... $72,200 $65,263 ======= ======= Liabilities and Stockholders' Equity Deposits U.S. Savings deposits..... $15,792 $ 404 2.56% $14,690 $ 397 2.70% Time deposits........ 10,752 589 5.48 10,014 560 5.59 International Banks in foreign countries........... 2,302 145 6.28 2,200 131 5.97 Other foreign savings and time............ 9,217 733 7.95 8,018 597 7.44 ------- ------ ------- ------ Total................ 38,063 1,871 4.92 34,922 1,685 4.82 ------- ------ ----- ------- ------ ----- Federal funds purchased and repurchase agreements U.S.................... 6,035 316 5.24 5,842 333 5.71 International.......... 168 9 5.09 175 17 9.46 ------- ------ ------- ------ Total................ 6,203 325 5.23 6,017 350 5.82 ------- ------ ----- ------- ------ ----- Other funds borrowed U.S.................... 5,312 312 5.87 4,365 262 6.01 International.......... 1,756 222 12.68 1,482 193 13.02 ------- ------ ------- ------ Total................ 7,068 534 7.56 5,847 455 7.78 ------- ------ ----- ------- ------ ----- Notes payable U.S.(5)................ 4,320 286 6.62 2,909 201 6.91 International.......... 378 34 8.93 473 44 9.37 ------- ------ ------- ------ Total................ 4,698 320 6.80 3,382 245 7.25 ------- ------ ----- ------- ------ ----- Total interest bearing liabilities............ 56,032 3,050 5.44 50,168 2,735 5.45 ------ ----- ------ ----- Demand deposits -- U.S................... 6,610 7,226 Demand deposits -- International......... 1,105 705 Other noninterest bearing liabilities.... 3,676 2,497 Stockholders' equity.... 4,777 4,667 ------- ------- Total liabilities and stockholders' equity(4)........... $72,200 $65,263 ======= ======= Net Interest Revenue as a Percentage of Average Interest Earning Assets U.S.................... $43,199 $1,686 3.90% $41,849 $1,822 4.36% International.......... 19,193 864 4.50% 15,859 631 3.98% ------- ------ ------- ------ Total................ $62,392 $2,550 4.09% $57,708 $2,453 4.25% ======= ====== ======= ====== - ---------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securi- ties' amortized cost. (3) Loans and lease financing includes nonaccrual balances. (4) As of December 31, 1998 and 1997, average international assets and liabili- ties as a percentage of total average consolidated assets and liabilities, each amounted to 30% and 27%, respectively. (5) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. - -------------------------------------- 55 -------------------------------------- BankBoston Corporation Average Balances and Interest Rates, Taxable Equivalent Basis
Year Ended December 31, 1996 Average Average (dollars in millions) Balance Interest(1) Rate - ---------------------------------------------------------------------------------- Assets Interest bearing deposits in other banks U.S. ................................................ $ 192 $ 12 5.96% International........................................ 1,136 91 8.01 ------- ------ Total.............................................. 1,328 103 7.71 ------- ------ ----- Federal funds sold and resale agreements U.S. ................................................ 474 25 5.24 International........................................ 1,203 178 14.78 ------- ------ Total.............................................. 1,677 203 12.08 ------- ------ ----- Trading assets U.S. ................................................ 552 31 5.76 International........................................ 870 124 14.30 ------- ------ Total.............................................. 1,422 155 10.99 ------- ------ ----- Loans held for sale U.S. ................................................ 260 18 6.88 International........................................ 12 1 6.12 ------- ------ Total.............................................. 272 19 6.84 ------- ------ ----- Securities U.S. Available for sale(2).............................. 6,577 423 6.48 Held to maturity................................... 684 42 6.15 International Available for sale(2).............................. 832 114 14.13 Held to maturity................................... 29 5 16.53 ------- ------ Total.............................................. 8,122 584 7.19 ------- ------ ----- Loans and lease financing U.S. ................................................ 31,472 2,714 8.62 International........................................ 9,117 1,135 12.44 ------- ------ Total(3)........................................... 40,589 3,849 9.48 ------- ------ ----- Total earning assets.................................. 53,410 4,913 9.20 ------ ----- Nonearning assets..................................... 6,113 ------- Total assets(4).................................... $59,523 ======= Liabilities and Stockholders' Equity Deposits U.S. Savings deposits................................... $14,918 $ 401 2.69% Time deposits...................................... 10,310 581 5.64 International Banks in foreign countries......................... 2,883 163 5.64 Other foreign savings and time..................... 6,380 535 8.37 ------- ------ Total.............................................. 34,491 1,680 4.87 ------- ------ ----- Federal funds purchased and repurchase agreements U.S. ................................................ 4,500 259 5.77 International........................................ 109 14 12.80 ------- ------ Total.............................................. 4,609 273 5.93 ------- ------ ----- Other funds borrowed U.S. ................................................ 3,140 186 5.92 International........................................ 1,002 220 21.91 ------- ------ Total.............................................. 4,142 406 9.79 ------- ------ ----- Notes payable U.S.(5).............................................. 2,119 140 6.59 International........................................ 547 54 9.99 ------- ------ Total.............................................. 2,666 194 7.29 ------- ------ ----- Total interest bearing liabilities.................... 45,908 2,553 5.56 ------ ----- Demand deposits -- U.S................................ 6,635 Demand deposits -- International...................... 477 Other noninterest bearing liabilities................. 1,759 Stockholders' equity.................................. 4,744 ------- Total liabilities and stockholders' equity(4)...... $59,523 ======= Net Interest Revenue as a Percentage of Average Interest Earning Assets U.S. ................................................ $40,211 $1,826 4.54% International........................................ 13,199 534 4.05% ------- ------ Total.............................................. $53,410 $2,360 4.42% ======= ====== - ----------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securi- ties' amortized cost. (3) Loans and lease financing includes nonaccrual balances. (4) As of December 31, 1996, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 25%. (5) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. - -------------------------------------- 56 -------------------------------------- BankBoston Corporation Change in Net Interest Revenue -- Volume and Rate Analysis The following table presents, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes for 1998 com- pared with 1997, and 1997 compared with 1996. The change due to the volume/rate variance has been allocated to volume and the change due to the difference in the number of days in the periods has been allocated to rate.
1998 Compared with 1997 1997 Compared with 1996 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in (in millions) Volume Rate Net Change Volume Rate Net Change - ------------------------------------------------------------------------------------------------ Earning Assets Interest bearing deposits in other banks U.S................... $ (10) $ (10) $ 6 $ 6 International......... (40) $ 23 (17) 28 $ 7 35 -------- ---- (27) 41 -------- ---- Federal funds sold and resale agreements U.S................... 57 (2) 55 9 1 10 International......... (3) 7 4 39 (2) 37 -------- ---- 59 47 -------- ---- Trading assets U.S................... 8 (5) 3 26 3 29 International......... 4 (6) (2) (10) (63) (73) -------- ---- 1 (44) -------- ---- Securities U.S................... 80 (20) 60 77 18 95 International......... 46 (27) 19 53 (13) 40 -------- ---- 79 135 -------- ---- Loans and lease financing U.S................... (72) (90) (162) (20) 3 (17) International......... 385 77 462 202 (89) 113 -------- ---- 300 96 -------- ---- Interest income......... 421 (9) 412 386 (111) 275 -------- ---- Interest Bearing Liabilities Deposits U.S. savings.......... 28 (21) 7 (6) 2 (4) U.S. time............. 40 (11) 29 (16) (5) (21) International......... 99 51 150 68 (38) 30 -------- ---- 186 5 -------- ---- Federal funds purchased and repurchase agreements U.S................... 10 (27) (17) 77 (3) 74 International......... (8) (8) 6 (3) 3 -------- ---- (25) 77 -------- ---- Other funds borrowed U.S................... 56 (6) 50 73 3 76 International......... 34 (5) 29 62 (89) (27) -------- ---- 79 49 -------- ---- Notes payable U.S................... 93 (8) 85 54 7 61 International......... (8) (2) (10) (7) (3) (10) -------- ---- 75 51 -------- ---- Interest expense........ 229 86 315 203 (21) 182 -------- ---- Net interest revenue.... $189 $(92) $ 97 $ 184 $ (91) $ 93 ======== ====
- -------------------------------------- 57 -------------------------------------- BankBoston Corporation Summary of Quarterly Consolidated Financial Information and Common Stock Data
1998 1997 (dollars in millions, Fourth Third Second First Fourth Third Second First except per share amounts) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------ Income Statement Data Interest income.......... $ 1,440 $ 1,410 $ 1,390 $ 1,337 $ 1,342 $ 1,267 $ 1,281 $ 1,275 Interest expense......... 781 785 750 734 720 696 665 655 ------- -------- -------- -------- -------- ------- -------- -------- Net interest revenue... 659 625 640 603 622 571 616 620 Provision for credit losses.................. 120 60 60 140 40 40 60 60 ------- -------- -------- -------- -------- ------- -------- -------- Net interest revenue after provision for credit losses......... 539 565 580 463 582 531 556 560 Noninterest income....... 601 385 457 589 408 448 377 330 Noninterest expense...... 816 786 647 661 600 601 578 544 ------- -------- -------- -------- -------- ------- -------- -------- Income before income taxes................... 324 164 390 391 390 378 355 346 Provision for income taxes................... 117 59 148 153 155 152 143 139 ------- -------- -------- -------- -------- ------- -------- -------- Net income............... $ 207 $ 105 $ 242 $ 238 $ 235 $ 226 $ 212 $ 207 ======= ======== ======== ======== ======== ======= ======== ======== Net income applicable to common stock............ $ 207 $ 104 $ 238 $ 234 $ 230 $ 217 $ 203 $ 198 ======= ======== ======== ======== ======== ======= ======== ======== Average Balance Sheet Data Loans and lease financing............... $45,731 $45,069 $44,196 $43,706 $43,242 $42,429 $42,112 $41,732 Securities............... 12,171 11,692 11,188 10,606 10,538 9,661 9,488 9,261 Other earning assets..... 6,302 6,108 6,577 6,175 5,774 5,679 5,234 5,648 ------- -------- -------- -------- -------- ------- -------- -------- Total earning assets... 64,204 62,869 61,961 60,487 59,554 57,769 56,834 56,641 Cash and due from banks.. 2,870 2,930 3,013 3,221 3,398 3,194 2,976 2,698 Other assets............. 8,257 6,702 6,262 6,002 5,140 4,741 4,136 3,885 ------- -------- -------- -------- -------- ------- -------- -------- Total average assets... $75,331 $72,501 $71,236 $69,710 $68,092 $65,704 $63,946 $63,224 ======= ======== ======== ======== ======== ======= ======== ======== Deposits................. $47,389 $44,539 $45,404 $45,774 $44,252 $42,989 $42,246 $41,899 Funds borrowed........... 13,279 14,423 13,054 12,309 12,730 12,367 11,466 10,866 Other liabilities........ 4,417 3,618 3,508 3,148 3,106 2,464 2,216 2,191 Notes payable(1)......... 5,477 5,149 4,392 3,749 3,524 3,336 3,351 3,316 Stockholders' equity..... 4,769 4,772 4,878 4,730 4,480 4,548 4,667 4,952 ------- -------- -------- -------- -------- ------- -------- -------- Total average liabilities and stockholders' equity.. $75,331 $72,501 $71,236 $69,710 $68,092 $65,704 $63,946 $63,224 ======= ======== ======== ======== ======== ======= ======== ======== Per Common Share(2) Net income Basic................... $ .70 $ .35 $ .81 $ .80 $ .79 $ .75 $ .68 $ .64 Diluted................. .70 .35 .80 .79 .78 .73 .68 .63 Cash dividends declared.. .29 .29 .29 .29 .26 .26 .26 .22 Market value High.................... 44 1/4 58 11/16 58 55 15/16 48 27/32 45 7/8 38 7/16 39 3/8 Low..................... 27 5/8 33 51 15/16 43 15/16 38 17/32 36 9/16 31 13/16 31 15/16 Average Number of Common Shares(2) (in thousands) Basic................... 294,774 294,379 293,769 292,542 290,482 290,766 295,820 306,842 Diluted................. 296,755 296,361 298,275 296,840 294,618 295,684 299,574 311,184 - ------------------------------------------------------------------------------------------------
(1) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. (2) All per share and average share information has been adjusted to reflect the Corporation's two-for-one stock split effected in June 1998. The common stock of the Corporation, which is the only class of its securities entitled to vote at the Annual Meeting of Stockholders, is listed and traded on the New York and Boston stock exchanges. - -------------------------------------- 58 -------------------------------------- [LOGO FOR PRICEWATERHOUSECOOPERS LETTERHEAD APPEARS HERE] Report of Independent Accountants To the Board of Directors and Stockholders of BankBoston Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in common stockholders' equity and of cash flows present fairly, in all material respects, the financial posi- tion of BankBoston Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibil- ity of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and dis- closures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall finan- cial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. January 21, 1999 /s/ PricewaterhouseCoopers LLP - -------------------------------------- 60 -------------------------------------- BankBoston Corporation Consolidated Balance Sheet
December 31 1998 1997 (dollars in millions, except per share amounts) - ---------------------------------------------------------------------------------- Assets Cash and due from banks......................................... $ 3,773 $ 4,006 Interest bearing deposits in other banks........................ 1,533 1,592 Federal funds sold and securities purchased under agreements to resell......................................................... 2,463 2,017 Trading assets.................................................. 3,802 2,947 Securities Available for sale............................................. 12,075 9,946 Held to maturity (fair value of $464 in 1998 and $540 in 1997)......................................................... 459 537 Loans and lease financing (net of unearned income of $526 in 1998 and $381 in 1997)......................................... 42,806 43,980 Reserve for credit losses....................................... (754) (712) Premises and equipment, net..................................... 1,319 1,042 Due from customers on acceptances............................... 338 462 Accrued interest receivable..................................... 561 552 Other assets.................................................... 5,138 2,899 ------- ------- Total Assets.................................................... $73,513 $69,268 ======= ======= Liabilities and Stockholders' Equity Deposits Domestic offices Noninterest bearing........................................... $ 6,554 $ 8,507 Interest bearing.............................................. 28,371 25,104 Overseas offices Noninterest bearing........................................... 1,144 1,085 Interest bearing.............................................. 12,431 11,065 ------- ------- Total deposits.............................................. 48,500 45,761 Funds borrowed.................................................. 12,016 12,865 Acceptances outstanding......................................... 338 460 Accrued expenses and other liabilities.......................... 2,254 1,884 Notes payable................................................... 4,593 2,941 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures................................. 995 747 ------- ------- Total liabilities............................................... 68,696 64,658 ------- ------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares -- 10,000,000 Issued shares -- 3,673,941 in 1997............................ 278 Common stockholders' equity Common stock, par value $1.00 in 1998 and $1.50 in 1997 Authorized shares -- 500,000,000 in 1998 and 300,000,000 in 1997 Issued shares -- 307,317,780 in 1998 and 154,002,254 in 1997 Outstanding shares -- 294,971,900 in 1998 and 145,706,594 in 1997........................................................ 307 231 Surplus....................................................... 1,118 1,219 Retained earnings............................................. 3,895 3,472 Accumulated other nonowner changes in equity Net unrealized gain (loss) on securities available for sale, net of tax.................................................. (19) 53 Cumulative translation adjustments, net of tax............... (14) (11) Treasury stock, at cost -- 12,345,880 shares in 1998 and 8,295,660 shares in 1997..................................... (470) (632) ------- ------- Total common stockholders' equity.............................. 4,817 4,332 ------- ------- Total stockholders' equity...................................... 4,817 4,610 ------- ------- Total Liabilities and Stockholders' Equity...................... $73,513 $69,268 ======= ======= - ----------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. - -------------------------------------- 61 -------------------------------------- BankBoston Corporation Consolidated Statement of Income
