-----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, OBdzQBdbwX2BK0zmMkDftluGINV0AKqKgECpEYFcLc0KDKUjAdP/BcBLH1vjnBIb hNooJUBHQFKkYqDqaDGTmA== 0000927016-96-001062.txt : 19960911 0000927016-96-001062.hdr.sgml : 19960911 ACCESSION NUMBER: 0000927016-96-001062 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960906 ITEM INFORMATION: Other events FILED AS OF DATE: 19960909 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 96627723 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 8-K 1 FORM 8-K ________________________________________________________________________________ ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): SEPTEMBER 6, 1996 BANK OF BOSTON CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 1-6522 04-2471221 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 100 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 434-2200 ________________________________________________________________________________ ________________________________________________________________________________ -2- ITEM 5. OTHER EVENTS. - ---------------------- On July 29, 1996, Bank of Boston Corporation (the Corporation) completed its acquisition of BayBanks, Inc. (BayBanks), and accounted for the acquisition as a pooling of interests. Accordingly, the purpose of this Current Report on Form 8-K is to file supplemental consolidated financial statements, supplemental management's discussion and analysis of financial condition and results of operations and supplemental statistical disclosure pursuant to Industry Guide 3 that reflect the acquisition as though the Corporation and BayBanks had operated as a combined entity for all periods presented. Certain Industry Guide 3 information for the periods included in the supplemental consolidated financial statements has not been presented, because either the information would not be materially different from that of the Corporation prior to the acquisition, or such information is included in the footnotes to supplemental financial statements. In addition, the Corporation filed a Current Report on Form 8-K dated May 16, 1996 that included certain pro forma combined financial information for the Corporation and BayBanks as of March 31, 1996; in order to update that information, attached hereto as exhibits and incorporated by reference herein is pro forma combined financial information for the Corporation and BayBanks as of June 30, 1996. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. - ------------------------------------------- (a) Financial Statements. The following supplemental consolidated financial information of the Corporation, giving effect to the acquisition of BayBanks as a pooling of interests, is included as Schedule A: (i) Supplemental Consolidated Selected Financial Data (ii) Supplemental Summary of Quarterly Consolidated Financial Information and Common Stock Data (iii) Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations (iv) Report of Independent Accountants (v) Supplemental Consolidated Balance Sheet as of December 31, 1995 and 1994 (vi) Supplemental Consolidated Statement of Income for the years ended December 31, 1995, 1994 and 1993 (vii) Supplemental Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 (viii) Supplemental Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993 (ix) Notes to Supplemental Financial Statements (x) Supplemental Statistical Disclosure by Bank Holding Companies (xi) Unaudited Supplemental Consolidated Balance Sheet as of June 30, 1996 and December 31, 1995 (xii) Unaudited Supplemental Consolidated Statement of Income for the three and six months ended June 30, 1996 and 1995 (xiii) Notes to Unaudited Supplemental Financial Statements (b) Pro Forma Financial Information. The following unaudited pro forma financial information is included as Schedule B: (i) Unaudited Pro Forma Combined Balance Sheet as of June 30, 1996 (ii) Unaudited Pro Forma Combined Statement of Income for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993 (iii) Notes to Unaudited Pro Forma Combined Financial Information (c) Exhibits. 11 Computation of Supplemental Earnings Per Common Share 12(a) Computation of the Corporation's Supplemental Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits) 12(b) Computation of the Corporation's Supplemental Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits) 23(a) Consent of Coopers & Lybrand L.L.P. (with respect to the Corporation) 23(b) Consent of KPMG Peat Marwick LLP (with respect to BayBanks) 27(a) Restated Financial Data Schedule for the six months ended June 30, 1996 27(b) Restated Financial Data Schedule for the six months ended June 30, 1995 27(c) Restated Financial Data Schedule for the year ended December 31, 1995 27(d) Restated Financial Data Schedule for the year ended December 31, 1994 99 Report of KPMG Peat Marwick LLP dated January 18, 1996 (with respect to the consolidated financial statements of BayBanks, Inc. and subsidiaries as of December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995) -3- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BANK OF BOSTON CORPORATION Dated: September 6, 1996 /s/ William J. Shea ------------------- William J. Shea Vice Chairman, Chief Financial Officer and Treasurer Schedule A Bank of Boston Corporation Supplemental Consolidated Selected Financial Data
Years Ended December 31 1995 1994 1993 1992 (dollars in millions, except per share amounts) INCOME STATEMENT DATA (1) Interest income.......................................................... $5,119 $4,376 $3,330 $3,664 Interest expense......................................................... 2,870 2,339 1,561 1,992 ------- ------- ------- ------- Net interest revenue................................................ 2,249 2,037 1,769 1,672 Provision for credit losses.............................................. 275 154 107 288 ------- ------- ------- ------- Net interest revenue after provision for credit losses.............. 1,974 1,883 1,662 1,384 Noninterest income....................................................... 1,309 1,035 945 1,020 Noninterest expense(2)................................................... 2,076 1,947 2,002 1,949 ------- ------- ------- ------- Income (Loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles.................. 1,207 971 605 455 Provision for (Benefit from) income taxes................................ 529 422 262 190 ------- ------- ------- ------- Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles........................................ 678 549 343 265 Extraordinary items Gains (losses) from early extinguishment of debt, net of tax.......................................................... (7) Recognition of prior year tax benefit carryforwards.................... 73 Cumulative effect of changes in accounting principles, net of tax(3)... 24 ------- ------- ------- ------- Net income (loss)................................................... $678 $542 $367 $338 ======= ======= ======= ======= Net income (loss) applicable to common stock........................ $641 $505 $332 $318 ======= ======= ======= ======= Per common share Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles Primary............................................................. $4.17 $3.44 $2.09 $1.77 Fully diluted....................................................... 4.09 3.36 2.05 1.73 Net income (loss) Primary............................................................. 4.17 3.39 2.26 2.30 Fully diluted....................................................... 4.09 3.31 2.21 2.24 Cash dividends declared (4)............................................ 1.28 .93 .40 .10 Average number of common shares (in thousands) Primary................................................................ 153,856 148,913 147,033 138,444 Fully diluted.......................................................... 156,768 153,616 152,067 144,044 1991 1990 INCOME STATEMENT DATA (1) Interest income.......................................................... $4,100 $5,160 Interest expense......................................................... 2,588 3,554 ------- ------- Net interest revenue................................................ 1,512 1,606 Provision for credit losses.............................................. 684 1,054 ------- ------- Net interest revenue after provision for credit losses.............. 828 552 Noninterest income....................................................... 974 939 Noninterest expense(2)................................................... 1,964 2,125 ------- ------- Income (Loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles.................. (162) (634) Provision for (Benefit from) income taxes................................ (51) (52) ------- ------- Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles........................................ (111) (582) Extraordinary items Gains (losses) from early extinguishment of debt, net of tax.......................................................... 8 44 Recognition of prior year tax benefit carryforwards Cumulative effect of changes in accounting principles, net of tax(3) ------- ------- Net income (loss)................................................... $(103) $(538) ======= ======= Net income (loss) applicable to common stock........................ $(116) $(552) ======= ======= Per common share Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles Primary............................................................. $(.95) $(4.67) Fully diluted....................................................... (.95) (4.66) Net income (loss) Primary............................................................. (.89) (4.32) Fully diluted....................................................... (.89) (4.31) Cash dividends declared (4)............................................ .10 .82 Average number of common shares (in thousands) Primary................................................................ 129,978 127,759 Fully diluted.......................................................... 130,313 127,999
(1) Consolidated selected financial data for each of the six years in the period ended December 31, 1995 have been restated to reflect the Corporation's acquisition of BayBanks, Inc. (BayBanks), which was completed in July 1996 and was accounted for as a pooling of interests. (2) Includes, in 1995, $28 million in charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. Includes, in 1994, costs of $21 million in connection with the Corporation's acquisitions of BankWorcester Corporation and Pioneer Financial, A Co-operative Bank; and, in 1993, acquisition-related costs and reorganization charges of $85 million, primarily in connection with the Corporation's mergers with Society for Savings Bancorp, Inc. (Society) and Multibank Financial Corp. (Multibank), as well as estimated costs of downsizing and reconfiguring certain of the Corporation's business and corporate units. Also includes reorganization charges of $54 million in 1991 and $139 million in 1990, comprised of $7 million in 1991 and $89 million in 1990 in connection with a Society reorganization plan, and $47 million in 1991 and $50 million in 1990 in connection with the Corporation's plans for the consolidation and downsizing of various domestic and international operations and facilities and staff reductions. (3) 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 taxes, relating to a change in accounting principles pertaining to the valuation of purchased mortgage servicing rights (PMSR). (4) Amounts represent the historical cash dividends of the Corporation. F-1 Bank of Boston Corporation Supplemental Consolidated Selected Financial Data
Years Ended December 31 1995 1994 1993 1992 1991 1990 (dollars in millions, except per share amounts) SELECTED RATIOS(1) Return on average assets......................................... 1.22% 1.01% .76% .73% (.22)% (1.00)% Return on average common equity(5)............................... 16.86 15.50 11.39 12.86 (5.20) (19.90) Common dividend payout ratio (6)................................. 28.1 24.9 14.4 3.4 NM NM Common equity to total assets.................................... 7.1 6.2 6.1 5.9 4.6 4.7 Average total stockholders' equity to average total assets....... 7.7 7.1 7.1 6.0 5.1 5.6 Risk-based capital ratios Tier 1...................................................... 8.5 7.7 7.7 7.4 5.5 5.4 Total....................................................... 12.8 12.7 12.4 11.8 9.7 9.6 Leverage ratio................................................... 7.4 6.7 6.9 6.6 4.8 4.5 Net credit losses to average loans and lease financing........... .51 .81 .87 1.38 1.99 2.42 Reserve for credit losses to loans and lease financing........... 2.29 2.19 2.70 3.57 3.98 3.70 Reserve for credit losses to nonaccrual loans and lease financing...................................................... 238.92 196.97 142.24 116.28 72.79 54.69 Nonaccrual loans and OREO as a percent of related asset categories..................................................... 1.1 1.5 2.5 4.2 7.1 7.9 Market value/book value.......................................... 171.2 112.2 108.9 134.4 67.7 35.3 BALANCE SHEET DATA at DECEMBER 31 (1) Loans and lease financing........................................ $38,870 $37,708 $34,819 $31,240 $31,764 $33,468 Reserve for credit losses........................................ (890) (827) (941) (1,116) (1,264) (1,237) Total assets..................................................... 59,423 55,411 50,711 47,222 47,837 49,445 Deposits......................................................... 41,064 40,249 38,316 38,097 38,064 40,772 Funds borrowed................................................... 9,503 7,211 5,487 3,092 4,762 3,198 Notes payable.................................................... 2,189 2,219 2,023 1,736 1,469 1,586 Stockholders' equity............................................. 4,702 3,931 3,615 3,198 2,420 2,534 Common shares outstanding (in thousands)......................... 155,296 148,343 147,036 145,379 130,265 128,810 Common stockholders of record(7)................................. 27,662 27,505 28,233 30,163 32,965 33,214 Number of employees.............................................. 23,710 24,009 24,215 24,986 24,283 26,072 Per common share Book value..................................................... $27.01 $23.07 $21.13 $18.98 $16.98 $18.06 Market value................................................... 46 1/4 25 7/8 23 25 1/2 11 1/2 6 3/8 AVERAGE BALANCE SHEET DATA(1) Loans and lease financing........................................ $38,283 $36,017 $32,565 $31,568 $33,001 $36,519 Securities....................................................... 7,463 6,473 5,631 6,272 6,347 5,559 Other earning assets............................................. 3,821 5,027 4,684 3,818 3,974 7,302 ------- ------- ------- ------- ------- ------- Total earning assets........................................ 49,567 47,517 42,880 41,658 43,322 49,380 ====== ======== ======= ======= ======= ======= Cash and due from banks 2,591 2,708 2,419 2,200 2,039 2,351 Other assets..................................................... 3,586 3,164 2,638 2,432 2,229 1,971 ------- ------- ------- ------- ------- ------- Total average assets........................................ $55,744 $53,389 $47,937 $46,290 $47,590 $53,702 ======= ======= ======= ======= ======= ======= Deposits......................................................... $38,406 $37,919 $37,163 $37,643 $38,534 $42,252 Funds borrowed................................................... 9,132 8,018 4,500 3,633 3,910 4,992 Other liabilities................................................ 1,760 1,563 1,087 1,000 1,101 1,324 Notes payable.................................................... 2,142 2,123 1,797 1,252 1,607 2,152 Stockholders' equity............................................. 4,304 3,766 3,390 2,762 2,438 2,982 ------- ------- ------- ------- ------- ------- Total average liabilities and stockholders' equity.......... $55,744 $53,389 $47,937 $46,290 $47,590 $53,702 ======= ======= ======= ======= ======= =======
(5) For purposes of this ratio, preferred stock dividends have been deducted from net income. (6) Ratios are based on the historical cash dividends and net income applicable to common stock of the Corporation. (7) The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. NM--Not meaningful. F-2 BANK OF BOSTON CORPORATION SUPPLEMENTAL SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA
1995 1994 Fourth Third Second First Fourth (dollars in millions, except per share amounts) Quarter Quarter Quarter Quarter Quarter Income Statement Data (1) Interest income....................................................... $ 1,279 $ 1,320 $ 1,297 $ 1,223 $ 1,254 Interest expense...................................................... 706 750 740 674 697 -------- -------- -------- -------- -------- Net interest revenue............................................. 573 570 557 549 557 Provision for credit losses........................................... 81 51 46 97 41 -------- -------- -------- -------- -------- Net interest revenue after provision for credit losses........... 492 519 511 452 516 Noninterest income(2)................................................. 367 305 292 345 249 Noninterest expense(3)................................................ 545 518 512 501 499 -------- -------- -------- -------- -------- Income before income taxes and extraordinary item..................... 314 306 291 296 266 Provision for income taxes............................................ 134 131 123 141 115 -------- -------- -------- -------- -------- Income before extraordinary item...................................... 180 175 168 155 151 Extraordinary loss from early extinguishment of debt, net of tax.......................................................... ------- ------- ------- ------- ------- Net income............................................................ $ 180 $ 175 $ 168 $ 155 $ 151 ======== ======== ======== ======== ======== Average Balance Sheet Data (1) Loans and lease financing............................................. $ 39,357 $ 39,033 $ 37,811 $ 36,894 $ 37,606 Securities............................................................ 7,823 7,468 7,335 7,218 7,499 Other earning assets.................................................. 4,115 3,764 3,681 3,723 3,964 -------- -------- -------- -------- -------- Total earning assets............................................. 51,295 50,265 48,827 47,835 49,069 Cash and due from banks............................................... 2,649 2,546 2,581 2,588 2,850 Other assets.......................................................... 3,857 3,901 3,453 3,134 3,186 -------- -------- -------- -------- -------- Total average assets............................................. $ 57,801 $ 56,712 $ 54,861 $ 53,557 $ 55,105 ======== ======== ======== ======== ======== Deposits.............................................................. $ 39,903 $ 38,766 $ 37,582 $ 37,342 $ 39,128 Funds borrowed........................................................ 9,355 9,620 9,128 8,407 8,301 Other liabilities..................................................... 1,806 1,790 1,818 1,618 1,580 Notes payable......................................................... 2,159 2,115 2,112 2,183 2,192 Stockholders' equity.................................................. 4,578 4,421 4,221 4,007 3,904 -------- -------- -------- -------- -------- Total average liabilities and stockholders' equity............... $ 57,801 $ 56,712 $ 54,861 $ 53,557 $ 55,105 ======== ======== ======== ======== ======== Per Common Share (1) Income before extraordinary item Primary.......................................................... $1.09 $1.06 $ 1.03 $ .98 $ .95 Fully diluted.................................................... 1.08 1.05 1.02 .95 .92 Net Income Primary.......................................................... 1.09 1.06 1.03 .98 .95 Fully diluted.................................................... 1.08 1.05 1.02 .95 .92 Cash dividends declared............................................... .37 .37 .27 .27 .27 Market value High............................................................. 49 3/8 47 5/8 38 1/4 30 3/8 29 1/8 Low.............................................................. 43 5/8 36 3/4 29 3/8 25 5/8 24 5/8 Average Number of Common Shares (in thousands) Primary.......................................................... 156,140 155,660 153,877 149,654 149,471 Fully diluted.................................................... 157,959 157,598 155,529 154,262 154,194 1994 Third Second First (dollars in millions, except per share Quarter Quarter Quarter amounts) Income Statement Data (1) Interest income....................................................... $ 1,256 $ 996 $ 870 Interest expense...................................................... 712 509 421 -------- -------- -------- Net interest revenue............................................. 544 487 449 Provision for credit losses........................................... 31 31 51 -------- -------- -------- Net interest revenue after provision for credit losses........... 513 456 398 Noninterest income(2)................................................. 255 246 285 Noninterest expense(3)................................................ 495 489 464 -------- -------- -------- Income before income taxes and extraordinary item..................... 273 213 219 Provision for income taxes............................................ 120 92 95 -------- -------- -------- Income before extraordinary item...................................... 153 121 124 Extraordinary loss from early extinguishment of debt, net of tax.................................................. (7) ------ ------ ------ Net income............................................................ $ 153 $ 121 $ 117 ======== ======== ======== Average Balance Sheet Data (1) Loans and lease financing............................................. $ 36,589 $ 35,185 $ 34,682 Securities............................................................ 6,774 6,133 5,526 Other earning assets.................................................. 5,120 5,767 5,207 -------- -------- -------- Total earning assets............................................. 48,483 47,085 45,415 Cash and due from banks............................................... 2,767 2,450 2,759 Other assets.......................................................... 3,288 3,308 2,878 -------- -------- -------- Total average assets............................................. $ 54,538 $ 52,843 $ 51,052 ======== ======== ======== Deposits.............................................................. $ 38,547 $ 36,794 $ 37,196 Funds borrowed........................................................ 8,447 8,866 6,455 Other liabilities..................................................... 1,702 1,470 1,499 Notes payable......................................................... 2,041 2,011 2,248 Stockholders' equity 3,801 3,702 3,654 -------- -------- -------- Total average liabilities and stockholders' equity............... $ 54,538 $ 52,843 $ 51,052 ======== ======== ======== Per Common Share (1) Income before extraordinary item Primary.......................................................... $ .96 $ .75 $.77 Fully diluted.................................................... .94 .73 .76 Net Income Primary.......................................................... .96 .75 .73 Fully diluted.................................................... .94 .73 .71 Cash dividends declared............................................... .22 .22 .22 Market value High............................................................. 27 3/8 28 1/2 25 5/8 Low.............................................................. 24 3/8 23 1/8 22 5/8 Average Number of Common Shares (in thousands) Primary.......................................................... 149,195 148,760 148,203 Fully diluted.................................................... 153,904 153,438 152,844
(1) Quarterly consolidated financial information and common stock data for each of the quarters in the periods ended December 31, 1995 and 1994 have been restated, except for cash dividends declared, to reflect the Corporation's acquisition of BayBanks, which was completed in July 1996 and was accounted for as a pooling of interests. (2) Includes a $20 million gain from the sale of the corporate trust business in the fourth quarter of 1995, a $75 million gain from the sales of the Corporation's Maine and Vermont banking subsidiaries in the first quarter of 1995, and a $27 million gain from the sale of the domestic factoring business in the first quarter of 1994. (3) Includes $28 million in charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units in the fourth quarter of 1995, and $5 million and $16 million of acquisition-related costs in the third and second quarters of 1994, respectively, related to the Corporation's acquisitions of Pioneer Financial, A Co-operative Bank and BankWorcester Corporation. 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. F-3 SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On July 29, 1996, Bank of Boston Corporation (the Corporation) completed its acquisition of BayBanks, Inc. (BayBanks). The Corporation acquired BayBanks in a tax-free exchange of stock, whereby the Corporation exchanged 2.2 shares of its common stock for each outstanding share of BayBanks common stock. Refer to Note 2 to the Supplemental Consolidated Financial Statements for further discussion of this transaction. The acquisition was accounted for as a pooling of interests and, accordingly, the information included in this discussion presents the combined results of BayBanks and the Corporation as if the Corporation and BayBanks had operated as a combined entity for all periods presented. This discussion should be read in conjunction with the Management's Discussion and Analysis and Consolidated Financial Statements included in the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, as updated by the Management's Discussion and Analysis sections of the Corporation's Quarterly Reports on Form 10-Q for the Quarterly Periods Ended March 31, 1996 and June 30, 1996. The Corporation is a registered bank holding company which, together with its subsidiaries, operates 750 offices in 25 countries around the world, including its 450-branch network within New England. The Corporation's major banking subsidiaries are The First National Bank of Boston (FNBB), BayBank, N.A., Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank, BayBank FSB and BayBank NH, N.A. Mergers and Acquisitions Since the beginning of 1995, the Corporation has conducted the following acquisition activities: . In February 1995, the Corporation completed its acquisition of Ganis Credit Corporation (Ganis), which is headquartered in Newport Beach, California. Ganis specializes in collateralized lending for recreational vehicles and boats, and had approximately $540 million in consumer loans outstanding at December 31, 1995. . In July 1995, the Corporation acquired NFS Financial Corp. (NFS), parent company of two New Hampshire banking institutions, which had total assets of approximately $625 million at June 30, 1995. The acquisition was accounted for as a purchase. Following the acquisition, the two New Hampshire banking institutions were merged into, and are operating as, BayBank, FSB. . In July 1995, Fidelity Acceptance Corporation (FAC), the Corporation's national consumer finance company, completed the acquisition of approximately $110 million in consumer loans and assumed 46 offices of Century Acceptance Corporation, a national consumer finance company based in Kansas City, Missouri. . In December 1995, the Corporation acquired Cornerstone Financial Corporation, parent company of Cornerstone Bank of Derry, NH, which had total assets of approximately $143 million at November 30, 1995. This transaction was accounted for as a purchase. Following the acquisition, Cornerstone Bank began operating as BayBank NH, N.A. . In June 1996, the Corporation completed its acquisition of The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with approximately $1.3 billion in deposits. In this transaction, which was accounted for as a purchase, the Corporation exchanged 4.6 million shares of its common stock, with a value of approximately $229 million, for all the outstanding common stock of Bancorp. The Corporation has purchased an equivalent amount of shares in the open market during 1996 for this transaction. Divestitures During 1995, the Corporation sold the following non-strategic business units: . In the first quarter of 1995, following its strategy to focus on the southern New England market, the Corporation completed the sales of its Vermont and Maine banking subsidiaries, Bank of Vermont (Vermont) and Casco Northern Bank, N.A. (Casco), resulting in a pre-tax gain of approximately $75 million, or $30 million net of tax. Vermont and Casco combined had loans of approximately $1.2 billion and deposits of approximately $1.3 billion at December 31, 1994. . In October 1995, the Corporation sold its corporate trust business, resulting in a net pre-tax gain of $20 million, or $12 million net of tax. F-4 Strategic Alliances Since the beginning of 1995, the Corporation has entered into the following strategic alliances to improve efficiencies and economies of scale of certain of its business units: . Effective in October 1995, the Corporation formed a joint venture with Boston Financial Data Services (a joint venture of State Street Bank and Trust Company and DST Systems, Inc.), which combined their respective stock transfer businesses into a single entity that is 50 percent owned by each party. . In December 1995, the Corporation announced it would enter into a transaction with two equity investors, the Thomas H. Lee Company and Madison Dearborn Partners, to form an independent mortgage company. During the first quarter of 1996, the Corporation sold its BancBoston Mortgage Corporation (BBMC) subsidiary in return for cash and a minority equity interest in the newly formed entity, HomeSide, Inc. (HomeSide). The second phase of the transaction, in which Barnett Mortgage Company was acquired by HomeSide, was completed in the second quarter of 1996, upon which the Corporation, Barnett Bank and the equity investment firms now each hold an approximate one-third interest in HomeSide. This entity is expected to provide a means to achieve the growth and scale deemed necessary to succeed in the mortgage banking industry. Further information on this transaction is included in the Corporation's Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1996. Additional information on certain of the transactions described above is included in Note 2 to the Supplemental Consolidated Financial Statements. F-5 Results of Operations The following is a discussion and analysis of the Corporation's supplemental consolidated results of operations. In order to understand this section in context, it should be read in conjunction with the Supplemental Consolidated Financial Statements included elsewhere in this report. Overview Table 1 presents the Corporation's income before extraordinary item and cumulative effect of changes in accounting principles and net income, as well as related primary and fully diluted earnings per common share amounts for 1995, 1994 and 1993. The Corporation's 1995 net income increased $136 million, or 25 percent, from the 1994 level. Net income per common share on a fully diluted basis for 1995 increased $.78, or 24 percent, from the 1994 level. Table 1 -- Results of Operations
Years Ended December 31 1995 1994 1993 (in millions, except per share amounts) Income before extraordinary item and cumulative effect of changes in accounting principles................................. $ 678 $ 549 $ 343 Extraordinary loss from early extinguishment of debt, net of tax.................... (7) Cumulative effect of changes in accounting principles, net of tax(1) ................. 24 ----- ----- ----- Net income.............................................. $ 678 $ 542 $ 367 ===== ===== ===== Per common share Income before extraordinary item and cumulative effect of changes in accounting principles Primary............................................ $4.17 $3.44 $2.09 Fully diluted...................................... 4.09 3.36 2.05 Net income Primary............................................ 4.17 3.39 2.26 Fully diluted...................................... 4.09 3.31 2.21
(1) Reflects a cumulative $77 million benefit as a result of adopting Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," as of January 1, 1993, and a cumulative $53 million after-tax charge as a result of a change in accounting with respect to the valuation of PMSR. F-6 Net Interest Revenue This discussion of net interest revenue should be read in conjunction with Average Balances and Interest Rates and Change in Net Interest Revenue -- Volume and Rate Analysis, presented elsewhere in this report. Table 2 presents a summary 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 adjusted to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35 percent, plus applicable state and local taxes, net of related federal tax benefits. Table 2 -- 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) 1995............................. $ 1,825 $ 446 $ 2,271 1994............................. 1,704 348 2,052 1993............................. 1,525 257 1,782 Average earning assets 1995............................. $38,688 $10,879 $49,567 1994............................. 37,711 9,806 47,517 1993............................. 35,323 7,557 42,880 Net interest margin 1995............................. 4.72% 4.10% 4.58% 1994............................. 4.52 3.54 4.32 1993............................. 4.32 3.40 4.16
1995 vs. 1994 Both domestic and international operations contributed to the improvements in net interest revenue and margin from 1994. The domestic net interest revenue increase of $121 million resulted from both a higher level of earning assets and wider spreads. Average earning assets increased by $977 million, reflecting an approximate $1.1 billion increase in average loan and lease volume partially offset by a decrease in other earning assets. Contributing to the loan volume increase was a higher level of consumer- related loans, reflecting increases in FAC's national consumer finance portfolio, the full year effects of the 1994 acquisitions of Pioneer Financial, A Co-operative Bank (Pioneer) and BankWorcester Corporation (BankWorcester), and the effects of the 1995 acquisitions of Ganis and BayBank FSB. These increases were partially offset by the impact of the 1995 sales of Vermont and Casco, as well as lower residential mortgage loans, which reflected the sale of certain lower-yielding residential mortgages by the Corporation, partially offset by increases in residential loans due to new volume, particularly at the BayBanks banking subsidiaries, and due to the BayBanks FSB acquisition (see "Noninterest Income" for further discussion of residential mortgage loans sold). Wider spreads mainly reflected the shift in the Corporation's average loan portfolio towards higher-yielding consumer-related loans, and earning asset yield growth which generally outpaced rate increases on interest bearing liabilities, particularly retail deposits, during the first half of the year. The widening of spreads was also mainly responsible for the domestic net interest margin increasing by 20 basis points compared with 1994. Information on the Corporation's management of interest rate risk is discussed in the "Interest Rate Risk Management" section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K. The international net interest revenue increase of $98 million and the international net interest margin increase of 56 basis points were primarily attributable to the Corporation's operations in Latin America. The increase in international net interest revenue was due to a higher level of average earning assets and wider spreads, the latter also mainly responsible for the increase in international net interest margin. The increase in spreads was, in part, due to a shift in mix to higher-yielding loans from lower-yielding treasury assets as well as the effects of asset and liability positions taken by the Corporation in Latin America which enabled it to benefit from prevailing interest rates. International volume growth included an increase of over $600 million in average loans and leases in Argentina from 1994. Consolidated net interest margin increased throughout 1994 to 4.54 percent in the fourth quarter of 1994. The margin increased further to 4.69 percent in the first quarter of 1995, and declined in each of the subsequent 1995 quarters, to 4.50 percent in the fourth quarter. The declines in margin during 1995 reflected the narrower domestic spreads being experienced by the industry as competitive rate increases on interest bearing liabilities, particularly retail deposits, caught up with yield growth on earning assets. In addition, international margin increased in the first half of 1995, mainly as a result of widening spreads in both Argentina and Brazil, which reflected the effects of government economic measures and interest rate positions taken by the Corporation enabling it to benefit from rising rates. Spreads generally narrowed in the second half of 1995, particularly in Argentina, as a result of declining interest rates stemming from increasing economic stability in that country during this period. See the "Emerging Markets Countries" section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, for further discussion. F-7 The level of net interest revenue and margin reported for the year ended December 31, 1995 is not necessarily indicative of future results. The Corporation has experienced, and could continue to experience in the future, pressure on margin. Future levels of net interest revenue and margin will be affected by competitive pricing pressure on retail deposits, loans and other products; the mix and volume of assets and liabilities; the current interest rate environment; the economic and political situations in countries where the Corporation does business; and other factors. Noninterest Income The composition of noninterest income is presented in Table 3:
Table 3 - Noninterest Income Years Ended December 31 (in millions) 1995 1994 1993 Financial service fees: Net mortgage servicing fees.................................... $ 172 $ 63 $ 11 Deposit fees................................................... 197 209 203 Loan-related fees.............................................. 72 61 46 Letter of credit and acceptance fees........................... 72 63 60 Other financial service fees................................... 182 168 188 ------ ------ ----- Total financial service fees..................................... 695 564 508 Trust and agency fees............................................ 240 222 198 Equity and mezzanine profits, net................................ 110 30 38 Net foreign exchange trading profits............................. 60 44 47 Trading profits and commissions.................................. 25 18 26 Securities gains, net............................................ 9 14 32 Gains on sales of businesses..................................... 95 27 Other income..................................................... 75 116 96 ------ ------ ----- Total........................................................ $1,309 $1,035 $ 945 ====== ====== =====
1995 vs. 1994 The $131 million increase in financial service fees reflected a significant increase in net mortgage servicing fees as well as higher loan-related fees and other financial service fees and higher letter of credit and acceptance fees, partially offset by a decline in deposit fees. Net mortgage servicing fees increased $109 million compared with 1994. As a result of the declining interest rate environment in the fourth quarter of 1995, the Corporation recognized $67 million of gains (net of increased servicing amortization) from the increase in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio. See the "Interest Rate Risk Management" section in the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, for a further discussion of these contracts and their potential effect on income. Excluding these gains, net mortgage servicing fees increased $42 million from 1994, reflecting the growth in the average servicing portfolio from $34 billion in 1994 to $42 billion in 1995. See the "Strategic Alliances" section for further discussion of the transactions completed during the first and second quarters of 1996 involving the Corporation's mortgage banking subsidiary. The growth in loan-related and other financial service fees was mainly due to higher syndication and advisory fees, reflecting the Corporation's increased emphasis on its capital markets business. Partially offsetting the increase in other financial service fees was the absence of factoring fees in 1995, due to the sale of the Corporation's domestic factoring business in 1994, which resulted in a pre-tax gain of $27 million ($15 million net of tax). Letter of credit and acceptance fees increased $9 million compared with 1994 due to a higher volume of business. Deposit fees declined compared to 1994, mainly resulting from the $1.3 billion decline in deposits due to the 1995 sales of Vermont and Casco, which resulted in a pre-tax gain of $75 million ($30 million net of tax). Net equity and mezzanine profits improved $80 million from 1994, as a result of a higher level of sales activity in 1995. The improvement in trust and agency fees mainly reflected higher fees from the Brazilian mutual fund business, as total funds under management increased to $2.5 billion at December 31, 1995, from $1.7 billion a year ago, which was partially offset by the absence of corporate trust and domestic stock transfer fees in the fourth quarter of 1995. As previously discussed in the "Divestitures" and "Strategic Alliances" sections, respectively, during 1995 the Corporation sold its corporate trust business, which resulted in a net pre-tax gain of $20 million ($12 million net of tax), and spun off its domestic stock transfer business into a joint venture. Foreign exchange trading activities principally include trading of spot and forward contracts in major foreign currencies. Net foreign exchange trading profits were $16 million higher compared with 1994, as increases were posted by international and domestic treasury operations. Trading account profits increased due to a higher level of profits from international securities trading during the second half of 1995. Offsetting these improvements were declines in other noninterest income and net securities gains. Other income declined, in part, due to a loss of $17 million on the transfer of approximately $1.3 billion of low-yielding residential mortgage loans into the held for sale account, substantially all of which were sold by December 31, 1995. Also contributing to the decline in other income were $17 million of valuation-related charges associated with certain investments and other assets, including assets being retained by the Corporation in connection with the aforementioned mortgage banking transactions, and the absence of net gains recorded in the first quarter of 1994 from the sale of securities originally acquired in connection with loan restructurings. Partially offsetting these items was a net improvement in the results of investments accounted for under the equity method. Other income in 1994 included $15 million of exchange-related profits arising from the strengthening of Brazil's currency against the U.S. dollar subsequent to the implementation of Brazil's new economic program in July 1994, and approximately $15 million of charges associated with certain investments. F-8 Noninterest Expense The composition of noninterest expense is presented in Table 4: Table 4 - Noninterest Expense Years Ended December 31 (in millions) 1995 1994 1993 Employee costs....................................................................... $1,146 $1,046 $ 988 Occupancy and equipment.............................................................. 324 310 304 FDIC insurance premiums.............................................................. 34 73 84 Other................................................................................ 535 459 459 ------ ------ ------ Noninterest expense, excluding OREO costs and special charges...................... 2,039 1,888 1,835 OREO costs........................................................................... 9 38 82 Acquisition, divestiture and restructuring expense................................... 28 21 85 ------ ------ ------ Total.............................................................................. $2,076 $1,947 $2,002 ====== ====== ======
1995 vs. 1994 The growth in noninterest expense before acquisition, divestiture and restructuring expense and OREO costs reflected increases in the Corporation's Latin American, personal banking and capital markets businesses which the Corporation has been expanding. The increase in employee costs mainly included higher merit increases and higher levels of incentive compensation, including stock awards made to senior management under a plan tied to the Corporation's common stock price, and reflected the net impact on employee levels of the Corporation's acquisition and divestiture activities during the year. The $14 million increase in occupancy and equipment from 1994 was the result of higher expenses from international operations, mainly Latin America, the Corporation's acquisitions and increased rental expense related to branch openings, including supermarket branches. The $39 million decline in FDIC insurance premiums reflected a reduction in the FDIC assessment rate effective in June 1995. Other expense increased from 1994 as a result of growth and business development in the Latin American and personal banking businesses. This increase included higher levels of advertising and marketing expense, including increases related to new retail deposit products, the Corporation's expansion of the domestic credit card business, the introduction of a home banking product, new branch advertising, the introduction of the BayBank product line in New Hampshire and customer surveys. In addition, growth in travel, communications and software costs and increased goodwill amortization contributed to the increase in other expenses. The decline in OREO costs was primarily due to lower valuation adjustments and the continued disposition of OREO properties. During the fourth quarter of 1995, the Corporation recorded $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. Included within these charges were expenses related to reorganizations underway in the European business, including the closing of the Luxembourg operations, corporate banking, certain Asian operations and various other units. In addition, a charge was included for curtailment losses as defined by SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." The curtailment losses resulted from the aforementioned mortgage banking transaction, which removed mortgage banking employees from the Corporation's postretirement and pension plans during the first quarter of 1996. Additional information on these items is included in Note 17 to the Supplemental Consolidated Financial Statements. Provision for Credit Losses The provision for credit losses was $275 million in 1995, compared with $154 million in 1994 and $107 million in 1993. The provision for credit losses in each year reflected management's assessment of the adequacy of the reserve for credit losses, including the risk characteristics of the loan portfolio and economic conditions. The 1995 provision for credit losses included special provisions of $75 million reflecting management's intent to strengthen further the Corporation's loan loss reserve (see further discussion in the "Reserve For Credit Losses" section). The 1994 provision reflected the effect of transferring certain lower quality real estate exposures to an accelerated disposition portfolio (ADP) (see further discussion in the "Accelerated Disposition Portfolio" section). The amount of future provisions will be a function of the regular quarterly review of the reserve for credit losses, which considers the risk characteristics of the loan portfolio and economic conditions existing at that time. Provision for Income Taxes The 1995 income tax provision was $529 million, compared with $422 million for 1994 and $262 million for 1993. The 1995 provision included $45 million associated with the $75 million gain on the sales of Vermont and Casco. The high level of tax associated with this gain reflected the lower tax bases in these investments as a result of $35 million of non-tax deductible goodwill associated with these subsidiaries. Excluding the impact of these sales, the Corporation's effective tax rate in 1995 was 43 percent, the same rate as in 1994 and 1993. During 1995, the Massachusetts Legislature enacted a bill to reduce the state income tax rate for banks from 12.5 percent to 10.5 percent to be phased in over five years, and to permit apportionment of a bank's taxable income. Additionally, in 1995, the Corporation reached a favorable settlement of an outstanding Massachusetts tax matter relating to income earned on certain securities. These items did not have a significant effect on the Corporation's 1995 effective tax rate, since the reduction in the current tax provision from the tax law changes and the settlement were offset by the required reduction in FNBB's net deferred tax assets resulting from the tax law changes. The changes in the Massachusetts tax law are expected to have a favorable impact on the Corporation's effective tax rate in 1996. F-9 Financial Condition Credit, liquidity, interest rate and capital management are important elements to be considered in understanding and assessing the Corporation's financial condition. For detailed discussions of these areas, refer to the Management's Discussion and Analysis section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, as updated by the Management's Discussion and Analysis sections of the Corporation's Quarterly Reports for the Quarterly Periods Ended March 31, 1996 and June 30, 1996. Loans and Leases Table 5 shows a breakdown of the Corporation's loans and lease financing portfolio for the last five years. Table 5 -- Loans and Lease Financing Portfolio
December 31 1995 1994 1993 (dollars in millions) Balance Percent Balance Percent Balance Percent United States Commercial, industrial and financial................... $12,809 33.0% $13,122 34.8% $13,199 37.9% Commercial real estate Construction.................................... 386 1.0 391 1.0 675 1.9 Other........................................... 3,393 8.7 4,065 10.8 4,003 11.5 Consumer-related loans Secured by 1-4 family residential properties.......................... 6,697 17.2 7,079 18.8 5,969 17.1 Other........................................... 5,554 14.3 4,559 12.1 3,524 10.1 Lease financing........................................ 1,564 4.0 1,482 3.9 1,367 3.9 Unearned income........................................ (240) (.6) (239) (.6) (228) (.7) ------- ----- ------- ----- ------- ----- 30,163 77.6 30,459 80.8 28,509 81.7 ------- ----- ------- ----- ------- ----- International Commercial and industrial 6,422 16.5 5,161 13.6 4,650 13.4 Banks and other financial institutions................. 796 2.1 749 2.0 690 2.0 Governments and official institutions.................. 82 .2 33 .1 22 .1 Lease financing........................................ 285 .7 329 .9 265 .8 All other.............................................. 1,159 3.0 1,053 2.8 791 2.3 Unearned income........................................ (37) (.1) (76) (.2) (108) (.3) ------- ----- ------- ----- ------- ----- 8,707 22.4 7,249 19.2 6,310 18.3 ------- ----- ------- ----- ------- ----- Total loans and lease financing $38,870 100.0% $37,708 100.0% $34,819 100.0% ======= ===== ======= ===== ======= ===== December 31 1992 1991 (dollars in millions) Balance Percent Balance Percent United States Commercial, industrial and financial................... $11,680 37.4% $11,993 37.8% Commercial real estate Construction.................................... 911 2.9 1,107 3.5 Other........................................... 4,169 13.3 4,721 14.9 Consumer-related loans Secured by 1-4 family residential properties.......................... 5,368 17.2 5,878 18.5 Other........................................... 3,037 9.7 2,967 9.3 Lease financing........................................ 1,322 4.2 1,386 4.4 Unearned income........................................ (231) (.7) (277) (.9) ------- ----- ------- ----- 26,256 84.0 27,775 87.5 ------- ----- ------- ----- International Commercial and industrial.............................. 3,646 11.7 2,929 9.2 Banks and other financial institutions................. 430 1.4 157 .5 Governments and official institutions.................. 54 .2 141 .4 Lease financing........................................ 218 .7 242 .8 All other.............................................. 721 2.3 609 1.9 Unearned income........................................ (85) (.3) (89) (.3) ------- ----- ------- ----- 4,984 16.0 3,989 12.5 ------- ----- ------- ----- Total loans and lease financing........................ $31,240 100.0% $31,764 100.0% ======= ===== ======= =====
Total loans and lease financing increased approximately $1.2 billion from December 31, 1994, as the increase in international loans and leases was partially offset by a decline in domestic loans and leases. The decline in domestic loans from December 31, 1994 reflected a $1.2 billion reduction from the sales of Vermont and Casco in the first quarter of 1995, of which approximately $500 million was related to commercial real estate loans, and the transfer of approximately $1.3 billion of low-yielding residential mortgage loans into the held for sale account in the fourth quarter of 1995, substantially all of which were sold by December 31, 1995. The transfer and sale of these residential mortgage loans were undertaken in connection with a program to remove low-return assets from the Corporation's balance sheet, which, in part, also accounts for the decline in the commercial and industrial and real estate portfolios. Excluding the sales of Vermont and Casco and the residential mortgage loans, domestic loans and leases grew approximately $2.2 billion, primarily due to higher levels of consumer-related loans, largely accomplished through residential mortgage and other consumer loan originations particularly at BayBanks subsidiaries, the acquisitions of BayBank FSB, Ganis and BayBank NH, N. A. and their respective origination activities throughout the year, and growth in the FAC loan portfolio by $250 million from December 31, 1994. International loans increased to $8.7 billion at December 31, 1995, from $7.2 billion at December 31, 1994. This growth has primarily occurred in Latin America, particularly in the loan portfolios of Argentina and Brazil. Total loans in these two countries have grown approximately $1.1 billion since December 31, 1994. Other countries contributing to the increase in international loans from December 31, 1994 were Chile, Colombia and Mexico. Domestic Commercial Real Estate Loans Table 6 details domestic commercial real estate loans by geographic location as of the last three year-ends. The portion attributable to other states at the end of 1995 was dispersed among approximately 28 states. F-10 TABLE 6--DOMESTIC COMMERCIAL REAL ESTATE LOANS
Other December 31 New Other (in millions) MA CT England States Total 1995........... $2,220 $318 $351 $ 890 $3,779 ====== ==== ==== ====== ====== 1994........... 2,380 427 651 998 4,456 ====== ==== ==== ====== ====== 1993........... 2,228 595 813 1,042 4,678 ====== ==== ==== ====== ======
A significant portion of the commercial real estate portfolio is comprised of loans from which ultimate payment to the Corporation is expected to come from the sale, operation or refinancing of the underlying property. The collateral underlying substantially all of these loans is valued at least annually using various real estate valuation techniques, including discounted cash flows and appraisals. The remaining portfolio is primarily composed of outstandings secured by real estate which is owner-occupied and where the underlying business credit, rather than the property, is viewed as the principal source of repayment. Overall, the level of commercial real estate loans to all geographic areas declined during 1995, particularly in northern New England due to the sales of Vermont and Casco. 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 designated as highly leveraged transactions (HLTs) if, by the nature of the loan terms and the profile of the customer, the transaction qualifies for this classification 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 repayment ability. Table 7 summarizes the Corporation's HLT portfolio for the last three years. TABLE 7--HIGHLY LEVERAGED TRANSACTION PORTFOLIO
Years Ended December 31 1995 1994 1993 (dollars in millions) Total loans............................... $1,342 $1,272 $1,304 Number of companies....................... 101 84 75 Average loan size......................... $ 13 $ 15 $ 17 Unused lending commitments................ $ 639 $ 653 $ 540 Nonaccrual loans.......................... $ 1 $ 10 Net credit losses (recoveries)............ $ (4) $ 6 $ 21 Equity and mezzanine investments.............................. $ 144 $ 105 $ 121
The Corporation's HLT portfolio is spread among a variety of industries. At December 31, 1995, the largest segments of the HLT portfolio by industry were as follows: the transportation industry ___ $177 million to 11 customers; the food, beverage and tobacco industry ___ $164 million to 14 customers; petroleum, chemicals, rubber and plastics ___ $110 million to 8 customers; and the communications industry ___ $108 million to 7 customers. Yields on HLT loans are generally higher than most other commercial loans. Typically, interest rates on new HLTs range from 1.5% to 2.75% over the London Interbank Bank Offered Rate (LIBOR) and fees charged range from .75% to 1.5% of the principal amount committed. The Corporation has historically been involved in transactions that are designated as HLTs, and it expects to continue to agent and participate in such transactions in the future. F-11 Nonaccrual Loans and Leases and OREO Table 8 summarizes nonaccrual loans and leases by type and as a percentage of the related consolidated loan category. Table 8--Nonaccrual Loans And Leases And OREO
December 31 1995 1994 1993 1992 1991 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.................... $ 88 .7% $ 130 1.0% $ 168 1.3% $ 285 2.4% $ 501 4.2% Commercial real estate Construction................. 25 6.5 13 3.3 32 4.7 89 9.8 138 12.5 Other........................ 103 3.0 133 3.3 277 6.9 416 10.0 823 17.4 Consumer-related loans Secured by 1-4 family residential properties...... 56 .8 53 .7 75 1.3 73 1.4 80 1.4 Other........................ 35 .6 26 .6 12 .3 31 1.0 36 1.2 ----- ----- ----- ------ ------ 307 1.0 355 1.2 564 2.0 894 3.4 1,578 5.7 ----- ----- ----- ------ ------ International Commercial and industrial..... 34 .5 17 .3 63 1.4 55 1.4 58 2.0 Banks and other financial institutions................. 1 .1 1 .2 2 1.3 Governments and official institutions................. 3 13.6 4 7.4 53 37.5 All other..................... 32 2.8 47 4.5 31 4.0 6 .8 45 7.4 ----- ----- ----- ------ ------ 66 .8 65 .9 97 1.5 66 1.3 158 4.0 ----- ----- ----- ------ ------ Total nonaccrual loans and leases....................... 373 1.0 420 1.1 661 1.9 960 3.1 1,736 5.5 OREO.......................... 69 143 222 366 572 ----- ----- ----- ------ ------ Total......................... $ 442 $ 563 $ 883 $1,326 $2,308 ===== ===== ===== ====== ======
Total nonaccrual loans and leases and OREO declined $121 million to $442 million at December 31, 1995, from $563 million at December 31, 1994. The decline from December 31, 1994 included a $27 million reduction from the sales of Vermont and Casco, and reflected the payoff of several domestic commercial loans and a decrease in the inflow of new loans placed on nonaccrual. The management of the Corporation's nonaccrual loans and leases and OREO is discussed in the "Credit Management" section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K. Table 9 summarizes the changes in nonaccrual loans and leases and OREO that have occurred during the last three years. Table 9--Changes In Nonaccrual Loans and Leases and OREO
(dollars in millions) 1995 1994 1993 Balance, January 1........................ $ 563 $ 883 $1,326 Assets from acquired entities............. 8 20 Assets of entities sold................... (27) Additions................................. 554 684 592 Sales, restructurings, payments and other decreases.......................... (396) (520) (663) Transfers to ADP ........................ (252) Net credit losses and valuation adjustments, excluding writedowns associated with transfers to ADP......... (260) (252) (372) ----- ----- ------ Balance, December 31...................... $ 442 $ 563 $ 883 ===== ===== ====== Ending balance as a percentage of related assets........................... 1.1% 1.5% 2.5% ===== ===== ======
F-12 The level of nonaccrual loans and leases and OREO is influenced by the economic environment, interest rates and other internal and external factors. The ratio of nonaccrual loans and OREO to related asset categories has declined to 1.1 percent of related assets at December 31, 1995. No assurance can be given, however, that this historically low level can be sustained by the Corporation. Additional information on the Corporation's nonaccrual loans and OREO is included in its Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1996. Information on the Corporation's accounting policy for nonaccrual loans and leases is included in Note 1 to the Supplemental Consolidated Financial Statements. ACCELERATED DISPOSITION PORTFOLIO During 1994, in order to expedite the disposition of problem real estate exposures and to strengthen its balance sheet, the Corporation transferred certain of its lower quality real estate exposures, including a portion which was on nonaccrual status, to ADP. In connection with the transfer, the Corporation recorded credit losses of $119 million to reduce the carrying value of the exposures to their estimated disposition value of $395 million at the date of transfer. The Corporation had disposed of all its ADP assets at December 31, 1995, with minimal additional gains and losses on disposition. Remaining off-balance-sheet commitments included in ADP were disposed of by the middle of 1996. RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses considering evaluations of individual credits and concentrations of credit risks, net losses charged to the reserve, changes in quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in size and character of the credit risks and other pertinent factors. The amount of the reserve is reviewed by management quarterly. The reserve for credit losses at December 31, 1995 was $890 million, or 2.29 percent of outstanding loans and leases, compared with $827 million, or 2.19 percent, at December 31, 1994. The reserve for credit losses was 239 percent of nonaccrual loans and leases at December 31, 1995, compared to 197 percent at December 31, 1994. In light of the effect of economic events on Latin American economies in the early part of 1995, and the recent industry trends in consumer credit, combined with the growth in the Corporation's Latin American lending and domestic consumer lending portfolios, the Corporation recorded special provisions for credit losses totaling $75 million during 1995 ($50 million in the first quarter and $25 million in the fourth quarter). The net increase in the reserve reflects the 1995 provision for credit losses of $275 million, including these special provisions, partially offset by reductions from the sales of Vermont and Casco and by net credit losses incurred during the year. The future level of the reserve will continue to be a function of management's evaluation of the Corporation's credit exposures existing at the time. Therefore, no assurance can be given regarding the future level of the reserve. During the first quarter of 1995, the Corporation implemented SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a LoanIncome Recognition and Disclosure." These standards affect the evaluation of the reserve for credit losses and require that impaired loans be evaluated based on the present value of expected future cash flows or the fair value of the collateral, as applicable. The adoption of these new standards, which is more fully discussed in Note 7 to the Supplemental Consolidated Financial Statements, did not have a significant effect on the Corporation's financial statements and related financial information. Table 10 presents a five-year analysis of the Corporation's reserve for credit losses and related ratios. TABLE 10--RESERVE FOR CREDIT LOSSES AND RELATED RATIOS