Years Ended December 31 1998 1997 1996 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------- Interest Income Loans and lease financing, including fees.......... $ 4,259 $ 3,954 $ 3,863 Securities......................................... 780 698 569 Trading assets..................................... 112 111 155 Federal funds sold and securities purchased under agreements to resell.............................. 309 257 203 Deposits in other banks............................ 117 144 103 -------- -------- -------- Total interest income............................ 5,577 5,164 4,893 -------- -------- -------- Interest Expense Deposits of domestic offices....................... 962 940 944 Deposits of overseas offices....................... 909 745 736 Funds borrowed..................................... 859 805 679 Notes payable...................................... 320 245 194 -------- -------- -------- Total interest expense........................... 3,050 2,735 2,553 -------- -------- -------- Net interest revenue............................. 2,527 2,429 2,340 Provision for credit losses........................ 380 200 231 -------- -------- -------- Net interest revenue after provision for credit losses.......................................... 2,147 2,229 2,109 -------- -------- -------- Noninterest Income Financial service fees and commissions............. 877 663 477 Trust and investment management fees............... 326 283 246 Trading profits and commissions.................... (3) 58 76 Net securities gains............................... 41 80 23 Other income....................................... 791 479 522 -------- -------- -------- Total noninterest income......................... 2,032 1,563 1,344 -------- -------- -------- Noninterest Expense Salaries........................................... 1,373 1,065 983 Employee benefits.................................. 257 214 195 Occupancy expense.................................. 231 204 203 Equipment expense.................................. 167 146 138 Acquisition-related restructuring expense.......... 180 Other expense...................................... 882 695 621 -------- -------- -------- Total noninterest expense........................ 2,910 2,324 2,320 -------- -------- -------- Income before income taxes......................... 1,269 1,468 1,133 Provision for income taxes......................... 477 589 483 -------- -------- -------- Net Income......................................... $ 792 $ 879 $ 650 ======== ======== ======== Net Income Applicable to Common Stock.............. $ 783 $ 848 $ 613 ======== ======== ======== Per Common Share Net income Basic............................................. $ 2.66 $ 2.86 $ 2.00 Diluted........................................... 2.64 2.82 1.96 Cash dividends declared............................ 1.16 .99 .85 Average Number of Common Shares (in thousands) Basic............................................. 293,873 295,918 307,058 Diluted........................................... 296,663 300,080 312,224 - -------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. - -------------------------------------- 62 -------------------------------------- BankBoston Corporation Consolidated Statement of Changes in Common Stockholders' Equity
Accumulated Three Years Ended December Other 31, 1998 Nonowner (dollars in millions, except Common Retained Changes Treasury per share amounts) Stock Surplus Earnings In Equity Stock Total - ------------------------------------------------------------------------------------ Balance, January 1, 1996.... $ 350 $1,240 $2,548 $ 78 $ (22) $4,194 Net income -- 1996.......... 650 650 Change in net unrealized gain on securities available for sale, net of tax and reclassification adjustment................. (6) (6) Change in translation adjustments, net of tax.... (3) (3) ------ Total nonowner changes in equity -- 1996........... 641 Change in par value......... (118) 118 Common stock issued in connection with Dividend reinvestment and common stock purchase plan --817,863 shares..... 1 18 23 42 Exercise of stock options, net of surrendered shares --2,123,434 shares.................... 3 (31) 52 24 Business combinations, net of treasury stock retired --4,765,908 shares.................... (6) (178) 420 236 Restricted stock grants, net of forfeitures -- 221,843 shares........... 9 5 10 24 Other, principally employee benefit plans -- 143,574 shares.................... 26 6 7 39 Cash dividends declared on preferred stock............ (37) (37) Cash dividends declared on common stock -- $.85 per share...................... (247) (247) Purchases of treasury stock -- 10,220,789 shares..................... (490) (490) ----- ------ ------ ---- ----- ------ Balance, December 31, 1996.. 230 1,202 2,925 69 4,426 Net income -- 1997.......... 879 879 Change in net unrealized gain on securities available for sale, net of tax and reclassification adjustment................. (23) (23) Change in translation adjustments, net of tax.... (4) (4) ------ Total nonowner changes in equity -- 1997........... 852 Common stock issued in connection with Dividend reinvestment and common stock purchase plan --269,470 shares..... 6 16 22 Exercise of stock options, net of surrendered shares --1,919,646 shares.................... 1 (53) 113 61 Business combinations -- 386,370 shares........... 8 21 29 Restricted stock grants, net of forfeitures -- 246,319 shares........... 17 (10) 1 8 Other, principally employee benefit plans -- 11,050 shares.................... 39 1 40 Cash dividends declared on preferred stock............ (31) (31) Cash dividends declared on common stock -- $.99 per share...................... (291) (291) Purchases of treasury stock -- 10,300,000 shares..................... (784) (784) ----- ------ ------ ---- ----- ------ Balance, December 31, 1997.. 231 1,219 3,472 42 (632) 4,332 Net income -- 1998.......... 792 792 Change in net unrealized gain (loss) on securities available for sale, net of tax and reclassification adjustment................. (72) (72) Change in translation adjustments, net of tax.... (3) (3) ------ Total nonowner changes in equity -- 1998........... 717 Change in par value......... (77) 77 Two-for-one stock split -- 153,728,260 shares........ 154 (154) Common stock issued in connection with Dividend reinvestment and common stock purchase plan --381,385 shares..... 4 19 23 Exercise of stock options, net of surrendered shares --1,447,235 shares.................... (1) (62) 104 41 Restricted stock grants, net of forfeitures -- 282,934 shares........... 6 (19) 33 20 Other, principally employee benefit plans -- 170,398 shares.................... 28 6 34 Cash dividends declared on preferred stock............ (9) (9) Cash dividends declared on common stock -- $1.16 per share...................... (341) (341) ----- ------ ------ ---- ----- ------ Balance, December 31, 1998.. $307 $1,118 $3,895 $(33) $(470) $4,817 ===== ====== ====== ==== ===== ====== - ------------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. - -------------------------------------- 63 -------------------------------------- BankBoston Corporation Consolidated Statement of Cash Flows
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income....................................... $ 792 $ 879 $ 650 Reconciliation of net income to net cash provided from operating activities Provision for credit losses..................... 380 200 231 Depreciation and amortization................... 194 157 150 Provision for deferred taxes.................... 33 255 2 Net gains on sales of securities available for sale and other assets.......................... (503) (361) (368) Change in trading assets........................ 95 (595) (356) Change in mortgages held for sale............... 269 Net change in interest receivable and payable... 24 63 72 Other, net...................................... (286) 191 (122) -------- -------- ------- Net cash provided from operating activities.... 729 789 528 -------- -------- ------- Cash Flows From Investing Activities Net cash provided from (used for) interest bearing deposits in other banks................. 59 42 (278) Net cash used for federal funds sold and securities purchased under agreements to resell.......................................... (446) (160) (309) Securities available for sale Sales........................................... 11,867 5,359 5,827 Maturities...................................... 2,722 2,902 4,288 Purchases....................................... (16,758) (10,313) (9,624) Securities held to maturity Maturities...................................... 142 120 55 Purchases....................................... (58) (64) (76) Net cash used for lending and leasing activities of nonbank entities............................. (1,560) (418) (1,229) Proceeds from sale of loan portfolios by bank subsidiaries.................................... 4,981 1,295 1,270 Net cash used for lending and leasing activities of bank subsidiaries............................ (1,845) (3,979) (2,710) Proceeds from sale of other real estate owned.... 43 50 45 Expenditures for premises and equipment.......... (502) (324) (237) Proceeds from sale of businesses and premises and equipment....................................... 374 110 264 Payment for purchase business combinations, net of cash acquired................................ (606) Purchase of investment in bank-owned life insurance....................................... (800) (400) Other, net....................................... 382 107 (72) -------- -------- ------- Net cash used for investing activities......... (2,005) (5,673) (2,786) -------- -------- ------- Cash Flows From Financing Activities Net cash provided from deposits.................. 1,563 2,930 1,767 Net cash provided from (used for) funds borrowed........................................ (1,856) 2,565 768 Net proceeds from issuance of notes payable...... 2,127 1,275 921 Repayment/repurchase of notes payable............ (476) (1,155) (289) Net proceeds from issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated debentures.................. 248 247 500 Net proceeds from issuance of common stock....... 94 108 92 Redemption of preferred stock.................... (278) (230) Purchase of treasury stock....................... (784) (490) Dividends paid................................... (350) (322) (284) -------- -------- ------- Net cash provided from financing activities.... 1,072 4,634 2,985 -------- -------- ------- Effect of foreign currency translation on cash... (29) ( 17) (15) -------- -------- ------- Net change in cash and due from banks............ (233) (267) 712 Cash and due from banks at January 1............. 4,006 4,273 3,561 -------- -------- ------- Cash and due from banks at December 31........... $ 3,773 $ 4,006 $ 4,273 ======== ======== ======= - -------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. - -------------------------------------- 64 -------------------------------------- Notes to Financial Statements 1. Summary of Significant Accounting Policies The financial reporting and accounting policies of BankBoston Corporation (the Corporation) conform to generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with current financial state- ment presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following is a summary of the significant accounting policies. Basis of Presentation The consolidated financial statements include the Corporation and its majority owned subsidiaries, including its major banking subsidiary, BankBoston, N.A. (the Bank). All material intercompany accounts and transactions have been elim- inated in consolidation. Investments in 20% to 50%-owned companies are ac- counted for using the equity method. The equity interest in their earnings is included in other income. The excess of cost over the assigned value of the net assets of companies acquired, or goodwill, is included in other assets and is amortized on a straight-line basis, generally over periods ranging from ten to twenty-five years. Foreign Currency Translation The Corporation translates the financial statements of its foreign operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Under the provisions of SFAS No. 52, a func- tional currency is designated for each foreign unit, generally the currency of the primary economic environment in which it operates. Where the functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end exchange rates, while income and expenses are trans- lated using average rates for the period. The resulting translation adjustments and any related hedge gains and losses are recorded, net of tax, as a separate component of stockholders' equity. For foreign units for which the functional currency is the U.S. dollar, includ- ing units that operate in a hyperinflationary environment, the financial state- ments are translated into U.S. dollars using period-end exchange rates for mon- etary assets and liabilities, exchange rates in effect on the date of acquisi- tion for premises and equipment (and related depreciation), and the average ex- change rate during the period for income and expenses. The resulting transla- tion adjustments and related hedge gains and losses for these units are re- corded in current period income. The Corporation hedges a portion of its exposure to translation gains and losses in overseas branches and foreign subsidiaries through the purchase of foreign exchange rate contracts and through investments in fixed assets and se- curities. Trading Assets Trading assets include securities held in anticipation of short-term market movements and for resale to customers. The Corporation values trading securi- ties at fair value and records gains and losses, both realized and unrealized, in trading profits and commissions, a component of noninterest income. Obliga- tions to deliver securities not yet purchased are carried at fair value in funds borrowed. Trading assets also include off-balance sheet financial instruments, primarily interest rate derivatives and foreign exchange products. Derivative trading po- sitions are carried at fair value, with realized and unrealized gains and losses recorded in trading profits and commissions. Interest rate derivatives include futures and forwards, interest rate swaps and interest rate options. Quoted market prices, when available, are used to determine fair value for trading securities and derivative trading positions. If quoted market prices are not available, the fair value is estimated by using pricing models, quoted prices of instruments with similar characteristics or discounted cash flows. Foreign exchange positions are valued at prevailing market rates on a present value basis, and the resulting realized and unrealized gains and losses are re- corded in net foreign exchange profits, a component of other income. Securities Available for Sale and Held to Maturity Securities are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All debt and equity securi- ties that are not purchased in connection with the Corporation's trading activ- ities are classified as either securities held to maturity or securities avail- able for sale. Securities held to maturity are debt securities that the Corpo- ration has the positive intent and ability to hold to maturity. These securi- ties are reported at cost, adjusted for amortization of premium and accretion of discount. Securities available for sale are debt securities that the Corpo- ration may not hold to maturity, as well as equity securities. These securities include debt securities that are purchased in connection with the Corporation's asset and liability management activities and that may be sold in response to changes in interest rates and other related factors; securities held in connec- tion with the Corporation's Private Equity and capital markets-related busi- nesses; and other securities that are intended to be held for indefinite peri- ods of time, but which may not be held to maturity. Within the available for sale category, equity securities that have a readily determinable fair value and debt securities are reported at fair value, with unrealized gains and losses recorded, net of tax, as a separate component of stockholders' equity. Equity securities that do not have a readily determinable fair value are re- ported at cost. If a security available for sale or held to maturity has expe- rienced a decline in value that is deemed other than temporary, it is written down to its estimated fair value through a charge to current period income. Re- alized gains and losses with respect to - -------------------------------------- 65 -------------------------------------- Notes to Financial Statements -- (Continued) securities, which are generally computed on a specific identified cost basis, are included in net securities gains, except for gains and losses with respect to equity and mezzanine securities, which are included in other income. Derivatives Used in Asset and Liability Management Activities As part of the Corporation's asset and liability management (ALM) activities, derivative products, including interest rate swaps, futures, forwards and op- tion contracts (including interest rate caps and floors), are used to hedge exposures or modify the interest rate characteristics of related balance sheet instruments. In order for a derivative to be included in the ALM portfolio, there must be a high correlation between the derivative contract and the item being hedged, both at inception and throughout the hedge period. Derivatives included in the ALM portfolio are linked to specific assets or li- abilities or groups of similar assets or liabilities. Income or loss on the derivatives is recognized on the same basis as that used for the linked assets or liabilities. If the