(dollars in millions) 1995 1994 1993 1992 1991 Balance, January 1................................................ $ 827 $ 941 $ 1,116 $ 1,264 $ 1,237 Provision......................................................... 275 154 107 288 684 Reserves of acquired entities..................................... 16 25 Reserves of entities sold......................................... (32) Credit losses, excluding those related to ADP..................... (282) (260) (353) (553) (773) Recoveries........................................................ 86 86 71 117 116 ------- ------- ------- ------- ------- Net credit losses before credit losses related to ADP............. (196) (174) (282) (436) (657) Credit losses related to ADP...................................... (119) ------- ------- ------- ------- ------- Balance, December 31.............................................. $ 890 $ 827 $ 941 $ 1,116 $ 1,264 ======= ======= ======= ======= ======= Loans and lease financing at December 31.......................... $38,870 $37,708 $34,819 $31,240 $31,764 Average loans and lease financing................................. $38,283 $36,017 $32,565 $31,568 $33,001 Reserve for credit losses to total loans and leases at December 31.................................................. 2.29% 2.19% 2.70% 3.57% 3.98% Reserve for credit losses to nonaccrual loans and leases at December 31.................................................. 239% 197% 142% 116% 73% Reserve for credit losses to nonaccrual and renegotiated loans and leases at December 31................. 219% 165% 104% 81% 59% Net credit losses to average loans and lease financing............ .51% .81% .87% 1.38% 1.99% Net credit losses to provision for credit losses.................. 71.27% 190.26% 263.55% 151.39% 96.05% Total recoveries to total credit losses........................... 30.50% 22.69% 20.11% 21.16% 15.01%
F-13 As detailed in Table 11, net credit losses were $196 million in 1995, compared to $174 million in 1994, excluding $119 million of writedowns in connection with ADP. In 1995, the Corporation experienced higher international credit losses, principally resulting from the Argentine consumer portfolio, and higher domestic commercial and industrial and consumer-related credit losses, with year-to-year total recoveries remaining flat. TABLE 11--NET CREDIT LOSSES
Year Ended December 31 1995 1994 1993 1992 1991 (in millions) DOMESTIC CREDIT LOSSES Commercial, industrial and financial.................................... $ (47) $ (38) $ (80) $ (162) $(240) Commercial real estate Construction.......................................................... (7) (10) (19) (63) (122) Other................................................................. (49) (62) (79) (154) (223) Consumer-related loans Secured by 1-4 family residential properties.......................... (26) (22) (33) (37) (34) Other................................................................. (94) (80) (76) (82) (100) ----- ----- ----- ----- ----- (223) (212) (287) (498) (719) INTERNATIONAL CREDIT LOSSES............................................. (59) (48) (66) (55) (54) ----- ----- ----- ----- ----- Credit losses, excluding those related to exposures transferred to ADP.................................. (282) (260) (353) (553) (773) DOMESTIC RECOVERIES Commercial, industrial and financial .................................. 17 22 26 38 46 Commercial real estate Construction.......................................................... 1 4 3 4 5 Other................................................................. 20 14 7 4 4 Consumer-related loans Secured by 1-4 family residential properties.......................... 5 4 6 4 2 Other................................................................. 28 24 23 25 24 ----- ----- ----- ----- ----- 71 68 65 75 81 INTERNATIONAL RECOVERIES................................................ 15 18 6 42 35 ----- ----- ----- ----- ----- Total recoveries................................................... 86 86 71 117 116 ----- ----- ----- ----- ----- Net credit losses, excluding those related to exposures transferred to ADP................................................ (196) (174) (282) (436) (657) Credit losses related to exposures transferred to ADP................... (119) ----- ----- ----- ----- ----- Total net credit losses............................................ $(196) $(293) $(282) $(436) $(657) ===== ===== ===== ===== =====
The Corporation's ability and 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; acquisitions or divestitures of companies or portfolios; and economic conditions in New England, other parts of the United States and other countries where the Corporation does business. In addition, certain segments of the loan portfolio may increase or decrease from the December 31, 1995 level in accordance with strategic or credit management decisions made by the Corporation. Given these factors, the rate of change in the size and mix of the Corporation's loan portfolios experienced during the past few years may not be indicative of future loan levels. Further information on the Corporation's loans and lease financing portfolio can be found in Note 6 to the Supplemental Consolidated Financial Statements. CROSS-BORDER OUTSTANDINGS At December 31, 1995, total cross-border outstandings amounted to $8.1 billion, representing approximately 14 percent of consolidated total assets, which compares with $6.6 billion and $6.1 billion, or approximately 12 percent of consolidated total assets, at December 31, 1994 and 1993, respectively. The acquisition of BayBanks did not have a significant effect on the Corporation's cross-border outstandings. For a detailed discussion of cross-border outstandings, refer to the Management's Discussion and Analysis section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, as updated by the Management's Discussion and Analysis sections of the Corporation's Quarterly Reports on Form 10-Q for the Quarterly Periods Ended March 31, 1996 and June 30, 1996. LIQUIDITY MANAGEMENT Liquidity is defined as the ability to meet known near-term and projected long- term funding commitments, while supporting selective business expansion in accordance with the Corporation's strategic plan. The Corporation proactively manages liquidity according to policy set by, and oversight provided by, its Asset and Liability Management Committee (ALCO) to ensure its ability to meet present and future funding needs in domestic and overseas markets. The acquisition of BayBanks is not expected to have a significant effect on the Corporation's liquidity management policies or strategy. Reference is made to the Management's Discussion and Analysis section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, for a detailed discussion of the Corporation's liquidity management policies. F-14 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 12 presents the levels of the Corporation's liquid assets as of each of the last three year-ends. TABLE 12--LIQUID ASSETS
December 31 1995 1994 1993 (in billions) Liquid assets.............. $7.4 $4.8 $5.3
Deposits are the principal source of the Corporation's funding. Table 13 includes information related to the Corporation's funding sources as of each of the last three year-ends. TABLE 13--FUNDING SOURCES
December 31 1995 1994 1993 (dollars in billions) DOMESTIC Interest bearing deposits.................... $24.4 $23.6 $24.2 Noninterest bearing deposits................. 7.1 7.0 7.1 ----- ----- ----- Total deposits............................... 31.5 30.6 31.3 Funds borrowed............................... 8.4 6.1 4.7 Notes payable................................ 1.8 2.0 1.9 ----- ----- ----- $41.7 $38.7 $37.9 ===== ===== ===== INTERNATIONAL Interest bearing deposits.................... $ 9.0 $ 9.1 $ 6.6 Noninterest bearing deposits................. .6 .6 .5 ----- ----- ----- Total deposits............................... 9.6 9.7 7.1 Funds borrowed............................... 1.1 1.1 .8 Notes payable................................ .4 .2 .1 ----- ----- ----- $11.1 $11.0 $ 8.0 ===== ===== ===== CONSOLIDATED Interest bearing deposits.................... $33.4 $32.7 $30.8 Noninterest bearing deposits................. 7.7 7.6 7.6 ----- ----- ----- Total deposits............................... 41.1 40.3 38.4 Funds borrowed............................... 9.5 7.2 5.5 Notes payable................................ 2.2 2.2 2.0 ----- ----- ----- $52.8 $49.7 $45.9 ===== ===== ===== Deposits as a percentage of Loans........................................ 106% 107% 110% Total assets................................. 69% 73% 76%
Domestic deposits increased approximately $900 million from 1994. Excluding the $1.3 billion reduction in deposits resulting from the sales of Vermont and Casco, domestic deposits increased approximately $2.2 billion. This was primarily due to deposit inflows from a new retail deposit product which was first offered in the second quarter of 1995, and increased deposits, particularly consumer certificates of deposit, from new volume as well as from the acquisitions made by the Corporation during the year. Domestic funds borrowed increased approximately $2.3 billion from December 31, 1994, mainly as a result of increased borrowings of approximately $1.9 billion under FNBB's medium-term bank note program and increased federal funds purchased, partially offset by decreased securities sold under agreements to repurchase. The FNBB medium-term notes have a weighted average maturity of 258 days. Notes payable declined slightly due to the conversion of $94 million of the Corporation's subordinated debt into common stock during the first quarter of 1995, and the redemption of $150 million of its subordinated debt during the third quarter of 1995, offset by new debt issued during the year, primarily by the Corporation's Brazilian operations. In addition, the Corporation has a shelf registration filed with the Securities and Exchange Commission with a remaining availability of $1 billion at July 31, 1996, which can be used for the issuance of equity or debt securities, including securities issued under a medium-term note program established by the Corporation in December 1994. Additional information on the Corporation's notes payable can be found in Note 10 to the Supplemental Consolidated Financial Statements. The Corporation continues to have access to funds at competitive rates, and, during 1995, received upgrades from three major rating agencies. 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, 1995 adequate to meet current obligations, support expectations for future changes in asset and liability levels and carry on normal operations. F-15 Interest Rate Risk Management Interest rate risk can be defined as the exposure of the Corporation's net income or financial condition to adverse movements in interest rates. Interest rate risk is managed within policies and limits established by the Corporation's ALCO and approved by its Board of Directors (the Board). ALCO issues strategic directives to specify the extent to which Board-approved rate risk limits are utilized, taking into account the results of the rate risk modeling process as well as other internal and external factors. The objective of ALCO's directives is to manage and control the effects of changes in interest rates on the Corporation's income statement and financial condition. Management seeks to enhance earnings, principally net interest revenue, and protect economic value, while ensuring that risks from adverse movements in interest rates are in compliance with ALCO directives. This objective is achieved through the development and implementation of interest rate risk management strategies, including various balance sheet actions and the use of interest rate derivatives. The acquisition of BayBanks is not expected to have an effect on the Corporation's interest rate risk management policies, and had a minimal impact on its interest rate derivatives and foreign exchange contracts at December 31, 1995 and 1994. Reference is made to the Management's Discussion and Analysis section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, as updated by the Management's Discussion and Analysis sections of the Corporation's Quarterly Reports on Form 10-Q for the Quarterly Periods Ended March 31, 1996 and June 30, 1996, respectively, for a detailed discussion of the Corporation's interest rate risk management policies. Refer to Notes 1 and 20 to the Supplemental Consolidated Financial Statements for additional information with respect to the Corporation's asset and liability management and trading derivatives, including accounting policies. Capital Management At December 31, 1995, the Corporation had $4.7 billion in stockholders' equity, compared with $3.9 billion at December 31, 1994 and $3.6 billion at December 31, 1993. The growth in stockholders' equity from the end of 1994 mainly resulted from retention of earnings, net of the payment of dividends on common and preferred stock, the conversion of $94 million of the Corporation's convertible subordinated debt into common stock during the first quarter of 1995, and the increase in the fair value of securities available for sale, net of tax. Based on the Corporation's historical dividend information, the Corporation's quarterly dividend was increased 37 percent, from $.27 per share in the first two quarters of 1995 to $.37 per share in the last two quarters of 1995. The Corporation's quarterly dividend was increased again to $.44 per share in the first two quarters of 1996. The level of dividends paid on the Corporation's common stock is determined 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 dividends paid to the Corporation by its subsidiaries. For a discussion of the Corporation's capital planning process and regulatory risk-based capital requirements, refer to the Management's Discussion and Analysis section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K. Table 14 presents the Corporation's capital position and related ratios as of the last three year-ends. Table 14--Capital Position
Well December 31 1995 1994 1993 Capitalized (dollars in millions) Minimum* Risk-based Capital Ratios Tier 1 capital ratio (Tier 1 capital/total risk-adjusted assets)......... 8.5% 7.7% 7.7% 6.00% Total capital ratio (Total capital/total risk-adjusted assets)........... 12.8 12.7 12.4 10.00 Leverage ratio (Tier 1 capital/adjusted total average assets)................. 7.4 6.7 6.9 5.00 Tier 1 capital................................................................ $ 4,275 $ 3,661 $ 3,456 Tier 2 capital................................................................ 2,165 2,404 2,085 Total capital................................................................. 6,440 6,065 5,541 Total risk-adjusted assets.................................................... 50,382 47,625 44,757 Common equity/assets ratio.................................................... 7.1% 6.2% 6.1%
* The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established minimum ratios for banks to be considered ''well capitalized.'' These ratios are determined solely for the purpose of applying FDICIA's provisions and, accordingly, such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any bank. Compared to the prior year-end, the improvement in the Corporation's capital ratios at December 31, 1995 reflected the impact of current year earnings and the sales of Vermont and Casco, which resulted in a lower level of risk-adjusted assets and the removal of $35 million of goodwill from the Corporation's balance sheet. In addition, the Corporation's Tier 1 capital ratio benefited from the above-noted conversion of $94 million of convertible subordinated debt into common stock. The redemption of $150 million of subordinated debt in the third quarter of 1995 partially offset the improvement in the total capital ratio. The conversion and redemption of subordinated debt are more fully discussed in Note 10 to the Supplemental Consolidated Financial Statements. Recent Accounting Pronouncements For a detailed discussion of recent accounting pronouncements, refer to the Management's Discussion and Analysis section of the Corporation's 1995 Annual Report to Stockholders, which is incorporated by reference into its 1995 Annual Report on Form 10-K, as updated by the Management's Discussion and Analysis sections of the Corporation's Quarterly Reports on Form 10-Q for the Quarterly Periods Ended March 31, 1996 and June 30, 1996. F-16 1994 VS. 1993 Net Interest Revenue Domestic net interest revenue increased $179 million to $1,704 million, resulting from both a higher level of earning assets and wider spreads. Average earning assets increased $2.4 billion, reflecting a $2.3 billion increase in average loan and lease volume. Contributing to the loan volume increase was a higher level of consumer-related loans, a portion of which came from the acquisitions of BankWorcester and Pioneer. In addition, the Corporation's average volume of domestic commercial loans increased, primarily from growth in some of the Corporation's specialty lending areas and the New England commercial lending business. The wider domestic spreads mainly reflected growth in earning asset yields, which outpaced increases in rates paid on interest bearing liabilities during 1994. The widening of spreads was also mainly responsible for the domestic net interest margin increasing by 20 basis points compared with 1993. The international net interest revenue increase of $91 million to $348 million was primarily attributable to the Corporation's operations in Latin America, two-thirds of which related to operations in Brazil. During the first half of 1994, Brazil's net interest revenue increased from 1993, as earning asset growth more than offset narrower spreads. During the second half of 1994, after the country's July 1994 economic program reduced inflation from approximately 50 percent to 1 percent per month, the Corporation maintained funding strategies which benefited from these economic changes and resulted in wider spreads. An increase in average Brazilian loan volume of $450 million from 1993 also contributed to the improvement in net interest revenue. Brazil's second half performance was the major factor behind the international margin improving 14 basis points compared with 1993. Noninterest Income The $56 million increase in financial service fees to $564 million primarily reflected improvements in net mortgage servicing fees and loan-related fees. Net mortgage servicing fees increased $52 million compared with 1993, reflecting a higher volume of servicing, as well as lower amortization of PMSR. Loan-related fees improved $15 million, mainly reflecting growth in syndication activity. The major factor offsetting these improvements was a decline of $20 million in other financial service fees reflecting lower factoring fees due to the sale of the Corporation's domestic factoring business in the first quarter of 1994. Trust and agency fees improved $24 million from the 1993 level of $198 million, primarily as a result of increased volumes and new business in the domestic stock transfer and Latin American mutual fund businesses. The $18 million decline in net securities gains reflected a lower level of sales. In addition, both trading account profits and net equity and mezzanine profits declined $8 million. Other income of $116 million in 1994 improved $20 million from 1993, and included a $23 million gain recognized in the first quarter from the sale of securities originally acquired in connection with loan restructurings. Noninterest Expense Excluding acquisition, divestiture and restructuring expense and OREO costs, noninterest expense increased $53 million, or less than 3 percent, from 1993. This growth is primarily attributable to higher employee costs of $58 million, which reflected a greater number of employees in Latin America, as the Corporation continued its strategic expansion in this area; higher compensation rates, including normal salary and incentive compensation increases; and a decline in the amount of loan origination costs deferred, reflecting a lower volume of originations in 1994. These increases were mitigated by a lower level of domestic employees. Nonemployee costs declined $5 million, reflecting an $11 million decline in FDIC insurance premiums, the result of lower assessment rates and a partial refund of 1993's assessment, and lower legal fees. These declines were partially offset by increases in various nonemployee cost categories from the 1994 acquisitions of BankWorcester and Pioneer. The reduction in OREO costs from 1993 primarily reflected lower valuation adjustments on and the continued disposition of OREO properties. During 1994, in connection with its acquisitions of BankWorcester and Pioneer, the Corporation recorded acquisition-related costs of $21 million. During 1993, the Corporation recorded acquisition-related costs of $68 million in connection with its mergers with Society and Multibank, and reorganization charges of $17 million in connection with downsizing and reconfiguring certain of its business and corporate units. Additional information on these items is included in Note 17 to the Supplemental Consolidated Financial Statements. F-17 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- The Board of Directors and Stockholders Bank of Boston Corporation: We have audited the accompanying supplemental consolidated balance sheets of Bank of Boston Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of BayBanks, Inc., a wholly owned subsidiary, which statements reflect total assets of approximately $12,063,501,000 and $10,770,947,000 as of December 31, 1995 and 1994, respectively, and net interest income of approximately $507,432,000, $464,942,000 and $423,823,000 for each of the years in the three-year period ended December 31, 1995. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for BayBanks, Inc., is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements referred to above give retroactive effect to the merger of Bank of Boston Corporation with BayBanks, Inc. on July 29, 1996, which has been accounted for as a pooling of interests as described in Notes 1 and 2 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in consolidated financial statements that do not include the date of consummation. These supplemental financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of Bank of Boston Corporation after consolidated financial statements covering the date of consummation of the business combination are issued. In our opinion, based on our audits and the aforementioned report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bank of Boston Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles applicable after consolidated financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in Notes 1, 15 and 19 to the supplemental financial statements, the Corporation has adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and changed its method of accounting for purchased mortgage servicing rights, effective January 1, 1993 ; adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective December 31, 1993; and adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure," effective January 1, 1995. /s/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts August 26,1996 F-18 Bank of Boston Corporation Supplemental Consolidated Balance Sheet
December 31 1995 1994 (dollars in millions, except per share amounts) Assets Cash and due from banks ......................................................................... $ 3,561 $ 3,146 Interest bearing deposits in other banks.......................................................... 1,356 1,559 Federal funds sold and securities purchased under agreements to resell............................ 1,548 1,323 Trading securities .............................................................................. 1,159 581 Mortgages held for sale ......................................................................... 910 188 Securities Available for sale ............................................................................. 7,582 3,262 Held to maturity (fair value of $667 in 1995 and $4,086 in 1994) ............................... 660 4,238 Loans and lease financing (net of unearned income of $277 in 1995 and $315 in 1994)................ 38,870 37,708 Reserve for credit losses ....................................................................... (890) (827) -------- -------- Net loans and lease financing ................................................................. 37,980 36,881 Premises and equipment, net ..................................................................... 832 764 Due from customers on acceptances ............................................................... 360 316 Accrued interest receivable ..................................................................... 554 437 Other assets .................................................................................... 2,921 2,716 -------- -------- Total Assets ................................................................................... $59,423 $55,411 ======== ======== Liabilities and Stockholders' Equity Deposits Domestic offices Noninterest bearing ........................................................................... $ 7,127 $ 7,008 Interest bearing .............................................................................. 24,392 23,626 Overseas offices Noninterest bearing ........................................................................... 552 569 Interest bearing .............................................................................. 8,993 9,046 -------- -------- Total deposits ............................................................................... 41,064 40,249 Funds borrowed .................................................................................. 9,503 7,211 Acceptances outstanding ......................................................................... 360 318 Accrued expenses and other liabilities............................................................ 1,605 1,483 Notes payable ................................................................................... 2,189 2,219 -------- ------- Total liabilities ............................................................................... 54,721 51,480 -------- -------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares-10,000,000 Issued shares-4,593,941 ..................................................................... 508 508 Common stock, par value $2.25 Authorized shares-200,000,000 Issued shares-155,785,611 in 1995 and 149,382,928 in 1994 Outstanding shares-155,296,203 in 1995 and 148,342,580 in 1994 ............................... 350 336 Surplus ....................................................................................... 1,235 1,069 Retained earnings ............................................................................. 2,553 2,091 Net unrealized gain (loss) on securities available for sale, net of tax......................... 82 (40) Treasury stock, at cost (489,408 shares in 1995 and 1,040,348 shares in 1994)................... (22) (27) Cumulative translation adjustments, net of tax ................................................. (4) (6) -------- -------- Total stockholders' equity ...................................................................... 4,702 3,931 -------- -------- Total Liabilities and Stockholders' Equity ....................................................... $59,423 $55,411 ======== ========
The Accompanying Notes Are an Integral Part of These Supplemental Financial Statements. F-19 Bank of Boston Corporation Supplemental Consolidated Statement of Income
Years Ended December 31 1995 1994 1993 (dollars in millions, except per share amounts) Interest Income Loans and lease financing, including fees................................. $ 3,876 $ 3,117 $ 2,588 Securities .............................................................. 503 380 349 Trading securities ...................................................... 186 114 11 Mortgages held for sale ................................................. 31 43 85 Federal funds sold and securities purchased under agreements to resell.... 303 605 147 Deposits in other banks ................................................. 220 117 150 -------- -------- -------- Total interest income ................................................. 5,119 4,376 3,330 -------- -------- -------- Interest Expense Deposits of domestic offices ............................................ 879 673 791 Deposits of overseas offices ............................................ 912 628 386 Funds borrowed .......................................................... 921 906 268 Notes payable ........................................................... 158 132 116 -------- -------- -------- Total interest expense ................................................ 2,870 2,339 1,561 -------- -------- -------- Net interest revenue .................................................. 2,249 2,037 1,769 Provision for credit losses ............................................. 275 154 107 -------- -------- -------- Net interest revenue after provision for credit losses ................ 1,974 1,883 1,662 -------- -------- -------- Noninterest Income Financial service fees .................................................. 695 564 508 Trust and agency fees ................................................... 240 222 198 Trading profits and commissions ......................................... 25 18 26 Net securities gains .................................................... 9 14 32 Other income ............................................................ 340 217 181 -------- -------- -------- Total noninterest income .............................................. 1,309 1,035 945 -------- -------- -------- Noninterest Expense Salaries ................................................................ 947 860 816 Employee benefits ....................................................... 199 186 172 Occupancy expense ....................................................... 191 184 176 Equipment expense ....................................................... 133 126 128 Other real estate owned expense ......................................... 9 38 82 Acquisition, divestiture and restructuring expense ...................... 28 21 85 Other expense ........................................................... 569 532 543 -------- -------- -------- Total noninterest expense ............................................. 2,076 1,947 2,002 -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles ........................................ 1,207 971 605 Provision for income taxes .............................................. 529 422 262 -------- -------- -------- Income before extraordinary item and cumulative effect of changes in accounting principles ................................................. $ 678 549 343 Extraordinary loss from early extinguishment of debt, net of tax ......... (7) -------- -------- -------- Income before cumulative effect of changes in accounting principles ...... $ 678 542 343 Cumulative effect of changes in accounting principles, net of tax ....... 24 -------- -------- -------- Net Income ............................................................. $ 678 $ 542 $ 367 ======== ======== ======== Net Income Applicable To Common Stock..................................... $ 641 $ 505 $ 332 ======== ======== ======== Per Common Share Income before extraordinary item and cumulative effect of changes in accounting principles Primary ............................................................... $ 4.17 $ 3.44 $ 2.09 Fully diluted ......................................................... 4.09 3.36 2.05 Net income Primary ............................................................... 4.17 3.39 2.26 Fully diluted ......................................................... 4.09 3.31 2.21 Cash dividends declared (1) ............................................. 1.28 .93 .40 Average Number Of Common Shares (in thousands) Primary ............................................................... 153,856 148,913 147,033 Fully diluted ......................................................... 156,768 153,616 152,067