related assets are carried at fair value or the lower of cost or fair value, the fair values of the derivatives are combined with the fair values of the assets and are recognized in income using the same method of accounting as that used for the linked assets. If the assets or lia- bilities are carried at cost, the derivatives are either accounted for on the accrual basis, with income or expense accrued over the life of the agreements as an adjustment to the yield of the related assets or liabilities, or marked to fair value, with any gain or loss deferred and amortized over the period being managed as an adjustment to the yield of the related assets or liabili- ties. In this connection, interest rate swaps, caps and floors are accounted for on the accrual basis and interest rate futures, forwards and other option agreements are marked to fair value, with gains and losses deferred and amor- tized over the period being managed. The Corporation does not utilize written options as part of its interest rate risk management strategy unless they are included as part of an overall option strategy that effectively creates a net purchased option position. If a contract is terminated, any remaining unrecog- nized gain or loss is deferred and amortized as an adjustment to the yield of the related assets or liabilities over the remainder of the period that is be- ing managed. If the linked assets or liabilities are disposed of prior to the end of the period being managed, the related derivatives are marked to fair value, with any resulting gain or loss recognized in current period income as an adjustment to the gain or loss on the disposal of the related assets or li- abilities. The Corporation also enters into foreign exchange contracts to hedge a portion of its own foreign exchange exposure, including foreign currency translation. (See "Foreign Currency Translation" above.) Such contracts are revalued at the spot rate, with any forward premium or discount recognized over the life of the contract in net interest revenue. Loans and Lease Financing Loans are reported at their principal outstanding, net of charge-offs and un- earned income, if any. Interest income on loans is accrued as earned. Unearned income on loans and leases is recognized on a basis approximating a level rate of return over the term of the loan. Loan origination fees and costs are ac- counted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," which requires the deferral of these fees and costs and sub- sequent amortization to income over the life of the related credit or facili- ty. Fees that adjust the yield on the underlying credit are included in inter- est income on loans and lease financing. Fees for credit-related services are included in financial service fees and commissions, a component of noninterest income. Lease financing receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income, including unamortized investment credits. Leveraged leases are reported net of nonrecourse debt. Unearned income is rec- ognized to yield a level rate of return on the net investment in the leases. The Corporation generally places loans and leases on nonaccrual status when any portion of the principal or interest is 90 days past due or, in the case of certain domestic consumer loans, 120 days past due, unless the loan or lease is well secured and in the process of collection, or earlier, when con- cern exists as to the ultimate collectibility of principal or interest. When- ever a loan or lease is placed on nonaccrual status, all other credit expo- sures to the same borrower are also placed on nonaccrual status, except when it can be clearly demonstrated that such credit exposures are well secured, fully performing and insulated from the weakness surrounding the nonaccrual credit to which they relate. When loans or leases are placed on nonaccrual status, the related interest receivable is reversed against interest income of the current period. Interest payments received on nonaccrual loans and leases are applied as a reduction of the principal balance when concern exists as to the ultimate collection of principal; otherwise, such payments are recognized as interest income. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the ultimate collectibility of principal or interest. Reserve for Credit Losses and Provision for Credit Losses The reserve for credit losses is available for future charge-offs of existing extensions of credit. The reserve is increased by the provision for credit losses and by recoveries of items previously charged off, and is decreased as credits are charged off. A charge-off occurs once a probability of loss has been determined, with consideration given to such factors as the customer's financial condition, underlying collateral and guarantees. - ------------------------------------- 66 -------------------------------------- Notes to Financial Statements -- (Continued) The provision for credit losses is based upon management's estimate of the amount necessary to maintain the reserve at an adequate level, considering evaluations of individual credits and concentrations of credit risk, net losses charged to the reserve, changes in the quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in the size and character of the credit risks and other perti- nent factors. Impaired loans are accounted for in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." Loans are classified and accounted for as impaired loans when it is probable that the Corporation will be unable to collect all principal and interest due on the loan in accordance with the original contractual terms. The Corporation uses the same criteria in placing a loan on nonaccrual status. Accordingly, im- paired loans are defined as all nonaccrual loans, exclusive of residential mortgage loans, consumer loans and leases. Impaired loans are valued based on the fair value of the related collateral in the case of commercial real estate loans and, for all other impaired loans, on the present value of expected fu- ture cash flows, using the interest rate in effect at the time the loan was placed on nonaccrual status. A loan's observable market value may be used as an alternate valuation technique. Impairment exists when the recorded investment in a loan exceeds the value of the loan measured using the above-mentioned val- uation techniques. Such impairment is recognized as a valuation reserve, which is included as a part of the Corporation's overall reserve for credit losses. The Corporation recognizes interest income on impaired loans consistent with its nonaccrual policy. Premises and Equipment Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated life of the improvement or the term of the lease. Other Real Estate Owned Other real estate owned (OREO), which is included in other assets, primarily includes properties on which the Corporation has foreclosed and taken title. OREO is reported at the lower of the carrying value of the loan or the fair value of the property obtained, less estimated selling costs. The excess, if any, of the loan over the fair value of the property at the time of transfer from loans to OREO is charged to the reserve for credit losses. Subsequent de- clines in the fair value of the property and net operating results of the prop- erty are recorded in noninterest expense. Income Taxes The Corporation accounts for income taxes in accordance with SFAS No. 109, "Ac- counting for Income Taxes." Current tax liabilities or assets are recognized, through charges or credits to the current tax provision, for the estimated taxes payable or refundable for the current year. Net deferred tax liabilities or assets are recognized, through charges or credits to the deferred tax provi- sion, for the estimated future tax effects, based on enacted tax rates, attrib- utable to temporary differences and tax benefit carryforwards. Deferred tax li- abilities are recognized for temporary differences that will result in amounts taxable in the future, and deferred tax assets are recognized for temporary differences and tax benefit carryforwards that will result in amounts deduct- ible or creditable in the future. The effect of enacted changes in tax law, in- cluding changes in tax rates, on these deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A deferred tax valuation reserve is established if it is more likely than not that all or a portion of the Corporation's deferred tax assets will not be realized. Changes in the deferred tax valuation reserve are recognized through charges or credits to the deferred tax provision. For financial reporting purposes, in- vestment tax credits received in connection with lease financing are recognized as lease income over the investment life of the related asset. Per Share Calculations The Corporation reports earnings per share pursuant to SFAS No. 128, "Earnings per Share." In accordance with this standard, basic net income per common share is computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares outstanding for each period pre- sented. For the computation of diluted net income per common share, net income is reduced by preferred stock dividends, and such adjusted net income is di- vided by the aggregate of the weighted average number of common shares out- standing for each period and the shares representing the dilutive effect of stock options outstanding. The effect of stock options is excluded from the computation of diluted net income per common share in periods in which the ef- fect would be anti-dilutive. Nonowner Changes in Equity Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting Comprehensive Income." Under this standard, the Corporation is required to re- port as comprehensive income, or nonowner changes in equity, all changes to stockholders' equity that result from transactions and other economic events during the reporting period, other than transactions with stockholders in their capacity as owners. For the Corporation, such nonowner changes in equity con- sist of net income and other nonowner changes, composed of unrealized gains and losses on securities available for sale and foreign currency translation ad- justments. - -------------------------------------- 67 -------------------------------------- Notes to Financial Statements -- (Continued) 2. Acquisitions, Joint Ventures and Divestitures In November 1998, the Corporation sold its Berkshire County, Massachusetts franchise, including approximately $300 million in deposits and $1 billion of Private Banking assets under management, resulting in a gain of approximately $51 million. In October 1998, the Corporation sold its domestic institutional custody business, resulting in a gain of approximately $38 million. In August 1998, the Corporation completed its acquisition of the investment banking operations of BancAmerica Robertson Stephens from BankAmerica Corpora- tion for $400 million in cash. The acquired operations were merged into the Corporation's Section 20 subsidiary, BancBoston Securities Inc., which was re- named BancBoston Robertson Stephens Inc. In connection with the acquisition and in addition to the purchase price, the Corporation agreed to pay $400 mil- lion, composed of stock options with an estimated value of approximately $100 million and approximately $300 million in cash compensation, to employees of the acquired operations over the next three and one-half years. In connection with this agreement, compensation expense of $94 million was recorded in 1998. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of the acquired operations were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisi- tion is being amortized over a twenty-five year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. Pro forma results of operations, including the acquisition, for the years ended December 31, 1998 and 1997 are not presented, since the results would not have been significantly different in relation to the Corpo- ration's results of operations. In February 1998, the Corporation completed the sale of its 26 percent minor- ity interest in HomeSide, Inc. (HomeSide). The sale of the minority interest in HomeSide, an independent mortgage banking company formed in 1996 in connec- tion with the Corporation's sale of its mortgage banking subsidiary, resulted in a gain of approximately $165 million. In January 1998, the Corporation completed its acquisition of Deutsche Bank Argentina, S.A. (Deutsche Argentina), a full service bank with approximately $1 billion of loans and $1.5 billion of deposits, for approximately $255 mil- lion in cash. The acquisition, which excluded Deutsche Argentina's pension fund, insurance and investment banking businesses, was accounted for as a pur- chase and, accordingly, the assets and liabilities of Deutsche Argentina were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisition is being amortized over a fifteen-year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. Pro forma results of operations, in- cluding the acquisition, for the years ended December 31, 1998 and 1997 are not presented, since the results would not have been significantly different in relation to the Corporation's results of operations. In January 1998, the Corporation completed a credit card venture agreement, under which it contributed its $1.2 billion national credit card portfolio in exchange for cash, at par. The Corporation also received 19 percent of the common stock and $50 million of preferred stock of the new company, as well as $5 million in cash. In October 1997, the Corporation completed its acquisition of Pacific National Corporation (Pacific), the holding company of Pacific National Bank of Nan- tucket, located on the island of Nantucket, Massachusetts. The Corporation ex- changed approximately 279,000 shares of its common stock, valued at approxi- mately $22 million, for all of the outstanding common stock of Pacific. At the time of acquisition, Pacific had loans of $98 million and deposits of $108 million. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Pacific were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisition is being amortized over a fifteen-year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. In September 1997, the Corporation completed the sale of Fidelity Acceptance Corporation (FAC), a consumer finance subsidiary with assets of $1.1 billion. The sale resulted in a gain of approximately $68 million. The Corporation also incurred a loss of $11 million in connection with interest rate futures con- tracts that had been used to hedge the funding of FAC. In July 1996, the Corporation completed its acquisition of BayBanks, Inc. (BayBanks). The Corporation issued approximately 43.6 million shares of its common stock in exchange for substantially all of the outstanding shares of BayBanks common stock. The acquisition was accounted for as a pooling of in- terests and, accordingly, the historical book values of the assets and liabil- ities of BayBanks were carried over onto the Corporation's consolidated bal- ance sheet, and no goodwill or other intangible assets were created. The ac- quisition is reflected in the accompanying consolidated financial statements as though the Corporation and BayBanks had operated as a combined entity for all periods presented. In connection with the acquisition, the Corporation re- corded acquisition-related restructuring expense of $180 million. In addition, in connection with regulatory approval of the transaction, in 1996, the Corpo- ration sold 20 branches of the resulting combined entity, comprising a total of approximately $500 million of loans and $700 million of deposits, and re- corded a gain of approximately $47 million. In June 1996, the Corporation completed its acquisition of The Boston Bancorp (Bancorp). The Corporation exchanged approximately 4.6 million shares of its common stock, with a value of approximately $229 million, for all of the out- standing common stock of Bancorp. The acquisition, which was accounted for as a purchase, has been included in the accompanying consolidated financial statements since the acquisition date. Goodwill resulting from the transaction is being amortized over a ten-year period. - -------------------------------------- 68-------------------------------------- Notes to Financial Statements -- (Continued) 3. Statement of Cash Flows For purposes of the statement of cash flows, cash and due from banks are con- sidered to be cash equivalents. Foreign currency cash flows are converted to U.S. dollars using average rates for the period. During 1998, 1997 and 1996, the Corporation paid interest of approximately $3 billion, $2.7 billion and $2.5 billion, respectively. The Corporation paid income taxes of approximately $230 million in 1998, $358 million in 1997 and $401 million in 1996. During 1998, 1997 and 1996, the Corporation transferred approximately $17 million, $21 million and $42 million, respectively, to OREO from loans. Loans made to facil- itate sales of OREO properties were not significant in 1998, 1997 or 1996. 4. Reserve Requirements, Restricted Deposits and Pledged Assets At both December 31, 1998 and 1997, cash and due from banks included $1.5 bil- lion to satisfy the reserve requirements of the Federal Reserve System and var- ious foreign central banks. Interest bearing deposits in other banks held to satisfy foreign central bank reserve requirements totaled $3 million at both December 31, 1998 and 1997. At December 31, 1998 and 1997, securities, loans and other assets with a book value of $3.1 billion and $3.5 billion, respectively, were pledged to collateralize repurchase agreements, public deposits and other items. 5. Securities A summary comparison of securities available for sale by type is as follows:
Gross Gross Unrealized Unrealized Carrying (in millions) Cost Gains Losses Value - ------------------------------------------------------- December 31, 1998 U.S. Treasury... $ 704 $ 7 $ 711 U.S. government agencies and corporations-- mortgage-backed securities..... 7,065 66 $ 36 7,095 States and political subdivisions... 34 34 Foreign debt securities..... 2,184 12 85 2,111 Other debt securities..... 1,135 13 3 1,145 Marketable equity securities..... 346 7 14 339 Other equity securities..... 640 640 ------- ---- ---- ------- $12,108 $105 $138 $12,075 ======= ==== ==== ======= December 31, 1997 U.S. Treasury... $ 936 $ 7 $ 943 U.S. government agencies and corporations -- mortgage-backed securities..... 5,798 65 $ 3 5,860 States and political subdivisions... 54 54 Foreign debt securities..... 1,399 8 24 1,383 Other debt securities..... 882 5 887 Marketable equity securities..... 277 35 6 306 Other equity securities..... 513 513 ------- ---- ---- ------- $ 9,859 $120 $ 33 $9,946 ======= ==== ==== =======
Other equity securities include securities which are not traded on established exchanges and are carried at cost. However, in accordance with SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," fair values were es- timated for these securities. These fair values exceeded cost by $216 million and $154 million at December 31, 1998 and 1997, respectively. Further informa- tion with respect to the fair value of these securities is included in Note 28. - -------------------------------------- 69 -------------------------------------- Notes to Financial Statements -- (Continued) A summary comparison of securities held to maturity by type is as follows:
Gross Gross Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ December 31, 1998 U.S. Treasury....................... $ 7 $ 7 U.S. government agencies and corporations -- mortgage-backed securities......................... 439 $ 5 444 Foreign debt securities............. 13 13 ---- --- ---- $459 $ 5 $464 ==== === ==== December 31, 1997 U.S. Treasury....................... $ 6 $ 6 U.S. government agencies and corporations --mortgage-backed securities......................... 520 $ 4 $ 1 523 Foreign debt securities............. 11 11 ---- --- --- ---- $537 $ 4 $ 1 $540 ==== === === ====
A summary comparison of debt securities by contractual maturity is as follows:
December 31 1998 1997 Fair Fair (in millions) Cost Value Cost Value - ------------------------------------------------------------------------------- Available for Sale Within one year.................................. $ 1,623 $ 1,611 $1,219 $1,224 After one but within five years.................. 1,365 1,376 2,030 2,029 After five but within ten years.................. 1,565 1,580 1,787 1,851 After ten years.................................. 6,569 6,529 4,033 4,023 ------- ------- ------ ------ $11,122 $11,096 $9,069 $9,127 ======= ======= ====== ====== Held to Maturity Within one year.................................. $ 7 $ 7 $ 8 $ 8 After one but within five years.................. 114 113 124 124 After five but within ten years.................. 226 231 242 246 After ten years.................................. 112 113 163 162 ------- ------- ------ ------ $ 459 $ 464 $ 537 $ 540 ======= ======= ====== ======
Certain securities, such as mortgage-backed securities, may not become due at a single maturity date. Such securities have been classified within the cate- gory that encompasses the due dates for the majority of the instrument. In 1998, the Corporation realized gross gains of $82 million and gross losses of $19 million from the sale of securities available for sale. Total proceeds from such securities sales in 1998 amounted to approximately $11 billion. In addition, the Corporation recognized a loss of $22 million in 1998 resulting from the writedown of certain securities available for sale which experienced a decline in value that was deemed other than temporary. In 1997, the Corpora- tion realized gross gains of $98 million and gross losses of $18 million from the sale of securities available for sale. Total proceeds from such securities sales in 1997 amounted to approximately $5 billion. In 1996, the Corporation realized gross gains of $44 million and gross losses of $21 million from the sale of securities available for sale. Total proceeds from such securities sales in 1996 amounted to approximately $5 billion. The above amounts for each year exclude equity and mezzanine profits, which are included in other income. 6. Loans and Lease Financing
December 31 1998 1997 (in millions) - -------------------------------------------------------------------------------- United States Commercial, industrial and financial.......................... $16,294 $15,268 Commercial real estate Construction................................................. 215 271 Other........................................................ 3,871 4,211 Consumer-related Residential mortgages........................................ 2,035 2,570 Home equity.................................................. 2,294 2,823 Credit card.................................................. 404 1,756 Other........................................................ 2,532 2,956 Lease financing............................................... 1,801 1,938 Unearned income............................................... (275) (302) ------- ------- 29,171 31,491 ------- ------- International Commercial and industrial..................................... 9,295 8,826 Banks and other financial institutions........................ 597 860 Governments and official institutions......................... 95 95 Consumer-related Residential mortgages........................................ 1,251 947 Credit card.................................................. 362 182 Other........................................................ 1,192 828 Lease financing............................................... 725 452 All other..................................................... 369 378 Unearned income............................................... (251) (79) ------- ------- 13,635 12,489 ------- ------- $42,806 $43,980 ======= =======
- -------------------------------------- 70 -------------------------------------- Notes to Financial Statements -- (Continued) In 1998, the Corporation sold $2.2 billion of commercial and industrial loans in a securitization transaction, and a total of $.8 billion of home equity loans in two securitization transactions. In 1997, the Corporation sold $1.3 billion of consumer-related loans in securitization-related transactions. Gen- erally, under the terms of the securitization transactions, the Corporation sold the assets to be securitized to a trust or other special purpose entity, which issued securities to investors. The investors will be repaid as to both principal and interest from the cash received through collection of the loans. In all of the securitization transactions entered into in 1998 and 1997, the Corporation retained servicing responsibilities and subordinated interests. These retained interests were valued at fair value as of the date of the securitization, and will be accounted for like securities available for sale. The Corporation will receive annual servicing fees approximating .1 percent (for commercial and industrial loans) and .5 percent (for the home equity and consumer-related loans) of the outstanding balance, and the rights to future cash flows in excess of amounts required to be paid to investors under the terms of the respective transaction. The investors and the securitization vehi- cles have no recourse to the Corporation's assets for failure of borrowers to pay when due. However, most of the Corporation's retained interests are gener- ally restricted until investors have been fully paid, and these interests are subordinate to investors' interests. The value of the Corporation's retained interests is subject to substantial credit, prepayment and interest rate risk related to the transferred assets. In 1998, cash proceeds from the securitization of commercial and industrial and home equity loans totaled $3 billion, with the recognition of gains of approxi- mately $12 million, substantially related to the securitizations of the home equity loans. In 1997, cash proceeds from the sale of the consumer-related loans totaled $1.3 billion, and the Corporation recognized a gain of approxi- mately $7 million. 7. Reserve for Credit Losses An analysis of changes in the reserve for credit losses follows:
Years Ended December 31 1998 1997 1996 (in millions) - -------------------------------------------------------------------------------- Balance, January 1......................................... $ 712 $ 883 $ 890 Reserves of entities acquired.............................. 26 3 3 Reserves of entities divested.............................. (95) (11) Provision.................................................. 380 200 231 Credit losses.............................................. (441) (366) (310) Recoveries................................................. 77 87 80 ----- ----- ----- Net credit losses......................................... (364) (279) (230) ----- ----- ----- Balance, December 31....................................... $ 754 $ 712 $ 883 ===== ===== =====
The portion of the reserve for credit losses associated with off-balance-sheet exposures is not significant. At December 31, 1998, impaired loans totaled $191 million, of which loans to- taling $15 million required no valuation reserve and loans totaling $176 mil- lion required a valuation reserve of $40 million. For the year ended December 31, 1998, average impaired loans were approximately $191 million. At December 31, 1997, impaired loans totaled $166 million, of which loans totaling $34 million required no valuation reserve and loans totaling $132 million re- quired a valuation reserve of $40 million. For the year ended December 31, 1997, average impaired loans were approximately $184 million. Interest recog- nized on impaired loans during the years ended December 31, 1998, 1997 and 1996 was not significant. 8. Other Assets
December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------- Investment in bank-owned life insurance........................ $1,247 $ 400 Investment in limited partnerships............................. 792 488 Goodwill and other intangibles................................. 787 329 Accounts receivable............................................ 713 530 Equity investments in affiliates............................... 621 275 Prepaid pension cost........................................... 190 180 OREO........................................................... 27 36 All other...................................................... 761 661 ------- ------- $5,138 $2,899 ======= ======= 9. Funds Borrowed December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------- Federal funds purchased........................................ $ 628 $ 1,003 Term federal funds purchased................................... 1,468 2,530 Securities sold under agreements to repurchase................. 3,145 1,789 Short-term bank notes.......................................... 652 2,679 Medium-term bank notes......................................... 1,850 1,633 All other...................................................... 4,273 3,231 ------- ------- $12,016 $12,865 ======= =======
Medium-term bank notes included borrowings with maturities of greater than one year of $185 million at December 31, 1998 and $150 million at December 31, 1997. All other funds borrowed included borrowings with maturities of greater than one year of $101 million at December 31, 1998 and $161 million at December 31, 1997. At December 31, 1998 and 1997, the Corporation had availability under various borrowing arrangements of $.9 billion and $1.3 billion, respectively. The Corporation had no significant compensating balance arrangements at December 31, 1998 and 1997. - -------------------------------------- 71 -------------------------------------- Notes to Financial Statements -- (Continued) 10. Notes Payable
By Remaining Maturity at December 31 Due less than Due Due 1998 1997 (in millions) 1 year 1-5 years 6-10 years Total Total - -------------------------------------------------------------------------------- Parent Company Senior notes....................... $315 $1,075 $ 150 $1,540 $ 575 Subordinated notes................. 286 648 934 1,041 ---- ------ ------ ------ ------ 315 1,361 798 2,474 1,616 ---- ------ ------ ------ ------ Subsidiaries Senior notes....................... 45 146 184 375 318 Subordinated notes................. 200 1,544 1,744 1,007 ---- ------ ------ ------ ------ 45 346 1,728 2,119 1,325 ---- ------ ------ ------ ------ $360 $1,707 $2,526 $4,593 $2,941 ==== ====== ====== ====== ======
Notes payable are unsecured obligations of the Corporation or its subsidiar- ies. Certain of the indentures under which these notes were issued prohibit the Corporation from making any payment or other distribution in the stock of the Bank unless the Bank unconditionally guarantees payment of principal and interest on the notes. The distribution shown above by remaining maturity is based on contractual maturity. Notes payable at December 31, 1998 and 1997 include fixed rate notes of $2,819 million and $1,943 million, respectively, and variable rate notes of $1,774 million and $998 million, respectively. Fixed rate notes outstanding at Decem- ber 31, 1998 mature at various dates through 2008 and have interest rates ranging from 5.49% to 10.88%. The consolidated weighted average interest rates on fixed rate notes at December 31, 1998 and 1997 were 7.07% and 7.38%, re- spectively. The Corporation has entered into interest rate swap agreements that have effectively converted a portion of its fixed rate obligations to floating rate obligations. At December 31, 1998, such interest rates ranged from 5.26% to 5.75%. Variable rate notes outstanding, with interest rates ranging from 5.17% to 9.25% at December 31, 1998, mature at various dates through 2005. The consolidated weighted average interest rates on variable rate notes at December 31, 1998 and 1997 were 5.62% and 6.48%, respectively. During 1998, the Corporation issued $1,215 million of senior floating and fixed rate medium-term notes, due in 1999 through 2005; $250 million of previ- ously issued medium-term notes matured; and $107 million of previously issued subordinated notes matured. During 1998, the Bank issued $750 million of 6.38% subordinated notes due in 2008. In addition, $161 million of senior floating and fixed rate medium-term notes were issued by a Brazilian subsidiary of the Bank, and $105 million of this subsidiary's previously issued medium-term notes matured. Notes payable maturing during the next five years amount to $360 million in 1999, $273 million in 2000, $677 million in 2001, $308 in 2002 and $449 mil- lion in 2003. 11. Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures Since November 1996, the Corporation has formed five wholly-owned grantor trusts, BankBoston Capital Trust I, II, III, IV and V (collectively, the Trusts), for the exclusive purpose of issuing capital securities (Trust Securities) and investing the proceeds from the sale of such securities in ju nior subordinated debentures issued by the Corporation. The aggregate amount of such debentures outstanding totaled $995 million and $747 million at December 31, 1998 and 1997, respectively. There have been no issuances of Trust Securities by BankBoston Capital Trust V. A summary of the Trust Securities issued and out-standing, net of discount, is as follows:
BankBoston BankBoston BankBoston BankBoston Capital Trust I Capital Trust II Capital Trust III Capital Trust IV - -------------------------------------------------------------------------------------------- Amount outstanding (in millions).............. $250 $250 $248 $247 Original issue date..... 11/26/96 12/10/96 6/4/97 6/8/98 Rate.................... 8.25% 7.75% Libor + .75% Libor + .60% Earliest prepayment option date............ 12/15/2006 12/15/2006 06/15/2007 06/08/2003 Stated maturity......... 12/15/2026 12/15/2026 06/15/2027 06/08/2028 Distribution payment frequency.............. semi-annually semi-annually quarterly quarterly Liquidation preference per Trust Security..... $1,000 $1,000 $1,000 $1,000
- -------------------------------------- 72 -------------------------------------- Notes to Financial Statements -- (Continued) All of the Trust Securities may be prepaid at the option of the Trusts, in whole or in part, on or after the prepayment option dates listed above. At De- cember 31, 1998, the interest rates on the Capital Trust III and IV floating rate Trust Securities were 5.97% and 5.82%, respectively. The Corporation's guarantees of the Trust Securities, together with the other obligations of the Corporation with respect to the Trust Securities, constitute a full and uncon- ditional guarantee by the Corporation of all of the Trusts' obligations under the Trust Securities. The Corporation owns all of the common securities of the Trusts, the sole as- sets of which are their respective subordinated debentures. The principal amount of subordinated debentures held by each Trust equals the aggregate liq- uidation amount of its Trust Securities and its common securities (see Note 27 for the aggregate amount of subordinated debentures currently outstanding). The subordinated debentures bear interest at the same rate, and will mature on the same date, as the corresponding Trust Securities. 12. Preferred Stock In July 1998, the Corporation redeemed all of the outstanding shares of its Ad- justable Rate Cumulative Preferred Stock, Series A, B and C, and its Fixed Rate Cumulative Preferred Stock, Series F, at their total aggregate carrying value of $278 million. In 1997, the Corporation redeemed all of the outstanding shares of its Fixed Rate Cumulative Preferred Stock, Series E, at its aggregate carrying value of $230 million. 13. Stockholder Rights Plan In 1990, the Board of Directors of the Corporation adopted a stockholder rights plan. The plan provided for the distribution of one preferred stock purchase right for each outstanding share of common stock of the Corporation. As a re- sult of the Corporation's two-for-one stock split effected in June 1998, the rights have been adjusted so that one-half of a right is associated with each outstanding share of the Corporation's common stock. Each right entitles the holder, following the occurrence of certain events, to purchase a unit, con- sisting of one-thousandth of a share of Junior Participating Preferred Stock, Series D, at a purchase price of $50 per unit, subject to adjustment. The rights will not be exercisable or transferable apart from the common stock ex- cept under certain circumstances in which a person or group of affiliated per- sons acquires, or commences a tender offer to acquire, 15% or more of the Cor- poration's common stock. Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances, a right may become a right to purchase common stock or assets of the Corporation or common stock of an ac- quiring corporation at a substantial discount. Under certain circumstances, the Corporation may redeem the rights at $.01 per right. The rights will expire in July 2000 unless earlier redeemed or exchanged by the Corporation. In December 1998, the Board of Directors adopted a renewed rights plan, which will become effective upon the expiration or earlier termination of the exist- ing rights plan. Except for differences in the purchase price, which will be $160 per unit, and in the beneficial ownership percentage relating to the exercisability of the rights, which will be 10%, the provisions of the renewed rights plan are substantially similar to those of the existing rights plan. 14. Capital Adequacy A summary of the Corporation's regulatory capital position and related ratios follows:
Well December 31 1998 1997 Capitalized (dollars in millions) Minimum - -------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital ratio............................. 7.1% 8.0% 6.0% Total capital ratio.............................. 11.7% 12.1% 10.0% Tier 1 leverage ratio............................. 6.7% 7.4% 5.0% Tier 1 capital.................................... $ 5,021 $ 4,971 Tier 2 capital.................................... $ 3,218 $ 2,548 Total capital..................................... $ 8,239 $ 7,519 Total risk-adjusted assets........................ $70,377 $62,216 Adjusted total average assets..................... $74,568 $67,661
The Corporation is subject to quantitative regulatory capital adequacy require- ments which take into account the differing risk profiles of banking organiza- tions by assigning risk weights to both assets and the risk asset equivalent amounts of off-balance-sheet exposures. The Corporation and each of its bank subsidiaries are required to maintain minimum ratios of Tier 1 and total capi- tal to total risk-adjusted assets, and of Tier 1 capital to adjusted total av- erage assets. Tier 1 capital includes common stockholders' equity and qualify- ing preferred stock (including the Trust Securities described in Note 11). To- tal capital includes Tier 1 capital and, subject to certain limitations, limit- ed-life preferred stock, mandatory convertible securities, eligible subordi- nated debt and the reserve for credit losses. Under the regulatory framework for prompt corrective action established by The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the Corporation and each of its bank subsidiaries must meet specific guidelines that involve quantitative measures of the Corporation's and each of its bank subsidiaries' assets, liabilities and certain off-balance-sheet exposures as calculated under regulatory accounting practices. The Corporation's and each of its bank subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 1998, each of the Corporation's bank subsidi- aries satisfied the requirements of the "well capitalized" category under the regulatory framework for prompt corrective action. The capital categories of each of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. - -------------------------------------- 73 -------------------------------------- Notes to Financial Statements -- (Continued) 15. Dividends and Loan Restrictions Bank regulations require the approval of bank regulatory authorities if the dividends declared by a bank subsidiary exceed certain prescribed limits. For 1999, aggregate dividend declarations by the Corporation's bank subsidiaries without prior regulatory approval are limited to approximately $448 million of their undistributed earnings at December 31, 1998, plus an additional amount equal to their net profits, as defined, for 1999 up to the date of any divi- dend declaration. However, for any dividend declaration, the Corporation's subsidiaries, as well as the Corporation itself, must consider additional fac- tors such as the amount of current period net income, liquidity, asset quali- ty, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends that the bank subsidiaries could declare. In addition, bank regulators have the authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. Each bank subsidiary is also prohibited by the bank regulatory authorities from granting loans and advances to the Parent Company that exceed certain limits. Assuming declaration of the maximum amount of dividends under the reg- ulations described above, any loans and advances would be limited to an aggre- gate of approximately $482 million at December 31, 1998, and would be subject to specific collateral requirements. Based on the foregoing limitations, an aggregate of approximately $4.1 billion of the Parent Company's investment in bank subsidiaries of $5 billion, which includes bank holding companies and their subsidiaries, was restricted from transfer to the Parent Company at December 31, 1998. 16. Other Income
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------- Gains on sales of businesses.................................... $254 $ 68 $153 Net equity and mezzanine profits................................ 233 221 209 Net foreign exchange profits.................................... 127 88 54 All other....................................................... 177 102 106 ---- ---- ---- $791 $479 $522 ==== ==== ====
17. Employee Benefits The Corporation maintains a qualified noncontributory defined benefit pension plan covering substantially all domestic employees, as well as nonqualified noncontributory defined benefit pension plans for certain executives. The qualified plan is funded in compliance with the requirements of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. The nonqualified plans are unfunded. The Corporation also provides certain unfunded postretirement health and life insurance benefits for eligible retired domestic employees. Postretirement health benefits are contributory, and life insurance benefits are noncontribu- tory. Postretirement benefits are accrued over the service lives of the em- ployees. The following tables summarize benefit obligation and plan asset activity for the plans:
Other Pension Postretirement Benefits Benefits Years Ended December 31 1998 1997 1998 1997 (in millions) - ------------------------------------------------------------------------------- Benefit obligation, January 1.................... $592 $516 $ 68 $ 63 Service cost..................................... 24 21 2 1 Interest cost.................................... 40 40 4 5 Effect of plan amendments........................ (18) 4 Actuarial loss................................... 14 96 2 Divestitures..................................... (2) Special termination benefits..................... 1 5 Benefit payments................................. (44) (66) (4) (5) ---- ---- ------- ------- Benefit obligation, December 31.................. $627 $592 $ 72 $ 68 ==== ==== ======= ======= Fair value of plan assets, January 1............. $832 $752 Actual return on plan assets..................... 117 147 Divestitures..................................... (3) Employer contributions........................... 3 2 $ 4 $ 5 Participant contributions........................ 3 3 Benefit payments................................. (44) (66) (7) (8) ---- ---- ------- ------- Fair value of plan assets, December 31........... $908 $832 ==== ==== ======= ======= An analysis of the funded status, or difference between the fair value of plan assets and the respective plan's benefit obligation, and the net amount recog- nized in the Corporation's consolidated balance sheet, as well as a summary of the components of this net amount, follows: Other Pension Postretirement Benefits Benefits December 31 1998 1997 1998 1997 (in millions) - ------------------------------------------------------------------------------- Funded status.................................... $281 $240 $ (72) $ (68) Unrecognized transition (asset) obligation....... (4) (6) 51 55 Unrecognized prior service cost.................. (2) (2) 3 3 Unrecognized actuarial gain...................... (126) (90) (18) (22) ---- ---- ------- ------- Net amount recognized............................ $149 $142 $ (36) $ (32) ==== ==== ======= ======= Prepaid pension cost............................. $190 $180 Accrued benefit liability........................ (41) (38) $ (36) $ (32) ---- ---- ------- ------- Net amount recognized............................ $149 $142 $ (36) $ (32) ==== ==== ======= =======
- -------------------------------------- 74 -------------------------------------- Notes to Financial Statements -- (Continued) An analysis of the components of periodic benefits expense (income) for the plans follows:
Other Pension Postretirement Years Ended Benefits Benefits December 31 1998 1997 1996 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------ Service cost............................... $ 24 $ 21 $ 20 $ 2 $ 1 $ 1 Interest cost.............................. 40 40 27 4 5 4 Expected return on plan assets............. (66) (60) (43) Amortization of transition (asset) obligation................................ (2) (5) (4) 4 4 4 Amortization of prior service cost......... 2 Recognized actuarial (gain) loss........... 1 1 4 (2) (2) (1) ---- ---- ---- --- --- --- Net benefits expense (income).............. $ (3) $ (3) $ 6 $ 8 $ 8 $ 8 ==== ==== ==== === === ===
In 1998, $1 million of special termination benefits were provided in connection with the Corporation's sales of its Berkshire County, Massachusetts franchise and domestic institutional custody business, both of which are described in Note 2. In 1997, special termination benefits of $5 million were provided re- lating to the Corporation's 1996 acquisition of BayBanks. In 1996, certain en- hanced retirement benefits were offered to eligible employees as part of an early retirement program in connection with the acquisition of BayBanks, com- posed of $26 million resulting from pension enhancements and $4 million result- ing from postretirement benefit enhancements. These 1996 benefits were charged to acquisition-related restructuring expense. Weighted average assumptions used in actuarial calculations are as follows:
1998 1997 1996 - ------------------------------------------------------------------------------ Discount rate at December 31................................ 6.75% 7.25% 7.75% Expected return on plan assets for the years ended December 31......................................................... 9% 9% 9% Rate of compensation increase at December 31................ 4.50% 4.50% 4.50% Initial health care cost trend rate......................... 8% 6% 7% Health care cost trend rate declining to 5% in the year..... 2005 1999 1999
A 1% increase or decrease in the health care cost trend rate assumption does not have a significant effect on postretirement benefit obligation or expense. The nonqualified pension plans, which are unfunded, had projected benefit obli- gations of $65 million and $51 million and accumulated benefit obligations of $48 million and $42 million at December 31, 1998 and 1997, respectively. The Corporation maintains a defined contribution thrift incentive plan covering the majority of domestic employees. Employer contributions to this plan are based on a percentage of employee contributions. Prior to 1997, BayBanks had a profit sharing and savings plan which was associated with an employee stock ownership plan. Amounts charged to operations for these plans were $20 million, $19 million and $11 million in 1998, 1997 and 1996, respectively. 18. Stock Options and Awards All share and per share information in this footnote has been adjusted to re- flect the Corporation's two-for-one stock split effected in June 1998. The Corporation maintains stock incentive plans for key employees and for non- employee directors. Shares of common stock issued under these plans may be au- thorized but unissued shares, treasury shares or shares purchased in the open market. The plans provide for the grant of stock options and, for certain plans, restricted stock, stock appreciation rights (SARs) and other awards. A total of 29,266,739 shares of common stock, which includes shares related to the Corporation's Shared Opportunities Programs discussed below, was reserved for issuance under the Corporation's plans at December 31, 1998, including 4,077,760 shares available for future grants. Options are granted at prices which are not less than the fair market value of the common stock on the date of grant. Options granted to key employees gener- ally are exercisable in equal installments on the first and second anniversary dates of the grant. Options granted to directors generally vest on the date of grant. All options expire not later than 10 years after the date of grant. There were 22,400 SARs at a grant price of $14.31 outstanding at December 31, 1998. Compensation expense (income) associated with SARs was $(.2) million in 1998 and $.3 million in each of 1997 and 1996. - -------------------------------------- 75 -------------------------------------- Notes to Financial Statements -- (Continued) The following is a summary of the changes in options outstanding under the Corporation's stock incentive plans:
1998 1997 1996 Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - --------------------------------------------------------------------------------------------------------- Options outstanding, January 1 ($3.13 to $48.13 per share)...... 6,900,726 $24.46 7,166,462 $15.82 9,528,364 $11.16 Granted ($21.88 to $58.38 per share)...... 12,449,331 $39.02 3,007,038 $35.62 2,708,818 $22.46 Exercised ($3.13 to $44.25 per share)...... (1,849,495) $21.65 (3,066,968) $14.80 (5,014,074) $10.49 Canceled ($12.75 to 57.38 per share)....... (681,623) $40.08 (205,806) $30.62 (56,646) $21.45 ---------- ---------- ---------- Options outstanding, December 31 ($3.13 to $58.38 per share)...... 16,818,939 $34.92 6,900,726 $24.46 7,166,462 $15.82 ========== ========== ========== Options exercisable, December 31............ 4,140,020 $24.49 3,074,784 $15.54 4,920,962 $12.81 ========== ========== ==========
- ------------------------------------------------------------------------------- The following is a summary of outstanding and exercisable options under the Corporation's stock incentive plans at December 31, 1998: Options Outstanding Options Exercisable
Weighted Weighted Average Weighted Average Weighted Remaining Average Remaining Average Number Contractual Exercise Number Contractual Exercise Range of Exercise Prices Outstanding Life Price Exercisable Life Price - ------------------------------------------------------------------------------------------- $3.13 to $15.00 per share.................. 1,534,460 4.0 years $11.40 1,534,460 4.0 years $11.40 $15.01 to $30.00 per share.................. 1,087,582 7.0 years $22.69 1,087,582 7.0 years $22.69 $30.01 to $40.00 per share.................. 10,091,199 9.3 years $35.54 1,055,510 7.9 years $35.04 $40.01 to $50.00 per share.................. 3,768,240 8.8 years $44.55 271,860 5.8 years $43.91 $50.01 to $58.38 per share.................. 337,458 8.4 years $55.23 190,608 7.5 years $54.06
- ------------------------------------------------------------------------------- Under terms of the Corporation's restricted stock awards, employees are gener- ally required to continue employment with the Corporation for a stated period after the award in order to become fully vested in the shares awarded. Perfor- mance-based restricted stock, for which vesting is contingent or accelerates upon the price of the Corporation's common stock or earnings per share reach- ing certain stated levels, has also been awarded. Restricted stock is recorded at the fair market value of the common stock on the date of award or, if solely a performance-based award, the value required for vesting. At the date of award, unearned compensation of the same amount is recorded as a reduction of retained earnings and is amortized as compensation expense over the estimated vesting period. The following is a summary of the activity in restricted stock and the weighted average price at the time of grant:
1998 1997 1996 Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------- Share balance, January 1...................... 1,060,390 $24.99 907,290 $15.77 2,016,250 $11.44 Awards................. 858,420 $44.77 595,360 $34.91 498,860 $26.23 Forfeitures............ (151,040) $32.89 (65,758) $24.20 (55,774) $10.41 Released from forfeiture restrictions.......... (231,152) $14.44 (376,502) $14.10 (1,552,046) $13.40 --------- --------- ---------- Share balance, December 31..................... 1,536,618 $36.81 1,060,390 $24.99 907,290 $15.77 ========= ========= ========== (in millions) Unearned compensation at December 31 (a reduction of retained earnings).............. $ 34 $ 16 $ 8 Compensation expense.... $ 23 $ 13 $ 17
- -------------------------------------- 76 -------------------------------------- Notes to Financial Statements -- (Continued) The following is a summary of outstanding restricted stock at December 31, 1998:
Weighted Average Restricted Weighted Average Price at Range of Market Value of Shares Remaining Time of Common Stock at Time of Grant Outstanding Contractual Life Grant - -------------------------------------------------------------------------------- $12.75 to $30.00 per share................ 241,438 0.5 years $14.05 $30.01 to $40.00 per share................ 490,860 2.1 years $34.84 $40.01 to $50.00 per share................ 781,820 3.1 years $44.59 $50.01 to $55.63 per share................ 22,500 3.3 years $53.49
In addition to the plans described above, on October 1, 1996, the Corporation granted options to substantially all employees worldwide, under its 1996 Shared Opportunities program. Options under this grant vested and became exercisable in 1997, and will expire on October 1, 2002. Under a similar program, on Sep- tember 24, 1998, the Corporation made an additional grant of options to sub- stantially all employees worldwide. These options will vest in 2003 or earlier if the price of the Corporation's common stock reaches certain levels, subject to a minimum two-year vesting period. Unexercised options will expire on Sep- tember 24, 2004. The following table summarizes the activity related to the Shared Opportunities programs:
Weighted Average Shares Price - -------------------------------------------------------------------------------- Options granted in 1996.................................... 4,304,000 $29.00 ---------- Options outstanding, December 31, 1996..................... 4,304,000 $29.00 Exercised.................................................. (1,533,038) $29.00 Canceled................................................... (544,550) $29.00 ---------- Options outstanding, December 31, 1997..................... 2,226,412 $29.00 Options granted in 1998.................................... 7,341,356 $35.81 Exercised.................................................. (880,094) $29.00 Canceled................................................... (317,634) $31.23 ---------- Options outstanding, December 31, 1998..................... 8,370,040 $34.77 ==========
There are 1,280,873 options exercisable under the Shared Opportunities programs at a price of $29.00 per option at December 31, 1998. In 1998, the Corporation implemented an employee stock purchase plan, which al- lows eligible employees to authorize payroll deductions up to certain limits for the purchase of the Corporation's common stock. The stock is purchased at the lesser of its fair market value at the beginning of the specified offering period or 85% of its fair market value at the end of such offering period. In 1998, 178,601 shares of common stock were issued under the plan at a price of $41.12. Effective January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by that standard, the Corporation elected not to adopt the fair value accounting provisions of the standard and to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock op- tions and awards. Had compensation expense for the Corporation's stock options and awards been determined in accordance with the fair value accounting provi- sions of SFAS No. 123, the Corporation's net income and basic and diluted earn- ings per share would have been as follows:
Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- Net income applicable to common stock (in millions) As reported................................................. $ 783 $ 848 $ 613 Pro forma................................................... $ 762 $ 836 $ 612 Basic earnings per share As reported................................................. $2.66 $2.86 $2.00 Pro forma................................................... $2.59 $2.82 $1.99 Diluted earnings per share As reported................................................. $2.64 $2.82 $1.96 Pro forma................................................... $2.56 $2.78 $1.95
Solely for purposes of providing the disclosures required by SFAS No. 123, the fair value of each stock option and stock award was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants of stock options and stock awards:
Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- Dividend yield................................................ 3.1% 2.7% 3.1% Volatility.................................................... 28% 24% 24% Risk-free interest rate....................................... 5.4% 5.3% 5.9% Expected option life in years................................. 4 4 4
The estimated weighted average grant date fair values per share of stock op- tions granted and restricted stock granted were as follows:
Years Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Stock options.............................................. $ 9.13 $ 7.34 $ 5.06 Restricted stock........................................... $31.84 $26.60 $15.40
- -------------------------------------- 77 -------------------------------------- Notes to Financial Statements -- (Continued) 19. Other Expense
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------- Communications.................................................. $132 $112 $101 Professional fees............................................... 111 61 56 Advertising and public relations................................ 109 107 108 Software costs.................................................. 71 44 35 Amortization of goodwill........................................ 39 27 24 All other....................................................... 420 344 297 ---- ---- ---- $882 $695 $621 ==== ==== ====
20. Income Taxes The components of the provision for income taxes were as follows:
Years Ended December 31 1998 1997 1996 (in millions) - -------------------------------------------------------------------------------- Current Tax Provision Federal......................................................... $224 $164 $219 Foreign Based on income................................................ 106 67 130 Withheld on interest and dividends............................. 60 38 36 State and local................................................. 54 65 96 ---- ---- ---- 444 334 481 ---- ---- ---- Deferred Tax Provision (Benefit) Federal......................................................... 20 225 (4) State and local................................................. 13 30 6 ---- ---- ---- 33 255 2 ---- ---- ---- $477 $589 $483 ==== ==== ====
Excluded from the above table are tax effects related to certain items that were recorded directly in stockholders' equity, including foreign currency translation, market value adjustments related to securities available for sale, stock options and restricted stock. Net tax effects recorded directly in stockholders' equity amounted to tax benefits of $74 million, $53 million and $40 million in 1998, 1997 and 1996, respectively. The Corporation has reported other nonowner changes in equity for the years ended 1998, 1997 and 1996 in the accompanying consolidated statement of changes in common stockholder's equity on a net-of-tax basis. The changes in unrealized gain (loss) on securities available for sale have also been pre- sented net of reclassification adjustments related to net securities gains that were realized from sales and writedowns of such securities during the re- spective periods. These gains, on an after-tax basis, amounted to $26 million, $49 million and $13 million for the years ended December 31, 1998, 1997 and 1996, respectively. Income taxes related to other nonowner changes in equity for the years ended December 31, 1998, 1997 and 1996 were as follows: tax ben- efits related to change in unrealized gain (loss) on securities available for sale of $48 million, $14 million and $6 million, respectively, which includes tax benefits related to reclassification adjustments of $15 million, $31 mil- lion and $10 million, respectively; and tax benefits related to change in for- eign currency translation of $2 million, $3 million and $2 million, respective- ly. The following table reconciles the expected federal tax provision, based on the federal statutory tax rate of 35%, to the actual consolidated tax provi- sion for the periods presented:
Years Ended December 31 1998 1997 1996 (in millions) - -------------------------------------------------------------------------------- Expected tax provision applicable to income................... $444 $514 $397 Effect of State and local income taxes, net of federal tax benefit..... 44 62 66 Non-creditable foreign taxes................................. 18 21 15 Dividends received deduction................................. (7) (9) (6) Tax-exempt income............................................ (2) (4) (6) Other, net................................................... (20) 5 17 ---- ---- ---- Actual tax provision.......................................... $477 $589 $483 ==== ==== ====
The components of the net deferred tax liability were as follows:
December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------- Deferred Tax Assets Reserve for credit losses........................................ $ 302 $ 280 Accrued expenses not currently deductible........................ 68 45 Deferred compensation............................................ 66 39 Interest on nonaccrual loans..................................... 44 48 Unrealized loss on securities available for sale................. 14 Other............................................................ 84 47 ----- ----- 578 459 ----- ----- Deferred Tax Liabilities Leasing operations............................................... (646) (553) Foreign operations............................................... (92) (17) Pension obligations.............................................. (74) (71) Unrealized gain on securities available for sale................. (34) Other............................................................ (26) (54) ----- ----- (838) (729) ----- ----- Net deferred tax liability....................................... $(260) $(270) ===== =====
It is expected that the Corporation's deferred tax assets at December 31, 1998 will be realized from the reversal of existing deferred tax liabilities and from the recognition of future taxable income, without reliance on tax plan- ning strategies that the Corporation might not ordinarily follow. - -------------------------------------- 78 -------------------------------------- Notes to Financial Statements -- (Continued) Domestic pre-tax income was $919 million in 1998, $999 million in 1997 and $755 million in 1996. Foreign pre-tax income, defined as income generated from oper- ations that are located outside the United States, was $350 million in 1998, $469 million in 1997 and $378 million in 1996. 21. Common Stock and Earnings per Common Share In April 1998, stockholders of the Corporation approved an increase in the num- ber of authorized shares of common stock from 300 million shares to 500 million shares, and a change in the par value of such stock from $1.50 per share to $1.00 per share. In addition, the Corporation announced the approval by its Board of Directors of a two-for-one split of the Corporation's common stock, executed in the form of a stock dividend of one share for every share held. The stock dividend was paid in June 1998. Average common shares outstanding, per common share data and stock options for all periods shown have been adjusted to reflect the effect of the stock split. A summary of the Corporation's calculation of earnings per share is as follows:
Years Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------- (in millions) Net income............................................. $ 792 $ 879 $ 650 Less preferred dividends............................... 9 31 37 ------- ------- ------- Net income applicable to common stock.................. $ 783 $ 848 $ 613 ======= ======= ======= (in thousands) Weighted average number of common shares outstanding used in calculation of basic earnings per share....... 293,873 295,918 307,058 Incremental shares from the assumed exercise of dilutive stock options as of the beginning of the period................................................ 2,790 4,162 5,166 ------- ------- ------- Weighted average number of common shares outstanding used in calculation of diluted earnings per share..... 296,663 300,080 312,224 ======= ======= ======= - ------------------------------------------------------------------------------- Earnings per share Basic................................................. $ 2.66 $ 2.86 $ 2.00 Diluted............................................... $ 2.64 $ 2.82 $ 1.96 - -------------------------------------------------------------------------------
22. Off-Balance-Sheet Financial Instruments Off-balance-sheet financial instruments represent various degrees and types of risk to the Corporation, including credit, interest rate, foreign exchange rate, implied volatility rate and liquidity risk. Interest Rate Derivatives and Foreign Exchange Contracts In the normal course of its business, the Corporation enters into a variety of interest rate derivatives and foreign exchange contracts as part of its trading activities, which primarily focus on providing these products to customers, and in its interest rate and currency risk management strategy. These products in- volve, to varying degrees, credit risk and market risk. Credit risk is the pos- sibility that a loss may occur if a counterparty to a transaction fails to per- form according to the terms of the contract. Market risk is the adverse effect of a change in interest rates, currency rates or implied volatility rates on the value of a financial instrument. The notional amount of interest rate de- rivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk as they tend to greatly overstate the true economic risks of these contracts. The Corporation controls credit risk arising from interest rate derivatives and foreign exchange contracts using credit procedures similar to those used for traditional lending activities. The Corporation believes that fair value, which approximates the cost to replace the contract at current market rates should the counterparty default prior to settlement date, is generally representative of credit exposure related to interest rate derivatives and foreign exchange contracts at a point in time. Credit exposure on derivatives and foreign ex- change contracts is measured by the Corporation by aggregating current credit exposure and potential future exposure. Collateral and master netting agree- ments, which are used by the Corporation to reduce individual counterparty credit risk, are incorporated into the measurement of credit exposure. Master netting agreements provide for the offsetting of amounts receivable and payable under derivatives or foreign exchange contracts with the same counterparty. Current credit exposure is represented by the positive fair value of deriva- tives and foreign exchange contracts at December 31, 1998. The potential future exposure on derivatives and foreign exchange contracts represents the potential increase in the replacement cost of the contracts over their remaining term as market rates and other relevant factors change. The Corporation determines po- tential future exposure based on statistical analyses of variables, including market values of underlying instruments, estimates of future volatility, inter- est rates, exchange rates and the remaining time to maturity or settlement of the contracts. - -------------------------------------- 79 -------------------------------------- Notes to Financial Statements -- (Continued) The market risk associated with interest rate derivatives and foreign exchange contracts is managed by establishing and monitoring limits as to the types and degrees of risk that may be undertaken and is measured using the Corporation's value-at-risk methodology. Interest rate derivatives utilized by the Corporation include futures and for- wards, interest rate swaps and interest rate options. Futures and forward con- tracts generally are contracts for the delayed delivery of securities or money market instruments in which the buyer agrees to purchase, and the seller agrees to deliver, a specific instrument at a predetermined date for a spe- cific price. Market risks on both types of agreements stem from market move- ments in the underlying securities' values, interest rates or implied volatil- ity rates. Credit risk stems from the ability of the counterparties to meet the terms of the contracts. The Corporation's counterparty credit risk for futures is limited, as the majority of these transactions are executed on or- ganized exchanges that assume the obligations of counterparties, and generally require margin collateral and daily settlement of variation margins. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties based on a common notional principal amount and maturity date. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. Interest rate options are contracts that allow the holder of the option to re- ceive cash, purchase, sell or enter into a financial instrument at a specified price within a specified period of time. Options include interest rate caps and floors, which are types of interest rate protection instruments involving the potential payment between seller and buyer of an interest differential. In addition, other types of option products provide the holder with the right to enter into interest rate swap, cap and floor agreements with the writer. The primary risks associated with interest rate options are the exposure to cur- rent and possible future movements in interest rates and the ability of the counterparties to meet the terms of the contracts. Foreign exchange contracts include such commitments as foreign currency spot, forward, futures, option and swap contracts. The primary risks in these trans- actions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contracts. - -------------------------------------- 80 -------------------------------------- Notes to Financial Statements -- (Continued) The following is a summary of the Corporation's notional amounts and fair val- ues of interest rate derivatives and foreign exchange contracts included in its trading and ALM portfolios.