(1) Amounts represent the historical cash dividends of the Corporation. The Accompanying Notes Are an Integral Part of These Supplemental Financial Statements. F-20 Bank of Boston Corporation Supplemental Consolidated Statement of Changes in Stockholders' Equity
Years Ended December 31 1995 1994 1993 (dollars in millions, except per share amounts) Preferred Stock Balance, January 1................................................................................... $ 508 $ 508 $ 438 Preferred stock issued-280,000 shares................................................................ 70 ------- ------- ------- Balance, December 31................................................................................. 508 508 508 ------- ------- ------- Common Stock Balance, January 1................................................................................... 336 331 329 Common stock issued Dividend reinvestment and common stock purchase plan-861,235 shares in 1995, 1,103,539 shares in 1994 and 286,201 shares in 1993............................................... 2 2 1 Exercise of stock options, net of surrendered shares-905,653 shares in 1995, 612,492 shares in 1994 and 918,872 shares in 1993......................................... 2 2 1 Conversion of subordinated debentures - 3,477,792 shares in 1995................................... 8 Acquisition of NFS Financial Corporation - 1,071,987 shares in 1995................................ 2 Restricted stock grants, net of forfeitures - 43,062 shares in 1995 487,323 shares in 1994......... 1 ------- ------- ------- Balance, December 31................................................................................. 350 336 331 ------- ------- ------- Surplus Balance, January 1................................................................................... 1,069 1,023 999 Dividend reinvestment and stock purchase plan........................................................ 33 25 6 Exercise of stock options............................................................................ 16 8 14 Conversion of subordinated debentures................................................................ 71 1 Acquisition of Ganis Credit Corporation.............................................................. 1 Acquisition of NFS Financial Corporation............................................................. 37 Restricted stock grants, net of forfeitures.......................................................... 2 9 1 Other, principally employee benefit plans............................................................ 6 4 4 Preferred stock issued, net of issuance costs........................................................ (2) ------- ------- ------- Balance, December 31................................................................................. 1,235 1,069 1,023 ------- ------- ------- Retained Earnings Balance, January 1................................................................................... 2,091 1,718 1,438 Net income........................................................................................... 678 542 367 Restricted stock grants, net of forfeitures.......................................................... 3 (6) Payment on ESOP loan................................................................................. 2 3 3 Cash dividends declared Preferred stock.................................................................................... (37) (37) (35) Common stock-$1.28 per share in 1995, $.93 per share in 1994 and $.40 per share in 1993........... (184) (129) (55) ------- ------- ------- Balance, December 31................................................................................. 2,553 2,091 1,718 ------- ------- ------- Net Unrealized Gain (Loss) on Securities Available for Sale Balance, January 1................................................................................... (40) 43 Change in net unrealized gain (loss) on securities available for sale, net of tax.................. 122 (83) 43 ------- ------- ------- Balance, December 31................................................................................. 82 (40) 43 ------- ------- ------- Treasury Stock Balance, January 1................................................................................... (27) (1) Purchases of treasury stock-1,594,016 shares in 1995, 1,110,640 shares in 1994 and 48,640 shares in 1993................................................................................................ (53) (29) (1) Treasury stock reissued Dividend reinvestment and stock purchase plan-331,782 shares in 1995............................... 9 Exercise of stock options - 147,370 shares in 1995, 70,292 shares in 155,128 shares in 1993....... 4 2 2 Conversion of subordinated debentures-530,475 shares in 1995...................................... 15 Acquisition of Ganis Credit Corporation-773,621 shares in 1995..................................... 21 Restricted stock grants, net of forfeitures - 255,520 shares in 1995............................... 6 Other, principally employee benefit plans-106,188 shares in 1995................................... 3 ------- ------- ------- Balance, December 31................................................................................. (22) (27) ------- ------- ------- Cumulative Translation Adjustments Balance, January 1................................................................................... (6) (8) (5) Change in translation adjustments, net of tax........................................................ 2 2 (3) ------- ------- ------- Balance, December 31................................................................................. (4) (6) (8) ------- ------- ------- Total Stockholders' Equity, December 31.............................................................. $4,702 $3,931 $3,615 ======= ======= =======
The Accompanying Notes Are an Integral Part of These Supplemental Financial Statements. F-21 Bank of Boston Corporation Supplemental Consolidated Statement of Cash Flows
Years Ended December 31 1995 1994 1993 (in millions) Cash Flows From Operating Activities Net income.................................................................................. $ 678 $ 542 $ 367 Reconciliation of net income to net cash provided from (used for) operating activities Cumulative effect of change in accounting for income taxes................................ (77) Cumulative effect of change in accounting for purchased mortgage servicing rights, net of tax............................................................................... 53 Extraordinary loss from early extinguishment of debt, net of tax.......................... 7 Provision for credit losses............................................................... 275 154 107 Depreciation and amortization............................................................. 239 202 200 Provision for deferred taxes.............................................................. 39 79 122 Net gains on sales of securities available for sale and other assets...................... (210) (115) (69) Change in trading securities, net of transfers............................................ (588) (284) (85) Change in mortgages held for sale ....................................................... (722) 1,286 (359) Change in securities available for sale, net of transfers................................. 1,267 Net change in interest receivables and payables........................................... (66) (180) 1 Other, net................................................................................ 163 33 146 -------- -------- -------- Net cash provided from (used for) operating activities.................................. (192) 1,724 1,673 -------- -------- -------- Cash Flows From Investing Activities Net cash provided from (used for) interest bearing deposits in other banks.................. 203 (453) 905 Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell....................................................... (225) 673 (439) Purchases of securities held to maturity.................................................... (2,531) (3,353) (2,838) Maturities of securities held to maturity................................................... 2,994 1,999 1,992 Purchase of securities available for sale................................................... (4,382) (4,541) Sales of securities available for sale...................................................... 1,979 2,930 Maturities of securities available for sale................................................. 1,439 591 Dispositions of equity and mezzanine financing investments.................................. 122 121 97 Loans and lease financing originated by nonbank entities.................................... (7,107) (2,773) (3,589) Loans and lease financing collected by nonbank entities..................................... 5,632 2,814 3,365 Proceeds from sales of loan portfolios by bank subsidiaries................................. 1,575 210 238 Loan portfolios purchased by bank subsidiaries.............................................. (44) Net cash used for lending activities of bank subsidiaries................................... (1,493) (3,353) (3,742) Lease financing originated by bank entities................................................. (11) (24) (50) Lease financing collected by bank entities.................................................. 59 24 22 Proceeds from sales of other real estate owned.............................................. 84 113 217 Expenditures for premises and equipment..................................................... (246) (215) (115) Proceeds from sales of business units, premises and equipment............................... 169 161 8 Other, net.................................................................................. (604) (380) (168) -------- -------- -------- Net cash used for investing activities.................................................... (2,343) (5,456) (4,141) -------- -------- -------- Cash Flows From Financing Activities Net cash provided from deposits............................................................. 815 1,963 308 Net cash provided from funds borrowed....................................................... 2,292 1,724 2,397 Net proceeds from issuance of notes payable................................................. 220 698 519 Repayments/repurchases of notes payable..................................................... (155) (502) (231) Net proceeds from issuance of common stock.................................................. 70 40 24 Net proceeds from issuance of preferred stock............................................... 68 Purchases of treasury stock................................................................. (53) (29) (1) Dividends paid.............................................................................. (221) (166) (90) -------- -------- -------- Net cash provided from financing activities ............................................. 2,968 3,728 2,994 -------- -------- -------- Effect of foreign currency translation on cash.............................................. (18) (22) (24) -------- -------- -------- Net change in cash and due from banks....................................................... 415 (26) 502 Cash and due from banks at January 1........................................................ 3,146 3,172 2,670 -------- -------- -------- Cash and due from banks at December 31...................................................... $ 3,561 $ 3,146 $ 3,172 ======== ======== ========
The Accompanying Notes Are an Integral Part of These Supplemental Financial Statements. F-22 Notes To Supplemental Financial Statements 1. Summary of Significant Accounting Policies On July 29, 1996, Bank of Boston Corporation (the Corporation) completed its acquisition of BayBanks, Inc. (BayBanks). The acquisition was accounted for as a pooling of interests and, accordingly, the information included in the accompanying supplemental consolidated financial statements and notes presents the combined financial position and results of operations of the Corporation and BayBanks as if they had operated as a combined entity for all periods presented. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These supplemental consolidated financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of the Corporation after consolidated financial statements covering the date of consummation of the business combination are issued. See Note 2 for additional information regarding the acquisition. The financial reporting and accounting policies of the Corporation conform to generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with current financial statement 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 supplemental consolidated financial statements include the Corporation and its majority owned subsidiaries, including its major banking subsidiaries: The First National Bank of Boston (FNBB), BayBank, N.A., Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank, BayBank FSB and BayBank NH, N.A. All material intercompany accounts and transactions have been eliminated in consolidation. Investments in 20% to 50%-owned companies are accounted 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 functional 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 translated 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 operating in highly inflationary economies, the functional currency is the U.S. dollar. Their financial statements are translated into U.S. dollars using period-end exchange rates for monetary assets and liabilities, exchange rates in effect on the date of acquisition for premises and equipment (and related depreciation) and certain investments, and the average exchange rate during the period for income and expenses. The resulting translation adjustments and related hedge gains and losses for these units are recorded 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 certain securities. Trading Securities Trading securities comprise securities purchased in connection with the Corporation's trading activities and, as such, are expected to be sold in the near term. The Corporation carries trading securities at fair value; realized and unrealized gains and losses on trading securities are recorded currently in trading profits and commissions, a component of noninterest income. Obligations to deliver securities not yet purchased are carried at fair value in funds borrowed. 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,'' which the Corporation adopted effective December 31, 1993. All debt and equity securities that are not purchased in connection with the Corporation's trading activities are classified as either securities held to maturity or securities available for sale. Securities held to maturity are debt securities that the Corporation has the positive intent and ability to hold to maturity. These securities are reported at cost, adjusted for amortization of premium and accretion of discount. Securities available for sale are debt securities that the Corporation 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/liability risk management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other related factors; securities held in connection with the Corporation's equity and mezzanine financing business; and other securities that are intended to be held for indefinite periods 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 reported at cost. If a security available for sale or held to maturity has experienced 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. Realized gains and losses with respect to F-23 Notes To Supplemental 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. Interest Rate Derivatives and Foreign Exchange Contracts The Corporation enters into a variety of interest rate derivatives in connection with its trading activities, including providing these products to its customers, and as part of its interest rate risk management strategy. Such derivatives include interest rate futures and forwards, interest rate swaps and interest rate options. Derivatives are included in either the trading portfolio or the asset and liability management portfolio. Derivatives included in the trading portfolio are carried at fair value. Realized and unrealized changes in fair value are recognized in current period income as a component of trading profits and commissions. The asset and liability management portfolio is comprised of derivatives used by the Corporation as part of its interest rate risk management strategy. When derivatives are included in the asset and liability management portfolio, they are linked to the related assets and/or liabilities. Income or loss on derivatives are recognized on the same basis as the linked assets or liabilities. If the related assets are carried at fair value or the lower of cost or fair value, the fair value of the derivatives are combined with the fair value of the assets and are recognized in income based on the method of accounting used for the linked assets. If the assets or liabilities 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 liabilities. 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 amortized 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 unrecognized 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 being 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 liabilities. Included in the asset and liability management portfolio are interest rate options used to manage prepayment risk resulting from a decline in interest rates related to the Corporation's mortgage servicing portfolio. While the Corporation utilizes these contracts as part of a risk management strategy, the current composition of the option portfolio has not been structured for economic reasons to provide a sufficient expectation that the change in its value, resulting from changes in interest rates, will substantially offset the change in the value of the mortgage servicing rights to which it is linked. As a result, these contracts are currently valued at fair value with the realized and unrealized changes in fair value recorded in the statement of income as part of net mortgage servicing fees, a component of financial service fees. The Corporation also enters into foreign exchange contracts in connection with its trading activities, including providing these products to its customers, and to hedge a portion of its own foreign exchange risk, which is principally related to foreign currency translation (see ''Foreign Currency Translation'' above). The trading portfolio includes foreign currency spot, forward, future, option and cross-currency interest rate swap contracts. Foreign exchange trading positions are valued at current market rates, with the net foreign exchange trading gain or loss recorded in the statement of income as a component of other income. Loans and Lease Financing Loans are reported at their principal outstanding, net of charge-offs and unearned income, if any. Mortgages held for sale are reported separately at the lower of aggregate cost or fair value. 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 accounted 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 subsequent amortization to income over the life of the related credit or facility. Fees that adjust the yield on the underlying credit are included in interest income on loans and lease financing. Fees for credit-related services are included in financial service fees, a component of noninterest income. Lease financing receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and the estimated residual values, net of unearned and deferred income, including unamortized investment credits. Leveraged leases are reported net of nonrecourse debt. Unearned income is recognized 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 ninety days past due, unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. Whenever a loan or lease is placed on nonaccrual status, all other credit exposures 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 F-24 Notes To Supplemental Financial Statements, Continued 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. The Corporation may renegotiate the contractual terms of a loan because of a deterioration in the financial condition of the borrower. The carrying value of a renegotiated loan is reduced by the fair value of any asset or equity interest received, and by the extent, if any, that future cash receipts required under the new terms do not equal the loan balance at the time of renegotiation. Renegotiated loans performing in accordance with their new terms are not reported as nonaccrual loans unless concern exists as to the ultimate collectibility of principal or interest under the new terms. Interest, if any, is recognized in income to yield a level rate of return over the life of the renegotiated loan. Reserve for Credit Losses and Provision for Credit Losses The reserve for credit losses is available for future charge-offs of 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. 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 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 pertinent factors. Effective January 1, 1995, the Corporation adopted, prospectively, 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.'' These standards require that a loan be classified and accounted for as an impaired loan when it is probable that the Corporation will be unable to collect all principal and interest due on the loan in accordance with the loan's original contractual terms. The Corporation uses the same criteria in placing a loan on nonaccrual status. Accordingly, for purposes of applying these standards, impaired loans have been 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, based on the present value of expected future 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 valuation 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. The adoption of these new standards did not have a material impact on the Corporation's overall reserve for credit losses, and did not affect its charge- off or income recognition policies. 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. Purchased and Excess Mortgage Servicing Assets Purchased mortgage servicing rights (PMSR) represent the cost of purchasing the right to service mortgage loans originated by others. Excess mortgage servicing receivables (EMSR) represent the present value of the servicing fee income retained in excess of a normal servicing fee rate when mortgage loans are sold. PMSR and EMSR are reported as assets and are amortized as reductions of servicing fee income, a component of noninterest income, over the estimated servicing period in proportion to the estimated future net cash flows from the loans serviced. Remaining PMSR asset balances are evaluated for impairment by determining their estimated aggregate recoverable amount through applying the discount rate in effect at the time the servicing portfolios were purchased to the estimated future net cash flows from servicing the underlying mortgages. The carrying value is written down for any impairment; such writedowns are recorded as reductions of servicing fee income. Prior to 1993, this valuation was performed on an undiscounted basis. EMSR is also evaluated for impairment based on estimated future cash flows on a discounted basis. Effective January 1, 1993, the Corporation elected to change its method of accounting for PMSR to conform its financial reporting to regulatory accounting rules adopted by the banking regulators in the first quarter of 1993. The cumulative effect to January 1, 1993 of adopting this change in accounting principle was a decrease in income of $53 million (net of taxes of $32 million), or $.36 per common share on a primary basis and $.35 per common share on a fully diluted basis. In May 1995, SFAS No. 122, ''Accounting for Mortgage Servicing Rights,'' was issued. This standard, which is effective January 1, 1996, amends SFAS No. 65, ''Accounting for Certain Mortgage Banking Activities,'' to require that rights to service mortgage loans originated for sale be recognized as separate assets either upon origination (if a definitive plan to sell the loans and retain the rights exists) or upon sale of the loans, based on the relative fair values of the rights and loans. This standard also requires that mortgage servicing rights be assessed for impairment based on the fair value of those rights, using a stratified method. The Corporation does not expect that adoption of this standard will have a material impact on its financial statements. F-25 Notes To Supplemental Financial Statements, Continued Accelerated Disposition Portfolio In 1994, the Corporation transferred certain lower quality real estate exposures to an accelerated disposition portfolio (ADP), which was included in other assets. The exposures were transferred at their estimated disposition values, with the excess, if any, of the exposures over the disposition values charged to the reserve for credit losses. Subsequent declines in disposition value are recorded in noninterest income. Gains, if any, are not recognized until realized. Income recognition is based upon existing policies for accruing and nonaccrual loans and other real estate owned. Other Real Estate Owned Other real estate owned (OREO), which is included in other assets, 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 declines in the fair value of the property and net operating results of the property are recorded in noninterest expense. Income Taxes The Corporation accounts for income taxes in accordance with SFAS No. 109, "Accounting 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 provision, for the estimated future tax effects, based on enacted tax rates, attributable to temporary differences and tax benefit carryforwards. Deferred tax liabilities 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 deductible or creditable in the future. The effect of enacted changes in tax law, including 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, investment tax credits received in connection with lease financing are recognized as lease income over the investment life of the related asset. Per Share Calculations Primary 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 presented. For fully diluted net income per common share, net income is reduced by preferred stock dividends and increased by the interest, net of income tax benefit, recorded on the Corporation's convertible debentures. Such adjusted net income is divided by the weighted average number of common shares outstanding for each period plus the shares representing the dilutive effect of stock options outstanding and the shares that would result from conversion of the Corporation's convertible debentures. The effect of stock options and convertible debentures is excluded from the computation of fully diluted net income per common share in periods in which their effect would be anti-dilutive. Cash dividends per common share declared, presented in the accompanying supplemental consolidated statement of income, represent the historical cash dividends of the Corporation. As described in Note 10, the Corporation's convertible debentures were converted to common stock in March 1995. 2. Mergers, Acquisitions, Joint Ventures and Divestitures In July 1993, the Corporation completed its mergers with Society for Savings Bancorp, Inc. (Society), a $2.4 billion registered bank holding company based in Hartford, Connecticut, and Multibank Financial Corp. (Multibank), a $2.4 billion registered bank holding company based in Dedham, Massachusetts. In connection with the merger with Society, the Corporation issued 9.6 million shares of its common stock for all of the outstanding shares of Society common stock by exchanging .80 of a share of its common stock for each outstanding Society share. In connection with the merger with Multibank, the Corporation issued 10.4 million shares of its common stock for all of the outstanding shares of Multibank common stock by exchanging 1.125 shares of its common stock for each outstanding Multibank share. These mergers were accounted for as poolings of interests and as such are reflected in the accompanying supplemental consolidated financial statements as though the Corporation, Society and Multibank had been combined as of the beginning of the earliest period presented. In May 1994, the Corporation completed its acquisition of BankWorcester Corporation (BankWorcester), a $1.5 billion bank holding company based in Worcester, Massachusetts. The total purchase price amounted to $243 million. In addition, in August 1994, the Corporation completed its acquisition of Pioneer Financial, A Co-operative Bank (Pioneer), a $.8 billion bank based in Middlesex County, Massachusetts. The total purchase price amounted to $117 million. These acquisitions were accounted for as purchases and, accordingly, the assets and liabilities of each were recorded at their estimated fair values as of the acquisition dates. Goodwill resulting from the acquisitions is being amortized over a twenty-five year period for BankWorcester and a fifteen-year period for Pioneer. A core deposit intangible resulting from the BankWorcester acquisition is being amortized over a seven-year period. Both acquisitions have been included in the accompanying supplemental consolidated financial statements since their respective acquisition dates. Pro forma results of operations including BankWorcester and Pioneer for the years ended December 31, 1994 and 1993 are not presented, since the results would not have been significantly different in relation to the Corporation's results of operations. F-26 Notes To Supplemental Financial Statements, Continued In January 1995, the Corporation completed the sales of two of its affiliate banks, Bank of Vermont and Casco Northern Bank, N.A. (Casco). The sales resulted in a combined pre-tax gain of approximately $75 million, or $30 million net of tax. In February 1995, the Corporation completed its acquisition of Ganis Credit Corporation (Ganis), a privately-held consumer finance company headquartered in Newport Beach, California. The Corporation issued Ganis stockholders approximately $22 million in Corporation common stock, comprised of 773,621 shares of its treasury stock previously purchased in the open market. In January 1996, the Corporation issued Ganis stockholders an additional $7 million in its common stock, comprised of 153,741 shares of its treasury stock previously purchased in the open market, as a result of the achievement by Ganis of certain performance goals. The Corporation will issue Ganis stockholders up to an additional $7 million in common stock if Ganis achieves certain additional performance goals over the next several years. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Ganis 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 supplemental consolidated financial statements since the acquisition date. In July 1995, the Corporation completed its acquisition of NFS Financial Corp. (NFS), parent company of NFS Savings Bank, FSB of Nashua, New Hampshire, and Plaistow Cooperative Bank, FSB of Plaistow, New Hampshire, with combined total assets of $625 million. The Corporation paid NFS stockholders $97 million, comprising $58 million in cash and $39 million in common stock. The acquisition was accounted for as a purchase and , accordingly, the assets and liabilities of NFS 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 supplemental consolidated financial statements since the acquisition date. Following the acquisition, NFS Savings Bank, FSB and Plaistow Cooperative Bank, FSB were merged and currently operate as BayBank FSB. Effective in October 1995, the Corporation formed a joint venture with Boston Financial Data Services (a joint venture of State Street Bank and Trust Company and DST Systems, Inc.), combining their respective stock transfer businesses into a single entity which is 50 percent owned by each party. Additionally, in October 1995, the Corporation completed the sale of its corporate trust business. This sale resulted in a pre-tax gain of $20 million, or $12 million net of tax. In December 1995, the Corporation completed its acquisition of Cornerstone Financial Corporation (Cornerstone), parent company of Cornerstone Bank of Derry, New Hampshire, with total assets of $143 million. The Corporation paid Cornerstone stockholders $18 million. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Cornerstone 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. Following the acquisition, Cornerstone Bank began operating as BayBank NH, N.A. In December 1995, the Corporation announced an agreement to sell its mortgage banking subsidiary, BancBoston Mortgage Corporation (BBMC), to a newly formed independent mortgage company, HomeSide, Inc. (HomeSide), for cash and a minority interest in the new company. During the first quarter of 1996, the second phase of the transaction was announced, in which Barnett Bank would sell its mortgage company to HomeSide. The sales were completed during the first half of 1996. Upon completion of both phases of the transaction, the Corporation, Barnett Bank and two equity investment firms each own an approximate one-third interest in HomeSide. In October 1995, the Corporation announced a definitive agreement to acquire The Boston Bancorp (Bancorp), and in June 1996 completed the transaction. Bancorp was the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with $1.3 billion in deposits at June 30, 1996. The Corporation exchanged 4.6 million shares of its common stock, with a value of $229 million, for all of the outstanding shares of Bancorp common stock. The Corporation has purchased an equivalent amount of shares of its common stock in the open market during 1996 for the transaction. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Bancorp were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisition is being amortized over a ten-year period. The acquisition will be included in the Corporation's consolidated financial statements from the acquisition date. In December 1995, the Corporation announced a definitive agreement to acquire BayBanks, and completed the transaction in July 1996. BayBanks, with total assets of $11 billion at June 30, 1996, was the Boston-based holding company of BayBank, N.A. Under terms of the merger agreement, 44 million shares of the Corporation's common stock were issued for substantially all of the outstanding shares of BayBanks common stock (based on an exchange ratio of 2.2 shares of the Corporation's common stock for each outstanding share of BayBanks common stock). The transaction was accounted for as a pooling of interests, and as such is reflected in these supplemental consolidated financial statements as though the Corporation and BayBanks had operated as a combined entity for all periods presented. In connection with the approval of the transaction by regulatory authorities, the Corporation agreed to sell 20 branches of the resulting combined entity, comprising a total of approximately $860 million in deposits. The sale of these branches is expected to be completed in approximately six months. Also, in connection with the acquisition the Corporation anticipates that it will incur certain merger and restructuring costs. Such costs include investment banking and other professional fees, stock issuance costs and other expenses and other costs associated with the acquisition and estimated facilities and operations consolidation and severance costs associated with expected reorganizations in connection with the acquisition. These costs, which were originally estimated to be approximately $140 million ($83 million after- tax), continue to be evaluated along with the estimated cost savings expected to result from the integration of the two institutions, both of which are likely to increase upon finalization of the integration plan. F-27 Notes To Supplemental Financial Statements, Continued 3. Statement Of Cash Flows For purposes of the statement of cash flows, cash and due from banks are considered to be cash equivalents. Foreign currency cash flows are converted to U.S. dollars using average rates for the period. During 1995, 1994 and 1993, the Corporation paid interest of approximately $2.8 billion, $2.4 billion and $3.0 billion, respectively. The Corporation paid income taxes of approximately $565 million in 1995, $237 million in 1994 and $114 million in 1993. During 1995, 1994 and 1993, the Corporation transferred approximately $49 million, $105 million and $172 million, respectively, to OREO from loans. Loans made to facilitate sales of OREO properties were $6 million in 1995: such loans in 1994 and 1993 totaled approximately $10 million and $31 million, respectively. Non- cash transactions in 1995 included $94 million from the issuance of common stock in connection with the Corporation's redemption of its convertible subordinated debentures due 2011, more fully described in Note 10, and the transfer of $3.3 billion of securities held to maturity to securities available for sale. The transfer was in connection with A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities (the Special Report), issued by the Financial Accounting Standards Board (the FASB) in November 1995, which allowed the Corporation to reassess the appropriateness of the classification of securities held at that time. This transfer is more fully described in Note 5. During 1994, the Corporation transferred a total of $387 million of lower quality real estate exposure to ADP. During 1993, the Corporation transferred approximately $861 million of securities held to maturity to securities available for sale in connection with the Corporation's mergers with Society and Multibank, as well as the Corporation's adoption of SFAS No. 115. In accordance with the new standard, cash flows from purchases, sales and maturities of securities available for sale in 1995 and 1994 are classified as investing activities in the accompanying supplemental consolidated statement of cash flows. For 1993, these cash flows are classified as an operating activity and presented on a net basis. 4. Reserve Requirements, Restricted Deposits And Pledged Assets At December 31, 1995 and 1994, cash and due from banks included $1.2 billion and $1.1 billion, respectively, to satisfy the reserve requirements of the Federal Reserve System and various foreign central banks. Interest bearing deposits in other banks held to satisfy foreign central bank reserve requirements totaled $37 million and $30 million at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, securities, loans and other assets with a book value of $4.4 billion and $4.1 billion, respectively, were pledged to collateralize repurchase agreements, public deposits and other items. F-28 Notes To Supplemental Financial Statements, Continued 5. Securities A summary comparison of securities available for sale by type is as follows:
Gross Gross December 31, 1995 Unrealized Unrealized Carrying (in millions) Cost Gains Losses Value U.S. Treasury............................. $2,556 $ 37 $ 2 $2,591 U.S. government agencies and corporations-- Mortgage-backed securities............................... 2,969 71 3 3,037 States and political subdivisions............................. 245 3 248 Foreign debt securities............................... 698 5 18 685 Other debt securities..................... 343 9 334 Marketable equity securities............................... 170 52 222 Other equity securities............................... 465 465 ------ ------ ------ ------ $7,446 $ 168 $ 32 $7,582 ====== ====== ====== ======
Gross Gross December 31, 1994 Unrealized Unrealized Carrying (in millions) Cost Gains Losses Value U.S. Treasury............................. $1,500 $ 13 $1,487 U.S. government agencies and corporations-- Mortgage-backed securities............................... 796 30 766 State and political subdivisions.......... 9 9 Foreign debt securities............................... 432 $ 4 52 384 Other debt securities..................... 142 142 Marketable equity securities............................... 124 21 1 144 Other equity securities............................... 330 330 ------ ------ ------ ------ $3,333 $ 25 $ 96 $3,262 ====== ====== ====== ======
Other equity securities included in securities available for sale 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 estimated for these securities. These fair values exceeded cost by $76 million and $70 million at December 31, 1995 and 1994, respectively. Further information with respect to the fair value of these securities is included in Note 26. A summary comparison of securities held to maturity by type is as follows:
Gross Gross December 31, 1995 Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value U.S. Treasury............................. $ 4 $ 4 U.S. government agencies and corporations-- Mortgage-backed securities............................... 523 $ 8 $ 1 530 States and political subdivisions............................. 5 5 Foreign debt securities............................... 11 11 Other equity securities............................... 117 117 ------ ------ ------ ------ $ 660 $ 8 $ 1 $ 667 ====== ====== ====== ======
F-29 Note To Supplemental Financial Statements, Continued
Gross Gross December 31, 1994 Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value U.S. Treasury............................. $2,146 $ 70 $2,076 U.S. government agencies and corporations Mortgage-backed securities............................... 1,449 74 1,375 States and political subdivisions............................. 201 1 200 Foreign debt securities............................... 123 2 121 Other debt securities..................... 200 5 195 Other equity securities............................... 119 119 ------ ------ ------ $4,238 $ 152 $4,086 ====== ====== ======
Other equity securities included in securities held to maturity represent securities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. The FASB Special Report, which provided guidance on the implementation of SFAS No. 115, allowed companies, no later than December 31, 1995, to make a one-time reassessment of the classification of their securities portfolios between available for sale and held to maturity. As a result of this reassessment, the Corporation transferred $3.3 billion of securities from held to maturity to available for sale, with a net after-tax unrealized gain of $52 million recorded in stockholders' equity. A summary comparison of debt securities available for sale by contractual maturity is as follows:
December 31 1995 1994 Fair Fair (in millions) Cost Value Cost Value Within one year........ $1,844 $1,844 $ 626 $ 624 After one but within five years............ 2,472 2,518 1,502 1,475 After five but within ten years............. 1,165 1,190 238 197 After ten years........ 1,330 1,343 513 492 ------ ------ ------ ------ $6,811 $6,895 $2,879 $2,788 ====== ====== ====== ======
A summary comparison of debt securities held to maturity by contractual maturity is as follows:
December 31 1995 1994 Amortized Fair Amortized Fair (in millions) Cost Value Cost Value Within one year........ $ 11 $ 11 $ 911 $ 902 After one but within five years............ 115 115 2,121 2,040 After five but within ten years............. 200 208 338 325 After ten years........ 217 216 749 700 ----- ----- ------ ------ $ 543 $ 550 $4,119 $3,967 ===== ===== ====== ======
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. Included in 1995's net securities gains were gross gains of $11 million and gross losses of $2 million related to the sale of debt securities available for sale. Total proceeds from such securities sales amounted to $1.4 billion. For 1994, net securities gains included gross gains of $24 million and gross losses of $9 million related to the sale of debt securities available for sale. Total proceeds from such securities sales in 1994 amounted to $2.5 billion. For 1993, net securities gains included gross gains of $39 million and gross losses of $1 million related to the sale of debt securities available for sale. Total proceeds from such securities sales in 1993 amounted to $4.7 billion. F-30 Notes To Supplemental Financial Statements, Continued 6. Loans and Lease Financing
December 31 1995 1994 (in millions) United States Commercial, industrial and financial........................... $12,809 $13,122 Commercial real estate Construction................................................. 386 391 Other........................................................ 3,393 4,065 Consumer-related loans Secured by 1-4 family residential properties................................................. 6,697 7,079 Other........................................................ 5,554 4,559 Lease financing................................................ 1,564 1,482 Unearned income................................................ (240) (239) ------- ------- 30,163 30,459 ======= ======= International Commercial and industrial...................................... 6,422 5,161 Banks and other financial institutions......................... 796 749 Governments and official institutions.......................... 82 33 Lease financing................................................ 285 329 All other...................................................... 1,159 1,053 Unearned income................................................ (37) (76) ------- ------- 8,707 7,249 ------- ------- $38,870 $37,708 ======== ========
7. Reserve for Credit Losses An analysis of changes in the reserve for credit losses follows:
Years Ended December 31 1995 1994 1993 (in millions) BALANCE, JANUARY 1....................... $827 $941 $1,116 Reserves of acquired entities............ 16 25 Reserves of entities sold................ (32) Provision................................ 275 154 107 Credit losses............................ (282) (260) (353) Recoveries............................... 86 86 71 ------ ----- ----- Net credit losses..................... (196) (174) (282) Credit losses related to exposures transferred to ADP...................... (119) ______ ______ ______ BALANCE, DECEMBER 31..................... $890 $827 $941 ====== ====== =======
As described in Note 1, the adoption of SFAS No. 114, as amended by SFAS No. 118, on January 1, 1995 did not have a material effect on the Corporation's financial statements, and did not result in any additional provision for credit losses as of January 1, 1995. At December 31, 1995, impaired loans in accordance with these standards totaled $250 million, of which loans totaling $113 million required no valuation reserve and loans totaling $137 million required a valuation reserve of $32 million. For the year ended December 31, 1995, average impaired loans were approximately $297 million. Interest recognized on impaired loans during the year ended December 31, 1995 was not material. F-31 Notes To Supplemental Financial Statements, Continued 8. Other Assets
December 31 1995 1994 (in millions) Accounts receivable............................................ $ 405 $ 547 PMSR and EMSR.................................................. 553 432 Prepaid pension cost........................................... 187 187 Goodwill and other intangibles................................. 352 316 Precious metal assets.......................................... 136 175 Investments in limited partnerships............................ 183 148 Equity investments in affiliates............................... 149 109 ADP............................................................ 118 OREO........................................................... 70 143 Refundable income taxes........................................ 38 29 Equity investments from loan restructurings.................... 20 23 All other...................................................... 828 489 ------ ------ $2,921 $2,716 ====== ======
9. Funds Borrowed
December 31 1995 1994 (in millions) Federal funds purchased........................................ $1,869 $ 416 Term federal funds purchased................................... 870 765 Securities sold under agreements to repurchase.................................................... 1,688 2,680 Short-term bank notes.......................................... 1,190 1,569 Medium-term bank notes......................................... 1,871 Demand notes issued to the U.S. Treasury....................... 361 395 All other...................................................... 1,654 1,386 ------ ------ $9,503 $7,211 ====== ======
All other funds borrowed included borrowings with maturities of greater than one year of $333 million at December 31, 1995 and $221 million at December 31, 1994. At December 31, 1995 and 1994, the Corporation had availability under various borrowing arrangements of $1.4 billion and $1.7 billion, respectively. The Corporation had no significant compensating balance arrangements at December 31, 1995 and 1994. 10. Notes Payable
By Remaining Maturity at December 31 Due less than Due Due 1995 1994 (in millions) 1 year 1-5 years 6-10 years Total Total Parent Company Senior notes.......... $ 100 $ 100 $ 100 Subordinated notes ............ $ 235 $ 934 1,169 1,320 Convertible subordinated debentures ........ 94 ---------- ---------- ---------- --------- ----- Subtotal ............ 100 235 934 1,269 1,514 Subsidiaries Senior notes ........ 27 274 157 458 243 Subordinated notes .............. 65 397 462 462 ---------- ---------- ---------- ---------- ----- Subtotal ............ 27 339 554 920 705 ---------- ---------- ---------- ---------- ----- $127 $574 $1,488 $2,189 $2,219 ========== ========== ========== ========== ======
F-32 Notes To Supplemental Financial Statements, Continued Notes payable are unsecured obligations of the Corporation or its subsidiaries. Certain of the indentures under which these notes were issued prohibit the Corporation from making any payment or other distribution in the stock of FNBB unless FNBB 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, 1995 and 1994 include fixed rate notes of $1,659 million and $1,534 million, respectively, and variable rate notes of $530 million and $685 million, respectively. Fixed rate notes outstanding at December 31, 1995 mature at various dates through 2005 at interest rates ranging from 6.63% to 10.50%. The consolidated weighted average interest rates on fixed rate notes at December 31, 1995 and 1994 were 7.78% and 7.74%, respectively. The Corporation has entered into interest rate swap agreements that have effectively converted its fixed rate obligations to floating rate obligations. At December 31, 1995, such interest rates ranged from 5.75% to 5.95%. Variable rate notes outstanding, with interest rates ranging from 5.81% to 9.25% at December 31, 1995, mature at various dates through 2003. The consolidated weighted average interest rates on variable rate notes at December 31, 1995 and 1994 were 6.68% and 7.03%, respectively. During 1995, the Corporation called for redemption its 7.75% convertible subordinated debentures due June 2011 at 100.78% of their principal amount plus accrued interest to the date of redemption. Substantially all holders of the debt opted to convert their bonds to common stock prior to redemption, resulting in the issuance by the Corporation of approximately 4,008,000 shares of its common stock. Of the total shares issued, approximately 530,000 shares were treasury shares previously purchased by the Corporation in the open market. Primary earnings per share for the year ended December 31, 1995 would have been $4.52 had the debentures been converted on January 1, 1995. Also during 1995, the Corporation redeemed its 10.30% subordinated notes due September 2000 at their $150 million principal amount plus accrued interest. During 1994, the Corporation redeemed its floating rate notes due September 2000, with a carrying value of $179 million, at their principal amount plus accrued interest, and a nonbanking subsidiary of the Corporation prepaid $186 million of its senior notes, with fixed interest rates ranging from 6.67% to 9.50%, at their principal amount plus accrued interest and a prepayment penalty. The loss on these early extinguishments of debt amounted to $7 million, net of tax, or $.04 per common share on both a primary and fully diluted basis, and is presented as an extraordinary item in the accompanying supplemental consolidated statement of income. Notes payable maturing during the next five years amount to: $127 million in 1996, $454 million in 1997 and $120 million in 1998. There are no notes payable maturing in 1999 and 2000. 11. Preferred Stock A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Adjustable Rate Preferred Stock) issued and outstanding is as follows:
Series A Series B Series C Outstanding at December 31, 1995 and 1994 Shares ...................... 1,044,843 1,574,315 774,783 Amount (in millions) ........ $ 52 $ 79 $ 77 Dividend rates At December 31, 1995 ..... 6.00% 6.00% 5.50% Minimum .................. 6.00% 6.00% 5.50% Maximum .................. 13.00% 13.00% 12.50% Dividends per share 1995 ..................... $ 3.06 $ 3.01 $ 5.50 1994 ..................... $ 3.02 $ 3.02 $ 5.51 1993 ..................... $ 3.01 $ 3.01 $ 5.51 Liquidation preference per share ................. $ 50 $ 50 $ 100
F-33 Notes To Supplemental Financial Statements, Continued A summary of the Corporation's Fixed Rate Cumulative Preferred Stock (Fixed Rate Preferred Stock) issued and outstanding is as follows:
Series E Series F Outstanding at December 31, 1995 and 1994 Shares ....................................... 920,000 280,000 Amount (in millions) ......................... $ 230 $ 70 Dividend rate ................................ 8.60% 7.88% Dividends per share .......................... $ 21.50 $ 19.69 Liquidation preference per share ............. $ 250 $ 250
The Fixed Rate Preferred Stock is held by stockholders in the form of depositary shares, with each depositary share representing a one-tenth interest in a share of the respective preferred stock, and entitles the holder to a proportional interest in all rights and preferences of a share of Fixed Rate Preferred Stock, including dividend, voting, redemption and liquidation rights. Dividends on all series of preferred stock are cumulative and, when declared, are payable quarterly. The dividend rates for the Adjustable Rate Preferred Stock are determined according to a formula based upon the highest of three interest rate benchmarks. Neither the Adjustable Rate Preferred Stock nor the Fixed Rate Preferred Stock have preemptive or general voting rights. The preferred stock is redeemable, in whole or in part, at the option of the Corporation as follows: Series A and B Preferred Stock are redeemable at $50 per share and Series C Preferred Stock is redeemable at $100 per share. The Series E and Series F Preferred Stock are redeemable on and after September 15, 1997 and July 15, 1998, respectively, at $250 per share ($25 per depositary share). 12. Stockholder Rights Plan In 1990, the Board of Directors of the Corporation adopted a stockholder rights plan. The plan provides for the distribution of one preferred stock purchase right for each outstanding share of common stock of the Corporation. Each right entitles the holder, following the occurrence of certain events, to purchase a unit, consisting 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 except under certain circumstances in which a person or group of affiliated persons acquires, or commences a tender offer to acquire, 15% or more of the Corporation'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 acquiring 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. As a result of the Corporation's acquisition of BayBanks, described in Note 2, the plan was amended to exclude the transactions contemplated by the agreement. 13. 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 1996, aggregate dividend declarations by the Corporation's bank subsidiaries without prior regulatory approval are limited to approximately $765 million of their undistributed earnings at December 31, 1995, plus an additional amount equal to their net profits, as defined, for 1996 up to the date of any dividend declaration. However, for any dividend declaration, the Corporation's subsidiaries, as well as the Corporation itself, must consider additional factors such as the amount of current period net income, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends which the banking 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 regulations described above, any loans and advances would be limited to an aggregate of approximately $417 million and would be subject to specific collateral requirements. Based on the foregoing limitations, an aggregate of approximately $3.4 billion of the Parent Company's investment in bank subsidiaries of $4.6 billion, which includes bank holding companies and their subsidiaries, was restricted from transfer to the Parent Company at December 31, 1995. F-34 Notes To Supplemental Financial Statements, Continued 14. Other Income
Years Ended December 31 1995 1994 1993 (in millions) Net equity and mezzanine profits .......... $ 110 $ 30 $ 38 Net foreign exchange trading profits ...... 60 44 47 Precious metal income ..................... 16 13 9 Net gains from sales of mortgage inventories ............................. 13 10 Gains from sales of mortgage servicing rights .................................. 10 11 1 Equity in undistributed earnings of affiliates ............................ 18 1 16 Exchange-rate related profits from Brazil .............................. 15 Gain on sale of domestic factoring business ................................. 27 Gain on sale of Maine and Vermont bank subsidiaries ........................ 75 Gain on sale of corporate trust business ................................. 20 All other ................................. 31 63 60 ----- ----- ----- $ 340 $ 217 $ 181 ===== ===== =====
15. Employee Benefits The Corporation maintains non-contributory defined benefit pension plans (the Plans) covering substantially all domestic employees. The Corporation funds the Plans in compliance with the requirements of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. The principal plan is an account balance defined benefit plan in which each eligible employee has an account to which amounts are allocated based on level of pay and years of service, and which grows at a specified rate of interest. Benefits accrued prior to 1989 are based on years of service, highest average compensation and social security benefits. Plans other than the principal plan have benefit provisions based on length of service and qualifying compensation in the final years of employment. Employee benefits expense (income) for the Plans included the following:
Years Ended December 31 1995 1994 1993 (in millions) Service cost (benefits earned during the period) ....... $ 22 $ 25 $ 21 Interest cost on projected benefit obligation .......... 32 29 26 Return on plan assets Actual................................................ (161) 5 (54) Actuarial deferral of gains (losses) ................ 110 (59) 5 Amortization Unrecognized net asset .............................. (6) (6) (6) Unrecognized prior service cost ..................... 2 2 3 Other, net .......................................... 2 1 ----- ----- ----- Net pension expense (income) ........................... $ 1 $ (3) $ (5) ===== ===== =====
F-35 Notes To Supplemental Financial Statements, Continued The following table sets forth the funded status of the Plans:
December 31 1995 1994 1993 (dollars in millions) Projected benefit obligation Vested benefits ................................................. $ 368 $ 282 $ 252 Nonvested benefits .............................................. 35 33 31 ----- ----- ----- Accumulated benefit obligation ..................................... 403 315 283 Effect of projected future compensation levels ..................... 79 77 83 ----- ----- ----- Projected benefit obligation ....................................... $ 482 $ 392 $ 366 ===== ===== ===== Plan assets at fair value (primarily listed stocks and fixed income securities) ....................................................... $ 688 $ 552 $ 564 ===== ===== ===== Plan assets in excess of projected benefit obligation .............. $ 206 $ 160 $ 198 Unrecognized net (gain) loss ....................................... (15) 37 (5) Unrecognized prior service cost .................................... 14 13 23 Unrecognized net asset ............................................. (18) (23) (29) ----- ----- ----- Prepaid pension cost ............................................... $ 187 $ 187 $ 187 ===== ===== ===== Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31 ................... 7.25% 8.25% to 8.5% 7.25% to 7.5% Rate of increase in future compensation levels at December 31..... 4.45% to 4.5% 4.5% to 5.25% 4.5% to 4.7% Account balance interest rate at December 31 .................... 6.0% 6.5% 6.0% Expected long-term rate of return on assets for the years ended December 31..................................................... 9.0% 9.0% to 9.5% 9.0 % to 9.5%
The Corporation also maintains nonqualified deferred compensation and retirement plans for certain officers. All benefits provided under these plans are unfunded and any payments to plan participants are made by the Corporation. As of December 31, 1995 and 1994, approximately $25 million and $22 million, respectively, were included in accrued expenses and other liabilities for these plans. For 1995, 1994 and 1993, charges to operations related to these plans were $4 million, $4 million and $2 million, respectively. The Corporation also provides certain health and life insurance benefits for retired employees. Eligible domestic employees of the Corporation, except BayBanks employees, currently receive credits of up to $10,000 based on years of service, which are used to purchase postretirement health care coverage through the Corporation. Life insurance coverage is dependent on years of service at retirement. BayBanks employees retiring prior to December 31, 1993 received $5,000 in life insurance benefits and a subsidy to cover Medicare premiums. Those retiring after December 31, 1993 will not receive the Medicare supplement and will pay the full cost of life insurance and medical insurance premiums at the Corporations rate. Pursuant to SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", which the Corporation adopted effective January 1, 1993, these postretirement benefits are recognized over the service lives of the employees. The components of postretirement benefits expense were as follows:
Years Ended December 31 1995 1994 1993 (in millions) Service cost (benefits earned during the period) ......................................... $ 1 $ 1 $ 1 Interest cost on projected benefit obligation ...................................... 5 5 6 Amortization Unrecognized transition obligation .............. 4 5 5 Unrecognized net gain ........................... (1) (1) ----- ----- ----- Net postretirement benefits expense .............. $ 9 $ 11 $ 11 ===== ===== =====
F-36 Notes To Supplemental Financial Statements, Continued The following table sets forth the status of the Corporation's accumulated postretirement benefit obligation:
December 31 1995 1994 1993 (dollars in millions) Accumulated benefit obligation Retirees..................................... $ 51 $ 53 $ 65 Active employees eligible to retire.......... 6 7 5 Active employeesnot eligible to retire....... 9 9 10 ----- ----- ----- Accumulated postretirement benefit.............. obligation..................................... 66 69 80 Unrecognized net gain........................... 17 16 4 Unrecognized transition obligation.............. (62) (76) (80) ----- ----- ----- Postretirement benefit liability................ $ 21 $ 9 $ 4 ===== ===== ===== Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31................................. 7.25% 8.25% to 8.5% 7.25% to 7.5% Rate of increase in future compensation levels at December 31....................... 4.50% 4.50% 4.50% Medical cost trend rate...................... 8% 11% 12% declining to declining to declining to 5% in the 5% in the 5% in the year 1999 year 2001 year 2001 Effect of 1% increase in medical cost trend rate on Accumulated postretirement benefit obligation.................................. 5.80% 5.90% 4.80% Postretirement benefits expense.............. 4.90% 4.90% 4.10%
In 1995, the Corporation recognized curtailment losses in connection with its pension and postretirement plans. These losses were primarily a result of the anticipated sale of BBMC to a new mortgage banking joint venture, and represented the effect of expected employee reductions on the Corporation's pension and postretirement plans. The BBMC curtailment losses are more fully described in Note 17. BayBanks has an employee stock ownership plan (the ESOP). Employees of BayBanks are eligible to participate in the ESOP plan if they meet certain service requirements. In 1990, the ESOP borrowed $19 million from a third party to purchase 1,760,000 shares of BayBanks common stock. This loan, unconditionally guaranteed by BayBanks, bears interest equal to Reserve Adjusted LIBOR plus .35% and is payable in eight annual installments ending January 31, 1997. At December 31, 1995, the balance of the ESOP loan was $6 million at an interest rate of 6.19% and the number of unallocated ESOP shares was 595,089. During 1995 ESOP expense of $2 million, net of dividends, included an accrual to cover the loan payment due on January 31, 1996 and interest expense of the ESOP loan of $.4 million. The dividends used to service the ESOP debt, which were paid on shares held by the ESOP were $1.6 million in 1995, $1.2 million in 1994 and $.7 million in 1993. The Corporation maintains thrift incentive plans covering the majority of domestic employees. Under the BayBanks profit sharing plan, employer contributions are made based on specified earnings hurdles and offset by contributions made to the ESOP. Under the Corporation's thrift incentive plan, employer contributions are made based on a percentage of employee contributions. The amounts charged to operating expense for these plans were $10 million, $12 million and $10 million in the years ended December 31, 1995, 1994 and 1993, respectively. 16. Stock Options and Awards The Corporation's stock incentive plans include the 1991 Long-Term Stock Incentive Plan (the 1991 Plan), the 1986 and 1982 Stock Option Plans (the 1986 and 1982 Plans) and the BayBanks 1978 and 1988 Stock Option Plans (the 1978 and 1988 Plans). The 1991 Plan provides for the award of stock options, restricted stock and stock appreciation rights (SARs) to key employees. Awards may be made under the 1991 Plan until December 31, 1996. No additional grants may be made under the 1986 and 1982 Plans and the 1978 and 1982 Plans. Shares issued under these plans may be authorized but unissued shares, treasury shares or shares purchased in the open market. Options are granted at prices not less than the fair market value of the common stock on the date of grant. Options granted under the 1991 plan generally have been exercisable in equal installments on the date of grant and the first anniversary of the grant date. Under the 1986 Plan, options granted are generally exercisable in equal installments on the date of grant and each of the three anniversary dates thereafter. Options under the 1986 Plan are fully vested. All options expire not later than 10 years after the date of grant. The 1986 Plan allowed for the granting of rights to receive Tax Offset Payments with respect to Non-Qualified Stock Options, which are intended to compensate the participant for the difference in tax treatment of Incentive Stock Options and Non-Qualified Stock Options. At December 31, 1995, Tax Offset Payments with respect to 78,334 options, granted in 1987, were outstanding. Compensation expense for Tax Offset Payments for the year ended December 31, 1995 was $1 million. There were 22,400 SARs, at a grant price of $28.63, outstanding at December 31, 1995. Compensation expense associated with these awards was $.4 million for the year ended December 31, 1995. A total of 7,488,921 shares of common stock were reserved for issuance under the above plans at December 31, 1995. Options outstanding at December 31, 1995 were at prices ranging from $6.10 to $47.88 per share. F-37 Notes To Supplemental Financial Statements, Continued The following is a summary of the changes in options outstanding:
1995 1994 1993 Options outstanding, January 1...................................... 4,744,473 4,803,706 5,721,656 Granted ($18.69 to $47.88 per share).............................. 1,294,174 927,489 659,603 Exercised ($5.63 to $30.50 per share).............................. (1,250,716) (804,623) (1,146,835) Canceled........................................ (23,749) (182,099) (430,718) ----------- ---------- ----------- Options outstanding, December 31.................................... 4,764,182 4,744,473 4,803,706 =========== ========== =========== Options exercisable, December 31.................................... 3,871,117 3,687,929 3,669,596 =========== ========== =========== Shares available for future grants.................................. 2,724,739 4,469,942 5,532,000 =========== ========== ===========
Under terms of the Corporation's restricted stock awards, employees are generally required to maintain employment with the Corporation for a period of five years after the award in order to become fully vested in the shares awarded. Under the BayBanks restricted stock plan, restriction periods vary from one to ten years from the date of grant. Under terms of the Corporation's agreement with BayBanks, no additional shares were issued under the BayBanks plans. Performance-based restricted stock has also been awarded by the Corporation, which vests if the market price of the Corporation's common stock reaches certain stated levels within specified periods. During 1995, the common stock price levels for vesting of 180,200 shares of performance restricted stock granted in 1994 were reached, and the shares were released from forfeiture restriction. Restricted stock is recorded at the fair market value of the common stock on the date of award or, if 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 vesting period. The following is a summary of the activity in restricted stock:
1995 1994 1993 Share balance, January 1........................ 1,205,859 908,559 1,051,197 Awards......................................... 316,570 528,600 111,100 Forfeitures.................................... (17,988) (41,277) (112,541) Released from forfeiture restrictions.................................. (496,316) (190,023) (141,197) ----------- ----------- ---------- Share balance, December 31...................... 1,008,125 1,205,859 908,559 =========== =========== ========== Shares available for future grants 0 865,040 =========== =========== (in millions) Unearned compensation at December 31 (a reduction of retained earnings)............................. $ 13 $ 17 $ 7 Compensation expense............................ $ 13 $ 6 $ 2
Upon approval of the stockholders of the Corporation and BayBanks, stock granted under the BayBanks restricted stock plans became fully vested, and any restriction periods or other restrictions on outstanding awards of restricted stock lapsed. This resulted in an additional $4 million of compensation expense to the Corporation in the second quarter of 1996. In November 1995, SFAS No. 123, " Accounting for Stock-Based Compensation," was issued, and is effective January 1, 1996. This new standard requires either the recording of compensation expense for all stock awards and stock option grants, or significantly increased disclosures for such awards and grants made after December 31, 1994. The Corporation intends to disclose the information required by the standard. 17. Acquisition, Divestiture and Restructuring Expense During 1995, the Corporation recorded $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. These charges included expenses related to reorganizations underway in the Corporation's European business, including the closing of the Luxembourg operations, corporate banking and various other units, and the reorganization of certain Asian operations. The charges included $16 million, comprised of estimated costs of employee reduction of approximately 265, including executive, managerial and staff positions, and $4 million related to equipment and certain lease obligations. In addition, the charges included $8 million of curtailment losses as defined by SFAS No. 106, ''Employers' Accounting for Postretirement Benefits Other Than Pensions'' and SFAS No. 88, ''Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.'' The curtailment losses resulted from the announced sale of the mortgage banking business, which is expected to remove mortgage banking employees from the Corporation's pension and postretirement plans. The majority of the remaining reserve of $19 million at December 31, 1995 is expected to be utilized in 1996. F-38 Notes To Supplemental Financial Statements, Continued During 1994, in connection with its acquisitions of BankWorcester and Pioneer, the Corporation recorded acquisition-related costs of $21 million. Significant components of the costs included $10 million for estimated costs of employee reduction of 414, and $11 million for estimated conversion costs. These conversions were completed in 1994, and consisted of costs to convert loans, deposits and other computer systems to a common Corporation system, as well as costs of replacing customers' checkbooks, automatic teller machine cards and other deposit documents. During 1994, the Corporation charged costs totaling $12 million to the BankWorcester and Pioneer reserves. Substantially all of the remaining costs, principally comprised of the Corporation's liability for involuntary termination benefits, were paid during 1995. During 1993, the Corporation recorded acquisition-related costs and reorganization charges of $85 million, primarily in connection with its mergers with Society and Multibank. The costs also included the estimated costs of downsizing and reconfiguring certain of the Corporation's business and corporate units. Significant components of the acquisition-related costs included professional fees; employee reduction costs, principally termination benefits paid to employees; conversion costs, including costs to convert loans, deposits and other computer systems of the acquired banks to a common Corporation system and costs to dispose of systems hardware and software of the acquired banks; and property related costs, including costs related to the closing of 24 branches and the disposition of other principal properties, such as post-closing lease payments and other monthly costs. Components related to the downsizing and reconfiguration plan included employee reduction costs and estimated costs related to the disposal of branches and other principal properties and exiting operating leases. Total employee reduction related to both the mergers and the downsizing and reconfiguration plan amounted to 950. During 1993, the Corporation charged costs totaling $40 million to the reserve created by the charges. Charges to the reserve during 1994 totaled $35 million, and the remainder of the costs were paid during 1995. 18. Other Expense
Years Ended December 31 1995 1994 1993 (in millions) FDIC insurance premiums......................... $ 34 $ 73 $ 84 Legal fees...................................... 30 31 33 Consulting and other professional fees.......... 36 40 41 Communications.................................. 90 82 79 Advertising..................................... 87 64 58 Forms and supplies.............................. 32 32 33 Travel and customer contact..................... 31 26 26 Software costs.................................. 27 23 22 Other staff costs............................... 26 19 17 Amortization of goodwill and other intangibles.................................... 28 18 13 All other....................................... 148 124 137 ----- ----- ----- $ 569 $ 532 $ 543 ===== ===== =====
19. Income Taxes The components of the provision for income taxes were as follows:
Years Ended December 31 1995 1994 1993 (in millions) Current Tax Provision Federal......................................... $ 297 $ 135 $ 47 Foreign Based on income.............................. 91 48 27 Withheld on interest and dividends........... 22 15 8 State and local................................. 80 145 58 ------- ----- ----- 490 343 140 ------- ----- ----- Deferred Tax Provision (Benefit) Federal......................................... (1) 121 108 State and local................................. 40 (42) 14 ------ ------ ----- 39 79 122 ------ ------ ----- Income tax provision before extraordinary item and cumulative effect of changes in accounting principles................................... 529 422 262
F-39 Notes To Supplemental Financial Statements, Continued Income Taxes Applicable To Extraordinary Item And Changes In Accounting Principles Loss from early extinguishment of debt.......... (4) Change in accounting for income taxes........... (77) Change in accounting for PMSR................... (32) ----- ----- ----- $ 529 $ 418 $ 153 ===== ===== =====
Excluded from the above table are tax effects related to certain items which 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 a $74 million charge in 1995, a $62 million benefit in 1994 and a $26 million charge in 1993. The income tax provision included tax provisions related to securities gains of $3 million in 1995, $6 million in 1994 and $13 million in 1993. Effective January 1, 1993, the Corporation adopted, prospectively, SFAS No. 109, which principally affects accounting for deferred income taxes. The cumulative effect to January 1, 1993 of adopting the standard was an increase to net income of $77 million, or $.52 per common share on a primary basis and $.51 per common share on a fully diluted basis. The following table reconciles the expected federal tax provision before extraordinary item and cumulative effect of changes in accounting principles, based on the federal statutory tax rate of 35% in 1995, 1994 and 1993, to the actual consolidated tax provision before extraordinary item and cumulative effect of changes in accounting principles:
Years Ended December 31 1995 1994 1993 (in millions) Expected tax provision applicable to income before extraordinary item and cumulative effect of changes in accounting principles.......................... $ 423 $ 340 $ 211 Effect of State and local income taxes, net of federal tax benefit........................... 81 67 47 Tax-exempt income.............................. (8) (5) (6) Non-creditable foreign taxes................... 11 9 5 Non-deductible goodwill from sale of subsidiaries............................... 11 Other, net..................................... 11 11 5 ------ ------ ------ Actual tax provision before item and cumulative effect of changes in accounting principles......................... $ 529 $ 422 $ 262 ====== ====== ======
F-40 Notes To Supplemental Financial Statements, Continued The components of the net deferred tax asset (liability) were as follows:
December 31 1995 1994 (in millions) Deferred Tax Assets Reserve for credit losses....................... $ 358 $ 370 Foreign operations.............................. 63 30 Interest on nonaccrual loans.................... 45 83 Mortgage servicing rights....................... 39 33 Unrealized loss on securities available for sale....................................... 32 Other........................................... 92 106 ------ ------ Deferred tax assets.......................... 597 654 Deferred Tax Liabilities Leasing operations.............................. (493) (484) Pension obligations............................. (71) (77) Unrealized gain on securities available for sale....................................... (55) Other........................................... (57) (36) ------ ------ Deferred tax liabilities..................... (676) (597) ------ ------ Net deferred tax asset (liability).............. $ (79) $ 57 ====== ======
During 1994, the Corporation eliminated its deferred tax valuation reserve, which was $56 million as of January 1, 1994, as a result of writing off certain fully reserved state deferred tax assets, executing certain tax planning strategies and partially settling an Internal Revenue Service (IRS) examination. The execution of the tax planning strategies and the partial settlement of the IRS examination resulted in the realization of deferred tax assets, some of which had been partially reserved. The deferred tax provision was reduced by the release of these reserves; however, this reduction was offset by an increase in the current tax provision from these events. Accordingly, there was no net effect on the Corporation's earnings. During 1995, The Commonwealth of Massachusetts passed a law which reduces the state income tax rate for financial institutions from 12.5% to 10.5% to be phased in over five years, and permits apportionment of a bank's taxable income. Additionally, in 1995, the Corporation reached a favorable settlement of an outstanding Massachusetts tax matter relating to income earned on certain securities. These items did not have a significant effect on the Corporation's 1995 effective tax rate, since the reduction in the current tax provision from the tax law changes and the settlement were offset by the required reduction in FNBB's and BayBank, N.A.s net deferred tax assets resulting from the tax law changes. It is expected that the Corporation's deferred tax assets at December 31, 1995 will be realized from the reversal of existing deferred tax liabilities and from the recognition of future taxable income, without relying on tax planning strategies that the Corporation might not ordinarily follow. Domestic pre-tax income was $978 million in 1995, $782 million in 1994 and $394 million in 1993. Foreign pre-tax income, defined as income generated from operations that are located outside the United States, was $229 million in 1995, $178 million in 1994 and $125 million in 1993. 20. 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 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 involve, to varying degrees, credit risk and market risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to the terms of the contract. Market risk is the effect of a change in interest rates or currency rates on the value of a financial instrument. The notional amount of interest rate derivatives 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, the notional amounts should not be taken as the measure of credit or market risk. F-41 Notes To Supplemental Financial Statements, Continued 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 the 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. Counterparty credit risk is also reduced through the use of master netting agreements. Such agreements provide for the offsetting of amounts receivable and payable under interest rate derivatives or foreign exchange contracts with the same counterparty. The market risk associated with interest rate derivatives and foreign exchange contracts is managed by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Interest rate derivatives utilized by the Corporation include futures and forwards, interest rate swaps and interest rate options. Futures and forward contracts 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 specific price. Risks on both types of agreements stem from market movements in the underlying securities' values and interest rates and from the ability of the counterparties to meet the terms of the contracts. The Corporation's counterparty risk for futures is limited, as the majority of these transactions are executed on organized 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 receive 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 all types of options are the exposure to current and the 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 transactions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contract. F-42 Notes To Supplemental Financial Statements , Continued The following is a summary of the Corporation's notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in its trading and asset and liability management (ALM) portfolios.
Trading Portfolio(1)(6) ALM Portfolio(1) ------------------------------ ---------------------------------- Notional Notional December 31, 1995 Amount Fair Value (2)(3)(5) Amount Fair Value (2)(3) Unrecognized(4) (in millions) Asset Liability Asset Liability Gain (Loss) Interest rate contracts Futures and forwards ............ $30,821 $ 12,558 $ 10 $ (89) Interest rate swaps ............. 9,169 $ 91 $ 80 5,852 $ 93 8 102 Interest rate options Purchased ...................... 3,411 9 3,968 119 2 Written or sold ................ 3,986 9 360 34 ------- ----- ----- -------- ------ ---- ----- Total interest rate contracts .... $47,387 $ 100 $ 89 $ 22,738 $ 212 $ 52 $ 15 ======= ===== ===== ======== ====== ==== ===== Foreign exchange contracts Spot and forward contracts ...... $13,254 $ 172 $ 167 $ 1,258 $ 3 $ 5 $ (2) Options purchased ............... 1,044 13 Options written or sold ......... 1,130 16 ------- ----- ----- -------- ------ ---- ----- Total foreign exchange contracts . $15,428 $ 185 $ 183 $ 1,258 $ 3 $ 5 $ (2) ======= ===== ===== ======== ====== ==== =====
Trading Portfolio(1)(6) ALM Portfolio(1) ------------------------------ ---------------------------------- Notional Notional December 31, 1995 Amount Fair Value (2)(3)(5) Amount Fair Value (2)(3) Unrecognized(4) (in millions) Asset Liability Asset Liability Gain (Loss) Interest rate contracts Futures and forwards ............ $17,272 $ 16,578 1 $ 36 Interest rate swaps ............. 12,604 $ 75 $ 40 3,735 $ 19 $ 225 (208) Interest rate options Purchased ...................... 4,251 55 7,710 39 49 Written or sold ................ 5,639 36 6,135 19 (17) ------- ----- ----- -------- ------ ---- ----- Total interest rate contracts .... $39,766 $ 130 $ 76 $ 34,158 $ 59 $ 244 $(140) ======= ===== ===== ======== ====== ==== ===== Foreign exchange contracts Spot and forward contracts ...... $17,241 $ 172 $ 186 $ 604 $ 2 $ 5 $ (4) Options purchased ............... 811 8 Options written or sold ......... 753 9 ------- ----- ----- -------- ------ ---- ----- Total foreign exchange contracts . $18,805 $ 180 $ 195 $ 604 $ 2 $ 5 $ (4) ======= ===== ===== ======== ====== ==== =====
(1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in other assets or other liabilities, as applicable. The majority of derivatives that are part of the ALM portfolio are accounted for on the accrual basis, and not carried at fair value. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) The credit exposure of interest rate derivatives and foreign exchange contracts is represented by the fair value of contracts reported in the "Asset" column. F-43 Notes To Supplemental Financial Statements , Continued (4) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts which have been terminated. Such amounts are recognized as an adjustment of yield over the period being managed. At December 31, 1995, there were $32 million of unrecognized gains and $2 million of unrecognized losses related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 32 months and 23 months, respectively. At December 31, 1994, unrecognized gains of $35 million related to terminated contracts were being amortized to net interest revenue over a weighted average period of 14 months. (5) The average asset and liability fair value amounts for interest rate contracts included in the trading portfolio for the years ended December 31, 1995 and 1994 were $99 million and $67 million, respectively, and $148 million and $83 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were $313 million and $313 million, respectively, for the year ended December 31, 1995, and $278 million and $283 million, respectively, for the year ended December 31, 1994. (6) Net trading gains or losses from interest rate derivatives and foreign exchange contracts are recorded in trading account profits and commissions and other income, respectively. Net trading gains from interest rate derivatives for the years ended December 31, 1995, 1994 and 1993 were $7 million, $7 million and $5 million, respectively. Net trading gains from foreign exchange activities, which include foreign exchange spot, forward and options contracts, for the years ended December 31, 1995, 1994 and 1993 were $60 million, $44 million and $47 million, respectively. Credit-Related Financial Instruments A commitment to extend credit is a legally binding agreement to lend to a customer 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 borrowing 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 Corporation'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 condition deteriorates or if the customer fails to meet certain covenants. Commitments 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 Corporation's customers. Standby letters of credit may be issued as credit enhancements for corporate customers' commercial paper, bond issuances by municipalities 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 primarily credit risks. Again, the Corporation's credit review and approval policies and practices are adhered to when evaluating issuances of standbys or guarantees for customers. Similar to commitments to extend credit, the Corporation may obtain various types of collateral, if deemed necessary, based upon the Corporation's credit evaluation. The following table summarizes the Corporation's credit-related financial instruments:
Years Ended December 31 1995 1994 (in millions) Fee-based or otherwise legally binding commitments to extend credit(1)................ $23,503 $22,992 Standby letters of credit, foreign office guarantees and similar instruments(2)................................. $ 2,315 $ 2,293 Commercial letters of credit.................... $ 1,399 $ 1,188
(1) Net of participations conveyed to others of $233 million in 1995 and $345 million in 1994. (2) Net of participations conveyed to others of $720 million in 1995 and $374 million in 1994. F-44 Notes To Supplemental Financial Statements , Continued 21. 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 economic characteristics, whose aggregate credit exposure is significant to the Corporation's total credit exposure. Consistent policies exist regarding the requirement for collateral security on asset based and real estate credits. Approximately 50% of the Corporation's business activity in 1995 and 1994 was with customers located within New England. Information with respect to the Corporation's overseas business activities and its geographic concentrations is included in Note 24. The Corporation's commitments to lend and loans collateralized by domestic commercial real estate properties were approximately $5 billion and $6 billion in 1995 and 1994, respectively, of which 80%, in both years, was related to properties in New England. Also, combined domestic credit exposure from consumer lending and credits secured by 1-4 family residential properties totaled $16 billion in both 1995 and 1994. There were no other significant concentrations of credit risk. 22. Lease Commitments Rental expense for leases of real estate and equipment is summarized below:
Years Ended December 31 1995 1994 1993 (in millions) Rental expense............................ $ 125 $ 118 $ 122 Less sublease rental income............... 11 13 14 ----- ----- ----- Net rental expense........................ $ 114 $ 105 $ 108 ===== ===== =====
The Corporation has obligations under noncancelable operating leases for real estate and equipment which 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 1996 through 2000 are $97 million, $82 million, $75 million, $68 million and $62 million, respectively, and $468 million for 2001 and later. Capital leases, the minimum rentals of which are included in the preceding amounts, are not significant. 23. Contingencies The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the normal course of business, including claims that borrowers or others have been damaged as a result of the lending practices of the Corporation's subsidiaries. Management, after reviewing all actions and proceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's financial statements. 24. Segment Information The Corporation operates within the financial services industry. The geographic segment information presented in the following table is provided to meet the requirements of SFAS No. 14, ''Financial Reporting for Segments of a Business Enterprise,'' and differs from the information used by the Corporation to manage its businesses. Certain revenues and expenses are allocated differently for this segment information than for the Corporation's management reporting. For example, revenues and expenses herein are allocated based on the domicile of the customer or service provider rather than to the business that earned or incurred those revenues or expenses, and certain corporate overhead expenses, which are allocated to business units, have not been allocated to the international segment for this presentation. This geographic segment information does not consider other factors, such as method of funding (i.e., local vs. non-local currency) or location of any cash collateral or guarantees. F-45 Notes To Supplemental Financial Statements, Continued As a result of the inter-relationships that exist within the Corporation's worldwide network, allocations of certain income and expense items are necessarily based on assumptions and subjective criteria. Estimates of interest costs charged to users of funds, stockholders' equity, and administrative and other expenses incurred by one area on behalf of another are allocated utilizing internal methodologies. The information presented is based on reporting assumptions in place at December 31, 1995.
Period Income End Years Ended December 31 Total Total Before Net Total (in millions) Revenue(1) Expense(1) Taxes(2) Income Assets 1995 International Latin America............................ $ 606 $ 433 $ 173 $ 98 $10,864 Europe................................... 91 62 29 17 1,891 Asia/Pacific............................. 65 36 29 16 1,095 All other regions........................ 2 7 (5) (3) 45 ---------- ---------- --------- --------- ------- Total International................... 764 538 226 128 13,895 Domestic...................................... 2,794 1,813 981 550 45,528 ---------- ---------- -------- -------- ------- Total................................. $ 3,558 $ 2,351 $ 1,207 $ 678 $59,423 ========== ========== ======== ======== ======= 1994 International Latin America......................... $ 480 $ 331 $ 149 $ 83 $ 7,822 Europe................................ 72 40 32 18 1,776 Asia/Pacific.......................... 55 39 16 9 973 All other regions..................... 14 11 3 2 337 ---------- ---------- -------- -------- ------- Total International................. 621 421 200 112 10,908 Domestic...................................... 2,451 1,680 771 430 44,503 ---------- ---------- -------- -------- ------- Total............................... $ 3,072 $ 2,101 $ 971 $ 542(3) $55,411 ========== ========== ======== ======== ======= 1993 International Latin America............................ $ 364 $ 265 $ 99 $ 56 $ 6,630 Europe................................... 60 47 13 7 1,546 Asia/Pacific............................. 49 51 (2) (1) 976 All other regions........................ 19 23 (4) (3) 234 ---------- ---------- -------- --------- ------- Total International................. 492 386 106 59 9,386 Domestic...................................... 2,222 1,723 499 308 41,325 ---------- ---------- -------- -------- ------- Total............................... $ 2,714 $ 2,109 $ 605 $ 367(4) $ 50,711 ========== ========== ======== ======== =======
(1) Total revenue includes net interest revenue and noninterest income. Total expense includes the provision for credit losses and noninterest expense. (2) Excludes extraordinary item and cumulative effect of changes in accounting principles. (3) Includes a $7 million extraordinary loss, net of tax, from early extinguishment of debt that, for purposes of this analysis, has been allocated to domestic. (4) Includes a $24 million cumulative effect of a change in accounting, net of tax, for PMSR and income taxes that, for purposes of this analysis, have both been allocated to domestic. F-46 Notes To Supplemental Financial Statements, Continued 25. Parent Company Supplemental Condensed Financial Statements The following is a supplemental condensed balance sheet of the Corporation (Parent Company only):
December 31 1995 1994 (in millions) Assets Cash and short-term investments in bank subsidiary................................... $ 119 $ 205 Advances to subsidiaries Bank subsidiaries............................ 19 36 Nonbank subsidiaries......................... 437 217 Subordinated notes receivable from bank subsidiary................................... 580 580 Investments in subsidiaries Bank subsidiaries............................ 4,635 4,250 Nonbank subsidiaries......................... 161 137 Other assets................................... 47 43 ------ ------ Total Assets.............................. $5,998 $5,468 ====== ====== Liabilities and Stockholders' Equity Notes payable.................................. $1,269 $1,514 Other liabilities.............................. 27 23 ------ ------ Total liabilities............................ 1,296 1,537 ------ ------ Total stockholders' equity................... 4,702 3,931 ------ ------ Total Liabilities and Stockholders' Equity.................... $5,998 $5,468 ====== ====== The following is a supplemental condensed statement of income of the Corporation (Parent Company only): Years Ended December 31 1995 1994 1993 (in millions) Operating Income Dividends from subsidiaries Bank subsidiaries(1)......................... $ 391 $ 125 $ 24 Nonbank subsidiaries......................... 15 30 Interest from subsidiaries Bank subsidiaries............................ 59 46 37 Nonbank subsidiaries......................... 25 9 3 Noninterest income............................. 9 ------ ------ ------ Total operating income..................... 499 210 64 ------ ------ ------ Operating Expense Interest expense............................... 92 79 51 Other expense, net............................. 6 5 4 ------ ------ ------ Total operating expense.................... 98 84 55 ------ ------ ------ Income before income taxes, equity in undistributed net income of subsidiaries and cumulative effect of change in accounting principle............... 401 126 9 Provision for (Benefit from) income taxes........................................ 2 (11) (6) ------ ------ ------ Income before equity in undistributed net income of subsidiaries and cumulative effect of change in accounting principle............... 399 137 15 Equity in undistributed net income of subsidiaries................................. 279 405 354 ------ ------ ------ Income before cumulative effect of change in accounting principle............... 678 542 369 Cumulative effect of change in accounting for income taxes.................. (2) ------ ------ ------ Net Income..................................... $ 678 $ 542 $ 367 ====== ====== ======
(1) Dividends in 1995 included $205 million from a subsidiary bank holding company in connection with the sale of Casco. F-47 Notes To Supplemental Financial Statements, Continued The following is a supplemental condensed statement of cash flows of the Corporation (Parent Company only):
Years Ended December 31 1995 1994 1993 (in millions) Cash Flows from Operating Activities Net income.................................... $ 678 $ 542 $ 367 Reconciliation of net income to net cash provided from (used for) operating activities Cumulative effect of change in accounting for income taxes................ 2 Equity in undistributed net income of subsidiaries............................ (279) (405) (354) Gain on sale of subsidiary.................. (8) Other, net.................................. 1 (13) (9) ----- ----- ----- Net cash provided from (used for) operating activities..................... 392 124 6 ----- ----- ----- Cash Flows from Investing Activities Net cash provided from short-term investments in banking subsidiary............ 86 1 81 Net cash provided from (used for) advances to subsidiaries..................... (203) 37 (149) Investments in subsidiaries................... (12) (39) (299) Proceeds on sale of subsidiary................ 92 Purchase of subordinated note receivable from bank subsidiary.............. (180) ----- ----- ----- Net cash used for investing activities............................... (37) (181) (367) ----- ----- ----- Cash Flows from Financing Activities Repayments/repurchases of notes payable....... (150) (189) (88) Net proceeds from issuance of notes payable...................................... 400 449 Net proceeds from issuance of common stock........................................ 70 40 24 Net proceeds from issuance of preferred stock........................................ 68 Purchases of treasury stock................... (53) (29) (1) Dividends paid................................ (221) (166) (90) ----- ----- ----- Net cash provided from (used for) financing activities..................... (354) 56 362 ----- ----- ----- Net change in cash and due from banks......... 1 (1) 1 Cash and due from banks at January 1.......... 1 ----- ----- ----- Cash and due from banks at December 31........ $ 1 $ $ 1 ===== ===== ===== Interest payments made........................ $ 90 $ 73 $ 46 Income tax payments made (refunds received).................................... $ 5 $ (8) $ (2)
26. 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 rate 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 relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets 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 Corporation's financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer. F-48 Notes To Supplemental Financial Statements, Continued Where available, quoted market prices are used to estimate fair values. However, due to the nature of the Corporation's financial instruments, in many instances quoted market prices are not available. Accordingly, the Corporation has estimated fair values based on other valuation techniques, such as discounting 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 transaction 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 instruments will change. Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations for pensions and other postretirement benefits, premises and equipment, OREO, prepaid expenses, PMSR, core deposit intangibles and other customer relationships, other intangible assets and income tax assets and liabilities. Accordingly, 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 because 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, Funds Borrowed, Due from Customers on Acceptances and Acceptances Outstanding These items are generally short-term in nature and, accordingly, the carrying amounts reported in the balance sheet are reasonable approximations of their fair values. Trading Securities Trading securities are carried at fair value in the balance sheet. Such values are generally based on quoted market prices. Mortgages Held for Sale Fair values are based on the estimated value at which the loans could be sold in the secondary market. The fair value of commitments to issue mortgage loans, net of forward contracts to sell mortgage loans, is included as part of the disclosure of off-balance-sheet financial instruments. Securities Available for Sale and Securities Held to Maturity Fair values are principally based on quoted market prices. For certain debt and equity investments made in connection with the Corporation's equity and mezzanine financing business that do not trade on established exchanges and for which markets 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 market sources. The fair value of accruing home equity loans is estimated using comparable market information adjusted for credit and other relevant characteristics. 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 management'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 interest receivable approximates its fair value. Financial instruments classified as other assets subject to the disclosure requirements of the standard consist principally of accounts receivable, EMSR, investments in limited partnerships and, in 1994, ADP. 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. The fair value of EMSR is based on the present value of expected future cash flows and the estimated servicing life. Estimates of fair value of investments in limited partnerships are based upon management's review of the investee's financial results, condition and prospects. The carrying amount of real estate assets held for accelerated disposition approximates fair value, as such assets are carried at the lower of their value upon transfer to the portfolio or their current estimated disposition value. Deposits The fair values of deposits subject to immediate withdrawal, such as interest and noninterest bearing checking, passbook savings and money market deposit accounts, are equal to their carrying amounts. The carrying amounts for variable rate certificates of deposit and other time deposits approximate their 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 accrued 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 secondary market prices and does not include the fair values of related interest rate swap agreements, which are presented separately. F-49 Notes To Supplemental Financial Statements, Continued Foreign Exchange Rate and Interest Rate Financial Instruments The fair values of foreign exchange rate and interest rate contracts, including contracts used to manage interest rate, currency and market risks, are estimated based on market information adjusted for credit and other relevant characteristics using pricing models, including option models. Other Unrecognized Financial Instruments The fair value of commitments to extend 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. F-50 Notes To Supplemental Financial Statements, Continued The following table sets forth the estimated fair values of the Corporation's financial instruments:
December 31 1995 1994 Estimated Estimated Carrying Fair Carrying Fair (in millions) Amount Value Amount Value Assets Cash and due from banks.................. $ 3,561 $ 3,561 $ 3,146 $ 3,146 Interest bearing deposits in other banks................................... 1,356 1,356 1,559 1,559 Federal funds sold and securities purchased under agreements to resell.... 1,548 1,548 1,323 1,323 Trading securities....................... 1,159 1,159 581 581 Mortgages held for sale.................. 910 919 188 189 Securities(1) Available for sale..................... 7,582 7,658 3,262 3,332 Held to maturity....................... 660 667 4,238 4,086 Loans.................................... 37,176 36,013 Reserve for credit losses(2)............. (890) (827) ------- ------- 36,286 37,415 35,186 35,861 Due from customers on acceptances........ 360 360 316 316 Accrued interest receivable.............. 554 554 437 437 Financial instruments included in other assets.................................. 611 700 838 866 Liabilities Deposits................................. 41,064 41,117 40,249 40,207 Funds borrowed........................... 9,503 9,503 7,211 7,211 Acceptances outstanding.................. 360 360 318 318 Financial instruments included in accrued expenses and other liabilities.. 537 537 645 645 Notes payable............................ 2,189 2,255 2,219 2,107 Interest Rate Contracts(3) Trading Asset.................................. 100 130 Liability.............................. (89) (76) Asset and liability management Asset.................................. 212 59 Liability.............................. (52) (244) Foreign Exchange Contracts(3) Trading Asset.................................. 185 180 Liability.............................. (183) (195) Asset and liability management Asset.................................. 3 2 Liability.............................. (5) (5) Other Unrecognized Financial Instruments Fee based or otherwise legally binding commitments to extend credit............ (59) (37) Standby and commercial letters of credit, foreign office guarantees and similar instruments..................... (32) (50)
(1) Securities include investments made in connection with the Corporation's equity and mezzanine financing business that do not trade on established exchanges, and for which no markets exist. At December 31, 1995 and 1994, these investments were classified as securities available for sale, and their estimated fair values exceeded the related carrying amounts by $76 million and $70 million, respectively. (2) The reserve for credit losses is established for future charge-offs arising from all extensions of credit. The Corporation has not made a specific allocation of the reserve to other instruments such as leases, commitments to extend credit, standby letters of credit and interest rate contracts. Accordingly, a separate determination of the reserve allocable to loans has not been made. F-51 Notes To Supplemental Financial Statements, Continued (3) Additional information with respect to interest rate and foreign exchange contracts can be found in Note 20 to the Supplemental Financial Statements. The Corporation's accounting policy related to such instruments is discussed in Note 1 to the Supplemental Financial Statements. F-52 SUPPLEMENTAL STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The supplemental information set forth below is provided in accordance with the Securities Exchange Act of 1934, Industry Guide 3. Bank of Boston Corporation Supplemental Average Balances and Interest Rates, Taxable Equivalent Basis (dollars in millions) Year Ended December 31, 1995
Average Interest(1) Average Balance Rate Assets Interest bearing deposits in other banks U.S. $ 253 $ 15 5.98% International.................................................... 1,087 206 18.91 ------- ------ Total........................................................ 1,340 221 16.48 ------- ------ ----- Federal funds sold and resale agreements U.S. 537 32 5.89 International.................................................... 649 271 41.77 ------- ------ Total........................................................ 1,186 303 25.51 ------- ------ ----- Trading securities U.S. 245 15 5.85 International.................................................... 602 171 28.45 ------- ------ Total........................................................ 847 186 21.91 ------- ------ ----- Loans held for sale U.S.(2).......................................................... 448 31 6.98 ------- ------ ----- Securities U.S. Available for sale(3)........................................ 3,002 211 7.07 Held to maturity............................................. 3,836 230 5.99 International Available for sale(3)........................................ 422 64 13.36 Held to maturity............................................. 203 16 7.66 ------- ------ Total........................................................ 7,463 521 6.98 ------- ------ ----- Loans and lease financing U.S. 30,367 2,701 8.90 International.................................................... 7,916 1,178 14.88 ------- ------ Total(4)..................................................... 38,283 3,879 10.13 ------- ------ ----- Total earning assets.............................................. 49,567 5,141 10.37 ------ ----- Nonearning assets................................................. 6,177 ------- Total assets(5).............................................. $55,744 ======= Liabilities and Stockholders' Equity Deposits U.S. Savings deposits.............................................. $14,359 $ 382 2.66% Time deposits................................................. 9,288 520 5.60 International Banks in foreign countries.................................... 2,257 145 6.42 Other foreign savings and time................................ 5,804 744 12.82 ------- ------ Total......................................................... 31,708 1,791 5.65 ------- ------ ----- Federal funds purchased and repurchase agreements U.S. 4,322 237 5.48 International..................................................... 189 45 23.60 ------- ------ Total......................................................... 4,511 282 6.24 ------- ------ ----- Other funds borrowed U.S. 3,730 236 6.34 International..................................................... 891 403 45.16 ------- ------ Total......................................................... 4,621 639 13.83 ------- ------ ----- Notes payable U.S. 1,932 135 7.02 International..................................................... 210 23 10.87 ------- ------ Total......................................................... 2,142 158 7.40 ------ ----- Total interest bearing liabilities................................. 42,982 2,870 6.68 ------ ----- Demand deposits-U.S................................................ 6,242 Demand deposits-International...................................... 456
F-53 Other noninterest bearing liabilities.............................. 1,760 Stockholders' equity............................................... 4,304 ------- Total liabilities and stockholders' equity(5)................. $55,744 ======= Net Interest Revenue as a Percentage of Average Interest Earning Assets U.S. $38,688 $1,825 4.72% International..................................................... 10,879 446 4.10% ------- ------ Total......................................................... $49,567 $2,271 4.58% ======= ======
(1) Income is shown on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Average rates for securities available for sale are based on the securities' amortized cost. (4) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $62 million. (5) As of December 31, 1995, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respectively, amounted to 22%. F-54 Bank of Boston Corporation Supplemental Average Balances and Interest Rates, Taxable Equivalent Basis (dollars in millions) Year Ended December 31, 1994
Average Interest(1) Average Balance Rate Assets Interest bearing deposits in other banks U.S. $ 195 $ 7 3.69% International....................................................... 864 109 12.54 ------- ------ Total........................................................... 1,059 116 10.91 ------- ------ ----- Federal funds sold and resale agreements U.S. 1,421 58 4.06 International....................................................... 1,255 547 43.62 ------- ------ Total........................................................... 2,676 605 22.61 ------- ------ ----- Trading securities U.S. 178 9 5.45 International....................................................... 398 105 26.26 ------- ------ Total........................................................... 576 114 19.84 ------- ------ ----- Loans held for sale U.S.(2)............................................................. 716 45 6.33 ------- ------ ----- Securities U.S. Available for sale(3)........................................... 1,943 119 6.13 Held to maturity................................................ 3,992 208 5.21 International Available for sale(3)........................................... 332 47 14.63 Held to maturity................................................ 206 17 8.12 ------- ------ Total........................................................... 6,473 391 6.05 ------- ------ ----- Loans and lease financing U.S. 29,265 2,301 7.86 International....................................................... 6,752 819 12.14 ------- ------ Total(4)........................................................ 36,017 3,120 8.66 ------- ------ ----- Total earning assets................................................. 47,517 4,391 9.24 ------ ----- Nonearning assets.................................................... 5,872 ------- Total assets(5)................................................. $53,389 ======= Liabilities and Stockholders' Equity Deposits U.S. Savings deposits................................................ $15,139 $ 307 2.03% Time deposits................................................... 8,617 383 4.44 International Banks in foreign countries...................................... 2,118 277 13.09 Other foreign savings and time.................................. 5,062 334 6.60 ------- ------ Total........................................................... 30,936 1,301 4.21 ------- ------ ----- Federal funds purchased and repurchase agreements U.S. 4,274 168 3.94 International....................................................... 203 65 31.96 ------- ------ Total........................................................... 4,477 233 5.21 ------- ------ ----- Other funds borrowed U.S. 2,361 120 5.05 International....................................................... 1,180 553 46.87 ------- ------ Total........................................................... 3,541 673 18.98 ------- ------ ----- Notes payable U.S. 1,996 119 5.98 International....................................................... 127 13 10.36 ------- ------ Total........................................................... 2,123 132 6.25 ------- ------ ----- Total interest bearing liabilities................................... 41,077 2,339 5.69 ------ ----- Demand deposits-U.S.................................................. 6,536 Demand deposits-International........................................ 447 Other noninterest bearing liabilities................................ 1,563 Stockholders' equity................................................. 3,766 ------- Total liabilities and stockholders' equity(5)................... $53,389 ======= Net Interest Revenue as a Percentage of Average Interest Earning Assets U.S. $37,711 $1,704 4.52% International....................................................... 9,806 348 3.54% ------- ------ Total........................................................... $47,517 $2,052 4.32% ======= ======
(1) Income is shown on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Average rates for securities available for sale are based on the securities' amortized cost. (4) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $58 million. (5) As of December 31, 1994, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respectively, amounted to 21%. F-55 Bank of Boston Corporation Change in Net Interest Revenue--Supplemental Volume and Rate Analysis The following tables present, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes for 1995 compared with 1994. The change due to the volume/rate variance has been allocated to volume.
1995 Compared with 1994 Increase (Decrease) Due to Change in (in millions) Volume Rate Net Change Earning Assets Interest bearing deposits in other banks U.S............................................. $ 4 $ 4 $ 8 International................................... 42 55 97 ----- 105 ----- Federal funds sold and resale agreements U.S............................................. (52) 26 (26) International................................... (253) (23) (276) ----- (302) ----- Trading securities U.S............................................. 5 1 6 International................................... 58 8 66 ----- 72 ----- Loans held for sale U.S............................................. (19) 5 (14) ----- Securities U.S............................................. 62 52 114 International................................... 11 5 16 ----- 130 ----- Loans and lease financing U.S............................................. 97 303 400 International................................... 173 186 359 ----- 759 ----- Interest income.................................. 213 537 750 ----- Interest Bearing Liabilities Deposits U.S. savings.................................... (20) 95 75 U.S. time....................................... 37 100 137 International................................... 97 181 278 ----- 490 ----- Federal funds purchased and repurchase agreements U.S............................................. 3 66 69 International................................... (3) (17) (20) ----- 49 ----- Other funds borrowed U.S............................................. 85 31 116 International................................... (130) (20) (150) ----- (34) ----- Notes payable U.S............................................. (5) 21 16 International................................... 9 1 10 ----- 26 ----- Interest expense................................. 119 412 531 ----- Net interest revenue............................. $ 219 =====
F-56 SECURITIES The following table sets forth the amortized cost of securities held to maturity for the years indicated:
December 31 1995 1994 1993 (In millions) U.S. Treasury $ 4 $ 2,146 $ 1,520 U.S. government agencies and corporations - Mortgage-backed securities 523 1,449 1,046 States and political subdivisions 5 201 158 Foreign debt securities 11 123 109 Other debt securities 200 205 Other equity securities 117 119 70 ----- ----- ----- $ 660 $ 4,238 $ 3,108 ===== ===== =====
The following table sets forth the carrying values of securities available for sale for the years indicated:
December 31 1995 1994 1993 (In millions) U.S. Treasury $ 2,591 $ 1,487 $ 436 U.S. government agencies and corporations - Mortgage-backed securities 3,037 766 530 States and political subdivisions 248 9 19 Foreign debt securities 685 384 490 Other debt securities 334 142 150 Marketable equity securities 222 144 74 Other equity securities 465 330 372 ----- ----- ----- $ 7,582 $ 3,262 $ 2,071 ===== ===== =====
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, 1995, excluding equity securities. Certain securities, such as mortgage- backed securities, may not become due at a single maturity. Such securities have been classified within the category that represents 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.
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 $ 1,422 5.4% $ 1,066 6.6% $ 54 5.3% $ 49 6.3% $ 2,591 5.9% U.S. government agencies and corporations - Mortgage-backed securities 29 5.4 944 7.0 790 7.0 1,274 6.3 3,037 6.7 State and political subdivisions 129 6.3 60 3.6 59 4.2 248 5.2 Foreign debt securities 233 8.1 337 13.7 100 12.8 15 11.1 685 11.6 Other debt securities 31 12.3 111 9.7 187 10.3 5 9.9 334 10.3 ----- ----- ----- ----- ----- Total carrying value $ 1,844 6.0 $ 2,518 7.7 $ 1,190 7.7 $ 1,343 6.3 $ 6,895 7.0 ===== ===== ===== ===== =====
F-57
After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Tears Total Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate HELD TO MATURITY (Dollars in millions) U.S. Treasury $ 4 5.4% $ 4 5.4 % U.S. government agencies and corporations - Mortgage-backed $ 110 6.5 % $ 197 7.1% $ 216 6.1% 523 6.5 securities State and political subdivisions 5 3.4 5 3.4 Foreign debt securities 2 6.9 5 5.6 3 6.8 1 7.7 11 6.3 ------- ----- --- --- ---- Total amortized cost $ 11 4.9 $ 115 6.4 $ 200 7.1 $ 217 6.1 $ 543 6.5 ======= ===== === === ====
SELECTED LOAN MATURITIES AND SENSITIVITY 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, 1995, 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 Within Five Five (In millions) One Years Years Total Year Commercial, industrial and financial $ 6,227 $ 4,479 $ 2,297 $ 13,003 Real estate: Construction 222 141 21 384 Other commercial 1,283 1,691 389 3,363 Overseas offices 7,246 905 190 8,341 ------ ----- ----- ------ $ 14,978 $ 7,216 $ 2,897 $ 25,091 ------ ----- ----- ------ Loans with predetermined interest rates $ 3,992 $ 2,259 $ 600 $ 6,851 Loans with floating interest rates 10,986 4,957 2,297 18,240 ------ ----- ----- ------ $ 14,978 $ 7,216 $ 2,897 $ 25,091 ====== ===== ===== ======
SELECTED DEPOSIT DATA The aggregate amount of deposits by foreign depositors in domestic offices averaged $1,131 million in 1995, $863 million in 1994 and $876 million in 1993. 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, 1995:
Certificates Time of Deposit Deposits Total (In millions) Maturing within three months $ 1,054 $ 22 $ 1,076 After three but within six months 232 8 240 After six but within twelve months 171 6 177 After twelve months 848 61 909 ----- ----- ----- $ 2,305 $ 97 $ 2,402 ===== ===== =====
The majority of foreign office deposits are in denominations of $100,000 or more. F-58 SHORT-TERM BORROWINGS The following table summarizes the Corporation's short-term borrowings for the three years ended December 31, 1995:
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 Aggregage Short-Term Borrowings Period Rate (1) Period Period Period For the Year Ended December 31, 1995 Federal funds purchased (2) $ 1,869 5.25% $ 1,920 $ 1,119 5.86% Term federal funds purchased (2) 870 5.80 2,058 1,409 5.16 Securities sold under agreements to repurchase (3) 1,688 6.24 2,935 1,983 7.31 Demand notes issued to the U.S. Treasury (5) 361 4.85 1,051 406 5.75 All other (6) 2,511 13.37 3,724 3,006 17.31 For the Year Ended December 31, 1994 Federal funds purchased (2) $ 416 5.51% $ 1,240 $ 763 4.28% Term federal funds purchased (2) 765 5.77 2,504 1,793 3.62 Securities sold under agreements to repurchase (3) 2,680 5.86 2,950 1,921 7.05 Demand notes issued to the U.S. Treasury (5) 395 4.63 1,060 329 4.34 All other (6) 2,734 18.44 3,807 2,895 17.36 For the Year Ended December 31, 1993 Federal funds purchased (2) $ 471 3.00% $ 872 $ 773 2.99% Term federal funds purchased (2) 2,150 3.36 2,325 1,284 3.34 Securities sold under agreements to repurchase (3) 1,247 5.43 1,450 907 4.25 Commercial paper (4) 35 15 3.59 Demand notes issued to the U.S. Treasury (5) 123 2.73 1,219 404 2.78 All other (6) 1,164 24.77 1,171 708 8.42
(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 borrowing are subject to abnormal short-term movements. (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) Securities sold under agreements to repurchase by domestic offices mature within one year and are collateralized by U.S. Treasury and U.S. government agencies and corporations securities. The majority of securities sold under agreements to repurchase by overseas offices in 1995, 1994 and 1993 related to Brazilian operations of FNBB for which various Brazilian government securities served as collateral. (4) Commercial paper represents unsecured obligations with maximum maturities of nine months. (5) 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. (6) The majority of other short-term borrowings represent secured and unsecured obligations of the Corporation's overseas branches and subsidiaries. NONACCRUAL LOANS AND LEASES 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 - ------------------------------------------------------------------------------------ (In Millions) 1995 1994 1993 1992 1991 Loans and leases over ninety days past due and on accrual status $56 $49 $59 $98 $120 - ------------------------------------------------------------------------------------
F-59 ALLOCATION OF RESERVE FOR CREDIT LOSSES 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 presented in the Corporation's 1995 Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Current Report on Form 8-K, and such information is incorporated herein by reference.