Trading Portfolio(1) ALM Portfolio(1) ------------------------------ --------------------------------------------- Notional Fair Value(2)(3)(4) Notional Fair Value(2)(3) Unrecognized (in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)(5) - ----------------------------------------------------------------------------------------------------- December 31, 1998 Interest rate contracts Futures and forwards.... $ 4,037 $ 2 $ 734 $ (6) Interest rate swaps..... 29,164 471 $ 470 8,366 $ 219 $ 81 110 Interest rate options Purchased(6)........... 32,640 191 2,411 89 89 Written or sold(6)..... 24,199 200 1,911 66 (66) ------- --------- --------- ------- -------- -------- ---- $90,040 $ 664 $ 670 $13,422 $308 $147 $127 ======= ========= ========= ======= ======== ======== ==== Foreign exchange contracts Spot and forward contracts.............. $48,206 $1,221 $1,274 $ 3,469 $ 35 $ 22 $ 13 Options purchased....... 3,581 68 68 Options written or sold................... 3,711 54 ------- --------- --------- ------- -------- -------- ---- $55,498 $1,289 $1,328 $ 3,537 $ 35 $ 22 $ 13 ======= ========= ========= ======= ======== ======== ==== - ----------------------------------------------------------------------------------------------------- December 31, 1997 Interest rate contracts Futures and forwards.... $42,842 $ 36 $ 69 $ 3,947 $ 21 $ 11 Interest rate swaps..... 20,451 113 160 11,162 132 $ 11 96 Interest rate options Purchased(6)........... 23,231 56 2,765 13 2 Written or sold........ 12,716 53 ------- --------- --------- ------- -------- -------- ---- $99,240 $ 205 $ 282 $17,874 $166 $ 11 $109 ======= ========= ========= ======= ======== ======== ==== Foreign exchange contracts Spot and forward contracts.............. $25,793 $ 476 $ 442 $ 2,430 $ 36 $ 41 $ (5) Options written or sold................... 6,692 107 ------- --------- --------- ------- -------- -------- ---- Options purchased....... 5,428 115 $37,913 $ 591 $ 549 $ 2,430 $ 36 $ 41 $ (5) ======= ========= ========= ======= ======== ======== ==== - -----------------------------------------------------------------------------------------------------
(1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be ex- changed in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in trading assets or funds borrowed, as applicable. The majority of deriva- tives that are part of the ALM portfolio are accounted for on the accrual basis, and are not carried at fair value. When certain contracts, such as futures, are subject to daily cash settlements, the fair value of these in- struments is zero. (3) The current credit exposure from interest rate derivatives and foreign ex- change contracts at December 31 is represented by the fair value of con- tracts reported in the "Asset" column. (4) The average asset and liability fair value amounts for interest rate deriv- atives included in the trading portfolio for the years ended December 31, 1998 and 1997 were approximately $389 million and $443 million, respective- ly, and $158 million and $185 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were approximately $775 million and $760 million, respec- tively, for the year ended December 31, 1998, and $435 million and $484 million, respectively, for the year ended December 31, 1997. (5) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement as of the balance sheet date. This includes amounts related to contracts that have been terminated. Such amounts are recognized as an adjustment of yield over the period being managed. At December 31, 1998, there were $4 million of unrecognized gains related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 46 months. At De- cember 31, 1997, there were $7 million of unrecognized gains related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 14 months. (6) The ALM portfolio includes equity contracts entered into by the Corpora- tion's Argentine operations. These contracts are linked to Argentine de- posit products, where the holder receives payment based on changes in the prices of underlying Argentine securities. - -------------------------------------- 81 -------------------------------------- Notes to Financial Statements -- (Continued) Net trading gains or losses from interest rate derivatives are recorded in trading profits and commissions. The Corporation's interest rate derivative trading activities primarily include providing risk management products to customers. Derivatives are also used to manage risk in other trading portfo- lios, such as emerging markets securities. The results of these derivative ac- tivities are combined with the results of the respective trading portfolio to determine the overall performance of the trading business and, as such, are not included in the results of derivative trading activities. Net trading gains from interest rate derivative trading were $29 million for the year ended December 31, 1998, $19 million for the year ended December 31, 1997 and $4 million for the year ended December 31, 1996. Net trading gains from foreign exchange activities, which include foreign ex- change spot, forward and options contracts, for the years ended December 31, 1998, 1997 and 1996 were $127 million, $88 million and $54 million, respectively, and are recorded in other income. Credit-Related Financial Instruments A commitment to extend credit is a legally binding agreement to lend to a cus- tomer in the future that generally expires within a specified period of time. The extension of a commitment, which is subject to the Corporation's credit review and approval policies, gives rise to credit exposure when certain bor- rowing conditions are met and it is drawn upon. Until such time, it represents only potential exposure. In connection with entering into a commitment, the Corporation may obtain collateral, if deemed necessary, based upon the Corpo- ration's credit evaluation. Such collateral varies but may include securities, receivables, inventory, fixed assets, personal property and real estate. The obligation to lend generally may be voided if the customer's financial condi- tion deteriorates or if the customer fails to meet certain covenants. Commit- ments to extend credit do not reflect the actual demand on liquidity that the Corporation will be subjected to in the future, since historical experience with loan commitments indicates that a large portion generally expire without being drawn upon. Standby letters of credit and foreign office guarantees are commitments that are primarily issued to third parties to guarantee obligations of the Corpora- tion's customers. Standby letters of credit may be issued as credit enhance- ments for corporate customers' commercial paper, bond issuances by municipali- ties or other debt obligations, and to guarantee other financial performance of a customer. The Corporation has current exposure only to the extent that a customer may default on the underlying transaction. The risks involved in the issuance of standby letters of credit and foreign office guarantees are pri- marily credit risks. Again, the Corporation's credit review and approval poli- cies and practices are adhered to when evaluating issuances of standby letters of credit or guarantees for customers. Similar to commitments to extend cred- it, the Corporation may obtain various types of collateral, if deemed neces- sary, based upon the Corporation's credit evaluation. The following table summarizes the Corporation's credit-related financial in- struments:
December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------ Fee-based or otherwise legally binding commitments to extend credit....................................................... $31,975 $31,845 Standby letters of credit, foreign office guarantees and similar instruments(1)....................................... $ 4,473 $ 4,202 Commercial letters of credit.................................. $ 1,673 $ 1,587 - ------------------------------------------------------------------------------
(1) Net of participations conveyed to others of $1,518 million in 1998 and $1,283 million in 1997. 23. Concentrations of Credit Risk Credit risk associated with concentrations can arise when changes in economic, industry or geographic factors affect groups of counterparties with similar risk characteristics, whose aggregate credit exposure is significant to the Corporation's total credit exposure. The Corporation's loans and leases and commitments to lend to borrowers in Latin American countries were approxi- mately $12.6 billion and $10.9 billion at December 31, 1998 and 1997, respec- tively. Included in these outstandings and commitments were exposures to bor- rowers in Argentina and Brazil of $6.6 billion and $3.4 billion, respectively atDecember 31, 1998 and $5.2 billion and $3.2 billion, respectively, at Decem- ber 31, 1997. Information with respect to the Corporation's overseas business activities and its geographic concentrations is included in Note 26. 24. Lease Commitments The following table summarizes rental expense for leases of real estate and equipment:
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------- Rental expense.................................................. $139 $130 $132 Less sublease rental income..................................... 12 12 13 ---- ---- ---- Net rental expense.............................................. $127 $118 $119 ==== ==== ====
The Corporation has obligations under noncancelable operating leases for real estate and equipment that include renewal options and escalation clauses. The Corporation's minimum future rentals under its leases, exclusive of executory costs and net of sublease rental income, for the years 1999 through 2003 are $127 million, $118 million, $106 million, $93 million and $77 million, respec- tively, and $309 million for 2004 and later. Capital leases, the minimum rent- als of which are included in the preceding amounts, are not significant. - -------------------------------------- 82 -------------------------------------- Notes to Financial Statements -- (Continued) 25. Contingencies The Corporation and its subsidiaries are defendants in a number of legal pro- ceedings arising in the normal course of business, including claims that bor- rowers or others have been damaged as a result of the lending practices of the Corporation's subsidiaries. Management, after reviewing all actions and pro- ceedings 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 condi- tion or results of operations. 26. Business Segment Information Effective December 31, 1998, the Corporation adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This new standard re- quires disclosure of financial and descriptive information about an entity's reportable operating segments. Such information is required to be reported on the basis that is reviewed by the Office of the Chief Executive Officer (the OCEO), which is the senior decision making group for the Corporation, to evalu- ate performance and allocate resources. In accordance with the new standard, the Corporation has presented financial and descriptive information for four principal operating segments -- the Wholesale Bank, the Regional Bank, Argen- tina and Brazil. The Wholesale Bank provides a full range of commercial and investment banking services to a predominately middle market, non-investment grade corporate cus- tomer base. The Regional Bank is a New England-based business, which provides for the financial service needs of its three major customer groups: consumers, high net worth individuals and small businesses. The Corporation maintains a significant presence in Argentina and Brazil with services to large corporate, consumer and middle market customers. All other individual businesses have been included in "Other Businesses," and include the Global Treasury group, other Latin American units, the Corporation's national consumer businesses (which the Corporation sold in 1997 and 1998), Asia, the International Private Bank and the Emerging Markets, Sales, Trading and Research unit. The information presented in the following table is consistent with the Corpo- ration's significant accounting policies, except for the following: . Average assets and revenue and expense items are derived from the internal management reporting system, where they are specifically attributable to individual business units. . Net interest revenue is allocated to the business lines using a funds transfer pricing process, which incorporates a matched funding concept, with the residual assigned to the Global Treasury group. . The provision for credit losses is allocated based on actual net credit losses for consumer loans and on an "'expected loss" basis for commercial loans. Expected loss is determined under the Corporation's risk adjusted return on equity methodology, and is an estimate of the average loss rate that individual credit portfolios will experience over an economic cycle. . Various techniques are employed to allocate certain costs associated with corporate support areas, including the use of unit costs and service vol- umes. . The provision for income taxes applied to each business line reflects an estimate of the actual effective tax rate related to each segment, which varies due to a number of factors, including state and foreign tax rates, foreign tax issues and tax ramifications of certain transactions. - -------------------------------------- 83 -------------------------------------- Notes to Financial Statements -- (Continued) The following table presents selected financial information for the Corpora- tion's lines of business for 1998, 1997 and 1996, on a fully taxable equivalent basis. Consolidated net interest revenue and income tax provision include tax- equivalent adjustments of $23 million, $24 million and $20 million for 1998, 1997 and 1996, respectively. Information provided for 1997 and 1996 is pre- sented on a basis consistent with 1998 and, as such, has been restated for changes in the Corporation's organizational structure and internal management reporting methodologies implemented during 1998.
Wholesale Regional Other Corporate Consolidated (in millions) Bank Bank Argentina Brazil Businesses Adjustments Totals - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 Net interest revenue.... $ 618 $ 952 $ 332 $ 345 $ 234 $ 69 $ 2,550 Noninterest income...... 861 450 244 174 160 143 2,032 Noninterest expense..... 697 1,012 381 327 282 211 2,910 Provision for credit losses................. 118 78 64 24 46 50 380 ------- ------ ------ ------ ------- ------ ------- Income (loss) before income taxes........... 664 312 131 168 66 (49) 1,292 Income tax provision (benefit).............. 273 119 57 69 5 (23) 500 ------- ------ ------ ------ ------- ------ ------- Net income (loss)....... $ 391 $ 193 $ 74 $ 99 $ 61 $ (26) $ 792 ======= ====== ====== ====== ======= ====== ======= Average assets.......... $29,365 $8,148 $8,227 $6,297 $18,394 $1,769 $72,200 - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1997 Net interest revenue.... $ 575 $ 954 $ 205 $ 265 $ 382 $ 72 $ 2,453 Noninterest income...... 710 406 145 138 181 (17) 1,563 Noninterest expense..... 502 979 217 260 312 54 2,324 Provision for credit losses................. 120 81 21 18 139 (179) 200 ------- ------ ------ ------ ------- ------ ------- Income before income taxes.................. 663 300 112 125 112 180 1,492 Income tax provision.... 269 117 49 54 45 79 613 ------- ------ ------ ------ ------- ------ ------- Net income.............. $ 394 $ 183 $ 63 $ 71 $ 67 $ 101 $ 879 ======= ====== ====== ====== ======= ====== ======= Average assets.......... $25,131 $8,776 $5,160 $5,466 $19,698 $1,032 $65,263 - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1996 Net interest revenue.... $ 540 $ 914 $ 183 $ 213 $ 441 $ 69 $ 2,360 Noninterest income...... 552 407 108 105 206 (34) 1,344 Noninterest expense..... 419 939 173 199 358 232 2,320 Provision for credit losses................. 106 44 20 16 116 (71) 231 ------- ------ ------ ------ ------- ------ ------- Income (loss) before income taxes........... 567 338 98 103 173 (126) 1,153 Income tax provision (benefit).............. 235 148 40 46 70 (36) 503 ------- ------ ------ ------ ------- ------ ------- Net income (loss)....... $ 332 $ 190 $ 58 $ 57 $ 103 $ (90) $ 650 ======= ====== ====== ====== ======= ====== ======= Average assets.......... $22,497 $8,149 $4,275 $4,616 $19,312 $ 674 $59,523
Corporate adjustments for all three years are primarily composed of the follow- ing items: gains on sales of businesses; net funding costs for certain nonin- terest bearing assets and liabilities; transfers between noninterest income and net interest revenue related to certain compensating balance arrangements; am- ortization of goodwill; acquisition-related restructuring expense and costs re- lated to the realignment and downsizing of certain businesses; and bonus pay- ments due employees in connection with the acquisition of the investment bank- ing operations of BancAmerica Robertson Stephens. Total revenue from international operations included in Other Businesses to- taled $210 million, $249 million and $239 million for 1998, 1997 and 1996, re- spectively. Intersegment revenue and expense for 1998, 1997 and 1996 were not significant. - -------------------------------------- 84 -------------------------------------- Notes to Financial Statements -- (Continued) 27. Parent Company Condensed Financial Statements The following is a condensed balance sheet of the Corporation (Parent Company only):
December 31 1998 1997 (in millions) - ------------------------------------------------------------------------------- Assets Cash and short-term investments in bank subsidiary............... $ 591 $ 290 Advances to nonbank subsidiaries ................................ 1,781 1,080 Subordinated notes receivable from bank subsidiary............... 330 330 Investments in subsidiaries Bank subsidiaries............................................... 4,959 4,838 Nonbank subsidiaries............................................ 709 413 Other assets..................................................... 108 99 ------ ------ Total Assets.................................................. $8,478 $7,050 ====== ====== Liabilities and Stockholders' Equity Notes payable.................................................... $2,474 $1,616 Other liabilities................................................ 158 51 Junior subordinated debt payable to subsidiary trusts............ 1,029 773 ------ ------ Total liabilities................................................ 3,661 2,440 ------ ------ Total stockholders' equity....................................... 4,817 4,610 ------ ------ Total Liabilities and Stockholders' Equity.................... $8,478 $7,050 ====== ======
The following is a condensed statement of income of the Corporation (Parent Company only):