(DOLLARS IN MILLIONS) DECEMBER 31 1995 1994 1993 1992 1991 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............. $221 24.8% $284 34.3% $290 30.8% $ 340 30.4% $ 518 41.0% Commercial real estate, including construction..... 158 17.8 194 23.5 300 31.9 394 35.3 367 29.0 Consumer related loans Secured by 1-4 family residential properties.... 36 4.0 34 4.1 47 5.0 49 4.4 44 3.5 Other...................... 131 14.7 104 12.6 97 10.3 89 8.0 110 8.7 Lease financing............ 22 2.5 21 2.5 18 1.9 4 .4 5 .4 ---- ----- ---- ----- ---- ----- ------ ----- ------ ----- 568 63.8 637 77.0 752 79.9 876 78.5 1,044 82.6 International 171 19.2 99 12.0 89 9.5 121 10.8 103 8.1 ---- ----- ---- ----- ---- ----- ------ ----- ------ ----- 739 83.0 736 89.0 841 89.4 997 89.3 1,147 90.7 Unallocated................ 151 17.0 91 11.0 100 10.6 119 10.7 117 9.3 ---- ----- ---- ----- ---- ----- ------ ----- ------ ----- $890 100.0% $827 100.0% $941 100.0% $1,116 100.0% $1,264 100.0% ==== ===== ==== ===== ==== ===== ====== ===== ====== =====
RENEGOTIATED LOANS Loans are renegotiated when the Corporation determines that it will ultimately receive greater economic value by revising the terms than through foreclosure, liquidation or bankruptcy. Candidates for renegotiation must meet specific guidelines and undergo extensive due diligence reviews. Once a renegotiation takes place, the loan is subject to the accounting and disclosure rules prescribed by SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Renegotiated loans at the end of each of the last five years were as follows:
DECEMBER 31 1995 1994 1993 1992 1991 (DOLLARS IN MILLIONS) Renegotiated loans......... $ 33 $ 82 $ 243 $ 413 $ 392 ===== ===== ===== ===== =====
F-60 BANK OF BOSTON CORPORATION SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEET (IN MILLIONS)
JUNE 30, 1996 DECEMBER 31, 1995 -------------- ----------------- (Unaudited) ASSETS Cash and due from banks $ 3,307 $ 3,561 Interest bearing deposits in other banks 1,192 1,356 Federal funds sold and securities purchased under agreements to resell 2,516 1,548 Trading account securities 1,732 1,159 Mortgages held for sale 23 910 Securities available for sale 8,459 7,582 Securities held to maturity 686 660 Loans and leases 40,653 38,870 Reserve for credit losses (894) (890) Premises and equipment 856 832 Due from customers on acceptances 473 360 Accrued interest receivable 555 554 Other assets 2,829 2,921 ------- ------- Total assets $62,387 $59,423 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $43,494 $41,064 Funds borrowed 9,215 9,503 Acceptances outstanding 473 360 Accrued expenses and other liabilities 1,611 1,605 Notes payable 2,632 2,189 ------- ------- Total liabilities 57,425 54,721 ------- ------- Stockholders' equity: Preferred stock 508 508 Common stock 235 350 Surplus 1,389 1,235 Retained earnings 2,785 2,553 Net unrealized gain on securities available for sale, net of tax 51 82 Treasury stock (22) Cumulative translation adjustments, net of tax (6) (4) ------- ------- Total stockholders' equity 4,962 4,702 ======= ======= Total liabilities and stockholders' equity $62,387 $59,423 ======= =======
The accompanying notes are an integral part of these supplemental financial statements. F-61 BANK OF BOSTON CORPORATION SUPPLEMENTAL UNAUDITED CONDENSED COMBINED STATEMENT OF INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------- ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- INTEREST INCOME Loans and lease financing, including fees $ 937 $ 962 $ 1,915 $ 1,857 Securities 139 124 277 238 Trading securities 52 44 93 85 Mortgages held for sale 1 5 18 9 Federal funds sold and securities purchased under agreements to resell 45 95 88 199 Deposits in other banks 28 67 52 132 ------- ------- ------- ------- Total interest income 1,202 1,297 2,443 2,520 ------- ------- ------- ------- INTEREST EXPENSE Deposits of domestic offices 228 214 461 404 Deposits of overseas offices 198 258 385 479 Funds borrowed 159 229 370 452 Notes payable 46 39 90 79 ------- ------- ------- ------- Total interest expense 631 740 1,306 1,414 ------- ------- ------- ------- NET INTEREST REVENUE 571 557 1,137 1,106 Provision for credit losses 57 46 114 143 ------- ------- ------- ------- Net interest revenue after provision for credit losses 514 511 1,023 963 ------- ------- ------- ------- NONINTEREST INCOME Financial service fees 135 156 187 303 Trust and agency fees 62 63 119 121 Trading profits and commissions 25 7 38 9 Net securities gains 4 17 6 Other income 157 66 307 198 ------- ------- ------- ------- Total noninterest income 383 292 668 637 ------- ------- ------- -------
NONINTEREST EXPENSE Salaries 244 231 485 458 Employee benefits 49 51 101 101 Occupancy expense 50 47 101 94 Equipment expense 34 33 68 66 Other expense 155 150 304 294 ------- ------- ------- ------- Total noninterest expense 532 512 1,059 1,013 ------- ------- ------- ------- Income before income taxes 365 291 632 587 Provision for income taxes 151 123 263 264 ------- ------- ------- ------- NET INCOME $ 214 $ 168 $ 369 $ 323 ======= ======= ======= ======= NET INCOME APPLICABLE TO COMMON STOCK $ 205 $ 159 $ 350 $ 304 ======= ======= ======= ======= PER COMMON SHARE Net income Primary $ 1.33 $ 1.03 $ 2.27 $ 2.01 Fully diluted $ 1.32 $ 1.02 $ 2.24 $ 1.96 Dividends declared $ .44 $ .27 $ .81 $ .54 AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS) Primary 153,650 153,877 154,318 151,777 Fully diluted 155,183 155,529 156,018 155,248
The accompanying notes are an integral part of these supplemental financial statements. F-62 BANK OF BOSTON CORPORATION NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS 1. The accompanying interim supplemental consolidated financial statements of Bank of Boston Corporation (the Corporation) are unaudited. However, in the opinion of management, they contain the adjustments (all of which are normal and recurring in nature) necessary to present fairly financial position and results of operations. These interim supplemental consolidated financial statements should be read in conjunction with the notes to the supplemental financial statements included elsewhere in this Current Report, and the Corporation's Quarterly Report on Form 10-Q for the Quarterly Period Ending June 30, 1996. 2. The accompanying interim supplemental consolidated financial statements have been prepared on a pooling-of-interests basis to give retroactive effect to the Corporation's acquisition of BayBanks, Inc. on July 29, 1996. Certain prior period amounts have been reclassified for comparative purposes. F-63 Schedule B BANK OF BOSTON CORPORATION UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following Unaudited Pro Forma Combined Financial Information combines the historical Consolidated Financial Statements of the Corporation and BayBanks, giving effect to the merger as if it had been effective on June 30, 1996, with respect to the Pro Forma Combined Balance Sheet, and as of the beginning of the periods indicated herein, with respect to the Pro Forma Combined Statements of Income. The merger is accounted for as a pooling of interests. This information should be read in conjunction with the historical consolidated financial statements of the Corporation and BayBanks, including their respective notes thereto. The effect of anticipated merger and restructuring costs has been reflected in the pro forma combined balance sheet; however, since the anticipated costs are nonrecurring, they have not been reflected in the pro forma combined statements of income. The pro forma financial information does not give effect to any anticipated costs savings in connection with the merger. The pro forma combined balance sheet is not necessarily indicative of the actual financial position that would have existed had the merger been consummated on June 30, 1996 or that may exist in the future. The pro forma combined statements of income are not necessarily indicative of the results that would have occurred had the merger been consummated on the dates indicated or that may be achieved in the future. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996
PRO FORMA PRO FORMA CORPORATION BAYBANKS(1) ADJUSTMENTS(1) COMBINED ----------- ---------- -------------- -------- (IN MILLIONS) ASSETS Cash and due from banks $ 2,351 $ 956 $ 3,307 Interest bearing deposits in other banks 1,191 1 1,192 Federal funds sold and securities purchased under agreements to resell 2,166 350 2,516 Securities held to maturity 633 53 686 Securities available for sale 6,430 2,029 8,459 Trading account securities 1,649 83 1,732 Mortgages held for sale 23 23 Loans and leases 32,885 7,768 40,653 Reserve for credit losses (744) (150) (894) Premises and equipment 647 209 856 Due from customers on acceptances 472 1 473 Accrued interest receivable 475 80 555 Other assets 2,675 154 2,829 ------- ------- ------- Total assets $50,830 $11,557 $62,387 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $33,305 $10,189 $43,494 Funds borrowed 8,856 359 9,215 Acceptances outstanding 472 1 473 Other liabilities 1,605 6 $83 (2) 1,694 Notes payable 2,632 2,632 ------- ------- ----- ------- Total liabilities 46,870 10,555 83 57,508 ------- ------- ----- ------- Stockholders' equity: Preferred stock 508 508 Common stock 170 40 25 (3) 235 Surplus 1,043 371 (25) (3) 1,389 Retained earnings 2,198 587 (83) (2) 2,702 Net unrealized gain on securities available for sale 47 4 51 Cumulative translation adjustments (6) (6) ------- ----- ----- ------- Total stockholders' equity 3,960 1,002 (83) 4,879 ------- ------- ----- ------- Total liabilities and stockholders' equity $50,830 $11,557 $62,387 ======= ======= ===== =======
See Notes to Unaudited Pro Forma Combined Financial Information F-64 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME SUMMARY
SIX MONTHS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ENDED YEARS ENDED DECEMBER 31, ------------------------ JUNE 30, 1996 1995 1994 1993 ------------- ---- ---- ---- INTEREST INCOME: Loans and lease financing, including fees $ 1,915 $ 3,876 $ 3,117 $ 2,588 Securities 370 689 494 360 Mortgages held for sale 18 31 43 85 Federal funds sold and securities purchased under agreements to resell 88 303 605 147 Deposits in other banks 52 220 117 150 -------- -------- -------- -------- Total interest income 2,443 5,119 4,376 3,330 -------- -------- -------- -------- INTEREST EXPENSE: Deposits 846 1,791 1,301 1,177 Funds borrowed 370 921 906 268 Notes payable 90 158 132 116 -------- -------- -------- -------- Total interest expense 1,306 2,870 2,339 1,561 -------- -------- -------- -------- Net interest revenue 1,137 2,249 2,037 1,769 Provision for credit losses 114 275 154 107 -------- -------- -------- -------- Net interest revenue after provision for credit losses 1,023 1,974 1,883 1,662 -------- -------- -------- -------- NONINTEREST INCOME: Financial service fees 187 695 564 508 Trust and agency fees 119 240 222 198 Trading profits and commissions 38 25 18 26 Net securities gains 17 9 14 32 Other income 307 340 217 181 -------- -------- -------- -------- Total noninterest income 668 1,309 1,035 945 -------- -------- -------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 586 1,146 1,046 988 Occupancy and equipment expense 169 324 310 304 Other real estate owned expense 3 9 38 82 Acquisition and restructuring expense 28 21 85 Other expense 301 569 532 543 -------- -------- -------- -------- Total noninterest expense 1,059 2,076 1,947 2,002 -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change 632 1,207 971 605 Provision for income taxes 263 529 422 262 -------- -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 369 $ 678 $ 549 $ 343 ======== ======== ======== ======== PER COMMON SHARE: Income before extraordinary item and cumulative effect of accounting change: Primary $2.27 $4.17 $3.44 $ 2.09 Fully diluted 2.24 4.09 3.36 2.05 Average number of common shares (in thousands): Primary 154,318 153,856 148,913 147,033 Fully diluted 156,018 156,768 153,616 152,067
See Notes to Unaudited Pro Forma Combined Financial Information F-65 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA CORPORATION BAYBANKS(1) ADJUSTMENTS(1) COMBINED ----------- ----------- -------------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 1,580 $ 335 $ 1,915 Securities 305 65 370 Mortgages held for sale 16 2 18 Federal funds sold and securities purchased under agreements to resell 83 5 88 Deposits in other banks 52 52 -------- ------- -------- Total interest income 2,036 407 2,443 -------- ------- -------- INTEREST EXPENSE: Deposits 718 128 846 Funds borrowed 357 13 370 Notes payable 89 1 90 -------- ------- -------- Total interest expense 1,164 142 1,306 -------- ------- -------- Net interest revenue 872 265 1,137 Provision for credit losses 100 14 114 -------- ------- -------- Net interest revenue after provision for credit losses 772 251 1,023 -------- ------- -------- NONINTEREST INCOME: Financial service fees 96 91 187 Trust and agency fees 106 13 119 Trading profits and commissions 37 1 38 Net securities gains 17 17 Other income 294 13 307 -------- ------- -------- Total noninterest income 550 118 668 -------- ------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 456 130 586 Occupancy and equipment expense 126 43 169 Other expense 229 75 304 -------- ------- -------- Total noninterest expense 811 248 1,059 -------- ------- -------- Income before income taxes 511 121 632 Provision for income taxes 216 47 263 -------- ------- -------- NET INCOME $ 295 $ 74 $ 369 ======== ======= ======== PER COMMON SHARE: Net income: Primary $2.50 $3.71 $2.27 Fully diluted 2.46 3.71 2.24 Average number of common shares (in thousands): Primary 110,380 19,972 154,318 Fully diluted 112,064 19,979 156,018
See Notes to Unaudited Pro Forma Combined Financial Information F-66 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA CORPORATION BAYBANKS(1) ADJUSTMENTS(1) COMBINED ----------- ----------- -------------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 3,240 $ 636 $ 3,876 Securities 539 150 689 Mortgages held for sale 30 1 31 Federal funds sold and securities purchased under agreements to resell 293 10 303 Deposits in other banks 217 3 220 -------- ------- -------- Total interest income 4,319 800 5,119 -------- ------- -------- INTEREST EXPENSE: Deposits 1,557 234 1,791 Funds borrowed 866 55 921 Notes payable 155 3 158 -------- ------- -------- Total interest expense 2,578 292 2,870 -------- ------- -------- Net interest revenue 1,741 508 2,249 Provision for credit losses 250 25 275 -------- ------- -------- Net interest revenue after provision for credit losses 1,491 483 1,974 -------- ------- -------- NONINTEREST INCOME: Financial service fees 523 172 695 Trust and agency fees 217 23 240 Trading profits and commissions 22 3 25 Net securities gains 9 9 Other income 320 20 340 -------- ------- -------- Total noninterest income 1,091 218 1,309 -------- ------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 897 249 1,146 Occupancy and equipment expense 240 84 324 Other real estate owned expense 9 9 Acquisition and restructuring expense 28 28 Other expense 423 146 569 -------- ------- -------- Total noninterest expense 1,597 479 2,076 -------- ------- -------- Income before income taxes 985 222 1,207 Provision for income taxes 444 85 529 -------- ------- -------- NET INCOME $ 541 $ 137 $ 678 ======== ======= ======== PER COMMON SHARE: Net income: Primary $4.55 $7.01 $4.17 Fully diluted 4.43 6.99 4.09 Average number of common shares (in thousands): Primary 110,716 19,609 153,856 Fully diluted 113,560 19,640 156,768
See Notes to Unaudited Pro Forma Combined Financial Information F-67 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA CORPORATION BAYBANKS(1) ADJUSTMENTS(1) COMBINED ----------- ----------- -------------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 2,606 $ 511 $ 3,117 Securities 355 139 494 Mortgages held for sale 41 2 43 Federal funds sold and securities purchased under agreements to resell 600 5 605 Deposits in other banks 116 1 117 -------- ------- -------- Total interest income 3,718 658 4,376 -------- ------- -------- INTEREST EXPENSE: Deposits 1,148 153 1,301 Funds borrowed 868 38 906 Notes payable 130 2 132 -------- ------- -------- Total interest expense 2,146 193 2,339 -------- ------- -------- Net interest revenue 1,572 465 2,037 Provision for credit losses 130 24 154 -------- ------- -------- Net interest revenue after provision for credit losses 1,442 441 1,883 -------- ------- -------- NONINTEREST INCOME: Financial service fees 396 168 564 Trust and agency fees 201 21 222 Trading profits and commissions 16 2 18 Net securities gains 14 14 Other income 201 16 217 -------- ------- -------- Total noninterest income 828 207 1,035 -------- ------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 813 233 1,046 Occupancy and equipment expense 231 79 310 Other real estate owned expense 22 16 38 Acquisition and restructuring expense 21 21 Other expense 392 140 532 -------- ------- -------- Total noninterest expense 1,479 468 1,947 -------- ------- -------- Income before income taxes and extraordinary item 791 180 971 Provision for income taxes 349 73 422 -------- ------- -------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 442 $ 107 $ 549 ======== ======= ======== PER COMMON SHARE: Income before extraordinary item and cumulative effect of accounting change: Primary $3.79 $5.60 $3.44 Fully diluted 3.67 5.60 3.36 Average number of common shares (in thousands): Primary 106,730 19,174 148,913 Fully diluted 111,427 19,177 153,616
See Notes to Unaudited Pro Forma Combined Financial Information F-68 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA CORPORATION BAYBANKS(1) ADJUSTMENTS(1) COMBINED ----------- ----------- -------------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 2,112 $ 476 $ 2,588 Securities 271 89 360 Mortgages held for sale 76 9 85 Federal funds sold and securities purchased under agreements to resell 139 8 147 Deposits in other banks 141 9 150 -------- ------- -------- Total interest income 2,739 591 3,330 -------- ------- -------- INTEREST EXPENSE: Deposits 1,016 161 1,177 Funds borrowed 264 4 268 Notes payable 114 2 116 -------- ------- -------- Total interest expense 1,394 167 1,561 -------- ------- -------- Net interest revenue 1,345 424 1,769 Provision for credit losses 70 37 107 -------- ------- -------- Net interest revenue after provision for credit losses 1,275 387 1,662 -------- ------- -------- NONINTEREST INCOME: Financial service fees 350 158 508 Trust and agency fees 178 20 198 Trading profits and commissions 24 2 26 Net securities gains 32 32 Other income 162 19 181 -------- ------- -------- Total noninterest income 746 199 945 -------- ------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 771 217 988 Occupancy and equipment expense 224 80 304 Other real estate owned expense 44 38 82 Acquisition and restructuring expense 85 85 Other expense 407 136 543 -------- ------- -------- Total noninterest expense 1,531 471 2,002 -------- ------- -------- Income before income taxes and extraordinary item 490 115 605 Provision for income taxes 215 47 262 -------- ------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 275 $ 68 $ 343 ======== ======= ======== PER COMMON SHARE: Income before cumulative effect of accounting change: Primary $2.28 $3.57 $2.09 Fully diluted 2.22 3.56 2.05 Average number of common shares (in thousands): Primary 105,336 18,953 147,033 Fully diluted 110,258 19,004 152,067
See Notes to Unaudited Pro Forma Combined Financial Information F-69 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (1) Certain historical data of BayBanks have been reclassified on a pro forma basis to conform to the Corporation's classifications. Transactions between the Corporation and BayBanks are not material in relation to the pro forma combined financial statements, and have not been eliminated from the pro forma combined amounts. (2) Reflects certain anticipated merger and restructuring costs that the Corporation expects to incur in connection with the merger. These costs, which were originally estimated to be approximately $140 million ($83 million after- tax), continue to be evaluated along with the estimated cost savings expected to result from the integration of the two institutions, both of which are likely to increase upon finalization of the integration plan. Such costs include investment banking and other professional fees, stock issuance costs and other expenses and other costs associated with the acquisition and estimated facilities and operations consolidation and severance costs associated with expected reorganizations in connection with the acquisition. (3) Pursuant to the merger agreement, each outstanding share (19,771,772 shares at June 30, 1996) of BayBanks Common Stock will be converted into 2.2 shares of Corporation Common Stock, subject to adjustment in certain circumstances. F-70 Exhibits EX-11 2 COMPUTATION OF SUPP. EARNINGS PER SHARE EXHIBIT 11 BANK OF BOSTON CORPORATION Computation of Supplemental Per Share Earnings
EARNINGS Six Months Years Ended -------- Ended June 30 December 31 ---------------------- ----------------------------------- 1996 1995 1995 1994 1993 (in millions) ---- ---- ---- ---- ---- 1. Net income $ 369 $ 323 $ 678 $ 542 $ 367 2. Less: Preferred dividends 19 19 37 37 35 ---- ---- ---- ---- ---- 3. Net income applicable to primary earnings per common share 350 304 641 505 332 4. Add: Interest expense on convertible debentures, net of tax 4 4 ---- ---- -------- -------- -------- 5. Net income applicable to fully diluted earnings per common share $ 350 $ 304 $ 641 $ 509 $ 336 ==== ==== ==== ==== ==== SHARES ------ (in thousands) 6. Weighted average number of common shares outstanding 154,318 151,777 153,856 148,913 147,033 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 1,700 1,693 2,027 674 991 8. Incremental shares from assumed conversion of debentures at date of issuance 1,778 885 4,029 4,043 -------- ----- --- ----- ----- 9. Adjusted number of common shares 156,018 155,248 156,768 153,616 152,067 ======== ======== ======== ======== ======== PER SHARE CALCULATION --------------------- 10. Primary net income per common share (Item 3 divided by Item 6); see note below $ 2.27 $ 2.01 $ 4.17 $ 3.39 $ 2.26 11. Fully diluted net income per common (Item 5 divided by Item 9); see note below $ 2.24 $ 1.96 $ 4.09 $ 3.31 $ 2.21
Note = Income per common share before extraordinary item and cumulative effect of changes in accounting principles, net of tax, on both a primary and fully diluted basis for the years ended December 31, 1994 and 1993 is computed by adding to the numerator the extraordinary loss from early extinguishment of debt, net of tax, in 1994 of $7 million and subtracting from the numerator the cumulative effect of accounting changes, net of tax, in 1993 of $24 million. EX-12.1 3 COMP. OF CONSOLIDATED EARNINGS EXCLUDING EXHIBIT 12.1 BANK OF BOSTON CORPORATION COMPUTATION OF SUPPLEMENTAL 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 six months ended June 30, 1996 and 1995 and the five years ended December 31, 1995 were as follows:
Six Months Ended June 30, Years Ended December 31, ---------------------------- ------------------------------------------------------------ (Dollars in millions) 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Net income (loss) $ 369 $ 323 $ 678 $ 542 $ 367 $ 338 $ (103) Extraordinary items, net of tax 7 (73) (8) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense (benefit) 263 264 529 422 262 190 (51) ------- ------- ------- ------- ------- ------ ------ Pretax earnings (loss) 632 587 1,207 971 605 455 (162) ------- ------- ------- ------- ------- ------ ------ Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 20 18 38 35 36 37 39 Interest on borrowed funds 460 531 1,079 1,038 384 352 386 ------- ------- ------- ------- ------- ------ ------ Total fixed charges 480 549 1,117 1,073 420 389 425 ------- ------- ------- ------- ------- ------ ------ Earnings (for ratio calculation) $ 1,112 $ 1,136 $ 2,324 $ 2,044 $ 1,025 $ 844 $ 263 ======= ======= ======= ======= ======= ====== ====== Total fixed charges $ 480 $ 549 $ 1,117 $ 1,073 $ 420 $ 389 $ 425 ======= ======= ======= ======= ======= ====== ====== Ratio of earnings to fixed charges 2.32 2.07 2.08 1.90 2.44 2.17 .62 ======= ======= ======= ======= ======= ====== ======
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. For the year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary to bring the ratio of earnings to fixed charges to a one-to- one basis are $162 million. EX-12.2 4 COMP. OF CONSOLIDATED RATIO INCLUDING INTEREST EXHIBIT 12.2 BANK OF BOSTON CORPORATION COMPUTATION OF SUPPLEMENTAL 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 six months ended June 30, 1996 and 1995 and the five years ended December 31, 1995 were as follows:
Six Months Ended June 30, Years Ended December 31, --------------------------- ---------------------------------------------------------- (Dollars in millions) 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ ------ Net income (loss) $ 369 $ 323 $ 678 $ 542 $ 367 $ 338 $ (103) Extraordinary items, net of tax 7 (73) (8) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense (benefit) 263 264 529 422 262 190 (51) ----- ----- ----- ----- ----- ----- ----- Pretax earnings (loss) 632 587 1,207 971 605 455 (162) ----- ----- ----- ----- ----- ----- ----- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 20 18 38 35 36 37 39 Interest on borrowed funds 460 531 1,079 1,038 384 352 386 Interest on deposits 846 883 1,791 1,301 1,177 1,640 2,202 ----- ----- ----- ----- ----- ----- ----- Total fixed charges 1,326 1,432 2,908 2,374 1,597 2,029 2,627 ----- ----- ----- ----- ----- ----- ----- Earnings (for ratio calculation) $ 1,958 $ 2,019 $ 4,115 $ 3,345 $ 2,202 $ 2,484 $ 2,465 ===== ===== ===== ===== ===== ===== ===== Total fixed charges $ 1,326 $ 1,432 $ 2,908 $ 2,374 $ 1,597 $ 2,029 $ 2,627 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.48 1.41 1.42 1.41 1.38 1.22 .94 ======== ======== ======== ======== ======== ======== =========
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. For the year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary to bring the ratio of earnings to fixed charges to a one-to- one basis are $162 million. EX-23.1 5 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.1 ------------- Consent of Independent Accountants The Board of Directors and Stockholders Bank of Boston Corporation: We consent to the incorporation by reference in the registration statements of Bank of Boston Corporation on Form S-3 (File Nos. 33-29515 and 33-52571) and in the registration statements on Form S-8 (File Nos. 333-09041, 333-07329, 333- 00297, 33-1899, 33-11186, 33-64462, 33-65850 and 33-66012) of our report dated August 26, 1996, on our audits of the supplemental consolidated financial statements of Bank of Boston Corporation as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, and the inclusion of such report in Form 8-K of Bank of Boston Corporation dated September 6, 1996. /S/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts September 6, 1996 EX-23.2 6 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.2 ------------- Consent of Independent Accountants The Board of Directors and Stockholders BayBanks, Inc. We consent to inclusion in Bank of Boston Corporation's Form 8-K dated September 6, 1996, and incorporation by reference in registration statements of Bank of Boston Corporation on Form S-3 (File Nos. 33-29515 and 33-52571) and in registration statements on Form S-8 (File Nos. 333-09041, 333-07329, 333-00297, 33-1899, 33-11186, 33-64462, 33-65850 and 33-66012) of our report dated January 18, 1996, relating to the consolidated balance sheets of BayBanks, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. /S/ KPMG PEAT MARWICK LLP Boston, Massachusetts September 6, 1996 EX-27.1 7 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT REPORT ON FORM 8-K FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL FINANCIAL STATEMENTS. 6-MOS DEC-31-1996 JUN-30-1996 3,307 1,192 2,516 1,732 8,459 686 668 40,653 (894) 62,387 43,494 8,113 3,186 2,632 0 508 235 4,219 62,387 1,915 277 251 2,443 846 1,306 1,137 114 17 304 632 369 0 0 369 2.27 2.24 4.40 399 49 13 0 890 (138) 39 894 572 181 141
EX-27.2 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT REPORT ON FORM 8-K FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL FINANCIAL STATEMENTS. 6-MOS DEC-31-1995 JUN-30-1995 3,030 1,575 959 832 3,288 4,254 4,298 38,370 (838) 56,201 38,194 8,292 3,250 2,160 0 508 345 3,452 56,201 1,857 238 425 2,520 883 1,414 1,106 143 6 294 587 324 0 0 324 2.01 1.96 4.66 412 56 33 0 827 (139) 40 838 562 168 108
EX-27.3 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT REPORT ON FORM 8-K FOR THE YEAR ENDED DECEMBER 31,1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL FINANCIAL STATEMENTS. 12-MOS DEC-31-1995 DEC-31-1995 3,561 1,356 1,548 1,159 7,582 660 667 38,870 (890) 59,423 41,064 7,293 4,175 2,189 0 508 350 3,844 59,423 3,876 503 740 5,119 1,791 2,870 2,249 275 9 569 1,207 678 0 0 678 4.17 4.09 4.58 373 56 33 0 827 (282) 86 890 568 171 151
EX-27.4 10 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT REPORT ON FORM 8-K FOR THE YEAR ENDED DECEMBER 31,1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL FINANCIAL STATEMENTS. 12-MOS DEC-31-1994 DEC-31-1994 3,146 1,559 1,323 581 3,262 4,238 4,086 37,708 (827) 55,411 40,249 6,988 2,024 2,219 0 508 336 3,087 55,411 3,117 380 879 4,376 1,301 2,339 2,037 154 14 532 971 549 (7) 0 542 3.39 3.31 4.32 420 49 82 0 941 (260) 86 827 637 99 91
EX-99 11 REPORT OF KPMG PEAT MARWICK EXHIBIT 99 ---------- INDEPENDENT AUDITORS' REPORT ---------------------------- KPMG Peat Marwick LLP Certified Public Accountants 99 High Street Boston, MA 02110 To the Board of Directors and Stockholders of BayBanks, Inc.: We have audited the accompanying consolidated balance sheets of BayBanks, Inc., and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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 disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BayBanks, Inc., and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP January 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----