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------- Operating Income Dividends from subsidiaries Bank subsidiaries........................................ $474 $1,079 $537 Nonbank subsidiaries..................................... 180 11 23 Interest from subsidiaries Bank subsidiaries........................................ 42 39 50 Nonbank subsidiaries..................................... 130 79 41 Noninterest income........................................ 2 2 ---- ------ ---- Total operating income.................................. 828 1,210 651 ---- ------ ---- Operating Expense Interest expense.......................................... 192 146 95 Other expense, net........................................ 9 8 14 ---- ------ ---- Total operating expense................................. 201 154 109 ---- ------ ---- Income before income taxes and equity in undistributed net income of subsidiaries................................... 627 1,056 542 Benefit from income taxes................................. (8) (10) (6) ---- ------ ---- Income before equity in undistributed net income of subsidiaries............................................. 635 1,066 548 Equity in undistributed net income of subsidiaries........ 157 (187) 102 ---- ------ ---- Net Income................................................ $792 $ 879 $650 ==== ====== ====
- -------------------------------------- 85 -------------------------------------- Notes to Financial Statements -- (Continued) The following is a condensed statement of cash flows of the Corporation (Parent Company only):
Years Ended December 31 1998 1997 1996 (in millions) - ------------------------------------------------------------------------------ Cash Flows From Operating Activities Net income............................................. $ 792 $ 879 $ 650 Reconciliation of net income to net cash provided from operating activities Equity in undistributed net income of subsidiaries.... (157) 187 (102) Other, net............................................ 79 (32) (52) ------ ------ ----- Net cash provided from operating activities.......... 714 1,034 496 ------ ------ ----- Cash Flows From Investing Activities Net cash provided from (used for) short-term investments in bank subsidiary........................ (302) 448 (600) Net cash used for advances to subsidiaries............. (701) (361) (263) Investments in subsidiaries............................ (305) (183) (16) Proceeds from liquidation of subsidiary................ 14 Repayment of subordinated note receivable by bank subsidiary............................................ 250 ------ ------ ----- Net cash used for investing activities............... (1,294) (96) (629) ------ ------ ----- Cash Flows From Financing Activities Repayment/repurchase of notes payable.................. (357) (404) (100) Net proceeds from issuance of notes payable............ 1,215 450 400 Net proceeds from issuance of junior subordinated debentures............................................ 255 258 515 Net proceeds from issuance of common stock............. 94 108 92 Redemption of preferred stock.......................... (278) (230) Purchase of treasury stock............................. (784) (490) Dividends paid......................................... (350) (322) (284) ------ ------ ----- Net cash provided from (used for) financing activities.......................................... 579 (924) 133 ------ ------ ----- Net change in cash and due from banks.................. (1) 14 Cash and due from banks at January 1................... 15 1 1 ------ ------ ----- Cash and due from banks at December 31................. $ 14 $ 15 $ 1 ====== ====== ===== Interest payments...................................... $ 186 $ 150 $ 95 Income tax payments.................................... $ 11 $ 7 $ 6 - ------------------------------------------------------------------------------
- -------------------------------------- 86 -------------------------------------- Notes to Financial Statements -- (Continued) 28. Fair Values of Financial Instruments SFAS No. 107 requires that the Corporation disclose estimated fair values for certain of its financial instruments. Financial instruments include such items as loans, deposits, securities, interest rate and foreign exchange contracts, swaps and other instruments as defined by the standard. Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and rele- vant available market information. Fair value information is intended to repre- sent an estimate of an amount at which a financial instrument could be ex- changed in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading mar- kets for a significant portion of the Corporation's financial instruments, the Corporation may not be able to settle its financial instruments immediately; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the Cor- poration's financial instruments, such as loans and deposits, are held to matu- rity and are realized or paid according to the contractual agreement with the customer. Where available, quoted market prices are used to estimate fair values. Howev- er, due to the nature of the Corporation's financial instruments, in many in- stances quoted market prices are not available. Accordingly, the Corporation has estimated fair values based on other valuation techniques, such as dis- counting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible income tax ramifications or estimated transac- tion costs. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial in- struments will change. Disclosure of fair values is not required for certain items such as lease fi- nancing, investments accounted for under the equity method of accounting, obli- gations for pension and other postretirement benefits, premises and equipment, OREO, prepaid expenses, core deposit intangibles and other customer relation- ships, other intangible assets and income tax assets and liabilities. Accord- ingly, the aggregate fair value amounts presented do not purport to represent, and should not be considered representative of, the underlying "market" or franchise value of the Corporation. Because the standard permits many alternative calculation techniques and be- cause numerous assumptions have been used to estimate the Corporation's fair values, reasonable comparisons of the Corporation's fair value information with that of other financial institutions cannot necessarily be made. The methods and assumptions used to estimate the fair values of each class of financial instrument are as follows: Cash and Due from Banks, Interest Bearing Deposits in Other Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell, Due from Cus- tomers on Acceptances, Funds Borrowed, and Acceptances Outstanding These items are generally short-term in nature and, accordingly, the carrying amounts re- ported in the balance sheet are reasonable approximations of their fair values. Trading Assets Trading assets are carried at fair value in the balance sheet. Values for trading securities are generally based on quoted, or other indepen- dent, market prices. Values for interest rate and foreign exchange products are based on quoted, or other independent, market prices, or are estimated using pricing models or discounted cash flows. Securities Available for Sale and Securities Held to Maturity Fair values are principally based on quoted, or other independent, market prices. For certain debt and equity investments made in connection with the Corporation's Private Equity business that do not trade on established exchanges, and for which mar- kets do not exist, estimates of fair value are based upon management's review of the investee's financial results, condition and prospects. Loans The fair value of accruing consumer mortgage loans is estimated using market quotes or by discounting contractual cash flows, adjusted for credit risk and prepayment estimates. Discount rates are obtained from secondary mar- ket sources. The fair value of accruing home equity loans is estimated using comparable market information adjusted for credit and other relevant character- istics. The fair value of all other accruing loans is estimated by discounting cash flows, using interest rates that consider the credit and interest rate risks inherent in the loans, and current economic and lending conditions. The fair value of nonaccrual loans is primarily estimated by discounting manage- ment's estimate of future cash flows using a rate commensurate with the risks involved. Accrued Interest Receivable and Other Assets The carrying amount of accrued in- terest receivable approximates its fair value. Financial instruments classified as other assets subject to the disclosure requirements of the standard consist principally of accounts receivable and investments in limited partnerships. The carrying amounts of short-term receivables are considered to approximate their fair value. For longer-term receivables, fair value is estimated by discounting expected future cash flows using a discount rate commensurate with the risks involved. Estimates of fair value of investments in limited partnerships are based upon management's review of the investee's financial results, condition and prospects. Deposits The fair values of deposits subject to immediate withdrawal, such as interest and noninterest bearing checking and money market deposit accounts, are, by definition, equal to their carrying amounts. The carrying amounts for variable rate certificates of deposit and other time deposits approximate their - -------------------------------------- 87 -------------------------------------- Notes to Financial Statements -- (Continued) fair values at the reporting date. Fair values for fixed rate certificates of deposit and other time deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities. Accrued Expenses and Other Liabilities Financial instruments classified as ac- crued expenses and other liabilities subject to the disclosure requirements of the standard consist principally of short-term liabilities; the carrying amounts approximate their fair values. Notes Payable The fair value of long-term borrowings is estimated using sec- ondary market prices and does not include the fair values of related interest rate swap agreements, which are presented separately. Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures The fair value is estimated using secondary market prices. Interest Rate and Foreign Exchange Financial Instruments The fair values of interest rate and foreign exchange contracts used to manage interest rate, currency and market risks are estimated based on market information and other relevant characteristics using pricing models, including option models. Other Unrecognized Financial Instruments The fair value of commitments to ex- tend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of foreign office guarantees and letters of credit are based on fees charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. - -------------------------------------- 88 -------------------------------------- Notes to Financial Statements -- (Continued) The following table sets forth the estimated fair values of the Corporation's financial instruments:
December 31 1998 1997 Estimated Estimated Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - -------------------------------------------------------------------------------- Assets Cash and due from banks.................. $3,773 $3,773 $4,006 $4,006 Interest bearing deposits in other banks................................... 1,533 1,533 1,592 1,592 Federal funds sold and securities purchased under agreements to resell.... 2,463 2,463 2,017 2,017 Trading assets(1)........................ 3,802 3,802 2,947 2,947 Securities Available for sale(2)................... 12,075 12,291 9,946 10,100 Held to maturity........................ 459 464 537 540 Loans.................................... 40,280 41,590 Reserve for credit losses(3)............. (754) (712) ------ ------ 39,526 40,324 40,878 41,673 Due from customers on acceptances........ 338 338 462 462 Accrued interest receivable.............. 561 561 552 552 Financial instruments included in other assets.................................. 1,506 1,599 1,021 1,087 Liabilities Deposits................................. 48,500 48,641 45,761 45,793 Funds borrowed(1)........................ 12,016 12,016 12,865 12,865 Acceptances outstanding.................. 338 338 460 460 Financial instruments included in accrued expenses and other liabilities.......... 1,294 1,294 1,225 1,225 Notes payable............................ 4,593 4,648 2,941 3,003 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures.............................. 995 980 747 765 Interest Rate Contracts(4) Asset and liability management Asset................................... 308 166 Liability............................... (147) (11) Foreign Exchange Contracts(4) Asset and liability management Asset................................... 35 36 Liability............................... (22) (41) Other Unrecognized Financial Instruments Fee-based or otherwise legally binding commitments to extend credit............ (73) (62) Standby and commercial letters of credit, foreign office guarantees and similar instruments............................. (13) (11) - --------------------------------------------------------------------------------
(1) Trading assets and funds borrowed include the fair value of derivative trading positions. (2) Securities available for sale include investments made in connection with the Corporation's Private Equity business that do not trade on established exchanges, and for which no markets exist. At December 31, 1998 and 1997, their estimated fair values exceeded the related carrying amounts by $216 million and $154 million, respectively. (3) The reserve for credit losses is established for future charge-offs arising from all extensions of credit. The amount of the reserve associated with instruments other than loans, such as leases, commitments to extend credit, standby letters of credit and interest rate contracts, is not material. Ac- cordingly, a separate determination of the reserve allocable to such in- struments has not been made. (4) Additional information with respect to interest rate and foreign exchange contracts can be found in Note 22. The Corporation's accounting policy re- lated to such instruments is discussed in Note 1. - -------------------------------------- 89 -------------------------------------- EX-21 12 LIST OF SUBSIDIARIES OF BANKBOSTON CORPORATION Exhibit 21 List of Subsidiaries of BankBoston Corporation Information reflected is as of December 31, 1998 except where noted. There is no parent company of BankBoston Corporation (the "Corporation"). BankBoston, N.A. ("BKB"), all of whose voting securities are owned indirectly by the Corporation, is the principal subsidiary of the Corporation. A number of entities which are owned wholly or in part, either directly or indirectly, by the Corporation are not listed below. However, their assets if considered in the aggregate as a single subsidiary would not constitute a significant subsidiary of the Corporation as of December 31, 1998.
JURISDICTION NAME OF SUBSIDIARY (1) (2) OF ORGANIZATION - -------------------------- --------------- BankBoston, N.A. (3) US BancBoston Aircraft Leasing Inc. MA BancBoston Insurance Agency, Inc. MA BancBoston Insurance Agency of Rhode Island, Inc. RI BancBoston International Leasing LLC DE BancBoston Leasing Inc. MA BancBoston Transport Leasing Inc. MA BancBoston Leasing Services Inc. MA BancBoston Services, Inc. MA BancBoston Ventures Inc. MA BankBoston Commerical Loan Funding LLC DE BankBoston Commerical Loan Master LLC DE BankBoston Credit Corporation MA BankBoston Development Company, L.L.C. (4) MA BankBoston International US Edge Act Corp. BankBoston Investor Services, Inc. MA BankBoston Retail Finance Inc. DE BayBanks Finance & Leasing Co., Inc. MA BayBanks Investment Management, Inc. MA BayBanks Credit Corp. MA BayBanks Systems, Inc. MA Boston Bancorp Securities Inc. MA Boston World Holding Corporation MA Boston Overseas Financial Corporation US Edge Act Corp. Equiserve Limited Partnership (5) MA Multibank Service Corp. MA
RV Marine Funding Corporation DE West Broadway Security Corp. MA BancBoston Investments Inc. MA BancBoston Capital, Inc. MA BancBoston Leasing Investments Inc. MA BancBoston Real Estate Capital Corporation MA BancBoston Robertson Stephens Inc. MA BancBoston Robertson Stephens International Ltd. U.K. BankBoston (NH), N.A. US Bank of Boston Florida, N.A. US BankBoston Capital Trust I DE BankBoston Capital Trust II DE BankBoston Capital Trust III DE BankBoston Capital Trust IV DE BankBoston Maine, N.A. US Boston International Holdings Corporation MA Boston Overseas Holding Corp. MA Bulfinch Indemnity Company, Ltd. VT FSC Corp. MA Pacific National Corporation MA RIHT Life Insurance Co. AZ Back Bay Capital LLC DE
- ---------------------- (1) Except as noted, each such business organization is directly or indirectly owned by the Corporation. (2) BKB and certain other subsidiaries own a number of subsidiaries which hold real property acquired in connection with certain loan workout situations. If considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. (3) 99.72% owned by BankBoston Corporation. and .28% owned by Pacific National Corporation. (4) 99% owned by BankBoston, N.A. and 1% owned by BancBoston Investments Inc. (5) Joint venture in which an interest of.5% is held by BancBoston Services and a 24.5% limited partnership interest is held by BankBoston, N.A. EX-23 13 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 PRICEWATERHOUSECOOPERS CONSENT OF INDEPENDENT ACCOUNTANTS To The Board of Directors BankBoston Corporation We consent to the incorporation by reference, in the registration statements of BankBoston Corporation on Form S-3 (Registration Nos. 333-13697, 333-38135, 333- 47125, 333-47125-01, 333-47125-02 and 333-67383) and Form S-8 (Registration Nos. 33-1899, 33-11186, 33-64462, 333-00297, 333-07329, 333-09041, 333-12851, 333- 18999, 333-24199, 333-41589 and 333-71867) of our report dated January 21, 1999 on our audits of the consolidated financial statements of BankBoston Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998 included in the Corporation's 1998 Annual Report to Stockholders and in Exhibit 13 to the Corporation's 1998 Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts March 5, 1999 EX-27 14 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 3,773 1,533 2,463 3,802 12,075 459 464 42,806 (754) 73,513 48,500 9,581 2,254 5,874 0 0 307 4,510 73,513 4,259 780 538 5,577 1,871 3,050 2,527 380 41 882 1,269 1,269 0 0 792 2.66 2.64 4.09 375 41 0 0 712 (441) 77 754 497 227 30 INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR SUBORDINATED DEBENTURES.
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